Interview – Dr Vinaye Ancharaz, International Economic Consultant
by showing such utter disrespect for the Bretton Woods institution’
* ‘The Budget falls short of the major expectations of economic experts as well as the common man. This will make economic recovery protracted and harder’
Economist Vinaye Ancharaz is not as optimistic as the Finance Minister about the potential of the measures he has announced in the Budget to lift the economy out of its current impasse. He is sceptical about many of the projections made, such as the number of tourist arrivals during the year, the level of debt and the other indicators. There ought to have been genuine reforms, and pay heed to the IMF’s remarks about the MIC. The one positive item is about green energy – but it too requires more than just an announcement in the Budget. There are insufficient measures to take us out of the black list, and hardly any that will create jobs and employment.
Mauritius Times: What’s your opinion, as an economist, of the second budget of Minister Reganaden Padayachy for the year 2021-2022? Is it a befitting answer to the serious challenges the country is facing as a result of the Covid-19 pandemic?
Vinaye Ancharaz: Honestly, I think the Minister has missed a crucial opportunity to lay the groundwork for economic recovery. Last year’s budget started the process, and was bold in several ways even if its financing raised a lot of controversy. However, this budget failed to maintain continuity. It is more of a patchwork of measures, lacking coherence and vision. It will not have the much-expected impact.
* There is broad consensus about the state of the macroeconomic situation, which was already bad, and has been made worse by the pandemic. But do you see the budget capable of reversing this trend and of lifting the economy back on a higher growth trajectory?
Indeed, the economy was not doing very well even before the pandemic hit. Recall that the growth rate had hovered under 4% since 2012 and dipped further to 3% in 2019. The tourism sector, which has been hit the hardest by Covid-19, was already showing signs of fatigue, contracting by 1% in 2019. Merchandise exports have been on a steady downward trend since 2015, and in 2019, we imported three times more than we exported, suggesting a sharp decline in our international competitiveness. And although the unemployment rate had fallen to 7%, one out of four youth remained unemployed in 2019.
Obviously, all these indicators have taken the toll of the pandemic. The economy contracted by 15% in 2020, and although official figures put the unemployment rate for 2020 at 9.2%, few pundits actually trust the number. On the other hand, inflation, which had been practically absent from the economic landscape in recent years, is coming back with a vengeance, and even here few people believe that the inflation rate is currently 2.4%, as reported.
Unfortunately, the Budget does not do enough to lift the economy out of the current slump. The government’s idea of boosting growth relies on expectations of 650,000 tourists over the next financial year and on the construction of drains! I do not see any substantial measures aimed at reversing the decline in export competitiveness, boosting exports and promoting new growth poles.
And while the Minister reiterated the government’s commitment to move out of the EU/FATF grey list, few experts are convinced that the few measures proposed in the Budget will succeed in doing so. This is especially so because Mauritius failed the test in February 2021, and there is a feeling that the EU is rather nervous about the unprecedented level of institutional decay and bad governance under the current regime.
* The Finance minister is expecting growth to reach 9% on the strength of an improved performance of the economy: ‘The measures announced in this Budget will accelerate our economic recovery and boost our GDP growth, putting the level of our public debt on a downward trend,’ he said. Don’t you think that that could be an attainable goal if not in the short but at least in the medium term?
May be in the medium term, but very unlikely over the course of the next financial year! Let me explain.
First, the target of 650,000 tourists, which is critical to the 9% expected growth rate, does not look attainable in just one year. The pandemic has reduced real incomes across the world, including in our main tourist markets, changed people’s priorities, and altered travellers’ preferences to short-haul destinations. All of this has caused a sharp drop in the global demand for travel, which, unfortunately, no amount of advertising will be able to counter. These adverse factors will play against Mauritius for several years to come. To make matters worse, the fate of the tourism industry is intricately tied to that of the national airline. If a lasting solution to the Air Mauritius crisis is not found soon, tourist arrivals will remain subdued even after borders open.
Second, the government’s recovery plan puts a premium on public infrastructure investment. This follows the Keynesian logic: public investment creates jobs, supports domestic demand and raises national income. However, if the big-ticket investment projects of the past few years are to serve as any guide, I remain sceptical about the multiplier effects of public spending. This is because those projects have created few jobs for locals while causing a substantial leakage of income as remittances are sent abroad.
Moreover, at a time when the pandemic has dented productive capacity, the focus of government investment should have been on rebuilding such capacity in the real sectors rather than on constructing drains and dams that improve living standards but do little to create jobs and boost productive capacity.
Third, the measures proposed to support exports and boost export competitiveness are at best palliative. For example, the four major trade agreements that came into force this year, in theory, hold good promise for Mauritius’ exports. However, experience teaches us that the mere existence of new, more open markets is no guarantee that exports to these markets will increase.
In the absence of a strategic plan to exploit the opportunities presented by free trade protocols, there is a risk that they will simply cause our imports to swell and our trade deficits to widen. The Budget mentions an array of initiatives to be launched by the EDB, but their effectiveness at this stage remains in doubt for EDB as an apex institution is yet to prove its worth. Similarly, a series of measures are proposed to maintain export competitiveness. This choice of words is puzzling since export competitiveness has tanked and is in urgent need of a boost. I doubt that the Budget proposals will succeed in doing that.
Finally, Minister’s claim that the Budget will put “public debt on a downward trend” is equally dubious. Officially, the national debt has reached 95% of GDP, but most experts agree that this figure seriously underestimates the true level of debt, which has been artificially depressed by clever, albeit reprehensible, accounting tactics. The public debt level is dangerous approaching the half-trillion-rupee mark. Last year, there was no borrowing since the government ploughed Rs50 billion from the central bank’s reserves. This year, when an ailing economy is supposed to have cut short government revenue, the budget is being financed by indirect taxes and by drawing Rs9 billion from the reserves of four state-owned enterprises. These measures are unsustainable. I suspect that next year, the government will be back to borrowing to support its spending spree.
* In other words, you do not see the reopening of our borders to vaccinated tourists as from October 1 – if everything goes well – and the renewed focus on and investments in green energy as sufficient to kick start economic recovery?
I think I’ve adequately explained why I don’t believe that the projected re-opening of our borders will give the expected boost to tourist arrivals. Let me focus on the second part of your question.
The Minister spoke of a green energy industry as a new pole of economic growth. The industry will derive impetus from the government’s goal to produce 60% of the country’s energy needs from renewable sources and to phase out the use of coal by 2030, that is, in less than 10 years. By any account, these are overly ambitious targets that have never before been discussed and agreed upon.
In fact, I was surprised that such important goals were so casually announced in a Budget speech. It only echoes the view that the government is riding the wave of announcement effects, of which there were plenty in the Budget. Coming from a government that has paid lip service to the environment since 2014, the proposal of a green energy industry will, I am sure, be closely monitored by environmentalists and economists alike.
As an economist, however, I am yet to be convinced about the contribution that such an industry, in its announced format, would make to GDP and jobs. Most of the measures contained in the Budget are about enabling companies and individuals to sell the excess energy they produce from renewable sources directly to the CEB. The Budget also announces the setting up of a National Biomass Framework but I doubt if electricity from bagasse qualifies as green energy although biomass may be considered a renewable energy source.
These measures are certainly welcome as they will support the country’s transition to a greener economy. However, turning green energy into an industry requires much more than that. It calls for massive investments in solar and wind farms, which are known to have created remunerative employment opportunities for skilled technicians. The Budget mentions two projects in this direction: a 10 MW solar farm and a 40 MW wind farm. This is a good start. The challenge in the years to come will be to scale up these green energy initiatives to a level where they could be referred to an industry as such.
* There is no indication as to whether the Government will heed the comments of the IMF with regard to its monetary policy, transfers from the central bank and the MIC. Questions are therefore being asked on the financing of this budget. What’s your view on that?
It is clear that the Government ignored the IMF’s reprimand. The fact that the Minister reported a budget deficit of 5.6% for the current financial year suggests that a major chunk of the Rs60 billion ‘grant’ by the Bank of Mauritius was treated as revenue rather than as a financing item. If the whole amount was correctly treated as a source of financing, the budget deficit would reach about 19% of GDP!
The effect of the central bank financing has been to increase the monetary base by some 40%. Such a massive increase in liquidity will inevitably have inflationary consequences, and we have just begun to see a hike in consumer prices that will only get more pronounced in the months to come as the rupee continues to slide.
Moreover, the IMF advised against the BoM running a private company, the MIC, since it was in clear violation of the fundamental mandate of a central bank, whose role is limited to that of a regulator and conductor of monetary policy. Clearly, again, the BoM has chosen to overlook the IMF’s recommendation as it shows no sign of letting up. The Government is playing with fire by showing such utter disrespect for the Bretton Woods institution.
* At the end of the day, what do you see missing in this budget?
A number of things are missing from the Budget. Before Budget Day, there was much speculation that the Budget would be an austerity-budget since the Minister of Finance had reportedly asked government ministries and departments to target a 25% cut in recurrent expenditure. While this goal was ostensibly unattainable, we nevertheless expected greater efficiency in government spending, especially in light of the National Audit Report, which drew attention to the unprecedented level of waste of public funds last year. However, the Budget shows a 4% increase in recurrent expenditure!
As an economist, I was also expecting the Budget to be one of reforms – reform of policy incentives that have gone astray, critical sectoral reforms, institutional reforms, you name it…This did not happen. Instead, the Budget has come up with a rather long list of little white elephants that will litter the institutional landscape of the country – the Industrial Financial Institution, the Financial Crime Commission, the Regulatory Impact Assessment Office, the Emerging Technologies Council, the National Environment Cleaning Authority…
* If we are not going to be any better, as you say, despite the measures that have been set out in the Budget (the monitoring and implementation of which will take care of by an Agency which will report on progress achieved to the PMO), what will be the economic situation like two or three years down the line?
Indeed, the one institution that I welcome is the proposed Project Implementation and Monitoring Agency (PIMA) that will oversee, coordinate and assist the implementation of the budgetary measures and projects. However, the Minister missed the opportunity to pitch PIMA as a high-standing institution with powers to sanction wastage, inefficiency and weak implementation.
Moreover, the fact that the Agency will be based at the Ministry of Finance raises doubt about its real effectiveness. It should have been a completely independent institution.
The economic situation does not look too good. The government is betting on a 9% growth rate this year. This will depend to a large extent on how the tourism sector responds to the reopening of borders on 15th July. As things stand, the target of 650,000 tourists over the next 12 months looks unrealistic. The economic recovery plan centres on public infrastructure investment – in drains, water supply and land transport. Several of these projects are simply repetitions from previous Budgets, with higher costs, and most will not have the income multiplier effect that is synonymous with job creation and growth.
The budget should have prioritized reforms and new growth poles, but other than the proposed green energy industry, which marks a positive, albeit timid, beginning, the Budget falls short of the major expectations of economic experts as well as the common man. This will make economic recovery protracted and harder.
* Published in print edition on 15 June 2021
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