One
year after the financial conflagration that devastated Wall Street and burned
financial institutions around the globe with a credit binge that brought us the
credit crunch, the world economy seems to be shifting gears. It has gone from
reverse to neutral. US President Barack Obama caught the mood at the Group-20 Pittsburgh
Summit last month saying “because of the bold and coordinated action that we
took millions of jobs have been saved or created, the decline in output has
been stopped…”.
Our much ballyhooed
stimulus Package and other measures seem so far to have yielded little
measurable benefits when we compare our performance to that of our African
friends. Moreover, the recent forecasts of the CSO give little cause for
optimism as it is worse than that of the IMF. In terms of real GDP at market
prices, the same measure used by the IMF,
Mauritius is forecasting a growth rate of a mere 1.5% for 2009 showing
we are not resilient enough to withstand the external shocks and our recovery
will be “lente, timide et graduelle”.
Locally,
they have been singing from the same hymn sheet. They are crediting the
reforms, the expansionary 2008-09 budget, monetary policies and the stimulus package for helping the economy to climb out of the wrenching
crisis -- one of the worst recession in decades.
The
return of optimism after the bitter recession, the deepest global downturn
since the Second World War, has been welcome to economists as it has been
surprising. Among advanced economies only Spain, Ireland and Italy were still
in recession in the third quarter of the year. The good news for us is that the
bad news is not worse. The worse, they claim, is that we have avoided the type
of social crisis and job losses
experienced in the US, Europe and even in China and India. But we need not go
that far. Our African friends and many low-income countries in the region have
weathered the global recession fairly well and are placed to quickly return to
the higher growth paths of the mid-2000s. Without any of the stimulus packages
or other types of pump-priming that we have been through, they are achieving
reasonable growth rates as shown in the table below.
Growth Rate of Real GDP at Market Prices
(%)
|
2009
|
2010
|
Zambia
|
4.5
|
5.0
|
Uganda
|
7.0
|
6.0
|
Tunisia
|
3.0
|
4.0
|
Tanzania
|
5.0
|
5.6
|
Rwanda
|
5.3
|
5.2
|
Namibia
|
4.3
|
5.2
|
Kenya
|
1.9
|
2.5
|
Ghana
|
4.5
|
5.0
|
Malawi
|
5.9
|
4.6
|
Mauritius
|
2.1
|
2.0
|
Source: WEO
Governments and central
banks curtailed the current recession by fiscal stimuli and that involved
largescale monetary expansion in the domestic economy, unprecedented deficits
and sharp reduction in interest rate. The US had witnessed a near doubling of
its monetary base as well as highly liberalized lending procedures and rapid
accumulation of unprecedented public debt during the past months. As many other countries in Africa we did not
have to go through all these and we still ended up with such an anaemic
performance. Despite all these high talks about reforms and the achievements
that we have notched up, we have not delivered the promised high growth rates;
on the contrary we have returned to our Mauritian rate of growth. Let us
examine closely these measures that have had as outcome a mere 1.5% growth rate
in 2009 and expected to deliver just 2.0% growth in 2010 which can hardly be
said to be an unequivocal sign of economic vigour. The Economic Intelligence
Unit(EIU) posts a modest 2.3% real growth rate for 2009 with the stern warning
that the improvement in the current account balance of the Balance of Payments
“stems directly from the impact of the economic slowdown, it has added to
concerns about the resilience of the economy and has led to calls for a
depreciation of the rupee..”
Reforms
The current post trade preferences, new
socio-economic model -- the supposedly new paradigm of economic development --
is not working. Our neoliberal policies are simply not delivering on our
economic, social and environmental goals. The few touches to the tax rates and
the improvement in the investment climate framework were not the reforms-broad
based and inclusive -that would generate sustainable growth.We have so far
avoided making hard choices - A policy
paradigm shift to enhance long term productivity is key to ensuring Mauritius's
future by providing citizens broad-based access to education and finance.
In ‘Doing Business 2010’, the latest flagship report
from the IMF and World Bank, Mauritius moved into the world's top 20 economies
in the overall ‘ease of doing business’. For the foreign investors
it is fine but it does not mean much for us for only the hotels and IRS and
low-end BPOs seem to be attractive for them. In the World Bank’s index that
measures the ease of starting a business, Germany ranks 84th. But Germany can
boast of an innovative and super competitive export sector, now generating 48%
of GDP, that has flooded the world with sophisticated products from industrial
machinery to construction equipment and chemicals. We should not fool ourselves
with carefully orchestrated performances. Our economic issues in Mauritius are
more sectoral than macroeconomic, and unless sector reforms are undertaken to
generate productivity improvements, in agriculture, industry, public utilities,
health, education, etc, the long run growth potential will be insufficient to
absorb the unemployed.
The
absence of substantive reforms and investment in the economic infrastructure
during these past four and a half years has affected the growth rates of the
productive sectors. In the absence of any effort to add meaningful pillars to
the economy to improve its competitive edge, the monetary authorities take
refuge in their historically tested instrument -- competitive depreciation.
Growth has to be more broad-based to achieve those desired above-average growth
rates; the continuing over-reliance on few traditional pillars -- like tourism
and textiles – has left us vulnerable to the current global economic meltdown
and the accompanying exogenous shocks. There has been no spending on the
retraining workers in those declining industries such that they acquire the
required skills to become employable in new sectors. All these years the
Empowerment Programme has not delivered, it had just remained a front for the
private sector, ensuring that their labour search costs are minimized and that
their short-term labour needs were subsided by government. Our active labour
market policies -- the job search and training to get people back into work
quickly and spending on them -- has not grown at all during the period . Our
training instititutions do not seem to get the measure of the immense task
ahead to provide quality hauman capital formation for the the economy to succed
in its transition to a new plateau of growth..
Expansionary Budgets
Without
the creative accounting of including in the Budget the allocation to funds
rather than actual expenditure, the recalculated deficit for Budget 2008/09 is
around -2.7% instead of the announced 4.4% of GDP. There is no transparency in
the figures which have been so worked out to show a higher than actual budget
deficit because of under spending. Capital expenditure as a percentage of GDP,
without the accounting gimmicks in the four Budgets, has barely exceeded an
annual average of 3%. Such a dismal
investment performance has choked off economic growth by limiting public
investments in key sectors. They have not succeeded in fixing the flaws in the
country’s hardware -- its physical environment and the system that is required for
developing it. The signs are everywhere – in energy, water, transportation,
ports, and telecommunication.
The TINA (There Is No Alternative) policies did generate fiscal space by
overtaxing people and putting in place a more unfair and regressive tax system
without reining in expenditure; the Director of Audit’s Report shows that
wastage and unnecessary expenditures have continued unabated. The reduction in
income and corporate tax rates and the weakening of the revenue base, while
expenditure is still not reined in and the new dependence of the budget on
substantial EU grant money, in compensation for sugar reform, are critically hazardous. They have made a joke of
the Programme Based Budget and the Public Sector Investment Programme(PSIP),
proceeding by trial and error, without any substantive analysis by economists,
employed more as glorified finance officers rather than analysts, to support
the haphazard cuts in expenditures and explain the rationale of a prioritized
list of much-needed infrastructure projects.(In many countries this function is
carried out by a Planning Commission or the Ministry of Planning; here the MOF
is judge and party on the basis of policies that are not encrusted in a medium
to long term vision or Plan). Without any comprehensive framework for trimming
the fat off our public sector especially in eliminating many of the amorphous
parastatals that seem irrelevant to most citizens, they have only succeeded in
creating more rift than consensus such that the sector has now grown wary and
cynical.
A regressive
tax system
“Mauritius is on of the few countries
where 7% of the population pay (direct) taxes”. Mauritius is also one of
the many countries where the blind application of the purely theoretical TINA
policies, rather than a cautious and methodical approach, has increased the
rich-poor divide. Our local Tinawallahs
have to pick up some insights from the pragmatic middle ground approach adopted
by some European leaders, especially their expediency, their rapid co-opting of what’s new and learning from
past mistakes. They are parting company with that rigid obsession with the
neo-liberal policies of pro-business, anti-welfare and anti labour. President
Sarkozy has launched a global crusade against excessive bankers’ pay and is expanding a plan to subsidise the
low-wage earners returning to work. The Conservatives (the main opposition
party in UK) want to raise the marginal tax rate on the already highly taxed
richest Britons from 40 to 50%; here we among the few countries that have
replaced a progressive income tax system by a regressive one and has allowed the better-offs and the
corporate sector to capture all the gains of our generous taxation
policies.
The taxation of interest income is
prevalent worldwide but we are one of the few countries where it is being
allowed to prevail in a situation of acute disparity in the earning potentials
of the different income groups or classes and where the middle class has to
substitute for an ineffective State in investing in the higher education of its
children and thus ensuring that the country is provided with the necessary
qualified human resources to meet its needs.
Expansionary monetary policies - comatose bank lending
Despite the
generosity of the Stimulus Package and the reduction in the repo rate, credit
to the private sector has been slack; the growth of bank credit to the private
sector slowed down to as low as 0.1% for the 1st quarter of 2009 and picked up
slightly in the 2nd quarter. This is the sort of funding that is
required by firms and businesses for working capital and for swift adjustments
in business scenarios.
% Growth
|
Q3-08
|
Q4-08
|
Q1-09
|
Q2-09
|
Domestic Credit
|
3.9
|
4.1
|
0.7
|
1.6
|
Credit to Private Sector
|
4.1
|
7.9
|
0.1
|
1.5
|
Broad Money Liabilities
|
3.8
|
3.9
|
3.6
|
1.8
|
Monetary Base
|
14.1
|
1.0
|
4.6
|
-4.4
|
Source:BOM
The table above
confirms the slackness in the growth of credit and the greater effort being
made to limit the growth of the monetary base and the broad monetary
liabilities. Thus the fact that enterprises were doing measurably better than
expected was due more to the depreciation of the rupee than to the credit to
businesses or stimulus measures.
Additional
Stimulus Packages
For four and a half
years we have been served with more lofty rhetoric than sweeping reforms. What
we have had is a souped-up version of the reforms and stimulus packages. Most
of the schemes have been slow to get off the ground and we seem to have
administered the wrong medicine to the wrong persons. We are also doubtful on
the quantum that has been doled out to the sunset industries and the big
companies. In the midst of the crisis,
requests for funds had already stopped and whatever had been dished out were
being used mostly for recurrent expenditure, and barely Rs 150 M have been
spent from the Savings and Recovery fund, they have barely spent more than Rs
150 million. But we did miss the opportunity to prop up our SME sector for they
would have provided more employment opportunities for every rupee of capital
invested vis-a-vis the large companies. It was important that for the Stimulus
Package, which totally lost sight of the SMEs, to create an environment and
build an infrastructure which would have allowed SMEs to risk capital at
reasonable rates.
As we look more
closely at our performance, we acknowledge that we have created more fiscal
space that may however lend itself to the critique that more of the energy was
focused on political options than displayed on achieving results and in giving
the economy stronger foundations. For example the fate of our Global Busines
Sector has been long in the making though our leaders would like to pretend
otherwise. The Minister of Finance ,last week , was standing on tiptoe in an
effort to be heard by India; our policy in the sector has been calculated inertia
instead of a more pro-active and creative role.These are not cheerful times
though there are political offerings ahead. These are times of economic
uncertainty, and most Mauritians remain concerned that the country is just not
on the right track. We still face hard questions about the lopsided shape of
the economy. The trust seems to be missing; if we do not trust each other we
are not going to make it.
