Previously announced in the 2005-2006 budget, the government’s policy to transform Mauritius into a Duty Free Island has been emphasized again in the Government Programme 2010-2015. In people’s mind, the concept is not limited to developing shopping tourism but covers all economic activities. In that case, the project consists in dismantling all tariff barriers to permit free flow of foreign goods into the country.

Import liberalization is currently well-paced. During the past five years, the government has set the stage for a modern integrated business, shopping and leisure hub. While several shopping malls have sprung up, some 87 per cent of tariff lines are now duty free and customs duties account for about 3 per cent of tax revenue. As a matter of fact, the collected amount of customs duties has fallen from Rs 4 billion in 2005 to an estimated Rs 1.6 billion in 2010, representing an average reduction of Rs 500 million per year. At this rate, customs duties could be brought down to zero in three years’ time if the government wished.

The big question is, would such a duty reduction schedule be in the interests of both the local industries and the Treasury? On the one hand, small and medium enterprises need more years to re-engineer their production units. On the other, the government has to manage public finances properly if it decides to extend the additional stimulus package beyond 31 December 2010. A smooth implementation of the Duty Free Island project, phased over a longer period, would give the right impetus to the Mauritian economy in these turbulent times.

According to the Programme-based budget estimates 2010, the budget deficit would rise to 4.1 per cent of gross domestic product this year, and the public sector debt would overshoot the threshold of 60 per cent of GDP. However, the fiscal deficit could be higher as the current government would forgo some Rs 900 million by abolishing the National Residential Property Tax and the tax on interest. Although there exist other sources of revenue, like taxes on lotteries that could increase, it would be reasonable to slow down the pace of import liberalization to an annual duty reduction of Rs 300 million, thus extending the transition to a full-fledged Duty Free Island to five years.

Predictable trade liberalization

Investors like predictability. Within a span of five years, our enterprises will have ample time to become internationally competitive. Retailers should be provided with incentives to upgrade their shops to be able to tap the tourist market. The Mauritian destination will have to be promoted both as a seaside resort brand and as a shopping brand – a major strategic change that would take at least five years to take hold. By then, the new airport terminal should be ready to manage passenger and aircraft movements on a large scale.

As it is struggling against the dramatic plunge in the value of the euro owing to the European economic turmoil, our national air carrier needs some time to compete in a more liberalized environment. But the Duty Free Island can only take off with an open air access policy that allows for greater seat capacity, higher frequency of flights and diversification of source markets. In particular, we must expand the market of transit tourists. In 2008, 42,657 tourists, or 4.6 per cent of total arrivals, were in transit. But the number fell to 6,228 in 2009.

Lastly, the phased abolition of formal trade barriers should be accompanied by trade facilitation. Non-tariff barriers can be a larger chunk of the overall trade costs than customs duties. Simplification of customs procedures, rationalization of administrative formalities and minimization of transhipment costs will play a key role in making Mauritius a Duty Free Island.

By Eric Ng Ping Cheun
Director, PluriConseil Ltd.