“We will witness the sharpest decline in our economy since 40 years”

Interview: Rama Sithanen

‘The pandemic will have permanent effects on the way we work, live, buy, eat, socialise, behave and travel. Yet Government and the private sector are reacting as if nothing has changed’

* “The Labour Party is disturbingly in a precarious predicament”
‘Either it adapts and reforms and becomes electable again or it runs the risks of staying in the opposition and be marginalised’

* ‘Can the ‘L’EntentePTr-MMM-PMSD’ convince the country that they have what it takes to win an election? And more importantly to govern! The jury is still out’

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Rama Sithanen, former Finance Minister, is well placed to comment on the state of the economy in the time of Covid. He is concerned about the attitude of both the government and the private sector, who are behaving as if as nothing has changed whereas it’s the exact opposite, with an economy which is already in recession. He is emphatic that the Labour Party must reinvent itself radically if it wants to stay relevant and be electable, and do more than to point out the downsides of the government – which is good enough to be in opposition, but not as a potential contender when it comes to ruling the country. ‘The tragedy often in politics,’ he says, ‘is that almost everyone knows what needs to be done. Yet emotion, self-interest, the belief that one is irreplaceable… trump informed judgement, reasoned behaviour and rational choice. And we end up with the worst of both worlds.’ Read on:

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Mauritius Times: Save lives, fix the economy and win re-election: that’s what any government would strive to do in the present testing circumstances. Does the Government’s handling of the economy in the wake of the Covid pandemic indicate that it’s well on track to achieving its objective?

Rama Sithanen:It is not clear there is a causal relationship between how a Government handles the economy and its chances of re-election. There are other important factors at play in determining who wins even if the state of the economy has a bearing.

* Where do matters really stand as regards the state of the economy?

The economy is in dire straits. All thefundamentals are in the throes.We are in a very deep economic recession as growth will contract by around 15% in 2020. The budget deficit and public debt have surged astronomically to unprecedented level and if we add the off-budget financing and the colourable devices used to compute actual debt, the predicament is worse.

Unemployment has risen sharply, and if we include discouraged workers, underemployed employees, those who work few hours or are onfurlough or unpaid leave, it could morph into a social crisis with income falling for a large section of our population. It is an unmitigated disaster forself-employed, independent workers and SMEs.

The balance of trade, the current account and the balance of payments will post massive deficits of 27%, 16% and 6% of GDP respectively in 2020. Exports, investment and consumption have all collapsed while savings is at an all-time low of 6.7%of GDP. Trust and confidence are at a very low ebb. The old economy represented by sugar, textiles/clothing and tourism are in agony. The financial services sector is operating with the triple threats of the grey and black lists, falling demand and hot competition while the seafoodhub is facing boycott.

* Things got worse with the pandemic?

The economy was struggling well before the pandemic hit us. Tourism had reached the end of a cycle and was showing signs of weaknesses while sugar had turned sour in the absence ofstructural reforms to lower unit cost and raise revenue for all stakeholders. The export-oriented industries have posted significant negative growth for the last five years. Apparel continues to face tough challenges and now the seafood hub is under stress.

The status quo is not sustainable for global business as the world environment has changed considerably. There has hardly been a new economic pillar developed for a long time. A lot of talk but little actions whether in terms of food security, the blue, green and the circular economy, the Africa strategy, the digital economy, fintech and the various hubs.

* As they say, things will get worse before they get better, right?

The closure of borders, the lockdown and the sharp fall in demand for our goods and services have amplified the gravity of the problems.As the tide has receded, we have been found swimming naked. We will witness the sharpest decline in our economy since 40 years.

There will be a bounce backin 2021, but it will be a technical one as the growth in 2021 will be measured on the very low 2020 figures. It will be then fade as is the case in many countries. The recovery will be slow, weak, unequal and unstable with borders still closed and a second wave of the pandemic in countries which buy our goods and provide us with tourists and investments.

* Are you saying we have not yet reached the normalisation stage where growth is moving closer to the pre-Covid levels? What conditions are necessary for an economic revival and how long will it take?

We are still in the induced coma phase with many sectors being supported by artificial economic respiration through wage support, financial assistance to firms and the MIC rescuingsomebig corporates. We are not yet in recovery phase for many sectors. And,more importantly, we have notstarted to adapt to the new economic environment in the wake of this severe health and economic shock as the world will be different with no return to the pre-Covid situation.

Covid-19 has caused widespread economic damage with long-term implications for countries, especially those dependent on global trade in goods and services and FDIs. The shock is more than three times worse than the 2008 financial crisis. There is extreme uncertainty about the path, duration, magnitude, and impact of the economic disruption.

In some sectors, the worst may be ahead of us as there is always a lag before we feel the full effects of the economic cyclone. It will not be a V-shaped recovery, especially with the second wave and the new lockdown in many countries.More likely to be a W- or K-shaped bounce back with a second decline in output after a recovery.

Some sectors will recover relatively quickly while others will take a very long time and some will bepermanently scarred. In terms of GDP, we are unlikely to reach the 2019 level before 2023. Tourism and travel will take around four to five years to attain the 2019 level. Our GDP per capita will collapse from US$ 11100 in 2019 to around US$ 8800 in 2020 which is the level we were 10 years ago.

Even before Covid-19, we had the lowest growth for many years at 3% in 2019. Without structural reforms, the outlook is bleak. The heights to scale are daunting and just burying our heads in the sand will not make these problems disappear. We need sound, robust and sustained policies and hard work to recover and transform the economy.

* Money does not seem to be an issue for the government. It has had recourse to the special reserves of the Bank of Mauritius, and more funds would be forthcoming from an Indian line of credit. But the government seems adamant about keeping a lid on the disbursements of the Mauritius Investment Corporation (MIC) and the conditionalities attached thereto. Is there scope for any abuse there?

There is a limit to raiding the reserves of the Bank of Mauritius, to printing money to monetise the fiscal deficit and to borrowing to finance elevated expenditures. We have gone past the acceptable limit for all three of them. We need to be careful of the impact on trust, confidence and credibility of a policy that systematically and cynically uses the Bank of Mauritius as an ATM to finance reckless expenditures. The consequences will be unsustainable debt and deceitful creative accounting that will place a heavy burden on our children.

Furthermore, the various wage subsidies are clearly not sustainable, neither for Government nor for the private sector. They do not meet the totality of fixed costs, hence their recourse to quasi equity from the MIC. Rs 80 b is a huge amount and nobody knows the evaluative criteria and whether the MIC has the technical competence and knowledge to appraise such complex files.

There must be transparency, accountability and governance in the structure of the MIC and the way it allocates public funds to corporates. A parliamentary oversight would have reined in the risks of excessive monetisation and careless indebtedness and potential abuses in the use of these funds. In some cases,it looks like the MIC is simply throwing good money after bad ones as some business models arenot sustainable in a post-Covid era.

* You also seem very concerned about the economic recovery strategy of Government.Why?

Covid-19 is teaching us some important lessons. I am worried that the strategy of government and also many in the private sector is to try to recover quickly from the economic downturn and go back to the same pre-Covid situation. While this is understandable, I believe it will be a serious policy mistake. We need economic leadership, strategic vision and a capacity to anticipate to stay ahead of the curve. The pandemic will change our day-to-day life and will likely have permanent effects on the way we work, live, buy, eat, socialise, behave and travel. Yet Government and the private sector are reactingas if nothing has changed.

Reliance on more of the same is simply untenable. Historically, pandemics have forced humans to break with the past and build a new world. Some of the changes in the digital economy, remote work, videoconferencing, e-commerce, fintech, online teaching, shorter supply chains, reshoring of activities, food security, telemedicine and delivery serviceswill be permanent. There will be a movement towards a greener economy, a substitution of capital for labour with greater emphasis on robotics, and a slowdown of globalisation and urbanisation. Governments will be bigger as it plays the role of insurer and investor of last resort while public debt will balloon, creating financial challenges.

The attitude and behaviour of people towards travel and tourism will change. Will the future of travel and tourism be smaller and different?Business travel will decline substantially with Zoom and Microsoft Teams and tech innovations making video meetings much better. Meetings, incentives, conferences and exhibitions (MICE) will be severely impacted as virtual events take hold.

Long haul destinations may be replaced by domestic staycations and regional trips. Large and crowded hotels could lose out to villas, private homes and short-term rentals like Airbnb. There will be an acceleration in the digitalisation of the tourism sector with as little human contact as possible. The question is whether the destination, hotels and airlines can reinvent themselves to meet these new needs and lifestyles in travel, including long stay tourists and people seeking safer locations to migrate to.

The biggest challenge for policy makers is how to embrace strategies that will speed up recovery while concurrently transforming the economy to meet the new challenges and capture the emerging opportunities unlocked by the health pandemic. Provided that the measures for recovery do not collide with the transformation ofthe economy.

We have yet to see a clear strategy that reconciles recovery with transformation. Some jobs will disappear permanently while some industries will go under as the economy evolves. There will be creative destruction. We need to support the recovery of sectors that can be resilient and competitive while also helping new sectors that will create futurejobs. History shows that policy choices made during crises can shape the world for decades to come. The country needs structural transformation to lay the foundations for the future prosperity of our people on a resilient, sustainable and inclusive manner.

* On the other hand, there is also continuing concern about the Contribution SocialeGénéralisée (CSG), and Business Mauritius has announced its intention to challenge this new contribution system in replacement of the NPF. What is the Government not telling us about its motives behind the shift to the CSG?

The current animosity and confrontation on the CSG does not bode well for our economy. This tax is an unnecessary distraction when we need to focus all our time, effort, energy and resources on economic recovery to save jobs and rescue firms.

To be frank, the CSG is discriminatory, inequitable, unfair, unsustainable, ineffective and ill-timed.

Discriminatory as it penalises private sector employees. Inequitable as a doctor who is an employee pays much more than his self-employed counterpart. Unfair as the benefits are not related to employee’s contribution.Unsustainable as the contribution would not be enough to meet the outflows due to the ageing population. Ineffective as it will make talented Mauritian less employable with the rising labour costs. And ill-timed as it is disingenuous to fight employees and employers when we need everybody on board to articulate a comprehensive and a coordinated policy response to face the triple health, economy and social crisis.

* On the political front, there seems to be a latent discontent with the leadership of the Labour Party, and some are saying in private that this predicamentis dragging the party down the road of perdition, and that this has to change. What are your thoughts?

The Labour Party is disturbingly in a precarious predicament. It must rise to the occasion to regain its momentum. It has an illustrious past and has contributed significantly to many social, political and economic advancements.It has never found itself in the opposition for two consecutive terms. It has arguably a very simple choice to make. The interests of the party, of its electorate and the country must prevail over personal considerations. Either it adapts and reforms and becomes electable again or it runs the risks of staying in the opposition and be marginalised.

It should follow the example of the Labour Party in New Zealand and in the UK and build an appealing leadership, a diverse and competent team, an ambitious and realizable programme, a modern way of doing politics and a broad coalition of people to become electable again. This is both feasible and desirable if the party does its soul searching in a dispassionate, composed and calm manner.

We have seen how Jacinda Ardern has made labour electable in New Zealand after a long spell in opposition. The same is happening to theUK Labour Party under Keir Starmer. The overriding criterion must be electability. Banking on the unpopularity of Jugnauth, on fraud, corruption, andpoor economic results may help but is not sufficient for the Labour Party to be back in office.It must do itsself-introspection and embrace a new paradigm in terms of leadership, people, ideas and policies to become the broad church again. Difficult for some, painful for others but absolutely necessary to become an attractive, effective and electable alternative to the MSM.

In its current shape, it is sadly the single biggest catalyst for another term of Jugnauth, as the frequency, intensity and vigour of thediscontent with the current LP leadership seem to be rising.

* What is your take on the ‘L’EntentePTr-MMM-PMSD’? The leaders of the Labour Party (LP) and of the MMM appear to be keen to go much farther. Do you see that happening?

The electoral system favourspre-election alliance to avoid vote fragmentation. We saw it at the 2019 elections when the MSM won handsomely in terms of seats with only 37% of the votes. The ‘entente’ is also important to act as a check and balance on Government.

Will it become an electoral alliance? Anyone with an insight into politics understands that this ‘entente’ faces six stumbling blocks.

– First, who will lead it against PravindJugnauth as potential PM?
– Second, who will hold the major constitutional posts and key ministries?
– Third, how will the 60 seats be split among the three parties?
– Fourth, where will candidates be fielded between urban and rural constituencies?
– Fifth, can they produce a roadmap of policies to address the various problems besetting the country?
– And, sixth, how does the ‘optics’ composition of that alliance minimise the risks of polarisation between urban and rural areas and between one section of the population and the rest?

Can they crack these six tough nuts, convince their respective supporters and the country at large that they have what it takes to win an election?And more importantly to govern! The jury is still out.

* How do you react to the view expressed in some quarters that a large majority of the LP-MSM common vote bank are still supporting the present MSM-led government – despite all the allegations of corruption, nepotism, etc. – for want of a credible alternative?

As at now, the answer appears to be a contingent yes.

The last four elections were fought on almost exactly the same basis. The LP won in 2005 by maximising its seats in rural constituencies and winning a few seats in urban ridings. The LP-MSM won in 2010 with a similarstrategy.

A new coalition of identity politics laced with economic interests delivered the election of 2014 to the MSM. And in 2019, the same menu was served by the MSM. Win most rural seats and fight hard to gain a few urban constituencies. Elections in 1967, 1983 and 1987 were contested along the same lines. The only difference is the party that manages to convince a specific electorateabout identity politics and economic interests. Since 2005, the MSM has done it three times, the LP twice and the MMM not at all. This is the stark ground reality.

While it is important for the three opposition parties to collaborate and coordinate their strategies and while it might win the municipal elections, it will be a different kettle of fish for the general elections. As it is not only about adding up the sum of the parts to reach the whole when they come together. The structure, character and dynamics of the campaign will change in a straight fight between LP-MMM-PMSD and the MSM Government.

This is not rocket political science. Identity politics is taking a more central role in many countries. The recent US presidential election is a case in point. It was largely based on identity politics and economic interest with a twist of ‘cultural’ differences. It was a highly cleaved contest in a very divided country. Broadly, the non-college educated, rural, mid-western, white men went for Trump in droves while the college educated, suburban, coastal, black,Hispanic and white women chose Biden. Of course, Biden built a powerful coalition of young, female, minorities and college educated people while minimising his loss among white working class and elderly people.

It will not be dissimilar in Mauritius. The identities and the containment strategy will of course be different. Can PravindJugnauth keep his strong rural base and contain his erosion in urban constituencies with a coalition of specific interests? Or could a potential LP-MMM-PMSD alliance flip most urban seats while resisting losses in rural ridings?

With the current leadership of the Labour Party, I believe it will be a repeat of the last four elections. And chip in 1967,1983 and 1987 and you have the main drivers of the next election campaign.

How will the LabourParty defend this LP-MMM-PMSD coalition among its supporters if it has fewer than 30 candidates out of 60 and these are likely to be in rural areas where it will be very vulnerable to the onslaught of the MSM? Even if it wins, it could end up as a junior partner both in Parliament and in Cabinet. How will the MMM convince its supporters that Ramgoolam should be the leader of that alliance?

Yet it could all be different. An informed change in leadership opens up vast opportunities for the Labour Party to become electable, either on its own or in an alliance. Many support the LP but not its current leadership. The interests of the party should prevail over personal ambition.

Of course, the change must be done decently and honourably. Will change happen? I would say a contingent no. The tragedy often in politics is that almost everyone knows what needs to be done. Yet emotion, self-interest, the belief that one is irreplaceable, the desire to take revenge and plain shortsightedness trump informed judgement, reasoned behaviour and rational choice. And we end up with the worst of both worlds.

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* Published in print edition on 13 November 2020

Tags:Bank of Mauritius, Biden, Contribution SocialeGénéralisée, COVID, FDI, FinTech, Hispanic, Interview, L’EntentePTr-MMM-PMSD, Labour Party, LP-MMM-PMSD, LP-MSM, MIC, MSM, MSM-led government, Post-Covid, PravindJugnauth, pre-Covid, Rama Sithanen