“For change to be effective, it must be owned by the people”

Interview: Dr Vinaye Ancharaz, International Economic Consultant

‘This sense of belonging can only be built and nurtured through clear, constant and inclusive communication‘

* ‘The MSM govt cooked up GDP figures to make the situation look rosier than it really was’

* ‘The previous govt exploited petrol taxes as a cash cow. Slashing these taxes while increasing pensions and paying a 14th-month bonus will be doubly challenging’

In this week’s interview, we speak with Dr Vinaye Ancharaz, an International Economic Consultant, to gain insights into the current state of Mauritius’ economy and the challenges ahead. The new government has expressed its intention to audit the country’s fiscal health, but how much can an audit reveal beyond the public debt, fiscal deficit, and revenue generation figures already available? Dr Ancharaz provides a critical analysis of the previous government’s economic performance, scrutinizing its policies and their implications for the future. He examines key issues such as fiscal management, public debt, inflation, and the pressing need for structural reforms. Offering a deep reflection on the economic decisions that have shaped Mauritius’ current challenges, he shares his recommendations for how the current government can deal with the complex economic landscape to secure sustainable, long-term prosperity.

Mauritius Times: The new government has made known its intention to conduct an audit of the state of Mauritius’ economy. Does not the current state of Mauritius’ fiscal health, including public debt levels, fiscal deficit, and revenue generation tell us how good or bad the economy is faring, or would an audit tell us more?

Vinaye Ancharaz: If we go by the MSM government’s assessment, the economy is faring rather well. You may recall that, in presenting the 14th-month bonus proposal days before the election, the then Minister of Finance, Dr Padayachy, claimed that the economy was in a boom! He was probably referring to the ‘exceptional’ GDP growth of 8.9% in 2022, the ‘strong’ growth of 7% in 2023, and the growth forecast of 6.5% this year. The truth, however, is that the economy has just come out of the hole it had slipped into following the massive 14.5% GDP decline in 2020. According to a recent IMF report, real GDP per capita at the end of 2023 (US$11,417) was about the same as in 2019 (US$11, 408) before the pandemic.

In fact, the hike in GDP growth to 8.9% in 2022 following a timid recovery (GDP growth of 3.4%) in 2021 is largely due to a major change in national income accounting, which saw the inclusion of primary income from the global business sector in the computation of GDP. I believe that the MSM government cooked up GDP figures to make the situation look rosier than it really was.

Similarly, the inflation rate is reportedly on a downward trend, falling from a peak of 10.8% in 2022 to 7% in 2023 and to a projected 4.5% at the end of 2024. However, earlier this year, Statistics Mauritius adopted a revised CPI basket based on the 2023 Household Budget Survey. The new basket features significantly higher weights given to several items, notably gasoline and pharmaceutical products. If this basket was applied before, the inflation rate for 2023 would be above 7%.

Moreover, the MSM government proclaimed that public sector debt was on a declining path. But this is in relative terms (that is, as a ratio to GDP) only. In fact, public debt is expected to reach Rs 567 billion by the end of 2024, Rs 55 billion higher than in December 2023. And let us not forget that these figures understate the true debt level as the former government used a variety of Special Purpose Vehicles (read ‘debt-disguising tactics’) to conceal debt. In the same vein, the budget deficit may also be understated by over-estimating revenues and under-estimating expenditure. No wonder the MSM government has called for supplementary budget financing of billions of rupees every year over the past 5 years!

Last, but certainly not least, the former Minister of Finance painted a very positive picture of the country’s export position, rejoicing in the fact that exports were increasing in value. However, he omitted to say how much of the increase was due to the depreciation of the rupee, nor did he make any mention of merchandise imports, which have soared since 2020, with the result that the trade deficit reached a staggering Rs 182 billion in 2023. Again, the sad truth is that, in US$ terms, goods exports in 2023 were 26% lower than in 2014 when the MSM government took office.

All the above points to the necessity of a statistical audit, which will reveal the true state of the economy and its financial situation. I won’t be surprised if the inflation rates and budget deficits in recent years were higher, and growth rates and the level of reserves lower, than official data suggest.

* The necessity of this audit would also suggest that the true picture of the state of the economy would have been hidden by the previous government and the institutions directly connected with the economy and public finance – the Ministry of Finance itself, Bank of Mauritius, possibly Statistics Mauritius. How can that be possible especially in an open and democratic country?

Indeed, government manipulation of economic data was once unthinkable — until the previous regime, that is. And it was possible because there is no required audit of government statistics, as is the case, for example, with company accounts. One may recall an incident when Statistics Mauritius was forced to remove a report that it had just posted online – because it contained GDP growth forecasts that were lower than those that the Minister of Finance had presented earlier. MCB Focus, a periodic publication by the MCB, suffered a similar fate, demonstrating the length to which the MSM government went to create and perpetuate a statistical illusion.

I won’t blame Statistics Mauritius for misreporting economic data, if they ever did. Statisticians swear by a strict ethical code, but sadly, they were subject to pressure and intimidation by the Ministry of Finance under the MSM government.

However, it is also not correct to say that there are no checks and balances on economic data accuracy in an open, democratic country. These controls are exercised by external agencies, such as the IMF/World Bank, and Moody’s.

The IMF has decried the MSM government’s manipulation of economic statistics and provided its own counter-estimates. For example, the IMF projects a GDP growth rate of 4.9% this year – as opposed to Dr Padayachy’s 6.5%. Similarly, the IMF’s inflation forecast of 4.9% is higher than the previous government’s 4.5%.

 As an international watchdog, Moody’s can punish any country with a credit-rating downgrade if it finds that economic data has been manipulated to create a better picture of the country’s credit worthiness.

* Economists are in a better position to identify the key areas where the previous government’s policies may have caused long-term harm to the economy. In your view, what are the main villains that have contributed to the current situation?

I will refer to two among many of the previous government’s policy failures. One is that the government made big electoral promises without assessing the economy’s capacity to deliver them. The second is that it relied on consumption as the economy’s engine of growth.

It all started with the MSM’s promise, in October 2019, to double the basic retirement pension (BRP) to Rs13,500 during their term in office. As soon as they came to power, they raised the BRP to Rs 9,000, paying Rs 18,000 in December 2019, including the traditional 13th-month bonus. To finance the pension hike, the government ploughed Rs 18 billion from the Bank of Mauritius’ reserves in January 2020. This was the beginning of the end, and it started even before Covid-19 hit us. The pandemic only made things worse, prompting the government to seek further financing (Rs 60 billion) from the central bank.

And then, in June 2020, the MIC was set up with a capital injection of Rs 80 billion from the BoM’s reserves. These repeated drawdowns on the Bank’s reserves weakened its ability to defend the national currency, causing the rupee to fall relative to major currencies, and unleashing an inflation spiral, which got worse as the government kept up its spending frenzy. Further increases in the BRP were financed through the inflation tax as the government discovered that giving money brings back more tax revenue as prices rise.

The second mistake was to make consumption the locomotive of economic growth. This is in contradiction with a basic tenet of growth theory, which holds that growth is driven by investment. The government did invest massively in public infrastructure – perhaps for political reasons – but investment in the real sectors was neglected. As a result, agriculture, manufacturing and exports have continued to decline; the bulk of foreign direct investment has flowed to the real estate sector; and no new growth pillar has emerged since 2014. The pharmaceutical industry, announced with great pomp in 2021, is yet to see the day while food security remains a mere concept.

In light of the above, there is an urgent need to rethink our model of economic development. This must be the new government’s top priority.

* While it may be premature given the upcoming audit, how much fiscal space do you anticipate the government will have to implement key policy reforms without exacerbating the current economic challenges?

In the past, I always said that the MSM government had considerable fiscal space to implement its expenditure programme since it relied on inflation-tax financing. However, this option is not available to the new government. The government needs to implement its electoral promises, stabilize the rupee, develop new growth poles to stimulate the economy and boost exports, and achieve a degree of food security. These measures will require significant financing. On the other hand, slashing excise duties to ease petrol prices and cutting VAT rates to bring basic food prices down will reduce the government’s revenue. Rental income from the Chagos deal is also in jeopardy as the Trump administration will likely call for its renegotiation.

All things considered, the fiscal space to implement the new government programme is rather limited at the moment. But this was expected. There is no magic bullet to economic prosperity. Economic reforms, if any, must be carefully phased to reduce their adverse impacts. But I believe that the challenges facing the economy today call more for innovative policies and improved economic management rather than painful structural reforms. Over time, the fiscal space will expand as the economy picks up.

* The ‘Alliance du Changement’ has had to compete with the electoral promises of the Lepep Alliance, particularly regarding the proposed 14th-month bonus. It’s worth noting though that the previous government was notably silent about any potential decrease in petroleum product prices. Implementing the 14th-month bonus may prove to be more challenging than it initially appears, wouldn’t you agree?

Indeed, it will be more challenging. The previous government did not reduce petrol prices, which many were hoping for as a last-minute electoral bribe, nor did it make any explicit promise to cut petrol prices in their next mandate, if any. That was because the MSM government exploited petrol taxes as a cash cow. Slashing these taxes while increasing pensions and paying a 14th-month bonus will be doubly challenging for the current government.

However, I believe that the government will find the means to pay the extra month’s salary later this month and assist financially distressed SMEs to do the same. My understanding is that this measure will be one-off. Going forward, better expenditure management, improved tax buoyancy in a more dynamic economy, and enhanced revenue mobilization can help finance some of the other electoral promises.

* Financing electoral pledges and additional commitments will undoubtedly demand substantial funding. In this context, do you believe that introducing some form of progressive taxation could be a necessary measure to generate the required revenue?

First, I believe that the government should review its electoral pledges in a comprehensive manner with a view to rationalizing them. Some political measures are inherently time-inconsistent: they lose their relevance after the election. For example, the proposal to revamp the MBC-TV licence fee may not be necessary if the masses start enjoying watching the MBC again. Moreover, several of the proposed measures are motivated by the need to make up for the erosion of purchasing power due to ongoing inflation. However, if the government manages to bring inflation under control, measures such as free internet and free public transport may become insignificant.

On the other hand, as I said earlier, there are other ways to mobilize revenue than reforming the income tax system. The 2023-24 Budget introduced a dose of progressivity, starting with 2% on base chargeable income (Rs 390,000) and rising in steps of 2% to a maximum of 20% on taxable income above Rs 2,390,000. The impact of this reform on tax revenue needs to be studied before implementing any further changes to the tax system. Higher tax rates may not always yield increased tax revenues – due to the so-called Laffer-curve effect. The government should explore other options to mobilize revenue, such as rationalizing tax exemptions, casting the tax nets wider, and cracking down on tax evasion.

* How about the scope of improving the efficiency of public spending, particularly in areas such as social welfare, infrastructure, and public services?

There is substantial scope to improve public service delivery so that the government gets value for money. Annual audit reports have systematically revealed lapses in public financial management, poor project monitoring and coordination failures that the MSM government failed to address. There was a proposal in the 2021-22 Budget to up a Project Implementation and Monitoring Agency (PIMA) within the Ministry of Finance to assist in the effective execution of budgetary measures. Unfortunately, PIMA never quite lived up to its promise, largely because most ministries failed to comply.

I was hoping that the new government would bring back the Ministry of Economic Planning and Development of the old days and strengthen its coordination role. Perhaps this is something that the Ministry of Financial Services and Economic Planning might consider. Better coordination across the public sector can help reduce wastage, maximize synergies and enhance efficiency.

* Do you think it might also be necessary to review social welfare benefits, including pensions, to make them more effective, ensuring they reach those who are truly in need?

Mauritius has a complex three-tiered pension system consisting of a universal, non-contributory basic retirement pension (BRP); funded, income-related schemes – the National Pension Fund (NPF) and the National Savings Fund (NSF) for private-sector employees, and a separate civil service pension scheme for public officers; and private, voluntary schemes. I believe your question refers to the BRP, so I will focus on this tier. Suffice it to say that the replacement of the NPF by the CSG in 2020 has been a reform in the wrong direction. The CSG is not specifically earmarked for welfare benefits, and CSG funds are totally fungible. As such, there is no guarantee that sufficient funds will be available to meet pension obligations in the future, in which case contingent liabilities will fall on the government.

The BRP has played a key role in redistributing income and alleviating poverty in old age. However, in its current form, the BRP is unsustainable in the face of an ageing population. As early as in 2004, the World Bank proposed two sets of reforms to make the BRP fiscally viable. The first relates to the eligibility criteria; the second concerns the benefit level. Currently, any citizen reaching age 60 is eligible for the BRP. This is a contradiction given that the retirement age is officially 65. The burden of the BRP on public finance could be reduced if the eligibility age is brought closer to the retirement age.

Moreover, since the BRP is meant to provide a living income, it could be better targeted to those who really need it, rather than paying it out indiscriminately. The second reform suggests that the amount of the BRP could be adjusted according to the government’s capacity to pay. Technically, this means reducing the benefit level to relieve the fiscal pressure on the government budget.

These reform proposals have been extensively debated in the past and wholesomely rejected. Trade unionists have vehemently opposed any changes to the BRP that would adversely impact employees, claiming the BRP as a ‘droit acquis’ and its universality sacred. Targeting has been a hotly contested political issue since 2005. Conversely, the MSM government had made pension politics a central part of its electoral strategy, raising the BRP repeatedly and further segmenting it by age group. In nominal terms, the BRP has more than doubled in the past 5 years and is set to increase progressively in the next 5 years to reach Rs 21,500 by 2029.

Unless we are ready to depoliticize and desensitize the pension issue, reforming the BRP will remain as elusive as ever. The current government has been given a clear mandate to bring about several constitutional changes. My hope is that the government also re-opens the debate on pension reform with a view to finding mutually acceptable, lasting solutions. In this, communication will be key.

* How can the government stabilize commodity prices, particularly for basic food items and fuel, without relying on unsustainable subsidies, while also addressingthe cost of living—especially in areas like housing and healthcare—to improve the affordability of essential goods and services?

There is no alternative to stabilizing prices other than halting the depreciation of the rupee. I trust that the new team at the helm of the Bank of Mauritius will focus on the Bank’s primary mandate, that is maintaining price stability. An independent central bank can inspire confidence among market participants in ways that could lead to a self-fulfilling prophecy. For example, if economic agents believe that the BoM is serious about fighting inflation and stabilizing the rupee, they may choose to sell the foreign exchange that they have been hoarding, thereby causing the rupee to appreciate.

Subsidies on rice, flour and household gas are clearly unsustainable. These subsidies are financed through levies on petrol, so they are just a means of redistributing income. It would be better to target the subsidies to the most vulnerable households by topping up their income allowances. This question also needs to be thoroughly considered by the government.

On the issue of healthcare, the government has proposed a system of vouchers that would enable patients to purchase drugs not available at public hospitals from private pharmacies. Going forward, the government should tackle the vested interests that prevented the MSM government from cracking down on the cartels involved in drug imports and the over-invoicing that they are known to practice.

As for housing, there is a need to review the property development schemes that have resulted in land-price inflation and distorted FDI incentives towards the real estate sector. The government should also come up with a plan to build and deliver social housing units in a phased manner during its mandate.

* The road ahead may prove to be more challenging than the ‘Alliance du Changement’ anticipated. It may therefore be crucial for the government to have the right team at the helm and to communicate its economic reforms and fiscal policies effectively through a “politique de vérité” to ensure public support and understanding. What are your thoughts on this approach?

The people were helpless spectators of the institutional decay caused by incompetent political nominees in key positions under the MSM regime. The Alliance du Changement government has signalled a “politique de rupture”, which is already evident in the handful of appointments made to date. The government is serious about putting the right person in the right place as the country will need to leverage on all its competent might to forge ahead.

The “politique de rupture” also means a different way of doing things, one that restores the democratic values that were so often buffeted under the previous regime; one that does away with the cronyism and nepotism that had become the hallmark of the MSM government; one that re-instills meritocracy and transparency; one that prioritizes a “politique de vérité”, as you put it.

For change to be effective, it must be owned by the people. This sense of belonging can only be built and nurtured through clear, constant and inclusive communication. A revived MBC can surely play a role in this process as will the unfettered press.

Mauritius Times ePaper Friday 6 December 2024