The Big Budget Bluff

Opinion

Ignoring critical IMF recommendations, such as to rebuild fiscal buffers and restore prudent macroeconomic management, the Budget risks compromising economic stability and the country’s credit rating

By Vinaye Ancharaz

Every Budget since this regime’s first – in 2020 – has had a decisively overt populist flavour and, as such, the population has gotten used to a generous shower of perks at every Budget speech. With elections on the horizon, the 2024-25 Budget came with pent up expectations; ultimately, it turned out to be a huge disappointment. To be fair, it doled out a string of ‘social measures’ to various segments of the population, but many were left hungry for more. And middle-income families, the government’s cash cow, were tossed some measly crumbs. The Budget had promised to focus on the economy, on social welfare, and on the environment, but it failed miserably in boosting economic resilience or creating a ‘feel-good’ factor.

“Inflation has fallen from 10.8% in 2022 to 7% in 2023 and is projected to fall further to 4.9% this year. However, a drop in the inflation rate should not be confused with falling prices. It only means that prices will keep rising, albeit at a reduced pace. Moreover, the inflation forecast of 4.9% does not consider the effects of the budgetary measures, which will increase liquidity in the economy, and cause a further degree of inflation…”

There were some positive measures and a few innovative ones, such as the 2% CCR levy on companies, and the setting up of a Climate and Sustainability Fund (CSF), to finance climate change adaptation and mitigation projects. While a modest start toward rallying the Rs 300 billion needed to meet the country’s climate needs, this will still leave a financing gap of about 1.6% of GDP per year over 15 years, according to IMF estimates. This amount must be mobilized from global climate funds and by novel instruments such as green or blue bonds. The Budget, including its annexes, failed to make a statement on the future of climate financing in Mauritius.

The Budget has been widely critiqued, and it is none of my intention to repeat what has been said. However, as with Dr Padayachy’s past four Budgets, this one too will be remembered, not for what it delivered, but for what it did not; not for the half-truths it said, but for the lies it concealed. Paragraphs 12-20 of the Budget Speech paint a very positive picture of the economic situation but, as usual, the devil lies in the detail.

We’re just out of the woods

The Budget speaks of ‘strong’ GDP growth of 7% in 2023 and ‘exceptional’ growth of 8.9% in 2022, with GDP reaching Rs 651.7 billion in 2023. However, the Minister omitted to mention that, despite this growth, real GDP per capita at the end of 2023 ($11,417) was the same as in 2019 before the pandemic ($11,408). These figures come from the IMF’s Article IV Consultation report released last month, and they are a damning verdict on the government’s cover-up of the true state of the economy.

The truth is that the economy has only now emerged from the hole it slipped into following the massive 14.5% decline in output in 2020. During this time, the government engaged in a spending frenzy as if the economy were in a boom!

Investment is up, but consumption remains the locomotive of growth

Gross domestic investment is on the rise, driven mainly by public investment in infrastructure projects, such as the tramway and flyovers. However, this increase is not sustainable and, despite the surge in investment, consumption remains the locomotive of growth in Mauritius.

Moreover, investment as a share of GDP (about 20% in recent years) remains below that of peer countries like Singapore (23%) and Ireland (36%). For long-term growth, it is crucial that investment flows into the productive sectors of the economy. There is a risk that continued heavy investment by the government crowds out critical investment by the private sector.

The bulk of FDI swallowed up by the real estate sector

The Minister celebrated the fact that foreign direct investment (FDI) inflows reached a record high of Rs 37 billion in 2023, but he conveniently forgot to mention that over 60% of these flows have been directed to hotels and property development, with productive sectors, such as agriculture and manufacturing together receiving less than 10%, on the average, between 2021 and 2023.

It seems that the Integrated Resort Scheme (IRS) and its recent innovations, such as the Property Development Scheme, have distorted the risk-return trade-off so much in favour of investing in luxury villas (significantly higher return for lower risk) that investing in other sectors has become unattractive for foreign investors. Food security will remain a mere concept unless investment incentives are reset to attract larger volumes of FDI into agriculture and agro-processing.

Stagnating exports

Exports have increased in value…but imports have increased even more. The trade deficit reached a record Rs180 billion in 2023. Imports are three times bigger than exports. Moreover, the Minister conveniently omitted to mention that the increase in exports – whether of goods only, or of goods and services – is purely in nominal terms. If measured in US dollars, merchandise exports in 2023 were 26% lower than in 2014 when the MSM government took office.

There has been no attempt to diversify exports over the past 10 years, more precisely since the emergence of the tuna canning industry in the early 2000s. Whatever happened to the pharmaceutical hub that was announced with great pomp in the 2022-23 Budget? The flourishing business of monkey exports is testament to a country that has run out of ideas.

Services exports too are on an upward trajectory, driven mainly by recovery in the tourism sector, but part of the increase is surely due to a weakening rupee, which inflates all foreign currency receipts.

An annex to the Budget states that the Economic Development Board will develop a national strategy for adventure tourism. This is a welcome initiative to diversify the tourism product, but there is need to rethink the future of the tourism industry to make it more resilient to external shocks; strengthen its linkages with the local economy; and ensure that the bulk of the sector’s foreign exchange earnings is remitted to Mauritius, thus relieving the constant pressure on the rupee.

In other service sectors, the Budget had nothing to propose other than ‘blueprints’. For example, a 5-year blueprint is the ‘mesure phare’ for the Digital Industry, now in 2024, confirming how far the country has fallen behind the digital wave. Similarly, the blueprint for the financial services sector will be reviewed.

Unemployment has become entrenched

Unemployment was down to 6.1% in 2023 according to the Minister. In fact, it should be 6.3%, according to both Statistics Mauritius and the IMF. The IMF predicts that this rate will persist until 2029, which means that structural unemployment, arising from a persistent skills mismatch, has become systemic. The Budget makes no attempt to address this problem – not even mention of a study, or the ubiquitous blueprint.

Elsewhere, the Budget commits to continue supporting the clothing industry by subsidizing wages. Is this strategy viable in the long term given that the industry’s workforce is predominantly foreign? Moreover, will the manufacturing sector be able to cope with the restructuring of salaries when it happens, or will the government then have to pay out even more to keep it afloat?

Given all these challenges, isn’t it time for a holistic review of the national employment strategy – or a blueprint?

Lower inflation doesn’t mean lower prices

Inflation has fallen from 10.8% in 2022 to 7% in 2023 and is projected to fall further to 4.9% this year. However, a drop in the inflation rate should not be confused with falling prices. It only means that prices will keep rising, albeit at a reduced pace.

Moreover, the inflation forecast of 4.9% does not consider the effects of the budgetary measures, which will increase liquidity in the economy, and cause a further degree of inflation. Nor does it factor in downside risks arising from the geopolitical tensions in the Gulf, which are already exacerbating freight costs.

A trillion-rupee debt trap?

Public sector debt (PSD) stood at 78% of GDP at the end of 2023 and is projected to fall to 74.5% by June 2024 and further to 71.1% at the end of June 2025. True, debt is on a declining path, but in relative terms only. The PSD stood at Rs 512 billion in December 2023 and is expected to reach Rs 567 billion by the end of this year, that is, an increase of Rs 55 billion in just one year! At this rate, government debt will soon hit the Rs 1 trillion milestone! More worrying, external debt will increase by at least Rs 14 billion in 2024/25.

Dr Padayachy takes pride in showcasing the falling debt-to-GDP ratio toward the long-term anchor of 60%. While GDP reflects an economy’s debt-carrying capacity, ultimately it is the people who pay the debt. The idea of Ricardian equivalence suggests that debt is just deferred taxes. From this perspective, the true measure of the debt burden is in per capita terms. Currently, public debt per head amounts to a whopping Rs 416,000, and this figure is bound to rise as debt increases and the population declines.

Where will economic growth come from?

The Budget forecasted GDP growth at 6.5% for 2024 (compared to the IMF forecast of 4.9%, and 3.3% in the medium term). Where will this higher growth come from? In 2022, GDP growth soared to 8.9% (after a timid 3.4% in 2021) following a major change in national income accounting, which saw the inclusion of primary income of the global business sector from abroad in the computation of GDP. Are GDP figures being cooked up again?

Conclusion

The 2024-25 Budget, like previous ones, is rife with populist measures, creating misleading optimism. Despite showcasing economic growth and high FDI, it glosses over stagnant real GDP per capita, an unsustainable reliance on consumption, and the twin deficits (i.e., budget and trade deficits). Many sectors, including agriculture and manufacturing, remain underfunded, revealing the Budget’s bluff.

Going forward, ignoring critical IMF recommendations, such as to rebuild fiscal buffers and restore prudent macroeconomic management, the Budget risks compromising economic stability and the country’s credit rating, with drastic consequences for the global business sector and FDI.

Vinaye Ancharaz, PhD, FCMI, formerly a principal economist at the African Development Bank and a senior lecturer and Head of Department at the University of Mauritius, is an international economic consultant specializing in trade and development.

Mauritius Times ePaper Friday 21 June 2024