2.1 Mauritius is facing a number of challenges both on the international front and locally. The erosion of trade preferences with the dismantling of the Multifibre Agreement, the sharp cuts in the EU sugar price and the increasing number of actual and potential competitors have affected the international competitiveness of Mauritian exports. In addition, the surge in oil prices has significantly increased the import bill and production costs. On the local front, the economy is being constrained by numerous rigidities in the product, labour and financial markets. As a result, the Mauritian economy registered a marked slowdown with an average annual growth rate of around 3.8% during the period 2003-2005 as compared to the historical average of above 5%. The sugar and textile sectors contracted during that period whilst the tourism, construction and other manufacturing sectors grew at a relatively slower pace.
2.2 With a view to addressing these challenges, Government is implementing a comprehensive reform programme based on four pillars, namely: (i) fiscal consolidation and improving public sector efficiency; (ii) enhancing trade competitiveness by restructuring existing sectors and diversifying into emerging sectors such as ICT and BPO, the land-based oceanic industry, the seafood hub and aquaculture, the knowledge and medical hub, and light engineering; (iii) improving the investment climate to take Mauritius among the top ten nations in the Ease of Doing Business ranking and to further open the economy to foreign ideas, capital, technology and expertise; and (iv) democratising the economy through participation, social inclusion and sustainability. These reforms have contributed to a significant recovery in economic activities during the past two years with overall output growing by 5% and 5.4% in 2006 and 2007 respectively.
2.3 The implementation of these reforms has, indeed, improved the economic prospects for Mauritius. However, there are a number of risks to maintaining these positive results. The economic slowdown in major trading partner countries, triggered by the sub-prime mortgage crisis, and surging oil and food prices are significantly affecting domestic demand in these countries and are thus creating significant spill-overs in emerging markets and developing economies like Mauritius.
2.4 On the domestic front, labour productivity growth is not adequate enough to absorb the increase in average compensation, thus resulting in rising unit labour cost that, in turn, erodes export competitiveness. Moreover, the appreciation of the rupee resulting from the success of the reform programme is affecting export sectors, in particular textile exports, and the tourism sector. The labour market reflects growing skills mismatch and does not allow for the required flexibility that would speed up investment and further accelerate the pace of employment creation. Investment in public infrastructure and services remains subdued and falls short in meeting the increasing needs of the emerging sectors and of a modern economy. Much still remains to be done in budgetary and public sector reforms, such as the implementation of the programme based budgeting framework, the introduction of performance management system across the civil service and the implementation of a programme to re-engineer the jeopardised sectors. These are, indeed, daunting challenges which could jeopardise potential gains from reforms.
2.5 The present salary review exercise has thus been carried out taking into consideration these challenges and risks, and the measures being taken by Government to address them. The policy objective of this pay review has been to ensure:
(i) Equity,implying fair relativities commensurate with responsibilities and competencies;
(ii) Efficiency, by linking pay to productivity and performance to the extent possible;
(iii) Macroeconomic stability, with pay as a percentage of GDP kept within acceptable limits; and
(iv) Competitiveness, implying a need to link pay to productivity and not just to inflation
with the focus to transforming Public Sector Organisations into modern, professional and citizen friendly entities with competent, committed and performance oriented personnel dedicated to the service of the citizen.