By Mubarak Sooltangos
There have been loads of articles written, mainly by economists and finance professionals, since the start of the Covid pandemic. If we take stock of what is the real substance of these articles and opinions in this period of difficulty where deep thinking and quick initiatives are of the essence, we invariably come to the conclusion that the only information given by these experts is an état des faits of our economy without any real analysis of its causes and, obviously, not an iota of solution proposed.
The mathematical accuracy of the figures mentioned may lure us into the perception that this has been the product of voluminous and deep thinking. Not at all, the major part of these figures is contained in published economic data, is available on internet, and has been largely copy-pasted. The general message given by these experts is that we are in deep difficulty followed by empty statements like “we should protect our SMEs”, “we should optimise our resources”, “we should invest in productive sectors” without elaborating in the least. Nobody says, for example, maybe for lack of courage, that we should bring an immediate stop to dubious government investments in sumptuous infrastructure which we cannot afford and which do not bring GDP growth, except for some job creation in the construction stage.
There is a lot of rhetoric on the state of the economy, but no answer to what should be done. If we listen to economy and finance professionals piecemeal, we come to the conclusion that we should not borrow, we should not resort to money creation, we should not increase interest rates, we should not deplete our foreign exchange reserves, we should protect household purchasing power, we should not resort to protectionist measures because this would “annoy” the World Trade Organisation (WTO). In the meantime, subservience to the same WTO has sent our import substitution industry to the gallows.
I personally presided over the setting up of the only table salt refinery plant 20 years ago and it is now closed because the product price is uncompetitive. Make a calculation of the excess money our population would have spent if import of salt was banned, and we will not go beyond Rs 10.00 per household per month. In the meantime, our salt pans, which also have a cultural, historic and emotional value have been invaded by waist high wild grass. Enough to break any heart with some patriotism in it.
The rhetoric can sometimes turn into a show, like the competition between economists to calculate what will be the expected GDP growth next year. A totally useless debate over figures which have nothing productive in them. What we are interested in is how to produce growth, create employment and raise purchasing power, but everybody is clueless on these issues.
Another show is the quarterly determination of the Bank of Mauritius Key Repo Rate, with the media involved in this masquerade. How does half a point increase or decrease in interest rate help in materialising the results we want from the economy? It does neither promote savings, nor discourage it, nor promote investment and even less discourage investment because all business people table on return on capital employed (ROCE) averaging 20% before they decide to invest.
Another widely talked about subject is the constant fall in national savings rate, because this is considered to be a vector of investments. Our savings ratio has come down to 6% of GDP and all ex-finance ministers ring the alarm bell to highlight the failure of those in office, without perhaps understanding some basic fundamentals, namely, 1) what are the constituents used in the calculation of this rate, 2) what are the important constituents that are not taken into account, 3) what are the factors that influence the creation or the destruction of savings, and 4) what eats up savings? Let us examine them one by one.
The constituents of national savings
Experts and books say: “The national savings rate measures the amount of income that households, businesses and governments save. It essentially looks at the difference between the nation’s income and consumption and is a gauge of a nation’s financial health, as investments are generated through savings.”
However, there are enormous misconceptions about the nature of the word “savings”. Firstly, statisticians collect data about “monetary savings” only, that is, savings in bank accounts of households, pension funds and profits generated by companies. Including government savings into this total would be a misnomer, because most governments in the world are over spending, as evidenced by chronic budget deficits everywhere.
The more liberal and advanced the welfare state is, the lesser people will feel the need to save.
There is a more than an obvious paradox in the published figures. I would like to understand how our national savings have come to a low of 6% of GDP, and at the same time, the Bank of Mauritius reports “an all-time high of Money Supply (M2) of USD 17 billion in December 2020”. With loss of employment, reduction in household income, reduced disposable income of households due to a 10% depreciation of the rupee, drastic reduction in corporate profits due to a severe contraction in demand, we would all have expected our national savings to take a severe blow. If yes, where does the excess money supply generated in 2020, in the middle of the pandemic come from? True, a big component of money supply is money created by the banking system through new customer borrowings, but we have to come to the reality that new bank lending has also considerably decreased in 2020. The likely conclusion is that the published savings rate is not based on realistic information.
We have seen above that according to the definition of experts, savings is calculated by the difference between income and consumption. What is misunderstood as being “consumption” in this definition is that not all income which is spent goes unto consumption. Money spent out of income also goes into investments, namely housing, land and buildings, participative investment in businesses and investments in stocks and shares on the stock exchange. All these important elements are lumped together with living expenses into what is called “consumption” and are not factored in the calculation of national savings, thus grossly understating the savings rate. What is also overlooked is savings deposited in overseas bank accounts which can be repatriated at any time. Finally, what is considered as private businesses’ savings does not include new investments, but the depreciation of these new assets is deducted from their profits causing a mathematical and totally virtual reduction in their savings. It is a real paradox in the science of econometrics which I fail to understand.
True, not all investments are liquid and generators of GDP, like housing and real estate, and these are not routed through the banking system to finance other productive investments. They are nevertheless stores of value which can be converted into cash at a future date for productive investment. Or else, these assets can be pledged as collateral with banks to unlock cash which can go into productive investment. There may be a case for not considering these sorts of investments as savings available for investment, but all the other types of investments stated above are real inputs into the productive chain.
My conclusion, therefore is that what is effectively classified as savings in our economic indicators is a strictly monetarist view of savings and very far from the real propensity of the country to save.
The factors influencing creation and destruction of savings
Instead of constantly ringing the alarm bell for our decreasing savings rate and painting a doom scenario without proposing anything concrete, it would have been better, in the first instance, if the elements that create or destroy savings are singled out and acted upon. Again, what we see is a perceptual état des faits without any solution being proposed.
The easiest beaten track route would be to increase interest rates, and by the same token, deal a blow to indebted businesses and households. But, viewed seriously, interest is in no way a vector of savings. Savings is the resultant of disposable income and no interest rate, however high, can generate more disposable income. The other theory that higher savings interest rates have a positive effect on decreasing consumption to save money for a remuneration is another fallacy. In 90% of cases, consumption is based on necessity and cannot be compressed. Furthermore, I do not see any household decreasing its consumption to earn a meagre additional interest rate of a couple of percentage points. It would perhaps have been a reality if saving interest rates were of the order of 15-20%, but here we would be in the realm of dreams.
The current system rewards risk averseness and allows additional wealth to be built on existing wealth with no effort.
The real factors of savings creation are:
- An increase in income via salary hikes and corporate profits, which can be accentuated by a reduction in taxation rates to generate more disposable income.
- The uncertainty of the future, which carries potent risks like job losses, illnesses requiring expensive surgery and high inflation rates likely to bite into the purchasing power of retirement pensions over time.
- The certainty of some future needs like overseas holidays, weddings, buying a house or paying for the tertiary education of children. This urge to save for the future may also be to escape the necessity of borrowing heavily at high interest rates when the funds are needed, even if credit is easily available, but this is only the concern of a wise minority.
The factors that reduce savings are:
- Increase in salaries which lag behind increasing household expenses due to increase in number of family members depending on the same income and due to inflation having various origins.
- Availability of easy credit, which gives an assurance that funds will be available through bank borrowing when they are needed at any time in future. This is an incentive to make less efforts to save.
- Availability of instant and 100% credit on purchases like household appliances, furniture, cars and even overseas travel (of late) which encourages a consumption which would have been deferred, had easy credit been available. In the meantime, funds kept aside from month to month to pay for part of these purchase would have constituted concrete savings. The propensity to spend on consumer durables is aggravated by the fact that sellers give up to six months moratorium before the first monthly instalment starts. Nowadays, there is even no necessity for households to look for credit availability before such expenses are envisaged, because the sellers do door to door canvassing with ready-made credit packages in hand. So do banks with whole teams on the road, so to say, to sell loans.
- The existence of welfare states. The more liberal and advanced the welfare state is, the lesser people will feel the need to save because the uncertainty of future needs are reduced, since a large part of it will be funded by the state in case of necessity. This argument is in no way a negative reflexion on welfare states, but it needs to be mentioned because it has a direct effect on savings.
- As paradoxical as this may seem, the abomination called interest is a destructor of savings because it gives access to easy credit. On top of this, it promotes speculation because any entrepreneur having locked himself in debt with fixed instalments is speculating on earning enough future profits to pay, not only his interest bill, but the borrowed capital with a pre-fixed reimbursement schedule. Had interest not existed, nobody would have lent money for no return at all. The reflex of any economist or banker would be to ask how an economy can function without the existence of provider of funds to entrepreneurs. Some intelligent thinking would convince them that every possessor of excess money would have invested it in concrete business. Those who are risk takers and have business acumen would have invested in businesses of their own. Those not willing to take high risks and not possessing entrepreneurial skills would have entered as equity partners with entrepreneurs in need of cash. Those who are more risk averse would have spread their investment over several businesses so as to do a risk-averaging. Those who would have wanted their investments to be quasi-liquid would have resorted to the stock exchange and invest in stocks with high liquidity.
This ground breaking theory will certainly shock conventional economists and bankers because they have lived in an existing paradigm all their life. Not all paradigms, even those having existed for ages, are the best of what we could call conventional wisdom. There is no special wisdom in a system where possessors of money are guaranteed a remuneration for no effort and no risk while an intelligent and daring entrepreneur, who is the life blood and future promise of any country runs the risk of losing everything he has invested, including his hard work if his business fails for reasons sometimes beyond his control. The current system rewards laziness and risk averseness, and allows additional wealth to be built on existing wealth with no effort. Is this any sort of meaningful philosophy of life?
The items that eat up savings are:
- A change in consumption habits and patterns, especially in low-income countries. This is a direct result of the quantum leap the world has witnessed in terms of means of communications. Communication in real time via satellite TV, internationalisation of traditional media, and especially social media have exposed the populations of poorer countries used to austere (and probably wiser) living to the higher standard of living of people in affluent countries. They have gradually increased their standards of living through equipping their houses better in terms of household appliances and other amenities. There is nothing wrong in this if part of disposable income is saved for this purpose. But such expenditure has made a quantum leap with the introduction of plethoric credit facilities. At the same time, globalisation has had the good effect of providing more jobs with better salaries in the process of delocalisation of manufacturing industries from Europe, Japan and America to low wage countries, and the bad effect of exporting the credit-based consumption habit to these countries. International banks and other powerful credit providers have done the physical job of putting this new selling and financing logistics in place. This is how the scourge called debt-based economy has reached new shores and internationalised.
- Non-financial people may be under the impression that a reduction in (official) savings rate means less investment on productive enterprises. This is only marginally true for two reasons. One is that important amounts of savings (as mentioned above) not accounted for in published figures, and which cause an understatement of the official savings rate, do actually fuel investments via the stock exchange. The second is that more and more businesses thrive on money borrowed from banks and subsist on very fragile debt to equity ratios. This has become an international trend and has polluted the whole world. Household debts and company debts, added to government debts have reached astronomical levels and the whole world is in debt slavery. Monthly repayment of diverse loans by households has become an end of month trauma, debt servicing by business companies leaves no money in the kitty to finance their growth and they are condemned to continue borrowing to survive in a world where constant change needs regular new investments.
Chronic government budget deficits
The magnitude of government borrowing shuts out productive private sector enterprises from credit availability.
Governments live under mountains of debts contracted to finance their budget deficits, year in, year out. The debt economy, fuelled by the practice of interest which gives access to easy money, is the root cause of a whole world collapsing after four months of inactivity due to the pandemic, because there is no cushion of existing savings or unused borrowing capacity to finance overheads in this period of inactivity. For those who say that the debt-based economy has been the vector of productive investment and wealth creation for years, the answer is to be found in the Chinese economic structure. It is not debt based, but equity based and this explains why it has been able to massively buy foreign businesses within its shores and in India specially, which were stranded for lack of liquidity in the middle of the pandemic. On top of being a quasi-cash-based economy, China lends money to 150 countries to serve as a vector to develop its export trade worldwide. So there are other paradigms than the western world paradigm, and the Chinese one has proved its worth.
There is also a theory which says that government budget deficits destroy savings. This is absolutely false. Budget deficits are an over consumption or an over investment by the government, but this has nothing to do with the savings generating power of households and businesses, i.e., what we call private savings. Budget deficits only increase government indebtedness because these deficits have to be financed by borrowings from existing savings generated by the economy.
However, in the process, the magnitude of government borrowing is such that it shuts out productive private sector enterprises from credit availability. The problem is compounded by the fact that lending to the government is a risk-free investment for banks, as compared to lending to business enterprises and it does not require the administrative hassle and cost of appraising and monitoring loans to a plethoric number of private businesses. We have in this situation the answer to the outrageous risk averse attitude of banks nowadays.
The negative side of this situation is that however hard governments try to sell the idea that budget deficits are an economic tool to inject money in the economy to beef up industrial activity and promote growth, the reality is that countries live in chronic budget deficit situations because of the sheer weight of the servicing of existing debts contracted to finance chronic deficits of past financial years.
As per pre-covid data, Mauritius creates (or rather suffers) a yearly budget deficit of 3% of GDP (Rs 16 billion) which has to be financed by new debts, largely because the cost of servicing of interests amounts to Rs 14 billion. How much money is left to boost the economy to create much needed growth? This unveils a story so far untold and unheeded.
Dangerous experimentation and spin doctoring
This diagnosis and analysis, though subject to debate, at least give a base for the start of a thinking process on how to increase savings to feed investment needs, among other things. I am not an economist, but you will have noticed the holistic approach to this analysis, which is what is needed for the management of a country. In short, we need multi-skilled decision makers with analytical capacity, ability to work in a team, humility to ask advice from others, a lot of common sense and who relegate political issues and management of public opinion to win elections to the place that they deserve.
We have changed focus from process-driven thinking to procedure-driven actions without the thinking.
The weakness of our country is that we have changed focus from process-driven thinking to procedure-driven actions without the thinking. Everything is pre-set by experts for subordinate staff to follow scrupulously, whatever the specific needs of a given situation are. This has killed all initiative to think and has established an aversion to go outside the beaten track which may involve more risks and certainly more thinking, but which is intellectually rewarding and result oriented.
Economists, central bankers, commercial bankers and other credit providers, accountants and business entrepreneurs are each working in their own bubble where their comfort zone lies. Outside this bubble, there is a vacuum which does not allow consultation and circulation of information. No wonder this leads to dangerous experimentation and spin doctoring, and this is the root cause of our stagnation for the past decade. This is aggravated by periodic ad-hoc catastrophic decisions like promoting growth by consumption in a country where 80% of its supply chain is found outside its shores.