The 4 per cent growth rate in 2018 heralded by Government is unrealistic. The era of blind faith in the economy and the chase for the golden calf is over. This is why.
Dyed-in-the-wool opinions have been subtly expressed about the economy having attained a 4 per cent growth rate in 2018. Having entertained a contrary viewpoint regarding the recent GDP forecasts for 2018 by Statistics Mauritius and the MCB Focus team, the contenders seem to be taking a risk in seeking to improve, if at all there is a compelling need, the coverage of data compilation by Statistics Mauritius. While seeking to justify their stand, they could possibly end up showing that the 2018 GDP grew by far less than 3.8 per cent, if not less than 3 per cent.
High growth rates do not happen in a vacuum. While foreign direct investment is important, the key to higher growth rates of any economy is sustained private sector investment. Until the early years of the new millennium, we had been attempting to solve real problems. For quite some years now, we have kept ourselves busy solving imaginary problems, leaving real problems undermining the viability of our economy on the sideline. Insouciance has been at its best. Our economic well-being has rested overwhelmingly on the comfortably warm glow of capital inflows from anywhere. It’s almost an iron rule that, whenever countries run large and sustained current account deficit - usually 5 per cent of GDP and over - they end up in financial crisis. Ours has been far above 5 per cent of GDP for many years.
We have had a long run – indeed, a very long run - of good luck. Think of it rationally. Instead of taking advantage of the stability engendered by capital inflows to create and promote green field activities for sustainable growth, we have kept on distributing the rest of the world’s savings to anyone who has claimed to be a victim in our society. To be a victim has turned out to be an asset justifying still larger pay-offs from Government. Deluge of handouts, drop by drop, without compensating improvement in our foreign exchange-earning capacity is a cruel act that can only aggravate an external balance that is already seriously threatened. The typical Swabian housewife from the hub of the Protestant work ethic in Germany shares with us her worldly wisdom: “in the long run, you can’t live beyond your means.” The fun game is ending. The emerging indicators of what’s likely to come are here, with us already. The facts have actually changed. They cannot be swept under the carpet. They are published. We have actually reached the turning point, the day of reckoning. It’s clear and present. For the past six months, the precursors revealed in the Bank of Mauritius statistics have gone unheeded.
The 3.6 new norm
In my first one-to-one meeting with the then Prime Minister, Sir Anerood Jugnauth, in Janauary, 2015, I vividly recall having sounded a view that if the Government could successfully break all the major barriers to sustainable growth, a 4 per cent growth rate and over would be within easy reach. After years of dull economic performance in the wake of the 2008 financial crisis, a 4 per cent growth in the very first year of the Government’s mandate would have triggered forces favouring self-sustainable growth. ‘Breaking the barriers’ to growth was the key point I had stressed on and ‘breaking the barriers’ meant a battery of bold initiatives fertilized with the broad mix of measures in a world that has undergone dramatic paradigmatic transformation, unseen till the dawn of the new millennium.
The breakthrough did not happen. The 4 per cent growth rate has remained an obsession and an elusive goal. As opposed to the trend growth rates of 5 per cent or more of yesteryears, a growth rate oscillating in the region of 3.6 per cent is arguably said to be the ‘new normal’ for Mauritius. In the stickiness of the growth rates to around 3.6 per cent, there reside important hidden messages for policy makers to decrypt. Seen objectively, without jaundiced eye, the decrypted messages are telling. Succinctly stated, they speak comprehensively of the deleterious influence of capital inflows on the economy and on the country’s economic prospects.
Lately, the growth forecasts contention seems to have taken a twist that must have been avoided at all cost. It does not strike a good chord with regard to the credibility of the authorities in our jurisdiction. It’s understood that a group of policy making officials has been desperately in quest of a growth rate of 4 per cent. Albeit a delayed quest, it’s a commendable objective. The MCB Focus team came up recently with a forecast lower than 4 per cent and, subsequently, Statistics Mauritius, a Government body, swept the contenders off balance with a growth forecast of lower than 4 per cent for 2018. As a matter of course, the group finds anything lower than 4 per cent unrealistic. It’s false optimism, not pragmatic skepticism. Once the hidden messages in the ‘new normal’ growth performance are brought to light, the enlightened economists are likely to conclude that the growth forecasts conundrum is, indeed, an optical illusion.
Estimates that remain estimates
GDP figures, which are an aggregation of value added (which in simple terms means an aggregation of income) in an economy during a specified period of time which is normally 12 months, are estimates and remain estimates for ever. They are not exact measurements. Exactitude in an impossibility. From provisional figure, they get upgraded to a first forecast, revised forecasts and eventually to a final estimate. They remain an estimate, whatever the adjective used. Statisticians and economists strive to come up with the best possible approximation of the unknown actual GDP figures. As such the reliability of any GDP figure can be challenged as long as the arguments adduced make sense.
The contenders appear to have tenaciously clung to the view that the massive Metro Express-related government expenditure during 2018 has, in fact, made a substantial contribution to the growth rate of the economy. True, it’s an exceptionally hefty public sector investment. But is the contention faultless? Is the view in line with the rationale underlying national accounting of macro-economic aggregates? Let’s check.
Anyone who has been initiated to elementary school arithmetic must be able to grasp the common sense underlying the measurement of GDP by way of a simple equation, or rather an identity equation that is valid for any economic system all the time. An “A” Level economics student would proceed to explain a beginner’s version of national accounting aggregates as follows:
GDP = C + I + G + (X-M),
where GDP is gross national product, C is aggregate consumption expenditure in the economy, I is aggregate investment in the economy, G is Government expenditure, X stands for exports and M for imports. The totality of economic transactions, inclusive of drug trafficking, money laundering activities etc., that generates streams of incomes in the domestic economy, is summarized in the above national accounting of economic aggregates. Depending on the accounting standards adopted for classifying the massive Metro Express-related expenditure, either I or G will substantially go up. For convenience sake, it is assumed that only G goes up substantially.
The ‘value’ of the metro express
In real terms, C and I in our case are registering their usual trend values. The contenders seem to argue that if, in the equation above, the value of G which is a massive Metro Express-related government expenditure goes up substantially, GDP should necessarily go up substantially. There is, therefore, no reason at all why the GDP growth rate should be as low as 3.8 per cent. In the thinking process of the average citizens and even of some who claim to be economists, the value of (X-M) in the equation is often overlooked. Policy and decision makers in a country that is overwhelmingly dependent on foreign trade for its economic survival cannot afford to take the value of (X-M) for granted. Metro Express trains, rails and all other construction materials and accessories are not manufactured in Mauritius; they are imported wholesale. Nearly 100 per cent of Metro Express-related government expenditure are outlays on imported items. Moreover, the bulk of wages related to the project is paid to foreign workers, not to Mauritians. To the extent that Metro-Express-related imports have gone up, M, which is a negative item, in the above equation, of course, goes up. Worst, exports, X, in the equation have not been rising but, instead, declining for several years. X-M thus turns out to be an unusually whopping negative item in the equation. Simple algebra. An exceptionally huge negative item on the right-hand side of the equation pulls down the value of GDP consequentially. The basis for claiming that the GDP for 2018 must have shot up because of the massive Metro Express-related government expenditure collapses. A GDP growth rate of less than 4 per cent cannot but be a realistic forecast.
Let me recast the foregoing differently for the benefit of those who abhor mathematics. The average Mauritian is clever enough to understand that on one side of our national balance sheet we already have a Metro Express-related external liability, a debt that will have to be repaid, which, hopefully will not impinge adversely on the forex reserves of the country in the years ahead. On the other side of the balance sheet, we have an asset, the Metro Express, that is under construction. The production of none of the components of the asset has generated streams of incomes in Mauritius but it has elsewhere in the world. The truth is that almost no Mauritian has derived any income in the process of producing and acquiring the asset. It clearly is an aberration to claim that the GDP of Mauritius which is a summation of incomes during 2018 must have gone up as a result.
There cannot be simpler illustrations of the contribution of Metro-related government expenditure to GDP than the foregoing. They are basic ‘A’ Level mathematical and non-mathematical illustrations, not a figment of imagination romanced with in an armchair. Anyone who does not believe in the above equation is clearly in a state of stupor. If he does believe in the equation but is unwilling to consume the economic logic, he is in a state of fundamental disequilibrium, reflecting a total failure of fully understanding the very economic concept of the GDP. After all, one cannot believe in the laws of gravity and still see water running uphill.
A sophisticated technique of discovering the contribution of Metro Express-related government expenditure to GDP and its implications for fresh business opportunities and employment creation is to run a General Equilibrium Model for the Mauritian economy. Give the model a massive Metro Express-related government expenditure shock and examine what the system of equations produces. The model throws up the following findings:-
(i) The contribution of Metro Expressrelated government expenditure to GDP is almost nil because of the nearly 100 per cent import content;
(ii) There are substitution effects. New employment opportunities will be created while existing ones will be destroyed. There will be little or no net addition to employment opportunities in the transport industry;
(iii) That all the Metro Express stations will evolve into new shopping areas is undoubtedly true. The flip side is that there are substitution effects: economic transactions will shift from one place to the Metro Express stations. A shift of economic transactions from one location to the other does not translate into additional business opportunities. As I had said in my exit interview, unless additional consumer spending is debtfinanced, additional business opportunities would be created by Metro Express-related expenditure if, and only if, it generates streams of additional incomes, which unfortunately is not the case.
Readers might wish to dig into media reports on statements made by a couple of local economists making authoritative statements about the beneficial impact of stimulus to consumer spending on growth of the Mauritian economy. This is an attempt to blindly monkey policy making in big and resourceful economies like the US. Boosting aggregate demand in big economies means giving a boost to domestic productions and employment. By the way, even in big economies, pumping up demand excessively gives rise to serious imbalances. Surprisingly, some local economists, now occupying policy making positions, have tendered such advice to the Government while completely disregarding the specificities of the Mauritian economy. Ours is an economy completely reliant on foreign trade. Our economy is prone to huge current account deficits and forex shortages. Boosting aggregate demand by way of a variety of generous handouts does not necessarily mean boosting production and employment in Mauritius. It means a kick upward for imports of goods and services the payments of which are made out of export proceeds, a drawdown on the forex reserves of the country or out of money borrowed. In addition to an exchange rate that has been favouring consumption expenditure in the economy for many years, aggregate demand, through deliberate official policy, has been regularly boosted without due regard to its implications for the country’s external payments position. Higher levels of consumption expenditure are thought to lead to higher growth rate of GDP. Hence the expectation that GDP growth rate for 2018 cannot be lower than 4 per cent. This is voodoo economics as far as Mauritius is concerned.
Commission of inquiry on drugs
There are several other factors that have significantly depressed GDP growth (i.e. income growth) in 2018, two of which are noteworthy: (i) the Commission of Inquiry on Drugs Trafficking in the context of a sustained crackdown on drug dealers even before the Report was published in July 2018, and (ii) the adverse impact of the unfortunate AGF/Alvaro saga that emitted very poor signals about the jurisdiction and the Bastos, Santos etc. episodes.
A month before the publication of the Commission of Inquiry on Drugs Report, purchases and sales of foreign currencies on the interbank forex market had abruptly dropped by nearly 60 per cent. Causation or coincidence? The contraction continued until November 2018 (see Table 50 of the BoM Monthly Bulletin for November 2018). It’s the first time, after quite some time, the interbank market has revealed a clear tendency to remain depressed. It goes to say that, at the levels of money changers, foreign exchange dealers and the unofficial market for foreign currencies, transactions must have suffered a setback. Concomitantly, the foreign exchange reserves of the BoM are revealing a declining tendency and this for the first time after quite some years (see Table 61 of the BoM Bulletin for November 2018). Whatever the sources and character of the capital inflows, corrupt or not, one point stands out clearly: capital inflows have indeed shrunk in 2018 and are thinning out. Why? There is a world of possibilities.
The guess is yours. What are the implications of these declining trends for the 2018 economic growth rate? Unlike in the past when huge inflows of capital had sustained high growth of aggregate income (i.e. GDP), declining capital inflows in the current context translate into very subdued increase in aggregate income (i.e. subdued growth of GDP). This is yet another reason why not to expect a pick-up in the growth rate of GDP for 2018. (As an aside, it’s worth a mention that with the shrinkage of capital inflows, excess liquidity in the banking system has dried down on its own, without any central bank intervention; it’s no longer a policy concern for the BoM since June last.)
Even lower than 3.0 per cent
It has been given to understand that Statistics Mauritius is lacking in capturing capital flows (income flows) from offshore to onshore in its data compilations and computations. That’s another reason why GDP growth forecast of neither Statistics Mauritius nor that of MCB Focus is plausible. Let’s, for a moment, make a bold assumption that this is proven true. In that case, the contributions of the offshore sector to income generation (GDP growth) in the economy may eventually need to be revised, most probably upward, not only for 2018 but for all the previous years when the domestic financial system was richly flushed with huge amounts of capital inflows. In the years before 2018, income generation stemming from the offshore sector was at high levels. The BoM Monthly Bulletin, November 2018 tells us that capital inflows (and therefore income generation from the offshore sector) have shrunk substantially in 2018. If at all, figures for the contributions of the offshore sector to GDP are eventually revised, the increase for 2018 is likely to be much smaller. A smaller increase in contribution from the offshore sector over a larger contribution for the preceding year would give a smaller growth rate. All in all, in trying to come up with a brighter picture of the GDP growth rate for 2018, the contenders could end up with a growth rate far lower than 3.8 per cent for 2018, if not a growth rate lower than 3.0 per cent. Where good intentions proverbially lead to, is a familiar piece of wisdom.
In the light of the foregoing interpretations, three major points have been highlighted: first, the claim that the forecasts of GDP growth rate for 2018 made by Statistics Mauritius and the MCB Focus team are unrealistic because the exceptionally hefty Metro Express-related government expenditure is clearly out of line with the principles of national accounting of macro-economic aggregates; second, in seeking to justify their claim, those who are asking for a revisit of the systems and procedures of collecting and compiling data on offshore activities may end up with a growth rate of much less than the 3.8 per cent or one even lower than 3.0 per cent for 2018 on their plates and, third, the evolution of monetary statistics is flagging a contraction in the value of interbank foreign currency trading over the last six months ended November, 2018. At the same time, the foreign exchange reserves of the BoM stopped rising and began a descent later.
If this trend-reversal persists, macro-economic and political stability would be seriously compromised. If not smartly dealt with, it could potentially bring down any Government. It did happen in the past. The interpretations I have very briefly outlined above, after having taken stock of all the relevant monetary trends and studied their relationships with activities in the real sector of our economy, are causes for serious concerns about
our economic prospects. It is, however, not my intention to suggest that the interpretations must be accepted unquestionably. But I’m inclined to believe that we are at the tailend of a long run of good luck.
The era of blind faith in the economy and the chase for the golden calf is over. Even sophisticated lambs volunteer to be slaughtered, thinking that they are smart enough to get out in time. Politicians, beware of self-seeking footloose advisors in the garb of smart lambs. In hearing only what pleases you to hear, you run the risk of losing sight of the possibility of serious blunders.