By V. Bhardwaj
Despite attempts to cleverly pepper the ERCP with the jargon of the earlier Stimulus packages, it still does demarcate itself from those earlier packages in that it anchors the growth dynamics in more solid stuff in both the short- as well as medium- to long-term, and the restructuring strategies and productivity enhancement measures easily fall in line. The stimulus Package had been criticized for not showing any clear intention to resolve the current structural imbalance in the economy, which is so dependent on the Euro market and selective capital inflows.
The measures, especially the debentures, equity, asset buy-back schemes of the Stimulus package only reflected the aim to keep the engine running until external demand picked up again. In other words, it is only provided short-term liquidity to the failing big enterprises. It amounted to a transfer of wealth from the public purse to the private sector, bankers and parasitic enterprises and institutions – with absolutely no influence over what they did.
This shortsighted strategy of an elaborate package of dole-outs — that are palliatives at best — has led us back to the same precarious situation with the present Euro crisis. Indeed the reform Agenda of 2006-10, supported by stimulus packages, had not delivered. We are far from the way to recovery, from the promised land of the higher and higher levels of capital investment of the right kind, of a more diversified globally competitive service economy in tourism, finance, IT services, BPO/KPO, legal and accounting outsourcing, media and entertainment industries as well as education, training and health care.
Growth: Like the US administration, which is envisaging the possibility of further pump-priming, government had no choice but to go in for a full-fledged compelling Rs 13 billion restructuring and de-leveraging ERCP – as the much-ballyhooed and ill-targeted stimulus plan and other measures seem so far to have yielded little measurable benefits. Our anemic recovery will have continued to be “lente, timide et graduelle”. When we compare our performance to that of our African friends, our “Great Resilience”, does not seem to be the exception. The average annual growth rate over the period 2005-09 is 4.2%, barely surpassing the average of 4% of the previous 2001-05 period. We still compare unfavourably with Sub-Saharan Africa, which have also been experiencing the “Black Swan” effects, yet averaging 5.5% over the same period.
EOE: In the Export Oriented Enterprises (EOE) sector, we thought that the back loading of the MFA (Multi Fibre Agreement) between 2000-05 which saw the loss of some 24,000 jobs, was a passing phase. Five years later, despite an earlier bout of depreciation of the rupee to artificially boost the sector, coupled with the plethora of fairs and shows of Entreprise Mauritius and the Additional Stimulus Package to “restructure” les canards boîteux, the new socio-economic model seems to have failed in revigorating the sector: The EOE sector has continued to lose employment. Since 2005, 93 enterprises have closed down and employment has fallen by 8,365. Investment in the EOE sector had decreased by 50% in 2008 and 2009. These developments may be undermining the prospects of near-term recovery in manufacturing activity. Average compensation of employees has been growing faster than productivity. A recent US International Trade Commission Report ‘Sub-Saharan African Textile and Apparel Inputs: Potential for Competitive Production’ highlights the constraints faced by the sector, namely the rising costs in terms of energy, land prices, and labour, which impede sector competitiveness. “… For example, one firm stated that spinning is more expensive in Mauritius than in China because of energy costs.” If the TINAwallahs had delivered on their promise to provide appropriate corrective measures to enhance the sector’s competitiveness, we would not thus be back to square one with again the same divisive issue of the strong v/s weak rupee back on the agenda; we would not be needing now the restructuring and de-leveraging ERCP.
Productivity: The Unit Labour Cost (ULC) for the manufacturing sector increased by 22% over the period 2005-09; the rupee however depreciated against the dollar by around 7% between 2005 and 2007, appreciated by 9.1% in 2008 and depreciated by a huge 12.4% in 2009, showing a decrease by 10.6 % in the ULC in dollar terms. Over the period 2005-09, the 22% increase in the ULC was nullified by the 23% depreciation of the rupee against the Euro. Thus, we had to continue to rely on depreciation to maintain external competitiveness in the absence of productivity enhancement in the sector. Hopefully with the ERCP, we will be able to do some catching up in the productivity race.
Tourism: The global crisis had a major impact on the tourism industry in general, including a slump in global volumes, in particular for long-haul destinations. Growth only returned to international tourism in the last quarter of 2009. Because of its status as a premium holiday island, the Mauritian tourism industry has held up better than some others but it has not been completely spared in 2009, registering a negative growth of -5.3%. Africa (+5%) was a robust performer, with sub-Saharan destinations doing particularly well.
The worrying trend in the sector is the near stagnancy in the expenditure per tourist, the slow growth of employment and the slow increase in tourism capacity and over reliance on the Euro market. Though Mauritius together with Singapore and Greece have been ranked as top performers in terms of the overall prioritization of the tourism industry by The Travel & Tourism Competitiveness Report 2009, it is among average performers in environmental sustainability (53), Health and hygiene (60) and Tourism and ICT infrastructure (59). (Tourism infrastructure means hotel rooms, presence of major car rental companies, ATMs accepting Visa cards; ICT infrastructure relates to extent of business Internet use, Internet users, telephone lines, Broadband Internet subscribers and mobile telephone subscribers.)
Financial sector: It is no surprise that, courtesy of Wileaks.org, Mauritius is being classified as the Switzerland of Africa in the murky world of offshore banking and that the renegotiation of the Double Taxation Agreement with India is back on the agenda with the Indian Mission here rushing to set up an Income Tax Overseas Unit to ensure exchange of information. We are still awaiting from our High Net Worth Individuals (HNWI) developments especially in “the tried and tested currency-risk management instruments” of haute finance. There has been very little development in the sector since 2005 to bring Mauritius closer to international best practices and thus ensure that the economy keeps functioning optimally in the face of change and the accompanying risks. Indeed we are “behind the curve in making available in our domestic market the use of standard instruments such as currency futures and options.” Five years later, down the lane of the financial world, we have to rely on the ERCP to support the creation and use of new financing instruments such as such as options, futures and swaps.
Savings & Investment: Gross National Savings has fallen as low as 13.7% of GDP in 2009, one of the lowest for decades. Such a rapid decline in savings is alarming. The growth of Gross Domestic Investment (GDI) slowed down due to the completion of some big investment projects. The Resource Gap, which is the difference between investment and savings, has widened considerably from Rs 9.5 bn in 2005 to Rs 27.6 bn in 2008 and Rs 21.4 bn in 2009. As a % of GDP, it increased from -5.2% to -7.8% in 2009. This trend is clearly unsustainable.
|(As percent of GDP)
|Gross Domestic Investment (GDI)
|Gross Domestic Savings (GDS)
|Gross National Savings (GNS)
Fiscal consolidation: From FY 2005/06 to FY 2007/08, the budget deficit as a % of GDP declined from 5% to 2.7%. As from 2008/09, it is estimated to climb back to 4.5% of GDP in 2010. Current expenditure as a % of GDP continues to be as high as in 2005/06 at 22.0% of GDP. There is still need for better planning and consolidation of performance Budgeting and for a more effective implementation to achieve efficiency expenditure targets.
Consolidation efforts have not improved revenue buoyancy. Excluding one-off items like grants, revenue as a % of GDP has stagnated at 20%. Successive underperformance in meeting the targets on capital expenditures has jeopardised the sustainability of future growth. The burden of fiscal adjustment was on capital expenditures. Acquisition of non-financial assets has averaged a mere 2.3% over the past four budgets. The ERCP is providing the fiscal space for badly-needed infrastructure spending. Total public sector debt as a percentage of GDP decreased to 56.6% in FY 07/08. It then increased by 2.6 per cent during the fiscal year 2008-09 to reach 61.6 per cent in December 2009. It is estimated to be slightly lower at 61.1% in December 2010. As per the Public Debt Management Act 2008, the percentage should not exceed 60 per cent and should be reduced to 50 per cent at the end of December 2013.
Current Account Balance: The external balances have been deteriorating since 2005. The slight improvement in the trade balance in 2009, as a result of a 9.5% nominal fall in imports of goods and services due largely to lower oil costs, may not be reflecting the healthy signs of an economic recovery as much as the weakening of exports sector and particularly the imports of capital goods. Exports growth of goods have been negative for eleven quarters since 1Q 2007; for the second quarter running export growth in 2009 fell by more than 11%. Exports of goods and services as a % of GDP have been declining since 2006. Goods exports, a significant driver of the economy, which made up some 36% of GDP in 2006, now stands as low as 23% of GDP.
|Trade Balance (f.o.b)
as a % of GDP
|Current Account Balance
as a % of GDP
FDI and REER: Gross foreign direct investment (FDI) in Mauritius, mainly from France and Britain, went mainly to tourism, real estate and the financial services sector. The ERCP will intensify efforts to diversify the sources and inflows of FDI to other sectors. As from 2007, the large capital inflows have more than offset the widening current account deficit resulting in BOP surpluses. There has been a continuing build-up in foreign reserves and upward pressure on the Real Effective Exchange Rate (REER). The relatively appreciating REER means that we will have to put in more efforts to boost productivity if we are not to rely on competitive depreciation of the rupee. Mauritius’ real effective exchange rate has appreciated by around 12.4% over the past four years. The trade deficit has tended to increase when the rupee has appreciated in real effective terms, raising the current account deficit.
Conclusion: It is thus clear that the economic situation is quite difficult; there are enormous challenges – in the productive sectors, on competitiveness of our export sector, on fiscal consolidation and public debt – challenges that have not been confronted with and the situation has deteriorated over time. There is the danger that public debt could become unsustainable as a result of continuing high budget deficits. Government has thus considered that its economic priority is to bring in a new dynamism in the main productive sectors of the economy and the SME sector while ensuring that the economy becomes more inclusive, broad-based, equitable and sustainable over time.
The ERCP will broaden the structural reforms, especially the sectoral or microeconomic reforms, to spur economic efficiency and create fiscal space for much-needed spending on public infrastructure, on the restructuring and deleveraging of enterprises and the upgrading of the skills of the workforce.
The economic issues in Mauritius are more sectoral than macroeconomic, and unless sector reforms are undertaken to generate productivity improvements in agriculture, industry, public utilities, health, education, etc., the long-run growth potential will be insufficient to absorb the unemployed. A paradigm policy shift to enhance long-term productivity is the key to ensuring Mauritius’ future. Thus the ERCP is a better policy response, than the earlier Stimulus Packages supporting a fail-to-deliver reform agenda, to “steer Mauritius to its vision of a modern nation, with a world class physical fabric, globally competitive enterprises, higher income per capita and standard of living and greater social justice.”
* Published in print edition on 27 August 2010