By Mohun Kanhaya
As the economy limps along on the back of the international field, our dismal record in the implementation of capital projects continues. Indeed, we continue to register unsatisfactory progress on the completion of critical infrastructure targets.
As in previous years, some six months after the budget, capital spending (Net Acquisition of Non-Financial Assets) as a percentage of the total amount earmarked for 2011 is a mere dismal 19%. The most depressing thing about capital expenditure is not that it has been temporarily grounded to a halt. It is that once it eventually picks up speed, that speed is predicted to be pedestrian. We are told that it should be expected after the type of debt-driven financial crisis. Such resignation should be resisted. We must have more ambition. Cash is not the problem. There are huge sums of money looking for investments, for infrastructure projects. After four years of underinvestment, our infrastructure badly needs an upgrading to meet the demands of the economy. Investing in infrastructure provides direct benefits and also increases the long-term growth potential of the economy. To be fair this had been recognised by the ex-Minister of Finance. He had published a National Infrastructure Plan laying out the billions of rupees of investment of public and private money over the long term in energy, water, transportation, health, education and telecommunication.
But the corporate world worries that the plan is faltering owing to a lack of leadership at MOFED and the will to tackle issues such as planning, implementation and monitoring. Holes are already appearing in the plan increasing the doubts of Corporate Mauritius as to its successful implementation. The investment plan is more of a wish-list and has not been framed on the basis of policies that are encrusted in a medium- to long-term vision or Plan. A more medium- to long-term view would thus enable the policymakers to see holistically the big picture and achieve proper cohesion in their vision, strategies, the linkages between sectors, and implementation capacities. Industry leaders are now recognising the fact that the government needs a vision for the economy and must take an active role in making it a reality. Other countries do and come out as better competitors, reflecting their successful execution of ambitious long-term plan by government.
Our reading of the IMF’s Mauritius Article IV Consultation – Staff Report reveals that the special funds created outside the budget that led all sorts of tortuous accounting to hide the incapacity at boosting capital went against the principles of sound public finances. The Report welcomes the closure of the special funds and its reintegration into the budget and notes that this will reduce budgetary fragmentation and result in stronger expenditure controls. Readers will recall that the disturbing Audit Report, on the flagrant disregard for all the principles that should guide public expenditure at various levels and in various ministries, had criticised MOFED for its management of these seven special funds (see table below) that were appropriated during the last days of the previous three fiscal years and established pursuant to the Finance and Audit Act 2008. These funds have remained largely unutilized as of 31 December 2010. “Dormant funds are held in deposits that are earning interest at a lower rate than monies borrowed by government to finance fiscal deficits.”
|Maurice Ile Durable Fund
|Social Housing Development Fund
|Local Infrastructure Fund
|Food Security Fund
|Human Resource, Knowledge & Arts Development Fund
|Manufacturing Adjustment & SME Development Fund
|Saving Jobs and Recovery Fund
|Road Decongestion Programme Fund
Moreover the Fund, as we had done in these very columns, cautions us on our concept of budget deficit which is less comprehensive because it excludes the special earmarked funds which are macroeconomically important. Reworking the budget deficit for 2009, for example, the Fund posts a deficit of 2% of GDP rather than the MOFED figure of 3.6% and the Net acquisition of non-financial assets (capital spending) is a mere 2.7% of GDP.
We had commented at that time: “For much less than such manipulation, one Finance minister was hounded by the mainstream press and the erstwhile opposition and had to resign. These shifty tricks of parking special funds outside the budget that were carried over three budgets to hide the ineffectiveness in implementing capital projects have had very serious economic consequences. The true picture was hidden from the population and more seriously it meant a total failure in the management of public finances, which had their implications on interest rates, the current account, exports, growth, and the level of public debt. The parking of Rs 11 billion at the Central Bank has had a huge opportunity cost. At least if we had been drawing regularly from these funds we could have had some excuses for such poor fund management.”
Appreciating Real Exchange Rate
Some time back in our comments on the Foreign Direct Investment (FDI) and the Real Effective Exchange Rate (REER), we had alerted the authorities as to the need to intensify efforts to diversify the sources and inflows of FDI to other sectors and to boost overall and sector productivities if we are not to rely on competitive depreciation of the rupee. As from 2007, the large capital inflows have more than offset the widening current account deficit resulting in BOP surpluses. There has been a continuing build-up in foreign reserves and upward pressure on the Real Effective Exchange Rate (REER). A lower reliance on external borrowing and a genuine effort at diversifying some of the local funds like the NPF internationally would have helped to decrease pressure on the REER.
We had then calculated that Mauritius’ real effective exchange rate has appreciated by around 12.4% over the past four years. The trade deficit has tended to increase when the rupee has appreciated in real effective terms, raising the current account deficit. The IMF Report in its chapter on Exchange Rate assessment is more or less in line with our figures showing an average overvaluation of 11% above its equilibrium level. But surprisingly the Fund expects this overvaluation the REER, which is broadly in line with fundamentals, to narrow over the medium-term. This is conditional on “continuation of structural reforms to increase productivity, reduce trade restrictions, and price rigidities (which) are likely to appreciate the equilibrium rate and would thus reduce measured overvaluation of the real exchange.”
We have been behind the curve throughout most of the past four years stuck with policy paralysis in economic restructuring, productivity improvement and medium- to long-term planning. The future will have to be different if we want to succeed in overcoming these challenges.
Mauritius cannot afford the luxury of an appreciating currency. The growth of exports of goods have been negative for eleven quarters since 1Q 2007. Exports of goods and services as a percentage of GDP have been declining since 2006. Goods exports, a significant driver of the economy, which made up some 36% of GDP in 2006, now stands as low as 23% of GDP.
|Trade Balance (FOB)
as a % of GDP
|Current Account Balance
as a % of GDP
The Article IV Staff Report in its analysis of the export sector, while recognising that demand fluctuations explain much of this poor performance, points to the low level of sophistication of our exports that has not changed much since 2004-05 signalling a slow-down in innovation and expansion into new industries. “The stagnation since 2004-05 points to important constraints faced by the traded goods sector. These could probably be traced to bottlenecks in infrastructure, but further investigations are warranted.”
* Published in print edition on 5 August 2011