Finance Minister Seeks to Solidify Public Finances Whilst Nurturing a Weak Growth

The 2011 National Budget had to deliver on two critical tasks which are to support short-term demand and to build long-term supply whilst improving fiscal performance. Vice-Prime Minister and Minister of Finance Pravind Jugnauth has managed to integrate these objectives in the first national budget of his mandate. Moreover, he has adopted a number of fundamental measures to promote social justice by taxing more the wealthy people and extending welfare benefits and social integration policies, including affordable housing, to the poor and the lower mid-income groups.

Obviously, this is has been a very painstaking exercise with so much at stake. Job creation with government support is vital amidst a dampened global economic outlook, but government cannot afford any fiscal slippery. The budget should be the centerpiece of future economic policies that should be geared at building long-term competitiveness of the economy through unleashing fresh waves of productivity gains and at balancing government’s books over the lifetime of this Parliament.

The 2010 budget deficit is projected at around 4.5 percent as announced in 2009. The deficit should fall to 4.3 percent next year and 4.1 percent in 2012. Given the subdued growth prospects, public finances will remain under stress and the deficit is not expected to return below 4 percent until 2013. Assuming more vibrant business activity and consumer spending after 2011, increased tax receipts should improve notably to help plug the gap by 2015. Additional taxes on consumption will also create new income streams in government’s coffers.

Public sector borrowing is expected at around 60.7 percent in 2010, up from 60.7 percent in 2009. Public debt will pick up to 61.1 percent in 2012 as a result of increased spending in 2011 and 2012. Borrowing as a percentage of GDP should decline in 2013.

Government is revisiting its debt management strategy by reviewing the maturity profile of its borrowings. Regular servicing of short-term borrowings put a lot of pressure on the exchequer’s cash flow. By smoothing the maturity profile of the domestic debt portfolio, government will minimize rollover and refinancing debt risks. Government will ease out the concentration on the near-end of the spectrum and spread its borrowing over a longer period of time in view of large infrastructure works funding.

The Mauritian economy is directly exposed to the Eurozone and the United Kingdom where fiscal austerity is the order of the day. Consumer demand is weakening as the European governments tighten the belt and with high unemployment. The Minister of Finance realizes that more austerity at home can do more harm to the local economy. He has therefore worked out a progressive fiscal consolidation programme that aims at fixing the fiscal gap and return public debt at more sustainable levels over time.

A sustainable fiscal policy should include a national health insurance programme, pension reforms, a series of ambitious public sector reforms and a workable private-public partnership [PPP] programme. Some of these issues have been addressed in the budget. Public sector reforms must cease to be a mere political slogan. Sub-standard design and delivery of public services exacerbate existing weaknesses of the economy and prevent the country attain a higher growth trajectory.

Government is contemplating the merger of a number of utility bodies namely the Central Water Authority, the Water Resources Unit, the Waste Water Authority and the Irrigation into a single organisation. This is a move to improve the efficacy of these parastatals. However, government should commit itself to a more comprehensive and bolder public restructuring plan that aims at aligning costs with sustainable budget performance targets and upgrading services and infrastructure to support economic modernisation.

Government has huge capital expenditure commitments [as much as Rs 250 billion over the next ten years] to modernise the country’s physical fabric, water and energy supplies, telecommunications and public services, whereas its budget is under stress. Pravind Jugnauth is eyeing opportunities of burden sharing with the private sector, and is therefore seriously exploring the PPP route to mobilise the much needed financial resources. The PPP legal framework will be revamped to make public infrastructure financing and operation an attractive business proposition for financial institutions, corporates and entrepreneurs.

The PPP policy should also apply to existing government properties. Sale and lease back opportunities can be explored to free cash from government assets and relieve the public debt burden. Similarly, innovative financing and operating models should be devised to make the burden sharing work.

Whilst all the sectors are still showing positive growth, the economic machinery is slowing down dangerously. The budget measures seek to prevent a deceleration spiral to take hold. The budget is in line be synch with the Economic Restructuring and Competitiveness Programme [ERCP] i.e., supporting business activity; help business restructure, develop new capacity, new markets and new products. The support for small business is being strengthened through better access to finance and technical assistance with the Mauritius Business Growth Scheme.

The SME and micro-financing infrastructure is also being overhauled with the Development Bank of Mauritius [DBM] being turned into the Development Finance Agency [DFI] which will have a new mandate. The DFI will not provide direct lending facilities, except in cases where market financing is not available such as micro-credit, start-ups up to Rs 5 million and qualifying existing clients.

Other measures of the preceding stimulus packages are being enhanced as the euro-zone crisis will continue to weigh on growth in the next two years at least. Government is therefore extending all the facilities under the Leasing for Equipment Modernisation Scheme [LEMS], a government-sponsored leasing programme, until 2012. Other vulnerable groups as the small planters and fishermen are being provided with additional assistance.