Modified version published in L"express, 12 Oct 2012
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 geopardy are being traded to describe the present economic situation. But at the Ministry of Finance (MOF), until recently there was a misplaced optimism which suggested that its top officials/advisers were out of touch with the opinion among private economists, investors and even the Central Bank (CB) about the economy that was already showing signs of strain. At comatose 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 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 fiasco like the Tian li/Jin Frei 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 –education, 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 ?; it is sad that the country has to pay a heavy price for this team’s misplaced priorities . There were indeed some acute criticisms from some business leaders recently for the policy paralysis which has made the task of boosting economic growth far harder today than it was some time back. With the lack of strong growth, the pressures for a meaningful economic strategy are rising by the day. Businesses were expecting some fiscal stimulus especially from -the rainy day fund – the National Resilience Fund -that will help to cushion the economy from the euro zone crisis. The policy inaction is a cause for concern and there is need for fresh economic thinking. Policy making has been retrogressive during the past five years. To remedy to this situation, government had in its Government Programme 2012-2015 announced the setting up a National Strategic Transformation Commission(NSTC) -in short a Planning Commission that will revive the earlier Ministry of Economic Planning and Development (MEPD). Where are we with the NSTC ? This is an urgency. Mauritius is locked in a struggle for economic survival in an age when nations are being tested by the raging forces of globalisation and markets. 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 they did not want in the first place.
Waiting in vain for the policy initiatives to create some good-time feelings for our precariously perched economy, the corporate leaders were expecting the CB to come to the rescue of the economy and deliver strong economic growth with some monetary easing. The CB Governor is not buying that idea. Even in times of crisis the CB sees its overriding mandate as keeping a lid on inflation. The CB kept its policy rate –the repo rate- unchanged. By not cutting its policy rate, the CB 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; this may place the CB in a an uncomfortable position; the CB's activism in response to policy paralysis for an economy, that is languishing in the depths of a punishing downturn, has consequences ; the CB 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. Expansionary 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.
And what is happening on the fiscal side ? Every year it is the same thing; they post over-optimistic forecasts at the beginning of the year which at the year’s end turn out to be way off the mark. The forecast figures, when it is presented in the budget speech, 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.” And 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 and this means that the budget deficit for 2012 will be substantially lower than the targeted figure of 3.8% of GDP. Using the same doubtful 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 for the 2013 and future budgets. Thus the economy can easily sustain the PRB awards amounting 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 1 billion of 2016- and 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 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.
