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AfricaMoney | August 21, 2017

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Financial ExpertSpeak: Structural reforms necessary to avoid ‘middle income trap’

Financial ExpertSpeak: Structural reforms necessary to avoid ‘middle income trap’

Rama Sithanen, former finance minister of Mauritius, spoke to ION News on how there is no way out to achieve robust economic growth except by embracing structural reforms.

Rama Sithanen continues his exclusive interview to ION News by turning his lens from the Mauritius-India tax treaty to the economy as whole. The former finance minister of the island economy states categorically that there is no way out to achieve robust economic growth except to embrace structural reforms. Our dynamic financial expert, who spearheaded the economic reforms that gave birth to Mauritius’ offshore sector, also speaks out on current finance minister Xavier-Luc Duval.

AfricaMoney brings you edited excerpts from the interview:

The growth forecast for the financial sector in Mauritius is 5-6%. The Mauritius economy as a whole however, is facing slowing growth amid global economic uncertainty. Do you think that the government and the Finance Minister are leading a party which allows the island economy as a whole, and not just the financial sector, to perform at a higher level?

All economic experts and institutions which have closely followed the island economy have concluded that we are performing below our potential. There are some valid explanations for our sub-par growth as we are dependent on Europe whether for tourism, textile, fishing or other sectors, and these sectors are facing difficulties due to economic slowdown in Europe. Footfalls from France have decreased, and it has had an adverse impact on Mauritius tourism. Obviously, the economic crisis has affected us and even if 2014 is forecast to be slightly better than 2013, the aftereffects of the recessions will be present for a long time. The economy as a whole must target growth in the range of 5-6%. If this is not the case, it will be difficult to absorb structural unemployment. And we have three major issues in terms of unemployment: Youth unemployment, female unemployment and joblessness among graduates.

What are the measures that can be taken to improve economic growth?

All countries are taking measures to alleviate the effect of the crisis by turning to any of the three paths available. In Mauritius as well, we can play on the monetary pedal, fiscal pedal or the pedal of structural reforms. The last pedal is the most important as it yields long-term benefits. In Europe, there is no more headroom for fiscal flexibility because of already high debts as well as ballooning fiscal deficits. However, we are still fortunate to have the use of the fiscal pedal and we need to know how to make it work in order to serve the economy strategically. On the monetary front, we continue to face the issue of excess liquidity. It has happened in the past and once again, the Finance Ministry and the Central Bank must sit together to find a solution. We also have structural issues which need to be resolved and do not bear any relation to the economic crisis. All in all, we have many difficult choices to make whether in education, human resource training, pension system, the labor market, the goods market, export competitiveness or escalating telecommunications costs.

When you look at Navin Ramgoolam and Xavier Duval, do you think they are performing well in terms of taking the right economic decisions?

It is a difficult question and the context is crucial. You can only choose among the people you have in your team to be the Finance Minister. And I think that the best choice that Prime Minister Navin Ramgoolam has as Finance Minister from his party is Xavier Duval. Duval tries his best but there are some decisions which do not depend on him in an individual capacity, as taking economic decisions is equally a matter of team work. In the short term, he is trying his best to ensure that there is enough economic growth for job creation, but we have long term structural issues going unaddressed. If we do not undertake much-needed reforms in various sectors, it will be difficult to achieve a growth rate of 6-7%. The risk we then face is that we might fall into the “middle income trap”, like many other countries before us.

Can you comment on our current competitiveness and the way forward?

We have been performing very well but now find ourselves in a situation which is not competitive, innovative, productive and efficient enough to compete with Singapore, Italy, or the United States for higher-end products and services. Also, on low-end sourcing, we have lost business in sectors where we had a low cost advantage to not just traditional competitors such as Madagascar and China but also newer rivals such as Cambodia, Vietnam and Sri Lanka. There are solutions to these problems among which foremost is investing in infrastructure. Mark you, the infrastructure must be of good quality and not just impressive in terms of scale or quantity. We also must invest in human resources, and this is where education at the primary and secondary levels assumes great importance. Thirdly, we have to invest in both economic diversification and innovation. Here, some crucial reforms must be undertaken to set the economy on the right track, for instance, to make it possible for us in even the next 15 years to provide statutory welfare and make pensions non-contributory in nature. Besides, there are other ways in we can boost the economy such as increase in tax or a cut in unnecessary expenditure.

What, in your view, is the best way out for the economy?

There are some complicated decisions facing the economy because very often we do not distinguish between two things: a strong political and social will to solve problems, and the method of governance. I see many people who think that only with the right governance all the problems can be solved, but this is not the case as you need strong political will as well. Will the government take these tough decisions or continue to follow the easy path of 3-4% growth? These are some difficult issues and Xavier Duval is intelligent enough to know what needs to be done. However, undertaking these reforms is proving a tough task because of the implications of policies that need to be taken into account, and partners with differing interests who need to be taken on board. According to me, it is clear that if we have only fiscal and monetary tools on our side, it will be difficult to achieve a robust growth rate of 6%.

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