MOFED: The Merger Revisited

Titbits

Although the merger of the Ministry of Planning and Economic Development (MOFED) with the Ministry of Finance was announced in December 2003, efforts at an effective merger of the two cadres started in 2006.

The whole idea about the merger emerged with the priorities set out in the 2000-01 New Economic Agenda. One of the priorities was the need of a Medium Term Expenditure Framework (MTEF) to the budget processes as the key tool to plan and manage public resources and to link policy, plans and budgets in a medium-term perspective. The development of the MTEF requires a combination of planning and budget skills. It provides the ‘linking framework’ that allows projected expenditures to be driven by policy priorities reflected in the long-term vision and strategies and disciplined by budget realities. The World Bank in its June 2003 report: ‘Economic Agenda for Fiscal Sustainability’ recommended integrating the planning functions of the Ministries of Finance and Economic Development to improve operational efficiency and consistency.

The irony of the decision to merge Planning with Finance (under dubious management and poor leadership response) is that it effectively ended the national planning process, leaving the government without the one technical agency that was qualified and best suited to handle the critical issues of optimality in resource allocation. The link between planning, budgets, and results remained weak. The focus of the Ministry of Finance and Economic Development was principally directed towards budget work/matters, which left little scope for the proper application of MTEF, of planning and strategic thinking skills. The Budgets were driven by fiscal pressures emerging from the broader economic environment rather than developmental needs. There was thus a tendency to focus myopically on fiscal discipline and financial controls, without any influence from planning that could have extended that focus to macro- and micro-prioritisation as well. Very little research and sectoral/impact analysis, which were the main focus at the earlier Planning ministry, have been carried out during the past years. If the recent budget had been based on national priorities, which implies transforming the vision into strategic scenarios, choices and policies compatible with available resources, we would not have heard such criticisms as the lack of strategic direction and coherence in the Budget document from the private sector and development partners.

Now that the main hurdle is no longer in the way, there is scope for revisiting the existing structure which is no longer conducive to attaining the desired outcomes in the most effective manner. Given the two cadres from Budget and Planning have separate cultures and the seven years of force cohabitation have not produced the desired results especially in the implementation of MTEF/ESTP and critical areas of policy and sectoral analysis, the Strategic Policy Unit under the PMO, announced in the budget, should now assume this planning/think tank function. But strong coordination and collaboration as well as the existence of consultative mechanisms between budget and planning will still be important elements for ensuring that government policies are planned and implemented in accordance with key development priorities. This increased focus on planning will create a demand for experienced economists including those with sector-specific skills. It’s quite likely that recourse will have to be made to the economists of the former Ministry of Planning as recommended by the 2013 Errors, Omissions and Anomalies Committee (Manraj Report).

* * *

The NAIRU Debate: Growth and Unemployment

In the 2013 IMF Article IV document, mention is made of the fact that “unemployment should decline somewhat over the medium term, but Mauritius would need stronger growth and targeted labor market reforms to reduce unemployment significantly.”

Why stronger growth? Because the IMF has estimated that our present potential growth rate as at 4.5% and the present unemployment rate of 8.0 – 8.3% to be the Non-Accelerating Inflation Rate of Unemployment or NAIRU. As its name suggests, the NAIRU is supposed to be an unemployment rate (or range of unemployment rates) that produces a stable rate of inflation: if the unemployment rate is lower than the NAIRU, then the inflation rate will tend to rise, and vice versa. Given that our short-term production possibilities are limited to a growth rate of 4.5% and that any stimulus to the economy at this level of output will only lead to inflationary pressures, we cannot but accept that the anemic growth forecasted in the budget to be “good” growth.

Can the Mauritian economy grow more than 4.5% per year and the unemployment rate fall below 8-8.3% without causing an increase in inflation? How far can we rely on the IMF estimates that the long-run potential growth rate of the economy is around 4.5% per year and that the natural rate of unemployment is in the 8.0-8.3% range? If unemployment would fall below its natural rate and output grow above its long-term potential rate, inflation would start to increase as bottlenecks in production, capacity limits and tight labour market would lead workers to require higher wages and firms to increase price as demand and costs go up.

It is unquestionable that inflation will eventually increase if the economy grows above its potential rate. What is questionable is whether the potential growth rate of the economy is 4.5% and whether the Non Accelerating Inflation Rate of Unemployment (NAIRU) is around 8.0%. On this issue, opinions may widely diverge: in fact, there is no way to exactly estimate the value of NAIRU as the natural rate of unemployment is not constant but changes over time depending on the factors that determine the structural unemployment rate of the economy.


What is apparent from the ‘Inflation & Unemployment’ graph is the disparate behaviour of the inflation rate and the unemployment rate. If there were a well-defined and stable NAIRU we would expect to find some unemployment rate range where the inflation would be accelerating and below that range it will be decelerating. The graph results clearly do not support the existence of such a rate. So what about the estimates of the NAIRU itself?

The value of NAIRU is hard to measure, largely because it changes over time. The variability of the short-run NAIRU makes it less suitable as a benchmark. The economy experiences many kinds of shocks that influence inflation and unemployment. In light of this fact, it would be remarkable if the level of unemployment consistent with stable inflation were easy to measure. Even the IMF estimates of short-run NAIRU show remarkable volatility. From one of the graphs of the Art IV document (Fig V 3), one can easily deduce that presently the situation may be different with a positive output gap and the NAIRU around 6% whereas the unemployment rate is around 8%. So, there is some scope for reducing unemployment.

Some of the recent studies carried out on NAIRU have pointed to the limitations of any analysis based on the NAIRU, particularly that they depend on estimated econometric relationships that explain inflation developments imperfectly, and are sometimes subject to large margins of error. NAIRU can only serve as one of a range of possible indicators that are useful for assessing inflationary expectations.

* * *

Tackling the real estate bubble

The stakes are indeed very high in tackling the real estate bubble. One has to be careful not to induce countercyclical effects likely to discourage local investors and Foreign Direct Investment. Mauritius, which needs global financing to bridge its high current account deficit of 10.3 % of GDP, will be badly hit. If there is a marked diminution in capital inflows, especially in the 70% of our FDI that goes to accommodation, construction and real estate, asset prices would be first to feel the effects and asset saleability would be impaired. Hot capital, a consequence of capital inflows attracted by the real estate bubble, will also take flight. Borrowers’ incentives to repay their loans will subside and, all of a sudden, domestic banks realize that they face a mountain of nonperforming loans and stuck with collaterals whose values are bound to fall.

The liquidity crunch will give rise to the drying up of credit causing a severe impact on output and employment. Such a halt in inflows can lead to higher exchange rate fluctuations (even a significant depreciation of the currency) and a widening current account deficit that reduces the overall balance of payments surplus and thus affect our long-term growth prospects. Sudden decline in capital flows not only contribute significantly to drops in economic growth, but their effect is more pronounced in countries with large current account deficits. So we have to be vigilant and ensure that the selective credit-control tools of the Bank of Mauritius impact on the causal factors of financial instability not on the mere symptoms. Otherwise we will only be postponing the risks for later periods.

* * *

The Budget: Prioritised expenditures

An IMF working paper dated May 2013 on ‘Inclusive Growth and the Incidence of Fiscal Policy in Mauritius-Much Progress, But More Could be Done’ by Antonio C. David and Martin Petri posits that the share of expenditures on physical capital has declined both in relative terms and as a share of GDP, despite the authorities’ ambitious public investment plans.

In fact, public expenditure on physical capital investment throughout the period has been quite volatile. “The share of expenditures on human capital (education and health) and on social security and welfare (which also includes housing) has increased marginally over the period. Overall, these trends indicate that there is scope to improve the quality of public expenditures by reallocating towards areas that are more conducive to growth, in particular by increasing the share of expenditures on physical capital.”

The issue for our re-oriented fiscal policy, post-Mansoor, is not just a question of having a more expansionary fiscal policy. We need a combination of fiscal reforms and fiscal rebalancing towards prioritised productive expenditures. More efforts at fiscal consolidation are needed to generate the fiscal space to meet these priorities which will generate future productivity growth. We have to improve the quality of our public expenditures by reallocating towards areas that are more conducive to growth, in particular by increasing the share of public expenditures on productive investment in physical and human capital.

Table I: Consolidated Budget (including Special Funds)

(% of GDP)

2011

2012

2013

2014

Budget Deficit

-2.4

-2.2

-4.8

-5.0

Capital spending

3.5

3.7

4.5

4.4

o/w Expenditures on roads & land drainage.

1.1

1.4

1.5

0.7

 

Add a Comment

Your email address will not be published.