… since it is the taxpayer and the consumer who will foot the bill in the final analysis”
Interview: Manou Bheenick – Last Part
‘The time’s right to address old thorny issues relating to inherited inequities and ownership concentration’
Mauritius Times: The view has been expressed that, as elsewhere, the Government will have to step in, as it’s already doing to help pay part of the people’s wages, but also to mitigate the hit of the Covid-19 on the Mauritian economy by injecting billions of taxpayers’ money. Do you see a fiscal and debt crisis looming on the horizon?
Manou Bheenick : The fiscal/debt crisis was already here well before the last election and the outgoing government was well aware of it. Why else would it have done Greek-style massaging of debt and deficit figures? Why else would it have resorted to the subterfuge of setting up off-budget Special Purpose Vehicles to channel large inflows, escaping all accountability and transparency, to undertake very large projects that it had waved through to be implemented in total opacity?
When any economy is in an acute economic crisis, it is the duty of its government, drawing on its central bank resources and external resources as required, to backstop the economy and come to the rescue and save its citizens while minimizing damage to its financial and economic infrastructure. The debt metrics and other prudential guidelines that apply under normal circumstances are suspended pro tem.
To take an example, when Greece was in crisis, it fell foul of these guidelines and had to be nursed back to health with an austerity cure to purge it of the bad habits it had acquired. Without Covid, we would, in all likelihood, have run similarly afoul of applicable norms, and probably be considering some form of austerity at this time. If Covid were not a pandemic, and we were among a few countries affected, we would still have been in the same situation as Greece was.
Because Covid is a pandemic, affecting all countries, some of the applicable norms are no longer of primary concern and prudential guidelines are relaxed across the world.
We should, like every other country, suspend our normal concerns about public deficits and public debt, at least so long as we have access to the external resources required to pay our import bills— but we do so only temporarily, until humanity has won the battle against the virus, and normal fiscal discipline and macro-prudential guidelines gradually come back.
What it does not mean is that we can defy economic gravity with impunity. It may help with the window-dressing of past incompetence but it doesn’t hand a Get-out-of-Jail-Free card to our bungling government. There will be a bill to pay. The adjustment that we would have been doing, had Covid-19 not happened, is not cancelled, only postponed— with the added uncertainty that we’ll have to adjust to a new global trading environment whose contours we can only begin to guess.
We would, of course, have been much better-placed to take on the challenge if we had not squandered our reserves buffer earlier.
* It’s ultimately the public that will have to pay for the Government’s intervention to save the economy, but shouldn’t there be some form of democratic and popular control over that intervention so that we do not repeat the mistakes of the past – like we did with the Stimulus Package of 2008?
I have never been a great believer in special stimulus packages targeting specific sectors, especially for ongoing activities, as it is the business of policy to be as neutral across various sectors of activity as possible. They may be alright, for limited periods, if you are trying to build up some new sector from scratch. Otherwise, if you resort to it as a normal practice to direct State largesse to your favourites, it only breeds inefficiency, lobbying, and corruption.
In both its origin and nature, the 2008 crisis may have been different but it was still a garden-variety old-fashioned financial and banking crisis — admittedly, a severe and systemic one, but still one — that monetary authorities could fix as the rest of the economic and social structure continued functioning.
The situation now is fundamentally different. We are confronted with a complex, unprecedented, multi-dimensional crisis, with some of its dimensions still unknown, and there’s no monetary solution to it. With people locked down at home, work-places closed, and the very act of handling money itself, at least in its physical form, being a possible source of contamination, the transmission mechanism to make monetary policies, via bank intermediation, work may be broken. We cannot take time off to fix it. Which is why bank supervisory bodies have rolled out an array of measures aiming at regulatory forbearance, and relaxation of man-made rules, to ensure that banks don’t go to the wall as their financial assets tank in the financial crisis so that attention can be focused on the struggle to overcome the disease with all the resources that it takes.
An unprecedented situation calls for out-of-the box thinking. Governments, and ours is no exception, will take on the task of helping their citizens survive. Ours has, predictably, bungled in its first responses. The size of the bungle is particularly striking for a country which only the other day was mistaking itself for a tiger. It is even more evident when compared to how many other countries, including Madagascar!, are responding to the same situation by handing out cash handouts , resorting to job creation, offering Care and Support Packages and extra payment to lower-income households and the unemployed, and introduced in-kind transfers of basic foodstuffs with door-to-door delivery every three days.
It is now that we need to spend, and keep on spending, until some semblance of normality returns, not just here in Mauritius but also, in the export markets that may fuel our restructured economy.
* What about the taxpayer ultimately having to foot the bill?
It is the taxpayer and the consumer, through his direct and indirect taxes, and by suffering a dose of depreciation/devaluation, and rising inflation, who will foot the bill in the final analysis. We therefore need total transparency in how we conduct our economic and financial affairs in this matter. We need to have an oversight of how our money is going to be used for bailing out various operators.
We must limit our efforts to sectors that have a reasonable chance of recovering. We should limit our involvement to a specified multiple of the recent tax payments of the beneficiaries. We should suspend dividend payouts of beneficiaries and of the financial intermediaries at least while our own debt repayments to the IMF, and to others who may be funding us in this exercise, are still outstanding. Every aspect of emergency expenditure and bailout must be done transparently and subjected to the closest scrutiny, amending audit requirements to legislate concurrent audits backer by the severest penalties, not the little rap on the knuckles in belated audit reports that come out when the harm is long done.
Since we are going to lean on taxpayer rupees to pull ourselves out of this crisis, the time may well be right to address some old thorny issues that successive governments have studiously shied away from. I am referring to the inherited inequities and the ownership concentration which overshadow our entire economic and production structure. Or should we again close our eyes, hold our nose, and just roll the old structure over? Which, in our local lingo, would be tantamount to a case of Prend mo baton pou batte mo-même! If we are serious about rebooting and resetting the system, this must also be addressed.
We may very well need a new team to take on this monumental task if we are to have any running chance of being among the winners of the new post-Covid world emerging before our very eyes. The Supreme Court and the IMF hold some cards. But it is the people who has the final say. We should give them their say before we wreak irretrievable damage to ourselves and to future generations.
* It has been argued the time has come for ‘helicopter money’ to help weather the Covid-19 storm. What’s your take on that?
I must confess my utter bafflement that so much energy is being spent on what is for me very much of a non-issue, as indeed also is the subsidiary question, which is also exercising some minds, of how to avoid classifying such money as central government debt.
Milton Friedman, the guru of monetarism, coined the term in the 1950s, in a half tongue-in-cheek manner, when he wrote about what to do in the extreme scenario when normal monetary policy instruments, operating through their usual transmission mechanism i.e. commercial bank intermediation, have stopped working.
We should recall that what Friedman had in mind was a country with a reserve currency that the rest of the world was prepared to hold in unlimited quantities and happily accept them in exchange for their exports of goods and services or add to their reserves. He assumed that the domestic — and also the greater part of the international — banking/trading/production/ supply/distribution/transport system, etc., were all open for normal transactions, i.e. everything was all right with the world, except for the little matter of the monetary authority of this one particular country, which had reached the zero-lower-bound in its policy rate, finding itself unable to make its monetary policy stick as it was effectively trying to push on a string. In those limiting circumstances, there was nothing left to do but to call out the helicopters, stack them with cash, and offload the cash in the back garden of consumers to get them spending again, and thus get the entire economic machine back into gear in spite of a failure in the monetary transmission mechanism.
A lot has happened since to tweak the original proposal for circumstances approximating the conditions envisaged. Yes, the US has thrown out money from helicopters in occupied and war-torn countries. More relevant, for our present purpose, is how the 2008-2010 global economic crisis— at its core, a systemic financial crisis —which began as a debt-crisis, was actually fixed by the counter-intuitive method of increasing debt. This goes under the label of QE, or quantitative easing, and it took a US Treasury Secretary going down on his knees in Congress for it to happen. Friedman would have approved, had he been around. There was no one fixating about the level of public debt going through the roof in the countries whose central banks were at the origin of this flood of liquidity. There were bigger fish to fry.
The current crisis is much worse than the sub-prime crisis as we said earlier. This crisis is taking the world into a deep recession, probably much worse than the Great Depression of the 1930s. The IMF forecasts negative global growth of minus 3% for this year. For Mauritius, the growth collapse is much worse at minus 6.7%. Next year may be worse. Recovery is not on the horizon anytime soon.
In a classic banking crisis, the lender of last resort is the central bank. If a central bank does not have the resources and is not up to the task, the government must reinforce its firepower by drawing on resources available to it, e.g. under IMF quotas or other such facilities, or recapitalize the bank. Note that the debt is assumed by the borrowing country, never mind the debt level which will be addressed after fixing the banking crisis. Il faut parer au plus pressé.
In a systemic banking crisis, this function is taken over by central banks of the affected countries acting in concert. We’ve just mentioned the US Fed and its critical role in providing international liquidity in the 2008-2010 economic crisis. It’s playing that role in the present case too.
Taking care of only the financial half of the hydra-headed monster will not work. The pandemic part of it must also be addressed, as well as the economic part resulting from the fallout of the pandemic. Governments must step in because there is no one else.
It’s the common citizen who backstops his government, having delegated to it, amongst others, the power to tax and spend. The ultimate burden rests on the citizen, not just the taxpayer. If the question were put to the man in the street, surviving the pandemic will no doubt be his highest priority. So it must be for his agent, the government.
Just as central banking authorities are doing everywhere to save their financial and banking system, governments must also pull out all the stops to wage war against the other half of our hydra-headed monster, and protect the citizen. In a lockdown situation, Government must provide food and essential supplies, including income-support — not just for the low-income and unemployed but also for all the new unemployed such as daily-paid workmen, the self-employed who cannot work from home, taxi-drivers who cannot ply their trade, and so forth.
Government must pay or subsidize or postpone all utilities bills payments and pay the agencies directly, with safeguards to prevent abuse. Had Friedman been around this time, those helicopters would be dropping, not bank notes, but food parcels and other supplies – to cut out the financial intermediary and shorten the supply chain, support the lockdown, and minimize the risk of contagion. Some countries are delivering time-bound electronic vouchers – helicopter money 2.01?
How much it will cost? In the current state of knowledge where we don’t know the duration of the crisis, it’s like asking how long is a piece of string? We just don’t know. What we do know is that it just has to be done; it requires total transparency and accountability, with the strongest possible penalties with mandatory prison sentences and reimbursements for those defrauding the system, profiteers, etc
We’ll breach fiscal deficit targets and public debt ceiling? So what? So will everybody else! Targets and guidelines are man-made constructs to provide safety in these areas in normal times. In abnormal times like these, all such norms are implicitly or explicitly suspended. In the banking sector in the US, Europe and elsewhere, they have been explicitly lowered or made more flexible, with more to come if required.
We should not worry overmuch about debt/GDP or deficit/GDP ratios for now. We should focus on efficiency and transparency in delivering what it takes, for however long it takes, to tide our economy and our people over the crisis. Since, in my view, accepted norms will change post-Covid, it also matters very little whether we classify it as public debt or leave it on the central bank balance sheet. It matters little because every other country will be having recourse to similar final resort financing.
We could simply get an amendment to raise the limits currently applicable to central bank financing of public sector deficit. Or we could use an unusual provision in our central bank legislation — one which has always raised eyebrows with every new IMF staff-member taking over the Mauritian desk — which allows the central bank, with the approval of the Minister of Finance, to finance development projects.
I ask you: What greater development project can there be but to save our nation?
* Published in print edition on 21 April 2020