(Published in MTimes 22 March 2019)
Whenever an economic aggregate ((national income, budget deficit, government expenditure, debt. ..) is chosen as a target of public policy, it’s almost invariable that policy-makers will try to manipulate its presentation and computation to their advantage. Take budget deficits, which can be deliberately underestimated by displacing expenditures from the budget to state-owned special purpose entities (SPEs). Borrowed funds can be directed to SPEs for spending, and Government can make equity investments in the SPEs without adding to the fiscal deficit. In cases where SPEs are used as an artifice for circumventing the budget, the budget deficit will provide a misleading measure of the fiscal gap.
There are several instances in the past of such tampering of the budget deficit by the creation of SPEs, starting with the National Infrastructure Fund in the mid-1990s, to the Privatization Fund in the late 1990s, and the Special Funds almost continuously for a decade.
The definition and measurement of public debt is similarly subject to varying interpretations, often leading to a blatant misrepresentation of debt data. The focus on public sector debt (PSD) intensified following the introduction of the Public Debt Management Act (PDMA) in 2008, which set a statutory PSD ceiling of 50% of GDP, to be attained by 2013. Failure to meet this objective led to an extension of the target date to 2018.
Under the threat of missing the debt target for the second time, the PDMA was instead amended in 2017 to revise the definition of PSD for purposes of the debt ceiling, and align it with the IMF’s broader scope and coverage. Instead of including the debt of selected non-financial public enterprises on a discounted basis, PSD in the amended PDMA now covers along with General Government debt, the total debt liabilities of all public enterprises, both financial and non-financial.
The revised PSD is also now a measure of gross debt liabilities, without any netting of cash balances as it was the case previously. The statutory PSD ceiling was therefore raised in the amended PDMA to 60% of GDP, to be met by 2021. For any one fiscal year, the statutory PSD ceiling was set at 65% of GDP.
The public sector is defined under the PDMA as consisting of the following sectors:
1. Central Government (namely, Budgetary Central Government, Extra Budgetary Units, and Social Security Funds), 2. Rodrigues and Local Government, and 3. all public nonfinancial and financial enterprises. PSD is an aggregate of the gross debt liabilities of these sectors. The debt instruments comprise loans and overdrafts, securities, and the incurring of debt by any other means.
1. Central Government (namely, Budgetary Central Government, Extra Budgetary Units, and Social Security Funds), 2. Rodrigues and Local Government, and 3. all public nonfinancial and financial enterprises. PSD is an aggregate of the gross debt liabilities of these sectors. The debt instruments comprise loans and overdrafts, securities, and the incurring of debt by any other means.
As required under the PDMA for purposes of monitoring the PSD ceiling, a quarterly report of the actual public sector debt stock is made public. The latest debt data show that PSD at Dec 2018 stood at 64.5% of GDP. However, a new adjustment item was added to the debt table, reducing PSD by Rs2.9 bn, or 0.6% of GDP. Without this adjustment, PSD would have exceeded 65% of GDP. This “consolidation adjustment” is an artificial item, nothing less than an arbitrary concoction to underestimate the level of PSD.
An IMF’s Government Statistics Manual makes an important distinction between aggregated and consolidated debt statistics. PSD, as defined in sec 6 of the PDMA, was since 2008 always understood to mean a simple aggregation of the debt liabilities of the various sectors, namely the central, regional and local government, and public enterprise sectors. Now, out of the blue, in Dec 2018, without any clarifying amendment of the PDMA, PSD is no longer viewed as an aggregate, but as the product of a consolidation across sectors.
Consolidation is a legitimate method of presenting debt statistics across a group of sectors as if these constituted a single unit. Consolidation across sectors involves the elimination of all transactions that occur among the units being consolidated. For example, in the case of the Dec 2018 consolidation adjustment, the stock of securities issued by the central government (a debt liability) is offset by holdings of government securities of Rs 2.9 bn by the non-financial public sector enterprises (a financial asset). By offsetting a liability and an asset of these two sectors, respectively of central government and of nonfinancial public enterprises, the intention is to avoid double counting and arrive at a consolidated view of these sectors as a single group.
However, the consolidation adjustment of Rs 2.9 billion is incomplete, and reflects a devious intent to lower PSD accordingly. A sectoral consolidation is not restricted only to debt securities, but must also cover all other debt liabilities. A consolidated PSD for central Government and non financial public enterprises would also include other liabilities of non financial public enterprises, such as other accounts payable. Even if the figure for accounts payable is considered negligible, there is a stronger argument for dismissing the consolidation adjustment of Rs 2.9 billion.
It is illogical to consolidate the central government only with non financial public enterprises, and ignore financial public enterprises. In fact, the consolidation adjustment for financial public enterprises would be even more significant, with holdings of government securities of Rs 4.6 bn at Dec 2018. A consolidated PSD measure eliminates inter-sectoral matching assets and liabilities, but also includes all the gross debt liabilities of the sectors concerned. In consolidating financial public enterprises as well, PSD would be reduced by an extra Rs 4.6 bn, but would also be raised by the sizeable debt liabilities, such as currency and deposits, of the financial public enterprises.
Even if the sudden interpretation of PSD on a consolidated rather than aggregated basis is accepted, consolidation should run across all the sectors comprising the public sector, without any exclusion, to include their total debt liabilities. The selective approach to consolidation adopted in the reporting of PSD at Dec 2018 appears to be a desperate attempt to comply with the PDMA’s single-year deficit ceiling by artificially limiting the public debt burden to less than 65% of GDP.
Mauritius has already committed to upgrade its current economic reporting to the IMF from the Special Data Dissemination Standards (SDDS) to SDDS Plus. Under SDDS Plus, a consolidated PSD will include liabilities arising from all debt instruments, and across all sectors. Pension liabilities of the social security sector, mainly of the National Pension Fund, net of consolidation adjustments, would thus substantially raise PSD.
The suppression of uncomfortable debt data and the use of questionable methodology is a further indication of political interference in order to influence the public discourse. Regardless of our political leanings, we should all raise our voice against this growing tendency to corrupt the integrity of our economic statistics.
