4.2%

The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.

John Foster Dulles, Former US Secretary of State

Instead of the 4% that was announced on the day the last World Cup began. That’s what the budgetary deficit would have been if Rama Sithanen had kept the subsidies on rice and flour instead of subjecting us to yet another instalment of Faratanomics, his trademark rendition of the dismal science. For a mere 0.2% difference in that deficit and a string of incoherent measures he has managed to put Mauritius still a bit more out of focus since he was back in office for more than 1 full year now. Naturally the attendant political risks will be borne mostly by Navin Ramgoolam as Mr. Sithanen will always have the possibility of again jumping ship if push came to shove in 2010. Unless of course he tries to convince us that his name should appear on all party lists if ever our electoral system is modified to include a dose of proportional representation. You think that’s exaggerating a little bit? Well, hasn’t he already suggested on TV that the name of party leaders should find their way onto party lists?

Budget process needs to be reformed
Rama Sithanen took about 2½ hours to deliver his budget last June 9th. A lot of what he said then should have been left for the budgetary debates and shifted in one very handy document along the lines of the 310-page Economic and Fiscal Strategy Report and Financial Statement and Budget Report published by Her Majesty’s Treasury. This explains why Gordon Brown’s 2005 budget speech lasted only 45 minutes. The British authorities also publish a Pre-Budget report each December which contains an update on the economy and projections on the fiscal position of the government as well as describing the reforms that are being considered in the following budget. The UK budget and accompanying documents can be accessed here. There are a number of advantages of getting these documents out. The most important one is that it will make a lot of people (this includes analysts at rating agencies) save time by having access to information they need to do their jobs in a handy format which will leave more time to raise the level of debate about economic policies in our country.

Doing things differently
Nobody can argue with the fact that we need to put our fiscal house in order. But probably where a large majority of Mauritians totally disagree with our Finance Minister is the way he’s been going about it. Our Finance Minister wants us to believe that things are really bad out there. So bad, that he has passed up the opportunity of presenting an additional full budget when he produced the half-baked statement that he delivered back in August 2005. He wants us to believe that Adam Smith got it totally wrong and that there is no such thing as an invisible hand. No. There is in its stead something extremely vicious lurking out there: some kind of Bolom Loulou.

A new disease has appeared…

So you need a new prescription and you better follow the doctor’s advice scrupulously, right? Not necessarily. The doctor may have come up with the wrong diagnosis and it would make perfect sense to, at least, seek a second opinion before swallowing in the recommended medicine. In fact, it is clear that the way Rama Sithanen has been managing the economy for the past 15 months is the equivalent of gross medical malpractice. And Navin Ramgoolam as the boss of the ‘medical institution’ should already have done the needful to have Mr. Sithanen seated next to Ashock Jugnauth in the Legislative Assembly because his Finance Minister has misread the situation and has proposed half-baked policy responses.

Misreading the situation
The triple external shock argument
As detailed in the previous edition of this newsletter this argument does not hold any water as recent events have started to confirm. The economic konnetou of the current government has simply confused shock for consolidation in the textile sector. As regards to oil, ask yourself the following question: Does the higher price of oil impact negatively on our budget deficit? Not really because when oil imports shoot up from Rs 11 billion to Rs 17 billion as they’ve done over a recent 12 months period, the government collects an additional billion rupees in VAT receipts. Besides, with the automatic pricing mechanism all of the price increase is passed on to us. For the good of the country, but only if he will stay on as Finance Minister for the next little while, Mr Sithanen should immediately be sent to business school to get some management theory under his belt and provided with a copy of the speech of David Walton, Has oil lost the capacity to shock?[1]

The World owes us a living
Mr. Sithanen wants loans that we don’t qualify for from the World Bank and elsewhere. The pathetic excuse used is that of Mauritius being penalized for its past successes. The AFD (Agence Française de Développement) which closed its local offices many years back when we had migrated into the group of middle-income countries has been begged back into Mauritius. Is the UNHCR going to be called in next year?

Growth and unemployment
According to the somewhat convoluted chain of logic of Rama Sithanen, we need 8% growth otherwise jobs may not be created and we will end up with one of his favourite terms: jobless growth. Well, not if you make job creation the focus of your action. We should go for policies that work in practice irrespective of whether they work in theory.

Treaty risk
Mr. Sithanen misreads the Financial Sector as consisting essentially of the offshore sector. There was nothing for Capital Markets in his statement a year ago. Effectively nothing in his recent budget either. And because of this misreading the treaty risk that we face in the offshore sector becomes much larger than it ought to. Hey, but don’t worry. We’ve already sent him along with Minister Boolell abroad with large begging bowls, haven’t we? We really don’t need better management, right? All we need is cheap loans.

Some of the half-baked policy responses
School-feeding program
Who came up with the really smart idea of cancelling this program? Doesn’t that look like one of the typical stinking recommendations on which the International Monetary Fund / World Bank (IMF/WB) has built part of their reputation on? It’s a good thing that the same person(s) back-pedalled.

Subsidy on SC and HSC fees
The targeting of that subsidy has surprised even some of the closest Sithanen supporters. It may unfortunately exclude people who are moonlighting to make ends meet. What an irony when you consider the role that education has played in the life of Hon. Sithanen in getting him to where he is today.

Pension reform: Is Otto back?
Simply extending retirement age by 5 years is like having Chancellor Von Bismarck back to adjust his Ponzi scheme. When are we going to consider better organisational design and paradigmatic shifts? Maybe we are planning to spend another Rs 100 million to have NTan back in a few years when and if another Rs 1 billion is recycled in a parallel conduit?

National Residential Property Tax
Doesn’t it look like a half-pregnant policy to you?

Forex deposits become more attractive
Exports down, imports up. Currency under pressure. What did you expect from the budget? Surprisingly, it made going for foreign currency deposits the reasonable decision. Afterwards, you hear your Finance Minister imploring people to convert their foreign currency positions into rupees. Hmm. That must be the new model he’s talking about. Glory to thee.

Better Options
We could have done better since July 2005 if things had been done differently. Here are a few examples.

There was no need to cry wolf
Rising oil prices surely affect us. But they affect other countries that are not oil-producing too. What we instead expected from our Finance Minister was an intelligent pronouncement as to how we were going to produce each unit of GDP with less oil. In the final analysis, our competitive position could even be improved if our response was smarter than other countries that compete in the same products and markets as we do.

Removal of subsidies on rice and flour
If he couldn’t think of anything better he could have spread this new policy measure over 2-3 years or leave the one on flour because of its cascading effects. This would have given time to the population to adjust and for officials to get the implementation right and would have salvaged the credibility of our monetary policy – whatever remains of it.

Everything is related
Economics cannot be practised in a vacuum. We are being held back by our education system, poor English-speaking skills, quantity and quality of our infrastructure and our leisure policy to name just a few. In India, for instance, the Finance Minister recently estimated that about 200 basis points (2%) are shaved off the annual growth rate because of inadequate infrastructure.

Do not create uncertainty
There is a good deal of uncertainty hanging over our country and a non-negligible part of that sinking feeling can be traced back to the application of Faratanomics by our Finance Minister. More on this below. And the inflation rate is going to exceed the target rate set by the Bank of Mauritius by a significant margin while core inflation is on the rise.
Who likes uncertainty? Rating agencies, for one, don’t. Credible Central Banks neither. Target 2.0 is a publication of the Bank of England named after the targeted rate of inflation that the Old Lady has set to herself. A number of central banks worthy of that name have adopted similar targets: The Federal Reserve and The Bank of Canada. Voters in Belle-Rose/Quatre-Bornes may also wish to learn that in Germany, federal elections, in the past, have been lost over the single issue of the rate of inflation.

How to create uncertainty in 3 easy steps
Start misreading the current situation and remain concentrated so that you misread the past too. Come up with a silly argument such as Triple External Shocks that will speak directly to the spines of the people. Don’t mention Bolom Loulou, at least not in the beginning. And forget that we are a sovereign country.
Get a university buddy who is at least as confused as you are as Financial Secretary. It’s really not a problem if he lives on another planet. It’s even better if he promises to do IMF/WB experiments here. That shouldn’t make it too difficult to make sure this appointment is heralded as another bold move in the history of humanity after man set foot on the moon.
Get another friend as adviser. This friend should ideally be a high-school physics teacher so that he will explain how Newtonian physics can confirm that the first buddy is indeed from outer space and consequently why you shouldn’t expect more cohesion from fellow majority MPs. He may even use cloud dynamics to help your vision stay, uh…, clouded.

Come and do business
That’s the tag line for the world tour that our Finance Minister has been embarking on for the past little while to woo investors into our Motherland. I wonder who is responsible to blurt out such a low-quality tagline although I do remember Rama Sithanen stating a year ago that he would be seeking the help of the World Bank for branding Mauritius.[2] But that will not prevent J. Walter Thomson from turning in his grave. Where can we buy a DVD of these trips to find out what exactly he’s been saying and doing? And who is listening to him?

Attracting talent
We already have more than enough talent here to solve most of our problems. The problem is that a lot of our brains are either planning to move out or are not returning. Before you talk of attracting talent you should first stem the brain drain.
In the financial services sector, for instance, I estimate that about 60 CFA Charterholders could be employed in these following three areas: the Debt Management Unit of the Ministry of Finance, The National Pension Fund (with an appropriate organisational makeup) and the Bank of Mauritius (including managing the country’s reserves portfolios instead of getting the BIS – a club of central banks – to do it for us). This should already have been done back in 1991 if Mr. Sithanen had adopted some of the international best practices the first time he was Finance Minister.
Once you’ve done this kind of basic stuff you may try to see how you compare with Singapore in the stem-cell research race.

Comments: density@intnet.mu.

[1] This speech was delivered on February 23, 2006. Sadly enough, David Walton passed away last June 21 at the age of 43. He was a member of the Monetary Policy Committee of the Bank of England.
[2] Maybe it is inspired from the name of that World Bank ranking called Doing Business. Doing business, Come and do business. You get it? I don’t either.

No. 6 November 2006

© Sanjay Jagatsingh, 2006