The
world economy retains deep scars from the collapse of the western banking
system in 2007-09. Advanced economies’
debt crisis remains unresolved. These economies are in once-a- generation
seminal process of deleveraging; debt reduction -- private as well as public --
still have years to run, acting as a drag on growth long into the future. The emerging markets’ economies, the engine
of global growth so far, are slowing down appreciably. Domestically the
situation is not so desperate but the economy is obviously not in good shape.
The combination of falling growth, increasing unemployment, bulging trade and current account deficits, falling real growth rates in the Export Oriented Enterprises and tourism sectors, lower FDI inflows and higher outflows and negative investor confidence would have worried any Finance minister. And the most vital statistics often hide more than they reveal. We have reasons to be quite worried that wide swathes of corporate Mauritius have financially stressed balance sheets. The other big worry is that distress seems to seeping into their lenders’ balance sheets whose suddenly worsening asset quality is causing sleepless nights as well. Are we close to the cusp of our financial crisis?
In the private sector the air
of anxiety is palpable; words such as danger, peril and jeopardy are being
traded to describe the present economic situation. But at the Ministry of
Finance (MOF), it seems to be business as usual, the routine numbers crunching
and short-termism, all contributing to the impression that the overly budgetary
focus prevails over everything else such that the Minister has had to call an
urgent meeting demanding some meaningful contributions and new ideas for the
forthcoming budget from budget sector teams. The Minister has been struggling
to put his mark on a ministry whose policy making wing has stopped functioning
for years since the planning division was converted into a mere ineffective
appendage. They have failed to come up with any path-breaking policy initiatives
besides a futile attempt recently at reviving the “Land Based Oceanic Industry”
(LBOI), which is more likely to turn out
to be another failure like the Tianli/Jin
Fei project. The change in leadership at MOF did little to change the fundamental
approach to the challenges facing Mauritius. From 2006 to present there has
been no consistent stance on core policies and a failure to implement
meaningful reforms – welfare, the public and financial sectors, diversification of markets and products and
supply-chains bottlenecks, skills mismatch, human capital formation, food and
energy security.
Mauritius
seems to be running on autopilot. One cannot deny the ripple effects of the
debt crisis in Europe, but blaming Europe for all the domestic woes – lacklustre
growth, cost overruns and low implementation capacity, absence of reforms -- is
far fetched! Is the Euro zone to be blamed for the policy paralysis? With the
lack of strong growth, the pressures for a meaningful strategy are rising by
the day. Businesses were expecting some fiscal stimulus especially from -the
rainy fund – the National Resilience Fund- that will help to cushion the
economy from the euro zone crisis. Policy
inaction is a cause for concern and there is need for fresh economic thinking.
To remedy this situation, government had announced in its Government Programme
2012-2015 the setting up a National Strategic Transformation Commission (NSTC) --
a Planning Commission that would revive the earlier Ministry of Economic
Planning and Development (MEPD).
Where
are we with the NSTC?
This is an urgency, as only those that have the best
teams at the helm will prosper. We have pressing problems appearing on the horizon
to attend to if we do not want to get stuck into to a long period of sub-par
performance. This is a good time as any to put in place such a dedicated
institution that will compel Mauritius to step on the reforms pedal and take
the required incremental steps aimed at getting rid of the clouds hanging on
the Mauritian economy. What are we waiting for? . Some top officials are said to be
dragging their feet over the new Planning Commission which apparently they did
not want in the first place; they are turning out to be a real problem obstructing
the implementation of key government programs.
Loosening
monetary policy to revive growth !!!
Waiting in vain for the policy initiatives to create some
economic dynamism for our precariously perched economy, the corporate leaders
were expecting the Bank of Mauritius (BOM) to come to the rescue of the economy
with some monetary easing. The BOM Governor is not buying that idea. Even in times of crisis the BOM sees its
overriding mandate as keeping a lid on inflation. By keeping its policy rate – the
repo rate -- unchanged, it stuck to its position that the threat of inflation
was a bigger one than that of slowing down growth.
International prices rose in August due largely to
increases in fuel and food prices; inflation worries have driven gold and
platinum to six-month highs. Monetary easing may see an increase in the value
of savings and lower interest income; depreciation of the rupee picks up and
the risk for long term inflation goes up, and this may place the CB in a an
uncomfortable position. The Central Bank's activism in response to the policy
paralysis for an economy that is languishing in the depths of a punishing
downturn has consequences. It looks like the BOM does not want to be blamed for
laying down the groundwork for a new round of inflation that may hit the
economy after the PRB awards. Monetary policy is like pushing on a string – raising
growth needs a mix of monetary and fiscal stimulus. The emphasis in this case
is on the fiscal.
Budgetary
figures: Some Rs 10 billion in Special Funds
And what is happening on the fiscal side ? Every year it is the same thing: over-optimistic macroeconomic
and fiscal forecasts at the beginning of the year which, at the year’s end,
turn out to be way off the mark. Why is this so? It would appear the forecast
figures, as presented in the Budget documents, are not properly discussed and
analyzed by the MOF team;For example ,there is no exchange rate assumption
which is crucial for the balance of payments, inflation and customs duty. The ‘Mauritius: Public Expenditure and
Financial Accountability (PEFA) Assessment 2011’ had noted that “most of the
information in the budget documents is provided in tabular format, with limited
analysis or discussion of the programs, the macroeconomic projections, or the
revenue and expenditure aggregates.” It had also highlighted the absence of “…the
links between macroeconomic projections, fiscal strategy, ministry-level
strategic plans”.
Thus it comes as no surprise that, as at August 2012,
only 34% of the total earmarked capital expenditure for 2012 has been spent. This means that the budget deficit for 2012
will be substantially lower than the targeted figure of 3.8% of GDP. Using the
same questionable accounting that has been carried out during the past years,
the savings in the 2012 budget can be credited to the Rs 6.2 billion available
as balance as at December 2012 in the Special Funds’ accounts. (See Table
C1: Summary of Special and other Extra Budgetary Funds of the 2012 budget
document). In all, we will have over Rs 10 billion available for 2013 and
future budgets. Thus the economy can easily sustain the PRB awards amounting to
some Rs 5 billion and still have provisions to absorb the PRB costs in subsequent
years – Rs 3 billion for 2014, Rs 2 billion for 2015 and Rs 1 billion for 2016!!! Given
our low implementation capacity for capital projects and consequential
implementation delays, we need not allocate funds exaggeratedly, as we have
been doing, to future capital expenditure estimates. This will ensure that the
budget deficit figures remain under control. There is thus no cause for such
alarmist statements as presented in the 2013 Budget circular -- “There is very little scope in
terms of intakes next year into the Public Sector, including budget-dependent
parastatal bodies, local authorities, RRA and other public agencies.” Or is
it just another gimmick to streamline the bloated welfare state!
A
financial services centre of substance
The recent MCB occasional paper ‘Deepening
and entrenching its reach in Africa’ highlights the fact that “Mauritius has
a trump card to play with regards to entrenching its positioning as a regional
trading, financial, telecommunication, knowledge and innovation hub acting as
the obvious bridge for global business penetration and structuring of
investment from Europe and Asia into Africa.” What has hampered Mauritius
in playing this role so far, especially in the financial and business sectors?
We have not provided the economy with the tools to assume such a role – to
regain its historical importance in the Indian Ocean. For the past five years
we have been served with more lofty rhetoric rather than sweeping reforms. We
get so carried away by our own rhetoric that we start believing in them and the
clichés that we readily churn out -- a regional financial and services hub, a
Financial, Banking, Management or Legal Service Centre, you name it. The
ex-minister of Financial Services and now the Chairman of CIM Global Business,
who had been the main architect of the reengineering and modernisation of the
financial sector, had to remind us that we have been resting on our laurels.
Today, financial services activities are
characterised by speed and continuous innovation. The ability to leverage
capital markets, specialised skills and technology to innovate and create new
products, processes and services has become the prerequisite to being a
sustainable premier financial centre that has both width as well as depth. For many, the main issues and concerns in the
global business sector, for example, are day in day out , to be a mere adjunct
of the global tax avoidance industry - the DTA with India, whether we have
regained “the confidence that was being lost” or of “earning a couple more of dollars by
perking up the quality of services”. The issue is that we persist in
locking the sector in low-value added, passive administrative of foreign
accounts established to benefit from double taxation treaties and agreements. Indeed, as highlighted by the new Chairman of
CIM, if we want to be a sector that will be offering access to a greater
panoply of financial vehicles to tap the global and regional business and trade
networks and which will allow Mauritius to obtain a larger role in
international finance and forge the synergies between the export of
commodities, financial and business services, and a more active domestic
capital market, we need now to roll up our sleeves and sort out our
difficulties to focus on developing the "hard" and "soft"
aspects of the infrastructure for a sustainable, diversified premier financial
centre.
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