Titbits:Propositions indécentes; Learning to unlearn; Excess liquidity and reform of the sector and Receding inflation risks

Propositions indécentes

The document ‘Prospects for Agricultural Markets and Income in the EU 2013-2023’ apprises us of the European Union proposal to wind up the sugar quota scheme by 2017 which will lead to a reduction in the EU domestic sugar price and EU sugar imports and that in the long term EU will be moving closer to full self-sufficiency and to being an occasional net exporter. EU sugar beet production is projected to expand in the coming decade and additional volumes will be used mainly to produce sugar rather than ethanol. The expiry of the sugar quota system in 2017 is part of the 2020 Common Agricultural Policy,(CAP).

After the Sugar Protocol, we now have the quota system that is falling apart despite the special ACP-EU partnership dating back to the Yaoundé Convention. It was doomed once the financial benefits of that partnership started tilting only on one side to the detriment of the other partner. And it all falls within the EU’s economic logic of strengthening the competitiveness and the sustainability of its agriculture in order to guarantee its citizens healthy and quality food production, to preserve the environment and to help develop its rural areas. It’s all in the interests of the EU !!!

I have not  heard any such snide comments about the EU’s decision to do away with the quota system as being des “propositions indécentes”… Why is it then that in the case of the double taxation Avodance Treaty with India , we should see India's position of overriding the tax treaty provisions by the General Anti-Avoidance Rules (GAAR) and other related legal changes as "propositions indécentes” “?.

Now that India is consolidating its fiscal base, placing far greater weight on its tax sovereignty and on the avoidance of risks of potential misuse of its tax treaties, it is in its financial interests to plug the loopholes in the DTAA and recover some of the fiscal loss due mainly to the avoidance of taxation on capital gains tax incurred in India. Like the EU, India sees what is in its best interests and it makes economic sense that India should be harnessing the maximum of the financial benefits possible from global capital flows to meet its development needs.

The General Anti-Avoidance Rules scheduled to come into force in 2015 are unavoidable. At the international level OECD is intensifying actions to address the crossborder tax hybrid schemes after its widely published 15-point action plan on Base Erosion and profit Shifting (BEPS) on the issue of profit shifting from high-tax to low-tax jurisdictions and its negative effects on tax bases. Mauritius has to adapt to this new reality –improved international tax rules that will be closing the gaps in the international tax architecture which are presently being exploited by all sorts of arrangements- and develop a financial services centre of greater substance  oriented towards more value addition than being a mere adjunct of the global tax avoidance industry

Some twenty years ago, Singapore embarked on developing substantial investment activities, and implemented a clear and decisive strategy to achieve this objective- for instance, by offering the right incentives, including a USD 100 million individual investment mandate to attract foreign investment firms to set up business in Singapore. Malta has recently chalked out an ambitious road map for its financial services sector aiming at doubling its contribution to GDP to over 25 percent. It is strengthening its regulatory structure to supervise some 350 hedge funds with a combined asset value of Euro 7.2 billion. Some 100-odd fiduciary companies are setting up trust and trustee services there as well as wealth management, pension funds and private banking companies and a score of non-retail professional funds that are regulated as collective investment schemes. It also aims at beefing up its 21-year-old stock exchange by listing companies from outside the island and Europe on its bourse which will be trading in trades stocks, gilts, treasury bills and corporate bonds. How quickly Malta succeeds is a matter of time. It surely has the will. Are we equally fired up on the need for such a road map for our financial services sector !!!

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Learning to unlearn

One of our correspondents had recently attended the World Innovation Summit for Education (WISE) held in Doha, Qatar. WISE’s mission is to address the challenges facing 21st century education, to expand dialogue around the world and to implement practical and sustainable solutions. It seeks to establish some of the most innovative practices in the field and spread the learning through policy makers and organizations working on the ground. The theme of the meeting was reinventing education for life.

This is the type of meeting that our policy makers and educational administrators should be attending, especially those presently working on the road map for 9-year schooling, to imbibe some of the latest innovative solutions in education. Policy makers and educators deliberated on the best ways of promoting innovation in education. Some of the highlights of the summit were the Escuela Neuva education model which places pupils at the heart of the learning process while teachers become facilitators;, the Madhav Chavan's Pratham model which has proposed a simple formula to bring education and literacy to millions at minimum cost, and the Satya Bharti School Programme for its transformative impact and innovative approach to improve the quality and delivery of education to the underprivileged children in rural India. There were also sessions about gamed-based learning developed by the Institute of Play. Educators were introduced to a range of approaches being taken by developers in the games and learning sector.

It is only though such interactions that our policy makers will learn to unlearn the traditional approaches that have continuously failed to deliver through outdated reform programmes the same old wine that is now being displayed in new bottles. Instead of being served over and over again the same recipe with some minor adjustments and refinements here and there, it may be worth trying those innovative approaches that seem to be working wonders elsewhere.

For example, we may be able to replicate some elements of the Pratham model here, namely, its strategy of ensuring quality in teaching. By maintaining strict performance standards and providing systematic training, Pratham has turned people without teaching experience into effective instructors. In fact, training is the only overhead in which Pratham invests a lot of money. We are at a crucial crossroads where it is important to learn to unlearn with a view to making our education system more suitable to our situation, our culture and history and  our path of progress.

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 Excess liquidity and reform of the sector

We were surprised to see the ex-Minister of Finance (MOF) intervening in the rather caustic exchanges between the present Minister of Finance (MOF) and the Governor of the Bank of Mauritius(BOM) . The reason is that some of the present distortions and inefficiencies in the system are a direct result of the lack of reforms in the sector. ( Banks were having excess cash since 2007.)

A road map for the sector is long over due; we have been waiting for a reengineering and modernization of the sector since 2006 with the objective of transforming it into a financial services sector that is characterized by speed and continuous innovation with an increasing ability increasing ability to leverage capital markets, specialized skills and technology to innovate and create new products, processes and services. These are the prerequisite to becoming a sustainable premier financial centre that has both width as well as depth.

Indeed the way forward is to continue adding momentum to the diversification and deepening of the financial sector by developing a truly functional bond and debenture market supported by local/regional credit rating agencies, an interest rate swap market and the securitization of financial assets , by adding more value and substance to global business activities, by diversifying product offerings and providing higher value advisory work, risk management, trust administration, asset financing, securities custodial services, investment management and business process outsourcing activities. . Such a financial services centre of tangible commercial substance and oriented towards more value addition will be offering us access to a greater panoply of financial vehicles to tap the global and regional business and trade networks. It 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 and regional capital market.

These are the reforms that should have been undertaken by the TINAwallahs (There Is No Alternative tribe). And now, we would have been reaping the fruits of those initatives for their impact are felt over time in terms of the efficiency and effectiveness of financial intermediation and the monetary policy transmission mechanism, among others.

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Receding inflation risks

The headline inflation rate, calculated on a moving average rather than on a year to year basis, was 3.5% for year 2013 compared to 3.9% for year 2012. Headline inflation rate, excluding 'Alcoholic beverages and tobacco', was 2.5% for year 2013 compared to 2.6% for 2012. This downward trend is confirmed at the global level. U.S. energy officials expect global and domestic crude prices to moderate this year as the world's supplies outpace consumption. Prices for U.S. retail gasoline, which fell on average from 2012 to 2013, are expected to fall again in 2014 to $3.44 a gallon, and in 2015 to $3.37 a gallon. The fracking revolution (hydraulic fracturing of oil and gas trapped in shale rock) seems to be already making a big impact as it spreads outside North America.

Consumer prices in the Euro zone barely moved last month raising fears of deflation. Inflation in the 17 EU member states that were using the euro in 2013 rose in December at an annual rate of only 0.8% and 0.7 % in January 2014, a record low since the advent of the Euro currency and well below the European Central Bank’s target of 2%. If this situation persists, Europe could face outright deflation. The Euro zone’s near-deflation is not much out of line with the rest of the developed world. It reflects sluggish growth, high unemployment and pressure on wages. Much better American growth and a weak dollar, which ought to have led to higher prices in the US, have not stopped the disinflationary momentum there.

The Euro zone’s case of near-deflation does not yet look dangerous but it’s not clear whether monetary policy can do much to help. The US Federal Reserve super-stimulus has not done much to stimulate prices. As for the Euro zone, it needs structural reforms and not looser money. Similarly in our case , in the present circumstances of excess liquidity there is limited scope for monetary policy to stimulate growth;  whereas on the fiscal side , there is a  need,  first of all, to consolidate public finances.  (Martin Petri’s - IMF Art IV Presentation, available on the website of the BOM, confirms our consistent stand at the Mauritus Times - refer to our article ‘Budget 2014: Positive but deceitful’ - that the fiscal slippage last year was quite serious increasing substantially from -2.2% to around -4.5 % of GDP) before carrying out the structural reforms to boost productivity and growth through growth-supporting targeted expenditures.