In his inimitable style laced with imagery, Ramesh Basant Roi comments on the recent repo rate hike and the economic situation in the country and globally.

What’s your take with regard to the general trends of the economy?

A view from the cockpit conveys to me the following impression: what looked sizzling in the past now looks fizzling.

Could you come out of the cockpit to the passengers’ section?

O.K. Although the passengers’ section does not give a view of the horizon, let me outline the directions of the economy in very broad terms: in the 1980s our economy grew at an annual average rate of nearly 6 per cent. In the 1990s the growth rate averaged much less than 6 per cent. In the first 10 years of the 21st century, the growth rate ped to much less than 5 per cent. It’s a declining trend. For the year 2011, growth is forecast at 4.6 per cent – slightly lower than the latest average performance. The Mauritian economy is known to have some kind of inherent coping mechanism with an average lazy performance of over 5 per cent and not less. The inflation rate in the 1980s averaged 8 per cent it averaged 7 per cent in the 1990s and 6 per cent in the first decade of the 21st century. There is every reason to believe that the inflation rate in 2011will not make baby steps but will leap towards double digits.

This is why the Monetary Policy Committee (MPC) decided on Monday last to hike up the repo rate by 50 basis points as a measure to fight inflation. Do you agree with  this move by the BoM?

Yes, but you don’t fight a problem that is rooted overseas with a local policy tool. It’s definitely the duty of the Bank of Mauritius to combat inflation. But it is also its duty to see to it that a rate hike does not damage the prospects for growth, more so at a time when the economy is struggling to find its way out of the recent economic slow-down. The BoM is not only barking up the wrong tree, it’s in a different forest altogether.

Given the drastic increases in the prices of commodities, isn’t inflation the right forest to be?

As one of the over a million consumers in this country, I would totally agree with you. But as an economist and a former policy maker and decision maker, I would not in the circumstances. It’s indeed a futile attempt to fight the inflation under reference.

But this is what central banks do in all economies, especially Western ones.

I agree but in the West, an overwhelming proportion of households depend totally on bank credit for a living. Most consumers live beyond their means throughout their lives and the excesses are financed by continual borrowings from banks. Credit cards are instrumental in promoting overconsumption in the West. A rate hike in such countries makes access to credit more expensive. Consumption expenditure shrinks and the inflation rate decelerates as a result. A rate hike to fight inflation in these countries makes perfect sense.

In Mauritius, the situation is totally different. Mauritians, in general, are not dependent on bank credit for a living. Most households in Mauritius depend on their monthly income for their economic survival. When things become more expensive, they generally try to adjust their expenses rather than going for bank credit to finance the higher cost of living. They are aided by two protective clauses built into our system. It’s binding for employers to compensate for increases in the cost of living in addition to yearly bonuses. This is not a common practice elsewhere. Consumers do not feel the need to have recourse to bank credit and bankers in Mauritius are never prepared to finance consumption. Bank credit thus plays a much reduced role in the consumption picture.

Read the full interview on l’express e-paper.