(Published in l'express Nov 2020)
The inflationary pressures which in normal times would have led to a consequential wage-price spiral is the making of this regime.This government amended the law governing the central bank to allow for a range of unconventional financing measures including a grant from the central bank to the government of an amount of Rs 60 billion.
It’s like we have given a gambling addict the keys to the casino and we are paying the price today. The need to award Rs 375 as wage compensation to workers to catch up with the loss of purchasing power and provide financial aid to SMEs to meet the cost of this measure is the result of the irresponsible policies that have caused inflation to rear its head again.
The Mauritian economy is being burdened with a legacy of populist and misguided policies confounded further by the doubtful logic of the Minister of Finance, obsessed with consumption as the engine of growth, especially in the present exceptional circumstances. Many of these policies not only fail to make economic sense but are also harmful to recovery growth.
What are the implications of these populist and misguided policies?
We have entered the crisis with elevated debt and weak growth prospects. While pre-Covid, we had been tossing around like a boat in a storm, in the face of the fury of the Covid economic storm, we seem impotent to generate new ideas and policies to brace the beleaguered economy, clinging fatalistically and cynically to a crumbling status quo.
Macro indicators continue to be a cause of worry. GDP is set to shrink by a record 15 per cent this year. Private investment shows no signs of pick-up, exports are at a low and tax collections are falling. Private consumption has grounded to a halt. There has been widespread disruption in manufacturing, services, supply chains and logistics. The tourism sector is likely to remain impaired by Covid-related containment measures and consumer behavior changes - the effects of which will be visible in the corporates’ performance in the coming quarters and in the innumerable job losses. The global strengthening of the US dollar is likely to amplify the short-term fall in global trade and economic activity. Thus it will be unrealistic to expect a V-shaped recovery or a sharp rebound. Growth should rebound modestly in 2021 but a return to 2019 levels won’t occur until 2024 or later.
We have known for a long time that higher taxes will be necessary if public finances are to be sustainable, given the pressures from an ageing population. The Covid-19 crisis just makes the recovery far worse, in terms of both debt and deficits. Instead of making greater efforts to raise revenue and prioritise spending, we capitulated in our plans to raise taxes on the super-rich and continued with our wastefully extravagant populist spending policies with the end-result that our consolidated Budget Deficit as % of GDP peaked at -15.7 for FY 2020 and Public Sector Debt as a % of GDP has already reached the 100% mark.
In the current absence of a credible framework to promote growth and fiscal restraint and restore debt sustainability over the medium to long term, inflation will be pumping up, the fiscal deficit getting higher and the official exchange rate dipping lower and lower while the central bank keeps losing reserves . The situation is really going to be dramatic. When the sense of emergency is gone, rising debt levels would come back to haunt us and we may see a forceful return of social discontent throughout the country and drastic economic adjustments involving higher taxes, more austerity, the sale of state assets and pay freezes for public sector workers.
Has our debt risen too far too fast, and should we worry about it? Is there a critical level of debt that marks a breaking point?
Payadachy had tried to downplay the explosion of our debt level by comparing us with the high debt levels attained in the advanced economies. But if he had been advised properly ,he could have argued, instead, that if the debt ratio can be held stable with little effort, there are fewer reasons to be worried about sustainability and crisis. Indeed, as long as nominal interest rates are below nominal growth (i.e. r<g) there is no additional burden in keeping debt-to-GDP levels stable. Put simply, all interest can be paid by issuing new debt and the debt ratio would still fall. Alternatively, the debt ratio can be kept stable even while adding new debt unrelated to interest (to the tune of the difference of r and g times the debt ratio).
But unfortunately, we may be presently in the unfavourable and risky situation where our rates are exceeding our growth by a large margin. The inflationary pressures and the higher inflationary expectations, the positive risk-rate correlation, the need to build reserves and worry about outflows, and the supply side- drivers (labor input, capital input, and productivity growth) that have been pulling down our trend growth for quite some time now are delivering an unfavourable r-minus-g regime.
Several red lights are flashing. The debt created by the pandemic is unprecedented and will have to be repaid mainly by those who are young today. Many young Mauritians think the system is geared towards the elderly, and they feel the sense of burden. They know they will have to work harder to support all this, but they also know they won’t even benefit from the pension system because it will not be able to sustain them when they reach retirement age.
This regime does not have an internally consistent economic plan to tackle the economic and financial fallout from the coronavirus pandemic, revive the fortunes of the economy and thus recomfort the future generation that it will not be dimming their hopes by leaving them with a bankrupt economy.
