Stimulus package: Greater Coherence needed

The effectiveness of the additional stimulus package of around Rs 10 billion, equivalent to 3.8% of GDP ( much above the 2% norm recommended by the international institutions) to shore up our economic performance will depend to a large extent on some important parameters. A fundamental one, as pointed out by erudite Pierre Dinan, is our ability of “sortir du mode du projet pou passer à l’action” - especially the big time lag between allocation of funds and actual work being started.

This perennial problem of the implementiation and absorptive capacity of the economy explains to some extent the low level of capital expenditure over the past three years which has barely exceeded  3% of GDP (without the accounting gimmicks) and reflected in the absence of a meaningful  increase  in capital expenditures in priority sectors, namely in energy, transportation, ports, and telecommunication.

Another one is the expectation that the funds made available to enterprises are not used to carry out speculative activities but to innovate and restructure so that they acquire the flexibility to satisfy small volume orders as well as quality and price- a key component of the stimulus package which has not succeeded to walk the talk during the past three years. It is equally important that commercial banks put in their fair share. The MBA Chairman, Antony Withers, has however given the assurance that this time the banks will be onboard, supporting the local enterprises, especially the hardest hit small and midsize enterprises. The MBA also acknowledges that the BOM  " fait de son mieux pour s'assurer que le secteur commercial et autres opérateurs économiques soient financés adéquatement”.

But will the restructuring of our local enterprises be possible without the shedding of redundant employees? Can we expect Air Mauritius to restructure without laying off its workers ?  The proclamation of the Employment Rights Act & Employment Relations Act should not be an urgency now if Government is sincere in its concern about the impending job losses. There has not been much spending on the retraining of workers in those declining industries such that they acquire the required skills to become employable in new sectors. The Empowerment programme has been reduced to that of a mere ex-post job matching agency, a front for the private sector, ensuring that their labour search costs are minimized and that their short-term labor needs are subsidized by Government. Bissoon Mungroo, a spokesperson for  the the small and medium hotels is categorical on this issue-“Si l’état ne veut pas qu’on licencie il faut qu’il nous retourne la TVA qu’on lui verse, environ 6% de 15%.”

This kind of demand seems to be more in line with the 10-point- Rs 320 billion package of the Indian Government to stimulate the Indian economy. Of this, infrastructure spending to the tune of Rs 200 bn over the next four months were also on the cards. Valued added tax was cut by 4% across the board. Labour intensive exports such as textiles received sops. Small scale industries were eligible for funding without collateral to the tune of Rs 10 m per entity. But there the exporters’ lobby seems to have won out a larger component of the stimulus package.

Here our exporters, Mr Ahmed Parkar, for instance, while showing their appreciation - “ Maurice, au niveau de son gouvernement, ne fait qu'emboîter le pas à d'autres pays où les gouvernements sont intervenus de façon prompte et dynamique pour soutenir leurs économies et des entreprises en difficulté. Il est important de protéger au maximum le système de production tout en donnant au pays les moyens de s'ajuster face aux nouvelles donnes”- also  caution that “un financial package comme celui présenté par le gouvernement mauricien est certes très important, mais j'estime qu'il doit être accompagné par des mesures visant à renforcer la compétitivité de notre roupie”.

Georges Chung Tick Kan of the MEXA is of the same view : " J'accueille favorablement les mesures proposées par le gouvernement. Je considère qu'elles apporteront un certain soulagement à nombre d'entreprises et qu'elles nous éviteront des licenciements massifs.” He adds that “nous devons en parallèle voir ce qui se fait ailleurs, par exemple en Inde et en Chine, où les gouvernements n'ont pas hésité à prendre des mesures draconiennes pour insuffler une certaine dynamique au sein de leurs économies respectives et qui n'ont pas hésité à changer de cap en matière de politique économique pour donner un coup de pouce à leurs exportations. Le gouvernement chinois a même annoncé une forme de subventions à l'exportation. Je ne dirai pas qu'on doit faire de même mais je suis d'avis qu'il faut retrouver, toutes choses étant égales par ailleurs, un taux de change de la roupie qui soit au même niveau que celui de 2006-2007. C'est grâce à ce taux de change que le secteur textile a été relancé et a connu un véritable boom.” He concludes without any doubt that “L'ensemble du secteur d'exportation se trouve face à un urgent besoin d'une roupie compétitive. "

 

If this is true, the whole stimulus package stands the risk of lacking coherence in its ultimate aim of boosting our crumbling exports sector and thus shoring our economic performance. And we should keep in mind that our export sector has been feeling the full brunt of the strong rupee policy carried out for the past two years.

           

	2007				2008
Goods	Q1	Q2	Q3	Q4	Q1	Q2	Q3
Growth rate of Exports	-12.5	-9.9	-11.7	-8.7	-2.3	-0.4	-3.0

 

Is the exchange rate of the rupee broadly in line with economic fundamentals?  Our analysis below shows that the rupee is not moving in line with fundamentals and when we compare ourselves with other countries, it is clearly evident that we are pricing ourselves out of the export market by allowing the rupee to appreciate excessively against the Euro and not depreciating enough against the Dollar.

 

 

                                   

For 2008	Inflation Rate (%)	Current Account balance as a % of GDP	Nominal Exchange rate changes (%)		Real Exchange rate changes (%)
Textile producers			Rs to Euro	Rs to $	Euro mkt	$ mkt
India	7.9	-3.2	-9	-27	-4.1	-18.6
Indonesia	10.3	0.5	-10	-30	-3.1	-18.9
Malaysia	5.8	12.8	0	-9	2.2	-7.2
Pakistan	20.8	-6.2	-9	-29	7.3	-9.9
Thailand	6.4	-0.4	-2	-5.6	0.7	-3.4
South Africa	11.3	-6	-30	-51	-17.3	-29.2
Tunisia	5	-2.7	-13	-15	-10.0	-12.3
Morocco	2.7	-1.1	-2	-13	-2.6	-12.6
Egypt	17.1	0.8	10	0	25.4	12.7
Turkey	11.1	-7.1	-33	-35	-19.40	-21.1
Mauritian Rupee	10.1	-10.0	5	-5.5	11.6	-0.6
Appreciation = +ve					Source:LM

 

            Among all the textile producers there is only one country ,Egypt, a strong rival in jeans production, whose currency, the Egyptian pound, has appreciated more than our rupee against the Euro; some other competitor countries’ currencies have even depreciated against the Euro; what is more serious is the change in the real exchange rate .

 

            An increase in the real exchange rate means that the relative price of a country’s goods increases. Such an increase is not good for the export sector. Either producers will find it more difficult to sell goods abroad at the higher price, or they will have to absorb the higher cost of production by reducing profit margins. In either case, production in the export sector is likely to suffer, and so will employment. An increase in the real exchange rate tends to widen the current account deficit. It slows down exports, but it also increases imports because foreign goods become relatively cheap.

            In Euro market, with the exception of Egypt, Mauritius real exchange rate has appreciated exaggeratedly by 12%, much above most of the textile producers’ currencies.   Similarly in the $ market, our competitors are getting an edge over us as our real exchange rate has barely changed. Their currencies’ real exchange rate has depreciated heavily showing that we are unduly putting additional burdens on our exporters by not properly aligning our exchange rate with the fundamentals.

Why this misalignment?

First of all, we can note from the table that those countries that have a high current account deficit and double-digit inflation tend to see their currency depreciate. We seem to be the exception. Despite a current account deficit as high as 10% of GDP that keeps growing bigger and bigger we have a strong rupee. A lot of this is explained by the FDI inflows which plug in the gaps in the current account and these FDIs are mainly in the real estate sector, that is, the IRS . Most of these inflows should not be counted as FDI because they are not being used presently to extend our production frontier, that is to boost future production of either goods or services; Can we cannot afford to have a strong rupee now if it is not supported by increasing productivity in the productive sectors and adequate infrastructure-social and physical. (And the IMF had recommended that part of these inflows be reinvested abroad such that it does not strengthen the rupee). It is all about competitiveness, stupid. It is not just a question of a strong or weak rupee; factoring in all the main determinants of the competitiveness of our exports sector and including the efforts to lower interest costs and boost the level of overall productivity, what if we are still found wanting ? ; we should perhaps have no alternative but to subsidise the exports sector and if this is not enough we will have no choice but to depreciate. But if we do away with the IRS scheme, the exchange rate will start moving more in line with the economic fundamentals.

 Or it would have been a different matter altogether if we believe like Ahmad Macky in anti-TINA- that there is an alternative- “ More than anything we should prepare a sound domestic base and meet the goals of self-sufficiency in all spheres. This would help us a great deal in overcoming global economic tides that may buffet us from time to time. It could be in time the government would have no choice than to devalue our rupee and perhaps this is what would come next if the situation persists.”