Interview: Rama Sithanen
and consider some unconventional financing methods which other countries have embraced”
* ‘We simply cannot use public funds to bail out very rich enterprises
without insisting on strict conditions and burden sharing’
* ‘It would be sheer blackmail if some were to brandish massive layoff of workers as a negotiating argument to bring an inexperienced Finance minister to panic and force him to accept anything to save jobs!’
If there seems to be broad consensus that we might be in for the long haul given that the Covid-19 pandemic has led to ‘an economic crisis which is itself morphing into a financial crisis, a foreign exchange shortage and may be a social crisis with rising unemployment and poverty’, and recovery likely to be a long journey depending on the form it takes — a normal U-, a flatter U- and a L-shaped, but certainly not be a V-shaped recovery –, there is going to be agitated debate in the days to come not only on burden sharing, but also on who does the financing of the recovery and the source of that money. Rama Sithanen states in today’s interview that ‘we should throw away some taboos and consider some unconventional financing methods which other countries have embraced’… Read on:
Mauritius Times: How bad do you think post-Covid is going to be for the country, in particular for public finances, the workers and business?
Rama Sithanen: It will be extremely bad for all three. Fiscal revenue has already shrunk considerably as receipts from VAT, corporate and personal tax, excise duties and other streams such as passengers fees will fall drastically while expenditure will rise as a result of untargeted assistance to around 425,000 employees and self-employed. Government revenue could decline by around 25% for this financial year. It would be worse in 2020/21. Expenditure could rise by at least 3% of GDP if we account for some savings from recurrent budget and the deferment and cancellation of some capital projects. The budget deficit would be much more than 10% this year especially as the denominator which is GDP will also fall significantly from the Rs 500 billion of last year.
The Minister of Finance has spoken of 100,000 people becoming unemployed. Added to the existing 40,000 jobless people this would represent an unemployment rate of about 24% on a labour force of 585,000 persons. Many firms, especially those in very affected areas such as travel, tourism and related activities, EPZ, SMEs and micro-entreprises and construction will face huge financial and cash flow difficulties and many could close down.
Government faces a daunting choice between a rock and a hard place. If it insists on firms keeping their employees when revenues are down, it will have to pay their salaries, which is clearly unsustainable over the months. And if it relaxes the labour law as demanded by the private sector, tens of thousands of our compatriots will be either laid off or furloughed. Those who remain will have to share jobs, and have cuts in their salaries and fringe benefits.
* Researchers in the UK argue that ‘major pandemics in Europe, from the Black Death in 1347 to the 1918 flu, have a long-lasting and severe effect on the economy’, with interest rates – and therefore investment – remaining depressed for between 30 and 50 years following an outbreak. …a “V-shaped” recovery – where economic growth returns to its previous level by the autumn – is highly unlikely.’ This clearly suggests that Mauritius, which is highly dependent on external trade and export markets, is also in for the long haul unless an effective vaccine is developed, isn’t it?
Absolutely. Unless we find a safe and effective therapy and/or a vaccine, life will be very different post-Covid. The behaviour and expectations of consumers, producers and investors will change. We already have many crises folded into the public health emergency. It is similar to the great depression of the 1930s. The pandemic has led to an economic crisis which is itself morphing into a financial crisis, a foreign exchange shortage and may be a social crisis with rising unemployment and poverty. It will certainly not be a V-shaped recovery, which is an immediate bounceback after a sharp and deep economic downturn. I think it will be a combination of a normal U-, a flatter U- and a L-shaped recovery.
It will vary from industry to industry. Tourism, travel and hospitality will take years to recover to pre-Covid level. IATA and British Airways speak of 5 years before being back to where we were in December 2019. It will thus be L-shaped. All our export-driven sectors from textiles, clothing, seafood, sugar, jewellery and medical devices will be affected by both a fall in demand and lower prices resulting from fierce competition to gain market share in a depressed environment. They could follow a flat U-shaped recovery. Or a W if there is a resurgence of the pandemic.
Other sectors such as the domestic-oriented industry and construction could have a normal U-shaped recovery. We are very dependent on what happens in our major trade, tourism and investment markets. While tourism and EPZ account directly for around 22% of GDP, when we add their indirect, induced and catalytic effects, this figure rises to about 44% of GDP. If we include the export of services such as global business, it goes above 50% of GDP. This external dependence is considerable.
We are definitely in this for the long haul and we better get prepared for it.
* The current Minister of Finance stated, some 40 days into confinement, that the cost to the economy would be around 10% loss of GDP. There is also the cost to the government of preventing a deep depression, which probably will far exceed the current spending on the Wage Assistance Scheme. Where will that kind of money come from?
The economic, social and financial impact of the pandemic is a moving and dynamic figure as we continue to grapple and update its direct, indirect and supply chain effects in our economy. The IMF is always behind the curve and will continue to downgrade its economic outlook as the year unfolds. It will also depend on the pace of the easing of the lockdown and the reaction of households, investors and firms.
Even if we open our borders, it does not mean that tourists will flock back immediately. The Schengen airspace will be closed to non EU countries for some time and surveys show that Europeans would hesitate to travel long haul in the initial period. FDI, portfolio and private equity investment will also be adversely affected. The more so now with the country on the black list of the EU for identified strategic deficiencies in its money laundering effectiveness framework.
The loss to the economy will certainly be more than 10% of GDP. I have worked on three scenarios. A baseline which is around 15% of GDP, an optimistic one of 12% and a pessimistic one of above 20% of GDP if the recovery is slow.
The Government has four conventional fiscal tools to finance deficits.
First, it can raise existing taxes or broaden their scope. Or introduce new ones. This would be counterproductive in the current recession. Many countries are lowering taxes to stimulate activities while some are deferring the payment of taxes to ease the cash flow of firms.
Second, it can lower expenditure. To have a material effect, it should be a massive decrease in spendings. Can Government rise to this challenge from a political economy standpoint? It is not a freezing of vacancies, a 10% decrease in MPs’ salaries and a postponement of international conferences that will do this job. We have an inferno, and using the garden hose to douse the horrendous flames will not take us far.
Third, it can borrow internationally from the IMF, World Bank, African Development Bank and other development financial institutions. It can also have recourse to sovereign debt by tapping the international capital market.
And, lastly, it can borrow domestically. However these conventional measures will be inadequate to fund such a massive deficit. We need innovative and creative measures even if they are unconventional.
* The Minister of Finance has also stated that public expenditure will be cut by 17%. Can he do that to contain the budget deficit if he can’t raise taxes?
The simple answer is a big no. He may be well intentioned but he is very new and without experience in preparing and presenting a budget. It will be his first one. I wish him well under these testing circumstances.
I have presented 10 budgets including two during the financial crisis of 2008 and I have a little bit of experience. Unless he reverses some of the fundamental policies of the Prime Minister, questions the foundation of our Welfare State, reviews the rights of employees in the public sector, and disregards the legal obligations of Government. Otherwise he simply cannot slash expenditure by 17%. This represents Rs 24 b of cuts for a total expenditure of Rs 139 m in 2019/20, a whopping 5% of GDP. Simply impossible.
Will the PM allow him to do so? Let me explain in very simple terms.
In the 2020/21 indicative budget, there are seven items that account for 82% of the total expenditure of Government. Out of a total projected expenditure of Rs 152 b adjusted from Rs 143 b for the higher pensions as from Dec 2019, these seven items add up to a total spending of Rs 125 b.
Social protection, which includes adjusted old-aged pension, is at Rs 49 b, Education at Rs 19 b, Health at Rs 15 b, Public debt servicing at Rs 14 b, public service pensions at Rs 10 b, Police at Rs 10 b and transfers to local authorities and Rodrigues at Rs 8 b.
Pensions for retired civil servants and other public officers and debt servicing are state obligations. Education and health are the two pillars of our Welfare System. It would be very difficult to deprive local authorities and Rodrigues of transfers without affecting the quality of services to citizens unless there is a massive rise in municipal rates or other levies to raise revenue. Police is tricky for security reasons.
Will the PM allow his Minister of Finance to review the social protection policies that won him the elections in 2014 and 2019? We shall see when the Minister of Finance presents his budget.
To crown it all, the 82% does not include the salaries and related benefits of the other 20 or so ministries. Nor the capital expenditures that would be difficult to curtail as the projects are ongoing and spread over many budgets, such as the two road/bridge infrastructure works at Phoenix and the M1/A1 link.
* If you were Finance minister in these uncertain times, what would you have done differently from what the current government is doing in order to speed up post-Covid economic recovery?
I was Minister of Finance during the financial crisis of 2008. It was tough even if this one is more challenging.
We carried out reforms in 2007 and this helped us to build resilience. Economic growth was 5.9% in 2007 and 5.5% in 2008. We had fiscal space resulting from the reforms and public debt was not high. With the Stimulus Package, we prevented a recession. In fact growth was positive at 3.1% in 2009 and 4.2% in 2010. Employment rose in 2008, 2009 and 2010 while the unemployment rate declined. Investment and FDI did not fall.
I exercised prudence in managing the fiscal and financial affairs of the country. I acted quickly and in a targeted and proportionate manner. We weathered the storm well and Mauritius successfully avoided a recession. We have been commended for the management of the 2008 crisis. Today is a different context. The economy was in decline well before the pandemic. We had growth of only 3% in 2019 while the fiscal deficit is high and debt very high.
I would have focussed on seven areas:
1.We have no choice than to allow the fiscal deficit and public debt to rise. The question is by how much? So as not to unduly penalise our children and grandchildren who will have to pay more taxes to finance these exorbitant debts. We will have to resort to lending from institutions such as the IMF, World Bank, AfDB, etc., to fund the rising fiscal deficit. And also do some domestic borrowings;
2. It is clear that conventional monetary and fiscal policies will not be enough to fight this severe economic depression. We should throw away some taboos and consider some unconventional financing methods which other countries have embraced. I have proposed a once-in-a-lifetime use of a money-financed fiscal deficit by the Central Bank as opposed to the traditional debt-financed fiscal deficit;
3. I have also proposed the setting up of a massive reconstruction fund with seed capital from Government, BOM, commercial banks and the corporate sector. And an international development finance institution (DFI) partner/s which will bring its brand to the Fund. Each will contribute US$ 50 m making a total of US$ 250 m. This can be leveraged by four times to reach US$ 1.25 b. A recovery fund of Rs 50 b to support the economic revival;
4. I have suggested the creation of 5 funds to support the economic recovery. Horses for courses. One for tourism, travel and Air Mauritius as they are the most affected sectors. A second one for the export sector such as textiles and clothing, seafood, jewellery, medical devices, etc. A third for construction and domestic-oriented industries. A fourth fund for SMEs and micro entrepreneurs. And a fifth one for food security;
5. I do not think it is right to give a 100% wage subsidy indiscriminately. Money is very scarce and should be managed very prudently and wisely. The support should be targeted and proportionate. It must be fair to taxpayers. Many companies that have not been adversely affected are drawing the 100% subsidy. Also, we do not make the difference between a company that has been impacted 20%, 40%, 60% and 80% like it is done in Australia and New Zealand.
Group companies should be treated differently as the holding has cash reserves built from extraction of surpluses from subsidiary firms. And companies that have paid 80% or more of profit as dividends until recently cannot be treated as others who have been prudent. We cannot reward the grasshoppers and penalise the ants of our country;
6. There must be a fair and equitable burden sharing of the costs of adjustments. In terms of conditions imposed for access to funds, contribution from beneficiary firms and financial quid pro quos;
7. We should lay the foundation for the architecture of the future economy. Some sunset firms will disappear, some will have to be completely restructured to survive post Covid, while new ones should be nurtured to capture the emerging opportunities. Invest in quality infrastructure, in sharpening our skills and human capital, in science and technology, in innovation and creativity, in strong and independent institutions. In new clusters that are both sustainable and inclusive. From the green economy to a circular economy and a responsible blue economy, from capturing the opportunities of the digital economy and the fourth industrial revolution to Mauritius as an effective platform for Africa in many areas.
* You have also spoken of the monetisation of fiscal deficit which some people call ‘helicopter money’. Can you explain exactly what you mean?
I start with a simple observation. The traditional fiscal measures will not be enough to fight this economic war. Bows and arrows will not take us very far.
It would be difficult to raise taxes. It is impossible for the Minister of Finance to slash expenditures by 17%. Of course he has no choice than to raise the fiscal deficit and public debt as the amount needed is staggering. He can borrow both domestically and externally with the IMF, World Bank, AfDB.
But a country cannot continuously borrow its way out of unsustainable debt. Public debt is already close to 75% if all debts are properly accounted for. It will increase by June 2020. Do we want to become Greece or Lebanon? While we have no choice than to increase the level of debt, we must also utilise some unconventional non-debt measures. We need the nuclear options.
* What do you mean by nuclear options and the economic taboos you referred to earlier?
I am a pure product of conventional fiscal and monetary economics having studied them at both undergraduate and post graduate at the LSE in the 70s. For sure, I do not agree with unconventional measures in normal times. But these are exceptional times and they call for exceptional measures. I see no other way than to complement conventional debt-financed fiscal deficit with some monetisation of the fiscal deficit and a more active role by the Central Bank in the fiscal policy domain.
I have said it in interviews and press articles. No institution has the foreign exchange and special reserves and more importantly the unique power to create money to give to Government and to invest in our economy now other than the Central Bank. But these must be exceptional and resorted to once in a generation. The BOM has to monetise some of the fiscal deficit and invest to revive a moribund economy and prevent an economic and social crisis.
We all know how this is done in other countries. Call it conventional quantitative easing, people’s quantitative easing, an unlimited line of credit to Government, a perpetual bond, a grant, a donation, drone or helicopter money, the printing press or whatever politically correct terms, it boils down to the same thing. The BOM has to open its reserves and its electronic money transfer machine to the Government to finance the huge deficit and to invest directly.
Some people believe Mumbai and Bombay are two different cities in India. Similar to Pekin and Beijing. People are making an unnecessary fuss about a name.
* How would the Bank of Mauritius do that?
I have already suggested two to three ways of going about it.
First, the Bank of Mauritius could buy directly Government papers and then deal with it on its balance sheet as former US Federal Reserve Chair Ben Bernanke or Adair Turner (former chairman of the Financial Services Authority, UK) has suggested. A perpetual bond which basically means no refund or just have an annotation on the balance sheet and again no reimbursement. Some call it a grant or a donation.
Second, I have proposed the setting up of a large recovery fund with the BOM as one of the five providers of capital. I have recommended US$ 50 m by each participant. Put simply, the Bank of Mauritius will draw from its foreign exchange reserves to make such investment.
Third, Government will continue to draw from the Special reserves of the BOM as it has done with a first tranche of Rs 18b to prepay its debt. Except it will not be used to repay debt, but to finance the massive budget deficit.
Let me be very clear both as a former Minister of Finance for 10 years and a professional economist with 41 years of practical, pragmatic and solution-driven hands on experience. The Minister of Finance simply has no choice than to depend on the two reserves of the Central Bank and on its electronic money transfer machine to save the country from both an economic and a social crisis. All countries are doing it – from the US and the UK to the EU and Japan. But they call it differently. The smell of the rose does not change simply because you describe it as a different flower! Or to split hairs on the elusive difference between a whore and a call girl.
However he must be responsible and these must be included in a standalone and robust Act of Parliament with key safeguards, oversight, supervision and control. It should be done only ONCE. Otherwise it will lead to a loss of confidence and trust in our money and economy. We should avoid the moral hazard where irresponsible governments will use this to finance any economic largesse.
A Special Economic and Finance Committee of the National Assembly with the Minister of Finance as Chairperson and experienced MPs such as Paul Berenger and Xavier Luc Duval (both former Ministers of Finance) and the leader of the Opposition as key members of that Committee during the next four years to oversee the use of these funds, its supervision and monitoring.
* This is quite unconventional and never heard of in Mauritius…
Just like we have never heard of the pandemic and its economic viruses before…
What I have suggested above is for the medium- and long-term. The Government immediately needs funds to meet the large decline in revenues and the significant rise in expenditures. The Finance minister should defer some expenditures and reprioritise others, reallocate the outstanding amount of Rs 11 b from the Special Reserves of the BOM to finance the deficit instead of prepaying the external debt and mop up the huge windfall gains from both the CEB and the STC due to the collapse in the prices of petroleum products.
I have doubts if he can dispose of assets in this context to generate some additional revenues. He should not sell crown jewels at a fire sale price. He cannot also shoot all his ammunitions now as we are in this crisis for a long time.
* Who should foot the bill for stimulus packages? Is there any reason why taxpayers (present and future) should bail out rich enterprises?
The country desperately needs money for three purposes.
First, for survival during the lockdown. This is the wage subsidy and the support to informal workers and entrepreneurs.
Second, for induced coma to ensure that companies do not go bankrupt and their productive capacity destroyed. Access to credit and liquidity are key to avoid closures and massive layoff. There is need for credit guarantees and special line of credit so that commercial banks can assist firms that are in difficulties.
Third, is the massive stimulus package required once we ease the lockdown restrictions. This will last for two to three years.
The support must be targeted, timely, temporary and proportionate. A differentiated approach according to how deeply and widely sectors have been affected. Air Mauritius, tourism and travel will need one set of policies while the EPZ, construction and SMEs require a different approach. We should also adopt a specific strategy for food security in four to five key clusters.
There must be burden sharing and conditions attached. We simply cannot use public funds made up principally of indirect taxes to bail out very rich enterprises without insisting on strict conditions and burden sharing. Enterprises must present a robust turnaround strategy with burden sharing proposals.
The US has introduced conditions like no dividend payment until loans are paid back, no shares buyback and a significant reduction of executive pay and benefits. There could be equity, quasi equity and redeemable bonds in exchange for public money. Companies that have declared 80% or more of profit as dividends should make an equity infusion.
Group companies should first seek assistance from their ultimate owners who sit on reserves. Some of these companies are owned by the richest people of the land with considerable fortune. It is not fair for the middle income and the poor that pay indirect taxes to bail them out unconditionally. They should make some contribution. Similar to what Rishi Sunak, the Chancellor of the Exchequer in the UK, has told Richard Branson. He should contribute as he is very rich and has many assets including a private island in the Caribbean.
It would be sheer blackmail if some were to brandish massive layoff of workers as a negotiating argument to bring an inexperienced Minister of Finance to panic and force him to accept anything to save jobs! There must be solidarity and proportionate sacrifice.
A combination of loans, equity or quasi equity could be used in some cases.
Government must also consider the option of cash for land for those who have huge immovable assets. This land will be indispensable for food security in four to five clusters. Left on its own, this land will be used mainly for unproductive real estate development that does not contribute much to the real economy. However Government must use the acquired land strategically for food security.
We could bring from overseas very robust companies with expertise in food security and agribusiness in addition to the good work of the likes of Medine locally in that space.
* Published in print edition on 12 May 2020