“The economic situation will get worse before it starts improving”

Interview: Dr Vinaye Ancharaz – Economist

‘We can only hope for the best, but we must be prepared for the worst’

‘The ‘Plan de Soutien’ is not robust enough. It should have provided dedicated resources to help companies pay their wage bills and keep every employee on the payroll’

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In the pandemic situation which has taken us by storm, the question is how prepared are we to face the consequences in both the health and the economic sectors? Dr Ancharaz, economist, thinks that the government should be investing more to protect the health of the population, and should be mindful about not repeating the outcomes of the bail-out or economic stimulus packages that were dished out during the financial crisis of 2008-09, which left workers out in the cold, whereas the ‘patrons’ made good for themselves. This would involve revisiting the ‘Plan de Soutien’ so that those who are genuinely vulnerable get the support that they are the ones who deserve the most.

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* Do you think we are sufficiently alive to the threat posed by the Covid-19 pandemic – that’s currently hitting all our major trade, export and tourism markets – to the Mauritian economy?

I think we’re very much alive to the threat, especially following the announcement of the three cases in Mauritius on the night of March 18th. Before this, there was a feeling that we were immune to the virus, that it wouldn’t hit us. We’re now waking up to the realization that the threat is very real and, as a small country, we are particularly vulnerable to the pandemic. The whole country is in a state of panic, but I believe this will subside as the news sinks in.

Conversely, we’ve been aware that the pandemic is already affecting different facets of the economy, with some businesses hit more than others. With the sealing off of frontiers, tourist flow to the island has been severed. And both exports and imports are bearing the brunt of the global economic slowdown. But the economic crisis will impact other sectors as well. Manufacturing will be affected as global supply chains are disrupted, and the services sector, in particular retail trade, will take the toll as the country enters a period of lockdown.

* Air access has already been curtailed, hotel bookings will drop considerably, consumption of a wide range of products is likely to drop, and layoffs are already in the pipeline… Can we imagine what the worst-case scenario would be like for the Mauritian economy if things were to get worse?

Mauritius is an extremely open economy, so we will feel the economic impacts of the pandemic even more. It is hard to imagine the worse-case scenario because we cannot tell how long the situation will last. We tend to think of a two-week self-confinement period, but this could well last longer. And even after the virus is gone, the global economy will take time to recover.

I understand that the virus cannot survive temperatures above 27⁰C. Thus, as we enter winter in the coming weeks, and as the northern hemisphere warms up, the virus will likely travel down south, which means the risk will increase. We can only hope for the best, but we must be prepared for the worst.

As of now, I don’t think the country is ready to face a full-blown pandemic. We don’t have adequate health facilities, and those that exist are not properly equipped. I’ve learned that patients in quarantine centres are not receiving proper care, and that the medical staff is stretched and demotivated. It is alleged that some patients have run away, putting others potentially at risk. It is clear that the government has not invested enough to protect the people. Quarantine centres must be secured; we need more of them; and we must see to it that patients are attended to, not stigmatized.

* Economists have been saying that the Mauritian economy was already in a bad shape even before the onset of the Covid-19 pandemic, and it will get much worse in the weeks ahead. Given the set of uncertainties that we are now facing, does it mean that the task of restarting the growth engine can only be addressed at a later stage?

Indeed, the economy wasn’t in too good shape before the pandemic hit. Let’s recall that we ended 2019 with a GDP growth rate of 3.6%, downgraded from earlier forecasts of 3.8%, and the lowest since 2015. The budget deficit was estimated at 3.2% of GDP for the financial year 2019-2020, but as some critics have observed, it is likely to be in the region of 6% if we add the recent increase in pensions and other off-budget expenditures.

Public debt has increased by over 50% in the last 5 years and is dangerously approaching the Rs 400 billion mark. The debt-to-GDP ratio which, according to official data, currently stands at 65% is actually closer to 70% if we include external borrowing by the government and its entities that are kept off the books through clever accounting. The trade deficit, which has grown continuously in recent years, has reached a record deficit of Rs120 billion, equivalent to about 24% of GDP…

The economic situation will get worse before it starts improving. For now, the government should focus on two things. First, it is imperative to secure human lives and prevent the virus from spreading. For that, it needs to invest more in health care and health facilities. Second, we need to prepare for the economic recovery when it happens. For this, it is crucial to keep workers on the job… even if this requires subsidizing employment and bailing out businesses that would shut down without government support.

 * What do these new economic circumstances call for in terms of immediate and medium term measures?

Immediate measures should focus on saving human lives. We should not allow the pandemic to turn into a human tragedy. As I said earlier, the government needs to invest more in quarantine centres, equip them adequately, and ensure that there are sufficient and proper food and medical supplies to cater for the patients. Anyone can become infected, so we should avoid treating patients as unwanted cases! Every life matters.

The economy is secondary for now, but it doesn’t mean we should neglect it. Nor does it mean that the economy should take precedence over human life! Unfortunately, this is how it looks for now. The government has announced a panoply of economic measures to support businesses, but it hasn’t done as much to cater for future casualties. We know of a stimulus plan to the cost of Rs 9 billion, but are we aware how much has been invested in health-related facilities?

 * The measures proposed by the government in its ‘Plan de Soutien’ in favour of economic operators do not appear to convince everybody; it’s said such measures have been tried in the past to no effect. What do you think?

I see the ‘Plan de Soutien’ as comprising both monetary and fiscal elements. The decision to slash 50 basis points off the repo rate was an early monetary measure aimed at stemming the brewing economic crisis. In my view, it may help alleviate the financial burden of businesses, but it will do little to stimulate the economy since the real sector of the economy (that is, the sector where goods and services are produced) is sick and down.

Then came the ‘Plan de Soutien’ as we know it. The government will be injecting Rs 9 billion: Rs1 billion will come directly from the Consolidated Fund; Rs 2.7 billion will be in the form of equity participation by SIC, the government’s investment arm; and the remaining Rs 5 billion be provided by the Bank of Mauritius to support short-term loans to small and medium enterprises at the below-market interest rate of 2.5%.

Except for the Rs 1 billion from the Consolidated Fund, which represents a fiscal measure, the government’s demarche cannot be described as a fiscal stimulus package. The proposed measures will do little to protect the economy from the unfolding crisis. The equity participation by SIC will only shift business failure from the private sector to the government — since we all know the dismal record of SIC in managing public sector investments! The Credit Support Scheme of the Bank of Mauritius will be funded by a Rs 5 billion savings bonds, which will reduce liquidity in the economy and dampen spending— this at a time when consumption is seen as the lever that could sustain the economy.

All of this illustrates the limited fiscal space that the government is currently facing. I’ve warned repeatedly about the government squandering resources on populist measures instead of consolidating the economy and building up its arsenal to face rainy days. Government’s recurrent spending has increased continuously to over Rs 130 billion for the financial year 2019-20. With public debt reaching 70%, government’s ability to borrow is severely constrained. And we can now appreciate better why digging out Rs 18 billion from the central bank’s reserves last year to pay off debt was such an ill-inspired step.

The government has acted utterly irresponsibly in managing public finances. Gouverner, c’est prevoir! They are learning that lesson at their expense — and, sadly, at the people’s expense— now!

* It has also been argued that such measures are mostly meant to compensate the corporate sector for their losses or lower profits and little has been provided for the workers. In fact, despite the ‘Plan de Soutien’ it would appear that layoffs in the tourism industry have begun. Are these inevitable?

Let us recall the fate of the fiscal stimulus package put forth by the Labour government to deal with the financial crisis in 2008-2009. There are horror stories of big businesses guzzling up government funds and shutting down the very next day, laying off thousands of employees, who needed additional government funding to be supported through their ordeal.

One wonders how the funds now proposed through the ‘Plan de Soutien’ to help struggling businesses will be used. Who will benefit from them? Will they be the usual suspects, the very same companies that have benefited from government contracts and other favours under the present regime? Time will tell. We can only hope that history doesn’t repeat itself!

As I said before, I believe government funding should be used primarily to protect employment. This can be through support to businesses that cannot pay their wage bill. This measure is in the spirit of the support advocated by The Economist, which calls for direct support to the people in the wake of the pandemic. Existing SMEs already have other schemes at their disposal to finance working capital. We don’t need another Credit Support Scheme —unless that is a device to give away loans to cronies, only to be written off later!

Some layoffs will be inevitable, especially by companies that were already in bad shape even before the coronavirus pandemic struck. However, I believe that the bulk of jobs — in the tourism industry, in retail and in the manufacturing sector — can be safeguarded. This should be the government’s utmost responsibility, and it will be judged on this score.

* If the “Plan de Soutien” does not convince, what else can the Government do, or should do?

Times of crisis put the political wit of a nation to test. I believe the government has responded rather timidly to the crisis so far —whether in terms of protecting lives or protecting livelihoods. Human life should take center-stage, and the government should invest massively in health care so as to treat every Mauritian in fairness and dignity.

The ‘Plan de Soutien’ is not robust enough. It should have provided dedicated resources to help companies pay their wage bills and keep every employee on the payroll. Unfortunately, the government’s fiscal space is limited by past over-spending and reckless borrowing. However, it can raise bridging finance by imposing a solidarity levy on the most profitable sector — the banks.

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* Published in print edition on 20 March 2020

Tags:Bank of Mauritius, Coronavirus Pandemic, Covid-19 Pandemic, Credit Support Scheme, Dr Vinaye Ancharaz, Financial Crisis 2008-2009, Fiscal Stimulus Package, Interview, Labour Government, Plan de Soutien, Quarantine Centres, Self-Confinement Period