A memo from the International Monetary Fund making ‘recommendations’ about the Mauritius Investment Corporation and the way our finances should be run. A government embarrassed by the confirmation that the economists who were sounding the alarm about many Government decisions were right all along. A public debt hovering, if not exceeding, 100% of our GDP….We turned to Economist and Director of PluriConseil Eric NG PING CHEUN for his views and outlook. As usual, he pulls no punches.

In the preliminary findings of the International Monetary Fund (IMF), there are a lot of truths couched in a very diplomatic language. What exactly is the IMF telling us in non-diplomatic terms?
For the International Monetary Fund, Mauritius has been successful in containing the Covid-19 pandemic so far, but the economic impact of the pandemic is huge despite stimulus measures to mitigate it. The tax-and-spend policy of the government has now reached its limits as public sector debt has sky-rocketed to unprecedented levels.

How much has public debt reached exactly. There seems to be different figures given by different sources…
According to the latest figures published by the Ministry of Finance, gross public debt reached Rs388.4 billion as at 31 March 2021, representing 91.3% of GDP, up from Rs329.5 billion (66.2% of GDP) on 31 March 2020. So, over one year, it has increased by an average of Rs5 billion per month when in normal times, the monthly increase is usually less than Rs2 billion!

Former Minister of Finance Rama Sithanen says our public debt has in fact exceeded 100% of GDP if you count the Special Purpose Vehicles. Is that a fair estimate?
Even without the Special Purpose Vehicles (SPV), our gross public sector debt is nearing 100% of GDP. The Rs60 billion contribution of the Bank of Mauritius (BoM) to Government was supposed to be a grant, but the BoM communiqué of last Friday now tells us that “Rs 28 billion is being treated as advance against future profits distributable to Government.” So this sum, which represents 6.6% of GDP, becomes a government debt, bringing the ratio debt/GDP to 98%. If the SPV are taken into account, we are above the 100% mark.

The BoM also stated in its communiqué that Rs 32 billion out of the Rs 60 billion given to the government have been written off. How is that consistent with these IMF recommendations?
The governor of the Bank of Mauritius has taken us for a ride as he wrongly stated that the contribution of the BoM would be entirely financed by market borrowings. He never mentioned that Rs32 billions of it would come from the Special Reserve Fund of the central bank. This is pure money printing, i.e. money created out of thin air. Presented with a fait accompli, the IMF has allowed the BoM to use this face-saving device, while recommending that “mechanisms should be phased in to further support the central bank’s credibility.”

“If the government continues to bury its head in the sand, the economic situation will dramatically worsen. Public debt will keep on rising, causing a sharp increase in interest rates, crowding out private investment, raising unemployment, depreciating further the rupee and fuelling inflation. Mauritius would become a stalled economy for a long period.”

What is there to worry about as long as Bank of Mauritius (BoM) is there?
The IMF has warned the government to stop using the BoM as a fiscal agent to finance its budget. Firstly, you will recall that the government amended the Bank of Mauritius Act last year to allow the central bank to grant Rs60 billion to the Public Treasury. Now, under pressure from the IMF, the central bank law is being reformed “to pre-empt further exceptional transfers to the government”. Secondly, the Mauritius Investment Corporation (MIC) was created as a subsidiary of the BoM, which means that the assets and liabilities of the MIC have to be reported on the balance sheet of the central bank. I wonder whether the IMF was really consulted on the MIC structure because it now recommends that the BoM should relinquish ownership of the MIC. These two recommendations of the IMF constitute a double slap to the top management of the BoM.

What are the implications of this?
The first implication, if the government follows these recommendations, is that it will no longer have recourse to money printing to finance its expenditures. The Ministry of Finance must find its own budgetary resources for its current and capital expenditures. Maybe the reform of the central bank law will allow government to use central bank money – “helicopter” money – to meet expenditures, but this should be recognised as a financing item, not as a revenue item, in which case these expenses will add to the budget deficit. The second implication is a result of the first one. The room for manoeuvre of the minister of finance for its forthcoming budget becomes very limited, if not inexistent as he will have to earmark budgetary funds for the MIC which has committed itself to additional deals to the tune of Rs14 billion. This money will not be available for essential public infrastructure investments and social subsidies. He will have to choose between saving distressed systemic companies, stimulating the economy and fulfilling the government’s electoral promises. Renganaden Padayachy is walking a tightrope.

What if he chose to fulfil the government promises as that seems to be the overriding motivation in everything this government does?
The prime minister has himself admitted that “the economy is on its knees”. Now, if the government continues to bury its head in the sand, the economic situation will dramatically worsen. Public debt will keep on rising, causing a sharp increase in interest rates, crowding out private investment, raising unemployment, depreciating further the rupee and fuelling inflation. Mauritius would become a stalled economy for a long period.

“The Mauritian economy today is totally different from what it was in 1982 when the then prime minister could protest against the diktats of the IMF. Its banking and financial sector is so connected with the world that the government cannot take the risk of being in conflict with the IMF.”

Is all this due to Covid-19 or was it expected?
This was expected well before the Covid-19 broke out. The Mauritian economy was already struggling with a faltering growth rate, tepid private investment, declining exports and a growing public debt. The economic strategy under the 2015-2019 legislative period boiled down to stimulating consumption with generous increases in wages and old-age pensions, without any structural reforms necessary to bolster the long-term potential growth of the economy. For genuine economists, it was obvious that such a strategy could not be sustained for an island economy that is fully dependent on imports for everything, from consumption to production. This approach did not change an iota, but was actually consolidated further, after the 2019 general elections. The pandemic has only revealed the economic weaknesses of the country and accelerated its fall.

Now what are the choices open to the Bank of Mauritius (BoM)?
The Bank of Mauritius has no other choice than to follow the advice of the IMF to withdraw from the shareholding structure of the MIC.

When the MIC was set up, some ‘political observers’ said that the BoM was following other banks elsewhere and that it was OK. How come the IMF has a different opinion?
No other central bank in the world did what the BoM has worked on: creating a subsidiary and financing it with foreign exchange reserves. Our monetary authority has lost all credibility in the way the MIC has been structured. The governor of the Bank of Mauritius cannot shirk his responsibility, having been involved in the creation of the MIC. He may at least save his personal reputation if he listens to calls for his resignation. 

We know political stooges don’t resign. What are the choices open to the government?
The government should change the structure of the MIC by setting up a Special Purpose Vehicle outside the remit of the Bank of Mauritius, injecting equity in it, allowing it to borrow funds from banks to leverage, and appointing a qualified and experienced expert in private equity to manage it. The MIC Board should also be reviewed to comprise real independent directors, i.e. excluding people from the BoM, which as the regulator of banks, has conflicts of interests with the MIC, and lobbyists from the private sector who are close to big business.

But wouldn’t another SPV create more opacity when the IMF is clearly pushing for more transparency?
Indeed, SPVs are opaque mechanisms which fall out of the purview of the parliament although public money is at stake. We live in a country where transparency is preached but not practised. The exception becomes the rule. And we have the nerve to boast about good governance in public affairs!

The BoM has already taken some measures. Are they in the right direction or too little too late?
The measures taken by the BoM to support the economy in the pandemic context were basically further cuts in the Key Repo Rate and extensions of moratoriums on capital and interest payments. For sure, they were appropriate for mitigate the impact of an economic shock, but they should be gradually withdrawn once the country firmly emerges from the pandemic. Otherwise, in the long run, the problem of moral hazard will become more serious, putting at risk the banking industry with a lot of zombie companies that are unable to service their debt and that survive only on state aid.

The IMF is in favour of an “accommodative monetary policy”, though, isn’t it?
Only in the short term. In the long term, it recommends “strengthening the monetary policy lever in anticipation of the waning of the crisis” to “solidify an effective monetary policy”. By these technical terms, the IMF means that the BoM must be ready to tighten its monetary policy and bring the interest rate to a level from which an eventual lowering of the rate will have a real impact on the economy.

What would happen if the government reacted in its usual ‘so what?’ attitude to the IMF recommendations?
I don’t think the government will dismiss the IMF recommendations with regard to MIC and central bank financing because the country is likely to ask for the use of the IMF Special Drawing Rights to get foreign currencies and pay its imports. If ever the government turns its back to the IMF, the tone of the IMF in subsequent reports will be more and more negative, and this will frighten international investors away from Mauritius. Worse, it would become more difficult for the country to be removed from the black list of the European Union. The Mauritian economy today is totally different from what it was in 1982 when the then prime minister could protest against the diktats of the IMF. Its banking and financial sector is so connected with the world that the government cannot take the risk of being in conflict with the IMF.

Considering the alarm being sounded about our public debt, particularly by the IMF, what will the next budget look like in your opinion?
Since the government cannot count on the central bank to finance its expenses, it can only raise its revenue mainly though taxes, apart from foreign grants. This is precisely what the IMF is proposing when it writes that “the government should prepare plans for fiscal consolidation”. I have no doubt that the next budget will focus on tax increases. Still, these will not be enough to stabilise government debt in the medium term. They should go hand in hand with cuts in expenditure. Obviously, it is impossible to slash recurrent expenses by 25% over one year. But there must be at least a 10% reduction together with prioritisation of expenditures, which would send the right signal to the IMF and to credit rating agencies like Moody’s.

What if we kept borrowing from foreign countries to keep people happy and keep the current government in power?
Moody’s has just downgraded Mauritius to Baa2 with a negative outlook and is likely to bring it down by one more notch, in which case our domestic banks will lose their investment grade. This could jeopardise our global business sector and prompt capital outflows, bearing in mind that deposits of Global Business Companies represent the bulk of foreign currency deposits of the domestic and international banks based in Mauritius. Presently, the Mauritian government does not borrow on the international markets. However, even foreign governments would henceforth think twice before lending money to Mauritius. At best, the costs of sovereign debt would soar. In any case, external debts do not necessarily make people happy as they need to be reimbursed with taxpayers’ devalued rupees. Whoever will be at the helm of the country to redress the Mauritian economy will require a lot of guts and political courage.