“There is a risk of the economy being sucked into a vicious circle, with lose-lose outcomes for all”

Interview: Dr Vinaye Ancharaz – International economic Consultant

* ‘The government may be keeping public infrastructure projects as a joker up its sleeves to later drum up support for the upcoming elections’

 * ‘The special funds will be fully tapped in the next two years, and depleted before the 2024 elections’

*The government is preying on the ‘money illusion’ – the fact that people would rather have Rs1000 more as a cash handout than benefit from Rs1000 (or more) worth of price cuts’

The budget presented by Minister of Finance, has observers worried by its unrealistic growth and inflation forecasts and the lack of serious measures to revamp the production or export sectors or to rein in the devaluation of our national currency. We are in the middle of the dreaded stagflation of the seventies, which the MoF has sidestepped with the bonanza of central bank reserves and special funds stashed away for the coming years to general elections. Against the token relief of Rs1000 to employees earning below Rs 50,000, there has been no relief on the cash cow front of high fuel taxes and VAT, which have numerous cascading effects on the economy. Pinning all our hopes on tourist arrivals to keep the economy and growth figures buoyant has not addressed the issue of carrier capacity and with enormous sums allocated for public infrastructure, we remain more than ever in a vulnerable situation.
Dr Vinaye Ancharaz, International Economic Consultant, shares his views on the current economic situation and where it’s likely to be heading in the short and medium terms

Mauritius Times: Let’s go beyond the ‘For the People’ budget of Finance Minister Padayachy and its relief measures for the lower-income groups and the middle-class. What’s your assessment of the present state of our economy, and where do you think we’ll stand two years down the road?

The economy is recovering, but not fast enough to make up for the loss of GDP since the pandemic. Recall that the economy contracted by 15% in 2020 and although it bounced back last year, it did so at a subdued rate of 4% against a growth forecast of 9%. Growth this year will turn around 6%, lower than initial projections of 7.5%, and 5.6% in 2023.

On these trends, real GDP at the end of 2023 will still be a shade lower than the pre-pandemic level in 2019. While I don’t wish to fixate on GDP growth, there is no denying that it remains the single most important indicator of how the economy emerges from the combined effects of the Covid-19 pandemic and the ongoing war in Ukraine. On this count, the narrative is not a very positive one. Many of our comparative economies are doing much better than us.

* Do you mean to say that the ‘For the People’ budget and what is likely to be more populist next year will make an already bad situation worse?

What we have witnessed over the past two years is a combination of two dreaded economic evils: slow growth and rising inflation, a situation that economists call ‘stagflation’. While a recession requires that the government takes bold measures cut down on waste and use dwindling resources optimally to stimulate the economy, our government discovered that it could plough into the central bank’s reserves to fuel its spending frenzy in the midst of the worst pandemic we have ever known! The result is that no reform ever took place.

On the contrary, the availability of easy money created a mirage – as if our policymakers were looking at the hard reality with rose-tinted glasses! There is little doubt that the monetizing of the Rs60 billion budget deficit in 2020 is the root-cause of the economic pains today. The depreciation of the rupee, which created those artificial revaluation gains, has been pursued as a deliberate policy choice, resulting in inflation in excess of 11%. And then as the rising cost of living led to popular calls for relief, the government came up with what you call a ‘populist’ Budget that tries to compensate some segments of the population for their loss of purchasing power. 

Again, the government missed another chance to launch some critically-needed real reforms, some of which would be bitter pills to swallow. The populist tone of the Budget is likely to continue – with added zeal – over the next two years as the elections draw closer. The budget deficit for the next financial year is forecast at 4% of GDP, but this feat was achieved by engaging in deceitful accounting, and running a parallel budget, which remains hidden from public scrutiny. But international agencies are watching, and they cannot be easily fooled. With the government repeatedly ignoring the IMF’s advice, the risk of another credit downgrade by Moody’s is hanging like the sword of Damocles on our heads. That would be disastrous for the country.

* The government is betting on the revival of the tourism sector with one million tourists expected during the current financial year and the promotion of food security projects to bring the economy back to its pre-Covid level. Would these be sufficient to achieve that objective?

The government’s forecast of one million tourist arrivals this year is based on the assumption that we are out of the woods and that the war in Ukraine will not impact our traditional tourist markets. This is a dangerous assumption to make – more so, since the World Bank has just revised its forecasts for global GDP growth in 2022 down from 4.1% to 2.9%, citing the combined effects of the war, the gradual lifting of fiscal support and the rise of interest rates to stamp out inflationary pressures. These events will inevitably have an impact on global tourism, and Mauritius may not be spared.

Against this background, the growth forecast of 8.5% for the next financial year is utterly unrealistic. Recall that in the 2021-22 Budget exercise, the government projected the economy to grow by 9% on the back of a slow recovery in tourism, with 650,000 tourists expected during the financial year ending 30 June 2022. Based on the latest statistics, we can now reasonably expect tourist arrivals to top 550,000, and the real GDP growth rate to turn around 5%, both well below target.

The IMF expects tourist arrivals to reach 800,000 this year. I believe that is a more reasonable figure. I don’t see how 1 million tourists will reach our shores this year, and 1.4 million by June 2023, in the absence of a government plan to provide more air connections between Mauritius and our key tourist markets.

Beyond tourism, the Budget proposes a panoply of measures and incentives, but none strong enough to propel the much-awaited economic recovery. As you mentioned, in agriculture, the focus is on food security rather than on production for export. In fisheries, the Budget speaks of exploration and surveillance, while off-lagoon aquaculture is not a new concept. In the manufacturing sector, the measures proposed are merely palliatives. And in tourism, the key proposal is to give each tourist a voucher worth Rs200 (that is, less than USD5) to be spent at the duty-free shop! There is no mention of the pharmaceutical industry, which was announced with great pomp in last year’s budget, and the ITC sector has also been largely forgotten.

* In fact, the latest World Bank’s Global Economic outlook warns that in light of the Covid-19 pandemic and the war in Ukraine the ‘global economy might be on the brink of high prices and low economic growth’. In other words, ‘stagflation, generally viewed as a relic of the 1970s, could make a comeback’. What does this mean for a small economy like ours which relies heavily on its export markets for its growth?

I believe we are already in the grips of a stagflation. Stagflation is an economist’s nightmare since it presents an unpalatable policy dilemma. Expansionary policies to stimulate the economy will typically fan the inflationary fire while measures to control inflation will dampen growth. For a small economy like Mauritius, it is important to find the middle ground. The recent price hikes have impoverished people, especially those who are now emerging from a long period of unemployment induced by the pandemic, and those living off fixed incomes, such as the elderly. A caring government should protect the people against the onslaught of inflation while cautiously supporting the private sector to create jobs.

Unfortunately, I don’t think the Budget lays the right conditions for job creation. Nor does it do enough to boost export growth. Even if our merchandise exports increased in the first quarter of 2022, careful analysis shows that the increase is entirely due to higher prices, reflecting the effects of currency depreciation, rather than bigger volumes. Stagflation at the global level may further reduce the demand for our products and, if this encourages a steeper depreciation of the rupee in a desperate attempt to regain competitiveness, the stagflation will worsen. There is a risk of the economy being sucked into a vicious circle, with lose-lose outcomes for all.

* The other important source of foreign exchange is the financial sector. Do you have any indications that would keep us somewhat confident that such inflows can keep us buoyant?

The Budget proposes to merge the tax regimes applicable to domestic and global business companies. This will take away the tax advantage that traditionally attracted businesses to the Mauritian offshore centre, making it harder for Mauritius to compete against established financial centres around the world. This is an important setback given that we just came out of the EU blacklist and were hoping to leverage the contribution of the financial sector to the ongoing efforts at economic recovery.

Moreover, as the stagflation deepens, the global business sector too will feel the pinch. In short, it would be imprudent to bet too much on the financial sector as a source of foreign exchange over the next financial year.

* What’s your forecast on the state of our currency by the end of the fiscal year and what continued impact will that have on imported inflation?

There are opposite forces bearing on the external value of the rupee. On the one hand, as tourism picks up, foreign exchange shortages will gradually disappear, relieving the pressure on the rupee. On the other hand, as the spectre of stagflation plays out, there may be a need to support national competitiveness through an orchestrated depreciation.

Moreover, the Bank of Mauritius, it seems, has now become accustomed to a weakening rupee that boosts its revaluation gains and makes its balance sheet look healthier than it actually is. I believe this latter tendency will dominate – over the short term, at least. This means that inflationary pressures will become endemic. As such, the government’s forecast of inflation at 8.6% for the year is ill-inspired. It assumes that inflation will fall rather than rise. It goes against current trends and is far off the IMF forecast of 11.5%.

* Economists and all those who are seriously concerned about the state of our economy may have come out disappointed with the absence of concrete measures designed to address the systemic weakness in our economic infrastructure. That’s quite understandable but no government would be inclined to go in that direction two years ahead of elections, isn’t it?

Well, you may have a point there, but let us not forget that the government had made investment in big-ticket public infrastructure projects a priority in the last two Budgets. Specifically, it committed Rs11.7 billion in the 2021-22 Budget to the construction of drains along with Rs 22 billion more to road development and Rs9.4 billion to the ubiquitous Rivière des Anguilles Dam project. The government picked up Rs8.5 billion from the reserves of state-owned enterprises to finance the flood management programme.

Obviously, finances are drying up, and so, the capital spending spree of the past years cannot continue. It is little surprise, therefore, that large infrastructure projects are absent from this year’s Budget. Perhaps it is a good thing – for these projects have not had the multiplier effect that one would usually expect. This is because they are generally contracted out to foreign firms, which import their materials and machines, and use their own workers. This leads to a significant leakage of income that leaves little in terms of gains to the domestic economy.

However, the government may be keeping public infrastructure projects as a joker up its sleeves. A joker that it can play to great effect later in 2023 and in 2024 to drum up support for the upcoming elections. This possibility looks all the more real as the government seems to have built a secret war chest – the special funds – outside of the consolidated budget, which it has cleverly exploited to fund several popular projects and programmes, including, it appears, the wage assistance schemes. I am convinced that the special funds will be fully tapped in the next two years, and depleted before the 2024 elections.

* We have never known a state of such high fuel prices on a sector that earns government massive revenues but has so many cascading effects on all aspects of everyday life for citizens and businesses, transport or the costs of distribution. Do you think, that as many countries elsewhere, government could have eliminated some “contributions” or brought VAT down on fuel prices even for a limited period of 1 or 2 years?

Indeed, that was one of the biggest disappointments of the Budget. Everybody was expecting that the government would make an effort to relieve the burden of such high fuel prices on motor vehicle users. Personally, I thought that the government would, at the very least, remove the Rs3 per litre representing contributions for the purchase of Covid-19 vaccines and to the Covid-19 Fund.

This did not happen. By hindsight, the government’s decision has an eerie logic to it. First, the Covid-related levies bring in billions. So, why kill the cash cow? Second, public transport fares had already been hiked prior to the Budget, and slashing fuel prices would have led to large windfall gains to bus and taxi operators, and the metro. Then, the Budget offered an extra Rs1000 to those earning less than Rs50,000 per month as well as a top-up on travel allowances. In doing so, the government is preying on the ‘money illusion’ – the fact that people would rather have Rs1000 more as a cash handout than benefit from Rs1000 (or more) worth of price cuts, the effects of which are easily dissipated.

Mauritius Times ePaper Friday 24 June 2022

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