Any Mauritian who studies economics or takes an interest in the history of the Mauritian economy is undoubtedly proud of the feat that our forefathers accomplished in disproving the prediction made by late Economics Nobel Prize Winner, James Meade in 1961, as to “our country facing a dismal future because of its vulnerabilities to weather and price shocks and lack of jobs opportunities outside the sugar sector”, and the comment made by another late Nobel Prize Winner V.S. Naipaul in 1971, who described our country as “an overcrowded barracoon”.

It is an undeniable fact that the economic success the country has attained since then, is a feat reckoned internationally and enjoyed locally. Unfortunately, the economic course the country has embarked on over the past years, especially since 2020, has set Mauritius on a very tricky path, with the spectre of an enduring inflationary spiral and sustained low real GDP growth looming ahead.

Let us start with the beginning. We rush to quickly blame all our economic woes on Covid-19 and its ensuing ramifications globally. While some may sing the Covid-19 blame song, we should be able to dispassionately analyse and conclude that the catalyst of our major economic woes started with the printing of the famous Rs 140 billion as the policy response to the economic ramifications of the Covid-19 pandemic. In administering an economy, it is not always a crisis per se that causes enduring pains and troubles; it is rather the actions taken to tackle or deal with the crisis that can either take the country towards a higher and more productive direction or a lower stratum embroiled in unnecessary negative and self-defeating spirals.

Back then, it should have already been crystal clear to those who studied and applied Monetary Economics or worked as economists in advanced financial markets, that this money-printing decision within the Mauritian context, would eventually lead to high inflation, distortions in the forex market and loss of confidence in the Mauritian Rupee. Now that these consequences have already materialized, and we can clearly see the accounting operations in the financial statement of the Bank of Mauritius for the writingoff of the Rs 60 billion given to the government, we can assert that the depreciation of the Mauritian Rupee is a direct consequence of the writing-off of the Rs 60 billion printed by the Bank of Mauritius and given to the government. Another fact that we can also acknowledge, based on “official statistics” from Statistics Mauritius on the Consumer Price Index, is that more than 90% of the loss of purchasing power is due to the depreciation of the MUR vis-à-vis the USD. As such the policy decision of printing and writing off Rs 60 billion is the main reason behind the sustained loss of purchasing power that Mauritians have witnessed since 2020.

Another crucial ramification of the above policy decision, which was not necessarily straightforward to predict is the current distortion that has been created in the labour market in Mauritius. It is understandable that any government would focus on successive salary increases for those earning less than Rs 20,000 per month (around 72% of the labour force, as per 2023 data) and those earning less than Rs 50,000 per month (around 90% of the labour force, as per 2023 data), from an electoral perspective. It is one thing to try to alleviate the financial burden of the population and another thing when the same decision gives rise to a new problem. The problem arises when only the salary quantum is taken into consideration when the government imposes unilateral wage increases and thresholds across the board.

With hindsight now, it looks that other crucial variables like number of years’ experience, level of qualifications, age, sector of economic activity, and relativity among several factors have not been taken into account before imposing the unilateral decisions taken by the current government. This situation, coupled with the ongoing loss of purchasing power, may also be among the core reasons for the rather significant brain-drain that the country is currently facing, further impacting the productive capacity of our economy.

To tackle the loss of purchasing power in Mauritius, we first need to understand that we are dealing with a cost-push inflation arising from the depreciation of the Mauritian Rupee, which increased the cost of everything we consume in the country. As such the mere fact of pumping more money, from a purely economics perspective, is self-defeating, as economists are still awaiting for empirical evidence whereby pumping money and/or reducing the cost of money are ways of combating high persistent costpush inflation in any country.

While increasing salaries can help combat the loss of purchasing power in the short term, if not very short term in the context of Mauritius; it must be managed carefully to avoid triggering inflationary pressures. The ideal scenario is one where wage increases are aligned with high levels of real Gross Domestic Product (GDP) growth, ensuring that real wages (actual wages net of inflation) grow and purchasing power is maintained without causing higher inflation. Despite the GDP per capita in Mauritian Rupee (MUR) terms rising by a whopping 63% from Rs317,434 in 2014 to Rs516,809 in 2023, in US Dollar (USD) terms, the rate of increase has been a meagre 14% from USD10,001 in 2014 to USD11,417 in 2023 as the MUR depreciated by a cumulative 47% against the USD from 31st December 2014 to date. Therefore, it is obvious that we are not producing enough in USD terms, but we are only playing with money illusion to generate a temporary feel-good factor.

No wonder then that everybody feels and talks about the high-level game of money illusion that is consistently being played in Mauritius. This also explains why despite successive increases in salaries over the last two years, Mauritians, on average, keep on complaining that the increase is not enough or that however much is given by one hand, twice the amount given, if not more, will be taken by the other hand by the government through its revenue collection mechanism, which is classified as “inflation tax”.

Unfortunately for all Mauritians, the money illusion game is a zero-sum game as no “real” wealth is created. To understand the concept of real wealth, consider the following example, if Mauritius used to produce 10 bars of gold worth Rs 1,000 each at an exchange rate of Rs 35 per USD in 2020; and in 2024, we are still producing 10 bars of gold worth Rs 1,500 each at an exchange rate of Rs 52.50 per USD, we have neither experienced any real growth nor have we created more wealth because of a higher price! The only thing that changed was the impression of having more Mauritian Rupees in hand! The zero-sum game nature of a wellentrenched money illusion policy plays in the favour of a few, with the rest paying the bills.

It is a known fact that the collection of VAT revenues by the government increased from Rs 36 billion back in Financial Year 2018/19 to Rs 56 billion in Financial Year 2023/24, while the real GDP has remained almost similar between these two periods.

It is also unfair that small and medium enterprises which contribute around 35% of GDP, employs around 45% of labour force but exports only around 6-7% of total exports have to foot in the bill both in terms of depreciation of Mauritian Rupee and sustained higher labour costs. The money game is highly skewed in favour of the government which after raking in the Rs 60 billion that everyone continues to pay through the depreciation of the MUR, also benefits from an annual inflation tax in the billions of Mauritian Rupees at the expense of everyone’s loss of purchasing power. Those who have significant export activities generating significant forex flows are also riding the wave of annual gains from the depreciation of the Mauritian economy.

Unfortunately, our country is becoming a tale of two categories: the haves and the have-nots, or those who can and those who cannot profit from the rent-seeking venture from the depreciation of the Mauritian Rupee. In between we try to assuage the pains of employees with salary increases, which they now know, will in turn result in more purchasing power loss in the near future. Are we nearing the end of this game, or it is just beginning?