In a recent interview to Business Magazine, the views expressed by the Minister of Finance again misrepresent the truth about the country’s debt situation, and mislead the public by treating the deterioration in the course of the economy with utmost complacency. It is time to stop living in a fool’s paradise and come to grips with the hard facts.

Cosmetic debt targets 

After drawing on additional Bank of Mauritius (BoM) money, the Minister is now announcing a Govt debt target of 80% of GDP in June 22 by maintaining the debt ratio at the Dec 21 level. This appears achievable, especially with a further improvement in nominal GDP. Whether this projected debt stabilisation will provide sufficient comfort to Moody’s about the sustainability of our public finances, and thus avoid a downgrade of our sovereign credit rating is questionable. Govt’s repeated recourse to the central bank’s printing press to hold down debt will no doubt weigh negatively on a credit rating decision. 

The Minister is also targeting a Govt debt ratio of 60% by 2030. This gradual debt reduction would still call for drastic fiscal adjustment. Assuming a low interest rate of 3%, representing the average cost of Govt debt, and a strong GDP growth rate of 5% annually, the country would still need to show a primary budget surplus of 2% of GDP as from 2025 onwards to lower the debt ratio to 60% by 2030. 

Mauritius has never recorded such primary fiscal surpluses in the past. Achieving primary budget balance is difficult enough. The primary budget balance in the five years preceding the Covid crisis averaged a deficit of 1% of GDP. Even with a zero primary budget balance as from 2025, a spectacular GDP growth of 8% annually would be needed to decrease the Govt debt ratio to 60% by 2030. 

Mauritius faces a severe debt challenge. Without a thorough review of Govt spending policies, a 60% Govt debt ratio by 2030 is unattainable. A first step towards reining in future debt increases is to revive the Public Debt Management Act, preferably without any easy-going escape clauses. 

Inflation 

Despite being queried on how to counter inflation, the Minister only makes reference to Govt subsidies on essential goods and hardly even mentions the word inflation. Stats Mtius estimates the year-on-year increase in consumer prices at 7.4% in Jan 22, while the general consensus is that inflation is actually running at 10% and above. He brags of his “politique fiscale progressive et distributive” but says nothing about inflation being equivalent to regressive taxation, by putting a heavier burden on the poor and vulnerable. This lack of response from a devoted disciple of the Gini coefficient, and a self-proclaimed apostle of “la lutte contre la pauvreté et le progrès social comme une priorite absolue”, is bewildering. 

His focus is on supporting growth, not on protecting the purchasing power of the population, and he does not call for any anti-inflationary measures by the BoM. The risks of slipping into a wageprice spiral and the destabilizing effects on the economy are conveniently dismissed. Some private sector concerns have also been expressed about the adverse effect of higher interest costs on corporate profitability. But, with the global rise in interest rates, the BoM will anyway be compelled to follow suit to prevent capital outflows, unless it chooses to reimpose exchange controls. 

Growth 

To justify his forecast of a 6.5% real growth rate in 2022, the Minister relies on tourism recovery, as well as manufacturing, and the “grands projets d’investissements et d’infrastructures”, besides the pharmaceutical, knowledge and renewable energy sectors. The growth lies mostly in spin and curl, as the boost in public investments is largely concocted. 

Total public sector investments are estimated in the 2021-22 budget at about Rs50 bn annually for the next three financial years, or about the same as previous years’ estimates. The largest item of total public investment is budgetary capital expenditure. For the first half of 2021-22, budgetary capital outlays amounted to only Rs3 bn, indicating a major shortfall on the budgeted estimate of Rs14 bn for the whole year. 

The optimism on growth prospects is also not supported by improved capital or labour productivity gains, which are critically important to enhance the economy’s growth potential. Besides, domestic growth in a highly open economy like Mauritius is strongly dampened by the sizeable net deficit on exports of goods and services, which limits the expansionary effects of consumption and investment expenditures. 

External deficit 

The deficit on net exports of goods and services already represented a high of 15% of GDP, or Rs75 bn, in 2019 – a pre-Covid year. It is estimated to have shot up to 25% of GDP, or Rs110 bn, in 2021, mainly on account of the slump in tourism receipts. The resulting persistent shortage of foreign exchange has put downward pressure on the rupee, and the authorities have accommodated a rupee depreciation of about 10% annually in the last two years. 

Despite the deteriorating goods and services imbalance, the authorities are highlighting the increase in external reserves during 2021, equivalent to USD1.3 bn, without revealing that external reserves were boosted by Govt and BoM foreign borrowings, especially the BoM financing of USD0.8 bn. Another exceptional inflow of USD0.8 bn in the last week of Dec 21 to further uplift the BoM foreign reserves remains unidentified. If reserves are already at such a comfortable level, as Govt claims, there should be no need for BoM to borrow so heavily. 

Conclusion 

A tourism-dependent country like Mauritius is highly vulnerable to health crises or natural disasters. True to its populist leanings, Govt engaged in Covid-spending without restraint, coupled with excessive expenditures on public employee compensation, basic retirement pensions, and wasteful capital projects, while also abetting pervasive corruption. 

The chickens are now coming home to roost, with all the main macro-economic indicators flashing red – unsustainable public debt, widening external deficit, continued rupee depreciation, worsening inflation, and weak growth recovery. Better managed countries that exercised due control over the fiscal stimulus, while still providing for needed social expenses, are now in a sounder position to revive growth and contain economic imbalances. 

Although the signs of a possible fiscal correction are mildly encouraging, our policy makers need to demonstrate a stronger commitment to a comprehensive review of Govt expenditures and stop pandering to populist agendas. Good governance requires prudent management to ensure adequate fiscal space for potential foreign and domestic shocks, from pandemics to tropical cyclones.

Analysis: Decoding Debt and the Economy (Part 1)