The disturbing trends in the country's main economic indicators constitute serious cause for concern, as is being expressed more frequently and forcefully by independent observers. The world economy also faces a risky and uncertain outlook heightened by trade fragmentation and financial instability. In view of the forthcoming Government budget, it may be opportune to press once again for a critical review of misguided economic policies.
Growth and inflation
The economy is facing flagging growth and soaring inflation. Instead of Government's GDP growth projection of 5% in 2023, IMF forecasts a lower growth rate of 4.6%. GDP in real terms in 2023 will barely cross the 2019 pre-Covid level. With a declining labour force and weak productivity gains, annual mediumterm growth is not foreseen to exceed 3.5%. The official inflation rate for 2023 is 6%, but IMF expects steeper inflation at 9.5%. The cost of living is worsening drastically with headline inflation at 11.1% in March 2023. Besides rising global energy and food prices, the depreciation of the rupee by 25% between 2019 and 2022 has amplified inflationary pressures. Continued rupee depreciation, by 8% since the beginning of 2023 till mid-March, will further feed into higher prices in the coming months, inflicting greater hardships on lowerincome families.
External deficit and the rupee
Government is not addressing the primary cause of rupee weakness, which lies in the large deficit recorded on the external current account of the balance of payments. This external deficit stood at USD1.6 bn in 2022, or more than double the 2019 deficit, mainly because imports of goods have surged far in excess of exports. Net foreign exchange reserves of the Bank of Mauritius (BoM) dropped by USD1.8 bn over the 12 months ending March 2023.
Government's export boom narrative is nowhere in the statistical data. Exports of goods in 2022, in real terms, represented only 95% of the 2019 level. Exports of goods stood at USD2.3 bn in 2022, slightly lower than USD2.4 bn for 2018. The secular deterioration in our capacity to meet import needs from export earnings is reflected in the declining ratio of exports to imports of goods (both on FOB basis) from over 50% a decade ago to less than 40% currently.
Exports of services have grown, especially with a statistical adjustment in recent years to include global business activities, but the services surplus falls short of the goods deficit by about USD1 bn. Tourism is recovering well enough, with tourism receipts in US dollars in recent months running 10% higher than in the pre-Covid period. The improvement in tourism revenue is largely driven by more revenue per tourist, while the number of tourists is stabilizing at only 85% of the pre-Covid level. This may denote a welcome structural shift back towards more high-spending visitors but could spell difficulties for smaller-size hotels.
Despite the tourism revival, BoM forex interventions and exchange rationing by banks, forex stays scarce, and the rupee remains under pressure. The BoM is allowing the rupee to depreciate so as to artificially build up its capital reserves by valuation gains. In 2021-22, BoM forex valuation gains amounted to over Rs 9 bn, and the BoM is counting on further rupee depreciation this year to offset major losses on its investments in foreign securities.
Fiscal deficit and debt
Higher inflation raises nominal GDP, which reduces the ratio of public debt to nominal GDP. Currency depreciation has a limited adverse impact on public debt, which is still largely rupee denominated. Nonetheless, public debt is expected to remain elevated at 80% of GDP in June 2023. The past bail-out costs of Rs 25 bn for BAI and of Rs 6 bn for Betamax compensation, in addition to wasteful and unproductive spending, have hugely burdened Government debt.
In December 2021, a restructuring bail-out of Rs 12 bn for Air Mauritius was engineered by recourse to a BoM/ MIC investment of Rs 25 bn in Airports Holdings Ltd (see Box). Without this investment subterfuge, the fiscal deficit in 2021-22 would be wider by over 2% points of GDP, and public debt larger by close to 5% points. BoM moneyprinting to finance quasi-fiscal operations serves to suppress fiscal deficits and debt but contributes to aggravate demand pressures and inflation. Assuming no other financial capers, the fiscal deficit for 2022-23, after consolidating the budget with special funds, is forecast at over 4% of GDP, as shown in the table below.
Between the pre-Covid fiscal year 2018-19 and 2022-23, expenditure went up by Rs 52 bn, with almost half of the increase accounting for social benefits. Over the same period, revenue rises by Rs 41 bn from new measures, including the levy on high incomes, the compulsory CSG pension contribution, and petroleum taxation, but mostly from greater VAT revenue spurred by inflation. While the fiscal deficit is retreating from peak levels in the Covid years, it remains higher than in the pre-Covid period.
The current fiscal stance is not sustainable in view of elevated public indebtedness and the inflationary impact of continued deficit financing. Moreover, the undue focus on social welfare spending is at the expense of public investment, which is now lower by 1% point of GDP compared to a decade ago. The share of the public sector in total investments is down as well by 4% points. The emphasis on road and transport projects does not make up for much larger investments required to develop the country's key infrastructure, especially in the water, energy and waste management sectors, to boost productivity and growth. In 2023-24, expenditure on pension benefits will expand sizeably by some Rs 8 bn, to include payment of an additional CSG monthly retirement benefit of Rs 4,500 in line with a pre-Covid electoral promise. As reported by the Director of Audit, 72 public sector bodies are running cash and actuarial deficits in their employee pension funds, totalling Rs 40 bn at June 21. The need to meet these pension obligations will put severe strain on future Government budgets. The zealous social housing programme, of over Rs15 bn, is already proving far costlier than estimated, and will add to overshooting budgets in coming years.
Conclusion
The IMF is currently urging countries to adopt resolute domestic policies to reduce inflation and debt. The dogged pursuit of reckless fiscal policies in a challenging global context will further exacerbate domestic and external imbalances. Incantations for a Diego Garcia or Agalega financial windfall cannot substitute for responsible fiscal management. Without a reawakening to less spendthrift and more productive ways, the Mauritian economy is clearly riding for a fall.
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BoM Investment in Airport Holdings
In December 2021, Mauritius Investment Corporation (MIC), a subsidiary of the BoM, invested Rs25 bn in Airport Holdings Ltd (AHL), and recorded a loss of Rs1.5 bn or 6%, within six months. The credibility of BoM/MIC is heavily at stake in this doubtful investment.
The Report of the Director of Audit states that, "The audited financial statements of the AHL group for the year ended June 2022 was not available in December 2022", i.e., 16 months after its setting-up in August 2021. Moreover, the value of MIC's investment in AHL, its single largest investment, was based on a generous Rs 26 bn revaluation gain on Airport of Mauritius Ltd, a AHL subsidiary.
As reported by the Director of Audit, the AHL revaluation was carried out by an unidentified "private company". This revaluation by a lowerranking accounting firm may well be exaggerated, leading to further BoM/ MIC losses on the AHL investment.
The BoM/MIC investment of Rs 25 bn was used by AHL to pay off an amount of Rs13 bn to Govt in respect of AHL's acquisition of Airport of Mauritius, and the balance of Rs12 bn went towards the restructuring costs of Air Mauritius, another AHL subsidiary. The MIC investment in AHL was an artifice to channel BoM printed money to Govt.
MIC is relying on inflation to boost the valuation of its property investments. Land assets acquired from Omnicane for Rs 2.4 bn in June 21 were fair-value adjusted by an extra Rs 1.3 bn in June 22. MIC also acquired other investment properties for Rs 4 bn in 2021-22. The incongruity of a central bank generating profits from property investments is striking.
