Government’s doctoring of the budget deficit is effected by the non-accounting of Special Funds and of off-budget expenditures…
By Rattan Khushiram
In an article published in L’Express of 3 July 2019 on the 2019-20 Budget, Dr Rama Sithanen concludes that “the Minister of Finance has doctored the budget deficit and the debt figures”, and computes “a total of over Rs 40 billion in creative and voodoo accounting”. While the charges of fiscal doctoring are undeniable, his demonstration of “over Rs 40 billion of accounting tricks and colourable devices” is mostly incorrect.
A contributor to the alleged Rs 40 billion is a sizeable consolidation adjustment item to public sector debt. This is indeed an accounting trick to underestimate public sector debt, introduced as from December 2018, representing the amount of Government securities held by non-financial public sector entities. To this purpose, the Ministry of Finance has recently started issuing specially-designed Government securities for non-financial public sector bodies to invest their surplus balances.
The consolidation adjustment item is thus estimated to rise from Rs 4 billion in June 2019 to Rs 6 billion in June 2020, further to Rs 8 billion in June 2021, but then to decline to Rs 4.5 billion in June 2022. Dr Sithanen wrongly derives a gross total of this item by adding the stock figures, instead of adding flow figures, i.e., an additional investment of Rs 2 billion in 2019-20 and again in 2020-21, and a disinvestment of Rs 3.5 billion in 2021-22. The net investment flow between June 2019 and June 2022 is only Rs 0.5 billion.
Therefore, the statement that “the forced conversion of the surplus of some public entities stands at around Rs11 billion or 2.2% of GDP over 4 years” is mistaken. But, unlike Government data fiddling, this is most likely not a deliberate error, arising from an understandable confusion between stocks and flows. What the consolidation adjustment item simply does is to underestimate public debt by 0.8% of GDP in June 2019, 1.1% of GDP in June 2020, 1.4% of GDP in June 2021, and 0.7% of GDP in June 2022.
The other two contributors to the purported Rs 40 billion, namely the transfer of Rs18 billion, from the Bank of Mauritius (BOM), and the sale of public assets for Rs11 billion, are questionable, but not strictly on grounds of doctoring. The BOM transfer is considered to be excessive, and will weaken the BOM’s balance sheet and independence, thereby hampering the BOM in its statutory tasks and putting the country’s financial stability at risk.
The sale of public assets is a legitimate budget financing item. However, the failure of Government so far to identify the assets for sale does partly lend some credence to a doctoring claim on this count.
All the three above alleged sources of doctoring are financing items that impact the public debt, and not the budget deficit. Government’s doctoring of the budget deficit is effected by the non-accounting of Special Funds and of off-budget expenditures, and by the inclusion in revenue of an exceptional transfer from reserves of the Financial Services Commission, and of surplus balances of statutory bodies.
In Part 2 of the above-mentioned article published a day later, Dr Sithanen obtains a much higher “real” budget deficit figure by including loans/equity to public entities of Rs 6.1 billion in the computation of the budget deficit. This is not in line with the current definition of the budget deficit, as recommended by the IMF Government Statistics Manual 2014 and adopted by Government. The internationally-accepted IMF measure of the fiscal balance considers all transactions in financial assets such as loans/equity as financing items, which are therefore not included in the derivation of the budget deficit.
These comments on Dr Sithanen’s article is meant to keep the public debate on the budget free from exaggerated and misleading claims, perceived as more akin to political propaganda than to serious analysis.
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Export Oriented Enterprises: The plunge continues
The Export Oriented Enterprises (EOEs) consist of enterprises previously operating with an EPZ Certificate as well as enterprises manufacturing goods for exports and holding a registration certificate issued by the ex-Board of Investment.
In 2018, we had 21 less enterprises than in 2015 employing 3,735 fewer workers. All the main economic indicators show a downward trend. This is confirmed for the first quarter of 2019. From March 2018 to March 2019, total employment in EOE decreased by 2,439 (-4.8%) from 51,138 to 48,699. Job losses occurred mainly in enterprises engaged in the manufacture of “Wearing apparel” with a decrease of 2,649 jobs.
Net exports, i.e. exports minus imports, amounted to Rs 3,887 million in the first quarter of 2019 and its ratio to total exports worked out to 38.1% compared to 40.0% in the corresponding quarter of 2018.
The decrease in industry growth since 2015 ( -3.1%, -5.1%, 0.3 % and -4.5%) can be attributed to declining overseas orders, to labour as well as other costs rising too fast (recall the introduction of the minimum wage in January 2018). Increasing labour costs have, to some extent, undermined the international competitive advantage of the textile industry. Budget 2019-20 does not provide enough of support to the industry that would have paved the way to a clearer vision of where the industry is heading and ensure enough of investment in innovation to re-dynamise the sector.
* Published in print edition on 5 July 2019