Navigating on waves of uncertainty


Budget 2012 was read against a background of uncertainty. On the one hand, there is no visibility as to when the traditional markets on which we depend for our exports will actually turn around.

Till then, we are not quite certain as to how much our exports and tourism will be affected. It would appear that, in its growth forecast, the budget assumed that exports will remain more or less at the same level in 2012 as in the preceding year. Even though there is always a possibility for exports to do better, it is safer to err on the conservative side and not pin too many hopes on the unsteady condition prevailing in those markets. Things might even get out of hands if international economic conditions were to deteriorate.

On the other hand, the SME sector has been accounting for over half of total employment in Mauritius during past years. SMEs also generate more than a third of GDP. Lately, they have been giving signs of having reached a plateau both in terms of employment generation and contribution to GDP. The activity of SMEs is like the equivalent of the internal market in other bigger countries; this means that when external markets are not up to the mark – which is the case at present – you lean on the internal market, of which SMEs are a big part, to sustain growth. This explains the emphasis being placed in the 2012 budget on this sector of activity.

The budget has gone in the direction of putting new emphasis on the growth of this type of activity. It aims to beef up the sector by reducing its cost of finance and improving its access to funding. Other than the DBM which is becoming the bank of the SMEs, the government has, with the collaboration of the Bank of Mauritius and commercial banks put in place a total loan facility of Rs 3 billion from banks over the next three years in favour of the SME sector. The interest rate for such loans has been negotiated down to 8.5% pa from the prevailing prohibitive rate of 14%. Numerous charges usually levied by banks have been negotiated away to keep down those invisible costs.

The government’s Equity Fund will provide a guarantee cover of 35% of every loan and overdraft availed of by SMEs under this deal. Banks will have the right to offset any write-offs of SME loans from their tax dues, without having to qualify for the write-off after instituting court cases to recover the same as it is the case usually. The government will also be providing subsidized additional units of industrial space to operators in the sector to make for their expansion.

However, there are limits on the extent to which SMEs can effectively contribute to growth and employment without the support of growing auxiliary lines of other businesses.

With uncertainty surrounding the pace at which FDI will flow in during the coming year and hence affect sectors like construction, transport, etc., it is the scale of government expenditure on infrastructure building that is expected to pick up the slack in GDP growth in view of anticipated slowing down of world economic growth. Government has set aside a sum of Rs 7.5 billion called the National Resilience Fund to support corporate restructuring and promoting developmental activities of enterprises. In addition, it is intending to spend Rs 21.5 billion on the implementation of infrastructure projects in the course of the next year. The substantial capital expenditure to be incurred thus in the next year, together with its multiplier effect on incomes, should by itself contribute vastly to pulling up the rate of economic growth of next year to around 3%. In other words, government spending is going to be the major driver of growth in the next year, given the scale of spending on public capital projects.

There is nothing highly imaginative about engineering economic growth by having recourse to such expenditure. The fact is that, in the absence of structures that would have made the economy resilient on its own if it had a developed a broader base of production in past years, it is normal for the government to inject expenditures of the sort to keep up economic activity. Of course, there are limits to this kind of action insofar as there are limits to the amount of debt governments can go on raising to fund expenditures in excess of the revenues they are able to raise. When reasonable parameters are exceeded in this respect, you have cases like the current Greek and Italian debt crises. This means that while you can hold out in the short term by having recourse to substantial public expenditures, the long run will still require a solid re-engineering of the economy’s base of production and its external market outreach, for things not to get into serious imbalance at some time or other.

This is where, we believe, the government is looking out for more and reliable outposts for sustaining economic growth. If we do manage to link up successfully with the new regional and non-regional centres currently experiencing growth as well as having a potential for future growth, we will have set down a reliable foundation for the future, something that has been eluding us unfortunately for a long number of years. To become a regional hub in the diverse areas as enunciated in the budget requires a good amount of prior groundwork. You have to have an established record as a first mover of change in those businesses you want to attract to your shores, at least on a regional basis. In other words, Mauritius has to carve for itself a more favourable position than any other location in our part of the world for investors to really gravitate around us. We have a number of ‘acquis’ in this respect such as a reputation for good governance, rule-of-law, business-friendliness and high regard for regulation, etc., but these things have to be publicly manifested from time to time to draw attention to your good credentials.

It is fair enough to throw up a few good things left and right so as to keep up support and project a socialist image, on the one side, while yielding to pressures for reversing less than one-year-old measures like the capital gains tax and tax on dividends, on the other, if only to get tensions out. One would have rather wished that it would have been far better, in terms of the old cliché, “to teach the man how to fish instead of giving him a fish from time to time”. It would also have been consistent with past practices in matters of taxation by not making fiscality look like something that can be toyed with at will. In terms of fiscal inflexibility, it may be recalled that, unlike the unexplained relinquishment of the tax on capital gains and on dividends from one budget to the next, there was no going back on the NRPT and similar taxes until after the change of government took place.

A budget is important if it sets out clear direction about what policy is going to be like. This year’s budget does not break from the general tendency of the government to support growth. Does it go deep enough to indicate future avenues that will be groomed up to help the economy fight its way out in the prevailing difficult international environment? One is not quite sure about this. It does tackle the immediate fears arising from the prevailing economic uncertainty by employing a reserve of instruments to create hope about some amount of inclusiveness on the way forward. It does not go the further step to show that it has identified with sufficient vision and clarity the lines of production Mauritius will sit upon in the time to come. It would serve a useful purpose to formulate through general discussion or otherwise the actions we need to prioritize to give better depth to our economic pursuits of the future.

* Published in print edition on 11 November 2011

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