Economist Warns, Govt’s Fiscal Indulgence Equates to 5-Term Overspending

Rajeev Hasnah, Economy expert, analysed the IMF report, arguing that beyond the noted post-pandemic performance, there are urgent issues to address, including the need to rebuild fiscal reserves to tackle future crises.

In a recent interview with l’Express, the economist sounded the alarm on the growing burden of public debt. He expressed concerns that the government’s reliance on tax revenue and borrowing to cover the budget deficit is a worrying trend. The economist claimed that this approach is unsustainable and could have long-term consequences for the country’s economy.

Is the Ministry of Finance justified in celebrating the contents of the IMF’s May Article IV report?

The IMF has acknowledged the Mauritian economy’s capacity to rebound, especially in the tourism, construction, and financial services sectors, three years after the COVID-19 pandemic.

It’s worth noting that tourism took off only after our borders reopened in 2021, which was late according to economic operators.

It’s also important to recall that the financial services sector was “blacklisted” by the European Union and the United Kingdom in February 2020.

This necessitated a revamp of the “AML/CFT” legal framework to exit the list and remove the looming threat over the Mauritian jurisdiction and financial services.

Many still wonder how we ended up in this category, which endangered our financial services sector, contributing at least 10% of the Gross Domestic Product (GDP) and generating thousands of jobs.

What are your key takeaways from this report?

The IMF emphasized the need to rebuild our fiscal and external buffers 33 times.

The main recommendations focused on rebuilding fiscal and external reserves and reducing public debt to enhance resilience against future crises.

It’s crucial to remember that the world has experienced 15 different crises in the last 20 years.

Additionally, the IMF reiterated its proposal for the Mauritius Investment Corporation (MIC) to withdraw from the central bank’s shareholding, advocating for its independence and credibility through amendments to the Bank of Mauritius Act.

Simultaneously, the institution calls for much-needed structural reforms to enable sustainable and inclusive economic growth in Mauritius. It also suggested revising the Generalized Social Contribution (GSC) formula.

Furthermore, the IMF expressed doubt about the feasibility of the debt reduction trajectory promised by this government.

It categorized the country with a “High Sovereign Risk and Debt Sustainability” rating due to the “high level of vulnerability in the medium and long-term horizons” and a “contingent debt liability” associated with the quasi-fiscal operation of the MIC.

Ultimately, the IMF insisted: the printing of bills amounting to Rs 158 billion should be considered public debt.Therefore, in our analyses, the Rs 158 billion must be factored in addition to the Rs 525 billion public debt. The IMF projected a GDP of Rs 1 trillion for Mauritius by 2029. Is this achievable?

To reach this GDP level, the IMF predicted that the annual nominal growth will be between 7% to 7.5% from 2025 to 2029.

It’s imperative to note that the IMF expected over 50% of this growth to be driven by inflation, with the remaining as real growth.

Unfortunately, the IMF is foreseeing this monetary illusion persisting in the future, impacting the Mauritian economy for the next five years.

Additionally, there are concerns raised by specialists regarding the Rs 651.7 billion GDP in 2023 reported by Statistics Mauritius. The IMF highlights this discrepancy and points out changes in GDP calculation methodologies.

Economists and independent observers still awaiting official explanations regarding the disparity between Statistics Mauritius’ GDP and that of the Bank of Mauritius, particularly concerning export service figures.

This difference representing a colossal Rs 100 billion gap in the 2023 GDP. If we deduct this amount, the country’s GDP would stand at only Rs 870 billion in 2029 and Rs 551.7 billion in 2023 (compared to Rs 512.1 billion in 2019).

An official clarification on this difference would dispel any uncertainty surrounding the actual GDP figures.

Approaching a budget, there’s talk of the Finance Minister’s maneuvering room. Does he have enough space to ensure budgetary balance?

The budget will be constructed mainly on inflation tax, with record VAT collection, and chronic borrowing to cover the budget deficit.

Almost half of the expenses from extra-budgetary special funds are recurrent. The IMF has called for a review of these funds’ usage to enhance transparency and strengthen public fund utilization by the government.

With upcoming elections, some observers expect populist or even electoral measures. Can we anticipate this in the fifth Budget of this government?

There’s already talk of a “labous dou” Budget, risking becoming diabetic, which is a disease!

However, the IMF states on page 9, paragraph 17, that the government is planning to adopt a different fiscal policy, if not austerity:

“In this context, the expected contractionary fiscal stance in FY24/25 is appropriate.” Nevertheless, according to salary data published by Statistics Mauritius, economic decisions since 2020 have resulted in only a 20% salary increase from 2019 to 2023, while the cumulative purchasing power loss was 27.8%.

Implying a minimum loss of 7.5%, compared to 26.2% salary increase and 11% purchasing power loss from 2014 to 2019, and a 33.7% salary increase and 12.8% purchasing power loss from 2010 to 2014.

Additionally, residential property construction prices increased by 88.4% from 2019 to 2023. This raised questions about the country’s economic philosophy today.

What should be the main focuses of this government’s fifth Budget?

Beyond the IMF-recommended reforms mentioned earlier, the country’s biggest challenge remains restoring substantial confidence in its macroeconomic management and institutions, as emphasized by the IMF.

This is essential for all stakeholders – consumers, entrepreneurs, youth, and investors – to come together to rebuild reserves spent without control over the past five years.

Without high confidence in the sustainable management of the economy, we cannot retain our precious resources or attract others to achieve balanced, sustainable, and inclusive growth. Unfortunately, Rajeev Hasnah doubting that the next Budget will move in this direction.

Following a negative growth of 14% in 2020 due to the pandemic and economic crisis, the economy rebounded to an estimated 6.5% rate this year, according to Renganaden Padayachy. Should the Finance Minister be credited for managing the economy well?

It would be unfair not to recognize the contributions of all previous governments, ministers, and Mauritian citizens who have worked towards this direction.

This is because the IMF has repeatedly stated that the reserves built by the entire country over several decades have been used, if not exhausted.

The IMF also acknowledged that we were able to rebound thanks to the resilience everyone contributed to building, as well as the courage and determination across various sectors.

The government opened the reserve floodgates and, as the English saying goes, “inflate their way out of the situation they created.”

The situation we face today – a loss of purchasing power of over 34% from 2019 to March 2024, a 28% depreciation of the rupee against the US dollar since 2019, and a shortage of foreign currency for the economy’s smooth operation – steming from the famous decision to print Rs 158 billion from the central bank.

That being said, we’ve incurred an additional Rs 205 billion in public debt since 2019, whereas in the five years between 2014 and 2019, we only incurred Rs 65 billion in debt.

Adding the “quasi-debt” to the equation, we’ve accumulated debts and expenditures equivalent to 5.5 terms of a government (or 22.5 years) within a single 5-year term!

The high cost of living affects all Mauritians today. It’s their primary concern, according to a Synthesis/l’express survey conducted in October 2023.

One of the reasons cited is the price hike, stemming from the rupee depreciation. How can we halt the decline of our currency?

The answer is simple: our rupee needs to regain the confidence of Mauritians and operators. Currently, that’s not the case, explaining the shortage of foreign currency in the forex market.

An analysis by visualcapitalist.com ranks Mauritius at the top of the list of countries where under 30s are less happy than over 60s.

Could this be a reason driving young professionals to emigrate?

It’s not entirely unfounded that “the devil lies in the details.” The findings of the World Happiness Report shed light on several aspects of Mauritius, both internally and in comparison with other countries.

While Mauritius ranks 70th out of 143 countries in the global indicator, results vary significantly when filtered by age. For over 60s, Mauritius ranks 28th, alongside countries like France, Singapore, and Spain.

However, for under 30s, Mauritius ranks 85th, on par with countries like South Africa, Venezuela, and Ukraine (where Venezuela and Ukraine rank even better, at 83rd and 82nd, respectively).

Visual Capitalist placed Mauritius at the top of the world for the gap in rankings between over 60s and under 30s. This disparity is quite alarming.

While the happiness level of the elderly mirroring that of those living in Singapore and France, the happiness level of the youth category aligning with that of those living in Venezuela (considered an authoritarian regime by The Economist) and Ukraine (a country at war with Russia since February 2022).

This significant happiness gap between the two generations is concerning, indicating extreme opinions about living in Mauritius.

Perhaps this situation regarding the Happiness Index of the youth could explain why the country is currently experiencing a massive brain drain across all economic sectors – the situation is so dire that one might even speak of a labor force exodus from the country.

Those under 30, as well as those aged up to 50, might worry about their future and that of their children and retirement.

They may also feel sad about the lack of access to opportunities for a comfortable life and building a decent asset base, as their parents did in the previous generation.

They may also feel angry about how their purchasing power, both for consumables and for assets like a house, has been reduced to almost nothing in such a short time!

Source: l’Express