SADEK RUHMALY

Consultant Economist

SADEK RUHMALY

« Will stimulus packages, without personal guarantees from beneficiaries, not constitute an ineffective grant to corporates with retained earnings and healthy profitability in good times? Will profiteering behavior using coronavirus as a convenient cloak not be a misuse of public funds for private benefit? »

A prudent path of serene outlook with clarity for the Prime Minister is the best scenario to ride a global economic shockwave.

Hiccups in global economic cycles are not so rare in World economic history. Mauritius has had its fair share of global shocks over the past half century. Yet, policymakers in Mauritius across decades, have opted for clichés in macroeconomic stabilization tools: Currency adjustments [MERI] through BOM interventions to cushion Rupee appreciation, coupled with a gradual slide of a weakening domestic currency relative to our trading partners basket of currencies; Quantitative easing though a softening of the Repo rate; Stimulus Packages and fiscal policy initiatives to provide liquidity lifelines to fledgling inefficient businesses.

So why does our economy exhibit fundamental structural flaws that persist across decades?

Our economy has reflected serious structural problems since the IMF stabilization programs of the 1980s. Our Balance of trade has seriously worsened over the years, with ensuing incidence on the rupee’s exchange rate vis-à-vis the basket of currencies of trading partners and the central bank’s currency reserves volatility.

Our public debt situation weighs significantly in terms of the costly repayments and its incidence on potential Gross Domestic Product. Beyond the public debt consideration, our economy does seem to trigger onto the next stage of post-Commonwealth Sugar Agreement and Multi-Fibre Agreement development stage.

The fears and skepticism of investors reflect the lackluster performance across all the key sectors of the economy: the sugar sector; the manufacturing sector includes the textile sector; the hotel and hospitality sector; the financial services sector.

The policy stagnation and lack of imagination of an innovative development model since the post-CSA and MFA era largely explains a scenario of sectoral asphyxiation and a difficult take-off for SMEs – Small and Medium Enterprises in the face of corporate domination seeping into SME business clusters.

Banking practices are not adapted to the requirements of SMEs in terms of guarantees, cash flow and working capital. The rate of « business failures / bankruptcies » over the decades is a panacea. Financial engineering at the SME level is inadequate. The Stimulus Packages of 2005/2010 did not provide vital momentum to vulnerable operators in the manufacturing sector and SMEs. Credit squeeze and poor access to capital in the short and medium term has suffocated operators in different sectors of the economy.

A major and persistent concern lies in the level of household debt in Mauritius. This consumer landscape coupled with the indebtedness of companies in different key sectors of the economy remains a primary challenge for the government.

The informal economy is an essential dimension in a strategy to democratize the economy, notwithstanding corporate oligopolies in the sugar, energy, financial services and hotel sectors. The lack of an adequate and targeted supervision policy has made this sector chaotic.

Murky scenarios of public service employees in direct competition with SME entrepreneurs cloud the equation– notwithstanding the conflict of interest arising from civil servants’ privileged access to commercial data and business secrets for personal benefits. This paradox harms legitimate operators, notwithstanding the institutionalized elements of corruption.

Our budget deficit ratio to GDP over decades has come under increased pressure.

Income Tax revenues, VAT Revenues and Customs and Excise duties are almost Rs50-60 billion short of our budgetary requirements, as the Covid-19 [Coronavirus] pandemic undermines significantly our trade balance and consumption expenditure – a significant driver of GDP Growth.

Are we truly in a state of heightened economic emergency?

The debacle of the pandemic in China since January 2020 highlights our almost absolute dependence on Chinese manufacturing architecture. The Covid-19 disrupted China’s production process, thereby triggering a supply chain disruption of raw materials for China’s manufacturing sectors. World prices for commodity prices are collapsing – with a crumbling of crude oil prices towards a US$20 per barrel – A Scenario that puts a lid on our core inflation.

Conversely, the increased risks in terms of shortage of products from Chinese factories are a serious threat to our consumer economy which is a major determinant of our growth rate – a risky parameter with a potential negative incidence on our Output Gap.

Concerns about short-term capital – which already poses a barrier to the viability of SMEs and players in all key sectors of our economy – could lead to layoffs if the virus persists beyond two quarters … a growth rate at below zero for two consecutive quarters is defined as a Recession.

Air access is a lifeline for an island economy, in terms of passengers and cargo, and such a major interruption of this magnitude is an extreme emergency situation; we observe that 80 percent of transatlantic USA / Europe air traffic is disrupted with a catastrophic effect on the G7 economies.

Our main trading partners in G7 Countries are facing a potential financial meltdown scenario. The impact on our exports of goods and services, as on our tourist arrivals, will be deep and negative.

Our airline strategy as well as our tourism policy is obsolete, as economic lobbies safeguarded a myopic concept rooted in a « high-end euro-centric market strategy ».

The slowdown in aviation services is triggering drastic shockwaves in the hotel and hospitality sector across the range of high and mid-range products. The risk of layoffs is real.

Our national aviation company will experience oscillating fortunes unless a far-reaching corporate strategy is promptly reengineered.

The key macroeconomic policy questions persist:

Will quantitative easing – without complementary measures relating to targeted long-term refinancing operations and an asset purchase portfolio rebalancing- be effective in cushioning a GDP weakening phase?

Will stimulus packages, without personal guarantees from beneficiaries, not constitute an ineffective grant to corporates with retained earnings and healthy profitability in good times?

Will profiteering behavior using coronavirus as a convenient cloak not be a misuse of public funds for private benefit?

Will disproportionate Policy dosage not be a risky palliative?

The Prime Minister Policy discernment and clarity of purpose shall be the moderating factor to economic salvation.

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