Question

1. Explain the importance of the Financial Sector in Mauritius?
2. Developments of the Financial System In Mauritius
3. Performance of the Financial System in Mauritius?

Answer 1

In spite of its small economic size, low endowment of natural resources, and remoteness from world markets, Mauritius has transformed itself from a poor sugar economy into one of the most successful economies in Africa in recent decades, largely through reliance on trade-led development. Real GDP
growth averaged more than 5 percent between 1970 and 2009, while GDP per capita has increased more than tenfold over the same period. Though its economic success has been the subject of considerable debate, several key factors were central in bringing about the Mauritian miracle: good macroeconomic policies, particularly fiscal prudence and a competitive exchange rate policy; strong public sector and private sector institutions, with exceptionally productive interaction between the two; a strong, pro-trade orientation and a liberal trade regime; and use of its ethnic diversity to forge a consensus between the different groups. In parallel to its economic growth, Mauritius has achieved significant improvements in key human development indicators.

Since the 1970s, Mauritius has recorded very high growth rates and sustained increases in human development indicators due to a combination of good macroeconomic policies and strong institutions. With the advent of the sugar preferences and the EPZs in the 1970 and 1980s, Mauritian authorities have succeeded in transforming their economy and laying the foundation for stable growth in the future. Sugar and textile revenues have been used to facilitate service-sector development and contribute to socioeconomic progress and higher living standards.

A well-managed economic regime

Proper macroeconomic management—fiscal discipline during boom times, monetary management that kept inflation in the single digits and that produced interest rates that encouraged domestic savings, and an exchange-rate policy that maintained flexibility and competitiveness for exporters—have all been key to Mauritius’ economic success. At the same time, flexible public policy, especially in the form of experiments creating EPZs in the 1980s and embracing the ICT industry in the 2000s, was also an important feature. Trade reforms, the development of a social welfare system, and policies that favored human capital development also played a part. The result has been respectable and stable growth rates, manageable fiscal and current account deficits, and high rates of private investment.

A very successful economic trajectory

Between 1977 and 2009, real GDP in Mauritius grew on average by 5.1 percent annually, compared with 3.2 percent for sub-Saharan Africa (figure 1 based on IMF and government data); this rate of growth is despite the volatility caused by exogenous shocks over those years. The acceleration of the growth rate In the 1980s is the result of the macroeconomic reforms in response to protracted balance of payments and fiscal troubles. Following the reforms, Mauritius experienced steady growth, low inflation, and increased employment. GDP per capita, meanwhile, increased approximately seven-fold between 1976 and 2008, from less than $1,000 to nearly $7,000 (figure 2). At the same time, consumer price inflation in Mauritius has remained in the low single digits through the 1990s and 2000s, and the country’s debt stock has been manageable.5 Windfalls from sugar and textile preferences have been used wisely to help promote diversification and boost growth. The structural transition away from agriculture and into manufacturing and services shows the success of the government’s efforts at economic diversification.

Favorable international comparisons

Both a cursory examination of economic indicators and detailed diagnostics show that Mauritius has been one of the best-performing and most stable economies in Sub-Saharan Africa in recent decades, even in the presence of terms-of-trade shocks and oil shocks. Using purchasing power parity (PPP) data for 44 Sub-Saharan African countries, Arbache and Page (2008), for example, examine country-level dynamics of long-run growth between 1975 and 2005 and conclude that Mauritius was one of the best performers, both in terms of per capita growth performance and in terms of low growth volatility, alongside Botswana, Cape Verde, Gabon, Namibia, the Seychelles, and South Africa. Decomposing the standard deviation of GDP per capita and economic growth into within-country and between-country components, Arbache and Page (1999) find that Mauritius’ growth stability was much higher than that of many oil economies, such as Nigeria and Angola, and of resource-poor economies, such as Burundi and Central African Republic, in Sub-Saharan Africa. While Mauritius was growing, much of SSA was not. In 1975–94 growth decelerations were twice as frequent as accelerations: 29 percent versus 14 percent of all country-year observations in the Arbache-Page dataset.

The role of total factor productivity

Empirical work decomposing total factor productivity (TFP) in Mauritius during different time periods shows the strong role of factor accumulation. As in many countries in East Asia, the principal driver of growth in Mauritius has been capital and labor accumulation, with TFP growth making a significant but varying contribution.
In a paper using a growth accounting framework analysis for Mauritius and highlighting the
performance of the 1980s and 1990s, Subramanian and Roy (2001) uncover diverse performance in the two periods. In the first period (1982–90), economic growth was rapid and driven predominantly by the growth of inputs—capital and labor—which together accounted for more than 80 percent of the annual average rate of GDP growth of 6.2 percent. During this period, there was a stellar performance of employment growth, which averaged 5.2 percent per year, reflecting in a sharp decline in the unemployment rate from 20 percent of the total labor force in the early 1980s to 3 percent in the late 1980s. TFP growth was respectable at more than 1 percent, but capital accumulation was the main driver of growth. The authors find that economic growth from 1991 to 1999, however, was driven less by capital accumulation than in the past and to a greater extent by productivity growth, with TFP growth during this period averaging more than 1 percent per year.
In another study, the analysis of Sawkut et al (2009) provides evidence that TFP gains in
Mauritius have reached a plateau. TFP growth averaged 1.35 percent in the 1980s, 1 percent in the 1990s, and 0.7 percent in the 2000s, but the TFP contribution varies depending on the different growth rates . For the entire period 1980–2007, however, Sawkut et al. (2009) find that the TFP contribution to growth in Mauritius averaged 1 percent annually, considerably higher than the 0.28 percent average in Common Market for Eastern and Southern Africa (COMESA) countries over the same years. The TFP change in Mauritius was due to economic reforms and human capital improvements.

Structural transformation

Over time, there has been a profound change in the sectoral composition of the Mauritian economy. Between 1976 and 2010, the share of primary-sector production declined from 23 percent of the overall economy to 6 percent, while the secondary sector (including manufacturing, electricity, water, and some construction) increased from about 23 to 28 percent (with manufacturing making an even bigger jump), and the tertiary sector, which includes tourism and financial services, grew from just over 50 percent to nearly 70 percent of GDP (figure 3). Projections by the Mauritian government suggest further expansion of the tertiary sector as a share of the economy in the future. In general, the share of manufacturing output increased in the 1980s due to the presence of EPZs but stagnated as the sector faced adjustment in the 1990s and 2000s. Table 3 shows patterns for specific industry groups and subgroups between 1990 and 2010. Sugar, which represented more than 20 percent of Mauritius’ GDP in 1976, accounted for approximately 4 percent of GDP as of 2009. At a disaggregated sectoral level (whether at current prices or constant prices), there has been a strong structural change, with the decline in sugar, the rise of financial services and real estate, and the mixed performance of textiles as the service sector has strengthened . By the 2000s, the service sector is now the dominant feature of the economy in terms of contribution to output. This structural transformation has been noteworthy, and it has helped the country deal with decreasing returns to scale of capital accumulation at the sectoral level. The various economic pillars in Mauritius have thus contributed to growth and mitigated output
volatility.

Improvement in human development indicators

As opposed to many Sub-Saharan African and comparator economies, rapid economic growth in Mauritius has occurred in parallel with substantial improvement in human development indicators and a decrease in income inequality. Life expectancy at birth, for example, increased from 62 years in 1970 to 73 years in 2008, while infant mortality has dropped from 64 per 1000 in 1970 to 15 in 2008. The Gini coefficient, a measure of income inequality in which 0 represents perfect equality among households 1 represents perfect inequality, declined from 0.5 in 1962 to 0.37 in 1986–87 and was stable at 0.38 in 2008. Following heavy government investment in education improvements in the 1980s and 1990s, primary school enrollment rates have reached very high levels, averaging more than 90 percent in the 1990s and 2000s, although challengesremain.7 Poverty levels in Mauritius have also fallen significantly. In 1975, 40 percent of Mauritian households were below the presumed poverty line, according to the Central Statistics Office.8 By 1991/92, the proportion had fallen to 11 percent, and by 2010, absolute poverty was less than 2 percent. Significant improvements in gender equality have also occurred, due to the massive inflow of women into the labor market starting in the 1980s. The country recently ranked 11 out of 102 countries in the OECD Social Institutions and Gender Index. Mauritius’ housing stock has also improved, both in terms of quality and quantity, as a result of government investment. Finally, Mauritius has developed a sophisticated pension system covering retirement benefits and general social security.