‘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.Read More… Become a Subscriber

Mauritius Times ePaper Friday 27 September 2024