The 2019-20 budget marked people’s minds more by the controversies than by its policy proposals. Two factors finally retained attention: the absence of caution and care in the running of public affairs and the arguably dubious accounting exercise to trade a device seemingly devoid of transactional substance with intent to counterbalance the magnitude of national debt escalations – that raised technical issues about reserve instruments within the central banking framework.
Two things, however, were well understood: (i) the executive takeover of national monetary management decisions, a prerogative vested through the instrument of legal autonomy provided to the Bank of Mauritius over matters pertaining to money, while policy goals are set by government ; and (ii) the country must prepare to face up the harder realities of public liabilities arising from infrastructure and other public debt-funded developments associated with high operating costs against prospects of poor revenues, and reflect on possible policy alternatives to meet new challenges. Have no doubts, serious efforts shall be called for to generate additional surpluses. Unless higher levels of production and earnings are generated, an unlikely possibility under the present setup, this required surplus shall inescapably be extracted through a series of measures ranging from erosions in household revenues in the form of tax, especially consumption tax, to the extreme alternative of the sale of national assets.
The 2017 Ministry of Finance Report on Fiscal and Debt Management Strategy had already set the tone. It signaled the need for “enforcing” greater fiscal discipline, financial prudence and to “rationalize” subsidies (emphasis mine), a social engineering exercise with obvious political overtones. The Report also spelt out its strategy with regard to the expected mounting public sector debt dilemma through a tacit proposal for a future trade-off – “If the statutory debt target of 50% of GDP is to be achieved, policy options of the sale of equity and disposal of other government assets will have to be considered” – further acrimonious debates and huge hostilities on the agenda with regard to ‘disposal of assets’. Not without surprise, the initial 2017 MOF forecast also turned out to have been based on couple of wrong assumptions that events, facts and fi gures later unfolded when further defi cits were brought to light during 2017-19 two year spans that followed. In public opinion, such a situation is quickly seen not only as gross incompetence but the procedural fallacies no longer appear unplanned. This can only mean that pressures shall mount further on several fronts to get the authorities to track real cost overruns and other deficits to gauge the depth of the fi nancial hole on which the country presently sits, if only to clear the grounds for future action. People expect to remain informed about what the future holds. Politics and public policy planning fare poorly under conditions of prolonged uncertainty.
The Middle Productivity Trap
All sectors of the economy are unequivocally hurdled with difficulties – all are presently rooted in a general setting of diminishing productivity and rising uncertainty – hence the hypothesis of a looming middle-income trap. But the fact is that the economy is fundamentally cabined in a diminishing productivity trap due to chronic deficiencies resulting in reductions in real incomes. Real incomes have a substance called productivity that provides the basis for rising living standards and improved prosperity. Mauritius needs to prioritise incomes generated from increases in productive capacity for yet higher levels of productive transformations. From a long term view, the dynamics of productivity growth are far more important than income growth in determining a country’s development prospects. Productivity unlocks society’s long term dynamic forces and builds the road to long term prosperity.
Government Borrowings and IMF’s Recommendations
The IMF recommends that Mauritius does not borrow more. IMF’s recommendations are not based on thin air. They draw from insight gained from a comprehensive multi-country study and are issued when a situation arises. It goes under the name of EWE – Early Warning Exercise. This work combines ‘rigorous empirical analysis with surveys of experts and market intelligence’ by professionals and serves to gauge the potential for a crisis to manifest itself by identifying the underlying vulnerabilities that a system is predisposed to. The objective is to sharpen advice. IMF advice, expressed in polite prose, purports to be sharp and unequivocal.
Mauritius, on the contrary, does not think that the vulnerabilities are serious as the greater proportion of the debts is from the domestic financial market. Government in fact borrows by issuing securities which are bought by the local banking and non-bank sector; the main non-bank buyers being the National Pensions Fund, the National Savings Fund, the Insurance Sector and private entities, local and foreign. The total government securities held at March 2019 was Rs. 246,6 Billion, comprising mainly pension and insurance contributions.
This, more importantly, means that surplus otherwise available for investment in the productive private sector has now been absorbed into government securities causing a scarcity on the domestic money market and the consequential slowdown of private ventures, especially the startups: efforts, capital growth and innovations stagnate and the productivity of the workforce starts to lose ground. Today’s avenue towards increasing labour productivity and earnings runs through the application of knowledge-based capital, education and creativity and is actualized through 21st century technological progress. Devoid of these dynamics, Mauritius shall remain sluggish and dormant.
The Hard Facts
The multi factor productivity growth between 2017 and 2018 receded from 1.6 % to 1. 5 % in 2018, i.e. a 0.1 % loss over a one-year period; not a major retreat but not a forward movement either, especially when national liabilities are on such a sharp increase. Average compensation of employees for the same period went up by 0.4 % – this is a fundamental indicator of loss on the total productivity index as cost of inputs rise and output diminish. In fact, we daily witness diminishing productivity scenarios as prices rise and general real wages diminish bringing down purchasing power – a daily experience of the housewife. Debts eventually camouflage real economic forces. To put figures in perspective, the total Government Debt Servicing Cost at June 2018 stood at Rs. 21, 4 Billion.
The Public Sector Productivity Drag
Our public sector, a major provider of services, has long become a cause for concern. Public sector employment stood at 100,417 in 2018, while total employment in private establishments employing more than 10 persons was 220,849. As a percentage to Total Private Employment, government employment stood at 42,7 % in 2014 and moved up to 45,4 % in 2018. It is not surprising that this figure climbs further up under the prospect of the coming general elections.
Have the costs of this level of public sector employment to society as a whole become too much of a burden? This again raises the inescapable productivity issue. Public employment has historically been instrumental to huge social transformations; but its overall productivity and relevance shall henceforth come under greater scrutiny. Compare with countries that have high levels of public sector employment and effective provision of services such as Denmark, Norway and Sweden; their highest level of employment reported never went above the 30% ceiling. Japan’s public sector employs 8%, South Africa 17.9%, Greece 15% and Cuba 77%.
The Ministry of Finance official 2017 document recognises the need to ‘raise public sector efficiency, including in parastatal bodies and public enterprises.’ On the expenditure side, ‘Government will enforce better returns on public enterprises … reduce wasteful expenditure and ensure costefficient public service delivery.’ The narrative of productivity shortfalls is no longer disputed, though a contrary narration continues to hold sway in a few quarters. But narratives assign meanings to events; narrations are only about story telling. The hard fact is that the public sector efficiency theme is now a matter of dissent.
In truth and in fact, no meaningful study has been undertaken to quantify the productivity attributable to the public sector. The public, through the budget and the media, is only made aware of the ever growing expenses. It is known that the costs to the nation in terms of compensation of employees were to the tune of Rs. 27.8 Billion in 2017 and Rs. 28.5 Billion in 2018, excluding public corporations where personally tailored individual packages skyrocket to millions. On the whole, the public sector has undeniably become a heavy load on the national economy. The real costs to the users can be stunning, in more than one way. Public officers however typically hold high qualifications and certificates – which brings us to another issue of public sector efficiency, effectiveness and productivity: the public sector low productivity paradox. It is the one sector most amenable to huge productivity gains.
The one terrible hurdle it faces arises from one fundamental flaw: the system is formally blueprinted on the principle of division of responsibilities but its day to day practice draws from a fusion of power operating through a political party partisanship principle.