“We should stop playing with fire”

Interview: Vinaye Ancharaz, International Economic Consultant

‘Populist measures condemn all future governments since those measures become entrenched and difficult to remove without a political backlash’

* ‘Indeed, the business sector is doing very well. There is little doubt that economic recovery has been fed by a weaker rupee and rising prices for consumers’

* Statistics show an improved economic situation but, as always, the devil lies in the details’

Vinaye Ancharaz, an International economic consultant, is familiar to MT readers as he has shared his independent views on the Mauritian economy a few times in the past. He broaches for us several topics of interest, most notably on the general state of the economy and its recovery post-Covid, with buoyant figures of Statistics Mauritius and MOF, at a time when many Mauritians feel the pinch in their pockets through the high VAT/fuel taxes and the steep depreciation of the rupee. He also comments on the opacity surrounding the MIC’s helicopter money, the MOF’s “empty” CSG coffers and the additional burden of government’s promised pension target of Rs 13,500 or the risks of “surenchère politique” that may have disastrous longer-term effects, at a time when the only FDI inflows have been to the real estate sector.

Mauritius Times: The time for political rhetoric and outbidding (“surenchère politique”) has come. We see that happening with regard to old-age pensions (Navin Ramgoolam has been saying lately that a future LP-MM-PMSD government will ensure that old-aged persons obtain a rise in their pensions even if CSG funds would have been wholly spent) or with respect to the payment of a 14th month end-of-year bonus to all employees (Xavier Duval argues that the Public Exchequer has pocketed more money from the petrol taxes, and the profitability of the Top 100 companies has improved, and even doing better than during the pre-Covid years). That makes for good politics, isn’t it?

Vinaye Ancharaz: Before the MSM’s promise, in October 2019, to double the basic retirement pension (BRP) during their next term in office, the only other major political freebie I could think of was the 1976 promise by the Labour government to make secondary education free of charge. While there are other examples of political populism, these two examples stand out because they occurred on the eve of elections and their intent could hardly be disputed. In both cases, the party that made the promise was re-elected.

However, there is a major difference between the two episodes.

Free education at the secondary level since 1977, which extended also to the University of Mauritius, the only tertiary education institution at the time, played an undeniable role in the subsequent economic development of the country and led to the emergence and growth of a thriving middle class.

The promise of higher pensions, on the other hand, has drained government finances, led to exorbitant petroleum prices and an unending inflation-depreciation spiral as the initial hike in the BRP was financed by drawing down Rs 18 billion from the Bank of Mauritius’ reserves, which opened the floodgates to further plundering of the reserves. And the worst may be yet to come as the remaining Rs 2,500 that would take the BRP to the magical figure of Rs 13,500 could cost the government a whopping Rs 10 billion extra per year.

The danger with such populist measures is two-fold.

First, they create, what economists call, a game-theory scenario in which the party that under-promises risks losing the elections. Consequently, they all converge towards the same bid, like in the 2019 election campaign where all political parties promised to match the initial MSM offer of pension at Rs 13,500.

However, the risk of ‘surenchère’ is real, leading to outrageous and unsustainable promises. And since history teaches us that the party that makes the initial bid carves out a strong first-mover advantage, there may be a very high degree of outbidding in future elections – unless a credible institution establishes and enforces some legally-binding parameters for the conduct of electoral campaigning. I was hoping that the Privy Council would do that, but they glaringly missed the target.

Second, populist measures condemn all future governments since those measures become entrenched and difficult to remove without a political backlash. They can therefore compromise the long-term economic and political stability of the country. We should stop playing with fire.

* On the other hand, the contention of the Opposition with regard to the improved payment capacity of both blue-chip companies as well as the Public Exchequer to pay for a 14th month bonus to civil servants and to come in support of less profitable private companies for that same payment would paradoxically suggest that the economic situation of the country has considerably improved under this government. Isn’t it what the opposition would be unwittingly saying?

There is little doubt that the economic situation of the country has dramatically improved, and that is quite natural following the collapse in 2020. As I’ve repeatedly said, when you’ve hit the rock-bottom, the only way is up.

I won’t deny that government policies did play a role in the economic recovery. The Wage Assistance Scheme, the generous fiscal stimulus package and handouts by the MIC… all helped companies to navigate their way out of the woods, and many have emerged stronger and more profitable.

But there is no such thing as a free lunch. The Covid-19 support package has come at huge cost to the economy for it was financed in large part by helicopter money, leading to the current stifling cost of living. Moreover, the economic outcomes would be better had it not been for hundreds of millions of rupees wasted in dodgy deals and defective equipment.

* The recent survey conducted by Business Mauritius adds credence to the claims of the government that the business and investment climate in the country has considerably improved: 83% of companies expect an improvement in their sales in 2023; 52% export-oriented firms have registered a rise in their export earnings in 2022 compared to the preceding year; 70% have been able to safeguard full employment, etc. Kevin Ramkalaon, its CEO, expressed satisfaction that “il y a un réel progrès dans le paysage économique…”. How do you react to that?

Indeed, the business sector is doing very well. A major bank recently reported net profit of Rs 14 billion, a figure unheard of until now. Tourism is booming again, the real estate sector, including construction, is going full throttle, and exports across a wide range of sectors have increased. There is little doubt that this recovery has been fed by a weaker rupee and rising prices for consumers.

But if Mr Ramkalaon admits that business is flourishing and that prospects are positive, why would he claim that the private sector cannot afford to pay the initial salary compensation of Rs 1000 demanded by the trade unions – or the 14^th month bonus proposed by the Leader of the Opposition?

Allow me to debunk a few myths about ‘compensation salariale’.
First, salary compensation is meant to restore workers’ purchasing power, which has been eroded by inflation in the past year. It has nothing to do with productivity.
Second, anyone with a basic knowledge of Economics can tell you that rising prices hurt consumers but benefit sellers and businesses.
Third, companies can pass any increase in wages to the consumer through higher prices.
And finally, because the salary compensation is paid ex-post, it is less in real terms and is partial rather than full because the inflation rate is typically underestimated, and the quantum of the compensation is calculated on the lowest pay or ‘salaire minimal’. So, whichever way you look at it, the fact remains that businesses will still be better off even after paying a ‘compensation salariale’.

Perhaps there is no better justification for ‘compensation salariale’ than the following realization: since the wage is the price of labour, why shouldn’t it rise along with other prices?
* If the business climate has improved, according to Business Mauritius, that may be due in a large measure to the MIC’s assistance during the pandemic. The question we should be asking today is whether the “distressed companies” have played their part of the deal?

Indeed, that’s the question many people are asking. Many of the companies that are now reporting handsome profits were the primary beneficiaries of the assistance provided by the MIC. They include a number of hotels as well as manufacturing firms and conglomerates in agro-industry. Banks did not receive any MIC funding, but they benefited immensely from the restructuring of debt, government-backed waivers on interest payments, and fiscal concessions as part of the Covid-19 stimulus package. There is no denying the fact that the assistance and resources provided by the state, whether directly or through the MIC, helped many of these companies to fight off the pandemic and prosper in the aftermath.

A side question, however, is whether all the companies that received MIC funding were truly in distress. We have heard of cases where companies that were set up during the lockdown bagged hundreds of millions from the MIC, but we can never be sure of the true scale of such dubious deals, given the opacity in which the MIC operates.

Relatedly, one also wonders if the beneficiary companies that are now showing big profits are paying back their loans or paying dividends proportional to the MIC’s equity stake. Although the MIC itself reported a profit of Rs 2.3 billion in 2022, the major part of it (or Rs 1.9 billion) is due to gains in revaluation of assets, notably land, rather than interest income or dividends received. 

* To come back to the issue of an improved business climate, not to be outdone, Finance minister recently stated, in response to a PQ of MP Ritish Ramful on the World Bank’s Country Report, that GDP has risen from by 44% from 2020 to 2023, the country has a growth rate of 8.9% in2022, and is expecting 6.8% for 2023, FDI has outpaced the pre-pandemic levels, unemployment has fallen from 9.1% in 2021 to 6.4 in 2023, which would be the lowest in the last 25 years. The statistics speak of an improved economic situation, don’t they?

The economy contracted by 14.5% in 2020, so the subsequent pick-up is natural. In fact, the 8.9% growth rate registered in 2022 is a mathematical outcome since the base on which GDP growth is calculated had shrunk drastically.

However, if we look beyond these hand-picked statistics, we may find that the bigger picture is not all that rosy. Growth this year, according to IMF projections, will be 5.1%, lower than the government’s estimate of 6.8%, which itself was revised upward from an earlier forecast of 5.3%. On this point, I’m afraid to say that official GDP figures are being manipulated to show a more positive economic outturn. The IMF has recently warned against such practice, calling on Statistics Mauritius to exercise greater integrity and independence in the publication of economic data.

Moreover, growth is projected to return to pre-pandemic levels next year. Finally, despite the recovery and the increase in GDP, real GDP at the end of this year will be just a shade higher than what it was in 2019!

Similarly, the unemployment rate of 6.4% in 2023 is not very different from that in 2019 (6.7%) and it conceals worrying trends. For example, more than one-third of the unemployed are youths and 80% of them have been looking for a job for more than one year, which suggests that the kind of jobs being churned out by the economy does not fit our jobseekers’ skills. Unemployment over prolonged periods may encourage the jobless to seek opportunities beyond our shores, aggravating the brain drain the country is currently experiencing. The government, in the 2023-24 Budget, announced a series of measures to attract foreign talent, but nothing was proposed to retain our local talent!

As for FDI, gross inflows in the first semester of 2023 amounted to Rs 13.5 billion, about 34% higher than the corresponding period last year. However, since FDI is received in foreign currency and converted into rupees, a depreciation of the rupee has the effect of artificially inflating the value of inward FDI. Moreover, more than 75% of the FDI went into the real estate and hospitality sectors. Agriculture and manufacturing, together, attracted a measly 0.15% of FDI inflows. It is clear that FDI incentives have been distorted in favour of property development and at the expense of the productive sectors.

So, yes, on the surface, the statistics show an improved economic situation but, as always, the devil lies in the details.

* There may be dark clouds in the picture though: the empty coffers of the Contribution sociale généralisée (CSG) – another “Ponzi-like scheme” according to some commentators, or the fluctuations in interest rates which impact negatively import prices, as noted by Business Mauritius’ survey, or the difficulties in recruiting local labour, etc. What’s your take on these issues?

Indeed! The “caisse vide” of the CSG, as recently revealed by the Minister of Finance, has sent shock waves across the country. But I was not surprised – because the CSG, unlike its predecessor, the National Pensions Fund (NPF), is not a reserve fund, or a piggybank. CSG is paid directly into the Consolidated Fund and is not specifically earmarked for pension payments.

The Consolidated Fund, contrary to its name, is not a fund; it is the government’s savings account, in which it receives revenues and out of which it makes recurrent payments. So, it is hardly surprising that there is no CSG money left. This raises serious questions about the government’s ability to honour its electoral promise of BRP at Rs 13,500 and to pay full pensions in the future – especially since the pension system is already under pressure from the ageing population.

The key (repo) rate has doubled in the past year-and-a-half. As the rupee continues to come under pressure, the Bank of Mauritius may be forced to raise interest rates again. That would hit large segments of the population since practically everyone in the country has some debt, whether a mortgage, personal loan, car lease, or hire purchase agreement. The paradox is that a hike in the interest rate, as an instrument of a restrictive monetary policy, is meant to combat inflation, but given the level of household debt in Mauritius, it could have the opposite effect.

I mentioned earlier the problem of labour shortage, which is likely to accentuate as the economy approaches full employment, the working population shrinks under the pressure of ageing, and Mauritians continue to leave for greener pastures abroad. The country needs a clear national policy on foreign labour and, indeed, a Foreign Workers’ Act. In the short term, many people hope for a new government that would put an end to the entrenched and pervasive nepotism of the current regime and allow meritocracy to prevail.

* On the other hand, the Minister of Finance will be hard put in the present circumstances to convince consumers that this government is doing what is required to safeguard the living standard of consumers across the board, not just the vulnerable ones. But when you look at it objectively, is it really the worst we have known for a long time?

There is little doubt that the inflation of today is the worst we’ve known in a long time. We ended 2022 with a headline inflation rate of 11%. The last time we registered an inflation rate that high or higher was back in 1990, when the inflation rate reached 13.5%. And we are not out of the woods yet.

The inflation rate was estimated at 8.4% in October 2023 and the trade unions are basing their claims for ‘compensation salariale’ on an inflation rate of 8% for the year. The Bank of Mauritius projects inflation at 7%, lower than the IMF’s forecast of 7.8%. In all likelihood, the inflation rate will not be far from the trade unions’ estimate, even though the government may be tempted to adopt the lower figure of 7% for the purpose of calculating the quantum of the salary compensation.

Be that as it may, the salary compensation will be grossly inadequate to offset the loss of purchasing power witnessed during the year. For this reason, I fully support the Opposition’s demand for a 14th month bonus to be paid to all low-income earners.

* It seems however that the government does not have any worries about the political impact of the rising cost of living on the electorate. It has at its disposal what it takes in terms of budgetary manoeuvre to soften that impact in the months to come. What do you think?

Celebrating the Privy Council verdict in the Dayal case, the PM very jubilantly remarked that his government had one last joker up its sleeve, referring to next year’s Budget. He set the tone for another populist Budget, boosted by the precedent set by the Privy Council judgment.

The government has the financial capacity – in the short term – to offer relief against the rising cost of living. The taxes maintained on petroleum prices bring billions into the government’s coffers in addition to inflation tax, that is, higher VAT revenues from rising prices. Direct taxes, including corporate and personal income tax revenues, are also likely to increase as the economy flourishes. Moreover, the government might again let the rupee slide to maximize on revaluation gains, or resort to massive injections of printed money as the general elections draw closer.

And finally, the government has at its disposal a war chest, which it will surely put to strategic use in the next Budget or thereafter. Such political manoeuvring may deliver short-term relief but will make things worse for the economy over the long run.

Mauritius Times ePaper Friday 24 November 2023