iio1010o A wa Ast c T $U2t Sector 198045 1986-91 1980 1985 1991 Agriculture 1.1 0.2 12.4 15.3 11.0 o/w Sugar .. -1.3 .. 11.1 7.2 Industry 3.6 9.8 25.9 29.2 32.7 o/w EPZ .. 14.8 .. 9.6 12.8 o/w Sugar .. -1.4 .. 3.2 2.0 Services 2.6 6.4 61.8 55.5 56.3 GDPFC 2.4 6.6 100.0 100.0 100.0 Source: Central Statistical Office. Data refer to calendar years. Growth rates from 1988-91 are based on 1987 prices, from 1982-87 on 1982 prices, and prior to 1982 on 1976 prices. The Convention gives Mauritius a considerable advantage over non-ACP countries, such as Hong Kong and the Republic of Korea, which are some of Mauritius' main competitors, since their exports are subject to a 17 percent duty on entry into the EEC. 1.4. Mauritius has also been very effective in developing a tourism industry which caters principally to the affluent, long-haul market. With its gorgeous beaches, great variety of landscapes, an educated, multilingual, multiracial society, excellent hotels of international standard and a tradition of courtesy to foreigners, Mauritius holds a great attraction for tourists. Tourism in Mauritius has grown faster than the worldwide average and year-round hotel bed occupancy rates are very high for a beach resort destination. B. The Need for Diversification 1.5. Notwithstanding the remarkable success discussed above, the economy now faces a number of constraints and vulnerabilities that leave its success fragile. The Mauritian economy is highly dependent on the external economic environment, specifically within the EEC and in the US, and the continuation of preferential trade 1: Inroduction 3 arrangements. Moreover, the economy is now close to, or at, full employment and thus the supply of labor has become less elastic. The tightening in the labor market is now a binding constraint on economic growth in the short and medium term. The associated upward pressures on wages and prices which are now being felt have adverse implications on the international competitiveness of Mauritian industries and, in addition, threaten the financial stability which has been crucial for the country's outstanding economic performance over the past few years. Given these developments, it is imperative to review the incentive and regulatory regime in Mauritius to determine what might be done to increase the country's international competitiveness. Such a review is given in Chapter 2. In addition, for the successful transformation of the economy from adjustment with growth to sustained development, it is essential that the factors behind the economy's vulnerability be examined critically and suitable policy actions be taken so as to minimize the risks associated with the occurrence of adverse exogenous events. One of the central elements of such a strategy would be to increase labor productivity through the diversification of agriculture, industry, and tourism. Figure 1.1: Changes in GDP Composition Tourism (2%) Tourism (3%) Sugar (23%) Sugar (9%) ^ EPZ (0%) CEPZ (13%) EPZ (0%) Other (75%) Other (75%) 1976 1991 Source: Central Statistical Office. Agriculture 1.6. There is little doubt that, for many years to come, Mauritius will continue to be heavily dependent upon sugar and hence on the terms of the Sugar Protocol. The Govermnent should therefore seriously encourage the private sector to explore nonsugar alternatives, while continuing to take maximum advantage of the Sugar Protocol. 4 Maurttius: Expanding Horizons 1.7 Although Mauritius has already gone some way towards diversifying its agricultural sector, this effort has so far been concentrated in cultivating foodcrops, largely but not exclusively in the interlines of sugarcane. Agricultural strategy, as articulated in the Government's 1983 White Paper on agriculture, has placed greater emphasis on attaining self-sufficiency in a number of food crops, where necessary by subsidizing domestic producers. This emphasis has in the past resulted in a certain amount of resources being devoted to the production of food crops like maize and rice which cannot be produced economically, given the conditions on the island. There has been increasing realization on the part of the Government that such a strategy could potentially become a drain on the economy and consequently the resources allocated to some of the food crops have been gradually reduced. It has been argued that the best way of reconciling the legitimate concerns relating to food security with efficiency considerations is to ensure that scarce resources, particularly land and labor, are devoted to crops that yield the highest returns, be they for export or efficient import substitution. This would ensure that any shortfall in domestic food production would be met through export earnings from high-value crops. 1.8 Several studies have revealed that Mauritius has great potential in horticulture, i.e., tropical fruits, vegetables, flowers, and potted plants. It already successfully exports cut flowers to Europe; its annual export of anthurium is second only to Hawaii. Hybrids can now be produced on a large scale through tissue culture. Possibilities for other flowers, such as vanda orchids, also exist. 1.9 Mauritius also has the potential to export profitably a wide variety of tropical fruits. The island's soil and climate are highly suitable for these fruits which are already grown on a backyard basis and cater to the growing domestic demand from the tourist industry. This is specially true for litchis and pineapples. The demand for fruits, especially in the off-season, already exists in Europe and is growing quite rapidly, and this should be Mauritius' primary target market because of its large and affluent population, reasonable shipping distance, and EEC preferential treatment. 1.10 Thus the issues regarding diversification in the agricultural sector include: the appropriate level of sugarcane production; the identification of suitable additional crops; and the role of the Government in providing a suitable environment for agricultural export diversification. These issues are discussed in Chapter 3. Industry 1.11 To reduce its vulnerability to fluctuations in demand conditions in foreign markets, Mauritius also needs to increase productivity and diversify its portfolio of export industries, both within and outside the wearing apparel industry. EPZ activities are presently highly concentrated in wearing apparel and the degree of concentration has increased over time. Within wearing apparel, there has been increasing concentration in textile garments, reflecting the relative decline of the 1: Intoductfonq 5 knitwear industry. In addition, EPZ exports are concentrated in terms of their markets, with almost 90 percent of total EPZ exports, in value terms, going to the EEC and the US. The Government is concerned about the vulnerability that this product concentration brings to the economy and has actively sought to reduce it, both by discouraging further investment in wearing apparel and by encouraging diversification into other products, such as leather goods, electronics, jewellery, optical goods, and so on. It has also commissioned a number of industry-specific studies which have examined the potential for establishing electronics, informatics, and agro-processing industries in Mauritius. 1.12 It has been pointed out that, rather than having the Government get involved in identifying specific industries, a better approach would be to leave private investors to make individual decisions concerning the choice of industries while strengthening the Government's role in providing information and guidance to potential investors on conditions in export markets. Such guidance would include the provision of information regarding restrictions that may affect specific industries under the rules of origin of the Lome Convention; the labor and skills requirements of the proposed industries and their availability in Mauritius; and the compatibility of the industries with other objectives, such as environmental protection. The key is to maintain flexibility so as to be ready for changes in the perceptions of investors. 1.13 It also needs to be established whether Mauritius might be ignoring its comparative advantage by fighting against specialization. There are many factors that have contributed to the success of the wearing apparel industries, including a number that are specific to these industries and give them a special advantage in the EEC and the US. The potential for expanding wearing apparel exports to the EEC and the US markets has by no means been exhausted. The EEC market offers the best hope for the future while in the US market there are still many categories of wearing apparel that are not yet under quota. In any case, even in the categories under quota, it should still be possible to move to higher-value products to take advantage of the fact that quotas are specified in volume, not value, terms. 1.14 Recently, the Government has attempted to equalize the incentives given to EPZ and import-substituting firms, defined as those that are given development certificates (DCs). There has been a reduction in the level of tariffs levied on imports, while at the same time DC firms are now granted duty drawbacks on their exports, such that DC firms exporting 100 percent of their output get the same level of incentives as EPZ firms. As would be expected, the tariff reduction has created problems for some DC firms which now face increased competition from imports. Another promising area for DC firms is to take advantage of backward linkages in the EPZ industries by, for example, establishing ancillary industries for the garment industry and packaging materials. 1.15 Thus, a number of issues present themselves in considering industrial export diversification in Mauritius: the incentive regime, particularly as it pertains to the DC firms compared- to the EPZ industries; the advisability of moving a,way 6 Maurillus: Expanding Hortzons from the garments industry; the appropriate strategy for diversifying within the garments industry; the development of exports other than garments; and the role of the Government in supporting and facilitating the diversification process. These issues are discussed in Chapter 4. Tourism 1.16 The Government's policy towards tourism has been to pursue a select clientele, emphasizing the island's distaste for high-rise buildings, mass tourism, and charter flights. Accordingly, official policy now limits the capacity of new hotels to 200 rooms and bans high-rise construction. However, despite the Government's predisposition to the more affluent end of the tourist market, the sector has grown rapidly, with tourist arrivals reaching 298,500 in 1991 and likely to exceed 500,000 by the turn of the century if current trends continue. The rapid expansion of tourism has strained the island's infrastructure, with the existing road, telephone, and electricity networks being stretched to capacity. The mushrooming of new hotels has added to the pressures on the construction industry and several projects are running behind schedule. The high visibility of the tourist sector has also led to a link in the minds of the Mauritians between tourists and the island's environmental degradation. 1.17 A number of issues need to be addressed by the Government as it assesses the future prospects for the tourism sector. There is growing concern about the social impact of the large volume of tourists on the local population; consequently, the question of the optimal size of the tourist population, and hence of related hotel and airline capacities, will need to be addressed. To ensure that Mauritius maintains its reputation of excellent service, suitable training programs will have to be devised and room capacity and hotel quality closely monitored. To guarantee a consistent supply of high-spending tourists, efforts will need to be made not only to diversify the markets but also to enhance the menu of local activities offered the tourist. Most importantly, to maximize the net foreign exchange earnings from the tourists, a program will need to be developed to make Mauritius an attractive place where the tourist can purchase both locally produced and imported products. These issues are discussed in Chapter 5 of this report. 2 Incentive and Regulatory Regime 2.1. This chapter reviews the incentive and regulatory regime for production and investment in Mauritius with a view to determining how to increase Mauritius' global competitiveness, both within and outside the EPZ sector. A related issue is the need to move towards a fully integrated economy, i.e., one in which the EPZ and non-EPZ sectors are subject to similar regimes of taxes and tariffs, with a view to increasing the local content of exports in an economically efficient manner.1 A. The Macroeconomic Context 2.2. Mauritius has shown an impressive economic performance during the 1980s. Following the onset of stabilization and the adoption of an export-oriented adjustment program in 1982/83, the GDP annual growth rate increased from just under 0.4 percent in 1983 to nearly 7 percent two years later. Since then, it has gradually declined to just over 4 percent in 1991. During the same period, unemployment has declined from 19 percent to less than 3 percent of the work force. The economy is now considered to be at full employment. Labor force participation rates are about 80 percent for males and a little over 40 percent for females. 2.3. As may be seen from Figure 2.1, Mauritius' external current account has fluctuated sharply over the last fifteen years. Following the collapse of the sugar boom in the mid-1970s and the second oil shock, the external current account deficit reached almost 15 percent of GDP in 1981. Under the influence of drastic stabilization and rapid export growth, the deficit was eliminated around 1985, and a surplus of about 5 percent of GDP appeared two years later. There has; been Legislation in Mauritius provides special incentives for companies incorporated under the Export Processing Zones Act, 1970, as amended. Such companies which, in principle, export all their production, are exempt from import duties and domestic sales taxes on their purchases of raw materials and capital goods. They benefit from a preferential rate of corporation tax (15 percent) and dividends are exempt from personal income tax for the first ten years of their existence. Such companies are generally referred to as EPZ companies, even though there are no geographical Export Processing Zones in Mauritius. In the past, certain companies producing for the domestic market could obtain special incentives (Development Certificates), but this regime has fallen into almost complete disuse. There is a third category of companies that receive neither EPZ certificates nor DC certificates. In the text, these are referred to as non-EPZ, non-DC, or sometimes non- certificate companies. 8 MaLulttus: Expanding Horizons continual deterioration since then, primarily on account of a declining trade balance. Traditionally, Mauritius has nearly always had a negative balance on merchandise trade and net factor services. Net private transfers have usually been positive, however, as may be seen from Figure 2.1. Figure 2.1: External Current Account In percent of GDP, 1970 - 1990 151 10o rL 5 1 \/tNot Private Trans. t g-5 - /"'g0lg w rL *1- Net FactorSeMces -15- j\Trade Balanoe Current Account -20' 1970 1975 1980 1985 1990 Source: IMF, IFS. Figure 2.2: External Current Account In percent of GDP, 1970 - 1990 510: D ° 1 : . Non-Govt Sav - Inv Current Accunt 10 Fl_ Datidt t 1970 1975 1980 1985 1990 Source: IMF, IFS. 2.4. The influence of budgetary behavior on the external current account is clear from Figure 2.2. There is a clear correlation between the evolution of the two, whether the external current account is deteriorating or improving. In this connection, the impact of an increase of nearly 40 percent in wages and salaries in 2: Incentive and Regulatory Reghrne 9 1987/88 should be noted. During the period 1987/88-1989/90, current transfers and subsidies rose by over 35 percent. Capital expenditure also rose by about 19 percent, in part on account of the long-delayed implementation of several large public investment projects. Although this analysis indicates that the budget deficit is quite small at the present time, it has to be remembered that receipts include social security taxes. After adjusting for this, the deficit is somewhat larger, approximating 2.5 percent of GDP. 2.5. Until 1976, the Mauritian Rupee was linked to the pound sterling. Subsequently, it was initially pegged to the SDR. Since then, a flexible exchange rate policy has been followed. Figure 2.3 shows a steady downward tendency in nominal terms during the 1970s, which accelerated sharply at the end of the decade and in the early 1980s under the influence of two major devaluations. In real terms, however, there was a slight appreciation in the 1970s, followed by a steady depreciation in the 1980s until 1988, since when there has been an upward trend. 2.6. Figures 2.4(a) and 2.4(b) show the evolution of real bilateral exchange rates against a number of real or potential competitors. It can be seen that the Mauritian Rupee has shown marked depreciation against some countries (Hong Kong, Singapore, and Sri Lanka), whilst the reverse is the case for others (China, Morocco, Tunisia and Turkey). Thus, the country's competitive position is deteriorating against an important group of competitors. Figure 2.3: Exchange Rate Indices 1902 1980- 100 1701 Terms of Trade 1500 Nomrnal Exch Rate o . § 130 1101 > ,",,^' 90 j Real Exchange Rat 70 1970 1975 1980 1985 1990 Source: IMF, IFS. 2.7. Real exchange rate movements in Mauritius are heavily influenced by the evolution of wages and prices. The declining rate of inflation during the first half of the 1980s has been reversed since 1987. The annual increase in the consumer price index (CPI) exceeded 10 percent in 1989 and 1990, although it fell to 7 percent 10 Maurltlus: Expanding Hor[zons in 1991. Primary explanatory factors for the increases in 1989 and 1990 have been: (a) the nearly 40 percent wage increase given to civil servants in 1987/1988, which prompted similar, if somewhat smaller, adjustments in the private sector; (b) the tightening labor market; and (c) some rise in import prices attendant upon the gradual depreciation of the Rupee. The challenge which the Government now faces is to contain the future level of inflation. Figure 2.4a: Index of Competitiveness 1980 -100 1351 0 j-?,f* *. . Legend 95 j . ' ' . Singapore Hong Kong I . Sri Lanka I . -- Thailand 75L 1978 1980 1985 1990 Source: IMF. Figure 2.4b: Index of Competitiveness 1980 - 100 125 ˇ105A 85 AR : Legend X . ..........O-China i651 \ Morocco Turkey 45 1 --Tunisia 1978 1980 1985 1990 Source: IMF. 2.8. In fact, minimum wage levels and their adjustment are heavily regulated in Mauritius, as discussed in the next section. During the early part of the 1980s, 2: Irncentive and Reguiatory Regftne 11 the stabilization period, Government consciously pursued a policy of ensuring that wage awards were less than the rate of price inflation. This policy changed sharply after 1986/87, however, since when increases have tended to be in line with the rate of inflation on an across-the-board basis. Moreover, available evidence suggests that wage increases have exceeded productivity gains during this period, so that unit wages have risen. In part, the decline in productivity has been manifested by a significant rise in absenteeism. 2.9. After several years of negative real interest rates on deposits and almost certainly for some categories of lending operations, in particular for lending to EPZ companies, real interest rates turned positive in 1991. However, during the last six years, the significant rise in the level of reserves has increased liquidity in the economy and generated inflationary expectations, thus exerting upward pressure on the Rupee. This development indicates the need for an appropriate monetary policy that sterilizes the impact of the increase in reserves. 2.10. Thus, the impressive economic performance of the 1980s of high growth and declining unemployment has been accompanied, since 1987, by a rapid upsurge in prices, wages and, more importantly, unit labor costs. This state of affairs must now be regarded as a cause for serious concern. B. Regulation of Prices, Wages and Employment 2.11. Wages are tightly regulated in Mauritius, at least with regard to minimum levels by skill category. So are some prices. In addition, the consumer prices of rice, flour, sugar and potatoes are subsidized. In all areas, Government's intent is to protect consumer purchasing power in real terms and to contain inflation. To this end, prices of over 100 consumer goods were reduced by government decree in February 1991. Despite these price controls and consumption subsidies, inflation reached 13 percent in 1990/91, but fell to an average of 7 percent for calendar year 1991. 2.12. The resurgence of price controls was sharply criticized, for all the conventional reasons, by firms outside the EPZ sector which are the most directly affected. Complaints were made not only of the directly stifling effect of price controls on private sector initiative, but also of the distortions that these continue to introduce into the structure of incentives and competition. For example, in an attempt to lower the consumer price of one commodity, tariffs were eliminated on competing imports whilst being left in place for imported inputs used to manufacture the domestic products. Prices 2.13. During the early to mid-1980s, price controls on domestically produced goods and imports had been reduced to a bare minimum. Some products were subject to maximum prices while, in other cases, distribution markups were regulated. Details are provided in Table 2.1. This list remained unchanged until 12 Maurtius: Expandtng Horizons Table 2.1 MAURITIUS: List of Products Subject to Price Control Products Subject to Maximum < ___________________- -Prices > Distribution Markups Local Products Imported Products Imported Products 1985 1990 1985 1990 1985 Bread Bread Cement Cement Pharmaceutical Edible Oils Edible Oils Petroleum Petroleum Products Onions Onions Products Products and Sports Goods Potatoes Potatoes Rice and LPG Timber Sugar Sugar Flour Rice and Flour School Text Books Canned Foods Edible Oils Whole Wheat Butter and Flour Cheese Margarine Fresh Fruits Frozen Chicken Powdered Milk Toilet Soap Frozen Chicken Toothpaste Iron and Steel Bars Iron and Steel Fertilizers Bars Pesticides, Fertilizers Herbicides and Construction Fungicides Aggregates Aerated Beverages Source: Data provided by Mauritian Authorities. October 1988, when there was a gradual re-introduction of controls on prices and markups. This reversal of liberalization was partly in response to perceived abuses on the part of some manufacturers, importers and distributors, and partly to minimize inflation as measured by the CPI. By July 1990, price controls, in the form of maximum prices, extended to about 17 classes of products, both imported and locally manufactured. In addition, the list of products subjected to maximum distribution margins was also widened to include motor vehicle tires. 2.14. With the decline in inflation in 1991, the number of commodities subject to price controls has once again been reduced and efforts are underway to limit the number of commodities under such controls to a minimum; i.e., only those commodities which are considered essentials. Wages 2.15. There is an elaborate set of administrative arrangements for wage rate determination and adjustment in Mauritius, with several bodies advising the Government on wage policy matters and mediating in industrial disputes. These bodies include the Pay Research Bureau, the National Remuneration Board, the Permanent Arbitration Tribunal and a Tripartite Committee. While this system, to 2: Incentive and Regulatory Regirne 13 date, has succeeded fairly well in terms of maintaining industrial peace, since 1987 the interplay of these forces has led to sizeable wage increases that considerably exceed the rate of inflation, as documented below. This situation is a cause for some concern, since wages appear to be rising faster than productivity; the rising unit cost of labor could seriously undermine Mauritius' international competitiveness. Studies undertaken by the Central Statistical Office (CSO) in 1989 indicate that there has already been a significant increase in unit labor costs.2 2.16. The Tripartite Conmmittee has been meeting for the last ten years, and has generally given wage increases that are close to the increase in the consumer price index. This is very clear from Figure 2.5(a). Figure 2.5(b) shows, however, that wages have in fact risen much faster than the consumer price index - as measured by the dotted line which represents the ratio between the wage index and the CPI.3 This development reflects several factors. In the first place, there has clearly been some upward pressure on wages because of the tightness in the labor market. But it is also clear that part of the increase has resulted from National Remuneration Board recommendations, which have been adopted by Government, and part from delayed spillover effects from pay increases granted to the civil service and parastatal sectors in 1987. In both cases, it seems that supplemental wage increases have been given over and above the award emanating from the Tripartite Committee. 2.17. For example, the 1987 Remuneration Order awarded Export Enterprises employees increases of 10-15 percent, with effect from July 1,1987. The Additional Remuneration Act for 1987-1988, which was voted in December and made retroactive to July 1, led to an additional increase of 10 percent for the lowest category of workers and somewhat less for higher grades. This same Remuneration Order also increased fringe benefits. In the same vein, deliberations of the Permanent Arbitration Tribunal led to an 18 percent exceptional increase in the sugar sector in 1990, over and above the 11 percent across-the-board increase granted as of July 1 by the Additional Remuneration Act. In this case, the problem appears to have been that sugar sector employees felt aggrieved by the massive increase granted in 1987 to agricultural employees in the parastatal sector, which made them about 10 percent better off than private sector agricultural employees. 2.18. Overall, then, it appears that a combination of circumstances has led to increases in wages that exceed the rate of inflation. As already indicated, this is very clear from the dotted line in Figure 2.5(b). This has had repercussions on the evolution of nominal wages in foreign currency terms, for which an index has also been presented in Figure 2.5(b). Specifically, the foreign exchange wage index 2 For further details, see Digest of Industrial Statistics 1990, Central Statistical Office, Mauritius, June 1991. 3 The wage index has been calculated using the average monthly earnings reported to the Central Statistical Office in March and September in the Bi-Annual Survey of Employment and Earnings in Large Establishments. 14 MaurLttus: E:xpandlng Horizons Figure 2.5a: Annual Wage & Price Increases 1975- 1990 351 301 25- Prices 20- 15" 1O~ 1975 1980 1985 1990 Source: National Remuneration Board, Pay Reseamch Bureau Figure 2.5b: Wage Indioes 1980 - 100 3001 20I Wage Inclex (Rs) 2002 %i NEER ~~~~~~Wage IndoxICPl 100- ~~~~~~~~~~Wage Index (For Ex) 0- 1972 1975 1980 1985 1990 Sources: Biannual Survey of Wages and Employment; IMF. deflates the nominal wage index by an index of the trade-weighted nominal exchange rate. The beneficial impact of continual currency depreciation in nominal terms on the foreign exchange "wage"t is immediately apparent but, nevertheless, the foreign exchange wage still shows a pronounced upward trend. The impact on competitiveness in real terms would require some direct comparison of wages and their evolution in Mauritius and its competitors. These are not currently available. However, Figures 2.6(a)-(d) show the evolution of wages in pounds sterling, French 2: Incentive and Regulatory Regime 15 francs, German marks and US dollars. In all cases, it is clear that the depreciation of the exchange rate has resulted in a somewhat lower rate of increase of wages expressed in foreign currency. This has undoubtedly helped maintain competitiveness, even though the wage level in foreign currency has showed an upward trend in all cases. Figure 2.6a: Wage Indices (Briftsh Pound) Figure 2.8b: Wage Indices (French Franc) 1980 - 100 1980- 100 3001 Wage Index (Rs) Wa ind IOD ......... " WageneCPI ii : wage Indewl 1o0w 1985 1990 198 19B5 190 Sources: Blennual Survey of Wages and Employment; IMF. Sources: Pbnnual Survey of Wages and Employmt IMF. Figure 2.6c: Wage Indices (German Mark) Figure 2.6d: Wage Indices (US Dollar) 1980-100 1980 -100 300 3001 Wage Index (s/ Wage Index (s 200i \ 200iJ 1200| Wage Index (For Ex) 3 NER I- 1300 A-4 mE E ; 3'1fl P1l fi 1001 11 iE - ~~~~Wage lndeyOI 0.Wr M(FOV Ex) 1980 1985 1990 19S0 1985 199O Sources: Blannual Survey of Wages and Employment IMF. Sources: Biannual Survey of Wages and Empbymnt IMF. 2.19. The above analysis suggests that great care is needed in the conduct of wage policy in the near term in order to avoid a precipitous loss of competitiveness. Specifically, wages should not be allowed to increase faster than the rate of growth of productivity. This will at least avoid an erosion of competitiveness. To the extent, however, that nominal wages do continue to drift up compared to competitors, it may be necessary to continue to use a downward flexible exchange rate to maintain competitiveness. Here again, it is obvious that 16 MauTthus: Expandlng Horizons this will be all the easier to manage if wage increases can be contained, and/or productivity increased. 2.20. An additional issue that needs to be addressed is whether the existing institutions for wage setting could be streamlined; and eventually, whether it is desirable, on economic grounds, for there to be any government intervention in wage determination beyond the establishment of a minimum wage. Might it not be better simply to let wages be freely determined by market forces for the most part? 2.21. The Government has identified the lack of a well-trained labor force as a. major constraint to further sustained growth and has developed a broad strategy towards industrial and vocational training, both within the context of the existing educational system and through the creation of the Industrial and Vocational. Training Board (IVTB). The Goverranent's emphasis on enhancing the productivity of labor through industrial and vocational training is entirely appropriate and it is strongly recommended that it be continued. However, it appears that, given the rapid and unforeseen growth in its mandate, the IVTB risks becoming a major provider of training programs which are supply-driven, whereas they should be demand-driven. Thus, IVTB's overall mandate needs to be more properly defined and its responsibilities and activities prioritized. The identification of priority areas for training programs should be based on the fundamental concept that all training should be done as a result of demand from the private sector (see Annex to this chapter). Regulation of Employment 2.22. Employment is regulated by the Labor Act and the Industrial Relations Act. EPZ companies are subject to all dispositions except, in part, those regarding the termination of employment. The present section reviews labor legislation, paying. particular attention to differences in regulations between EPZ and non-EPZ; companies, and seeks to identify whether the legislation might itself be a barrier to increasing labor productivity. 2.23. Hiring. In the firm-level interviews conducted, employers reported no administrative obstacles to hiring workers of their choice, but rather significant problems with absenteeism (5-15 percent) and high turnover (sometimes as much as 50 percent).4 Poaching is also a problem, particularly in EPZ companies. Foreigners planning to work in Mauritius need a residence permit from the Passport and Immigration Office and a work permit from the Ministry of Em- ployment. Work permits are usually granted to foreigners holding professional and technical qualifications in fields where Mauritians are not available. These permits have in the past taken a long time to obtain (up to nine months) although the situation has improved markedly with the establishment of the Work Permit 4 There is no obligation to hire workers through the Employment Office of the Ministry of Employment, although firms are free to do so if they wish. 2: Incentive and Reglloanoy Regine 17 Committee; work permits are now being issued within about three months. 5 It also appears that some firms have been authorized to import workers from Madagascar and Sri Lanka in order to alleviate the labor shortage on the factory floor. 2.24. Under the Sugar Industry Efficiency Act of 1988, employees in the sugar sector receive special protection in the form of an entitlement to work during the intercrop season. Section 4(b) stipulates that every sugar employer shall, during an intercrop season, employ his "regular" labor force, and all other workers employed by him in the preceding harvest or, in a designated year, a supplementary labor work force, consisting of 15 percent of all other workers employed by him during the preceding harvest. The "regular" work force consists of all workers who became entitled, under the Security of Employment (Sugar Industry) Act 1966, to be offered employment in the 1967 intercrop season. Employers are not required to fill vacancies in the regular workforce. But in any designated year, when the number of vacancies exceeds the supplementary work force, the employer is required to employ additional workers to make up the difference. These and other dispositions of the Labor Act and corresponding regulations are a direct barrier to increasing labor productivity in the sugar sector and should be removed.6 It also appears that there is complete security of employment in the government sector, as well as substantial overemployment. Both tend to reduce the supply of labor to other sectors of the economy. 2.25. Termination. Individual termination and reduction in the work force are governed by Part VI of the Labor Act, which requires both employers and employees to give suitable notice prior to the termination of employment. Workers employed for less than three years get, at most, two weeks' notice. This increases to three months for workers employed for over three years. Workers under notice of termination must receive reasonable time off, without loss of pay, to seek further employment. The notice regulations seem to be applied asymmetrically, in that firms are "advised" not to reclaim compensation from employees who leave without providing notice. This obviously facilitates poaching, if workers feel that they may leave with impunity. This problem might be solved by ensuring proper application of the legislation regarding notice by employees as well as employers. Employers are also required to pay a severance allowance to workers who have been in continuous employment for at least one year. However, employers may deduct from the severance allowance gratuities granted by the employer, or any contribution made to pension or provident funds they set up for the benefit of their employees. 5 The Work Permit Committee consists of representatives from the Prime Minister's Office, the Ministry of Industry and Industrial Technology, and the Ministry of Civil Service Affairs and Employment. 6 It appears that their scope of application has been considerably reduced by the Sugar Industry Efficiency Act, 1988. 18 Mauiffus: Expanding Horizons 2.26. Work Force Reduction. Firms employing more than 10 workers that wish to reduce their work force, either temporarily or permanently, are required to give written notice to the Minister of Labor, together with a statement of the reasons for the proposed reduction. The employer must specify the workers who will be laid off and must, according to jurisprudence, first lay off those who were most recently hired, although the principle is not prescribed and is not rigidly applied.7 The request is referred to the Terminations of Contracts of Service Board. It is illegal to proceed with the proposed reduction in employment until the Board has taken its decision and, in any event, less than 120 days after giving notice of intent to the Minister. Note in this connection that the Board often takes longer than 120 days to reach its decisions. Failure to abide by these provisions entails the payment of 120 days' remuneration, together with a sum equal to six times the amount of the severance allowance. 2.27. Firms rightly complain that these dispositions are excessively restrictive and make the adjustment and upgrading of the labor force unduly difficult. In the end, this results in a situation in which knowledgeable firms try to avoid the problem by minimizing the number of jobs created, either by limiting the scale of their enterprise or by choosing more capital-intensive techniques. In particular, the dispositions regarding the order in which employees can be fired - last-in, first-out - are a great deal less flexible than elsewhere. Some countries allow firms to retain workers showing the most aptitude for the jobs that will be maintained. The last-in, first-out rule applies to the remaining workers. Such a disposition can be particularly important where younger workers are more literate or better qualified than older workers, and so have a greater potential for increasing productivity. 2.28. It was also pointed out that these dispositions are much more restrictive than those applied to EPZ firms which are exempt from the dispositions of the Labor Act regarding termination of employment. In other words, EPZ firms are not required to give notice or pay severance allowances. Consequently, the last-in, first-out rule does not apply concerning the order of layoffs. Domestic market firms see no reason why they should be treated less favorably. The EPZ Act does indeed provide special regulations regarding labor. Section 14(9) effectively dispenses them from the obligations of Section 6 of the Labor Act regarding termination, except regarding unjustified dismissal. Neither notice nor severance allowances are required, for both individual terminations and work force reductions. However, the 'EPZ Act, Section 14, requires companies to pay compensation of two weeks per year of service to workers who are terminated, provided that they have more than three years of continuous service. These are equivalent to the termination allowances paid to workers in non-EPZ companies 7 Layoff provisions are governed by the Industrial Relations Act (1974) as amended, Third Schedule, Sections 33-34. In fact, Section 34 stipulates only that the employer "establish which employees are to be made redundant and the order of discharge". The last-hired, first-fired principle has been handed down by the courts. An exception may be granted in the case of incompetent workers. Incompetence cannot, however, be interpreted to mean inaptitude. 2: Incentive and Regulatory Regtrne 19 in respect of whom contributions are not made under the National Pensions Act. Thus, an EPZ employer receives preferential treatment only to the extent that compensation payments are not required for terminated workers having less than three years continuous service. In fact, the firm could avoid compensation, for periods of greater than three years so long as it is prepared to fire workers after two years and eleven months and rehire them more than 28 days later.8 But this practice is not widespread. 2.29. Although the normal work week for EPZ workers and most non-EPZ workers is 45 hours, there are several differences between EPZ and non-EPZ companies which relate to hours of work and overtime payments.9 Non-EPZ workers may be required to work for a maximum of 48 hours during a six.-day week, as compared to 60 hours in the case of an employee of an EPZ firm. Furthermore, marginal overtime in a non-EPZ company must be paid every day, whereas it does not have to be paid in an EPZ firm until the worker has completed 45 hours. This appears to have led to a situation in which the number of obligatory hours worked in the EPZ can easily amount to 60 hours on a regular basis. According to a small sample of workers, this is a partial explanation of absenteeism. Because of excessive hours, workers simply take the time off and charge it to sick leave. This strategy is considered preferable to refusing overtime, even if this leads to more than the statutory maximum of ten hours work per day, on account of the fear of termination. Even though finding another job would not be difficult in the present full employment situation, starting over would imply loss of seniority accumulated in the preceding job. 2.30. This explanation appears to be consistent with the findings of a recent study on absenteeism which interviewed both employers and employees. The firm-level responses found a clear, and statistically significant, correlation between the amount of overtime and the degree of absenteeism. Other explanatory factors for absenteeism suggested by employees include sickness or illness; care of other family members; weddings, funerals, births, etc.; fatigue; outings; personal business; etc.10 The two principal causes of absenteeism, in descending order of magnitude, were sickness and the need to look after other family members. The need for additional rest and recreation (outings) is a distant third, together with the need to attend to personal business. Other explanations, such as participation in a second job, the need to look for another job, or the absence of work at the principal establishment, were completely insignificant. The study points out that firm-level and employee findings are not necessarily inconsistent, since employees may have 8 In the non-EPZ sector, the same device could be used, but it would be necessary to terminate the worker every year. 9 Normal working hours for the bus industry are 40 hours weekly while those for the catering industry are 48 hours weekly. The Labor Act is presently under review by a technical committee appointed by the Ministry of Labor and Industrial Relations. 10 R. Lamusse and others, Study on Absenteeism among Production Workers in the Mauritian Export Processing Zone, University of Mauritius, 1990. 20 Mauritlus: Expanding Horizons simply reported sickness as the justification for time that was in fact used to rest. This seems entirely plausible since annual leave in the EPZ is only two weeks a year, whereas there are 21 sick days.11 2.31. In conclusion, the preceding analysis, cursory as it may be, indicates that labor regulations are much more flexible in the EPZ than outside, particularly with regard to overtime and termination. Furthermore, in certain cases, it is probable that present regulations are protecting employment unnecessarily and discouraging the growth of labor productivity. This would not be desirable, given the economy's overall need to increase productivity in the present era of rising wages. 2.32. The Government has recently announced its intention to revise and amend the Labor and Industrial Relations Acts. This should be the occasion for a complete and thorough re-examination of the current philosophy towards regulation of the labor market and employment, as well as the enhancement of productivity, in light of the needs for the second stage. of industrial development. In this connection, it would therefore be useful not to proceed with the elaboration of new laws without a thorough review of international developments regarding employment regulation, both in developed and developing countries. Work recently done by the OECD could perhaps be a good starting point for this work. C. Trade, Foreign Exchange, and Finance Export Controls 2.33. All exports require an export permit from the Ministry of Trade and Shipping (MOTS). This Ministry also used to deliver Certificates of Origin (EUR1) which are needed, among other things, to gain duty-free entry into the EEC under the Lome Convention.12 With a view to increasing efficiency and minimizing duplication of functions, the EUR1 certificates are now issued by customs authorities. Possibilities for making further improvements exist and these should be explored as part of a broader review of international trade procedures aiming at their simplification to the utmost. 2.34. The issuing of export permits is governed by the "Supplies Control Act of 1974" which empowers the Minister of Trade and Shipping to approve or reject an application for an export permit. The rationale for the existence of export permits is given as the need to exercise control over the export of prohibited goods such as sand, coral and limestone and also to regulate the export of agricultural and seasonal products. Furthermore, export permits are also used to control the export price of goods in order to discourage under-invoicing. Note also that the employer may decide on the timing of one of the weeks of leave, whereas the other is negotiable. 12 A CD3 form from the Bank of Mauritius is also needed. 2: Incentive and Regulltory Reg(me 21 2.35. Normally, export permits are given without difficulty except for quota- restricted textile exports to the US and some agricultural commodities, the latter apparently in order to guarantee an adequate supply to the domestic market. As a general rule, restricting exports in order to ensure supplies to the domestic market cannot be justified on economic grounds. Accordingly, if this is their raison d'etre, the corresponding export permits should be eliminated. As for export quotas for textile garments, consideration could be given to introducing an auction in order to maximize foreign exchange earnings (see Chapter 4).13 To the extent that export permits are required for exchange control purposes, they should be delivered directly to exporters by commercial banks acting in their capacity as approved foreign exchange dealers.14 The incentive study to be conducted under the UNDP-World Bank Trade Expansion Program is expected to examine this issue in greater detail. Import Controls 2.36. Imports, both by EPZ and non-EPZ companies, require an import permit from MOTS.15 These are normally delivered quickly and without difficulty, except for food items for which delays can be considerable. A few goods continue to be prohibited, but otherwise there appear to be no formal import licenses or restrictions. However, there is a system of "advising" EPZ companies to purchase some goods through domestic trading houses (and manufacturers) when these are available. In part, this policy has to be seen as a response to deficiencies in. the customs regime, which make it difficult for non-EPZ companies to deliver duty-free tax-free to EPZ companies, and for EPZ companies to claim a drawback on goods indirectly imported on a duty-inclusive basis. 2.37. These import permits must be obtained before shipment on the basis of a pro-forma invoice. When the goods arrive, the final invoice must be presented to MOTS, which compares the quantity and value to those declared on the import permit. After adjustment for any difference, the invoice is stamped, approved, and the goods are then allowed entry into the country, otherwise not. Goods that are imported without having first obtained the import permit may be subject to a 5 percent penalty tax at the time of arrival. Foreign Exchange Regulations 2.38. All exporters are required to repatriate their export proceeds, via sale to an authorized dealer, within 180 days of shipment. However, certain exporters may be authorized to retain their export proceedings temporarily in special foreign 13 The quotas are fixed in volume terms. 14 This would also be the case for the ADC certificate that is currently delivered by the Bank of Mauritius. 15 Except those included in Schedule No 1 of Government Notice 260 (1982). 22 Maw-t tus: Expanding Horizons exchange accounts. These accounts, which are non-interest bearing, may be used to make payments for purchases of imported raw materials.16 On the import side, all exporters purchase foreign exchange for imports through their commnercial banks. At present, the latter may only deliver foreign exchange against an import permit duly stamped by MOTS.17 2.39. Payments for invisibles related to imports are permitted without restrictioni. provided that they can be justified. Foreign exchange may be made available by commercial banks for bona fide business travel up to 200 pounds sterling per day, without prior authorization from the Bank of Mauritius. Residents may also hold international credit cards and use them for paying travel expenses abroad.1" Airline tickets purchased by residents bear an 11 percent tax (including a 1 percent surcharge) for all international travel. Outward transfers of capital are subject to certain restrictions. Foreign-owned companies may freely transfer interest, dividends and profits, but permission is required for the repatriation of capital, essentially to ensure that the 15 percent stamp duty is paid on capital gains. 2.40. At present, most foreign exchange is purchased through authorized dealers, i.e., commercial banks, who in turn obtain it from the Bank of Mauritius. Although there are a number of offshore banks, direct foreign exchange borrowing from them is as yet fairly limited and, in any case, restricted only to EPZ companies for a period of 90 days at most. Some offshore banks feel that this is too short. In this connection, the Banking Act of 1988 indicates that EPZ companies will be allowed to bank with, and borrow from, offshore banks on a restricted basis, that is for short-term loans (less than 90 days) for working capital purposes. The 1988 Act was very restrictive and gave no liberty to the Bank of Mauritius to authorize any operations other than those strictly spelled out above. The 1990 Banking Act, however, grants the Bank of Mauritius more discretion which the offshore banks hope will permit them to become more active players in the provision of trade finance to EPZ companies. On the other hand, the onshore banks may be expected to resist any tendency towards giving the offshore banks more business. On balance, there would seem to be no problem in allowing offshore banks to compete freely with onshore banks for both export and import financing. However, to begin with, the offshore banks do not expect to do that much business because of the legal difficulties of taking onshore collateral to cover themselves against borrower 16 The maximum holding period is not specified. The commercial banks generally deposit these funds in their "nostro" accounts located in their overseas correspondents. 17 Importers must be licensed under the Licenses Ordinance. Under the 1982 Supplies Regulations (Control of Imports), all imports require import permits from the Ministry of Trade and Shipping. This r equirement is, however, waived for goods specified in the third and fourth schedules, respectively. 18 When a credit card is used, approved travel allowances may be exceeded, subject to the payment of a 15 percent charge. This may be waived if it can be documented to the Bank of Mauritius that the additional expenses were indeed bona fide travel expenses. 2: Incentive and Regulatory RegIme 23 default. Resolving these problems will apparently require modification to certain aspects of the civil code. These issues will need to be examined in more detail. 2.41. The Bank of Mauritius maintains a forward exchange cover mechanism, albeit on a whole turnover basis, for the imports and exports of EPZ companies, and for foreign currency borrowing by banks for the purpose of onlending to the sugar sector. EPZ companies, other exporters and certain importers may also contract foreign exchange cover through their local banks, subject to specified conditions. Some banks feel that the present arrangements are too restrictive, and that it would be appropriate to create an interbank market in foreign exchange, both for spot and forward transactions. The need for whole turnover policies would then be obviated. This possibility could usefully be examined. Access to Finance 2.42. Current legislation allows firms to seek working capital finance from onshore and, to a lesser degree, offshore banks, as indicated above. Several issues are of concern in this area. First, some companies contend that access to finance is unduly restricted, both for working capital and term finance. In general, this was the position of EPZ companies (see Chapter 4), but generally not domestic compa- nies. However, foreign companies, EPZ and non-EPZ alike, contend that, compared to Mauritian companies, they are required to maintain lower debt-to- equity ratios (1:1 at most) in order to be able to obtain working capital from commercial banks without prior authorization from the Bank of Mauritius. They would also like to make greater use of offshore financing, but this is currently limited by the Bank of Mauritius to 90 days. Secondly, non-EPZ non-DC (Development Certificate) companies claim that current interest rate policy discriminates unfairly against them. As a result, they have to pay interest rates that are too "high". 2.43. The perceived shortage of working and term capital is puzzling, since the commercial banks appear to be replete with liquidity. It is possible that Bank lending ceilings are unduly restrictive. On the other hand, it seems more plausible that individual firms may find working capital more difficult to come by than in the past, as a result of stricter lending requirements on the part of commercial banks in the wake of recent failures and closures in the EPZ which have resulted in losses and a decline in the quality of portfolios for commercial banks.19 To this end, commercial banks pointed out that many firms, both inside and outside the EPZ, are undercapitalized and hence are not good credit risks. 2.44. Regarding interest rate policy, present policy does appear to be unduly favoring the EPZ sector, as the following analysis shows. In Mauritius, credit policy is directly managed by the Bank of Mauritius via a system of credit ceilings on each bank. Banks that exceed their lending ceilings are penalized through a 19 Non-performing and problem loans appear to be on the rise, particularly in the EPZ sector, and to have attained over 5 percent of claims on these companies. 24 Mauritius: Expanding HorHzons system of penalty interest rates and fines. Moreover, banks must direct their lending in such a way that EPZ firms and other producers in key sectors (category 1) receive at least 50 percent of available credit. Loans to traders and other non- preferential customers (category 3) cannot exceed 25 percent of the ceiling. The remaining credit can go to category 2 borrowers. The Bank of Mauritius a]so refinances nonsugar export (post-shipment) bills at 12.25 percent. The corresponding advances do not count against the commercial bank's credit ceiling. This is not so, however, for preshipment working capital loans for exporters. 2.45. Lending rates, as differentiated by sector, are summarized in Table 2.2. It is apparent that the structure of interest rates continues to be distorted in favor of exports and other preferential sectors. Banks reported that these distortions entail a significant opportunity cost for them; this is equal, on average, to the difference between the preferential and non-preferential rates. Certain banks even claimed that their gross spreads are close to negative, for customers borrowing at 13 percent. This assertion is entirely consistent with Table 2.3 which indicates the minimum and maximum spreads for different classes of borrowers. Table 2.2 MAURITIUS: Structure of Lending Rates for Lending by Commercial Banks Sectors and Activities Minimum and Maximum Rates Preferential: Miniinum Maximum Export bills rediscountable at the 13.5 15 Bank of Mauritius Sugar, EPZ, agriculture, 13 18 transport, development certificate companies Small-scale 13 19 industries Transport 13 19.5 Non-preferential: Hotels 16 19.5 Other industries and 17 19.5 manufacturers, parastatals, housing Traders 17.5 19.5 Others 19.5 20.0 Source: Bank of Mauritius. 2: Incentive and Regulatory Regime 25 Table 2.3 MAURITIUS: Lending Rates, Cost of Funds and Spreads, by Class of Borrower Lending Rates Earnings on Spread on Class of Borrower on Required Required Required Deposits Deposits Deposits Min Max Min Max Min Max Category 1 13.0 18.0 17.1 22.1 0.22 5.22 Category 2 17.0 19.0 21.0 23.1 4.12 6.22 Category 3 19.5 20.0 23.6 24.1 6.72 7.24 Average cost of required deposits 16.88 Average spread for all lending (base March 1990 distribution of credit) 2.99 6.03 Source: Bank of Mauritius, Quarterly Review, March 1990 and World Bank estimates.20 2.46. It also has to be borne in mind that at least 50 percent of bank loans must go to EPZ companies and other category 1 borrowers and no more than 25 percent to category 3. These rules have apparently made banks increasingly unwilling, at the margin, to lend at the lower end of the range for category 1 borrowers. Moreover, banks have now become much more prudent vis-a-vis low-quality EPZ borrowers, given the portfolio losses that have been incurred over the last year or so, when about 100 EPZ companies have closed down. Many of these companies were undercapitalized and significantly so, in the words of several bankers, when compared to norms in Singapore and Hong Kong. The same is true for many remaining EPZ companies. At the same time, banks contend that rates on top- quality category 3 borrowers may be unreasonably high, especially given that they are less risky than some EPZ customers borrowing at 13 percent. Thus, current policy compels banks to discriminate between clients but in a way that results in completely different lending conditions, and hence, portfolios than would result from the application of strictly commercial banking criteria. It was also pointed out that the high rates on category 3 borrowers may not be desirable from an economic point of view. 2.47. Overall, therefore, it would be important to undertake a review of interest rate policy in order to reduce present distortions between preferential and non- preferential sectors, and improve the overall efficiency of allocation of financial resources. In this regard, a particular concern is the possibility of deliberate overborrowing at preferential rates, the resources being onlent by the primary 20 In order to lend Mau Rs 100, a commercial bank has to mobilize about Mau Rs 150 because of reserve requirements: 10 percent in cash (non-interest-earning Bank of Mauritius deposits, and 23 percent in Treasury bills). The spreads in the Table are calculated per Mau Rs 100 lent. 26 Mauritius: Expanding Horizons borrower to non-preferential activities.21 The review of interest rate policy should also take account of the fact that deposit rates and some lending rates have been negative in real terms in the recent past. 2.48. Regarding lending practices for working capital, it appears that commercial banks do use transaction--based self-liquidating financing techniques, and in particular advances against confirmed letters of credit and other commercial papers of acceptable quality, provided that the risk of non-performance by the exporter is acceptably low for the lending bank. It is possible that there is greater scope for this kind of working capital financing; however, there would appear to be a number of technical barriers. One is that many orders are received in the form of simple telexes. Payment terms may be open rather than in the form of letters of credit. Thus domestic commercial banks do not have adequate financial collateral against which to make advances, Other problems are poor working capital management by firms, as well as the reduced degree of non-performance risk that the banks are now prepared to tolerate. In this regard, it should be noted that the preshipment export credit guarantee system, operated by the Development Bank of Mauritius, appears to be hardly, if at all, functioning at the moment. There are apparently plans afoot to revise it. At least one bank felt, however, that this was not necessarily desirable - and that it would be better to liberalize interest rates so that they could more effectively self-insure their prefinancing operations. 2.49. Great caution should be exercised regarding possible extension of export credit insurance and preshipment guarantee mechanisms, given that the volume of business is likely to be low and highly risky for the insurer, who could well be the Government. The capital for any system should come, in majority, from the private sector and be run on a profit-making basis, at least where commercial risks are concerned. The company s]hould also reinsure internationally and become a member of the Berne Union.. But, overall, one must be skeptical as to the financial viability of an export insurance and preshipment guarantee scheme in the Mauritian context. The market is very small and the information requirements enormous. It would perhaps be better to let the private sector banks manage performance and commercial risk as best they see fit in the context of market- determined interest rate and pricing policies that will reflect the riskiness of different foreign buyers and domestic producers. D. Import Duties and Indirect Taxes 2.50. This section reviews the system of customs duties and taxes, and their implications for the structure of protection. It further reviews the structure of internal indirect taxes, their relation to trade taxes, and how they affect the structure of production incentives. 21 Another response of the banks to thin margins to preferential borrowers may be to increase fees and commissions, which are reported to be unusually large in Mauritius, compared to competitor countries. 2: Incentive and Regulatory Reglme 27 Box 2.1 Levy Range of Rates Import 0 - 60 for non-preferential countries; Duty always zero for preferential countries Fiscal 0 - 600 for all countries Duty Import 17 percent; zero for exempt goods Levy Sales 5 percent, levied on the CIF value plus the import levy, Tax customs and fiscal duties. The rate is increased to 6 percent for non-registered producers Introduction 2.51. Imports may be subject to four kinds of fiscal levies at the point of entry, as shown in Box 2.1. The customs valuation basis for all ad valorem duties is generally the CIF value. Contrary to many African countries, there is no obligation to insure imports in Mauritius. Neither is there any preshipment inspection by companies such as SGS. Customs, however, reserves the right to adjust the declared value if this is considered not to represent the true transactional value.22 2.52. An unusual feature of tariff policy in Mauritius is that it has a general, as well as a preferential, customs duty. The preferential rate applies to most members of the EEC and the Commonwealth, the US, and a variety of other countries. On the other hand, some important countries do not have preferential status, including Japan, Taiwan, and Korea.23 The degree of discrimination can be considerable, since the preferential rate of customs duty is always zero, as compared to modal values of the non-preferential rate of 15, 25, 30, 40 and 50 percent. Thus the degree of preference varies by product. At the same time, in many cases, the preference has been eliminated through zero-rating of the customs duty. The advantages and disadvantages of maintaining these preferences should be carefully weighed, as they may entail sizeable balance of payments costs for Mauritius in the form of 22 As explained in the section on import controls, the Ministry of Trade and Shipping also has this authority, either when the import permit is obtained before shipment, or when it is verified after arrival of the merchandise. In this connection, the import permit must be stamped by the MOTS after arrival as a sine qua non of customs clearance. 23 The same is true for many ACP countries, for example the CFA Franc countries, as well as other middle-income countries -- Morocco, Tunisia, and Turkey. 28 MaurItlus: Expanding Hortzons trade diversion towards higher-cost sources for goods that are consumed on the domestic market.24 Structure of Collections 2.53. Between 1982/83 and 1989/90 the ratio of duty and sales tax collections to all imports averaged between 18.1 and 22.5 percent. However, this overlooks the fact that all imports by EPZ companies are totally exempt. It is more significant, therefore, to measure the ratio of collections to non-EPZ imports, for which the corresponding ratios are between 27.6 and 36.0 percent, as shown below (Table 2.4, columnn 2). But again, these averages mean relatively little, on account of the great variety of rates of the import and fiscal duties. In the same vein, the import levy has two rates, zero and 17 percent. Moreover, many goods are exempt from the sales tax that is normally levied at 5 percent. Hence, a significant proportion of taxable goods may be completely exempted, so that effectively taxed taxable goods support on average much higher rates than those suggested by the second column of Table 2.4. Table 2.4 MAURITIUS: Ratio of Import Duty and Tax Collections to Imports 1982/83-1989/90 (Percent) Effectively Taxed All Imports All Non-EPZ Imports Non-EPZ Imports 1982/83 20.8 n.a. n.a. 1983/84 22.5 29.4 n.a. 1984/85 21.1 33.2 n.a. 1985/86 21.5 36.0 66.0 1986/87 21.6 27.6 72.0 1987/88 18.1 31.0 55.0 1988/89 19.5 31.4 61.2 1989/90 19.8 n.a. 62.8 Source: Customs Administration and Ministry of Economic Planning and Development. 2.54. In fact, in fiscal years 1986/87 to 1989/90, between 45 and 50 percent of all non-EPZ imports were exempted from the import levy. Most of these goods were also exempt from the sales tax. Hence, only between 50 and 55 percent of non-EPZ taxable goods were effectively subject to some combination of the import levy, customs duty, fiscal duty and the sales tax, implying a much higher ratio of collections to imports than is suggested by the second column of Table 2.4. Since 24 The preferences might be defended on the grounds that they are the price of the concessions granted to Mauritius by the EEC and the United States. This argument may be countered, at least in the case of the EEC, by the fact that exports to the EEC only obtain "Mauritian origin" in the ACP sense of the term if they use goods of ACP or EEC origin. 2: Incentlve and Regulatory Reglrne 29 1985/86, this ratio has fluctuated between 55 and 72 percent, depending on the composition of effectively taxed imports (Table 2.4, column 3). 2.55. Here again, the average collection ratio does not give a good idea of average rates of taxation, since the collection ratio is, by definition, "biased" by the composition of imports. To get a better understanding of the rate structure per se, another exercise has been carried out and is summarized in Table 2.5. Table 2.5 MAURITIUS: Ratio of Collections to Taxable Value of Imports by SITC Section, 1989 (Non-EPZ imports only) SITC Section Ratio of Collections to Taxable Imports 0: Food and live animals 5.6 1: Beverages and tobacco 233.0 2: Crude materials, inedible except fuels 1.0 3: Mineral fuels, lubricants and related materials 37.0 4: Animal and vegetable oils and fats 5: Chemicals 9.1 6: Manufactured goods, classified chiefly by material 15.0 7: Machinery and transport equipment 23.7 8: Miscellaneous manufactured articles 42.2 9: Not elsewhere specified Source: Ministry of Economic Planning and Development. 2.56. Table 2.5 gives a breakdown of import and fiscal duty collections by SITC category for 1989, and indicates that raw materials are significantly less taxed than finished goods. It also appears that capital goods support, on average, import and fiscal duties of about 24 percent (SITC Section 7). In this connection, it must also be pointed out that capital goods imported by non-EPZ companies may pay the 17 percent import levy as well as the 5 percent sales tax which is not deductible, as explained later. Hence, the total effective rate of taxation of capital goods for a non-EPZ company would probably be in the range of 48 percent. The comparable figure for miscellaneous manufactures would be between 67 and 69 percent.. 2.57. This was confirmed in interviews with non-EPZ firms. More generally, they pointed to a highly distorted structure of import duties and taxes, in which capital goods, spare parts and precision tools are frequently subject to much higher rates than those indicated above, and frequently greater than 100 percent. At the same time, they pointed to the difficulties they face when trying to supply to EPZ com- panies or the sugar sector, which are entitled to import capital goods and spare parts on a duty-free basis. The problem is that non-EPZ companies, whilst technically capable of meeting some such orders, may not be competitive because they support import duties on their raw materials whereas, as pointed out above, the buyer may be able to import free of duties and taxes. 30 Maurtfus: Expanding Horizons 2.58. In order to throw additional light on this question, a detailed review of the tariff structure should be undertaken, line by line, by SITC section as well as by end use. This has not yet been possible because of data constraints. However, a perusal of the tariffs indicates a highly uneven structure. In some cases, the tariff is now perfectly flat, with no differentiation by stage of processing; this is the case in particular for the majority of textile products. In other cases, the principle of positive escalation seems to have been preserved and to be gaining acceptance. It is certainly the principle used in the various concessions granted to manufacturers serving the local market. Irn other cases, an attempt has been made to remove "anomalies", that is when the rate of duty on imported raw materials exceed that on the finished goods. A variety of special customs regimes (exemptions or concessions) have been intrioduced to redress these anomalies. These regimes generally try to remove the disincentive to local production by lowering, if not totally eliminating, the duties on raw materials needed by the non-EPZ company. But this does not always wrork as well as might be expected, and runs the risk of being limited on account of revenue considerations. The tariff regime therefore remains significantly distorted, with some industries receiving strong positive effective protection, whilst others are effectively penalized. Continuing to try to solve these problems on an ad hoc basis by the use of exemptions and concessions will become increasingly complicated and is likely to generate an even more distorted structure of tariff incentives. In addition, such a policy is likely to cause increasing revenue losses for the Treasury. 2.59. Revenue losses are likely to increase as the overall level of tariffs on competing imports is lowered in order to enhance economic efficiency. Such a policy will indeed be essential if Mauritius is to increase the domestic content of its exports of textiles and other industrial goods in an economically efficient manner. Revenues from customs duties could also be affected if Mauritius is to be transformed into a Free Port.25 Thus, for both economic and budgetary reasons, tariff rationalization and reform should be a major preoccupation in the months ahead. In particular, it will be necessary to find a means to recover the revenue losses that will result from the tariff reductions that are essential to fostering global economic efficiency, that is of export and import-substitution activities. In this connection, the sales tax will have an increasingly important role to play. Sales and Excise Taxes 2.60. The structure of producer prices, protection and production incentives may also be affected by internal indirect taxes, in particular the sales tax, hotel and restaurant tax, the foreign travel tax, and excises. 25 This is a high priority of the Government, in the words of the Governor General in his speech at the opening of the second session of the Legislative Assembly in November 1990. 2: Incentive and Regulatory Reg1rne 31 Table 2.6 MAURITIUS: Sales Tax Collections and Corresponding Tax Base 1983/84-1989/90 (In millions of Mau Rs) Year Domestic Deliveries Imports Total Sales Other Import Levies 1983/84 71.0 135.2 206.2 1161.8 1984/85 79.2 147.8 227.0 1361.2 1985/86 84.3 189.2 273.5 1627.8 1986/87 111.3 237.9 349.2 2055.1 1987/88 127.8 335.4 463.2 2638.6 1988/89 159.9 412.3 572.2 3054.7 1989/90 196.6 513.8 710.2 3703.0 Source: Sales Tax Administration and Customs and Excise Department. 2.61. The sales tax is governed by the Sales Tax Act, 1982, as amended. It is normally levied at 5 percent on domestic deliveries and imported goods, effected by registered persons. 26 Exports are exempt by virtue of the fact that they do not constitute domestic deliveries. Also exempt are deliveries to EPZ firms. 2.62. As shown in Table 2.6, receipts are much larger on imports than on domestic transactions. This is explained in part by the fact that the tax collected on imports may be credited against that levied on domestic transactions, at least by registered persons. The statutory rate of 5 percent is very low by international standards, and the average level - that is the ratio of collections to the gross value of transactions - even more so, because of the very significant level of exemptions. From a revenue-raising viewpoint, the combination of low rates and significant exemptions means that the sales tax is under-performing in terms of its revenue potential. This necessarily increases revenue dependence on other indirect taxes, most notably customs duties, and can have significant costs in terms of forgone economic efficiency and resource allocation. 2.63. This imbalance in the structure of indirect tax and customs duties receipts will have to be redressed if the Government wishes to proceed towards a significant lowering of import duties, as part and parcel of its policy to increase overall economic efficiency. It is apparent from Table 2.6 that there will need to be a sizeable increase in the sales tax in order to offset the decline in revenues from import duties, since collection from the sales tax is only about one-sixth of revenues from other import levies. For this reason, compensating the reduction in imLport duties should not be tackled just by increasing sales taxes. Rather, a comprehensive tax reform will be required to address this issue, covering all indirect and direct taxes. 26 The rate is increased to 6 percent for non-registered persons, on imports alone, however. Any merchant whose annual turnover exceeds Mau Rs 100,000 must be registered. 32 MavurMus: Expandtng Horizons 2.64. The sales tax is of the multi-stage credit variety, with provision made for registered producers to deduct the tax paid to their suppliers. However, deductions are limited to the tax paid on organic and inorganic materials that are effectively transformed and incorporated into taxable finished goods. The tax on some kinds of packaging can also be deducted. Thus, the tax paid on consumables, office supplies and capital equipment cannot be recovered. 2.65. The law provides that registered taxpayers may obtain a refund of any excess payments over collections concerning taxable goods. This is particularly important for exporters, who do not charge sales tax on their foreign deliveries, but who may incur the tax on the raw materials incorporated into the exported goods. However, no deductions are permitted to producers of statutorily exempted goods even when these are exported. This is a potentially significant tax-induced anti- export bias. 2.66. Overall, this tax is a rather embryonic value-added tax (VAT) applied to imports, domestic resales and manufactures. It has very little direct effect on the EPZ sector, but a somewhat greater impact on firms in the non-EPZ sector. This is because they must all pay the tax on machinery and equipment. In addition, those that produce exempted goods are unable to recover the tax paid on their raw materials. At the same time, competing imports enter net of sales tax, which clearly puts the domestic producer at a disadvantage, particularly if the import comes from a country which applies a full-fledged value-added tax that effectively ex- empts exports completely. This may be thought of as a tax-induced anti- production bias. 2.67. Many of these problems appear insignificant today because of the relatively low level of the tax (5 percent). However, the shortcomings of the present system would become much more evident if rates were to rise, as might well be niecessary if Mauritius is to become a fully integrated economy in which all sectors are exposed to international competition behind minimal tariff protection. An increase in rates would augment the anti-export bias; this could become significant if the rate were to reach 15 percent. However, the problems are not insurmountable and could be overcome by transforming the current sales tax into a full-fledged consumption tax of the value-added variety. It would be appropriate to initiate some technical work on this transformation relatively quickly as the modification of the sales tax could well be an important component of the overall diversification strategy. Hotel and Restaurant Tax 2.68. Hotels and restaurants levy a 10 percent tax on their transactions, including the sales of cooked foods to be consumed on or off the premises. In addition, hotels are charged a special levy, equal to 50 percent of the standard rate of tax. In all, then, there would be a 15 percent tax on hotel rooms and restaurant meals. However, no provision is made for crediting any sales tax that may be charged on intermediate consumption and capital goods, so that there is some potential for 2: Incentive and Regulatory Regime 33 cascading. This is not likely to be a problem at the present rate of sales tax, but could become so if the rate rises substantially. 2.69. In general, the hotel and restaurant tax is desirable in that it taxes foreign as well as national tourist consumption in Mauritius, as should be the case under the destination principle. The present rate of 15 percent, including the 50 percent levy, does not leave much room for increase.27 At the same time, if the sales tax is raised, consideration should be given to allowing it to be credited against the hotel and restaurant tax liability. Otherwise, the cascading problem could become serious. Foreign Travel Tax 2.70. The Foreign Travel Tax Act of 1978 introduced a 10 percent tax on travel by Mauritian residents, and more specifically on the value of any international ticket. This is a tax on international trade that applies to both business and leisure travel. While possibly justified in the latter case, this is not so for business travel, particularly that related to marketing. The tax probably imposes a larger burden on small companies. The problem is easy to solve in the context of a value-added tax, when a deduction would be allowed, ex post, for justified business travel. Under the present arrangements, provision would have to be made for a refund, under arrangements similar to those used for the sales tax. Consideration should be given to this option until such time as the foreign travel tax is incorporated into the sales tax, with right of deduction.28 E. Investment Incentives 2.71. Mauritian law provides a variety of tax incentives for investment in different sectors. These consist of both income tax relief, investment allowances, and investment tax credits. In addition, resident investors may be exempt from personal income taxation on dividends derived from companies operating under one or other of the incentive regimes. There is no capital gains taxation in Mauritius, except on land. However, foreign firms that repatriate capital are subject to a stamp duty of 15 percent, recently reduced from 35 percent, on capital appreciation. If these transactions take the form of a sale of shares, the foreign buyer would have to pay the registration tax.29 It is correctly argued in some quarters that this combination of taxes is a potential deterrent to foreign investment. Dividends received by individual shareholders are normally subject 27 Revenues amount to about Mau Rs 200 million per year, roughly the same as domestic collections from the sales tax. 28 Revenues from the Foreign Travel Tax are Mau Rs 40 million per year. 29 The registration duty is levied on any deed that witnesses a transfer of immovable property and shares. The rate, including a 10 percent surcharge, is 11 percent for values of less than Mau Rs 100,000 and 13.2 percent thereafter. This is levied indifferently on Mauritian and foreign investors. 34 MaurWus: Expandtng Horizons to personal income tax. However, dividend income derived from preferentiallY taxed corporate profits is exempt from personal income taxation during the first ten years of the company's life.30 However, this is disallowed if the company declares a dividend in a year in which it is reporting a tax loss. Similarly, intercompany dividends are not taxed, provided that they have been derived from effectively taxed profits. Personal income tax rates are now capped at 35 percent, with a system of abatements for expatriate staff employed in offshore banks and companies. 2.72. Effective tax rates on corporate income differs substantially from sector to sector. A Mauritian individual investing in a non-certificate company will pay an effective tax rate of 57.75 percent, assuming that all profits are distributed. An investor in an EPZ company. will pay only 15 percent. This, however, overlooks the fact that a non-certificate company may have paid taxes of between 23 and 50 percent on machinery and equipment, whereas the EPZ investor is completely exempt. So the effective tax rate for the non-certificate investor could be significantly higher than the 57.75 percent suggested above. In both cases, of course, the effective rates are reduced by the investment allowances, hence the marginal effective tax rate for an EPZ company could be well below 15 percent. Rates could be even further reduced to the extent that interest payments are deductible and that real interest rates are negative. 2.73. Another example of differential tax treatment concerns labor training. Section 55(A) of the Finance Act allows for a double deduction from corporate taxable income for expenditures incurred in respect of, or in relation to, manpower training under training programs approved by the Industrial and Vocational Training Board. Differential tax treatment arises in that the employers receive a grant that is inversely proportional to their rate of corporate income tax. For example, under the existing system, the share of training expenditure effectively borne by an employer will be 13 percent in the case of a company paying 35i percent corporate income tax; zero for a company paying the 25 percent rate; and. 6 percent for an EPZ or other company benefitting from the 15 percent rate. 2.74. Thus, the above analysis suggests that there could be rather important: distortions in the tax system that tend to penalize non-certificate companies. There could be two important conclusions from this: (a) the possibility of significant resource misallocation; and (b). significant imbalance in the structure of tax receipts, with non-certificate companies paying a disproportionately high, and preferential companies a disproportionately low, share of direct taxes. The second conclusion would appear to have some basis in fact, since corporate income tax receipts from EPZ companies (for 1990/91) are estimated to have been less than Mau Rs 20 million out of a total of about Mau Rs 800 million. 30 This is reduced to 8 years for housing development companies and housing construction companies. 3: Agricultural Diversykatton 67 3.41. Fong (1990) documents the rapid expansion in trade in deer carcasses and live animals from Mauritius, from 350 in 1986 to 1,400 by 1989. Preliminary estimates indicate that the economic returns from deer farming could be between Mau Rs 3,000 and 5,000 per hectare. With continuing improvements in institutional arrangements and management practices and with the development of new markets for live deer, hides, antlers, and venison, it appears likely that the returns will continue to improve. 3.42. These developments complement the deer-hunting industry which has no room for expansion and is limited to a harvest of about 10,000 head annually. The naturally hunted deer is limited to a seasonal shoot and consequently venison is either in glut supply or not available, since freezing facilities are as yet limited. The ranching and farming of deer can even out the venison supply and this provides the basis for a promising livestock industry. Deer farming naturally complements the sugar industry since it uses the more marginal land and climatic regions, as well as sugar by-products (molasses and bagasse). The industry also has great prospects for assisting inland tourist development through the promotion of stag shoots and related tourist activities. D. Proposed Action Plan 3.43. This chapter offers a few preliminary ideas for consideration; it does not give a comprehensive strategy for agricultural diversification in Mauritius. Nevertheless, the conclusions are that a number of actions might be considered by Government to put Mauritius on the path towards increased profitability and increased diversification in agriculture. As outlined above, despite the island's potential, there are at present several constraints which require government intervention. 3.44. Fruits, Vegetables, and Flowers. In this area, further work is required to determine the kind of government support necessary to enable this emerging industry to take off. Such support is no more than what has been provided to the sugar industry over the years. Such work would entail dealing, in some detail, with issues related to orchard development, new varieties suitable for export, trial shipments by sea, market analysis and the institutional support necessary, e.g., insurance fund, marketing intelligence, etc. There is need for an in-depth demand analysis, keeping in mind the strong competition that countries like Kenya, Ghana, and Zimbabwe offer, so that Mauritius can carve out a suitable niche for its products. Further, a material handling and packaging committee needs to be formed to study and make recommendations on the standardization of pallets and returnable crates. Given the potential threat of cyclones, studies also need to be carried out on modelling windbreaks for orchards and flower shade houses, orchard layout, tree size and pruning, and natural shelter. 3.45. Tea. In the tea industry, economnic returns could be improved through restructuring, improving tea quality, and making maximum use of the land by interlining tea plantations with complementary crops like citrus. At the same time, 68 Mauritius: Expanding Horlions studies could be undertaken to determine the potential for the mechanical harvesting of tea. For example, the tea industry might derive lessons from North Queensland, Australia, where the industry is highly mechanized and profitable. 3.46. Fruit Flies. Fruit flies pose a serious threat to both domestic and export produce. It is therefore recommended that a fruit fly information system be set up by the Government so that fly intervention strategies can be modelled and eradication strategies implemented. 3.47. Deer Farming. It is recommended that the deer industry be given livestock support funds for investigating breeding, management techniques, new markets and the potential for agro-tourist development. 4 Manufactured and Service Exports A. Background 4.1. Manufactured exports have brought about a structural transformation of the Mauritian economy which, until a few years ago, was a mono-crop economy wholly dependent upon sugar for its merchandise exports. The combination of political stability, a greatly improved macroeconomic environment, a large pool of educated, highly trainable workers, and generous fiscal incentives enjoyed by the Export Processing Zone (EPZ) attracted foreign investors who flocked to Mauritius to take advantage of the tremendous benefits from its association with the European Economic Community through the Lom6 Convention.48 Between 1980 and 1990, there was a five-fold increase in the number of EPZ companies as investors from France, Germany, Hong Kong, the Netherlands and Singapore sought the preferential access into European markets. During this period, employment in the EPZ grew from approximately 21,000 to well over 88,000 (Table 4.1). Between 1984 and 1991, value added increased at an annual average real rate of 17 percent. From around 20 percent unemployment in the early 1980s, EPZ growth has enabled Mauritius to achieve full employment. The EPZ now accounts for over 65 percent of gross export earnings, 30 percent of employment, and its share of GDP has risen to well over 11 percent in 1991, compared with 4 percent a decade earlier. 4.2. However, it is interesting to note that, within the EPZ sector itself, more than 85 percent of employment is in apparel manufacturing. This underlines the fact that growth of the EPZ sector during the past few years has been generated by the absorption of more and more workers into labor-intensive manufacturing, primarily of apparel. In other words, Mauritius has achieved its spectacular economic success primarily by absorbing the available slack in the labor market into labor-intensive export manufacturing. With full employment now achieved, this engine of growth is no longer available. Consequently, the fundamental issue which now needs to be addressed is what the new engine of growth will be. If manufactured and service exports continue their growth by employing more labor, from now on they will only be able to do so at the expense of other sectors. In this case, increased growth will only come about if this sector is able to make more productive use of labor than the other sectors. If, instead, manufactured and 48 See Mauritius: Managing Success, A World Bank Country Study, November 1989. 70 Maurlwus: Expanding Horions service exports continue their growth without employing more labor, then this will necessitate making more productive use of the labor already employed. Table 4.1 MAURITIUS: Key Indicators for the EPZ 1980 1985 1990 1991 Number of Enterprises 101 290 568 586 Employment 21,642 53,951 89,906 90,861 Exports (Million Mau Rs) 894 3,283 11,474 12,136 Imports (Million Mau Rs) 658 2,530 7,348 7,068 Net exports (Million Mau Rs) 236 753 4,126 5,068 Value added (Million Mau Rs) 321 1,333 4,000 4,615 Value added per worker 14,845 24,708 44,491 50,792 Total investment (Million Mau Rs) .. 340 750 Source: Digest of Industrial Statistics, various issues. 4.3. Either way, the only route to continued export growth in this sector will be a steady and continuing growth in labor productivity, specifically, exported value added per worker. Hence,, the emphasis now should be strongly and clearly on diversifying the industrial base and improving labor productivity in export production as the only means available for achieving continued export growth. B. Facilitating Export Expansion Harsh Extemal Realities 4.4. What distinguishes export development from most other types of development is that one is obliged to start from the "givens" of the external international market. All export development efforts must be directed towards improving the acceptability in this given external market of the export production facilities being offered. Only in this way will more orders be obtained, thus fuelling export growth. 4.5. The most important characteristic of nearly all available potential markets for developing country exports is that they are extreme "buyers' markets". In other words, each potential buyer can choose between many would-be suppliers, in many different countries, all very hungry for his order. The result of this harsh reality is that each buyer is able to insist on virtually every important aspect of supply meeting his requirements. Typically, these might cover not only price itself, but also quality level, quality consistency, speed of response to changing buyer requirements, delivery reliability, incorporation of specified components or labels, usually imported, quality of packaging and outer presentation, and terms of payment offered. 4: Manufactured and Service Exports 71 4.6. The new would-be supplier does not win the order unless he at least matches other potential or actual suppliers in all of these various aspects and beats them in at least one, such as price. At the level of the individual buyer, there are no preferential terms or special concessions given to developing countries. The reality is one of highly competitive and demanding markets. Countries that facilitate their exporters in meeting all these various requirements stand to increase their share of the huge world import market. Countries that ignore these realities, and believe that the solution lies elsewhere (for instance, in lobbying for ever-better concessions and preferences), on the other hand, allow the available benefits to go to other countries. The Challenge for Govermment 4.7. The reality in most developing countries is that the capacity of an exporter to meet these various buyer requirements is severely constrained. The essential reason, usually, is that the local markets for the various inputs that he needs do not operate as buyers' markets. Here are some typical examples. First, the available ports operate as a protected monopoly; they are regularly congested; red tape delays individual consignments; and the reliability of the individual exporter in terms of delivery suffers drastically. Second, utilizing imported components, even when supplied by the potential buyer, is virtually impossible because of costly, complex and time-consuming controls and taxes on imports. Third, the ability of an exporter to respond to new export opportunities by investing in new productive capacity is constrained by restricted access to loan capital, owing to government controls on credit allocation and pricing. Fourth, every change in buyer requirements takes much longer to organize, because of pervasive controls on every aspect of the production process. Shedding or switching workers, importing new machines or quality control instruments, using a special steel that has to be imported, all simple tasks for competitors in less regulated countries, become major costly and time-consuming hurdles in most developing countries. Buyers who can obtain fast responsiveness elsewhere are intolerant of these difficulties. 4.8. For a developing country government wishing to increase exports, the task is essentially a simple one. In addition to maintaining a stable macroeconomic environment and favorable investment climate, what is needed is to facilitate the operation of effective buyers' markets in the various key input markets facing the would-be exporter. In other words, the external reality of an extreme buyers' market has to be extended back into the domestic economy, if exporters are to be able to match external buyer requirements. However, with many input markets operating far from effectively, the practical dilemma that most governments generally face is not knowing where to start. The methodology adopted here has been to concentrate on the following four areas. First, examine what is already being exported and identify the next most promising directions for export expansion. Second, for each of these promising directions, find out what input 72 Mauitlus: Expanding Horlzons market constraints are holding back this expansion.49 Third, delve into each constraint and identify the core problems that need to be addressed in order for that constraint to be overcome. Fourth, develop an action plan, with priorities and timetable, for Government to address the various core problems in a manner that will give the fastest pay-off in terms of increased exports. The results of the analysis are described below. Assessment of Constraints 4.9. Broadly speaking, the manufactured exports sector in Mauritius can be classified in terms of two distinct categories of industries. First, there is the group of existing industries consisting predominantly of either knitwear exports to Europe or quota-lirnited exports to the US. Second, there is the set of new and emerging industries comprising primarily "precision assembly" companies, for example, jewellery, sunglasses and watch movements, and "brain-service" exports, for example, slow-turnaround data entry, computer software, translation services, digitizing of maps and drawings, and so on. The analysis confirmed that all of these directions have substantial potential for achieving a steady and continuing improvement in labor productivity, and thus for continuing export growth under full employment. However, the work also highlighted the fact that significant input market constraints exist in Mauritius which are adversely affecting both groups of industries and are presently constraining further development. While many of these constraints are industry specific, several of them cut across sectors, presenting the Government with a wide spectrum of areas where immediate action is warranted on the part of the Government. C. Constraints Across All Industries Access to Capital 4.10. There appears to be very little doubt that the existing financial system is fast emerging as a major constraint to growth.50 While much has already been achieved in the liberalization of financial markets, the new focus on labor productivity now demands much more of the financial sector. The core problem appears to be xa continuing lack of real competition within the financial sector and the absence of a market-determined system for the allocation and pricing of credit. This problem is aggravated by the weaknesses in the credit delivery systems which constrain exporters' access to outside borrowing. 49 If input markets were working well, and if indeed these directions represent attractive profit opportunities, then the requirements of external buyers would work themselves back automatically through the domestic input markets into the required supply adjustments, and the new opportunities would be taken up without the need for further intervention. 50 For an analysis of financial sector constraints and issues, see Mauritius: Financial Sector Review, World Bank, 1992. Some of the issues and recommendations in this section have been discussed in greater detail in that report. 4: Martufactured and Service Exports 73 4.11. It has not been possible to evaluate the relative impact of the core problems on the workings of the various credit delivery markets. Some potential exporters were convinced that all that was wrong was the dominance of the banking market by one large commercial bank; however, others were convinced that formal and informal pressure on commercial banks by the central bank was the root of the problem. Accordingly, an in-depth review of the credit delivery system needs to be given high priority. Such a study should itself give particular emphasis to the development of effective buyers' markets facing exporters seeking the various forms of finance useful to their export production operations. It will be up to such a study to propose specific actions that would facilitate the workings of the various markets. Such a study should focus on, for example, the provision of equipment leasing for which there is presently only one supplier owned by four of the banks, the provision of longer-term project capital which appears to be distorted by continuing implicit controls on pricing and allocation of bank credit and the widely-advertised but narrowly-available subsidized funds from the Development Bank of Mauritius, and the lack of variety in instruments and suppliers (e.g., merchant banks, private longer-term finance houses, and venture capital funds). The study would also cover the provision of competitive forward foreign exchange cover, the option to borrow for working capital in foreign exchange, the provision of letters of credit services by banks which appear to be exceptionally costly in Mauritius, and the provision of export credit guarantees and insurance, which should allow banks to move from the present collateral-based lending for export working capital towards lending based on firm orders. Worker Motivation 4.12. Increasing automation will require increasing shift work to achieve high utilization rates on expensive equipment. Increasing automation will also require more flexibility with regard to overtime work when needed. There must also be a willingness to adjust to more flexible working practices, if the benefits from automation are to be realized. However, it is evident that firms are already finding it difficult to motivate workers to work regularly even on single shifts without overtime, let alone motivating them to make these various adjustments. One indicator of poor motivation is high absenteeism rates. Figures as high as 25-35 percent have been reported by some firms with absenteeism on Mondays consistently higher. 4.13. The core problem appears to be that, having achieved their basic food and clothing needs plus a few luxuries (for example, a television and a video cassette recorder), all within just a few years, there is no clear affordable and attractive incentive to motivate factory workers to make these next adjustments. There was a widespread feeling among employers that the most attractive next step would be affordable housing for workers. For a variety of reasons, this is at present unavailable. Key building materials are in short supply, partly because of the rapid expansion in construction activity during the past few years and partly because of the existence of monopolies, both state and private, that control their importation. Moreover, the provision of workers' housing has been presumed to be a 74 Maurwlus: Expanding Horizons government task and has been entrusted to the Central Housing Authority, which is said to be ineffective. The availability of loan finance for housing is constrained by the same problems in the financial sector that have already been discussed. What is urgently needed, therefore, is an effective market in affordable housing for factory workers and their families. The facilitation of such a market could have a substantial impact on the willingness of workers to make the necessary work- related adjustments that will increasingly be demanded by automation. Furthermore, it would enable Mauritian workers to gain real benefits in terms of their quality of life from the automation process.51 4.14. A secondary underlying problem is in the provision of transport to and from work, with commuting time along certain corridors being as high as two to three hours per day. The density of vehicles on the roads has increased from 44 per kilometer in 1986 to 86 per kilometer in 1990; traffic congestion in certain places has resulted, with increases in commuting time of up to 40 percent on certain inter- urban routes. Again, the detailed reasons that the public transportation market does not operate efficiently are not entirely clear. Indications are that the bus licensing system is not entirely effective in achieving such a market. Minibuses are not able to assist with peak rush-hour longer-distance loadings because of their lack of comfort, inconvenience to passengers and the economics of their operation; bus operators opting for larger buses can carry more passengers and hence increase their revenue without significantly increasingly their fixed costs. A large number of minibuses, however, are licensed as contract buses for the conveyance of industrial workers and tourists. The large bus companies have traditionally operated on a regional basis; this geographical concentration has become entrenched over time. More than 300 contract buses have been licensed to meet the transport needs of industrial workers, both during normal working hours and for overtime work. Industrial operators reportedly instruct their drivers not to leave the terminals during rush hours until the buses are full, implying long waits for passengers at the terminals, and even longer waits for passengers attempting to join already-full buses at later stops. If workers are to be motivated to work overtime, or on shifts, or to arrive for work fresh rather than exhausted, they need effective and fast transportation to and from work. In spite of efforts to redirect bus services to overcome inadequacies along certain routes, the present situation in public transport is not conducive to increasing worker productivity, and needs detailed examination so as to make Ithis particular input market more effective. D. Constraints Within Existing Industries 4.15. The apparel industry presently dominates the Export Processing Zone (EPZ), and the degree of concentration has increased with time. Whereas in 1983 wearing apparel accounted for about 44 percent of firms and 80 percent of employment, in 1990 they accounted for 60 percent of firms and 84 percent of 51 In order to address this situation, the Government established in 1991 the Mauritius Housing Development C'ompany, a private sector organization which will facilitate the provision of affordable housing for Mauritians. 4: Manufactured and Serv6ce E4xports 75 employment (see Table 4.2). Consequently, given its size and importance, the most important direction for possible gains in productivity and exports are within apparel production itself. Table 4.2 MAURMTIUS: Percentage Distribution of EPZ Enterprises and Employment 1984 to 1991 1984 1985 1986 1987 1988 1989 1990 1991 ENTERPRISES Product Group: Flowers 8.2 6.6 5.1 53 4.7 59 7.6 8A Food .. .. 2.9 2.1 19 23 2.3 2.6 Textiles 5.6 4.5 4.4 4.3 4.6 5.3 5.6 6.1 Wearing Apparel 52.3 60.0 67.6 68.5 69.0 63.8 59.7 56.7 o/w Pullovers 19.0 15.2 13.0 11.5 10.8 10.5 9.9 8.7 Gloves 33.3 44.8 54.7 57.1 58.2 53.3 49.8 48.0 Leather Prods/Footwear 3.1 2.4 2.2 2.3 2.0 2.0 2.3 1.9 Wood, Furniture, Paper 3.6 3.1 2.5 2A 2.5 2.5 2.6 3.4 Optical Goods 1.0 1.0 0.7 0.8 0.7 0.7 1.1 1.0 Watches & Clodcs 3.1 2.1 1.2 1.1 1.0 1.1 1.1 1.4 Jewelry 5.6 4.5 2.2 2.3 2A 3.0 33 3.2 Fishing Tackles & Flies 2.1 1A 1.0 0.6 0.5 0.5 0.0 0.0 Toys & Carnival Articles 3.1 2.4 1.5 1.3 1.2 1.2 1A IA Other 12.3 12.1 8.6 9.0 9.5 11.7 13.0 14.0 TOt 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Number 195 290 408 531 591 563 568 586 EMPLOYMENT Product Group: Flowers 0. 0.4 0.3 OA OA 0.5 0.6 0.7 Food .. .. 0.7 0.8 0.8 1.0 1.3 1A Textiles 4.0 33 3.2 3.8 43 4.8 53 5.6 Wearing Apparel 82.8 86.3 88.3 88.0 86.7 84.8 84.2 84.1 o/w Pullovers 50.7 46.7 42.6 39.4 35.5 334 32.0 30.1 Gloves 32.1 39.7 45.7 48.7 51.2 51A 52.2 53.9 Leather Prods/Footwear 1.1 0.8 1.0 1.0 1.2 IA 1.5 IA. Wood, Purniture, Paper 2.6 1.8 0.9 0.5 0.6 0.6 0.6 0.7 Optical Goods 0.6 0.5 0.5 0.7 0.6 0.7 0.6 0.6 Watches & Clocks 1.2 1.2 0.8 0.8 1.0 1.0 0.9 0.8 Jewelry 2.1 1.6 1.3 1A 1.7 1.9 1.5 1.6 Fishing Tackles & Flies 1.3 0.9 0.8 0.2 0.2 0.2 0.2 0.0 Toys & Carnival Articles 1.7 13 0.9 0.8 0.9 1.0 1.1 1.1 Other 22 1.9 1.3 1.6 1.6 2.0 2.1 2.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Number 37,532 53,951 74,015 87,905 89,080 88,650 89,906 90,861 Source: Statistical Appendix Table VII.4. 4.16. The apparel sector is dominated by two rather different production activities; each of these contains promising immediate directions for increasing 76 MauMius: Expanding Horizons labor productivity. First, Mauritius is particularly strong in the export of knitted items, achieving sufficiernt added value locally to satisfy the rules of origin arLd qualify for ACP preferential entry into the European Community under the Lome Convention. This small island is now the third largest knitwear exporter in the world, with knitwear exports amounting to US$293 million in 1989. Knitwear production has excellent opportunities for steadily upgrading production machines and methods so as to achieve improved labor productivity. The other important activity is the export of quota-limited garments to the US, mainly items sewn from imported cloths. In this, Mauritius functions essentially as a subsidiary source of quota for marketing operations based in Hong Kong. Although sewing has less potential for increasing productivity, since even the best machines require one operator for each machine, improved working methods can achieve dramatic improvements in labor productivity. Moreover, productivity gains can be achieved by moving steadily into higher-value garments. Thus, there would appear to be substantial scope for productivity enhancement in this area as well. Access to Capital 4.17. A substantial proportion of knitwear exports is still based on simple hand- operated flatbed knitting machines, with an average output of around four garments per worker-shift. The latest Japanese knitting machinery, which allows one operator to look after three machines, achieves output levels of around thirty garments per worker-shift. This gives some indication of the potential for increasing labor productivity within this particular direction. A steady shift away from simple flatbeds is what is now required in order to continue productivity improvement within this business. While this shift has already begun, the investment requirements will be substantial and will necessitate knitwear manufacturers having effective access to loan capital. In addition, changes in the target markets are already putting pressure on working capital. Suppliers are under increasing pressure to offer open-account credit terms instead of letters of credit. As competition from new sources increases, Mauritian exporters will need to stay competitive in the credit facilities they offer. Thus, for these potential productivity gains to be exploited, exporters must have effective access to a competitive market for longer-term investment borrowing as well as working finance borrowing. Undervaluing Outside Expertise 4.18. It is quite clear that there is substantial scope for increasing productivity through improvement in production systems, particularly in knitwear, but also in wovens. However, this in turn will usually require bringing in outside expertise so as to introduce the latest systems ideas from higher labor-cost countries, and to train Mauritian labor on the new systems. Large forward-looking firms are already investing substantial resources and employing the best foreign know-how in production systems. However, at present, this process is still relatively slow, and it is this slowness that constrains export growth. 4: Manufactured and Servtce Exports 77 4.19. It is quite typical for exporters in developing countries to undervalue the benefits to be gained from systems improvements; they are put off by the seemingly high costs of buying expertise from higher-income countries. Unless active encouragement from the outside is given, Mauritius will be slow in reaping the productivity benefits available. The core problem appears to be that the present scheme for encouraging this process is inadequate in coverage, and so far is having very little of the desired motivating effect. Although the Government has made a positive start by collecting the one percent levy on wages to cover assistance through the Industrial and Vocational Training Board (IVTB), some exporters are still unclear as to what activities, if any, qualify for assistance under the new scheme. Some are still unaware that assistance could be available for in-company training. In addition, there are complaints about the degree of red tape involved in obtaining assistance from IVTB, and about the initially unrealistic restrictions imposed on the coverage of the scheme; this reflected IVTB's slow start-up and is beginning to improve with time. 4.20. Consequently, there is a very real need to re-orient this scheme in order to widen and improve its motivating effect. Assistance in the form of cost-sharing grants, in addition to the double taxation relief, serve to motivate currently unprofitable firms, as well as profitable ones; thus, all firms should have access to the grants irrespective of profitability. Eligibility criteria should be simple and clearly stated, with eligibility based primarily on the expected impact of productivity, with coverage otherwise very wide. The choice of source of expertise should be left to the user firm and the approval process should be easy and fast. In time, coverage could be extended beyond training into all uses of outside expertise that go towards increasing labor productivity. Lack of a Transfer Market in Quotas 4.21. A special problem exists for firms exporting under quota to the US market. In the quota year ending September 1990, several quota categories were less than 50 percent utilized, including some that are currently fetching high premia on the Hong Kong quota transfer market. This represents a serious loss of potential revenue for Mauritius. At the moment, US quotas are allocated mainly on past performance, and cannot be officially transferred. As the process of adjusting to higher productivity levels gathers momentum, not all existing firms will be equally able to make this adjustment. Consequently, this arrangement for quota allocation will increasingly constrain the pace of adjustment itself. 4.22. What is required is an active market in quota transfers. Such a market will enable those exporters who hold quotas based on past performance that they are unable to utilize to sell this "right to export" to the highest bidder, and to do so early enough in the quota year to make this attractive to the quota buyer. Such a quota transfer market will also increase the pressure on the individual exporter to increase unit value. In this way, it will further assist the process of productivity improvement. The Government should be aware, however, that such a move is likely to be resisted by holders of large past performance quotas. They will rightly 78 Maurtis: Expanding Hortzons suspect that the move to a quota market will mean that they will have to pay a market rate for at least a proportion of what they presently obtain free of charge. This opposition is understandable, but should not detract the Government from initiating a system that will, firstly, speed the process of productivity improvement and, secondly, minimize the under-utilization of valuable quota entitlements. The other argument likely to be used against a quota transfer market is that it would concentrate quotas in the hands of a few large producers. If indeed it turns out that a few large exporters are able to make significantly better unit returns in all quota categories, then a transfer market could indeed concentrate quotas in their hands. But that would not mean that smaller producers would have no place in the market. On the contrary, it is very likely that their future as specialist suppliers and sub-contractors would be more assured than at present. Besides, there is no evidence that a few large producers would indeed be able to bid higher in all categories. And, if that were the case, then the Government would have to balance considerations of fairness to less efficient smaller exporters against the desirability of increasing unit realizations and quota utilizations. The latter are surely more important considerations in the present situation. 4.23. The introduction of a quota transfer market is likely to require expert assistance from seconded officials with relevant experience elsewhere. The best- known quota transfer market is that operated by Hong Kong, which has developed by experience a complex and sophisticated system to regulate the market. It would be sensible to learn from the experience of the Hong Kong Trade Department when introducing this innovation. E. Constraints Affecting New and Emerging Industries 4.24. Outside the wearing apparel industry, there are as yet few significant export flows. The only non-textile items achieving over Mau Rs 200 million of exports in 1991 were fish and fish preparations, watches and clocks, and pearls, precious and semi-precious stones (see Table 4.3). However, based on field investigations of these and other emergent export activities, it would appear that there is substantial potential for extending the presently limited existing investments in higher- productivity export activities outside apparel. This potential exists primarily in the following two directions: (a) "precision assembly", i.e., starting with jewellery, sunglasses, and watch movements, and developing later into a range of other more sophisticated mechanical, optical and electronic assembly operations; and (b) "brain-service exports", i.e., starting with slow-turnaround data entry, developing later into telecommunications-based data entry, computer software, translation services, digitizing of maps and drawings, and eventually professional consulting services. Precision Assembly 4.25. Lack of Local Sub-Contractors and Parts Stockists. Much of the precision assembly so far attracted to Mauritius appears rudimentary. Watch movement 4: Manufactured and Service Exports 79 Table 4.3 MAURITIUS: Main EPZ Exports by Main Commodities, 1988-1991 (In millions of Mau Rs) 1988 1989 1990 1991 Fish and fish preparations 173 190 142 296 Textiles yarn, fabrics, made-up articles 180 361 498 480 Pearls, precisous and semi-precious stones 302 325 354 392 Articles of apparel and clothing accessories 6,446 7,038 9,085 9,621 Optical goods 88 133 124 145 Watches and clocks 563 500 616 550 Toys, games and sporting goods 85 91 126 121 69 80 139 156 273 340 390 375 Total EPZ Exports 8,179 9,058 11,474 12,136 Source: Quarterly External Trade Statistics. assembly is undertaken on an "assembly fee" basis, with no involvement in sourcing, product design, or marketing. Assembly of the electronic elements of watches is just beginning. Attempts to attract more sophisticated assembly operations have come up against the problem of a lack of local support facilities on the island. 4.26. In electronics, for instance, substantial potential exists in low-volume assembly of items such as laboratory equipment and instruments. But such operations depend on the local availability of flexible sub-contractors and their ability to produce to specification key custom-made items such as printed circuit boards, metal chassis and precision injection-moulded plastic casings. Local production of printed circuit boards has already begun, but neither precision metal nor precision plastic fabricating is apparently available yet to serve such needs. A similar problem exists for firms using moulded plastic components. Because there is apparently no local toolroom able to make and repair moulds for plastic moulding machines, these are presently being imported from as far away as Italy. For more standardized components and materials, precision assembly operations depend in a similar way on local stockists of such items. As with custom-made parts, there is as yet very little of this kind of stock-holding, and apparently none able to supply free of duties and taxes to EPZ plants. 4.27. There are two core problems. First, without a few key sub-contract functions available, as mentioned above, precision asscmbly, particularly in electronics, is unlikely to take off. Second, without a simple and fast mechanism that will encourage stockists and converters of imported raw materials and components to stock for duty-free sales to EPZ exporters, these important support services will not develop. 4.28. To solve the first problem, a more detailed study to specify those sub- contract activities most likely to stimulate investments in precision assembly is 80 MauHrltus: Expanding Horizons urgently required. This could lead to a highly specific incentive scheme to stimulate the development of these activities, ahead of expected demand. To solve the second problem, elimination of the remaining import duties and stamp duty on all raw materials and components likely to be of interest in assembly operations would be desirable. These duties serve no protection function, and they are counter-productive as a means of raising revenue.52 In addition, positive incentives could be extended to stimulate the development of local stock-holders serving assembly operations. 4.29. Red Tape. This continues to hold back foreign investment. It might be tempting to believe that, with full employment now achieved, foreign investment no longer needs to be actively encouraged. This belief might possibly be justifiable within the core industry of garment production. But, if Mauritius is to attract higher-productivity assembly operations, and thus diversify its export base, then foreign know-how and market links will be vital. The new precision assembly and "brain-service" activities are likely to be predominantly foreign-owned or joint ventures. 4.30. Setting up an industry in Mauritius is still a long, frustrating and complex process, particularly for foreigners. The Mauritius Export and Development Investment Authority (MEDIA) and private consultants do their best to help new entrants through the maze, but still this major constraint remains. Higher-tech operators, for instance in electronics, are less likely to be tolerant of such impediments than the early entrants, who were attracted then by the more obvious benefits of quota-free US entry, or ACP preferences. Even after the establishment of the enterprise, the red tape problem continues. Obtaining the various permits and clearances to import a piece of equipment for production is said to take typically three to five weeks. For example, customs clearance of a customer's countersample recently took three weeks, even though it had deliberately been made unusable, and thus had no commercial value. One new exporter estimated that dealing with the various regulatory departments of Government involved him in an average of around four phone calls each day while another exporter had to abandon a particular export expansion plan because he could not get work permits for two key foreign individuals vital to the process. 4.31. The reality is that no one element of red tape dominates. But, when taken together, all the various controls and regulations add to the costs, delays and uncertainties of doing business in Mauritius. The core problem appears to be a continuing excessive reliance by the authorities on regulation, as opposed to facilitation. This reliance on regulation is increasingly inappropriate, as Mauritius seeks to increase productivity and chase the "Tigers" of East Asia. What is required is a thorough review of the various controls, concentrating on those facing new investors, both during and after the process of business establishment. The aim of this review should be simple. For those investors offering genuine gains in 52 These issues are being addressed in greater detail by the joint UNDP-World Bank Trade Expansion Program study. 4: Manufactured and Servfce Exports 81 exportable productivity, the costs, delays and uncertainties involved in starting up should be minimal. Conditions should be superior to those in the other new NICs, with which Mauritius is competing for these kinds of new business, and which do not have its location disadvantage. Brain-Service Exports53 4.32. Higher Education. As living standards improve and parents can afford to educate their children better, the demand for "white-collar" employment by Mauritians is likely to increase. As Mauritius seeks to continue export expansion via productivity improvement, export industries of all sorts will demand higher education levels of their employees. As yet, it would appear that higher and further education has not begun to meet these significant challenges. Software firms complain that very few of the private software training companies provide the quality of training required by the industry. Firms in other fields complain that very few school-leavers obtain Advanced Level qualifications. Firms recruiting graduates are even worse off, being still mainly dependent on the few who return from expensive college education overseas. 4.33. The core problem appears to be that the educational system is not yet geared to meeting the demands of the changing industrial environment. Only about 30 percent of the Ordinary Level students proceed to Advanced Level education and although the pass rate at the Advanced Level has been going up over the years, it was still only 56 percent in 1990. This represents a serious under- utilization of the educational, and thus the export productivity, potential of the country's youth. The Government is making efforts to expand Advanced Level facilities and to improve the pass rate further through better staff training and the provision of facilities and materials. The vocational schools, on which industry depends for its supply of mechanics, technicians, and so on, are roundly criticized by industrialists as being too theoretical, and inadequate for the task. The private software schools that have sprung up to fill one particularly serious gap are not properly supervised by an accreditation body, with recognized examination standards. The local university has only just started courses in subjects like economics, engineering, accounting and computer science. Financial assistance is apparently not available for those wishing to take degrees abroad which are not available locally; around a hundred scholarships are offered each year under bilateral and multilateral agreements. In short, the building blocks needed for the development of higher-level brain-service exports are not yet in place. The Ministry of Education has prepared an Education Sector Master Plan which addresses these various elements of the problem. 4.34. As has already been mentioned, the Government has started a program whereby the IVTB has been assigned the responsibility of administering the industrial and vocational training program, for which a one percent levy on waLges 53 The discussions on red tape and the undervaluation of foreign expertise also apply to this category of exports. 82 Mawltlus: Expanding Horlzons is collected. At present, there is still an ongoing debate about the scope of the program and its coverage stemming from the need to distinguish clearly between pre-vocational training to be provided by the formal education system and hence funded out of taxation, on the one hand, and employment-specific training, for which partial or total funding by employers can be obtained, on the other. The training levy from employers should only be used to fund employment-specific training, along with other firm-specific activities aimed at productivity improvement. In addition, if IVTB is to continue administering this levy fund, it should not itself be a provider of employment-specific training services. It should leave the choice of the training service provider to the individual firm, and restrict its involvement to partial funding. If, on the other hand, IVTB is nevertheless to become a major provider of employment-specific training services, these services should be provided at fully commercial rates, and IVTB should give up to some other body its administration of the levy fund. 4.35. Finally, the effectiveness of a centralized approach to the provision of industrial training, as is planned by the IVTB, is seriously questionable. Centralized state institutions have a clear role to play in the provision of higher and further education. But in the area of industrial training, such institutions may not be the answer, particularly in the type of training that industry is expected to pay for, at least in part. F. Proposed Action Plan 4.36. The recent achievement of full employment represents a wonderful and unique opportunity for the Government to take bold initiatives that will stimulate and speed the next stage of export growth in the manufacturing sector. 4.37. As a first step, there is a great deal of analytical work that will be necessary to provide the underpinnings for the actions necessary to usher in the next phase of industrialization. A number of key input markets are not functioning effectively as buyers' markets, and are thus constraining export expansion. The Government needs first of all to understand in detail why this is so, and what would need to be done to facilitate these markets. The following actions would be involved in this first stage. ' Commission an in-depth review of the credit delivery markets facing exporters, giving special attention to the adequacy of the provision of the following financial services to exporters: equipment leasing, longer-term project capital, forward foreign exchange cover, working capital in foreign exchange, letters of credit and export credit guarantees and insurance. W Commission an expert study on the workings of the market in affordable housing for factory workers. ' Commission an expert study on the workings of the public transport market. 4: Manufactured and Service Exports 83 w Determine what sub-contract services and what stock-holding services are most likely to stimulate new investments in precision assembly. w Carry out a thorough review of the various controls and regulations facing new investors, both before and after establishment. Determine howr to create entry conditions superior to those in competing NICs. 4.38. With the above studies and reviews completed, the Government would enter the second phase of the program where it would be in a position to spell out in detail how it intends, over the next two to three years, to achieve effective buyers' markets for the various key inputs identified in this report as presently holding back the second phase of export-led growth. During this second stage, it would also be possible to initiate actions in some areas where quick and simple actions are called for. This would be useful in giving a clear signal to the business community as to the seriousness of government intent. The particular actions initiated at this stage would, of course, depend on the findings of the various studies, but the following examples look promising at this stage. -s The licensing of bus routes could probably be modified quickly and relatively simply, so as to stimulate real competition in that particular market. :W Import and stamp duties on standard parts for precision assembly could be removed in stages, so as to begin the process of stimulating local parts stockists. am Positive and attractive investment incentives could be introduced for a few obvious sub-contract services, such as making chassis and plastic casings for electronic assemblies. W The employment levy scheme could be quickly expanded to cover cost- sharing grants for all forms of technical assistance at the firm level which are aimed at increasing productivity in export production. ' Quotas could be made transferable, initially under close supervision, so as to begin the development of a market in quotas. ' After publication of the Education Sector Master Plan, specific actions aimed at boosting the education level of new entrants into the job market might also be included. 4.39. The aim would be for the Government to have facilitated successfully within three years the operation of effective buyers' markets in all the various inputs indicated in this report. It would also have improved its facilitation of entry by foreign investors, by changing over to a regime viewed by such investors as being superior to those in competitive NICs. 84 Mauritus: Expandrng HorLzons 4.40. As the economy becomes more and more linked to continued export expansion, particularly in manufacturing and services, the existing high-duty regime will become less and less appropriate. High duties on production equipment may have made sense in colonial times, e.g., to protect industry in the United Kingdom, but they make little sense now. High duties have remained, not for purposes of protection, but as a convenient way of raising revenue. As export production gradually becomes more dominant in the economy, the Govermnent would be well advised to take up the idea, already put forward locally, of turning Mauritius eventually into a Free Port. This would require tariff elimination in stages, with revenue generation shifting to other less obstructive forms of taxation, such as perhaps a value-added tax. The positive impact of such a move, however, could be dramatic. It would substantially increase the attractiveness of Mauritius as a base for more sophisticated production activities. It would attract industries and services serving the nearby East African markets. It would also eliminate at a stroke many of the red-tape problems. It would free up labor resources, and enable many of the staff involved in controlling imports and collecting duties to transfer to directly productive tasks. 4.41. This could be part of a longer-term vision for the economic future of Mauritius: a duty-free country, gradually moving up the labor productivity and thus the income ladder; moving steadily from a start in flatbed knitting into more and more sophisticated and skill-intensive processes; and following the example of another island state, Singapore, by becoming the wealthiest country in its region, and an advertisement for sustained export-led growth. 5 Tourism A. Introduction 5.1. Since 1988, Government's stated policy towards tourism in Mauritius has been to emphasize low-impact, high-spending tourism and, by maintaining the island's upmarket profile, to increase expenditure per tourist and per tourist night. The argument is that a move downmarket could create unacceptable environmental and social pressures and seriously damage Mauritius' image as a luxury beach holiday destination. Thus, the 1988 White Paper on Tourism sets clear targets on the number of tourists based on the ratio of tourists to population of 1 to 3, restricts high-rises on the island, and puts a limit on the maximum size of each resort hotel complex at 200 rooms.54 5.2. However, two recent developments have already undermined this stated policy and will continue to do so in the absence of prompt action on the part of the Government. First, Government's applied policy has been at odds with its 1988 stated policy, to the extent that hotel certificates granted imply a hotel capacity which is totally out of line with the stated targets for tourists (see Section C). Second, there has been a gradual shift downmarket, as evident in the increase in the number and share of tourists using informal accommodation; this in turn may be partly a response to the relatively high room rates of Mauritian hotels (see Section B). 5.3. These developments pose a serious and urgent dilemma for the Mauritian Government and raise several issues about the appropriate strategy for the tourism sector in Mauritius. First, there is likely to be strong downward pressure on hotel room rates, causing average earnings per tourist to fall. Second, if this decline in prices results in a shift towards lower-end tourism, there could be adverse effects on the environment. Third, lower prices could in turn lead to a rapid increase in tourist arrivals which will put even greater demands on an already stretched infra- structure. Finally, training needs will have to rise to meet the demands of the additional hotel facilities and the quality of hotel services will deteriorate if training cannot keep up with demand. 5.4. In order to pursue successfully its stated policy of encouraging high-end tourism, the Government will have to decelerate drastically the growth in the total 54 Ministry of Tourism, White Paper on Tourism, Mauritius, 1988. 86 Maurilus: Expandirg Hortzons number of tourists visiting the island and ensure that downmarket tourists are! discouraged; the policy instruments at its disposal include revoking hotel certificates already granted, scaling back on incentives given to the hotel industry, limiting air access, and taxing tourist arrivals and activities (tariffs on airline tickets, hotel charges, restaurants, etc.). This is obviously not without costs to at least some Mauritians and even then it is not clear how successful the Government can be in keeping out low-end tourists. Alternatively, in the absence of government intervention, the trend downmarket may continue and the Government will then have to face up to the erosion in the island's image at some point in the future. The predicament for Mauritius today is whether to tackle the emerging problem at a relatively early stage or postpone it till a later date. 5.5. This chapter first analyzes the trends in the demand for, and supply of, hotel rooms (Sections B and C respectively). Noting the emerging imbalance between projected demand and supply, it goes on to discuss the necessity for planning in the tourism sector and for weighing the trade-offs between permitting more-rapid-than-planned growth of the sector and promoting high-end tourism (Section D). Promotion and diversification of tourism are discussed in Section E; the issue of how to increase net earnings per tourist in Section F; and the supporting infrastructure for tourism in Section G. B. Tourism Demand Characteristics of Tourism in Mauritius 5.6. Mauritius is overwhelmingly a holiday destination; this accounted for 90 percent of all arrivals excluding those in transit in 1990.55 And, apart from most of those staying with friends and relatives (9 percent of the total in 1986), it is also almost entirely a beach holiday destination; 95 percent of tourist accommodation is on or fairly near the beach. For European tourists, who probably account for over 60 percent of all tourist spending, it is essentially seen as an "exotic" distant beach destination, rather more exotic and unspoilt than the Caribbean (with which it is fairly comparable in terms of price), and definitely upmarket of beach resorts in Kenya, the Gambia and Sri Lanka. Beach holidays in Bali, Malaysia and Thailand lack the tropical island irnage, but are seen as having more to offer in terms of sightseeing and cultural image; they are also, of course, considerably cheaper (see Statistical Appendix Table VIII.5). The Maldives, Seychelles and much further afield Pacific destinations such as Fiji and Tahiti are also direct competitors, but attract many fewer European visitors, presumably because of the great distances involved. Non-European travel to Mauritius is heavily dominated by visitors from Reunion and South Africa (Table 5.1). For these it is essentially a convenient, rather than an exotic, beach holiday destination; they tend to stay for shorter periods than Europeans, and those from Reunion are relatively low spenders per night. 55 The proportion may be slightly overstated because of those who believe that frontier formalities may be easier for tourists. 5: Tourtsm 87 Table 5.1 MAURITIUS: Characteristics of Tourists from Main Origin Countries in 1988 Percent of Average Percent Expenditure total length of staying in per night in nights in stay AHRIM Mauritius Arrivals Mauritius (nights) hotels a (Mau Rs) b France 21.0 21.6 12.5 55.9 636 Germany 6.3 7.8 15.0 79.9 828 UK 5.8 7.9 16.8 83.9 616 Italy 6.2 5.6 10.9 82.5 992 Switzerland 3.8 4.5 14.6 67.0 807 Total of above 43.1 47.4 13.4 68.0 728; Reunion 23.8 18.1 9.3 21.3 49CI South Africa 15.0 13.7 11.1 79.8 666 All others 18.1c 20.8 12.9 35.8 597 World total 100.0 100.0 12.2 52.8 649 a Around 85 percent of all tourist arrivals in hotels are in those which are members of Association des H6teliers et Restaurateurs Ile Maurice (AHRIM). b 1986. Total gross tourist receipts per night in the country were 29 percent higher in 1988 than in 1986, but expenditures per night for individual origin countries probably all grew at much the same pace. C 6.4 percent were from the nearby African countries, 1.8 percent from India, 1.4 percent from Japan and Singapore and 1.0 percent from Australia; probably most of the remainder (7.5 percent) were from minor European origin countries. Sources: Central Statistical Office and Assoaation des HOteliers et Restaurateurs lle Maurice (AHRIM). 5.7. In terms of average expenditure per night while in Mauritius, European tourists are clearly the most valuable to the country; this reflects the very high proportion, other than those from France, who stay in hotels. Moreover, they stay relatively long. South Africans are also quite high spending. The highest-yielding group of all consists of those from Japan and the new industrial countries of the Far East, but their numbers are still small. Visitors from Rdunion and from other neighboring African countries and India are low spenders and mostly stay in relatively low-cost informal accommodation. There are two big distinct groups of French visitors: those who stay in large hotels, usually not for very long, and are high spenders, and those, frequently travelling on cheap fares via Rdunion56, who mostly use low-cost informal accommodation and stay much longer. 56 Currently around Fr4,500 retum, about two-thirds of the cheapest official fare. 88 MaurUlus: Expanding Horlzons Demand Trends 5.8. Mauritius has, in recent years, substantially increased its still tiny share of total world tourism and of total long-haul beach tourism. While this growth in tourist arrivals is still well above the worldwide figure, it has slowed since 1988. Data indicate 298,510 foreign tourist arrivals in Mauritius in 1991, staying an average of 12.0 nights in the country - a total of 3.6 million nights - and yielding Mau Rs 3,875 million in total gross receipts. As Table 5.2 shows, from 1989 to 1991 there was a considerable slowdown from the exceptionally rapid growth achieved in 1987 and 1988. Indeed, if hotel receipts per bed-night sold and hotel room rates are taken as the most appropriate indication of tourist prices (around 70 percent of gross expenditure goes to hotels), real receipts per arrival and per night appear to have declined in 1989. Of course on a longer-term basis, growth rates remain well above the worldwide tourism growth rate of about 6 percent a year in terms of arrivals (World Tourism Office estimate). In terms of its own market segment too, essentially long-haul beach tourism, Mauritius performance has also been relatively good. 5.9. Temporary slowdowns in growth rates of tourism, even falls, have from time to time been experienced by most destinations around the world. In the case of Mauritius, there appears to be two main reasons for recent trends. First, as shown in Statistical Appendix Table VIII.6, the slowdown has been mainly due to sharply reduced growth rates in travel from France, one of the three most important individual origin countries for travel to Mauritius. Travel from South Africa picked up in 1990 after a slowdown in the previous year, and travel from Reunion has continued to grow relatively rapidly. While travel from Germany and the United Kingdom performed well in 1990, arrivals from Italy decreased slightly. To a large extent these reflect worldwide trends in travel from individual origin countries. In particular, the persistent weakness of the rand has made all travel abroad from South Africa increasingly expensive, while economic problems in France have had a general depressing effect on French travel abroad. The second major factor which has slowed the growth of travel to Mauritius is cost. Mauritius has long been a relatively expensive beach holiday destination. For most Europeans, staying predomninantly in the better class hotels, only the Caribbean is comparable in cost as a long-haul beach destination. But, while prices of inclusive tours in some competitive destinations (notably Bali, Malaysia and Thailand) have stabilized or even fallen in the last few years, prices for Mauritius have risen sharply, reflecting both the lack of truly concessionary air fares57 and a very substantial increase in hotel prices (see later). A comparison of inclusive tour prices available from the United Kingdom58 appears in Statistical Appendix Table VIIL.5 57 Apart from cheap fares via Reunion, of which tourists other than from France are largely unaware; in any case few are prepared to change aircraft twice during the course of a flight. ss Inclusive tour prices are for half board in comparable grade accommodation in each destination (typically the average charged in five different hotels, of three and four star grade) using scheduled flights. 5: Tourlsm 89 and a similar comparison could be made for other European origin countries. A final factor affecting Mauritius' market share has probably been the relatively meager spending on promotion at a time when many competitive destinations have been stepping this up. A Shift to Informal Accommodation 5.10. The especially rapid growth in travel from Europe in recent years (notably from Germany and the United Kingdom which continued to perform well in 1990) in itself implies a shift upmarket; but this is offset by the stagnation of what used to be almost equally high-yielding traffic from South Africa. Moreover, there is evidence of a general shift away from the expensive hotel sector to more modestly priced accommodation, such as bungalows, guest houses and rented private rooms. In consequence gross tourist receipts in 1988 and 1989 rose appreciably more slowly than the rises in nights spent plus hotel price increases imply (Table 5.2). It is also notable that the average length of stay in the country (12.0 nights in 1991) is nearly double that in hotels (6.3 nights for all hotels, including those which are not members of the Association des H6teliers et Restaurateurs Ile Maurice (AHRIM); the figure for AHRIM hotels only is 7.6 nights (Table 5.3)). Thus long-stay visitors are heavily concentrated outside the hotel sector. Some, of course, are Mauritians living abroad visiting friends and relatives. But there does seem to be a clear trend for the hotel share of the remainder to shrink. It would indeed be surprising if this were not the case in view of the sharp increase in prices. Consequently, only about half of all tourist nights spent in the country are spent in tourist accommodation. Of the remainder, of some 1.62 million nights in 1988, about 0.58 million were by Mauritians living abroad; perhaps some 85 percent of these were staying with friends and relatives and half the remainder in hotels. The balance of 1.04 million nights implies the existence of 5,400 beds used by tourists in non-hotel acconmmodation in 1988 even at 50 percent occupancy (probably on the high side as much of the travel by those using informal accommodation, especially from Reunion, is very seasonal). Yet the capacity of bungalows and beach area boarding houses listed with the Mauritius Government Tourist Office (MGTO) amounted to only 1,000 beds. There consequently could be as many as 5,000 beds in commercial accommodation regularly used by tourists which are not listed with MGTO. Both the absolute number and their share of all tourist nights appear to have risen in recent years. Prices 5.11. As already noted, Mauritius has long been a relatively expensive beach resort destination. And, it has been becoming relatively more expensive as prices in Mauritius have escalated while those in some competitive destinations have been stable or even declining. In particular, South East Asian destinations have become relatively cheaper owing to the easier availability of cheap air fares and some excess capacity in beach resort hotels. Partly reflecting a shortage of hotel capacity (occupancy rates rose quite rapidly from 1986 to 1988, but then declined in 1989), revenue per bed night in AHRIM hotels was pushed up by 21 percent in 1987 and 90 Matutius: Expanding HorHzons Table 5.2 MAURITIUS: Growth Rates in Foreign Travel to Mauritius, 1986-90 (Percent) 1986 1987 1988 1989 1990 1991 All arrivals 11.0 25.6 15.3 9.8 11.0 2.4 Nights spent 8.0 26.1 26.6 6.7 11.2 0.6 Gross tourist receipts Current prices 40.8 50.1 33.3 17.4 29.8 6.7 Constant prices a 31.3 41.0 21.1 4.2 14.1 0.2 Constant prices b ... 28.6 7.4 0.4 ... Deflator as in national accounts data for all restaurants and hotels, induding local use. b Deflator from increase in gross hotel revenue per bed night sold in AHRIM hotels (1987 and 1988) andfrom increase in hotel room rates (1989). Source: Central Statistical Office (CSO), National Accounts of Mauritius, Association des Ho^teliers et Restaurateurs Ile Maurice (AHRIM) and Mauritius Government Tourist Office (MGTO). Table 5.3 MAURITIUS: Proportion of Foreign Visitor Stays in Hotels 1986-91 1986 1987 1988 1989 1990 1991 Nights Total tourist nights in country (million) 1.88 2.37 3.00 3.20 3.56 3.58 Hotel beds available (nud-year) 5,671a 6,187a 6,563 7,196 8,743' 10,027a Hotel bed occupancy by toursts (percent) 47.2 54.0 57.4 55.3 54.3 47.1 Hotel nights by tourists (mn) b 0.98 1.22 1.38 1.45 1.73 1.72 52.1 51.5 46.0 45.3 48.6 48.0 Stays Total tourist arrivals ('000) 165 208 239 263 292 299 Estimated average stay in hotels (nights)' 7.76 7.74 7.62 7.60d 7 60d Tourists staying in hotels ('00) 126 158 181 191 228 ... (% of all arrivals) 76.4 76.0 75.7 72.6 78.1 ... Average of year beginning and year end. b Beds x bed occupancy x 365. Average stay in AHRIM hotels x 1.21 (matches 76.4 percent who stayed in hotels in the 1986 tourist expenditure survey). d Assumed. Nights/stay. Sources: CSO and AHRIM. 32 percent in 1988. These increases far outstripped the depreciation of the rupee against the currencies of most tourist origin countries (though the South African rand has been even weaker), and price rises in other destinations. So hotel prices in Mauritius have become relatively much more expensive for tourists from abroad Sable 5.4). The sharpest past rises and the greatest pressure on current rates are in medium-sized and smaller hotels. They certainly largely explain the shift away from the hotel sector. Comparable data reflecting actual prices paid are not as yet 5: oTutsm 91 available for 1989, but a weighted average of nominal hotel room rates showed a rise of 19 percent. However, 1990 room rates were only about 6 percent up on the 1989 level, and it seems that discounts on normal rates granted to tour operators increased in 1990 and 1991. Table 5A Percentage Increases in Average Mauritian Hotel Prices Adjusted for Exchange Rate Changes For residents of: 1987 1988 1989 France (including Reunion) 11 25 12 South Africa 14 41 21 Germany 5 24 12 United Kingdom 14 16 14 Switzerland 5 25 16 Italy 10 27 10 Source: Mission estimates. Seasonality and Length of Stay 5.12. Overall, seasonal peaking of travel to Mauritius is not particularly pronounced. Arrivals in the high months (August, December and January) are typically only around two-thirds higher than those in the low months aune and February). For many competitive destinations, peak-month arrivals are more than double those in the low months. Seasonal peaks in Mauritius vary by country of origin. For European-origin countries they are in October and November, while for Reunion there is a very big peak in August (20 percent of the annual total) and a less pronounced one in December/January. Travel from South Africa peaks in September and December (see Statistical Appendix Table VIII.7). Thus the peaks for different countries tend to cancel each other out. But this is less of an advantage than might be thought, because tourists from different countries do not use the same facilities. In particular, those from Reunion tend to stay in much more modest accommodation than Europeans, with the partial exception of French tourists. Nor can airline capacity be switched from long-haul to short- or medium- haul routes. The not-very-pronounced peak in December as a whole also disguises a very big peak over the Christmas/New Year period. And, as Mauritius is primarily a holiday destination, there is a heavy concentration of flights on weekends. 5.13. Linked to seasonality is length of stay. The overall average of 13-15 nights for European tourists, as against 9 for those from Reunion and 11 from South Africa, disguise a tendency for most stays to be of either one week (especially from Reunion and South Africa) or two weeks (though Germans, particularly, often come for three), while a small minority, many of them Mauritians living abroad, stay for a month or more at a time. Inevitably, too, length of stay reflects flight timings. When Air Mauritius flights to Europe are used, the tendency is for stays in Mauritius to be of 12 nights, or 19 nights, when the tourists concemed might well 92 MaurLtus: Expandlng Hortzons have preferred a full two or three weeks' stay; this is particularly evident for Swiss tourists. Use of European-based airlines, which turn round back-to-back flights in Europe rather than in Mauritius, thus has favorable effects on length of stay and overall hotel occupancy (a hotel relying primarily on European travellers carried on Air Mauritius tends to be half empty two nights a week). C. Hotel Supply Growth in Hotel Rooms 5.14. At the end of 1990 Mauritius had 75 hotels with a total of 4,603 rooms and 9,572 bedspaces. Around 40 percent of this capacity was in high-grade hotels (nominal tariff for two occupying a room in the main season in excess of Mau Rs 3,000 a night, half board), and about another 15 percent was in reasonable-grade hotels (Mau Rs 2,000-3,000 a night). Many of the remaining hotels offer only modest facilities and several charge under Mau Rs 1,000 a night for two, half board. Accommodation in MGTO-registered bungalows amounts to only about 500 rooms; some of these offer facilities, including restaurants, comparable with those in reasonable-grade hotels. Accommodation in registered beach area boarding houses amounts to only about 100 rooms. But, as already noted, there may be as many as 5,000 beds, or say 2,000 rooms, in non-registered commercial accommodation regularly used by tourists. Though some of these, mainly bungalows, are c,f reasonable quality, a great many are not. Some rooms with basic facilities are let for extremely low prices. Rates per night in these may be less than one-tenth of those in high grade hotels - an unusually large differential by international standards. The 1990 estimates referred to above include some of the 24 new hotel projects involving 2,358 rooms that are currently under construction plus some 380 rooms in extensions of existing, predominantly good grade hotels. 5.15. Rather over half of the new rooms were scheduled to have been completed in 1990, and all except 200 rooms of the balance in 1991. But construction delays (largely responsible for pushing into 1990 some completions originally expected in 1989) have pushed the schedule back significantly. Some projects are also believed to be running into problems and, in view of the impending overcapacity situation, may well be frozen or even abandoned by promoters at this late stage. Nonetheless, there was an increase of over 25 percent in room capacity in 1990, an implied increase of a further 15 percent in 1991, and 10 to 15 percent in 1992. Thus, by 1992 probably around 2,000 to 2,300 extra hotel rooms are likely to be in existence, or some 60 percent more than at the end of 1989. Around two-thirds of these are in fair-sized hotels (over 100 rooms) and about two-thirds, predominantly the same ones, are planned to be of reasonable or good quality (projected investment per room, often in practice substantially underestimated, in excess of Mau Rs 650,000). Though somewhat downmarket of Mauritius' best existing hotels, the focus of the new construction is thus significantly upmarket of the current hotel sector as a whole. This projected capacity means that Mauritius could accommodate well over 400,000 tourists per year by 1992, compared with the targets set in the 1988 White Paper on Tourism of 325,000 in 1992 and 400,000 by the 5: Tourism 93 year 2000. Thus Government's applied policy is already putting its 1988 stated policy in jeopardy. From 1993 to 1995, a further 15 to 20 percent increase appears to be in the pipeline. Even allowing for a few closures of existing hotels, this implies a capacity of between 6,500 and 7,000 rooms in 1995, not far short of double the existing number. 5.16. In addition to these hotels under construction, development certificates have been granted to a further 19 projects (1,565 rooms), but construction has still. to start. In addition, a further number of large projects are in the pipeline. While projects now under construction, like Mauritius' existing hotel industry, are dominated by Mauritian-owned concerns, these new projects appear to have a greater involvement by international groups. They also show a further trend upmarket. In March 1990, the Government announced a temporary freeze on all projects where construction had not started. However, it now appears that this is to be relaxed, at least for the larger projects where substantial funds have been committed in advance of construction. It is also appreciated that to go back on authorizations already granted would affect Mauritius' reputation for straight- dealing with investors, both local and foreign, especially in relation to the EPZ sector. Moreover, a significant proportion - probably at least a quarter, possibly half - of these projects are in any case likely to be abandoned by investors, in view of the rise in investment costs and the evidence that it may become increasingly difficult to fill a greatly expanded hotel capacity at worthwhile charging rates. 5.17. The bulk of the increase would be in reasonable quality hotels well suited to "inclusive" tourists, notably from Europe. The increase in nationwide tourist room capacity would be a good deal less, though, as the growth in bungalows and rooms in informal accommodation is likely to slow - partly because the main growth in demand should be by higher-spending tourists, and partly because the more modest hotels will be forced to become more price competitive. Though price cutting in hotels should mean that these attract a higher share of visitor-nights, especially by Europeans, non-hotel commercial accommodation is bound to continue to dominate travel from Reunion and from most African and some Asian origin countries. Moreover, many will continue to stay with friends and relatives. Overall, the share of total tourist-nights spent in hotels seems likely to rise only fractionally from the 1989 level (47 percent). Hotel Costs and Profits 5.18. In part, the escalation of hotel prices has reflected mounting costs. In particular, staff costs have clearly increased very rapidly; but they typically account for only about a quarter of all operating costs. Most other costs are local, notably food and drink and, for some hotels, quite substantial rental charges; these have risen a good deal more slowly. Especially with the increase in occupancy up to 1988, total costs have been rising appreciably more slowly than hotel charges. The resulting boost to profits was undoubtedly a major factor in the current boom in hotel construction. Rough estimates based on first returns to the hotel survey 94 Mawltlus: Expanding HorHzons (Table 5.5) indicate generally healthy profits, though there are obviously wide variations. Margins are appreciably larger in the more expensive hotels, mainly because of higher accommodation charges; lower price hotels depend far more on revenue from food and drink. Breakeven bed occupancy levels are generally a good deal higher in the lower-priced hotels. A rough estimate puts the average breakeven level at 57 percent in the lower-priced hotels, against only 46 percent in the higher-priced ones. Table 5.5 Estimated Hotel Receipts and Operating Costs per Bed Night Sold (Mau Rs) Higher price hotels' Lower price hotels Total Gross receipts b 1,229 615 1,009 of which: for accommodation 718 358 589 Staff costs 232 114 190 Other operatin, costs c 750 405 626 Gross margin 247 96 193 a Gross receipts per bed night in excess of Mau Rs 800. b Net of discounts. c Purchases of goods and services, including rent, insurance, commissions, promotion costs, and repairs and maintenance. d Before depreciation, interest payable and profits tax. Source: Mission estimates based on preliminary returns to Ministry of Tourism/CSO Hotel Survey (period covered varies, but typically from mid-1988 to mid-1989). D. Tourism Planning 5.19. The rapid increase in hotel capacity has resulted from individual investors responding to mounting profitability of existing hotels and a case-by-case approach to granting development certificates. Many within the industry now feel that certificates were granted too easily. For the large number of hotels now under construction, little account appears to have been taken of the risk of overconcentration in some areas, or of the problems posed for water supply and the road network. Some also feel that certain developments are overlarge or inappropriate for the particular sites in question and will damage the general image of Mauritius as an uncrowded, relaxed tourist destination. Above all, it does seem that more new developments were authorized in the mid-to-late 1980s than the market could realistically be expected to support. Essentially, developments have been granted on an ad hoc, case-by-case basis rather than in the context of an overall tourist strategy or a spatial plan. 5.20. There are a number of externalities which would argue strongly against leaving the decision of whether and where to build hotels to the private sector. With limited financial resources, infrastructural facilities cannot be laid on wherever 5: Tourism 95 development takes place. As a minimum, it has to be made clear which are the preferred areas where necessary infrastructural facilities will be laid on. Furthermore, it is arguable that on a small island some stretches of prime coastline should be left free of all building (though there should be road access) and so be earmarked primarily for day visitors. Moreover, development in the most popular areas should not be allowed to continue to the point where there could be serious environmental damage. This would drive foreign tourism to Mauritius downmarket (as has happened in some Mediterranean resorts). Individual investment decisions would therefore impose costs on other parts of the economy. 5.21. All the above implies a need for long-term strategic planning for the tourist sector as a whole and for linked broad spatial planning (see also paragraph 5.25). Priorities and objectives have to be clearly spelt out. The growth in hotel capacity should be related to the carrying capacity of the island, as well as a realistic appraisal of market potential and of aircraft capacity. Promotional plans, staff training and infrastructural needs will have to be developed accordingly. In the tourist sector, the knowledge and necessary skills already largely exist in Mauritius. It is coordination which is needed, both of the planning exercise as a whole and of the necessary decisions to be taken and implemented by different government departments. Nor should the strategy be rigid. It must be able to respond continually to changing circumstances and be indicative, rather than prescriptive, in its application to particular projects. By developing an appropriate long-term strategy, the need would be eliminated for stop-gap measures such as the recently announced freeze on new hotel projects (in practice it seems already partially lifted). Strategy Issues 5.22. The first key issue to be addressed is how large an annual inflow of tourists is acceptable. This is ultimately a political decision which only Mauritians can make; there is no hard-and-fast rule that can be applied. Comparisons with competitive destinations are interesting and informative but still do not provide the answers for Mauritius. While it is true that the current level of tourism relative to total population is still far below that in some other destinations (see Statistical Appendix Table VIII.8), this does not mean that Mauritius would want to continue to allow increasing numbers of tourists and follow the pattern of tourism development in these resorts. If there is a problem of absorptive capacity, it probably lies in the social impact of tourism on Mauritius' traditional established way of life. The 1988 White Paper on Tourism has set guidelines on the basis of a ratio of tourists to population of 1 to 3, based on what Mauritians feel is the tourist carrying capacity of the island. 5.23. Although Mauritius would have little difficulty in physically absorbing greater numbers of tourists, the policy of emphasizing higher spending and so predominantly long-haul visitors should be continued. Indeed, if possible it should be reinforced, especially in view of the recent shift to more modestly priced accommodation (with consequent adverse effects on Mauritius' image and on the 96 Maurtius: ExpandLng Horizons environment) and the continuing strong performance of tourism from Reunion and the lower-value segment of French tourism. But there are several steps that need to be taken to implement this policy. It would almost certainly be impracticable to squeeze out low-value tourism; the numerous, inexpensive flights between Reunion and Mauritius are an obvious reason. But the cheaper end of the market can be upgraded to yield more in termns of net earnings, which in turn might discourage some. More acceptable accommodation in the moderate price bracket (say between Mau Rs 500 and 1,000 per night for a double room) is needed. This does not necessarily imply a greater number of modest price hotels or bungalows. There is also considerable scope for reasonable quality rented holiday apartments - preferred as holiday accommodation to hotels by many French in particular. Suitably sited developments should be encouraged. At the same time, there could be greater control on informal accommodation. The MGTO could require a license for the letting of accommodation upon payment of a license fee and after getting approval for meeting quality standards by the MGTO or some other agency. The Government could also impose a tax on imputed income and mandate periodic checks on sanitary conditions and waste disposal. By publicizing those bungalows, apartments and rooms which have been approved, by allowing an official sign to be displayed, and by prosecuting or fining those found operating without licenses, the MGTO could also make it increasingly difficult for other operations to compete. Finally, a squeeze on camping by foreigners could be exercised by requiring advanced booking and allowing this only on designated sites with appropriate waste disposal facilities. 5.24. The question also arises of the value of the present system of hotel development certificates. Though it probably has helped Mauritius escape very large and visually obtrusive (especially high-rise) hotels which have spoilt resorts in some other parts of the world, ordinary building regulations could achieve this equally well. The system has not prevented an overconcentration of hotels in some areas, or overbuilding on some sites, or the development of sites which may be inappropriate on wider planning grounds. Nor has the permitted expansion of capacity been linked to any overall appraisal of market potential. As even Singapore has found, it is in practice very difficult, perhaps impossible, to use hotel supply limitation to keep demand and supply in balance. Finally, the present system is open to abuse. 5.25. Arguably what is needed is not just control of hotel development but overall land use planning for all coastline areas with touristic potential.59 Low- quality, creeping urbanization and villa building along the coast are probably equally serious problems for the environment, for Mauritius' tourist image and even for the provision of infrastructural services than is hotel development as such - as has also been the case in many Mediterranean resorts. But land use planning could be used to ensure that hotels are only built in appropriate places on sufficient land to prevent overdense developments and without encroaching too closely to 59 While this does imply projecting probable hotel capacity growth, it would nonetheless be consistent with the scrapping of development certificates. 5: Tourism 97 the beach'o or to existing buildings. Such a system would encourage the upgrading or rebuilding of existing lower or mid-range hotels to higher standards. 5.26. Especially in view of the likely hotel oversupply situation over the next few years, air access policy represents another major issue. As discussed in Section E, air access policy is an instrument that Government can use to influence the number and composition of tourists coming to the island. The question is how to design air access policy in such a way that the right numbers of upscale tourists visit Mauritius without encouraging perverse reaction which undermines the Government's policy. This may in fact imply that there should be a more positive attitude to traffic rights negotiations with foreign carriers, which should be given more freedom to operate in the manner which suits their commercial interests best.6' 5.27. As also discussed in Section E, the main potential for increased tourism to Mauritius lies in Europe, including some origin countries of only very minor significance at present (e.g., the Netherlands and Scandinavia). And, it is in Europe that promotional efforts should be concentrated. The MGTO needs a substantial increase in its budget; a close coordination of the promotional programs by the MGTO, Air Mauritius and the main hotel groups is desirable. Planning and Implementation Capabilities 5.28. As noted in paragraph 5.21, the knowledge and skills for long-term strategic planning of the tourist sector already largely exist in Mauritius. Capabilities for general land use planning of tourist areas are possibly rather less adequate. The main problems lie in coordinating the process of both tourism strategy planning and land use planning, in reaching agreement on measures to be taken by different governrent departments and in implementation. 5.29. It is evident that both the Ministry of Tourism and the MGTO need strengthening. In the MGTO, a core of perhaps two or three additional professional staff should be recruited to plan and use increased resources effectively both in Mauritius and abroad. The Ministry of Tourism also needs more full-time professional staff. In addition, there is need to build up the Ministry's capabilities to analyze tourist trends in both origin countries and competing destinations, and to coordinate the technical aspects of long-term strategic planning for the sector. The Government also needs to be able to draw on advice in relation to aviation policy, especially in negotiations on air traffic rights. 60 Some hotels are built so close to the sea and are so aggressively protected by guards that the beach becomes effectively private; ordinary Mauritians cannot easily or comfortably exert their legal right to access. 61 The preference which many tourists have for using their own national airlines, increased promotion of Mauritius by these airlines, and the favorable effects on hotel occupancy and average length of stay of using aircraft based in Europe rather than in Mauritius, are also important reasons for allowing an increased market share to foreign airlines. 98 Mauritus: Expanding Hortzons 5.30. Finally, a key element in the strategic planning for the tourism sector is to get close involvement of the industry. The industry should be consulted in major decisions affecting the sector's development. And its collaboration in matters such as promotion is essential. A National Tourism Board, as was proposed in the 1988 White Paper on Tourism, would be an appropriate mechanism by which this could be effected. The Board might comprise perhaps eight to ten members drawn partly from the government departments primarily affected, plus representatives of the hotel industry, tour operators and Air Mauritius. Meeting possibly once a quarter under the chairmanship of the Minister of Tourism, it should be primarily concerned with strategy and policy issues and should be able to make recommendations for consideration at the Cabinet level. If it were decided to retain the system of hotel development certificates (probably unnecessary - see paragraphs 5.24 and 5.25), decisions on these could probably most suitably be taken by this National Tourism Board, excluding the hotel representatives; spreading responsibility for such decisions implies that the system would be less open to suspicions of possible abuse. E. Promotion and Diversification 5.31. It is very important to maintain, and if possible reinforce, Mauritius' upmarket image as a beach holiday destination. Beach holidays, particularly in South East Asia, have become increasingly price competitive for Europeans and now overlap with the more expensive Mediterranean holidays, while prices in the Caribbean have also become relatively lower. It is, therefore, necessary to pay far more attention than in the past to attracting the right kind of tourists and to making it easy for them to get to Mauritius. The availability of convenient flights from Europe particularly is a major potential problem. Moreover, coordination of promotional strategies and country programs between Air Mauritius, the hotel industry, and the Mauritius Government Tourist Office (MGTO) is needed. This, of course, implies agreement on priority markets. Promotion 5.32. Given the Government's overall policy towards tourism, the Government's budget for tourism promotion at this point in time should be directed towards attracting tourists from upscale destinations rather than increasing the numbers of tourists as such. The MGTO 1989/90 budget of Mau Rs 35 million (US$2.3 million) is, by international standards, modest for a relatively small, but upmarket, beach holiday destination. Several comparable destinations spend around US$20 million annually, two to three times as much per visitor or as a percentage of gross tourist receipts. Some, such as Tahiti, spend far more still. A comparison appears in Statistical Appendix Table VIII.9. Inevitably, small destinations have to spend relatively more than major ones. Though the promotion budgets of larger countries such as Hong Kong, Singapore and Thailand are roughly ten times that of Mauritius in absolute terms, they are smaller per visitor or as a proportion of gross receipts. The point is that it is difficult to make a real impact in a number of 5: Tourism 99 different destinations with a total budget of under US$15-20 million. Indeed, the US market alone can easily absorb spending on this scale. Moreover, inevitably, a large part of MGTO spending goes to general expenses, rather than to advertising and public relations in individual markets. Even the largest advertising budget, of Mau Rs 2.2 million in France, is far too small to have any real effect. 5.33. In common with many other destinations, the bulk of the promotion of Mauritius is by airlines, hotels and tour operators. Air Mauritius and the two main hotel groups spend around Mau Rs 150 million between them on marketing and promotion abroad. But this is far less than some other national airlines are in a position to spend (compared, for instance, to the massive campaigns mounted by Singapore Airlines and Thai International). The featuring of Mauritius in foreign tour operators' brochures probably represents the largest single element in promoting the destination and a large slice of MGTO efforts go to persuading operators to give sufficient prominence to Mauritius. However, in contrast with some other destinations, foreign airlines do relatively little to promote travel to Mauritius. This is partly because air traffic agreements give little incentive to those who operate joint services with Air Mauritius to push the island. It also reflects the lack of joint promotional campaigns between foreign airlines and the MGTO. Some beach holiday destinations, in the Caribbean for instance, need to do little in the way of promotional activities because foreign airlines, and foreign travel journalists, do it all for them. 5.34. In the increasingly competitive market for long-haul beach tourism, and especially in view of the need to emphasize an upmarket image, it is clear that a major increase in the MGTO's budget is needed. However, there is little point in doing this until clearly defined plans have been developed in conjunction with Air Mauritius, the hotel groups and the Ministry of Tourism for allocating the increase. Limited funds should be concentrated in a very few priority markets so as to make maximum impact in these, even at the cost of ignoring some promising secondary markets. Cost effectiveness - the anticipated promotional cost per additional visitor - should be an important criterion in selecting these priority markets. Once this strategy begins to yield results, additional priority markets could be added. Within a very few years an MGTO budget in excess of Mau Rs 100 million should prove worthwhile. To compete effectively with other upmarket beach holiday destinations, it could well be significantly more. 5.35. To use increased resources effectively, the MGTO clearly needs strengthening, both domestically and abroad. More professionals with a real understanding of promotion are needed. While full-blown tourist offices abroad in prestigious locations would certainly be excessively expensive, continued reliiance primarily on modest retainers to public relations concerns cannot be expected to produce much; an intermediate approach is indicated. More attention also needs to be given to the promotion of tourist activities after their arrival in Mauritius. They should be made more aware of the full range of attractions on the island, including special interests which operators' tours cannot cater to. As in other destinations, well presented, illustrated brochures should be placed in hotel 100 MauwitLus: ExpandLrng Hortzons bedrooms and could also be available at the airport. As Hong Kong, Singapore and Hawaii, for example, have shown, widening the "menu" of attractions to tourists stimulates spending, increases the likelihood of repeat visits, and tends to lengthen the average length of stay. Market Diversification 5.36. Current policy puts considerable emphasis on market diversification. Clearly Mauritius has been excessively dependent on three main markets - France, Reunion and South Africa. The last of these has little growth potential at present, in view of the country's many problems and the weakness of the rand, while tourism from Reunion and a fair proportion of that from France yields relatively low returns per visitor-night. So diversification is needed. But it will always be difficult to get much traffic from countries from which no direct flights are available. Moreover, each new market requires a substantial addition to promotional spending. So diversification should not be carried too far. Furthermore, Mauritius' share, even of the French long-haul beach holiday market, is still quite small; so there is not the same urgency in diversification which faces some other destinations. 5.37. As is widely appreciated, market diversification and air access are two sides of the same coin. Hence current emphasis has been on building up travel from origin countries with which traffic rights have recently been established, especially in the Far East. However, it must be appreciated that Far Eastern travellers have a wide choice of nearer and cheaper tropical beach holiday destinations, both north and south of the equator. Australia, Fiji, Hawaii, Indonesia, Malaysia, New Zealand, the Philippines, Tahiti, Thailand and many small Pacific islands are competing for the same market, for under half the price of a holiday in Mauritius. Moreover, the facilities in these destinations are generally tailored to the needs of Far Eastern holidaymakers, with heavy emphasis on extensive shopping facilities and with a wide range of modestly priced gourmet restaurants. Shopping and eating are the major holiday pursuits of most Japanese and Chinese travellers. Finally, Japanese travellers, particularly, tend to favor large Japanese owned and run hotels (which have consequently come to dominate areas of the Australian and Hawaiian coasts); their poor linguistic skills are a major factor. And, keen though they are on golf, it is doubtful whether this would be the major draw which some in Mauritius believe; even closer tropical destinations have found it difficult to tap a substantial part of this market. For all these reasons, it is doubtful whether Far Eastern travellers will ever constitute more than a very small proportion of visitors to Mauritius. The honeymoon market is perhaps the most promising market segment. An additional problem is the lack of direct flights from Japan. Lack of airport capacity in Japan until at least the mid-1990s poses serious problems; nor is the use of Hong Kong as a hub a satisfactory solution, because of shortage of capacity there and the preference for direct flights. Australia possibly represents a more interesting market as the distance from Western Australia to Mauritius is competitive with that to popular Pacific island destinations and there is a strong tradition (in contrast to Far Eastern origin countries) for pure beach holidays. 5: Toulsm 101 Traffic rights remain, however, a long-standing problem; until this is resolved, Australia will be only a minor market for Mauritius. 5.38. Consequently, the main growth potential remains in Europe, and it is there that the vast bulk of promotional resources should continue to be focussed. Attracting European tourists, preferably with a shift away from the low-spending French tourists coming in through Reunion, would be consistent with the focus on upmarket destinations. As was seen in Section B, European tourists stay relatively long and are high-spending. Mauritius has done relatively well in attracting tourists from France; around 1.7 percent of French long-haul tourists worldwide go to Mauritius. Linguistic affinity and relatively good air access (including cheap flights via Reunion) are the main reasons, but France also absorbs the largest single share of promotional spending. For no other European origin country, except Switzerland (around 1.0 percent), does Mauritius' share reach 1 percent of the long- haul total. Even for relatively important origin countries such as Germany, Italy and the United Kingdom, only about 0.4 percent of all long-haul travellers go to Mauritius. The Scandinavian countries and the Netherlands, which between them account for considerably more long-haul beach holiday travel worldwide than does France, are perhaps the most obvious almost-total gaps in terms of travel to Mauritius. Air access is, of course, a major reason. Air Access 5.39. Air access policy is one of many tools that the Government can use to further its overall objectives in the tourism sector. However, such a policy can only be determined in the context of a clearly articulated government policy concerning the number and type of tourists that Mauritius wants to attract. Under the current stated policy, the Government could use air access policy to limit the total number of tourists while encouraging a move upmarket. This implies a strategy which does not go after numbers of tourists as such, but rather those from selected upscale destinations. However, if the Government were to decide that it cannot reverse the existing boom in hotel construction, for example because of pressure from the hotel industry, then it may well want to use air access policy to support the additional tourist traffic. 5.40. Limiting Air Access. Air Mauritius currently dominates air transport to the island; a large majority of traffic is either on Air Mauritius flights or on joint Air Mauritius/foreign airline flights operated with Air Mauritius equipment. Indeed, Air France, British Airways, Singapore Airlines, and South African Airways are the only important carriers operating wholly independently. This contrasts with the situation in most other long-haul beach destinations, the bulk of traffic to which is by airlines of the passenger's own country of residence. Reasons include the weakness of many developing country airlines, the strong preference which most passengers have for travelling either by their own national airlines or in other big carriers with an international reputation for quality and safety, and the policies of many tourist destinations which have given priority to developing tourism as a 102 Mauritius: Expanding Hortzons whole rather than to the interests of national airlines. This last is, in some cases, reflected in a large share of charter operations. 5.41. In the conditions which have operated to date, with relatively limited numbers of passengers corning long haul from individual countries of origin, Air Mauritius has clearly served the island well. It plans to continue to do so and a study is currently in progress on the strategy it should pursue in the 1990s; this will of course have to be part and parcel of the Government's overall tourism strategy. 5.42. Assuming that the Government reaffirms its policy to limit the total number of tourists and to encourage low-impact, high-spending tourism, there would not be great pressure to increase the seat capacity to Mauritius as such. Air Mauritius' policy of restricting the operations of other airlines and keeping air fares to the island high also serves to keep down the total number of tourists visiting the island. Certainly there are foreign airlines that feel that in traffic rights negotiations the Government has favored Air Mauritius and that they have accordingly been forced into accepting joint operations on Air Mauritius terms. On the other hand, certain foreign airlines with rights into Mauritius have chosen not to operate because they have other priorities or they find the route unprofitable. Other carriers which started operations decided to withdraw their services or to operate jointly with Air Mauritius, for example, Qantas, Alitalia, Air India and Lufthansa. Generally, of course, the volume of traffic has not so far been sufficient to support separate operations by two carriers. It is also true, however, that conditions have been imposed, for instance on the mix of different classes in flights, which have a significant effect on the viability of operations by independent airlines. Certain specific arrangements also turn out to be of clear benefit to Air Mauritius; for instance, the royalty which British Airways pays Air Mauritius for the carriage of fifth freedom traffic (a usual practice in the industry) on every tourist brought from the Middle East (where there are no Air Mauritius services) clearly deters traffic by increasing the cost advantage of holidays in the Seychelles and South East Asia - of particular interest to expatriates and their families. 5.43. Air Mauritius has also shown an interest in keeping fares to Mauritius relatively high; it considers that its fares are in line with the high standards that it sets and with the Government's policy of selective and high-spending tourism. Other airlines serving Mauritius have likewise shown little interest in pushing for lower fares as this would neither generate much traffic nor take any substantial part of the market share away from Air Mauritius. As Statistical Appendix Table VIII.10 shows, though official fares to Mauritius are not dramatically different in terms of US cents per kilometer to those on other long-haul routes, discount fares are substantially less attractive (except from France via Reunion). Rates paid to airlines by tour operators for travel to Mauritius are also unusually high - more than the all-inclusive cost of one-week holidays from Europe in some competitive destinations. There are some legitimate reasons why fares have to be fairly high. Though peak load factors are high, year-round load factors are not. There is little, normally highly profitable, first class and business class travel which on many 5: TourHsm 103 routes subsidizes the concessionary fare and inclusive tour passenger. Crew costs are high because the long flight necessitates a crew change and low frequency necessitates long crew stopovers. Whatever the reasons for Air Mauritius' policy concerning fares and the operations of other airlines, it has clearly helped to keep down the total tourist traffic to the island which is consistent with the Governm,ent's stated policy. The issue for the Government is whether the de facto monopoly rents should accrue to the country as a whole instead of only Air Mauritius as is the case at present. 5.44. Nevertheless, the existing situation has some shortcomings in relation to the goal of encouraging high-end tourism. First, current arrangements give little incentive to foreign airlines to promote Mauritius as a destination, thus depriving the island of some high-spending tourists who should be targeted, including those from Europe and Australia. Moreover, German tourists, for instance, who have booked on a Lufthansa flight are sometimes disconcerted to discover that in practice it is, in essence, an Air Mauritius operation. 5.45. Second, when Air Mauritius equipment is used in flights to and from Europe, hotel occupancy is reduced because beds are often unoccupied for two nights a week in each fortnight's holiday when back-to-back flights turn round in Europe (paragraph 5.13). It almost certainly also reduces the average length of stay. This is not, of course, the result of any Air Mauritius strategy, simply the consequence of its market domination. 5.46. One of the problems facing airlines serving destinations like Mauritius is that the bulk of their fleets of long-haul aircraft are too large in capacity for a fairly low-volume destination. Although the economies of using these long-haul aircraft on flights to Mauritius will become more worthwhile as traffic volume increases, the availability of a suitable 200-seater aircraft would make it easier in the meantime to step up frequencies and thus the choice available to travellers. Delivery delays for these aircraft are substantial, however. 5.47. Improving Air Access. If, however, the Government cannot resist the pressure from the hotel industry to limit, or even curtail, hotel capacity, then it will also come under pressure to improve air access. If the incidence of peaking and average length of stay remain unchanged, fairly conservative estimates would suggest a need for around 1,200 extra seats a week by 1992 and 2,750 extra by 1995, based on the projection of hotel capacity. This includes estimated arrivals from minor origin countries and those coming via Reunion. But even if half the additional French visitors, plus a small proportion of those from other European countries, travelled via Reunion, this would only cut the additional number of long-haul seats required between Mauritius and Europe by between a fifth and a quarter. 5.48. To cater for even half this additional traffic (less than its current share) plus the increase in its traffic from other areas of origin, both long haul and short/medium haul, Air Mauritius would need to expand its long-haul fleet from 104 Mauatus: Expandtng Horizons six aircraft to seven by 1992 and certainly eight, possibly nine, by 1995. However, this may be difficult, given that manufacturers' order books for suitable aircraft are now full until around 1997. With many other airlines around the world also desperate to acquire new capacity, secondhand and leased aircraft are becoming increasingly difficult and costly to obtain. Financing a major expansion in its fleet and building up staff and related facilities could also pose problems for Air Mauritius. 5.49. Under this strategy, if Air Mauritius will not be in a position to put on the bulk of the additional capacity needed, then other airlines, especially European airlines, will have to be encouraged to build up services to Mauritius. Particularly in view of the capacity constraints these are also facing and the relatively low priority most give Mauritius (a fairly small and not especially profitable destination), these possibilities will need to be explored seriously. 5.50. In the event, the question also must be posed whether charters should be permitted. It is natural that airlines now serving Mauritius should be opposed to these. Charters would siphon off traffic in peak months, while not operating in the low season. They thus make the economics of a low-volume route even more difficult for scheduled services. They could also imply a move dowmnarket; the upper-income tourists, whom Mauritius is particularly keen to encourage, generally have a preference for scheduled flights. However, it is only the French market which is likely to be large enough to support a viable charter operation in the next few years. As many French visitors to Mauritius are already coming on charters to Reunion, little would be lost by allowing direct services. It is recognized that, once in Reunion, tourists cannot be effectively discouraged from coming on to Mauritius. The competition opened up would also restrain prices charged to tour operators by scheduled carriers (who would otherwise be tempted by the general shortage of capacity to boost rates). 5.51. There is some disquiet at reported plans to develop Reunion as a regional air traffic hub served by a regional airline. Mauritius would appear to be better placed to perform this role, being linked to a wider range of destinations and with a more substantial and more diversified economy. The main potential for a regional hub is in relation to travellers from outside the region. Apart from the well developed flow between Mauritius and Reunion, the scope for intraregional travel is more limited. Mauritius should actively seek to develop the island as a regional tourism center and pursue cooperation with nearby islands. Action is needed to sell the region as a whole. As in the Caribbean, "island-hopping" tourism could be encouraged, and Mauritius could be the starting and finishing point for Indian Ocean fly-cruises and yacht charters. 5.52. Finally, increased tourist traffic would soon necessitate an increase in the terminal capacity at the airport. At peak periods it is already under some pressure, though there is room for changing this through modest improvements to facilities. With the heavy predominance of tourist traffic and an emphasis on travel from 5: Tourwsm 105 Europe, bunching of arrivals and departures and a high proportion of weekend traffic is, of course, inevitable. 5.53. To conclude, it needs to be clearly understood that air access policy must serve the Government's overall objective in the tourism sector. Limiting air access through high prices and restrictions on the operations of airlines other than Air Mauritius is quite consistent with the current stated policy, although it does lead to some problems in being able to attract tourists from certain targeted markets. However, there are tremendous pressures to allow an expansion of hotel capacity and hence on increasing aircraft seat capacity. The latter policy is consistent with an overall strategy of expanding tourism, not one of moving upmarket and encouraging high-end tourism. F. Increasing Tourist Eamings 5.54. One of the effects of the surplus of hotel space which is already emerging will be that nominal rupee hotel rates will stabilize (a decline in real terms) and discounting increase. Up to 1993 at least, this will probably more than offset increased emphasis on typically high-spending tourists from Europe. Mauritius' quality image has also naturally attracted many who are unable or unwilling to pay the high rates charged by hotels, when far cheaper accommodation is available outside the hotel sector. This is the main reason why real expenditure per tourist night after a rapid rise up to 1987 has declined slightly since. The trend for a substantial and rising proportion of tourist nights to be spent in informal accommodation will be difficult to reverse. Some possible means, however, have been discussed in Section B. 5.55. Although average spending on accommodation, food and drink per tourist night may well fall in real terms in the years ahead, there is scope for a substantial increase in other areas of tourist spending, especially on shopping and on tours. The latest available tourist expenditure survey (for 1988) indicates that accommodation, food, drink and related gratuities absorbed about 66 percent of all tourist spending, while shopping absorbed 16 percent and car hire and tours 10 percent.62 There has probably been little change since.6 By international standards this is a low proportion of spending on items other than accommodation, 62 These numbers refer to tourists not on package tours. For tourists on package tours, the share of expenditure on accommodation, food, drink and related gratuities was about 71 percent, for shopping it was 13 percent, while car hire and tours accounted for about 10 percent of expenditure. 63 On the one hand, there has been the shift to informal accommodation which implies relatively more spending on intemal transport and shopping. On the other hand, there has probably been a rise in the proportion on all-inclusive tours (certainly more come from Europe, travel from which is dominated by inclusive tourists). Though in absolute terms the average inclusive tourist spends more on shopping, but less on transport than the average independent traveller, the proportion of total spending going to accommodation, food and drinks is considerably higher. 106 Mawlutus: Expanding Horizons food and drink. In 1989, the average visitor to Mauritius probably spent only around US$70-75 on shopping, plus US$65-70 on transport and other elements apart from accommodation, food and drink while on the island. In contrast, in many Far Eastern destinations the typical tourist spends US$300400 on shopping alone on visits averaging well under a week; in Hong Kong and Singapore, over half of all tourist spending goes to shopping. Obviously Mauritius cannot yet expect to approach this level. The type of tourist is very different, and there are still few Japanese and Chinese visitors for whom shopping is a major holiday pursuit. Nonetheless, there is scope for considerable improvement; data on spending by European tourists in some competitive destinations suggest that their shopping expenditure in Mauritius could be boosted to US$200 per visitor, while spending per head on tran,sport and tours might be increased by half. Net Tourist Eamings 5.56. No recent estimate exists of the proportion of gross tourist earnings which, is retained in Mauritius. The analysis of 1980 data in a World Bank-sponsored study' suggested that, when direct, indirect and induced effects were taken intoc account, only 9 percent of gross foreign exchange earnings were retained in. Mauritius as net foreign exchange earnings. However, a large part - around a third - of additional imported goods and services were "induced" effects, resulting from a high import propensity among Mauritian households receiving remuneration on profits from hotels, restaurants and other tourist undertakings, or from enterprises operating as suppliers or contractors to these (e.g., laundry services and building firms). Such induced imports are, of course, an intrinsic part of the development process in all sectors. Thus, the results of this study are not as different as might at first appear from the unofficial preliminary results of recent work carried out within the Ministry of Tourism based on a breakdown of the 1981 national input/output table to give more detailed coverage of the tourist sector. This work estimates imports of the tourist sector plus those generated in industries supplying this sector as equivalent to 29 percent of its gross output. Probably another 5 percent were profits paid directly abroad, but most of the industry's gross operating surplus (36 percent of gross output) was retained within Mauritius. Excluding induced effects from higher incomes, this work implies that net tourist earnings were the equivalent of 60 percent to two-thirds of gross. 5.57. This is high by international standards for a relatively small island economy, especially one which at the time was still at a fairly early stage in the development process. The main reasons were the quite substantial profits of a mainly locally-owned industry, with few hotels being run by foreign companies under management contracts and most construction being by Mauritian firms and financed locally. The contrast in these respects with the Caribbean, the main competitor area as a long-haul beach holiday destination, is striking. 64 Economic Impact Study of Tourism in Mauritius by Brian Archer and Steve Wanhill, September 1981. 5: Tourlsm 107 5.58. Moreover, it is probable that, since the early 1980s, the share of net export earnings has increased. The more developed state of the economy as a whole means that more inputs can be purchased locally. Owing in part to the EPZ, the range of Mauritian-made manufactures is wider and their quality improved, while construction and other skills are also better. The increase in the tax surcharge on hotel bills to, in effect, 15 percent is another factor. Profitability of an industry which is still predominantly locally owned has probably also risen as hotel occupancy has improved and room rates have been boosted. Relatively low imported inputs are also implied by the first preliminary returns to the 1988/89 Ministry of Tourism/Central Statistical Office hotel survey. Direct purchases of goods and services abroad appear to be equivalent to under 5 percent of gross revenue. A modest proportion of food purchases - especially meat - though bought in Mauritius, has also been imported, as have all fuel and a number of lesser material inputs. The imported component in services other than quite substantial rents to government and local property owners is probably higher than for goods, while a small part of staff costs is for expatriate salaries paid or transferred abroad. The substantial profits of the industry are generally either reinvested or accrue to local investors. Hardly any is transferred abroad. Overall, it seems that the local component of hotel receipts is about 80 percent of the total, taking account of second-round effects (the imported component of goods and services bought locally) but not of induced effects. The local component could be higher still for restaurants, but lower for local transport and tours (in spite of the high taxes on vehicle imports) and for shopping; even locally manufactured goods bought by tourists have a big import content. The implication is of a combined current local content for the whole tourist sector of around 75 percent. 5.59. There appears very little scope for increasing the already high local content within existing tourist sector operations. There are few examples of imported products being bought where equivalent quality local ones are now available. Indeed it is striking how keen a locally run industry is to maximize the use of Mauritian products. The contrast with some other destinations, such as the Caribbean, is very pronounced. Nor do there seem to be many imported products which could potentially be produced locally within the next five to ten years. Agricultural diversification should, however, improve the supply of locally produced foodstuffs, and industrial development through the EPZ should widen the range of manufactures available. On the other hand, the squeeze on hotel margins implies a decline in local content, as does the serious shortage of skilled staff; for the next few years a higher proportion of key workers are likely to be expatriates. And, it is becoming so difficult for hotels and restaurants to obtain adequate supplies of fish that a rising share of imports seems unavoidable. Improving Shopping Opportunities 5.60. The single biggest way in which spending per tourist can be increased is by substantially improving shopping facilities. It will be appreciated that even imported, duty-free goods have a substantial local content - sometimes as much as 50 percent - because of high trade markups. The need for better facilities is 108 Maus: Expanding Horizons already widely appreciated and a new venture, The Mauritian Shopping Paradise, plans to set up outlets in different parts of the island. The present shops in tourist areas, including hotel shops, offer only a meager range of generally low-quality goods of little interest to upper-income visitors. Handicrafts and cheap beachwear predominate. Many of these are not even local in origin - cheap handicrafts are largely from Madagascar. The prestige name, high-fashion articles, quality jewellery, and camera equipment readily available in or close to hotels in competitive destinations are noticeable only by their absence. Nor is the situation much better in the main urban centers of Mauritius. In any case, they are too distant and difficult to access for tourists who usually prefer to shop after a day on the beach, or only when the weather is poor. Consequently it is likely that the average tourist spends significantly less on shopping than originally envisaged when leaving for his or her holiday. 5.61. From the upper-income tourist's point of view, the ideal is a shopping complex with cafes, restaurants and several shops of each type (fashion, shoes, cameras, etc.) so that goods and prices can be compared. There are two main problems in establishing profitable modern tourist-oriented facilities in Mauritius. First, the tourist population is relatively scattered. Even in Grande Baie, there is not a large number of potential shoppers staying within easy walking distance or a short taxi ride away. Consequently, shopping facilities would have to be on a more modest scale than in the big complexes in Far Eastern beach holiday destinations. Second, to have a good range of high-quality products available implies that most will have to be imported (exactly as they are in shopping centers in Europe and the Far East). And for these to sell to tourists, they have to be attractively priced, implying low or even no duties. Inevitably, many in the local population would also be attracted. This could stimulate imports and lead to a loss of tax revenue. 5.62. To prevent Mauritians from using tourist shops, as some countries have sought to do, would naturally cause resentment and, as elsewhere, would be almost certainly ineffective, especially with the planned abolition of exchange controls. Rebates of taxes on leaving the island might be practicable, but could prove an administrative nightmare, not least because of the temptations to issue falsely- inflated invoices to give the customer a bigger refund. The need to get refunds or the alternative of a dual price system (lower prices for goods delivered directly abroad or at the airport) w ould also significantly deter tourist purchases. The only way to give sufficient stimulus to shopping by tourists may therefore be to reduce sharply or eliminate tax on sales in Mauritius of the products concerned, on the presumption that tourists will in practice prove to be the main purchasers; if so, the local content of sales to tourists arising from trade markups should roughly equal, or even exceed, the import content of additional purchases by Mauritians. Duty- free local sales are already allowed for EPZ products. There would obviously be some risk in this approach, though there would be compensating benefits to the local population. The key may lie in carefully defining a limited range of products of particular interest to tourists which would benefit from the tax cuts. The more 5: Tourism 109 limited range of goods would also mean that centers would not have to be overly large. Tours and Car Hire 5.63. Tour operators believe that around half of all visitors to Mauritius take one or more full or half-day tours while on the island. The proportion tends to be relatively high among first-time visitors, while repeat visitors, especially those from Reunion, are more likely to take taxis (highly competitive with organized tours in terms of price) or hire self-drive cars. Many take two or three tours while! in Mauritius. Around half of all tours are boat excursions. The remainder are by bus, predominantly day trips visiting a range of inland attractions, plus a fair number of half-day shopping visits. Prices are very competitive, around Mau Rs 450 on average for a full-day, guided tour; but the local tour operator's take may be as little as Mau Rs 250 (hotels and foreign operators extract substantial shares). One of the problems is that local tour bus capacity is geared to what is needed mainly on weekends for transfer between the airport and hotels. Midweek, this capacity is largely unutilized, leading to intense price competition especially in sales to foreign operators. Moreover, the extremely heavy duties on small luxury buses make it impracticable to import them. This deters tourists from taking full-day tours (bad roads are perhaps an even more important factor in this, especially from east coast hotels), and means that there is no comfort distinction between bus tours and trips offered by taxis. Total tourist expenditure on tours is probably Mau Rs 100-150 million annually, half of which is for boat excursions, or between 3 and 5 percent of gross tourist receipts. 5.64. Taxis do, of course, provide a valuable and flexible service to tourists, though there is, perhaps, some justice in the complaints that safety and other standards are often lower than they should be. The volume of day and half-day trips in taxis, including the cheaper minibus taxis, can only be roughly estima.ted, but is clearly well below that handled by organized tour operators. There are believed to be around 25,000 car-hire contracts a year, generally divided between two or more tourists and typically for five days. Thus approximately 20 percent of all tourists have a hired car at their disposal, especially those staying in bungalows or informal accommodation some distance from the beach. Relatively small vehicles, especially the open Mini Mokes, are the most popular. Total gross revenue of car hire operators is around Mau Rs 125 million a year, or 4.5 percent of gross tourism receipts. 5.65. While the potential for boat excursions appears well developed, there is considerable scope for increasing tourist spending on bus tours. Cost is not a constraint, as prices are modest for those spending considerable sums on a holiday in Mauritius. The lack of comfort in non-luxury buses travelling in a hot climate over, in some cases, very poor roads is a more serious problem. It limits the number taking excursions from some hotels. Bad roads also increase vehicle maintenance and repair costs and shortens their useful life. There is a case on grounds of equity to giving tour operators and car hire firms the same tax-free 110 Maurlttus: Expanding Horlzons privileges as other export concerns but, much as they would like this, it is doubtful whether they need it to attract many more tourists. It would also put taxi drivers, who currently pay considerably lower duties on vehicles, at a disadvantage. But import duties on buses, especially luxury types, are excessive. A substantial cut, to perhaps the same rate as on taxis, could be justified for both buses and rental cars.65 5.66. It is also important to make tourists better aware of the full range of attractions on the island, including those such as mountain walking, forest visits and special interests which commercial tour operators cannot cater to. The Mauritius Government Tourist Office (MGTO) needs to give more attention to promotion to tourists once in the country (paragraph 5.35). Tourists seem largely unaware of the scenic attractions away from the beaches. Many might also welcome the opportunity to visit some agricultural undertakings (few will ever have seen, for instance, a sugar estate and mill at harvest time). In short, especially in view of the quite substantial number of repeat visits to Mauritius, the "menu" of potential places to viisit needs widening. To do this, road surfaces need improving in some areas, while at many attractions there is much that could be done to enhance tourist appeal and generate additional income at the same time. The ease of visiting Port Louis could be improved by parking facilities for coaches together with a meeting place. 5.67. Visits to Mauritius' inland tourist attractions generally need to be made more convenient, interesting and memorable. Cafe and restaurant facilities are often poor or even non-existent. Some could probably also support a tourist shop. The possibility of additional activities, such as mountain mule treks or swimming in mountain streams, might be explored and introduced at suitable locations. All this would help to encourage visitors to stay longer and spend more. 5.68. Perhaps the prime example of an underexploited tourist resource is the Royal Botanic Gardens at Pamplemousses. An entrance fee could be charged to non-Mauritian visitors.66 Some refreshment facilities are needed. A shop could sell souvenirs, including pictures of plants and other specifically botanically- oriented items. Some of this additional revenue could go to improve the appeal of the gardens to tourist visitors. There should be more emphasis on flowers, especially orchids. (The orchid garden within the Singapore Botanic Gardens is a major tourist attraction). Tree and plant labelling and explanations of uses could be greatly improved (though the guide book is good). Possibly too, in time, a wider variety of trees and plants could be established to enable it to live up to its reputation as one of the world's prime tropical botanic gardens. The French 65 Wnhen vehicles are resold, the difference in duties could be levied on the secondhand value. 66 It is generally obvious which visitors are Mauritians. An entrance fee equivalent to Mau Rs 24 has had little impact on the massive flow of tourists, both foreign and British, to Kew Gardens in London, and in 1991 it was tripled. 5: Tourtsm 111 Government has already agreed with the Government on a management plan for the Gardens which will be implemented by the French. Sports Facilities 5.69. All the leading beach hotels have good facilities, mostly free to guests, for water sports and many also have tennis courts. Facilities for yacht charter and deep-sea fishing are also well established. There are nine-hole golf courses at St Geran and Trou aux Biches, and deer hunting can be arranged at Domaine du Chasseur. Though there is potential for mountain walking and rock climbing in some parts of the island, few of those visitors who might be interested are aware of this in advance and it would be difficult to take advantage of them without preparation. 5.70. Many in Mauritius believe that there is a sufficiently good holiday market to be tapped to justify the construction of one or more 18-hole golf courses. Some doubts can be expressed as to whether this is the case. Few travel long haul for specifically golf holidays, as this is not necessary. Americans take winter golf holidays predominantly in the Caribbean; Europeans mainly in southern Spain, Portugal and Tunisia.67 Europeans rarely take golf holidays in the Caribbean and Americans rarely in Europe. This is largely because, apart from distance and cost, Europeans have a tropical island image of the Caribbean (as they do of Mauritius) where golf does not fit, while, for Americans, the image of Spain and Portugal certainly does not suggest golf. Additionally, playing habits vary. Europeans play relatively rapidly, rarely use buggies and do not regard golf as a suitable hot- weather activity, while in the United States golf is played throughout the summer but is generally impracticable in the winter in many parts of the country. Of course some Americans play the odd round of golf whilst in Europe, while some Europeans take their clubs to the Caribbean. But this is generally only a minor element in their holidays. Golfers from Japan and the Far East are closer to Americans in speed of play and adaptability to hot weather; but few could be expected to come to Mauritius on primarily golf holidays when warm-weather golf can be found far closer to home during their winter. In short, the opportunity to play golf in Mauritius would for all except perhaps a tiny minority be secondary to the island's prime attraction as a beach holiday destination. In this context, and in a hot climate, it is doubtful whether an 18-hole course is a much more substantial draw than a 9-hole one. G. Supporting Infrastructure Staff Shortages and Training 5.71. The increase in hotel capacity potentially implies an almost proportionate rise in the demand for trained hotel workers; though staff ratios are generous by 67 The undoubted benefits which Mediterranean region resorts draw from golf courses are in the winter season when hotel occupancy would otherwise be even lower than it now is. Golf courses contribute little to summer season occupancy. 112 MaurLttus: Expanding HorHzons international standards, a substantial improvement in average skill levels would be needed to reduce significantly the number of staff per visitor. The immediate impact of the expansion in capacity could, however, be a lowering of standards, which would also affect Mauritius' reputation of high quality. Staff recruitment and training are clearly one of the most serious operational problems facing hotel managements. Shortages are particularly acute in the higher skill and supervisory grades. They have led to a sharp rise in staff costs. 5.72. The larger hotels have well established training programs for the more junior grades, but only the two big groups, Beachcomber and Sun, and those with strong international lipks can attempt training in higher skills. Often, as with smaller hotels and restaurants, staff shortages are mnitigated by poaching. The Mauritius Goverrunent Hotel and Catering Training School has long been starved of resources. Its facilities and staff are quite inadequate to supply the industry's needs in both quantitative and qualitative terms. If, as it seems, it has been decided to transfer responsibility for the school to the Industrial and Vocational Training Board (IVTB), this should be effected immediately. The IVTB envisages the establishment of an entirely new school with French assistance. It is recognized, however, that this cannot be operational for some years (both site and design have still to be finalized). Pending this, priority must be given to establishing a crash training program based on revamped existing facilities plus those which the industry can make available. For the next few years significant numbers of trainers and some of the key personnel within hotels will clearly have to be recruited abroad. Tourism and the Environment 5.73. Many in Mauritius, both inside and outside the tourist industry, note that the current rapid expansion of hotel capacity and of tourism generally has gone ahead with little thought to environmental or social impact. There are even more widespread complaints of increasing water and beach pollution in the main tourist areas, especially in the north of the island and particularly around Grande Baie. The coral reef is said to be seriously damaged and fish stocks affected. But it has not as yet been possible to take scientific measurements over a sufficient period of years to establish the extent of ecological damage or its likely causes. The creeping urbanization of some tourist areas, with resulting increases in discharges and solid waste, is, however, clear. While the visible signs of damage are on a minor scale compared with many resorts in other parts of the world, the "unspoilt tropical paradise" reputation of Mauritius will obviously evaporate without action soon. 5.74. Foreign tourism is not the sole cause of environmental damage. Industrial discharges and agricultural fertilizers and other runoff also appear to be important factors. Moreover, the greater mobility which rising prosperity has brought has encouraged an increasing number of Mauritians to move to the prime tourist areas or to visit them on weekends. Some of the development in the Grande Baie area appears completely unrelated to foreign tourism. So, much of the environmental damage which has occurred in Mauritius in recent years results from the general 5: Tourism 11.3 development process. This does not, however, imply that it is an inevitable effect of economic development. Steps can and should, be taken to mitigate it. 5.75. Following the World Bank environmental report for Mauritius,68 a number of projects are being initiated which will help reduce pollution and protect the coastline in the north of the island. Consultants have been short-listed for a nationwide master plan for sewage financed by the African Development Bank. An important subcomponent, to go ahead faster, is a special study on the Grande Baie area. Two separate projects are involved in a master plan to restore and protect the coastline in the north; there are hopes of French aid. Finally, the Nordic Development Bank/Fund has expressed interest in financing the implementation of a 10-year solid waste management plan, which is expected to be prepared by a technical assistance team from the Overseas Development Administration (United Kingdom). Infrastructure 5.76. The concentration of tourist development in the northern part of Mauritius puts an appreciable strain on water resources. In total, around two million cubic meters a year of water are used in tourist hotels. Like all communal users, hotels get piped supplies at subsidized prices (around 25 percent below the cost of supply). However, price increases are planned. But many hotels have to bring in a large part of their needs by road tanker, often from the Central Water Authority, at much higher prices. The great majority of hotels, especially the larger ones, have water treatment plants and an increasing number of them are now re-using the waste water for hotel gardens and nearby agriculture. Residential units in tourist areas discharge their waste water into septic tanks; this can be a problem in areas where ground water levels are high because of seepage and eventual runoff into the sea. The studies shortly to be undertaken on sewage treatment should be considering the options, but there may well be a case for establishing, and encouraging hotels to establish, water recycling in major deficit areas. 5.77. As noted in paragraph 5.65, road conditions are very poor in some tourist areas of the island, especially on the east coast, and this deters many from seeing more of Mauritius, and consequently from spending more while on the island. Programs for road rehabilitation should give greater priority to needs in these areas, although it is doubtful that the volume of tourist traffic alone would provide economic justification for a road rehabilitation program. Other infrastructural facilities appear generally adequate, though the incidence of electricity supply interruptions, often due to cyclones, has forced most hotels and many restaurants to invest in standby generators. 66 The World Bank, Economic Development with Environmental Management: Strategies for Mauritius, Report No. 7624-MAS, November 1, 1988. 114 Maurtus: Expandirg Horizons H. Action Plan 5.78. The above analysis suggests the need for consideration of an overall master plan for tourism in Mauritius. While the 1988 White Paper on Tourism gives a clear vision of how the Government would like to see the sector develop over the next few years, the analysis in this chapter points to areas where the stated objectives are being frustrated. The following should be given consideration: m In light of existing and projected hotel capacity, review government policy on the target for ithe number of tourists with a view to clearly restating government policy towards the tourism sector. Ensure consistency between stated policy and actual hotel capacity. m Review the systerm of hotel certificates and make a decision on certificates already granted. Review incentives given to hotel developers in light of government policy and targets. W Ensure proper and close coordination between tourism strategy planning and land use planning. ; Carry out a comprehensive review of air access policy to ensure that it is consistent with the policy of attracting upmarket clients. W Explore and develop a plan for the regulation of informal accommodation, including licensing and establishing standards for sanitary conditions and waste disposal. m Increase the budget for the Mauritius Government Tourist Office and review promotional strategy so as to direct resources at selected upscale destinations in an effective manner. ; Strengthen the institutional capacity of the Ministry of Tourism and the Mauritius Government Tourist Office. W Develop an action program for increasing net tourist earnings, including shopping facilities, tours, sports, and inland activities. W Create a National Tourism Board as a forum for consultation in matters relating to the tourism industry. m Review the adequacy of the proposed arrangements for the Mauritius Government Hotel and Catering Training School in order to maintain Mauritius' upmarket reputation. In addition, devise a training plan for the interim period. 6 Synergy in Diversification 6.1. The economy of Mauritius is at a crossroads. The successes achieved during the 1980s, which exceeded even the most optimistic forecasts of the Government, have structurally transformed the country from an agriculture-based, mono-crop economy to one with a dynamic manufacturing sector and a rapidly growing tourism sector. There can be little doubt that the first phase of development has been achieved and the Government deserves a great deal of credit for laying the foundations for sustained, export-led growth. The country now stands poised to enter into the second phase of development, a phase which is likely to transform it into a Newly Industrialized Country (NIC). The situation today is much more complex than it was when Mauritius embarked upon its initial adjustment effort and, consequently, the path ahead will be even more challenging. While pragmatic macro-management of the economy will continue to be a prerequisite, the Government will have to focus more and more on policies aimed at enhancing the productivity of its factors of production. It will have to do this at a time when there are rapid changes taking place within the international economic environment which could have far-reaching implications for the Mauritian economy. 6.2. However, this process of increasing productivity and diversifying the production base of the economy does not necessarily imply competition among the major growth sectors. Rather, what emerges from this study is the feasibility of peaceful co-existence between the major sectors in the economy and, within agriculture, between sugar and nonsugar crops. Developments in one sector can generate backward and forward linkages in other sectors, thereby stimulating additional growth. 6.3. The recent rapid growth of the EPZ and tourism sectors has created a whole range of new opportunities which have directly affected the allocation of land, labor and capital. These sectors have provided new opportunities for investment and, in the process, have made the economy more diversified and more robust. They have also enabled agriculture to participate in, and contribute to, the boom: for example, the increased profitability of sugar estates through diversification into other crops, the backward linkages into the packaging industry from the fruits and vegetables export industry, and the production of fruits and vegetables for the tourist industry, as well as for the export market. 6.4. Similarly, there are important linkages between "brain-service" exports, as discussed in Chapter 4, and, for example, the eradication of the fruit fly, as 116 Maurtlus: ExpandWg Horizons discussed in Chapter 3. Mauritius has unique advantages in dealing with both of these areas. Having an educated and bilingual work force, it is quite easily capable of installing the information base and modelling techniques necessary for designing fruit fly intervention strategies. Indeed the development of an "informatics"' industry, i.e., one that specializes in different types of information-providing databases, is already underway in Mauritius. Moreover, being a small island with many micro-climates, a range of agricultural activities, offshore reefs and fishing industries, Mauritius offers a "closed system" where studies can be made in isolation and tested for effectiveness, a marketing advantage few countries in Africa can offer. The informatics industry, by combining service roles with direct applications in Mauritius, could spawn a new service industry. Mauritius is already the leader in sugarcane training for the area. It could similarly take the lead in the development of informatics and transfer this technology to the African region. This is another example of synergy and complementarity between the EPZ and the agricultural sectors. Agricultural diversification also assists in offering many more opportunities for developing information management systems; in short, informatics is a growth industry. 6.5. The growing tourism industry, combined with diversification in agriculture, creates new opportunities for tourist businesses. The scenic beauty of inland Mauritius can be combined with agriculture to develop agro-tourism. Centers like Le Val and Domaine du Chasseur which could be developed to offer stag hunting, beautiful scenery, ebony forests, kestrel birds, restaurants, and overnight accommodation are particularly attractive. The tourism and agriculture industries can both benefit from this sort of development. The economic benefits of these attractions need further study and market research, and a strategy needs to be developed to realize the tourist potential of agriculture and the natural interior beauty of the island. 6.6. In addition to the more obvious linkages between sectors, there are a number of issues which are cross-sectoral and further highlight the synergies generated by the diversification process. This report strongly recommends that, as the Government embarks upon this second phase of development, it explicitly incorporate such cross-sectoral linkages into its planning process. At this critical juncture of Mauritius' development effort, the Government needs to target its efforts at creating the kind of facilitating environment which will put scarce resources, be they land, labor, or capital, to their most productive use. A. Land Resource Management 6.7. One area in which the Government will have to place major emphasis, and which has far-reaching cross-sectoral implications, is land resource management. Land provides the resource base for a wide range of pursuits. The interaction between land, climate, productivity, management practices and markets governs the allocation of land for agriculture, industry, tourism, and other uses. These interactions are exceedingly complex and a thorough understanding of their impact is required before an optimal allocation of land can be achieved. Given its peculiar 6: Synergy in DIversylcatlon 1117 importance in the Mauritian context, the Government needs to adopt the best technology available to assist it in making its decisions. 6.8. An extremely important tool that can assist in such allocation decisions is an integrated information system such as the Geographic Information System (GIS) referred to earlier (see paragraph 3.33). GIS is a powerful tool for integrating and analyzing data from diverse sources such as land ownership, land parcels, soil surveys, land suitability, irrigation surveys, land use topographic maps, climate regions and remote-sensed data. These geographic data are spatially registered so that various types of data can be compared and analyzed together. The data can be "digitized" and stored in computers so that they can be manipulated, reconfigured, updated, compared, displayed and mapped in a format to meet management needs. Such systems are now widely used in several parts of the world; two of the largest applications are the Sydney Water Board and the Brisbane City Council and, although they are complex to set up, provide benefits which can far exceed the costs. Installation of such a system would greatly facilitate the analysis of the various alternative uses of land and assist the Government when it decides whether to issue the necessary licenses and permits for industry, tourism development, or agriculture. 6.9. The Sugar Protocol, which sets quotas for sugar exports and hence production targets, has been one of the overriding concerns in the allocation of land in Mauritius. Sugar has traditionally been a major source of export income; the guaranteed EEC market, together with the institutional infrastructure, have dictated that sufficient land be devoted to sugar to meet production targets. With the growth of the manufacturing and tourism sectors, there has been a gradual erosion of the amount of land devoted to agriculture and increasing concern has been expressed by the Government on the need to manage land resource allocation more effectively. The need for a better information base has also emerged in discussions on the availability of suitable land for horticultural production. 6.10. These alternative land uses need not be in conflict with each other but act synergistically. For example, agro-tourism could combine agriculture, natural scenery and tourism to create a new inland tourist industry. Similarly, as has been pointed out earlier, there need not be competition between sugar and other crops for land resources. A great deal of land is still available for other agricultural pursuits through sugar crop rotation, interline cultivation, use of marginal land better suited to other industries like deer farming or fruit orchards, and high-value intensive crops like anthurium which do not require large tracts of land and hence have little impact on sugar land. In some climatic zones like super humid or very dry regions, crops like tea or mangoes are better suited. Some of the sugar land which is marginal because of rockiness or lack of irrigation could in fact be derocked and irrigated on the basis of improved economic returns from high-value vegetable crops. Steep and excessively rocky land is also more suited to high- value orchard development. Using the cutting-edge of technology and developing the necessary database will greatly facilitate the Government's task and assist it in designing appropriate interventions. 118 Mauritius: Expanding Horizons 6.11. The Ministry of Environment and Land Use is very conscious of the need for effective land resource management to service all sectors of the economy. The development and use of an agricultural land resource database system (ALRDS) in Mauritius is well underway. The data already captured and stored within ALRDS comprise terrain characteristics, climatic factors, soils, land suitability, crop data, etc. These multiple data layers should now be able to provide, through a process of integration, different thematic maps on topics such as land areas suitable for food crop production, wetland and rocky areas affecting cane growth, land areas which have not been derocked, land ownership and parcelling pattern, land areas for erosion control, and the impact of cyclones in relation to terrain and windbreaks, etc. The development of GIS capability from the ALRDS is a natural progression and the only major constraint at present is the lack of appropriate computer software and some training in its use. Given the importance of land resource management in Mauritius, it is recommended that this area be accorded high priority. B. Human Resource Management 6.12. The single biggest asset of Mauritius is its people. With a literacy rate of well over 90 percent, the people of Mauritius present a harmonious blend of different ethnic origins. Combined with the island's political stability, they have proved to be a magnet for foreign investment from all over the world. As Mauritius embarks upon the next phase of development, it will have to pay particular attention to further developing its rich human resource base. 6.13. Mauritius has a young population, of whom more than two-thirds are of working age. Most of this population is bilingual, fluent in English and French, which, over the past decade, has acquired considerable experience and knowledge about international trade and commerce. The task of effectively managing this young, politically active, upwardly mobile population and channelling its energies in the right direction will be a challenging one for the Government. 6.14. At the heart of the challenge lies the Mauritian education system and its capability for delivering well educated, easily trainable, young men and women. Formal education is accorded a great deal of importance in Mauritius. Both primary and secondary education in Mauritius are free and the enrollment ratios of 105 percent and 53 percent in primary and secondary schools, respectively, compare favorably with those of other middle-income economies.69 However, the structural transformation of Mauritius into a more sophisticated economy has changed the traditional manpower requirements and created the need for technical and specialized skills. While participation in secondary education has increased from 26 percent in 1965 to its present level of 53 percent, this is still not sufficient to provide the intellectual foundations of a country that would want to move in the general direction of "brain-service" exports. In contrast, secondary school participation is 69 percent in Singapore and more than 74 percent in Hong Kong. 69 World Bank, World Development Report, 1991, pp. 260-261. 6: Synergy tn DtersYtcatton 119 Between 1965 and 1988, Korea was able to increase secondary school enrollment from 35 percent to 87 percent.70 6.15. With the increasing mechanization in agriculture, the potential growth of high technology industries in the EPZ, and developments in the financial sector like the stock market and offshore banking, the demand for higher-level skills is bound to increase, calling for urgent action on the part of the Govermment. Moreover, in addition to facing competition from other developing countries like Sri Lanka, China and Indonesia, Mauritius now faces the spectre of increased competition from Mediterranean economies like Tunisia and Morocco and from the recently liberalized economies of Eastern Europe. It is therefore imperative that the Govermment establish an education system that will provide the average Mauritian with the necessary tools to respond effectively to the emerging competition. In May 1990, the Government embarked on the preparation of an Education Sector Master Plan, aimed at making the education system more responsive to the country's socioeconomic needs. As discussed earlier (see Chapter 4), efforts are also underway to introduce a system for industrial and vocational training. This report strongly recommends that continued emphasis be placed on this vital area in order to prevent it from emerging as a constraint to future growth. C. Management of Capital 6.16. Despite the introduction of innovations such as offshore banking, the stock market, and a leasing company, the financial system in Mauritius has not kept pace with the developments in other sectors of the economy. The continued reliance on direct controls and credit ceilings has restricted competition in the financial system and has inhibited the development of capital and money markets. Several reports of the World Bank and the International Monetary Fund have documented these weaknesses and have proposed a reform program but implementation continues to be slow.71 6.17. As discussed in Chapter 4, there are widespread indications that the financial system is fast emerging as a major constraint to the future growth of the economy. At a time when the two most productive sectors of the Mauritian economy, industry and agriculture, are in the process of upgrading plant and equipment in an attempt to shift emphasis from labor-intensive techniques of production to a greater reliance on capital, this weakness in the financial system can become particularly obstructive. For Mauritius to be able to compete successfully, the existing system will need to be overhauled. Ibid. 71 See International Monetary Fund, Central Banking Department, Mauritius: Proposals for Reform of the Framework of Monetary Control, June 30,1988; and The World Bank, Mauritius: Managing Success, Chapter 6, November 1989. 120 Maurttlus: Expandin Horlzons 6.18. While the banking system is fairly well developed, it will be necessary to develop new financial markets, increase the competition for financial services, and increase the number of financial instruments. The Government needs to review the present system of directing credit to the productive sectors of the economy and to promote dealers and money brokers with a view to develop secondary capital and money markets. As the demand for financial services grows, Mauritius will need to encourage the development of nonbank financial institutions (such as finance companies and mutual funds) and securities markets in order to broaden the range of services and to stimulate competition and efficiency. STATISTICAL APPENDIX . = -n ____ h < --= ,r; = .=,-=.T _ T ---E = ___ NX xs N a _; LF I-wSiS= 5E S | W __ W ' S l_ 4 s =tR z _| ii Q;_ _: :- = _ l e _il \|\|\\ \ hiE | \E\'l\N i M______ ==S=:=S= = ::--1t | | \||::: :E llS l , M I-,r_l 1 _S S \ N =S _ _ | | N l: xi _ i i _ i _ l\ !\_! W___ _ SZ i i i ^ _ } _ _ . g=: =- a - - | X = w A | | i | . --w w w 11 w 1S i= = i= m =B:::21= ::::==: :: $||1 = E _ _ _ 7he data in this appendix reflect their avaWabiliX as of Decexnber 31, 1991. MAURITIUS TABLE 1. 1 POPULATION AND VITAL STATISTICS 1/ 1952 1962 1972 1983 1986 1987 1988 1989' 1990 Island of Mauritius Malte birth03 r4at30 4refers 4to36 the,5 5num22r of1 510ith 627 524r,0 100 i-ya pplain Female2438 333341,1 48,9 49,2.0.7.0,3 5618.3,1 Island of Rodrigues 33 th5 24,769 3f 3 37 a y7 70e' Male . ,4- ,6 22 0 16,5 800363"61 1 31,0 Female7,8 9,7 1249 1,3 1753 1,4 7,2 101 ,9( Other Islands 4at r0s to the 500 onn Male , 7 3 5 5 5 5 5 Female . 9 15 15 15 S15 15 Total Population 54136994813410042109991008110351 ,6,5 .9,2 Crude Birth Rate 21 Island of Mauritius 4. 85 2. 06 1 . 91~47 2A 2. Island of Rodrigues 3/ of 49.e 42.1 o4.7 2n a y4.r 2er 1 w n Crude Death Rate 2/ Island of M auritius 27, 93 79 e 61 6.6 S 6s6 Island of Rodrigu9es 3/ T 1a0. 9r 3 b o 3 499 c 4t7 Infant Mortality Rate 2/ Island of Mauritius 11.3 60ta 63e 2. 2642 22 216 9 Island of Rodrigues 3/ . 7. 754 5. 481 24 44 407 49 Fertility Rate 4/ . 145 72 6.9 64 7,3 34 72 Definitions: Crude birth rate refers to the number of live-births in a year per 1,000 mid-year population. Crude death rate refers to the number of deaths in a year per 1,000 mid-year population. Infant mortality rate refers to the number of infant deaths, aged under one, in a year per 1,000 live-births during the year. Fertility rate refers to the number of live births occurring in a year per 1,000 women aged 15 to 49 years at mid-year. It As of March 27, 1992 population estimates for the State of Mauritius for 1991 are 1,078,072 and for 1990 are 1,065,990. These estimates are based on the 1990 census rather rather than on a 'do facto' basis (used in the, above table) which included non-residents but excluded residents who were away. 2/ 1952 data refer to the average for 195 1-55. 3! Except for 1990, which refers to same-year data, rates have been calculated by taking the average for three years to remove fluctuations in yearly data. 41 Island of Mauritius; 1990 data are provisional. Note: 1952, 1962, 1972, and 1983 were census years. Population estimates are mid-year. Source: Central Statistical Office, Digest of Demographic Statistics. 123 MAURITIUS TABLE I.2 SOCIAL NDICATORS 1972 1983 1987 1988 1989 1990 Population Life Expectancy at Birth - Male ---..1 64-.. - Crude BirthRate 2Fe21 ale 2- . Crude Death Rate .8.7....... Infant Mortality Rate 64 ...... 2....- Labor Force .............. Participation Rate - Male 3 0 8 - 3 83 Female 20 - . 28 42 4 Unemployment Rate 1 : : 9 3 3 Education . Primary Enrolment Ratio (%) (gross) * 9.. 95 8. 9 100 -/ 99 9 : - 102 X Pupil-Teacher Ratio -31 2:: 22 22 Secondary Enrolment Ratio (%) (gross).. 44 45.4......... .-....... ........... . ........ .... ............. ..... ........ .. . ....... Food, Health & Nutrition Proteins 5/ : 52i SQ s . - i .. . PDoctor/opulation Ratio 6/ 27 7 -: 8 Hospital BedRopulationRato 6! 328 22 I--. Percent Owner Occupied 52 --s 66 7si ss s sssi6 Percent with Electricity 0 70 93 i97-< @i- Rev. Es. Es. 1984 1985 1986 1987 1987 1988 1989 1990 1991 Primary Production . 2 12 11 24 2 Agriculture 1342 1492 .l52 161 28 84 2732' 2:18 259 2681 o/w Sugar 76 3 89 1 Other 5 .484- 513 512 -70 808' 834 878 '93 ,.,,,,,,. .. gi. ... .. ... . .. . Secondary Production 2698 30.68 -- 379 0 60 98. 741 801 . 851 Mining & Quarrying -1 1. 1 Manufacturing 178 2 - 2450 280 4841 5 o/w Sugar Milling 244 293-- 330 317 6 6 5 ExportProcessing Zone 0 85 110 191 2. . 289 306 331 -:3513 Other Manufacturing 874 90 98 112 1580 1722"17 19 21 Construction .4 9 6 3 104 122..1357 1527 164 Electricity, Gas, Water26 31 34 30 49 59 59 57 61 Services 652 60 03 77 01 18 19 21 3218 Hotels & Restaurants 292 312 -553 Trade 1163 12 1 5 2 2 2896'3055 3 Transport, Storage & Com. 1 1260 1345 1486 20 2262 241 2 757 Finance, Real Estate, etc. 17 95 19 06 28 59 25 93 36 o/w Housing 5 1064 6 1 Government Services 12 30 14 33 23 16 29 20 28 Other Services64 65 67 70 85 90 96 116 06 GDP at Factor Cost 1 1 126 3 9 2 2 ... . . . ... ..... ... .. o/w sugar sector 11i20 1301 1469 1406 2800 2532 2216 2468 23- 26 Other 9421} 996 10795 118 169 132 92 294 28 Net Indirect Taxes 17i9 1 0 2 GDP at Market Prices 12332 13180 1446G5934 2356 25173 26285 275 2937 Note: Data refer to calendar year. Source: Central Statistical Office, National Accounts of Mauritius. 126 MAURITIUS TABLE 11.3 GDP BY EXPENDITURE IN CURRENT PRICES, 1984-1991 In millions of Mau Rs Rev. Eat. Est. 1984 1985 1986 1987 1988 1989 1990l 1991 Consumption (C) 117`33 416111274241 92 21 Private 4 Government 183n 19p t 2076 2722 3509 39ar 4444. Gross Domestic Investment (1)30566 Fixed Investment295 30 380 59 790 86 185125 olw Private 170 20.21.35 60 68 7500..8180 Public 82..000.375.715.3.022. 4365..4..0 Change in Stocks 570 Nt0 422 87 51u30tius. Gross Domestic Expenditure (C-Ii) 141 693188208 926 4534058 44075l~ Exports (G+NFS) 69 89 19: 539186 21363 2524 213 olw Goods 521 63 05 19 355116167 .18.67 Services 178 2256 2863 4146 ,511 6197 757 46 Imports (G+NFS) 7474920 060 154119988281284 95 olw Goods 573 75 26110 52 88 1 21 22135:: Services177 26 231 34 430 41 633 91 Resource Balance (RB) -8 35 11 9 12 23 28 11 GDP AT Market Prices (GDX+IRB) 146 161 190 237 283315370420 Net Factor Service Income (FSY) -2 70 -2 $3 -9 33 -0 -1 Net Current Transfers (NCT) 267 l33 ii402 53 92 13 22 1 GNP at MP(GDPMP+FSY)133 151 187 234 271 312339 493 Gross Domestic Saving (GDS)264 38 $64 49 779 49 876 70 (GDP-C) (I-iRB) olw Private 267 341.491..8 ..9.2 63..54 7. Public I/ 6 12 63 17 17 10 82 29 Gross National Saving (GNS) 22 21 59 49 74 14 99 01 (GDS+FSY+NCT) olw Private264 38 492 59 669 71 762 75 Public (incl foreign interest) 1/ 30'9 -167 315 56 19 75 133 205 Memorandum Items: Average Exchange Rate (Rs/US$)-IFS 1.0 5421.6 2881.3 5201.6 562 Population (Thousands) 11 01 13 01 15 04 19 GNP (UJS$ Million) 95 13 49 18 05 28 56 28 GNP Per Capita (UJS$) 94 11 38 11 91 16 32 22 I/ Derived by averaging fiscal current account deficit/surplus to obtain calendar year data. Note: Data refer to calendar year. Source: Central Statistical Office, National Accounts of Mauritius. 127 MAURITIUS TABLE 11.4 GDP BY EXPENDIlURE IN CONSTANT PRICES, 1984-1991 In millions of Mau Rs <-- In 1982 Prices --> <---- In 1987 Prices ----> Rev. Est. Est. 1984 1985 1986 1987 1987 1988 1989 1990 1991 Consumption (C) l. 2 0 20 Private 8344 --295- -945 -1194. 39 :1631672 -74 1:17 Government 1727 -72 -75 17 7226. 96 32 24 ,. , , ,~~~~~~~~. , . . 2.,,....... ,.,,, .,...... . . Gross Domestic Investment (1 2520- . 326 412 591 70 6.4 840 8281 Fixed Investment 2300 250 33 7 00 77 67 25 78 olw Private 1570 1715 1 210 3 Change in Stocks -- . 220 -60 232 3871 125 274...2...... Gross Domestic Expenditure (C+1) :13091 137 1 4 0 25796 29663 2917 : Exports (G+NFS) 5810 6048258i J76 {53 13 874129 9 Imports (G+NFS) 65373 900 1<[9w* -wf4j:1854 t 3~ - Q5 204 Services 17 35 .60 1474 313 344 390: .49 :45 Tmport Capacity 6154 671111 2 1563 I66 163 1 :7 82 Terms-of-Trade Adjustment TTADJ) -44. 7. . : Resource Balance (RB) ..49. . -3 -3.. ..02..3 Discrepancy (DISC) 4< gii . -,-. 239 462.... ....- . ..... ... ., .... GJDP at Market Prices (GDX+T +-'DISC) 12332 1318 146g53 37 57 68 87 97 Net Factor Service Income (FSY) '-551 M-$3. .: ....0 Net Current Transfers (CT) ii235-:-S S:i: 257-: 34 .42 .523:, :.8.74' 804 879 88 GNP (GDP+FSY) 118 124 13845E 150 34 43 65 75 92 Gross Domestic Saving (GDS) 7 5 7 . (GD-C ,= '(I4+RB+DISC), o/w Private 1756 2003 222- 1403 5381 5766 570 611 . x-. . - ..~~~~~~..... .............. . .. ... Gross Domestic Income (GDP+TTADJ) 12676 146 1631 186 2357 240 245 70.:.89 Gross National Income (GDY+FSY) 1............ I2:i25.-:.12~ .3x1570 iS.1834 204 ......... -.3 23965 2451l5 26886 - 28241 - - i X X X X .' X X XX' , -" " ' -''' ~~~~~~~~~~~~~~~~~.-' .. -x.... .. . 11 Deflated by Government consumption deflator. Note: Data refer to calendar year. Source: Central Statisticld Office, Nation Accounts of Maurtius. 128 MAURITIUS TABLE lI. 1A BALANCE OF PAYMENTS, 1983/84-1990/91 In millions of Mau Rs Rev. Est. 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 Exports of Goods & NFS -- 7 1 18 17082 -0158 - 2 2624> Merchandise, FOB 644 o/w Sugar 274 EPZ 1644 211720 Other47 61 49 56 75 85 113 26 Non--Factor Services132 21 253 30 475 66 677 03 Import of Goods & NFS 36 351 Merchendise, FOB -496 2 .795 Merchandise, CIF 1 8 73 .45 o/w Rice and Flour 29- 4 3 Petroleum 935 11215 865 6 96 8 1 EPZ126 25 312 47 556 64 780 63 Other315 47 418 34 929 69 125 170 Non-Factor Services 1310 1 Resource Balance -6 34 21 17 13 2 84 20 Net Factor Income : -545 0 Net Current Private Transfers 3 '1 311 361 4 .4 1 O180 . . ... . ....... ... . . . .----:-:. Current Account Balance 798 -123 9 Long-Term Capital Infow .5.7. 32.. ..431.15...1789 Direct Foreign Investment 8 1 26 Official Transfers (Grants) 4: 93 11 1 2 374 7 Net Medium- & Long-Term Loants -2.76....8.10.-59 78 0 Disbursements 71S 1354 - 4 10 Repayments 742 608 566 455 761 1343 704 815 Other Infows, Net33 13 39 -885 -4 4( Errors and Omissions 4 4 6 1 3 223 Overal Balance -38 2379 643 76--.9 . Change in Net Resrves 32 -7 4 72 -78 -I96K1 31 (-indicates increase) Net Credit from IMF 175 26 25 3 0 0 Purchases 47. 439 1 Repurchases 70 69 45 48 49 98. 0 Other Reserve Changes . 3 4 2 Memorandum Item: Stock of Reserves 2 106 3 15% 3957 62 7708 1i665;, Source: Bank of Mauritius and Staff Estimates. 129 MAURITIUS TABLE III. 1B BALANCE OF PAYMENTS, 1984-1991 In millions of Mau Rs Ea. 1984 1985 1986 1987 1988 1989 1990 1991 Exports of Goods & NFS699 89 111 153 185233224275 Merchandise $21 63.$.43 .45116V677 87 Non-Factor Servces 178 25.86.16 51 617.58 ..4... Import of Goods & NFS740 21 100 154 198 231214200 Merchandise 52 00 88 10 52 88 12 23 Non-Factor Services177 26 231 44 460 57 623 95 Resource Balance 8. M243u a2d -1915 Net Factor Incomie ~-0 -0.-1 Factor Receipts 4 0 7 8 5 7 12 95 Factor Paymenfts66 30 85 73 50 01 136 12 Current Private Transfers, Net 27 36 42 53 92 13 22 18 Current Account Balance -4 69 95 48-04-73- 6KK+4~ Long-Term Capital Inflow 27 17 33 04 192 67 194 2003..... Direct Foreign Investmnent10 22 37 76 220 37 222 33 Official Transfers (Grants)12 20 26 37 28 11 14 12 Net Medium- & Long-Term Loans .-1 56 -5 20 27 24 79 45 Disbursements 67 67 30 71 12 9 6 7 Repayments 68 51 35 41 13 7 4 3 Other Inflows, Net 12 -5 30 -8 25 -7 8 Private Capital, Errors & Omissions 23 70 48 16 68 39 20 18 Overall Balance -9 5 76 28 46 22 42 23 Change in Net Reserves 29 .25 -116-28..46.22..342-23 (-indicates increase) o/w Use of Fund Credit -8 55 -6 65 -7 Other Reserve Changes40 -7 -45 -39 -11-69-27-77 Memorandum Item: Stock of Reserves 570 882 2450 4428 6428 804 106213500 Source: Bank of Mauritius and Staff Estimates. 130 MAURITIUS TABLE 111.2 MERCHANDISE IMPORTS AT CURRENT PRICES (CIF), 1983-1991 In millions of Mau Rs ITEM 1983 1984 1985 1986 1987 1988 1989 1990 1991 Food and Beverages128 14 166 17 165 17 242 93 01 Rice21 27 28 16 20 9 41 41 34 Wheat Flour 7 Meat & Meat Preparations 11 13 14 14 25 22 24 32 36 Fish - Fresh & Preserved 76 2 9 1 6 7 1 2 Animal & Vegetable Oil 155 03 0 2 25 Milk & Cream 18 10 11 11 1 5 7 1 4 Fruits & Vegetables15 11 12 11 17 20 26 28 30 Other Food 20 25 24 22 34 $1 60 77 12 Beverage & Tobacco Other Consumer Goods34 42 63 73 140 63.68 69 10 Petroleum Products 94 12 06 17 16 86 10 99 21 Gasoline 14 16 16 9 1 Distillate Fuels 292 3 6 2 0, Other Petroleum Products51 59 57 32 Intermediate Goods146 24 363 474 65 776 98104114 Crude Inedible Material 22 2 9 658 Fertilizers al 7 Chemical Products Textiles59 104 17 250 58 372 08 527 05 Cement . 163 187 182 T01 17at6 26 41s2 Iron & Steel13 19 23 25 28 41 53 53 70 Manufacture of Metal11 12 15 22 37 43 41 17 65 Other intermediate 31.13 55....4 115 166 18 Capital Goods62 75 114 59 271 56 474 53 625 Machinery (non-electric)27 31 43 87 176 70 195 51 Machinery (electric)10 18 25 41 90 96 139 27 Transport Equip. & Parts79 10 16 22 72 43 145 76 Other Capital Goods 120 148.42.8 14...95.07. Total imports 5156 6495 8120 9191215117104 02172401213 Source: Central Stdattical Office, Quarterly External Trade Statistic's. 131 MAURITIUS TABLE 11.3 MERCHANDISE EXPORTS AT CURRENT PRICES (FOB), 1983-1991 In millions of Mau Rs ITEM 1983 1984 1985 1986 1987 1988 1989 1990 1991 Sugar Ai 2 6 5 431 4467 44 51 5221 Molasses 6 62 X 09 Tea 9 2 1 Fish & Fish Preparations 7 0 -43 3 3 Textiles 67 7 Processed Diamonds & Stones Clothing92 152 54 45 553 62 125 19 Other Manufactured Goods 2 317 4 . .7 2 Other Domestic Goods ) 0 6 8 2 Total Domestic Exports 4 56 6 8 1 1 Re-exports Total Exports 4346 -201 6639 905 11493 13455 15 17677 18673 . . Source: Central Staiftcd Office, Quarterly External Trade Statistics. 132 MAURITrIUS TABLE 111.4 EXPORTS AND IMPORTS OF MAIN EPZ COMMODITIES, 1983-1991 In millions of Mau Rs Jan-Sept 1983 1984 1985 1986 1987 1988 1989 1990 1991 Exports (fob) Fish and Fish Preparations ,8 9 14 .7 1 .. ... .4 . . Textile Yar and Fabzics . - 6 06 4 Wearing Apparel 2 1 23 4 5 OpticallGods 3. 82 .090 1 13 .1 Watches and Clocks 5 1 4 Pearls and Precious Stones 49 9 1 17, - 3 2 354 282 Jewellery 3 8 5 2 6 9 8 3 0 Toyscandous 34 50' 44 7 7 Other40 5 87 4 16 27 34 39 28 Total 1307 21 328 49 6567 176 0 114748654...... ......... Synthetic Fibres .6 -44 4. - 3 Wool and Animal Hair 94 154. 19.6.1..5 3? 25 8 Leather 1.......9 ..5...97 10.7 Textile Yarn and Fabrics 37 8214 2026 2647 1230 Chemicals 2 0 5 9 11 12 23 8 1 Machinery and Transport Equipment 7 9 0 0 9 3 6 9 5 Watches, Clocks and Optical Goods 67 11 2 213a4 511 450 262 0 Pearls, Precious and Semi-Precious Stones65154 15 23 7 Jewellery 24.34..0.70.6 46 43....9 Miscellaneous 8 2 9 7 0 5 1 2 4 Total :847 6123 8340 8070 3852 Net EPZ Exports46 0 75 108 76 226 56426 32 Source: Central Statistical Office, Quarterly External Trade Statistics. 133 MAURITIUS TABLE IV. 1 EXTERNAL DEBT, 1981-1990 In millions of US$ 1981 1983 1985 1986 1987 1988 1989 1990 ToS Ex % ebt .. . ... . . . . . - R '' '-' ''' ' ''''-''... .. Total Externdl Debt54 56 62 67 81 86 83 93 Long-Term Debt 4 3 413 40 Public and Publicly Guaranteed 3 3 39 4 3 4 7 Private Nonguaranteed24 4 15 2 46 6 10 17 Use Of IMF Credit 1 1 1 1 i.2 103 3 22 Short-Term Debt 39 4 3 Long-Term Debt: Debt Outstanding & Undisbursed 496 545 591 687 67 884 9 1134 Public & Publicly Guaranteed 472 53 7 65 80 88 2 8 Official Creditors 4 477 557 2 69 7 59 Multilateral 192 6 8 2 1 3 7 IDA 20 20 2 20 . 19 1 1 IBRD 0 1 16 205 4 226 191 214 Bilateral . 156 1 233 08 Private Creditors 130 106 99 108 10 119 127 128 Private Nonguaranteed 24 1 1$ 2 4 6 14 Debt Outstanding & Disbursed 4 31 43 47 62 70 74 86 Public & Publicly Guaranteed 9 44 5 3 3 7 Official Creditors 193 213 308 3 6 56 526 624 Multilateral 1 12 18 2 8.........3 2 2.8 0 . IDA 20 2i 2 20 1 i ...... i IBRD55 2 11 14 19 19 7 17 Bilateral 88 90 12 1 21 2 23 Private Creditors 1 104 90 8 8 17 1 115 Bonds4) 4 4) 4 0 4) ) 0 Commercial Banks 127 130 Suppliers 4 . 2 2 4 9 5 1 Other Private0 0 0 0 0 08 Private Nonguaranteed24 4 15 2 46 6 10 17 Memo: Total Commercial Banks 0 7 13 1 12 Commitients 0 113 0 Public & Publicly Guaranteed 53 85 41 10 1 62 103 136 Official Creditors . 3 3 3 Multilateral 35 81 13 47 72 20 10 38 IDA0 0 0 0 0 0 00 IBRD 3 72 0 3 2 .... Bilateral 41 4 Private Creditors0 2 6 21 4 91 70 Bonds4) 4 0 4) 4 4) ) 0 Commercial Banks 0 1 6 8 0 Suppliers 0 1 0 2 0 9 Other Private 0 0 0 0 0 0 1 Private Nonguaranteed 0 0 0 4 0 0 0 Continued 134 MAURITIUS TABLE IV. 1 External Debt, 1981-1990 - Continued 1981 1983 1985 1986 1987 1988 1989 1990 Disbursements 7 3 6 9 13 26 10 10 Public & Publicly Guaranteed 6 . 4 Official Creditors 63 36 54 .7.6 16.. 3 Multilateral - 1 - 1 2 5 -- 19 IDA 0 ....~. IBRD~2. 6 3 1 2 2 Bilateral 3 1 19 21 53 48 3 ¸ Private Creditors3 1 4 5 16 5 0 Bonds0 0 0 0 0 00 Commercial Banks , 0 3 5 4 5 0 0 Suppliers 1 0 2. 1 00. Other Private 0 - S 0 0 0 Private Nonguaranteed 2 4 . 1 2 48 -.. Memo: Total Commercial Banks 8 3 ~ 1 5 3 8 5 Principal Repayments 61 43 39 49 104 52... Public & Publicly Guaranteed16 5 39 $ 46 10 7 Official Creditors 6 2 6 22 3 6 4 3 * Multilateral . 9 1 1 2 2 22 IDA 0 0 0 0 0 0 0 -R IBRD 2 - 6 7 13 6 1 16 Bilateral 3 0 1 4 1 6 Private Creditors 10 4 22 14 14 64 7 0 Bonds0 0 0 Q 0 00 Commercial Banks 9 .. 43 . 1 14 9 2. 4 Suppliers 1 1 0 0 0 . OtherPrivate 0 0 00 Private Nonguaranteed 6 5 4 3 3 4 5 1 Memo: Total Commercial Banks 15 4 Net Flows51 22 1 11 7 12 471 Public & Publicly Guaranteed 0 2 Official Creditors 57 23 3 5 54 70 '2 47 Multilateral 2 ,' 2 4 ,4 3 4 IDA0 0 0 0 0 0 00 IBRD 13 Bilateral 2 . 2 t . 1 4 Private Creditors 7 n 2 o Bonds0 0 0 0 00 Commercial Banks - 4 2 9 0~- Suppliers . 1 -0 24 Other Private0 Private Nonguaranteed 01 . 1 2 4 Memo: Total Commercial Banks 2 X 3 4 37 Continued 135 MAURITIUS TABLE IV. 1 External Debt, 1981-1990 - Continued 1981 1983 1985 1986 1987 1988 1989 1990 Interest Payments 35 2 28 30 34 42 42 41 Public & Publicly Guaranteed 33 27 27 29 32 41 39 35 Official Creditors . 2 15 2 2..1...3 Multilateral 20 IDA 0..0.8 . 8....... IBRD Bilateral 5 ... 6 8 1 1 12 Private Creditors .. .2- t 1 -. 4 Bonds 0 . B onds - 0 0~~~~~~~~.. } .0 . - ..t . .. .......... . ..... -......4-$ Commercial Bank 25; ; 1 :5 0- 0-.12 ..... - - .... .... Suppliers .:.. 0. Other Private . -0 8 -0 ..0 . Private Nonguaranteed ..2 . 1. 1 3 6 Memo: Total Commercial Banks 27 1 13 9 8 9 6 100 Net Transfers 16 -51 -10 - 41 0 5 50- Public & Publicly Guaranteed 16.7 -9 -32.6.4 1 Official Creditors -49 11 22 -5 29 39 -17 1 Multilateral 24 3 14 -40' - 16 -26 -22 IDA 0 8 0 0 0 0~ C IBRD 18 -4 1 -80 -5. -2 -21 -2 1BS t.;-.: -;.-18 ~~~..... - --.0-;l. ...... 9\ t .:-| - :- 3; Bilateral 2 8... 7 - 32 23 9 3 Private Creditors 32 -8 -3. 1 -17T- -5 21 - -1 Bonds ...... 0.0.0.0.0... Commercial Banks - - 4 -8 Suppliers ..1 1T -1 2: 8 1 Other Private 8 0 0 0 0 0 0 7 Private Nonguaranteed 0 .-4. -1. 3 17 20 9 3 Memo: Total Commercial Banks -4 42-6. 2 -1 Debt Service ..5.7 89 71 69 83 146 10 Public & Publicly Guaranteed 49 3 6 65..... 78. 14.8... Official Creditors 1 2 3 43--,- -57 7 . 9 .. 6... Multilateral 14 20 2:6 3 1 - 41 IDA .. 4 8.. .) ..... IBRD 146 1 30 Bilateral 1 1 1 21 25 28 2- Private Creditors 59 34 22 21 74 1 Bonds 4 Commercial Banks 58 3 2 20 6 S : Suppliers . .. -.4.........13...0 Other Private 0 0 0 0 0 0 0 Private Nonguaranteed 6 5 4 4 5 9 2 Memo: Total Commercial Banks 42 6 539 25 2 7 13 30 Continued 136 - M . : :-:: - ~ ~~~~ :~ :: : : 00 ::: :. ::::.. . . . : co :'.::: : ::: o 00~~~~~~~~~~~~~~~~I 0% . : 'J~ :O0nE : : ::: :;:: - .~~~~~~~~t.k In-~ ~ ~ ~ ~ ~ ~~ ~~~~~~~~~~~~~~~~~I n .::::::tte::X.:X*::: ~ .... . ... : ::: o : : :em:t O00% t.:f: -FooN::^t co:: . .......... .. . ... .. .: 00 0%p E a/:* O tt~ 'OZQ ' g tt:: C It .. . . ... W on v : i] t @OitS r%sO~r. .... .... ...... 16.0~~~~~~~~~~~~~~~~~~~~~~4 P-4~~~~~~~~~~~~~~~~~~~~~~~~~5 > 02~~~~~~~~~~~~~~ 0 U MAURITIUS TABLE V. 1 CENTRAL GOVERNMENT OPERATIONS, 1985/86-1991/92 In millions of Mau Rs Budget 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Total Revenue: 3899 4 1 72 373 9 08 Tax Revenue - 35 4 416 51 6656 765 904 9921 Taxes on Income and Profits .. .. .. 7 9 1 138 1620 Taxes on Property .160 2 1 373 46 609 624 Taxes on Goods and Services :. 7..51 ..... 15 4 Taxes on Intemnational Trade :-- 28 205 350 .6 47 on Imports . .1721 05 2639 5 30 49 430 on Exports 459.5..61.610.75.40 40 Other Tax Revenue ...2 41 5 - 56 . 79 56 Property Income - 270. 473 43 34 44 22 71 Other 125 152 1 1 28.29 4 Total Expenditure & Net Lending .-71 544 64 82 ; 925 103 17 C~urrent Expenditure 393 433 59.61 56 55 94 Wages and Salaries 5 <1387. ..... 1 2.. ..... 2 2. .9 3 ..8 Interest Payments -1-069. 1 -1: 104 111 -69 102 3 o/w Domestic Interest 736 77- 709 764 17 52 14 o/w Foreign Interest 33.3 -04 340 35-. 352 .40 29 Transfers to Local Governments .-- 1060 . :71 224 29 -1 3580 Subsidies . 956 1116 1460 1800 2000 2429.2849 Capital Expenditure .567 -. ....5. 1183 1.0 141- 165 210. Net Lending26 26 13.. 63.29.36 14 C/A Def/Surp (excl For nt) 295. 72 050 1159....1395 ' 1822 Current AccountaDeficitSuplu s -39 6.6.: 843 95 80: 1055 1533 Overall Deficit/Surplus -7 -48 -50 .11 -88 83 891 Financing: 872: 48- 503 1018 882 839.891 External, Net 11 336 815 : 10 :5 8 1 Budgetary Grants 23 18 214 - 86 -- 116- Budgetary Loans -114 148 60 -178 .: 4. . ..... Disbursements 362 E 529 : 1146- 932 -850t--: - Amorti ation 476 381 5 11 410 . .. Domestic, Net -.752 147...-.2..128.326.1124.. BankingSystem 1 -7 6 -97" 24534. Non-Bat n Borrowing 481 0 3644 6 0 9 Source: Ministry of Fiance and Staff Esl4. 138 MAURITIUS TABLE V.2 CENTRAL GOVERNMENT REVENUES, 1985/86-1991/92 In millions of Mau Rs Budget 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Taxes on Net Income and Profits 5 73 Individuals18 24 31 44 56 54 60 Corporate16 27 39 55 66 84 9 Taxes on Property - 2 31 373 4 6 Land and Real Estate 2 2 3 2 6 4 8 Estate and Gift 3 Financial Transactions13 11 27 30 40 2 53 Taxes on Goods and Services Selective Excises23 32 36 62 3 83 85 Taxes on Services Taxes on Use of Goods Sales Tax on Goods Taxes on Intemnational Trade 20 67 37 67 41 73 57 Import Duties 160 Customs Duties 1 1 1 Stamp Duties 65 70 94 92 16 4S 17 Export Duties45 55 61 61 37 43 40 Travel Tax20 2 29 2 4 4 .4 Other Tax Revenue 12 1 j Total Tax Revenue 4 4 5 6 7 Total Non-Tax Revenue 3 2 625 5 68 51 959 Property Income27 47 43 30 44 20 71 Bank of Mauritius 100 100 40 Sa 100 C r 100 Interest and Royalties 10 8 3 7 Dividends 1/ 2 7 9 5 9 Operating Surpluses 2 . I. Rent and Other 1 6 2 0 4 Administration Fees81 Fines and Forfeits 1 4 1 9 2 Goveriiiuent Pension 1Fi.und 1 2 2~5 Other Non-Tax Revenue 6 1 2 1 2 Total Revenue389 44 611 21 33 50 100 Foreign Grants 23 13 24 6 1 1 7 Total Revenue and Grants412 52 635 78 89 61 193 I/ Includes substantial profit transfer from State Trading Corporation on petroleum products. Source: Ministry of Fiace. 139 MAURITIUS TABLE V.3 ECONOMIC CLASSIFICATION OF EXPENDITURES, 1985/86-1991/92 In millions of Mau Rs Budget 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Total Cufrent Expenditure 3..8 4273 529 6519 7 6505? 9347 .. . . .....,S ...- ..' .....0 ..' .. . . ........... : $f-f0i0g fSVit Wages and Salaries - 387-1484 2019 02587tlt 2858' 294 3486 Other Goods andtServices ---366 -;421 546;i0 715: 7640-; 89 10 760 * - E- : - ~ ~ ~ ~~ ~~ ~~... .. . .. . .: ..: ........................ ..-.. ... Interest Payments 1069 1081: :: 1049 111: lll9 :::0; f ... ...................... i:::1629 1. -.-n' "t90Qf'.'.2-15:32' Dometic 736-t -0 777 7 09t:i -: - i0764 1277 162 1243 Foreign 33 3 X 04 34l t f-0 30-5<50 352 34 28 Current Transferies and9Subsidie4. 1287 1684" 2098 235 28 3 . Local Governments i -: 160 -E-i i10171 : : 224 2 98 315i ' 3594..........0............2.. ..... Education 1I96 213 267 373 416 548 582 Pension and Pension Fund 51. I581 708 894 953 1208 1417 OhrDomestic 228 323.485 . ...533. 63 73 oapital Expnditures 935 I 1183 10 i414 58 2 , ,.,,,, f ..., , .. Fixed CapitalAssets 6: - : 411 0::f:587. 778- 1006t;00 1306-::::- 1;943 Land Tangfibl e Assets 1 122 9 :7 7 26 5. *~~~~~~~~~~~~~~~~~ . . . . -. E . . . . . . . . . . . -. . -. . .--S :-S-:I Capital Transfers 276xl - 50 :X0i567 325; 314 297 -31 Other Domestic 247 4 880 56 30 304: 27 290 Abroad 19- : l... 11 3 18 ..... 9 - 18 22 ... ....., , ,........ - ..... 3 ;f if .. , ...... ., ;00.f. .. .A0.0.,, ,, . 0..fj, NetLending 266 < 0216 163 6 } t03000;j0 279 2-36 11 . . . . . . . . . . . . . ,. . . . f. . .tt$0;0;itS ,fWf Total Expendi ures & Net Lending 477 5424:: 6644 8232 9255 10399 717 Sourc: Mfinistry of Finance. 140- Other Domstic 323 85..: 5 MAURITIUS TABLE V.4 FUNCTIONAL CLASSIFICATION OF EXPENDrrURES, 19W85-1989/90 In millions of Mau Rs 1984/85 1985/86 1986/87 1987188 1988/89 1989/90 Public Administration & Defence 6 . 1.2....... 0 1........ General Public Services 7 R 2 11 142 1848 Defense 36 3 4 53 77 1'' Social Services i 1 1 2 2 352 Education S. 6 ' 796 10 19 Health & Sanitation 2 3 3 4 6 7R8 Social Security & Welfare -- 6 6 8 9 1 Housing & Comnunity Amenities - 9 ..4 94 12 2.3 Other Community & Social 44 7 8 98 234 Economic Services 56 1 1 Agriculture, Forestry & Fishing 3 2 436 420 5 645 Mining, Manuf & Construction 66 R, 59 65 7' 23 Transportation & Communication 1 1 Other Other Purposes 1391 1451 1490 10 1803 244 Public Debt Interest 9 1 Transfers to Local Government 15 1 17 2 2 316 Subsidy on Rice and Flour 1.14 72 7. ' . 2 1 265 Development Works 132 147 :- 194: Other 13 9 39 . 4 Total Expenditure 40 .4.. 722... Source: Ministry of Finance. 141 MAURITIUS TABLE V.5 CENTRAL GOVERNMENT SUBSIDIES AND TRANSFERS, 1985/86-1991/92 In millions of Mau Rs Budget 1985186 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 Current Subsidies and Transfers 1116 1 7 123 27 Local Governents 1 Education 19 213.......37..416...4..582 Secondary Schools 14 0 1 University 1 9 2 8 4 5 6 Education Institute 4 16 2' .. 28 32 34 Gandhi institute 5 "6 2 2 4 37 4' College of the Air . 2 4.....0.12.14 Examination Syndicate R 14 'i 20 2R RCEA Block Grant Rice and Wheat Flour72 7 26 14 26 19 25 Domestic Crops 2 3 4 Public Service Pensions 231 24 3 4 418 478 542 National Pension Fund 301 33 39 4 5 - 9 Unemployment Fund19 8 17 1 6 3 2 Outdoor Relief 2 3 2 9 3 9 4 Otier Current Transfers - 17 1 3 2 ., '-'.,'. ' ' '' ' .- '---- ...... ........... Capital Transfers ..4 ... 317 . . ..... Local Governments 1 1 3 - Public Financial Institutions 4 Equity Financing Fund Small Industries 1/ " 40 41 Other 0'"' ' .. . . Non-Financial Public Enterprises 21 0 4 5 2 .69 30 26 Development Works Corporation R j 2 134 14 1 1 128 Civil Aviation, PTT and Sewage . . .105i 310c 285 77 4 7 60 Other 2 36 13 2 1 International Organizations 1 ;; 3 1 Total Subsidies and Transfers -439 . 178 2 2 9 3085 3568 11 Contributions for the promotion of smnall-scale industries. 2/ Principally wages and salaries of government employees transferred to corporations. Sourec: Ministry of Finance. 142 MAURITIUS TABLE VI. I MONErARY SURVEY, 1985-1991 In millions of Mau Rs 1985 1986 1987 1988 1989 1990 1991 1991 June June June June June June Jume Dec Net Foreign Assets ~6V 47 1~ W, 66 01 35 57 Bank of Mauritius A201d Reot and S6af 57t58a6es2 Commercial Banks 3 £2 69 96 114 £3 176 $5 Net Domestic Assets904 Il1 II $64 62$ 9 2 203 Claims on Govermnment410 57 6 33 306 41 545 67 Claims on Private Sector484 15 1 7 6& 190 427 32 Total Assets ~2 32 *52 $~. 3£6* Total Liabilities 126.12 0$ 262 322 377 Money and Quasi-Money (M2) 710 83.174 100 *4 716 26' 296 Money (Ml) 11 93 54 39 10 42 46 67 Quasi-Money563 69 920 $01 441 177 212 2& Other Items, Net 74 40 7S 12 8$ 49 81 72 Memorandum Items: Nominal GDPMP (Mau IRs) 14~119 268 260 294 3~3.29~~I6 Nominal Growth of GDPMP 79 1.. 1, 87 1 65 -42 1. Real Growth of GDPMP7. 1.0 0. 16 56 , 57 43 Nominal Growth of Ml-17 161 76 5 194 86 202 26 Nominal Growth of M2 ~ 62~~ 18 3. 91 1. 16 1L Nominal Growth of Quasi-Money . 270 3,) 3, 19 14 2$ 92 Ml as %ofGDPMP 11 1, 111 1. 1.7 30 23 1. M2 as % of GDPMP ~$. 03 6. 30 166 7. Rate of Inflation (CPI)83 41.0 07 129 7) Nominal Interest Rate (D)eposits) 85 8. 80 80 1. 20 1. Real Ini~terest Rate (D)eposit.s) .0 1.3 -0. 5.1) Source: Bank of Mauritius, Annual Report, and Staff Estimates. 143 MAURITIUS TABLE VI.2 INTEREST RATE STRUCTURE, 1985-1991 In percent 1985 1986 1987 1988 1989 1990 1991 Dec Dec Dec Dec Dec Dec Mar Lending Rates Bank of Mauritius -: : . - Bank Rate Redicount Facilities 11. 3 0. 0.3 2 12 :12 Commerical Banks................... Prime Rate 12 11; I Export Finance 2..-1 R -1 .-, ''1 125-' ,: 1-.5 12R17R5.' S Commercial Rate 1/7 5 S. "-'" " """. . Parastatal Bodies -11 1 Persona & Professional - 1 . I 2 Mauritius Cooperative Ba nk -.-...5 Crop Loan-Short Term 2. 10.0 Credit Union/Co-operatives . ... 1. ..15.51' Medium-Term Loans 14......14...... . ..... Housing Societies 14.5. -2 Deposit Rates Savings - .: 4 '.'4 "RR 34) "' 1'2R R . . .' ' '.'.' :' . . : § R R : R...R. .. . ..... . ........ Fixed Deposits UTp to 3 Months : .-. R.-9 ,.-1 S1 R'.3 R S-S0 1RSR-12SR S 10RRRR 5S 1Rl2' 1 1. 3M 'R R'12.5- 3 to 6 Months 9.3-1 RRS S SS S3-1 8.-1 -.-4 SS.-1 S0 $S RR 6R R105R.'.- R 14 6 to 12 Months 10-10.5 1 9-1 9 3 9 18 to 4 Months 1 .... ......... 10-1. , . I 11.,- - 24 to 36 Months 1.1R2.- 11-2 R ..-10.1 10 .-11-1.813- : 11.3-1R; 1..-14. 36 to 48 Months -2 -1 .8-1R . .1..R-14 11.8Rl Over 48 Months R 12. ..;.1. 0 11-. 1 0.R-11 1R-1 '" '-4. 3-14.3 ~~~~~~~~~~~~~..... EE i, j j i. . .. j .jjjj . i,, ij- i .......... . .i. 1/ Applicable to traders and small commercial businesses. Source: Bank of Mauritius, Annual Reports and Quarterly Reviews. 144 MAURITIIJS TABLE VII. 1 FOOD CROP PRODUCTION, 1983-1991 In metric tons 1983 1984 1985 1986 1987 1988 1989 199() 1991 Banana 77 70 75 80 72 90 44 15 67 Beans and Peas Pr 1310 24 9 7 m 1 1 m-- Beet22 20 17 13 16 17 21 15 SBrinjal 99r 750 870 68s o8 73u 83.120.c7. Cabbage 25 90 25 20 27 95 24 60 39 Carrot46 57 55 76 81 74 125 10 Cauliflower 53.25.0 61.40 95.2.28 8 Chillies 45 35 45 35 3 1 7 9 9 Cucumber145 16 200 12 120 28 240 72 Garlic 10 15 20 35 25 15 10 10~~ G3iniger 45 5( . 2. 6 Groundnut 11 40 26 20 14 65 iO 75 14 Leek40 3 40 3 25 2 35 0 Lettuce25 25 28 25 17 42 54 60 Maize 19 25 49 90 35 70 29 25 21 Onion 18 65 29 95 24 00 32 65 25 Pineapple 42.35 70.8.11.16.14 15 1480 Potato141 268 230 166 153 127 199 172 i00 Pumpkin100 10 210 18 12% 11 160 17 Rice 145 275 135 175 40 20 20 14 Squash15 15 13 17 17 30 8 29 Tomato 150150 88 00 85 71 15150 99 Miscellaneous320 46 470 51 505 50 605 60 I50 Total563 605 679 670 533 540 620654 630 Total Area Under Production 44 38 54 26 51 20 50 69 51 (Hectares) Source: Central Statistical Office, Digest of Agricultural Statistics. 145 MAURITIUS TABLE VIII. 1 MAIN AGGREGATES OF THE INDUSTRIAL SECTOR, 1984-1990 1/ Units as stated below Rev. Prelim. 1984 1985 1986 1987 1988 1989 1990 Numbers Number of Establishments 592 :658 8x2 0 1,1B 106 1,068 MiningandQuarrying 4..4.. ... Manufacturing 4 6 0 963 0 0 Electricity, Gas and Water 2 2 2 2 2 2 2 Constrution 42 3 44 41 48 - 61 Numbers .. .... ..... Employment (September) 6,6283 8300 8 1 128,263 9 .55 Ming and Quarrying 166 1 22+4 26 220 Manufacturing 55422 3351 90,640 106355 1293 114,3 . Electricity, Gas and Water 3,899- 37 3 3 3 ..... :..... ....... - ... ., . .... , 5fiE . iR:. - - . . . .-. y 5 i EiE..E f - i E ,-.. Construction 4,141 to012 6 417- 870 i93 9 ij 11 100 .,..,...A,.,: A. .. , .. . ...0-- ,.0-. .f.0- 00000,-ff- ..,.-' ..f4St.0 Value Added at Current Factor Cost t3,188 405-;4600 05,194 6,40 7,4 8,69 1021 Mnong andQuarrying X :z X.:19 . . .... .. 20I.:I: 22 2 - : .. .... . 27 ... 3 35.. Manufacturing - 2,1:83 2,864 4-i;j3, 83Ofl-00-0 ;00 4-S41 .. ............ 5,627.36 74 Electricity, Gas and Water 296 397 462 4; | | t ;|;9000}0; 517 577...... 54. . 0 ... Construction : 690 77El:-E5200: d:!:: $880:. 1,04 5 1,370dEGi .1,72i:f0 2,1g85. : -..,..... .. . ....-.. ; . f:Ej- .,ifEEf- -iEEEF :..:.E4# .E.-tt: Mau Rs millions . ... ...... .-+- nvestment at Current Factor Cost - 848 1,105 1,435 6,85 2 2 3030 M ining and Quarrying -2 .. .. .. ..... Manufacturing `03 74 1, 1,460 15 2440 Electricity, Gas and Water 30 : .0 Construction - ::480- 13 115 15 250 4 1/ Large establishments employing 10 or mo:re persons. Source: Central Statistical Office, Digest of Industrial Statistics. 146 MAURITIUS TABLE VIII.2 LOCAL PRODUCTION OF SELECTED COMMODITIES, 1984-1990 Units as stated below Rev. Prelim. 1984 1985 1986 1987 1988 1989 1990 AtJ5GL) 1' Si ~~~~~~~~~~~~~~~~~~~~~~~.... ........ ...... -"'' 0'1R''i'"A Sugar M/Tons 57-5,617 ':645)797 76,3 6`i1,13 634,224 :'568,301 624,30 Molasses M/Tons 1.41,5 14544 W173,398 19,4i7,2 17700019, Tea M/Tons 8,01 8115 7,8 76 ,4 6,854:550 575 Poultry M/Tons 6,200:: 6,0 00 8,10 9,000 1,501,0 Animal Feed M/Tons 31''000: 30-00035 '4004,0 5,0 400 325 Iron Bars MITons 150 1370 60020002160 4,8 64( Alcohol (93.5 GL) H/Litres `10020,6 1.79 22.292 253 2187 Power Alcohol H/Litres 277 ,86 ,7 4,48 4,6 4,:754~~: Alcohol for Heat/Light H/Litres 203 O45 , 4,054 Beer and Stout H/Litres 162 1 1872 8,09 .261,12 24,00 281,24 Wine H/Litres -50,756 42,93 42,10 40,3 2 31,6 Perfumed Spirits H/Litres 890- -13 13 17 1,14- 1,571 1,505X Vinegar H/Litres 1,$.1,5 ,16 108 ,2 1088 1,'156 Matches Gross Boxes 1i92,187 1960194 22 ,2 VZi-227,9 227,10 227.342 Lime ~~~~~~~~M/Tons 5,00 540 550 570 ,0.. ,S ,0 Canned Tuna M/Tons 24,60 3,234 244 2 Outer Garments '000 --,98 24,56: 40117 44,405 Under Garments '0 7,- -11,51 191 36,301 Electricity Generated Mn Kwh 379 398 43 487 4 5 667 Source: Central Statistical Office, Digest of Industrial Statistics. 147 MAURrTIUS TABLE VIII.3 MAIN ECONOMIC AGGREGATES FOR EPZ ENTERPRISES, 1984-1990 Units as stated below Rev. Preim. 1984 1985 1986 1987 1988 1989 1990 Numbers . . .. ............. Number of Establishments (September) 1/ 7. Employment (September) 11 76 3 70 .. , , ,., X ..........~~~~~~~~~~~~~~~~~~~~. .......... . .... ... ,~~~~~~. .-.j jf,j............. ,. , ........ . . j. , j.i ..... . .jj.,jj j ... ......... ,.,,, ,, Mau Rs millions Compensation of Employees 406 66- 975 27. 18 1-7 Value Added (Current Prices) 86 Value Added (Constant 1982 Prices) I60 4 1 * s ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . . . . . . . . . . . . . . ................ . . .... Exports 1 , 4,5 51 9 05 14 Imports 1,65- 385 Investment (Current Prices) - 1 3 750 ................................. ~~~........ .......... Percent - - ...... Growth Rate of Value Added 32.9 , 4 9 2 10 Growth Rate of Exports 40.0 22.0 19 10 Share of EPZ in GDP 9.6 11. 13.1 13. 12.8 EPZ Exports as % of Total Exports 2 48 5 5 5 58.4 EPZ Imports as %of Total Imports 25.4 3.2 20r68 3.7 3. 1/ Large establishments employing 10 or more persons. Source: Central Statistical Office, Digest of Industrial Statistics. 148 MAURIrIUS TABLE VIII.4. EPZ ENTERPRISES AND EMPLOYMENT, 1984-1991 1984 1985 1986 1987 1988 1989 1990D 1991. Product Group Vine f u .ie Flowers 16' 19 2 3 43 Food 1 1 1 3 1 Textiles13 1 23 2302 Wearing Apparel .......)b olw Pullovers..... 70: Gloves & Other Garments (6) (3) (23 33t(4) (0) 23 2 i Leather Products/Footwear6 7 9 12 111 1 I Wood, Fumitare &Paper 7 9 10 3 154 15 2 Optical Goods 44' Watches &Clocks 6~ 65 6 66. Jewellery :1 3 9 1 4 1 4 Fishing Tackles and Flies 4 ...3 Toys & Carnival Articles .:76 77788 Other:** 24 .3:.*3: :456 *6 4 Total19 20 40 53 59 53 56 58 Product Group ....10....... Flowers 17 27 23 37 5 2 54 65 Food52 73 14 92 116 26 Textiles 1,0 1,7 ,5U,4 ,1 ,5 ,8 ,~ Wearing Apparel 3~6 65( 5371,1 7237,0 5797,0 ofw Pullovers (1,2) 2,86) (31,2)(463 3,3)(966 2,0)(733 Gloves & Other Garments (1,03 -(1394) (33~4)(27 4,0)(555 4,0)(906 Leather Products/Footwear 42 54 720 85 115 124 ,3 ,5 Wood, Furniture & Paper 97 96 64 41 52 54 51 62 Optical Goods .29 20 32 62 57 57 50 5 Watches & Clocks 454 63 58 74 82 90 80 64 Jewellery 73 88 97 119 1,4 1,2 130 148 Fishing Tackles and Flies K 85 461 6i6 6 7 6 Toys & Carnival Articles65 69 67 70 74 86 97 07 Other .89 105 97 i34 149 17( ,0 ,7 Total '~37432J 53..951 14,1 105800 8608969;$. Source: Central Statistic-al Office. 149 MAURITIUS TABLE VIII.5 REPRESENTATIVE 1990 PRICES OF LONG-HAUL BEACH RESORT INCLUSIVE TOURS FROM THE UNTrED KINGDOM In pounds sterling One Week Two Weeks Peak Season Mid-Season Peak Season Mid-Season Mauritius 1650 i--; 1,725 Carribean Antigua 1,500 . 152201,2 Barbados 27S1:5 1;27: 2 ; , St. Lucia 1,300 975 I 950 1 475 Indian Ocean....... Kenya-Mombasa 975 625 1,58 Maldives 800 7 1,000 00 Seychelles-Mahe 1,75 i 1 5 - 2.5 SriLanka 700. 65 |- 725- South East Asia........ Indonesia-Bali 1/ .- 0 97 13 1,250 Malaysia-Penangl/ ..5.. ....0 . 00 Thailand-Phuket 1/ 1,25 0. 1-00 1 00 1,250 1/ Includes estimate of expenditure on meals (quoted prices exclude these). Note I Inclusive tour prices are for half board in comparable grade accommodation in each destination (typically the average charged in five different hotels, of three and four star grade) using scheduled flights. Peak season prices are the highest charged in each destination (over the Christmas/New Year period). Mid-season prices are typically those charged in July and August, but timing varies. Note 11: Price comparisons for other European origin countries show similar differentials except where there are special factors (eg. cheap fares from France to Mauritius via Reunion). Source: Speedbird Holidays. 150 MAURTrIUS TABLE VIII.6 TRENDS IN TRAVEL TO MAURTIIUS BY MAIN COUNTRY OF RESIDENCE 1985 1986 1987 1988 1989 1990 1991 Arrivals '000 Total for Europe 56 665 90. 10. 1. 1, 2 ~~~~~~~~~~............. . ,- ... . ...... . Reunon 35.6 40. 4k05. 5. 33. South Afica 27.4 20. }. } 5. 36. 419 4 All Others 2. 13 3. 33 4. 6 3 -World Total 23.3 262'6 291.6 298.5 Nigts '000 France 347 Germany14 14 21 2227 20 Umted Kingdom 124 144 20 231 313 371 Italy 7 0 3 6 7 5 Switzerland p 119 12 133 167 163 Total for Europe 791 - - 1, 1. - 1.6.1 Reunion . 4 9 7 South Africa 0 All Others34 34 46 6 65 81 World Total 1,136 8 Source: Central Statistical Of fice. 151 MAURITIUS TABLE VIII.7 SEASONAL PEAKING OF ARRIVALS FROM MAIN ORIGIN COUNTRIES, 1988 Percent of Average Monthly Arrivals August I/ December 1/ Other Highs France 5 Octobe 1420 -oene 145 60g;$0t0 - :0001 0040;i Germany October129 November126. . .. .. . . . .. . . . . .. . .. ......................................... Italy I Sep~~~~~~~~~~~~~~~~~~~~0teoe 130 OcobrA2 Switerland 4 0tober 144 No ber 164 United Kigdom 106: -.:: ::: M::::--:::--::-Q--::-::-: -$-:-21---- :--4 - : :- : iOtobr -152: Noveznber 122w r Reunion ;-000it-238 15 Jaur 18 May 113-Q South Africa 0--- 0 ; 3 56- 5- September00000 137 October0; 119 All Other ;;0 1 - ; ;02 6 Api 11 Noeme 108;--0 All Origin Countries --:0:-i ----t-0--0 -- --23 Ocoe 11 Jauz 116;- 0i-i; 1/ The two peak months for all travel to Mauritius. Source: Central Statistical Office. 152 MATRITIUJS TABLE VIH.8 TRAVEL TO MAURllIUS IN 1988 COMPARED WITH SOME COMPETrIlVE DESTINATIONS Arrivals from Amnal Total Tourist Total Europe Arrivals as % of '000 '000 Local Population Mauritius . 9 .IV {: -: Bahamas , Barbados 451- 7 Fiji 20v Indonesia - - - . 1,30 1 3 : - - - - ...... ..~~~. . . . . . .. . . . ..... . . . . . .. . . -. . . . -. . .- ........... ...... ..-..-.-.-.... .. ...- Jamaica 649 7- Malaysia , 1 Seychelles -7 Sri Lanka 1:3 Tahiti 1 . 35..... Thailand 4 - -:-. 1/ Six main origin countries only. 2/ Estimate. Source: World Tourism Office, Pacific Asia Travel Association and CSO. 153 MAURITIUS TABLE VIII.9 COMPARISON OF BUDGETS OF NATIONAL TOURIST OFFICES FOR BEACH RESORT DE STINATIONS Spending per Spending as % of Totatl Budget Foreign Visitor Gross Tourist US$ mn US$ Receipts Mauritius 1989/90 2 Antigua 1986 6 . .......... Bahamas 1987 .. ......... Grenada 1986 6 Jamaica 1987 6. Malaysia 1989 230 9 Puerto Rico 1987 191 St. Lucia 1986 6 ....... Sri Lanka 1988 ..... .-5I; Tahiti 1988 .92-0 0-v :- -0: -; :O Sources: Various. 154 MAURITIUS TABLE VIII. 10 COMPARISONS OF LONG-HAUL AIR FARES FROM LONDON (April 1990) Return Fares Pounds Sterling US Cents per Kilometer Cheapest Cheapest Normal Official Discount Normal Official Discount Destination Economy Rate Fare Economy Rate Fare Mauritius 1S865631.) ~ Q$ Bangkok 2&5S391().63 Barbados Hong Kong20458 2 #25.4, Los Angeles 1,0 7 191. . Mombasa I;Q14063510 304 Montego Bay 13242311. . . New York ..j 3 Singapore 1&560451. . . Note: For other European origin countries a broadly similar picture emerges, with the important exception of a substantially lower discount fare to Mauritius from France, via Reunion. The fare component of inclusive tours is typically roughly similar to the discount fare. Sources: ABC World Airways Guide and Trailfinders. 155 MAURiTIUS TABLE IX.1I CONSUMER PRICE INDEX, 1982-1991 January-June 1982=100 1982 1983 1984 1985 1986 1987 1988 1989 1990, 1991 January9.1 046 0.9191 14013?17. 14. 16. 19. February 99816. . 120. 124.2 125. 126.9:: 148. 16 188.5: March 10. 0.i1. 21. 147 127. 12614. 16. 160 April 1Q31.7 132121.0~- 12.612.7§2.715. 1-6.4 185.1 June 19158132112146161 1: 5.0 169.0. 183.5 Fiscal Year Ending p6713910. 1. 12. 24.8 2.7.4.'126 8. June 30 (Average) July 10. 0.4. ...4.0 2.9 12... 2.6182.5..146.8. August 10. 0. ..2..2..23714. 157 174. 1874: September lA 170174142143138152173123 8.0.... October 10. 0.1 180124.2:1.124'.0 124.6161.5. 8. 8. November10210. 17. 12. 12. 12. 14. 15. 18. 175 December 1341.51.2 236 126.12. 14. 160. 1561.7 Calendar Year10.916 14. 12. 12. 12013. 15. 174186 (Average) -- Aimnual Rates of Inflation: Janluary 136 66 51 . . 0.2 33 41::9 1. February 147~. . . .9 .6. 1.6 166 2. 13. March 143 64 56 . . .1 -. 69 41 1. April 1. 6. 61 6.9 3. 01 32 S0 0. 99 May 1. . . . . . . 78 1. . Fiscal Year Ending 1. . . .. 3.07 15 1. 07 1. June 30 (Average) .... August105 48 85 61 23 1. 148 89 19 73 September 9. 58 9. .8 01 04 172 .3 59 26 October 8. . . . 02 0.5 77 76 1. . November 74 .3 91 .6 0.7 1..6.7...1...... December 6.. 0 100 46 .0 13 17.1.9 56 01 Calendar Year I.67 18.0. 92.126 13 S 0: (Average) ....... . .. Note: Beginning in July 1987, the base period for the CPI was changed to July 1986-June 1987= 100, to reflect changing weights. For continuity, data foir 1987 and onwards have been adjuste to the 1982 base. 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