Mauritius: Recent Financial Developments

Last Updated: 10 May 2001
Article by KC Li, LLM, TEP

Passing Of The Financial Services Development Bill In The Mauritius Parliament

The Minister of Economic Development, Financial Services and Corporate Affairs of Mauritius has introduced the Financial Services Development Bill in Parliament on March 16, 2001. The object of this Bill is to provide for the establishment and management of a Financial Services Commission (FSC) as a statutory body to regulate the non-bank financial services and to promote fairness, efficiency and transparency of financial and capital markets.

The Bill makes provision for close collaboration and cooperation between the Bank of Mauritius and the FSC on matters relating to prudential norms and standards, and to the conduct of business in the non-bank financial services sector. It also provides for the preparation and implementation of a plan for the integration of the various sectors, including the offshore sector, into one non-fragmented, efficient and competitive industry.

The Bill further provides for the establishment, within the Commission, of a Financial Services Advisory Council chaired by the Minister of Finance and comprising of the Governor of the Bank of Mauritius, the Chairperson and the Chief Executive of the FSC and 6 other members from amongst persons of high calibre and of international repute in their relevant fields. The Council will serve as a forum for discussions of the innovative developments and international trends in the field of financial services.

Furthermore, the Bill makes provision for the establishment of a Financial Services Promotion Agency as a separate and distinct body to promote, in collaboration with the Board of Investment, the development of the financial services industry and an international financial centre in Mauritius and to act as a one-stop service with a view to ensuring smooth and timely processing of applications for any required authorisations or permits by the public administration.

The Bill also makes provision for the repeal of the Mauritius Offshore Business Activities (MOBA) Act and the regulations made thereunder. The necessary provisions relating to the offshore sector are being incorporated under the provisions relating to qualified global business, thus paving the way towards the integration of offshore and onshore activities. Likewise, the Banking Act is being amended to pave the way for the integration of domestic banking and offshore banking. Consequential amendments have been made to the Stock Exchange Act 1988, the Insurance Act 1987, the Protected Cell Companies Act 1999, the Securities (Central Depository, Clearing and Settlement) Act 1996, the Unit Trust Act 1989 and the relevant regulations made under those Acts to provide for various powers, functions or duties at present conferred on the Controller of Insurance and the Stock Exchange Commission to be vested in or exercised by the Financial Services Commission. Consequential amendments have also been made to various other enactments including the Non-Citizens (Property Restriction) Act.

Further amendments are being made to the Stock Exchange Act 1988. These provide for a broader and more modern definition of "securities". The Commission will have the power to order the temporary closure of the Stock Exchange and any other securities exchange where prevailing circumstances may prevent orderly trading.

For more information or a discussion on the new legislation, please contact our Legal Services, per Mr D. Ramsewak, QC (former Solicitor General of Mauritius).

New Opportunities For Mauritius As India Pursues Its Liberalisation Process

The Budget 2001-2002 presented by the Indian Minister of Finance in February last was received with general acclaim by the business community in India and worldwide.

In brief, the Budget proposals aim at creating a sound macroeconomic climate to encourage FDI’s as well as to pursue the liberalisation process initiated since 1991. Specifically, the following new regulatory reforms have been announced which pave the way towards greater capital account convertibility:

  1. Indian companies can now invest abroad up to USD 50 million on an annualized basis under the automatic route without being subject to three year profitability condition.
  2. Indian companies which have issued ADRs/GDRs can now make foreign investments up to an amount of 100 per cent of these proceeds.
  3. Indian companies which have issued ADRs/GDRs can now acquire shares of foreign companies up to an amount of USD 100 million or an amount equivalent to ten times their exports in a year, whichever is higher.
  4. FIIs can now invest up to 49 percent in the paid up share capital of an Indian listed company.
  5. FDI in the Non Banking Financial Companies is now permissible up to 100 percent subject to the foreign investor capitalizing the Indian company of a sum not less than USD 50 million.

All these reforms argur well for Mauritius which, with its fiscal and commercial benefits, is poised to attract substantial inbound and outbound trade and investments.

It is well known that much of the success of the Mauritius offshore sector was due to our very favourable double taxation treaty which, coupled with the liberalisation process of the Indian economy, have helped to make Mauritius the largest Foreign Direct Investor into India today.

Therefore, the various incentives provided under the 2001-2002 Budget will have a further positive impact on Mauritius which can also act as a strategic platform for the structuring of outward investments from India, especially into African countries which offer significant trade and business opportunities for the textiles, light manufacturing and pharmaceutical industries. The US initiative of reorienting the US Trade and investment strategy in favour of Africa under the African Growth and Opportunity Act will attract Indian capital flows towards Africa.

For further details on structuring investments into and out of India via Mauritius, please contact our Managing Director, Mr K.C. Li (former Economic Adviser to the Minister of Finance of Mauritius).

The World Bank And IMF Praise Mauritian Economy But Encourage Reforms For Future Growth

Economists at the World Bank and the International Monetary Fund have given Mauritius high marks for its economic progress and management. But they warned that reforms must be achieved in several key areas like education, pensions, worker productivity and financial services if the island was to compete globally and continue to improve its standard of living.

In separate interviews with the local press, the economists said that the island's economic development is impressive largely because it has been home grown, meaning the country's economic program was developed, executed and fine tuned by Mauritians themselves. Two of the country's greatest assets, they said, are the ability of Government leaders to anticipate and address problems before they occur and the ability of Mauritians to innovate and adapt to new situations.

"I was impressed with how the Mauritian government is anticipating and attempting to respond to what will be significant changes in the economic environment that will have a lasting impact on (the country's) economic growth," said Arvind Subramanian, deputy division chief of the Africa Department at the IMF.

Subramanian led a two-week mission to Mauritius in February last during which an IMF team scrutinized the country's economic policies. This is part of a routine, annual evaluation that each IMF member country undergoes and it involves discussions with the government, private business leaders and non-government organizations. A staff report on the team's findings will be submitted to the IMF Executive Board and it will be publicly released in late May.

However, the country's competitiveness, especially in the textile sector, is being tested by the emergence of new, low-cost competitors and the phasing out of preferential trade agreements. "Mauritius has to grapple with the problems that its success has brought," said Alan Gelb, chief economist for Africa at the World Bank. "Mauritius must move out of labor- intensive activities that it has specialized in. Already this is happening, and it's a positive sign that the garment industry is moving to Madagascar and Mozambique and is looking at West Africa. When you look at how the economies developed in Asian countries like Japan, this was the same pattern."

Gelb said that Mauritius is on the right track to move its production work offshore and develop the island into regional centers for services like clothing design or computer assembly. "It's the service sector that will create the new generation of jobs. Just look at how the service industry in the United States has become a major supplier of jobs."

Gelb said that this transition to a new kind of economy will be painful at first, as workers in traditional industries lose their jobs and need to be retrained. The educational system must remain flexible, he suggests, so that people can move easily into new types of work.

"But all this is a good kind of stress on the economy," he said. "It's better to have the stresses associated with growth than the stresses that come from a downturn in the economy. Economic stresses that occur as the standard of living is rising are much easier to deal with that those that happen after an economic crisis."

The economists of the Bretton Woods Institutions are optimistic that these challenges can be met if the government carries out several proposed reforms. These include:

  • Strengthening the education system with the goal of improving the quality of the labour force. This might involve expanding the years of mandatory schooling and more training at higher levels in information technology (IT), especially for those now working in the production of sugar and textiles, two industries;
  • Reducing the size and increasing the productivity of the civil service;
  • Reducing the government's debt, which if unchecked could lead to higher interest rates and less private sector activity. Essentially the government is spending more than it is collecting in tax revenues. One option is to redesign the country's tax system;
  • Taking steps to control expenses in the country's pension system. As the population ages and lives longer, there will be increasing demands to pay out pensions. One option is to increase the retirement age;
  • Increasing the productivity of workers. As the birthrate declines and the population ages, the supply of labor will decline. This means that productivity of those still working must be increased. Moving into industries where competition is strong, such as IT, and privatizing services such as the public utilities, will help improve productivity; and
  • Encouraging people to save more money. As the population ages and more people retire, there are fewer incentives and opportunities to save money. This could lead to high rates of personal debt and strains on the national economy.

Subramanian said the government is aware of the need for these reforms, and is exploring the best ways to implement them. "One challenge is that some of these reforms, such as extending schooling and expanding the economy into IT are all desirable and necessary but they cost money," he said. "They must be financed in such a way that it doesn't jeopardize the country's finances."

Subramanian also said that the government has been wise to seize new export opportunities in the light of upcoming changes in world trade agreements that will remove preferential treatment for developing countries like Mauritius. He praised Mauritius for taking an active role in shaping the African Growth and Opportunity Act (AGOA) in the US Congress and now working aggressively to take full advantage of the law's new trade benefits.

"When I visited Mauritius last February, I was positively impressed by what I saw. It seemed like you were in a high-middle income country. Things functioned, there were good roads and many cars," said Subramanian.

"Mauritius remains one of the shining successes in terms of economic reforms in Africa," he added. "After a macro economic crisis in the late 1970s, early 1980s, Mauritius reformed its economy on its own. The IMF provided technical assistance, but the design and implementation of reforms have been done by Mauritius and we see that as a very positive development."

Treaty With Canada On The Mauritius Horizon

Mauritius has an extensive network of favourable tax treaties, thus establishing the island as a tax treaty planning center. Mauritius has made it tax efficient for companies across the world to access markets. So far, Mauritius has signed and ratified tax treaties with 26 countries: Belgium, Botswana, China, France, Germany, India, Indonesia, Italy, Kuwait, Luxembourg, Madagascar, Malaysia, Mozambique, Namibia, Nepal, Oman, Pakistan, Zimbabwe, Cyprus, Singapore, South Africa, Sri Lanka, Swaziland, Sweden, Thailand and the United Kingdom. Treaties awaiting signature are with Vietnam, Malawi and Bangladesh. Mauritius is also negotiating treaties with Greece, Portugal, Czech Republic, Tunisia, Croatia and Zambia.

Canada has not yet signed a tax treaty with Mauritius. However, a group of Mauritian Government representatives will meet Canada officials in Ottawa in May in order to renew negotiations for a Treaty.

FDI In Mauritius Between 1990 To 2000

The foreign direct investment (FDI) in Mauritius has known an exceptional growth during the last decade. According to latest economic indicators published by the Bank of Mauritius, the FDI has increased from MUR 609 million in 1990 to MUR 7,265 million in 2000.

During the 10 year period 1990-2000, the Export Processing Zone (EPZ), which is primarily textile-based, has attracted MUR 1,367 million and was the sector where foreign investment was the highest in 1999. Two major foreign investments can be singled out during this period: France Telecom invested MUR 7.204 billion for 40% of Mauritius Telecom in 1999 and Nedcor (SA) bought 15% of State Bank of Mauritius (SBM) in 1997.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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