We finally worked out what Pravind Jugnauth, our new Minister of Finance, was saying in the National Assembly on Tuesday. The key that unlocked the puzzle was the old adage “always compare like with like”. What our rookie Minister had managed to do was confuse the whole Assembly and all of the nation’s journalists as well by creating a fruit salad with the statistics. One minute the numbers were in Rupees, then in dollars and then in Euros. On top of that he was mixing up outstanding debt at a certain date with debt contracted over a period time. But the cherry on the ice cream was a clever sleight of tongue that completely obscured the nation’s debt crisis.

We must start with some definitions from the opaque world of state finance:

  • Debt – loans to a party that it has a legal obligation to repay.
  • Public debt – loans to the Government that the population is legally obliged to repay plus loans from third parties to parastal bodies that the Government has guaranteed and hence the population is legally obliged to repay in the event that the parastatal bodies are unable to.
  • Private debt – loans to the private sector that the population is not legally obliged to repay.
  • Personal debt – loans to individuals that they are legally obliged to repay.
  • Internal debt – debt owed in the national currency.
  • External debt – debt owed in foreign currencies.
  • Contracted debt – a loan that one party has (recently) been promised by another.
  • Disbursed debt – contracted debt that one party has actually received from another.
  • Outstanding debt – the amount of debt that remains after some of it (if any) has been repaid.
  • Outstanding and disbursed debt – the total debt that one party actually owes another and on which interest should be paid.

[A parastatal body is a government owned business, such as the State Trading Company. This gets confusing with companies like Mauritius Telecom and Air Mauritius since the government only partly owns them. This is further complicated when the government fully guarantees the debts of partly owned companies. During financial crises, governments often guarantee the debts and liabilities (deposits or claims that are liable to be paid) of some private sector banks (and insurance companies) and privatise other banks. Since these banks may or may not be able to repay their depositors in the future and insurance may or may not be able to pay out future claims, they are normally described as government liabilities rather than actual debts.

Other liabilities that a government has are the commitments to pay future pension and healthcare costs. In the UK there is a separate tax for them called “National Insurance”, however, unlike private sector insurance companies and pension funds, the “scheme” is not “funded” (it has no savings and investments). Government liabilities, although very real, are not classified as debts. Contrast this with the balance sheet of a business whose net assets are its assets less is liabilities (which includes debts). Governments do not follow standard accounting procedures because they are part company, part bank (although central banks are often “independent”), part insurance company, part pension fund.]

Confused? It is not surprising and it was Pravind’s objective, by being “ambiguous” in his use of definitions to confuse even economists (although we would argue that confused is their natural state). When describing the nation’s public external debt, he gave the figures for outstanding and disbursed external debt. However, he didn’t use the precise term “outstanding and disbursed external debt”, he simply called it “external debt”. The number is useful because it indicates how much foreign currency is needed to make the interest payments right now. However, ratings agencies, who effectively determine the interest rate at which new public debt must be contracted, look at outstanding and contracted public debt (both internal and external, although they do take total private and personal debt into consideration too), because they assume that all contracted debt will be disbursed. This is a very important number because it indicates our capacity to take on more debt.

“So what is our total outstanding and contracted public debt?”

We will start with the external debt. Taking Pravind’s figures:

  • Total external public sector debt at the end of March 2010 was Rs27.5 billion.
  • Contracted debt over the period June 2005 to 31st March 2010 was Rs51.6 billion.
  • Of this only Rs10 billion has been disbursed, leaving Rs41.6 billion to be disbursed in the future.

So the answer is (Rs billion):

27.5 (outstanding and disbursed) + 41.6 (contracted but not yet disbursed) = 69.1

Pravind artfully avoided mentioning this key figure. So we give Pravind a high rating for sophistry but a low rating for integrity. He is a true economist: economical with the truth. The question is: was he intentionally obscuring the truth or simply repeating the lines given to him by the master string puller, Ali Mansoor? I bet Navin wishes he had studied for an MBA in public finance rather than a degree in law!

With respect to the internal debt, Pravind didn’t give these numbers. Unfortunately, the audited accounts for 2009 are not yet available on the website of the National Audit Office, so we will have to make do with the figures for the end of June 2008. At that time, for comparison, the total external debt was only Rs15.2 billion (Rs11.2 billion owed by central government + Rs4.0 billion owed by parastatal bodies). In other words, during the first part of his mandate, Rama Sithanen reduced the external debt and during the second part he increased it (rather massively).

This is pretty consistent with Keynsian economics, which, in a nutshell, says: borrow money to stimulate the economy with infrastructure projects when the economy is sluggish and repay the loans when the economy picks up again. The only problem is when the economy NEVER really recovers, as has been the case in Japan since the 1990s! Their real “growth” in GDP is predicted to be nearly minus 6% in 2010.

At the end of June 2008, Mauritius’ total internal public debt was Rs120.3 billion (Rs111.0 billion owed by central government + Rs9.3 billion owed by parastatal bodies). So we can estimate the total indebtedness of the country once all the promised loans have been disbursed (Rs billion):

120.4 [internal] + 69.1 [external] = 189.5

“How does this compare with GDP?”

Who cares how it compares with our GDP! What matters is can we afford to pay the interest on it? In 2007/8, public debt servicing costs (excluding parastals) were Rs13.3 billion or 26% of recurrent expenditure (total expenditure minus investment projects). Assuming an average debt servicing costs of 10.9% (as in 2007/8), current potential debt (outstanding + contracted but excluding parastatals) would cost approximately (Rs billion):

10.9% x ( 189.5 – 20 [assumed debt of parastatals] ) = 18.5

[Note: we have assumed the internal debt of the parastatals to be Rs9.2 billion, according to Pravind their external debt is Rs10.8 billion]

So we will need to find an extra Rs5.2 billion in tax revenues (an increase in debt servicing costs of 39%) to fund the additional interest payments. How does Pravind plan to do this? Well, he has told us he will:

  • Eliminate the Nation Residential Property Tax.
  • Eliminate the tax on interest on savings.
  • Eliminate duties on imports to create a “Duty Free Island”.
  • Borrow more for the light railway.

“That isn’t going to help is it?”

No it certainly is not! But there is some respite this year in the form of one-off grants (mostly from the EU to say sorry for ending the subsidies to our sugar industry) of Rs 4.1 billion. To quote Pravind:

“I can assure the Member and the House that these exceptional resources will be optimally utilised to implement policies and programmes designed to unlock the development potential of our country.”

Hmmm…Even Sithanen, with his extra taxes and dodgy accounting with his stimulus package, was predicting a budget deficit (i.e. additional debt) of Rs 13.7 billion in 2010. With the economy showing signs of crashing, tax receipts are bound to be less than hoped.

“So what happens if the Bank of Mauritius devalues the Rupee by 30%?”

You mean if Mr Bheenick accepts the bribes from the capitalist elite? Well, the total debt will balloon to (Rs billion):

120.4 + 69.1 / 0.7 = 219.1

And the interest payments will be approximately (Rs billion):

10.9% x ( 219.1 – 20 [assumed debt of parastatals] ) = 21.7

In this event, Pravind would have to raise an extra Rs8.4 billion in taxes (an increase in debt servicing costs of 63%). To put all this into perspective, in 2007/8 the total amount the Government spent on “public services” (total expenditure – debt servicing costs – investment projects) was Rs37.8 billion. Debt servicing costs of Rs21.7 billion would add an extra 57.4% to this figure!

“So you think the Mauritian economy looks a little pear-shaped?”

Yeah, and with our major trading partners discovering that their public debt is also unsustainable, things are likely to get worse before they get better. One more thing, these figures do not include the financing costs of the new airport terminal (Rs11 billion). With tourism revenues set to continue falling, it doesn’t seem like such a good investment now does it? Well, we told you so! While we are on the subject, we also told you that we are going to have enormous problems meeting our future liabilities (which no one has even tried to quantify) and that, because of our small but open economy, Mauritius cannot avoid being sucked into the whirlpool that is the global economic crisis and, even without devaluation, our economy and currency are destined to go down the plug hole – or should that be round the bend?

For the economists amongst you who are comforted by knowing the ratio of outstanding and contracted public debt to GDP, what is our GDP? Do you mean at factor prices, basic prices or market prices? How does this imply the ability of the economy to sustain public sector debt? How does it account for the willingness of the people to accept higher taxes and cuts in spending?

According to the Central Statistics Office, GDP in 2009 at basic prices was Rs 242.1 billion. Therefore, at the current value of the Rupee, the ratio is 78.3%. If the Rupee devalues by 30%, it increases to 90.5%. Pravind calls this sustainable.

For comparison, according to the Office of National Statistics, UK public sector net debt was 62.2% of GDP at the end of May 2010 (the British have really up to date figures), but bear in mind they have made massive financial interventions to stimulate their economy (which caused a dramatic devaluation of their currency). Without those financial interventions, the figure reduces to 53.5% at the end of March 2010. Unless Prime Minister Ramgoolam has hidden (on behalf of the nation) a treasure trove at the bottom of his garden (or in a Swiss bank account), Mauritius is in worse shape than one of the worst economies in Europe. Does that make you feel better Mr Economist?