The global economy is already in the grip of a severe crisis, as Covid-19 spreads worldwide. It will unfortunately reach Mauritius at some stage, and our state of preparedness to deal with the impending contagion must be enhanced as a matter of utmost priority and urgency.  

The recent economic measures, announced by Govt in a Plan de Soutien aux Entreprises and by the Bank of Mauritius in its Credit Support Programme, will no doubt provide short term financial support to keep businesses afloat and safeguard employment. 

However, a more comprehensive and substantial package of economic policy measures is needed to respond more effectively and flexibly to the evolving depth and duration of the crisis. Hefty expenditure provisions will notably be required for emergency healthcare facilities to handle the sick and contain contagion, as well as for direct assistance to retrenched employees and those most affected by economic hardship.  

Limited Fiscal Space

The critical issue that arises is whether there is available fiscal space to meet these additional demands for financial resources.  The contribution of a measly amount of Rs1 bn from the Consolidated Fund to Govt’s Support Plan clearly reflects the limited room for fiscal manoeuvrability. 

Several economic observers previously highlighted the dangers of pursuing an agenda of excessive social largesse, in the light of weak macro-economic fundamentals, especially of stagnating investment and GDP growth, and a gaping current account deficit.  Mauritius is highly vulnerable to adverse external shocks stemming from oil and commodity prices, volatile capital flows, or a natural disaster, like a severe cyclone.  In April 2019, the IMF cautioned about the availability of fiscal space to cope with any sudden and unexpected shocks to the economy, and recommended a degree of fiscal adjustment in the 2019/20 budget.  

Govt chose to ignore these repeated warnings for ensuring fiscal prudence. The state of public finances has instead worsened considerably, and raises important and alarming concerns. The budget deficit is currently estimated at a record high of around 6% of GDP, after accounting for expenditures by special funds and off budget entities, and after allowing for a normal shortfall in capital spending. As illustrated in Box 1, the size of the budget deficit is heavily underestimated by accounting ploys to dissimulate runaway public spending.

The manipulation of public debt data has proved more difficult than obscuring the deficit.  Official public sector debt has continued to grow in past years to reach around 65% of GDP.   The public sector debt ratio is however estimated to be closer to 70% of GDP, after accounting for including undrawn commitments under the Indian Eximbank line of credit of over Rs 15 bn, and for borrowings of over Rs5 bn from non-financial public sector entities. This elevated and growing level of public debt will eventually undermine international investor confidence and jeopardize the country’s credit rating.  

The recourse to central bank deficit financing is a manifest illustration of the desperate condition of public finances. Although early repayment of external debt of only Rs7 bn has been made, the whole budgeted amount of Rs18 bn from the BOM’s reserve fund was transferred, with the balance of Rs11 bn being kept on deposit to earn interest for Govt. The illusory equity sale of Rs5 bn budgeted for this financial year, and Rs6 bn next year, from a disposal of state-owned assets points to an even more significant financing shortfall.

Furthermore, budget data for the first seven months of 2019/20 show that tax revenue has grown by only 2% over the corresponding period of the previous year, while the budget projected a rise of 6.5% for 2019/20.  Reflecting an already slowing economy, the falling tax yield represents a tax shortfall of Rs3 bn for the current fiscal year, implying still larger bigger deficit financing requirements.  Public finance is under serious stress, and the scope for extra spending is tightly constrained.

Govt overspending 

Govt overspending stemmed from current expenses, which impart a short-term boost to GDP growth in view of import and other leakages on the external account.  A greater emphasis on capital spending is more beneficial for raising future growth potential. The surge in current spending happened at the expense of public investments.  

Public investments, which comprise investments of Govt and other public bodies, were practically stagnant from 2015 onwards, and only increased significantly in 2019.  As a ratio of GDP, public investments averaged 4.6% during the 5 years from 2015 to 2019, lower than the average of 5.3% in the previous 5 years.

The average growth in recurrent spending from 2015/16 to 2019/20 amounts to 10.5% annually, higher than the average yearly growth in tax revenue, total revenue, or total consolidated expenditure.  It is mostly driven by the sharp increase in basic retirement pensions, as shown in Box 2.  Social benefits, which stood at Rs 19 bn in 2014, will rise to an estimated Rs45 bn in the next financial year, showing an average growth of close to 15% annually. It now accounts for a third of recurrent expenses compared to a quarter in 2014.

Imprudent fiscal management has left Mauritius exposed and vulnerable.  The Public Debt Management Act, which seeks to limit the growth in public debt as a measure of fiscal responsibility, was patently and continually ignored.  Populist political considerations won the day over reasonable and sustainable economic policies.  Pursuing a social spending spree displaced public investments and undermined the potential for long term growth.

All major political parties in last year’s general elections promised a generous hike in pensions, despite evident signs of its financial unaffordability and untenable cost to the economy.  The road to Greece, Venezuela, Argentina and now South Africa, among the more vivid examples, is paved with good intentions. Mauritius is living beyond its means, but the party is coming to an end. Creative accounting devices can mask fiscal realities for some time, but as Warren Buffett famously remarked, you will see who is swimming naked when the tide runs out.

Fiscal stimulus and reforms

Fiscal stimulus measures are essential for confronting the supply and demand shocks generated by the global pandemic, and to mitigate the social and economic fallout.  Substantial resources are required for salvaging the economy, handling the health emergency, and protecting the population, especially laid off workers and the most vulnerable. The IMF is exhorting countries to apply fiscal stimulus to spend more on health for curbing contagion, and to provide affected persons and businesses with timely, targeted and temporary financial relief.  

In this regard, the announced Govt measures appear largely insufficient.  The bulk of the support is meant to ease credit terms and availability.   Coming on the heels of a drop in the repo rate, BOM’s facility of Rs5 bn to provide cheaper credit to enterprises is a creditable measure, funded by enhanced savings mobilization.  The SIC will also raise funds of Rs2.7 bn, mainly for equity participation in deserving companies. 

The recourse by SIC to redeemable preference shares is an oft tried but worn-out ruse to avoid inclusion in public debt.  According to IMF methodology, strict conditions are required for considering redeemable preference shares as equity instead of debt, notably whether these are participating or non-participating shares.

Govt’s minor contribution of only Rs1 bn and other cosmetic reductions in expenditure highlight the difficulties in rolling back excessive Govt spending. The current elevated levels of the budget deficit and of public debt constrain the scope for espousing a fiscal stimulus.  The lack of fiscal space will prove harmful, unless urgent policy reforms are adopted to produce the savings required for additional Government spending.   

The IMF is urging countries to provide broad-based fiscal stimulus consistent with available fiscal space. Govt must undertake appropriate policy reforms to streamline expenditures, including better targeting of social spending and reforming the national pension system. Corrective policies and appropriate targeting to rationalize spending, supplemented by some revenue raising measures, would generate enough fiscal space to provide more resources to the deserving and vulnerable. Govt must also prepare for a substantial fiscal transfer programme to sustain incomes during the impending economic downturn.

Conclusion

Govt should present an emergency stimulus budget, including fiscal adjustments that reorient recurrent expenditures towards expanding health care capacity and safety nets to help enterprises and households.  This will enhance fiscal credibility in the face of deteriorating economic and financial conditions, and instill greater public confidence in the country’s ability to ride this temporary crisis. 

Threats to financial stability must be closely monitored. Mauritius, with its large current account deficit, could find itself at risk of sudden and disorderly market conditions and a disruption of global capital flows, requiring foreign exchange intervention or temporary exchange controls.  The lessons of the 1979 oil crisis and its dramatic consequences for the Mauritian economy should not be forgotten. Hopefully, we can today act more decisively and responsibly. Hoping for the best, and preparing for the worst.

Box 1: Record Budget Deficit   

The budget deficit for 2019/20 was officially forecast at Rs16.8 bn, or 3.2% of GDP, at budget time in June last year.  The post budget and electoral promise to increase the monthly basic retirement pensions from Rs6,210. - to Rs9,000.- represents an extra expenditure of around Rs10 bn for the whole fiscal year.  

Since the pensions increase was implemented from December 2019, it is adding Rs6.4 bn to social benefits in 2019/20, or 1.2% of GDP. The revised official budget deficit would be accordingly higher at 4.4% of GDP.  Including net expenditures from Special Funds, and off budget expenditures by special public entities, the consolidated budget deficit for 2019/20, stands at Rs37.1 bn, or 7% of GDP.  

A recurring feature of successive budgets is the shortfall in capital spending, mostly due to delays in project implementation. Assuming underspending of close to 25%, both on budgetary capital expenditure and off budget expenditures by public entities, the actual budget deficit would be accordingly lower by the total shortfall on these two items, which amounts to Rs5.3 bn, or 1% of GDP.

As summarized in Table 1, the 2019-20 revised consolidated budget deficit would amount to Rs31.8 bn, or 6% of GDP.  This oversize deficit contrasts with official figures of around 3% of GDP, dressed up in recent years to present a false sense of fiscal discipline.

Table 1: Budget Deficit, 2019-20

                          
The masking of expenditures in order to downsize annual budget deficits deserves special attention. Grants from India and China are credited to Govt revenue, but the grant proceeds are then injected as equity in specially created public entities like Metro Express and the Multi Sports complex.  Equity investments are considered as financial assets, and not expenditures for purposes of calculating the budget deficit, in line with IMF methodology. 

External borrowings are also channeled through the State Bank of Mauritius to finance Metro Express expenditures. Proper fiscal accounting requires that both special funds and special public entities should be consolidated with the Budget, thus adding 2.6 % points to the budget deficit.  

The Director of Audit observed that two thirds of Govt investments have not yielded any return since acquisition.  Govt equity additions to Maubank and WMA, amounting to a total of Rs3 bn in 2019/20, are hardly investments with positive return prospects, and more like bail out funds instead. Classifying these Govt investments as expenditures would raise the revised consolidated budget deficit further to 6.6% of GDP. 

An even higher deficit gap was averted by front-loading sizeable expenditures on the Safe City Project on Mauritius Telecom, while Govt makes much smaller annual payments to Mauritius Telecom.  More of such Govt projects, based on the Public Private Partnerships (PPP) model, are planned, to limit a further escalation of the budget deficit in future years.

The recent transfer of Rs18 bn from the BOM’s special reserve fund is not included in Govt revenue for the monthly reporting of fiscal data to the IMF Govt, and was also not considered as Govt revenue in the 2019/20 budget estimates.  But, a monthly statement table of Govt operations with data from the Ministry of Finance adds the BOM transfer to Government revenue in seeking to artificially and substantially downsize the budget deficit for 2019/20.  

Box 2: High Recurrent Spending 

As shown in the chart below, the share of recurrent expenses to total consolidated expenditures in the Govt budget averages 91% over the 5-year period from 2015/16 to 2019/20, or 5 percentage points higher than in 2014.  

 As shown in Table 2, the rise in budgetary recurrent spending is dominated by the marked expansion of pension benefits.   Between 2014 and 2019/20, social benefits have more than doubled, increasing from about a quarter to a third of total recurrent expenses, overtaking employee compensation as the largest component of recurrent spending.

Table 2: Recurrent Spending

Table 2: Recurrent Spending

*Including latest pension increase

Social benefits, employee compensation and interest payments, currently representing about 70% of total recurrent expenses, are understandably hard to compress without policy reforms.  About a third of grants to extra budgetary units, local authorities and Rodrigues Regional Assembly, also consists of employee compensation.  The use of goods and services and other expenses are the only two items more readily amenable to cutbacks, but represent only around 10% of total recurrent expenditure.  Predictably, the proposed reduction of 10% in recurrent expenditures has so far remained largely elusive.