(Published in L'express, another version title " No room for Manoeuvre", May 2021)
A number of comments have recently been made about an alleged room for manoeuvre available to the Minister of Finance for the forthcoming 2021/22 budget. The most common line of argument is that BoM provided a grant of Rs60 bn to Govt in 2020/21, and since some Govt expenditures have been unspent, especially in extra budgetary special funds, there is surplus finance available for the Minister for the next budget. This reasoning is totally flawed and only serves to obfuscate the need for fiscal adjustment.
The budget deficit for 20/21 is expected to be around 15% of GDP. It excludes the grant of Rs60 bn from the BoM as Revenue, which already been transferred to the budget in Aug-Sep 20.
If the recent IMF recommendations are applied, then, an amount of Rs28 out of the Rs60 bn will be treated as BoM advances, not revenue, in addition to the Rs32 bn drawn from the BoM Special Reserve Fund, which is also considered as financing, not revenue. A similar previous transfer of Rs18 bn to Govt from the BoM Special Reserve Fund was previously treated in the 2019/20 budget as a financing item, not revenue.
The 15% deficit figure is only for Budgetary Central Govt and excludes extra budgetary special funds. A budgeted amount of Rs15 bn was transferred in Oct 20 to special funds, mainly for Rs9 bn as expenditure for Air Mauritius and Rs6 bn for social housing. Since not much spending has taken place in the special funds, the 15% budget deficit overestimates the extent of the fiscal deficit.
The true fiscal deficit is derived from a consolidation of the budget with special funds. Assuming that the budget transfer of Rs15 bn, or about 3% of GDP, to special funds has not been spent, the consolidated budget deficit would be lower i.e., around 12% of GDP.
Even if the total amount of BoM transfer of Rs60 bn is considered as revenue, the budget deficit would be around Rs8 bn, or 2% of GDP , but at a consolidated level it will show an overall surplus of Rs7 bn for the year 20/21, arising from a surplus of Rs15 bn in special funds.
Accepting the incongruity of a fiscal surplus arising from a BoM transfer in 2020/21 does not however mean that the Minister of Finance has room for manoeuvre for the next 2021/22 budget. If the outstanding balance of Rs15 bn in special funds is used to finance expenditures , it does not represent revenue, but a source of financing.
The fiscal deficit in 2020/21 is determined solely by the sum of revenues and expenditures in the budget and in special funds, and the use of surplus balances in the budget or in special funds does not represent revenue. If the amount of Rs 15 bn in special funds is transferred back to the budget as revenue , it does not increase the consolidated total revenue of the budget and special funds.
Even when holding surplus cash balances, Govt would still incur a deficit simply because revenues are less that outlays. The only consequence is that Govt would need to borrow less, and public debt would not rise as much. If this is the room for manoeuvre that is being perceived, then it is not worth talking about. The main issue is our elevated public debt . How to bring it down ?
A long-time deceptive practice by several Ministers of Finance has been to underestimate the fiscal deficit by carrying out spending in off-budget special funds, and then ignoring these expenditures by focusing only on budget expenditures for the purpose of computing the budget deficit. Examples abound – the National Infrastructure Fund in 1994/5, the Privatization Fund in 1998/99, and multiple funds between 2005 and 2014, and even more funds recently.
In the forthcoming 2021/22 budget, the same illusory trick will be adopted to present a lower budget deficit by spending heavily in special funds. (off-budget funds , which has been repeatedly criticized by both the IMF and WB for weakening the effectiveness public financial management)
Another major frequently-used deceptive device is to artificially lower the budget deficit by reconfiguring expenditures as equity investments. Various equity injections in financially moribund institutions, like the Waste Water Authority of the Cote d’or Sports Complex, are disguised expenditures to meet their operating deficits.
The recently announced Govt equity investment of Rs11.9 bn in the National Property Fund similarly represents a disguised bail-out of ex-BAI conglomerate companies. Govt expenditure in 2020/21 should in fact be higher by Rs11.9 bn, which clearly washes out even a hypothetical Rs7 bn fiscal surplus.
But With the accumulation of high successive deficits, the build up in public debt has been pushed to unsustainable levels. Our Public Sector Debt is considerably heavier in Mauritius than in peer countries and Moody’s may consider a further downgrade if there is a continued deterioration in the relatively elevated debt burden.
There is simply no room for budgetary maneouvre. Govt will have to make hard choices, or else invite another Moody’s downgrade, which could further aggravate uncertainties, heighten risks, and undermine confidence. The alarm bells from Moody’s, the IMF and now the World Bank are ringing loud and clear. Govt must commit to a credible macro-fiscal adjustment to restore debt sustainability, or else the country will drift further towards a potential financial crisis, with far reaching economic and social consequences.
