Economists: Budget 24, Mixed Bag of Social Measures & Economic Concerns

As overall inflation sees a gradual decline, some of the social measures in the budget could tip the scales. Price controls alone may not suffice to keep inflation within the 3% to 5% range, warned economist Swadicq Nathay.

Over the past two years, Mauritius has experienced a cumulative inflation of 15.5%. Various factors, including disruptions in the global supply chain, the pandemic, and geopolitical tensions like the Ukraine-Russia conflict, have influenced prices internationally.

Being heavily reliant on imports, Mauritius has borne the brunt of these consequences.

However, despite a decrease from 10.8% in 2022 to 7% in the following year, concerns about a potential inflation uptick arose shortly after social measures—such as increased pension benefits and revised minimum wage—were introduced in the 2024-25 budget.

Swadicq Nathay explained that an expansionary budget can impact inflation, typically involving increased government spending. In the 2024-25 budget, this translated to investments in infrastructure, subsidies, and social programs.

Additionally, measures aimed at boosting consumers’ purchasing power stimulate overall demand in the economy.

When overall demand grows faster than supply, it can create inflationary pressures, as noted by Cédric Béguier, Head of Investment Strategy at AXYS.

He highlighted that various factors within the budget could contribute to this situation. One primary driver of inflation in Mauritius, he asserted, is the depreciation of the rupee.

“Income growth can lead to increased demand, and since most of the products we consume are imported, there will be a higher demand for foreign currency, resulting in further rupee depreciation and ultimately inflation,” he explained.

Moreover, he added that high spending on infrastructure and development projects can boost overall demand, thereby increasing inflationary pressures.

“Policies aimed at wage increases to support purchasing power can also push inflation upwards.

And finally, extensive social programs can increase consumption without a corresponding increase in the supply of goods and services,” he affirmed.

Suttyhudeo Tengur, President of the Association for the Protection of Consumers and the Environment (APEC), offers a nuanced view on the potential inflationary impact of budgetary measures.

He noted a significant increase in the circulation of money following various measures announced in the 2024-25 budget, warning of a potential surge in inflation if Mauritian consumers fail to manage their household budgets effectively.

He cited imported inflation as a consequence of rising freight costs and fluctuations in the rupee-dollar exchange rate, ultimately impacting consumers negatively.

Hence, he emphasized the need for a thorough analysis of rupee depreciation concerning indicators like Gross Domestic Product (GDP) and public debt.

In the pursuit of enhancing the purchasing power of those at the bottom of the economic ladder, there is a real risk of price surges.

The economist expressed surprise at the Finance Minister’s failure to disclose the total cost of social measures.

He pointed out that a significant portion of the funds allocated to retirees and the most vulnerable will go towards imports, raising concerns about rupee depreciation.

Therefore, this could compel the Bank of Mauritius to intervene in the domestic foreign exchange market by tapping into reserves or borrowing more.

Tengur warned of the dangers of increased consumer spending resulting from a wealthier wallet, with consumers bearing the brunt of any resultant inflationary pressures.

In the medium term, inflation could erode the announced budgetary allocations, opined Shaktee Ramtohul, a business consultant.

He concurred with Béguier, highlighting the risks of an inflationary budget, including reduced consumer purchasing power and economic uncertainty, which could deter long-term investment.

To counter inflation, Béguier suggests that the central bank may maintain its policy of raising interest rates, potentially hampering economic growth. He also notes that inflation could make public debt servicing more expensive, affecting public finances in the long run.

In response to inflation risks, Finance Minister Renganaden Padayachy has pledged to take action to ensure that inflation remains within the target range of 2% to 5%.

Economists proposed various measures, including effective monetary policy to absorb excess liquidity and encourage savings, alongside reductions in consumption.

Tengur emphasized that effective inflation control requires efforts both from the government and consumers.

He advised families to prioritize needs, budget wisely, and indulge in personal pleasures sensibly.

As Mauritius navigates these challenges, prudent fiscal and monetary policies alongside responsible consumer behavior will be crucial in maintaining economic stability.

“Don’t get caught up in the spiral of impulsive buying just because your neighbor is doing better,” he continued.

Ultimately, he urged consumers to make an effort to save. Several conditions should be met to limit the impact of inflation.

If consumers spend their money wisely, taking into account their family priorities, inflation will be under control, he said. “And if, as the Finance Minister has promised, the government takes appropriate measures to control price hikes,” he added.

However, Suttyhudeo Tengur added that, as is generally the case in all countries, the more money there is in circulation, allowing consumers to make more extravagant purchases, the longer the inflationary trend will persist.

On the other hand, Cédric Béguier analyzed that the central bank must closely monitor economic indicators and proactively adjust interest rates to prevent economic overheating.

“Furthermore, there must be close coordination between fiscal and monetary policies to avoid contradictory policies that could destabilize the currency,” he suggested.

He also spoke of diversification of the economy. “Another way would be to invest in technology and innovation to increase productivity without increasing costs,” he argued.

Cédric Béguier added that there is a need to prioritize public spending and avoid unnecessary expenses to maintain strict budget discipline.

He also recommended training and education programs. “We need to strengthen the skills of the workforce to increase the supply of qualified labor, which can help contain inflationary wage pressures,” he said.

The Finance Minister has stated that price control will be relevant to avoid any artificial increase.

According to the economist, this wouldn’t be the best solution. This, he said, risks causing shortages of certain products.

“It would be more appropriate to counteract the devaluation of the rupee. There should also be rapid stimulation of our exports.

However, there is nothing in the Budget in this regard nor to boost tourism, two currency earners in Mauritius,” the economist lamented.

In an interview, economist Manisha Dookhony addressed concerns about the inflationary potential of the 2024-25 Budget.

She pointed out that increased allocations for Generalized Social Contribution (CSG) and pension raises will inject additional money into circulation, potentially leading to inflation.

She emphasized the importance of implementing measures to absorb excess liquidity to maintain inflation between 3 and 5%.

Dookhony also noted a potential conflict between the Budget’s social measures and the central bank’s monetary policy aimed at combating inflation.

Business Mauritius highlighted the continuous economic growth projected in the 2024-25 Budget, with a GDP growth rate of 6.5%.

Key budgetary measures aimed at stimulating economic growth include improving the ease of doing business, supporting the industrial and agro-industrial base, and laying foundations for emerging sectors such as biotechnology, Fintech, and AI.

Business Mauritius underscored the importance of productivity and value creation as ongoing priorities, alongside national efforts toward climate-related initiatives such as climate adaptation, circular economy, water management, and renewable energy.

Source: Defi Media