Sovereign debt sustainability is attracting growing concern with the change in the global trend towards weaker growth. In 2023, the Govt debt-to GDP ratio averaged 93% globally, varying from 68% in emerging and middle-income countries to 111% in advanced countries. These high debt burdens still largely reflect the expansion in Govt spending during the Covid pandemic. The IMF is now urging countries to rebuild fiscal buffers through durable fiscal consolidation, reduce debt to more sustainable levels, and implement structural reforms to enhance future growth.

In Mauritius, Public Sector Debt (PSD) as a proportion of GDP rose from 62% in Dec 2014 to 65% in June 2016, and stayed at around this level until Covid struck in 2020. Following massive Covid emergency fiscal spending, PSD jumped to over 80% of GDP in June 2020 and reached a peak of 96% in June 2021. The public debt-to-GDP ratio has since fallen to around 80% in March 2024, and is estimated at 74% in June 2024.

Rating downgrade

The heavy level of public debt continues to weigh on the economy’s performance. The debt ceiling target under the Public Debt Management (PDM) Act 2008, was missed once in 2013, and again after an extension of the debt deadline to 2018. In the wake of Covid, the PDM Act was amended to be inoperative. A public debt ceiling was reintroduced in the Act in 2023, at 80% of GDP, higher than the previous level of 60%, and with more generous escape clauses.

However, this apparent alignment of the current public debt ratio to the statutory debt ceiling of 80% may not be sufficient to ward off a further sovereign credit rating downgrade, unless Mauritius makes a credible medium-term commitment to fiscal consolidation and debt reduction. The relatively elevated debt burden compared to peer countries remains a critical issue. A downgrade to junk status would be most damaging for banking and financial stability.

In March 21, Moody’s downgraded Mauritius from Baa1 to Baa2, mostly on account of massive Covid fiscal support - one of the largest among Moody-rated sovereigns, pointing to “sharp and long-lasting deterioration in fiscal and debt metrics, resulting in a weaker profile than Baa peers”.

In July 22, Moody’s again downgraded Mauritius from Baa2 to Baa3, due to the reliance on one-off and unconventional measures, which “increases uncertainty over the ultimate trajectory of Govt debt and complicates the accurate assessment of fiscal strength”. These measures included transfers from state-owned enterprises, the creation of the Mauritius Investment Corporation (MIC) as a special purpose vehicle of the Bank of Mauritius (BoM), and the large one-off grant of Rs55 bn from BoM to Govt.

According to Moody's latest report dated Jan 24, Mauritius is facing a major credit challenge because of a higher Govt debt ratio than its peers. Moody’s estimated a Govt debt-to-GDP ratio for Mauritius of 69% in June 23 (excluding public sector bodies representing about 10% of GDP), while the median of Baa-rated countries was 54%.

Moody’s projected a narrowing fiscal balance and a reduction in the Govt debt-to GDP ratio to 64% in June 24 and 62% in June 25 (equivalent to PSD of 74% and 72% respectively). Among the factors that could lead to a rating downgrade, is the likelihood that the Govt debt ratio will remain higher than Moody’s expects. The 24-25 budget estimates indicate that Moody’s debt projection for June 24 would be met.

Data fiddling

The authorities are fudging statistical data to present a doctored picture of the public debt situation. The PSD-to-GDP ratio is held down artificially by understating PSD and overestimating GDP. To limit PSD increases, Govt resorts to subterfuge by inappropriately accessing free finance from the central bank and state-owned enterprises.

At end 2018, prior to Covid, an amount of Rs18 bn was transferred from BoM’s capital reserves for the repayment of Govt’s external debt, followed by an additional transfer of Rs55 bn in 2020-21, as a Covid-related grant contribution to Govt. In Dec 21, MIC transferred Rs25 bn to Govt, dressed up as an investment in Airports Holdings Ltd, a state-owned company, which enabled Govt to pay off Air Mauritius creditors.

MIC is now also extending finance for public capital projects. The total of BoM/MIC fiscal funding amounts to Rs98 bn, which represents a PSD understatement of about 15 % points of 2023 GDP. Public debt was also held in check by a transfer of the accumulated reserves of state-owned companies to revenue for a total of Rs8 bn in 2021-22. Taxes on goods and services are overstated by at least Rs5 bn in 2023-24.

Furthermore, Stats Mauritius (SM) overestimates GDP by a questionable upward adjustment to a component of GDP, namely, net exports of services. From balance of payments (bop) data compiled by BoM, SM boosts exports of services by a transfer of primary income, (e.g., interest and dividends) received by Global Business Companies (GBCs). By definition, foreign services income of GBCs is included in GDP, while foreign primary income of GBCs is not.

GBCs are thus reclassified by SM as receiving foreign income from the provision of services instead of interest and dividends from foreign investments. It is beyond comprehension that SM, instead of BoM, should undertake this sizeable GBC adjustment by the reclassification of bop data. In 2022 and 2023, GDP was thus overstated by making a GBC adjustment of Rs90 bn.

GDP for 2023 also appears to be inflated by an excessive estimate of public investment in the second half of the year, especially as a major capital project, namely the planned extension of the Metro Express, did not go ahead. Considering both BoM/MIC fiscal support and GDP overestimation and other data fiddling, the PSD-to-GDP ratio is currently around 95%.

Reckless policies

A small island economy like Mauritius is particularly vulnerable to adverse external shocks. Following the global oil crisis of the 1970s, Mauritius experienced major economic distress, including significant rupee devaluation, resulting largely from excessive fiscal spending. The IMF was called to the rescue with a structural adjustment program that involved drastic fiscal consolidation. Various governments that followed took heed of this hard lesson, and endeavored to maintain a reasonable degree of fiscal discipline for long-term economic stability.

Populist fiscal programs were not entirely abandoned, with periodic electoral promises of free transport, generous old age pensions and other social welfare provisions. However, fiscal deficits remained relatively contained, and public debt stayed broadly in line with the internationally recommended bounds for middle income countries. Fiscal responses to unfavorable developments such as the loss of trade preferences in textiles, or the 2008 global financial crisis, provided relief for sustaining the economy, but also paid due regard to deficit and debt sustainability.

As from 2015 onwards, however, fiscal policy began to lean heavily towards unsound and populist measures. Profligate social spending, mainly on pensions and employee compensation, has since been pursued in successive Govt budgets, accompanied by high deficits and a rising debt burden. Although the official fiscal strategy was always geared towards “greater fiscal discipline and putting public sector debt on a downward path”.

The recent Covid epidemic and the Ukraine war caused a severe economic downturn, accompanied by commodity and energy price hikes as well as supply disruptions. Mauritius responded with a massive fiscal stimulus, one of the highest in the world relative to GDP, despite the burdened state of its public finances.

The post-Covid economy is still struggling today with large fiscal deficits, and an elevated PSD, mainly due to unchecked social spending. Old age pensions and other social benefits went up from 5% of GDP in 2014 to 6% in 2018/19, and to an estimated 9% in 2023/24. The share of social benefits in total Govt expenditures (consolidated with special funds) grew from 20% in 2014 to 25% in 2018/19 and further to an estimated 28% in 2023/24, and expected to rise further to 30% in 2024-25.

The surge in social expenses is a major reason for the increase in the Govt deficit and debt. Prior to Covid, total Govt revenue and expenditure, including special funds, stood at 21.5% and 25% of GDP respectively. In 2023-24, total Govt revenue and expenditure, including special funds, are estimated to increase to 25% and 31.5% of GDP respectively.

The overall fiscal deficit has therefore widened significantly from 3.5% of GDP, prior to Covid, to an estimated 6.5% in 2023-24, and 5% in 24-25. The effort to raise more revenue through petroleum and indirect taxation, and a new CSG social contribution, and the recent climate responsibility levy, is proving inadequate to meet growing social expenditure needs.

Unbridled social largesse and wider fiscal deficits have worsened the external imbalance, leading to greater exchange rate depreciation and higher inflation. Govt's sizeable recourse to central bank money has exacerbated rupee weakness and price rises, inflicting a drastic erosion of purchasing power on the poor and vulnerable sections of the population.

Despite informal exchange controls, foreign exchange remains scarce, putting further downward pressure on the rupee, and foreign reserves are under risk of further depletion. The current fiscal stance is not sustainable in view of high public indebtedness and the inflationary impact of continued deficit financing. Painful fiscal adjustments to curb the growth in pensions and other social spending will become unavoidable in coming years.

Stymied growth

Unrestrained social welfare spending is also at the expense of productive public investments, thus undermining the potential for long term growth. Total Govt capital expenditure fell from 3.5 % of GDP in 2014 to 1.7% in 2018/19, and only fully recovered by 2023/24. The share of capital expenditure in total Govt expenditure declined from 14% in 2014 to 7% in 2018/19, and rebounded partly to 11% by 2023/24. During the period from 2015 to 2022, public investment, which includes capital expenditure by Govt and public sector bodies, averaged 4.3% of GDP, at least one percentage point lower than in the years preceding 2015.

The recent emphasis on road and transport projects does not compensate for the much heavier investments required to develop the country’s key infrastructure, especially in the water, energy, and waste management sectors, to boost productivity and growth. A major scaling-up of capital investments is required to address acute issues in key infrastructural sectors, amplified by the impact of climatic changes.

Non-revenue water exceeds 50% owing to an antiquated piping system. The urgency for a new power plant is becoming critical. The waste-water network still covers less than half of the island. The construction of another solid waste landfill is long overdue. Prioritizing public investments to sectors with more productive potential is vital. Promoting consumption at the expense of productive capital spending will not generate durable growth.

Govt expenditures have also been loaded with the bail-out costs of dismantling the BAI Group of over Rs20 bn, and Betamax compensation of Rs6 bn, in addition to rampant waste and corruption. These reckless financial outlays could have been avoided, or kept within manageable limits. As reported by the Director of Audit, investments of Rs5 bn in the Cote d’Or sports complex, of Rs14 bn in Metro Express, of Rs26 bn in Airports Holdings, and in other prestige projects are yielding zero returns.

A thorough review of public projects to maximize value for money and the ruthless elimination of waste and corruption are critical. Doing away with program-based budgeting was a most retrograde decision that wrecked the scope for a rigorous and cost-effective management of public investments.

Instead of pandering to a populist agenda, fiscal policy should focus on rectifying the economy’s economic imbalances, and improve its resilience, productivity and competitiveness. Extensive reforms in public utilities and in the delivery of public services, starting with sound pricing and efficient management, are indispensable to enhance the economy’s lagging infrastructure and growth potential.

It is also telling that the largest foreign direct investment in 2023, besides real estate, was for an existing monkey-breeding business, with minimal investments in more productive sectors like manufacturing, financial services and ICT. Real GDP growth in 2024 is forecast by SM and IMF at 4.9%, while Govt is aiming at 6.5%.

Debt management

Mauritius faces a serious debt problem. Govt is clinging to the illusory hope of growing out of debt, based on optimistic GDP growth projections. The global economic environment is however turning less favorable, reflecting geopolitical, population ageing and climate issues. In this changing global context, international financial institutions are expressing heightened concerns about “the fiscal and financial risks of a high-debt, slow-growth world”, and calling for debt reduction to more sustainable levels.

In its recent WEO forecasts, IMF projects that if Mauritius gradually reduces its primary fiscal deficit, i.e., the fiscal deficit excluding interest payments, down to zero by 2030, its public debt will remain stable at the current level of 80% of GDP. Govt is instead targeting an ambitious public debt ratio of 60% by 2030, which will require much more drastic fiscal adjustment.

Without a radical correction of Govt spending policies to show a primary budget surplus for several years, a 60% Govt debt ratio by 2030 is unattainable. In the past, Mauritius has hardly ever recorded a primary budget surplus. Achieving primary budget balance is hard enough.

To tackle its debt overhang, Mauritius should follow the example of another small island economy. Jamaica reduced its debt ratio by half from 144% of GDP in 2012 to 72% in 2023, despite poor GDP growth and exceptional Covid-spending increases. It managed to do so by running a primary budget surplus of 7% of GDP over much of the past decade.

Jamaica’s noted success in debt reduction is attributed mainly to two factors. First, a Fiscal Responsibility Framework, far stronger than our Debt Management Act, included a ceiling on the share of public wages to GDP, in addition to fiscal rules on deficit and debt ratios. An Independent Fiscal Commission was also established to promote sound fiscal policy and management and promote fiscal discipline. It acts as a legal body to guard, monitor and interpret the country’s adherence to fiscal rules.

Secondly, Jamaica built a national consensus through discussions in the National Partnership Council, involving Govt, parliamentary opposition and social partners, leading to a shared agreement on fiscal reform and consolidation. A broad-based Economic Programme and Oversight Committee was entrusted with monitoring and publicly reporting on fiscal policies and outcomes. Through the power of public ownership and acceptance of burden sharing, fiscal reform polices remained unchanged even after a change in Govt.

Conclusion

Unsustainable fiscal deficits and debt resulting from unchecked social spending have inflationary consequences and undermine growth prospects. Govt engaged in Covid-spending without restraint and pursued its populist policies with ongoing expenditures on pensions, employee compensation, and wasteful capital projects, while also abetting pervasive corruption.

High Govt deficits and debt also constrain the available fiscal space to meet future and unforeseen spending needs. Mauritius, a tourism-dependent country, is particularly vulnerable to health crises or natural disasters, and to other adverse external shocks resulting from oil and commodity prices or volatile capital flows.

As highlighted in the latest IMF country report, a more responsible fiscal approach coupled with structural transformation is necessary to safeguard the next generation, and to ensure vigorous and resilient long-term growth. Mauritius must implement medium-term fiscal consolidation to rebuild fiscal buffers and reduce public debt, by taking measures to mobilize tax revenue, contain current spending, reform the pension system, and strengthen public financial and debt management.