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The IMF predicts pain: economic contraction and inflation

16 avril 2020, 16:03

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The IMF predicts pain: economic contraction and  inflation

The International Monetary Fund this week announced its forecast for the world economy, predicting the global economy being plunged into a recession in 2020, that it dubs The Great Lockdown. As the IMF predicts economic pain, unprecedented since the Great Depression, what does it predict for Mauritius and how realistic is it?

The International Monetary Fund (IMF) is calling it The Great Lockdown. It predicts 2020 to be a period of economic contraction of the global economy, worse than the global finance crisis in 2008, comparable to the Great Depression in the early 20th  century. For Mauritius, the IMF predicts that in 2020, the Mauritian economy will shrink by 6.8 per cent while inflation will hit 8.5 per cent. So how realistic are these numbers and do they have local economists worried?

First, the IMF’s forecast that the Mauritian economy will shrink by 6.8 per cent in 2020. “Clearly a contraction of the global economy would have immediate repercussions on an open market like Mauritius,” says Rajiv Servansingh, chairman of MindAfrica, who also sits on the Economic Development Board. The IMF is predicting that 2020 will see a three per cent contraction across the global economy with major markets for Mauritius such as the US, UK and France shrinking by 5.9, 6.5 and 7.2 per cent respectively this year and global trade diving by 11 per cent. “Out of the four major employers that are hotels, construction, non-food retail and manufacturing, two are dependent on world markets and it’s hard to predict when they will pick up,” Servansingh adds. “Also, keep in mind that in making this prediction, the IMF is assuming that the worst of the pandemic is behind us” with the pandemic fading by the latter half of 2020.

 

“Right now, the official unemployment rate is nearly seven per cent. This crisis will see lots of small and medium enterprises shutting down and major companies forced to downsize. I am not sure that the assistance offered by the government will be enough to prevent that.” Lindsay Rivière, economic observer.

 

Others agree that the IMF forecast of the Mauritian economy taking a nosedive of 6.8 per cent is an optimistic one. “This may well prove to be a best-case scenario,” says economic observer Lindsay Rivière. “I think it will be closer to 10 per cent because we have not had any economic activity for two months now, which lops of between Rs50 billion and Rs60 billion off the economy and recovery in tourism and exports will be slow as demand won’t return instantly. There is so much uncertainty”. Economist Eric Ng too, agrees that the economic contraction is likely to be deeper than 6.8 per cent this year. “This could be an underestimate since I think the IMF computed this estimate before the government recently decided to extend the lockdown, halting economic activity, by another two weeks until 4 May.”

Inflation

If they think that the IMF prediction regarding the economic recession looming this year is too optimistic, what about its prediction that inflation in Mauritius would hit 8.5 per cent? “If this happens, purchasing power will plunge sharply and interest rates will become negative which means there will be little saving going on,” offers Ng. For his part, Rivière is less sure. “I am not so certain about the prediction of 8.5 per cent inflation,” he says, “We are consuming and spending less so I don’t think it will be inflation that’s domestically driven; rather, it will be imported inflation.” He cites the fact that he expects the government relying more on borrowing and floating government bonds which would lower the value of the rupee further, making imports expensive (one dollar is nearly Rs40 now, from Rs35 at the end of last year -ed.) and with some countries stockpiling or restricting the exports of basic commodities, such as Russia with flour, their prices would go up. Servansingh, on the other hand, says that he is not so worried about inflation in Mauritius in 2020. “Sure it may spike up with the value of the dollar rising vis-à-vis the rupee but that will be compensated somewhat by low oil prices.” According to the IMF, international oil prices tumbled by 65 per cent since mid-January and the end of March due to weak demand. The world body said that it expects global oil prices to average around $34.80 a barrel in 2020 – more than 43 per cent lower than average oil prices in 2019.

Regardless of how deep the Mauritian recession – the first in three decades – will be, what is clear is that 2020 will see a pincer between economic decline and inflation. “It will mean being stuck between the plague and cholera, as they say,” says Ng. He estimates that since all the indicators going down into the red, unemployment may reach as high as 17 per cent. It’s a prognosis that Rivière concurs with. “Right now, the official unemployment rate is nearly seven per cent. This crisis will see lots of small and medium enterprises shutting down and major companies forced to downsize. I am not sure that the assistance offered by the government will be enough to prevent that,” he argues. “We are heading towards a period of high, double digit unemployment, unfortunately.”

“This could be an underestimate since I think the IMF computed this estimate before the government recently decided to extend the lockdown, halting economic activity, by another two weeks until 4 May.”

Regardless of whether the IMF’s predictions are seeing the glass half-full or half-empty, what is clear is that 2020 will be a year of economic pain for Mauritius.

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