(Published in MTimes of 14th June 2019)
For weeks, we had been asking around about the probable fiscal stance for the 2019-20 budget? Will it be an austerity budget given the pressures of the IMF for greater efforts at fiscal consolidation and reining in of the public sector debt to meet the debt target? The Government seems to have opted for fiscal profligacy rather than fiscal rectitude.
The consolidated budget deficits for fiscal years 2018-19 and 2019-20, inclusive of special funds and off budget expenditures, work out to be -4.8% and -5.2% of GDP respectively. Without the grants of Rs 4.2 billion and Rs 6.3 billion, the consolidated deficit peaks at a catastrophic figure of -6.1% and -7.0% of GDP for these two fiscal years (assuming disbursement of the full grants amount).
Recurrent expenditures are registering an all-time high of 24.1% for the 2019-20 budget. For the fourth year running, capital expenditures are less than 2% (1.4%, 1.5%, 1.7% and 1.7%). Even if we look at the investment rate for the period 2015-19 (inclusive of the prestige products - Metro Express, the Cote d’Or Multisports Complex and Safe City), the average comes to only 17.8% of GDP compared to an average of 22.4% over the period 2010-2014. Similarly, as regards private sector investment as a percentage of GDP, it is a mere 13.3% on average over 2015-19 compared to the average of 17% registered over the period 2010-2014.
This is irresponsible fiscal management. It’s a direct result of the populist policies - distributing goodies while jeopardising growth prospects. The impact on growth is being limited by insufficient productive investments. While the economy’s infrastructure certainly needs improvement, increased capital spending on the prestige projects has not stimulated the economy. These projects were not priority projects that could have provided the greatest economic return. It will now take us an additional decade to become a high-income economy.
Whereas the IMF had been recommending fiscal consolidation, the current Government is doing the exact opposite. This budget embodies an abdication of responsibility and a retreat from sound macro-economic management of the country. This government is turning back the clock on the sound and strong macroeconomic and institutional underpinnings that have been the hallmarks of the emerging Mauritian tiger struggling to come out of the middle-income trap. In fact, given the rise in fiscal profligacy, the unproductive investment in prestige projects, a preference for consumption today over investment in boosting the exports sector, the absence of any strategic thinking and concrete measures and policies - both short- and long-term - to counter the threats to the main sectors of the economy, it is actually setting the nation back on the path of massive budget and current account deficits and increased debt.
The 2019 Article IV Consultation had recommended that fiscal consolidation should be pursued as from the 2019-20 budget itself. The authorities had tried to delay the adjustment two years down the line, but the IMF had put its foot down given that the slowdown in the financial sector and the possible contingent liabilities are already posing a risk to the growth outlook and debt sustainability. But our shrewd economists at the Ministry of Finance turned the table on the IMF by borrowing a leaf from Modi’s government attempted raid on the RBI’s reserves to bridge its fiscal deficit.
Like the colourable accounting in the Budget that excludes the the Special Funds and the off-budget expenditures, this latest one is yet another of the tricky tricks to avoid the required fiscal consolidation. We strongly condemn the announced decision to use the reserves of the Bank of Mauritius to repay the public debt. It is a totally irresponsible decision, to the detriment of the financial stability of the country, and which in the same breath reduces the independence of the Central Bank.
But this controversy over the raiding of the BOM reserves cloaks a bigger issue: the one-off transfer of the ‘excess reserves’ in the BOM’s balance sheet does not solve the government’s chronic inability to control overspending and the fiscal deficit. It does not remove the source of the bulging public debts; it only postpones the day of reckoning.
The BOM needs to have a strong balance sheet and adequate capital reserves for monetary policy operations, currency fluctuations, possible fall in value of bonds, sterilisation costs related to open-market operations, credit risks arising from the lender of last resort function and other risks from unexpected increase in its expenditure to deal with a possible crisis and external shocks.
But this controversy over the raiding of the BOM reserves cloaks a bigger issue: the one-off transfer of the ‘excess reserves’ in the BOM’s balance sheet does not solve the government’s chronic inability to control overspending and the fiscal deficit. It does not remove the source of the bulging public debts; it only postpones the day of reckoning.
At a time when the country’s main economic sectors — textiles, tourism and offshore — face enormous challenges, besides those posed by Brexit, the revision of the Treaty of Non-Double Taxation with India and the decrease in the number of tourist arrivals in the country, many observers were expecting that the 2019-2020 budget would come forward with a range of measures, including structural ones, to re-dynmanise these key sectors.
The government has failed to make the difficult choices required, having instead been swayed by electoral politics preferring to focus on feel-good giveaways to please nearly every special interest group: pensioners, civil servants, farmers, the auto industry, and consumers, etc, but which will ultimately not have any meaningful positive impact on the long-term well-being of Mauritians.
