“For change to be effective, it must be owned by the people”

Interview: Dr Vinaye Ancharaz, International Economic Consultant

‘This sense of belonging can only be built and nurtured through clear, constant and inclusive communication‘

* ‘The MSM govt cooked up GDP figures to make the situation look rosier than it really was’

* ‘The previous govt exploited petrol taxes as a cash cow. Slashing these taxes while increasing pensions and paying a 14th-month bonus will be doubly challenging’

In this week’s interview, we speak with Dr Vinaye Ancharaz, an International Economic Consultant, to gain insights into the current state of Mauritius’ economy and the challenges ahead. The new government has expressed its intention to audit the country’s fiscal health, but how much can an audit reveal beyond the public debt, fiscal deficit, and revenue generation figures already available? Dr Ancharaz provides a critical analysis of the previous government’s economic performance, scrutinizing its policies and their implications for the future. He examines key issues such as fiscal management, public debt, inflation, and the pressing need for structural reforms. Offering a deep reflection on the economic decisions that have shaped Mauritius’ current challenges, he shares his recommendations for how the current government can deal with the complex economic landscape to secure sustainable, long-term prosperity.

Mauritius Times: The new government has made known its intention to conduct an audit of the state of Mauritius’ economy. Does not the current state of Mauritius’ fiscal health, including public debt levels, fiscal deficit, and revenue generation tell us how good or bad the economy is faring, or would an audit tell us more?

Vinaye Ancharaz: If we go by the MSM government’s assessment, the economy is faring rather well. You may recall that, in presenting the 14th-month bonus proposal days before the election, the then Minister of Finance, Dr Padayachy, claimed that the economy was in a boom! He was probably referring to the ‘exceptional’ GDP growth of 8.9% in 2022, the ‘strong’ growth of 7% in 2023, and the growth forecast of 6.5% this year. The truth, however, is that the economy has just come out of the hole it had slipped into following the massive 14.5% GDP decline in 2020. According to a recent IMF report, real GDP per capita at the end of 2023 (US$11,417) was about the same as in 2019 (US$11, 408) before the pandemic.

In fact, the hike in GDP growth to 8.9% in 2022 following a timid recovery (GDP growth of 3.4%) in 2021 is largely due to a major change in national income accounting, which saw the inclusion of primary income from the global business sector in the computation of GDP. I believe that the MSM government cooked up GDP figures to make the situation look rosier than it really was.

Similarly, the inflation rate is reportedly on a downward trend, falling from a peak of 10.8% in 2022 to 7% in 2023 and to a projected 4.5% at the end of 2024. However, earlier this year, Statistics Mauritius adopted a revised CPI basket based on the 2023 Household Budget Survey. The new basket features significantly higher weights given to several items, notably gasoline and pharmaceutical products. If this basket was applied before, the inflation rate for 2023 would be above 7%.

Moreover, the MSM government proclaimed that public sector debt was on a declining path. But this is in relative terms (that is, as a ratio to GDP) only. In fact, public debt is expected to reach Rs 567 billion by the end of 2024, Rs 55 billion higher than in December 2023. And let us not forget that these figures understate the true debt level as the former government used a variety of Special Purpose Vehicles (read ‘debt-disguising tactics’) to conceal debt. In the same vein, the budget deficit may also be understated by over-estimating revenues and under-estimating expenditure. No wonder the MSM government has called for supplementary budget financing of billions of rupees every year over the past 5 years!

Last, but certainly not least, the former Minister of Finance painted a very positive picture of the country’s export position, rejoicing in the fact that exports were increasing in value. However, he omitted to say how much of the increase was due to the depreciation of the rupee, nor did he make any mention of merchandise imports, which have soared since 2020, with the result that the trade deficit reached a staggering Rs 182 billion in 2023. Again, the sad truth is that, in US$ terms, goods exports in 2023 were 26% lower than in 2014 when the MSM government took office.

All the above points to the necessity of a statistical audit, which will reveal the true state of the economy and its financial situation. I won’t be surprised if the inflation rates and budget deficits in recent years were higher, and growth rates and the level of reserves lower, than official data suggest.

* The necessity of this audit would also suggest that the true picture of the state of the economy would have been hidden by the previous government and the institutions directly connected with the economy and public finance – the Ministry of Finance itself, Bank of Mauritius, possibly Statistics Mauritius. How can that be possible especially in an open and democratic country?

Indeed, government manipulation of economic data was once unthinkable — until the previous regime, that is. And it was possible because there is no required audit of government statistics, as is the case, for example, with company accounts. One may recall an incident when Statistics Mauritius was forced to remove a report that it had just posted online – because it contained GDP growth forecasts that were lower than those that the Minister of Finance had presented earlier. MCB Focus, a periodic publication by the MCB, suffered a similar fate, demonstrating the length to which the MSM government went to create and perpetuate a statistical illusion.

I won’t blame Statistics Mauritius for misreporting economic data, if they ever did. Statisticians swear by a strict ethical code, but sadly, they were subject to pressure and intimidation by the Ministry of Finance under the MSM government.

However, it is also not correct to say that there are no checks and balances on economic data accuracy in an open, democratic country. These controls are exercised by external agencies, such as the IMF/World Bank, and Moody’s.

The IMF has decried the MSM government’s manipulation of economic statistics and provided its own counter-estimates. For example, the IMF projects a GDP growth rate of 4.9% this year – as opposed to Dr Padayachy’s 6.5%. Similarly, the IMF’s inflation forecast of 4.9% is higher than the previous government’s 4.5%.

 As an international watchdog, Moody’s can punish any country with a credit-rating downgrade if it finds that economic data has been manipulated to create a better picture of the country’s credit worthiness.

* Economists are in a better position to identify the key areas where the previous government’s policies may have caused long-term harm to the economy. In your view, what are the main villains that have contributed to the current situation?

I will refer to two among many of the previous government’s policy failures. One is that the government made big electoral promises without assessing the economy’s capacity to deliver them. The second is that it relied on consumption as the economy’s engine of growth.

It all started with the MSM’s promise, in October 2019, to double the basic retirement pension (BRP) to Rs13,500 during their term in office. As soon as they came to power, they raised the BRP to Rs 9,000, paying Rs 18,000 in December 2019, including the traditional 13th-month bonus. To finance the pension hike, the government ploughed Rs 18 billion from the Bank of Mauritius’ reserves in January 2020. This was the beginning of the end, and it started even before Covid-19 hit us. The pandemic only made things worse, prompting the government to seek further financing (Rs 60 billion) from the central bank.

And then, in June 2020, the MIC was set up with a capital injection of Rs 80 billion from the BoM’s reserves. These repeated drawdowns on the Bank’s reserves weakened its ability to defend the national currency, causing the rupee to fall relative to major currencies, and unleashing an inflation spiral, which got worse as the government kept up its spending frenzy. Further increases in the BRP were financed through the inflation tax as the government discovered that giving money brings back more tax revenue as prices rise.

The second mistake was to make consumption the locomotive of economic growth. This is in contradiction with a basic tenet of growth theory, which holds that growth is driven by investment. The government did invest massively in public infrastructure – perhaps for political reasons – but investment in the real sectors was neglected. As a result, agriculture, manufacturing and exports have continued to decline; the bulk of foreign direct investment has flowed to the real estate sector; and no new growth pillar has emerged since 2014. The pharmaceutical industry, announced with great pomp in 2021, is yet to see the day while food security remains a mere concept.Read More… Become a Subscriber

Mauritius Times ePaper Friday 6 December 2024