GBCs and the Balance of Payments

Published in Mtimes 05 10 2018

It is expected, from the newly released National Accounts estimates, that the Current Account (CA) deficit of the Balance of Payments is likely to improve marginally in 2018 to less than 6% of GDP. A closely related measure of the external deficit, namely the deficit in net exports of goods and services, is also forecast to decrease slightly from 13% of GDP in 2017 to 12.5 % in 2018.

Balance of Payments (% of GDP)	2015	2016	2017	2018
Current Account	-5.0	-4.2	-6.5	-5.7
Net exports of Goods & Services	-10.0	-9.3	-13.0	-12.5
Current Account (excl.  GBCs)	-10.1	-9.0	-11.4	-11.5

But without the net inflows of Global Business Companies (GBCs), the CA deficit will remain around 11.5% of GDP, or around Rs 55 billion in 2018.  In 2017, net GBC inflows to the Current Account amounted to Rs 22 billion, and with a further Rs 69 billon to the capital account, GBCs ensured a balance of payments surplus of Rs 28 billion. Net GBC inflows generate sizeable balance of payments surpluses for Mauritius, despite relatively large current account deficits.

Thus, the balance of payments is heavily dependent on GBC transactions, representing external financing of a total of Rs 91 billion or 20% of GDP in 2017.  GBCs as a source of external financing may not be sustainable in view of the new and evolving global framework governing offshore financial centres. The measures taken locally to comply with (1) the OECD/G20 BEPS framework, (2) the EU Code of Conduct approach to tax havens, and (3) the FATF anti money laundering standards, as well as (4) the elimination of capital gains exemption under the India Mauritius tax treaty as from April 2019, are bound to impact adversely on the future growth of the financial services sector.

In view of our heavy reliance on GBCs for external financing, any reversal of volatile capital inflows could potentially trigger an economic and financial crisis.  India is currently facing currency pressures, and is threatened by contagion from a looming emerging markets crisis that has already hit Argentina and Turkey, and, to a lesser extent, South Africa and Indonesia.

Two scenarios have been worked out in the financial sector Blueprint. (a) The Base case scenario which is based on the assumption of a business as usual IFC and a moderate loss of cross-border investment from India (b) The Pessimistic scenario which is based on a  80% non-perpetual investment into India declining by two-thirds over the period of 7 years, and the possibility of Africa accounting for 46% of cross-border investment by 2030 . These two scenarios can be the basis for the EDB to carry out further work on the likely impact on our Balance of Payments.  It will also have to start addressing the savings-investment imbalance, and reviving the domestic savings rate in order to finance the country’s growing investment needs on a sustainable basis.