On the economic side, what has gone so wrong that the economy has fallen in complete disarray, despite what Pravind Jugnauth and Renganaden Padayachy have been – and are still – trying to sell to us? This question is being regularly brought to the table when l’express meets key partners and actors of business in Mauritius. Many years of budget deficits without tears spread complacency among the people about their ability to keep consuming goods they did not produce with money they did not have. In the end, all sources of funds dried up. Ramesh Basant Roi, economist, is a key contributor of l’express. He focuses on what he knows the best: the central bank (BoM), which has not been spared. “The economy is mired in a complete baggage of riddles trapped inside a policy dilemma. Policy makers find themselves checkmated. The drain on the forex reserves of the BoM is continuing. The failure to perceive that nature is a better accountant than politicians probably explains our common hubris and indifference to history. Our economists engaged in policy making could have learnt a few great lessons if they had cared to read Lord Keynes’ famous 97-page classic on ‘How to Pay for the War – A Radical Plan for the Chancellor of the Exchequer.”Basant Roi has given us, during the week-end, an overview of where things are going to on the economic front. He told us bluntly that “painful settlement of accounts is on the card. For a better understanding of the Government’s policy mistakes during the recent pandemic, an Open Letter was addressed to the Prime Minister by myself.”

Following an in-depth briefing with l’express, Basant Roi underscores hereafter some useful policy recommendations, which were regularly published during the past three years or so. Had they been implemented, our balance of payments position, the domestic foreign exchange market, the foreign exchange reserves of the BoM and its balance sheet as well as the prevailing monetary conditions would have been in relatively much better shape. In short, the economy would have been under much lesser strains.

1. The economic tea leaves are forming a pattern worldwide; it’s not pretty. It is not unusual for anybody, economists or non-economists, to look for historical precedents that might serve as a useful guide for crisis resolution. In times of crises, the question usually set is: “Which policy instrument worked last time we had a crisis?” We believe that the crisis Mauritius is currently going through is very much unlike the 2008 financial crisis which had wiped out trillions of US dollars of financial assets of financial institutions and other investors and of millions of debt-ridden householders. Almost overnight, failed financial institutions and the massive losses of assets by investors and householders had brought about a depression-like contraction of the afflicted economies of the world (…).

2. During and after the Covid-19 pandemy, three foreign exchange earning sectors, Tourism, Manufacturing and Construction – vitally important for the Mauritian economy – became the worst hit.

3. As a result, the three sectors are bound to face cash flow problems. Which institutions know best the strengths and weaknesses of the balance sheets of all the firms operating in these sectors? Of course, it’s not the Government. Nor is it the BoM or any party other than the commercial banks. The banks are better placed than anybody else in the system to know and fully comprehend the cash flow problems of the firms brought to a halt in the lockdown. Banks, too, have skin in the game as they also face the threat of deaths. They do have more than sufficient idle loanable resources and as such their contributions are a decisive factor in a successful crisis resolution without side-effects as long as the BoM competently provides the necessary supports. Wouldn’t it be appropriate for considering a suggestion that the banks ease out the cash flow of enterprises by way of making available to them funds out of their own idle resources at, say, 0.5 per cent or even free of interest, subject to an interest margin paid by the BoM to them, and the credit risks shared between the BoM and the banks, while bearing in mind that the latter’s robustness matters for macro-economic and financial stability?

4. Is the Mauritian economy facing a generalised ‘demand problem’ or a ‘supply problem’ as are conventionally understood? Apart from a handful of vegetables and canned foodstuffs, Mauritius imports almost every consumer goods. The country is not short of foreign exchange to meet its imports requirements. The Government is the largest employer in the economy and all public sector employees are being paid their regular monthly salaries. It is clear that many in the private sector, including banks and other financial institutions and the Offshore business sector, etc., are being paid their salaries. Old people are being paid their monthly pensions. Retired people are earning their monthly pensions. The class of citizens left out includes the self-employed and daily wage earners in the manufacturing sector. This group constitutes the core class of citizens who genuinely deserves due consideration. The basic problem is not about widespread and self-feeding demand and supply deficiencies as in a war-devastated economy that would require ‘helicopter money’.

5. A suitably targeted support measure would be the most appropriate approach of assisting the temporarily unemployed. Ideally, each of the householders who has been out of job due to the lockdown could have been issued with a special debit card with limits set for each week until the lockdown is lifted. In the design of policies, additional burden on an already strained Government finance has to be avoided by all means. Nor should the BoM have any recourse to its printing press in the process. Where would the money hail from? Given the economic emergency and serious threat of job losses in vast numbers, the Government could justifiably call for burdensharing and suspend payments of end-of-year bonuses across-the-board to all its employees and pensioners for one or two years. This could be made applicable to the private sector, too. Public sector employees would forego the travel grants paid to them during the lockdown period. These, along with the expected windfall gain from the massive drop in the price of oil would go towards constituting the Covid-19 Fund for re-allocation to the genuinely needy citizens and for saving our small enterprises in the private sector. Of course, these are unconventional and exceptional measures but are meant to resolve an extraordinary crisis at a time when fiscal space is lacking. This is not a full set of emergency economic measures. It could be complemented by other measures, too. Importantly, these decisions would obviate the need to having recourse to the printing press of the BoM. Government debt would be contained as a result. Aggregate demand, in the face of a further deterioration of the current account deficit of our balance of payments, would be clamped down to some extent. Pressures on the forex reserve of the BoM and on the exchange rate of the rupee would be lessened.

6. We are all familiar with the saying: “You cannot eat your cake and have it at the same time.” If we eat the cake and still want to have it with total disregard to our own economic wellbeing, we will eventually get the kind of economy we deserve. The foregoing suggestions would be a “litmus test” for all the high talks aired here and there about our capacity and willingness for nationbuilding. Only we, as a people, can hurt Mauritius. And only we, as a people, can save Mauritius from troubles, present or future. Uplifting one another is the surest way of getting the best out of the present crisis and paving the way for a stable economy in the years ahead. We need to be guided by this national objective. To achieve the national objective, we have to tune on our national spirit.

7. Financial stability matters. The three most important variables which we need to bear in mind in respect of the concept debt-to-GDP Ratio, an important one to consider in optimal policy decision-making at present, are income, interest rate and the magnitude of debt, irrespective of whether it is household debt, corporate debt or Government debt. A dis-aggregated empirical analysis of this concept leads one to conclude that interest rate is a far less important variable than income, the coefficient of which is materially significant. Income is overwhelmingly more important. One would be inclined to argue that a low rate of interest sustained over time would help promote investment and raise income levels in Mauritius. Theoretically, yes.

‘’The banks are better placed than anybody else in the system to know and fully comprehend the cash flow problems of the firms brought to a halt in the lockdown.''

Does it, in practice, consequentially influence productive activities in the real sector of our economy in a big way given the prevailing state of the economy? And has it, so far? We have had roughly a decade of low interest rates. With so low rates of interest, one sould have expected a ‘bubble’ somewhere in the real sector of our economy instead of a ‘bubbling’ Government debt!

In highly financialised financial centres, low rates are steroids for unproductive speculative activities. Literature is littered with evidence that, below a certain level, interest rate loses its efficacy. If sustained for too long, low rates are very likely to turn out to be counterproductive. Regulators of our banking industry know that better. Excessive reliance on interest rate as an instrument for easing access to finance needs to be weighed appropriately since banks have to strike a balance between risk and reward. It is quite a common feature, more so in times of crises, that even in advanced countries banks stick to their own terms and conditions of lending despite cuts in key policy rates by their central banks. Emphasis on growth enhancement by way of much-needed structural reforms – a can that has been kicked down the road for many years – is a far more meaningful strategy for growth enhancement than futile cuts in the key policy rate of the BoM.

8. In the Pandemic box of suggested policies, mention has been made of ‘helicopter money’ which involves recourse to the printing press of the BoM as if helicopters spraying water randomly over raging forest fires could stop them. True there is some merit in this line of thinking, particularly in a war-devastated economy where all means of production have been destroyed. But ours was not a war-devastated economy. All means of production are stil intact. ‘Print and spend’, in a system already flushed with excess liquidity, is very likely to bring about dislocations and distortions in the economy. This policy path had/has to be religiously avoided (…). Suffice it to say that the policy of ‘print and spend’ in crisis times has made the rich richer and the poor even poorer. This is well documented. Mauritius is not the US; it is not the Eurozone; it is not the UK or Japan either.

These countries have currencies that are ‘reserve currencies’. And reserve currencies are currencies which investors world over are ready to deal in and hold as assets. From time to time, their Governments and central banks can afford to have safe recourse to the printing press in order to wriggle out of crisis situations without unleashing disruptive forces to their own economies and the world economy as well. As long as they ‘print and spend’ at a rate consistent with world economic growth, they and the world economy keep going in stable conditions. But these countries have been looking only at the money value of what is being bought and sold at the present time; they have stopped looking at the economy as a whole in structural terms, nor even over the longer term, and hence their persistent sluggish growth performance and overdependence on China which focuses on the real economy. Covid-19 has thrown on the table the huge risks associated with the overdependence, however virtuous globalisation is said to be.

9. Ours is not a ‘reserve currency’. The Mauritian economy is having to do with a huge current account deficit which is expected to worsen. We no longer have a good cushion of foreign exchange reserves which was meant to be preserved by all means. The more the Government prints and spends, the more intense will be the pressures on our foreign exchange reserves and consequently on the exchange rate of the rupee. A large-scale ‘stimulus’ made up of sizeable increases in public spending out of money freshly printed eventually arrests growth. Money is spent without productive outcomes. Labour is often misdirected into dead end forms of activity. Debt builds up with little or no increase in real output which allows the debts to be repaid. With a ‘print and spend’ policy stance, it will be easy in the beginning but tough in the end. Whereas, with the ideal set of measures mentioned earlier it will be temporarily tough for some (if at all) in the beginning but durably easy in the end.

‘’The more the government prints and spends, the more intense will be the pressures on our foreign exchange reserves and consequently on the exchange rate of the rupee.”

10. Therefore, there is no “first best” or the “best practice” for tackling crises. In practical terms, Mauritius cannot but only apply tools that “best fit” its own prevailing conditions on the ground. Fear and misgivings inhibit our ability to think clearly, to cooperate fully, and to change things radically as a community. The wellbeing of any person is also dependent on the well-being of the person next door. If we, individually and collectively, fail as a community in making hard choices, many jobs will get destroyed and morality shattered with little hope for a durable economic revival. All of us need to keep in mind a simple truism: there is an unavoidable cost for crisis resolution, irrespective of the measures implemented by the authorities. And the cost is ultimately and indiscriminately borne by all the citizens of the country. It is rewarding to make a one-off pay for the cost than to let the cost works its way into the system and grow bigger and bigger in terms of economic dislocations, distortions, imbalances in Government finance and in external payments position, and eventually sluggish growth in the future. Hard choices !

By Ramesh Basant Roi & l’express economic team

PS: For purposes of illustration, Basant Roi relates an anecdote, in his own unique style.“Way back in 1998, before I was appointed Governor of the BoM, the domestic forex market had crashed. An accelerated depreciation of the rupee, gone wild and out of control, had severely undermined social and economic stability. Soon after I was appointed Governor, I had raised yields on treasury bills to as high as 13 per cent and soaked up over Rs 5.0 billion borrowed from the BoM within a few weeks of my appointment. Once it was syphoned off the system, the domestic forex market had stabilised. ‘Print and spend’ for overspending carries with it a huge risk, more so when the balance of payments outlook is far from promising. Prudence dictates that our policy makers must not err on the wrong side.”