■ <B>The context</B>

Mauritius as a nation faces a tough challenge: how do we adjust to the phasing out of trade preferences in textiles and sugar that for so long has underpinned our remarkable economic and social progress. Following a deterioration of the economic situation in recent years, Government announced wide-ranging reforms contained in some forty economic measures during last year?s Budget Speech. A year on, there are early signs that the reform programme is starting to bear fruit. Growth, employment and investment, in particular FDI, are on a rising trend while unemployment has fallen. However, we are certainly not out of the woods yet. Growth rate must be accelerated, unemployment needs to be reduced further and the rapid rise in inflation and as a result, the declining purchasing power of consumers, is a cause for concern. Current account deficit has also widened and the high budget deficit and unsustainable public indebtedness must be dealt with. Thus, the Budget 2007/08 seeks to maintain the reform momentum with the view of "consolidating global competitiveness and moving towards full employment and improved living standards".

■ <B> Opening the economy to attract foreign talents</B>

Attracting foreign investment as well as foreign talents and skills is a key Government objective. The budget proposes, inter alia, to review the eligibility of foreign workers to obtain Permanent Residence and acquire property in Mauritius. This is meant to encourage skilled labour migration into the country, thereby enhancing both the quality and stock of human capital. It is important that we make up for skill shortages in specialised fields, gain access to international competence and knowledge and promote innovative ideas so as to improve the competitiveness of our traditional sectors while supporting the development of emerging ones.

■ <B> Controlling inflation</B>

Government has adopted a monetary approach to control inflation, using interest rate as the primary instrument. Rising prices are usually explained by the relative demand and supply conditions domestically, international price shocks such as rising oil prices and imported price inflation. The Monetary Policy Committee (MPC) has been given the independence and authority to set the level of interest rate needed to maintain price stability in the economy on the basis of proper evaluation of these factors. As such, the MPC recently raised the rate of interest to dampen aggregate demand and contain inflationary pressures. A monetary policy clearly geared toward price stability should also help stabilise the exchange rate and contain imported inflation. Additionally, second round effects of inflation via the wage-price spiral are likely to be limited with the setting up of the National Pay Council (NPC) which has granted wage increases on the basis of not just inflation but also on factors such as productivity, ability to pay, employment and unemployment levels.

Government also intends to keep inflation in check by encouraging more competition in the product market. Price liberalisation coupled with a Competition Bill to provide adequate safeguard against monopolistic practices should pave the way for new players to emerge. The promotion of competition should lead to lower prices and wider choice for consumers as well as greater efficiency and productivity at the enterprise level.

■ <B> Investment in infrastructure</B>

Modern and adequate public infrastructure is an important precondition for sustainable economic development. There has been an increase of over 20 percent (from Rs6.1 billion to Rs7.5 billion) in the spending budget for infrastructure projects. The proposed investment in specific projects will help address major infrastructure bottlenecks in production and is targeted to meet the needs of industry and the country for the future. For instance, modernisation of the port infrastructure is crucial for increasing the competitiveness of our export and freeport sectors. Similarly, extension of the airport is in line with the vision of accommodating 2 million tourists by the year 2015. The adequacy of public infrastructure is, in effect, vital for achieving successful economic diversification, lowering production costs, increasing productivity and attracting foreign direct investment (FDI).

■ <B>Economic restructuring</B>

An integrated approach to development has been embraced. Traditional sectors like sugar and manufacturing are being reengineered and given a new focus based on value added and enhanced competitiveness while the fast growing tourism and financial sectors are being consolidated. The sectoral measures also favour the development of new pillars of the economy, in particular, the seafood hub, land based oceanic industry, knowledge hub and property development. These are expected to significantly contribute to economic growth in the medium and long term.

Government policy is also to increase the role and participation of SMEs in all economic sectors. For example the IRS scheme has been extended to small land owners and artisanal fishermen and bank fishermen have been given an opportunity to participate in deep sea fishing.

■ <B> Tackling unemployment</B>

Besides the general macroeconomic policy promoting increased economic growth and job creation, Government is pursuing three approaches, especially targeted at women, youths and the long term unemployed, to reduce unemployment. First, improving employability and reducing the skills mismatch between labour supply and labour demand through training, education and placements of the unemployed in the private sector. Second, developing entrepreneurship and encouraging self-employment. Third, strengthening equal opportunities for men and women in all occupations and sectors.

■ <B> Taxation</B>

The tax policy reforms pursued since last year have as main objectives to increase economic incentives, bolster investment, especially foreign direct investment (FDI) and discourage tax avoidance and evasion. The tax system has been extensively simplified and tax rates lowered faster than planned. The reduction of the top rates of both personal income tax and corporate tax rates to 15 percent are meant to further alleviate the burden of taxation on individuals and businesses, stimulating effort and entrepreneurship and as a result, boosting tax revenue. The imposition of a special charge on highly profitable banks follows last year?s levy on hotels. Government is aiming to raise additional revenue by taxing sectors with a greater capacity to pay without causing a negative impact on incentives and economic activity. Government is also seeking to generate revenue by improving tax compliance and collection and reduce opportunities for tax avoidance via the introduction of a new tax payment system for companies, the Advance Payment System (APS), the Tax Arrears Payment Incentive Scheme (TAPIS) to settle outstanding tax arrears and the Voluntary Disclosure Incentive Scheme (VDIS) to encourage disclosure of undeclared and under declared income/turnover.

■ <B>Consolidating public finances</B>

Both budget deficit and public debt as a ratio of GDP despite the fact that on the one hand, the top tax rates have been lowered and on the other, substantial resources are being devoted to restructure the economic base of the country and improve public infrastructure and social services. Government is relying on three main factors to contain budget deficit and public debt. First, an increase in tax buoyancy as a consequence of higher economic growth rates in the medium term. Second, an inflow of EU grants mainly to support the economic restructuring programme. Third, effective debt management, cutback on wastage and rigorous control of public finances.

■ <B> Concluding comments</B>

The Budget 2007/08 must be seen as a continuation of the broad-based reform programme initiated by Government last year. The measures announced are intended to consolidate the implementation of the reform agenda rather than redefine the policy direction. Government?s medium term strategy, in fact, seems well defined and there is a macroeconomic framework with clear policy objectives. These revolve around a monetary approach to maintain price stability and a supply side strategy to increase output, employment and growth through an enabling business environment; low tax burden to create more incentives; improvement in the institutional setting of the product and labour markets to promote flexibility, efficiency and productivity and; enhanced employability and human capital via training and education. The budget also include no fewer than twenty-three targeted measures to support the less well off and neediest segments of society. The result is a more balanced budget, which should put the country on a more stable and sustainable growth path.

<B>Dr Vishal RAGOOBUR </B> Economist, Mauritius Employers? Federation