(Published in Weekly, Issue 404, 11-17 June 2020)
According the World Economic Outlook (WEO), the global economy is projected to contract sharply by -3% in 2020, and the growth of the emerging markets and developing economies to be - 1%, while on the basis of our own forecasts, our economy is projected to contract by - 11%. In a baseline scenario, which presumes the pandemic to disappear gradually in the second half of 2020 and containment efforts to be slowly unwound, the global economy is projected to grow at 5.8% in 2021 as economic activity normalises, helped by appropriate policy support.
The cause underlying the catastrophe, as we all know, is the Covid-19 virus, which no economic policy measures can bring under control, though the virus itself carries the potential of destroying economies. In fact, even before this crisis emerged, the economy was struggling; the main macroeconomic parameters were in the red -the growth rate had plummeted to a mere 3.3% , the fiscal deficit was already at -70% of the GDP and a public debt higher than 70% of GDP if we include the off-budget expenditures and the undrawn commitments under the Indian Exim bank line of credit of over Rs 15 billion, and for borrowings of over Rs 5 billion from non-financial public sector entities-a widening external imbalance reaching 11% of GDP if we exclude GBC, whereas sector-wise, besides youth unemployment and declining productivity , manufacturing was in a mess, services sector was not growing fast enough, and agriculture continued to be at the mercy of external elements and internal inherent problems. The government was in complete denial that the economy faces a grave macroeconomic challenge and the growth rate one of the lowest since the 3.1% of 2015.
But with the new team at the helm - a new finance minister and other young Turks ready to prove themselves - there was still hope that there will be a serious rethink about the economy, how our society should be run and that the economic management will improve upon the pre-Covid 19 period. There were cyclical and structural issues that have been allowed during the past five years to become growing pains. This government had no choice but to address them all.
Their first attempt at a Plan de Soutien, a partial “fizette”, got caught in a vicious economic whirlpool. Besides the “path-breaking”(sic) measure of additional whisky bottles for tourists, the opening of the pipeline of a spate of liquidity measures to help businesses to access capital easily did not deliver as the banks were not willing to take the risks and the borrowers ready to use it. But the young turks of the new regime recovered quite rapidly, calling in their troops and cheerleaders, including some top economists who were regularly grabbing the front page news. They succeeded in orchestrating a hysteria-driven hyperpartisan spending TINA circus ( There Is No Alternative to money creation) whose real goal was a continuation of populist policies even if it meant a permanent growth in government spending and debt liabilities that will rob future generations of income and prosperity.
Their success in imposing their views was partly due to the fact that we had on hands a "war economy" where a country's economic model, production capacity and distribution dramatically switches during a war to meet the unique needs of the time. Governments around the world have put their economies on something like a war footing with massive emergency stimulus and loan packages. "The world is de facto at war," was the blunt assessment of Olivier Blanchard, a former chief economist for the IMF.
Even when facing such a war economy, they just could not pass up the opportunity to to steer the crisis to their advantage. As the scale of the coronavirus disaster revealed itself, their escalating response charted a stunning expansion of government expenditure and colossal deficit spending via money creation. It was not a new appreciation of how Keynesian budget policy or helicopter money ameliorates economic pain, but rather a keener sense of what political advantage could be taken from such a massive anti-cyclical spending backed by the potent slogan that appeals more to the gut, than to the head- “The trying times call for exceptional massive spending”.
Let us thus have a hard look at the basis of this huge government spending and assess it against these three goals a) make sure people’s basic needs are satisfied b) use these funds to create positive change, and rebuild areas we previously neglected to make it possible for the economy to spring back into action c) while we accept it that the main economic fundamentals (inflation, budget deficit, public debt …) cannot be our current preoccupations, ensure that we do not allow these to grow into an unstoppable burden .
The mammoth spending of government fails on all these three counts.
Goal a: In terms of discretionary fiscal provisions-the Rs 8 bn earmarked as Covid related wage subsidies, and some 1/3 of the additional Rs 9 bn for support to Air Mauritius-only 2.4% of GDP is being allocated as wage subsidies and income support whereas other countries are providing some 5 to 10% of their GDP. Why ? because we do not have enough of fiscal space after provisions are made for pensions and capital expenditures and there are even risks that we may not be able to provide substantial relief to the needy in the future.
Goal b: The apparent attempt to resuscitate economic activity via an overemphasis on capital spending is not likely to reboot the economy and extricate it from the quicksand of economic inactivity-a route that we have tried before with heavy public sector investment growth of 18.3% and 21% in the last two years failing to break the growth barrier of 3.6%. In 2019, growth even dipped to 3.1 %.
We should have made the most of the chance to recalibrate the economy and reset its priorities towards quality spending. Instead, we were served with a confused hotch-potch budget of unfettered spending and the so-called prospects for digitalisation of the economy, artificial intelligence, data technology, etc. sounded as hollow and empty as the previous vain promises of the government on blockchain technology, and fine tech, with zero results. The budget fell into the old trap of trying to be all things to all people, of having so many priorities that in fact it has none. There were multiple themes, segments and programmes, leaving the listener dazed and confused. It was a laundry list of old (that is current) programmes…
Beneath the facade of a grandiose package runs a wary, almost palpable, anxiety -as our main stakeholders face a make or break moment. Besides the dismal verdict in the media not convinced by the budget ‘s blueprint, the incoherence and lack- of -focus & direction in Budget 2020-21 seemed to have earned quite some backlash from every quarter. It succeeded in gathering diverse disgruntled stakeholders from across the whole business spectrum venting their discontent and frustration- the self-reliance activists, the SME sector and the textile sector representatives (who are even threatening a hunger strike) to the representatives of the tourism and hospitality sector ,the trade unions and even the regime’s preferred partners-Business Mauritius - who felt that some of the measures were ill-timed and likely to affect the competitiveness of the business sector and last but not least even the EU with the new differential taxation between domestic and offshore companies.
Goal c: This budget will not be able to take this country from the ICU to the recovery ward, from economic crisis to economic growth. It lacks a proper macroeconomic narrative and a soaring vision of the country’s ability to emerge with sound economic fundamentals as a strong, self- reliant nation built around a home-grown model of economic development fulfilling the pledge of a self-reliant and vibrant Mauritius adhering to good practices on monetary and fiscal transparency and accountability.
Our main indicators already appear to supply irrefutable proof that the economy could fall off a cliff anytime now. The country’s macro-fundamentals stand the risk of further deterioration. With a consolidated budget deficit of 17% of GDP and Gross Public Sector debt nearing 90% of GDP, the flooding of the market with liquidity will accelerate the depreciation of the rupee, aggravate the already high debt to GDP ratio and ultimately the economy will end up with soaring levels of inflation and unsustainable Current Account deficits in the BoP. Mauritius will have to make painful adjustments over several years to bring the public debt burden back to sustainable levels . We will have to pay the high price of social unrest as a result of falling real wages, falling purchasing power and increasing levels of poverty.
Mr Payadachy, given that the collection of the disjointed announcements of various spending plans from the different sectors/ministries/funds is a hopeless hotch-potch, with no common vision, goal, direction or identified target for economic betterment, it will be difficult to find fault with this commentator who summarised it all so succinctly –“If you are just a tactician, the lack of strategy will catch up with you. If you chase headlines, you will end up with headlines chasing you.” Indeed, he is already making the headlines; the populist policies that they started with the pensions hike are catching up with them and which they have come to realise now are unsustainable , so will the cooking up figures in this budget, the raiding of the Central bank, the lack of a coherent strategy and their irresponsible ways of managing the economy.
