World economic growth

1.0 INTRODUCTION


1.1 World Economic Outlook:

According to the World Bank, world economic growth accelerated sharply in 2004. In aggregate, the year 2004 has been the healthiest year for developing countries since the last three decades. East Asian countries have come out of the 1997 crisis and are now performing well. The ongoing economic boom in China as well as the surge in activities registered in Japan were major factors in promoting growth in the region. Latin American countries and Sub-Saharan Africa also had a better year. This performance reflects a fortuitous combination of long-term secular trends built on a foundation of better macroeconomic management and an improved domestic investment climate converging with a cyclical recovery of the global economy.


There were however some lingering imbalances in the global economy associated with the rising twin deficits in the United States, a delayed recovery in Europe, coupled with high and volatile oil prices, and questions about the path of China's economy that might constitute risks to the pace of growth in developing countries over the medium term.


World's economic growth is likely to slow down in 2005 with a projected rate of 3.2%. Several factors are likely to contribute to the slower growth. It is believed that the investment cycle in the US has peaked, therefore resulting in a slowdown in growth. Furthermore, world demand has far exceeded world supply, resulting in a substantial increase in oil and other commodity prices, therefore reducing demand in other countries. Also, increases in interest rates are likely to slow the investment growth. The US is likely to finance its large budget deficits through tighter fiscal policies and in Europe countries will tighten their budgetary control to remain within the realm of Maastricht limits.


Table 1: World economic outlook


Real Growth Rate (%)

2002

2003

2004

2005*

World

1.7

2.7

4.0

3.2

High Income Countries

1.3

2.1

3.5

2.7

Euro Zone

0.9

0.5

1.8

2.1

USA

1.9

3.0

4.3

3.2

Japan

-0.3

2.4

4.3

1.8

Developing Countries

3.4

5.2

6.1

5.4

East Asia and Pacific

6.7

7.9

7.8

7.1

Latin America and Caribbean

-0.6

1.6

4.7

3.7

Sub Saharan Africa

3.1

3.0

3.2

3.6


*projected figures

Source: Global Economic Prospects 2005, World Bank.


1.2 Mauritian Economic Outlook:

Mauritian economic growth in 2004 was positive and stabilised at 4.2%, slightly lower than the 4.4% recorded in 2003. On the one hand, internal demand constituted an important dragging factor, with a 6.3% growth in consumption expenditure compared to 4.5% in 2003. On the other hand, lingering uncertainties linked to the wave of change in the international economic order, uninterrupted trade liberalisation and the gradual loss of our long-standing preferences had a dampening effect on growth. The recent run-up in oil prices was also a constraining factor on economic buoyancy.


Business confidence appeared to be quite timid in 2004. However, in spite of an overall deceleration in the rate of investment, which grew by 5.5%, compared to 10.0% in 2003, private sector investment grew by a high 13.2% as opposed to a negative 2.2% in 2003. Moreover, international perception about Mauritius remained positive, and foreign investments in hotels and ICT projects were at a relatively high level.


Despite the stable growth rate, several macroeconomic and sectoral performances were relatively unfavourable. Savings rate was lower, registering 23.3% of GDP in 2004 against 25.4% in 2003. Inflation rate was higher in 2004, reaching 5.5%, as opposed to 3.9% in 2003. Overall external trade worsened, from a surplus of Rs. 2 billion in 2003 to a deficit on Rs. 3.9 billion in 2004, as a result of a very large increase in the merchandise trade deficit, from Rs. - 8.4 billion to Rs. - 15.7 billion.


On a sectoral basis, industries were faced with a restricted margin of manoeuvre as a result of increasing international competition from lower-cost producers. Repercussions were felt in the EPZ sector, which registered a negative growth rate of 5% in 2004, following the deceleration of 6% in 2003. The tourism sector, in spite of its apparent dynamism, recorded a growth rate of only 2.6%, compared to 3.0% in 2003. Financial services experienced some inertia, with a low expansion of 1.0%, compared to a high 7.2% in 2004. However, the agricultural sector expanded by 5.1% in 2004, in contrast to the low 1.9% recorded in 2003 and the non-EPZ sector grew by 5.0% in spite of the gradual reduction of tariff protection.


2.0 ECONOMIC PERFORMANCE FOR 2004


2.1 National Accounts:

Real Gross Domestic Product (GDP) grew by a moderate 4.2% in 2004, compared to 4.4% in 2003. At current basic prices, GDP increased from Rs. 137.9 billion in 2003 to Rs. 151.7 billion.


GDP per capita at current basic prices increased by 10.1%, to attain Rs. 122,984 in 2004. In US dollar terms, GDP per capita reached US$ 4,477, 11.7% higher than the previous year, when it reached US$4,010. It is worth noting also that at Purchasing Power Parity, GDP per capita in dollars was estimated at US$ 11,400 in 2003.


For the second consecutive year, net income from the rest of the world was negative, with Rs. – 415 million in 2004, compared to Rs. – 833 million in 2003.


Table 2: Output at current basic prices:

Unit

2001

2002

2003

2004

Real GDP growth rate

%

+5.6

+1.8

+4.4

+4.2

GDP

Rs. Million

117,720

125,260

137,868

151,725

Net income from abroad

Rs. Million

393

396

- 833

- 415

GNI

Rs. Million

118,113

125,656

137,035

151,310

GDP/capita

Rs.

98,086

103,479

112,720

122,984

US$
US$ (PPP)*

3,380.9
9,609

3,462.2
10,810

4,010.0
11,400

4,477.4
n/a

Exchange Rate, annual av. mid-rate

Rs/$

29.012

29.888

28.11

27.468


* GDP at Purchasing Power Parity provides a more reasonable international GDP comparison among nations.Source: CIA Fact Book 2004


While the EPZ sector continued to register negative growth rates for the third consecutive year, almost all other sectors recorded positive growth rates in 2004.  Non-EPZ grew by +5.0% in 2004, slightly lower than in 2003, when the growth rate was +5.8%. After high growth rates registered in 2002 (+7.6%) and 2003 (+11.1%) mainly due to high investment in building and construction works by the public sector, Construction grew by 3.1% in 2004. The distributive trade sector grew by 3.2%, slightly higher than the 3.1% recorded in the previous year.


Transport and Communications activities expanded by 6.5% in 2004 as opposed to 6.1% in 2003. During the same period real estate, renting and business activities grew by 6.9% compared to 6.5% in 2003.


Education, including services provided by public and private operators grew by 7.2% in 2004, compared to 5.3% in 2003, while health and social work expanded by 8.8% compared to 7.0% in 2003. Electricity, gas and water supply registered a growth of 4.2% as opposed to 4.6% in 2003.


2.2 Consumption

Last year's economic performance was once again influenced by internal demand. Total final contribution of consumption to GDP at market price was estimated at 77.3%, compared to 75.1% in 2003. Real final consumption expenditure, increased by 6.3% in 2004, compared to a 4.5% rise in 2003. This expansion in the consumption rate, which is much higher than the GDP growth rate, is clearly inflationary and has a negative direct impact on trade balance and budget deficit. It must be noted that private consumption represented 83.1% of total consumption in 2004, as opposed to 82.8% in 2003. A growth of 6.7% was observed in the consumption of households in 2004, against 4.9% in 2003. This is the highest growth rate recorded since 1989. On the other hand, the share of public sector consumption amounted to 16.9% of total consumption in 2004, showing a slight drop from the 17.2% observed in 2003. Public consumption grew by 4.4% compared to an increase of 2.6% in 2003.


In 2004, the continued growth observed in total consumption has been largely sustained by the significant increase in average monthly income earnings of households. The average monthly earnings in large establishments grew by 12.8% between March 2003 and March 2004, to reach Rs. 11, 084. A general upward trend was observed in all industrial groups. The largest increase (+24%) was noted in public administration, following the implementation of the PRB in July 2004.


Table 3: Consumption

2001

2002

2003

2004

Aggregate Final Consumption
- Household
- Central Government

Rs b
Rs. b
Rs. b

97.0
80.2
16.8

106.6
88.3
18.3

118.3
98.1
20.2

135.1
112.2
22.9

Consumption as a % of GDP at MP

%

73.4

75.0

75.1

77.3

- Real Agg. Final Consumption growth
o Household
o Central Government

%
%
%

3.3
3.0
4.7

3.2
3.3
4.1

4.5
4.9
2.6

6.3
6.7
4.4

Average monthly earnings (March)

Rs.

8,701

9,159

9,826

11,084

- Change in monthly earnings, Nominal

%

6.4

5.3

7.3

12.8


2.3 Savings & Investment

Gross national savings, measured by the difference between Gross National Disposable Income and Total Consumption, increased in nominal terms by 1.8% to reach Rs 40.7 billion in 2004 from Rs 40.0 billion in 2003. Consequently, the saving rate, calculated as the ratio of GNS to GDP at market prices, showed a decline from 25.4% in 2003 to 23.3% in 2004. This decline results from an increase in both public and private expenditure.


Table 4: Savings and investment

2001

2002

2003

2004

Gross National Savings (Rs. Billion)

37.6

38.7

40.0

40.7

Nominal Change (%)

+2.8

+3.4

+1.8

GNS as a % of GDP at MP (%)

28.4

27.3

25.4

23.3

GDFCF (Rs. billion)
Private Sector
Public Sector

29.8
20.5
9.3

31.4
21.6
9.8

35.7
21.8
13.8

38.9
25.6
13.4

Real Change in GDFCF (incl aircrafts and vessels) , %

+2.7

+1.9

+10.0

+5.5

Real Change in GDFCF (Excl. aircraft and vessels), %

-2.6

+6.1

+7.9

+8.2

GDFCF as a % of GDP at MP

22.5

22.0

22.6

22.3


Investment, measured by the Gross Domestic Fixed Capital Formation (GDFCF), increased to Rs 38.9 billion in 2004 from Rs 35.7 billion in 2003. In real terms, including the purchase of aircrafts and marine vessels, total investment has followed an upward trend of 5.5% in 2004, but lower than the 10.0% growth recorded in 2003. It is interesting to note that net of the purchase of aircrafts and vessels, real investment grew by 8.2% in 2004, representing a better performance than in 2003, when it grew by 7.9%.


Investment rate, measured as the ratio of GDFCF to GDP at market prices, has however gone down by 0.3%, to reach 22.3% in 2004 from 22.6% in 2003.


Private sector investment continued to make up the bulk of GDFCF in 2004. It accounted for 65.6% of total investment in 2004, compared to 61.2% in 2003. This represented a real growth of 13.2% in 2004, after a negative growth rate of -2.2% in 2003. Higher private sector investment was accounted for by new hotels projects, where investment increased by 55.8% in 2004, as opposed to a negative growth of 21.8% in the preceding year. Moreover, there were additional investments in spinning mills and other projects in the EPZ sector, with an increase of 45.0% in 2004 as opposed to a negative 7.7% in 2003.Inversely, the share of public sector investment fell from 38.8% in 2003 to 34.4% in real terms in 2004. In fact, real public sector investment dropped by 6.6% in 2004, after a high 37.0% real growth in 2003, resulting from a record increase of 133.3% in investment in the construction sector in 2003.


The resource gap, given by the difference between savings and investment, was again positive in 2004. However, there has been a significant contraction of 59.7%, from Rs. 4.3 billion in 2003 to reach Rs 1.7 billion in 2004, since investment increased more than savings. The direct consequence of this contraction is a further deterioration of the external account of goods and services.


2.4 Foreign Direct Investment

In 2004, FDI inflow fell by 8.6% to reach Rs 1.79 billion against Rs 1.96 billion in 2003. A sharp contraction was observed in the banking sector, where only Rs. 121 million were invested in 2004, as opposed to a high Rs. 1.3 billion in 2003.

In contrast, higher investments were recorded in the telecommunications sector in the wake of further liberalisation. Similarly, a total of Rs. 1.08 billion were invested in 2004 in other sectors of the economy, including IT, compared to only Rs. 485 million in 2003. The EPZ sector also attracted more FDI in 2004, with Rs. 248 million, compared to Rs. 77 million in 2003. The same upward trend was observed in the tourism sector, from Rs. 103 million in 2003 to Rs. 121 million in 2004.

Table 5: Foreign Investment, Rs million

2000

2001

2002

2003

2004'

Foreign Direct Investment

7,265*

936

979

1966

1,796

EPZ

8

3

41

77

248

Tourism

10

0

100

103

121

Banking

0

600

316

1301

310

Telecoms

7204

0

0

0

38

Others

43

333

522

485

1079

Direct Investment Abroad

333

83

278

1166

909

Net Foreign Direct Investment

6,932

853

701

800

887

* Includes receipts from the sales of Mauritius Telecom shares to France Telecom of Rs 7.2 billion

1 Revised Estimates


Concerning outward investment, a high figure of Rs. 1.2 billion was recorded in 2003. However, in 2004, it fell to Rs. 887 million.


2.5  Balance of Payments

The overall balance of payments in 2004, measured as a change in foreign reserve assets excluding valuation changes of the Bank of Mauritius, showed a surplus of Rs. 4.2 billion, compared to a surplus of Rs. 6.2 billion in the preceding year.


In the first three quarters of 2004, the current account recorded a deficit of Rs. 2.3 billion, compared to a surplus of Rs. 1.8 billion in the corresponding period in 2003, reflecting a deterioration in the visible trade account. The balance of trade worsened from a surplus of Rs. 988 million in the first three quarters of 2003 to a deficit of Rs. 3.0 billion in the corresponding period of 2004.


The capital and financial account, inclusive of reserves, recorded a net outflow of Rs. 163 million in the first three quarters of 2004 as opposed to a net outflow of Rs. 1.6 billion in the same period in 2003.


At the end of December 2004, Net International Reserves amounted to Rs. 52.8 billion, 8% higher than in December 2003, when it reached Rs. 48.9 billion. Based on the value of the import bill, exclusive of the purchase of aircrafts and vessels, the level of net international reserves represented 39.6 weeks on imports at the end of December 2004. For the corresponding figure in 2003, it represented 36.6 weeks of imports.


2.6 External Trade


Table 6: External Trade, Rs Billion

2001

2002

2003

2004

Trade in goods:

Exports of goods – excl freeport activities (f.o.b)

47.5

47.3

46.2

48.9

Export of goods – freeport activities

7.3

6.6

6.8

6.8

Imports of goods – excl freeport activities (f.o.b)

53.8

56.0

57.5

67.6

Imports of goods – Freeport activities

5.2

4.2

3.9

3.8

Merchandise trade balance*

- 4.2

- 6.3

- 8.4

- 15.7

Trade in services

Exports of services

35.6

34.4

35.7

39.8

Imports of services

23.6

23.7

25.3

30.0

Balance of trade in services

12.0

10.7

10.4

11.8

Overall trade balance

7.8

4.3

2.0

- 3.9

* Both Exports and imports are calculated on an f.o.b basis


The overall balance of trade in goods and services marked a significant deterioration in 2004. In fact, there was a shift from a trade surplus of Rs. 2 billion in 2003 to a trade deficit of Rs. 3.9 billion in 2004.


There was a sharp increase in the deficit in visible trade, which worsened by 87.1% in 2004. Trade in goods was largely biased against imports, therefore resulting in a faster growth in imports, which soared by 14.6% compared to a low 3.3% in 2003. Exports however grew at 7.6% in 2004 as opposed a meagre 0.5% in the preceding year.  On the other hand, trade in services fared well, registering a surplus of Rs. 11.8 billion in 2004, representing 13.5% more than in the previous year.


Much of the increase in merchandise imports in 2004 was associated with investment projects, both in the public and private sector. For instance, appreciable increases were noted in the c.i.f value of cement (+57.6%), machinery and transport equipment (+25.9%), crude materials including textile fibres (+46.2%), and telecommunications equipment (+80.3%). Others are linked to an increasing food bill, with surge in the c.i.f value of food items (+14.9%) and of road vehicles (+53.1%).


In fact, it is worth noting that in the fourth quarter of 2004, additional projects and events continued to contribute to boost the import bill. There were also new investment projects in EPZ and in energy production and the significant rise in the international price of petroleum products. Finally, the appreciation of the Rand (+13.2%), the Pound Sterling (+9.1%), the Australian Dollar (+9.2%) and the Euro (+7.1%) also contributed to the escalating visible trade deficit.


Box: 1 - Exports lack dynamics:

Although the Mauritian rupee continued to depreciate against major currencies, including the Euro, exports growth remained relatively static over the past few years. A combination of factors resulted in such a situation. Our markets remained relatively undiversified, with a high concentration in Europe. In the past few years, especially since the advent of the Euro in 2000, the Euro Zone has been relatively less dynamic than other countries like China and the US. Our exports to the most dynamic zones have remained however low. Some of the factors responsible for this lack of dynamism include erosion of our long-standing preferences, rising costs of production and the mismatch of skills on the labour market.


Trade in services on the other hand, recorded a surplus of Rs. 11.8 billion, 13.5% higher than in the previous year. This is in part, due to higher earnings from the travel industry benefiting from the windfall gains of a strong euro and a strong pound sterling. Exports of services surged by 11.4% in 2004, from Rs. 35.7 billion in 2003 to Rs. 39.8 billion in 2004, whereas there was a 10.6% increase in the imports of services during the same period of time, from Rs. 25.3 billion to Rs. 30.0 billion.


2.7 Inflation


Table 7: Inflation Rate, %


Calendar Yr

Inflation rate (%)

Fiscal Yr

Inflation rate (%)

2001

5.4

01/02

6.3

2002

6.4

02/03

5.1

2003

3.9

03/04

3.9

2004

4.7

04/05

5.5


The inflation rate, as measured by the percentage change in the yearly average consumer price index reached 4.7% for calendar year 2004 compared to 3.9% in 2003.  This was mainly the result of a combination of domestic and external factors.


There were significant increases in the price of subsidised flour (+17%) and rice (+40%). The rise in the price of flour led to an increase in the price of bread by 12%. The price of other food items, such as chicken (+8.8%), fish (+8.5%) , beef (+9.7%), and frozen mutton (+15.2%)  also went up in 2004.


In addition, the rise in international oil prices had spill over effects on the domestic economy. There were three successive increases in the price of gasoline and diesel oil. The price of gasoline increased by a total of 27.9% and the price of diesel oil rose by 45.0%, therefore causing subsequent surges in electricity tariffs (+5.1%), bus fares (+13.3%), taxi fares (+15.4%) and air fares (+16.0%).


Finally, the prevailing high budget deficit and the sustained level of public investment also contributed to inflationary pressures.


2.8 Employment/ Unemployment

Until 2003, labour force statistics were estimated on the basis of the Population census or Labour Force Sample Survey. A new methodology, named the Continuous Multi Purpose Household Survey  (CMPHS) was introduced in March 2004 to estimate the labour force, employment and unemployment rate. It is based on a sample of households that presently covers a total 8,640 households for the whole of 2004. Estimates are conducted on a quarterly basis, on 2,160 households per quarter.


In the new CMPHS, the lower age cut-off point to estimate the labour force was brought to 15 years instead of 12 years used previously. A few inconsistencies with regard to the results of the survey have been noted, which probably indicate some weaknesses in the new methodology.


The table below gives the estimated figures for the 3 quarters of 2004:


Table 8:

March 2004 –
Estimates

June 2004 –
Estimates

September 2004 –
Estimates

Labour force
- Male
- Female

541,100
348,700
192,400

540,700
347,500
193,200

527,800
349,400
178,400

Employment
- Male
- Female

494,100
328,400
165,700

491,200
324,600
166,600

483,500
329,800
153,700

Unemployment
- Male
- Female

47,000
20,300
26,700

49,500
22,900
26,600

44,300
19,600
24,700

Unemployment Rate (%)

8.7

9.2

8.4


Contrary to what one would logically expect, the CMPHS estimates indicate a downward trend in the labour force over the three quarters. From March to June, there was a fall of 400 people in the labour force. However, a larger fall was observed, with a contraction of 12,900 jobs from June to September 2004. Surprisingly, a contraction of 14,800 was observed among the female labour force, while it was estimated that 1,900 males joined the labour force.


The number of people employed in all three quarters also followed a downward trend. There was a fall of 2,900 in total employment between March and June, whereas the total employment loss stood at 7,700 for the period June to September 2004. A total of 5,200 males are estimated to have gained employment between June and September, whereas 12,900 female workers are estimated to have been laid off during the same period.


Despite the significant fall in the level of employment during June to September 2004, the overall level of unemployment has also gone down, from 9.2% in June to 8.4% in September. This paradoxical situation is explained by the proportionally larger contraction in the labour force in that period.


Over the first three quarters of 2004, employment in the primary sector,  showed a slight improvement, slowly rising from 9.6% of total employment in March 2004 to 9.9% in June and to settle at 11.3% in September 2004. The trend in the secondary sector, which includes manufacturing, electricity and water and construction industries, showed a slight decrease in percentage distribution, from 33.0% in March 2004 to 32.4% in June 2004, but picked up again in the third quarter to settle at 34.4% in September 2004. The share of the tertiary sector, which covers hotels and restaurants, transports and all service industries, improved from 57.4% in March 2004 to 57.7% in June and dropped to 54.3% in September 2004.


According to the CMPHS, the number of unemployed increased from 47,000 in March 2004 to 49,500 in June 2004 to finally settle at 44,300 in September 2004.  The unemployment rate, defined as the percentage of people unemployed to the labour force, increased from 8.7% in March to 9.2% in June to drop down to 8.4% in September 04.


Box 3: Unemployment: A structural phenomenon:

Despite a relatively stable economic performance, Mauritius is experiencing U-curve employment phenomenon since the last decade. It can be observed that the rate of unemployment has been slowly crawling, from a record low level of 4% in the early 1990's. A closer look at the nature of unemployment shows that the majority of those without a gainful job have the following characteristics: (i) they are young, often less than 30 of age, (ii) many have never held a first job, (iii) most of them have failed primary or secondary education, (iv) they had no vocational or technical training and (v) they are single and family supported. It is however interesting to note that despite the rising trend in joblessness, two paradoxical facts can be observed. On the one hand, the EPZ is crippled by labour supply shortages, and is compelled to import foreign labour mainly from China. On the other hand, the number of unfilled skilled-job vacancies, especially in the financial services sector and in the ICT sector has been increasing since the last 10 years.


It is therefore appropriate to say that the unemployment phenomenon is of a structural nature. It basically means that due to changes in demand and technology, there is a mismatch between available skills and available jobs. Structural unemployment cannot be cured solely by “reflation”, which is the macroeconomic policy to increase aggregate demand in view of creating more jobs. Instead, a policy that would emphasise on retraining and relocation of the affected workforce is necessary.


Here, it is worth noting that the education system plays a central role in supplying skilled labour. Although Mauritius is ranked as having a comparatively high literacy rate, it has some weaknesses in its secondary and technical education, especially in the teaching of natural science, engineering and vocational subjects. Our education system is rather academic and based on traditional fields of study. There is presently a lack of training/ retraining programmes that would prepare the labour force for the newly emerging sectors, such as ICT and high value added services. Let us note that Government has come up with a comprehensive reform programme in the education system, which present certain remedial measures to this problem, such as training/ retraining programmes, technical courses and additional university courses, in particular in ICT.


2.9 Public Finance


Table 9: Consolidated Government Finance (Rs. Billion)

2001/02

2002/03

2003/04

2004/05 (Estimates)

Total Derived Revenues and Grants

25.3

30.3

33.7

35.9

      - Ratio Rev/GDP (%)

18.4

20.2

20.4

19.9

Total Derived Expenditure and lending minus repayments

33.6

39.5

42.6

45.0

      - Ratio Exp/GDP (%)

24.5

26.4

25.7

24.9

Overall Budget Deficit
      - as a % of GDP

-8.3
6.1

-9.2
6.2

-8.9
5.4

-9.1
5.0

GDP at MP

137.0

149.6

165.3

180.6

Financing:
- External
- Domestic
o Banking
o Non-Banking
o Others

1.0
7.3
1.4
4.8
1.1

0.087
9.1
2.5
6.8
-0.15

-0.49
9.4
13.6
-3.5
-0.72

0.17
8.9
4.5
4.4
0


Source: Ministry of Finance and Economic Development


Total derived revenue and grants are expected to increase by 6.5% in financial year 2004/05, from Rs. 33.7 billion in 2003/04 to Rs. 35.9 billion. However, the ratio of revenue to GDP is expected to follow a downward trend, from 20.4% to 19.9% in fiscal year 2004/05. Tax revenue is expected to continue to make the bulk of total revenue, with a ratio of 91.1% in 2004/05, compared to 86.3% in the previous year.


Domestic tax on goods and services is expected to contribute to 53.8% of tax revenue in 2004/05, slightly higher than the 53.4% registered in 2003/04. The second contributor to tax revenue will continue to be taxes on international trade, although its share will decline from 25.4% in 2003/04 to 24.5% in fiscal year 2004/05.


Total derived expenditure and lending minus repayments is forecast to grow by 5.6% in FY 2004/05, increasing in value terms from Rs. 42.6 billion in 2003/04 to Rs. 45.0 billion. The ratio of expenditure to GDP is expected to drop for the second consecutive year to reach to 24.9% in 2004/05 compared to 25.7% in the previous year.

Current expenditure makes up the bulk of total expenditure, with a share of 82.1% in 2004/05, higher than the 81.9% recorded in 2003/04. The main component of current expenditure is expenditure on goods and services, accounting for 41.2% of total expenditure in 2004/05, slightly lower that the 41.3% registered one year ago. The second biggest component is current transfers and subsidies, with a share rising slowly from 39.8% in 2003/04 to 40.3% in 2004/05.


Capital expenditure accounted for 17.2% of total expenditure in 2004/05, against 18.1% in the preceding fiscal year. 72.6% of capital expenditure was dedicated to the acquisition of fixed assets in 2004/05, as opposed to 67.8% in the previous year.


Regarding expenditure by function, welfare and social security (18.3%), education (15.7%), debt interest payment (15.4%) and housing (7.4%) make up the bulk of total expenditure.


It is worth noting that in 2004/05, education and housing, taken together, accounted for the bulk of capital expenditure, amounting to a total of 49.9%. This represents a 5% increase from the previous year, where capital expenditure on housing and education was equivalent to 44% of total capital expenditure.


The overall value of the budget deficit is projected to increase from Rs. – 8.9 billion in 2003/04 to Rs – 9.1 billion 2004/05. However, as a percentage of GDP the overall budget deficit is expected to fall from 5.4% in 2003/04 to 5.0% in 2004/05. The deficit is planned to be financed at 98% from domestic sources, with an equal contribution from the banking and the non-banking sector.


Table 10: Public Debt Rs. Billion

June 2001

June 2002

Jun 2003

June 2004

Sep 2004

Actual

Actual

Actual

Actual

Provisional

Internal Public Debt

53.7

67.4

86.4

85.0

86.1

  - Medium & Long Term
    (at nominal prices)

12.7

11.8

12.3

16.7

17.7

  - Short Term (at nominal prices)(1)

41.0

55.6

74.1

68.3

68.4

External Public Debt

6.8

8.5

9.1

8.4

8.5

  - Long Term

6.8

0.32

8.6

8.3

8.3

  - Short Term (2)

-

8.1

0.5

0.13

0.19

Total Public Debt

60.6

75.9

95.5

93.4

94.7

  - As % of GDP

48.9

55.1

63.8%

56.5%

N/a

External Debt of Public Corporations

18.0

18.6

17.6

15.2

15.2

Total Public Sector Debt

78.6

94.5

113.1

108.7

109.9

  - As % of GDP

63.5

68.4

68.5

65.3

N/a


Government short-term obligations, made up essentially of treasury bills represented 63% of total public sector debt in 2004. Medium and long-term obligations, consisting of government bonds, Mauritius Development Loan Stocks, accounted for 15% of total public sector debt. External debt, consisting of foreign loans, disbursement and amortisation was estimated at 8% of total debt. Finally, external debt of parastatals represented the remaining 14% of total public sector debt in 2004.


As at June 2004, total public debt, excluding debt of public corporations was estimated at Rs. 93.4 billion, which represented 56.5% of GDP, 6.8 percentage points lower than in June 2003, where total public debt amounting to Rs. 92.5 billion, stood at 63.8% of GDP. The external debt of public corporation was significantly reduced by 13.7%, from Rs. 17.6 billion in June 2003 to Rs. 15.2 billion in June 2004. On the whole, total debt of the public sector, including external debt of public corporations fell from 68.5% of GDP in 2003 to 65.3% of GDP in 2004.


Table 11: Public Debt Servicing (Rs billion)

June 01

June 02

June 03

June 04

External Debt Servicing

4.4

0.94

1.0

1.1

   - Capital Repayment

3.9*

0.71

0.84

0.88

   - Interest payments

419

229

199

218

Internal Debt Servicing

5.9

5.4

7.4

7.7

   - Contrib. to Consolidated Sinking Fund

0.96

1.0

1.2

1.2

   - Interest payments

4.9

4.4

6.3

6.5

Total Public Debt Servicing

10.2

6.3

8.5

8.8

   - As % of Recurrent Revenue

42.4

25.7

28.7

27.2

* includes repayment of Rs 3,125 million in respect of the Floating Rate Note (FRN)


External debt servicing slightly increased in June 2004, from Rs. 1.0 billion to Rs. 1.1 billion. Internal debt servicing also went up in money terms in June 2004, from Rs. 7.4 billion in 2003 to Rs. 7.7 billion. Total public debt servicing grew by 4.1% in June 2004. However, the ratio of debt servicing to Recurrent Revenue went down by 1.5 percentage points, from 28.7% in 2003 to 27.2% in 2004, due to higher recurrent revenue in 2004.


Box 4: Medium Term Expenditure Framework (MTEF)

The Government is currently undertaking a comprehensive budgetary reform programme to strengthen all aspects of the fiscal management system, particularly budget preparation, monitoring and evaluation.  The objective is to ensure aggregate fiscal discipline and promote allocative and technical efficiency.  In the last Country Assistance Strategy (2002-2004), Government has committed itself to introduce the MTEF as one of the elements of its budgetary reforms programme.  At the initial stage, around five ministries are included in the MTEF exercise on a pilot basis.  Other Ministries will be integrated into the exercise at a later stage when sufficient experience has been gained in formulating and implementing the MTEF and designing logical frameworks for the Ministries.


It is expected that MTEF would bring a fundamental change to the budget preparation process involving:

  • a more strategic approach to the allocation of resources linked to ministries' objectives over the medium term (3-5 years);

  • greater emphasis on the performance and achievement of objectives in sectors;

  • improvements to the budget classification so that the types of activities being funded could be more clearly seen in the budget documents;

  • using the activities to be implemented as the basis for estimating both the Recurrent and Development Budgets, thus moving to an activity based budget approach; and

  • building strong links between all stages in the public financial management cycle: budget preparation , implementation; monitoring and evaluation.

3.0  SECTORAL PERFORMANCE:


3.1  Agriculture

The agricultural sector, including sugar milling, grew by 5.1% in 2004, compared to a low 1.9% in 2003 as a result of better climatic conditions. The contribution of agriculture to GDP reached Rs. 10.9 billion, compared to Rs. 10 billion in 2003. It must be noted that although the growth rate of the agricultural sector was higher than the GDP growth rate, its share in GDP fell in 2004. In fact, it represented 7.2% of GDP at basic prices against 7.3% share of GDP in 2003. The reason is that overall prices increased more than that of the agricultural sector.


Table 12: Agriculture, including sugar milling - Main Indicators

2001

2002

2003

2004*

Sugar cane
Sugar milling
Non-Sugar
Total Agriculture

4,646
1,436
3,950
10,032

3,914
1,270
3,995
9,179

4,370
1,418
4,219
10,007

4,830
1,565
4,480
10,875

Agriculture
- Real growth rate, %
- Real growth rate, sugar cane, %
- Real growth rate, sugar milling, %
- Real growth rate non-sugar, %

7.5
9.9
9.9
4.3

-17.5
-25.0
-25.0
-6.1

1.9
3.1
3.1
0.3

5.1
6.5
6.5
3.3

Agriculture

  -as % of GDP at basic prices

8.5

7.3

7.3

7.2

  -as % of Total Employment**

11.7

10.2

9.9

na

Sugar

  -as % of GDP at basic prices

5.1

4.1

4.2

4.2

   -as a % of total employment **

6.4

5.0

4.5

na

Non-Sugar

  - as % of GDP at basic prices

3.4

3.2

3.1

3.0

  - as % of total employment**

5.3

5.2

5.4

na

* First forecast       ** March estimates              na: not available


a: Sugar Sector:

Sugar production reached 572,200 tonnes in 2004, compared to 537,155 tonnes in 2003. It showed a 7.1% growth in production.  In 2004, sugar constituted 3.2% of GDP similar to 2003. Employment in the sugar sector continued its downward trend as a result of the implementation of the Voluntary Retirement Scheme (VRS), linked to the centralisation of sugar industries.


b: Non-Sugar Sector:

Non-sugar agricultural sector grew by 3.3% in 2004, compared to 0.3% in 2003 and –6.1% in 2002. Favourable climatic conditions contributed to higher growth rates in 2004. Non-sugar sector output increased from Rs. 4.2 billion in 2003 to Rs. 4.5 billion in 2004. The share of non-sugar agricultural sector is estimated at 3.0% of GDP at basic prices, slightly lower than the preceding year.


Table 13: Non- Sugar Sector Indicators

Units

2003

2004

% change

Tea (Green leaves)

Tonnes

6,973

7,229

+3.7

Manufactured tea

Tonnes

1,436

1,482

+3.2

Tobacco

Tonnes

424

411

-3.1

Food crops

Tonnes

103,455

113,164

+9.4

Agro-industrial livestock and fishing

Tonnes

43,105

43,719

+1.4


The production of green tea leaves went up by 3.7% from 6,973 tonnes in 2003 to 7,229 tonnes in 2004. A slight increase was also observed in the production of manufactured tea by 3.2% in 2004. Tobacco registered a negative trend, where there was a decrease of 3.1% in 2004.


A 9.4% expansion was registered in food crops, from a total of 103,455 tonnes in 2003 to 113,164  tonnes in 2004. The most significant increases were observed in mixed vegetables (+148%), ginger (+114.1%), maize (+108.5%), and cauliflower (+71.5%). However, negative growths were recorded in creepers (-49.3%), groundnuts (-32.6%) and pineapples (-1.5%).


Box: 6 – Non Sugar Sector Reforms

In the light of the difficulties being encountered within the sugar sector, the non-sugar sector is called upon to assume a more important role in the agricultural economy. In this context, a non-sugar sector strategic plan has been elaborated in 2003, for a 4-year period to modernise the sector through the transition from traditional practices to a more sophisticated, technology-based approach. The main objectives of the reform are geared towards assuring a certain degree of self-sufficiency in food production, meeting quality exigencies up to international standards, optimising productivity by promoting the transfer of technology and developing a diversified local agro-processing industry in high value added products for exports.


3.2 Manufacturing

The manufacturing sector, which represented around 19.7 % of GDP in 2004, registered a real growth rate of 0.3 %, compared to a negative growth rate of - 0.02% in 2003. Despite the positive growth rate registered in 2004, the share of the manufacturing sector continued to decline. This reflects the difficulties being felt in the EPZ sector following the rapid liberalisation process and the emergence of new competitors.


Table 14: Main Indicators - Manufacturing (Excl. sugar milling) Rs. Million

2001

2002

2003

2004

Output
- EPZ
- Other

25,987
13,681
12,306

27,009
13,600
13,409

28,281
13,167
15,144

29,955
13,135
16,820

Real growth rates (%)
- EPZ
- Other

4.3
4.4
4.1

-1.1
-6.0
4.2

-0.02
-6.0
5.8

0.3
-5.0
5.0

Share in GDP at basic prices (%)
      EPZ
      Other

22.1
11.6
10.5

21.6
10.9
10.7

20.5
9.6
11.0

19.7
8.7
11.1

Share in manufacturing (%)

      EPZ

52.6

50.3

46.6

43.8

     Other

47.4

40.7

53.4

56.2


a: EPZ Sector

The EPZ contributes significantly to the manufacturing sector. However, its share has been slowly declining since 1999. In 2004, it accounted for 43.8 % of the manufacturing sector, compared to 46.6% in 2003. The same trend was observed in employment, when it represented about 13.7 % of total employment in 2004, against 15.8% in 2003. But one very positive element can be highlighted. It is the substantial increase in investment, which after a drop to Rs. 1.4 billion in 2003, rose by nearly 50% in 2004 to Rs. 2.1 billion.


Table 15: Main Indicators in EPZ sector

2001

2002

2003

2004

Real growth

%

4.4

-6.0

-6.0

-5.0

Exports (f.o.b)

Rs m

33,695

32,683

31,444

32,370

Exports Growth
(nominal terms)

%

8.8

-0.6

6.0

2.9

Imports (c.i.f)

Rs. m

17,140

16,909

15,579

17,210

Net exports

Rs. M

16,155

15,774

15,865

15,160

Investment

Rs. m

1,758

1,475

1,400

2,090

No. of enterprises
- New
- Closures

No.

522
23
19

506
9
25

506
23
23

501
20
25

Employment
(Growth Rate)

No.
%

87,607
-3.4

87,204
-0.5

77,623
-11.0

68,022
-12.4


The EPZ sector was severely affected by the economic slowdown, particularly by the phasing out of the MFA.  In 2004, EPZ output contracted by -5.0 %, against a contraction of –6.0% in the previous year.  In 2004, total EPZ exports amounted to Rs 32.4 billion, while total imports reached Rs. 17.2 billion. Raw materials made up the bulk of total imports, accounting for 85.7% of total imports in 2004, against 90.4% in the previous year. The share of machinery imports increased significantly, by 66.7%, from Rs 1.5 billion in 2003 to Rs. 2.5 billion in 2004. This is due to new investments made in spinning mills and other factories. For the same period, net exports added up to Rs. 15.2 billion, slightly less than the Rs. 15.9 billion registered in 2003.


The number of small EPZ firms increased from 134 in 2003 to 141 in 2004. However, employment fell from 565 2003 to 538 in 2004, representing a net job loss of 27. On the other hand, there was a large contraction in large EPZ establishments, with the number dropping from 372 firms in 2003 to 360 firms in 2004. The number of jobs in large establishments fell from 76,707 to 67,145 in the same period.


However, most closures occurred in the textile and clothing sector, in particular among foreign-owned firms. The number of factories in the textile yarn and fabric sector diminished from 43 to 41, laying off some 869 people. In the wearing apparel sector, the number of factories fell from 229 to 224 in the same period and 8,953 people loss their jobs.


The downward trend in employment in the EPZ sector reflected to a large extent the closure of factories as well as the downsizing of others as a result of restructuring and loss of market access. Also, it is observed that there is a general reluctance for unskilled/low skilled workers to join the EPZ sector. Total employment in the EPZ sector fell by 9,601 from 77,623 in 2003 to 68,022 in 2004.


The textile sector continued to represent the bulk of large EPZ establishments. In 2004, there were 265 textile companies, 7 less than in the preceding year.


UK, USA and France remained our principal EPZ export markets, accounting for Rs. 23.3 billion, which made up 72% of total exports in 2004. This represented a slight fall from the previous year, where EPZ exports to UK, USA and France amounted to 77.6% of total EPZ exports. The share of UK market increased by 14% from Rs. 7.8 billion to reach Rs. 8.9 billion, whereas the share of US market contracted by 12.9% from Rs. 8.5 billion to reach Rs 7.4 billion and that of France went down by 4.0% from Rs. 7.3 billion to reach Rs. 7.0 billion in 2004. In the region, there was an overall expansion of 11.9% in EPZ exports, from Rs. 1.7 billion in 2003 to Rs. 1.9 billion in 2004. There was an expansion of 25% in the exports towards Madagascar, from Rs. 560 million to Rs. 700 million, but a reduction of 20.1% of exports to South Africa for the same period from Rs. 557 million to Rs. 445 million.


b. Non-EPZ Sector:

In 2004, the non-EPZ sector registered a real growth rate of 5.0%, compared to the 5.8% registered in the previous year. Contrary to the EPZ sector, it recorded steady positive real growth rates over the past few years. In 2004, the non-EPZ sector accounted for 56.1% of the manufacturing sector, higher than the 53.4% registered in 2003.


Table 16: Non-EPZ Sector

2001

2002

2003

2004

Output, Rs. Million

12,306

13,409

15,114

16,820

Share in Manufacturing (%)

47.4

49.6

53.4

56.1

Share in GDP, %

10.4

10.7

11.0

11.1

Real Growth rate, %

+4.1

+4.2

+5.8

+5.0

Employment*

49,300

50,700

52,700

53,900

Investment, Rs. Million

2,614

3,397

3,006

3,590

Share in total manufacturing investment, %

59.8

69.7

68.2

63.2


* March Estimates

**Estimated


The share of the non-EPZ sector in the economy, which was 10.4% in 2001, increased to 11.1% in 2004. The evolution of employment in the non-EPZ sector was also positive, with an estimated figure of 53,900 in 2004, compared to 52,700 in 2003. This represented a positive growth rate of 2.3%.


Investment in the non-EPZ sector represented 63.2% of total manufacturing  compared to 68.2% in 2003. This is the result of a high 48% growth in EPZ investment in 2004.


Manufacture of food products, beverages and tobacco accounted for the bulk of the non-EPZ sector. Other important activities include the manufacture of chemical products, metallic and non-metallic products, furniture and publishing.


3.3 Tourism:

During the past decade, the tourism industry has emerged as the fastest growing sector and established itself as the third pillar of the Mauritian economy, accounting for about 6.4% of GDP in 2004, compared to 5.8% in 2003. In 2004, the tourism sector expanded by 2.6%, slightly lower than the 3.0% growth registered in 2003. This is the result of the slower growth in the number of tourist arrivals in 2004, when it increased by 2.4%, compared to 3.0% in 2003.


Table 17: Main Indicators in Tourism Sector

2001

2002

2003

2004

Real growth

%

1.0

3.2

3.0

2.6

Tourism as a % of GDP at BP

%

6.3

6.0

5.8

6.4

Gross earnings

Rs m

18,166

18,328

19,415

23,448

Tourist arrivals

No.

660,318

681,648

702,018

718,861

Employment (March)

No.

19,522

20,729

21,860

22,613

Investment as a % of GDFCF

%

10.0

12.8

9.3

13.7

Investment (real growth rate)

%

-2.9

32.8

-21.0

54.5

Number of Hotels

95

95

97*

103

Number of rooms

9,024

9,623

9,647

10,640

* 3 hotels were not operating in 2003 due to renovation works


Gross tourist earnings increased by 20.8% from Rs. 19.4 billion to Rs. 23.4 billion in 2004. Direct employment went up by 3.4% to reach 22,613 in March 2004, from 21,860 in the corresponding period a year ago. Investment grew by a record 54.5% during 2004 following the construction of three new hotels and the modernisation of existing ones. Number of rooms has increased from 9,647 in 2003 to 10,640 in 2004.


In 2004, the number of tourist arrivals stood at 718,861, compared to 702,018 in 2003. Some 91% of tourists came for holiday purposes, while 4.2% were on business and 3.5% were on transit.


Europe remained our main source, accounting for 66.4% of total arrivals. France, the leading European market, represented 29.3% of total tourists and 44.1% of the European market. Arrivals from France increased by 5.1%. Positive growth rates were recorded in arrivals from countries such as Italy (+3.5%) and UK (+1.6%). The biggest growth came from the Austrian market (+15.9%), the Netherlands (+10.5%) and from Eastern Europe (+10.8). Declines were also observed, namely from Germany (-3.1%), Switzerland (-10.1%) and Belgium (-16.2%).


The African market, with most arrivals originating from Reunion Island and South Africa, was second after Europe, with 24.4% of total arrivals in 2004, with the number of arrivals attaining 175,649. This represented a growth of 0.7% from 2003. Reunion island remained the main market, with 96,510 tourists, 0.9% higher than 2003. The South African market expanded by 15% in 2004 with total arrivals increasing from 45,756 in 2003 to 52,609.


The Asian market totalled 6.3% of arrivals, with 54.5% coming from India. Although in absolute terms the share of arrivals from China remained relatively low, it showed the highest progression in 2004, with a growth rate of 41.5%


In order to boost the tourism industry, Government has recently adopted a Master Plan on Air Access Policy in view of looking at the long-term viability of both Air Mauritius and the tourism sector. The report recommended the prudent and gradual liberalization of air access. Prior to this, an efficient restructuring of the National Airline company is necessary.


3.4  Financial Intermediation:

The financial intermediation sector, which comprises banking services and the insurance sector, stagnated, with a low growth rate of 1.0%, compared to 7.2% in 2003. This is the result of a negative performance of –15.5% in the offshore sector, counterbalanced by a growth rate of 5.0% in insurance, 7.4% in commercial banking services and 0.7% in other financial intermediation activities (stock exchange, trusts etc).


Table 18: Main Indicators in Financial Intermediation

2001

2002

2003

2004

Financial Intermediation

- Real growth

%

11.0

2.0

7.2

1.0

- as a % of GDP at BP

%

9.7

9.5

9.9

9.6

- Investment as % of GDFCF

%

2.3

3.0

2.3

2.0

- Investment real growth rate

%

21.4

33.8

-16.0

-7.6

Insurance

- Real growth rate

%

10.0

8.0

7.3

5.0

- as a % of financial intermediation

%

24.8

27.3

27.5

28.5

- as a % of GDP at BP

%

2.4

2.6

2.7

2.7

Others (mainly banking and offshore)

- Real growth rate

%

11.4

0.0

7.2

-0.5

-as % of financial intermediation

%

75.2

72.7

72.5

71.5

-as % of GDP at BP

%

7.3

6.9

7.2

6.9


While the growth rate stagnated, its share in GDP went down to reach 9.6% as opposed to 9.9% in 2003.


3.5 Information and Communications Technology (ICT)

The ICT sector has been considered as a major component in development strategy over the past few years and the sector has witnessed important changes and a rapid growth. Activities are concentrated around IT enabled services (ITES) and business process outsourcing (BPO). Since the setting up of the first company in 1996, which then employed some 14 people, the BPO-ITES sector counted in June 2004 some 60 companies with a total investment worth Rs. 1,171 million and employing about 2,935 people.


Table 19: Indicators on ICT

1996

1998

1999

2000

2001

2002

2003

June 04

No. of companies

1

4

5

7

14

18

42

60

Total employment

14

113

125

278

842

889

1,696

2,935

Investment, Rs. M

5

39

2

28

275

45

408

369


Since the beginning of 2002, the industry has experienced a high growth in terms of new companies created. 24 new companies were created in 2003 and 18 in 2004.


Back office operations constituted 36% of the sector, while call centres accounted for 30% and software development made up some 17% of the ITES-BPO sector.


Source BPO Secretariat, BOI, 2004


Call Centers employed mostly HSC holders who were recruited to work as tele-operators mainly, while people holding higher-level qualifications were called upon to perform more responsible tasks such as supervisors or team leaders.


On the other hand, companies engaged in providing BPO services, Software Development and Multimedia, recruited mostly diploma/degree holders.


Total foreign investment in the sector amounted to Rs. 611 million, equivalent to 57% of total investment in IT. 60% of FDI originated from France and India and were concentrated in BPO and call centres.


4.0  CONCLUSION:

The review shows that economic performance in 2004 was rather good, especially when viewed against the mounting challenges with which we have to cope.  The twin phenomena of regionalisation and globalisation, if they contain the promise of future benefits, impose upon us severe constraints in the short and medium terms, implying critical strategic changes, profound restructuring of business, and heavy investment in equipment and human resources.  It is not surprising in this demanding economic environment to see that the price which we have to pay to maintain the growth momentum at a moderate level is translated in high public indebtedness, persisting unemployment, continued depreciation of the rupee and relatively high inflation rate. In spite of all the odds, we have been able to cushion up to now the brutal blows of trade liberalisation.  Our textile industry is managing to keep afloat, though it is impossible to avoid the closures of the less performing units.  The non-EPZ sector is adapting successfully to more acute competition from overseas.  The situation in the tourism industry seems to be improving. The sugar industry has made real advancement in its restructuring and diversification programme.  We can also observe material progress in the ICT and financial sectors.


It can be inferred further that our economy has developed greater resilience to adversities as the significant improvement in living standards brought about by strong economic growth of the nineties has contributed to develop a robust and varied internal demand.  However, the relative lack of dynamism in our export industries can impose serous constraints on growth prospects, with negative impacts on employment, budget deficit and external trade deficit.