Mauritius Macroeconomics: Fumbling the Fundamentals?

The trends of some major economic indicators in recent years compel the question of whether Mauritius is properly handling its macroeconomic fundamentals. In its Article IV Press Release (February 2024), the IMF expressed its worries by mentioning repetitively the need for Mauritius to rebuild its macroeconomic buffers. Specific mention was made in the Press Release of the need to rebuild fiscal, macroeconomic and external buffers. The message from the IMF was clear, although put in a diplomatic or rather subliminal way – Mauritius must show more concern about the deteriorating macroeconomic fundamentals and come up with effective solutions. 

The macroeconomic fundamentals that should be the focus of public policy going forward range from the long-term growth path to private investment rate (investment as a ratio of GDP), external balances, public finances and the labour market dynamics. 

A declining long-term growth path

There are two major concerns about the long-term growth path as evidenced by data for the period 1977 to 2023. First, the long-term GDP growth path is on a downtrend. The average annual GDP growth rate which was 5.05 percent during the period 1977 to 2000 has declined to 3.8 percent during the period 2001-2010, 3.6 percent in the period 2011 to 2019 and to 1.2 percent for the period 2020-2023 (which includes the deep recession resulting from the Covid 19 pandemic). During these same periods, investment as a ratio of GDP has also been declining and could have been the main driver behind the declining growth path. The annual average investment rate (investment as a ratio of GDP) has dropped from 24.5 percent during the period 1977-2000 to 19.5 percent for the period 2011-2019. 

The second concern is that the Mauritius GDP growth path may be growing at the same low pace as the world GDP.  Statistical evidence shows that the gap between the GDP growth rates for Mauritius and those of the world (Mauritius GDP growth rates less World GDP growth rates), which averaged annually some two percentage points during the period 1977 to 2000, has shrunk to an average of 0.5 percent during 2011 to 2019. Mauritius GDP growing in lockstep with the world GDP should not be a source of worry if the world GDP growth path was rising. But it is not. On the contrary, the world GDP growth path is predicted to decline in the long-term. The OECD’s baseline forecast is for economic growth in the G20 countries, which produce some 80 percent of world’s GDP, to decline to 1.1 percent by 2060, bringing down with it the world GDP growth path. Mauritius may never regain the high-income status if its GDP grows at the same pace as world GDP. Should Mauritius GDP grow at a slower pace than that of the world in the future, its upper middle-income status may also be at risk – though in a quite distant future.

If the current account deficit is generated by macroeconomic imbalances, which is clearly the case, it is urgent that policies leading to effective adjustments in aggregate demand, real wages, and the exchange rate are implemented. The long-term solutions are mostly structural.

 

Chronicity of the external deficits

Besides the declining long-term growth path, the external balances, which are crucial macroeconomic indicators for an open economy, have been rather wobbly in recent years. The trade and current account deficits of the Balance of Payments have become chronic. The current account deficit averaged 6.6 percent of GDP in the decade to 2022, and passed the double-digit mark in 2021 (13%) and in 2022 (11.5%). While a current account deficit does not necessarily result from an economic imbalance or crisis, its chronicity should be a source of apprehension. A chronic deficit reflects a persistent negative savings-investment gap (lower savings than investment), which means that the country has been, for a long time, living beyond its means and relying on financing from abroad – be it through borrowing and/or grants. An overvalued currency and greater reliance on imports can also contribute to the deficit in the external accounts. 

To make matters worse on the external front, the terms of trade (TOT) have also been unfavourable to Mauritius in recent years. From the first quarter of 2021 to the third quarter of 2023, the TOT indices were below 100 for every quarter, averaging 88.5.  

If the current account deficit is generated by macroeconomic imbalances, which is clearly the case, it is urgent that policies leading to effective adjustments in aggregate demand, real wages, and the exchange rate are implemented. The long-term solutions are mostly structural. Mauritius must act to reduce its imports through well-thought-out import substitution policies (not necessarily through protective measures, but by, for example, promoting greater autonomy in food and energy) while at the same time boosting its export competitiveness.

Countries that use monetary policy as a handmaiden of fiscal policy in times of high inflation will pay a high price in the future.   

Chronic budget deficit and high levels of public debt

For most of the years since 2010, Government has been running a deficit on its recurrent budget, resulting in an accumulation of unsustainable debt. And government borrowing requirements as a percentage of GDP have been higher than the budget deficits. 

During the past decade, central government debt in Mauritius has more than doubled with both external and internal debt growing faster than GDP.  External central government debt in the past decade has risen to an annual average of 12.4 percent of GDP from around 7 percent in the previous decade. The precarious fiscal position of government is both a result of the country’s deteriorating economic health and a source of risk for the rest of the economy. Admittedly, the recent exogenous shocks have contributed to the current fiscal situation, but they have only worsened a situation that was already precarious, judging by the trends during the decade ending in 2019. It is clear that a rebuilding of the fiscal situation has become an urgent imperative.

A labour market that hinders rather than supports economic growth

Another conspicuous threat to macroeconomic performance lies in the labour market which, since 1999, has been suffering from persistent skills mismatch without any sign of improvement. The origin of the mismatch can be traced to an education and skilling system that has been unable to adapt to the evolving needs of the economy. Moreover, the education system can be considered as being exclusive since only a very small percentage of the cohort of students joining primary school makes it to post-secondary education. Only 20 percent of the labour force have post-secondary education, more than a quarter of that labour force have only primary schooling, and around 20 percent do not hold the Certificate of Primary Education. For an economy which is diversifying in knowledge and technology-intensive activities, the education and skill profile of its labour force is quite incongruous and requires rapid fixing. Moreover, the education profile of the labour force does not in any way support the much needed intersectoral mobility of labour, which is a sine-qua-non condition for successful economic diversification. This absence or very low intersectoral mobility may be one of the key reasons why the problem of skills mismatch has been lingering for so many years on the labour market. 

The trend in the evolution of the labour force is also quite bleak. The annual growth rate of the labour force during the decade to 2020 averaged a mere 0.42 percent, and it is forecast that the size of the labour force would start shrinking as from 2035.  A labour force which is already inadequate in size and poorly prepared for the world of work, and which is predicted to constrict further, does not augur well for the economic growth path in the long-term.  

Conclusions

The macroeconomic fundamentals on almost all fronts of the demand and supply sides of the economy seem to need greater policy attention – the more so that the future is still fraught with uncertainty and that climate change is taking its toll on economic activities. It is clear that Mauritius is fumbling its macroeconomic fundamentals.

The lion share of policy responses should come from labour market reforms, which in turn compels a total rethinking of our education system to make it inclusive again, as it has been in the first two decades following the country’s independence. The labour market reforms are required not only to raise the growth path, but most importantly to lift up the standard of living and quality of life of all individuals and make it easier for the youth to be in employment. It is now widely recognised that youth with post-secondary education have a much higher chance of finding a decent job than those with only secondary or primary education in low and middle-income countries. 

In addition to the deterioration of the macroeconomic fundamentals mentioned above, there is also the resurfacing of the spectre of high inflation. This poses a tough challenge to monetary policy and overall macroeconomic policy. Countries that use monetary policy as a handmaiden of fiscal policy in times of high inflation will pay a high price in the future.  

Populist pressures in an election year will certainly complicate policy responses. But it is manifestly clear that a policy status quo relating to the macroeconomic fundamentals will inevitably drive the Mauritian economy and society to a tipping point. Mauritius must therefore tread carefully.