Current Account Deficit in Mauritius: Risks and Prospects

Abstract Mauritius is often cited by international institutions, including the I nternational M onetary F und and W orld B ank, as a success story in economic development. The island has, since the early 1970s, adopted an export‐led growth strategy to power its economy. However, a constant decline over the last decade in the exports to gross domestic product ( GDP ) ratio has resulted in a worsening current account to GDP ratio, which is now a cause for concern. Using a three‐regime, self‐exciting threshold autoregressive ( SETAR ) model, this paper finds that the M auritian economy may converge to either of two current account equilibria, namely a deficit of 9% or a surplus of 2.5% on a seasonally adjusted basis. A dynamic simulation exercise suggests that the M auritian current account is more likely to switch from surplus to deficit equilibrium than from deficit to surplus equilibrium. Given that the prevailing deficit is in the vicinity of the deficit equilibrium, structural policies aiming to boost productivity and efficiency are indispensable for pulling M auritius out of the “deficit trap,” the more so since the island has been experiencing a continuous erosion of trade preferences, which formerly enabled it to have privileged access for its exports to the EU market.