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Updated Jun 11, 2020
An aerial view shows people waiting while adhering to social distancing in a parking lot before entering a supermarket as only persons with the last names starting from A to G are allowed to enter at the Super U supermarket in Grand Baie, Mauritius, on April 2, 2020. Residents of the Indian Ocean island nation Mauritius rushed to supermarkets on April 2, 2020, after they had been shut for 10 days under a lockdown to curb the
An aerial view of people waiting in a parking lot to do their shopping as only persons with the last name starting from A to G are allowed to enter at the Super U supermarket in Grand Baie, Mauritius, on April 2, 2020. (AFP)

Mauritius reported its first cases of COVID-19 on March 19 and closed its borders to all foreigners on the same day. It was a radical step for a small, open economy, but a necessary one.

Subsequent containment efforts proved successful. A travel ban on foreign visitors was declared as early as February 2. Contact tracing began soon after, along with an aggressive public information campaign about the disease and the precautions people should take. Under a countrywide lockdown, schools, markets, and even the country’s famous beaches were closed.

The World Health Organization had projected that Mauritius could have more than 20,000 COVID-19 cases and 1,139 deaths, but the authorities’ swift action limited the number of infections to 337, and only 10 people died.

With the virus outbreak now largely contained, attention must shift to the economic and social fallout. Although Mauritius has reinvented itself before, the consequences this time challenge its economic philosophy and will require vision, creativity, and innovation.

The country, heavily exposed to global dynamics, now faces a triple threat of declining tourism, capital flight from its financial sector, and increasing concerns about food security. A rethink is needed of how to adapt, especially with a downturn in the global economy.

 

Pressures in the offshore sector could not have come at a worse time

 

COVID-19 has devastated the tourism and hospitality industry all over the world, which has effectively been shut down along with border closures. In Mauritius, the sector contributes an estimated 25 percent of GDP and 15 percent of all employment.

French and British visitors are among the biggest contributors of foreign exchange receipts, with China also a fast-growing market. For many, lost income makes island holidays an unaffordable luxury. The fear of infection and practicalities of travel will also keep visitors away. South African Airways and Air Mauritius, two of the main carriers bringing tourists to the island, have been grounded by the pandemic, and both have entered business rescue.

It is not just the tourism sector, however, that is taking a beating. Pressures in the offshore sector could not have come at a worse time. Last year, Mauritius narrowly escaped being blacklisted by the European Union as a tax haven, an issue that has recently resurfaced. Dismissed as noise in some quarters, its impact could be dramatic.

More recently, the European Commission added Mauritius to its “grey list”: countries that pose financial risk due to lax regulatory systems to counter money laundering and terrorist financing, but have committed to resolving the identified deficiencies. Despite the Mauritian government’s assurances that it will implement remedies to be removed from the list, the reputational damage could exacerbate COVID-19-related outflows and divestment.

The damage to the country’s reputation is already evident, says Anuradha Ramphul, managing director at the financial services consultancy St Lawrence Management. “We have seen some initial impact outside of the EU last week, for example, the Reserve Bank of India turning down investment proposals from Mauritius-based entities in the Indian financial services industry.” She nevertheless believes the authorities will soon address regulators’ concerns.

 

Other Setbacks

In May, Senegal announced it was withdrawing from its Double Taxation Avoidance Agreement with Mauritius, criticizing the agreement as lopsided. This is a blow to Mauritius’s intra-Africa relations amid efforts to pivot towards the continent. This will dent sentiment and future investment prospects, especially if other African nations follow Senegal’s example.

Food security is another growing concern. Mauritius has diversified away from agricultural output (sugar and vanilla) for nearly five decades, all the while drawing subsistence farmers into the now-collapsing services labor market.

Mauritius imports most of its food, which makes up 20 percent of total imports. In a climate of growing nationalism and protectionism, many countries have restricted some food exports to protect domestic food security. A sudden stop of staple imports from any one country would have a dramatic inflationary impact, heightening social pressures.

The impact of COVID-19 alone has forced extraordinary downward economic revisions. The economy is forecast to contract by up to 11 percent year on year in 2020, and unemployment to grow from 7 percent to 17.5 percent. With economic and regulatory headwinds mounting, both Moody’s and Fitch Ratings revised Mauritius Commercial Bank’s outlook to negative in line with their downwardly revised sovereign rating.

 

Mauritius needs to radically reinvent itself to stay relevant

 

This is not the first time Mauritius has faced such existential shocks. Policy makers have previously reacted with dexterity, but this was when Mauritius was a lower-income country moving up the industrial value chain. Now, the country needs not only to avoid the middle income trap, but also to radically reinvent itself to stay relevant.

It therefore finds itself at a crossroads. The tenets of its economic success—being attractive to international markets in an increasingly globalized world—are threatened as nationalism grows and countries look inward.

But as Eumonix CEO Claude Baissac argues, decision makers should be careful not to throw the baby out with the bathwater. With its small domestic market, endogenous solutions are limited. Instead, Mauritius should use one of its main comparative advantages: its seat at all diplomatic tables.

An aerial view shows people waiting while adhering to social distancing in a parking lot before entering a supermarket as only persons with the last names starting from A to G are allowed to enter at the Super U supermarket in Grand Baie, Mauritius, on April 2, 2020. Residents of the Indian Ocean island nation Mauritius rushed to supermarkets on April 2, 2020, after they had been shut for 10 days under a lockdown to curb the
Mauritians streamed to supermarkets on April 2, 2020, after they had been shut for ten days under a lockdown to curb the spread of COVID-19. (AFP)

The country’s strategic location and geopolitical appeal to foreign powers allow it to develop new sectors and industries tailored to specific needs. The sovereignty dispute over the Chagos Archipelago is illustrative of the rapidly changing geopolitics of the Indian Ocean region. With India, China, the United States, the United Kingdom, and France all having vested interests from a strategic and economic perspective, this remains a unique comparative advantage.

That said, there is a need for creativity, says Kevin Teeroovengadum, a Mauritian finance executive. “First, Mauritius must target self-sufficiency; it is essential to reduce its import bill, which has been growing faster than exports for the past two decades. Second, we need to go big bang into innovation, digitalization, and big data. Third, the blue economy is key given that we are surrounded by the ocean. Fourth, make the environment the center of everything and create an economy around it.”

Having already lowered interest rates and tapped reserves for business lending, the Bank of Mauritius was recently granted permission to make equity investments in private companies. These investments should be directed to future-facing industries in science, technology, and innovation.

The country’s established manufacturing base can capture some of the shift away from Chinese supply chain dependence. And its skilled, multilingual workforce can drive a greater share of the global business process outsourcing market. Looking ahead, a strong services focus positions Mauritius to play in emerging sectors such as health and medical tourism, medical cannabis technology, and green-geared industries.

While “business as usual” is under threat, Mauritius has proved agile in adapting to a changing world. The crisis requires it to fortify existing economic sectors, but offers the opportunity to forge a new future. To do so will require bold and visionary leadership. The question is whether the incumbents are ready for the challenge.

 

Ronak Gopaldas is a consultant for the Institute for Security Studies, director at Signal Risk, and co-founder of Mindflux Training

This article was first published by ISS Today.

 

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