Avoiding pitfalls and increasing economic scope

Current uncertainty clouding global economic conditions seems to indicate that we’ll need to put in extra effort to pull up the economy… Times are difficult

Comes the month of December, people go out to buy all and sundry consumer goods. It’s like a pent-up emotion waiting to find expression in the purchase of goods. The end-of-year bonus acts to stimulate the demand. We don’t know how things will turn out to be this end-of-year.

Ordinarily, some among the purchasers used to save enough money all year long in order to be able to buy up something they needed – a kitchen equipment, a piece of furniture, electrical and electronic gadgets, clothes… It’s a reminder of the days when household income was really low and the purchases came as a crowning realisation after a long period of abstinence and persevering saving. It also reminds us of a time when people were forced to live up within their means.

Then, there came a shift in the pattern of consumption. Consumers bought up at any time of the week, the month, the year, things that came in sight and appealed to them as something that would fulfil them. The heyday of credit dawned. People would borrow money for anything involving a cost higher than what they could afford immediately from their normal income: to buy up a smartphone, a foreign holiday, a vehicle or an additional vehicle…

Technology which facilitates online purchasing brought consumers within even easier reach of what they want to buy up: one can order goods almost any time of day or night from stores anywhere in the world provided one has ready access to electronic money transfer devices, such as credit and debit cards. All this has facilitated sustained consumption, based on debt a lot of the time. This process has also helped keep the economy growing here and in other places.

But when buyers run out of money and can’t repay debts incurred, debt defaults take place. Institutions which have lent heavily in the process are confronted with non-performing loans. One of the factors which weighed heavily to bring in the 2007-08 financial crisis was a huge mountain of unpaid credit card debt across the board, involving the best known names among the planet’s financial institutions. We’ll need to keep our debt factor under good control even as we devise means to gainfully employ safely the available excess liquidity with our financial institutions.

A financial institution which has run out of capital under the process of poorly managed lending has to set aside provisions against unpaid debt. If it keeps running out of cash due to debts not being repaid, it will need to be capitalised and re-capitalised as the bad debts swirl up. This is what brought about the economic and financial crisis from which the world has yet to recover. We need to steer clear of such an unmanageable situation.

Investors are not making the huge investments they were making when the upswing of consumer spending was at its peak. In fact, workers who have secured new jobs paying a less steady or guaranteed income think twice before spending away their money. So, demand for more goods and services and, consequently, for additional investment is continuing to remain weak across countries. All this is the sequel to the earlier period of bad lending. The economic downturn is due to bad lending. And low economic performance is, in turn, sharply slowing down international trade – a potential danger to an open, small-internal-economy like that of Mauritius.

An important factor affecting Mauritius’ ability to get the economy going at full speed springs thus from the external sector. Our total exports in September 2016 were 4.2% lower compared with September last year. Similarly, exports during the second quarter – latest quarterly data available — this year were by 15.3% lower compared with the second quarter 2015. During the same quarter this year, exports of the EPZ sector were by 10.9% lower than last year. Something is not working up in our favour.

The World Trade Organisation states that global trade has considerably slowed down: trade is now on track to expand more slowly this year than world GDP, for the first time in the last 15 years. As an example, Asian exports are set to grow by a mere 0.3% this year, compared to an average annual rate of growth of 8% the past 20 years.

In the process, developing economies such as Mauritius and African countries, which depend on exports for their development, have been hit by this slackening global situation. Current uncertainty clouding global economic conditions seems to indicate that we’ll need to put in extra effort to pull up the economy against this not-so-rosy picture of global prospects. Times are difficult.

Anything is good for us if it helps perk up our export trade. That includes implementing at long last (after 11 years perhaps) a Comprehensive Economic Cooperation and Partnership Agreement (CECPA) with India, which it is now proposed to do. This may not immediately reverse our adverse balance of trade with India but it can open up new other partnerships.

If we manage to get the necessary technical support to develop new products and access additional markets by such means, it could bring about for us more export trade and investment with third countries. We need to explore all possible means available to get new anchors of economic growth by growing our exports of goods and services to third countries.

Anil Gujadhur