Krishna Bhardwaj

The Economy: Whither Bound? 

— Krishna Bhardwaj 

During the crunch of the international economic crisis which began in America in 2007, several self-proclaimed pundits appeared on stage here to claim that the economic reform measures our decision-makers would have adopted at that time, with some sort of prescience about the crisis, it appears, had insulated us from the gales of the storm that hit those less well-managed developed economies. We were therefore putting ourselves into a category of star performer. It was however sufficient for the Euro Zone markets, on which we depend extensively, to go into a downturn some months later for us to realize that we continue to remain vulnerable much the same. As the Euro dropped sharply against the US dollar in this context, our exporters rushed to the authorities, asking for a depreciation of the rupee for them to be able to survive. This shows that we are still navigating in low depths and risk facing the same shoals of uncertainty to which we were vulnerable in the past.

This doesn’t mean that work has not been done. The process of business facilitation (such as the issue of Development Certificates and EPZ certificates back in the 1990s) which was begun decades ago was continued. Direct and indirect taxes, which started being rationalised in the 1980s, were streamlined further. They sent the correct signals that the authorities were not bent on increasing the incidence of taxation in general, especially to businesses and international investors in real estates in Mauritius. The latter were assured in 2005 that schemes like the IRS which began in 2003, would not be subjected to adverse taxation despite the change of government. Foreign investments in real estate thus continued to bring in foreign exchange into the domestic economy in ever increasing amounts. However, the government had to recoup from other sources its reduced incomes due to its having lowered, for instance, the corporate tax rate to 15%. It maintained therefore the Value Added Tax at 15%; it introduced new taxes like the NRPT and tax on bank interest earnings while withdrawing tax exemption thresholds that were previously applicable to small producers as a way of ensuring their economic viability. The effect of the shift in the tax effort from the better endowed towards those who were at the bottom of or climbing up the social ladder had the effect of considerably improving government finances. The budget deficit which stood at around 5% in 2005 was down to around 3% by 2009.

However, the recent events associated with the European downturn have raised question marks about the lack of adequate orientation given to the economy for it to be in a position to withstand adverse situations arising from its pre-existing insufficient market and product diversification. Not only was this sort of needed structural transformation of the economy not undertaken. The accumulated infrastructure problems started being attended to only at the last minute and one is not quite sure whether the projects being initiated in this regard apprehend a fully orderly national plan for the future, capable of addressing effectively the potential bottlenecks that will otherwise necessarily spike up for years in this area. The enormous wastes that are regularly being brought to public notice in the matter of public spending in the reports of the Director of Audit reinforce the feeling that there would be no real strategic Master Plan behind a number of the expenditure items chalked out for financing in the budgets. Quality control may be absent in several projects undertaken so that unnecessary duplication of costs cannot be ruled out altogether.

At this stage, the economy will need a massive overhaul and re-orientation instead of the routine tinkering at the edges which it has been the custom to do from budget to budget over the past several years. Grand policy orientations would now do more good and build substance: for instance, the Rs 10 billion that were voted up last week in the Assembly in respect of cost overruns from the previous budget would have served a better purpose if they had been directed to meet specific targets towards increasing our production potential. As the examples of the Mediterranean European countries has shown, it is all too easy for politicians to assume that Rs 10 billion are not much; in fact, they are. Spending public funds wisely is not a common occurrence in our midst. One of our important management failures in the public sector has been the lack of integrated spending covering various interlocking projects whose overall impact is to minimise total costs incurred by avoiding duplication of overlaps. In contrast, jumping the guns has important unnecessary cost implications in the alternative model of ad hocism. We need to stop from time to time and take a full view of the macro-perspective.

Consider how we have been managing at the broader level so far.

Mauritius is heavily dependent on external trade; this means our exports and imports should tend to balance each other out for long term equilibrium. What do we see in fact? In 2000, our imports amounted to Rs 55 billion and exports to Rs 41 billion, i.e., our exports covered 75% of our import costs. In 2009, imports amounted to Rs 118 billion and exports to Rs 62 billion; in other words, exports covered barely 53% of our import bill (down from 75% in 2000). As a result of this trend deterioration, we have been incurring trade deficits from year to year in ever increasing amounts. It means we have not been making sufficient efforts to increase our exports. To plug the gap between exports and imports, we usually derive incomes from the net sales of services (e.g. tourism) abroad and from our foreign investment earnings. Normally, these incomes when netted against the trade deficit, amount roughly to what is called the current account of the country’s balance of payments. If at the level of the current account, the balance remains positive, we can still carry on despite the trade deficits. But recent events, such as low returns on overseas investments from our foreign exchange reserves due to prevailing very low international interest rates, have shown that we remain highly vulnerable externally. Our balance of payments thus swung into deficit as from 2004.

Fortunately for us, the fundamental shortfall of foreign exchange that the adverse balance of payments would have thrown up was mitigated for by inflows of foreign exchange through the sale mostly of real estate to foreigners in the context of the IRS project that was launched in 2003. Thus, out of the record Rs 11.5 billion of FDI which came into the country in 2007, some Rs 7 billion was in respect of IRS, accommodation and food service activities; in 2008 and 2009, the same sources contributed Rs 5.8 billion and Rs 6.2 billion out of total FDI inflows of Rs 11.4 billion and Rs 8.8 billion, respectively, to soften the adverse impact of our excessive spending on imports in relation to our exports. We are informed that so far investment by the Indians in the Bramwell Hospital has brought in FDI of approximately Rs 3 billion this year.

The question is whether we should not take action to redress the structural trade imbalance arising from continuous excess of imports over exports even if the FDI inflows have successfully shored us up on the front of foreign exchange availability on the local market. Many economists believe that we should since long have taken action to boost and diversify our exports instead of depending on the FDI which can be quite erratic at times, especially if the economic crunch bites harder the developed countries from which most of our IRS FDI has actually come. If we were to assume that FDI from this source was to come down sharply in future, then we would not have enough foreign exchange to foot our ever increasing import bills. The consequence of such a situation would be to drive down the exchange rate of the rupee which, in turn, will add to domestic inflation through higher import prices.

There is nothing wrong with increasing values of imports if they help us fetch additional export earnings. Do they? The dwindling figures of our exports over the years suggest that they don’t. Are we importing then so as to be able to better export even more services? We are not quite sure that we have been doing well enough for the external services, though one has to credit sectors like the BPO which have been doing relatively well despite the economic crisis. But sectors like this depend on a reasonably well educated local personnel of international stature, something that we will surely miss out on if we keep putting emphasis on the teaching of local languages in our schools instead of focussing full steam to get on to the currently much abhorred elite that should enable us to better penetrate difficult external markets. Internet costs will also need to be competitively aligned in this broader context. All of these go together, for which policies need to be made instead of looking after the profits of quasi-monopolies which thwart progress.

A lot of interdependency exists among the options we can exercise. What we do or do not do today will affect our economic outcomes of tomorrow. We cannot go on experimenting amateurishly when existing structural problems have been beckoning us to take action for years now. A comprehensive strategy is needed if we want to keep most of the cards in our hands. This is where we have failed. If we under-manage, we will be held up addressing short term issues like over-indebtedness, foreign exchange shortfalls leading to external borrowings, rising inflation and falling levels of economic activity. The time has come to concentrate upon how to move the whole economic machinery together towards a realisable future goal of substance. It will require policy-making that will deal effectively with the structural problem facing us since some years while opening up new horizons for growth at the same time. 

Krishna Bhardwaj

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