In view of the forthcoming Budget which will be presented next Monday, the former Minister of Finance writes a series of articles. In the first one, he evaluates the current economic situation. The next one will be published on Wednesday.

Budget: Diving below the headlines (Part 2)

Budget: Diving below the headlines (Part 3)

Assessing the performance of Government after four and a half years

The Prime Minister and Minister of Finance will deliver the fifth and last budget in this Government’s mandate next Monday. Undoubtedly there will be considerable focus on what has been achieved during the last four budgets. Indeed after four and a half years of economic stewardship by Lepep Government, it is time to take stock and draw the balance sheet to ascertain the accomplishments, misses and failures, to determine if promises have been kept and forecasts fulfilled. Above all to establish whether the country is in stronger shape economically and better prepared to meet the daunting challenges posed by the risks, uncertainties and volatility of the global economy and to scale the difficult heights domestically to attain high income status.

I dive behind the anticipated euphoric headlines, self-congratulations and elation of the 2019/2020 budget to carry out a painstaking and granular exercise to fathom the real state of the economy, using official statistics from the Ministry of Finance, Statistics Mauritius and the Bank of Mauritius. The findings and conclusions are unequivocal. First, besides inflation, most key macroeconomic fundamentals are either weak or in dire shape when their real health is not concealed. Second, except for construction that is cyclically doing very well, other sectors are struggling or facing difficult structural and transition challenges. Third, save for consumption, the other components of growth such as net exports and private investment are in a precarious condition. Fourth, competitiveness has been eroded while there are hurdles to boost productivity, thus inhibiting the manufacturing and the export potential. Fifth, many figures are doctored to elicit an optimistic outlook when the reality is different. Frankly, the fiscal and public debt management is neither transparent and sound nor credible and sustainable. It is only a question of time before the country is caught by the grim truths of the debt and budget deficit that are being swept under the carpet. Sixth, the country is stuck in the middle income trap.

Para 10 of last year’s Budget spoke of ‘virtuous economic cycles’. They hardly exist. In fact, in the absence of structural reforms to transform the economy and coupled with the inability to remove binding constraints and supply-side bottlenecks and embroiled in policy paralysis on difficult issues, the economy is underperforming and is vulnerable to external shocks. It has lost its resilience and dynamism and is unable to find new pillars of growth to compensate for the decline in the old economy and the slack in new sectors. On current trend, our economic future does not bode well and the task to turn the corner will be arduous and painful.

The economic outlook is bleak. Debt data from the Ministry of Finance shows that public sector debt reached a staggering level of 64.8% at March 2019. And if we recharacterise recurrent and capital expenditures intentionally excluded from the consolidated fund, the size of the budget deficit and the public sector debt soar to unsustainable levels. Statistics Mauritius reveals that employment creation is very low, if not negative as in 2018, that growth is under par, investment largely inadequate and savings collapsing. The Bank of Mauritius indicates that the trade deficit is exorbitant at 23% of Gross Domestic Product (GDP) in 2018, the balance of payments has recorded an unexpected deficit for two consecutive quarters in 2018, Foreign Direct Investment (FDI) is down in 2018 and tourism receipts lower by a significant 10.6 % for the first quarter of 2019.

“Alarmingly, the share of FDI in manufacturing and ICT is at a dismal 5% and 1.6% respectively.”

■ Inflation is subdued

Inflation is low since 2012. It dropped from 6.5% in 2011 to 3.9% in 2012, to 3.2% in 2014 and 1% in 2016. Then it rose to 3.7% in 2017 before declining to 3.2% in 2018. It is forecast at 2.1% in 2019. The country has benefitted from muted global inflation resulting from lower than expected growth and contained energy costs. However with geopolitical tensions, the trade war between the US and China, and other risks, oil and commodity prices have picked up. The unusual deficit in the balance of payments could trigger a depreciation of the rupee and stoke inflation.

■ Unemployment is low but job creation is appalling

One can safely bet that the PM will speak about the lower unemployment rate and ignore the poor record on job creation. The unemployment rate has come down from 7.8% in 2014 to 6.9% in 2018. However it is a mechanical and not an economic decline as employment creation is very low. The fall in unemployment is attributable to a decrease in the labour force (by 3,600 between 2015 and 2016 and by 3,100 from 2017 to 2018) and to thousands of unemployed persons not being counted as jobless (5,800 in 2017 and 3,600 in 2018).

The promise of around 20,000 new net jobs per annum is very widely off the mark. 300 net jobs were created in 2016 and 6,500 in 2017 while 1,400 were destroyed in 2018, giving an average annual number of net jobs generated of 1,800 compared to the forecast of 20,000. Worse, female joblessness is higher than 10% while youth unemployment has risen to 25.1%. Further, activity rates and the employment to population ratio are declining which augur badly for our economic future. And there is significant labour underutilisation to the tune of 168,800 persons, representing 29% of the labour force, that were either without a job or underemployed in 2018. Graduate unemployment and skillsrelated underemployment are high.

■ Growth is disappointing as it is sub optimal and way off forecasts

The prediction of a consistent and sustained 5.5% GDP growth has not materialised at all during the five year tenure. There is not a single year when growth has crossed the 4% threshold! The gross value added at basic prices grew by 3.1% in 2015 and 3.6% for 2016, 2017 and 2018. And 3.6% for GDP at market prices in 2015 and 3.8% thereafter. The growth forecast for 2019 is at 3.6% for Gross Value Added (GVA) and 3.9% for GDP. Taxes on products net of subsidies are often overestimated to raise the GDP forecast at market prices. The 3.9% expansion is based on a value addition of 3.8% from tourism. Already, for the first quarter of 2019, receipts are down by a considerable 10.6% while net exports of goods have deteriorated significantly. The growth forecasts are likely to be lowered during the year.

■ Investment has declined while the private sector share has shrunk

Investment is a very important driver of sustainable growth, jobs and development. The average gross domestic capital formation for the five year 2010- 2014 period was 22.4% of GDP and Government targeted a rise to 25% during its mandate. In spite of massive investment in public infrastructure projects, the share of investment to GDP has fallen to 17.8% for the 2015-2019 period, which is way below the level necessary to achieve the country’s socio-economic ambitions. This is attributable to a substantial decrease in private sector investment which accounts for around 75% of capital formation. Its share has contracted from an average of 17% of GDP for the 2010-2014 period to only 13.3% for the five years ending 2019.

Government is also slashing deeply into its capital budget which is key to building productive assets and investing for the future. The ratio of government capital expenditure to GDP has declined from 3.6% in 2014 to a very low 1.6% in 2015. It was at 1.7% of GDP in 2017/18 and the forecast for 2018/2019 is 2.2% of GDP but with the usual underspending, the actual capital expenditure is likely to be around 1.7% of GDP. Unless a colourable device is used to transfer some of this earmarked amount to a special fund as was the case for the Rs 2 b farmed out to a newly created environment fund outside the budget last year. Government is simply sacrificing the much needed capital budget on the altar of its very high recurrent expenditures.

■ FDI has fallen in 2018 and its composition is biased towards unproductive rent-seeking activities

FDI was expected to reach an annual level of Rs 28 b with a reasonable share in the productive sectors of the economy to stimulate quality growth. Even with the newly adjusted figures of the Bank of Mauritius, the average annual FDI inflows for the 2015-2018 period is around Rs 16.5 b. The amount for 2018 is worrying as it represents a decline of 18% compared to 2017. More problematic is that the share of real estate in FDI has risen from 41.4% in 2017 to 52.6% in 2018. And if we exclude the oneoff transactions in global businesses related to the acquisition of local management companies by foreign entities (IFS, CIM and Abax), almost 70% of FDI is in immovable properties. It should be pointed out that these acquisitions are not greenfield investments that create additional jobs. They are mostly a transfer of ownership.

Alarmingly, the share of FDI in manufacturing and ICT is at a dismal 5% and 1.6% respectively. Also, there is hardly any FDI in new sectors such as the blue economy, artificial intelligence, robotics, new technology and innovation. Portfolio investment has also contracted. The net portfolio disinvestment was Rs 2.5 b in 2017 and Rs 1.6 b in 2018. This negative trend persists as net disinvestment is around Rs 800 m for the year to date.

■ The faltering savings rate is a threat to future investment and growth

As the mirror image of investment, savings by households, corporates and the Government are a crucial indicator of the future growth potential of the economy. They have steadily declined from 14.1% of GDP in 2008 to 12.6% in 2012, 11% in 2016 and 10% in 2017. They have sunk to an alarmingly low 9.1% of GDP in 2018.

This is the direct result of the strategy of government to rely significantly on consumption as the engine of growth as opposed to a more balanced approach that focuses on exports and private investment too. It has led to a massive deficit in the trade balance as import leakages from consumption are considerable. While very high consumption can boost economic growth in the short-run, the growth momentum and its sustainability crucially depends on adequate savings in the medium to long-run.

Budget: Diving below the headlines (Part 2)

Budget: Diving below the headlines (Part 3)