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Analysis : Economic survival

So the Prime Minister has kick-started his electoral campaign. In his New Year message, he announced free public higher education and hinted he could consider trade union wage demands. He has thus raised expectations about a readjustment of salary relativity in the public sector, an early implementation of the next PRB award and an alignment of the old-age pension on the national minimum salary. Clearly, these are meant to woo voters ahead of the general elections. Meanwhile, the Mauritian economy is tottering on the brink of a slippery slope.

To analyse the dire economic situation, let us put forward the insights of our survey respondents. One assures us that “we shall survive” although “job creation remains a big challenge.” Oddly enough, his optimism is about survival, not with regard to employment or economic growth. The latter for 2019, as forecasted by a second analyst, will be “under 4% definitely.” Deep structural reforms are required to bring it above 4% but, says a third analyst, “no government will want to commit hara-kiri in this electoral year.”

A fourth analyst, yet optimistic for 2019, reckons that “the economy remains subject to notable challenges linked to downside risks associated with the global economy, non-materialisation or slower execution of earmarked ventures, and ramifications of changes within the global business sector. Furthermore, the evolution of some indicators such as export, trade balance and public debt requires close scrutiny while there is a need to guard against policy slippage that could undermine the economy in the longer term.” He does not expect a hike in the Key Repo Rate this year, nevertheless “a close monitoring of inflation trends is called for, since the risk of potential shocks materialising cannot be discounted, notably those related to the evolution of international oil prices and local climatic conditions.”

There are telling signs that a perfect storm is brewing. A fifth analyst points out that “deposits of global business companies with banks have been declining recently as a sign that capital inflows may have peaked. The global economy is slowing, and our economy has become very dependent on these flows which plug an unsustainable current account deficit. Our regulators are politically colonised and compromised by incompetence, the economic advisers of the Prime Minister are ill-equipped, and the government is engaging in populism. The party will soon be over.” 

He has said it: populism is the order of the day. Government is giving free tuition for tertiary education in the hope that it would be able to save money on fewer primary and secondary students. But fixed costs at those levels will not change as it will not be easy to close schools. The relevant ministry will simply increase the bill by Rs 600 million.

The same analyst comments further on this matter: “We have a quality problem and our local universities are not up to the mark. Research budgets are peanuts to salaries, and public universities are badly ranked in Africa, let alone globally. What we needed was better quality tertiary education, more investment and research grants and improved global rankings for Mauritian universities. What we are getting is more badly educated youth. The current education system produces people who are not ready for the demand in the private sector. Quality of local graduates has gone down because local universities have ensured that everyone passes. Free education is not the answer.”

Having failed to raise the educational standard, government is now set to belittle the value of work. There is no logic that a pensioner, someone who does not work, obtains the same income as a worker paid at the minimum wage. As a sixth analyst puts it, “it looks like an insult to someone who is earning the minimum wage through sheer hard work that someone else who has retired (or even continues working) after age 60 receives the same amount freely from the government, i.e. from taxpayers.” Another analyst asks: “How is it possible that people who are not economically active any longer receive the same benefit as one who is active?”

If we take into account the trends in the number of pensioners over the last 10 years, and the current 10-year government bond yield (5.40%) as the discount rate, the present value of a 40% increase in the Basic Retirement Pension to Rs 9,000 for a period of 
10 years would be close to Rs 400 billion – the annual GDP of the country! And even this is a very conservative figure representing only one component of the total social security spending. This defined benefit pension is an unfunded liability and an obligation of government which, when added to the public, corporate and household debts, would amount to over three times the GDP. Not to mention that an increase in salaries in the public sector would lead to bigger lump sum payments and to more unfunded pension liabilities.

Mauritius’ economic growth is stalling, its external vulnerability metrics are weak, its fiscal policy is constrained, its monetary policy is ineffective, and capital inflows are ebbing away. Fortunately for the government, it will be able to call elections before the day of reckoning. Afterwards, only the fittest will survive.