“In Mauritius, nobody finds anything wrong with conglomerates obtaining MIC money and paying themselves dividends…

In the US or in Europe, this would be unacceptable”

Interview Sameer Sharma

‘The MIC is a risky mess and needs to be completely revamped’

“From ‘l’élève exemplaire de l’Afrique’, we have become the bad example ‘par excellence'”

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Our guest interviewee Sameer Sharma intervenes regularly on the country’s economic and financial situation, with sharpness and clarity. Today he sets out what a Budget exercise is about and identifies some of the core problems that are plaguing the country in terms of fiscal policy and strategies to meet objectives that are set. Repeatedly the issue of the right people in the right places is emphasised for implementation to be effective and timely. He is unsparing about the misconceived and mismanaged MIC, and blunt about how money that was supposed to bailout the corporates has found its way into dividends for shareholders and other packages, reminiscent of the fate of bailouts that accompanied the financial crisis of 2008.

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Mauritius Times: The forthcoming budget should be one of the more carefully prepared documents presented by the current government given the impacts on our economy of a world pandemic. Questions have been raised about the government’s ‘marge de manoeuvre’ to steer the economy back on the path of growth and development. That does look bright, isn’t it?

Sameer Sharma: A national budget is not an accounting exercise and actually has little to do with accounting. A national budget should be assessed in terms of how fiscal policy can achieve a clearly defined growth objective in the medium term, about key priorities which will help you achieve the objective, about the economic strategy the Government will adopt in order to achieve the objective along with a clearly defined implementation plan. And finally a national budget should be assessed in terms of resource mobilization which, while important in achieving the objective, cannot be viewed in isolation.

With non-financial corporations and households having more than 90% debt to GDP and with private investment and consumer demand remaining weak, the economy has a lot of slack. Cutting fiscal spending in a meaningful way at this time will worsen the deleveraging process further. (At the macro-economic level, deleveraging of an economy refers to the simultaneous reduction of debt levels in multiple sectors, including private sector and the government sector.) The Government will need to cut waste, yes, but it will still rely heavily on the central bank because it cannot cut spending too soon.

To answer your question, we know that the Government has at least a gross debt to GDP ratio of more than 97% if you account for colourable devices it uses and the Bank of Mauritius’ advance – which means that raising resources through more debt issuance will be constrained unless we are willing to accept the credit downgrade. We know that the likes of the IMF have been writing about broadening the tax base to include more realistic property taxes. These should also include imposing such taxes on some modern villages where a lot of the wealthy citizens reside, but tax raising will have its limits in terms of timing right now given already weak demand.

We know that the Government still has some unspent funds from the current fiscal year and should have at least MUR 11.5 Bn to roll over. We also know that the Bank of Mauritius has been making a lot of changes to its balance sheet recently when it comes to the MIC. The subsidiary is currently funded with Rs 1 Billion in equity but with also a whopping MUR 79 Billion in debt from freshly created money waiting to be spent. The MIC has a capital structure with a 79 to 1 leverage ratio. It is unclear whether the Government will buy out the 1 Billion of BoM equity in the MIC, taking the whole structure off its balance sheet and putting it into a special purpose vehicle (SPV).

While the Rs 11.5 Bn may be used to fund operating expenses, I expect the MIC to play a larger role on the Capital expenditures (CapEx) front when it comes to funding strategic projects.

* Moody’s had earlier painted a quite grim picture of the state of our economy, wherein it highlighted the fact that the country’s “economic fundamentals, including its economic strength, its fiscal, including its debt profile, as well its institutions and governance strength, have materially decreased”. The World Bank has made more or less the same assessment. They can’t be wrong, can they?

When you rely so heavily on the central bank printing so much money which has also been highlighted by Moody’s and the World Bank, then it means that you are indeed in a dire situation. Mauritius has reached the end of its long term debt cycle both within the private and public sectors. The deleveraging process will be slow, painful and the Government must find the right balance between the use of unconventional monetary policies, spending cuts and structural reform. Else it risks creating stagflation.

The over-reliance on money printing is getting out of hand and the structuring of these measures is not always well thought through. From “l’élève exemplaire de l’Afrique” we have become the bad example “par excellence”.

The other problem with the Government is that economic policy making has become overly centralized around the office of the Prime Minister. Over-centralization has in turn come at the expense of technocracy which is going extinct within our institutions. These are increasingly manned by overpaid yes-men who owe fidelity to the PM and add little value, which is why there have been so many key policy mistakes and despite billions in fiscal stimulus, implementation and the multiplier effect have been so poor.

* Does this mean that the risks of economic deterioration are very real for the next two to three years despite the several billions that have been taken over by the government from the BOM and “with a potential increase in social risk” before the economy reverts back to the pre-Covid situation?

It typically takes around a decade, hence the term “lost decade” to come out of a deleveraging process. In that kind of environment, social tensions will continue to manifest themselves. The Government may be tempted to inflate its way out of the debt problem rather than better target pension spending and eventually raising taxes, but this kind of trick has its limits.

Beyond the base effect induced 4.8% growth we may see in 2021 and an as-of-yet-unknown leftover effect on 2022 growth, real economic growth will be below its 20-year average. Tax revenues to fund populist measures of course depend on both real growth and inflation. Inflation induced by gradual currency depreciation is a less noticeable tax.

* What then are the options available to the government to turn around an already bad economic situation which faces the risk of further deterioration?

The main objective of the Government should be to engineer what the likes of Ray Dalio call a “beautiful deleveraging” process by engaging in some austerity, promoting a successful debt restructuring and recapitalization process in the private sector, and by relying in a controlled manner on unconventional monetary policy. Unconventional monetary policy won’t cause inflation provided it offsets a decrease in credit demand, but does not exceed it.

The Government must strike the right balance and must also engage in meaningful structural reforms. It needs to do a mea culpa and start over by putting the right people in the right places, and allow institutions to function much more efficiently. It must cut wasteful spending, set up an independent Budget Office for added transparency, and conduct long-term impact analysis studies. It must also fight corruption, prioritize more targeted spending with a focus on giving more to the poor, increasing the share of CAPEX towards new and promising sectors and include R&D spending grant schemes in the budget, and reversing the declining trend in terms of the quality of our education system with more spending on retraining programs.

It must reverse over-centralization of policy making and focus on improving project management and implementation. The Government must rethink its involvement in various state-owned companies in order to not only raise much needed revenues but also to massively improve efficiency. Public majority owned companies must be listed and the salaries of top management and board members must be better aligned to performance. All majority state-owned entities and ministries must have clearly defined and tracked KPIs which are in line with the overall growth objective.

The Government must gradually reduce its footprint on the economy and implement a new generation of free market reforms with a focus on encouraging more competition from within an increasingly rent-seeking private sector, encourage more FDI in PPP projects. And of course it must allow markets to work and aggressively push for a more dynamic Stock Exchange.

It must professionalize the way in which public assets are managed and allow pension funds to become seed capital providers to a new venture cap and private alternative credit ecosystem, as is done in more developed markets. It must look towards Europe’s open banking policy and create the right environment in order for Fintech to thrive. In the long term only productivity matters to an economy.

* Former minister Rama Sithanen has been quite severe in his assessment of the last budget – “nothing happened,” he said. He has also been very critical of any support extended to the “zombies”, which would amount to money thrown down the drain. He was no doubt referring to the MIC, about which not much is known. What’s your take on that?

Implementation is a challenge because of the over-centralization of economic policy-making and not having the right people in the right places.

Regarding the MIC, the idea as I had proposed it initially was for the Government to inject around MUR 5 Billion in equity, sourced from budget revenues, into a professionally managed structure similar to a Protected Cell Company which would – on a deal by deal basis and subject to clearly-defined return objectives – support viable firms, not pre-existing Zombies. And also resort to borrowing from the market and from the central bank which would purchase bonds issued by the structure at market terms on a deal by deal basis.

The MIC was supposed to in turn negotiate debt haircuts with creditor banks and bond holders and also push companies to list more shares on the stock market in the medium term. It was not just about bailing out but about re-engineering.

The idea was for the MIC to make a reasonable level of annualized average returns of around 11% over the lifetime of the structure which is low considering the risk of investing in distressed assets. The MIC would have also shared the burden with banks and the shareholders of distressed firms. The idea was certainly not for the MIC to become the sole sheriff in town. It was certainly not meant to be funded by selling international reserves and become a subsidiary of the Bank of Mauritius with the current governance structure. What we have is a curry of a bailout fund mixed in with a sovereign wealth fund which should have nothing to do with each other with a 79 to 1 leverage ratio! The MIC is a risky mess and needs to be completely revamped.

I have seen conglomerates whose subsidiaries are obtaining MIC money and benefiting from wage assistance schemes pay themselves dividends and I have seen banks also announce dividend payments, all this while public money is being used to bail out the private sector. In the US or in Europe, this would be unacceptable. In Mauritius, nobody finds anything wrong with this.

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* Published in print edition on 4 June 2021