From the minutes of the
29th Monetary Policy Committee (MPC) Meeting of the 11 March 2013 , it seems
that we are being taken for a ride by both the Ministry of Finance (MOF) and
the Bank of Mauritius (BOM). The fiscal policy/monetary policy regime influences
the depth and duration of downturns and time for recovery. With growth clocked
at an average annual growth of 3.5 % for the past five years, is it not time to review the country’s growth strategies?-
Growth must come up first.!!! To the Governor of the Reserve Bank of India, Dr Duvvuri Subbarao’s concern that
a Central Bank must be responsive to the needs of the downtrodden,( in its pursuit to rein in inflation) there is also the argument that growth is the right potion
to lift the poor out of poverty , be it directly through government programmes
or indirectly through a trickle down. But how long will the general public
accept low growth and its manifold impact?
While no one
underestimates the need to fight inflation or to have a lower debt to GDP ratio
, one still need to ask if our two major institutions ,the MOF on the fiscal
side and the BOM on the monetary side are not throttling growth in a global
environment where Mauritius should be having higher investment, creating more
jobs and growing faster.
The revival of growth
from its current level of 3.5% to its potential of about 5 to 6% depends on a
higher rate of investment. It is now more than four years that since private
investment peaked at 21 % of GDP before falling to the current level of
17%. Public Investment as a % of GDP is
expected to be as low as 5.1% in 2013 from a high of 6.6 % in 2009. Both public
and private sector investment (exclusive of aircrafts) are expected to contract in 2013,
public sector investment declining by 6.7% and private sector investment by 1.3 %.(Chart 1)
Incapacitated fiscal policy; The
foremost challenge for returning the economy to a high growth trajectory is to boost
capital spending. It is the remit of
fiscal policy ; it is not a monetary
policy problem, especially during a slackening of the growth momentum. In the present sluggish growth environment , fiscal
policies in several countries are providing a massive stimulus to aggregate
demand especially through higher capital spending. When the volume of
investments increases, the potential for further investment expands and this
eventually raises the economy’s capacity for growth.
The MOF is holding the economy
hostage with its mix of rigid control of the level of
debt and its incapability to boost capital expenditure. In his presentation to
the MPC, the Financial Secretary, Mr Ali Mansoor, posited that there was little
room left for fiscal policy to further support the expansion of the economy and
admitted to the incapacity of MOF to overcome the implementation capacity
constraints and believed that fiscal policy was expected to end up neutral or
even contractionary in 2013 because of the need to control the total amount of
Government debt.
With a budget deficit targeted at
2.2 % of GDP for 2013 and some Rs 10 billion lying idle in Special Funds , we
believe that there is more than enough resources for an expansionary fiscal
policy. The lack of fiscal space is not a solid argument. As the RBI Governor ,Dr Duvvuri Subbarao, rightly puts it
in his I.G. Patel Memorial Lecture at
the London School of Economics on 13 March, 2013-“ Growth slow-down can be mitigated, indeed growth can be aided, provided
attention is paid, along with the quantum of fiscal adjustment, also to its
quality. Experience demonstrates that even if total expenditure as a proportion
of GDP is curtailed, it need not dampen growth; on the contrary, if there is
switching from current expenditure to capital expenditure, fiscal consolidation
can actually stimulate growth by ‘crowding in’ private investment.” But
here also the MOF fails miserably in its ability to reorder its existing
expenditures in favour of more targeted expenditures that help build
diversified productive capacity for the future.
As
for the level of debt it is not that simple as it is being presented by MOF. Whether it is presently a problem depends on
how far the economy is from its productive capacity, where future deficits are
likely to grow or shrink as the economy moves towards full capacity and the
likely effect of taxes and spending on growth of that productive capacity in
the long term. Good
fiscal policy can enhance global competitiveness of the economy and unleash
substantial growth. If we get higher growth, tax revenues will increase as well
the ability to pay down debt. That's why we need good policy right now.
To get good policy, there needs to
be thoughtful debate and compromise. The question of how we
induce enough investment to build the production capacity we need in the years
ahead is worth a vigorous debate. But dogmatic responses to budget deficits are
not conducive to this sort of examination. Our fiscal rigour is weakening the
economy not strengthening it. The MOF cannot kick responsibility down the road;
it is its responsibility to generate medium to long term structural reforms and
capital spending to enhance productivity and competitiveness to keep the growth
engine running and lift sluggish growth.
What is really at issue is not the
lack of fiscal space or the limit to our ability to absorb more borrowing, it
is too much focus on the size of the Budget rather than on the quantum of
creative new policy thinking; it is the
latter that matters more- New thinking and policies that could have generated
stronger fiscal management ,higher-quality public spending and long-term
investment programs for infrastructure, for renewable energy, mass transit system,
innovation, large-scale skill and job training, and so forth,. These require thinking and planning of the kind that
has never happened with the MOF’s short-termism and its overly budgetary focus.
Despite its Programme Based Budgeting, which has remained a mere theoretical
tool failing to bring efficiency gains and its Public Sector Investment Programme,
(PSIP), which is a mere wish-list of projects rather than a well-planned
prioritized list of much-needed infrastructure projects, the MOF is finally admitting
that it has not been able over the years to address the implementation capacity
constraints within the public service and across sectors.
The glaring instances
of inadequacies in e concept, design, execution and monitoring of projects , cost overruns, unforeseen delays, and the
technical and legal proceedings that have far-reaching effects on projects have continued year after year to mar the implementation of
capital/infrastructure projects. The MOF failed to impart more powerful growth
impulses to the economy because the burden of fiscal consolidation fell mainly
on capital expenditures. - a failure to ensure the “deliverology” on our priority capital
projects . The country needs productive public investments, not wasteful
spending to rev up growth. The final test for fiscal policy as a development tool is
its ability to deliver results. The MOF claim that structural fiscal
issues have been addressed is simply not true. Fiscal reforms have so far
focused on business facilitation, which have boosted private investments only
for a few years. Bottlenecks in capital spending do not date from
yesterday, and using implementation problems to explain insufficient capital
expenditures is only a pretext to cover up Government's policy failure to spur
adequate growth and employment opportunities.
A Conservative Monetary Policy stance: In the light of moderate inflation
( 2.9% in January and 3.6 % in March) and decelerating GDP growth, we expected
the BOM’s monetary policy stance shifting to support growth taking a cue from
the
Federal Reserve's aggressive easing
of monetary policy which is proving surprisingly effective at blunting the blow
to the economy from tighter fiscal policy. Many economists have been
scrambling to raise their growth forecasts. And in India, the
RBI cut its benchmark policy rate by 25
basis points, for the second time since the start of the year in a bid to help
revive flagging growth.
What is surprising is
that the MPC’s outlook remains hawkish ; it sees upside risks to inflation
despite acknowledging that the threats to the growth outlook outweighed
inflation worries and more importantly accepting that monetary policy could not insulate the
public from an increase in the cost of living and decrease in real income if
they originated from an exogenous rise in world oil or food prices or other
deterioration in the country’s terms of trade. On the basis of these arguments,
we believe that there is need to revisit the ideal inflation target, as carried out in India which
led to a lowering of its repo rate to support the economy. Our inflation target may be too low for the
current environment ; that target may be more relevant for the period before
the crisis began afflicting the global
economy about four years ago. An inflation target that is nearer to our historical
rate will give more elbow room to the BOM to lend some support to the economy. We
believe that the MPC’s stance should have been growth supportive. As pointed
out by J.Stiglitz in the 15th C.D. Deshmukh
Memorial Lecture on “A
revolution in Monetary Policy : Lessons in the wake of the global financial
crisis” on 2 January, 2013 in
Mumbai – “the crisis has forced many
Central Banks to rethink their doctrinaire policies. …. that monetary and
fiscal policy needs to be coordinated, and it makes no sense for the body
controlling one of these to be allegedly independent, while the one responsible
for the other is politically accountable………Central banks should broaden their
objectives beyond inflation. They need to focus too on employment, growth, and
financial stability. And monetary policies need to be coordinated with fiscal
policies.”
