Fear of Flying

We cannot also keep waiting either due to a widespread sentiment of “fear of the forbidden” which appears to have seized certain operators and perhaps decision-makers, as well. As a pre-condition to further development, confidence needs to be brought back for us to start flying again

The IMF issued a Press Release on 17th March 2016, following its annual Article IV Consultations on Mauritius. The Release highlights, along with other positive remarks about the economy, that “Mauritius has continued to grow at a moderate rate of 3.4 per cent in 2015, as weak external demand, protracted decline in construction, and the collapse of a large financial conglomerate group (the BAI group) more than offset the positive impact of favourable terms of trade (e.g. lower oil prices).” In brackets are mine.

It also states that “domestic non-performing loans have been rising and provisioning (for bad debts) has not kept pace with the decline in asset quality (of financial institutions). In addition, the authorities face macro-financial challenges (e.g., risk of loss of scope of the offshore sector if the India-Mauritius DTAA goes away and possible exposure of local financial institutions to potential bad debts) stemming from risk exposures and potential spill-overs from the very large offshore sector and its sizeable inter-linkages with domestic banking activities.”

Another salient feature of the IMF Press Release pertains to the size of the public debt. It draws attention to the “public debt (which) continued to increase (by more than 2 percentage points of GDP) due to the government’s interventions in the financial sector and the impact of the depreciating rupee on external debt.”

From what precedes, it must be clear that we have to struggle to steer clear of the economic problems which have already visited upon us, as mentioned in the IMF Press Release. The best way to do so is to undertake additional economic activity and manage prudently our financial sector to prevent it from taking the same path as that of several other countries whose financial markets have been showing signs of much volatility of late.

However, all this must be done without inviting more troubles. For example, if our public debt situation has worsened, we should be extremely wary not to aggravate the situation by contracting external debts (directly or indirectly) which don’t simultaneously help stabilize our external balance of payments situation. If we borrow to undertake more economic activity, this means the money should go into areas which generate additional exports with which we should be able to more than repay the amount of external debt incurred. And give the economy additional springs for developing into newer areas of production by the same token. Structural response is necessary to the structural challenges we face, not temporary remedies.

We should not, for example, do like Greece which kept borrowing excessively to, among other things, construct useless infrastructure having no economic yield, thus ending up with the catastrophic situation in which it landed finally, having to be bailed out at great pains from out of the mountain of debt it had raised earlier when the going was still good. It is still caught up in the mess. It is not known yet how this situation will eventually unwind.

Our export market, mainly in the developed economies of Europe and north America, is itself not in great shape. It will add to our scope as and when it recovers. Several key economies of the world are not at present showing significant economic growth these days. In a world which had got used to continuously increasing growth year after year in the period before the 2008 crisis, the current state of tepid economic growth (US: +2%, Euro area: +1.5%, China: +5.4%, Russia: -1.3%, Japan: +0.8%, South Africa: +1.0%) east and west, and its unlikely sustainability in the short term, is a source of great preoccupation for key decision-makers. Caution is the order of the day.

The Chair of the US Federal Reserve Bank (the Fed), Ms Janet Yellen, spoke to the influential members of the Economic Club of New York on Tuesday last. I saw her presentation before the Club as a strongly watered-down version of the economic optimism the Fed had displayed last year, well intent to be finally embarking on a money tightening (i.e., raising interest rates) phase after almost a decade of persistent low rates.

Fear grips other major central banks in much the same way, perhaps as they recall the various blunders central bankers committed only to aggravate the economic situation during the Great Depression of 1929-39 when, like the situation today, millions of shareholders were wiped out, jobs lost, with investment and production continuously shrinking by the day.

The key, Ms Yellen said, is that the global economic and financial backdrop looms more threateningly now than before, as evidenced by the market turbulence of last year’s US summer and early this year. She added that even though “officials expect the U.S. economy to weather any further rough patches” (see the cautious language), the dangers can’t be ignored. She was very guarded not to give undue optimism to her audience.

Now, the US is only one of the economies the world can count upon to extricate it from the current economic gloom. Others, such as Europe, one of our major export markets, as well as Japan and China principally, are to be reckoned with and they are not yet out of the woods. This situation requires us to manage our own economic situation with much prudence.

There are signs that we are not yet in a solid pick-up phase of economic growth in Mauritius, as confirmed by the IMF Press Release. On the contrary, the growing bad loan situation is a cause for concern and it should be quickly put behind through added capitalisation of financial institutions and by increasing producers’ scopes.

The main economic areas which we could venture out into are known for several years now. For some reason, we have not broken new grounds into those areas however. This is perhaps due to the risk that we cannot operate out our projects in isolation from the outside world. Demand and supply should be matched up. But we cannot also keep waiting either due to a widespread sentiment of “fear of the forbidden” which appears to have seized certain operators and perhaps decision-makers, as well. As a pre-condition to further development, confidence needs to be brought back for us to start flying again.

*  Published in print edition on 1 April 2016