‘An increasing number of our elderly voters are waking up to the reality of the money illusion…

… they realize that, despite their pensions doubling since December 2019, rising living costs make this increase insufficient to meet their needs’

Interview: Vinaye Ancharaz, International Economic Consultant

* ‘The Mauritian economy has just come out of the woods…

… but I remain cautious due to several downside risks—now is not the time for complacency or indulgence’

* “Change is on the Way”

‘Triolet meeting signals strong support for the opposition despite all kinds of pressures’

In a rapidly changing economic landscape, recent developments have sparked significant discussions about the future of Mauritius’s economy. The Monetary Policy Committee’s recent decision to lower the key interest rate by 50 basis points has raised questions about its implications for borrowers and the broader economy. Dr Vinaye Ancharaz, an International Economic Consultant, shares his insights on this crucial decision and its potential impact on Mauritian society. With general elections approaching, the interplay between economic measures and political strategy is more relevant than ever. In this interview, Dr Ancharaz also addresses the anticipated salary realignments, proposed interest-free loans for young people, and the possible ramifications of a looming political shift.

Mauritius Times: Several significant events have recently unfolded that could have a notable impact on the economy in the coming months. One key development is the Monetary Policy Committee’s decision on Monday to lower the key interest rate by 50 basis points. What are your thoughts on this decision?

Dr Vinaye Ancharaz: I have been expecting a cut in the key (formerly repo) rate for at least two reasons. First, the Federal Reserve slashed the Fed funds rate by 0.5% last week. Second, the recent government announcement of granting interest-free loans to youths aged 18-35, if re-elected, has unleashed a debate about the effectiveness of the proposal, with many arguing that it would have been better if the government reduced the key rate and capped borrowing rates. With the general elections approaching, I was expecting the rate cut to be more substantial. The rate cut makes little economic sense in the current conjuncture, but the government’s recent manoeuvres have clearly shown that it is too fixated on political survival to care about good economics.

The rate cut will be welcomed by borrowers – and that means practically everybody, whether those with home loans or car leases or hire-purchase agreements. Household debt reached Rs 240 billion in December 2023, equivalent to 102.5% of income, with debt servicing absorbing 17% of household income. The rate cut will thus bring long awaited relief to debtors, after rising continuously from 1.85% to 4.5% between December 2021 and December 2022, and staying at that level until the drop on Monday.

The Governor of the Bank of Mauritius justified the rate cut, citing falling inflation rates over the past 18 months. Inflation at the end of 2024 is estimated at 4%, that is within the Bank’s target range of 2%-5%. However, the IMF projects the inflation rate to be 4.9%, and with the recent increase in freight and salaries, inflation is likely to be higher than expected. So, it may be too early to settle for cheap money. The risk is that lower interest rates may discourage portfolio investment in Mauritius, leading to reduced foreign currency inflows and increasing downward pressure on the rupee. Further depreciation could drive up inflation, ultimately defeating the Bank’s objectives.

* Another significant development is Business Mauritius’ decision to challenge the salary realignment in the Supreme Court. What potential impacts do you foresee from this challenge?

Some 200,000 employees in the private sector earning up to Rs 50,000 per month were expecting salary adjustments ranging from Rs 600 to Rs 2,925 at the end of this month, with back pay for July and August. The government gazetted the new salary structures on 13th September, allowing ample time to employers to effect the change in their September payroll.

However, on Monday 23rd, Business Mauritius, called on its members to freeze payment of any salary adjustment pending further legal advice and, possibly, recourse to legal action at the level of the Supreme Court. Business Mauritius is concerned about the legality of the Remuneration Regulations issued by the Ministry of Labour and Industrial Relations. The Regulations did not evolve from the established process of tripartite consultations involving the National Remuneration Board (NRB) and the National Wage Consultative Council but were simply decreed by the Ministry.

In response, the Minister of Labour urged Business Mauritius to comply with the Remuneration Regulations, warning that failure to do so could result in legal sanctions. Clearly, this situation can do much damage to the government on the eve of elections – for it was hoping that the cash bonanza at the end of this month might encourage private sector employees to vote for the government alliance. This may still happen if the government succeeds in convincing the public that the private sector is being manipulated by the Opposition, as the Minister of Labour claimed during his press conference. The Opposition has refrained from taking sides, and understandably so. Criticizing Business Mauritius’ position is equivalent to supporting the government stance.

Politics aside, the status quo is the result of the government’s minimum wage policy, which has pushed many companies to the brink. SMEs, in particular, are struggling to pay higher salaries, and the wage support that the government had promised when the national minimum wage (NMW) was raised to Rs 16,500 is not forthcoming. In any case, it makes little sense for the government to help enterprises foot their wage bill out of CSG contributions, which are paid by private sector employees themselves!

* As we approach the elections, various freebies or ‘bribes’ are likely to be announced by both sides, particularly by the incumbent government alliance. The latest in this series is the announcement by the Prime Minister to make housing loans interest-free for youths aged 18 to 35. What potential economic impact do you see from this measure? Additionally, do you think it will be enough to attract young voters to support the MSM-led alliance?

This proposal has sparked considerable debate. Some estimates suggest that implementing the measure could cost the government nearly Rs 40 billion over five years. However, whether it will actually be a vote-winner is debatable.

First, the target age group is not quite representative of the typical home loan applicant. Most borrowers are over 30, so the measure will impact only a small proportion of the youth. Second, the measure will surely come with conditions which are not specified at this stage. For example, to what loan amount will it apply? Capping the mortgage size will clearly reduce the proposal’s effectiveness.

Finally, given the prevailing property prices, only those who own land, or are well-off to begin with, are likely to benefit from the measure while the rest of us will pay for it through taxes.

* Furthermore, many anticipate that the Prime Minister will announce another significant commitment regarding retirement pensions on International Day of Older Persons, October 1st, an event the government is preparing for with considerable interest. Do you share this expectation?

There is little doubt that the prime Minister will make yet another big promise of pension hike, if re-elected. With the BRP at Rs 15,000 for those aged 60-64 as from January 2025, I won’t be surprised if the PM announces that the BRP will rise to Rs25,000 during their next term. With some 270,000 beneficiaries of the BRP, a further Rs10,000 increase in pensions will take a heavy toll on public finances, costing an additional Rs35 billion annually, and raising questions about financing and sustainability.

Such an announcement will surely have the effect of locking in many, but by no means all, of our senior citizens’ votes in favour of the government alliance. However, I doubt if it will sway undecided voters or those who are not quite supportive of the government.

An increasing number of our elderly voters are waking up to the reality of the money illusion. They recognize that, despite their pensions having doubled since December 2019, the rising cost of living means that this increase is hardly sufficient to make ends meet. They understand that simply having more money doesn’t necessarily improve their financial situation.

Many seniors are also aware of the rise of social scourges such as drugs, corruption and nepotism that impact their children’s lives. As parents, they know the pain of sending their children to study abroad and asking them not to return home. No amount of pension will lure these people to vote for the government.

* There are also talks about an additional year-end gratuity representing a 14th month’s pay for all employees, both in the public and private sectors. The announcement of this could constitute the government’s trump card for the upcoming elections. However, it remains to be seen whether it would give the MSM-led alliance an edge over the Opposition at the polls. What are your thoughts on this?

I recall this proposal being mooted by the then Leader of the Opposition, Xavier-Luc Duval, in Parliament. But I understand that the proposal was neither discussed nor approved by Opposition members, and so it remains Mr Duval’s pet idea. With the PMSD set to join an MSM-led alliance, it is likely that the proposal for a mandatory 14th month end-of-year bonus finds its way into the alliance’s electoral programme. The MSM government is known for showering the public with cash, so such a proposal will hardly be surprising.

However, considering the backlash created by the recent salary adjustment, the private sector will most likely oppose the payment of a 14th-month gratuity. Imposing it on enterprises that have been buffeted by progressive salary increases in recent months could deal a major blow to much of the private sector.

In the end, the proposal could apply only to government employees, which would limit its adverse economic impact. Its impact on a segment of electors that the MSM sees as its vote bank could be significant, nevertheless.

* Besides the freebies and populist measures, there have also been the usual share of questionable practices, the latest being the revelation by ReA about a possible nexus between the government, Silver Bank, and the Mercantile and Maritime Group, which supplies fuel to Mauritius. What are your thoughts on this matter?

Little is known about the reasons behind the fall of Silver Bank—until now. The investigation by ReA has explored its connections with the government, the STC, and the Mercantile and Maritime Group (MMG). In June 2023, the STC justified selecting MMG as its oil supplier by highlighting better credit terms and the agreement to be paid in rupees. This raised eyebrows since MMG has no established business in Mauritius, but there was little questioning of the arrangement.

It now appears that MMG may have been pressured into holding its rupee deposits at Silver Bank. Was this an attempt to to give the bank a lifeline after uncovering systematic fraud in February 2023? Who benefited from this situation? Some power brokers close to ‘Lakwizinn’? While these questions warrant further investigation by a proper commission of inquiry, it seems the STC’s claim about MMG accepting payment in local currency is inaccurate, as around Rs30 billion transited through Silver Bank to be repatriated in US dollars.

ReA suggests that MMG would have put the STC in a difficult position on August 9 by allegedly refusing to offload its last oil shipment unless it was refunded a $15 million security bond frozen at Silver Bank. If this is proven true, the government’s questionable deals could have pushed the country to the brink of disaster last month.

* Besides the Finance Minister’s positive remarks on the performance of the Mauritian economy, the Governor of the Bank of Mauritius has also painted an optimistic picture, especially regarding its “robust performance” during this year’s first quarter. Does this suggest that the economy is performing well enough to sustain the cost of social welfare measures in the coming years, or do you think they might be considering a fallback financing instrument, such as rental proceeds from the Americans for the Diego base?

I have said it repeatedly that the Mauritian economy has just come out of the woods. The IMF notes that our GDP per capita at the end of 2023 ($11,417) was about the same as in 2019 before the pandemic ($11,408). This means that, over the past three years, we have only made up for lost production.

GDP grew at 6.4% in the first semester of the year, and economic prospects are positive, with growth projected at 6.5% for 2024, well above the IMF estimate of 4.9%. However, I remain cautious in the face of several downside risks, including geopolitical tensions, trade fragmentation, and rising freight costs. This is certainly not the time for complacency or indulgence.

In the future, Mauritius could benefit from a massive windfall if the UK and the US offered compensation for retaining Chagos as a military base. However, I don’t recommend using those funds to prop up social spending in the country or to lavish the population with gifts. It would be more prudent to set aside the bulk of the proceeds in a sovereign wealth fund that would come in handy during rainy days.

* Sitting governments often find it easy to promote and implement populist measures, confident that the opposition will feel embarrassed and thus reluctant to oppose them. What stance should the Labour Party-MMM-ND-ReA alliance take regarding the salary realignment decision?

As I said before, the Opposition is quiet on the issue, maintaining a neutral stance. It would be politically risky for the Opposition to take sides. On the one hand, one can sympathize with Business Mauritius. The government has played politics with wages, forcing many enterprises into a precarious position. Many companies are shedding labour; others are delaying recruitment, and yet others are opting for foreign workers who, they believe, can do a lot more for the same wage. In the end, the repeated hikes in the national minimum wage, and the salary adjustments that they necessitated, have helped few workers at the low end of the ladder.

On the other hand, many companies benefit from a situation of inflation since they sell at higher prices. Banks have benefited from high interest rates over the past two years, churning out billions in profits. Hotels and the sugar industry have benefited from MIC money.

One can argue that these companies have a moral obligation to pay the salary increases. However, many SMEs and export-oriented enterprises are incapable of paying the wage hikes. In the past, the government helped them pay increases in the national minimum wage. Should it also assist them in paying the salary adjustment?

From a strictly economic point of view, this isn’t the role of the government. But shouldn’t the government itself solve a problem that it created?

* To come back to the private sector’s reaction to the salary realignment issue. This “very belated wake-up call” from a sector that has benefited from billions in taxpayer subsidies through the MIC, and coming at this late stage in the current government’s mandate — could also signal a shift in the political climate. The private sector typically does not express its political views unless it is confident that there is little risk of retribution, right?

I think it’s a matter of perspectives. Yes, you might say that Business Mauritius is challenging the government because it feels that the risk of retribution is low if there is an impending change in government. Perhaps the private sector is covertly backing the Opposition, which is what the Minister of Labour admonishes.

On the other hand, the private sector’s position may be motivated by pure self-interest rather than by partisan politics. Would you blame the private sector for wishing a government that has done so much harm to them to go?

* Although there is still much uncertainty about the “rapport de forces” on the ground, what does the Triolet meeting of the Opposition alliance last Sunday suggest to you? Do you honestly believe that, after many months of unending negotiations to finalize the composition and terms of the alliance — despite not yet being aware of its electoral program — the Labour Party-MMM-ND-ReA alliance has what it takes to effectively challenge the governing alliance?

I believe the Triolet meeting sends a strong message that change is on the way. This message was clear in the sheer number of people who showed up despite all kinds of pressures and the Opposition’s limited means. The message was clear in the enthusiasm of the crowd as they welcomed the leader of the Alliance du Changement as the future Prime Minister. It was also evident in the leaders’ call for change, which resonated deeply with those in attendance.

The meeting is a crucial one since it goes towards cementing Navin Ramgoolam’s candidacy in constituency no.5 and serving as a catalyst for electoral campaigning in the rural areas. The presence of ReA on the stage was visual confirmation that the leftist party has now joined the Alliance du Changement and would bring its voice to the alliance’s ‘projet du societé’.

Mauritius Times ePaper Friday 27 September 2024