The 24-25 budget fails dismally to (1) reduce fiscal pressure on the external deficit, which is depreciating the rupee and driving up inflation, (2) lower the high and unsustainable level of public debt, and (3) create fiscal space to meet any future adverse shocks and contingencies. Government has abandoned all notions of fiscal responsibility by engaging in prodigal social spending.
Fiscal excess
The fiscal deficit, augmented by consolidating budgetary operations with special funds, is rising to 6.6% of GDP in 23-24, and is estimated at 4.9% of GDP in 24-25. The official budget deficits amount to 3.9% and 3.4% of GDP respectively, and the corresponding deficits of special funds are 2.7% and 1.5%. Spending in special funds has grown substantially over time and now accounts for about a quarter of budgetary expenditures. Compared to pre-Covid years, the deficit has grown by 2 % points of GDP. Total expenditure rose by 7 % points to 31% of GDP while total revenue went up by only 5 % points to 26% of GDP.
The size of fiscal deficits is unduly large for economic and financial stability, and will contribute further to rupee depreciation and inflation. The rupee has fallen by over 30% since 2019, and inflation reached double digits in 2023. Inflation is a tax on the poor, inflicting a loss of purchasing power on the weaker sections of the population. The budget recognizes the reality of persistent inflation by forecasting a GDP deflator of 6% in 24-25, only slightly lower than the figure of 6.5% in 23-24.
The widening gap between Govt revenue and expenditure will only aggravate inflation. Govt is however counting on inflation to generate more tax revenue, especially through VAT and other taxes on goods and services, and thus fund another round of welfare handouts. The country is running the risk of spiralling inflation, like many other countries, such as Zimbabwe Turkey, Argentina, and oil-rich Venezuela, which have spent recklessly without regard to fiscal and debt sustainability.
External shortfall
Mauritius is already witnessing signs of economic trouble, with the loss of $1 bn of external reserves in each of the last two years and a chronic scarcity of foreign exchange. The central bank is borrowing $1.5 bn externally and relying on foreign exchange deposits from other financial institutions to prop up reserve adequacy.
Govt highlights the improvement in the external current account deficit to 4.5% of GDP in 2023. However, the current account deficit, excluding net flows of global business companies, is a more accurate measure of our external position. It is showing a deficit of 13% of GDP in 2023, still higher than the corresponding deficit of 11% in 2019.
The external account is the Achilles heel of the Mauritian economy, especially since foreign exchange outflows can be large and unpredictable. Exports have registered weak growth last year, despite the benefits of devaluation. An increasingly unfavourable global economy will not help in expanding exports, whereas increases in imports are sustained by expansionary fiscal spending.
The Govt hype about the contribution of tourism to improving the external deficit is overstated. Gross tourism earnings recovered from the pre-Covid level of $1.7 bn in 2019 to $1.9 bn in 2023, or by $190 mn. With a full recovery in tourist numbers, gross tourism earnings are projected at Rs100 bn, or $2.1 bn, in 2024, with a further rise of $240 mn this year. However, these increases in gross tourism earnings are less significant when viewed in relation to the much larger current account deficit, excluding GBCs, of $1.8 bn in 2023. Tourism is important for generating foreign exchange, but it is the imports of goods, valued at $5.9 bn (f.o.b.) in 2023, that drive the current account imbalance.
Govt also entertains the misguided hope that massive increases in foreign direct investments (FDI) will help balance the external accounts. Between 2019 and 2023, FDI rose by a net amount of only about $200 mn, from $0.6 bn to $0.8 bn, largely explained by an investment of $135 mn (Rs6 bn) for the foreign acquisition of a monkey-breeding business, and other 'unspecified investments' of $83 mn in 2023. Moreover, FDI remains disproportionately focused on less productive sectors, mainly real estate activities. In 2023, FDI in manufacturing and financial services was almost nil, and was negligible in other key sectors, except for real estate and hotels.
Since the Covid epidemic, Mauritius has been borrowing extensively from external sources, primarily from international development institutions such as AfDB. AFD, and JICA, to boost its external reserves. An IMF credit line and a World Bank budget support loan were mentioned as financing sources in previous budgets, but did not materialize. Reports from these two international institutions have expressed strong concerns about the sustainability of public spending on pensions, and the role of MIC in funding quasi-fiscal operations. A "green" Govt commercial borrowing to support environmentally sustainable development was also recently announced, then abandoned.
Debt burden
The recurring fiscal deficits mean more Govt borrowing and heavier public debt. Govt estimates public debt by to rise by Rs28 bn in 23-24 to Rs524 bn in June 24 and projects that it will go up by another Rs43 bn in 24-25 to Rs567 bn in June 25. Generous social spending needs to be paid for somehow, if not by today's taxpayers, then by future taxpayers. The cost of extravagant spending is being passed on as a debt burden to the upcoming generation.
Constantly rolling over a soaring level of public debt will eventually lead to a future economic crisis, if galloping expenditures are not matched by higher revenues. The fiscal imbalance will be reflected in the external imbalance, resulting in rupee depreciation, rising prices, shrinking external reserves, and a foreign exchange crunch. Capital flight due to lack of confidence in economic management can also precipitate a financial crash.
Govt is also claiming that it managed to reduce public debt to GDP ratio, which is estimated to fall from 81% in June 23 to 74% in June 24, and further to 71% in June 25. However, the decline in the debt ratio is misleading, because it fails to include free financing to Govt from BoM/MIC for a total of Rs98 bn, namely, Rs73 bn from BoM capital reserves for the budget, and Rs25 bn from MIC for Airports Holdings.
The use of data manipulation to underestimate the fiscal deficit and debt is a rampant practice. Govt revenue for 2023-24 and 2024-25 is overstated by at least Rs5 bn, relating to taxes on goods and services (see Box). With a shortfall in projected revenue, spending will have to be met by additional Govt borrowing and higher debt. In the 22-23 budget, Govt projected an equity sale of state-owned companies of Rs22 bn, thereby significantly lowering its debt forecast for June 23. However, this equity sale was never realized. After accounting for lower revenue and expenditures disguised as equity investments, the fiscal deficit is actually higher at 7.7% of GDP in 23-24, and 6% in 24-25.
GDP is also grossly overestimated since 2022, by arbitrarily adding a substantial amount of income of offshore companies to domestic services income. Ireland resorted to fairly similar magical accounting in the past, using offshore activities to create staggering but fictitious growth, dubbed as 'leprechaun economics' by Paul Krugman, Economics Nobel prize winner. This distortion in national income statistics led the Central Bank of Ireland to propose an alternative measure to better reflect economic activity generated domestically.
Govt is projecting real GDP growth of 6.5% in 2024, whereas Statistics Mauritius (SM) released a growth forecast of only 4.9% in March 2024. In its latest report on Mauritius, the IMF adopted the same SM growth figure for 2024. After adjusting for GDP and tax revenue overestimation, as well as a doubtful debt consolidation adjustment, public debt at June 24 will still stand around 80% of GDP. Including BoM/MIC financing to Govt would increase the public debt to GDP ratio by an additional 15 % points, to 95% of GDP.
Govt can achieve a reduction in the public debt ratio by taking advantage of inflation to collect more VAT and other taxes on goods and services. Govt is using inflation to raise higher revenue, and support spending with a lesser recourse to debt. Inflation has become an indispensable tool for Govt's spendthrift policies, at least until the economy unravels.
The expectation that the public debt ratio will be brought down by future strong GDP growth is largely unfounded. Given the weak trend in productivity gains, and minimal growth of the labor force, the potential medium-term growth rate of the Mauritian economy is around 3.5% per annum, lower than Govt's over-optimistic 5% figure.
Conclusion
The current state of the world is not conducive to robust growth prospects, partly on account of adverse geopolitics, population ageing and environmental factors. International financial institutions and credit rating agencies are concerned about the record global levels of public debt and are urging countries to engage in corrective adjustments in their expansionary fiscal policies.
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Mauritius is pursuing a radical populist agenda for electoral gain, and blatantly flouting standards of fiscal prudence. An independent diagnosis will no doubt confirm that the country has become increasingly vulnerable to the threat of an economic crisis, especially in the wake of the 24-25 budget.
Fudging on taxes
Tax revenue is inflated by at least Rs5 bn in both 23-24 and 24-25. A detailed explanation follows. Taxes on Goods and Services (G &S) for Financial Year (FY) 23-24 were estimated at Rs104 bn in the 23-24 budget, but were revised downwards by Rs 6bn, to Rs98 bn, in the 24-25 budget. Based on actual figures published by Statistics Mauritius, Taxes (G&S) amounted to Rs66 bn in the first three quarters of 23-24, averaging Rs7.3 bn monthly. The revised estimate of Rs 98 bn for 23-24 can be realized, if taxes in the last quarter amount to Rs32 bn (98-66), or a monthly average of Rs10.7 bn.
Such a sizeable increase in the monthly average from Rs7.3bn in the first 3 quarters of 23-24 to Rs10.7bn in the last quarter is most unlikely. If a less unrealistic monthly average of Rs9 bn is assumed, Taxes (G&S) in the last quarter of 23-24 would stand at Rs27 bn, or Rs 5bn lower than estimated. Taxes (G&S) would then sum up to Rs93 bn for 23-24, representing an increase of 10% over the previous year.
Taxes (G&S) for 24-25 are estimated at Rs112 bn in the 24-25 budget, showing an increase of 14% over the previous year's revised estimate of Rs98 bn. If the previous year increase of 10% is again assumed over a more realistic estimate of Rs 93 bn, Taxes (G&S) would be Rs102 bn in 24-25. Inclusive of the newly introduced Corporate Climate Responsibility Levy of Rs5 bn, total Taxes (G&S) add up to Rs107 bn in 24-25, or Rs5 bn lower than estimated in the budget. This tax fudging example is another illustration of the deceptive practices used to fiddle economic statistics.
