Mauritius throws kitchen sink in Covid crisis. Now, it has to deal with broken pottery.

When the pandemic hit in early 2020, the government put public health first. The decision meant isolating the island economy, which is highly dependent on tourism, from the world.

That leaves it no choice but to inject a lot of cash to keep the business going. It did, and according to the data, it cost 28% of GDP IMF estimates, comparable to many advanced countries. The Mauritian government is supporting employment and wages of self-employed people with 18 billion rupees ($400 million at current exchange rates), especially in the battered tourism and hospitality industries.

Another Rs 900 crore has flowed to the national carrier Air Mauritius after it went into receivership in April 2020. The airline has halved the number of planes it had previously, and the airline has resumed operations.

To help pay for all this generosity, the central bank transferred Rs 6,000 crore to the government by issuing “instruments” linked to rupee liquidity. It provided Rs 8,000 crore from foreign reserves to Mauritius Investment Corporation, a subsidiary of the bank that was set up in June 2020 to help inject capital into struggling companies.

In Mauritius’ version of Too Big to Fail, Central Bank Governor Harvesh Seegolam, explain The MIC Fund will “help systemically large, important and viable companies” that would otherwise struggle to meet their debt obligations and risk throwing the banking system into crisis.

Even with the help of this unorthodox monetary policy – which Rakesh Seesurn, head of risk at the Port Louis-based African-Asian Bank, likened to turning central banks into “magic money trees” – traditional government spending will continue to grow in 2020. The budget deficit pushed up to 20 percent of GDP.

The economy contracted by 15% that year and will grow by only 5% in 2021. Unemployment rose from 6.7% in 2019 to 9.2% post-crisis.

Last year, the IMF stressed that it was time to rein in what it called “quasi-fiscal activity” in the Mauritian economy. It recommended a further ban on such transfers and said the central bank should relinquish ownership of the MIC, which should be funded through the regular budget.

This amounts to a warning that unorthodox policies, if expanded, could undermine the independence and credibility of central banks.

The IMF says that while stimulus should not be withdrawn too quickly, once the economy is “completely out of the pandemic”, fiscal consolidation is needed to stabilize public debt, which rose from 66% of GDP before the crisis to nearly 100% . Now a penny.

Sushil Khushiram, former Minister of Financial Services, blame the authorities Populist spending they can’t afford: “Chickens are now coming home to roost and all macroeconomic indicators are flashing red – unsustainable public debt, widening external deficits, continued depreciation of the rupee, worsening inflation and a sluggish growth recovery. “

Opposition Labour’s former finance minister Rama Sithanen was critical of the government’s response but defended the underlying strategy: “We’re in a perfect storm, so they’re putting all their firepower on fiscal policy, Fiscal support and monetary policy to mitigate the impact of the pandemic on the economy.” He added that the situation needs to be lifted now.

The government said the stimulus was within its means. “Mauritius has so much idle cash, basically, we clean it up and put it back where it belongs,” said Achim Kurimji, former vice-chairman of the investment promotion agency Mauritius Economic Development Council.

“Mauritius is a stable country,” added EDB CEO Ken Poonoosamy. “We’re probably one of the few countries that has had consecutive positive growth for 30 to 40 years. Our GDP has never contracted, except during the Covid-19 pandemic.”

Nonetheless, the government still needs to work hard to keep macroeconomic fundamentals stable. Moody’s long-term credit rating for Mauritius is below investment grade Baa2 with a negative outlook. It also warned of a further deterioration in debt indicators and rising inflationary pressures due to the sharp depreciation of the rupee: from 32.5 rupees to the dollar in March 2020 to 44 rupees two years later.

But there are signs that Mauritius is struggling to get back to normal as the economy opens up. The IMF said the budget deficit more than halved to 8.6 percent by 2021. It is expected to drop again to 5.6% this year.

While the current account balance is likely to widen further to minus 15.6% this year, it is expected to recover to minus 6.8% next year as tourism and airline revenues normalize. Exports, including tourism receipts for hotel beds and airplane seats, will benefit from a weaker rupee.

However, a long-term fiscal problem may be looming. The average age in Mauritius is 38, which is on par with Europe. Its fertility rate of 1.4 is well below the 2.1 needed to keep the population stable. The IMF calculates that more generous basic pension schemes will suffer as the workforce ages, with government spending on pensions rising to more than 8% of GDP in 2023/24, up from 2018/19. The ratio is 4.5%.

These must be addressed through a combination of solid growth and fiscal prudence, Sithanen said. “It’s time to rein in our deficit. . . it’s not sustainable.”