After three budgets and 42 months: has Government kept its economic promises ?

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An evidence-based and fact-driven evaluation

Before the Minister of Finance stands up to deliver the 2018/19 Budget speech on June 14th, Government will have completed 70% of its five-year mandate and presented three budgets. This is sufficient time to examine its economic performance by comparing what it pledged to achieve after winning office in December 2014 and what it has actually accomplished after three and a half years. In addition to an evaluative appraisal, the aim is to recognise the very long and arduous road we still have to travel to attain a high income country status and to highlight issues that deserve urgent attention.

Has Government kept its economic promises ? (Part 2)

1-Three comparisons to determine whether Government has lived up to its economic pledges

The objective is to find out with respect to the seven key economic indicators:

  • how much has Government delivered between January 2015 and December 2017 in relation to its pledges;

As the promises were highly exaggerated, the level of underdelivery is simply overwhelming.

Hence the use of two other benchmarks to compare apple with apple.

  • how does the average performance for the three years 2015 to 2017 measure against 2014;
  • whether the forecasts for 2018 are better than the 2014 results , especially with the improved performance of the global economy .

The table below summarises the 2015 promises of Government in the seven economic areas, the outcome of 2014, the average performance for 2015-2017 and the forecasts for 2018.

The difference between promises and performance: the figures speak

2-Comparison between 2015 pledges and actual performance: light years from commitments

As the promises were very rhetorical, it is no surprise that the outturn is extremely far from what was envisaged by Government.

  • it envisioned a GDP growth of 5.5% per annum. The average growth rate for the 2015 – 2017 period is 3.7% ,which is 33% below target;
  • it promised an income per capita of far more than US$ 13500 in 2018. Due to the sharp depreciation of the rupee against the US$, the per capita nominal GDP increases in rupees were more than wiped out by a weaker domestic currency. As a result, income per capita for the period 2015 to 2017 declined to an average of US$ 9760. It is 22% below target;
  • it pledged to raise employment creation to an incredible 20000 per year from 2016. The actual number of jobs generated over the three year period is a modest 4733 per annum. It is an astonishing 76% below target;
  • it undertook to lift investment to 25% of GDP. The share has actually fallen to 17.3% for the three year period. It is below target by 31%;
  • it vowed Rs 140 b of FDI over a five year period, around Rs 28 b per year. The actual average yearly FDI between 2015 and 2017 is Rs 13.6 b, a thumping 51% below target;
  • it committed to reverse the declining trend in manufacturing and bring it back to 25% of GDP in 2018. It has averaged 14% of GDP for the three years ended 2017, a significant 44% below target;
  • it projected to lower public sector debt to 50% of GDP in 2018. It has swollen to an average of 63.8% over the 2015-2017 period, which is 28% higher than target.

3-Comparison between 2015- 2017 performance and 2014: the winner is… 2014 and by far!

  • There is no difference in economic growth with both posting a 3.7 % expansion. To be accurate, 2015-2017 is lower in terms of gross value added at basic prices (3.4 % against 3.6 % in 2014) and slightly higher with gross domestic product at market prices (3.73 % against 3.7 % in 2014);
  • The income per capita in 2014 was US$ 10150 while it stood at US$ 9794 in 2017 as per IMF figures. Inspite of GDP in nominal prices in rupees rising by 17 % between 2014 and 2017. It’s the ‘depreciation of the rupee’ stupid;
  • Employment generated was 5200 in 2014 and a yearly average of 4733 for the 2015-2017 period;
  • Investment as a share of GDP was higher at 18.9 % in 2014 than the 17.3 % between 2015 and 2017;
  • FDI stood at Rs 18.5 b in 2014 compared to the average of Rs 13.6 b for the three years ended 2017;
  • The share of manufacturing in GDP fell to 14 % during the 2015-2017 period compared to 15.3 % in 2014 ;
  • The ratio of public sector debt to GDP was 60.7 % in 2014 and rose to 63.8 % for the 2015-2017 period.

4-Comparison between 2018 forecasts and 2014: the winner is still… 2014

GDP growth is forecast at 3.9 % for 2018 compared to 3.7 % in 2014. However it is very likely to be downgraded as the year unfolds. It was projected at 4 % in Dec 2017 and lowered to 3.9 % in March 2018. Especially if there are major delays in public sector project execution, exports and manufacturing continue to decline and tourism and construction grow at a slower pace. The official figures for the first quarter of 2018 are quite disappointing. The 3.9 % projection is based on tourist arrivals expanding by 5.1 %. It has grown by only 2.3 % for the first four months of 2018. Exports of goods are estimated to rise marginally in 2018 while they have declined by a hefty 13.8 % in the first quarter. As a result, growth will likely be at most 3.8 %, if not lower;

ii) there was an initial prediction of an income per capita of around US$ 11550. But with the fast depreciation of the rupee, it could fall to about US$10500;

It also means Government will miss, by very far, its target of graduating to high income status in 2018. The IMF forecasts an income per capita of US$ 12327 in 2022 while the threshold to qualify as a high income economy was already US$ 12475 in 2016. On this trajectory, we may not reach high income status before 2028 as the hurdle is adjusted and the rupee continues to depreciate; 

iii) there is no estimate yet for employment creation in 2018;
iv) investment as a share of GDP is projected to continue its downward trajectory at 17.2 % in 2018 which is much lower than the 18.9 % of 2014;
v) there is no forecast yet for FDI inflows for 2018;
vi) manufacturing as a share of GDP is predicted to fall further to 13.1 % in 2018 from 13.4 % in 2017 compared to 15.3 % in 2014;
vii) the share of public debt to GDP is estimated at 62.9 % in 2018. Recognising that it will not be able to meet the debt to GDP ratio of 50 % in 2018, Government changed the legislation in 2017 to set a new debt threshold of 60 % to be achieved in 2021. The IMF has expressed doubts on the realism of that objective. In addition, many large scale public investment projects are being funded outside the budget. The Metro Express and the Safe City are two cases in point. Government is guaranteeing both the SBM SPV and MT and yet the two borrowings are not included in public sector debt. If the IMF definition were used, the debt to GDP ratio would be close to 70 %. And if we included some known contingent liabilities (such as Betamax, BAI reimbursements and Maubank), the percentage would be higher.

5-Many other key economic indicators are very disappointing

There were no quantitative commitments for some other economic indicators. However there are disturbing trends as illustrated below

No promises… but trend is worrisome

i) savings as a percentage of GDP was lower at 10.7% in 2017 compared to 11% in 2016 and is likely to be adversely affected by the current negative real interest rate;
ii) inflation has hardened after being muted for some time , from 1% in 2016, to 3.7% in 2017 and 5% in March 2018;
iii) the balance of trade registered a huge deficit of 19.7% of GDP in 2017 which is projected to increase to a staggering 22.2% in 2018;
iv) the balance of current account has deteriorated from a deficit of 4.2% of GDP in 2016 to 6.5% in 2017 and a predicted soaring 7.7% in 2018;
v) the vital export oriented industries have seen two consecutive years of high contraction of 3.1 % and 5.1 % in 2015 and 2016 respectively while growing very marginally at 0.3% in 2007;
vi) exports of goods as a percentage of GDP has dropped significantly from 24.1 % in 2014 to 17.7% in 2017. It is forecast to decline further to 17.1% in 2018;
vii) the share of investment in manufacturing to total investment has plummeted from 8.1% in 2014 to 5.2% in 2017.

6-Concluding Note

Three incontrovertible findings and conclusions emerge from these economic facts and figures.

i) first, Government has utterly missed all the seven targets it established at the beginning of its mandate. It is an outstanding case of excelling in overpromise and underdelivery. Using a football analogy with the forthcoming World Cup, it is a straight loss of 7-0;
ii) second, on six of the seven economic indicators, the 2005 to 2007 period is worse than 2014. On one measure, there is a tie with GDP growth at 3.7 %. It amounts to six clear losses and one draw;
iii) third, the prognosis for 2018 are not better than the 2014 results. On employment and FDI, the jury is out waiting for the preliminary results of six months. There are doubts on the 3.9 % growth rate because of likely delays in projects execution and downgrades in tourism and exports. Income per capita would be greater unless the rupee continues its depreciation. Investment, manufacturing and public sector debt would be worse than 2014. It boils down to three clear defeats, one contingent victory, one result too close to call and two matches into extra time. 

Further, inflation is rearing its ugly head, savings and investment in manufacturing are low and falling while the external balance is in dangerous territory with declining exports and massive deficits in the trade and current account balances. 

True, economic news management by communication experts are important in modern politics. So are alternative facts, fake news and post truth as we see in some countries. However it would be disingenuous to bury our heads in the sand and not acknowledge the statistical reality. Forget ‘the pie in the sky’ seven promises. Disregard the hubris of a second economic miracle. More prosaically, fact checking using official and reliable data show beyond reasonable doubt that we have mostly regressed since 2014 on these seven economic indicators. It makes the road to join the league of high income countries a very elusive one. Will the Budget on the 14th June acknowledge this chasm between words and deeds, promises and performance and ‘effets d’annonce’ and delivery? Or will the spin doctors continue to lull in complacency and maintain their unabated self-congratulatory demeanour on the economy? It is never good to follow bad advice with stubborn dedication. The official data will eventually catch up with such economic misrepresentation.

 

Has Government kept its economic promises ? (Part 1)

1 - The seven key economic promises of Government

The principal economic performance indicators of Government are contained in three documents that spell out in quantitative terms its main objectives during the 2015- 2020 mandate. These are the Government programme of January 2015, the 2015/2016 budget of March 2015 and the speech on ‘Achieving the second economic miracle’ by the Prime Minister in August 2015.

These seven undertakings could not be clearer and simpler and are as follows, using the actual quotes.

  • ‘For 2015/2016, we expect GDP growth to go up to 5.3 per cent and …we are targeting an average growth rate of 5.5 per cent annually as from 2017’;
  • ‘Our objective is to attain a GDP per capita of far more than 13,500 US dollars by the
  • year 2018’. And reach high income status;
  • ‘Some 15,000 jobs will be created annually’ and ‘100,000 new direct and indirect jobs within the coming five years’;
  • ‘Foreign Direct Investment will grow significantly to around Rs 140 b over five years (an average of Rs 28 b per year )’ ;
  • ‘Investment will rise to 25% of GDP’ ;
  • ‘Manufacturing today (2015) accounts for about 18% of our economy and we aim to increase its share significantly to 25% within the next three years (2018)’;
  • ‘Government will ensure that the public sector debt as a ratio of GDP is on a declining trend in order to achieve the statutory requirement of 50 % by 2018’.

2 - Origin of data and statistics and some sectoral considerations

The exercise is a sober, lucid, and realistic assessment, immune from charm offensive, spin doctoring, the pomp and pizzazz and the chorus of congratulations and condemnations that invariably surround the budget for a few days. It basically uses the facts, figures and projections of Statistics Mauritius, the Ministry of Finance, Bank of Mauritius, IMF, MCB focus and SBM insights.
 
Before considering these performances, it is opportune to shine light on some sectoral developments which while being positive must be contextualised because of some inherent risks and vulnerabilities.

3 - An ambitious public investment programme with green shoots and some major caveats

Undoubtedly Government sells its massive public investment programme as the jewel in its economic crown. It purports to modernise, upgrade and expand the road infrastructure and land transport system through the Metro Express and the Road Decongestion programme. Upon completion, they will significantly transform the transport infrastructure and landscape of the country and alter the travel pattern of commuters. It is also giving a much needed boost to the construction industry. However it is hell for the travelling public and for many residents during the protracted execution period. Sadly, the Terre- Rouge–Verdun road remains a bottomless financial pit with hardly any sustainable engineering remedy in view. And the real impact of this very onerous investment on the public sector debt has been eluded by the use of a Special Purpose Vehicle that keeps the debt outside the public sector even if Government has guaranteed the annuity repayments to the Exim Bank of India.

4 - A revived construction sector after many years of agony

The current buoyancy in the construction sector is driven by the projected massive investment in public infrastructure. The sector has grown by 7.5% in 2017 and is forecast to expand by 9.5% in 2018. However this comes after a cumulative contraction of 25% over five consecutive years between 2011 and 2015. There is also need to monitor its impact on the balance of trade because of its high import content. It could be a cause of anxiety as it would contribute to a widening of the already yawning trade deficit;

 

Because of the low base for the construction sector after many years of decline and delays in project implementation, the official statistics do not show an improved public sector investment. The table above is very revealing.

The share of total investment to GDP has decreased from 18.9% in 2014 to 17.3% in 2017 and is projected to inch lower at 17.2 % in 2018. The percentage of public sector investment to GDP has also diminished from 4.8% in 2014 to 4.1% in 2017 and is expected to rise to 4.6% in 2018 if projects are implemented in a timely manner. There is also the major problem of the systematic and severe under execution of the capital budget. In the current financial year, only 33% of the budgeted sum of Rs 12.7 b has been spent by March 2018, leaving a huge unspent capital budget. It not only distorts the budget deficit but such huge underspending lowers the actual public sector investment.

5- Tourism keeps forging ahead but at a slower pace and a China conundrum

The tourism sector has done well with the opening up of the skies and the diversification of markets. The growth was already healthy at 6.3% in 2014 and has risen to an annual rate of around 8% between 2015 and 2017, essentially due to the excellent result of 2016 (11.5% growth). The forecast for 2018 is a slower expansion of 4.7% while the actual growth for the first four months of 2018 is at 2.3% only. The downside is the drastic drop of 19% in arrivals from China between 2015 and 2017. Worryingly, there is a further decline of 16% from China for the first four months of 2018. Also the Africa-Asia corridor is going nowhere as evidenced by the very low number of passengers that use Mauritius as an aviation hub between the two regions. The Singapore flights cater essentially for Mauritius passengers while Air Mauritius has ceased operations to Maputo due to huge losses. The same fate will likely befall the Dar es Salaam services in the near future as the national carrier would not be able to sustain such deficit making routes. It is simply not attractive to lure traffic in the Africa-Asia corridor because of much better alternatives from competitors.

6 - Financial services must brace to face structural headwinds

The financial services sector which represents around 12% of GDP has grown by an annual average rate of 5.5% over the threeyear period ended 2017 and is predicted to expand by 5.5% again in 2018. It is exactly the same growth rate as in 2014. However there are looming challenges with the implementation of BEPS, the requirements for substantial economic activities, the principal purpose test for anti-tax avoidance, the reform of the deemed foreign tax credit, the impact of the new treaty with India as from April 2019 and the determination of many African countries to renegotiate the tax treaties to balance the allocation of taxing rights. Hopefully, the roadmap being prepared will pave the way to cross these hurdles and help mitigate the impact on the sector. Otherwise growth will taper.

7 - ICT should gear up to the new possibilities of the fourth industrial revolution

The ICT sector has grown by around 5.6% per year between 2015 and 2017 and is projected to expand at a slower pace of 4.5% in 2018 compared to the 10% that it recorded a few years back and 6.6% in 2014. We need to reverse this declining growth pattern by shifting our focus to the digitalisation of the economy in order to start reaping the benefits of the fourth industrial revolution. Artificial intelligence, machine learning, robotics, 3D printing, internet of things and block chain technology and fintech will deeply affect every aspect of the economy and society, from manufacturing to agriculture, from retailing to finance, from transportation to construction, from education to medicine, amongst others. We must attract investment in technology and lure digital-savvy talents and companies to our shore to capture these benefits and move up the revenue value chain. Sadly, the share of FDI going into ICT was less than half of 1% for the 2015-2017 interval.

8 - Beware of the changing pace of growth in these clusters

While these sectors have produced good results until now, we should track some key fundamentals that could morph into disquieting trends. The table below serves as a reminder against exuberance.

 
  • The rate of growth of tourism has decelerated from 11.5% in 2016 to 5.2% in 2017 and to 2.3% for the first four months of 2018;
  • The expansion of financial services has remained constant at around 5.5% between 2014 and 2018;
  • The ICT sector has grown at a much lower pace of 4.4% in 2017 compared to 6.6% in 2014 and 7.1% in 2015;
  • Construction declined substantially by 25% between 2011 and 2016, grew by 7.5% in 2017 and is expected to expand by 9.5% in 2018. However it is still well below its 2010 contribution to the economy. Its secular fall is characterised by its declining share to GDP from 7 % in 2010 to only 4.3 %

 

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