“The Post-Lockdown Recovery Will Be Slow and Painful”

Interview: Vinaye Ancharaz, Economist

* ‘In 2009, Mauritius was spared only because of its low degree of financial integration in the global economy. But this time around, the economic crisis is different’

* ‘We have become a nation of entitlements. The Welfare State has reached a breaking point. Government interference in parastatals and public companies has resulted in a culture of ‘laissez-aller’, largesse and inefficiency galore!’


Economist Vinaye Ancharaz takes a bird’s eye view of the economic dimensions of the Covid-19 pandemic. Unsurprisingly, he sees the chances of any recovery taking place in 2020 as receding, so that we will have to wait until 2021 for an economic upswing. He feels that the Wage Assistance Scheme should have been better targeted instead of being applied to all private sector entities indiscriminately, and this can still be reviewed, along with taking a longer term view of seriously considering much needed tax reforms, as well as taking the drastic steps required for greater efficiency of public sector organizations like SBM, Air Mauritius, etc.


Mauritius Times: What are your feelings could be the most likely scenario over the short term? Covid-19 vanishes and our economy recovers but rather tepidly, or it lingers and we are in for a deep recession? 

Vinaye Ancharaz: There’s no clear answer to your question. The economic evolution here in Mauritius and globally will, of course, depend on the duration of the pandemic. In Mauritius, the number of cases seems to have levelled off, and we haven’t had any new cases for several days in a row. I was therefore puzzled by the government’s decision to extend the lockdown until June 1st. Like many, I wonder if there’s more to it than meets the eye. Perhaps time will tell…

There are multiple scenarios, but two of them stand out. One is that the worst is over, and that we should prepare for a gradual return to economic activity — as envisaged by the Government’s plan. The other — rather extreme if we were to subscribe to the view of some experts who have studied past pandemics — is that a second wave, perhaps deadlier, could be around the corner.

I certainly don’t want to sound as a prophet of doom — quite to the contrary. I look forward to the economy picking up in the months to come, slowly but surely. However, one thing that the pandemic has taught us is that we can never be too prepared. So, while we try to return to ‘business as usual’ — if that is possible — we should be ever conscious of how fragile life and livelihoods could be, and we should try harder to be resilient in the broad sense of the term.

* What are the odds for a quick economic recovery post-lockdown? Will it be wholly dependent on how the global economy will recover, or do you subscribe to the view expressed here and abroad that 2020 is wasted anyway, and we’d rather wait for better days in 2021?

The post-lockdown recovery will be slow and painful. The IMF forecasts that GDP in Mauritius will contract by 6.8% in 2020. However, I believe this is a best-case scenario. The actual contraction will be in excess of 10%! As you hinted in your question, the pace of economic recovery will depend to a significant extent on how the global economy responds in the aftermath of the Covid-19 crisis. The US, the world’s biggest economy, has borne the brunt of the pandemic, and no end is in sight yet. Europe, our prime export market, has also been severely hit, and growth in the Euro Area is expected to top —7.5%.

Mauritius will not be able to escape from the tentacles of the global recession in 2020. What is interesting to note about the current recession is that it will hit Mauritius harder than many other economies, unlike the recession induced by the 2008 financial crisis. In 2009, for example, while the world economy contracted by 1.7%, Mauritius registered a respectable GDP growth of 2.5%. But this is nothing to cheer about: the country was spared only because of its low degree of financial integration in the global economy. But this time around, the economic crisis is different and the Mauritian economy, weakened by years of mismanagement and bad governance, will have little cover.

Our merchandise exports, or whatever remains of them, will fall sharply; tourist arrivals are not expected to pick up until much later in 2021; and, locally, economic activity will remain subdued as the retail sector, construction and a host of other services, including restaurants, entertainment, transportation and education services pick up timidly, subject to Government directives. What I worry more is that we may never quite return to normalcy as the pandemic would have left deep scars and a permanent fear of crowds. This will condemn businesses to operate below capacity for months, if not years to come, with attendant consequences on output and employment.

So, while we wait for better days in 2021, we have to endure the pains of a full-blown economic recession in 2020. However, this is not to say that the year is wasted. The alternative scenario could have been far more dramatic than what we have witnessed. While every loss of life is deplorable, I think it’s safe to say that, at the end of the day, we came out of the pandemic relatively unscathed. As I’ve said before, the priority should be to save lives — for without life, there is no livelihood, and without people, there is no economy. On that count, Mauritius did rather well.

* Is it too early to talk about how our economy might be transformed or how it will have to evolve to avoid the weaknesses noted in the context of the pandemic?

No, it’s never too early to talk about the economic weaknesses that were exposed by the coronavirus pandemic and what we need to do to avoid them in the future — with or without such pandemics.

I think the most important lesson we learned is the urgent need for the country to be self-sufficient in food. Food imports amounted to Rs 36 billion in 2019, representing 18% of the country’s total import bill. Of this amount, Rs 4 billion was spent on fruits and vegetables, and a similar amount on dairy products. While I agree that we cannot produce everything we consume, it is inconceivable that, at a time when we are lamenting the death of king Sugar, we cannot find ways to use our agricultural lands more judiciously.

We imported some 12,000 tons of potatoes and over 15,000 tons of onions last year! And we saw the chaos that the ongoing pandemic has created around the sale of these products! Can’t we grow more of these staples locally? Even chicken that we claim as 100% locally-bred is fed with imported maize. We imported over 100,000 tons of this cereal in 2019!

Seriously, I think there is a major mismatch between our needs and our capabilities in the agricultural sector. I believe it is high time that we came up with a food security bill to encourage greater local production of basic commodities and reduce our reliance on imports. This is not just to protect ourselves at times of disruption in global supply chains, it also makes good economic sense.

Globally, countries are waking up to their agricultural potential. A robust and efficient agricultural sector is the hallmark of a modern economy. But in Mauritius, incentives for agricultural production have been distorted — either in favour of sugar production or in favour of non-agricultural activities, such as IRS, RES, PDS, etc., that are competing land away from primary agricultural use. There is urgent need to take a holistic look at the agricultural sector and enact critical reforms to boost and diversify local food production.

Beyond food security, the coronavirus pandemic has highlighted the virtues of a well-diversified economy, whether in terms of sectors or markets. Mauritius is a services-oriented economy, dominated by tourism, financial services and retail trade. But tradable services are extremely vulnerable to twists and turns in the global economy. While we rethink our diversification strategy, it is important that we also look regionally. African and other emerging economies are more resilient to global crises and provide a much-needed cushion.

There are several other lessons that need to be debated in the months to come — such as the need for a robust public health sector, alternative modes of teaching and learning, flexitime and working from home — as well as new opportunities emerging in the wake of the pandemic, such as home delivery services, online courses, etc.

Last, but not least, we cannot be ready enough for a pandemic! It is important for the government to constantly build its war chest and keep a Plan B at hand at all times. Just like it is important for people to rethink their priorities and save for rainy days.

* The cost to the country of 40 days into the lockdown has been estimated to be around 10% of GDP. That was stated by the Finance minister last week in the wake of the extension to 1 June 20. Another month of confinement will add up to the cost to the country of the pandemic even if some sectors will see a partial easing of the lockdown mid-June. The questions of who will and how to pay for the pandemic will sooner or later have to be addressed. What’s your take on these questions?

 

I believe there will be a 2-digit contraction of the economy this year before we start picking up in 2021. But while it is true that the lockdown has been extended to 1st June, the economy has started opening up gradually, and the confinement will not be as rigid as it was in the first 5 weeks. As much as I believe in protecting human life, I believe also in preserving livelihoods. So, it is imperative that economic activity is allowed to resume sooner rather than later, subject, of course, to sanitary norms and other precautionary measures.

I say this because I am aware of the hardships sustained by thousands of families who run small businesses or operate in the informal sector. While many of them are receiving Rs 5,200 as government support, this is clearly not enough. The best way to help them is by letting these people return to work.

The government had earmarked Rs 2.6 billion in the Wage Assistance Scheme to provide for the payment of salaries in the private sector. I understand that this amount covered the month of March 2020. With the lockdown extended until 1st June, I doubt if there are enough funds to cover two more months of wage support.

But, as an economist, I wonder also where the money will come from. The government has acted in extremely irresponsible ways over the past 5 years, borrowing as if there was no future and squandering public finances to make good on its electoral promises. Several large-scale investment projects that guzzled up billions of rupees are of dubious economic value, and some will probably be left in decay. Borrowing has reached alarming levels, and will likely entail a downgrading of the country’s credit ratings. Ploughing out Rs18 billion from the coffers of the central bank was an ill-inspired move.

All of this has severely limited the government’s fiscal space. Tax revenues will dwindle as economic activity remains subdued, and the government cannot borrow without trespassing the budget deficit ceiling of 65%. And, as if these troubles were not enough, the government will have to grapple with two state companies, Air Mauritius and SBM, in dire straits largely due to its own mismanagement down the years.

* How is Government doing so far with its assistance measures directed towards the self-employed and to private sector employers? Is it doing the best it could, or not nearly enough? Or is it misdirected in some sectors?

As I said before, the Wage Assistance Scheme is underfunded and it isn’t clear where additional funds will come from. Will it be from the Covid-19 Solidarity Fund? Maybe. But it is clear that the government is not doing the best it could. In other countries, governments are pumping out billions of dollars to support livelihoods and to stimulate the economy. The Rs 9 billion fund that the government announced earlier will not be enough. It only shows that the government has run out of money!

On the other hand, the Wage Assistance Scheme is designed to cover the entire private sector! It does not distinguish between small and large enterprises; essential and non-essential sectors; firms in difficulty and companies making billions in profit, etc. In my view, this is an inefficient use of scarce funds. The Scheme would achieve more if it was targeted to the needy. But I can understand the political motives underlying the current design of the Scheme. By paying part of the private sector’s wage bill, the government seeks to ensure that jobs are preserved. For it will have a legitimate right to query companies that took money from the Scheme and still closed down or downsized. We certainly don’t want a repeat of the 2009 stimulus package saga!

* A possible second wave and non-recovery of world trade could work against our economic recovery efforts, but what about the major factors on our side that may help a quick turnaround? A proactive central bank? Decisive political leadership, or financial assistance from the IMF and/or the much talked about Soodhun-negotiated loans?

All of what you mention will have a role to play in the post-pandemic economic recovery. The Bank of Mauritius has slashed the repo rate by 1% and proposed measures to support cash-strapped companies. When it comes to financing, several proposals have been floated by people in the government as well as self-proclaimed pundits outside the corridors of power. There is much talk about ‘helicopter money’ — basically, the idea that the central bank puts into circulation billions of rupees of newly printed money. The argument is that this will boost purchasing power at a time of low inflation. But the argument is flawed. True, inflation is currently low, but it is ridiculous to assume that it will remain so. Already, the IMF has forecast an inflation of 8.5% this year; my take is that the inflation rate will move into double-digit territory. With helicopter money, along with the continued depreciation of the rupee, we may well be looking at inflation of the kind we last saw in the early 1980s.

I am not in favour of what you call ‘Soodhun-negotiated loans’ — for one simple reason. We don’t know the real terms on which such loans are given to the country. Personally, I would prefer getting a loan from the IMF. It will surely come with conditionality, but I believe we need it to start some critically-needed reforms.

Almost all sectors of the economy are crying out for reform. We have become a nation of entitlements. The Welfare State has reached a breaking point. The public service is over-staffed and underproductive. Government interference in parastatals and public companies in which the state is a major shareholder has resulted in a culture of ‘laissez-aller’, largesse and inefficiency galore! There is hardly any state-run company earning a profit. Governance finances need to be revamped. The list goes on…

* What do you think could be the other (best) possible steps to speed up recovery? A revision of our flat tax system, tax cuts, a special Covid budget with amongst others the introduction of a Covid tax?

It will be a combination of different things — a comprehensive package spanning the short-term to the long-term. Immediate measures include restoring the government budget. I welcome the government’s call for a 10% cut across Ministries’ budgets and a freeze on recruitment in the civil service. (Recall that during the 2019 electoral campaign, the same government had promised to create 10,000 jobs in the public sector!) But, in light of the wastages publicized by the National Audit Office each year, I believe there’s scope for more.

On the financing side, I think it’s high time that we revisited our income tax system. When the government proposed changes in the tax bands in the last Budget, I was hoping to see a more progressive tax system. Instead, the reforms went backwards: the previously 15% flat rate was retained while a lower band at 10% was introduced! It is clear that this was a populist measure aimed at winning votes, rather than a fiscally responsible act that would secure the country’s finances.

Tax rates in Mauritius are among the lowest in the world. At current trends, the welfare state is unsustainable, but past governments have shied away from politically difficult tax reforms. Now is the time to rethink the tax system. I believe there is room to introduce a 25% income tax rate for both individuals and companies.

* Once Covid is gone and economic recovery is well underway, what should be the priorities of the Government? 

Over the longer term, the government should revisit a number of shortcomings that became glaringly clear during the pandemic. I talked about the need for greater food security, which requires that the government rethinks its incentives across sectors to restore balance. I fail to understand how large sugar estates could be granted all kinds of tax concessions when they convert agricultural land into luxury villas while small owners are threatened with stifling taxes when they want to move out of unprofitable cane cultivation. It is this kind of deranged incentives that have encouraged some activities to flourish at the expense of productive sectors.

On the other hand, we brag ourselves as a modern country, and we have big cars and luxury malls to show off for that. But easy lease facilities are causing young employees to sink in debt while exorbitant rents for stalls in our shopping malls are choking life out of small businesses. I believe it is time for government to come up with some form of rent control.

We are a small economy infested with monopolistic practices. When markets fail, economists recommend government intervention to correct market failures. I am one of those economists, and I believe in the virtues of free markets and free trade. But economic liberalization in Mauritius has been pursued to its very limits, leaving businesses dangerously exposed to external competition and to excessive profiteering by unscrupulous traders and investors. In a small country like ours, we cannot expect competition to be fair.

The Competition Commission of Mauritius, supposed to be a vanguard against market power, has failed lamentably. It is imperative that the government empowers the institution to fully play the role it is designed to play. At the same time, the government should consider extending price controls to a larger number of goods and services to provide relief to both consumers and small businesses that use those products as inputs. The price controls introduced during the pandemic are a welcome start; they should not be the end!

The pandemic also revealed the size and precariousness of the informal sector. Informality makes it hard for the government to propose targeted support measures. There is need, more than ever before, for businesses to register duly. For those that prefer to remain informal for fear of paying taxes, the government should consider a nominal tax rate that could encourage them to comply.

We can’t be thankful enough for the sacrifices of frontline workers who helped combat the pandemic. Luckily, Mauritius managed to flatten the curve, preventing our healthcare facilities from being overwhelmed. But the pandemic highlighted the crucial importance of a modern, efficient and capable healthcare sector. Over the long term, the government should consider how this sector could be strengthened and empowered to deliver more effectively. Free healthcare should not mean cheap health care!


* Published in print edition on 5 May 2020

One Comment

Add a Comment

Your email address will not be published.