Swadicq Nuthay : “We are heavily dependent on foreign investment”

Swadicq Nuthay, economist and chairman of Legacy Capital, a management consultancy firm, explains that we have no leeway to improve our current growth rates, unless we embark onto a bold economic reform with the objective of re-allocating our resources towards high value-added sectors, eliminating inefficient use of public funds and improving fiscal discipline. He also comments on the long term risk of an ageing population.

Why has Mauritius been unable to have a growth over 4% during the past few years?
The engine to economic growth is investment. To generate a higher growth rate, as compared to the trend that the country has witnessed over the last decade, we need an investment rate closer to 25% of GDP. However, the investment rate today is only 18% of GDP. Moreover, the share of private sector investment to public sector investment has shown a downward trend in recent years, that is, had we not have the massive investment in infrastructure development programme, the investment rate would have been lower. Although the investment in public infrastructure contributes to improve the country’s overall capacity to sustain better growth, its overall impact on growth is limited and is of short-term nature. Normally, it is private sector growth that is more productive and generates wealth in the long run. We should work on attracting more FDI into high-value added sectors of our economy which would pave the way for an inclusive and sustainable long-term growth for the economy.

As an economist, are you satisfied with our current growth rates, given our circumstances?
The closing of the output gap, i.e. the actual level of GDP versus the potential level of GDP of the country demonstrates that we cannot hope for a higher economic growth with the existing conditions. Notwithstanding the effects of a weakening global economic growth and headwinds from exogenous factors such as the effects of Brexit, our main macroeconomic indicators are also already in the red: Public debt at Rs 307.2bn in Sep-18 i.e. 64.2% of GDP, current account deficit at 6.2% of GDP, budget deficit for 2018/2019 at 3.2% of GDP. We, therefore, have no leeway to improve our current growth rates, unless we embark onto a bold economic reform with the objective of re-allocating our resources towards high value-added sectors, eliminating inefficient use of public funds, improving fiscal discipline, amongst others.

What’s in a number? Does it really matter that the growth rate is 3.8 percent or 4 percent? Does higher growth necessarily mean improvement in the standard of living?
Economic growth forecasts are based on certain assumptions and specific methodologies. Specifically, economic growth is defined as an increase in a country’s productive capacity, as measured by comparing Gross Domestic Product (GDP) in a year with the GDP in the previous year. The projected increase, in quality and quantity of a country’s factors of production, is subject to constant variation, hence the measure is far from an exact science. I believe that the components of economic growth are far more important than the quantum. We must favour growth focused on technical progress and innovation. In the long run, only technical progress and innovation are able to make an economy more productive and enable it to produce more, that is, to have growth. A higher real GDP per capita would usually translate into an improvement in standard of living. However, it is important to assess other factors such as inequality in income & wealth, imbalances between consumption and investment, innovation, amongst others, for a more accurate picture of the real standard of living.

In order to achieve a higher economic growth and a high-income economy status, we should embark on broader structural reforms."

What can be done to achieve a higher growth rate?
We should focus more on the quality and sustainability of our economic growth, than merely on the figures. In order to achieve a higher economic growth and a high-income economy status, we should embark on broader structural reforms, to better utilise our resources and attract FDI in high value-added sectors. 

The mismatch of skills is a major challenge that must be addressed. While we are moving towards a higher-value added economy even in the service industry, the demand for highly trained and educated professionals has increased. Mauritius is facing a challenge to attract local and foreign talents to work in the service sector. We also need to bridge the gap between universities and business. There is a need to train our graduates according to the demands of specific sectors if we want to progress further. 

Our financial sector, more specifically the offshore segment, has so far contributed a big proportion of our GDP; however, this sector is facing major challenges and threats. In order to contain these exogenous shocks, we should continuously adapt ourselves to the ever-changing ecosystem of this sector.

We should also analyse the effects of public debt on our economic growth. Several studies have concluded that there is a negative relationship between public debt and GDP growth per capita, beyond the major barriers to public debt. Explicitly, for advanced and emerging countries with a debt threshold exceeding 60% and 40% of GDP, an increase in public debt has resulted in a slowdown in economic growth in the long term.

Should we further open our economy to foreign investors and professionals?
Indeed, we should focus on a strategy to further open up our economy by attracting Foreign Direct Investment in high value-added sectors but also foreign talents and professionals who will come to bring their expertise to the development of our country. 

As an export-oriented economy with limited resources, we are heavily dependent on foreign investments and it has been proven that progress in a small economy like ours cannot exist without both foreign skills and investments. Mauritius thus needs to further develop its services sectors with strong growth potential, particularly knowledge-based sectors like Fintech & AI, biotech and ocean economy, among others. The development of these sectors can only be done with the contribution of international expertise. Moreover, this can foster the development of a culture of Research & Development, which would support the transition to a knowledge-based economy, as is the case in major & emerging economies. 

Last but not least, we are increasingly talking about the threat that an ageing population will put over the long-term economic stability of the country. What are your views?
It is a fact that the ratio of the active population is on a decreasing trend. According to the latest statistics available, the percentage of active population was 65.5% in 2017 and based on the projections of the Ministry of Health, this will decrease to 58.9% in 2037 and 53% in 2057. The active population is defined as the number of working-age people available in the labour market, whether they have a job (currently employed) or are unemployed. 

In the same vein, Mauritius is witnessing a progressive ageing of its elderly population. The ‘pensioner support ratio’, i.e. the number of persons of working age (15-59 years) for each old person (aged 60 years) is declining. In 2017, the ratio was 4 i.e. for each pensioner, there were 4 active persons, aged between 15 and 59 years. In 2027, the ratio will decrease to 3 and in 2032 the ratio will be 2, i.e. 2 active persons for each pensioner.  By 2057, this ratio will fall to 1, implying that there would be only one active person for each pensioner, according to the latest forecasts.

An ageing population poses a significant risk to the long-term viability of public finances, as there would be a decrease in active population and an increase in the dependency rate. The consequences of a rapidly ageing population must therefore be considered in order to avoid imbalances in the economy.