“A government of national unity could be a good idea

Interview: Rama Sithanen

if it allows Mauritius to make the choices to avoidsliding into economic chaos”

* ‘Why not have Paul Berenger as DPM and Minister of Finance at this critical time? And Ramgoolam at the Presidency so that he does not throw the spanner in the works and wreck the deal?

* ‘Poverty and hunger will rise. If we want to support poor people, we should support poor people instead of helping everybody’

* ‘The relentless depreciation of the rupee is an assault on the poor and the middle-income groups’

The economic consequences of the Russia-Ukraine conflict that began on 24 February are already very serious. Energy and commodity prices have surged, adding to inflationary pressures from supply chain disruptions and the rebound from the Covid‑19 pandemic. Price shocks will have an impact worldwide, especially on poor households. Should the conflict escalate, the economic damage would be all the more devastating, stated the IMF one week after the war started on February 24. Mauritius is already feeling the consequences of the war with potentially devastating social consequences, says Rama Sithanen, former Finance minister, in today’s interview. ‘We have just emerged from two very difficult years on lives and livelihood due to Covid-19. Our recovery is still moderate at best, uneven and fragile. Uncertainty, risks, volatility and instability unleashed by the war could severely damage Mauritius.  Besides proposing a number of economic measures, he comes up with the suggestion of a government of national unity, which he thinks could be ‘a good idea if it allows Mauritius to make the choices to avoid sliding into economic chaos similar to what we see in Sri Lanka today’…

Mauritius Times: After the economic havoc caused by the coronavirus, now concerns about a global recession have returned with what appears to be another long-lasing crisis – the war in Ukraine, opposing the western world to the Russians. The UN’s trade and development body has downgraded its global economic growth projection for 2022 to 2.6% from 3.6%. Do you think we are indeed about to enter a global recession, and what would it mean for Mauritius?

Rama Sithanen:The Russian invasion could not have come at a worse time for the global economy. Many countries were struggling to recover from the impact of the Covid pandemic. There was already high inflation, unmanageable debt anddeficit, and financial turbulence. The war has aggravated risks and instability that will reverberate across the world. The adverse shock willshrink outputwhile inflation will surge with skyrocketing food, fuel and fertiliser prices. The scale and ferocity of the economic spilloverswill vary acrosscountries depending on their specific context and circumstances and on whether the war escalates.

Mauritius is already feeling the consequences of the war with potentially devastating social consequences. We have a very open economy that relies on exportsand imports of goods and services, on cross border investments and movement of people. We have just emerged from two very difficult years on lives and livelihood due to Covid-19. Our recovery is still moderate at best, uneven and fragile. Uncertainty, risks, volatility and instabilityunleashed by the warcould severely damage Mauritiusif there are disruptions in the supply chain of energy, food, fertilisers, and other inputs critical to our country. 

* You would not expect in these circumstances for growth to rise to 6%, would you?

Economic growth will falter while inflation will soar to double digits. Energy prices will increase significantly, food costs will escalate and other inputs will surge. Rising interest rates in the US, the ban on export of some products and surging freight costs will coalesce to inflict more economic harm. Financial markets and investment flows could work against us as there is a capital flight to safer asset classes. And to pour fuel on fire, the relentless depreciation of the rupee will destroy purchasing power. It is an assault on the poor and the middle-income groups who will be further disadvantaged. This is the perfect storm threatening us.

It is too early to fully grasp the full impact on growth. It will obviously be lower than 6%. We will lose most tourists from Russia and Ukraine who are high spenders. There could be a severe trade shock. And an income effect from the falling purchasing power of many EU countries with adverse consequences on discretionary consumption and travel propensity. Uncertainty and fear could also impact EPZ, ICT and global business. 

How big the plunge in output will depend on the duration and intensity of the war and the impact of economic and financial sanctions and their collateral damage on other countries. After the huge contraction of almost 15% in GDP in 2020 and the likely growth of around only 4% in 2021, it will be almost a recession if growth were to decline to 3% in 2022. It means that we will take much more time to reach the level of 2019 GDP. 

* The IMF Managing Director has said that global economic growth this year will manage to stay in positive territory despite the war in Ukraine, but a number of countries with already weak economies may be tipped into recession. Does Mauritius fall in that latter category?

The trade, economic and financial ramifications will be felt across the world with varying degreeof scale andseverity depending on the state and theresilience of economies. Growth could stay positive depending on how the US manages the extremely difficult task oftaming inflation without killing growth. If the Fed is too aggressive in terms of rising interest rates and ending its easy quantitative monetary policy and scale back its balance sheet too fast, it could derail the economy and we will have the worst of two worlds: low or even zero economic growth with high inflation. Basically, a stagflation. That would be a disaster.

Mauritius has weak and/or very weak economic fundamentals going into this potentially catastrophic economic cycle. We had structural deficiencies well before Covid which simply amplified them with a drying out offoreign earnings from tourism. Now the war will make a bad situation even worse. Our GDP is far below its 2019 level, the budget deficit is high while debt and its costly servicing are unsustainable. Inflation is very high, investment and savings are low, the external balance is very weak with a massive trade and current account deficit. And we hardly have any fiscal buffer.

The economy is wobbling. There is an acute shortage of US$ and other currencies in the market. A black market has started to develop where even banks are selling outside the range recommended by the Bank of Mauritius. In fact, we are already in a regime of exchange control by stealth as many people cannot obtain currencies from their banks. We may not tip into a recession in the strict sense of the word with negative growth. But the economic expansion could be very low if the war lasts, tourists defer their travel plan and corporates delay their investments.

*There is now the issue of inflation and higher cost of living with the prices of essential commodities and petrol going up and which have become a matter of concern for most people these days. There are also apprehensions about food security in the months ahead. Do you think it’s going to get worse for Mauritian consumers in the months ahead?

The big elephant in the room will be the devastating effects of accelerating prices on the purchasing power and quality of life of our compatriots. The combination of dismal growth and very high inflation would be an economic and social catastrophe. It is clear that higher food and energy prices along with supply shortages and bottlenecks will be the immediate inflictor of pain for low- and middle-income economies. Poverty and hunger will rise.

There were already signs of higher energy and freight costs prior to the war. The invasion has worsened the predicament with the prices of energy, food and fertilizer rising sharply. There is also the great danger of supply of vital commodities as countries embrace protectionist policies to prioritise their population. As a net food and fuel importer that relies very heavily on other countries, there is the twin risks of security of supply and rising prices.

* For having been minister of Finance yourself for a long time, what do you think Renganaden Padayachy should be doing in the current financial circumstances, and how much leeway does he have in light of higher public debt? Should he print more money, or should he go back to the Bank of Mauritius?

It would have been difficult for any Minister of Finance to handle such a combination of complex economic and financial factors in an environment of greater uncertainty, volatility and risks.

Minister Padayachy has fired most of his ammunition and his room for manoeuvre is tight with high debt and rising debt servicing. He has harvested all the crops from the Bank of Mauritius – from the Special Reserve Fund, to printing ofRs 60 bn to gift the government and the use of Rs 25 bn from the MIC. Hehas also completely depleted the reserves of many parastatal bodies such as the CEB, MPA, STC and FSC.

The BOM is undercapitalized and has hardly any fund to conduct adequately monetary policy for either defending the rupee or mopping up excess liquidity. The very timid intervention of the BOM to supply the market with currencies is choking the system and has created the conditions for a black marketby stealth.He may extract some additional rupees from the reserves of the BOM through the sustained depreciation of the rupee or print more money. But this would be counterproductive as inflation and depreciation will surgeand the currency shortage will deteriorate. If anything, interest rates may have to rise more to rein in inflation.

The Minister has spent most of his fiscal, financial and monetary firepower. To be fair, he was probably putting all his bets on a quick economic recovery, a regained momentum in tourismand the EPZ to bring much needed foreign currency. And not expecting a war in Ukraine with itscollateral damages on us.

Now that the economic tide is receding again, we find that RenganadenPadayachy has been swimming naked. He probably has neither gun nor ammunition to fight the new economic and financial war. The STC is broke, the BOM is under severe stress, and the size of public debt and its servicing are becoming unbearable. So, his fiscal and monetary space is very tight.

He will have to repurpose and be inventive,innovative,disruptive and think out of the box to ride out this tough and complexlandscape. He will be called to make some difficult tradeoffs.Unless he decides to kick the can down the road and pander to economic populism which will bring the country to its knees like Sri Lanka.

 *So, what should the Minister of Finance do? He surely cannot leave the situation unattended and allow the economy to tank and people to suffer…

First, he needsto be transparent about the economic predicament. Everybody is very concerned about the weak economic fundamentals, the lack of structural reforms to reverse the declining trend, the absence of economic leadership in charting out a clear roadmap to get out of this messand the poor governance of many institutions. And if we add the high propensity of Government to pursue economic populism, it augurs a difficult path for our country. The World Bank, the IMF, Moody’s, the AfDB and all independent observers are worried about the state of the economy and the near-term prospects.

Stop the strategy of denial.Minister Padayachyshould come clean about the poor state of the economy and explain the basic truth to the population. All the problems are not of his making even if someof his policies have aggravated the situation. There is no magical wand and no easy choices.

In the short term, he could lower taxationon petroleum products, grant higher subsidies on some food items, provide direct support to those most impacted by the massive rise in cost of livingand award a wage increase to compensate for higher inflation. All will either lowerrevenue or raise expenditure and increase the deficit and public debt. Unless he finances them from either higher taxation or lower spending elsewhere.

I believe the most pressing need is to identify ways to support families that are struggling to make both ends meet as a result of the surge in inflation resulting from higher costs in importing countries, rising freight costs, and rupee depreciation. He has some difficult and very complex choices to make.There will be painful tradeoffs to make as financial resources are limited.

He cannot support everybody by giving subsidies across the board. First, they are very expensive and not sustainable. Second, they can be highly regressive. Some help the rich disproportionately and penalizes the poor terribly. Take subsidy on cooking gas. Poor households consumeprobably one cylinder every three months while rich families use three cylinders every month.So, we are subsidizing rich people nine times more than poor ones.

There is a simple principle in fighting poverty. If we want to support poor people, we should support poor people instead of helping everybody and expect the poor to have a small crumb of the pie. 

* How should the Government support the poor in that case?

I would propose three specific, timely and temporary measures to protect their purchasing power. 

First,Government must design a policy roadmapto support the poor, the lower middle-income and part of the middle-income households. They have been terribly affected by the rising cost of food and other basic necessities. They spend around 75% to 80% of their income on food and basic necessities. They may represent between 25% to 30% of the population or 85,000 to 100,000 households. Their cost of living has gone up by at least Rs 2,500 per month. So, we should provide a direct support to these families until the situation improves to avoid a social crisis.And as measure of unity, solidarity and compassion, this support should be in place for 12 to 18 months.

At Rs 2,500 per month for 100,000 households, it would cost Rs 3 bn for one year. The total expenditure of Government is around Rs 180 bn comprising both recurrent and capital expenditure. Rs 3 bn represents around 1,67% of total expenditures. Not difficult to find savings from many cost items, declare war on wastages and eliminate inefficient expenditures for a compelling cause for 100,000 deserving compatriots.

At a push, Government can defer some expenditures, reprioritize some spendings, cut back on prestigious projects and slow down the implementation of some capital projects. So as to create fiscal space for this safety net to protect 100,000 most vulnerable families in a time of crisis.

There are three broad ways of providing this support. A voucher system to enable these families to meet the higher cost of the basket of goods and services. An in-kind support to have the same effect. Or a direct income support in cash to each of these 100,000 families.

Second is a temporary increase in personal allowances of taxpayers to ease pressure on the purchasing power of another segment of the population. Say around Rs 20,000 per individual taxpayer for 18 months. He could limit it to those who earn up to Rs 50,000 per month as theyhave been disproportionately affected in comparison to the rich.

Third is the price of petroleum products. It is a difficult one unless Government revises completely the price structure. However, as a gesture to contain spiking energy prices and its cascading effects, Government could remove some taxes to the tune of around Rs 6 on a litre of mogas and diesel to offer some relief to both motorists and producers that use energy as an input. Otherwise, the prices of many goods and services that use energy will skyrocket when inflation is already high. A vicious circle.

Government should also adopt measures to safeguard foreign exchange earnings as it vital to ensure a regular flow of currencies to avoid a deeper crisis in the availability of US dollars. We should do our best to keep the tourism flow into our country to avoid a deterioration in foreign exchange earnings. Similarly, for the EPZ and the ICT and financial services sector as they bring in the vitalcurrencies.Otherwise, we are heading toward a situation similar to Sri Lanka with high deficit, excessive debt and debt servicing, low tourism earnings, huge externalimbalancesand an acute shortage of currencies.

* Will these measures be adequate to contain the crisis?

These are short-term, specific, timely and temporary measures than can be taken to mitigate the ripple effects of higher inflation and to safeguard the vital flow of foreign currencies to our economy.

Then there are the medium- to longer-term policies required for food and energy security. By creating a conducive ecosystem to fast-track local food production to reduce our excessive dependence on imported products. This is not about prices but about strategic supply and security to feed our people. We have seen that we cannot continue to depend on faraway supply chain for 85% of what we consume.

We must accelerate domestic production and leverage the regional supply chains to enhance our food security. We will not be able to produce everything we consume.However, there are significant prospects in many food crops, from vegetables to fruits, from agro processing to livestock to reach around 50% of food security in the medium term.

If we include the creation of a regional value chain in the food sectorand encourage some changes in our consumption pattern, we could achieve the strategic goal of food security.The same applies for transitioning to sustainable and green economy with a focus on renewable energy to replace fossil fuel and energy efficiency to save power.

We need a robust strategic plan with good institutional support, an enabling environment, capacity building, technology adoptionand a supporting incentive framework.

The present incentive framework with massive tax exemptions encourages most landowners to engage in real estate development and sale of land at the expense of food crops and vegetable production, agro-industrial development and livestock.While there is a case for some moderate investment in real estate, it cannot be at the current pace that works against our national interestin food security.

Almost 90% of FDI is in real estate and hardly anything in the productive sectors of the economy. The choice of land use cannot be driven exclusively by the profit considerations of a few companies buoyed by tax exemptions from the state. This isa strategic food security issue for the country to feed its people. We have no choice than to prioritise food security.

We should reverse this current trend that favours real estate development and penalizes food security. Take a leaf from what is being done to discourage fossil fuel andsupport renewable energy in many countries. Basically, tax fossils and use the proceeds to subsidise renewables. We should do the same for food security and domestic production. To introduce a tax on large land sale and conversion and use the revenue to subsidise food security in five to six easily identified products.

Let me hasten to add that the beneficiaries of these subsidies would be almost the same companies as they are the largest land owners. This would deliver a better mix between their investment in real estate/ land sale and food security for the benefit of the nation.

The programme can be financed in the context of a strong partnership between public and private sectors. We could also use some of these resources to invest in a reliable food supply chain in the region to enhance our food security.

* What about a political solution to the current economic difficulties facing the country? We hear that the MSM leadership would these days be considering the option of reaching out to the Opposition, in particular the L’Entente de l’Espoir, if things were to get out of hand on the socioeconomic front by the end of the year. That would of course be “dans l’intérêt du pays”, as they would surely want us to believe. How would do you react to that?

I do not know what shape and form this ‘reaching out to the Opposition in the national interest’ by the Government could take.

In this very difficult context on the economic and social front andthe ferocious global headwinds and to enable the country to navigate this treacherous path with a sense of responsibility, a government of national unity could be a good idea if it allows Mauritius to make the choices to avoidsliding into economic chaos similar to what we see in Sri Lanka today.

In that context, why not have Paul Berenger as DPM and Minister of Financeat this criticaltime? His wide experience, knowledge, courage, sense of duty and responsibility and also agewill restrain him from sheer demagogy and economic populism. Whether he will be offered or will accept this proposition is a different matter.

Xavier Duval could be tasked to reinvigorate the tourism sector and rescue Air Mauritius. Arvin Boolell could help mobilise support for us internationally at Foreign Affairs as we will need resources. Mahen Gungaparsad could bring some much-needed innovation and transformation in the key education sector while Osman Mohamed could lead us into the green and sustainable economy, and Reza Uteem at the helm of financial services.

Gavin Glover at Attorney General to design and implement constitutional and institutional changes that are absolutely necessary after 54 years of independence and to embed accountability, transparency and governance in the system. Essentially putting the talent that we have in the system to save the country from chaos and economic decline.

May be Ramgoolam at the Presidency so that he does not throw the spanner in the works and wreck the deal… if there is indeed one proposedby the Prime Minister.

Will it happen or is it a dream? Egos, selfishness, personal interests and ambition, political animosity, the extreme polarization of the system and jockeying for ministerial postswill stifle such an initiative. The Opposition is incapable of reaching an agreement on a ratherinsignificant post of Whip that most people do not understand what the Whip actually does to create such a big fuss. So, the outcome is not difficult to predict.

Einstein was absolutely right when he stated‘insanity is doing the same thing over and over and expecting different results’. So, the ‘men in black’ from Washington should expect the phone call or the mail from the Minister of Finance. Exactly what Sri Lanka is starting this week. And what we did almost44 years ago.

* Published in ePaper 1 April 2022