‘The toughest reforms have taken place at the peak of economic crises.
The time is ripe for reform, and the government knows it well’
Interview – Dr Vinaye Ancharaz, International Economic Consultant
* ‘It is time for the government to demand the community responsible for the present-day ‘malaise creole’ to take bold measures to address it’
* ‘Further tax increases will be unpalatable in a politically-charged situation’
Dr Vinaye Ancharaz, International Economic Consultant, shares his views on the current economic situation in view of the forthcoming opening of borders. He feesl that government should revisit the provisions for quarantine for tourists so as to incentivise them to come as well as to make them feel that the country is a safe destination. He also makes some sharp observations on the misgovernance that is happening and some suggestions about the way forward to address the problems of the economy and poverty, including land distribution and social housing.
Mauritius Times: There has been tremendous pressure from Business on the government for the reopening of our borders, and the second phase before the last and final one will begin next week. Does it mean that this measure will reignite the country’s already ailing economy?
Vinaye Ancharaz: Every country in the world is facing a difficult choice. Closing off borders certainly helps in getting a handle on the pandemic. But it deals a severe blow to the economy. Either way, there will be hardships.
The longer we keep our borders closed, the more will the travel and tourism industry suffer. This sector contributes almost 10% to GDP and accounts for 6% of direct employment. If we add the number of people employed in tourism-related activities, the total employment figure may double. Tourism generated some Rs 63 billion in foreign exchange earnings in 2019, representing 35% of goods and services exports.
These figures suggest that the economic impacts of sealing off the borders will be drastic. Yet they do not reflect a range of spillover effects arising from the linkages of the tourism industry with the domestic economy. For example, local farmers supplying vegetables to hotels, hotel-based tour and taxi operators, leisure and entertainment service providers, etc.
While keeping borders closed will surely hurt the economy, it is debatable whether opening up will reignite it. This is because of the conditions under which the borders will be allowed to open. Imposing mandatory quarantine at a cost of Rs50,000 is one condition that is likely to keep the tourists away from our shores. Data suggests that each tourist spends on average 9 days on the island. Requiring them to spend 14 days in a designated quarantine centre imposes extra costs in terms of time and money that most tourists cannot afford to bear.
While it is important to protect public health and control the spread of Coronavirus, doing so through such draconian measures is totally counterproductive. Government should review this condition. I believe more reliable and more frequent testing, self-quarantine for returning residents, and combining quarantine for tourists with leisure and entertainment to create a sense of normal holiday can do much to help.
These measures will need to be well advertised to convey to potential visitors that they are welcome to Mauritius if they could keep safe.
* Dr Soumya Swaminathan, chief scientist of the WHO says that there is a real risk of a second wave as economies reopen, and there would be a need to live with and manage this virus for the next couple of years until an effective vaccine emerges. How long the pain for Mauritius and our export markets will last remains an open question, but do we know how long our economy can absorb the Covid-19 shock?
The economic situation is Mauritius was already weak before Covid-19 struck. Growth had slumped and most economic sectors seemed to have run out of steam. The government’s mismanagement of the economy, with a skyrocketing public debt, a weakening rupee, rising labour costs and declining competitiveness did not augur well for the country’s future. The pandemic has only made matters incrementally worse.
If the pandemic continues without an effective vaccine, Mauritius will start to see a severe foreign exchange shortage in about six months’ time. This is largely because the pandemic has caused a drastic slowdown in our exports, particularly of services, while imports continue to increase unchecked. In February 2020, Mauritius had about 16 months of import cover in foreign reserves. In the first quarter of 2020, the country recorded a balance-of-payments deficit of nearly Rs6 billion (compared to a surplus of over Rs7 billion for the corresponding period in 2019). At this rate, reserves will be depleted rapidly, and if the government continues to plough into the Bank of Mauritius coffers, very soon the country will be confronted with a situation where it will neither be able to pay for its imports nor defend the rupee against external pressures. Already, the depreciation of the rupee is fueling a dose of imported inflation. This will get worse.
* Besides the cost to the Mauritian economy of the lockdown and closure of borders, further public spending to prevent a deep depression will probably far exceed the current government assistance to employees and Business. How will Mauritius finance all of that?
Governments around the world are injecting massive amounts of spending to prop up their economies and sustain livelihoods during the pandemic. Germany’s stimulus package in response to Covid-19 amounts to a whopping 33% of GDP. Closer to Mauritius, South Africa is spending close to 9% of its GDP to support its economy. The Mauritius government has announced a series of fiscal and monetary measures, a key component of which is the Wage Assistance Scheme that has absorbed some Rs25 billion so far. Smaller amounts have been proposed to support public health and SMEs. Altogether, the stimulus package amounts to an estimated 6.7% of GDP. That’s tiny compared to what other countries are doing.
As the economic crisis deepens, and the pandemic lingers on with no vaccine in sight, the government will have to inject more cash to support those currently out of job. I’ve said it before, and I maintain: The Wage Assistance Scheme is underfunded. Doling out Rs5,100 to a head of household at a time of soaring inflation brings little relief. But the government is incapable of doing more. Reckless spending over the past five years has seriously constrained the fiscal space, forcing the government to dig into the central bank’s reserves to maintain a historic balanced budget for the current fiscal year.
The government also announced an increase in the Solidarity Levy for high-income earners and a levy on corporates. These measures will bring in some extra revenue but that won’t be enough to maintain the fiscal stimulus to business and income support to employees left jobless by business closures. At some point, therefore, the government will be forced to borrow more — and find a convenient scapegoat in Covid-19 — since further tax increases will be unpalatable in a politically-charged situation.
* Are the fears of the worse-to-come scenario in terms of job losses and business failures therefore well-founded?
As the pandemic continues, and finances run low, the wage assistance scheme may become unsustainable. If the government can no longer support employees, companies will be forced to downsize or wind up, leading to a sharp increase in unemployment in the most affected sectors, namely, travel and tourism, and related services, such as restaurants. So, fears of a worse-case scenario are well-founded, but, at this stage, we are hopeful that a vaccine will become available soon.
* There is continuing opacity regarding government’s assistance to Business. The conditions under which this assistance will be provided, the conditions attached and the beneficiaries remain unknown and shielded from parliamentary scrutiny for the duration of the adjournment of Parliament. How do you react to that state of affairs?
Adjournment, yes, but even when the Parliament is in session and questions are asked, the government remains evasive in its answers. We haven’t forgotten the scandal around the emergency procurement of medical supplies and equipment during the confinement. The public knows that political cronies benefited most from those purchases. Similarly, we still remember how some companies mysteriously vanished after gobbling up millions in stimulus funds during the 2008 financial crisis. The same will inevitably happen again: the writing is on the wall. We have a government which cannot care less about accountability, and the ‘chamchas’ have lined up with their begging bowls.
A responsible government would publish, and update on a regular basis, a list of all beneficiaries of stimulus funds, including the amount and type of assistance received, and the commitment made by the beneficiary. But we know that this is too much to ask of this government.
* In light of the severe economic consequences of closed and restricted borders on the one hand, and the view expressed by medical experts and researchers that the coronavirus won’t go away soon and an effective vaccine won’t be forthcoming until perhaps mid-2021 on the other hand, shouldn’t this uncertainty call for a rethink of the foundations on which our economy rests with a view to increasing national resilience?
The pandemic has indeed underscored the need for building economic resilience. A resilient economy is one that is diversified in the range of goods and services it produces and the markets it sells to. The Mauritian economy has, for long, rested on sugar, manufacturing, financial services and tourism as the main income-generating sectors. Diversification into other sectors, such as ICT or the blue economy, has been slow. As a small economy, Mauritius is forced to look to international markets to sustain economic progress. Such openness exposes the country to external shocks.
Several paths are available to Mauritius to boost its economic resilience. First, I think it is time that we look at the potential of the local market. For example, hotels with vacant rooms are now trying to woo the Mauritian public through all sorts of deals. Yet, in normal times, they tend to focus almost exclusively on foreign visitors. Why can’t hotels serve both markets concurrently? This will allow them to reduce their dependence on foreign markets. Second, as the pandemic disrupted supply chains, Mauritians have woken up to the critical need for greater self-sufficiency in food. I believe that agriculture’s potential in Mauritius is yet to be fully exploited, especially as sugar cane cultivation is not seen as profitable anymore. Mauritius is a net food importer, with food imports amounting to Rs 36 billion, representing 18% of the country’s total import bill in 2019. Clearly, this can change with the right government incentives and cooperation with the private sector.
* The importance and weight of our tourism industry in Mauritius’ GDP has grown over the years, but given its vulnerability to climate change and rising sea levels as well as to pandemics like the Covid-19, do you think it would also be necessary to scale down its importance in our economy?
I won’t say that we need to scale down the importance of tourism in the economy. Instead, as I said earlier, we need to diversify the country’s industrial base so that we depend less on tourism, or any other sector for that matter. Tourism will remain an important pillar of the economy for years to come. However, given that the sector is vulnerable to the effects of climate change and is highly income-sensitive, we should rethink our tourism strategy to consider tourist attractions other than beaches and high-end, rather than mass, tourism, which is less sensitive to economic shocks.
* It’s being said the current pandemic provides us with a once in a 100-year chance to shake up the system, revisit the economic structures and policies and drive the economic democratisation agenda. Do you think that’s feasible in the current circumstances?
Research shows that the toughest reforms have taken place at the peak of economic crises. So, the time is ripe for reform, and the government knows it well. The proposed change in the pension system with the substitution of the NPF by the new Contribution sociale généralisée (CSG), tax rates of up to 40% on high-income earners, postponement of PRB, etc. are all examples of drastic measures taken by the government in the hope that the bitter pill will be easier to swallow when the economy is seriously ill. Whether the government has succeeded in these endeavors, time will tell…
The Covid-19 pandemic has also brought to light some old issues that refuse to go away. We remember, for example, how squatters were forced out of their humble shelters as the latter came under the bulldozer, and how entire families were left to the mercy of the elements during a cold winter. While this problem, and the larger problem of poverty and homelessness, is unrelated to the pandemic, the economic crisis that it triggered has brought the problem into sharper focus.
Unfortunately, whenever the problem of social housing comes into the public domain, emotions run high. There is a belief that this problem is a Creole problem, and perhaps rightly so. But it is important that we understand its origins. Economic research shows that historical events have persistence effects on the human condition decades or centuries later.
In Mauritius, when the French colonists landed, they just claimed the land as theirs, and this passed on from generation to generation, with the result that a large share of land today is owned by a tiny Franco-Mauritian community. Members of the Asian community also own smaller plots of land. These were bought by their ancestors during the ‘morcellements’ of the late 19th and early 20th centuries using their hard-earned savings.
The Creole ancestors, the slaves, also worked hard, but they received no pay, and although they were free when the ‘morcellements’ took place, they had no money to buy land. The compensation meant to be paid to the freed slaves was shamelessly pocketed by the colonists. This lack of land titles has only been perpetuated through the years even if some have managed to acquire a plot through social mobility.
How do we correct this historical injustice? You call it economic democratization, that is, a fairer distribution of assets and resources among the population. We have fiddled with this idea in the past. It is time for the government to demand the community responsible for the present-day ‘malaise creole’ to take bold measures to address it.
* The pandemic has revealed the critical importance to the country of, amongst other things a sound and efficient public health/healthcare system, less waste in government expenditures as detailed out in Audit Reports year after year to help us weather economic storms when they happen – all of which have to be steered by a public interest-driven political leadership and an efficient civil service. Why are we unable to do that?
Successive governments have grappled with the sheer waste of resources that is highlighted by the Audit reports every year. Last year, some Rs700 million went down the drain because of mismanagement in the public sector. Yet nothing has been done to date to address such waste. The reason is a lack of willpower, perhaps more so by the current government, which, on the contrary, is perpetuating wasteful and dubious practices— be it through opaque emergency procurement, or nomination of political cronies in positions of responsibility, or rewarding them with public funds.
The solution is surprisingly simple. The government needs to set up an institution that would work closely with all government departments to monitor their expenditure, demand explanations for wasteful spending or budget overruns, and punish those that incur the biggest waste of resources. But I would be surprised if this happened under the current regime.
* BBC reported recently that China is going to face an ‘unprecedented global backlash that could destabilise its reign as the world’s factory of choice’ and India is keen ‘to make inroads into a space it hopes China will vacate sooner rather than later’. Scale no doubt matters, but are there opportunities for Mauritius in the post-Covid world?
China has dominated world production over the past two decades thanks to its large pool of cheap and adaptable labour. However, the pandemic has triggered an unprecedented backlash against China because of the country’s handling of the virus in its early days. Anti-China sentiments were already high in some countries, notably in the US, where President Trump’s daring decision to impose tariffs on Chinese products has degenerated into an open trade war. The pandemic has exacerbated these sentiments as many countries and people have lost trust in China. This will lead to less foreign investment flows into China and reduced demand for Chinese products.
As the world’s factory downsizes, opportunities will emerge for many countries across the world. India, for example, stands ready to fill the gap left by China, but so are some African countries, such as Ethiopia, which has been described as Africa’s next workshop. Can Mauritius benefit too? I doubt it. Mauritius is a high-cost, low-productivity country that cannot compete in many of the products in which China is known to have a comparative advantage. In the clothing sector, some Mauritian firms have thrived on the basis of foreign labour. But these firms bring very little value to the domestic economy, although their contribution to foreign exchange earnings could be significant.
* Published in print edition on 25 September 2020
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