The Broader Economic Philosophy
In answer to this week’s PNQ of the Leader of the Opposition, the Minister of Finance stated that the rate of growth of the local economy for 2010 was being revised down. This was due to adverse developments such as the uncertainties sparked off by the crisis in the Euro zone (a major part of our export market) and dampening of external demand due to difficulties faced by our other trade-partners to get firmly out of the recent recession. Our GDP growth would come down in the range of 3.5 to 4% against the previous forecast of 4.5%. This should not be interpreted to mean that all activities are down; some like tourism are affected not for the same reason as others (e.g. the exchange rate factor in this case) and hopefully not for long; textile producers which are selling to the high-end of the market are less affected than those that are producing for the more internationally competitive lower-end of the market.
This slower pace of economic growth is coupled with a deficit recorded in the country’s international balance of payments account over the first half of 2010 (whereas it had been in successive surpluses of Rs. 4.6 billion and Rs.12.1 billion in 2008 and 2009). There was also the existing budget deficit which will not be helped by a falling GDP and by the anticipated abolition in 2010 of the NRPT and tax on interest paid to depositors by financial institutions. It is well known that the buoyancy of tax collections suffers from falling levels of economic activity. However, the Minister stated that he is to come up with a series of measures to address the economic situation and it is possible that these will involve measures compensating for the loss of revenue that would be occasioned by the abolition of taxes like the above without necessarily acting as a brake on economic growth.
On the other side, banks have stocked up large amounts of liquidity. It is not unusual for banks in Mauritius to find themselves in this kind of situation. They have nearly always carried excess liquidity. In the current circumstances, it is the more so as opportunities for the banks to make profitable risk-free overseas investments of their surplus funds are not as numerous as they used to be. The situation also indicates that banks must be finding it increasingly difficult to increase their lending locally within their tolerable risk parameters. It may also be the case that local demand for credit is not as brisk and forthcoming to bring down significantly the surplus liquidity being held by banks due to falling external market demand for our products. Or, it could be a combination of all of these. This mirrors the situation of slowing economic growth pointed out in the Minister’s reply.
The victims of this situation of excess liquidity in the system are the depositors who have to accept relatively low returns on their savings; in general, it is the interest rate structure which bears the burden of this situation. This condition is confirmed by the Monetary Policy Committee’s decision of 22nd June to keep the key repo rate (i.e. the central bank’s market signalling interest rate) unchanged at 5.75%. In all of this, one has to put up with current external market conditions that are beyond our control. We have to adapt with the external environment.
The Opposition asked further whether it was intended to do away with the Additional Stimulus package put in place by the previous Minister of Finance. Given the general picture of economic uncertainty painted by the new Minister of Finance, how could the opposition expect any conscientious government to take unnecessary risks such as doing away with the fiscal stimulus package outright? The Opposition could instead have sought assurances from the government that it will deploy funds from the package only if exceptional circumstances involving key areas of activity or key enterprises justified any such disbursement. For example, any politically motivated support intended to salvage a hopeless enterprise having lived beyond its means should not be eligible for support. The Minister replied that there was no question of abolishing the stimulus package but that the scheme needed to be reviewed to ensure a better balanced distribution of benefits towards all other stakeholders (workers, consumers) as well, reiterating his earlier proposal to come up with a series of measures.
Given that there is a new government and a new Minister of Finance, it would indeed be a good thing to produce a more comprehensive set of measures to put the economy back on a sound and sustainable track. In fact, measures adopted in isolation tend to have lopsided effects on the social and economic environment. A lot of resources are thus wasted to reverse the negative impact of one-sided approaches to development. We need to avoid this. Decades have passed since the last time the country adopted a set of mutually consistent economic and social policies which fall neatly into place and impart a sense of direction overall. It was a time when economic diversification was becoming entrenched, incomes were enhanced and better distributed across the board, employment was created to such an extent that there was barely any unemployment left in the economy, the institutional framework was being consolidated to better serve our social and economic pursuits, and we had our sights set on the next move to make. It is true that part of this success was due to favourable external factors, which are absent today. That kind of smart economic management did not last, unfortunately.
The country has however to be ready to take the plunge when the opportunities emerge again. It is possible to make all the stakeholders part of the game again in a spirit of sharing. There is no need to alienate anybody in order to get a new set of economic policies ready for the next round. Building up on consensus is more valid than personalising issues or putting one person against the other for short term political gains. For example, in the recent agreement reached in the conflict between the MSPA and the unions of the sugar industry, it costs nothing to give some of the credit for his conciliating attitude to Mr Jacques d’Unienville on the side of the MSPA while supporting the unions in their fight for better working conditions. A non-conflict situation will give us the serenity to look to new opportunities for all.
Consider in this context the IRS-induced FDI that has saved the economy from running into scarcity of foreign currency on the markets in the past few years. Our tendency to maintain a large excess of imports of goods and services beyond our capacity to export as much inevitably lands us into this kind of situation. The IRS capital inflows have thus come in handy. We are still getting FDI from this source which is supplementing foreign exchange earnings from other traditional areas of activity. We are thus keeping the foreign exchange market supplied. We have therefore managed to prevent running down the purchasing power of the rupee even more. We might have used the exceptional funds generated in this context to set aside a war chest with which to grow and diversify our economic space within and outside the country. This kind of development would have been of benefit to both the population and the private sector. It is still an option.
There is nothing unusual about in this sort of real estate activity. Other countries have been doing it as well. But the other countries have, under strategic advice from their permanent top teams, created sovereign country funds with the money so obtained to keep for a rainy day. Many of them have achieved a good dose of integration of those projects with the local population under well conceptualised plans making optimal use of natural and other resources. Some have internationalised themselves further so as not to miss out on the advantages conferred by globalisation. Their infrastructure has not become more stressed over time due to such newer developments. Those countries’ roadways and subways have in fact undergone improvements in anticipation of such developments, not after the event. Pollution has remained under control. The countries have vigorously pursued intense re-invention of education and training: few would be aware for example that Doha in the state of Qatar hosts some of the world’s most renowned learning institutions. All the things which hinge upon each other have gone together in those places. Countries like this have not allowed themselves to be overtaken by the developments, with a resulting mess.
Economic policy-making of the future will require a much larger amount of coordination and farsightedness. By so doing, we will avoid wasting precious resources. We need to identify that platform which will make various projects nicely fall into place with each other and with good timing. One-man shows will not be enough to ensure this kind of ambition to modernise and re-equip the production base of the economy. Well defined and coordinated strategies running smoothly into each other will make the real difference. The economic philosophy should not blindly embrace the invisible hand of the market; it should guide it in the right direction.