“14th Month Payment…Illusion of Growth, but Not Sustainable”

Anthony Leung Shing, the Country Senior Partner at PwC Mauritius and the Deputy Regional Senior Partner for the East Market Area at PwC, has raised concerns over the implications of mandating all businesses to finance the 14th month’s salary, regardless of their specific economic circumstances. He warns that such a requirement presents risks of economic distortion and emphasizes the need for a robust support mechanism.

According to Leung Shing, the anticipated boost in Gross Domestic Product (GDP) of over Rs 36 billion for 2024 appears inflated, accompanied by overestimated revenues of Rs 16.7 billion and underestimated expenditures of Rs 5 billion for the fiscal year 2024-2025.

He pointed out that there is a concerning addition of Rs 321 billion to the public debt over the last decade, describing the findings of the ‘State of the Economy’ report as “overwhelming.”

When asked if he was surprised by these “manipulations” of data, Leung Shing noted that numerous economists had previously highlighted controversies related to the revision of GDP calculation methods, which have sparked significant debate.

Such practices often emerge when institutions face pressure to present a more favorable view of economic conditions.

Particularly alarming is the magnitude of revisions highlighted in the latest State of the Economy report.

However, he stressed the need to contextualize these analyses within the backdrop of a recent government change.

He cautioned against painting an overly grim picture of the current situation, as this could further erode stakeholder confidence and complicate the implementation of necessary reforms.

A balanced approach, grounded in factual evidence and rigorous analysis, is essential to restore institutional credibility and ensure an honest assessment of the economy’s state.

In a recent report, Moody’s highlighted that discrepancies in economic data would hinder the country’s efforts to improve public finances.

Leung Shing agreed, stating that such inconsistencies risk distorting budgetary policies, exacerbating financial imbalances, and making essential reforms even harder to implement.

Additionally, they are undermining the country’s credibility with investors and international partners, potentially increasing borrowing costs.

The new government faced numerous challenges in restoring trust, including enhancing transparency, conducting independent audits, and strengthening public institutions.

Ensuring integrity and rigor in public financial management will be critical for maintaining a sustainable and credible economic trajectory.

The discussion around the payment of the 14th month is currently dominating headlines.

For the private sector, this represents an unbudgeted expense of Rs 12 billion.

Leung Shing examined the potential impacts of this electoral promise on businesses, noting that the 14th-month payment could have significant implications.

“This unplanned expenditure will strain cash flow, particularly for small and medium-sized enterprises (SMEs),” he warned, adding that this could lead to increased risks of bankruptcy and decrease investment activities.

To cope with this added cost, some businesses may be compelled to pass the burden onto consumers, which could further drive inflation.

Exporters, already grappling with high production costs, may find their competitiveness in international markets diminished due to these new financial pressures.

While the government has initiated consultations with the private sector and proposed mechanisms like payment installments to ease the financial burden of the 14th month’s salary, many businesses are still grappling with the strain of this additional cost.

This raised the question: what will happen to companies that, despite these adjustments, lack the necessary resources to absorb such expenses without jeopardizing their economic viability?

The introduction of the 14th month payment is anticipated to exert significant pressure on cash flow, particularly for small and medium-sized enterprises (SMEs).

This situation is likely to increase the risk of bankruptcies and stifle investment opportunities.

In an effort to manage these costs, some businesses may find themselves forced to pass additional charges onto consumers, potentially exacerbating inflation.

Since the pandemic, many companies have managed to return to profitability, with some even performing better than they did before COVID-19.

However, the issue of payment capacity is not uniform across the private sector.

Sectors still heavily impacted by the pandemic or smaller enterprises may find this extraordinary expense challenging and detrimental to their liquidity.

Furthermore, recent profitability does not necessarily equate to having adequate cash flow to absorb an unforeseen cost of Rs 12 billion.

Imposing the 14th month payment on all companies without considering their specific economic situations could lead to distortions in the market.

Therefore, establishing a support mechanism recognizing sectoral disparities and the financial health of companies is crucial to mitigate negative consequences.

Business Mauritius has expressed concern over the 40% increase in payroll expenses since the beginning of the year, describing the addition of an extra salary payment as “distressing.”

The federation has also criticized the government’s intervention in corporate salary policies.

In response, Leung Shing stated that the 40% increase in payroll, paired with this additional compensation, is jeopardizing business viability, especially given the current global environment characterized by heightened competition and inflationary pressures.

Uncoordinated wage increases that do not align with productivity gains pose significant risks to the competitiveness of Mauritian businesses in international markets and threaten their long-term sustainability.

Government interference in salary policies restricts the ability of companies to adapt to economic realities, exacerbating an already precarious situation.

Without thorough consultation and a collaborative approach, these decisions could undermine the private sector, hinder growth, and adversely affect employment levels.

A balanced and constructive dialogue between the government, the private sector, and social partners is essential for reconciling social objectives with economic imperatives in an ever-evolving global landscape.

There is another perspective that asserts it is not the government’s responsibility to pay private sector salaries with public funds.

This viewpoint raised important considerations regarding the appropriateness of the government making such electoral promises, particularly when they impose significant financial burdens on the private sector without proper consultation.

Furthermore, this approach distorts market dynamics and sets a concerning precedent where private enterprises, already facing economic challenges, are compelled to adhere to politically motivated decisions that may not align with their economic realities.

This is reflecting a poorly considered government intervention that risks further weakening businesses and harming their competitiveness.

A salary policy should be realistic, based on productivity gains, and designed collaboratively with all stakeholders rather than dictated by electoral considerations.

Understanding the interdependence of social and economic goals is vital for fostering a robust and sustainable economic environment.

The Risks of the 14th Month Payment: Consumption vs. Sustainable Growth

The introduction of the 14th month salary payment is creating the risk of fueling consumption, which may inadvertently intensify inflation in the country.

This situation raised an important question: Are governments universally destined to rely on consumption as a means to boost the nation’s GDP?

Focusing solely on consumption to stimulate GDP growth is a short-term strategy that can lead to detrimental effects, particularly on inflation.

While the 14th month payment may increase consumption levels, it runs the risk of exacerbating the already high inflation rates, ultimately eroding the purchasing power of citizens in the long run.

This approach is creating an illusion of growth that is unsustainable.

Although not every government is bound to adopt this strategy, transitioning toward a more balanced economic model will be challenging and demanding.

Sustainable growth requires productive investments, innovation, enhanced productivity, and an increase in exports.

Therefore, it is essential to move beyond temporary measures and prioritize structural policies that strengthen economic fundamentals while mitigating inflationary pressures.

This government, much like its predecessor, has chosen to exclude employees earning more than Rs 50,000 from benefits associated with the 14th month payment.

This decision is particularly impacting the most productive employees, who significantly contribute to tax revenues and the Social Contribution Fund (CSG).

Excluding these high-earning workers reflecting an unfair and shortsighted policy.

Such employees play a crucial role in bolstering the economy and their exclusion could diminish their engagement in the workforce, heighten the risks of talent flight, and undermine the overall competitiveness of the country.

This approach also exacerbates tensions between social equity and economic efficiency.

A balanced policy recognizing the contributions of all employee categories is essential to maintain social cohesion and long-term competitiveness.

In light of recent developments, some observers have voiced concerns about potential discontent among those workers who have been excluded from salary-related adjustments.

This could lead to an increased risk of brain drain. Countries like Singapore and the United Arab Emirates attract and retain talent by providing growth opportunities, attractive working conditions, and an environment conducive to innovation.

In Mauritius, brain drain is not solely related to salary revisions; it is also driven by a lack of opportunities, career prospects, and a trustworthy, ambitious ecosystem.

To counter this trend, Mauritius must position itself as a hub of opportunity and growth. This requires policies that value local talent, promote innovation, and create a competitive and inclusive environment.

Investing in strategic sectors, enhancing education, and fostering public-private partnerships can transform Mauritius into an attractive center for both local and international skillsets.

Turning to the Mauritius Investment Corporation (MIC), there are concerns about its operations, described as a “Pandora’s box.”

An audit trail from the Bank of Mauritius has revealed that billions of rupees were allocated to companies with ties to the previous regime.

To bring order to the MIC, an independent audit is crucial to identify abuses and hold involved parties accountable.

Increased transparency, including detailed reports on activities and decisions, is also essential for restoring trust in the institution.

However, given Mauritius’s limited resources, the country may struggle to maintain a sovereign fund like the MIC effectively.

The management of such funds requires robust governance, substantial resources, and political independence, which the MIC currently lacks.

In the medium term, dissolving the MIC may be a viable solution. Public funds should be redirected toward infrastructural projects and strategic sectors with enhanced oversight to ensure effective economic management aligned with national priorities.

Only through such prudent measures can the nation hope to foster sustainable growth and long-term stability.

Source: Defi Media