‘Minister Padayachy has used some tricks, embraced some stratagems and kicked some cans down the road’
* ‘How will Moody’s react to this budget in its annual review?
Especially with respect to debt sustainability? Clearly expenditures are not under control’
* ‘It is plain to me that the objective of 8.9% growth will be difficult to achieve’
Eagerly awaited by the political class, the business community and the population, it was expected that Hon Padayachy’s third budget would not propose disruptive and innovative policies but would instead address those issues that are calling for immediate and concrete solutions, namely the erosion of the purchasing power of consumers, growing unemployment and increased poverty, etc. In this week’s interview, former Finance minister Rama Sithanen recognises that the Minister has met some of the expectations of the population with a few flagship measures, but the question that should be asked, he says, is: How will all these measures be financed? ‘The Minister has been totally silent and conspicuously surreptitious on how he will finance these expenditures… One has to dig into the finest details of the appendices and make inferences to grasp the funding of these measures.’ This is what he attempts to do in the following interview, and his answers give an indication of the ‘what next’ in the political calculations of the government. Read on:
Mauritius Times: The Prime Minister has stated that the 2022-23 budget was a very difficult one to prepare due to the war in Ukraine, the slow post-pandemic world recovery and rising energy and food prices globally. To what extent do you think have these events influenced the budget presented by Finance Minister Padachy?
Rama Sithanen: The tone and tenor, the form, substance and preparation of the budget have been primarily shaped by a combination of context, circumstances and prevailing public opinion.
First, undoubtedly are surging inflation, the unprecedented rises in the prices of oil, gas, food, medicines, fertilisers and other inputs that have dramatically eroded the purchasing power of everybody across the board, leading to a spike in poverty level and a sharp rise in cost of living. And as people became desperate, these carried the risks of social unrest and riots erupting as we have seen in many countries.
While headline inflation is expected at around 8.5% in Mauritius, food inflation is well above 16%. A significant share of the population spends a very high proportion of its income on food and food related items. The consequences are dramatic for them with these items rising by more than 16%. With many families struggling to make ends meet, some surviving on only one meal and children having to bear the brunt of this humanitarian crisis.
Second, there has been the lack of timely and effective response from Government to intervene since a long time to protect purchasing power, especially for the vulnerable groups. There has been almost unanimous calls for Government to swiftly intervene, as has been the case in many countries in the world, including UK and India, which did not wait for the official budget to come to the rescue of its citizens.
In many countries, the Minister of Finance is on a third annual budget precisely to respond quickly to legitimate and urgent demands for actions to support the people. Here, Government has instead irked the population by raising again the cost of diesel and mogas by another 10% recently, causing a cumulative increase of above 46% in 5 months. And to rub salt in the wounds, the price of cooking gas has surged by 33% while public transport has become more expensive.
Third was the absolute need to change the conversation in the press, on social media, and among Mauritians on the shocking, disgusting and inhuman brutalities inflicted by some in the police force on many of our compatriots who hail mostly from the low-income groups and have difficulties to defend themselves even when they are innocent and are forced to make confessions as they are savagely beaten up.
Fourth is the likely upcoming municipal elections and Government’s objective to improve its electoral chances.
There was an absolute necessity for appeasement, for defusing the social time bomb that was ticking away, to express empathy with the trials and tribulations of the population, to stop being tone-deaf, to distract from police brutalities, to be seen to taking measures and to introduce, albeit belatedly, policies and measures to reverse the declining purchasing power of the population and restore some hope. It was payback time and the imperative to compensate people.
* Has the Minister been able to meet the objective of protecting the purchasing power of the population with his ‘With the people, For the people’ agenda and his endorsement of Nobel Laureate and economist Joseph Stiglitz’s credo about ‘true and sustainable prosperity’ being ‘shared prosperity’?
Frankly, based on facts and evidence as spelt out in the budget, the Minister has clearly met some of these objectives. May be too late for many and not enough for others.
Government had no choice than to change the political and social landscape to prevent further discontent. Expectations were also very high. Broadly speaking, most Mauritians were expecting six to seven key policy measures from Government to compensate for the massive loss in purchasing power, estimated at least around Rs 2500 to Rs 3000 per month per household earning around Rs 20,000 per month. Measures and policies that are similar to what other countries have introduced to safeguard purchasing power and to strengthen the social safety nets to protect the most vulnerable. Some of these expectations are well documented and have been proposed by many, namely
an across-the-board increase in salary, akin to a cost-of-living allowance;
a rise in minimum wage by around Rs 2000 per month;
an increase in old-age pensions and other related pensions by about Rs 2000 pm, especially as these recipients have not been compensated for two years;
a reduction in taxes and contributions on the price of mogas and diesel after the staggering 46% rise in 5 months;
a meaningful income support or food voucher system for those most affected by rising inflation and surging food prices;
an increase in subsidy on some food necessities to either lower their prices or prevent any further increase for some time; and
a lowering of personal income tax and/or an increase in allowances that will benefit the middle-income group.
Objectively, he has met some of the expectations of the population with his three flagship measures. First is the Rs 1000 monthly increase in salary to be granted to all employees and self-employed earning less than Rs 50,000 per month.
Second is the rise in old-age pensions of Rs 1000 and Rs 2000 per month for those between 60 and 65 years and those above 65 years respectively.
Third is the subsidy of over Rs 4 bn annually to keep the prices of some products such as ‘pain maison’, cooking gas, rice, milk and few other items unchanged.
These are the three main measures to restore some of the lost purchasing power, to contain the social crisis and to defuse the social bomb that was ticking.
He has also removed municipal tax for town dwellers, lowered income tax and raised personal allowances for the middle income and increased social aid for the vulnerable groups.He has also enhanced the threshold of turnover to qualify as a micro, small and medium enterprise, thus opening up some fiscal and financial opportunities to many MSMEs.
The Minister has cast the net very wide to include almost everybody among the population. Everyone, everywhere in the country is expected to benefit somehow from these several measures.
* Let me put the preceding question differently: If you were Finance minister in these difficult times, what would you have done things differently from what the current government is doing and would still be fair towards the less well-off and the middle class?
Of course, there are criticisms that can be levelled against the Minister in his timing, his policy choices and tradeoffs.Sure, another Minister could have adopted a different set of policies and made other tradeoffs.
First, he has waited for far too long to bring relief to the distressed population. As in other countries, at least some of these measures should have been introduced months ago, especially as the fiscal space was available with so much of underspent resources as manifestly evidenced in his budget.
The Minister could easily have reallocated funds from underspent items to this critical necessity of supporting the people. He does such reallocations all the time. During the financial crisis of 2007/2008, I presented two budgets in one financial year to ensure timely and effective measures to mitigate its adverse effects.
Second, many would argue that the loss in purchasing power is much more than the Rs 1000 additional salary per month and he should have gone further in his measures, especially for the working poor.
Third, it is unfair to exclude around 130,000 pensioners between the age of 60 and 65 and recipients of widows and invalid allowances from the second tranche of Rs 1000 per month. They have also been terribly impacted by food and medicine prices, similar to those who are above 65 years and who will receive Rs 2000 more per month.
Fourth, he could have done more for those who are at the lower end of the income ladder and who are witnessing greater pain. Either through an income support or a food voucher formula as is the case in some countries. There are around 100,000 families that are really hardest hit and a targeted approach would have given them more relief.
Fifth is the lack of consideration for the prices of mogas and diesel. Evidently, there are some taxes/contributions that could have been removed and passed on to motorists. To at least show a gesture of goodwill. Many countries have lowered taxes on petroleum products to afford some relief to motorists, especially as taxes and contributions account for almost 50% of the prices of these products and the accelerated depreciation of the rupee has worsened the predicament.
Also, mechanically, the VAT paid on these products automatically rises with an increase in CIF prices. And Government has transferred the totality of the reserves of the STC to the Consolidated Fund, thus depriving the STC of the ability to intervene through its own funds. Especially as high prices of these products have a cascading effects on the prices of many products directly and indirectly and will feed into higher inflation.
Then there are three key questions that many are asking. How will all these measures be financed? Are they sustainable in the medium- to long-term? And what will be the reaction of Moody’s in its forthcoming annual review on the rating of the country? The Minister has been totally silent and conspicuously surreptitious on how he will finance these expenditures, not only next year but also in the future. One has to dig into the finest details of the appendices and make inferences to grasp the funding of these measures.
* Precisely many observers have asked this crucial question of how Government will finance all these social measures. There is a weird feeling about how this is possible when both the Prime Minister and the Minister of Finance have constantly been telling the population that the room for manoeuvre is tight and that fiscal space is limited. Is there a magical wand to achieve that objective or is there more than meets the eye?
This is a very good question and since Tuesday many people have asked me for an answer. Most people think that the Minister of Finance did not have a large room for manoeuvre. Indeed, he does not have much room in the Consolidated Fund. However, he has used some tricks, embraced some stratagems and kicked some cans down the road. These tricks are not easy to detect for those who are not very familiar with the overall architecture, intricacies and complexities of the budget.
He is embracing four major tools to finance these expenditures.
First, he clearly overestimates the economic growth and thus forecasts a much higher level of tax revenues than would otherwise be the case. He has systematically done so. For instance, he forecast a 9% growth last year and he ended up with 6.9% only. Same for inflation: he predicted 4% and we will end up with 8.5%. Now, he is relying on a growth of 8.5% in 2022/23 when most independent institutions are closer to 6.5%.
As a result of his very optimistic growth forecasts, taxes are projected to rise by a significant Rs 22 bn in 2022/23. Around Rs 15 bn more in VAT and Rs 6.5 bn more for taxes on income and profit. He will also collect Rs 10 bn of CSG from both employers and employees.
Second is the financing of the budget deficit by borrowing either domestically or internationally. Both domestic debt and external debt have risen considerably since 2014. If all debts including those in Special Purpose Vehicles (SPVs) are recognized, the debt to GDP ratio is very high at close to 100% even if it has come down in relative terms due to the disposal of 49% equity of Government in Airports of Mauritius and the rise in nominal GDP by almost 30% in two years.
Third is the exceptional financing of the budget deficit of 2022/23 of around Rs 23 bn representing 4% of GDP. In his first budget, he had used the reserve fund of the Bank of Mauritius, a special transfer of Rs 60 bn from the BOM to finance the deficit. And for the year ended June 2022, he has sold 49% of Airports of Mauritius to the MIC at Rs 13 bn. This has also had the effect of lowering the debt to GDP ratio by around 2.6 percentage point.
After increasing the debt to finance the deficit, after using the reserves of the BOM and many other state-owned enterprises, the printing of money and the resources of the MIC, next year he will fund the budget deficit of Rs 23 bn by disposing of Rs 22 bn of public assets which is termed ‘equity sale’ in the budget. There will hardly be any incremental debt to fund the budget deficit in 2022/2023.
The Minister has a responsibility to inform the country about which public assets are being sold for Rs 22 bn? Are these the jewels in the crown such as MT, SBM, the Port? Or Maubank and the NIC? Have the evaluation been done? To whom will such assets be sold? What happens in the unlikely event that the sale does not go through either because of no buyer or the price being unattractive? Or it takes longer to complete the transaction? He will have to raise public debt to fund the gap. He should be transparent about it.
However, the biggest trick he has played with us is the presentation of a second budget in addition to the one contained in the Consolidated Fund. This is not obvious to the naked eye and to the uninitiated about how the budget is done. This is the surreptitious use of what is classified as ‘Special and Other Extra Budgetary Funds’.
* What are these tricks? How long can such tricks be used? And with what consequences? What will we be left with after all resources would have been tapped?
The Minister has created a massive war chest. This Special Fund is found in Appendix C of the budget. When the Minister took office in 2019, it was forecast that there would be a very small sum of Rs 435 m as balance at the end of June 2020 in the Special Fund. Essentially to finance the National Environment Fund and a small Lotto fund. However, even before presenting his first budget in 2020, he had transferred a massive amount to this Special Fund and the actual balance at 30th June 2020 rose from a meagre forecast Rs 435 m to a staggering actual of Rs 13.2 bn net of payments.
In his first budget in 2020/21, he projected to transfer another Rs 15.5 bn to that fund. The total was therefore at Rs 28.7 bn. He projected to spend Rs 19.6 bn during that year, thus leaving a forecast balance of Rs 9.1 bn at end June 2021. However, he actually transferred much more than Rs 15.5 bn and spent far less than Rs 19.6 bn to leave an actual balance of Rs 35.4 bn at end June 2021. A staggering difference of Rs 26.3 bn.
In his second budget 2021/22, he planned to transfer Rs 10.3 bn to the Special Fund, thus raising the total amount available to a very high amount of Rs 45.7 bn, representing around 10% of GDP. He had projected an expenditure of Rs 25.9 bn for that year, thus leaving a forecast balance of Rs 19.8 bn at end June 2022.
Again, he did the same trick. He transferred more and spent less during the year. Instead of a projected balance of Rs 19.8 bn at June 2022, he is showing a massive balance of Rs 36.3 bn in his budget for 2022/23. He will now transfer Rs 3.94 bn to the fund this year. The total sum available to be spent next year is an astronomical Rs 40.2 bn. He is expected to spend Rs 23.3 bn to leave a balance at end June 2023 of Rs 16.9 bn. No prize for guessing that the amount transferred will be higher than Rs 3.94 bn and that spent lower than Rs 23.3 bn, thus leaving a much higher balance than Rs 16.9 bn.
The trick is that these expenditures are not included in the Consolidated Fund except for transfer to and from the Special Fund. Without any transparency and accountability. He can do whatever he wants with this fund. There are six funds under this Special Fund. The two most important ones are the Covid-19 Projects Development Fund with Rs 26.7 bn and the National Resilience Fund with Rs 6 bn.
The sheer size and scale of this fund makes it a second and parallel budget. As such, there are two budgets that the Minister has presented. The official one is the Consolidated Fund and the stealth one is the ‘Special and Other Extra Budgetary Funds’. The budget deficit has become meaningless as he uses the money in these special funds to decide on the exact size of the budget deficit he wants to present.
When the deficit in the Consolidated Fund is low, he transfers underutilized funds to the Special Fund. This does two things. It artificially raises the budget deficit of the Consolidated Fund for the year while it increases the availability of funds in the Special Funds for subsequent years. This is exactly what he has done this year to reach a deficit of 5% of GDP.
When the deficit of the Consolidated Fund is high, he does the reverse transaction. He transfers money from the Special Fund to the Consolidated Fund to lower the budget deficit. To avoid such deceptive tactics, the IMF and other institutions have called for a consolidation of all revenues and all expenditures in the Consolidated Fund. It is abundantly clear that the Minister will refuse such consolidation and transparency and governance of public funds. As it allows him to build a massive war chest.
* So, he has great leeway in transferring funds from the Consolidated Fund to the Special fund and vice versa?
Absolutely. He decides which expenditure will be in the Consolidated Fund and which one in the Special Fund. Let me give an example. There was a forecast expenditure of Rs 4 bn in 2021/2022 to construct social houses. Only Rs 100 m has been spent and no house built. The National Flood Management Programme was to spend Rs 3.6 bn this year. Only Rs 800 m has been used. He had earmarked to spend Rs 1 bn for the development of vaccines. Actual spending is only Rs 100 m.
So, it is the same money that is recycled year in year out. Underspent amounts from the Capital Budget is transferred to these special funds and these special funds in turn largely underperform. Then this is used to finance some recurrent expenditure. Such as the annual contribution to the MTPA (Rs 525 m next year), EDB schemes (Rs 500 m), support to planters and farmers (Rs 1.4 bn). All these are recurrent expenditures that should feature in the Consolidated Fund but are not. It looks like an unsustainable scheme as the system only works when the Capital Budget and the special funds show huge underspending and some of these funds are used to finance recurrent expenditures.
* Coming to this year’s budget itself, what do you think will be the impacts of the proposed measures on the macroeconomic environment in the short- and medium-term?
It is plain to me that the objective of 8.9% of growth will be difficult to achieve. The Minister forecast 650 000 tourists for the financial year 2021-2022. At best we will achieve 550,000, basically a shortfall of 100,000 or a drop of 15%. For the year 2022, he is hoping for 1 m tourists. This requires a monthly average of around 83,000. Not achieved for the first 6 months of the year. Unless there is a huge increase in the last quarter of 2022, we are more likely to be closer to the IMF target of 800,000 than the one of government at 1 m.
I do not see much for the financial services sector, ICT, the blue economy and biotechnology and the pharmaceutical industry. Nor for the fintech and the digital economy. Very lukewarm on manufacturing and the hospitality sectors. For the benefit of the country, I hope the measures for food security and the green economy deliver results. Many of the measures announced have been packaged before with little impact on food security. We need bolder actions to shift land use from unproductive real estate development to strategic food security.
I am concerned that we are not rising up fast enough to the challenges to build a new economic model to face the deep-seated structural and geopolitical changes taking place in the world.
A few areas are sources of concern:
(i) Not enough is being done to revamp and modernize the traditional sectors of the economy to build global competitiveness. Some sectors still rely almost exclusively on continued grants, subsidies, rebates, tax incentives, accelerated depreciation to survive with negative tradeoffs;
(ii) Too much reliance on a few sectors to build economic resilience to external shocks. Diversifying into new sectors such as food security, blue, green and technology/digital/fintech economy, renewable energy and Africa are too slow to create meaningful economic impact;
(iii) Very slow in transitioning to a higher value-added economy through depth and intensity of activities because of a severe lack of skilled people and knowledge. The current eco system with a punitive tax on skilled labour acts a disincentive to attract and retain talents;
(iv) Whether the current strategy of high expenditures financed by high taxes, high deficit and debt, disposal of key strategic public assets and monetization of fiscal deficit and the use of the Special Fund as a second budget is sustainable;
(v) The clear absence of structural reforms to sharpen competitiveness and unlock opportunities;
(vi) How will Moody’s react to this budget in its annual review? Especially with respect to debt sustainability? Clearly expenditures are not under control. This will play against us. I am unsure whether an exclusive dependence of growth-related tax revenue is adequate to bring debt to an acceptable level in the long term. And whether ‘clever’ tricks such as disposal of public assets, the use of special funds and the MIC will convince Moody’s of our seriousness to bring debt to a level comparable with our peer group.
Mauritius Times ePaper Friday 10 June 2022
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