Debt accumulation has a causal and damaging effect on GDP growth. Reinhart and Rogoff (2010) supported the thesis by examining a large panel of countries. They found non-linearities in the relationship between public debt and growth and identified a critical threshold of 90% of the debt-to-GDP ratio, beyond which debt is harmful to growth. Other empirical studies confirmed the negative impact of high public debt on growth.
Generally high public debt tends to slow down growth by increasing uncertainty over future taxation, squeezing private investment, and weakening a country’s resilience to shocks.
Once the pandemic is over and Mauritius starts its recovery, a high debt ratio over the medium term will make the economy vulnerable. Countries with high levels of indebtedness are poorly equipped to withstand future asymmetric shocks.
“High debt economies can lose more output in a crisis, are more heavily affected by spillover effects, face a crowding out of private debt in the short and long run, and are adversely affected in terms of potential (long-term) output, with a significant impairment in the case of large sovereign risk premia reaction and the use of the most distortionary type of taxation to finance the additional debt burden in the future” (Burriel et al., 2020). Mauritius being heavily dependent on Europe for its tourism is already feeling the burden of the spill over effect.
Long-term debt accumulation is inconsistent with optimal government debt policies. Public spending by those responsible for managing public affairs is used to seek political advantage, rather than to boost the economy to change its structure, improve productivity and promote growth. Politicians have as their goals their re-election and the extension of political power, and these goals make the management of public spending inefficient. One example is the electoral promise to increase the universal pension to Rs 9,500 monthly and by the end of the Government mandate to increase it to Rs 13,500 monthly.
Before the COVID-19 pandemic, public debt level in Mauritius was already very high and alarming, and growth rate had stagnated; therefore, the fiscal and other populist measures adopted by the Government following the pandemic entails significant risks. In 2020, during lock down period, the Government introduced a Government Wage Assistance Scheme and a Self-Employed Assistance Scheme to help small and medium businesses and self-employed sustain the crisis. This had a significant impact on the Government Budget.
Also, in last year’s budget, the Finance Minister announced the creation of the Mauritius Investment Corporation (MIC) as a subsidiary of the Bank of Mauritius. This organization disbursed huge sums to the hotel industry to enable sustain employment. A major risk is the potential feedback loop between high public debt and the risk premium.
It is not appropriate to finance fiscal stimulus by debt or by central-bank money creation or its reserves. These will leave a huge bill for the future. A side effect of Quantitative Easing (QE) is that it leaves the central bank unable to raise interest rates without paying interest on the enormous quantity of electronic money that local banks have parked with it.
The higher the outstanding QE as a share of total Government debt, the more the Government is exposed to fluctuations in short-term interest rates, and this becomes particularly problematic for the country’s high public debt/GDP ratio.
The COVID-19 pandemic and the Government stimulus measures have resulted in a significant rise in public debt that will heighten the tension with meeting important policy goals, such as growth, employment, environment, health system, fighting inequality.
A country’s public debt is considered sustainable if the government can meet all its current and future payment obligations without exceptional financial assistance or going into default. New borrowing should be consistent with fiscal spending and deficit plans.
The pandemic is adding severe economic consequences on the country with a collapse in output, GDP and employment, and a huge increase in public debt. The Mauritian GDP has grown on average by 3% over the last decade. In fact, Mauritius has been struggling with limited annual budgets and its large public debt for quite some time.
Just before the Pandemic, the country offshore sector was recently added to the EU blacklist. This resulted in a chaotic situation for this sector. Major structural and tax changes are being brought by the Government to remove the country from the blacklist. Consequently, Mauritius offshore sector is becoming less competitive and thus resulting in a loss of major offshore clients and revenues.
The structural problems of the Mauritian economy that have also contributed to the low growth and high debt included an inefficient public administration that allowed unproductive public spending. It is also important to mention an aging population coupled with low birth rates.
Faced with a high and growing debt, Mauritius presents a worrying situation regarding growth. In the last decade (2009–2019), the average growth rate of the Mauritian economy was 3%. Per capita GDP was US$ 11,100 in 2019, while it is estimated that in 2021, it will regress to US$ 9,500.
Regarding the debt, the COVID-19 epidemic has further precipitated the precarious situation. With decline of about 80% in the tourism industry in 2020, Mauritius is facing a severe economic crisis with a significant drop in its income and foreign exchange reserves. The market can already feel a lack of foreign exchange availability with commercial banks and money changers doing rationing to satisfy foreign exchange demands.
PUBLIC SECTOR DEBT
|Sep 2020||Dec 2020||Mar 2021|
|General Government Total Debt||335,994||327,708||351,781|
|As percent of GDP||76.0%||76.3%||82.7%|
|Public Sector Domestic Debt||279,069||270,674||281,453|
|Public Sector Domestic Debt as % of GDP||63.1%||63.0%||66.2%|
|Public Sector External Debt||89,536||91,253||106,928|
|Public Sector External Debt as % of GDP||20.3%||21.2%||25.1%|
|Public Sector Debt (Gross)||368,605||361,927||388,380|
|Public Sector Debt as % of GDP||83.4%||84.3%||91.3%|
* in line with Section 6 of the Public Debt Management (PDM) Act 2008, as amended
With the COVID-19 pandemic, we are in the midst of a unique global economic and financial instability, a great recession in the global economy, increased spending in healthcare, and continued uncertainty about the duration and depth of the crisis, which is reflected in its economic and financial management.
Unfortunately, we are still in a very fragile position and unable to forecast when the pandemic will be over. Particularly in Mauritius, a resurgence of the virus risks the collapsing of the economy and its recovery as we are completely dependent on the global economy. Such uncertainty is likely to remain high.
Moreover, the crisis will require countries to rethink and bring structural changes in their economies, where qualitative and quantitative transformation will be needed. Changes in consumer behavior, evolution of technologies, and a change in the role of the Government and central banks will have a disruptive effect on the structure of economies.
As the Government starts planning its recovery by rolling out economic stimulus packages and increase its borrowings to finance the budget deficit, the public debt of the country will continue to increase sharply.
The Government’s economic policy which focused on aid to sustain employment is understandable to be short term to deal with the emergence of the crisis due to COVID-19. However it cannot be a long–term strategy to come out of the crisis and to restore the public finances. Debts are only useful if the money is well spent. To maximize on its budget policy to improve the living standard of the population, the Government should spend more on the health system, education, infrastructure, digitization and modernization of the public administration.
The COVID-19 pandemic marks a new paradigm. It portrays Government borrowing, money-printing and intervention in capital markets in a low-inflation environment. According to macroeconomic theories of government debt, there are only three ways to reduce debt: A higher economic growth; Reducing budget deficits; and Print money by the central bank.
However, the best route is Growth. Reducing deficit becomes a necessary corresponding measure, especially for a country like Mauritius with high debt. Printing money or monetizing debt (i.e., central bank financing the Government) is a measure best avoided because of the risk of unwanted inflation in the future.
With the Government Wage Assistance Scheme, Self-Employed Assistance Scheme and the MIC financing, there is the risk of progressively reducing the productivity of businesses and hindering future growth prospects. At the same time, public resources are being wasted which could have been used to boost up growth. An assisted economy discourages production and the will to innovate. With a production system slowed down or stopped, it is the weakest in the society that pay the highest price.
A tradeoff is sometime required for the best economic policy. Policymakers must turn their attention to practical tradeoffs to balanced present needs, the necessity to invest for the future and the undeniable costs of debt. Unfortunately, there is no easy way to manage that balance. However, it is necessary to assess the risks associated with medium-term fiscal sustainability.
Not all is doom and gloom with Covid 19
The Foundations for growth and employment should become the main objectives for the Government and should always comply with it. The complement to these must be the consolidation of the financial system as a driving force for economic growth.
Also, a sustainable development, such as “Go-Green” should be promoted. In particular, the Government should invest massively to digitalize and modernize the public sector and public services and countless economic activities. In addition, a modern public administration with all data migrated to cloud and inter department/ministries communication will add great value and reduce inefficiencies.
Public spending can be positive for growth, particularly when it is well spent, in targeted projects that improve the productivity of the country system, and when it is complementary to private spending, for innovation. Public spending can improve productivity, competitiveness, and the development of skills among the new generations, and increase the growth potential of the economy. However, a negative effect of public spending on growth occurs when it is used, as has often happened in Mauritius, to seek political gains.
It is an opportunity for many businesses to go digital and transform their business models to become more cost-efficient and productive which will be a permanent change that will augur well for their future.
The global economy has been greatly disturbed by the COVID-19 pandemic and resulted in strong growth in many countries’ debts level. Mauritius being a small economy has been greatly impacted by this crisis. The country’s economic growth has become largely dependent on the exceptional stimulus measures introduced by the Government. However the prospect for growth is uncertain due to the non-foreseeable evolution of the pandemic. The country’s public debt, already high, is growing at a worrying pace. Its sustainability will largely depend on the ability to implement long-needed reforms and stimulate growth through a clear strategy. It will also depend on a reformed transparent tax system that should be fair, simple, effective and efficient.
The Mauritian economy is at a critical juncture with high stakes involved and getting out of the crisis depends on Mauritius’ ability to develop credible projects and reforms aimed at growth and at consolidating its debt to not just get through Covid -19, but more crucially, gain ground that will pave the way for the next lap of economic growth in the next five to ten years.