“The economy will surely pick up this year, but the question is whether it will recover fast enough”
Interview: Dr Vinaye Ancharaz – International economic Consultant
* ‘Everybody knows that the inflationary fire in Mauritius is being fanned by the depreciation of the rupee. Stop the depreciation and inflation will take care of itself!’
* ‘Like it or not, the traditional parties are our only hope for change. What most supporters want to see, however, is a commitment to sweeping reforms’
Dr Vinaye Ancharaz, International economic Consultant, comments in this week’s interview on the rising inflation and the spiralling debt and the “colourable devices” being used to mask the real state of the economy. He is apprehensive that if this trend continues the economic situation will keep worsening and its impact and consequences borne by future generations. Only a united Opposition front can help to stop this slide, he says, provided it can wrench power from a regime that is firmly entrenched and does not hesitate to distribute freebies to lure people who are susceptible to such attractions without realizing how harmful they are to the national interest.
Mauritius Times: With one issue chasing another almost on a regular basis in different sectors, especially in the political field with talks of alliances which would be in the works, or election recounts and other headline-catching issues, would you say that the Opposition parties are missing out on the serious ones in relation to the economy and which ought to receive their full attention?
Vinaye Ancharaz: I would say no. To put things into perspective, let’s recall that the Opposition literally begged the Government to keep Parliament open during the festive season and beyond. But the Ministers and MPs of the majority insisted on having a free lunch and took to holidays. Now, with Parliament closed, there is only so much that the Opposition can do.
Yet, the Opposition has been active, and it isn’t just in talks of alliances or in politics as usual. The Plateforme de l’Espoir, for example, has continued to hold weekly press conferences, where they bring to light issues of national interest, and offer constructive insights to the government. Not later than last Saturday, Xavier Duval spoke about the impoverishment of the population due to escalating prices and urged the government to heed a report of the Competition Commission published in June 2021, which has made a series of recommendations aimed at making medicines more affordable to the population.
At the same conference, Paul Berenger explained in great detail a strategy that the ongoing mission to the Chagos Archipelago could use to ensure an outcome favourable to Mauritius over the contested exclusive economic zone with the Maldives.
Now, if you’re referring to the political match between Roshi Bhadain and Shakeel Mohamed on the radio as another headline-catcher, then that’s a different story – one that didn’t make anyone happy but the MSM.
* There is in fact growing concern among different cross-sections of the population, including the middle class, about their standard of living going down due to rising prices resulting from the depreciation of the rupee, higher freight charges, etc. The Rs 500 million subsidy disbursed to importers to protect consumers against rising prices does not seem to have worked as expected. What’s gone wrong with that decision?
Inflation is on a steep ascent. The year-on-year headline inflation rate was estimated at 6.8%. For January 2022, it has gone up to 7.4%. These are official figures from Statistics Mauritius, but few people believe them. In view of the relentless rise in the cost of living, which the Minister of Labour reportedly said was pushing large swathes of the population into poverty, the inflation rate has likely entered the double-digit territory. And there are reasons to believe that it will get worse during the year.
It is no secret that the principal cause of this inflation is the continuous depreciation of the rupee. While the shortage of foreign exchange – due to low activity in the tourism sector – is a contributing factor, the real culprit is the deliberate policy by the government to let the rupee slide. The Bank of Mauritius has discovered that a weakening rupee increases revaluation gains, which the Bank has passed on to the government to support its spending spree. The government, on the other hand, collects more taxes as prices rise while exporters make more money when they convert their foreign exchange earnings into rupees.
The biggest losers are income earners, especially those on fixed incomes, such as pensioners, and the poor. The recent salary compensation is grossly inadequate to restore purchasing power, so most people have witnessed a decline in their standard of living while those at the bottom of the ladder have slipped into poverty.
The government, in a desperate attempt to control prices, has instituted subsidies on a range of basic consumption goods. However, the policy does not seem to have worked. There are several reasons for this. First, the subsidy applies to specific brands, usually the ones that are purchased by the average household. Superior brands are not eligible, so if you are buying such brands, you don’t benefit from the subsidy. Second, and more importantly, even for brands that do get the subsidy, prices have hardly gone down a notch. This is because the prices were already high to begin with, so the subsidy had little impact. In a country ruled by cartels, this is not unexpected. Ultimately, the subsidies are being absorbed into profit margins, with little benefits passed on to consumers.
Third, the subsidies are available on a narrow range of staple products, which represent a small fraction of an average household’s expenditure. There are no subsidies on essential services like public transport and medical care, telephone and Internet bills, restaurant meals, school or tuition fees, and hundreds of common consumption items. Finally, I doubt that the subsidies are being effectively policed.
That said, subsidies are never among the textbook measures to control inflation. That is because they are politically motivated and are more in the nature of a second-best policy. Any good economist would tell you that, for a solution to work, it must be targeted to the source of the problem. Everybody knows that the inflationary fire in Mauritius is being fanned by the depreciation of the rupee. Stop the depreciation and inflation will take care of itself!
* Do you find the economy picking up in the wake of the reopening of the frontiers and the easing of travel rules and other restrictions?
The economy will surely pick up this year, but the question is whether it will recover fast enough. Having contracted by 15% in 2020, the economy grew by 4.8% last year, amid expectations of a 9% GDP growth rate. Growth after a deep slump is inevitable. Economists call it the ‘dead cat bounce’: when you’ve hit the rock bottom, the only way is up. The government is expecting a growth rate of 6.5% in 2022. This is based on recovery in tourism and the economic effects of major infrastructure spending, notably on drains, social housing and roads.
However, the tourism sector is recovering very slowly. The government had bet on total tourist arrivals of 650,000 between the opening of borders in October 2021 and the end of the financial year in June 2022. However, for the whole of 2021, tourist arrivals were a measly 180,000. The latest statistics speak of 40,000 tourists in January 2022, traditionally a peak month for tourists, compared to an average of 120,000 in the years preceding the pandemic. At this rate, Mauritius will welcome just about one-third of the usual number of tourists in 2022. This will certainly dent economic growth prospects for the year.
Infrastructure projects raise the growth rate mathematically since investment enters directly into the GDP equation. However, the trend in recent years has been to award large infrastructure projects to foreign contractors, who bring in their own labour, equipment and materials. This results in higher imports and a leakage of income when earnings are remitted abroad, thus reducing the multiplier effect on GDP and, eventually, the growth rate.
Finally, it is useful to point out that consumption has been the key driver of growth in recent years. Rising inflation will surely dampen consumption. For all these reasons, and more, such as the looming uncertainty about the pandemic, I expect GDP growth this year to fall short of its target of 6.5%.
* The consensus is that Covid-19 will likely become endemic, rather than fully eradicated. However, the current Omicron’s rapid rise here as elsewhere too, will certainly complicate matters. Does this mean there’s still a long way to go, and that based on current trends it might become even worse for our economy in the months ahead?
Indeed, Covid-19 is likely to become endemic but, even before that happens, we will have to deal with the socio-economic fallout of the pandemic as long as it lasts. With the Omicron variant, hospitalization rates and fatalities are much lower, but we are still far from normal. In Mauritius, the number of cases is increasing rapidly, and now schools may be closed down again.
All of this will impact on the economic outlook. School closures and other partial lockdown measures may be perceived as a government’s inability to get a handle on the sanitary crisis. This is what landed us into red lists for travel recently, and this threat hasn’t gone away. So, yes, we may see a ray of light at the end of the tunnel, but we are not out of the woods yet.
* To be fair, the government can only do what is possible in view of the fiscal space, which has shrunk and become narrower due to massive fiscal support to protect firms and employees, households and vulnerable groups. Is there more that it can do or should be doing?
The government has been bragging about spending a whopping 32% of GDP in dealing with the pandemic, and this, at a time when its fiscal space was limited. However, this statement is laden with colourful lies.
First, the figure of 32% is calculated on a GDP base that shrunk by 15% in 2020, so it looks larger than what it is in absolute terms. Second, the fiscal response, as the IMF explains, is not restricted to actual spending; most of it, in fact, is in the form of equity, loans and guarantees. It therefore includes the billions of rupees of loans made by the Mauritius Investment Corporation (MIC). Third, we thought that the fiscal space was narrow, but the government found clever, albeit controversial, ways of overcoming this constraint. When you remove the statutory limit on public debt, the sky is the limit as to how much you can borrow. When you start ploughing into the central bank’s reserves and keep replenishing them by artificially devaluing the rupee, the money pot becomes a bottomless pit because, in effect, you’re printing money. When you can finance purchases of life-saving drugs by imposing a tax on petrol, and raising it at will, funding is no longer a constraint.
Could the government have done more? Of course! If the Ministry of Health did not engage in dodgy procurement deals, the country could have saved billions, which the government could have redirected to the most vulnerable groups. If the MIC used its funds more judiciously, it could have given a real impetus to struggling firms and a crucial boost to the ailing economy. And if the government knew how to prioritize its spending in times of a pandemic, it would be spending more on health and education than on flashy infrastructure projects that only vent their ego.
* Based on current trends, what do you think the economic situation will be like three years down the road, that is around the time when the people will be called to cast their votes for the next government?
The economic situation will be alarming. Public debt has already crossed the threshold of 100% of GDP even if the official figure puts it at 80.9%. The government has announced a debt target of 80% for the end of the current financial year (i.e. June 2022). With the economy picking up, tax revenue rising, and the pandemic (hopefully) wearing out, borrowing requirements will naturally decline; hence, debt will be on a downward trend.
However, as the 2024 elections come closer, the government is likely to rev up its spending engine. With new infrastructure projects, including towers at Cote d’Or, further extensions to the tramway network, new social housing projects, politically-biased recruitment in the public service and the police force, and the handing out of perks to different segments of the population, including the promised Basic Retirement Pension of Rs13,500 to senior citizens, government spending will hit the escalator.
We are at the mercy of a government that will leave no stone unturned in its bid to retain power in 2024 and beyond. The harm done to the economy will be borne by the generations to come.
* When you put your ear to the ground, tell us very objectively what do you hear about what the people generally feel about how the present government is doing and what are their expectations?
What I hear are cries of distress from the jobless whose very means of livelihood has been quashed by the pandemic; from the elderly who can’t make ends meet; from parents who bemoan an entire year wiped out of their children’s life; from the youth who see little prospects for self-growth in a country where meritocracy has become a vain word.
The perception is that the government is working for a select group of people. Those who are politically close to the regime are being rewarded with juicy positions, contracts and loans. Those who are not, are being terrorized. There is also the perception that the country’s most trusted institutions, including the police, the ICAC, and the Electoral Commissioner’s Office, have been reduced to pawns in the hands of the government. They are sick and tired of the tactics being used by the government to weaken the Opposition. And they are scared of the MSM and its allies winning the elections again in 2024! The people are crying out for change.
* The people in the rural areas with whom you would be quite familiar are usually reluctant to speak their minds about their political preferences, but do you get the feeling that they are not in two minds about where their support will go irrespective of however much water will flow under the bridge until 2024?
I believe people in the rural areas and, I suppose, elsewhere too, can be separated into three groups according to their political preferences.
One group is made up of those who are clearly against the government. Most of them support a traditional party, but some are in favour of an alternative opposition.
A second group are the MSM supporters. They typically come from a given community or age group and see nothing wrong with the government’s doings. Some of these people are die-hards and will openly support the government, but the majority are more reserved.
The third group includes public officers, police officers and their close relatives. Their voting behaviour is hard to predict. They may be swing-voters, who decide where to throw their weight depending on how “much water flows under the bridge”, or they may have their personal interest aligned with the current regime.
In general, I believe most voters have already made up their mind.
* What are your thoughts about how the main opposition parties are doing? Do you think they will live up to the expectations of their supporters?
At the moment, we do not have a unified Opposition. The Plateforme de l’Espoir hopes that the Labour Party joins in, and negotiations between the two are under way. The recent exchange between Mohamed and Bhadain may complicate things a bit. However, just like birds of the same feather flock together, I believe that all those who wish to see the MSM government out, should form a united front against the common adversary.
The over-riding goal for the Opposition should be to win the 2024 elections. Everything else should be secondary. This means that Opposition members should set their egos aside, and think and act in the national interest. That they do so is not just a political imperative, it is a moral obligation.
Now, some people believe that the old parties should make way for new ones. To them, my message couldn’t be clearer: stop fooling yourself! This is not how politics works in Mauritius. By splitting up the votes of those who wish to vote against the incumbent, new parties, or a divided Opposition for that matter, will only help the MSM, whose minority voters remain loyal to their party.
Like it or not, we need the traditional parties in a new government and, in a way, they are our only hope for change. What most supporters want to see, however, is a commitment to sweeping reforms, and an action-driven agenda. The Opposition parties are all too aware of the people’s expectations and demands, and once they set up a common front, they will work on an inclusive political manifesto.
* Do you sometimes pause and reflect on where we are today and where we might have been with the right political leadership? We may win elections with higher pensions for the elderly, but we may not be doing the right things for the present and next generations. We could also be missing out on greater opportunities for placing the country on a much higher development level, don’t you think?
Oh, I reflect on it constantly! As an economist, I always say that development is felt, not seen.
With this government, since 2014, economic development has been all about big flashy projects to show. That has led the country down a dangerous path of spending and indebtedness for which future generations will have to pay. They will also moan the environmental damage that the country has suffered as trees have been replaced with infrastructure; as real estate projects continue to wreck the island’s natural beauty; and as the ocean has been polluted by an oil spill than stinks of government incompetence.
Populist measures, like higher pensions, are easy and tempting to promise. If no government before 2014, did it, that’s because they were economically responsible and accountable. The MSM-led government has no ethics. They would do anything to stay in power.
* Published in print edition on 18 February 2022
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