The amendments proposed in the Finance Bill 2023, relating to the Bank of Mauritius (BoM), Public Debt Management (PDM) and Economic Development Board (EDB) Acts, deserve to be highlighted for their positive impact on the conduct of monetary policy, the management of public debt, and the privatization of Govt entities. However, broader and deeper fiscal and monetary reforms are needed to address the country’s economic imbalances.
The Finance Bill 2023 proposes amending the BoM Act to repeal certain provisions introduced in the wake of Covid to allow for free and unlimited financing of Govt’s budget deficit by BoM from its Special Reserve Fund. BoM used these Covid provisions to make a one-off grant contribution of Rs52 bn to the Govt budget in 20-21 from the Special Reserve Fund, in addition to Rs3 bn from the General Reserve Fund, for a total amount of Rs55 bn. The Minister of Finance even boasted of a balanced budget, to create a stellar piece of economic nonsense.
The Special Reserve Fund largely consisted of valuation gains on foreign exchange following a deliberate BoM policy to support exchange rate depreciation. A major decline in the rupee has led to inflationary pressures, further exacerbated by BoM monetization of the Govt deficit. The inflationary impact of these BoM actions continues to weigh heavily on the economy to this day.
The Finance Bill also repeals sec 46(5) of the BoM Act authorizing BoM to use official foreign reserves to invest in any corporation or company set up to facilitate economic development. This provision was intended to provide Mauritius Investment Corporation (MIC) with USD2 bn, or about Rs80 bn. However, official foreign reserves were never used for this purpose, likely due to reserve adequacy concerns. Instead, MIC was funded through pure money creation by BoM. Only about Rs50 bn has been disbursed by MIC thus far, of which half was invested in a state-owned company, Airports Holdings Ltd, representing further Govt financing by BoM.
These amendments to the BoM Act will help restrict central bank deficit financing and contribute to restore monetary policy effectiveness in controlling inflation, a key central bank objective. However, while these amendments are necessary, they are not sufficient. BoM requires an updated legal framework, recapitalization, and the renouncement of MIC.
A new BoM Act consistent with best international practices will better safeguard central bank independence, enhance governance, and improve policy credibility. The introduction of a BoM Bill reflecting best international practices was announced in a previous budget speech in June 21, without any signs of implementation so far. As recommended by the IMF, revised BoM legislation should prohibit quasi-fiscal financing, as well as transfers to Govt beyond regular profit transfers.
The BoM should be recapitalized to strengthen its credibility in countering inflation. BoM paid-up capital at Rs10 bn represents only 2.5% of BoM total liabilities, and the costs of conducting monetary policy to combat inflation are significant, amounting to Rs1.8 bn in 21-22. Moreover, the balance in the BoM General Reserve Fund is less than the paidup capital, but BoM is not striving to replenish it, as required by sec 11(4) of the BoM Act.
Lastly, the MIC should be relinquished by BoM, either to Govt, the Development Bank of Mauritius, or State Investment Corporation, because it undermines monetary policy credibility and effectiveness, and adds credit risk to the BoM balance sheet. In 21-22, MIC posted a loss of Rs1.5 bn due to its investment in Airport Holdings, which was only offset by valuation gains on its land assets purchased from Omnicane. The valuation of MIC’s quasi-equity investments with convertible provisions is a complex exercise, and there are serious doubts whether MIC’s accounting actually reflects true and fair value. MIC’s audited financial statements for 21-22 are still pending, more than a year after the financial year end.
Govt is currently negotiating a budget support loan with the World Bank, which is usually tied to a program of fiscal and monetary reforms. The BoM Act amendments most likely form part of the minimum prior actions required for loan disbursement. Surprisingly, the recent budget speech did not mention the BoM Act amendments, which do reinstate some measure of independence and authority to the central bank. Govt is driven more by the need to comply with World Bank loan conditionality, than recognize the importance of restoring credibility to monetary policy
The Finance Act 2020, known as the Covid 19 (Miscellaneous Provisions) Bill, amended the Public Debt Management (PDM) Act to repeal section 7 in order to remove the public sector debt ceiling. The Finance Bill 2023 reinstates section 7 of the PDM Act to reimpose a ceiling on public debt.
But, there are significant differences between the proposed PDM Act compared with the PDM Act prior to 2020. The proposed ceiling on the public debt to GDP ratio for any one fiscal year is set at 80%, much higher than the previous level of 65%. A single debt target of 80% is proposed, whereas the previous PDM Act had two targets, a current one of 65% as well as a stricter longer-term target of 60% to be attained by 2021.
A waiver to the ceiling on the debt ratio is again proposed in exceptional cases of natural disasters and other emergencies, large investment projects, and a general economic slowdown. However, the new proposed waiver implies total leeway, whereas the previous PDM Act had a limited escape clause, restricting the increase in the debt ratio to 2% points between 2 fiscal years. The previous PDM Act also required that the debt ratio be reduced to 60% within 3 subsequent fiscal years.
The proposed amendments to the PDM Act do not fully restore the framework needed to promote fiscal responsibility and discipline. The targeted public debt ratio seems too high at 80% of GDP. No medium-term public debt target is specified, and exceptional waivers of the debt ceiling are not subject to any restriction.
In its July 2022 country report, the IMF recommended setting a fiscal anchor at 80% of GDP, based on a range of 74% to 87%, depending on less or more conservative assumptions. Monetary policy has since tightened, increasing the interest-growth differential and the effective interest rate on debt. A more conservative scenario would now be more appropriate, with a public debt target not exceeding 75% of GDP, and a medium term target of 70%.
The IMF further recommended an operational rule to preserve fiscal sustainability and reduce debt vulnerabilities, namely by adopting a ceiling on the overall borrowing requirement of 3 percent of GDP, averaged over the medium term. This is in addition to setting a ceiling on the overall budget deficit, of the order of 3% of GDP, to forestall any Govt spending disguised as financial investments. The IMF also supported the creation of an independent fiscal council to reinforce commitment to a credible medium-term fiscal framework.
The proposed PDM Act falls short of accepted global standards of fiscal governance, and could adversely affect our standing with development partners, international financial institutions, and credit rating agencies. The recent budget speech omits any mention of the reintroduction of a public debt ceiling, and only refers to a medium-term debt ratio target of 60%, which is however not included in the proposed legislation. Again, Govt is more concerned with meeting the World Bank’s lending terms than emphasizing the urgent need for fiscal discipline and consolidation.
A proposed amendment to the Economic Development Board (EDB) Act in the Finance Bill 2023 aims to facilitate the acquisition of non-strategic assets of Govt, which effectively means the privatization of certain public sector activities. Private investments of more than Rs500 mn, to (i) acquire or take over Government undertakings in whole or part, or (ii) buy more than 50% of Govt shares in a company, will now be eligible for a Premium Investor Certificate under the Premium Investor Scheme (PIS).
PIS investments benefit from a range of fiscal concessions and other facilities currently available under the EDB Act, as approved by the Minister of Finance. PIS applies to the following activities: emerging sectors, pioneering industries and, first movers, innovative technologies and industries, and such targeted economic activities as approved by the Minister. Govt-owned activities earmarked for privatization will now be considered a sub-category of innovative technologies and industries under PIS.
This is a ludicrous proposal, clearly aimed at sweetening the deal for private acquirers of Govt-owned business. The term “non-strategic” is undefined and can be freely interpreted to include any kind of Govt activity. The grant of fiscal and other benefits amounts to subsidizing private business, with the potential for corrupt collusion between politicians and their business cronies.
Privatization can contribute to boost the economy’s performance, fund the Govt deficit and hold back the growth of public debt. But the wide-ranging sops being offered on PIS investments also represent fiscal revenue foregone, which increases Govt borrowing requirements and public debt. By selling its assets under PIS, Govt can pass on part of the cost of its mismanagement of public sector entities to taxpayers.
The Finance Bill 2023 proposes to amend the Wastewater Management Authority (WMA) Act to allow for waste water privatization. In addition to WMA, Govt is scrambling to unload other poorly performing public entities to the private sector, like the National Insurance Company (NIC), MauBank and Casino companies.
Despite previous capital injections of about Rs5 bn in MauBank Holdings and Rs15 bn in National Property Fund, of which Maubank and NIC are the respective subsidiaries, these entities have negative net assets and were therefore disclosed at zero fair value in Govt accounts. The WMA and the Central Water Authority (CWA) had outstanding unpaid debts totaling Rs3.1 bn and Rs3.3 bn respectively at June 22. Heavy fiscal incentives and concessions will be required for privatizing such lame ducks under PIS, putting additional strain on public finance and debt.
A past attempt at privatizing CWA management operations was vigorously pursued with the support of the International Finance Corporation, but ended in dismal failure. Govt is currently programming a budget support loan from Agence Française de Développement (AFD) for the water sector, which may include reforms for a revitalized privatization plan. AFD involvement will hopefully improve the chances of success.
Conclusion The above Finance Bill amendments, even if prompted by international development agencies, offer a glimmer of hope that reckless fiscal and monetary policies will be restrained. In reneging on its commitment to raise the monthly pension to Rs13,500 as from July 2023, Govt was likely mindful of the IMF and World Bank’s highly critical views on the financial soundness of the pension system.
It is becoming increasingly important to address the large external account deficit, and Govt is turning to AfDB, World Bank, AFD, and other institutions for foreign funding. External reserves have shrunk, and foreign currency shortages persist despite informal exchange restrictions, putting pressure on the rupee and on inflation. Public debt reduction through inflation or central bank money is not sustainable, and more comprehensive economic reforms are unavoidable.