Inexact and flawed arguments of the Minister of Finance

First flaw: Mr Payadachy reminds us that “En tant que gouvernement responsable, avec une pandémie, nous avons utilisé toutes les recettes disponibles à travers le monde et nous avons utilisé, oui, le quantitative easing parce que c’est ce qui se fait à travers le monde, en particulier dans les pays avancés. Donc, pourquoi les pays avancés peuvent l’utiliser, et là, il n’y a pas de critique de la part du FMI,et nous en tant que pays en voie de développement, on n’a pas le droit d’utiliser ce genre de mécanisme parce qu’on est un pays en voie de développement...”

This is inexact on two points. The first one is that, strictly, we have not been carrying out quantitative easing (QE) - QE can be described simply as a large-scale purchase by central banks of Govt securities on secondary markets - Yes, most of the Central Banks in the developed economies and elsewhere have been implementing QEs. We, instead of QE, we have had recourse to an extreme form of monetary policy -money creation or printing money by crediting Rs 60 billion to the Govt’s account at the central bank . The central bank can thus print money for Govt by just adding an entry on the asset side of its balance sheet, or, by holding a zero-coupon non-repayable or perpetual bond issued by Govt. Spending by the Govt will thus inject this money in the financial system.

The second one is that the IMF is not against QEs which should not be confused with our resort to unbridled debt monetization by the BoM which is disapproved by the IMF. The IMF does mention that our “ Parliament amended the law governing the central bank to allow for a range of UNCONVENTIONAL FINANCING MEASURES, including one-off exceptional transfer (grant, not advance) from the central bank to the government of the amount Rs 60 bn (12% GDP)"; IMF also cautioned us that “Direct central bank lending to the government should be a last-resort mechanism, considered only where it is not possible to obtain enough financing from any other source. Moreover, it should be on market terms, restricted in time, and with an explicit repayment plan over the medium term. Otherwise, the monetizing of deficits risks undermining the long-term independence and effectiveness of the central bank, since concerns may arise about its ability to keep inflation under control in the future. This would unanchor inflation expectations and add to pressures on the currency like in Zimbabwe.”

Second flaw: We are being told that “le déficit budgétaire devrait s'élever à 4,1 milliards de roupies ce qui représente seulement 0,9% du PIB. En ces temps incertains, le déficit que nous prévoyons est l'un des plus faibles au monde. En comparaison, la France a récemment révisé son déficit budgétaire pour 2020 à 11,3 % de son PIB. Au Royaume-Uni, le montant que le gouvernement doit emprunter pour financer ses dépenses, c'est-à-dire son déficit budgétaire, devrait atteindre 390 milliards de livres pour l'année fiscale en cours, soit 19,6% de son PIB. Il s'agit du déficit le plus important de l'histoire britannique en temps de paix. .......Ce ne sont là que quelques exemples de l'augmentation des déficits dans le monde entier.”

First , Mr Padayachy persite et signe, ignoring the IMF’s rectification/censure in the sense that we should not be treating the Rs 60 billion transfer to Government from BoM as revenue but as a financing item in our budget deficit calculations. On the basis of the Government Finance Statistics(GFS) methodology, the consolidated budget deficit as a % of GDP works out to be -11.3 for FY 2019 and -15.7 for FY 2020.

Second, our MoF is intentionally not comparing likes with likes. IMF categorises Mauritius among the Emerging Market and Middle-Income Economies(EMMEs). While we are registering elevated double-digits budget deficit levels, for the EMMEs the average level of the overall fiscal deficit was -4.9% of GDP for FY 2019 and is expected to widen to -10.7 % of GDP in FY 2020 and for the Sub-Saharan African countries, the average level was -4.2 percent in FY 2019 and is projected to be - 7.6 percent of GDP in FY 2020 for the region as a whole. In Sub-Saharan Africa (SSA), we were thus ranked as the worst performer in FY 2019 and among the top three countries that are expected to register the highest fiscal deficits in FY 2020.

These figures show that we entered the COVID-19 crisis with significantly less fiscal space and this has hampered our capacity to raise additional spending to mount a better crisis response without having recourse to money printing policies that risk derailing the economy through accelerated depreciation and inflation and even jeopardising the recovery and affecting social stability.

Third flaw: This one is the icing on the cake. Payadachy cannily does not refer to gross debt but to net debt as % of GDP- “... La dette nette du secteur public en pourcentage du PIB devrait s'élever à 81,8% pour l'année fiscale 2020-2021. En comparaison, au Royaume-Uni, la dette en pourcentage du PIB devrait passer à 108,5% du PIB. Aux États-Unis, à 136% du PIB. En France, à 118,7 % du PIB.En Italie, à 161,8% du PIB. Ce ne sont là que quelques exemples. ....A l'échelle mondiale, les niveaux de la dette souveraine ont globalement augmenté pour atteindre un niveau record de 100% du PIB mondial. À Maurice, la dette a augmenté mais elle reste bien en dessous du seuil de 100 %.”

No, Mr Payadachy, Gross debt -as defined in our Public Debt Management Act and by the IMF - and not net debt, should remain the right measure of public indebtedness. If we include the quasi-fiscal debt raised by the BoM to finance the exceptional Rs 60 billion grant to Govt, our Public Sector Debt as a % of GDP reaches the 100% mark as at September 2020.

Again, Sir, your attempted comparisons are flawed, they’re like chalk and cheese. Rather than the advanced economies which can afford to have elevated levels of debt, more valid comparisons would be the EMMEs and SSA countries. For the EMMEs the projected level of debt as a % of GDP in 2020 is 62.2 and for SSA, it is 55.6 whereas for advanced economies it is 125.5.

Thus, at the onset of the Covid-19 crisis, we had elevated debt and weak growth prospects; now we are in a markedly worse position than at the beginning of the crisis with the high risk of debt distress or already in distress. Are we moving towards the Mugabe model ?

Gita Gopinath, the IMF’s chief economist, recommends that fiscal policy should play an essential role in economic recovery. She however warns that “ It’s not as if one should abandon concerns about increasing debt, I would be very, very careful about that. …. To work well, it is very important for countries to have medium-term fiscal frameworks to ensure that debt remains sustainable. And these have to be credible frameworks.”

In the current absence of a credible framework to restore debt sustainability, it is likely that the explosion of our debt level will end up disastrously with far-reaching economic and social consequences especially for the future generation that will have to bear an undue burden of drastic economic adjustments.

Last flaw but not least : Triumphantly, our MoF asserts “Nous n’avons pas eu de hausse de l’inflation qui peut en résulter avec une augmentation de la masse monétaire. Nous n’avons pas eu. Nous avons pu contenir l’inflation…” Let us not rejoice too soon.

Recent research carried out in the US by Diewert and Fox notes that out-of-stock products during and after Covid are likely to have higher market-clearing prices than those for continuing goods, potentially introducing a downward bias on the CPI.

The main reason for the difference is that the CPI keeps many expenditure weights such as clothing and footwear at pre-Covid levels and these items have on average declined by more. The inclusion of these prices, despite the fact that people are not spending as much as usual, means that CPI understates inflation.

Further research by Harvard economist Alberto Cavallo and published over the past week shows that by allocating different weights, his ‘Covid CPI’ will provide a better idea of how prices are shifting for the average person. Cavallo flags that, even with this method, we might be underestimating inflation and that Inflation is higher than the official numbers.

Moreover, with the accelerated depreciation of the rupee, the inflationary expectations are being revised significantly upwards, and as pointed out by the IMF, the Central Banks with limited credibility and poorly anchored inflationary expectations, may find themselves constrained in their ability to use monetary deficit financing without adding to inflationary pressures.

And we – le petit peuple- are already being impacted by the foul amalgam of a depreciating rupee, the spectre of inflation reaching gale force and economic distress. And this comment from a distinguished commentator could not have summarised it better – “Avek ban Zeni dan Statistics Mauritius et Sandya …dan Standards Mauritius, et zourlanus ki gobe tou san question, et politiciens ki blaguer ki zot p 'control' inflation, we are well and truly being ...., as the English would say!”

23Prakash Neerohoo, Harish Chundunsing and 21 others

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