Reply to Defi Media article of 11 August 2013 and News on Sunday 16-22 August on Debt
Following your article, your readers may find it useful to consider the following facts and clarifications:

We agree that all countries should be worried about excessive public debt. This is why in 2008
Government for the first time in our history adopted a Public Debt Management Act (PDMA) that set
the targets for Debt reduction.

The good news is that the Act is working. This is why excessive debt is not a concern for our country
according to the specialists of debt. Moody’s has in fact upgraded us at a time when many countries
have been downgraded on debt concerns. Moreover, the positive evolution of debt is clear in the table
below.

To better understand the assessment of debt experts, it is useful to consider the obligations imposed
by the PDMA. The PDMA uses two definitions of public debt:
o Total Public Sector Debt; and
o Discounted Public Sector Debt.
Discounted Public Debt evaluates Total Public Sector Debt for the fiscal risks associated with debt of
para-statals and state-owned enterprises. Accordingly, this debt is discounted whenever the fiscal risk
is small. For operational purposes of adherence to the provisions of the PDMA, it is discounted Public
Sector Debt that is relevant.

In practice, the two measures of Debt usually follow the same trends as indicated in the table below.
Total Public Sector Debt (as a % of
GDP)
Total Public Sector Debt Discounted
for the purpose of Debt Ceiling (as a
% of GDP)
05/06
69
06/07
63
07/08
55
08/09
57
Jul Dec 09
60
2010
59
2011
59
2012
58
Jun-13
58
2005
2006
2007
2008
2009
2010
2011
2012
Jun-13
64
61
54
48
56
55
54
53
54

The PDMA requires Government to reduce Discounted Public Sector Debt to 50% of GDP by 2018.

Government fiscal policies have been consistent with these legal provisions. Consequently,
Discounted Public Sector Debt has been reduced very sharply from 64% of GDP in 2005 to 54% of
GDP as at June 2013, as indicated in the table above.

Clearly, our level of public debt is not only well below the internationally accepted threshold of 60%,
contrary to the statement in your article, but is on a declining path.

A serious assessment of public debt and debt sustainability requires the use of appropriate statistics
and ratios. In particular, assessment of public debt should be based on its share to GDP rather than on
absolute figures. Debt is a positive means for individuals, companies and countries to finance
expensive items such as a house, machinery or a road. Moreover, debt is only a problem if it cannot
be repaid. To understand better why ratios matter and absolute figures are irrelevant, the following
example could be considered. If the income of person A is Rs 100,000 per month and he takes a loan
of Rs 1 M, with a monthly repayment of Rs 10,000, his repayment ratio (% of income used for
repayment of debt) is 10%. On the other hand if person B earns Rs 10,000 per month and takes a loan
of Rs 500,000, with a monthly repayment of Rs 5,000, his repayment ratio is 50%. If we use this type
of analysis, we would conclude that person A is very badly off because he owes Rs 1 M, whilst
person B is twice as well off on debt because he owes half that amount. In reality, once we consider
the capacity to pay, everyone would agree that person A is in fact not only better off, but with
manageable debt. In contrast, person B faces financial disaster, which a simplistic analysis of absolute
debt would overlook.

This point is both elementary in economics and crucial for a good understanding of debt issues. Thus,
it is worrying to observe that the same mistakes of analysis are routinely and widely made in many
other articles on debt and other related discussion forums.
Once we use the correct metric, it is clear that our debt level does not pose any threat at this stage –
which is one of the indicators of resilience. In fact the level of debt is much lower than the debt levels
in many countries in the rest of the world including, most of the Euro Zone nations, US, UK, India,
Brazil. In these countries debt ranges from 66.8% to 106.5% compared to only 58% in Mauritius.
An increase in absolute public sector debt is a normal phenomenon even for the best managed
countries in the world, and should not be a cause for ringing alarm bells. For example, in Germany
public debt has almost doubled from 1.2 trillion Euros in 2000 to well over 2 trillion Euros over the
12-year period to 2012.

More important than general aggregates is the purpose for borrowing. Greece and other countries
have run into trouble by borrowing to finance consumption and unsustainable increases in public
sector expenditure. In our case, our borrowing has largely been driven by the need to modernize,
upgrade and expand our public infrastructure. Against the increase in public debt in absolute terms
we also need to set off the massive increase in public investment since 2005.

MOFED is well aware of the need to reduce vulnerabilities related to public debt. In this regard, our
Debt Strategy is focused, inter-alia, on minimizing cost of borrowing to the public sector and
smoothing the debt profile through the use of longer term debt instrument to further reduce our
exposure to external shocks. It should also be noted that as at June 2013, nearly 78% of the total
public sector debt is held locally. This is why we face little risk of the type of debt crisis that afflicted
Brazil, India, Indonesia, S. Korea and Thailand amongst others. In these countries large amounts of
foreign debt became difficult to service when the exchange rate suffered unexpected depreciation. We
have demonstrated a good level of resilience in that we have been able to keep a low exposure to the
international debt market, which is part of the reason for the upgrade by Moody’s.

It is the credibility of a country’s economic policies and the capacity to repay its debt, which
determine whether a given level of debt is sustainable or not. Our recent upgrade to Baa1 reflects
Mauritius scoring positively score on both of these metrics. In fact, our recent upgrade Moody’s is
largely the result of a positive assessment of our debt dynamics. In a report following the upgrade to
Baa1 published on 27 June 2013, Moody’s states:
“Mauritius has undertaken various steps to geographically diversify its export market away from
slow-growth European economies and towards faster-growing African and Asian economies.
Progress in this area will mitigate the economy's external vulnerabilities, thereby maintaining its
favourable external debt metrics.”
“With short-term debt having shrunk to 18% of the total debt stock from 30% in 2007, rollover
risk has diminished substantially. The government can rely almost exclusively on the very liquid
domestic debt markets, and its external exposure is modest, albeit increasing vis-a-vis
multilateral lending. It should be noted that its debt affordability (i.e., the interest-payments-torevenue ratio) has also improved from 21% in 2007 to 14% in 2012, primarily as a result of
lower interest rates and better tax collection.”
Similarly, the IMF notes in its latest Article IV Report on Mauritius: “The debt sustainability
analysis (DSA) shows a broadly positive debt outlook, as in the previous DSA. Both total public
and external debt are on sustainable trajectories and the results of stress tests indicate that debt
dynamics are resilient to most shocks.”

Considering all of the above, there is no reason to doubt the ability of Mauritius to maintain its
current debt level. In fact, our assessment (which is shared by the IMF) is that Mauritius is well
on track to achieve its target of bringing public sector debt below 50% by 2018, and possibly
earlier.
Research Team
Ministry of Finance and Economic Development
20 August 2013