BUDGET 2018-19: SHORT-TERM GAINS FOR LONG-TERM PAINS

R.C.Khushiram, Ex-Director, MOFED

The consolidated budget deficit for 2018-19 is -3.8% of GDP (against the advice of the IMF they have recreated some off-budget special funds). If we include the realisable off-budget expenditures (my own estimates), the deficit works out to be -5.0%. Without the grants of Rs 8 billion (at what cost ?  Agalega and the amended Double Taxation Treaty!!!), the consolidated deficit peaks at a catastrophic figure of -6.7 % of GDP (assuming disbursement of the full grants amount).

What is even more serious is that they are wasting so many years of hard work and discipline – of fiscal consolidation – by their populist policies. This is irresponsibility towards the country and its future generation. They are indebting this country without preparing it to meet the challenges ahead. Recurrent expenditures register an all-time high of 23.6% and 24.3% of GDP in 2017-18 and 2018-19 respectively. For the third year running, capital expenditures are less than 2% (1.7%,1.9%, and 1.7%). This is irresponsible fiscal management! Our growth is being driven mainly by consumption and not by investment. Total investment in 2018 is forecast to remain almost static at 17.2% of GDP. Consumption is being further encouraged, but the leakage in net exports will also grow. That’s a direct result of the populist policies – distributing goodies while jeopardising the growth prospects. The impact on growth is being limited by insufficient investments. It will now take us an additional decade to become a high income economy. Another legacy of this government, like the previous one under Mansoor & Sithanen, is that, by that time, we will be foreigners in our own country. They are not only wrecking the future of this country they are putting it for sale.

The medium macroeconomic framework forecasts GDP growth to pick up to 4.1% in FY 2018/19, 4.3% in FY 2019/20 and 4.5% in FY 2020/21. This time it is by 2020/21 that the budget deficit is expected to be reduced to 2% of GDP. It seems that we had a foretaste of such forecasts since this government’s very first budget which predicted that budget deficit will be reduced to -1.4% of GDP in 2017-18.!!! At least for the public sector debt (PSD), they are acknowledging that it will stay as high as 63% of GDP till end June 2020, much above the prudential limit of 60%. With proper accounting that includes the foreign borrowings of SBM and MT, and the Indian Eximbank line of credit of $ 500 million, PSD is likely to be much higher than 63%. Thus, it does seem likely that the 60% debt target will not be reached by 2021, without major fiscal adjustments. Painful fiscal adjustments will become unavoidable in the coming years – short term gains for long term pains.

The fiscal strategy aims at improving transparency in public finance management, enforcing greater fiscal discipline and prudence, and putting public sector gross debt on a downward path. The ratings on each of these and in meeting the 3-year macroeconomic targets are as follows : Fiscal transparency : –1/10 because the special funds outside the budget, off-budget expenditures and SPVs are not good examples of sound public finance management; Fiscal discipline and prudence: 1/10 because of bulging recurrent expenditures, perennially low capital spending and incapacity to bring the consolidated budget deficit to sustainable levels and Public sector debt: 2/10 because of relatively high public sector debt ratio and doubtful accounting practices.

Once the unsustainable FDI inflows and the offshore funds dry out, the country will regress back to the 1979-1982 dark period of our short economic history. The current account deficit of the Balance of Payments had then shot up to 14.4 % of GDP and we had to devalue the currency by more than 30%. This is where such irresponsible budgets are leading us. This is being reflected in our gaping external current account which will become more severe and more difficult to finance if capital inflows become more volatile. The country’s survival depends on a strong export sector. There is need for a whole set of measures to re-dynamise the export oriented activities. Fiscal incentives are just not enough.

Only recently Lord Meghnad Desai was commenting that there is no reason why Mauritius should not see itself as a North European country – like Estonia for example. But we will have to be more ambitious. He emphasised that we will be needing a roadmap thinking of where we want to go and which country we’ll want to emulate in terms of economic progress. We have got it all wrong. Instead of improving our macroeconomic fundamentals we are going all haywire. We seem to have chosen a banana republic as our very model.