Introduction
Economic performance is affected by macroeconomic factors such as inflation and unemployment. It is the role of the government to ensure that the inflation rate in the country is maintained at manageable levels. Every government will face economic growth problems and create policies that will provide consistent economic growth. Some factors will affect the local market, and others will affect the foreign exchange rate. Inflation in an economy is measured using the consumer price index (CPI), and it will arise when there is a persistent increase in the prices of selected commodities or services (Nyoni, 2019).
There are several causes of inflation in an economy, and they are classified into demand-pull inflation, cost-push inflation, and inflation expectations. Economies will try their best to maintain the inflation rate at the optimal level because hyperinflation will negatively affect the economy. Hyperinflation can cause uncertainty in the projects. When the price levels keep changing, the investors will not predict the future costs of the project. In some nations experiencing hyperinflation, citizens have lost confidence in the domestic currency. They have opted to use stable foreign currencies such as US Dollars, while others use domestic currency.
When an economy experiences an inflationary gap, policymakers use monetary and fiscal policies to control inflation. The fiscal policies will affect government spending and taxes. The social stimulus used by the government is an example of fiscal policy. The monetary policies will involve measures controlled by the country’s Central Bank. Contractionary economic policies will be used to control inflation. The studies show that monetary policies are more effective than fiscal policies. Sometimes, the policies may not be effective when a country is dealing with a perfectly competitive foreign market. The government will not control foreign direct investment (FDI) performance in a perfect market.
A country will not operate as an Island. It means that it will have bilateral and multilateral international trade. Countries will produce the products and services based on their competitive advantage and trade for the goods they cannot produce. However, this is a disadvantage to a country in case of an international crisis. When random factors such as war arise between the trading partners, the domestic country will be affected, and this will cause changes in the economic factors.
The war between Ukraine and Russia has harmed the global economy and Mauritius. The war has disrupted the supply of fertilizer and fuel, causing supply shortages that have triggered the increase in fuel and food prices. The effect of the way is indirectly affecting Mauritius through the supply chain in other countries. This is because Russia and Ukraine are not the main trade partners with Mauritius, and it is possible for other countries to re-export the goods and services from the two countries to Mauritius.
The purpose of this study is to evaluate the economic performance of Mauritius to determine the inflation trend and discuss the causes of inflation in the country. The report also recommends the government have a comparative advantage.
Country Overview
Mauritius is an Island with a small population. In 1961, Professor James explained the country’s economic prospects. Due to its small size and low population, he was convinced that Mauritius was caught in a Malthusian trap and that it would be challenging for the country to achieve high economic progress. The government acquired independence in 1968, and since then, it has developed from a low-income country to a middle-class economy (Nyoni, 2019). Since then, the country has shown significant improvement in unemployment rates and successful diversification. The country is highly dependent on the agriculture sector, especially sugar production. However, it is diversifying to industrial sectors, financial sectors, ICT sectors, and tourism sectors. The country’s annual growth rate has been estimated to be 4%, which is favorable compared to countries in sub-Saharan Africa (Seetanah, Sannassee & Nunkoo, 2019).
The country has also shown high performance in achieving equitable income distribution and inequality, measured by the Gini coefficient. Between 1980 and 2018, the Gini coefficient fell from 45.7 to 38.9, indicating good performance in income distribution and reduction of inequality. The other achievement the country has made since independence is the improvement of infant mortality and much-improved infrastructure (Seetanah, Sannassee & Nunkoo, 2019). Infrastructure improvement has made the country reduce the cost of communication, leading to increased production.
The main economic activity in Mauritius is the growing of sugarcane. 90% of the cultivated land in the country is under sugarcane, contributing to approximately 25% of the country’s foreign income. The government has put measures to help the country diversify into other sectors. The government has developed strategic centers which will expand the local financial institutions.
It is building a domestic information telecommunication industry that has already attracted more than 10,000 foreign entities. The country is expected to take advantage of the Africa Growth and Opportunity Act (AGOA) due to its well-established textile sector (Oxford Analytica, 2022).
Mauritius, a developing nation, has established well-developed commercial and legal infrastructure, which have helped the country to have good government representation in various sectors. It has also encouraged entrepreneurship by providing a conducive environment that will help in dynamic entrepreneurial activity. The country has shown that it has moved further towards achieving economic freedom. The transparent and well-defined legal system and investment code attract foreign investors. The capital flow of the country is high due to the tax policies which are efficient and competitive. Mauritius is a mixed economy, but the government controls and owns companies that import rice, flour, cement, and petroleum products (Musango et al., 2021). Mauritius has been affected by an economic crisis, such as in 1970, the petroleum prices rose while the sugar boom reduced. This involved the balance of payment of the country.
Economic Performance in Mauritius
Economic performance is affected by macroeconomic and microeconomic factors. The country took drastic measures of locking the Island, which made the country record few cases. However, these measures affected the economic performance of the country. The country’s real gross domestic product was estimated to contract by 15% in 2020 against positive real gross domestic product (GDP) growth of 3% in 2019 (Chuttoo, 2020). The following chart shows the annual GDP growth rate changes from 2000 to 2021.
The recent macroeconomic factor that affected Mauritius is the Covid-19 pandemic. The annual GDP growth rate decreased to -15% in 2020. The measures which were put in by the government, such as social distancing, disrupted the market. The hospitality industry and tourism sector contribute 24% of the country’s gross domestic product, and it was highly affected by the measures to control the spread of COVID virus. The hospitality and tourism industry made an estimated loss of 75%. The exports of textiles, sugar, and seafood were also affected by the disruption in global demand.
After the breakdown of the Ukraine-Russia war, there was uncertainty about the annual GDP growth rate, but the war did not impact Mauritius’s GDP growth rate. The advancement of the Mauritius economy explains this by 7.4% in the third quarter of 2022. It reflected the sixth consecutive quarter expansion of the economy, and high tourist arrivals and the advancement of the manufacturing industry caused it.
The government’s role is to ensure a stable economy; therefore, it will provide stimulus to caution the economy and households. The government increased government expenditure by 53% as an economic stimulus program. The current account deficit widened to 12.9% because the receipts from tourism and exports decreased. The inflation during the covid-19 period increased by 2.5% from 0.5% before the Covid-19 period.
The government has contained the poverty level through social protection schemes. The unemployment rate has doubled from 6.7% in 2019 to 10.9% in 2021. The country’s economic growth was projected to grow by 7.8% in 2022, but it grew by 3.5% in 2022 (Moheeput, 2022).
Inflation Trends in Mauritius
Inflation has been defined as the persistent increase in the price level of commodities in the country. Inflation will arise when there is a high rate of rise in prices in a given time. Generally, inflation will indicate how much more expensive the relevant set of goods or services has become over a certain time. Prices of the commodity will measure the value of money, which means that when the prices increase, the cost of living in the country increases. Therefore, inflation is an indication of the cost of living. Inflation, the cost of living, is measured through household surveys to identify a basket of commonly purchased items and track the cost of buying the selected goods over time.
The consumer price index is determined by expressing the cost of the selected goods at a given time relative to a base year. International Monetary Fund recommends using the consumer price index (CPI) to measure the inflation rate in a country. According to Moreno et al. (2019), the inflation rate was highest in 2008 at 10% and dropped to 2.2% in 2009. Between 2009 and 2011, there was an increase, and after 2012, the inflation rate steadily decreased until 2016. The inflation rate increased to 3% in 2020 due to the effects of the Covid-19 pandemic ((Nyoni, 2019). The following chart shows the inflation rate trend in Mauritius for the last 20 years.
The chart shows the country’s decreasing trend of the inflation rate. The decrease in inflation is caused by the policies the policymakers have implemented. The economy can control inflation through the use of monetary and fiscal policies. However, sometimes the policies could be more effective in managing inflation. The ineffectiveness is likely caused by external factors such as foreign exchange rates and capital flow from foreign direct investment. When a country depends mainly on imports, it will take a lot of work for the government to control the inflation rate. This is evident from the chart above when the inflation rate in 2021 and 2022 is increasing due to huge importation.
Causes of Inflation in Mauritius
Since the global financial crisis of 2008 and the Great Recession, investors and policymakers have been experiencing low-interest rates and low inflation rates. However, in 2020 inflation rate in Mauritius started to rise sharply. This did not only take part in Mauritius but also in other parts of the world. Several reports were made by International Monetary Fund (IMF) to warn countries about the sharp global increase in inflation (IMF report, 2022 October). The Mauritius government needs to understand the causes of inflation since it will help them to manage the gradual loss of purchasing power.
The causes of inflation will be classified into demand-pull causes, cost-push causes, and inflation expectations. For this report, the causes of inflation in Mauritius will be discussed individually. From the analysis, several things have contributed to the rise in the inflation rate in 2021. Some of these causes are discussed below;
The annual average inflation in December 2021 stood at 4%, the highest since February 2018. The main factors contributing to the inflation in 2021 were food prices and non-alcoholic drink products. The prices of these goods increased by 10% annually. The alcoholic beverages and tobacco products had their costs increase by 9.7%, while the transport sector had a rise of 7.2%. The prices of household equipment and furnishing products also increased by 11%. The following chart shows food and transport prices drive up inflation in Mauritius (% annual change)
An increase in food prices triggered inflation. In 2021, the war between Russia and Ukraine affected food prices and the cost of fuel. The global increase in fuel and food prices cost of freight due to the Covid-19 pandemic has triggered a rise in the inflation rate in the country. Mauritius is a developing nation that depends on imported fuel and foods (Nyoni, 2019). Fuel and food products from Statistics Mauritius have a high weight on the consumer price index (CPI).
The foreign exchange rate is not constant, and changes in the rate will affect the price levels. The appreciation of the domestic currency (Mauritius Rupee) will cause a change in the balance of payment. In 2021, Mauritius Rupee weakened, causing an inflationary effect. According to Moraghen, Seetanah & Sookia (2020), the currency depreciated from MR40.30/ US$ in December 2020 to MR43.91/US$ in December 2021.
Inflation remained elevated in the first half of 2022 due to the high global commodity prices caused by the Russia-Ukraine war, high freight charges, and disruptions in shipping commodities. The transport and war issues caused a deficiency in the supply of food commodities in Mauritius, resulting in a persistent increase in prices. The government controlled the sharp increase in inflation to a moderate level in mid-2022 through the provision of subsidies on some imported food products. The subsidies helped to curb the upward pressure on food prices.
Consequences of Inflation in Mauritius
Every government aims to ensure that there is price stability in the economy. Mild inflation positively affects the economy, but a country will face negative effects when it becomes hyperinflation. The consequences of inflation in the country will trigger the government to determine the methods it will use to curb it. The inflation rate will determine the cost it will have to the individuals and the economy.
Some of these costs will include the distribution of income and wealth. Wages and assets are valued in Mauritius Rupee, and when there is a change in relative prices because of the increase in price levels, there will be a redistribution of income and wealth. When the employees earn real wages, their wages will increase rapidly as the prices rise. However, nominal wages will lag. The purchasing power of the employees earning nominal wages will be affected, necessitating income redistribution in the economy.
The second effect of inflation in Mauritius is the loss of export competitiveness. When there is inflation, domestic goods, and services prices will be high. The demand for domestic goods will decrease because they are more costly than imported goods. The foreign economies will not demand local goods, resulting in a decrease in exportation and negative net exports (Moraghen, Seetanah & Sookia, 2020).
Hyperinflation will become more variable and less predictable. This will result in an uncertain environment affecting long-term projects and contracts. Firms will be reluctant to take on new investment projects when the inflation varies. It also becomes complicated for the individual to spend in an unstable economy. However, there is the likeliness of economic growth in the long term.
Most countries, including Mauritius, will calculate wages based on nominal terms. When the price levels go up, wages and incomes will only increase if they are indexed to inflation. The tax man will increase the progressive income tax through adjustment for inflation. This will make individuals move into higher tax brackets and pay high taxes. The effect of inflation on taxation is that it will distort the tax system affecting savings and investments.
The other effect is that the monetary system is likely to collapse. The monetary system will function well when money as a measure of value and monetary unit is predictable and stable. When there is hyperinflation, the monetary system of the country will collapse. Additionally, households and firms will need more confidence in the domestic currency and will not store the value of the assets in money form. They will change from domestic currency to stable foreign currencies or commodity currencies such as gold. This has happened in Latin American countries with hyperinflation, which use more stable currencies like the US dollar instead of their domestic currency.
Impact of Geopolitical Tension Between Russia and Ukraine on World Economy and Mauritius
The Russian-Ukraine war has a growing concern in many nations. The war is expected to have a negative impact on the global economy, especially now that it has occurred when the global economy is struggling from the negative effect of the Covid-19 pandemic. The war is expected to cause a contraction in the world economy. It will likely affect all countries, whether they have direct trade ties. The war will cause lasting damage to the world economy through an increase in commodity prices, increase in interest rates, disruption of trade, and widening of fiscal pressures.
Russia is one of the leading petroleum-producing countries, while Ukraine is known for the most significant wheat production. When the two countries are at war, fuel and wheat products prices will increase because the supply of the commodities will be low. Most developing countries rely on developed nations, and therefore, the war will have a great impact on them. Sometimes the western nations will issue trade sanctions to the trade partners of the two countries, which will worsen the performance of the global economy.
The income from tourism in Mauritius is likely to have been affected by the war. Russia and Ukraine constituted 2.6% and 1.1% of the tourists who visited Mauritius in 2022 ((Gounder, 2021). This proportion may not be among the leading categories, but it greatly contributes to the economy. Based on global statistics, Russian tourists will spend, on average, two days compared to other tourists, and when Mauritius loses, these tourists will have lost USD 4.8 million (Balma et al., 2022). The associated spending would contribute significantly to economic activity in sectors that align with the tourism ecosystem. The following figure shows the tourist arrivals between January to March 2022.
There is an indirect impact of war on trade because Ukraine and Russia do not have significant trade ties with Mauritius. Mauritius will be affected by the re-exports of goods and the disruption of the global economy. The imports made by Mauritius from the two countries (Russia and Ukraine) are significantly low compared to the other trade partners in the world economy. From the statistics, China was the leading import partner to Mauritius, accounting for 17.7% and closely followed by India, UAE, South Africa, and France at 15.6%, 8.8%, 7.9%, and 6.6%, respectively. Russia accounted for 0.04%. However, the imports from Russia increased from 1.6 million US dollars in 2009 to 20 million Us dollars in 2015 (Mottaleb, Kruseman & Snapp, 2022). From this time, Russian imports have shown a downward trend. The highest imports from Ukraine were in 2015, accounting for 0.17% of total imports (7.7 million US dollars). In 2021, Ukraine’s imports surpassed the imports from Russia. The following diagram shows the trends of imports from Russia and Ukraine.
The imports and exports between Mauritius and the two countries (Russia and Ukraine) are of very low volume. In normal circumstances, this can be substituted from other sources in the global market. The war may impact Mauritius trade, but this will be an indirect impact. The effect will be caused by the global value chain, not direct trade relations. Mauritius will be forced to outsource fertilizer from other sources because it constitutes 61% of the items imported from Russia. Importing fertilizer will negatively affect sugarcane and other food production (Ragoobur, Tengur & Seewooruttun, 2021). This will affect food security in Mauritius. However, there is a likeliness that other global economies will re-export the cereals, milk, oil, and rice to Mauritius because the latter relies mainly on the global market for these products. The global market disruption will affect the supply irrespective of the source country and will knock on food imports into the country.
The pressure on the global market influences inflation, and the war has increased pressure on the market, causing an increase in prices. There is an overall price increase between June 2021 and March 2022 by 8%. Between February and March, the increase was 2.1%, caused by food and non-alcoholic beverages. The price pressure will likely be sustained when the war persists for an extended period. Other than inflation, there is a disruption of the net food importation which will cause constraints to the household’s welfare. Vegetables were the most significant contributors to the increase in food prices. The local production would have increased if the fertilizer had been available. However, the local production of vegetables was reduced, causing low supply due to the shortfall of fertilizer importation from Russia. The central Bank of Mauritius acknowledges that inflation is largely influenced by pressure on the global market.
Fuel prices have increased due to a shortage of oil in the market. This has caused an increase in freight costs. The government will have to incur a cost to ensure that prices have been kept in check and do not lead to inflationary pressures in the economy. The costs of subsidies by the government will put pressure on the government budget (Mahadeo, 2021).
The other impact is on the domestic currency, which has depreciated since 2020. The Mauritius Rupee depreciated by 12% between January 2021 and March 2022. Since February, the currency has been depreciating at a steep rate. This was the period when the war commenced. The rising prices and inflation will account for the global price hike resulting in the depreciation of the domestic currency. Therefore, rising prices cause additional pressure on Mauritius Rupee.
The economic growth will be lower than projected. The gross domestic product (GDP) could decline if the tourism and aligning sectors are significantly affected by war. The significant global market disruption and increase in freight costs will cause a shortage in supply, and commodity prices will increase, causing a reduction in economic growth (Gounder, 2021).
Recommendations for Restoring Competitive Advantage in Mauritius
Mauritius has faced several problems that have negatively affected its economic performance. The country has experienced low economic growth since the Covid-19 pandemic. Several measures should be implemented to ensure the country has restored its competitive advantage. The main pillars that will enhance strong recovery include;
The government should establish a new industrial policy to support innovation and creativity through technology transfers. This will help to address competition, skills development, and management of natural resources. The strategy can be implemented through public-private partnerships to increase employment and production. The increase in the government strategy on innovation has increased the manufacturing industry’s growth, as shown in the following diagram.
The country can reverse the competitiveness by leveraging foreign direct investment and new preferential trade opportunities to upgrade exports. When the government leverages foreign direct investment, it will encourage the country’s capital flow, resulting in the appreciation of the domestic currencies.
The other recommended way is to maintain an inclusive development path requiring renewed and more comprehensive efforts to promote labor market participation. The government should encourage labour market participation in lowly-educated women and youth. It should change the education system and pay more attention to early childhood and second-chance education. It should move the resources to effective anti-poverty programs that will help people to solve social needs and generate revenue. This will increase the income in the country and reduce the prices of food products because most people will be able to produce their food and other social products.
The government should strengthen the public sector by having complex policies that will enhance multi-sector reforms. This will tighten the foreign exchange rate by controlling the foreign market in the country. The government must collaborate closely with the private sector to ensure that the policies have been implemented.
The government should control inflation through contractionary monetary and fiscal policies. The Central Bank will sell government securities to reduce the money supply in the country. In contrast, the government will reduce its expenditure by reducing the economic stimulus programs it had introduced to curb the effect of the Covid-19 pandemic.
Conclusion
It is the role of the government to ensure that there is economic growth and price stabilization. It will develop and implement several policies to help achieve the economic goals. Mauritius is a developing country, and the government is responsible for making its economy grow from a low-class, middle-class to a developed nation. However, this is a long-term goal. It should create strategic plans in the form of visions and missions, which will help it prepare budgets.
The economy is affected by global market disruptions, such as the Covid-19 pandemic and the war between Ukraine and Russia. The Ukraine-Russian war will affect Mauritius trade indirectly because the imports and exports to the two countries are not among the leading trade partners. It is also estimated that the country will lose a lot of foreign income, which would be earned from Russian tourists.
The findings show that food prices and the cost of fuel are the main drivers of inflation in Mauritius. The government and Central bank should control inflation because it would have a negative effect on the economy when it grows to hyperinflation. Some of the effects will result in the collapse of the country’s monetary system and changes in the tax system. It will also cause uncertainty, and the local goods will become expensive, resulting in low exportation. The study also indicates that monetary policies will adequately control inflation in Mauritius.
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