"The year 2023 should be a year of vigilance”

‘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. Read More… Become a Subscriber

Mauritius Times ePaper Friday 13 Januart 2023