In his intervention on the Finance Bill 2022 in the National Assembly, the Minister of Finance  engaged in extensive data spinning to mislead the public about the true state of the economy.  This article helps to restore the facts and sniff out the truth.

Higher Growth

The Minister triumphantly stated to the country that Mauritius will register in 2022 « un PIB à hauteur de 526 milliards de roupies, bien au-dessus de celui de 2019 ».  With soaring inflation, the sky is obviously the limit for GDP in nominal terms.  Excluding inflation, GDP in 2022 will in fact still be 5% below 2019 in real terms.

Incredibly, the Minister managed to avoid any mention of inflation or prices even once during his speech.  It must be hard to reconcile a current inflation rate of 11 per cent, and the drastic erosion in purchasing power, with his oft-repeated devotion to the welfare of the poor and vulnerable.

Lower Debt Ratio

Even more elatedly, the Minister announced a decline in public sector debt relative to GDP :- « Je suis heureux et fier de pouvoir annoncer que la dette … s’est abaissée …au niveau de la dette du secteur public, passant de 92,1% au 30 juin 2021 à 86,4% au 30 juin 2022. En poursuivant nos efforts, nous atteindrons notre but de ramener la dette du secteur public à moins de 80% du PIB deux ans avant la date prévue ». 

There is little justification for such euphoria.  The quoted figure of 86% is derived as the ratio of Public Sector Debt (PSD) of Rs449 bn in June 22 to an updated GDP of Rs520 bn for 21/22.  PSD is underestimated by a concocted consolidation adjustment of Rs15 bn, or about 3% of GDP, which is discarded by the IMF in its debt analysis of Mauritius. Without this phony consolidation adjustment, PSD is actually higher at Rs464 bn, or 89% of GDP, in June 22.

PSD was reduced by Rs25 bn through an artificial sale of Air Mauritius Holdings, a state-owned company, to Mauritius Investment Corporation (MIC), owned by the Bank of Mauritius (BoM), in Dec 21.  Without this BoM/MIC financing, the PSD ratio is higher by Rs25 bn, or an additional 5% of GDP. 

Moreover, the updated GDP for 21/22 is based on revised National Accounts Estimates published at end June 2022. With the introduction of new benchmarks, Stats Mauritius revised GDP data upwards from 2018 to 2021 by about Rs14bn to Rs18 bn. Without this revised methodology of GDP statistics, GDP in 21/22 is lower by Rs22bn, and the PSD debt ratio would be another 4% points higher.

Inflation also contributed to raise nominal GDP and lower the PSD ratio. The budget estimate of the GDP deflator for 21/22 is around 7%.  With zero inflation, GDP is lower by Rs33 bn, and the PSD ratio higher by still another 7% points. 

PSD was thus reduced to 86% of GDP in June 22 as a result of a fabricated consolidation adjustment of 3% of GDP, a dubious equity sale to BoM/MIC of 5%, a GDP revision by Stats Mauritius of 4%, and GDP inflation of 7%.  Without these operations, the PSD ratio at June 22 is as high as 105% (86+3+5+4+7), as shown in Table 1.  Mauritius is still far from lowering its debt ratio to 80% in the near term, except with the help of high inflation and more doctored statistical adjustments and revisions. 

The Minister makes the stupefying claim that “80% du PIB est le nouvel ancrage fiscal déterminé par le FMI cette année, le relevant ainsi de 20 points de pourcentage. Cela montre la preuve de la résilience de Maurice et de la confiance des instances internationales en notre politique économique et fiscale ».  Contrary to this assertion, the proposed IMF debt anchor is not meant to reflect resilience or confidence, and there is instead an evident lack of international confidence in our economic policies.  

IMF is critical of Mauritius for the insufficient fiscal effort to achieve the relatively soft debt target of 80% of GDP.  The recent IMF Art IV  Report on Mauritius concluded that “Stabilizing the debt-to-GDP ratio toward the proposed anchor of 80 percent will require a greater fiscal consolidation effort in the medium term. It will be important to reduce debt through credible revenue and expenditure measures….”. 

Moody’s also downgraded Mauritius for failing to make adequate fiscal adjustments to protect the economy against future shocks, and for relying instead on one-off measures, such as transfers from state-owned companies and asset sales, that do not reduce public debt in a sustainable manner.

The IMF disapproved strongly of BoM and MIC financing for Govt.  Govt should heed the IMF’s advice and stop utilising BoM/MIC as its piggy bank.  The budgeted amount of Rs 22bn of sales of other state-owned companies in 22/23 is quite likely to come from MIC once more.  Irrespective of the 80% debt anchor, continued reliance on one-off measures will likely lead to another Moody’s downgrade, which Govt will again vainly try to spin into an improved rating.

Plentiful Reserves

The Minister of Finance also stated that « Les réserves internationales du pays continuent par ailleurs de se maintenir à un niveau très confortable pour atteindre 346 milliards de roupies à la fin du mois de juin 2022, soit l'équivalent de 7,6 milliards de dollars… ».  What he deliberately omitted to mention is that BoM borrowed over USD1 bn (Rs52 bn) to be so comfortable, and that external reserves were pumped up by USD0.7 bn (Rs34 bn) through a window-dressing exercise at end June 22.

BoM has been artificially boosting its foreign exchange reserves at the end of each quarter by attracting foreign exchange deposits from banks.  As shown in Table 2, foreign assets amounted to Rs346 bn at end June 22, or Rs34 bn higher than a week earlier. Liabilities to depository corporations also stood at Rs34 bn higher at end June 22, compared to a week earlier. One day after, on 1 July 22, both BoM foreign assets and BoM liabilities to banks then declined by Rs28 bn.

Foreign assets at end July 22 stood at only Rs317 bn (USD7 bn), or about Rs30 bn (USD0.7 bn) lower than in June 22.  The next window dressing exercise will likely take place in Sept 22.  The cosmetic propping-up of the level of reserves is largely pointless, since the public is confronted with an ongoing dire scarcity of foreign exchange.  Foreign assets, net of borrowings, amounted to less than USD 6 bn in July 22, or a level or reserves last recorded in Dec 17.

BoM Impaired Capital

The Minister referred to the forthcoming introduction of new BoM legislation « en adéquation avec les meilleures pratiques internationales. », adding that « la Banque de Maurice était aussi en train de remanier son cadre de politique monétaire, toujours avec l’appui du FMI, afin de renforcer encore davantage l'efficacité de sa politique monétaire ».  But, he did not say a word about the recent unfavourable developments in BoM internal capital reserves, and the impact of a weakened BoM balance sheet on the effectiveness of monetary policy. 

BoM produced its monthly financial statements after a delay of several months, revealing that BoM was incurring heavy losses of more than Rs10 bn since April 2022, partly due to the impact of rising global interest rates on its foreign investments.  As a result, the BoM’s capital was impaired in April and May 2022, meaning that its capital and reserves, including comprehensive income, were lower than its paid-up capital of Rs10 bn. 

During June 22, BoM engineered a depreciation of the rupee of over 4% against the US dollar, from Rs43.90 at end May 22 to Rs 45.80 at end June 22 (BoM consolidated exchange rates), or by Rs1.90 over the month of June 22.   The depreciation of the rupee creates foreign exchange valuation gains which add to BoM capital reserves. Without this rupee depreciation, the BoM would show a heavy loss for the financial year 21/22. 

The depreciation of the rupee saved the BoM from capital impairment for the year 21/22.  Even with hefty rupee depreciation, BoM capital and reserves are still lower in June 22 than a year earlier.  With the depletion of BoM reserves to contribute Rs55 bn to Govt in 20/21, the General Reserve Fund (GRF) balance stood at Rs0.3 bn in June 2021, well below the paid-up capital of Rs10 bn. Section (11)(5) of BoM Act requires that the GRF balance be brought up to Rs10 bn, which is still not the case in June 22. 

IMF considers that BoM capital is relatively low in view of the resources needed to sustain domestic liquidity sterilization costs at higher interest rates, to fight inflation. Any MIC losses will further weaken the BoM group financial position.  It is indeed paradoxical that BoM should find itself in need of recapitalization while dishing out money freely to Govt.  

BoM has also chosen to play dumb and does not comment about the adverse pressures on its capital position.  The introduction of a new BoM Act is hardly comforting when minimum standards of central bank independence, transparency and credibility in existing legislation are not being observed.

Conclusion

The story goes that while the Titanic was sinking, some musicians were fiddling with violins on the deck.  Mauritius is submerged by heavy debt and double-digit inflation, and, likewise, the Ministry of Finance and BoM are fiddling with economic data in politically expedient ways.  

Even Statistics Mauritius may be succumbing to political bias, gauging from the IMF’s disquieting observation about the importance “to safeguard statistical independence of Statistics Mauritius in its estimations of economic developments and outlook”.

Govt is clinging to the hope that with more smokescreens and skewing of numbers, it will become harder to read the economy correctly. IMF, Moody’s, and others prove otherwise.