Interview: Rama Sithanen
‘There is no economic miracle. Look at the promises made by SAJ and Lutchmeenaraidoo on the second economic miracle. Nothing happened’
“The Government has aggravated the situation on many fronts. We have the ingredients for a toxic mix”
In what shape will the next government find the economy of Mauritius in 2020? How long will it take to re-engineer it back to safer grounds? And what will it take to achieve that objective? Rama Sithanen, former Minister of Finance, provides answers to these questions in this week’s interview. He says that, as things stand, most of our key economic fundamentals are in a parlous state, and the new government will have to thoroughly evaluate the state of the economy in a very objective and transparent manner with all the facts and figures available. “Of course we have a good idea of the economic mess we are in. We need to confirm the scale of the mess.” How long will it take to undo the mess? That will depend, he says on what happens to the global economy with the trade war between US and China, the Brexit fall out, the deceleration in China, the lower growth in Germany and the growing geo-political tensions, and, secondly, on “the appetite of any new government to take bold decisions and embrace structural reforms to reverse the economic decline and reignite the engines of growth and job creation”. Are we therefore in for harsh times ahead?
Mauritius Times: In the wake of the Minister of Finance’s last budget, the question that we should really be asking ourselves at this point in time, after almost four and a half years of the current government’s mandate, is in what shape the next government – whichever comes to power next time round – finds the economy of Mauritius in 2020. What’s your objective assessment as an economist?
Rama Sithanen: Let us look at the facts and figures in a dispassionate manner and consider what well-respected institutions such as the IMF, Moody’s, MCB focus, and independent economic observers are saying on both the macro economic fundamentals and the trends in the main sectors. And also what are revealed officially in the appendices to the Budget, by reports from the Ministry of Finance, Bank of Mauritius and Statistics Mauritius. The facts are facts even if some try desperately to twist and distort them in a political strategy of alternative facts and fake news. One cannot doctor the figures for a long time as the economic reality will catch up as it has happened before in Mauritius and is the case in some other countries.
An informed review of the state of the economy by the next government will reveal in sharp relief four major problems.
First, out of ten key economic fundamentals, only one is doing well, four are faring poorly and five are in a parlous state;
Second, three of the main pillars of the economy are in a precarious condition. Sugar, textiles and exports are in structural contraction. To make matters worse, tourism which is one of the few sectors that was performing well is in trouble with lower arrivals by air, falling receipts and lower spend per visitor. The global business sector is struggling to sustain its growth with multiple threats and varied challenges, the latest one being the likely denunciation of the double taxation treaty by Senegal. And the ICT’s growth has moderated considerably;
Third, there is hardly any new economic sector that has been developed to compensate for the decline in the old economy and the difficulties of the emerging cluster. This begs the question of where future growth will come from. We face considerable headwinds both in the diversification and the transformation of the economy. We are stuck in the middle income trap;
Fourth, the new government will have to unravel the many colourable devices and accounting tricks that have been used to hide the true scale of some of the economic plight we are mired in. Only then will the real size of the budget deficit and the public sector debt be revealed and it could be a brutal wake-up call for the country.
* How bad are the economic indicators in the three categories you mentioned?
Inflation is very low due to lower than expected growth in the global economy, contained energy costs and subdued commodity prices. However with the recent policy of the Bank of Mauritius to willingly depreciate the rupee, imported inflation will rise.
Employment creation is a major weakness. There is hardly any net job being generated. In fact, 1400 jobs were destroyed in 2018 while youth unemployment has risen to 25%. Economic growth is well below par at lower than 4% and will fall sharply to 3.5% next year. The budget deficit is much higher than the 3.2% of GDP shown by Government as many expenses are being deliberately left outside the Consolidated Funds. Government’s own figures show extra budgetary expenses of around Rs 10 bn in 2019-20 which represents 2% of GDP. And the balance of payments has started to show vulnerabilities with two consecutive quarters of deficit, which has not happened for a very long time.
The five indicators that are very worrying are the very low level of private sector investment at 13% of GDP, the dismal rate of savings at 9.1% of GDP, the huge public sector debt at over 70% of GDP when government guarantees and other contingencies are accounted for, the colossal deficit of the balance of trade at 25% of GDP and the dangerously rising deficit of the current account balance at 7.3% of GDP.
* The fact that the Government is having recourse to the financing of the budget deficit by the Bank of Mauritius does not paint a bright picture of the present economic situation. As a politician, you would therefore say that it’s not the best of times to take up the reins of government, right?
It is for the people to decide who should be the next government and the next Prime Minister.
And challenges however formidable must be met. All over the world politicians fight to win office irrespective of the state of the economy. On the contrary, the poor economic performance of Government will give a fillip to opposition parties as there could be a strong protest vote on the mismanagement of the economy.
The use of the special reserves sets a very dangerous precedent for both the independence of the Bank of Mauritius (BOM) and its capacity to discharge its statutory obligations for the conduct of monetary policy and open market operations, the smoothing out of the rupee and to deal with financial instability in case of a crisis. Let me state vigorously and categorically as a professional economist and a former Minister of Finance who has presented ten budgets that: first, the foreign exchange reserves of Rs 240 bn do not belong to the BOM as there are very high liabilities against these reserves. They cannot therefore be distributed by the BOM to Government.
Second, the general reserves which stood at Rs 2.69 bn in June 2018 is constituted of 15% of the annual profit of the BOM. The remaining 85% of the annual profit is distributed to Government. However as the BOM is losing money by its intervention to depreciate the rupee by furiously buying US$, there is no profit to transfer to the Consolidated Fund anymore. Third, the only reserve that Government can draw from is the Special Reserve Fund (SRF) which stood at Rs 13.5 bn in June 2018, and is made up of both realised and unrealised gains following changes in the value of the assets and the liabilities of the Central Bank.
In preparation for the heist by the Ministry of Finance, the BOM has raised the unrealised gains in the SRF at June 2019 by depreciating the rupee by 3% or Rs 1 against the US$. As the reserves are around Rs 240 bn or US$ 7 bn, the change is simply an additional unrealised gain of Rs 7 bn to bring the total in the SRF to around Rs 20 bn now from Rs 13.5 bn a year ago. Government will take Rs 18 bn from that fund to presumably prepay and pay some external debt. Clause 47 of the BOM prevents Government from transferring the accumulated reserves in the SRF which is earmarked principally for strengthening the capital of the Bank and in exceptional circumstances only can be used for monetary policy purposes.
The Minister of Finance is amending the BOM act to allow the use of the SRF for fiscal policy too. Put simply, it will finance the budget deficit. In fact the amendment being proposed is much broader than to repay external debt. It is for fiscal policy which means for deficit financing. This is unprecedented in our economic history.
* Your own snapshot of different sectors of the economy, as published by l’express, shows lots of dark clouds hovering over almost the whole range of economic activities – whether it’s sugar or non-sugar agriculture, manufacturing, textile and clothing, ICT, global business, tourism, SMEs… Construction is doing well, but it “would peter out” within the next two years, you wrote. You mentioned the word “crisis” only in relation to the sugar sector. Does that mean we have not reached crisis point as regards the economy as a whole?
As I mentioned for the ten key macroeconomic indicators, there are different degrees of underperformance. The massive deficit of the balance of trade and the rising deficit of the current account are very worrisome in view of their significance for our economy. It signifies that we are consuming way above what we are earning from the rest of the world. This overconsumption is being financed by huge capital inflows from the global business sector. If there is a problem in that sector, there will be a massive deficit in the balance of payments.
The same analysis applies for the different sectors of the economy. Sugar is in deep crisis for a long time with a huge decline in world prices, rising costs and falling production. Non-sugar agriculture has hardly improved and the level of food security remains low. Textiles and clothing have been in deep trouble for the last five years. The export sector besides fish is underperforming significantly for a long time. SMEs and the domestic oriented industries continue to face structural challenges to access finance, markets and technology while confronting declining tariffs and unfair trade practices.
The fall in tourism while worrying is very recent since the beginning of 2019. ICT is holding up but at a lower growth rate than the 10% we have witnessed in earlier years. And there are dark clouds hovering over the global business industry with the changes to the India treaty and the new regulatory and tax landscape being imposed by the OECD and the EU. Construction is highly cyclical as it is driven by the major infrastructure programme of Government. Once these huge projects are completed, construction will hardly grow statistically unless the private sector takes on where Government would have left.
If we do not reverse the declining trend in these key sectors, it will affect the overall performance of the country. Economic growth next year is likely to be much lower at 3.5% precisely because sectors like tourism, sugar and textiles will not do well while global business will have lower expansion. And there are no new drivers of growth to compensate for slack and decline elsewhere in the economy.
* But, to be fair, Mr Sithanen, the rot could not have settled in just within the last four years or so. It must have been a long time coming — a slow and certain decline taking root during the last 10 years or more –, for want of bold and corrective measures to set the economy on a more solid footing, isn’t it?
Undoubtedly, there are deep structural problems that are preventing the economy to grow at a much faster rate to reach the high income status. There are bold policy decisions that must be made to diversify and transform the economy and put it on a robust, sustainable and inclusive trajectory. There has been policy paralysis and policy deferral on many of these key reforms.
Let me give one example. One of the most important policy choices is how to deal with the ageing population. Our country will experience a very sharp decline of close to 40% in its population by the end of the century and it will also age significantly. Such decline and ageing demographic has deep economic, financial, budgetary and societal implications. It is blindingly obvious that the current situation is unsustainable as we are placing a very heavy burden on our children and grandchildren. We all know the problems and Government knows the solutions. Yet nothing is being done. On the contrary the Government has simply worsened the predicament. It is a time bomb that is ticking away.
I must hasten to add that the current government has aggravated the situation on many fronts. Public sector debt has risen sharply over the last four and a half years by close to Rs 100 bn and the real budget deficit is very high. The trade and the current account deficits have widened significantly since 2015 while private sector investment is much lower as a share of GDP. We have the ingredients for a toxic mix.
* Why has Government not done enough to control the budget deficit and the public debt?
There has been no fiscal consolidation at all. Recurrent expenditures have grown very fast while revenue has not followed suit. Worse, Government has deteriorated the fiscal situation with the creation of so many fiscal niches that hardly produce economic benefits. Let me give three concrete examples to show how Government has been very lax on fiscal prudence and consolidation besides its propensity to raise recurrent expenditures substantially since taking office.
First, there was absolutely no reason for Government to remove ALL taxes on large land development. There was a balance between the Government and the very large corporates in terms of tax benefits. Some were removed while some were kept. Now this has been tilted completely in favour of 5 to 6 very large land owners only. And Government has lost billions of rupees of revenue in the process. It is a transfer from the population to a handful of developers. And worse, such fiscal giveaways are provided even when the development has not started. They simply create Special Purpose Vehicles to transfer the land and obtain the tax concessions. This happens while a small planter or a small land owner who wants to convert his land has to pay land transfer and land conversion taxes! It is extremely unfair. While I support the development of the private sector, I am against such fiscal generosity, if not, profligacy, that is totally lopsided and benefits extremely few corporates.
Second, why should a small entrepreneur who is struggling to make ends meet pay 15% corporate tax while a very large enterprise that exports textiles and apparel pays only 3% tax on its profit? If profits are made, they should pay the same tax as other companies. Inspite of this generosity, exports continue its structural decline. Such fiscal recklessness is unwarranted.
Third, can someone explain to me why there is 15% VAT on many goods and services that are consumed by ordinary people while there are zero VAT provisions for specific services that benefit four promoters only in the recreational space? Worse, instead of being VAT exempt, they are given a zero-rated VAT status so that they can claim many refunds.
Why does the Minister of Finance spend his time to erode the fiscal base of the country instead of consolidating it? At a time when expenditures are rising much faster than government revenue and there is no growth dividends for the exchequer. In the process he is distorting and complexifying the tax regime.
* How long would you say will it take to re-engineer the economy back to safer grounds such that we are able to create jobs and improve the daily living of one and all – not just for the few only? The next one or two mandates?
Let us be honest. I would be lying if I were to tell you that the next government will have an easy task. There is no magical wand. On the contrary, it would be difficult and it could create many challenges for the new team. I was discussing with a distinguished economist from abroad about our economic predicament and he told me that he feels very sorry for those who will inherit the legacy left by this government. And he did not understand why there is such a craze to gain power in such conditions. He obviously does not understand how politics work!
The new government will have to thoroughly evaluate the state of the economy in a very objective and transparent manner with all the facts and figures available. Of course we have a good idea of the economic mess we are in. We need to confirm the scale of the mess. Then the Government will have to produce a roadmap of policies, programmes and structural reforms to restore confidence, reignite the engines of growth, overcome binding constraints and identify new pillars of development that will deliver shared and durable growth.
* Does that mean, Mr Sithanen, that we should brace up for harsh times during the next two to four years and that we’ll only be out of the woods as from 2024-2025 or even further down the line?
Not necessarily. How long it will take our country to reverse the declining trend depends on two important factors. For the moment we are stuck in the middle income trap and we are going further into it. First, what happens to the global economy with the trade war between US and China, the Brexit fall out, the deceleration in China, the lower growth in Germany and the growing geo-political tensions? Some economists are predicting another recession worse than the one we had in 2008. I hope they are wrong and policy makers across the rich industrial world will align their fiscal and monetary agenda to avoid such a recession. If global output, trade and investment were to fall, this would affect our country that relies heavily on the external economy.
Second would be the appetite of any new government to take bold decisions and embrace structural reforms to reverse the economic decline and reignite the engines of growth and job creation. Let us be honest. One does not undo many years of policy paralysis and absence of structural reforms in one or two years. Unfortunately there is no economic miracle. Look at the promises made by Sir Anerood Jugnauth and Vishnu Lutchmeenaraidoo on the second economic miracle. Nothing happened. Worse, we have regressed on the economic front. Not a single of their seven objectives has been fulfilled. For instance, instead of manufacturing rising from 18% of GDP in 2014 to 25% in 2018, it has shrunk dramatically to 12% today!
* The Labour Party’s alliance with the MMM in 2014 nullified each of the two parties’ electoral clout and they both lost to a heteroclite alliance. How can it convince the electorate that it has the team, the leadership and the commitment to do better next time round if it’s voted to power?
The next Government will have a daunting task to accomplish. Leadership, commitment, resilience and determination will be extremely important. Equally key will be policies, innovative and disruptive ideas and the quality, competence and cohesion of the team to implement them. Economic decision making has become much more complicated and complex with the risks, uncertainty and volatility across the world and the rise of populism.
The Labour Party has been following the economy and it has a team that is constantly evaluating the predicament and considering policy options both at the macroeconomic level and in each key sectors of the economy. And of course there is work also on major themes such as education and training, health, infrastructure, sports, sustainable development, social policies for inclusion and sharing, amongst others. These will form part of its electoral manifesto in due course. It will have to fine tune its findings and conclusions once it has all the facts and figures, especially those that are being doctored to show a better picture.
The party is also bringing in talents, competence, dynamism, freshness and enthusiasm with many young and new people that it will blend with those that have experience, expertise and practical knowledge of how to govern the country. The leader of the Labour Party has announced that there will be many young and new candidates and also a significant place for women both as Mps and as Ministers. The party will federate the nation to accomplish the task.
* The word is out that the present Government will go the whole hog to win the next elections at all costs, suggesting that it would spare no efforts in terms of goodies and mud-slinging campaigns to obtain its re-election. The opposition may not have as much to offer except for promises of goodies to come, and we do know about their share of mud that they might use… Are you worried for what promises to be one of those very lousy electoral campaigns?
Make no mistake. Pravind Jugnauth will be a formidable challenge to the Labour Party. He has tried to appeal to many groups and sub groups of the electorate with some of his targeted policies and measures. He has the advantage of incumbency in terms of controlling the State apparatus and its propaganda machine through the MBC-TV. Both will be abused beyond reasonable limits. He has large financial means at his disposal to contest the elections. He is trying to improve his personal image.
And he will probably do four things. First, he will leverage extensively on some of the social policies that he has implemented such as higher old age pension, minimum wage, the negative income tax and free tertiary education to some new students. Essentially to try compensate for the poor economic performance of his government. Second, he will surely transform his party significantly with new faces and talents as many in his existing team are a liability to his electoral chances. Freshness sometimes gets the electorate to forget the blunders of those who have been purged. Third, he will attack the leader of the Labour Party in a very vicious and aggressive manner and will try to presidentialise the contest. We had a sample in the National Assembly with the speech of SAJ on the budget. It will be one of the worst electoral campaigns in terms of hitting below the belt. And, fourth, he could go for populist measures to try to win over some specific groups of the electorate.
But there are many countervailing factors against Pravind Jugnauth. The economy is in dire strait. The key sectors such as sugar, textiles and tourism are either in a parlous or a bad condition. It’s the famous economy, stupid! Fraud, corruption, nepotism have expanded significantly. Institutions have been politicised and have lost their independence, impartiality and credibility. Public entities such as Air Mauritius and SBM that used to be the pride of the country are going to the dogs through sheer incompetence and interference.
The social media will this time play against him because of the looming discontent. And the government has alienated some groups which are crucial in many constituencies. A party must be a broad church and a large tent to win elections in the 20 constituencies of Mauritius. The likes of Soodhun and Gayan ought to know this.
* Published in print edition on 28 June 2019