Our leader of the Opposition saw it coming; his PNQ on the 14th month bonus had spoiled their plans as this measure was supposedly under discussion for possible implementation. Such measures fit in this regime’s populist ideology and their electorally-dictated populist compulsions which have come to dominate their socio-economic policies.
Our populist demagogues , bent on winning its electorate with whatever populist measures, had to come forward with as good a measure as the 14th-month bonus - Why not a monthly salary compensation of 10% of basic salary, with a minimum of Rs1,500 and a maximum of Rs2,000 which is higher than the inflation rate at 7.1 % ! Pada’s populist rather than economic logic at work !
Their sloppy management of the economy, both pre- and post-Covid, has privileged short term political gains and populist measures over good fiscal governance and rectitude that would have put the economy back on a more sustainable fiscal path and rapid recovery. “Money printing, high budget deficits and public debt levels and the resulting soaring infaltion have been the key steroids. This is not sustainable but worse, the long term potential growth of the economy has not really improved.”
We were already feeling the effects of these populist and irresponsible policies.
And now we are being served with more of the same demagogic politics, same populist politics , à la Père Noel , which will be having a huge adverse impact on the economy.
What is the likely impact of the wage compensation increases on the economy ?
The wage compensation will cost Rs10 bn to Govt, and Rs12 bn to the private sector in 2024, including the upward adjustment in the minimum wage. Wage compensation will exacerbate inflation in two ways: by raising costs which will feed into higher prices on the supply side, and also by greater consumption demand pressures. Govt deficit financing to provide for additional CSG income allowances will also expand consumer demand.
While increased costs will have a direct impact on inflation, the increased demand for imports and foreign exchange will intensify pressure on the rupee to weaken, and ultimately add to inflation. There is already an unsatisfied demand for imports, mostly due to informal foreign exchange restrictions.
Imports of goods in real terms in 2023 are not projected to grow in 2023, according to the latest forecast of Statistics Mauritius in Nov 23, and are still 20% below the pre-Covid 2019 level. In spite of the suppressed demand for imports and the recovery of tourism earnings, net foreign exchange reserves have fallen to just over $5 bn as a result of the external deficit. A sizeable portion of these reserves are poorly liquid, due to the valuation effect of higher US interest rates on the BoM’s foreign investments. The adequacy of BoM external reserves to support the rupee is thus significantly constrained.
Although the BoM has stabilized the rupee against the US dollar by intervening on the foreign exchange market, the rupee has still depreciated by about 2.5% against the Euro in the last 2 months, and by 3% on average against the main trading currencies between 2022 and 2023. The positive interest differential in favour of the US dollar against the Rupee is also adding to the strain on foreign exchange reserves.
A critical economic and financial review by the IMF in the wake of a forthcoming IMF Article IV consultation mission in early 2024, followed by the threat of an outlook downgrading by Moody’s, could precipitate a financial crisis. Major policy issues of concern would relate to central bank financing of quasi-fiscal operations, the lack of monetary tightening to control inflation, and fiscal debt sustainability.
Inflation is curtailing purchasing power, especially of the lower income groups. It is also bringing more revenues to Govt in the short term, but the wage increases to compensate for inflation will intensify pressure on the rupee to weaken and/or lead to a foreign exchange crisis.
The global economy is still reeling from a series of shocks - the Covid pandemic, armed conflicts and geo-political instability. Further shocks cannot be ruled out, which could affect capital flows to and from Mauritius, and further enhance the country’s vulnerability to a foreign exchange crisis. The formal imposition of foreign exchange controls will then become inevitable, which will adversely affect the financial services sector, investment and the overall economy.
A special word for our SMEs and micro-entreprises: These enterprises, which are vital to achieving productive employment and decent work and contributing to human-centred, green and inclusive growth, are already suffocating-they have had to bear higher salaries, higher CSG, PRGF, higher interest rate charges , higher energy and diesel costs, costly raw materials in the face of uncertain business conditions; they will have no choice but to close down and lay off their workers. Many of these enterprises have over the years contributed in building up profitable competitive niche markets for the country, now their survival is at stake !
Conclusion :
We , taxpayers, feel that we have been conned again ; the billions collected, (especially via inflation tax) instead of being passed on to consumers in terms of sustainable, inclusive and broad-based growth that would have made a difference in the welfare of the common citizen, are financing more of populist measures that are likely to be only a temporary reprieve for the population.
