“A robust growth and economic development is unlikely to be a reality

since there has neither been the emergence of new economic sectors nor the significant climbing up in the value chain of the existing economic activities”

Interview: Rajeev Hasnah, Economist

* ‘There isn’t any need to speculate on old-age pensions or other social benefits. The writing was already on the wall since last year’

* ‘It would indeed be a sad outcome if the current and future generation of Mauritians primarily become expats in other countries and tourists in their own country’

Economist Rajeev Hasnah’s take is that Mauritian economy, through a built-up resilience, has allowed the Ministry of Finance to navigate the Covid and ongoing Ukraine crisis, although by means focusing on the short-term through the printing of Rs 140 billion, which is an amount higher than the country’s broad money supply in 2019 itself. Further, the increase in public debt to Rs 484 billion in March 2023 from Rs 327 billion in December 2019, an inflation rate hovering close to 10%, an ageing population and a projected increasing government spending in both debt servicing and social benefits as well as other infrastructural projects, will impact the medium-term and long-term economic outlook of the country. 

Mauritius Times: The profits of several of our blue chip companies – ENL, IBL, Ciel Ltd, etc., have gone up as indicated by their recently released financial statements, and that of the MCB has gone through the roof, exceeding Rs 10 bn – all of which might be higher than pre-pandemic levels. What would you attribute their excellent performance to, and would you say it’s also a reflection of how the Mauritian economy is doing presently?

Rajeev Hasnah: Due to the outbreak of the Covid-19 global pandemic, the Mauritian economy contracted by 14.6% in real terms in 2020. In 2021 and 2022, the rebound in the economy resulted in a real GDP growth rate of 3.4% and 8.7% respectively, implying that at the end of 2022 the real GDP of the Mauritian economy was still 5% – less than what it was in 2019. It is only in 2023 that it is expected to have fully caught up the lost revenues due to the series of crises that the world has witnessed since 2019.

Nevertheless, the core sectors of the Mauritian economy, with the exception of the tourism sector fared rather well over the past three years, which in effect demonstrated the resilience of the Mauritian economy, which can also be attributed to the diversification of its core economic activities over the past decades.

Indeed, the results of the blue chips of the Mauritian economy, which are conglomerates present in several sectors of the economy are also reflective of the impact of this diversification strategy whereby resources have constantly been reshuffled and reallocated to activities that generate the highest returns on their investments.

Moreover, over the past decade or more, this diversification strategy was also geographical in nature and not just sectoral, whereby both domestic capital and know-how have been invested in other countries; the results of which are clearly shown in the financial performance of the blue chips today.

The reported phenomenon of high inflation impacting positively on companies’ results and government coffers across the globe could also be attributed for these positive results, over and above the rebound in economic activity. Indeed, while in real GDP terms, the Mauritian economy will return to its pre-pandemic levels in 2023, in nominal terms (that is inclusive of the impact of inflation), the GDP level is already 13% above the 2019 levels of Rs 440 billion after having attained Rs 498 billion in 2022!

* If the performance of the blue chip companies, some of which were apparently “distressed” during the Covid pandemic and required assistance from the Mauritius Investment Corporation Ltd, makes good news for their shareholders, economic indicators in relation to inflation, public debt, Bank of Mauritius’ reserves tell a different story. It’s going to be bad for everyone, but mostly for those down the economic ladder and the middle class. How long will this last?

We need to acknowledge that the nature and extent of the crises experienced by the world and Mauritius were unprecedented, which required significant government intervention such that the economy could rebound quickly and without too much casualties. As I stated earlier, the diversification of the Mauritian economy from that end also contributed to the resilience of the economy in general.

We also have to agree that pre-2019, at the macro economy level, the reserves of the central bank along with its strong balance sheet, the relatively low levels of public debt (compared to today) and the generalized contained level of consumer price inflation at 3% over the decade prior to 2019, the low interest rate environment and stable Mauritian Rupee contributed towards this resilience of the Mauritian economy that we have all witnessed during one of the worst economic crises.

Unfortunately post this crisis in 2023, after the printing of Rs 140 billion, which is an amount higher than the country’s broad money supply in 2019 itself, the increase in public debt to Rs 484 billion in March 2023 from Rs 327 billion in December 2019, an inflation rate hovering close to 10%, an ageing population and a projected increasing government spending in both debt servicing and social benefits as well as other infrastructural projects, the medium-term and long-term economic outlook of the country, if the fundamentals remain as such, may not be as flamboyant as it has been over the past two decades (even though real GDP growth rate averaged only 3.5-4% over that period)!

I believe that the focus should be on a combination of the creation of new economic activities and targeting higher value-added services/products in our existing core sectors, while at the same time embracing the current transformation that Artificial Intelligence and Robotics are bringing to the world. We have to ensure that we do not miss this boat. As has been widely evidenced and documented, having the right ecosystem with the appropriate resources is crucial for achieving this aim and that we actually walk the talk.

* Given the already very high public debt level, how sustainable is the current trend of government spending in infrastructure projects, some of which look rather exorbitant?

In contrast to the accounting system of any company, whereby we have a profit and loss statement that documents the annual revenues, expenditures and profits and a balance sheet that shows the level of equity and accumulated reserves as well as the amount of borrowings, the same cannot be said for the government accounts, as we do not have a balance sheet of the assets of the country per se.

While on one hand, it is undeniable that infrastructure developments contribute to generating more GDP growth and enhancing economic development, there is also the concept of diminishing marginal returns that apply to this investment as well, whereby the marginal benefits of additional investments may not be as high as the initial ones or enough to exceed the costs incurred in setting the infrastructures.

The issue here is that these investments are not quantified and recorded in a balance sheet per se, which would have provided a different picture of the level of indebtedness of a country, similar to that of a company. Rather the metrics we have at our disposal to assess are only a combination of the public debt figure coupled with the revenues generated by the country on an annual basis, which is in effect a measure of the debt servicing capacity and credit worthiness of the country, and the revenue generation capability of the government.

It was indeed laudable, so as to neither penalize nor to allow for excesses, that the general rule of a public debt to nominal GDP ratio not exceeding 60% coupled with the discouragement of printing money to finance expenses, were highly and widely recommended as good governance practices in the sustainable management of public finances.

With the current public debt standing at Rs 484 billion (around 82% of nominal GDP), note that this excludes off-balance sheet financings, the impact of this indebtedness within the economic context I described earlier, is very likely to be felt at a more pronounced level over the next 3-5 years, should we not be able to significantly increase our revenue generation (GDP) potential.

* There is also the issue of our population demographics, which economists say do not determine the fate of economic growth but are certainly a key determinant for an economy’s growth potential. Are you worried as regards the long term?

The dynamics in our population demographics is very worrying. In comparison to the year 2000, the number of Mauritians over the age of 60 increased from 107,611 to 237,195 in 2021, for a population that remained around 1.2 million people. Equally worrying is the drastic decrease in Mauritians under the age of 30, which fell from 604,009 in 2000 to 498,286 in 2021. At the current trend, Statistics Mauritius is projecting a decline in the overall population in the coming years and a significant increase in the country’s dependency ratio.

Since our core resources have always been our people, this trend is worrying, as if we do not act promptly, the consequences could be irreversible. In this area, the planning horizon is over 10 years, and we need to act now to be able to see the benefits in a far ahead future. While we are living in a globalized world with a high degree of people mobility, it would indeed be a sad outcome if the current and future generation of Mauritians primarily become expats in other countries and tourists in their own country, especially since the quality of life in our beautiful country is quite high, which our parents and grand-parents have toiled and fought hard to bequeath to us. We need to be very conscious of what legacy we shall be leaving to the next generation!

It would also be a good idea if our policymakers could have a clear idea of the direction that they foresee the country will take in terms of its migration policy. Several models already exist today on which we could inspire ourselves (USA, EU, Dubai, Singapore, and others).

* What’s your opinion therefore of how things on the economic front might take shape in the next twelve months?

The main focus in the short-term will be inflation for all stakeholders as well as the forex situation, especially in the current environment of rising interest rates globally. While the fight against inflation is going full swing at the global level, through an increase in interest rate in particular, it is noteworthy that the fight against inflation in the Mauritian context should be fought with other government policies, rather than just the monetary policy through an increase in interest rates.

It should be noted that increasing interest rates work very well when an economy is overheating with demand exceeding supply to a large extent. So far, the data on real GDP do not point to this direction, as it is only in 2023 that the economy will be back to its 2019 levels, as per the real GDP growth rates published by Statistics Mauritius.

Rather it is obvious that the inflation situation in Mauritius has been driven by two main factors: (1) higher import costs – oil prices is a key element, and (2) a depreciating Mauritian rupee. While the former is dictated by international market forces and domestic regulation on oil prices, the latter is a result of the economic performance of the country as well as the strength of the Central Bank’s balance sheet.

I am of the opinion that we may not have much room left to maneuver on the central bank’s balance sheet. If we are to avoid the second-round effects of inflation that should materialize with increases in salary demands to compensate for the significant loss of purchasing power, action would be needed on the price of diesel/gasoline in Mauritius.

* It might be too early to talk about the overall performance of the government as regards its management of the economy; it can choose to present two more budgets – unless it decides to skip the second one. But even so, how would you say has it done so far?

We have to give credit that the government has been able to manoeuver through the difficult economic situation caused by the Covid-19 and the Russia-Ukraine war. While I may not agree on the financing side of the measures taken, we should acknowledge that the situation could have been worse. The resilience of the Mauritian economy, entrepreneurial ingenuity and grit in decision making was put to severe test – we can safely state that we did rather well, even though there is always room to do better!

The unfortunate phenomenon from the current economic situation due to the decline in purchasing power and the looming high interest rates environment in the foreseeable future, may have impacted the emergence of several sustainability-oriented sectors of the economy. For example, it would not be surprising that the move towards green investments and consumption of high value organic products are impacted in their ascendency as alternatives.

In part due to the focus on short-term priorities, it is obvious that long-term priorities such as (i) population demographic issues, (ii) climbing the value-chain of existing economic activities, (iii) creating the ecosystem for the emergence of new sectors of economic activities, and (iv) addressing the issues linked to fiscal discipline have taken a back seat. These issues remain critical and have to be tackled if we want to graduate to the next level of our economic development.

* Even if there are opportunities available locally and new ones could be coming up with new technology, many young persons, even highly qualified professionals, are presently exploring job opportunities abroad. Is there more to it than an issue of skills mismatch, or loss of hope and trust in the country’s potential?

This is a matter that should be addressed as soon as possible.

As per the captains of different industries, it seems that there is a growing shortage of professionals in both white- and blue-collar jobs, and it is getting harder to recruit and retain staff. The true reason for this phenomenon should be addressed and the appropriate actions taken so as to ensure that we do not deplete our already limited human resources, which will unfortunately then leave us with no option than to look elsewhere to cater for the shortage of resources. This phenomenon could also have an impact on the productivity of the country and hence reduce the country’s growth potential.

Additionally, we should be able to gear our sectors of economic activities towards higher value-added services rather than just the low value-added back-office works. This will be to our advantage as we should ensure that our already declining labour force is more qualified and able for the emerging high value-added sectors especially since the lower value-added works demand a much larger pool of not necessarily high skill set for the sector to flourish. In such an environment we will have to be competitive on the quality side as we definitely will not have the quantity to compete against other emerging economies.

* There are wild speculations in different quarters as regards the holding of early elections, rather than at the end of the current government’s mandate in 2024 or latest June 2025. If you look at it only from an economic perspective, would you say that given the state of the economy presently and what’s it’s likely to be one year down the line, it stands to reason that the government would wish to carry on till the end of its mandate so as to give itself more leeway, financially, to improve its electoral chances?

From an economic perspective, as I said earlier, in the short term, inflation will remain the key concern as the structural weaknesses that are now embedded in the Mauritian economy are likely to materially impact the economy in the medium to long term rather than in the short term. The money game, which is in effect a zero-sum game has been on for quite some time now and is unlikely to stop anytime soon. From that angle, it doesn’t make difference for any decision on that end over the coming 18 months period!

* It’s quite probable that the government might be betting on a robust recovery in the months ahead and that will save it from a worsening economic situation. Could that be plausible?

It is only in 2023 that the economy in real terms will reach its 2019 levels. I would not use the word robust since the economic landscape, barring all the structural weaknesses and rigidities now embedded in the economy at the macro level, has not changed much.

On the other hand, we now seem to have a labour force issue. Since there has neither been the emergence of new economic sectors nor the significant climbing up in the value chain of the existing economic activities, a robust growth and economic development is unlikely to be a reality.

That said, there has been a recovery in economic activities, which should now resume its course of growth within the previous paradigm of economic growth potential for the country.

* It is to be expected that the government would seek to hedge the bets to improve its electoral chances by giving away goodies like an increase in old-age pensions or by lowering petrol prices substantially. What do you expect will be the impact of such measures on the country’s finances?

To start with, I don’t think there is any need to speculate on old-age pensions or other social benefits. The writing was already on the wall since last year. In the forecasts made by the government during its last year’s budget exercise for its planned expenditures in FY 2023/24, an increase of Rs 9.4 billion in social benefits taking its total spending from a budgeted Rs 55.5 billion in FY 2022/23 to a planned Rs 64.9 billion in FY 2023/24 was already made public. We should normally only be looking forward to its materialization soon.

On the decline in petrol prices, I am of the opinion that this measure, if implemented, will have a significant impact on combating inflation and in keeping inflation expectations and inflationary pressures under control.

Mauritius Times ePaper Friday 19 May 2023