Afsar Ebrahim, Executive Director of Kick Advisory Services : « It is not appropriate to increase taxes in a period of crisis »

Getting over the severe economic crisis will require efforts at every level. Through this interview, on the eve of the Budget 2021/2022 presentation, the Executive Director of the Ebene-based Kick Advisory Services highlights what are our concerns and immediate targets. He stresses on the fact we need to shift to more pragmatic approach when it comes to business. Prospecting new avenues of boosting state revenue is also suggested.

As a seasoned professional in the private sector and advisor to corporate, do you share the view that Budget 2021/2022 is the most important since independence? Why? 

I am not old enough to be able to make that statement. However, what is true though is that we are facing a severe economic crisis emanating from a pandemic which has brought the global economy to a standstill. We are a small island. So far, we have properly managed the health crisis compared to some bigger economies. Having said that, the trade-off of being Covid-safe has been an unprecedented economic crisis. Today, there is increasing scientific evidence that the only way out is vaccination as the epidemic will just not go away. Now, we cannot let our economy, which was already in a precarious situation pre-Covid, face a major uphill battle. 

About 25 % of our economy is at a standstill. This is reflected in less export proceeds and lesser foreign currency earnings. It is adversely impacting the depreciation of our rupee. Hence, it is resulting in higher import bills. As a trading nation, this is a cost that cannot be afforded anymore. We really need foreign currency earnings. The non-opening of our borders may be more damaging than the actual health crisis. This budget should give us the green light and the message should be loud and clear: herd vaccination is the national short-term target, and we are open for business.

By 25 % of the economy at standstill, you are referring to tourism, an industry fighting for its survival. Reopening of borders is the only way to revive this 63-billion-rupee industry. Yet, we must make a choice, economy versus protecting the population. There is resistance to vaccinating.

There is no other choice than reopening the borders as we cannot afford to shut down a quarter of the economy. The adverse impact on the foreign currency earnings needs to be addressed. Although it will be a while before we reach the 63-billion-rupee level of pre-pandemic, we must act now otherwise the economic crisis will be too deep and may be beyond repairs! The vaccination is the only way we can be protected against the virus and is the safest way to prevent collapse of the healthcare system like in many other countries. The inoculation process needs to be accelerated. And the government must lean on the large private sector employers to ensure this program hits the fast gear. 

How can we step up our game and cut the time lost with regards to Seychelles and Maldives?

Seychelles have taken a lot of right steps including having an edge on communication. We can do better but we must get going. I am confident that once we open up, the demand will come back with a vengeance, and this will also have a positive impact on the welfare of the people including their mental state. However, the success of our opening of borders is coupled with the relaunching of Air Mauritius, our national pride, and the driver of success of the industry. This crisis has created an opportunity to restructure Air Mauritius and to review our air access policy. As Winston Churchill said, “Never let a good crisis go to waste.”

Although our exports sector has rebounded from lower exports in first half of 2020, we are still short of new markets and enhanced capacity to rise in the value chain. What is needed in the short and medium terms?

Our export sector has shown great resilience. We have benefitted from having smaller number of operators with better financials that have helped us weather the storm and inbuilt a certain degree of toughness. It is also true that the battle of productivity is being won thanks to imported foreign labour. There is nothing wrong with that if the social contract is complied with. We also need to attract new players that can start Manufacturing 2.0. Among existing players, very few can go up the value chain. The challenge for exporters has been access to bank finance. Their balance sheets unfortunately are skewed and make leveraging complicated. It is high time we have a trade finance institution which falls outside the Banking Act that understands trade and willing to finance the whole value chain. There is a need to shift the focus from financing the client to financing the transaction, the paradigm shift from Know Your Client to Know Your T (Know Your Transaction). This financing will only work if supported by insurance policies against supplier and end consumer. The only risk to lender will be the performance of the borrower in delivering on its orders in terms of timeliness and quality. 

" This budget should give us the green light and the message should be loud and clear: herd vaccination is the national short-term target and we are open for business. "

For our exports industry to thrive, connectivity is key. So far, we are not the best in terms. Your views? 

As we are looking at enhancing our exports, i should stress on the importance on having air and sea link which are competitive. As an island nation, logistics is a key competitive advantage for our import and export of goods and services but of late this competitive advantage has been eroded. We must focus on ensuring competitive logistics for our nation competitiveness. Also, when referring to exports we should also include exports of services and of equal importance maintain our legacy of a trading nation with our freeport activities. This sector can also be a catalyst for another boost for our foreign currency earning.

Let’s shift to public finances. Public debt is inching closer to 100% of GDP level. Can the National Treasury afford to be further indebted to finance its forthcoming budget or should the National Treasury take it as a golden opportunity to restructure its debt and cut down on unnecessary public expenses?

This is easier said than done. We are the welfare state par excellence: free healthcare, free education, free transport (to a large extent) and high level of old age pension. Where do you start the cut? These are the major expenses. What we must ensure is procurement which is Value for Money. The Government Audit Report is explicit with regards to where the leakages are, and here we are not talking about Central Water Authority pipes here (pun intended!). 

In fact, the Government has gone out of its way to provide social measures in the wake of this pandemic by not only supporting the distressed businesses through the Mauritius Investment Corporation - whether you agree with the International Monetary Fund or not is a different issue - and through the wage assistance schemes. If government had thought only about affordability, then we would have faced a social crisis. 

This pandemic also brings a golden opportunity to restructure. It is also true that the tax collection may not be sufficient to fill the coffers as economic activity is subdued and at the same time demand for government support is increasing. It is high time to restructure the assets that the government owns. This is key to unlock value and provide the platform to enhance investment and reduce debt. Just like many corporates, future cash collection will not be enough to cover the level of debts without assets disposal.

You mentioned the IMF recommendation that the Mauritius Investment Corp be moved from the Bank of Mauritius to the Finance ministry. Isn’t it too late? Such a move would further strain public finances?

The purpose of MIC to come to the rescue of distressed businesses is commendable. Whether the current structure is correct or not is open to debate. We must learn from the 2008 financial crisis and its rescue measures. What IMF is criticizing today is what was done by the Federal Reserve in its famous bailout post the crash of Lehman Brothers. We had our own Stimulus Package We can certainly think of a smarter way and rethink the structure of MIC which keeps its objectives intact and the same time, meet the requirements of IMF. It’s never too late to improve.

On the fiscal side, the Finance ministry increased the solidarity levy and introduced the Contribution Sociale Généralisée, provoking much debate. Should these taxes be maintained/increased? If yes, what would be the impact?

It will be interesting to see the level of tax collection from the Solidarity Levy. I am not sure if the collection has been to the government’s expectation, as the economic crisis has affected many businesses’ ability to pay dividends and many senior executives have had their earnings curtailed. In a period of crisis, it is not appropriate to increase taxes, despite the high temptation to do so, because the earning capacity is already on a declining trend. Increase in tax is counterproductive in a downturn. In fact, it should be used as a leverage to increase confidence and investment. The CSG is a matter being debated in court, so it is not appropriate for me to comment. All I will say is that there is the cardinal principle in ensuring competitiveness of a nation and of its enterprises. Our focus should shift from ease of doing business to cost of doing business as bureaucracy does not help competitiveness.

" We can obviously target more High Net Worth tax residents which itself will help to increase the tax collection but more importantly will create a new dynamism in the economy. "

Now, we can also keep the tax regime unchanged. How will it help the economy? Moreover, could an attractive tax regime bring more foreigners to live in Mauritius? What’s the category of foreigners are we looking at? Middle income earners from Europe or people needing wealth managers and an executive array of services?

It is a balance of a trapezist between keeping the tax as low as possible and to generate more funds for the government. Proceeds need to increase. Direct taxes generate Rs 10 billion on a total of Rs 99 billion, and they are contributed by 120,000 taxpayers. It is not a question of increasing the rate or get the existing numbers to contribute more as it would be counterproductive.

We rather need to attract new tax residents through immigration. We can obviously target more High Net Worth tax residents which itself will help to increase the tax collection but more importantly will create a new dynamism in the economy. Let’s assume we attract 5,000 upwardly mobile professionals (not retirees), this will not only broaden our talent pool and skills base, but should they be spending Rs100,000 per month, it implies an incremental Rs6bn expenses in a year. This should boost demand in our domestic economy and help Value Added Tax collection significantly. We should be like Dubai or Singapore - our competitors as International Financial Centres - in attracting talent with cutting edge skills in Biotech, Crypto, Fin Tech and Technology in general. This is what we need to take the country to another level. 

End of 2019, Mauritius would lay much emphasis on its financial services sector, the notion of being a major hub in the making, a link between Asia and Africa. Now, we are grey-listed and blacklisted. Questions are stacking up by the day. What must be done so that we regain credibility in the highly competitive offshore world? 

Inclusion in this grey list has been an unfortunate incident. Government and institutions have been working hard to get us out of the list. No efforts have been spared. Nonetheless, this inclusion seems to be part of a bigger political game which is beyond comprehensions for finance professionals. We are a jurisdiction of substance and repute. We have top-notch professionals, world class banks, great service providers and an independent judiciary which makes of us the complete package”.

What do you mean by a bigger political game?

We have been modest in our marketing and at times even shy to proclaim our competitiveness. We have been bullied by friendly nations and yet our response has been lukewarm. Hopefully, we shall review our “go-to-market” strategy with maximum impact and grow our brand as a nation that has a lot to offer. We need to have a focus marketing and promotional activities to establish our image which has been battered of late. We need to re-establish the Financial Services Promotion Authority, a dedicated marketing machine.

Could we become a certified hub and back office for the global business?

Once we are out of the blacklist, there will be exponential growth in this sector, which has shown resilience even in adversity, with small growth. The financial services sector has the ability to pull the whole economy to sustainable growth, based on which global businesses can offer ample opportunity to the emerging talents and University leavers. It is a question of time, sooner rather than later, before good days will shine over the Mauritius IFC.

" Inclusion in the grey list has been an unfortunate incident. (…) It seems to be part of a bigger political game which is beyond comprehensions for finance professionals "

We can’t end without talking about small and medium enterprises are always high on the Budget agenda. Yet, the main complaint of lack of proper financing never abates. How far do you agree with such a statement?

SMEs, as they are known, have benefitted from funding over the last 20 years. There has been a lot of money that has been poured by successive governments into SMEs. Yet, we have not witnessed enough success stories or even stable growth compared to the investment made in them. Very few small businesses have become medium Enterprises. Very few medium Enterprises have become large ones. 

Hence, we need to address the cause and the answer does not lie in government making cheap debts available. Debt is debt regardless of cost and even at zero interest rate, it still has to be repaid. Silicon Valley has been built on equity, not debt! If you look at the success stories of Offshore Management Companies, a new industry started 30 years ago, all started as SME and have been built into powerhouse that have attracted multinationals like IQEQ, SANNE, OCARIAN, APEX to take them over. 

There is value creation every step of the way and none has been built on debts. They have been equity financed and the results are here for all to see. There was also thought leadership, entrepreneurial flair and technical ability which has made those SME the established players they are today. Instead of pouring debt by government, the latter should encourage an equity culture which will address challenges of SME: Mentoring, Transparency, Accountability, Leadership and Governance. 

Fiscal incentives should be given to investors to provide equity to SME and annual tax allowance against the investors’ taxable income over a maximum period of five years. The capital gains on exit will be tax-free and the dividend income will also be tax-free subject to solidarity levy. This is the sort of financial engineering needed by SME to provide the strength in capital structure to boost the balance sheet.