With a public debt approaching 95% of our Gross Domestic Product (GDP), and considering a budget deficit of 5% of GDP, the State risks finding itself in a vicious circle of debt. This phenomenon corresponds to what economists call the snowball effect.
A budget deficit means that the public expenditure exceeds revenue. To finance this deficit, the state has to borrow, for example, by issuing government securities. Thus, a budget deficit leads to an increase in public debt, an increase in interest charges on loans, and thus more debt, and more interest to be borne by future generations. Like a snowball that swells, the debt risks becoming unsustainable. This is especially true if the debt ratio exceeds 60% of GDP, or the budget deficit exceeds 3% of GDP, or the economic growth rate is lower than the debt growth rate.
Budget deficit of 5% of GDP and debt ratio of 95% of GDP
It is, for this reason, that the Minister of Finance has assumed of 9% GDP growth in Mauritius for the fiscal year 2021-2022. If this assumption does not materialize, there is a risk that the accumulation of debt will not be sustainable in the long term: a real danger.
According to the 2020-21 budget, the Mauritian economy recorded a 14.9% decline in 2020, with the tourism sector being the most affected, due to the closure of the borders. The Chief Financial Officer expressed optimism that growth would resume, given the reopening of the borders through a massive vaccination campaign. He also emphasized the catalytic effect of public investment in various projects – including a new Administrative City, a dam at Rivière des Anguilles, road projects, the Grand Bay sewerage project, the construction of 12,000 social housing units, the building and expansion of schools, a modern eye hospital and drain projects.
Mauritius’ economy is once again at a crossroads. Balanced and sufficiently strong growth must be maintained, or it will risk getting caught up in a debt crisis. It is like walking on a razor’s edge!
