High inflation, an increase in the price of petrol, soaring prices of foods and other commodities conspire with the problems surrounding the Mauritius Investment Corporation to create a climate of economic insecurity. We sought the views of Vinaye Ancharaz, economist, on all these issues. His opinions are enlightening.

Last year ended with an increase in petrol prices and this year started with a general increase in the prices of commodities. According to Statistics Mauritius, the year on year inflation rate for 2021 was 6.8%. Is there a causal relationship between the two?

Indeed, last year ended with chilling news of a 10% hike in petrol prices. According to Statistics Mauritius, however, this price rise added practically nothing to the inflation rate for the year, which stands at 6.8%. It appears that food and beverages accounted for the bulk of the general increase in the price level last year.

Are the prices going to be stabilised this year then?

No. In fact, the full impact of higher petrol prices will be felt this year, and it is likely to push the inflation rate in 2022 into the double digits. Prices of bus, tramway tickets and taxi fares will surely rise. But the indirect effects can be more significant as the cost of distribution takes the escalator.

“Cases of nepotism and corruption have flared up; our institutions are being choked by incompetence and the public has little confidence in them; meritocracy has become a vain word; and our very freedoms are at stake. All this casts a dark cloud on the prospects for the year.”

Which areas do you think will be hit the hardest?

We should expect higher costs in the construction sector as well as increased prices of food and beverages, including of basic products like bread.

What were the causes of inflation in 2021?

The causes are not hard to detect. The monetary base has increased by 35% in the space of 12 months, between November 2020 and October 2021, largely as a result of central bank financing of government budget. This has led to a sharp increase in liquidity in the economy. The steady slide of the rupee against major currencies is another factor. Currency depreciation raises import costs, leading to a degree of imported inflation in a country where practically everything that is consumed is imported. Moreover, freight and food prices have increased as global supply chains have been disrupted by the pandemic.

Is the rupee likely to pick up when tourist arrivals go back to normal?

The rupee has depreciated by 18% on average against the US dollar, the euro and the pound since January 2020. In 2021, the depreciation continued at rates similar to the previous year for most currencies. For the euro, which had strengthened by a hefty 17% against the rupee in 2020, further appreciation was averted through massive interventions by the Bank of Mauritius. However, the rupee’s slide is likely to continue this year as foreign exchange earnings are unlikely to return to pre-Covid levels despite the uptick in tourism as the trade deficit continues to widen and as the central bank continues to divert its reserves to the government.

Isn’t the depreciation of the rupee being orchestrated by the central bank?

It is! With the clear aim to replenish its reserve funds, out of which it provided grants of Rs60 billion to the government to plug the budget deficit in 2020.

Many economists screamed in agony when the Bank of Mauritius (B0M) gave that Rs60 billion grant to the government. Where are all the fears expressed in relation to the consequences of depleting the reserves? The Bank seems to be doing rather well, isn’t it?

First, let me remind our readers that the BoM had subsequently agreed with the IMF to treat only Rs32 billion as a grant to the government and the remaining Rs28 billion as an advance against its future profits payable to the government. Ultimately, the Bank has ignored the IMF’s advice since its latest financial statements show that it had already transferred Rs55 billion as a “One-off Contribution to Government” by end-June 2021. This action may have important repercussions, including a possible downgrading by Moody’s. Second, it is misleading to say that the Bank of Mauritius is doing well. The Bank’s financial statements for the year ended 30 June 2021 show a net profit of Rs394.4 million. However, the Bank reports gains on revaluation of foreign currencies of Rs14.6 billion, representing 65% of its total comprehensive income for the year. These gains are the result of a deliberate policy of allowing the rupee to depreciate. As such, the Bank’s profit, far from being a sign of strong financial performance, is symptomatic of the sorry fate of our national currency. Ironically, it is the Bank of Mauritius’ responsibility to defend the rupee! A consequence of the continuous weakening of the rupee could be dangerously high rates of inflation. While it may give an artificial boost to exports, which struggle to take off after the plunge in 2020, any competitiveness gains are likely to be eroded over the long term as the costs of imported inputs rise.

Within the Bank, the Mauritius Investment Corporation (MIC) is now investing in projects, including the Airports Holdings Ltd. How do you react to that?

The MIC’s mandate is to invest in businesses that have been hit hard by the pandemic. Such investment is in return for an equity stake in the company. Airports Holdings is a government-owned company while the Bank of Mauritius is an agency of the government. So, we have a situation in which one government agency is acquiring an equity stake in another government entity! This does not create net wealth for the government, and is counter-productive. It seems that MIC has been handing out cash without any serious investment appraisal. It is little surprise, therefore, that the company reported a loss of Rs538 million in its first year of operations. Against this background, the cash injection into Airports Holdings is alarming both because of its sheer size and the opacity around its true purpose. The so-called ‘investment’ of Rs25 billion represents about one-third of the initial capital of the MIC and it alone equals the sum total of loans and investments approved by MIC as at end-June 2021. Rumour has it that a large chunk of the investment will be diverted to pay off government debt. So, it is doubtful whether this amount will ever be recovered. The same can be said for several of the other companies in which the MIC has invested. The MIC will probably go down in history as a special-purpose vehicle that the BoM conjured up to plunder its reserves, reward cronies and cover up the government’s abysmal failures at managing the national debt.

“The official unemployment rate of 10.2% in December 2020 was arrived at by reclassifying 65,000 workers as economically inactive rather than jobless. Without that adjustment, the true unemployment rate would be no less than 19.6%.”

Hasn’t the money been used judiciously?

It seems that the MIC has been handing out cash without any serious investment appraisal. Of the Rs80 billion injected into the MIC, the company had approved loans and investments of Rs25 billion as at end-June 2021, of which over Rs9 billion has been disbursed. Notably, the MIC reported a loss of Rs538 million in its first year of operations. Given this track record, it is doubtful whether any investment in Airport Holdings will ever be recovered. The same can be said for several of the other companies in which the MIC has invested.

Is there anything similar to the MIC in other central banks?

As far as I know, no other central bank operates a private subsidiary, especially one that invests in dubious businesses and is sheltered from public scrutiny despite operating with public funds. The International Monetary Fund (IMF) has been extremely critical of the BoM running a private company and had recommended that the MIC be operated by the government. Once again, the Bank chose to go against the IMF!

But what’s wrong with the Bank having a subsidiary?

The fundamental mandate of the BoM is to fight inflation and maintain financial stability. Conducting any other business could detract its attention from its core responsibilities and potentially compromise economic stability. In view of the rising inflation and the relentless depreciation of the rupee, it seems that this is already happening.

Is all this affecting the employment situation?

The unemployment rate at the end of September 2021 stood at 9.5%, about 1 percentage-point lower than the corresponding period in 2020. However, the official unemployment rate of 10.2% in December 2020 was arrived at by reclassifying 65,000 workers as economically inactive rather than jobless. Without that adjustment, the true unemployment rate would be no less than 19.6%. It is clear that we are starting off on unemployment figures that have been made to look better than they actually are.

Would you have a breakdown of these figures?

A close look at the data reveals the precariousness and the human cost of the unemployment situation. Some 63% of the unemployed have been looking for a job for about a year; 27% live in households where no one has a job; and 29% of the jobless are youths.

Has unemployment not gone down with the re-opening of the economy and recovery in the hospitality sector?

It has gone down a notch. However, not every unemployed is looking for a job in the tourism industry! So, unless the recovery gathers momentum and spreads out to other sectors, unemployment will persist in the years to come.

Where are we headed economically?

We are living in very uncertain times. We started the new year with news of a new variant that is wreaking havoc in Europe, in the United States and elsewhere in the world. On a positive note, however, the Omicron variant is allegedly milder, with significantly lower hospitalisation rates while vaccination rates have increased. Whether this is a harbinger of better days is too early to tell.

What about economic growth?

Economic growth in Mauritius recovered to 4.8% in 2021 after plummeting to -15% the year before. For this year, we can expect growth to hover around 5%, with substantial downside risks. Much will depend on the pace of recovery in the tourism sector, which remains at the mercy of the pandemic. The construction sector expanded by 25% in 2021 but it is unlikely that this momentum will be maintained this year, especially in light of the recent increase in the price of cement and other building materials. Consumption, which has been the main contributor to growth in recent years, is also likely to take the hit as inflation soars and uncertainty looms.

Is 2022 going to be a better year for most Mauritians?

‘Better’ is a strange word, I would say. Yes, the economic situation is improving, albeit slowly. Whether the same can be said of the social and political conditions is doubtful. We don’t have updated statistics on poverty in the country but my guess is that the number of poor has increased with the pandemic, and the safety nets tendered by the government have not been enough to protect livelihoods. Rising prices are biting into the public purse and more and more people are left moaning about making ends meet. This situation will get worse during the year. On the other hand, people are in the grips of a political situation that is sucking the life out of them. Cases of nepotism and corruption have flared up; our institutions are being choked by incompetence and the public has little confidence in them; meritocracy has become a vain word; and our very freedoms are at stake. All this casts a dark cloud on the prospects for the year.