A cynical and callous policy and practice akin to scorched earth (terre brûlée)

Introductory remarks 
Let us be frank. Ministers of Finance across the world always try to shine a better light on their budget by resorting to a few fiscal ruses and financial stratagems. On the day the budget is presented, very few people see and understand those artifices as the Minister speaks only about what he wants us to hear and to know. The less rosy parts are either relegated to technical supplements and appendices (such as the Rs 11 billion (billion) of public assets disposal) or simply ignored (the massive increase in FSC fees for global business companies). Then as the budget unravels, shrewd and informed observers start seeing into this craftiness and realise the extent to which we have been led down the garden path. Done in moderation and without threatening the fundamentals of the economy, such manoeuvre can be condoned. This is often life in the politics of the bud- get and it must be acknowledged even if many do not like it.

The difference with Pravind Jugnauth in his last budget for the current legislature is that he has broken all records by the sheer scale, scope and magnitude of these tricks and slyness. All carefully planned, thoroughly calculated and unscrupulously executed with little consideration for macroeconomic stability, sound public finances and the prudent management of the public sector debt. And oblivious of the disastrous consequences of his fiscal recklessness for the future of our economy. The only objective was to create a feel-good factor to enhance his chances when contesting the next elections by a helicopter-type distribution of some goodies to specific groups.

The best as the enemy of the good 
Based on reactions to the Budget, he has clearly overstretched it and it has achieved exactly the opposite effect. The tricks have backfired. Pravind Jugnauth has been awfully counselled by his advisers and spin doctors to exaggerate on these subterfuges as it has allowed the perfect to be the enemy of the good. His good measures have thus been engulfed by the vortex of sustained recriminations unleashed by his overzealousness to hoodwink the system.

In King Lear, Shakespeare puts it aptly as ‘striving to better, oft we mar what’s well’.

Or the aphorism of Voltaire that ‘the best is the enemy of the good’ captures what has happened to the Prime Minister in the aftermath of the budget.

He has been sucked in the maelstrom. And as Warren Buffet famously averred ‘only when the tide goes out do you discover who has been swimming naked’.

Unfortunately, he is now running to seek cover and clothes and to justify the unacceptable. Only a reversal of some of the very controversial measures such as the confiscation of the reserves of the BOM could restore some calm. Judged by his excessively aggressive summing up last week, he is unlikely to tread the path of reason and responsibility. It is known that some political actors furiously dig when they are already in a hole.

The Budget 2019/20 is a toxic mix of a raid on the reserves of the Bank of Mauritius, a fire sale of some crown jewels of the nation, a brutal stripping of the surpluses of many public entities and some colourable accounting tricks to largely underestimate the size of the budget deficit and the level of public sector debt.

I shall use the very figures of the Minister and the contents of the various Supplements and Appendices to the budget to demonstrate each of these charges.

The Bank of Mauritius heist of Rs 18 billion 
Most of us have been shocked by the dangerous and irresponsible transfer of Rs 18 billion representing 3.6% of GDP from the Bank of Mauritius to the Ministry of Finance for the early repayment (Rs 15,65 billion) and the scheduled repayment (Rs 2.35 billion) of some of the external debt of the country. The only purpose is to show a lower public sector debt from 65% at June 2019 to 61.6% at June 2020 and 59.8% by June 2021 by the use of an unprecedented measure. The BOM Act does not allow such illegal transfer from its Special Reserve Fund as per clause 47. Hence the necessity for the Minister to amend the Act to permit such unlawful appropriation. The proposed amendment of the BOM Act is broader than the early repayment of external debt as it goes beyond using the special reserve fund exceptionally for monetary policy to include fiscal policy too. This is no more than pure deficit financing. There are two transactions folded into one. First the transfer of Rs 18 billion from the Special Reserve Fund of the BOM to the Exchequer and second the use of the proceeds for the early repayment of some external debt. Never mind that these external debts represent a paltry 8% of the public sector debt, are very cheap at around 2.5% annual interest in US $ and with a meagre debt service ratio of 4.9% at June 2019.

The fire sale of Rs 11 billion of some of the crown jewels of the nation
At para 196 of the budget the Minister of Finance states that ‘We will also dispose of certain non-strategic assets to reduce the level of government debt’.

However there is complete opacity on which public assets will be sold, to whom, in what manner and for what amount. One has to dig into Appendix D titled ‘Loans and Equity’ to discover that Rs 11 billion of public assets will be disposed over two years. Rs 5 billion worth of public assets will be sold in 2019/20 and another Rs 6 billion in 2020/21. Nothing about which assets and whether there will be a transparent process for their alienation.

The conversion of the surplus of public companies of around Rs 11 billion into Treasury papers 
For some time Government has tried to underestimate the size of the public debt by resorting to a spurious definition of net public sector debt as opposed to the international standard for computing the gross public sector debt. The difference lies in the cash balances of non-financial public sector bodies such as the CEB, MPA, CHC and the STC. At December 2018, those cash balances represented Rs 32 billion or 6.7% of GDP. What Government has done is to compel these public sector bodies to convert their surpluses into Treasury papers to the tune of around Rs 11 billion over a four year period. The Boards of the public entities have been instructed to comply with this directive from the Ministry of Finance. As they belong to Government, this translation has the effect of lowering the debt by an equivalent amount over four years as Government cannot be indebted to itself. This transaction is concealed in the new item specially created in the debt profile of the country. It is characterised as ‘Consolidation Adjustment’ in Appendix F on public sector debt. The relevant section is shown at Table 1.

That item simply did not exist in prior years. It was zero in June 2015, 2016, 2017 and 2018. In the estimates of 2018/19 it was again zero. Now it suddenly shows up as a revised estimate of Rs 4 billion in June 2019. And a projection of Rs 6 billion in June 2020, Rs 8 billion in June 2021 and Rs 4.5 billion in June 2022. A staggering aggregate amount of Rs 22.5 billion over four years while it was inexistent since 2015. It is sheer magical incantation to hide the true size of the public sector debt.

Over Rs 40 billion in creative and voodoo accounting 
Table 2 illustrates how the Minister of Finance has doctored the budget deficit and the debt figures in a deliberate strategy to outwit the nation and to embark on a policy close to ‘terre brûlée’ with respect to these two key macroeconomic indicators.

The predicament is as follows: 

• The expropriation from the BOM represents Rs 18 billion or 3.6% of GDP; 
• The fire sale of public assets accounts for Rs 11 billion or 2.2% of GDP; 
• The forced conversion of the surplus of some public entities stands at around Rs 11 billion or 2.2% of GDP over four years; 
• The total is around Rs 40 billion representing a staggering 8% of GDP.