Courting Disaster

This is not the time for budgetary largesse or freebies at public expense to all and sundry the country can ill-afford from strapped public finances

By Mrinal Roy

The economic fundamentals of the country are deteriorating. The political situation is in disarray. Inflation is in double digits. The purchasing power of people is continuously eroding. The current escalating prices of groceries and essential existential needs due to the unchecked depreciation of the Rupee is having dire consequences on the livelihoods of people and in particular some 47.8% of the country’s employees earning up to Rs 15,000 per month and those struggling to make both ends meet from their basic pension.

Public debt, which was already on the rise even before the advent of the Covid-19 pandemic, stood at a whopping Rs 421.977 billion i.e., 94.3% of GDP in September 2021. It was slightly lower at Rs 413.726 billion in December 2021. The trade deficit, which was Rs 133.081 billion in 2021, is forecast to reach a new peak of some Rs 160 billion in 2022 and exceed 30% of GDP this year.

An endless array of costly botched decisions have added to the woes of the country. Rs 4.7 billion had to be paid from public funds to settle the liability towards Betamax following the Privy council ruling against government. There are also legitimate interrogations about the cost effectiveness of the costly Safe City project, the cost overruns on the Bagatelle Dam or the Cote d’Or National sports Complex projects, the emergency government procurement tenders to source medicines and equipment to fight the Covid pandemic from a nondescript array of suppliers, the absence of transparency and accountability of major government expenditures and disbursements from Mauritius Investment Corporation (MIC )funds as well as the wastage of public funds annually highlighted by the Audit report, etc. These have cost billions of Rupees of public funds which could have been put to more productive use for the common good. It is an indictment of the government decision-making process and governance.

Writing on the wall

The writing has been on the wall for quite some time. The current economic model is not sustainable. Independent commentators have been raising concern about the vulnerability, fragility and short-sightedness of an economic model so heavily dependent on tourism and high-end real estate development as well as the patent lack of competitiveness and level of value addition of the key sectors of the economy. The policy framework and the style of governance have further undermined the country’s prospects.

The January 2022 World Bank Mauritius Systematic Country Diagnostic report is quite explicit. It affirms that:

‘The decline in competitiveness continued in most sectors and innovation through investment in non-traditional sectors remained subdued. Between 2009 and 2019, exports dropped from 57 to 40 percent of GDP. This includes tourism, where before Covid-19 Mauritius showed solid growth but still performed below regional competitors, as well as apparel and business services, where Mauritius’ export growth was negative. Generally, Mauritius lost significant export volume in traditional products but was unable to scale up more complex new exports at a sufficient scale to compensate the decline. Subsidies and other state assistance continue to disproportionately support established sectors such as textiles, sugar and real estate rather than innovation and discovery. Such measures impede incentives for economic diversification towards higher value-added activities.’

It adds: ‘Real estate accounted for nearly half of private investment in the period 2015-19, while investment in tourism, retail, manufacturing and agriculture all declined. Half of the Foreign Direct Investment (FDI) flows during the 2015-19 period representing about 4 percent of GDP stemmed from the sale of high-end real estate occupied mostly by foreign residents.’ The 2021 figures show that Gross Direct Investment flows into real estate activities including IRS/RES/IHS/PDS/SCS 1 represented more than 65% of Direct Investment flows whereas investment in manufacturing was a paltry 1.5%.

What are the real benefits of these income flows for the country and Mauritius at large bearing in mind the plethora of generous tax benefits blithely granted by government to the sector at public expense? Is this one-sided outcome what the oft-touted government-private sector partnership is all about?

Budget ritual

Despite this appalling state of affairs, the government continues to bury its head in the sand. This is epitomized by the current budget exercise. In accordance with a well-oiled and highly publicised annual ritual, the Minister of Finance meets economic actors and stakeholders from diverse sectors, trade unions and representatives of associations and civil society and receives their shopping list of demands, financial support measures, moratoriums, waivers, tax rebates, etc. The Minister declared last week that he had so far received 700 proposals and counting. Subsidies and other state assistance remain the overriding driver and cornerstone of a tenuous economic lifeline.

For example, the tourism and hospitality sector has made a series of demands to sustain the sector including asking that the remaining Covid-19 sanitary controls and restrictions in force till June be fully relaxed despite the recent surge in cases in the country and rising infections caused by new Omicron variants in Europe, from where most of our tourists come from. Who will bear the responsibility of any collateral casualties?

All lives matter. Economic imperatives and fixations about balance sheet cannot put at risk people’s lives. Surely tourists feel safer if basic sanitary protective protocols remain in place.Expediting the process or watering down Covid-19 safety norms could backfire.

The sector has also asked for a moratorium to defer the repayment of their substantial banking loans of some Rs 53.4 billion as at end February 2022 by a year, a 50% rebate on their land lease rental for this year, a review of tax rules to extend the period to set off losses against taxes from five to 10 years, a review of the cost of travel for both airline and tourists and more competitive air fares as well as an air connectivity expansion strategy, etc. In contrast to the array of benefits requested and the cost reductions sought from other partners of the industry, there have been no concomitant measuresto sharpen the competitiveness of their hotel accommodation package offer, which is the key factor which determines tourist arrivals in an age of online booking. There are also no cogent measures to preserve employment in the hotels against the threat of loss of employees to better-paid jobs on cruise ships.

Addressing current concerns

The budget exercise must therefore be a well-thought-out response to address the many current challenges faced by the people and country bearing in mind the level of budget revenues, in order to put the economy on a robust growth path. These challenges inter alia include the erosion of purchasing power, rising unemployment rate, sluggish economic growth, deteriorating competitiveness, an outdated economic model, the quality of healthcare (despite a budget of Rs14.5 billion) bearing in mind the ageing population, widening inequality and climate change threats.

Government must also bear in mind that the International Monetary Fund has unequivocally asked the Bank of Mauritius to ‘refrain from providing direct financing to the government and engaging in quasi-fiscal activities and advised reforming the Bank of Mauritius law, including to pre-empt further exceptional transfers to the government.’

This is not therefore the time for budgetary largesse or freebies at public expense to all and sundry the country can ill-afford from strapped public finances.

Change tack

There is above all an urgent need to overhaul our economic model in partnership with foreign investors and seasoned entrepreneurs having the business acumen, expertise and track record required to move the economy towards high value-added activities and upmarket services in a wide range of carefully identified sectors in principally the services sectors which boost growth, employment, living standards, bridge inequality and have (in contrast to real estate development) a potent multiplier effect on the economy at large.

The present situation cannot go on. The status quo and the current state of governance in the country is tantamount to courting disaster. It is therefore imperative to urgently change tack for the good of people and country.

Mauritius Times ePaper Friday 15 April 2022