Despite the uncertainties plaguing over the global economy, Mauritius had a decent performance in 2013, with a domestic GDP growth of 3.2%, together with a contained inflation rate of 3.5%. Setting aside these two main positive macro-economic indicators, an in-depth analysis of the island’s macro-economic variables provides an insight into the structural weaknesses of the Mauritian economy and structural bottlenecks which are impacting negatively on the growth potential of Mauritius. More importantly, this will act as major hurdle to our future growth capabilities unless remedial action is taken.

One of the most visible signs is the current account deficit. The situation has deteriorated over the years as consumption outpaces production levels: we have gone from a current account surplus of 5.4% of GDP in 2001-2002 to an estimated deficit of 10.4% of GDP for the year 2012-2013. The deterioration in the current account balance depicts the external vulnerabilities of Mauritius, which have important implications for a small open economy due to potential impact on economic activity, financial markets and fiscal policy. The deficit in the current account has so far been adequately met by surpluses in the financial and capital account which is made of cross-border transactions of Global Business Companies (GBCs) and FDI.

Mauritiuscontinues to attract sizeable private capital inflows that have helped to finance the current account deficit. FDI and flows related to the GBCs account for the bulk of capital inflows. Inclusive of cross-border transactions of GBCs, the capital and financial account posted a surplus of Rs 35.5bn for 2012-2013 (of which 12.7bn were accounted as FDI in 2012). The issue is that we have become dependent on crossborder inflows linked to global business activities to finance our imports.

Heavy dependence on capital inflows to finance our balance of payments exposes us to volatile nature of capital flows and this risk that is probably hard to gauge now given that there is no comprehensive analysis of the dynamics of these flows. For that reason alone, our policy stance should not be a source of complacency and remedies are needed to boost up exports.

The falling investment rate is another source of concern. The investment rate as a percentage of GDP is on a descending trend, it has gone down from 26% in 2009 to 21.5% in 2013. This situation calls out for action since the ratio of investments to GDP shows how much value-added in total domestic production is being invested rather than consumed. What makes it even worse is that the declining level of investment comes from the private sector. Investment geared towards highvalue added sectors has not been significant in recent years. There is reluctance among domestic entrepreneurs to take opportunities beyond established sectors.

To give a new boost to private investment, it is important that we re-align our investment promotion strategy with our objectives. There is a strategically important role for FDI to play in increasing the investment rate in the short term as we have the potential to attract more FDI. But we need to refocus our strategy. We have missed on some opportunities because of our mistakes. We had for example the potential to develop the educational sector as a new hub but the absence of appropriate legislation and policy has tarnished the image of this grooming sector.

Too much focus has been put on property development in the past to attract FDI. During the year 2012 for example, over 50% of the FDI flows were headed towards real estate and construction. I believe that this is low quality FDI with low value added to the economy. FDI towards more productive sectors has been relatively low in recent years.

There is a mismatch between our long-term strategies and targets. The idea of private investments in public infrastructure and utilities projects has been floated but there is not yet a legal framework for these public-private partnership projects. Public infrastructure could have been a very good niche for private sector investments.

Structural bottleneck is also a source of concern as it hampers growth. Mauritius has already embarked on the reform path of our institutional framework. The Business Facilitation Act is a step towards achieving this goal but we have still a long way to go to further improve the ease of doing business in Mauritius. Also we still have a lot of activities that are still controlled. Obtaining various clearances or permits before starting a new business is the norm rather than the exception in Mauritius. And this indirectly acts as additional cost to capital!

Addressing structural issues will also require courageous decisions on the part of government. For example, government cannot continue to finance all services, such as education, health or pension as it leads to sub-optimal use of resources i.e. resources are not directed to more productive sectors. A more sensible approach would be targeted support for public health and public transport (‘ciblage’) but this would require an updated list with clearly defined social criteria which could spark controversy. But the most important thing is that Mauritius does not have unlimited resources so that the population at large must be made to think about the future of the country, even if this stance is a politically unpopular one. We have to develop economic strategies which focus on the long term even if these policies may prove to be detrimental to short term targets.

Mauritiushas been through multiple economic phases and unless we double our efforts, we will not climb out of the ‘middleincome country trap’. To do so entails a more substantial increase in growth. And for this, we need more investments and value added. Our investment level is currently standing at around 20-21% whereas in Eastern Asia, the rate is in thevicinity of 40%. This is a matter of concern as today’s level of investment is the fuel of tomorrow’s economic growth.

2013 was a turning point for developed countries and various economic data point to an improvement in developed economies, especially in the US and Europe. I believe that a technical rebound can be in the cards for Mauritius in 2014 with GDP growth of 3.5% -3.8%. Also, as the recovery in the developed world, and especially in our main trading partners including Europe, continues and optimistic global growth forecasts surface, this should impact positively on Mauritius. We already note a revival in the tourism sector and a rise in the level of exports. However, we are still operating below capacity and are under-utilising our resources,and thus, we should address the structural issues mentioned above in order to embark on a more sustainable growth path for the long-term.