‘Minister Padayachy has relied too much on ‘Old Normal’ remedies to cure the ailment of the ‘New Normal’ world’

Interview – Rama Sithanen

* ‘All the key macroeconomic fundamentals are in the red. This is why the Minister chose not to speak about them’

* ‘There are no 25 solutions to the problem of Air Mauritius. Its main shareholder must inject funds to revive the company

* ‘The country needs a balanced approach to create wealth and economic growth and generate sustainable jobs. The Minister’s strategy is too lopsided’

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Former Minister of Finance Rama Sithanen, noting that all the key macroeconomic fundamentals are in the red, is unsparing in his dissection of the budget presented by Minister Padayachy. In his opinion, there are more ‘unachievables’ (targets) than deliverables, based on the record post last year’s budget. He would have liked to see more disruptive and innovative policies so as to stimulate private sector investment, restore the export of goods and services amongst suggestions he makes to turn around our parlous financial situation and revamp the economy.

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Mauritius Times: In your various media statements with regard to Minister Renganaden Padayachy’s second Budget, you have drawn attention to his projected growth rate of 9% for the year 2021-2022 which many say is unattainable. Are you suggesting that the Minister would have misled the people?

Rama Sithanen: However you call it, there will not be a 9% growth even with a technical rebound. And the Minister should surely know it. Two things strike an alert observer about this budget. First, what he has omitted is much more important than what he has disclosed. There’s nothing on the crucial indicator of the export of goods and services and a lot on the names of towns, villages and even a few streets. Second, what he has hidden is more pertinent than what he has revealed. Again, nothing on the staggering level of unemployment at over 100,000 persons and yet he spoke about the construction of 5 petanque courts.

Let us look at the facts and figures objectively. In his budget last year, the Minister stated in his three-year macro-economic framework that growth would be 4.5% in 2021/22. Now he raises the same growth forecast for 2021/22 from his earlier estimate of 4.5% to a staggering 9%. Where will this massive growth come from? Surely not from drains

In its latest forecast, the IMF predicts a global growth rate of 6% in 2021, and 4.4% in 2022. It foresees growth of 3.4% and 4% for sub-Saharan Africa, 6.6% for Mauritius in 2021 and 5.2% in 2022, giving an average of around 5.9% in fiscal year 2021/22. The MCB is forecasting a 4.8% growth in 2021 which includes six months of 2021/22.

The Minister is relying on investment in public infrastructure, including drains, and 650,000 tourists to underpin his growth of 9%. Investment in public infrastructure takes time to deliver. Last year he stated that he would spend Rs 12 bn over four years to build some 12,000 social houses. He earmarked to spend Rs 6 bn in 2020/21 to construct 6000 such houses. There has not been a single house built under that programme until now.

I announced the Riviere des Anguilles dam in my last budget in 2010. Eleven years on, its construction is still being lauded at a cost of Rs 9.4 bn, compared to Rs 2 bn in 2010. His forecast of 650,000 tourists looks overblown in essentially 9 months as we can forget the quarter July to September 2021. Especially as he has said nothing on air access policy and on what Government will do with Air Mauritius that used to carry around 55% of tourists prior to the lockdown and going into administration.

Two main drivers of economic growth, which are export of goods and services and private sector investment, have not been addressed by the Minister. Last year, he stated that he would spend Rs 100 bn in public infrastructure over a period of 5 years, around Rs 20 bn per year. He has hardly used any money this year. In the budget estimates, he pretended that Rs 43 bn have been spent on capital expenditure during this current financial year. The single largest item of that sum is a substantial transfer of Rs 31.7 bn to Special funds, a code for saying that not much has been spent and the money is being warehoused to be used in subsequent years outside of the Consolidated Fund.

* The Minister has also been criticised for “concealing the true size of the budget deficit” on the premise of a very high increase in tax revenue. Is that indeed the case?

I simply do not know why he does these easily detectable tricks. If affects his credibility and leads to a lack of trust and confidence in the process. Let us consider the figures dispassionately.

Last year he proudly stated that he was presenting a balanced budget. However, he used the colourable device of the massive transfer of Rs 60 bn from the Bank of Mauritius and characterized it as revenue when it is in fact a mere financing item for a huge deficit of 14% of GDP. On paper, the deficit for 2020/21 is at Rs 25 bn or 5.6% of GDP. However, if he adopts best international practices and what the IMF recommends, the deficit is much higher at around 20% of GDP. And if the excess of payments over receipts in the various Special Funds is included, the fiscal deficit rises. So, will public debt.

For next year, he forecasts a budget deficit of Rs 24.9 bn representing 5% of GDP. He has done two subterfuges to reach that relatively moderate deficit given his very high expenditures. He has transferred Rs 31.7 bn to Special funds that are outside the Consolidated Fund, which will be used to finance many of the projects announced in the budget, including drains. It amounts to 6.3% of GDP. He reckons he will spend Rs 26 bn from these Special Funds and will transfer Rs 10 bn into them. The excess of payments over receipts at around Rs 16 bn represents an additional budget deficit of 3.2% of GDP.

He has also largely overestimated government revenue. Last year, he forecast Rs 91 bn of tax revenue and the revised estimates are at Rs 83 bn only, an 8.8% decrease. Now he is predicting an increase in 2021/2022 to Rs 110 bn from a base of Rs 83 bn – representing a very significant 33% rise. That tax revenue is higher than that of 2018/2019 at Rs 98 bn which was a normal year with many more tourists than 650,000. VAT will rise by 41% from Rs 28 bn to Rs 39.5 bn while corporate tax will expand by 44% from Rs 10.4 bn to Rs 15 bn. Even personal taxes are on the high side, at a time when companies have either made losses or posted much lower profit and many employees have seen a drop in their income compared to preceding year.

Last year he financed his large deficit by digging into the reserves of the BOM. Now he is taking the reserves of four state-owned enterprises. A huge transfer of around Rs 9 bn from CEB, STC, FSC and MPA making 1.8% of GDP.

He has also included Rs 7.8 bn of CSG contribution as revenue of Government. Strictly, these are not revenue as they represent built up reserves to pay pension as from July 2023 for those above 65 years. He should have created a separate account for such contributions. As it stands, the CSG is plainly unsustainable and there will be a very huge deficit in its funding. There are only two solutions. Either he will slash the promised benefit of Rs 4500 per month by at least 50% or he will raise the contribution significantly over the years.

So, the real budget deficit is much higher than 5% of GDP. It will be at least more than double that amount.

And now with the outcome of the Privy Council judgement in the Betamax case, Government will have to disburse around Rs 5.8 bn or 1.6% of GDP as a result of sheer political vendetta where the thirst for revenge trumped economic rationale and financial logic. This will have dire implications on public sector debt which has exceeded 100% of GDP and will rise again next year if his forecasts of growth and revenue do not materialize.

* If the budget does not seem to address the challenges created by the Covid-19 crisis, you are best placed, for having presented a number of budgets over the years, to read into what exactly lies behind the motivations – economic and/or political — of Hon Padayachy. What could have been at the back of his mind?

I can only speculate like many other people. It looks like a combination of political reasons and denialism. It would have been tough for any Minister of Finance to address the challenges resulting from the unprecedented health pandemic and the severe economic contraction. So you can feel some sympathy and even empathy for him. However, he seems to have the knack of turning a challenging situation into an extremely difficult one by not being frank and transparent, and thinking he is smarter and can get away with concealing vital facts and figures with rhetorical, verbal and linguistic acrobatics.

The country is in a big hole. Instead of looking for many ladders to come out of it, he is using spades to dig deeper and furiously. He also unnecessarily cuts off his nose to spite his face. He is not responsible for the economic mess we are in. It was already difficult before, and Covid-19 has worsened the predicament.

It is very silly to believe that he will not be exposed for omitting so many things and for concealing the true size of the deficit and debt when there are people out there who know the ins and outs of the budget very well. I have no idea whether he is not listening to sound advice, or that’s his own reading of the current crisis. But his proposals on how to emerge from it are flawed. Or whether it is a lack of understanding of practical as opposed to theoretical economics in a disruptive world, of what it is that makes the real-world tick or a deficit of experience in the job, especially at a critical juncture for our country. Or being too ideological on some key economic and societal issues and refusing to admit that mistakes have been made and should be rectified as for the CSG.

The Minister was very political in his speech by naming all the towns and villages in the country and what they will receive in terms of goodies in the hope that people in these locations will be thankful for the pork-barrel policy. Almost 10 pages on these towns and villages and nothing on the gravity of the three deficits on the external balance, on high job destruction and on rising inflation. Many are concerned after listening to his reply on the treatment of Rs 60 bn. How could he look at us in the eyes and say that at least the Rs 28 bn is not akin to debt? The communique of the BOM stated emphatically that the ‘Rs 28 bn is reckoned as advance against future profits of the Bank distributable to Government’. So Government will refund the advance through forfeiting whatever profit would have been distributed to the Consolidated fund. I prefer to believe that he is in an advanced state of denial rather than support the very nasty comments on social media about his grasp of public finance.

* Do you find worrying trends emerging?

Yes, and very much so. I am worried about employment and inflation – two key economic and social indicators. No less than the Prime Minister has recently stated that we are in a dire economic straits. And he knows very well for having been Minister of Finance. However, when you listen to the Minister, you do not seem to believe that the predicament is bad as he refuses to tell the truth.

If we look at the official statistics on employment and unemployment at end December 2020, five very worrying trends emerge.

First, there has been a destruction of 33,400 jobs in 2020 which have likely increased since Jan 2021. Second, unemployment is high at 52,200. There were 42,000 persons (as opposed to only 2,400 in 2019) who were unemployed but were not counted as such because of a technical definition. They were jobless but because they could not ACTIVELY look for a job during Covid, they were not classified as unemployed but as ‘potential labour force’. If you add the two as both are unemployed, it makes a total of 94,200 jobless persons at December 2020 or a 16.5% unemployment rate. If we now include jobs destroyed between January and June 2021 and there are many, unemployment rises above 100,000.

Third, the employment to population ratio, which is a key indicator of the buoyancy of the labour market, is down markedly from 55% to 51%. Fourth, youth unemployment has soared to 26% and will be likely higher by June 2021. Fifth, there are over 150,000 time-related unemployed persons who have been omitted in the report. These are underemployed people who would like to work for more hours and cannot do so because of poor economic conditions.

As Government withdraws the Wage Assistance Scheme (WAS) and the Self-Employed Assistance Scheme (SEAS) for all non-tourism related sectors in June 2021, many firms will go under with thousands of workers who will be laid off, not only in the formal sector but more importantly in the self-employed and informal clusters. Worse, if tourism does not pick up very quickly, the same will happen in the hotel and related industry after September when wage assistance ceases. So, unemployment is already over 100,000 if we include the 42,000 persons who are jobless but not counted as such and if we update the statistics to June 2021.

Besides taxes on mogas, diesel, alcohol and cigarettes, the population will be hit by inflation, which is a stealth tax. Many families are facing both job losses and/or lower monthly income. Inflation is eroding their purchasing power. Prices have been rising significantly lately as a result of the accelerated depreciation of the rupee, higher freight charges and increased commodity/food and energy prices. One has to go to supermarkets to experience these rising prices on basic necessities.

The rate of inflation will grow and will act as a punitive hidden tax especially on the poor and the middle-income groups which spend a high share of their income on basic necessities. The CPI index is an average benchmark that does not reflect the basket of foods and services bought by those at the lower and middle rungs of the ladder. Such groups spend much more than the published 23% on foods and related goods as there has been a change in the consumption pattern of many people with higher expenditure on basic necessities during Covid. This explains the disconnect between the official CPI and what is actually happening to consumers in terms of rising prices.

* What about the other key economic indicators? Are we slightly better off than last year?

The country has suffered two consecutive financial years of high economic contraction. Consumption also has shrunk considerably. Besides unemployment and inflation, the budget deficit and public sector debt have risen sharply to become unsustainable. Investment as a share of GDP is low while private sector investment, which is key for productive growth, has declined. FDI has contracted while its composition continues to be dominated by unproductive investment in real estate development. Savings are also dangerously low at lower than 10% of GDP.

The export of goods and services has been declining for a long time. The trade deficit is at 25% of GDP while the current account deficit has soared to 14% of GDP. The overall balance of payments, which has posted a surplus for a long time, has turned negative. So, all the key macroeconomic fundamentals are in the red. This is why the Minister chose not to speak about them.

* You had also hinted earlier that the government would be chasing the wrong objective especially through the minister’s bet on reviving the economy through massive public sector infrastructure. What else were you expecting?

The country needs a balanced approach to create wealth and economic growth and generate sustainable jobs. The Minister’s strategy is too lopsided on public sector infrastructure to revive the economy. He should have focused on revamping private sector investment in productive sectors, encouraging the export of goods and services, diversifying, strengthening and reengineering existing and emerging sectors and promoting new economic pillars that can deliver on growth and jobs.

The Minister tried his strategy of public infrastructure last year and it has not paid dividends. There are few challenges with such an unbalanced strategy. It takes time to plan, design, execute and deliver such projects. They do not add much to domestic growth with high leakages as most inputs are imported. Also, many of the jobs go to foreign workers and not to Mauritians. We see it with the Metro Express. He should have adopted policies to reverse the collapse in our external competitiveness as well articulated by the World Bank recently.

* As regards the government’s focus on the tourism sector’s revival, one would have expected it would have also done something about Air Mauritius instead of allowing it to remain in voluntary administration — that is, unless we can do without a national airline. What are your views on that?

Indeed. I am stunned how the Minister expects to reach a target of 650,000 tourists in 9 months without spelling out clearly how these visitors will travel. Air Mauritius is a major pillar in the industry, and it used to carry around 55% of tourists. We need a strong and resilient national airline not only as an insurance for nation building but also to strongly support our tourism and EPZ sectors.

There has been no decision made about MK for more than a year and now it is postponed to Jan 2022. What will two accountants tell us that we do not know? We need specialist airline experts to propose viable solutions. Why have we not followed in the footsteps of Air France, BA, Emirates and Singapore Airlines where their governments have stepped in to shore up their airlines. There are no 25 solutions to the problem of MK. Its main shareholder must inject funds to revive the company.

* At the end of the day, there are two questions that arise: first, how will the Government finance this budget? Second, what will we be left with after all resources have been tapped?

The Minister will finance the massive deficit by kicking the can down the road. He is using a combination of conventional debt financing to the tune of 5%, the broadening of the size, scope, scale of the Special Funds for Rs 35.4 bn, the overestimation of tax revenues by around Rs 13 bn to Rs 14 bn, the transfer of the reserves of Rs 9 bn from four SOEs and the computation of CSG contribution as recurrent revenue. He is relying solely on the dividends of higher growth to work his way out of the crisis. It is unlikely to work, and we will need painful economic adjustments and structural reforms to turn the tide.

The rupee will continue to depreciate while inflation will rise. Let us hope that the higher budget deficit, the rising and unsustainable debt and the high external balance deficit do not lead Moody’s to further downgrade Mauritius. Finally, we may have no choice than to enter into a tough adjustment programme with the IMF.

* If you were Finance minister in these uncertain and difficult times, what would you have done differently from what the current government is doing in order to speed up post-Covid economic recovery?

It would have been difficult for any Minister. He should have been strategic and told the population how bad the economic predicament is. He should have reined in excessive expenditures and wastages. He boastfully promised to lower expenditures by 25% to contain both the deficit and the debt. He has failed to do so and has instead increased spendings by 4%.

There should be a better priority on how to use the scarce resources available for recovery and reengineering. He has embraced a very conventional approach of high expenditures financed by high deficit and high debt. He should have adopted a balanced approach to economic recovery instead of putting most of his eggs in the public infrastructure basket. Introduce major reforms to deal with the many structural weaknesses that are inhibiting growth and job creation.

It is almost impossible to protect jobs. We should instead protect people and allow the economy to adapt and adjust. Stimulate private sector investment in the productive sectors of the economy, reverse the declining trend in the export of goods and services, do more with less for efficiency and effectiveness purposes, choose a better mix between stimulus package and reimagining and creating the new development agenda to build back better, fairer and greener.

Invest strategically in the blue, circular and green economy, in food security and agro-industrial transformation. A better blueprint for Africa and encourage some SMEs to penetrate the African market. Transform the financial services sector to add more value and substance. Fasten the pace of technology, innovation and digital transformation and adoption. Support enterprises and start-ups that have the potential to sell their services to the world. Greater focus on technical and vocational training. Undertake institutional reforms to ensure efficiency, deliverables, governance and accountability. Encourage rationalization, consolidation, integration and restructuring, both in the public and private sectors, to become more agile to respond to new and emerging challenges. To use all expertise and skills to help in reversing the declining trend.

We need some disruptive and innovative policies. He has relied too much on ‘Old Normal’ remedies to cure the ailment of the ‘New Normal’ world.

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* Published in print edition on 18 June 2021