The State of the Economy and Road Ahead
Economy
The government faces the Herculean task of stimulating the economy and consolidating the financial situation while delivering on its electoral promises. This should be feasible if the pledges are toned down
By Vinaye Ancharaz
There have been rumours, and some anecdotal evidence, that the MSM government had tampered with macroeconomic indicators to make the economic situation look better than it was. I have always decried such manipulation of economic data in my numerous radio and newspaper interviews, the latest being the previous edition of Mauritius Times last Friday.
Upon assuming office, the Alliance du Changement government undertook an audit of public finances and an objective situational analysis of the economy. The report on the state of the economy was tabled in Parliament last Tuesday, sparking extensive discussion both inside and outside the House. In short, the report makes several damning revelations, confirming what many had feared until now: the economic boom that the former Minister of Finance alluded to in his press conference just days before the general election is a mere statistical illusion. Together with the findings on the MIC, the report paints a rather bleak picture of the current state of economic affairs and exposes numerous sectoral and structural challenges.
1. Key findings
GDP and economic growth
GDP growth is the most significant indicator of the economic health of a country and, unsurprisingly, this variable took center-stage in the report. I have repeatedly said that the GDP growth figures churned out by the MSM government since 2020 were inflated by miscalculations of GDP. The report suggests that growth rates were exaggerated across several sectors, most notably in construction, where the sectoral growth rate for 2024 was revised from 38.8% down to 25%. Consequently, the growth rate for 2024 is estimated to be 5.1%, much lower than the forecast of 6.5%.
As an economist, I have always trusted the IMF more than Statistics Mauritius, which unfortunately had become an agency of the Ministry of Finance under the MSM government. In its April 2024 report, the IMF projected a GDP growth rate of 4.9% for 2024, which isn’t far from the updated estimate of 5.1%. The IMF also revealed, and the State of the Economy report confirms, that, in USD terms, nominal GDP in 2023 was no different from GDP in 2019 prior to the pandemic. In real terms, it was lower. This suggests that the Mauritian economy has just come out of the hole it had slipped into when the economy contracted by a massive 14.5% in 2020.
And yet, during this time, the MSM government behaved as if the economy was going full throttle: the national minimum wage, set at Rs8,500 in January 2018, was raised to Rs 16,500, prompting a salary re-alignment that further added to the financial burden of already-distressed enterprises; the basic retirement pension increased from Rs 9,000 in December 2019 to Rs14,500 most recently; and CSG revenue has been squandered in income allowances of all sorts. In fact, the report shows that the payment of pensions accounted for the biggest chunk of the increase in government debt in the last ten years, that is, Rs 101 billion out of Rs 275 billion, or 37%.
Investment and trade
The report confirms the long-term decline in the domestic investment rate – from an average 21.9% before 2014 to 18.5% during 2015-2023. If public investment in the tramway is excluded, the investment rate would be even lower, suggesting some crowding out of private investment.
Exports too have declined in volume terms, suggesting that the uptick in the value of merchandise exports since 2020 that Dr Padayachy proudly showcased as an unmistakable sign of economic progress is, in fact, largely a price effect due to the depreciation of the rupee.
With investment and exports down, consumption has been the engine of growth in recent years. This is unsustainable, more so since over 70% of the foreign direct investment (FDI) in recent years has flowed into property development, depriving the manufacturing sector of a critically needed lifeline and perpetuating food security as an elusive concept.
Monetary policy
The most shocking revelation of chapter 3 of the report (on monetary policy) is that the MIC was created entirely with helicopter money! In fact, the capital injection of USD 2 billion (equivalent to Rs 81 billion) out of the central bank’s reserves never took place. The transaction was simply an accounting gimmick that amounted to BoM printing Rs 81 billion. This brings the total amount of printed money to Rs 154 billion (including Rs 18 billion to pay pension-related debt in January 2020 and Rs 55 billion given as a one-off grant to the government in July 2020).
No wonder this massive spurt of liquidity into the economy provoked a long-term decline of the rupee. The rupee has depreciated by 46% vis-à-vis the US dollar since the MSM government took office in December 2014. That means you need about twice as many rupees to buy a dollar today than you did in December 2014. The impact on inflation has been huge.
Inflation is on a downward trend, falling from a peak of 10.8% in 2022 to an estimated 3.7% by the end of this year, and bottoming out at 3.5% in the near future according to the IMF. However, lower inflation should not be mistaken for falling prices! First, the low inflation rate is due to the so-called base effect (that is, the inflation rate is calculated on a higher price level). More important, it means that prices will keep rising, albeit at a slower rate. Finally, inflation has become systemic: it is here to stay. The report tracks the increase in price of several consumer products between October 2019 and October 2024, showing that, for many commodities, the price hike has been substantial.
Labour market
The unemployment rate, although low at 6.3% in 2023, is difficult to reconcile with the prevailing situation of labour shortage across a wide range of sectors, notably agriculture and retail trade. It is a sign of a systemic skills mismatch, which has gone on unaddressed. This skills mismatch is reflected in a high number of skills-related underemployed, that is, people who are overqualified in their current job. There is also some degree of ‘time-related underemployment’, that is, having time available for extra work.
The true rate of unemployment, adjusting for labour underutilization, works out to 23.2% in 2023, hardly a cause for celebration. Moreover, youth unemployment (17.8% among those aged 16-24) and unemployment among women (8.5% as of September 2024) remain high while female activity rate (the share of women of working age who are employed or looking for a job), at 47.5%, is well below the average in industrialized countries (67%).
Budget deficit and public debt
The budget deficit in recent years has been significantly underestimated. For example, the updated budget deficit for the financial year 2023-24 turned out to be 5.7% of GDP, significantly higher than the 3.9% announced in the Budget. The outlook for 2024-25 is not very positive either, with the budget deficit projected at 6.7% of GDP, compared to initial estimates of 3.4%. This is due to a combination of revenue shortfall and expenditure overruns.
Higher budget deficits imply increased government borrowing requirements and higher debt. The public sector debt has more than doubled over the past 10 years. As a share of GDP, the national debt stood at 83.4% in June 2024, higher than the estimated 76.5%, and is projected to edge up to 84.5% at the end of the current financial year. Significantly, the debt-GDP ratio has remained above the statutory ceiling of 80% since 2019-20 – a testimony to the MSM government’s appalling fiscal management.
Contingent liabilities
Many public entities are steeped in debt and continue to incur massive deficits.
Metro Express Ltd. will need some Rs1.2 billion annually as from financial year 2026-27 for capital and interest payments on loans amounting to Rs16 billion. One wonders where this sum would come from, given that the company has accumulated heavy losses since it came into operation.
Another case is the STC’s Price Stabilization Account (PSA), which currently shows a deficit of Rs3.4 billion, casting doubt on the government’s ability to cut petrol prices in any meaningful way. Finally, the report confirms the financial mess in which the national airline finds itself. With negative equity to the tune of Rs 10.4 billion, Air Mauritius is deemed insolvent.
- Constraints and challenges
The second part of the report takes stock of the challenges to the long-term growth of the Mauritian economy. Many of these constraints (such as growing labour shortages,rising production costs and stagnating productivity)are structural and cut across sectors. There arealso various sector-specific challenges facing traditional and emerging sectors (such as digital services, biotechnology and renewable energy).
Moreover, Mauritius is heavily dependent on imported fossil fuel-based energy, which weighssubstantially on the balance of payments and hinders the green energy transition. The country has committed to reducing its carbon emissions by 40%, increasing the share of renewable energy in its energy mix to 60%, and phasing out coal by 2030. With six years to go, these targets seem out of reach. Mauritius also needs to mobilize Rs 300 billion to implement its climate-related commitments, 70% of which for climate change adaptation purposes.
The report concludes with a critical review of pressing social issues in the educational and health sectors as well as the ageing population, which has major social and economic implications.
- What next?
The report has led to speculation on the government’s ability to make good on its immediate electoral promises, notably reducing petrol prices and granting the 14thmonth bonus. The deficit in the Price Stabilization Account limits the quantum of petrol price cuts that the government can afford to implement. On the other hand, government finances are running low, with higher projected budget deficits and hardly any cash left in special funds. Moreover, slashing taxes to reduce petrol prices is at variance with the 14thmonth bonus proposal. Cutting taxes will further squeeze public finances while paying the additional bonus will require billions in additional funding.
Fulfilling the promise of lower petrol prices and a 14thmonth bonus
I believe that the government will fulfill its promises. However, the people should not expect too much. According to rumours, petrol prices may fall by Rs 5 to Rs 10. This is reasonable and financially prudent. Even if well below public expectation, a price cut in this range will make some impact, and by stimulating economic activity, it may allow the government to retrieve part of the foregone tax revenue.
Implementing the 14thmonth bonus proposal may prove to be trickier, more for its legal than financial implications. One would recall that the salary realignment that was unilaterally decided by the MSM government and imposed on all employers in September 2024 led to a backlash by the private sector, with Business Mauritius asking the courts for a judicial review of the regulation. The 14thmonth bonus could provoke a similar reaction. This has led many to wonder if the government would pay the additional-month bonus on behalf of all employers, except those with deep pockets. In that case, a related question is whether the measure will apply to all employees.
If the aim is to provide some relief from the high and rising cost of living, then it is likely that the proposal, just like annual salary compensations, should target the most impacted, namely the poor. This line of thinking suggests that the 14thmonth bonus could be capped at some income level, say Rs 50,000. Those earning up to Rs 50,000 may receive a full 14thmonth bonus. For those earning above Rs50,000, the payment could be a flat Rs 50,000 irrespective of salary, or payment on a regressive basis up to a certain limit.
It is difficult to ascertain the cost of the 14thmonth bonus in the absence of specific details about its form. Assuming that the bonus is capped at Rs 50,000, a ballpark estimate of the total cost is Rs 8.5 billion, of which some Rs 6.5 billion will fall on the private sector. The MSM government borrowed Rs 101 billion over the past 10 years to implement its promise of a pension hike to Rs 13,500. The new government also could borrow to pay the 14thmonth bonus, assuming that this is a one-off perk to employees and that, by stimulating the economy and boosting government tax revenue,it would prove partly self-financing.
A Moody’s downgrade?
The report’s findings that the budget deficit and government debt figures have been drastically understated; that the setting up of the MIC was financed by printing money; that all special funds have been swept clean; that several state-owned enterprises are financially distressed; and that the national airline is insolvent could be ground enough for Moody’s to slap us with a credit downgrade. The slightest slip-up will send the country’s credit rating into the ‘non-investment grade’ or ‘junk’ category, with adverse repercussions on foreign investment and external borrowing. This could lead to a further deterioration of the economic situation.
On the other hand, the report can reassure credit rating agencies, investors and international institutions that this government is serious about fixing the economy and that the investigation that uncovered the past regime’s misdoings is the first step in the process. The government could also communicate, in writing, to Moody’s, its good intentions and strategic plans to help allay any fears of further economic deterioration.
A hike in interest rates?
The report suggests that the rupee’s depreciation was triggered by money-printing and sustained by a misguided monetary policy. Specifically, paragraph 25 of the report notes that interest rates on USD-denominated financial assets have been persistently higher than on rupee-denominated assets. This situation makes it attractive to hoard USD and/or to invest in USD-denominated assets, thereby increasing the demand for USD and pushing the dollar ever higher relative to the rupee.
Redressing this imbalance may call for a hike in the key rate. However, monetary tightening may compromise economic growth while increasing the debt service burden on (mostly) middle-income families and dampening consumption. The authorities should therefore carefully weigh the pros and cons of a rise in the key rate.
Will MK fly again?
Other than a matter of national pride, having a national airline is undeniably a must for a country that thrives on its vocation as a tourist destination. The State of the Economy report reveals – perhaps unsurprisingly, but shockingly nonetheless – that Air Mauritius is insolvent and needs a significant capital injection to keep it afloat. At least Rs10.4 billion is needed to recapitalize the company. A restructuring plan may require additional financing.
I believe the government is incapable of mobilizing such funds in the immediate term. Hence, strategic partnerships to save MK should be high on the government’s agenda. The best option would be a local partner, which preferably has experience in the aviation industry. Alternatively, partnerships with friendly countries’ national airlines (Air India?) could be considered.
- Final word
The Alliance du Changement government has inherited an economy beset by poor economic policies, institutional failures and a plethora of structural constraints and social pressures. The economy has recovered from the pandemic but remains vulnerable. The government, therefore, faces the Herculean task of stimulating the economy and consolidating the financial situation while delivering on its electoral promises. This should be feasible if the pledges are toned down to reflect the new economic reality and if the government gives recourse to debt in the short term while focusing on bringing the debt-GDP ratio under the 80% limit in the coming years. The government has been given a clear mandate to implement change and it should take full advantage of it.
Mauritius Times ePaper Friday 13 December 2024
An Appeal
Dear Reader
65 years ago Mauritius Times was founded with a resolve to fight for justice and fairness and the advancement of the public good. It has never deviated from this principle no matter how daunting the challenges and how costly the price it has had to pay at different times of our history.
With print journalism struggling to keep afloat due to falling advertising revenues and the wide availability of free sources of information, it is crucially important for the Mauritius Times to survive and prosper. We can only continue doing it with the support of our readers.
The best way you can support our efforts is to take a subscription or by making a recurring donation through a Standing Order to our non-profit Foundation.
Thank you.
