The financial expert and board director brings into focus pertinent issues raised by IMF in its recent Article IV Consultations report. He views the debt situation as worrisome and explains why Maldives is running at nearly 100% of occupancy levels of 2019.

IMF Article IV Consultations has raised concern in its latest report on Mauritius’ public debt which could exceed 100 of GDP at medium term. How do you respond to this finding? 
The public debt has reached unprecedent levels obviously on the back of the Covid crisis where government had to intervene to stabilize the economy, bail out several corporates and also pay the wage assistance scheme for nearly 18 months. Thereafter, we have seen the intervention of the government in providing subsidies to try to counter the effect of inflation. But then, we shouldn’t forget that public debt was already much higher than the target of 60% of GDP recommended by the IMF back in 2019. 

Before the Covid crisis, public sector debt to GDP was nearing the 70% level and if we add debt taken by state-owned companies and backed by Government, we all know that the level exceeded the 70%. So the reality is that the authorities have been unable to contain the rising level of debt pre-Covid, and today in an era of Covid and ongoing geopolitical crisis, it will be even more difficult for the government to bring the debt level to sustainable levels. And then as we can see around the world, rising interest rates are the new norm which will mean debt servicing will become more expensive and raising new debt to refinance existing debt will cost higher. 

This is why the likes of the World Bank have been warning about potential debt crisis for emerging markets, and we have lately seen the likes of Sri Lanka, Argentina and a number of African countries such as Kenya and Ghana having problems of potential debt default. That’s why the government of Mauritius needs to be careful about our very high level of debt and the more so, in an environment where the Mauritian economy has not been able for years to create real economic added value to bring the debt level down to manageable levels. 

How do you view IMF’s projection targeting tourist arrivals of 800,000 in 2022, which is well below the objective of government and private tourism institutions of 1 million? 
It’s no surprise that the initial targets set by the government which was 350,000 tourists for October to December 2021, 650,000 for up to June 2022 have not been met. And now pushing at 1 million till the end of 2022 might be a stretch, given the growing uncertainties in our core European markets, whereby we are talking of high inflation impacting Europeans and also the growing likelihood of recession in the Euro Zone. 

Having said that, we should try to understand why Maldives is now running at nearly 100% of occupancy levels of 2019 and at much higher revenue per tourist. How come India has become the number 1 source market and Russia, despite the Ukrainian crisis is the third source market for Maldives? 

The success of Maldives rests on the full opening of air access and also the ability to pull clients from source markets on a strategic basis. In the same way, India being the main source market, given its proximity to Maldives, we could have made South Africa, our second source market given its proximity. Particularly as for two years, South Africans have not been able to travel coupled also with the fact that long haul travel for South Africans to Europe or Asia has become too expensive with rising cost of air fares and a weak South African Rand. 

Besides, with the ongoing energy crisis leading to power cuts for 6 hours per day in South Africa, we could have pulled a different type of clientele looking for a Plan B for extended stays to be able to mix their holidays and remote work. As long as we are in the mindset of protecting Air Mauritius at all costs and hence have a half pregnant strategy in terms of air access policy and nothing radical nor bold in terms of overall strategy for sourcing new clientele, we will keep missing the target set by government. Just opening the borders and expecting a wave of tourists is no more a strategy. 

Annual inflation is expected to rise to 11,4% in 2022 driven by surging fuel and food prices, past depreciation of the rupee and recovering domestic demand. You share this view? 
Since last year, we could see that rising inflation will remain in for much longer on the back of a number of factors, namely a massive injection of money exceeding 25% of GDP since the start of the Covid crisis. This mass of money keeps demand buoyant. There is also a supply disruption as the global machinery was on still mode in 2020, recovering in 2021 and hence it takes time for the global supply to get to cruising speed. 

Another reason will be port disruptions in China following a zero-Covid policy and unprecedented increase in freight costs exceeding seven times the cost of freight in 2019. The rise of global energy prices to levels much higher than in 2019 and the Ukrainia- Russia crisis heading to the ongoing and increasing geopolitical tensions which unfortunately will last much longer should also being considered to explain this projected high inflation rate. 

This is the background to rising inflation in the world. Now for Mauritius, we add to the fact that the rupee keeps weakening against the dollar which is the principal currency for more than 70% of our imports. It’s not therefore a surprise that inflation is in the double digit territory. And the reality is that inflation is far more than the official rate for the low and middle classes. We are in a stagflation period for Mauritius. High inflation rate, high unemployment rate especially youth unemployment and low GDP growth. We should bear in mind the economy contracted by 15% in 2020 and only achieved a 4% growth in 2021 and in 2022, it will be difficult to exceed 5%. So we are far from having recovered the lost grounds of 2020. 

Let’s come with the monetary policy where it is highlighted by the IMF Report that BOM has borrowed from non-residents and used deposits of domestic banks in FX to increase its official reserves. Your comments? 
The reality is that our economy is unable to generate sufficient forex revenues and hence the BOM continues to inject forex to provide for forex liquidity and also to try to slow down the depreciation of the rupee. We saw how in April the US$ 200M injection by the BOM was quickly swallowed by the market and two months later the rupee was back to the 45 level against the dollar. 

If the BOM had not intervened, the rupee would have long hit through the level of Rs 50 against the dollar. That’s where I believe the real value of the rupee should be. As for reserves, BOM is spin doctoring its high level of reserves but reality is that it is on the back of external debt and bank deposits. This is an illusion as external debt needs to be repaid and bank deposits can flow out very quickly to safer havens just like hot money. That’s why we need to be careful when we look at the real situation of our reserves. 

What we need is for reserves to be increased on the back of real economic added value that brings real forex in the country. With our ever-increasing import bill, continuous downward trend of our exports, slower recovery of our tourism revenues which is still way below the levels of 2019, low FDI, no new sectors of substance launched to-date, it will be difficult for BOM to have a substantial increase of its reserves without having recourse to external debt and bank deposits. 

The issue of our pension system sustainability is being today highlighted by foreign reports, particularly with the ageing population and the CSG benefits to old-aged pensioners as from July 2023. How do you assess the situation? 
The pension system sustainability has been an ongoing issue for the last 10 years. All indicators back then showed that the pension system will be in deficit with increasing number of people reaching retirement, an inverse pyramid with an ageing population, rising youth unemployment and a Mauritian economy that has not been able to create any new pillars of substance for the last 10 years. 

We need to be very careful that we don’t end up like Greece which had similar issues with its pension system before the financial crisis of 2007/08. The reality is that the government will not be able to continue to service the future payouts unless they raise contributions from the working class people. We have seen the introduction of the CSG in 2020 and make no mistake, over time the current contribution by the working class will be increased. 

We need an urgent action plan to tackle this pension system which would include a number of solutions such as better management and investments by our pension funds to generate more income in the future, and implementing the policy of targeting which seems to be a taboo and yet is a necessity.