Despite the fact that the construction sector is booming with a growth rate of 9.5%, the latest national accounts estimates of Statistics Mauritius, as of September 2018, forecast a growth rate of less than 4% in 2018, which is marginally higher than in 2017. Why?
By Rattan Khushiram
The construction sites, or “chantiers” in common parlance, sprouting all over the island do not seem to be producing that much of an impact on the economy. These activities do not seem to be stimulating growth. Despite the fact that the construction sector is booming with a growth rate of 9.5% (as compared to 7.5% in 2017), the latest national accounts estimates of Statistics Mauritius, as of September 2018, forecast a growth rate of less than 4% in 2018,which is marginally higher than in 2017. Why?
The main reasons that may account for this lack of positive correlation between the “chantiers” and growth, the generation of jobs or a feel-good factor, as reflected in the improvement in people’s life or standard of living, may be because of the following: (1) the projects may have a low investment multiplier in the short run because of their high import content; they act more on the demand rather than the supply side and this leads to important leakages through imports, and (2) many of these projects have long gestation periods; indeed most of the investment multipliers for urban infrastructure in SIDS tend to be low in the short term and lower than multipliers in the export or the manufacturing sector which have a greater potential of boosting growth substantially and creating productive jobs in the short run.
Whatever the impact of these multipliers, there are reasons to believe that there are other factors that are plateauing or deflating the growth rate, namely:
a) Slowing down of manufacturing exports: The share of the manufacturing sector in the economy has been decreasing from 14.7% in 2013 to 13.4% in 2017. Over the past three years the sector has been growing at an average rate barely higher than 0.6%. Manufactured exports are facing strong headwinds, including domestic cost pressures, appreciating rupee, and Brexit. Giveaways like the 40% reduction in air freight costs to Europe and the Exchange Rate Support Scheme to support the export-oriented sector, besides being distortionary, are poor substitutes for structural reforms to address the emerging cost competitiveness challenges.
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|Exports of Manufactured goods
b) Low investment rate: Public investment has continued to stagnate at around Rs 19 bn annually for several years. Private investment recovered strongly in 2016 and 2017, after years of negative real growth, but would show a zero real increase in 2018. Even with the projected sizeable public investment programme, the investment rate will remain stuck at around 18% of GDP in 2018, since private investments account for three-quarters of total investments.
c) Shrinking net exports: Net exports of goods and services averaged a deficit of around Rs 43 bn during 2011-16, but this gap grew substantially to some Rs 60 bn in 2017, and is forecast to widen further in 2018. Net exports of goods and services relative to GDP are at a high level of 13% of GDP, after a slight and short-lived improvement. This heavy external deficit can be sustained only if capital flows are continuously available in the longer term to finance the balance of payments. The offshore banking and global business sector has so far provided a source of capital for meeting the goods and services deficit and generating balance of payments surpluses. But external threats are looming, with the downgrading of global growth forecasts in ‘World Economic Outlook’, October 2018, the end of quantitative easing in the U.S. and the EU with an attendant rise in global interest rates, the impact of American tariffs on global trade, and a possible slowdown of the Chinese economy and the new challenges facing our less tax-centric financial sector.
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The BAI saga: Some distortions
BAI was a disaster waiting to happen
Now that the ex-boss of the BAI is back in the news in the Britam case, some people are distorting the facts to try to show that the closing down of the BAI was solely a vengeful act of destruction and that the BAI was a well-run concern facing some minor liquidity issues without any involvement whatsoever in any so-called Ponzi schemes.
I beg to differ. As the narrative goes, it all started in 2004-2005 when the government of the day was putting some order in the insurance business and their investigations had indicated that BAI activities were in contravention of the regulatory regime and were putting at risk the entire financial sector. They had even gone so far as declaring that the insurance company was insolvent based on their findings that there was a significant deficit in the Life Fund.
Furthermore, in 2007 and 2012, the IMF had reminded us that the issue of the insurance company with a substantial proportion of its assets invested in related companies had not been resolved. They also warned us that these issues were potentially serious for the policyholders, depositors and investors, and the weaknesses that allowed the problem to remain unresolved for so long could result in more serious failure of a systemic nature.
They are all culprits as from 2005 – starting with the tandem Mansoor-Sithanen – followed by the successive finance Ministers (including the present one and the leader of the opposition) and ending up with the whole army of regulators. It looked as if they looked the other way when things were getting bad by the day. Why is that so? Instructions from above? What was most shocking was that despite these unsound investments, in December 2006, this financial group was granted in Dec 2006 a licence under the Banking Act by the Bank of Mauritius. And interestingly, when BAI was facing increasing difficulties to stay afloat, the culprits of the previous regime amended the Banking Act to allow BAI to lend to its related companies, though well aware of the unsound activities of BAI, especially the riskiness of the staggering level of investment in related companies.
On the issue of the closure of the BAI group and revocation of Bramer Bank’s licence following persistent liquidity and regulatory capital shortages, the audacity of the decisions did not necessarily mean a better management of affairs. Instead of bursting the BAI/Bramer Bank bubble, a clear rescue plan could have been devised and implemented by the Ministry of Finance, in coordination with the Financial Services Commission, the Registrar of Companies, the Financial Reporting Council and the Bank of Mauritius. A key objective would have been to establish proper supervisory oversight and enforce corrective action for effective and prudent risk management.
Under firm pressure from the supervisory institutions and Government, in December 2014 itself (not four months later), BAI Co Ltd could have been led into a salvage operation involving new strategic investments and sound professional management. The BAI Group’s well-performing Kenyan businesses which held substantial assets could have provided a financial underpinning to strengthen BAI Co Ltd. A major source of financial haemorrhage within the BAI Group could have been urgently addressed, namely the Apollo Bramwell Hospital, while some degree of public financial support could have been provided to bring health and soundness to BAI Co Ltd.
At the end of the day, when the harm has been done, one is perfectly entitled to put the following questions: Was it all due to a vengeful act per se? Was the government’s actions guided more by the need to avert a systemic crisis and banking on a master stroke on the recoupable assets of BAI rather than on the mere urgency to settle scores? There should however be consensus on the fact that the whole approach was blatantly amateurish – and directed by people who behaved like bulls in a china shop.
In any case, BAI was a disaster waiting to happen.
* Published in print edition on 30 November 2018