The State of the Economy and Road Ahead

Economy

The government faces the Herculean task of stimulating the economy and consolidating the financial situation while delivering on its electoral promises. This should be feasible if the pledges are toned down

By Vinaye Ancharaz

There have been rumours, and some anecdotal evidence, that the MSM government had tampered with macroeconomic indicators to make the economic situation look better than it was. I have always decried such manipulation of economic data in my numerous radio and newspaper interviews, the latest being the previous edition of Mauritius Times last Friday.

Upon assuming office, the Alliance du Changement government undertook an audit of public finances and an objective situational analysis of the economy. The report on the state of the economy was tabled in Parliament last Tuesday, sparking extensive discussion both inside and outside the House. In short, the report makes several damning revelations, confirming what many had feared until now: the economic boom that the former Minister of Finance alluded to in his press conference just days before the general election is a mere statistical illusion. Together with the findings on the MIC, the report paints a rather bleak picture of the current state of economic affairs and exposes numerous sectoral and structural challenges.

1. Key findings

GDP and economic growth

GDP growth is the most significant indicator of the economic health of a country and, unsurprisingly, this variable took center-stage in the report. I have repeatedly said that the GDP growth figures churned out by the MSM government since 2020 were inflated by miscalculations of GDP. The report suggests that growth rates were exaggerated across several sectors, most notably in construction, where the sectoral growth rate for 2024 was revised from 38.8% down to 25%. Consequently, the growth rate for 2024 is estimated to be 5.1%, much lower than the forecast of 6.5%.

As an economist, I have always trusted the IMF more than Statistics Mauritius, which unfortunately had become an agency of the Ministry of Finance under the MSM government. In its April 2024 report, the IMF projected a GDP growth rate of 4.9% for 2024, which isn’t far from the updated estimate of 5.1%. The IMF also revealed, and the State of the Economy report confirms, that, in USD terms, nominal GDP in 2023 was no different from GDP in 2019 prior to the pandemic. In real terms, it was lower. This suggests that the Mauritian economy has just come out of the hole it had slipped into when the economy contracted by a massive 14.5% in 2020.

And yet, during this time, the MSM government behaved as if the economy was going full throttle: the national minimum wage, set at Rs8,500 in January 2018, was raised to Rs 16,500, prompting a salary re-alignment that further added to the financial burden of already-distressed enterprises; the basic retirement pension increased from Rs 9,000 in December 2019 to Rs14,500 most recently; and CSG revenue has been squandered in income allowances of all sorts. In fact, the report shows that the payment of pensions accounted for the biggest chunk of the increase in government debt in the last ten years, that is, Rs 101 billion out of Rs 275 billion, or 37%.

Investment and trade

The report confirms the long-term decline in the domestic investment rate – from an average 21.9% before 2014 to 18.5% during 2015-2023. If public investment in the tramway is excluded, the investment rate would be even lower, suggesting some crowding out of private investment.

Exports too have declined in volume terms, suggesting that the uptick in the value of merchandise exports since 2020 that Dr Padayachy proudly showcased as an unmistakable sign of economic progress is, in fact, largely a price effect due to the depreciation of the rupee.

With investment and exports down, consumption has been the engine of growth in recent years. This is unsustainable, more so since over 70% of the foreign direct investment (FDI) in recent years has flowed into property development, depriving the manufacturing sector of a critically needed lifeline and perpetuating food security as an elusive concept.

Monetary policy

The most shocking revelation of chapter 3 of the report (on monetary policy) is that the MIC was created entirely with helicopter money! In fact, the capital injection of USD 2 billion (equivalent to Rs 81 billion) out of the central bank’s reserves never took place. The transaction was simply an accounting gimmick that amounted to BoM printing Rs 81 billion. This brings the total amount of printed money to Rs 154 billion (including Rs 18 billion to pay pension-related debt in January 2020 and Rs 55 billion given as a one-off grant to the government in July 2020).
No wonder this massive spurt of liquidity into the economy provoked a long-term decline of the rupee. The rupee has depreciated by 46% vis-à-vis the US dollar since the MSM government took office in December 2014. That means you need about twice as many rupees to buy a dollar today than you did in December 2014. The impact on inflation has been huge.

Inflation is on a downward trend, falling from a peak of 10.8% in 2022 to an estimated 3.7% by the end of this year, and bottoming out at 3.5% in the near future according to the IMF. However, lower inflation should not be mistaken for falling prices! First, the low inflation rate is due to the so-called base effect (that is, the inflation rate is calculated on a higher price level). More important, it means that prices will keep rising, albeit at a slower rate. Finally, inflation has become systemic: it is here to stay. The report tracks the increase in price of several consumer products between October 2019 and October 2024, showing that, for many commodities, the price hike has been substantial.

Labour market

The unemployment rate, although low at 6.3% in 2023, is difficult to reconcile with the prevailing situation of labour shortage across a wide range of sectors, notably agriculture and retail trade. It is a sign of a systemic skills mismatch, which has gone on unaddressed. This skills mismatch is reflected in a high number of skills-related underemployed, that is, people who are overqualified in their current job. There is also some degree of ‘time-related underemployment’, that is, having time available for extra work.
The true rate of unemployment, adjusting for labour underutilization, works out to 23.2% in 2023, hardly a cause for celebration. Moreover, youth unemployment (17.8% among those aged 16-24) and unemployment among women (8.5% as of September 2024) remain high while female activity rate (the share of women of working age who are employed or looking for a job), at 47.5%, is well below the average in industrialized countries (67%).

Budget deficit and public debt

The budget deficit in recent years has been significantly underestimated. For example, the updated budget deficit for the financial year 2023-24 turned out to be 5.7% of GDP, significantly higher than the 3.9% announced in the Budget. The outlook for 2024-25 is not very positive either, with the budget deficit projected at 6.7% of GDP, compared to initial estimates of 3.4%. This is due to a combination of revenue shortfall and expenditure overruns.
Higher budget deficits imply increased government borrowing requirements and higher debt. The public sector debt has more than doubled over the past 10 years. As a share of GDP, the national debt stood at 83.4% in June 2024, higher than the estimated 76.5%, and is projected to edge up to 84.5% at the end of the current financial year. Significantly, the debt-GDP ratio has remained above the statutory ceiling of 80% since 2019-20 – a testimony to the MSM government’s appalling fiscal management.

Contingent liabilities

Many public entities are steeped in debt and continue to incur massive deficits.

Metro Express Ltd. will need some Rs1.2 billion annually as from financial year 2026-27 for capital and interest payments on loans amounting to Rs16 billion. One wonders where this sum would come from, given that the company has accumulated heavy losses since it came into operation.

Another case is the STC’s Price Stabilization Account (PSA), which currently shows a deficit of Rs3.4 billion, casting doubt on the government’s ability to cut petrol prices in any meaningful way. Finally, the report confirms the financial mess in which the national airline finds itself. With negative equity to the tune of Rs 10.4 billion, Air Mauritius is deemed insolvent.Read More… Become a Subscriber

Mauritius Times ePaper Friday 13 December 2024