The 2014 Budget – Dealing in Hope

OPINION

“Our predicament is akin to the situation of a country stuck in a middle income trap, having reaped the low-hanging fruits of an earlier phase of development, but struggling to step up to higher-income status, because of insufficient productivity gains, a lack of advanced knowledge, skills and innovation, and poorly performing markets.

Fundamental policy reforms are urgently required, but cannot be implemented without determined leadership and bold actions…”

A distinctive feature of the 2014 budget is its forceful emphasis on support to SMEs, social housing, and tackling poverty. Whether the announced measures herald the equivalent of a Marshall Plan for the less advantaged awaits later judgement. But, the determination of the Minister of Finance, in his successive budgets, to level economic opportunities and reduce inequalities, deserves acclaim.

To restore the growth momentum, and create more jobs, the budget also breaks with previous thinking to steer fiscal policy on a more expansionary path, through massive capital spending over the coming years. The key to success however will depend on timely and effective project implementation on major projects, especially under the Marshall Plan framework. Moreover, a revival of growth cannot be sustained in the longer term without far-reaching sectoral and market reforms.

Ambitious Plans and Hard Realities

The budget is required to provide, once every year, a clear statement about the stance of fiscal and other economic policies to determine government revenues and expenditures and the allocation of national resources, in line with Government’s socio-economic objectives. The 2014 budget also seeks to craft a summary version of a long-term national strategic plan. But, in the absence of national consultations, without public ownership, and lacking a clear road map for implementation, this ambitious exercise falls short of its goal to inspire a vision of future prosperity. The budget has merely taken the shape of a revamped Government programme.

The budget’s unstated but legitimate aim is to emulate Singapore as a model of advanced economic progress, with the development of myriad hubs – land, sea, and air. Matching the gap between the budget’s aspirations and hard economic realities will be a herculean task that few believe can be undertaken without determined leadership and bold policy reforms. Without a sense of direction and strong action, the economy is simply tottering along, or staggering forward at best.

Growth is sub-par, investments are floundering, saving is at rock bottom, youth unemployment is high, especially among the well educated, and the external current account runs a chronic and gaping deficit. Economic inequality and relative poverty are worsening. A few mercies are thankfully noted though, such as the stable rupee exchange rate and subdued inflation. Still, the sunny outlook on these two important economic variables rests heavily on the sustainability of capital inflows, which are highly sensitive to the volatility and uncertainty prevailing on global markets. A rude awakening may be in store for us not far ahead.

The provision of public services is steadily deteriorating, and the welfare state is falling apart at the seams. Many sectors, including health, education, water, power, transport, ICT, and financial services are bedevilled by critical performance issues, including dismal management in public utilities. Key institutions like the police and the judiciary are faced with a mounting deficit of public trust in law and order and justice. The stench of corruption is unmistakable at all levels. The country appears to be adrift, and the coming generation is losing hope of a decent career and livelihood in their homeland.

Our predicament is akin to the situation of a country stuck in a middle income trap, having reaped the low-hanging fruits of an earlier phase of development, but struggling to step up to higher-income status, because of insufficient productivity gains, a lack of advanced knowledge, skills and innovation, and poorly performing markets. Fundamental policy reforms are urgently required, but cannot be implemented without determined leadership and bold actions. The proposed introduction of 9-year schooling is a belated attempt to confront the CPE issue, but without a credible implementation plan.

Special Funds and Fiscal Stimulus

The 2014 budget may be faulted for its panglossian vision, but it does seek to address macro-economic weaknesses, by applying a stronger dose of fiscal stimulus through greater capital spending. Excess balances of Rs 7 bn lying idle in special extra budgetary funds are being mobilized to finance capital expenditures. The 2014 budget deficit figure, estimated at 3.2% of GDP in 2014, is an understated measure of the fiscal balance, because it excludes special funds from the government’s budgetary operations. The adjusted budget deficit for 2014 is actually 5% of GDP.

Extra budgetary funds can serve legitimate purposes, but have to be consolidated with budgetary accounts for a comprehensive view of fiscal policy. In 2014, an amount of Rs1.4 bn will be transferred from the National Resilience Fund to the revenue account of Government. This transfer, equivalent to 0.5 % of GDP, cannot be counted as revenue at all. Similarly, a net amount of Rs 5 bn, equivalent to 1.3% of GDP, paid out of the special funds to meet capital expenses, must be added to budgetary outlays.

The budget deficit for 2014 is thus adjusted upwards from 3.2% to 5% (3.2+0.5+1.3) of GDP. Following a similar adjustment for special funds, the revised budget deficit for 2013 would increase from the reported 3.7% to 4.7% of GDP. The 2013 budget deficit is still not final, and will most likely be revised down. While the final annual deficit figures may change, the new emphasis on an active and expansionary fiscal policy is clear.

Although the Minister of Finance is imparting a stronger budgetary stimulus to the economy, he still wants to retain the illusion of fiscal rectitude, and to adhere to self-imposed debt sustainability constraints. Budget outcomes are thus understated through deceptive accounting devices. Instead, the budget must shed its inhibitions and explicitly state its goal to boost productive capital expenditures and raise economic growth. It must break free of past colourable practices, and get rid of the intense debt phobia that has sapped the role of fiscal policy for many years.

Monetary Policy and Credit Restraint

The Bank of Mauritius is not devoid of its own fixation on inflation. The country has recently witnessed with increasing bewilderment the disgraceful public bickering between two ‘tea party’ ideologies on the respective roles of fiscal and monetary policy. Even with the contrived departure of one of the main protagonists, it seems that the feud is not over. The 2014 budget speech, incredibly, does not make any reference to monetary policy. The Bank of Mauritius is mentioned obliquely, which is a telling sign of the ongoing lack of cohesion in fiscal and monetary policies.

Having failed to convince the Monetary Policy Committee to hike interest rates, the Bank of Mauritius is resorting to quantitative and selective controls, albeit in a light mode, to restrain credit expansion. These credit policy measures announced recently by the Bank of Mauritius surely deserve to be assessed against the background of national economic policies, in view of their likely impact on the state of the construction and tourism sectors. It is important to understand how these measures reconcile with the budget’s emphasis on economic expansion.

Pursuing a strictly non-market approach to credit adjustment has been discredited in the past as inefficient and counter productive. The Bank of Mauritius would be well advised to proceed warily on this path. At its next meeting, the Monetary Policy Committee must discuss these credit restraint measures, which fall within the purview of their monetary policy mandate, although the focus has primarily been on interest rate adjustment to influence credit, aggregate demand, and inflation. An evaluation by the Monetary Policy Committee of the rationale and impact of credit control measures as well as their consistency with overall monetary and fiscal policies is eagerly expected.

Financial Stability Council

The proposed inclusion of the Financial Intelligence Unit (FIU) as a member of the Financial Stability Council is some kind of tomfoolery. The Financial Stability Council, chaired by the Minister of Finance, comprises regulators like the Bank of Mauritius and the Financial Services Commission to improve coordination for the stability of the overall financial system, through the formulation of macro-prudential policies. The FIU, an agency responsible for intelligence gathering and analysis in the fight against money laundering, is taking a seat on the Financial Stability Council, next to policy makers. Are we so keen to become the laughing stock of the international financial community? And, how many times has the Financial Stability Council met since its creation?

That the FIU is responsible for overseeing money-laundering issues for the relevant professions and occupations does not confer it with the status of a regulator. If the aim is to ensure greater coordination and sharing of information between the financial regulators and the FIU, the existing National Committee for anti money laundering chaired by the Ministry of Finance can play a more active role, and insist on the strict observance of existing legal provisions for cooperation between all institutions engaged in the fight against money laundering.

Bank Confidentiality and the FIU

Recent changes in anti money laundering and related legislation, notably with regard to bank confidentiality, have raised much apprehension on the part of the informed public, and financial service providers in particular. The legal and institutional framework of the anti money laundering regime is being dangerously mangled to serve doubtful needs, including power grabbing by officials, without the required universally-accepted legal and other safeguards. Conferring unfettered powers to investigatory, law enforcement and other bodies to obtain confidential bank information opens the door to all sorts of abuse, including political victimization…

The granting of additional powers to the FIU, as mentioned surreptitiously in the Annex to the Budget Speech, warrants a great deal of circumspection. For example, a proposed legal amendment is “For members of the relevant profession or occupation to have an obligation to furnish to the FIU all such information and produce such records or documents as may be required by the FIU”.

Another amendment is “to allow the FIU to carry out inspection of the books and records on the business premises of a member of a relevant profession or occupation at any time, so as to ascertain whether the latter is complying or has complied with the requirements of the Act or regulations made under the Act or guidelines issued by the FIU”.

Someone must have fallen on his head. The obligation of the relevant professions or occupations, which include accountants and law practitioners, to automatically furnish information to the FIU should pertain only to a suspicious transaction report. The inspection powers should be held solely by the respective designated supervisors, namely MIPA, the Financial Reporting Council, the Bar Council, the Chamber of Notaries, etc. Law-abiding citizens, you have been warned!

The PPP framework

The surge in public investments is welcome, but the economy relies on the private sector for over two thirds of its total investments. The new measures for business facilitation can help remove the remaining obstacles to promote private investments. It is ironic that while the domestic investment rate had slumped to record low levels, Mauritius keeps rising in the ‘ease of business’ country rankings. This serves as a note of caution for those too easily dazzled by international investment league tables, or sovereign credit ratings. The animal spirits underlying investment behaviour are fickle.

Substantial public investments have already been made in road transport and decongestion. To meet overall growing infrastructure financing needs, Government is rightly having recourse to private participation, and adopting PPPs as a means of service and infrastructure provision. Huge investments are now planned under the PPP framework, including the tunnel under Signal Mountain, the Coromandel-Soreze bridge, and the light rail transit system.

While the benefits of well designed and executed PPPs in terms of superior service delivery are well established, the pitfalls are less known. Given the nature and technical complexities of PPP arrangements, the equitable transfer of risks between the state and private participants can be a highly contentious exercise. The recent attempt to revive a controversy about the Illovo deal, more than a decade after its conclusion, underlines the perils of balancing equity considerations. A ‘mari’ deal is not better than a twice ‘mari’ deal, but surely preferable to no deal.

The choices and commitments under PPPs stretch over long periods of time, and leave future governments and voters with tied hands, even when it later turns out that the public interest has been undermined. PPPs also add to the potential for corruption, since vast sums of money and lucrative contracts are involved. It is essential that PPPs be negotiated with the best of technical skills and expertise, and with the maximum openness and transparency, while paying due regard to commercial confidentiality.

It is therefore strongly recommended that all PPP projects seek the participation of Development Finance institutions (DFIs), such as the African Development Bank or the International Finance Corporation. Their involvement provides support for Government to secure a more level playing field in PPP negotiations, clinch an even-handed deal, and ward off corrupt practices. Long term financing by DFIs also means a lower interest burden, relative to private debt.

Conclusion

The 2014 budget reflects a renewed resolve to address economic opportunity and social issues, push for sizeable public investments, and support growth. A more active fiscal policy will however yield mixed results for lasting economic growth, unless decisive reforms are implemented to raise productivity through advanced knowledge and skills, innovation and improved market efficiencies.

At the time of independence, V S Naipaul described Mauritius disparagingly as an overcrowded barracoon and a nation of nurses. Invited to revisit our country today, he would, after stepping out of the gleaming airport extension, driving alongside the Ebene business park, and settling down in a classy hotel resort, hail us as a rising nation, an upcoming Singapore. But he would be equally tempted, after seeing more of our capital city, towns, and beaches, to label us anew, a nation of hawkers. We can prove him wrong again, but it will be a tougher call this time.

 


* Published in print edition on 15 November 2013

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