Iran War — “The risks of stagflation are real… However, I do not believe this is a terminal crisis”

Interview: Vinaye Ancharaz, Economist

* ‘The government is unlikely to hike taxes or slash spending merely to plug a Rs 10 billion gap
The reasons for these actions must be deeper and more structural in nature’

* ‘External factors are now dictating domestic policy choices. The room for manoeuver is narrowing by the day – leaving the government with little choice but to walk the tightrope…’

As tensions in the Middle East escalate and oil markets grow increasingly volatile, small import-dependent economies like Mauritius find themselves exposed to shocks far beyond their shores. With fuel prices rising, supply chains under strain, and Moody’s maintaining a negative outlook on the country’s sovereign rating, concerns are mounting about inflation, growth, and fiscal stability. Economist Vinaye Ancharaz assesses how vulnerable Mauritius really is — and whether the country is heading toward a stagflationary squeeze.

Mauritius Times: Despite our geographical distance from the Iran war, Mauritius remains highly vulnerable to global supply-chain disruptions, particularly in relation to fuel and food imports. Moreover, with Moody’s maintaining a ‘Negative’ outlook on our Baa3 rating, the threat of a sovereign downgrade looms large. Taken together, these vulnerabilities suggest that the economic situation could deteriorate in the weeks and months ahead. How bad is it likely to get?

Vinaye Ancharaz: You are right to be concerned. The confluence of geopolitical tension, domestic structural weaknesses, and a deteriorating sovereign credit outlook presents the most severe test for our economy since the Covid-19 pandemic.

Our geographical distance indeed offers little protection. The conflict in the Middle East is transmitting shocks directly to our shores through two specific channels. Firstly, the Strait of Hormuz – through which roughly 20-25% of global seaborne oil transits – is now effectively a war zone. This had pushed oil prices above $100 per barrel, but prices have dipped slightly following President Trump’s claim that negotiations were under way to end the Iran war. If no deal is reached soon, the war may rage on, especially in view of Iranian officials’ comments that no peace talks were on the table. With petroleum products accounting for approximately 20% of our total import bill, the pass-through to domestic inflation is inevitable.

Secondly, our supply chains are uniquely vulnerable due to a critical infrastructure weakness: our total national storage capacity for white oil (Mogas, Diesel, Jet Fuel) is roughly equivalent to 25-30 days of consumption. This leaves us gambling on the timely arrival of the next shipment, with no buffer for prolonged disruption.

The global investment manager, BlackRock, has projected that an increase in oil prices above $150 per barrel could throw the world economy into a recession. While this doomsday scenario looks like a distant possibility for now, Mauritius is already contemplating some of the adverse effects of the war on the economy. GDP growth, forecasted to edge up to 3.4% this year, is now expected to fall below 3% in the case of prolonged conflict as tourist arrivals drop. Headline inflation, on a steady upward trend since March 2025, and expected to reach 4% this year, may jump to 6% amid rising world oil and commodity prices. The current account deficit is expected to widen – to 6% of GDP – as the oil import bill soars and tourist receipts decline.

Regarding the sovereign rating, Moody’s decision to maintain a ‘Negative’ outlook on our Baa3 rating reflects an erosion of fiscal credibility. The Institute for Security Studies (ISS) recently noted that the state’s response to these headwinds has felt “unsteady,” with “policy inertia” and “questionable fiscal practices” denting investor confidence. A downgrade would raise our borrowing costs precisely when we need fiscal space to cushion the shock. It could also ward off FDI, exacerbating the pressure on the rupee to depreciate against major currencies.

* So, how bad is it likely to get?

The risks of stagflation – an ugly combination of slow growth and high inflation – are real, especially since structural weaknesses (such as lack of economic diversification, energy and food insecurity, constant downward pressure on the rupee, rising wages and falling labour productivity, persistent labour shortages and skills mismatch, and vulnerability to climate change) persist.

However, I do not believe this is a terminal crisis. Some reforms are already under way and the Mauritian economy has proved rather resilient during past crises. Ultimately, the severity of the outcome will depend on policy choices we make now. We must move decisively to diversify our energy sources, increase strategic storage capacity, and restore the technocratic competence that once defined our economic miracle. Without this, the deterioration you warn of will not just be a possibility – it will be a certainty.

*The Prime Minister recently signalled a “difficult” budget. In such a scenario, should the government prioritise fiscal consolidation to reassure markets, or expand subsidies and social safety nets to shield households from war-induced inflation?

The upcoming Budget is shaping up to be an exceptionally difficult exercise, as the government finds itself trapped between the devil and the deep sea. The Prime Minister’s warning of a “difficult” budget is no mere rhetoric – it reflects a genuine stagflationary predicament. On one hand, addressing the cost-of-living crisis calls for expanding subsidies and social safety nets. The government has already set up a High-Level Committee and allocated Rs 1.5 billion to a Price Stabilisation Fund to cushion consumers from inflation, including war-induced commodity price hikes.

On the other hand, the government’s hands are tied by the prevailing debt situation, which Moody’s is watching like a hawk. With public debt at 89.3% of GDP (Rs 654 billion) and a Baa3 rating with negative outlook, a credit downgrade hangs like a Damocles’ sword on the Mauritian economy. Moody’s has explicitly warned that delays in fiscal consolidation would trigger a downgrade, forcing the government to take a slew of unpopular measures last year (e.g., raising of the BRP-eligible age from 60 to 65, gradual suppression of CSG-related allowances, etc.)

The government has little choice but to prioritise fiscal consolidation – maintaining the debt-to-GDP target of 75% by 2030 – even as it tries to shield households through targeted, rather than expansive, relief. This is the grim reality of navigating between Moody’s gun and the social bomb.

*How will a weakening Rupee combined with rising global interest rates affect Mauritius’s ability to service its public debt, and does this significantly narrow the government’s fiscal room for manoeuvre?

A weakening rupee and rising global interest rates are a toxic cocktail for Mauritius. With nearly 45% of public debt denominated in foreign currency, every rupee depreciation inflates the domestic debt burden – and global rate hikes make refinancing that debt painfully expensive. This directly tightens the government’s fiscal space.

The challenge is stark: higher debt-servicing costs leave less room for productive spending or relief measures. Yet, given Moody’s negative outlook and its focus on debt metrics, the government cannot afford to ease up on fiscal consolidation. Any slippage risks triggering the very downgrade that would further raise borrowing costs.

In short, external factors are now dictating domestic policy choices. The room for maneuver is narrowing by the day – leaving the government with little choice but to walk the tightrope between fiscal credibility and household relief.

* While we are self-sufficient in some vegetables, we import 77% of our total food requirements, including staples like wheat, rice, and meat. With global freight and insurance premiums surging due to the Strait of Hormuz emergency, is the Rs 10 billion Price Stabilisation Fund sufficient to cushion oil and food price shocks, or is it merely a temporary buffer that risks being depleted quickly and placing additional pressure on public finances?

Indeed, Mauritius imports almost 80% of its food requirements, including staples like wheat and rice, but also fish and fish products – an aberration for a country that boasts of an exclusive economic zone a thousand times bigger than its land mass! Unfortunately, the food security issue always comes up in times of external crises, such as the prevailing one, only to be forgotten once the situation returns to a semblance of normalcy.

Now, the Strait of Hormuz emergency has sent global freight and insurance premiums soaring. There are additional risks of disruption to supply chains, leading to commodity price inflation. Against this backdrop, the Rs 10 billion Price Stabilisation Fund should best be understood as a temporary buffer, not a permanent solution.

To date, only Rs 628 million of the proposed Rs 10 billion has been disbursed. This leaves the government some room for manoeuvre as inflation is projected to hit 6%. However, the difficult budgetary situation – with the public debt overhang and Moody’s watching closely – means any rapid drawdown of the Fund would quickly deplete it, providing only partial relief to consumers facing a persistent cost-of-living crisis. In short, the Fund buys time, but it does not address the underlying fiscal and structural constraints.

* What specific mechanisms can the government use to prevent a cost-of-living “riot” scenario among householders if the Price Stabilisation Fund is depleted by mid-2026?

To prevent such a dramatic scenario, the government must urgently shift from blanket subsidies to targeted mechanisms that protect the most vulnerable while conserving fiscal space.

Targeted vouchers are a proven solution. By leveraging the Social Register of Mauritius, the government can disburse food vouchers directly to households in need – a model already used in Malaysia through the “Rahmah Basic Contribution” (Sara) programme, where island residents use a smart card (MyKad), administered by the government, to purchase subsidised goods at designated shops. This ensures that relief reaches only intended beneficiaries.

Rationalisation of subsidies is equally critical. Instead of general subsidies on rice, flour and LPG, the government can limit subsidies on these products to targeted groups, and redeploy the savings thus generated to subsidise a broader range of essential products or extend the duration of support.

Best practices from Chile demonstrate the value of clear withdrawal rules: the Economic and Social Stabilization Fund (ESSF) operates with strict parameters to prevent premature depletion. Mauritius should adopt similar discipline – drawing funds only during clear crisis triggers, not ad-hoc political pressures.

Together, these mechanisms stretch limited resources, protect households, and avoid the fiscal cliff that leads to social unrest.

* On the other hand, Mauritius remains 91% import-dependent for energy, with petroleum products alone making up 20% of our import bill. Since the government recently sought “stop-gap” diesel-powered barges to meet peak electricity demand, does this conflict effectively kill the 2030 goal of 60% renewable energy, or does the crisis provide the political “shock therapy” needed to force an immediate, massive investment in solar and biomass?

The government’s recent move to secure diesel-powered barges as a stop-gap measure effectively signals that the 60% goal is no longer attainable. Energy Minister Patrick Assirvaden himself acknowledged in July 2025: “We are at less than 18% renewable energy in the electricity mix. The target of 60% by 2030 is neither realistic nor achievable in its current form…” (l’express.mu, 30 July 2025). The government is now working with IRENA to revise the roadmap, with an updated interim target of 35% by 2028 backed by a Rs 30 billion investment in solar and biomass.

Rather than killing the transition, the current crisis – with the Strait of Hormuz disruption leaving just 15-20 days of heavy fuel oil stock – provides the political shock therapy needed. For an energy-insecure nation, where imported coal remains by far the dominant source of energy, and with petroleum alone making up 20% of the import bill, the path forward lies in accelerating solar, biomass, and battery storage. The stop-gap barges are a painful reminder that further delays to the green transition could have drastic consequences, with the risk of generalized blackouts looming large.

 * With airlines facing airspace disruptions over the Gulf and rising fuel costs, what is the likely contagion effect on tourist arrivals, connectivity, and foreign exchange earnings for the 2026 season?

The tourism industry directly contributes some 9% to Mauritius’ GDP. However, taking into account the sector’s entrenched linkages with the economy, its actual contribution can easily be in the vicinity of 22–25%. This significance is underscored by the 150,000 direct and indirect jobs it supports and over half a billion dollars it generates in income.

Tourism’s strategic importance was starkly illustrated during the 2020 pandemic, when border closures triggered a 14.5% GDP contraction. Today, the escalating conflict in the Gulf presents serious contagion risks. Airlines face airspace disruptions and rising fuel costs, likely leading to higher ticket prices, reduced bookings, and diverted tourist flows. This year, Mauritius was expecting to welcome 1.5 million tourists, but this milestone is now in question. A sharp drop in tourist arrivals could diminish foreign exchange earnings, putting pressure on an already-weak rupee, and further strain the economy. The actual impacts will depend on the duration and severity of the ongoing conflict.

* With Mauritius rated Baa3 (Negative), how much fiscal space remains before a downgrade to sub-investment grade becomes likely, particularly if the government opts to prioritise subsidies over deficit reduction?

Mauritius has very limited fiscal space before a potential downgrade to sub-investment grade. Moody’s currently rates the country at Baa3 with a negative outlook, a status described as the “last rung of the investment grade category”. The agency has indicated that it will likely make a decision within 12 to 18 months based on the government’s fiscal performance.

The fiscal thresholds are precise. Government debt is forecast to decline steadily to 82.7% of GDP by 2030, well above the Baa3 median of 58%. The fiscal deficit ballooned to 9.8% of GDP in FY2025 but is expected to fall sharply to 4.9% in 2025-2026, largely due to the government’s efforts at fiscal consolidation – often at the cost of its political popularity. Moody’s expects this fiscal consolidation to continue into FY 2027, explicitly warning that “delays in fiscal consolidation that lead to persistently large fiscal deficits” would likely result in a downgrade to Ba1 (junk status).

If the government prioritizes subsidies and social support over deficit reduction, at a time when it is politically expedient to do so, this would directly contradict Moody’s requirements and increase the likelihood of the dreaded credit downgrade.

* With a Rs 10 billion shortfall linked to delays in Chagos agreement payments and another Rs 10 billion committed to the Price Stabilisation Fund, is it realistically possible to bridge this effective Rs 20 billion gap without higher taxes, deeper spending cuts, or increased borrowing?

It is important to put things in their right perspective.

First, the Rs 10 billion committed to the Price Stabilization Fund should not be seen as a sunk cost; it is critical to combat the cost-of-living crisis, even if grossly inadequate. Second, the Rs 10 billion that Mauritius was expecting to receive as part of the Chagos agreement represents a mere drop in the government budget, amounting to over Rs 260 billion in FY 2026. Yes, the Rs 10 billion would have made a difference if added to the Price Stabilization Fund, but in the larger scheme of things, it matters little.

So, I don’t think that the government would resort to higher taxes, steeper spending cuts, or increased borrowing just because it is short of Rs 10 billion. The reasons for these actions must be deeper and more structural in nature. 

* What structural reforms — including industrial policy and energy transition measures — would both reduce Mauritius’s import dependence and reassure rating agencies enough to stabilise the outlook despite global turmoil?

Mauritius stands at a critical juncture where structural reforms are essential – not to resolve the immediate Gulf crisis – such external shocks require short-term adaptations – but to underscore the urgency of long-delayed transformations. The crisis should serve as a decisive reminder that reducing import dependence is an imperative, not an option. The country’s heavy reliance on imported fuel and food exposes it to global price volatility and supply chain disruptions.

Fortunately, Mauritius possesses considerable potential to address these vulnerabilities. Accelerating the energy transition – through solar, biomass, and emerging ocean technologies – can reduce fossil fuel imports. Simultaneously, expanding climate-smart agriculture, hydroponics, and the blue economy can enhance food security and create new economic opportunities. Industrial policy measures focused on enhancing labour and capital productivity – for example, through the adoption of Manufacturing 4.0 – can support economic growth, widening the tax base.

To reassure rating agencies and stabilize the negative outlook, the government must sustain its fiscal consolidation plan. Moody’s has linked the Baa3 rating to credible deficit reduction, requiring tighter spending controls and greater revenue mobilization. This includes reviewing tax expenditures and reassessing taxable income thresholds that constrain the revenue base.

Structural reforms in industrial policy and energy transition thus serve a dual purpose: they build long-term resilience against external shocks while signalling fiscal discipline to credit rating agencies. By pursuing these reforms decisively, Mauritius can protect its investment-grade status and lay the foundation for sustained economic stability.

Mauritius Times ePaper Friday 27 March 2026