‘A global recession is looming, and it will surely impact Mauritius. My advice to the public is to save for the rainy day
Interview: Dr Vinaye Ancharaz, International Economic Consultant
* ‘The country has shiny trams but empty taps. That’s the idea of modernity that this government brags about!’
* Feel-good factor? ‘How will the people feel good when the high cost of living has pushed many over the brink of poverty?’
Dr Ancharaz rates government well for mitigating the health and socio-economic risks of the pandemic but it has come at high costs. Depreciation of the rupee, a mountainous public debt, lavish distribution of Rs 158 billion Mauritius Investment Corporation (MIC) funds and the loss of the central bank’s ability to intervene effectively are all contributory factors to the risk of stagflation despite the excessive focus on shiny infrastructure. A depressed global economy and a pre-electoral spending spree would make matters worse. There may be therefore a feel-good factor in spheres close to power, he quips, but for the country and most ordinary Mauritians, 2023 should be a year of vigilance.
Mauritius Times: It might be too early to talk about the overall performance of the government as regards its management of the economy given that it can choose to present two more budgets – unless it decides to skip the second one. But even so, how would you say it has done so far? Has it made a bad situation even worse, or has it more or less weathered rather successfully the storm that came with the pandemic?
Vinaye Ancharaz: It’s never too late to assess the government’s performance, especially now that they are mid-way through their mandate. And to think that the government has two more budgets to present is to assume that general elections won’t happen before December 2024. With the Privy Council judgment in the Dayal case – expected later in the year – I believe the government will have a chance to present its fourth Budget. That could also be its last one.
Indeed, this government’s performance will be judged in terms of how well it managed the Covid-19 crisis. That’s because the pandemic broke out soon after the government took office in November 2019 and, with cases on the rise and a new variant wreaking havoc in China, it is likely to permeate the government’s entire term. The government handled the sanitary and economic crisis rather well. Drastic measures such as travel restrictions and lockdowns helped contain the spread of the virus. Economic measures such as wage assistance schemes, tax relief and financial support to distressed enterprises, and a six-month moratorium on loans provided a lifeline to many businesses and households. Additional policy actions, including scaled-up government spending and interest rate cuts, sought to stimulate the economy. Despite all these measures, the economy contracted by about 15% in 2020. In their absence, the economic decline and the socio-economic impacts of the pandemic would undeniably have been much worse.
As usual, however, the devil lies in the details. The Minister of Finance proudly claimed that the government’s Covid-19 stimulus package amounted to some 30% of GDP. But he did not mention that this sum included billions of rupees in special lines of credit, BoM bond issues, trade finance facilities, etc., which do not constitute actual spending. Nor did he mention that much of it was possible because of the one-off exceptional contribution of Rs60 billion by the central bank, which allowed him to accomplish the impossible feat of ‘balancing’ the budget in the midst of an unprecedented crisis! The pandemic also prompted the government to remove the statutory 65%-of-GDP debt ceiling, opening up the floodgates and leading to unsustainably high debt levels. And not the least, Covid-19 was a boon to the government’s cronies, with billions given away in dodgy procurement deals and through equity injections by the MIC.
In many ways, the government’s actions to deal with the pandemic are responsible for the economic malaise of today. A total of Rs158 billion has been ploughed out of the BOM reserves, causing the monetary base to swell, inflation to rise, and leaving the Bank in a weak position to defend the rupee. The subsequent depreciation of the rupee, which is only partly caused by the shortfall in tourist earnings, has pushed inflation into double digits, making life particularly hard for many.
* The IMF stated in its last Article IV Consultation that ‘the key macroeconomic challenge for Mauritius is to continue its economic recovery while controlling inflation in a global environment with high fuel and food prices and slower recovery.’ What is your reading of how the Mauritian economy is doing on those counts?
We ended 2022 with a headline inflation rate of 12.2%, the highest in the past three decades. True, part of this is due to external factors beyond our control. Supply chains disrupted by the pandemic have not fully recovered and, so, shipping costs remain elevated. Food prices have surged following the Ukraine war. Aggregate demand is recovering only slowly, so I doubt if that is a contributing factor. But I remain convinced that the current high inflation is due to the continuous depreciation of the rupee, which itself is the consequence of the systematic plundering of the BoM special reserves. Else, how can one explain that some of our neighbors, e.g., Seychelles (5.7%) and South Africa (7%), reported much lower inflation rates in 2022 than us?
Globally, inflation is expected to fall this year as a result of monetary policy tightening and as freight charges revert to pre-pandemic levels. In Mauritius too, inflation will subside – unless 2023 turns out to be an election year! In that case, the government will surely rev up its spending spree, causing inflation to rise.
However, it is important to dispel some misunderstanding about inflation. A lower rate of inflation does not mean that prices are falling! It means that prices continue to rise but at a reduced pace. So, if the public is looking for relief from the high and rising cost of living, they will need to wait a bit longer.
* We are not however in a situation of crisis, as speculated by some economists earlier in light of the high level of public debt, the still ongoing global negative supply shock, etc., isn’t it?
‘Crisis’ is a relative word! Yes, we may not be in a crisis like in 2020, but we are not completely out of the woods. Covid-19 is still around and it may flare up. The negative supply shock is dissipating away, so its impact on inflation will also diminish. Conversely, there is no end in sight to the Ukraine war.
Domestically, the debt overhang will haunt us for years. Officially, public debt currently stands at about 90% of GDP. However, if we factor in borrowing disguised in so-called Special Purpose Vehicles; if we add back loans contracted by parastatals and other public enterprises; and if we account for other colorful devices used by the government to artificially reduce the debt level, such as the Rs25 billion purchase of Air Mauritius Holdings by MIC in December 2021, the debt/GDP ratio would be much higher.
Such high debt condemns our future generations. It also reduces the country’s capacity to borrow for high-impact, as opposed to fashionable, development projects, which the current government has overtly privileged.
* Given the already very high public debt level, how sustainable is the current trend of government spending in infrastructure projects, like for example the extension of the metro line to Cote d’Or at costs that look rather exorbitant?
Last year, the IMF raised the debt sustainability ratio for Mauritius to 80% (of GDP). This is good news since it attests to the robustness of the economy and the country’s capacity to pay. The government forecasts that the debt ratio will fall and converge towards 80% by the end of its term. This is wishful thinking. The government keeps on borrowing, and countries outside of the Paris Club, notably India and China, are all too eager to lend. The recent case of Sri Lanka is a stark reminder of the dangers of excessive borrowing in foreign currency. Luckily for Mauritius, the bulk of the public debt is domestic, but that may change.
You mentioned the metro project. Let us recall that the MSM had vehemently criticized the project in the run-up to the 2014 elections, going so far as pleading PM Modi not to finance it. The same project has now become the government’s pet project. Extensions to the metro line to Réduit come at huge cost – an estimated Rs1 billion per km – and plans to further extend the network to Cote d’Or via Moka and St Pierre will increase the public debt by Rs13.6 billion at least, without counting cost overruns, which have become endemic. Our national debt is thus edging ever closer to the half trillion-rupee mark.
This level of debt is clearly unsustainable – more so since the metro is running at considerable loss, and will continue to do so for years to come. Indeed, one may ask if the company will ever show a profit. The danger is that, as elections draw closer, the government will launch many other flashy infrastructure projects to show they have been working hard to ‘modernize’ the country. Consequently, the debt level may soar out of control.
* Minister Padayachy had in his last budget earmarked billions for drains, the oft-promised Riviere des Anguilles dam and other measures to boost water distribution, yet the latest drought is evidence that not much has improved on that front. Has the metro engulfed other perhaps more pressing infrastructure priorities?
The Riviere des Anguilles dam project was first announced in the 2009-10 Budget of the then-Labor-led government, who committed to finishing it by 2014. That did not happen. In the meantime, the initial cost of the project, estimated at Rs2.5 billion, has increased four-hold. The project has become the poster child of the MSM government since it was announced in the 2015-16 Budget. Thereafter, every Budget has mentioned the project and earmarked funds for it. But to no avail!
It seems, as you suggest, that the project was overshadowed by other prestige projects, which are more visible to the public, and which could generate quick wins for a government eager to prove its legitimacy. The same can be said of the project to construct 12,000 social housing units. How many have been delivered so far? Unfortunately, when the going is good, the population would hardly feel the need for another dam, and that is what the government has been preying on. But the recent drought has highlighted the blatant failure of this government to ensure reliable water supply across the country. What has happened to its 24/7 water supply promise?
The right to clean water and sanitation is enshrined in Sustainable Development Goal (SDG) No. 6. But do you know that this government has chosen to prioritize only 4 of the 17 SDGs, and that water supply is not one of them? Isn’t that ironical of a government that promised uninterrupted availability of water and criticized its predecessors for not doing enough to address the perennial water leakage problem due to aging pipelines?
As a development economist, I’ve always maintained that development needs to be felt rather than seen. This government has adopted the opposite stance and elevated it to an art form. So, the country has shiny trams but empty taps. That’s the idea of modernity that this government brags about!
* Is the forex crisis coupled with the scarce reserves at the Central Bank in subdued mode or should we expect some further deterioration in the value of our currency during 2023?
There are conflicting forces at work. The recent hikes in the Repo rate are meant to induce an appreciation of the rupee. But they are unlikely to work as interest rates in the US and the Euro zone have also increased.
On the other hand, the central bank’s reserves position is constantly deteriorating. Our current account deficit increased to Rs60 billion – a whopping 10% of GDP! The global business sector brings in a significant amount of foreign exchange, but it remains rather vulnerable, and the country has not succeeded in diversifying its sources of foreign currency earnings.
Things can get worse if the emerging global recession hits Mauritius. If that happens, tourist arrivals, which were on course to return to pre-pandemic levels, will take another hit. The forex crisis will deepen, and a sharper depreciation of the rupee may be inevitable.
* 2023 is likely going to be a crucial year on the political front, and those decisions that could be expected to be taken by the government in what probably is going to be an election year will have an impact in the short- and medium-terms. What’s your assessment of such an impact on the country’s economy?
Indeed, many people are expecting that general elections will happen this year. The signs are clear to the discerning eyes. The municipal elections cannot be postponed indefinitely…unless they are preempted by general elections. The Prime Minister misses no opportunity to declare that he is determined to take his government to the very end, but his body language denies his words. More importantly, the Privy Council judgment in the Dayal case may come later in the year. If the PM anticipates a damning verdict, he may choose to call snap elections.
Anticipated polls will bring with them the usual load of promises. The government machinery will be set in full gear. Public projects, recruitment and promotion in the civil service and the police force, and the offer of perks to diverse segments of the population, including the much-awaited rise in retirement pension to Rs13,500, will require billions in funding. They may be financed by ‘helicopter money’, that is, by central bank lending to the government, which will fuel the inflationary fire and leave the economy in ruins.
* Rama Sithanen made mention in his comments on the 2022-23 Budget of some Rs 30 or more billions transferred to the Special Funds by Finance Minister Padayachy presumed to finance, among others, a number of pre-electoral populist measures. How far will those funds carry the government forward and keep the economy going?
Indeed, there is evidence that several big projects mentioned in the last Budget have opaque financing sources. And there is much speculation that the government has built a war chest, which it will exploit to great effect in the next elections. Added to that is the MSM’s private funds, which could also run into billions.
Money politics has always been the MSM’s game, and the next elections will be no different. If anything, the incumbent party will spend as if there were no future. For indeed, a defeat at the elections will deal the MSM a coup de grâce.
* Meanwhile inflation remains high and it should be disconcerting to the population that high fuel taxes and costs at the pump, with its cascading effects, are being maintained wouldn’t you say? Do you sense the feel-good factor the PM alluded to in his end-of-year address?
Like most people, I did not sense the ‘feel-good factor’ that the PM spoke about in his new year message. How will the people feel good when the high cost of living has pushed many over the brink of poverty? When senior citizens are complaining that, even with more than Rs10,000 of pension money, they are struggling to make ends meet? When the recent hike in the Repo rate means higher interest charges, which are stifling the middle class? When people are dreading the announced hike in electricity tariffs next month? And when the government refuses to cut fuel prices, which it keeps exploiting as a cash cow?
Feel-good factor maybe, but only for those well connected with the party in power.
* But it’s also probable that the government might be betting on a robust recovery in the months ahead and that will save it from a worsening economic situation. Could that be plausible when some form of recession is being predicted in our main partner countries?
I don’t want to be a prophet of doom, but I believe that the writing is in the wall. A robust recovery in Mauritius in 2023 is simply inconceivable. Globally, the economic outlook is not so bright. The World Bank has slashed its world GDP growth forecast for this year from 3% to 1.7%. All major economies will be in recession, with growth in the Euro area projected at 0.5% and 1% in the US.
GDP growth in Mauritius last year is estimated to top 7.8%, but much of it is due to the base effect, that is, the low level of GDP in 2021 following the 15% contraction of the economy in 2020. Growth in 2023 is forecast at 5%. That is reasonable given the unfolding economic conjecture, but considerable downside risks exist. A low growth rate means higher unemployment and yet, inflation too will remain relatively high, resulting in a rather rare occurrence that economists call ‘stagflation’.
There are no clear-cut policy prescriptions for addressing stagflation. Dealing with a recession calls for expansionary policies (e.g., fiscal stimulus, lower interest rates) but tackling inflation requires monetary tightening (e.g., higher policy rates). The only sensible thing to do is not to make things worse by resorting to populist measures.
* What’s your opinion of how things on the economic front might take shape in the next twelve months?
The year 2023 should be a year of vigilance. A global recession is looming, and it will surely impact Mauritius through trade and investment links, and tourist arrivals. With our imports being less sensitive to income than our exports, the recession will accentuate the current account deficit and worsen the current forex crisis, leading to a further weakening of the rupee.
Under these circumstances, my advice to the public is to save for the rainy day.
Mauritius Times ePaper Friday 13 Januart 2023
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