MOFED: The merger Revisited
Although
the merger of the Ministry of Planning and Economic Development (MOFED) with
the Ministry of Finance was announced in December 2003, efforts at an effective
merger of the two cadres started in 2006. The whole idea about the merger
emerged with the priorities set out in the 2000-01 New Economic Agenda.
One of the priorities was the need of a Medium Term Expenditure Framework (MTEF) to the budget processes as the key tool to plan and manage public resources and to link policy, plans and budgets in a medium-term perspective. The development of the MTEF requires a combination of planning and budget skills. It provides the ‘linking framework’ that allows projected expenditures to be driven by policy priorities reflected in the long-term vision and strategies and disciplined by budget realities. The World Bank in its June 2003 report:‘Economic Agenda for Fiscal Sustainability’ recommended integrating the planning functions of the Ministries of Finance and Economic Development to improve operational efficiency and consistency.
The irony of the decision to merge Planning with Finance (under dubious management and poor leadership response) is that it effectively ended the national planning process, leaving the government without the one technical agency that was qualified and best suited to handle the critical issues of optimality in resource allocation. The link between planning, budgets, and results remained weak. The focus of the Ministry of Finance and Economic Development was principally directed towards budget work/matters, which left little scope for the proper application of MTEF, of planning and strategic thinking skills. The Budgets were driven by fiscal pressures emerging from the broader economic environment rather than developmental needs. There was thus a tendency to focus myopically on fiscal discipline and financial controls, without any influence from planning that could have extended that focus to macro- and micro-prioritisation as well. Very little research and sectoral/impact analysis, which were the main focus at the earlier planning ministry, have been carried out during the past years. If the recent budget had been based on national priorities, which implies transforming the vision into strategic scenarios, choices and policies compatible with available resources, we would not have heard such criticisms as the lack of strategic direction and coherence in the Budget document from the private sector and development partners.
One of the priorities was the need of a Medium Term Expenditure Framework (MTEF) to the budget processes as the key tool to plan and manage public resources and to link policy, plans and budgets in a medium-term perspective. The development of the MTEF requires a combination of planning and budget skills. It provides the ‘linking framework’ that allows projected expenditures to be driven by policy priorities reflected in the long-term vision and strategies and disciplined by budget realities. The World Bank in its June 2003 report:‘Economic Agenda for Fiscal Sustainability’ recommended integrating the planning functions of the Ministries of Finance and Economic Development to improve operational efficiency and consistency.
The irony of the decision to merge Planning with Finance (under dubious management and poor leadership response) is that it effectively ended the national planning process, leaving the government without the one technical agency that was qualified and best suited to handle the critical issues of optimality in resource allocation. The link between planning, budgets, and results remained weak. The focus of the Ministry of Finance and Economic Development was principally directed towards budget work/matters, which left little scope for the proper application of MTEF, of planning and strategic thinking skills. The Budgets were driven by fiscal pressures emerging from the broader economic environment rather than developmental needs. There was thus a tendency to focus myopically on fiscal discipline and financial controls, without any influence from planning that could have extended that focus to macro- and micro-prioritisation as well. Very little research and sectoral/impact analysis, which were the main focus at the earlier planning ministry, have been carried out during the past years. If the recent budget had been based on national priorities, which implies transforming the vision into strategic scenarios, choices and policies compatible with available resources, we would not have heard such criticisms as the lack of strategic direction and coherence in the Budget document from the private sector and development partners.
Now
that the main hurdle is no longer in the way, there is scope for revisiting the
existing structure which is no longer conducive to attaining the desired
outcomes in the most effective manner. Given the two cadres from Budget and
Planning have separate cultures and the seven years of force cohabitation have
not produced the desired results especially in the implementation of MTEF/ESTP
and critical areas of policy and sectoral analysis, the Strategic Policy Unit
under the PMO, announced in the budget, should now assume this planning/think
tank function. But strong coordination and collaboration as well as the
existence of consultative mechanisms between budget and planning will still be
important elements for ensuring that government policies are planned and
implemented in accordance with key development priorities. This increased focus
on planning will create a demand for experienced economists including those
with sector-specific skills. It’s quite likely that recourse will have to be made to the
economists of the former Ministry of Planning as recommended by the 2013
Errors, Omissions and Anomalies Committee (Manraj Report).
* * *
The NAIRU Debate: Growth and Unemployment
In the 2013 IMF Article IV document, mention
is made of the fact that “unemployment should decline somewhat over the
medium term, but Mauritius would need stronger growth and targeted labor market
reforms to reduce unemployment significantly.”
Why
stronger growth? Because the IMF has estimated that our present potential
growth rate as at 4.5% and the present unemployment rate of 8.0 – 8.3% to be
the Non-Accelerating Inflation Rate of Unemployment or NAIRU. As its name
suggests, the NAIRU is supposed to be an unemployment rate (or range of
unemployment rates) that produces a stable rate of inflation: if the
unemployment rate is lower than the NAIRU, then the inflation rate will tend to
rise, and vice versa. Given that our short-term production possibilities are
limited to a growth rate of 4.5% and that any stimulus to the economy at this
level of output will only lead to inflationary pressures, we cannot but accept
that the anemic growth forecasted in the budget to be “good”
growth.
Can
the Mauritian economy grow more than 4.5% per year and the unemployment rate
fall below 8-8.3% without causing an increase in inflation? How far can we rely
on the IMF estimates that the long-run potential growth rate of the economy is
around 4.5% per year and that the natural rate of unemployment is in the
8.0-8.3% range? If unemployment would fall below its natural rate and output
grow above its long-term potential rate, inflation would start to increase as
bottlenecks in production, capacity limits and tight labour market would lead
workers to require higher wages and firms to increase price as demand and costs
go up.
It
is unquestionable that inflation will eventually increase if the economy grows
above its potential rate. What is questionable is whether the potential growth
rate of the economy is 4.5% and whether the Non Accelerating Inflation Rate of
Unemployment (NAIRU) is around 8.0%. On this issue, opinions may widely
diverge: in fact, there is no way to exactly estimate the value of NAIRU as the
natural rate of unemployment is not constant but changes over time depending on
the factors that determine the structural unemployment rate of the economy.
What
is apparent from the ‘Inflation & Unemployment’ graph is the disparate
behaviour of the inflation rate and the unemployment rate. If there were a
well-defined and stable NAIRU we would expect to find some unemployment rate
range where the inflation would be accelerating and below that range it will be
decelerating. The graph results clearly do not support the existence of such a
rate. So what about the estimates of the NAIRU itself?
The
value of NAIRU is hard to measure, largely because it changes over time. The
variability of the short-run NAIRU makes it less suitable as a benchmark. The
economy experiences many kinds of shocks that influence inflation and
unemployment. In light of this fact, it would be remarkable if the level of
unemployment consistent with stable inflation were easy to measure. Even the
IMF estimates of short-run NAIRU show remarkable volatility. From one of the
graphs of the Art IV document (Fig V 3), one can easily deduce that presently
the situation may be different with a positive output gap and the NAIRU around
6% whereas the unemployment rate is around 8%. So, there is some scope for
reducing unemployment.
Some
of the recent studies carried out on NAIRU have pointed to the limitations of
any analysis based on the NAIRU and short-run NAIRU, particularly that they
depend on estimated econometric relationships that explain inflation
developments imperfectly, and are sometimes subject to large margins of error.
(The use of univariate filters (Hodrick-Prescott filters) with no economic
content has rendered the NAIRU concept relatively arbitrary. Kalman Filter
estimates are extremely sensitive to underlying assumptions about the variance
components in the measurement and equations. Small signal to noise ratio
changes can have major impacts on the measurement of the NAIRU.) NAIRU and short-term
NAIRU can only serve as one of a range of possible indicators that are useful
for assessing inflationary expectations. Moreover, if there is a considerable
lag between changes in unemployment levels and inflation-affecting wage
movements, then it seems that any calculation of NAIRU would have to be so
retrospective that it could never be a useful tool for modeling future economic
data.
* * *
Tackling the real estate bubble
The
stakes are indeed very high in tackling the real estate bubble. One has to be
careful not to induce countercyclical effects likely to discourage/discouraging
local investors and Foreign Direct Investment. Mauritius, which needs global
financing to bridge its high current account deficit of 10.3 % of GDP, will be
badly hit. If there is a marked diminution in capital inflows, especially in
the 70% of our FDI that goes to accommodation, construction and real estate, asset
prices would be first to feel the effects and asset saleability would be
impaired. Hot capital, a consequence of capital inflows attracted by the real
estate bubbles, will also take flight. Borrowers' incentives to repay their
loans will subside and, all of a sudden, domestic banks realize that they face
a mountain of nonperforming loans and stuck with collaterals whose values are
bound to fall.
The
liquidity crunch will give rise to the drying up of credit causing a severe
impact on output and employment. Such a halt in inflows can lead to higher
exchange rate fluctuations (even a significant depreciation of the currency)
and a widening current account deficit that reduces the overall balance of
payments surplus and thus affect our long-term growth prospects. Sudden decline
in capital flows not only contribute significantly to drops in economic growth,
but their effect is more pronounced in countries with large current account
deficits. So we have to be vigilant and ensure that the selective
credit-control tools of the Bank of Mauritius impact on the causal factors of
financial instability not on the mere symptoms. Otherwise we will only be
postponing the risks for later periods.
* * *
The Budget:
Prioritized expenditures
An IMF working paper dated May 2013 on ‘Inclusive
Growth and the Incidence of Fiscal Policy in Mauritius-Much Progress, But More
Could be Done’ by Antonio C. David and Martin Petri posits that the share
of expenditures on physical capital has declined both in relative terms and as
a share of GDP, despite the authorities’ ambitious public investment plans.
In fact, public expenditure on physical capital
investment throughout the period has been quite volatile. “The share of
expenditures on human capital (education and health) and on social security and
welfare (which also includes housing) has increased marginally over the period.
Overall, these trends indicate that there is scope to improve the quality of
public expenditures by reallocating towards areas that are more conducive to
growth, in particular by increasing the share of expenditures on physical
capital.”
The
issue for our re-oriented fiscal policy, , post-Mansoor, is not just a question
of having a more expansionary fiscal policy. We need a combination of fiscal
reforms and fiscal rebalancing towards prioritized productive expenditures.
More efforts at fiscal consolidation are needed to generate the fiscal space to
meet these priorities which will generate future productivity growth. We have
to improve the quality of our public expenditures by reallocating towards areas
that are more conducive to growth, in particular by increasing the share of
public expenditures on productive investment in physical and human capital.
Table I: Consolidated Budget ( including special
funds)
2011
|
2012
|
2013
|
2014
|
|||
Budget Deficit
|
-2.4
|
-2.2
|
-4.8
|
-5.0
|
||
Capital spending
|
3.5
|
3.7
|
4.5
|
4.4
|
||
o/w Expenditures on roads & land drainage.
|
1.1
|
1.4
|
1.5
|
0.7
|
||
