1. The direct and indirect transmission pathways  

Brexit has unleashed huge uncertainty, significant risks and increased volatility, particularly for countries that have important economic links with the United Kingdom (UK) through the European Union (EU). While imports from and higher education in the UK will be cheaper with the depreciating pound sterling and there could be few opportunities in some specific services niches, it is very likely that the overall sectoral and macroeconomic consequences would be broadly negative for a trade-preference, tourism-reliant and FDI-dependent country as Mauritius. The UK exit could be a major economic challenge even if the extent and depth of the shock would depend on the type of trade arrangements that the UK will strike with the EU and with other countries and the time frame to reach such agreements. There will be both intended and unintended ramifications as there are both “known unknowns and unknown unknowns”. Consequently, policies, strategies and timely measures must be embraced to mitigate and manage the adverse effects on our economy.

The transmission channels of how Brexit will affect an economy like Mauritius are well documented. They range from trade in goods to trade in services, from foreign investment to development cooperation, from volatility in currencies to changes in the stock market and interest rates, from immigration to remittances and finally from the contagion of Brexit on the EU and the world as growth, output and trade are impacted.

2. The likely economic consequences

First, around 13% of our export of goods comprising chiefly sugar, textiles and clothing and seafood products go to the UK. There are many ways Mauritius could be affected. The significant depreciation of almost 18% of the pound sterling since the Brexit vote is already wreaking havoc on companies that have a high to average dependence on exports to the UK and are paid in that currency. There is then the prospects of a reduced export demand should output and growth in the UK be affected. There is already some evidence of lower demand for our products and of orders from UK clients being cancelled or deferred. In the medium to longer term, our preferential access to the UK market may be threatened if it introduces tariff on our exports or erodes our margin of preference by affording the same treatment to our competitors.

Second, the UK is an important tourist market both in numbers and receipts. Around 140 000 UK tourists are expected to holiday in Mauritius in 2016 and they will account for 11% of visitors. However their contribution to revenue is much greater as they stay longer and are high spenders. The hotel industry is already feeling the impact of the drastic fall in the value of the pound sterling. It could also suffer from a decline in numbers if growth in the UK slackens and uncertainty takes root.

Third, the services sector may lose out as financial services and ICT/BPO are impacted by either lower UK growth and/or increased competition from other countries. There are also many of our compatriots who live in the UK and send funds to their relatives back home even if it is not as important as for countries such as Nigeria and Kenya where remittances are substantial. One hopes that some financial sector activities which will leave the UK as a result of the loss of passporting rights in the EU will migrate to Mauritius instead of near shore EU jurisdictions such as Ireland, Luxembourg, Germany, Netherlands and even France. An articulate, intelligent and sustained marketing campaign that starts in earnest could help.

Fourth, the UK has always exercised a moderating influence in the EU for the more hardline position of countries such as France and Germany on offshore centres and how to describe uncooperative jurisdictions and alleged tax havens. We witnessed this marked difference in approach recently when the EU was finalising criteria to characterize harmful tax competition. Financial centres such as Mauritius may be vulnerable to the narrow view of some EU countries without the effective voice of reasonableness of the UK that also has to safeguard the interests of Jersey, Guernsey and Isle of Man.

Fifth, greater volatility in the financial markets will influence currencies, the stock market and interest rates. And these could have adverse consequences for Mauritius in terms of currency exposure, portfolio investment and debt servicing.

Sixth, foreign direct, portfolio and private equity investment might be reduced through lower GDP growth and rising uncertainty. Almost 11% of our FDI originates from the UK which is also a key provider of portfolio investment.

Seventh, the UK is one of the main contributors to the EU development aid budget, representing around 15% of the overall commitments to the 11^th European Development Fund (EDF) that provides development cooperation support to ACP countries. Mauritius has benefitted significantly from these funds over the years even if they have declined as we have graduated to upper middle income status. As the UK exits the EU, these resources will be curtailed and the EU cooperation will reduce its budget.  Mauritius is currently being supported by the 11^th EDF to move from an upper middle income to a high income economy. This cooperation may be at risks with Brexit even if we are likely to be affected by the post-Cotonou agreement in 2020 as scarce financial resources are transferred from upper middle income economies to fragile and low income countries.

Eighth, the UK exit could lead to lower growth in both the EU and other major economies. This would result into lower imports in these countries that will translate into reduced exports for economies like Mauritius.

Ninth, Brexit comes at a time when the global economy is already weak and volatile and Mauritius is facing declining growth, subdued exports and is mired in a middle income trap. There will be added risks and uncertainty for the country with the adverse impact of Brexit. And let us hope that the protectionist trade policy of a Trump US presidency does not threaten our market access to the US through a review of AGOA when it comes for renewal.

Tenth, Brexit could have an impact on the future of ACP-EU relations post-2020. The ACP group may feel the absence of a sympathetic voice and an ally at the table to discuss and negotiate a Post-Cotonou successor agreement. Unlike the UK and France, most of the EU countries do not have close historical links with ACP states. 

There will be both micro and macroeconomic ramifications. Firms will see a decline in earnings and profitability, resulting into job layoffs while the country will be adversely affected in terms of lower economic growth, declining foreign exchange earnings, deteriorating balance of trade and balance of payment with spillover effects on employment creation.

3. UK trade options and its impact on our preferential market access

As a small non-LDC ACP country, Mauritius will be vulnerable to UK trade policy options. The main threat is with respect to market access for our goods such as textiles and clothing, seafood products, sugar and fruits. Under the Economic Partnership Agreement, we enjoy duty-free and quota free market access to all EU countries and have preferences compared to exporters that face WTO-MFN tariffs. There is also the reassurance that our exports enter the market relatively hassle free. Depending on the new trade arrangements post-Brexit, our trade preferences could be at risk as our exports might be subject to tariffs or quota which would erode our competitiveness.

In choosing the post-Brexit trade relationship with the EU, the UK has to balance the advantages, obligations and influence of each option as there are significant trade-offs to be made. The negotiations with the EU is likely to be very tough as the UK is very divided between what it wants economically and what it must do politically following the Brexit vote. For instance, the UK will have to accept free movement of people to have full access to the single market. Equally, it will have to implement the EU rules to export to the EU and to contribute to the EU’s programmes and budget. On the other hand, a free trade agreement similar to what exists between the EU and Canada or a WTO option would result in fewer obligations but at the cost of reduced access to the single market, especially for services that is key for the UK economy. The question is whether the UK can have its cake and eat it at the same time with a bespoke deal that maximizes access to the single market while minimizing its obligations especially with respect to movement of people and budget contribution.

Unless the UK has a deal that is very close to what it obtains under the single market or has a custom union agreement akin to what Turkey has with the EU or decides to honour its commitment to the Interim Economic Partnership Agreement between the EU and ACP countries to which it is a signatory, there will be challenges for Mauritius in terms of market access. The options range from a soft to a hard Brexit. The question is whether the UK will choose to preserve our preferences or to lower MFN tariffs more generally and erode these margins of preferences?

Should the UK maintain the EU commitments of Member States that have signed the Interim EPA with a group of countries in Eastern and Southern Africa that includes Mauritius, there may not be any need for a fresh trade agreement for us. However should the UK change from the current Interim EPA model, Mauritius would have to enter into discussion with the UK over a new agreement to safeguard its market access, most likely as part of a regional or continental grouping.

The UK has entered unchartered territory. There is also an element of great uncertainty on the time required to complete the new trade deals. It looks increasingly unlikely that both the exit and the new trade arrangements can be concluded in two years after notification by the UK of Article 50. It took Greenland around seven years to withdraw from the then EEU while the free trade agreement between Canada and the EU have dragged on for close to eight years and is still not in operation.

The renegotiation of trade agreements will be a lengthy process as the UK will have to make alternative arrangements to replace around 100 trade treaties. Even a WTO default scenario might take longer than two years as it involves discussions with the 161 other members. We are therefore in for a prolonged period of risks, volatility and uncertainty which is not good for trade and the economy. A recently published report by Lord Green, a former UK trade Minister, cautions Africa against  a cliff edge scenario where the UK leaves the EU but fails to reach a new trade agreement and does not also implement transitional arrangements with ACP states for market access.

4. Articulating a viable response strategy

We must be ahead of the curve in terms of policy responses to the Brexit fall out. Both with specific proposals to protect our vital economic interests and the appropriate forum - whether bilaterally, within a regional bloc, a pan African framework or a Commonwealth-wide FTA – to shape our future trade and other economic relations with the UK. There is also need to avoid being crowded out by FTA’s that the UK will negotiate with larger and richer countries than Mauritius. Theresa May’s visit to India for her first major non-EU trip points towards a priority by the UK to engage with key trading partners.

In view of the complexity of the tasks, the limited personnel with trade expertise, the lack of institutional capacity, and the sheer number of negotiations that the UK will face in the next few years, there is a major risk that Africa and small countries such as Mauritius will not be on the front burner of trade considerations. While market access to the UK is vital for Mauritius, it is very likely that we will not be high on the agenda of the UK as its share of trade with us is almost insignificant as shown in the tables below.

 

South Africa is by far the most important trading partner of the UK in Africa. It is the largest exporter to the UK with a value of US$ 6.18 b. However it represents less than 1% of UK imports. The figure for Mauritius is at 0.045% which is very low. South Africa is also the most significant client of the UK with US$ 3.38 b of imports. Again it is tiny as a share of UK’s exports at far less than 1%. The percentage for us is a minuscule 0.022%. This places us at a distinct disadvantage compared to Europe and Asia which represent 58% and 23% of UK exports respectively.

We should also exclude some of the options that appear very unrealistic. In view of the very small share of UK trade with Mauritius, it is likely that we would hardly have any negotiating clout on a bilateral basis. Also, a UK- Commonwealth FTA looks very impractical from a legal, administrative and political standpoint. If our voice is to be heard, we have no choice than to play the regional or the continental free trade card. We could even seize this opportunity to broaden the agenda and go beyond quota free and duty free access to introduce more flexible rules of origin, new initiatives on services, investment and air for trade . And to strike a good balance between trade and development which the UK supports.

We should be proactive and not adopt a ‘wait and see’ position. In addition to setting up a high-level group of experts to assess the consequences of Brexit, analyse the negotiations between the EU and the UK as it unfolds and map out response strategies that are nimble and savvy, we should prepare for the worst case scenarii of a hard Brexit and choose a structured approach that will combine technical, political and diplomatic considerations. Strong leadership and clearly defined objectives are necessary to meet these challenges through constructive engagement. We should consider the option of initiating an exploratory dialogue with likeminded countries in the African region which will be affected by Brexit. In depth research and analysis and consultation are necessary to help inform and support policy making and implementation. And determine when to explore with the UK its future trade relationship with Mauritius as part of a larger trade group. The best deal for us would be one that is very close to the existing EU arrangements in terms of market access.

We must also advocate for the UK to maintain the current trade preferences so that our exports are not disrupted if the negotiation for Brexit lasts more than two years. Some transitional arrangements should be put in place until the UK embraces a new trade policy with respect to ACP countries such as Mauritius.

There are also short term measures, cyclical policies and targeted actions that can be implemented to mitigate shocks and help export firms cope with the effects of the falling GBP and lower the cost of doing business. The Ministry of Finance and the Central Bank should closely coordinate monetary, fiscal and exchange rate policies and be prepared to take additional measures to deal with the implications of Brexit as it unfolds. In the medium term, we should accelerate the diversification of markets for our products and encourage firms to penetrate the regional markets. In the longer term, there is need to structurally transform the sector by broadening the basket of goods and services exported and deepening it with value addition so as to build resilience to external shocks. We must improve the eco system to support a strong export-led manufacturing pillar and attract FDI in that space. We also have to enhance our productivity, lower trade costs and improve the quality of infrastructure in order to sharpen export competitiveness. Emphasis on innovation, technology, research and development will help our country to weather the storm and steer it on the road to higher export-led growth and FDI.

Concluding note

Brexit is a reality. Its implications for Mauritius could be far-reaching both directly in terms of trade in goods and services, investments, remittances and development cooperation and indirectly through the spillover effects on growth, external balance and employment. This is aggravated by heightened uncertainty on the nature and the character of UK’s trade options and the time it will take to negotiate alternative arrangements. There will be both short term financial impacts with the depreciation of the pound sterling and the long term economic effects of lower trade and reduced investment. Mauritius must focus its efforts on devising a robust strategy to manage this storm so as to safeguard its vital economic interests. We should also act to prevent the disruption of trade until the UK designs a new policy to address its strategic interests. This can be better achieved through a regional or a continental approach to engage with the UK to shape the future trade and development relations with Africa, including Mauritius.