Duty free is the latest buzz word in town. Deputy-prime minister and Finance minister Pravind Jugnauth announced, in his Budget speech last week, tariff cuts on a wide range of imported products from foodstuffs to consumer and office electronics to garments and cosmetics. This swift and aggressive dismantling of tariff barriers translates a bold step towards making Mauritius that duty-free island people have been dreaming of for ages.

The last budgetary measures have a two-pronged strategy. Besides the duty-free island slogan, there is an attempt to restore to some extent the purchasing power of the Mauritian consumer that has been hit by countless price increases over the past four years.

The 2005-06 budget is the last of the current mandate. As such, it was bound to have some strong elements of politicization. The opposition accuses the ruling parties of resorting to electoral bribes on the eve of an election campaign. Government says it is only alleviating the fiscal pressure on the population in line with a promise it made two years ago.

One thing is sure. The Finance minister is taking a huge gamble on the duty-free proposition. The tariff cuts will cost the Exchequer some Rs1.4 billion in terms of the drop in duty receipts. Public finance is banking a lot on a buoyant consumer demand to recover part of the revenue foregone through value added tax (VAT).

Is this the price to pay for the duty-free island? There is surely more to the tariffs phasing out than public finance? The ambition is to make the island an attractive shopping destination for tourists alongside quality beaches and hotels. The tourism industry configuration is set to change with this new vision. We now have a more comprehensive product on offer. How do we translate this vision into reality?

The Budget allocates a bigger amount of money to tourist promotion. The idea of a duty-free paradise needs to be forcefully sold in our various markets. This is going to be a tough job. Our competitors in this league are the likes of Dubai and Singapore. There is an implicit understanding that these two countries are the models to emulate. But for the duty free paradise of Mauritius to come of age, there are some key parameters to revisit.

Investments in shopping facilities will be forthcoming only if the size of the tourists market increases substantially. Higher tourist arrivals largely depend on transportation capacity and costs. Dubai has become a beacon of tourism shopping mainly thanks to its open sky policy. Mauritius is yet to show more readiness on liberalising air access so as to allow more people to travel to the island. Right now we are hardly crossing the level of 750000 tourists per year.

The duty free concept is not an end in itself but a step (indeed a big one) towards transforming the country into a services economy. With the end of quotas in textiles and the sugar reforms in Europe, Mauritius has no choice but to exploit new sources of growth. These will come in the way of multiple but smaller industries namely business process outsourcing (BPO), knowledge activities and enriched tourism services with shopping as a key component.

<B>Whilst the Budget initiates a sweeping twist in the strategic development thinking, there is a lack of focus and initiatives regarding several current macro- economic fundamentals. </B>

A services economy will only thrive in a liberal environment. Taxes on international trade are counterproductive and act as a disincen- tive to the free flow of goods, capital, people, technology and ideas.

Whilst the Budget initiates a sweeping twist in the strategic development thinking, there is a lack of focus and initiatives regarding several current macro economic fundamentals. The state of govern- ment finances is still wobbly. The danger of falling into a debt trap is very high. Public debt has reached a worrying level of Rs 105 billions. This figure is prone to increase, as the budget is likely to run deficits higher than 4% of Gross Domestic Product (GDP) in the years to come.

A higher import bill (which should normally accompany the tariffs cuts) will feed into higher inflation and possibly into a larger current account deficit on the balance of payments especially if Mauritians, rather than tourists, are the main consumers of the duty free items. Should this be the case, the country?s international reserves will also come under considerable strain.

The idea of relying on consumer demand to boost growth is not a sustainable option. Unfortunately, the Budget does not bring any fresh incentives to boost private investments. Nor is there any prospect of a reversal in the job creation outlook in the short term.

Has the duty-free project got what it takes to bring about the magical turn-around against all these odds?

MAJOR MEASURES

● Foodstuffs: One of the most popular measures is probably the drop in the price of food products: rice, frozen vegetables, pasta, olive oil, cereals, fruit juice, canned vegetables, like sweet corn, peas, ketchup and many others. In the mid-term, duties should also decrease on products such as alcohol and cigarettes.

● Job loss grant: In view of the many job losses in the textile industry, the minister of Finance has decided to help those unable to make ends meet. As a result, they will be allocated Rs 6,000 as a one-time grant if their factories close down.

● Bus and taxi drivers: Individual bus and taxi drivers now benefit from reduced prices for the purchase of their working equipment. Bus drivers no longer pay value added tax on the purchase of their buses while taxi drivers are granted a rebate corresponding to half of the initial price for the payment of their ?registration?.

● Small planters: The minister of Finance has committed to de-rocking all small sugar cane planters? fields. He also said irrigation systems will be given to them free of charge. Moreover, vegetable planters have also been granted a special financial aid ? between Rs 2,000 and 3,000 ? depending on the losses they have faced in the recent floods.

● Income tax: The authorised deduction for financially dependent wives is increasing ? from Rs 65,000 to Rs 85,000. This is a way, according to the minister, of paying tribute to the contribution of women to society.

● Pensions: Old age pensions are increasing for all. For people between 60 and 75, it goes from Rs 1,900 to 2,200. For those between 75 and 90, the payment increases by Rs 250. Those from 90 to 100 will obtain Rs 50 more and all others Rs 55 more.