23 June 2018

Mauritius: Pierre Dinan - "I preferred not to accept another term at the MPC because I value my independence!"


With the budget scheduled this week, Weekly speaks to Pierre Dinan, economist and former member of the Monetary Policy Committee (MPC), about the economic situation of the country. He highlights the short-term strategies employed and the long-term measures needed to become a high-income country. He also explains why he voted for an increase in the repo rate when he was part of the MPC and the reason for his no longer being there.

What is the economic context of this year's budget?

I think it's full of challenges. For the last few months, we have been talking a lot about the economy and how we have progressed from a poor to an upper-middle income country over the last 50 years. It was right to say that. But what we must be careful about it not to reach a stage where we think we can relax. The government is talking about trying to make us become a high-income country...

What measures has the government taken towards that?

I would say that there has been a lot of talking but the measures being taken will not take us there. Over the last two years or so, what we have been talking about is infrastructure. I am not against building infrastructure, whether it is the Metro Express, roundabouts or roads; they should help towards more productivity if they are used properly and allow people to go to work on time and in a better shape. But this is a one-off and the jobs created are temporary. Also, the economic activity and increased consumption will, unfortunately, lead to a higher deficit in the current account, a worse balance of payments. We can't reach the level we want to reach except through exports. We import almost everything we eat, but we are not exporting enough.

Is the export situation worse than it was?

It is. I am not in as good a position as those making policy, but we know that the export processing zone (EPZ) firms are having more problems to export. The financial sector that was doing well is now meeting a challenge since the treaty with India has been modified to our detriment. As for sugar, better not to talk about it. The only sector doing well is tourism.

Is the situation likely to get worse?

If we don't do anything then yes.

Are we doing anything?

We are doing things for the short term; we need to think long term. I am not against infrastructure, it's a good thing, but it is not enough. Amongst the resources that we have, what is it that can bring us some long-term benefits?

How about the smart cities that the government is banking on?

Those will generate some employment in the service industries. If you have more and more wealthy people coming here, they will need people like domestic service, plumbers etc. Is that what we want? We need something with greater importance and more opportunities for the future.

Like what?

The important thing is to use the one resource that we have that we are not using properly and that is the sea. We have 2.3 million square kilometres of maritime territory that is exclusive, according to the United Nations, 0.4 million out of that is shared with the Seychelles. The Seychelles is using its share to generate energy and so on. What are we doing with ours? It seems that if we want to make that quantum leap, that's the sort of thing we should be looking into. OK, we are a small country with no finances or know-how, but then let's go and find the right consultants. Let us ask our friendly countries to help us with competent consultancy and find out what can be done. We do some fishing, but that's not enough. What about energy, particularly given how reliant we are on petrol? Have there been any studies? What is economics? The proper use of the resources at our disposal! And we are ignoring the 2.3 million square kilometers at our disposal!

So why is it that the efforts seem to be concentrated on the Metro Express?

(Laughs) You should ask them! Developing these 2.3 kilomteres requires long-term efforts and long-term finance. Politicians are only interested in short term.

Now, coming to the public debt, are you as worried as some economists like Eric Ng?

The debt is growing. It is currently a bit more than 60%. The important thing is to look at the projects. I don't see any projects that will add value in the long term.

Will the Metro Express give us that value?

I don't know the figures. In theory, if it allows our people to travel in better conditions, come home earlier from work or leave home later, the Metro Express should mean less stress and should help. But we cannot just look at the metro; commuters have to be taken to the metro stations to begin with. The Metro Express is not elevated any more so the roads will still be affected. So let's see if the metro and the buses taking people to it will give us some relief from the gridlock.

When you mentioned our debt at 60%, did you include the money borrowed through the Special Purpose Vehicle (SPV)?

You have got a point there. The SPV is a trick. The money that came from India was to the State Bank of Mauritius. This is not right! This is hiding and concealing things. We must not use this kind of subterfuge at all. Besides, borrowing from local capitalists is less dangerous than borrowing from foreigners, because then refunding and servicing the debt does not affect the balance of payments.

Still on public debt, I suppose you are aware of the Safe City project which is raising eyebrows. What do you think of the finances of it?

I am afraid I don't know what that project is.

The government is allegedly guaranteeing a loan of about Rs3 billion to Mauritius Telecom (MT) when we know the government only owns 33.49%, with SBM Holdings owing 19% and the National Pension Fund 6.55%, leaving 0.96% for the MT employees. All these figures mean that the biggest shareholder is actually France Telecom. Why guarantee a loan to a private company where, on top of that, a foreign entity is the biggest shareholder?

MT is a company governed by the Companies Act. It is unlike the Central Electricity Board (CEB) and the Central Water Authority (CWA) which operate under an act of Parliament and are clearly positioned in the public sector. That they can benefit from government guarantees on their loans is understandable, though regrettable, because their freedom of management and of tariff levels is severely curtailed. On the face of it, MT being a company must manage its finances by itself and organise its financing requirements like any other company engaged in business activities. A government guarantee might become acceptable only if government were to request MT to execute a project of national interest involving a dose of subsidisation.

You were a member of the Monetary Policy Committee (MPC) and were the only one who voted to raise the repo rate at the last MPC meeting. Is that why you found yourself outside the committee?

I did vote to raise it and I was the only one to have done so. I thought and I still think that inflation will start creeping back on the world stage and then it will affect us and indeed, a few weeks later, we saw the price of petrol go up. I think the country should start winding up the rate of interest, because when this happens, all those who have a sizeable level of indebtedness - government, corporations and households - will start feeling the pinch. Concerning my not being on the MPC anymore, my contract was renewed but I preferred not to accept another term.

Why not?

(Laughs) Because I value my independence!

What do you mean? Was there pressure from the government to keep the repo rate low?

I am respectful of the duty of confidentiality.

A piece of advice for Pravind Jugnauth?

He must tackle the challenges that we have: we need a new strategy for maritime resources and we also need to put in place strategies for mature industries like the hotel industry. The danger with the hotel industry is to think that nothing more has to be done. The key word is diversification. First, diversification of the market - which we have done to some extent, although there are some problems with China - and we have opened the skies. But have we diversified the product? Tourists are not happy just being by the seaside. They want to see the country. So we have to showcase our cultural and religious diversity and our towns that are in such dire straits. Are our towns nice to see? Not at all. Government must lead the way. Sugarcane, we all know the problems of sugar but we must keep the cane and its byproducts like molasses that can be used for ethanol. Cane must be used for energy and for this, studies have to done.

Non-cane agriculture, we have 1.2 million tourists, but are we developing food sufficiency? Are we developing modern agriculture? Are we helping people fishing in the lagoon? Are we giving them finances to do that properly, with proper boats and so on? It's a bit frustrating to see that we have less and less land under cultivation and being hidden under big buildings and big villas. Are we helping small enterprises that are creating jobs but are facing many problems especially with financing? What are we doing? And of course, for exports at the EPZ, are we active enough in promoting exports to African countries, for instance? All these problems require strategies. We need agreement and strategies to allow these mature industries to continue to develop. We have learnt from the days when we had just one crop, through these 50 years we have diversified and now we have to learn how to keep all these new industries alive. Not to mention the financial sector: the Indian Double Taxation Avoidance Agreement (DTAA) is now more or less gone, so we must apply the skills and experience acquired to other services. All this is possible since we are a democratic country in peace, we can be trusted by cross-border investors and offer them services, we have a lot of accountants and bankers who speak both English and French.

So what is the missing ingredient?



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