MAURITIUS GB 06 - OECD.org

1 MauritiusPort-Louiskey figures Land area, thousands of km22 Population, thousands (2005)1 245 GDP per capita, $ PPP valuation (2005) 13 542 Life expectancy (2000-2005) Illiteracy rate (2005) Economic Outlook 2005-2006 tables and graphs in this section are available in Excel format at: Economic Outlook AfDB/OECD 2006357 MAURITIUS HAS ONE OF THE HIGHEST standards ofliving in Africa. It enjoyed sustained growth of morethan 6 per cent in the 1990s and reached GDP per capitaof $11 287 (in PPP terms) in 2003. The traditionalengines of growth in MAURITIUS have been sugar, textiles,and tourism. More recently, MAURITIUS has diversifiedinto financial services and information and computertechnologies (ICT). MAURITIUS has one of the mostcompetitive economies, ranked first in Africa, and 23rdworldwide for its business activity facility. Mauritiusis now a middle-income country as a result of goodeconomic performance, and ranks 65th in the worldand second in Africa (after the Seychelles) on the 2005 Human Development Index.

2 The economic trackrecord of MAURITIUS is the product of its soundinstitutions, good level of human capital and preferentialaccess to the European Union (EU) market for its keyexports. However, since 2000, MAURITIUS has faced newchallenges and its economicperformance has suffered, resultingfrom its loss of preferential access tothe EU sugar and textile markets. Inthe textile sector, MAURITIUS is facingincreased competition from cheaper Chinese andother East Asian country exports. These newconstraints mean there is an urgent need to diversifythe Mauritian economy. The persistent budget deficitsmust be reduced. Moreover, labour market andeducation reforms are prerequisites for absorbing end of preferential treatment and a high budget deficit threaten the Economic DevelopmentsWhile the annual growth rate was on average above6 per cent at the end of the 1990s, it has fallen to amuch lower level since 2000.

3 Performance for 2005 isexpected to be even lower at per cent, percentagepoints lower than in 2004. Indeed GDP grew by per cent in the first quarter of 2005, as comparedto and per cent in the first quarters of 2003and 2004. Excluding sugar, the 2005 growth rate isexpected to reach per cent, compared to percent in 2004. The lower than expected growth rate is02000400060008000100001200014000160001 80002007(p)2006(p)2005(e)200420032002200 12000199919981997012345678910 Real GDP Growth (%)Per Capita GDP ($ PPP)Figure 1- Real GDP Growth and Per Capita GDP($ PPP at current prices)Source:Central Statistical Office data: estimates (e) and projections (p) based on authors Economic Outlook AfDB/OECD 2006358 Mauritiusdue to the poorer performance of the four maineconomic sectors. First, sugar production in 2005 isexpected to be around 520 000 tonnes, instead of550 000 tonnes, because of the excessive rainfall inSeptember 2005.

4 While the area under sugar cultivationhas been falling between 2001 (73 196 hectares) and2005 (68 883 hectares), sugar yield has also fallen from79 to 72 tonnes per hectare over the same , the export processing zone (EPZ) has contractedby 13 per cent due to the end of the textile trade quotasin January 2005, coupled with competition from low-cost textile producing countries. Third, the constructionsector contracted by per cent in 2005, mainlybecause of delays in - or the non-execution of - severalprojects. Fourth, the non-EPZ manufacturing sectorgrew by only per cent as a result of increasedcompetition from imported goods faced by thesedomestic-oriented manufacturing poor economic performance has meant thatthe unemployment situation and public finances havedeteriorated. Unemployment has risen steadily since2000 to peak at around 10 per cent in 2005. Thereasons for this lacklustre performance are, as has alreadybeen noted, the changes in the EU Sugar Protocol andincreased competition on the international has always been the main pillar of theMauritian economy, enjoying preferential EU marketaccess.

5 Under the EU Sugar Protocol, ACP countriesexport million tonnes of sugar to the EU at a pricewhich is usually two or three times world market current price paid to ACP producers is 632 eurosper tonne. MAURITIUS is the ACP country that benefitsthe most from the Sugar Protocol, accounting for onethird of the total quota. Exports to the EU account formore than 90 per cent of the sugar cane production ofMauritius. Following a WTO ruling, the EU had to reducethe ACP-guaranteed sugar price. The guaranteed pricewill gradually be lowered between 2006-2009 by 36 percent (instead of the worst-case scenario of a 39 percent cut) to 400 euros. The price of sugar will fall by5 per cent in 2006, representing lower export earningsof 500 million rupees for MAURITIUS . There will be afurther reduction of 17 per cent in 2008, anadditional loss of billion rupees, and finally, the fullprice cut will come into effect in 2009.

6 This cut wouldtranslate into lower earnings of approximately 4 sugar producers will find it difficult tocompete on the international market because theirproduction costs are much higher than the worldmarket price. In fact their cost of production is twicethat of the most efficient ACP suppliers, and evenhigher when compared to Brazilian prices. To tacklethe anticipated fall in the guaranteed sugar price, thesugar industry and the government have taken somemeasures to adapt to the new situation. A 5-year SugarSector Strategic Plan (2001-05) was implemented torestructure and rationalise the sugar industry. The goalwas to decrease the number of sugar mills from 14 to7 or 8, so as to benefit from any increasing returns toscale, to reduce by up to 7 000 the current labour forceof 30 000 through a voluntary retirement scheme, aswell as proposing a number of other cost-reducing anddiversification measures. In an effort to diversify away from sugar, thegovernment has planned a number of Integrated ResortSchemes (IRS) offering luxury villa complexes for saleto foreigners at a price exceeding half a million sold under the scheme form part of international-standard building complexes offering high-class facilitiesand amenities such as golf courses, marinas andindividual swimming pools, nautical and other sportsfacilities, health and beauty centres and high-qualityrestaurants.

7 The acquisition of a villa under the IRS willgrant resident status to the investor and their spouseand dependents. The government is also offering incentives toencourage the transformation of MAURITIUS into aseafood-producing hub, with the expectation that 2 000new jobs will be created in this sector by 2008. TheMauritius Freeport Development Corporation isexpected to invest 300 million rupees in the constructionof a fishing harbour which should come into operationin March 2006. A number of private companies are alsoAfrican Economic Outlook AfDB/OECD 2006359 Mauritiusincreasing their investment in the sector, especially intuna fishing and , these reforms have so far been tooslow and have yet to produce significant gains inemployment or competitiveness. For example, 11 sugarmills - instead of the planned 8 - were still operatingin 2005. Both the sugar sector and the government wereunder the impression that EU-guaranteed sugar demandwould not be drastically reduced, or, if this were thecase, that MAURITIUS would benefit from sufficientmonetary compensation and a long transition periodbefore the lower price came into force.

8 However, thisdid not happen and the EU has reduced its price. It isnow expected that one third of all employees in the sugarsector will be made manufacturingOther manufacturingConstructionHotelsand restaurants Wholesale and retail tradeFinance, real estateand business servicesGovernment servicesOther servicesTransport, storageand communications sectorOther agricultureFigure 2- - GDP by Sector in 2004 (percentage)Source:Authors estimates based on Central Statistical Office at factor costSugar sectorOther agricultureEPZ manufacturingOther manufacturingConstructionWholesale and retail tradeHotels and restaurants Transport, storage and communications Finance, real estate and business servicesGovernment servicesOther servicesFigure 3- Sectoral Contribution to GDP Growth in 2004 (percentage)Source:Authors estimates based on Central Statistical Office Economic Outlook AfDB/OECD 2006360 MauritiusDrastic adjustments in the sugar sector are the end of 2005, there were indications that twosugar cane mills located in the south of the island(Mon-Tr sor/Mon D sert and Riche-en-Eau) willclose in 2007.

9 Mauritian sugar cane producers havestarted to invest in Mozambique and Tanzania wherethe costs of land and production are lower than inMauritius. In addition to potential sugar mill mergersand voluntary retirement schemes, sugar can also beused to manufacture other products that are in greaterdemand on the market. Other higher value-addedtypes of sugar product yielding a higher export pricehave already been exported to niche European this, as yet small, volume cannot adequatelycompensate for the expected loss in raw sugar of these types of products is ethanol, whichcan be blended with gasoline to create a cheaper fuelthat could reduce the energy bill of many oil-importingcountries. It is estimated that some 30 million litresof ethanol could be manufactured for use in blendedgasoline products. Some initiatives have already beentaken in MAURITIUS to produce ethanol for this , the benefits of these will only appear in thelong run.

10 For now, higher unemployment caused bythe downsizing of the sugar sector remains the challengeto be agricultural sector grew strongly in 2004, butgrowth slowed in 2005, reflecting earlier developmentsin 2003, notably recovery from poor weather conditions,when the sugar cane crop produced 537 155 tonnesof sugar. Accordingly, sugar production fell to 519 816tonnes in 2005, from 572 316 tonnes in was able to diversify out of sugar byattracting investors into the Export Processing Zone(EPZ), especially in the textile sector. The manufacturingboom has largely been responsible for this economicturnaround. Incentives in the form of tax holidays,exemptions from import duties and from some aspectsof the regulatory regime, as well as preferential credit,were provided to foreign and domestic investors whowould specialise exclusively in exporting. The volumeof EPZ activity expanded rapidly, benefiting from highprofits recycled from the sugar industry and fromtrading arrangements and protectionist EU and USpolicies which placed textile quota restrictions on somecountries while allowing free entry to others.