Didn’t you notice that in the latest IMF report we seem to have a more or less toned down version on debt and the gradual fiscal consolidation- less of the tough instructions and more of accommodations- which may perhaps explain the delay in the publication of the Staff Report for the 2022 Article IV Consultation.
On fiscal adjustment, without any assumed revenue measures , revenue as a % of GDP remains stable at 23.6% of GDP in IMF data and 26% in Budget data. IMF seems to have adjusted revenue and grants by 2.4% and expenses, which exclude Special Funds and capital transfers, are planned to decline slightly over time. Thus the budget deficit is reduced gradually to 3.7% by 27/28 over 5 years. Note that the net acquisition of financial assets are adjusted down by about Rs 11 bn as only 50% of the proposed equity sales of Rs 22 bn are expected to be realised.
On public debt, (see the selected issue “Reinstating fiscal rules in the post-pandemic Mauritius: Scenarios and Policy options), the IMF carried out all kinds of contortions and concessions about transition periods for the operational rule of a budget deficit of 3% of GDP and the medium term debt anchor of 80% of GDP , trying to convince us that Mts will be able to push “the debt ratio to the anchor in FY2026/27.”
Why is the IMF so keen to get us off the hook ?
It looks like the IMF is already beginning to engage with the country, as if in a stand by program. IMF is giving technical assistance on the new BoM and banking laws, and a host of other issues. IMF is urging stronger fiscal consolidation, but gradually over the next 5 years.
What IMF is basically saying is that let bygones be bygones, and let us start afresh with a 5 year time horizon to set things straight, through the new monetary policy framework, interest, exchange rate and fiscal adjustments. This can be done without a formal IMF program, but under a close engagement with the IMF that would give confidence to investors and rating agencies.
In fact, the IMF fiscal adjustment plan for Mauritius will not be plain sailing given this Govt's propensity for populist policies …..especially in our context where “elections become auctions where political parties compete to be more generous than the other to voters on pensions and other bread and butter issues…”
So far Govt seems to be following the IMF plan on interest rate and exchange rate adjustments and even some fiscal adjustments relating to petroleum prices and capital expenditure. What will be most doubtful about the IMF plan is whether govt will not back out on promises of pension reforms ! Reducing current expenditure relative to GDP, when pensioners and govt employees will push for compensation for inflation will be difficult. So the IMF plan will not be such an easy ride !
I think that Govt will do a minimum on the IMF plan, keeping its engagment with the IMF while warding off any risk of downgrading, at least until the next general elections, whether in 2024 or before. It will continue to use inflation to raise revenue and reduce debt, while delaying and holding down on expenditure increases-avoiding any unpopular major pension reforms and counting on some amount of Indian emergency financial assistance. ......
The IMF plan is a classic prescription of adjustments needed for improved macroeconomic equilibrium, centered on reducing aggregate demand-forcing the country to live within its means. Supply side reforms are for the long term. Govt strategy is instead based on the chimera of accelerated growth. The IMF plan makes broad sense, but the key issue is how to implement it?
If the new legislation is adopted soon, with a new monetary policy framework to effectively fight inflation, with some actions pointing to stronger fiscal consolidation (like the targeted increases in water and electricity prices and petroleum prices ), Moody’s would likely not take any rating action.
