“This is not a pro-poor budget but a budget for the rich by the rich.

There is nothing free for the poor and middle class”

Interview: Sameer Sharma, Investment Analyst & Financial Risk Manager

* ‘We are using printed money and inflation to fund populist measures, which is what other banana republics have done in the past. They have all failed at this game’

* ‘There are too many candidates for prime minister and not enough realism on who this person should be’

Investment Analyst & Financial Risk Manager Sameer Sharma needs no introduction to our readers, and he is generally known not to mince words and call a spade a spade. As several other independent economists, he finds that the policies pursued before, during and after the pandemic have done little to strengthen the economy, increase its resilience or compensate the population for its sacrifices. This, he says, is a budget for the wealthy and well-connected which the smattering of handouts cannot disguise.

Mauritius Times: How do you see the Mauritian economy doing right now, and where will that lead us to. What do the fundamentals inform you?

Sameer Sharma: To know where we are going, we must first understand where we really are. If the data that we have about the true health of the economy does not make complete sense, in other words, when the radar itself is not completely reliable, it becomes complicated for any economist to tell you where we really are and where we are going. In fact, if we do not understand where we really are in the short-term business cycle relative to our long-term real potential trend growth of 3.2%, then the conduct of both monetary and fiscal policies becomes error prone.

When we think about GDP growth, there are two types of growths: real growth which excludes inflation, and nominal growth which includes both real growth (volumes) and inflation as measured by the GDP deflator which is a broader measure of inflation than that derived from the CPI basket. Given that GDP is not observable, we need to make estimates based on various assumptions. We use proxy measures of the change in prices across various sectors of the economy to come up with the change in the deflator for example.

Holding nominal GDP growth constant, an underestimation of the deflator would mathematically lead to an overestimation of real growth and vice versa. If we look at Statistics Mauritius’ real GDP growth forecast for the year 2023, it stands at 5% while nominal GDP is forecast to grow by 8.2%. This would essentially mean a very low change in the deflator which is more deviated than usual from the forecast level of CPI inflation. Keep in mind that the current CPI basket was derived from the 2017 Household Budget Survey and given what has happened since 2017, this basket itself suffers from significant biases and is likely now underestimating true consumer price inflation. 

In this budget, which comes just three months after the Statistics Mauritius 2023 estimates, the Finance Ministry is forecasting a financial year (July to June) change in the deflator of more than 9% and real growth of 8%. Even when adjusting for calendar vs financial year differences, these are two very different forecast estimates coming from the Finance Ministry and Statistics Mauritius.

The reality is that Statistics Mauritius is likely moderately overestimating real GDP growth and underestimating the change in the deflator. The Ministry of Finance, on its part, is overestimating real GDP growth by an even wider margin.

Estimating real and nominal GDP growth in Mauritius is no trivial task. We lack an adequate amount of high frequency economic data; data quality can sometimes be poor and there has been inadequate research done on the real size of the parallel economy which includes money laundering and drug trafficking. There is also a poor understanding of the interplay between this parallel economy and the formal economy.

The honest answer then is that we do not completely know where we are and those who throw forecasts around have no clue either. We have some indicators that provide us with evidence that we have had a recovery from a low base and that inflation remains the key driver of nominal growth and government revenues. We also know that in a debt-driven import dependent consumption model, the currency will remain under pressure which explains why the central bank has adopted a moderate form of capital controls after having run out of liquid ammunition despite more than 1.2 Billion in foreign central bank borrowings.

We also know that inflation favours the asset rich and leads to more wealth inequality. It is clear that there are two realities in Mauritius, one for the asset rich, the money launderers and highly connected, and another for the rest. Drive around Tamarin and then drive around central Curepipe and you will understand what I mean, or you could look at the struggles of the middle-class in a country where corporate profits are reaching new highs given the opening up of borders, depreciation and inflation.

* Renganaden Padayachy said in his speech in the National Assembly last Friday that his Budget 2023-2024, his fourth during this mandate, is one of “daring” and “caring”. As an economist, who would know better than electors, how much would you say has he delivered on these two promises?

This is the best budget the powerful conglomerate oligopolies who really run this country could buy. It is a budget that relies even more on consumption taxes and the related inflation tax rather than on rebalancing our entire tax system, which is unfair by design. Inflation is the best friend of the asset rich as land prices tend to rise with inflation. The government has continued to relax rules on foreigners buying real estate in Mauritius – all to the benefit of large landowners in a country with concentrated land ownership.

The real value of debt also declines with inflation. Most of the conglomerates have no plans to make major investments in Mauritius beyond selling villas and energy. Their expansion is now abroad while they ensure that they maintain oligopolistic control over various sectors of the economy locally. Ignoring the MIC giveaways at losses to the state, which we called “love and care” bailouts, large enterprises will now be able to hire more foreigners across the wage spectrum. Their taxes have come down, dividends are not taxed, and inflation and depreciation are here to help too. What more could they ask for?

What we should have done is to tax the rent-seeking economy while encouraging those who work and add value. For example, we should have distinguished between distributed and non-distributed profits for local companies when it comes to taxation. We should have introduced a mild form of taxation on the rentier economy via land value taxation and reduced the share of consumption taxes and inflation taxes to total taxes. Reducing income taxes is a positive as we should reward work as long as we tax rent-seeking behaviors in a smarter way.

We should have also looked at fiscal consolidation by cutting and spending responsibly which would have helped to stabilize inflation and the currency. We should have moved towards a more targeted form of basic retirement pension that gives the well-to-do less of that basic pension so that the entire system can be made sustainable. We should have addressed the large actuarial hole in defined benefits plans and we should have sent all the printed money left back to the Bank of Mauritius in order to partially recapitalize it.

We should have reformed the Competition Commission and reduce barriers to entry across various sectors of this economy. As long as we depend so heavily on oligopolies to run the majority of sectors of this economy, we will have high prices and low levels of innovation. In a nutshell, we should have used behavioral economics to influence macroeconomic outcomes and let animal spirits do the rest. What we have done is to increase the dependence of a vast majority of the lower middle-class and the poor on the state largely funded by the inflation tax which is the source of their poverty. We are literally making the poor pay for their dependence.

* It was to be expected however that the 2023-24 Budget would form part of a two-step strategy to be implemented in this year’s and the next budget, the first one consisting mainly in easing the current economic hardships of low and middle-income earners, and the real big populism of vote-buying measures will come next year. The question is what reserves and leeway will government have to finance the long list of measures announced in the 2023-24 budget itself?

This budget has very little in it for the poor. Throwing what is left of the helicopter drops of the now undercapitalized Bank of Mauritius at the poor, who will consume most of this printed cash in imported goods given that we produce precious little locally, will only lead to a current account deficit that will remain above 5% of GDP for the foreseeable future, more pressure on the currency and an inflation rate that will remain above 5% for longer when the right level of inflation in Mauritius should be closer to 3%.

Money is neutral in the long term. Making the poor pay for their own state handouts is quite a farce. What is more worrying is that we are increasingly relying on the inflation tax to fund social programs rather than fair taxation. We seem to be relying on some form of nominal GDP targeting where the government focuses on a certain tax revenue target for the year. And if does not get enough real growth, then it will relax the capital controls a bit and let the currency slide and let inflation run hot in order to pay for it all.

Inflation is a dangerous animal to depend on. It has a life of its own especially when the Bank of Mauritius lacks credibility and the capital to fight it given fiscal dominance. The inflation game is a double-edged sword and while it makes everything on paper look good for a while, eventually it ends up costing you more and then you will need to engage in significant austerity measures when the next global economic shock comes around. When that reality check happens, it is game over.

* Consider the Rs 20,000 grant to those reaching 18 years as from 1 Jan 2023, and who are lesser in number than the pensioners. One would expect other political parties would seek to outbid this particular handout as well as the basic retirement pension, which might go up to Rs 15,000 next time round. Where will all this will lead us to?

This budget uses printed money and inflation to fund populist measures which is what other banana republics like Zimbabwe have done in the past. They have all failed at this game. This budget sets a dangerous trend for Mauritius as we seem to be relying less and less on structural reforms and reforming the unfair tax system but on inflation to provide state handouts. This budget ties the hands of all future governments to engage in a bidding contest of populism that will lead us to the bottom of the pit.

* There’s also the « Revenu Minimum Garanti » of Rs 15,000, which 85,000 men and women working on a full-time basis are expected to receive, according to the finance minister, as from 1 July 2023. The immediate gut reaction of many employers was that they’ll limit their available workforce, or they’ll go for Bangladeshis from the informal labour market, until the Minister clarified that the CSG and the taxpayer would finance the top up from the current Rs 11,500. What’s your take on this measure?

Have you not noticed that the ratio of Mauritian employees to foreign employees no longer exists? This is fine at the higher wage spectrum but, at the lower wage spectrum, this will serve to depress wages overall, increase the share of state contributions to total revenues and of course increase the dependency of the average poor and lower middle-class worker on the increasingly autocratic state over time.

If you want to increase wages, then open up the competition landscape in this country by reducing barriers to entry and strengthening regulations on those who exercise oligopolistic power across various sectors of the economy, be it conglomerates or some state-owned entities. De-centralize government and break down contract sizes and allow new players to compete in a fair landscape.

Open up the country to immigration with a focus on business owners and innovators. Revamp a failing education system, so you produce better quality workers and stop thinking that the state is the answer to all problems. Wages will go up if you improve productivity. Focus on targeting funded by a fairer tax regime as I described earlier and empower people in general but let them take ownership of their own destiny and mistakes. Equal opportunity, not equality of outcomes.

* There are also issues flagged by rating agencies and the IMF – elevated levels of budget deficits and public debt, rising inequality, inflation, depreciation of the rupee and acute cost of living crisis — matters of concern that ought to have been addressed head on by the Ministry of Finance, instead of the palliative measures proposed. Why are the required reforms not taking place? Is it only because of the popularity factor?

The likes of the International Monetary Fund provide mere recommendations. Mauritius is a small country and if it were to disappear tomorrow, the world would not even sneeze.

When it comes to Moody’s, neither the state nor local corporates are major issuers of Eurobonds globally. They do not pay the same level of attention as they would for larger economies or for economies that are asking for assistance which come with conditions.

Recently one person from the IMF asked me about this MIC 2.0 which apparently will now become the new sovereign wealth fund of Mauritius. He was quite confused given that Mauritius – unlike all other countries which have sovereign wealth funds – has a large current account deficit, a large fiscal deficit especially when you adjust for special funds spending, large unfunded liabilities from the basic retirement pension to defined benefit plans and declining international reserves which look even worse if adjusted for liabilities and large unrealized losses. How will they fund this, he asked?

Well, when the Bank of Mauritius sells foreign exchange in the local market with the supposed objective of stabilizing the currency, it earns Rupees in return and the idea then would be to destroy those rupees in order to reduce the supply of rupees which helps by definition to stabilize the exchange rate at least temporarily.

In our case, we are not destroying the Rupees but re-injecting them via the MIC into the local economy. In a nutshell we are funding a so-called sovereign wealth fund not with savings of any kind but with money printing. We have become a global laughingstock and, sadly in Mauritius, most may not fully grasp that sovereign wealth funds are funded with savings, not money printing and that sovereign wealth funds by design invest abroad, not locally. This is how we are now being perceived internationally. La folie des grandeurs! We have lost the plot.

* While there was undoubtedly some imported inflation over the past two years, the rate has ebbed considerably in other Indian ocean islands, similarly affected, yet stays high in Mauritius and is projected to be around 10% next year. Isn’t our inflation due in large part to the continuous depreciation of the Rupee against the dollar as the chief import currency?

There are various factors which explain our current inflation predicament. Initially, the inflation shock was indeed mostly imported in nature, but the central bank failed to act in time by tightening monetary policy aggressively by making real interest rates positive. This is because the sheer amount of public and private debt in the system would cause quite a heart attack to a patient currently on inflation steroids.

Eventually inflation gained a life of its own with what we call second round effects, especially given the dependence of the government on such a tax and today various factors from the currency, large fiscal deficit, money printing to our market structure dominated by inefficient oligopolies all explain our high level of inflation.

We should keep in mind that core inflation, which excludes a lot of the imported stuff, is currently at more than 6.3% on a year-on-year basis which is quite high for a country like Mauritius. The tolerable level of inflation for Mauritius stands closer to 3% and anything above 5% inflation is very high and hurts our competitiveness externally.

We are going to be stuck for a while to come with high levels of inflation despite favorable base effects which will kick in during the second half of the year.

* Given the high rate of our currency depreciation, how does our economy rate in real terms when that depreciation is accounted for? What do you foresee for the coming year on the forex market?

Currently, the Bank of Mauritius has imposed a moderate form of capital controls in order to try to stabilize the currency, but it cannot trick fundamentals and an inflationary budget forever.

Unless it significantly tightens monetary policy and makes short-term real rates slightly positive vs. forecast inflation to offset all the steroids the finance minister is throwing at consumers, the currency will weaken vs the basket of its main trading partners over time.

The pace of depreciation will slow given other global factors, but the trend will remain. Few also understand that the Bank of Mauritius lacks liquid ammunition to sell the quantum of foreign exchange it sold last year. The Bank of Mauritius has made large unrealized losses with our international reserves, it has borrowed heavily at increasingly expensive floating rates and has shot itself in the foot on the liquidity front by moving more than USD 1.8 Billion of its foreign exchange reserves from other accounting buckets to the hold to maturity/amortized cost bucket.

This may help to hide some of the unrealized losses, but it also means that you cannot sell these assets until maturity unless there is a major emergency. When you net international reserves against liabilities including the money commercial banks hold at the BoM, the central bank is not as rich as we think.

* Are you satisfied that this budget is laying the foundations for new growth pillars or even strengthening those that are frail, rather than simply handing out a series of targeted “freebies”?

No. This is not a pro-poor budget but a budget for the rich by the rich. There is nothing free for the poor and middle class in this budget. They will more than pay for it all via the inflation tax and via further currency depreciation.

* ‘The education system is so low and the mentality in Mauritius is so insular and so partisan and the alternative itself is so mediocre that I fear that this political party may come back to power again.’ That’s a comment posted by a Facebooker recently. Does this sound plausible to you?

This Facebooker you refer to sounds suspicious like me. What worries me right now is this populist bidding war to the bottom among relatively unpopular political parties and the level of fragmentation in the opposition. A large segment of the population have also become increasingly dependent on the state in terms of public sector and parastatal jobs and handouts. The level of discourse can sometimes be poor and contradictory.

For example, the opposition will warn us about mounting public debt and inflation and a few minutes later will say that the government should have done more when the majority of our revenues are being generated from money printing and inflation compared to real growth. They are encouraging a wage price spiral without realizing it.

There is zero mention about what will be done about the unfair tax system, structural reforms including overdue pension reforms and the large oligopolies that run the land because everyone is desperate for some election financing from them, and few want to tell it like it is to the population.

There are too many candidates for prime minister and not enough realism on who this person should be and from which party he/she should come from. While the opposition continues to shoot itself in the foot by remaining divided, the real powers who control the land are making a killing.

Mauritius Times ePaper Friday 9 June 2023

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