With the Covid-19 pandemic, Mauritius had two "extremely difficult" years. "For the first time, we had a decrease of 15.5%. The economy has declined." This is what Pravind Jugnauth said on Wednesday, February 23, 2022. The Prime Minister (PM) spoke at the inauguration of an Administration Building of the Pamplemousses District Council in Calebasses ."In the face of the Covid-19 crisis, the government has done a lot. We were able to buy drugs as well as vaccines. I ask those who are elderly and vulnerable to get their booster dose given as soon as possible, "said the PM.
Stop blaming COVID-19 for your reckless management of the economy !
The PM views the pandemic as the root cause of the nation's economic woes. The economy is in an economic mess that cannot be attributed solely to covid 19. Much before the onslaught of the pandemic our main economic fundamentals were in the red– a plateauing real GDP growth, a current account (excluding Global Business Companies) to GDP ratio above 11%, an imbalance between investment and savings, unsustainable budget deficits and public debt whereas sector-wise, 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 2019 IMF Art IV report had raised some concerns about the vulnerabilities in the economy that needed to be addressed , namely a) the rising public debt and high budget deficit, b) the rising current account deficit, c) a rapidly ageing population, d) upside risks to inflation, and e) the need to maintain strong and independent institutions.
They advised us to create more fiscal space to meet the increasing expenditures ahead on health and social security and to respond to unexpected shocks. The country can ill afford the largesse of the government.
The IMF also recommended that the authorities stay vigilant against any inflationary pressures as there are upside risks to inflation. This meant that the nominal interest rates which were at historically too low levels (and real market interest rates were negative which discouraged saving and aggravated the external deficit, and again endangering macroeconomic stability) to increase, thus the need of a tightening of monetary policy to tackle the emerging inflationary pressures.
Our unconventional monetary finance via BOM grants to govt paved the way to “fiscal dominance whereby monetary policy decisions are made subordinate to the fiscal needs of the government.” Govt depreciated the rupee deliberately to create valuation gains on external reserves for the BoM, in order to finance its fiscal deficit, thereby also fuelling inflation and reducing living standards. The BoM has been a willing party to this devaluation policy, in total contradiction to its role as independent institution responsible for controlling inflation.
The monetizing of deficits has thus undermined the ability of the BOM to keep inflation under control . Now the country is heading towards a deeper crisis .
Are we not paying now the consequences of the largesse of Government ?
( Compare with reforms carried out in Jamaica- Prior to the pandemic, Jamaica had successfully stabilized the economy, turning a fiscal deficit of 11 percent of GDP in 2009 into a 1 percent surplus in 2019, and reducing public debt from 142 percent of GDP in 2009 to 94 percent by 2019. The stabilization paid off through a sharp decline in interest rates, and the government’s interest bill fell from 17 percent of GDP in 2009 to 6 percent in 2019.
When the economy was hit by the pandemic, the government temporarily reduced the fiscal balance target to increase spending on health and social protection and reduced the VAT rate.
To safeguard the country’s hard-won economic stability and in line with the Fiscal Responsibility Law, the government aims to reduce public debt to 60 percent of GDP by 2028. This will further reduce interest payments, creating scope to boost spending on education, infrastructure, and poverty reduction, as well as improving the country’s resilience to natural disasters.)
In the recent article titled “ Should Monetary Finance Remain Taboo? by Itai Agur, Damien Capelle, Giovanni Dell’Ariccia, and Damiano Sandri , their analysis of the association between the monetary base and inflation across several countries back to the 1950s found that …. “a monetary expansion has modest effects on inflation in countries with strong central bank independence, low initial inflation, and small fiscal deficits. But the effects are much stronger if central bank independence is weak, inflation is high, and fiscal deficits are large. The analysis also detects considerable non-linear effects. While small expansions of the monetary base are associated with modest increases in inflation, large monetary expansions can have much stronger effects on inflation.”
Its conclusion “Most importantly, possible monetary finance operations should be decided exclusively and independently by central banks with the sole goal of ensuring economic stability. This is admittedly a difficult standard to achieve. A difficulty seen by some as sufficient reason to ban monetary finance altogether. Indeed, in this context, departures from central bank independence can be very dangerous. History abounds with examples where the use of monetary finance under inappropriate circumstances had devastating effects on economies and livelihoods. “
The worst fears about the economy are coming true- a result of the reckless management of our economy by the irresponsible duo – the Minister of Finance and Governor of the BoM.
