“Economic contraction will be over 13% in 2020

Interview: Rama Sithanen – Former Finance Minister

and we will not return to a pre Covid-19 situation before 2023 or 2024”

‘ICAC has an opportunity to show that it can bark and bite, that it has the capability of unravelling the massive CEB-BWSC corruption case’

Too many suspect cases revealed both locally and internationally have remained unresolved. This gives the impression that we are simply biding time’

Former Minister of Finance Rama Sithanen in today’s interview foresees much trouble ahead for the country on the economic, financial and social fronts, a consequence amongst others of the weak-kneed approach to resolve the many corruption cases that the country is facing, with the latest additions such as the St Louis Gate testing the (in)capacity of ICAC. That is the reason why our jurisdiction is being watched closely by international bodies and the country is losing face. This impacts investor confidence, which has already received a big blow in the wake of the budget presented by the Finance Minister, who has decided to shift gear from a model that has served the country only too well for the past nearly 25 years. All the wrong signals have been sent, says Rama Sithanen, and this does not bode well for the future of the country in terms of employment, investment, etc.

Mauritius Times: After the earlier grey list of financial havens, the European Union has included Mauritius on its revised list of high-risk countries with strategic deficiencies in anti-money laundering and counter-terrorist financing frameworks. There have also been the corruption charges levelled against the Mauritius “administration and others” in the matter of the CEB’s St Louis redevelopment project… all of these happening in the early days in power do not bode well for the present government. How do see it trying to extricate itself from these embarrassments?

Rama Sithanen: These unfortunate events could not have come at a worse time for our country while the piling up is awful for our reputation.

We are in the middle of an unprecedented public health emergency with devastating economic, financial and social consequences, and now we have to deal with being on the grey list of the FATF and the black one of the EU with calamitous ramifications not only for our financial services sector but for the entire economy.

To add to the rot, there is the serious corruption charge from a very credible international institution as the African Development Bank about the St Louis Gate that will tarnish our image. And to add insult to injury, within one week the country is mired in two new scandals with the Wiracard /EMIF fraud and round tripping in Germany, and the Milo Investment Limited affair in the UK. This is too much for us! And Government must act fast and diligently.

On the EU and FATF, the Government has no choice than to address the five identified strategic deficiencies that have been flagged way back in 2018 by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). They are all about deficiencies in implementation effectiveness. We will have to follow the due process which will take time.

For the St Louis Gate, Government must ensure that no stone is left unturned to get to the bottom of the corrupt practices and to take appropriate actions to salvage our reputation. Certainly not to play politics as our integrity and reputation as a state are at stake.

On the two scandals related to Wirecard and Milo Investment Funds, the legal enforcement agencies have a unique opportunity to demonstrate that they have the willingness and capacity to conduct complex investigations to curb the abuse and misuse of our jurisdiction by unscrupulous persons and companies. The ultimate tests must be outcome driven and not intention based.

* As regards the the CEB-BWSC affair, a commission of inquiry might have allowed the Government to extricate itself from its present embarrassment, but it instead chose to suspend the CEB’s acting GM, revoke its Board and the Public Utilities minister and refer the matter to ICAC. Do you see the Government acceding to the Opposition’s request for a commission of inquiry in these circumstances?

I believe the PM has made it abundantly clear that his Government will not set up a Commission of Inquiry on the St Louis Gate. Both the PM and the Attorney General have given the reasons why they prefer the investigation to be carried out by ICAC. As a matter of fact, the PM has already sent a copy of the ADB report to ICAC.

Many would prefer a Commission of Inquiry chaired by an independent Judge or former Chief Justice as they believe that ICAC is neither independent nor credible based on all the inquiries that are still unresolved or lie in a desk somewhere. And it may not have the institutional capacity to conduct complex investigations which is one of the strategic deficiencies identified by FATF in its evaluation of AML/CFT of Mauritius.

ICAC has an opportunity to show that it can bark and bite, that it is fully independent and has the capability of unravelling this massive corruption that has tarnished our reputation. Our country will gain by embracing good governance, transparency and accountability in dealing with this high-profile corrupt case.

Let us see whether ICAC will miss the boat and give another reason to its detractors to question its independence and its investigative capacity. Especially as there are strong evidence on corrupt practices as revealed by the ADB while BWSC has accepted that its employees engaged in such financial misdemeanours with Mauritian administrators and others and has taken actions against them.

* There is also the EU blacklist and there is some rehabilitation work to be done as regards the country’s status as a respected and serious jurisdiction. Amendments have been proposed to our anti-money laundering and prevention of terrorism law. Do you think the ticking of the right FATF boxes will be sufficient to reassure the European Union about the Mauritius jurisdiction?

Let us be frank about the chain of events.

While we have made some progress since the ESAAMLAG report of 2018 on technical compliance, there is still considerable work to be accomplished at the level of implementation effectiveness. Essentially between ticking the appropriate boxes in terms of the legislative and regulatory framework and the actual implementation, efficacy and effectiveness in regulation, supervision and enforcement.

It is not clear whether the new legislation on its own will cure the weaknesses identified by ESAAMLG, FATF and the EU. On paper, there is progress on three of the five strategic deficiencies. However there remain challenges at the level of non-profit organisations, DNFBPs (Designated Non-Financial Business or Professions) and the institutional capacity of law enforcement agencies (LEAs) to conduct money laundering and financial investigations.

There are 11 effectiveness ratings and we are low in 7 and moderate in 4. I think more will be required and additional measures should be taken to cure the five strategic deficiencies so as to convince the FATF and the EU that we meet the effectiveness and enforcement tests to be removed first from the grey list and then from the black list.

* Government believes that it can accomplish these before 1st October 2020 to avoid being effectively blacklisted by the EU? Is that possible?

Absolutely not, based on evidence and practice. We are not the only country in that predicament and there is a due process that must be followed by all states that are on that list. We should not be naïve to believe we can do this before October 2020 when the sanction of the EU kicks in.

First, we have to submit our roadmap and remedies to the FATF, then it has to assess it and carry out an on-site inspection before making its recommendations to the plenary session, probably in Feb 2021. Then we have to meet the additional criteria/methodology of the EU to be removed from the black list.

I do not know any country that has been delisted before two years. Even Tunisia which has the full support of France and the EU has taken almost two years to be delisted and it does not have a sophisticated global business sector as us. Bahamas is ahead of us in the queue while Ethiopia waited for a long time.

In the meantime, it will be difficult to attract new businesses while existing ones may relocate to competing jurisdictions because of the enhanced diligence and the reputational risks associated with the black list. It will also affect the banking sector through its correspondent facilities.

* We have an arsenal of laws to combat different offences in different sectors, including the Global Business sector, but ‘là où le bât blesse’, it’s at the level of the regulators and political interference in these institutions. What’s you take on that?

Undoubtedly, the many sleazy cases that have been unearthed either by the various leaks or by investigative journalists on alleged frauds, money laundering and abuse and misuse of our global business sector have certainly not helped our case vis-a-vis the international community. We all know the long list.

Our law enforcement agencies have also not shown enough diligence to back up our declared policy not to tolerate fraudulent and shady businesses. Too many suspect cases revealed both locally and internationally have remained unresolved. This gives the impression that we are simply biding time to ensure that these cases are no more hitting the headlines and we forget about them. Until the chickens come home to roost and another one emerges that reminds us of all the previous misdemeanours.

It is clear today that we need not only robust legislations and regulations but, above all, strong, independent, competent, transparent and accountable institutions to implement and enforce these rules, regulations, norms and standards. A Professor of Taxation that I meet at conferences always reminds me that Mauritius is best in class at enacting legislations and regulations but then we are not effective at implementing and enforcing them.

Worse, because of the ferocious competition among international financial centres, many companies often do not do what it takes to avoid our system being abused and misused. We need to plug in these loopholes to repair the damage done. Even if it means refusing some very low value-added entities that are harming our brand and reputation as a credible and reputable International Financial Centre (IFC).

* For having been Finance minister in previous governments and having interacted with the multilateral agencies, do you consider that the various instances of misgovernance in the functioning of different bodies and regulators in relation to sectors other than Global Business have also a bearing on the decision of the European Union to blacklist the Mauritius jurisdiction?

We have always had to defend the integrity and reputation of our financial services. We are under close watch. Whether in the context of the double taxation treaty with India, the OECD, the EU, the FATF and other standard setting institutions. I had to personally attend an OECD meeting in 2007 to defend our country and, thankfully, we were placed on the white list as a result.

The environment has considerably changed with significant emphasis on effectiveness of implementation as opposed to simple technical compliance. Government should have comprehensively and effectively sorted out these issues as they were amply raised by ESAAMLG in 2018. We must also strengthen the effectiveness of regulation and supervision in many areas such as Non-Profit Organizations (NPOs) and DNFBP’s and enhance the capacity of law enforcement agencies by appointing competent and knowledgeable people.

I am privileged to have been involved in various aspects of global business. As Minister of Finance, I started it in the early 90s. I have also worked in that sector for a long time and know its opportunities and challenges. And I have advised countries in Africa on offshore business and taxation.

Honestly our current model based on tax arbitrage through treaties, almost zero to low effective tax on GBC, inadequate substance except for funds, the challenges in the effective implementation of rules and regulations to combat money laundering and terrorist financing and a heavy reliance on simple holding structures for cross border investments, is clearly not sustainable.

Of course, it has delivered meaningful economic and employment outcomes over 25 years. But it has reached its limits, especially with greater emphasis on curbing simple treaty shopping through the principal purpose test, the renegotiation of many treaties to better balance the allocation of taxing rights and the aggressive behaviour of many NGOs against our jurisdiction.

We need to reinvent the global business model in the light of the significant changes in the tax, regulatory and substance environment. We need a more focused approach based on more substance, higher value added, a more diversified sector in terms of geographical footprint, range of products and suite of services. This could imply letting go of low value products that expose us disproportionately to the prying eyes of many and concentrate on building a modern, efficient, compliant, competitive and robust IFC.

Of course, the transition will be tough and there will be some collateral damages. But so is our economic history. It has happened in sugar, textiles, manufacturing and tourism. We need to adapt, adjust and to continually reinvent to survive. The alternative is what we see today. A constant challenge to our International Financial Centre in one way or another. There is no stability, no certainty and no predictability as our centre is stirred and shaken too frequently. It is not good for investment and businesses.

* How about the Finance Bill which provides for the implementation of measures announced in the Budget Speech 2020-2021? Do you think the proposed measures sit well with the Mauritian context in the present circumstances and will facilitate a speedier economic recovery?

I hope that everybody is wrong and the Minister of Finance is the only person in town who is right and knows what he is doing. I have my serious doubts.

I am very surprised that the PM who has been Minister of Finance three times and is politically astute is allowing an economic disaster to unfold. Everybody I meet who is an investor, an entrepreneur, a business person, a risk taker, large, medium and small, local and foreign and shrewd independent political and economic observers tell me exactly the same thing. That it is an awful budget, the worst one they have seen for decades. That it has destroyed trust, demolished confidence, shattered investor feeling and wrecked business sentiment.

It sends the wrong signal to the very people who have to work hard and innovatively to get the country out of the economic mess and the severe recession. I can only hope that my random sample is not a good reflection of reality and the Minister knows much better where he is taking our country. In uncharted territory with reckless fiscal and economic experimentation.

He has abruptly and drastically changed an economic model that has paid dividends over the years starting in the early 80s until today with Ministers of Finance of all stripes including the current PM who was Minister of Finance three times. The budget in its current shape and form is unlikely to boost investment, rekindle growth and save jobs.

Exports are already underperforming since 5 years and with falling demand globally it will be very difficult to kick start that sector. Sugar is sour and there is no structural reform to turn the tide. Tourism, travel and aviation are the worst affected and their direct, indirect, induced and catalytic effects are already being felt throughout the economy.

The financial services will be impacted by the grey and black lists. There is absolutely nothing to support the BPO sector that has been affected by declining demand. Then there is a significant wealth effect combined with a sizeable loss of income that will drive down consumption.

I do not see a rush for private investment and FDI with the introduction of punitive taxation. This is what a foreigner told me. Why should he pay 15% corporate tax as a base to which we have to add 2% CSR, 6% Contribution Sociale Généralisée (CSG), 4.5% PRGF and 25% dividend tax (or a cap of 10% on large amount). A cumulative tax of 52.5 %! And employees have to pay 40% after a prescribed threshold compared to 20% now. Who would want to come to Mauritius when the likes of Singapore, Hong Kong and Dubai have much lower rates?

I really do not know how EDB will market our country in its overseas roadshows.

The Minister needs to be reminded that we are still a small island and emerging economy that cannot compare with an OECD country. Taxes at over 52% is simply going to drive investment away to competing destinations. With such a massive gift of Rs 150 bn from the Bank of Mauritius, I have considerable difficulties to comprehend why the Minister has cut his nose to spite his face. We are already in a deep hole with the devastating impact of the Covid-19. Why make life much more difficult by drastically changing the economic model at the same time when the focus should have been on reviving the moribund economy to save jobs, rescue firms and safeguard livelihoods?

* What are really the main weaknesses of the 2020-21 budget?

The Minister should have used the substantial gift of Rs 150 bn from the Bank of Mauritius to boost productive investment, support exports, rekindle economic growth and avoid massive unemployment. By protecting people, rescuing companies and saving jobs. That should have been his priorities under the circumstances. Instead he proceeded to jettison the economic model that has been the success of our country for a long time.

Mauritius has thrived on a competitive, attractive, simple, non-discriminatory and coherent taxation system. He has raised taxation significantly across the board and introduced discriminatory taxation that will negatively affect business sentiment and investor confidence in our economic paradigm. It places taxation at the centre of everybody’s attention and it sends the wrong signal to employees and investors alike.

Many people are withdrawing money from the country and are focused on how to avoid the punitive and discriminatory taxes through tax planning and avoidance rather than concentrate their time, energy and effort to revive the economy. Many companies including Small and Medium-sized Enterprises (MSMEs) will go under as they simply cannot bear the rising costs of doing business. This will lead to much higher unemployment.

The economic contraction will be over 13% in 2020 and we will not return to a pre Covid-19 situation before 2023 or 2024. The Minister of Finance is relying too much on the construction sector to rekindle the economy. There is not enough support for the export-led and traditional sectors of the country. And hardly any new sector will emerge to diversify our economic base.

* Could the Mauritius Investment Company which has come into the picture with the billions of the Bank of Mauritius save the Government by rescuing firms?

The MIC is playing its cards too close to its chest as there is hardly any information on how Rs 80 bn of public funds will be used. There is a contradiction between the initial communique of the BOM and the announcements in the budget.

The BOM stated clearly that the MIC would invest in two key strategic sectors of our economy which are tourism and manufacturing while the Minister has considerably broadened its scope of intervention to other sectors such as aquaculture, pharma and Africa. We do not know what are the criteria used by the MIC to assess the requests made by various firms before deciding on whether to support them, in what amount, with which instruments between equity, quasi equity and loans and with what conditions. Nothing at all up to now.

For instance, will capacity to repay and economic viability be key conditions to determine access to MIC funds? Will shareholders be required to inject some new funds to share burden? Will they be told not to distribute dividends and not to do share buy back as long as they have not repaid the debt? Will there be restrictions on executive pay and fringe benefits to contain costs? Will these loans or redeemable debt have priority over existing commercial bank loans? Will there be conditions on keeping employees? Will assets be given as guarantees to the MIC commensurate with the quantum of the financing facility? How does the MIC handle blatant conflict of interest between some of its members and companies seeking its support?

The Government faces a policy dilemma. If it does not support the deeply affected sectors, there will be bankruptcies with knock-on effects on unemployment. However, based on strict financial viability and economic returns, especially the provisions of clause 46 on the use of reserves, it is almost impossible to justify investment in the hotel industry and export manufacturing in the current context. These two sectors were already in trouble before Covid-19 and their challenges have amplified after the pandemic.

I honestly believe MIC will lose lots of money if it invests in equity in these two sectors. Equally it will not be fully repaid of its loans for a long time as they are already overleveraged and do not have repayment capacity. Otherwise commercial banks would lend to them. Even if the redeemable loans are provided at below Prime Lending Rate, say 2 % interest per annum.

I can’t speak for the other members of the MIC as they are either ex officio or are conflicted. However, I am sure Professor Desai who taught me economics 45 years ago at the LSE knows very well that the risks of MIC’s exposure to two very fragile sectors are extremely high. These investments or loans do not provide ‘liquidity, security and return’ as clearly stated by clause 46. The MIC should be frank and transparent about it. Hence the need for burden sharing with shareholders and commercial banks to mitigate the risks of losing significant amount of public funds.

Otherwise it would be an utterly disproportionate socialisation of corporate losses.

* Published in print edition on 10 July 2020

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