INDERJEET MUNOHUR

 

Part one of this article highlighted the urgency for national policies to focus on greater productivity. The economy is riddled with serious constraints; it is time that policies be directed towards improved resource allocation in all sectors, including the public sector, to enable them to be more proactive and productivity oriented, in line with the stated official objective of Government ‘to raise public sector efficiency, including in parastatal bodies and public enterprises’ as spelt out in the 2016-17 Medium Term Fiscal Strategy And Debt Management Strategy.

However, this efficiency objective somehow remained a dead letter. The productivity issues, the deficits in service delivery and performance in the public bodies were never vigorously attended to, the loss-making and high-indebted entities somehow never submitted turnaround plans; deficiencies and deficits continued. The actual magnitude of the shortfalls continues to be an open question. The 16 Public Enterprises of Mauritius are almost all riddled with poor management track records, huge deficits and debts; have failed in their mission to open opportunities for growth. They are consistently shown in a bad light that further deepens the present climate of pessimism in the country.

 

IMF’s Recommendations

 

Is it against this broader background of low productivity, generalized poor management of the affairs of the state, poor image of public enterprises, generalized leadership deficits that we ought to interpret the stand of IMF?

But Mauritius is not among the countries with the biggest debt, as the table below shows.

Country Rankings of Debt as % of GDP

RANK COUNTRY % of GDP RANK COUNTRY % of GDP
1st Japan 250 8th Bhutan 118,6
2nd Greece 176 11th Singapore 104,7
4th Italy 132 12th USA 104,17

 

In fact, many countries have not been able to curb their debts. But why is it that this does not represent a huge issue for most of them? A 60% to 65% debt to GDP ratio does not, on the face of it, appear to be so daunting a challenge.

 

The Case of Japan

 

Japan is cited as the example of high government debts. The indicators appear more worrying than those of Mauritius. Its trade balance became negative for the first time in 2018 due to higher energy prices and reduced imports from China. Its debt is more than fifteen times its annual tax receipts. The population is ageing; Chinese geopolitics is impacting hard on its economy. The international trade competition it faces is fierce.

The country managed to increase its national savings and enabled domestic purchasers to continue to buy new government debts. It does not have a one man one car policy and has an 8% public sector employment. As most of the debts are held by its own citizens, the risk of defaulting is lower, giving Japan the image of a stable and creditworthy nation that therefore continues to attract foreign investors. The Japanese is known for his high sense of work dedication, honour and patriotic ideals through a nation centered school system. The monarch as head of state symbolises the Japanese nation and the unity of its people, and inspires immense respect and reverence; quite different from other models of heads of state.

But suppose for a moment that Japan cannot reverse the present trade trends and its deficits mount. To ensure that interest payments and current obligations are not defaulted, debts shall be sold more and more to foreigners through higher yielding debt options. Not an impossible alternative, as long as economic growth outpaces the growing debt burden. To achieve this, priority needs to shift in favour of developments with higher incomes and higher tax collection potentials to support more interest liabilities and more loans to pay for these.

This is the essence of the debt trap that IMF has directed attention to. As more and more interest obligations are entered into to service ever growing debts, countries borrow more and more to pay debts today; the borrowings push debts further up meaning higher interest and obligations for tomorrow. How long can a country manage to contain its debts is a matter of productivity; and its ability and political will to change the structure of its economy and reallocate manpower to productive activities.

 

The Master Dilemma: The Political Will

 

In a 2017 World Bank study of country rankings of household consumption levels as a percentage of GDP, Mauritius ranked 8th highest across a list of 129 countries, with 75,36 % of its GDP being consumed in that year. Of the seven countries that led the way ahead of Mauritius were Moldova, Bolivia, and Palestine, countries in such economic distress as to have little choice other than eat up the bigger lump of their income; the difference, however, is that Mauritius records a per capita income more than ten times that of Moldova, to cite the latter from one of the seven examples. For purposes of comparison, South Africa consumed 59,37 % of its GDP, the United Kingdom 63,28 %, France 54,11 %, and Singapore 35,01 %.

Along similar lines, another World Bank study places Mauritius 125th on a 129 country list which shows rankings of Savings as percentage of GDP by country. The three countries down the line behind Mauritius were Mozambique with savings of 1,78 % of GDP, Lebanon negative 2,2 %, Zimbabwe negative 48,78 %. Gross savings were calculated as gross national income less total consumption, plus net transfers. Using these criteria, Mauritius in 2017 registered a savings of 7.7% – fourth before the very last on the world list.

An identical picture emerges regarding capital investment: Mauritius is 129th with 18,27 % of GDP invested on a list of 157 countries – Djibouti invested 50,38 %, Mozambique 39,24 %, Seychelles 37,23 %, India 30,94 %, and Madagascar 15,15 %. Mauritius is among the world leaders on the consumption to income front and a poor performer on the savings and investment index. About time we face the realities – Mauritius has already lost ground on almost all fronts. Debts have become bad servants and bad masters.

 

How worse could things get?

 

The Early Warning Exercise of the IMF makes recommendations for the management of debt levels as a means to avoid crises. EWE is based on lessons learnt from analyzing crises worldwide. Crises arise from a number of underlying factors; the first being reserves mismatch followed by inadequate capitalization, terms of trade shocks, credit price bubble; or sectoral vulnerabilities, political disorder or a natural calamity. Any collision of events could precipitate financial crises. But the EWE is meant to be only a ‘flag raising’ exercise that merely calls attention to trends that could suddenly erupt into vulnerabilities. It seeks to inspire the right policy responses even during the good times.

The worry is that indicators in Mauritius do not suggest that times are good. Mauritius ranks 7th among countries most exposed to natural calamities; add to the list – an ageing population, worsening environmental problems, underperforming main economic sectors, accelerating brain drain, increasing tempo of dissent, withering off of participatory citizenship and the unending demands while productive growth slides further downwards.

The present age is one of exceptional turbulences. As a nation, we need to create our own destiny. Are the present policy-makers really up to the challenge?

 

THE END