Last year’s budget of the government introduced, amongst others, taxes on dividends and capital gains. These measures appear not to have been well digested by the richer classes of the country. Protests have abounded from the more vocal groups; they have become more strident after the split of the government as well as with the approaching 4th November when the new budget measures will be announced. There was not a murmur of protest by the same people when the previous government had introduced amongst others the NRPT, tax on interest earning on bank deposits and taxation of lump sums payable to retiring officers, all of which hit hard the lower and middle classes, with an attendant threat that the VAT rate would have to be increased short of all these new measures. Current protests have given as example the current slow pace of growth of the economy which is being seen by the protestors to mirror the lack of appetite on the part of the private sector to undertake more investment in view of allegedly adverse tax policies. As far as facts are concerned, the private sector did not have to wait for the budget measures of last year for its investment decisions: in 2010, there was no increase in its investment; in 2011, it is estimated that its investment will grow by a paltry amount of 0.6% over 2010. It is the public sector that has currently been driving growth of investment with plus 12.9% in 2011 as can be seen from the diverse infrastructure projects being financed out of public funds. GDP grew by 3.1% and 4.3% in 2009 and 2010 and is expected to grow by around 4% this year. The relatively low recent growth rates for an economy that has averaged 5.5% per annum in past decades show that it is conjunctural factors rather than the different tax regimes over this period that are the cause of the current economic slack.
The IMF has forecast the average rate of growth of GDP in Sub-Saharan Africa, of which we are part, at 5.8% for 2011. Our 4% compares poorly with the spurt in growth being realised even in this acknowledged poorer part of the world, let alone countries like China and India which are growing at 10.6% and 8% respectively. The reason for our weaker performance is due to the absence of “connection” with those areas of the world where greater growth is taking place. We keep “connecting” almost exclusively to places like America (+1.8% in 2011) and the Euro Area (+1.1% in 2011) instead. We have chosen to remain a prisoner of our existing markets and established lines of production instead of venturing out into newer markets and products when the time was ripe for so doing. It is the lack of agility of our entrepreneurs that has kept us stalling for growth, not the tax regime. It is a problem of business leadership. But leadership of any kind appears to be the scarcest commodity in Mauritius these days.
It is far from clear therefore that if the new Minister of Finance eliminated the grudged taxes on dividends and capital gains on November 4th, there would be a spurt of economic growth in Mauritius. Not really. If we wanted more production, it is the base of production that we should be looking at. If we wanted more employment, it is the skill resources that we can put into production that we should be looking at. We would therefore be targeting the production of more and better goods for which there is demand by a skilful combination of an enhanced base of production allied with the best skills we can put into their production. Price is an important factor to arouse demand for whatever we might produce for our own market and for global markets. So, we have to be cost-effective. This means enterprises should have been reinventing themselves to be able to meet demand for our goods and services competitively. This is called improvement of productivity for capturing markets. We are behind schedule in this respect.
Another complaint of the private sector protestors is directed against the central bank’s exchange rate policy. Here, it is presumed that it is the central bank that would be holding back the rupee from depreciating; the central bank has disagreed with this view of things. Had it allowed the rupee to depreciate, it is argued, our exporters of goods and services would have thrived. In other words, our GDP would have grown by much more. Can this argument be sustained? It is not evident that such would be the case when you are remaining far too dependent on faltering external markets beset by their own internal problems and where demand has a tendency to shrink rather than to jump up. How can they pick you up when they are themselves swimming into great uncertainties about themselves? Our policy should have been not to put all our eggs in one basket. We have not done so. There was no vision. If Sub-Saharan Africa has been growing by far more than ourselves, even if that growth is largely driven by demand for materials over there and which we don’t have, we should have gone out to do more business in association with them somehow. We have not done it. How then do we put the blame squarely on the exchange rate of the rupee?
In the past, financial institutions of the country whose business interests are closely linked with those of the larger exporters, have manipulated the rupee’s exchange rate to give exporters an edge over everybody else. Frequent shortages of foreign exchange on the market were created by players having concentration of economic power in their hands; the shortages were used to propel the rupee down continuously. Between 1995 and 2000, the rupee was thus depreciated by 47.5% against the US dollar; from 2000 to 2005, the rupee was again depreciated by another 11.3% against the dollar; from 2005 to 2009, the rupee went down by a further 11.7% against the dollar. Such was the accelerated depreciation of the rupee that it lost 83.4% of its value during this period, moving from Rs 17.80 to the dollar in 1995 to Rs 32.64 in 2009. Obviously, households have been footing this huge bill by way of erosion of their purchasing power. We are thus back to square one in 2011 with exporters needing further breathing space by way of further depreciation of the rupee. The advocates of currency depreciation are claiming that the Minister should prevent the central bank from exercising its diligent oversight of potential foreign exchange market manipulation so that the abuse can continue. Is there an end in sight for this game and does it still carry credibility?
In keeping with the ritual, lobbies of operators are doing what they can to bring the clock back so that selective policies are adopted, depending on the manner in which the argument is presented on each occasion. Governments know that there is a trade-off between the interests of the rich and that of society at large. They also know that even if they have to tilt the balance to one side on occasion, they need not rub the salt into the wound. For having transferred an excessive share of income in favour of the rich in past decades, America is currently considering introducing the Buffet tax on the rich through taxes on capital gains and dividends so as to ensure that the billionaire Warren Buffet and similar well-endowed persons do not end up paying a lower average tax rate than Mr Buffet’s secretary (as it is currently the case). In America and in Europe, there are large-hearted enough rich persons like Warren Buffet who have volunteered to contribute more taxes so as to bear their share of the burden. We should take example from such leads in other countries rather than be seen to be maintaining the litany of complaints for the well off to squeeze out as much as possible and get away once again, leaving the others to bear the burden alone.
* Published in print edition on 30 September 2011