Several economists have been sounding the alarm about the state of our economy, with a special emphasis on public debt, particularly after the downgrade by Moody’s. The minister of finance, on the other hand, has been displaying an arrogant confidence which is incongruous with the situation as portrayed by economists, editorialists and Moody’s. The latter’s downgrade was even spun into a happy story. We talk to Vinaye Ancharaz, economist and member of the MMM Central Committee about his views on the economic and political situation.

In spite of the doom and gloom predictions, our economy seems to be on the right track, doesn’t it? More investment, more tourists…
It depends on how you read the statistics and how far out you’re looking. If you suffer from what economists call “the money illusion” and read the economic data in nominal terms, as our learned minister of finance is used to doing, then there is indeed cause for jubilation. After contracting by 14.6% in 2020, GDP rebounded to 3.6% last year. The government expects growth this year to be 7.2%, compared to the International Monetary Fund (IMF)’s forecast of 6.1%. In any case, it is clear that GDP growth remains subdued, especially since the initial growth projection for 2022 was 7.5%, and the forecast for 2023 is lower at 5.6%. Real GDP at the end of 2023 will be a shade lower than the prepandemic level in 2019. Of course, nominal GDP will naturally be higher.

Because of inflation?
Yes, inflation reached 11% in May and is expected to fall only slightly to 8.6% by the end of the year, compared to the IMF’s forecast of 11.2%. Even then, significant downside risks to inflation exist as there is no end in sight to the war in Ukraine, as the supply-chain disruptions caused by the pandemic linger on and as the rupee will likely continue to depreciate as the Bank of Mauritius tries to make up for the financial losses incurred in the past months.

Is the international outlook brighter?
Not at all. As a matter of fact, the IMF, in its July 2022 update of the World Economic Outlook, warns of a “tough 2022 – and possibly an even tougher 2023, with increased risk of recession”. Since the beginning of the year, the IMF has repeatedly slashed its global growth forecast for 2022 from 4.4% to 3.2%. World GDP growth in 2023 is projected to be 2.9%. This will surely have an impact on Mauritius. The one sector that is most sensitive to global economic downturns is, no doubt, tourism. And just when we thought the worst was behind us, as tourist arrivals have picked up, we might be in for another rude awakening!

Tourists or no tourists, it would seem that around Rs200 billion – billion – of Foreign Direct Investment (FDI) are being processed by the Economic Development Board (EDB) and will span over the next five years. Isn’t that enough to shelter us from any shortage in tourist arrivals in the future?
FDI of Rs200 billion over the next five years amounts to Rs40 billion per year. That’s twice the average FDI inflows to Mauritius in recent years. Honestly, I don’t know where the figure of Rs200 billion comes from but it raises several questions. First, even if I trusted the figure, it more likely represents intentions to invest rather than firm commitments. We all know that intentions are not always carried through. With a recession on the horizon, and the latest downgrade by Moody’s, foreign investors will most likely reconsider their investment plans. Second – and I come to it again – with the level of inflation we have witnessed in recent times, Rs200 billion today represents 15% less in real terms compared to pre-pandemic investment levels. Third, and related to the last point, at the current exchange rates, every dollar of investment amounts to Rs45.40 compared to Rs35.80 in August 2019, that is, 27% more. Thus, the depreciation of the rupee artificially inflates FDI values, which are being flaunted in nominal terms because it serves the interests of a myopic government. Adjusting for the combined effects of inflation and currency depreciation, Rs200 billion today would be the equivalent of Rs124 billion three years ago. Spread over five years, that’s about Rs25 billion annually, which isn’t much higher than FDI levels in the prepandemic years.

 Isn’t the aim to go back to the level we reached during the pre-pandemic years?
We need to ask where the investment is going to. In recent years, almost 90% of all FDI inflows have been absorbed by just one sector – real estate. This is unlikely to change. Our manufacturing industry is waning, and we have systematically failed to attract any significant FDI into that sector. Last year, a mere 1% of FDI inflows was destined for the manufacturing sector. The same is true of the agro-industrial sector, which boasts much potential, but fails to attract any FDI.

You seem to be skeptical of the minister of finance’s predictions for growth. He made a number of predictions for the economy in the last three years. Haven’t we lived up to them?
Have we? Last year, the minister of finance projected a growth rate of 9% for the financial year ending 30 June 2022 on expectation that tourist arrivals would top 650,000. It is now clear that we received about 100,000 fewer tourists, and the actual growth rate was below 7%. Growth this year is projected to rise to 7.5% on the back of tourist arrivals of 1 million. However, tourist arrivals for the first semester of the year were 377,000. On these trends, the forecast of 1 million tourists by the end of the year looks rather unlikely. The IMF puts the growth rate for 2022 at 6.1% on the assumption that tourist arrivals are at 60% of prepandemic levels. I am inclined to go along with that forecast, especially in light of the gloomy prospects for the world economy, the Moody’s downgrade and the risks of ongoing double-digit inflation.

“Last year, a mere 1% of fdi inflows was destined for the manufacturing sector. The same is true of the agro-industrial sector, which boasts much potential, but fails to attract any FDI.''

Doesn’t the fact that investment on such a large scale is coming into the country prove that it doesn’t really matter what Moody’s says?
What you’re referring to is what the government recently sought to affirm! You will recall the communiqué issued by the Ministry of Finance, which completely misses the point by declaring that Moody’s had actually upgraded the economic outlook from ‘negative’ to ‘stable’ and that Mauritius remains the only international financial centre (IFC) in Africa that is qualified as “investment grade”. The communiqué fails to mention that there aren’t many IFCs in Africa, or that we are hanging by a thread because another downgrade will move the country to ‘junk status’.

Do you mean you don’t believe in the announcement made by the EDB?
The recent announcement by the EDB that Mauritius is successfully attracting large inflows of investment is more fiction than fact! As an economist, I believe in hard data, not in investors’ intentions! And I’ve explained in much detail why the EDB’s excitement should be taken with a dose of moderation. But, yes, you’re right in your query: that the EDB’s statement came just days after the ministry’s communiqué can hardly be dismissed as a mere coincidence. It was a calculated move meant to destroy an academic correlation and pretend that we can still be an attractive investment destination despite a Moody’s downgrade! This is dangerous and irresponsible. Only a narcissist would believe in such a self-concocted theory.

So what is the situation then?
We are in the grip of a stagflation and things might get worse. Instead of the government window-dressing the current situation, it would be better if it were upfront about the risks facing the economy, and getting prepared for the onset of a global recession.

Won’t India’s $300 million loan along with a $25 million grant for the Metro Express help us out of the rut that you’re describing?

We shouldn’t mix issues! The loan is meant to finance the extension of the tramway from Réduit to Côte d’Or. It will add another Rs13.5 billion to the national debt, which is dangerously approaching the half-trillion-rupee mark. But it is well known that even this figure underestimates the true level of the debt by more than Rs90 billion. According to the Ministry of Finance, public sector debt as a ratio of GDP currently stands at 86%. The new loan from India will add another 2 percentage-points to this ratio, which will remain above the new ceiling of 80% recommended by the IMF.

But all governments borrow, don’t they?
Borrowing by the government is in itself not a problem – so long as it can pay back the debt. For this to happen, it is crucial that the funds are invested in projects that generate revenue or cause the country’s GDP, and hence tax revenue, to grow. Unfortunately, this does not appear to be the case with the metro project. The company is operating at a heavy loss, and the new investments will only make the financial situation worse. I doubt that the tramway will ever be able to make a profit, and until that happens, it will continue to guzzle up millions of rupees in government subsidy. We should be careful of the debt trap, especially when we borrow in foreign currency. Already, every citizen has a debt overhang of some Rs400,000! We don’t want to end up like Sri Lanka, do we?

“The recent announcement by the EDB that mauritius is successfully attracting large inflows of investment is more fiction than fact! As an economist, I believe in hard data, not in investors’ intentions!''

What is your evaluation of the political situation in the aftermath of Pravind Jugnauth’s victory at the Supreme Court?
Personally, I was not expecting the Supreme Court to overturn the election of the prime minister and his running mates. And judging by the public’s reaction on social media, I can say that most people were not expecting any major surprise either. Obviously, the PM took it as a major victory, a vindication of his long-held claim that the 2019 elections were free and fair, and that an odd anomaly cannot be allowed to cast doubt on the entire democratic process. The timing of the judgment couldn’t have been more appropriate for the MSM government. It gave serum to an embattled party, sinking under the weight of a series of scandals, none more damaging than the latest Sniffing-gate. On the positive side for the country, I think the verdict allows us to move on. It allows the opposition to move on. There are more important things that deserve their full attention.

Like an alliance between the main parties?
The opposition cannot remain divided against a rival as mighty as the MSM, with all the affluence and influence they possess. So, the coming together of the main opposition parties has been hailed by a majority of the population as a positive development. Of course, we are at a very early stage of the coalition and much remains to be agreed upon. My sincere hope is that this unity prevails, and is actually strengthened, on the way to the general elections. For me, the question of primeministership is secondary – even if I would prefer some form of powersharing. The most important task is to rid the country of a tyrant. I hope all politicians could set their ego aside and focus on this task.