Cost of credit, Public debt and PBB


V. Bhardwaj


There seems to be a sudden awakening on the question of the cost of credit, may be because of the comments in the WB report – Investment Climate Assessment Mauritius 2009 — that “the cost of borrowing in Mauritius, as measured by average interest rates, is high by comparative country standards. Interest rates are equal to Sri Lanka and lower than Madagascar but are double those of Thailand.”  Our figures however reveal that Mauritius compares favourably with other countries.


The cost of credit is determined by the weighted average interest rate, bank spreads and taxes. Average bank margins (interest received minus interest paid by net assets) have been ranging around 4.6-5.5% over the past decade. The spread increased to 4.88-5.81%  in 2007-08 and in 2008-09 it increased further to 5.10-5.66%. This increase is attributable to the explicit and implicit taxation of interest. The extension of income tax to all interest income and the introduction of a withholding tax have had the effect of increasing the effective tax rate on deposit interest. It has thus increased the cost of deposits to the banking system. The unremunerated cash reserves requirement also puts pressure on the cost of intermediation. 

The problem is that not much has been done over the past five years to add breadth and depth to the financial sector — a more diversified market-based financial system that generates efficient investment, supports rapid growth and gives more competitive access to credit. The 2003 Mauritius: Financial System Stability Assessment had recommended the development of alternatives to bank funding to foster competition and innovation, namely, among others, an active government and corporate debt market.

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Public debt crosses the 60% mark

The Public Sector Debt has reached Rs 167 billion in December 2009, that is around Rs 131,000 per head of the population. Without including some of the guaranteed and non-guaranteed and other loans, committed but not yet drawn, it is much disconcerting to note that Total Public Sector debt as a percentage of GDP has crossed the 60% mark from 53.7% in December 2008. 

In the section ‘Public Sector Debt Ceiling’ of the Public Debt Management Act 2008, it is clearly stipulated that the  the total outstanding amount of public sector debt shall, at the end of each fiscal year, not exceed 60% of the Gross Domestic Product (GDP) at current market prices for that fiscal year. This is serious indeed, as serious as the flouting of the fiscal rules 1) that limit government borrowing to the financing of investment; 2) that require that the net public debt ratio to GDP is on a downward track; and 3) that require that total expenditure remains constant after adjusting for inflation. Are we serious about fiscal consolidation?

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Programme Based Budgeting and Improvement in Service Standards

There are lots of arguments about the improvement in service standards as a result of the implementation of the Programme Based Budgeting (PBB). The introduction of the PBB within Medium Term Expenditure Framework is an attempt to move away from conventional incremental budgeting, where current budgets are increased by some margin for the following year, to a budgeting system based on the actual cost of service delivery. The emphasis is placed on aligning the objectives of programmes with outputs, and increasing results-accountability, than only on improving cost-effectiveness.

But as long as ministries have not 1) developed the causal links between activities and outputs and between outputs and policy outcomes, 2)  properly disaggregated objectives and targets and cascaded them down to operating units, 3) ensured that implementation decisions are devolved to the lowest feasible level in the hierarchy, 4) proposed priorities that become precise and realistic during the preparation of the budget, 5)  set up mechanisms within the budget process that encourage the re-evaluation of policies and priorities and that facilitate the generation of policy alternatives, 6) reconfigured themselves to support the implementation of Medium Term Expenditure Framework/PBB, 7) developed the capacity for strategic planning and for assessing and appraising public spending, 8)  achieved a comprehensive approach to performance management so as to build a modern and efficient civil service with a focus on results and improvements in the delivery of services, it is futile and purely theoretical to start talking of allocation of resources, especially personnel, based on improvement in service standards.

The PBB is still in its infancy. We should not hide behind the PBB framework to impose all kinds of unrealistic demands on the different stakeholders of the reform process. That’s a sure way of killing it if we choose not to be realistic in the sequencing, scheduling and resourcing of the PBB.   

V. Bhardwaj 

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