Global Financial Crisis and Policy Response in Mauritius: Key Lessons

Transcription

1 Global Financial Crisis and Policy Response in Mauritius: Key Lessons Presented by Sunil Benimadhu Chief Executive Stock Exchange of Mauritius The North-South Institute Sheraton Hotel Ottawa June 8-9, 2010

2 Presentation Outline A brief introduction to Mauritius Preemptive reforms during the period: creating the necessary fiscal space to face the crisis The threatening Global Crisis Key short-run response to the crisis A few lessons from the crisis The Euro-crisis and its likely impact on Mauritius

3 Brief Introduction to Mauritius A small island of 1.3 million people with a 550 k labour force. An annual GDP of about USD 9 billion One of the fastest growing economies of Africa averaging 5% + during last forty years Size of domestic economy requires leveraging of external markets to sustain growth By construction, Mauritius cannot be insulated from developments in the global economy

4 Mauritius: from a Doom scenario to a Glittering one PRE-INDEPENDENCE YEARS mono-crop agricultural economy no scope for a manufacturing base per capita income less than USD 200 rapidly growing population high wealth and income inequality high unemployment susceptible to ethnic tensions

5 Mauritius: from a Doom scenario to a Glittering one DEVELOPMENT EXPERIENCE GDP GROWTH % AVERAGE: %

6 Mauritius: from a Doom scenario to a Glittering one PER CAPITA INCOME USD 3300 USD 7000 USD USD 1050 USD 200

7 CHALLENGES IN EARLY 2000S Unfavourable International Situation Increased competition with globalisation Soaring energy prices Sectors losing preferences Dismantling of Multifibre Agreement Sharp cut in sugar prices Macroeconomic situation deteriorating Mid 2000S Need for A New Development Paradigm Growth on declining path Low job creation resulting into rise in unemployment rate Deteriorating ToT Failure of Model based on Trade and Tax Preferences/ Incentives High burden of Incentive Framework Welfare State becoming unaffordable Pension system is unsustainable Incentives favour capital intensive, low productivity sectors Service quality is low and cost high in public utilities, particularly ICT Bias against micro-enterprises and SMEs Lack of skilled and semi-skilled workers to power new sectors Insufficient and ineffective training programs for low income groups, unemployed and new entrants

8 : Key Reforms to put Mauritius back on the track of sustainable growth To Return To High Growth, Government Resorted to A Four Plank Reform Programme Fiscal Consolidation and Improved Public Sector Efficiency Improving trade competitiveness Improving the Investment Climate Democratizing the Economy through participation, social inclusion and sustainability. Shift from Trade Preferences to Global competitiveness

9 : Key Reforms Doing Business Environment Greater openness/attracting foreign capital, skills, talents, expertise, ideas Simplified business registration processes Eased entry of skilled workers fast track residency/work permits Silent agreement principles Labour Reforms From job protection to worker protection Flexibility workfare Enhancing Competitiveness Tariff reduction Air access liberalisation Immigration restrictions eased Broadband internet cost reduced Fiscal Consolidation Low flat income tax rates of 15% Tax expenditure and Tax Administration reforms New Debt Law and Fiscal Rules Implementation of PBB Further Development of PSIP Framework Public Financial Management Procurement Framework Solidarity Targeted social safety nets Empowerment programme Social housing Education & Healthcare

10 ACHIEVEMENTS Economic Growth (Ave.) Investment Rate (Ave.) Per Capita Income $4,600 >7,000 FDI (Rs bn) (Ave.) NIR (Rs bn) weeks of imports PSD % of GDP (Ave) >70% 01/02 to 05/06 <60 % 06/07 to 09 Economy on a higher growth path -6.8 % in 2007/08 (pre crisis period) Unemployment rate declined to decade low and job creation on a net basis to all time high in 2008 and positive in 2009 (in spite of crisis) Improved fiscal Space and reduced external vulnerabilities Productive sectors more competitive Impact of Reforms ACHIEVEMENTS Improved international Rankings 2009 Index of Economic Freedom [18 th (world) and 1 st (Sub Saharan Africa) Ease of Doing business 17 th world and 1 st in SSA Index of African Governance and Mo Ibrahim Index 1 st in Africa Economist Political Instability index 7 th most stable country in the world (158 th out of 165 countries) BASIS OF SUCCESS Broad Based Reforms Favourable Climatic Conditions Strengthened supports from Development Partners Timely and successful reforms Political Commitment and Stability Strong public and Private sector participation Good Governance Short Term improvement in Macroeconomic performance

11 Stock Market Performance ( ) , , , , , , , , , , Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Jan-07 Feb-07 Mar-07 Apr-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Dec-08 SEM-7 SEMDEX DATE SEMDEX SEM-7

12 Global crisis and its impact on some key outward looking sectors of the economy Global crisis triggered slowdown of some key sectors of the economy Textile sector, after undergoing successful restructuring in the context of the phasing-out of trade preferences, grew by 8.5% in 2007, but slowed to zero % in 2008 and -4% in Tourism sector 14% in 2007, declined to 2.6% in 2008 and -5.3% in 2009 The Construction sector by 15.2% in 2007, 11.1% in 2008, but decelerated to 6.5% in 2009

13 Stock Market Performance SEMDEX AND SEM - 7 TREND: SEPTEMBER 08 TO MARCH SEMDEX SEM Sep Sep Oct Oct Oct Nov Nov Dec Dec Dec Dec Dec Jan Jan Jan Feb Feb Feb Feb Mar Mar Mar Mar-09 DATE SEMDEX SEM - 7

14 Global crisis and overall economic performance Overall economic performance did not collapse GDP growth was 5.1% in 2008, 3.1% in 2009 and was, until recently, projected to reach 4.6% in 2010 The above numbers are not far from the historical 5% average rate and fairly strong given the gravity of the Global crisis Unemployment rate increased only marginally by 0.1% to 7.2% between 2008 and 2009 Macroeconomic instability and exchange rate problems avoided as international reserves displayed positive growth and fiscal deficit was kept below 5% of GDP in 2009

15 Resilience of Mauritian economy to 1 st phase of Global crisis: key underlying factors Resilience of the Mauritian economy was not created overnight by immediate response to crisis Neither was it the result of a simple replacement of private sector demand with public spending Resilience can be understood as a combination of four factors: Reforms to sustain long-term growth which accelerated in 2006 Timely, targeted and temporary short-run response to the crisis Institutional arrangements that promoted private-public sector collaboration and formalized a social contract Strong partnership with development partners

16 Short-Run Response to Global Crisis Coordination between monetary loosening and fiscal policy stimulus was timely and calibrated Key repo rate slashed by 250 basis points within a sixmonth period from -% to % Government announced a Rs 14.5 billion (about 5% of GDP) stimulus package focusing on: Accelerating infrastructure investment projects crucial for longterm economic growth Investment in human capital A social contract to preserve employment whilst facilitating restructuring of firms and upgrading of skills; via the Mechanism for Transitional Support to Private Sector (MSTP), known as the Mauritius Approach.

17 Short-term Response: The Mauritius Approach Mauritius approach: The Mechanism for Transitional Support To the Private Sector Government/bank/enterprise working together on restructuring plan : financing time bound support from government 5 yrs no dividend payment & control of bonuses until government investment has been fully paid No lay offs, except where absolutely necessary Only x firms that are viable qualified/ x applications rejected Training for retrenched workers

18 Overall impact of short-term response Growth of 3.1 percent despite shocks: Maintained confidence of consumers and investors and avoided vicious spiral to cut spending and aggravate recessionary impact Fiscal reforms and contingency planning amplified impact of stimulus (no Ricardian equivalence) Saved some 7,500 jobs (1½% labor force) but allowed non viable enterprises to close (2,500 jobs) Reforms and confidence resulted in net job creation: unemployment up only slightly (about 0.2 percentage points) Saved dozens of enterprises on the edge Consolidated the resilience of the economy Protected some thousands of vulnerable families Improved infrastructure Built credibility at the international level

19 Stock Market Performance STOCK MARKET PERFORMANCE: APRIL 09 TO DECEMBER 09 SEMDEX 1, , , , , , , , , SEM Apr Apr Apr May May Jun Jun Jul Jul Aug Aug Sep Sep Oct Oct Nov Nov Dec Dec Dec-2009 DATE SEMDEX SEM-7

20 Short and Medium Term Challenges Fiscal Stimulus what Timing for Exit Fiscal consolidation without risking recovery Institutional reforms to better manage crises? Improving competitiveness at global stage Improving Infrastructure Preparing to meet the cost of ageing population Improving further the social protection system through the Social Register for Mauritius Sustaining financial sector and structural reforms

21 Lessons from the crisis Need to have Contingency Plans to address crises Countries with Fiscal Space are better positioned to manage crises Timely, Targeted and Time bound stimulus measures do contribute in mitigating impact of crisis and at easing exit strategy for stimulus Role of Development partners Critical EU unlocking/frontloading budget supports New instruments i.e., VFLEX Need to address global imbalances Savings /investment gaps between key economic players i.e., US, China

22 The Euro-crisis and its likely Impact on Mauritius Export sector of Mauritius very Euro-centric > 60% of exports are Euro & GBP denominated > 75% of services (ICT & Tourism) are Euro & GBP denominated Dwindling Euro constitutes major risk to export competitiveness & to key sectors like textile & tourism Mauritian economy confronted to double-whammingdwindling export/services earnings & rising import costs due to appreciating USD Growth expected to dwindle from 4.6% to < 4% in 2010 A joint Private sector / Government / Central Bank task force set up to address this fundamental threat

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