The Opposition has approached the coming budget from two angles. The first such approach comes from former Minister Vishnu Lutchmeenaraidoo, now Chairman of the MMM opposition Economic Commission. It may be recalled that at one time during the preceding mandate of the government, he had recommended that, in view of the miserly rate of interest we are earning on our foreign exchange reserves (a quarter to half a per cent per annum) denominated in the currencies of the major advanced western economies, we should divest part of it for investment instead in gold. At the time he had made this recommendation, an ounce of gold was worth about $700. Because of the continuing lack of confidence in the pick-up of western economies, investors have continued to seek refuge in investments in gold. As a result, the price of gold has shot up and is close to $1400 an ounce at present. This advice was not considered a valid one at that time. Rama Sithanen was Minister of Finance then. Consequently, no significant investment was made in gold to re-equilibrate our foreign exchange reserves portfolio. Vishnu Lutchmeenaraidoo has calculated that failure to take the action he had recommended has resulted in a manque à gagner of Rs 35 billion between then and now solely on account of the non-invested amount in gold. Had this decision been implemented as he had recommended, this windfall gain of Rs. 35 billion to the Exchequer would have helped to carry out a lot of the infrastructure projects on hand, leaving a surplus of about Rs 12 billion with which to alleviate poverty and reduce the budget deficit as a ratio of GDP from its current level of around 4.5%. Moreover, this gain-in-value in our reserves under the shift-to-gold policy would have excused the introduction of any tough fiscal measures after those of the preceding years.
The second approach comes from MMM deputy KC Li Kwong Wing. His view is that because of the heavy taxation that had marked the tenure of Rama Sithanen, a good amount of budget funds were diverted into various special funds. In his view, these funds must be lying around unutilised and hence are available for allocation to normal heads of budget expenditures. In other words, should all those special funds be simply scrapped, adequate budget resources would be available to the new Minister of Finance for him not only to meet substantial earmarked current expenditures on infrastructure. According to KC Li Kwong Wing, there will also be sufficient “fiscal space” to make good electoral promises, including the scrapping of the NRPT and tax on interest earned on financial savings and restoring certain exemptions, such as exemption from tax on the first 60 tonnes of sugar produced by small planters.
KC Li Kwong Wing’s approach recommends that the new Minister should not be tempted to go back on the government’s given word to voters on the grounds that the scope for fiscal manoeuvring is limited due to worsening international economic conditions and their adverse impact on fiscal revenues. The assumption under this approach is that, even if those taxes were abolished as promised during the electoral campaign, the government would not find it difficult not to impose additional burdens on taxpayers. It would even appear that it would still leave enough scope for government to manoeuvre without having to tighten fiscal policy even if, as KC Li Kwong Wing suggests, fiscal policy should concentrate on incentivising the growth of SMEs, which should be spearheading additional growth and employment despite the prevailing difficult external market conditions. There are some merits in the two proposals from the opposition but one need not endorse them all the way.
The new Minister has, on his part, stated that he is actively considering a hundred new proposals proposed by diverse stakeholders in the context of the forthcoming budget. These will apparently define the profile of budget policies that will be ultimately adopted. In the past, he has not denied that certain promises will be kept, those having been made to tilt the fiscal burden towards achieving a more balanced social distribution of the pains of adjustment. He has in the meantime set on foot an Economic Restructuring and Competitiveness Programme (ERCP) the aim of which is to restructure enterprises and make them viable to face an uncertain future in view of prevailing difficult external market conditions. Some Rs 12 billion are expected to be dished out by the public and private sectors in the implementation of this program.
The Minister has emphasized that there are real uncertainties as to whether the slow international recovery will not be derailed by extremely conservative fiscal policies being adopted by developed countries, which are also our major export markets. In his opinion, such a situation will prove onerous to Mauritius, especially if our export markets were to bump along low or even negative growth rates for a foreseeable number of years in the near term. He has also stated that there are very small leftovers in the various special funds that were constituted by Rama Sithanen where they have not been committed already under those items and are, hence, unavailable to compensate for revenues the Exchequer will be losing under the new circumstances.
Vishnu Lutchmeenaraidoo may be right about the scope we had to enhance our earnings by investing part of our reserves in gold instead of continuing to place all our eggs in a basket of extremely low-yielding foreign currencies. However, it is important to bear in mind that we would have realised something like the amount of gains he has mentioned from investing in gold only after taking a decision at some stage to sell off the gold so acquired at a price higher than what we purchased it for. At that point in time, you are back to square one holding low yielding currencies in your hand. This is what happens whenever you undertake speculative trades: you have to unwind your position if you want to encash the gains from an asset appreciation. In concrete terms, however, you would not be worse off than where you started from as you end up holding the same currencies which you were holding before. In the meantime, you have made a massive real gain which you can employ to your benefit. Normally, governments and central banks do not go for speculative investments but one may have to consider the issue more seriously when market forces indicate a clear one-sided outcome in your favour with hardly any risk of loss. In any event, it is an opportunity foregone which many sovereign funds would not have overlooked.
We are now in the situation where a clever marrying of the options proposed by KC Li Kwong Wing and the harsh realities facing the Minister will have to be merged in the shape of the realistic new budget policies that will eventually be adopted. A responsible government cannot take undue risks to jeopardise our chance of turning the situation around in our favour, thus saving thousands of jobs and bringing to life new maybe smaller enterprises that can hold on to massive external shocks better than the classical large enterprises which have been seeing their export markets shrink on account of the international economic crisis from which the world has not yet emerged.
That may even require the postponement of certain expected favourable budget decisions until the framework of production has been properly tuned. The international economic crisis is still stalking unpredictably around. Tuning the production framework to get the economy to respond effectively to this internationally bleak condition should be our priority rather than welfare give-aways. We guess that it is options of this sort that must be currently available to the new Minister of Finance, short of throwing the budget balance into unmanageable directions. Governments in France, the UK, Greece, etc., whose deficits have crossed the 10% GDP limit are busy tightening the screws in order not to throw their economies out of kilter altogether.
We are not saying that the government should go as far as they have gone slashing expenditures but there is surely a middle-of-the-road option to consider. It is during economic upturns that governments have enough leeway to pander to the expectations of voters. We are not in an economic upturn. In downturns, they have to manage expectations while addressing firmly the needed restructuring that should regenerate the long-neglected springs of the economic apparatus. It is unfortunate that Pravind Jugnauth should be faced with this dilemma for his very first budget but facts needing urgent attention can be extremely stubborn at times and they have to be reckoned with. No unnecessary digression into volatile subjects is warranted at this stage; the budget needs focussed attention and serious prioritizing at this moment.
* Published in print edition on 22 October 2010