The GM having recourse to the BoM: “It is a hold-up with complicity from inside!”

Avec le soutien de
Ramesh Basant Roi,former Governor of the Central Bank of Mauritius

Ramesh Basant Roi,former Governor of the Central Bank of Mauritius

For the benefit of our readers, would you mind telling us why the independence of the central bank is so important for an economy?
For the purpose of completeness, let me very briefly give you an outline of how this idea of central bank independence emerged in the 1980s. You will recall the oil price shocks of the 1970s. Monetary and fiscal policy makers across the world did never have any previous experience in tackling the financial and economic turbulence triggered by the unprecedented oil price shocks. The world economy suffered a protracted period of economic recession and high inflation rates. In short, the world economy underwent quite a good number of years of what had come to be known as “stagflation” and high unemployment rates worldwide. The persistence of recession and high inflation rates in the mid-1970s and early 1980s are said to be partly attributable to politicians, in advanced countries, agreeing on policy packages that had worsened rather than improved the world economic situation. Central bankers in those countries did not get the hearing they deserved; they and their stands were cast aside. The will of politicians had, as always, prevailed over central bank Governors’ understanding of monetary management and monetary policy making.

In spite of the continuing economic recession, Paul Volcker, the then Chairman of the Federal Reserve System, boldly disregarding criticisms from Wall Street, US politicians and the public at large took the bull by the horns and successively hiked up interest rate in the US to as high as over 18 percent in a strongly determined effort to bring down inflation in the US. I vividly recall how frustrated Americans had burnt the effigy of Paul Volcker as an expression of their utter disappointment with regard to the then rising rates of interest in the US. The acrimonious mood of the American people had not deterred Paul Volcker from relentlessly pursuing his goal. Volcker’s policy eventually paid handsome dividends. Within a short time span, there was a dramatic decline in the rate of inflation in the US and in the rest of the world. The achievement of price stability had paved the way for a strong resurgence of economic growth subsequently. This episode taught an important lesson to politicians and policy makers worldwide and, as a consequence, the seed of central bank independence was sown. Not only keeping politicians out of monetary policy making by central banks but also keeping out indirect political influence in interest rate setting was made the rule of the game and, in fact, made legally binding in many countries with sharpened taste for efficient and effective policy making.

But that was in the context of a specific situation when the world economy was beset by two unprecedented oil price shocks. Why is this idea of central bank independence so relevant for countries like ours?
Central bank independence is even more important for countries like ours. Politicians have a very strong inclination to lose their sense of responsibility and brutally misuse their authority over central banks. Political interests prevail harmfully over economic interests. I have known many politicians in Africa, including Mauritius, having gone for lavish pork-barrel spending during general elections’ time without any regard whatsoever to its deleterious impact on the economy. Pork-barreling is part of the folklores in Mauritius. Central banks that fall under the control of governments demonstrate greater tendencies to pursue low interest rate policy. Worst, when elections are in view, central banks are even called to finance budget deficits directly. While such a policy may relieve certain short-term problems like unemployment or difficulties in financing fiscal deficits, it ultimately results in higher inflation rates that require severe credit tightening in subsequent periods. I ask your readers to have a view of time-series of 3-month moving average data on money supply for Mauritius for the last 40 years. They will observe that around the periods of general elections that have been held in Mauritius, money supply has often ballooned. Additionally, independence is helpful to central banks in carrying out their regulatory and supervisory responsibilities in so far as they are well positioned to resist pressures for relaxing regulatory standards depending on political winds. These are two of several raisons d’être for central bank independence in countries like ours.

Would you clarify on what goes into the making of an independent central bank? A brief outline would suffice.
In all democracies of the world, it is critically important to have an independent central bank within government. In very simple terms, independence of the central bank is granted in law as follows:-

First and foremost, Government pulls out completely from monetary policy related decision-making. No one in Government is empowered to issue directives or dictate directly or indirectly or to influence by any means the process of monetary policy decision making. Government also pulls out from even other central bank decision making that somehow affects the process of monetary policy decision making. Note that in a democracy, Government and the Opposition party still have a right of information about the activities of the Governor and his two deputies. Central bank independence does not mean that the Bank is an island unto itself. After all, they are not elected representatives of the people.

The persons selected for the top jobs are exhaustively screened and are generally appointed for a period that lasts longer than the official term of the Government. Financial markets have to perceive the Governor as someone trustworthy, someone competent and someone who is learned and can be relied on to weather a crisis situation. He has to be a man of high character with an elevated sense of public duty. In fact, he has to be one of the most trustworthy personalities, if not the most, in the country for he presides over the management of the foreign exchange reserves of the country. In short, he has to be an exceptionally credible person, not a certified stooge or a smiling idiot. For instance, it goes against ethics to appoint a bad debtor as Governor of the Bank or to appoint someone without any clause in his contract that prohibits him from borrowing money from any financial institution or still someone who is deplorably incapable to write, even with mistakes, half a page on the Mauritian economy. The revocation of the Governor is made almost impossible. However, Government may get rid of him only in the case of misconduct appropriately defined in the central bank legislation.

A Committee known as the Monetary Policy Committee is established by law. The Chairperson is the Governor of the Bank. The members are generally persons appropriately qualified and known for their competence, integrity, probity and experience in the field of economics, banking, finance and related fields. As I said earlier, central bank independence essentially means that in the exercise of interest rate setting, politicians or their representatives must necessarily be out of the picture. It goes to say that there should be no representative of the Ministry of Finance or the Prime Minister’s Office in the Committee.

“I would support the idea of the Governor being made accountable to a Select Committee of the National Assembly (...) in the present row over the Budget proposal, the Governor could have been summoned by a Select Committee to provide clarifications and implications of the Budget proposal for the economy.”

Why is the need for a Monetary Policy Committee (MPC) when the Governor is expected to be the most competent person for the job?
There are two arms of macro-economic policy making, one is fiscal policy making and the other is monetary policy making. In all democracies, fiscal policy making falls in the portfolio of the Minister of Finance, an elected representative of the people. Importantly, the Minister of Finance is accountable to the people. But the person responsible for monetary policy making is the Governor, someone who is not an elected representative of the people. Yet, this person is entrusted with a highly sensitive portfolio of formulating and pursuing policies that affect the economic life of each and everyone in the society. The Governor is not an infallible person. To err is human goes the saying. The Committee provides the Governor with a framework for confidentially conferencing with hardened thinkers outside the walls of the central bank before a decision on interest rate policy is taken. I may venture to say that interest rate setting is, to some extent, thus democratized. In practice, the talented Governor, given his outlook and knowledge about the economy and finance, usually works it out into a one-man show.

You just said the Minister of Finance who is responsible for fiscal policy making is accountable to the people. To whom is the Governor, responsible for such a sensitive portfolio, accountable?
Independence of the central bank goes hand in hand with accountability. In a democracy, the Governor of a central bank cannot be independent without being accountable to a body. In some countries, for instance in the US, the Chairperson of the Fed is accountable to the Congress. He gives testimony to the Congress twice a year. And may be invited by the Congress any time to be questioned. In the UK, Australia, New Zealand, etc. the set up for accountability is different. In Mauritius the Governor, as per a judgment of the Court, is accountable to nobody. I would support the idea of the Governor being made accountable to a Select Committee of the National Assembly. As for instance, in the present row over the Budget proposal, the Governor could have been summoned by a Select Committee to provide clarifications and implications of the Budget proposal for the economy.

With independence of the central bank also goes transparency. I recall having once visited the website of the Bank of Canada and seen receipts of payments made by the Governor in a McDonald's outlet!!!

Nad Sivaramen in conversation with Ramesh Basant Roi.  

Is the Bank of Mauritius truly independent?
No. The BoM is far from being independent of politicians. De jure measures of independence do not necessarily reflect de facto independence.

Why do you say so?
Let me give you two key examples of why the BoM cannot be said to be independent of political influence. One is the composition of the members of the MPC. The Ministry of Finance has a representative as full member of the MPC. This goes against the spirit of central bank independence. The least said the better. The other is the weekly auctioning of treasury bills held at the BoM. In the auction committee there is at least one representative of the Ministry of Finance. The presence of the Ministry of Finance in this committee means that the borrower decides how much it will borrow and what rate it will pay for the borrowing. Have you ever heard about a highly indebted borrower who also decides what should be the lending rate? Do you call that market determination of interest rates? Do you call that central bank independence? Have a look at the amendments of the BoM Act in the last three years and find out for yourself the gradual erosion of the independence of the BoM. There are many more equally important aspects of independence that have yet to be covered in the BoM Act. Having said that, the only way central banks can achieve their goals is if their integrity is without question and people have confidence in the policies they pursue. At the end of the day, public confidence is their most precious commodity.

How independent were you as Governor of the Bank?
Wow. That’s a fitting question. I had an intellectually and professionally wonderful time as Governor of the Bank for five years with Hon Paul Raymond Bérenger in his three years as Minister of Finance and two years as Prime Minister. I also had an equally pleasant experience with the former Prime Minister, Dr Navin Chandra Ramgoolam. He had an irreproachable relation with and respect for the institution. Although the then BoM Act had empowered them to give directives to the BoM, they never did, formally or informally. In fact, they were both surprisingly very supportive of the Bank. Their meetings with the Governor were always on a one-to-one basis. The Cabinet Secretary or Financial Secretary were never around. I had a singularly cordial relationship and sound and healthy understanding with both of them. There was mutual respect. They bore in mind that the BoM is a key institution in the country. We rarely disagreed on policy issues having to do with the BoM. Wherever I disagreed, I was allowed to go my own way after fruitful discussions. No interference at all. Thus it was, perhaps because we belonged to the same generation and we happen to be around the same age and like-minded. It was a question of level. The former Prime Minister, Sir Anerood Jugnauth, too, never gave any directive whatsoever to the BoM. Like the other two former Prime Ministers, he appreciated full, frank and honest discussions. Admittedly, with Sir Anerood Jugnauth I was not that personally close. Our age gap had made me more reverent than friendly to him. I hope you get my point. I was, in fact, more independent that any piece of central bank legislation could possibly permit. It was a matter of trust, mutual respect, civility, credibility or something of the sort.

“Variation in the exchange rate of the rupee causes corresponding daily variation in the valuation of the foreign exchange reserves. It moves up and down every day like popcorn in a popcorn maker. It’s sort of a ‘theoretical’ or ‘notional’ profit that is not realizable. It’s not real money!”

I hope you have gone through the 2019-20 Budget Speech. The statement in the Speech about the Government having recourse to the BoM for early debt repayment and the document on detailed budget estimates have given rise to some confusion about the concept of Reserve in the balance sheet of the BoM. Is the Government dipping its hands into the foreign currency reserves of the BoM or is it drawing down of some other Reserve?
The statement made in the Budget Speech is as follows:- “We will make early repayment of public sector debt by using part of the accumulated undistributed surplus held at the Bank of Mauritius.” Clearly, the Minister of Finance is not at all referring to the foreign exchange reserves per se of the Bank of Mauritius. Should this by a stroke of imagination mean to say (which is very unlikely) that Government would acquire the foreign exchange from the BoM to extinguish part of its external debt liabilities, it will necessarily have to borrow in rupees (because the Government has run out of people’s money) to buy the foreign exchange from the BoM. In that case, Government would be contracting a debt to repay a debt, leaving the level of overall indebtedness unchanged. Worst, the size of the budget deficit would, of course, go up by the amount borrowed to repay the debt. Ratio of budget deficit to GDP would shoot up and that would be viewed as a poor budgetary performance of those who have been advising on budgetary policies in recent years. The debate about the government drilling the vault of the BoM for its foreign exchange reserves to repay external debt is, in my opinion, misleading and simply futile. This is definitely not the aim of the Government.

What the statement is actually referring to is ‘the accumulated undistributed surplus’ that the BoM is currently holding. This, too, is totally misleading. There is no such thing as ‘surplus’ in the Special Reserve Fund of the BoM and it has never been distributed and is not meant to be distributed. The so-to-say ‘surplus’ is found in a Special Reserve Fund (which is in rupees) in the balance sheet of the BoM. What goes in the Special Reserve Fund comes out clearly in the following example: say, for example, the foreign exchange reserves of the BoM stood at US$5.0 billion (equivalent to Rs175 billion at an exchange rate of US$1.00 = Rs35.0) at the end of a particular fiscal year. Assume for simplicity’s sake that there was no change in the foreign exchange reserves position of the BoM at the end of the following fiscal year but the exchange rate of the rupee vis-à-vis the US dollar moved to US$1.00 = Rs36.00. The rupee depreciated by Re1.00. The value of the foreign exchange reserves of the BoM in terms of rupees thus increased to Rs180 billion. The difference between Rs175 billion and Rs180 billion, that is, Rs5.0 billion represented a valuation change that goes in the Special Reserve item of the BoM balance sheet. An overwhelming proportion of the fund in the Special Reserve Fund is valuation changes of the foreign exchange reserves accumulated over the years. At the end of May 2019, the Fund stood at around Rs16.0 billion. Variation in the exchange rate of the rupee causes corresponding daily variation in the valuation of the foreign exchange reserves of the BoM. It’s a very volatile item. It moves up and down every day like popcorn in a popcorn maker. It’s sort of a ‘theoretical’ or ‘notional’ profit that is not realizable. It’s not real money. Materially, it does not exist. If it does not exist, the question of surplus and distribution does not arise. The sentence in the Speech is poorly crafted; it misleads.

Are you sure that Government does not mean to dip its hands in the foreign exchange reserves of the BoM for the early debt repayment?
This is how, as a former central banker, I read the sentence in the Budget Speech. I am absolutely sure about it. There is no valid reason why the Government would have to knock at the door of the BoM for an unfounded “surplus” when the domestic foreign exchange market is constantly flushed with foreign exchange. Amazingly, the BoM itself is unwilling to buy the surpluses on the market, right now. Yes, right now, at this moment. The magnitude of the surplus on the local forex market is mind- boggling. Isn’t is why the rupee has appreciated for so many years? Isn’t it why there is excess liquidity with banks for so many years? If at all there is a clean and transparent operation, the Government could as well buy it directly on the local forex market. Since the Government would be buying a hefty amount, the price could turn out to be favourable. As Governor of the Bank, I would have welcomed with great relief the massive purchases of forex on the local market by the Government. This would have alleviated BoM’s cost burden of sterilizing excess liquidity and prevented a weakening of the balance sheet of the BoM.

The fact of the matter is that the BoM is allowing the Government to misappropriate the “notional’ money. This money will not be lent but donated to the Government. As a result, billions of rupees will be indirectly created and taken out freely without cost. The use of the word “hold-up” in your paper should have been extended to include “with complicity from inside!”

For years, previous governors of the BoM have been referring to the weakness of the BoM balance sheet. This has been the reason that warranted government support to meet the cost of sterilization of excess liquidity. It now appears that the BoM has been hiding a surplus. Or, the government could be misleading the public when it comes to surplus. Which is which?
I have to reassure your readers that the BoM balance sheet is one of the most transparent central bank balance sheets in the world. Soon after I was appointed Governor, way back in 1998, I had made the Bank’s balance sheet very transparent. No fund is hidden in the balance sheet.

As far as I recall, ever since the BoM was established in 1967, it has never relied on Government finance for its operations and conduct of its core business. The Bank has instead always transferred part of its annual profit to successive Governments. The largest profits ever made by the BoM were under my stewardship. The BoM had transferred about Rs1.5 billion annually in the early three years of the new millennium. Historically, the BoM and the Ministry of Finance, with nuclear parity were always on collision course before Budget time regarding the question on the amount that needed to be transferred to Government. Whoever shot first, always died the second although the Minister had the power to issue directives to the BoM. In the year 2004, I did away with the annual quarrels by inserting a section in the BoM bill that 85 percent of the annual profits of the BoM is transferable to the Government. The remaining 15 per cent was left with the BoM to meet its operational expenses. Whatever is unspent by the BoM goes to the item on reserve in the BoM balance sheet. Over the years, the cost of operations of the Bank and the cost of conducting monetary policy have shot up dramatically. In the wake of the 2008 financial crisis, interest rates dropped worldwide. The return on BoM foreign exchange reserves dropped accordingly. The largest source of income of the BoM is income derived from its investment of foreign currency reserves. With the consequent contraction of income and the rising cost of operations coupled with the rising cost of conducting monetary policy, the BoM began to incur losses. The BoM had run out of money and I understand that the International Monetary Fund had advised the Ministry of Finance (MoF) sometime before 2015 to share the burden of financing the cost of conducting monetary policy. There was an agreement between the MoF and the BoM that was not given effect in 2015.

“The Prince who is not himself wise can never be well advised. Good advice, wherever it comes from, depends on the shrewdness of the Prince who seeks it...”

The BoM continued to incur losses. I had set up a new division at the BoM in 2015 with technically competent officers and assigned the exclusive responsibility to actively manage rather than passively manage the BoM foreign exchange reserves. The BoM made a sizeable profit in 2016-17, 85 percent of which was transferred to the Government. Ever since, the BoM has been incurring losses again. The BoM has been meeting the cost of sterilizing excess liquidity out of its Special Reserve Fund following an amendment of the BoM Act. But this is meant exclusively for meeting the cost of sterilizing excess liquidity under exceptional circumstances. In subsequent years, as its profitability improves sustainably, the BoM would have to refund the Special Reserve Fund. As is evident from the published balance sheet of the BoM, the Special Reserve that stood at over Rs20 billion slimmed down to Rs16 billion in April 2019. I emphatically maintain that the BoM is a loss making central bank. The idea of the existence of a ‘surplus’ is a figment of imagination. It is not a new political gadget for newly appointed policy makers to fool around with.

The BoM has issued a communiqué stating that it is common practice for central banks to use their international reserves to assist Government in respect of debt repayment. Is the communiqué telling us the truth?
Everybody is entitled to his own opinion, but nobody is entitled to his own facts. I read the communiqué at your request. When a document is designed to make untruths sound truthful and murder respectable, you strive to avoid optical illusion. I am familiar enough with the language and style of the Bank to detect that the communiqué has a strange smell. I suspect it has been produced outside the walls of the BoM.

The BoM tactfully avoids the true story and attempts to cover its bucket of defecated material with all the perfumes of Arabia. It suffocates the truth seekers. It’s a dark joke unworthy of a central bank. The word ‘assistance’ in the communiqué could mean that in countries where the supply of forex on the local market is scarce, the central bank makes it available to the Government for debt repayment, other payments and transfers but at a price. The point is that Governments actually buy the forex from the central banks as opposed to walking away with it without paying for it. It is certainly not a ‘dine and dash’ activity.

As I explained earlier, the issue is not about Government dipping its hands in the foreign exchange reserves of the BoM. Far from it. The issue is about Government misappropriating the accumulated ‘valuation changes’ which in plain language is ‘notional’ money in the balance sheet of the BoM.

What move does the Government make to obtain the fund from the BoM?
The MoF simply requests the BoM to credit the Government account maintained with the BoM itself with the said sum without the Government offering anything in return. An amendment of the BoM Act will shape it as “buckshish” to the Government. The former Chairman of the Federal Reserve System, Ben Bernanke, would have put it as, “helicopter money” falling from the sky.

How would the BoM finance its own operation and meet the cost of conducting monetary policy after the transfer?
Hmm, I guess this is where the music will stop playing for the BoM. The BoM does derive revenues from its operations but they are far from sufficient to meet the cost of monetary policy. The Special Reserve Fund will of course be wiped out. The BoM would, perhaps, have to seek assistance from Ministry of Social Security to meet the cost of conducting monetary policy.

But the Government is broke? Would the BoM have recourse to the marketplace for funds?
True, the Government is broke. It would be a disgrace for the BoM to have recourse to the marketplace. No wonder rumour is strife in the marketplace that the BoM has urged lead bankers to depreciate the rupee so that the figure for valuation of the BoM foreign exchange reserves in terms of rupees would be brought back from zero to its previous level. The flipside is that a depreciation motivated by the need to effect an early repayment of part of the external debt of the Government would substantially increase the rupee value of the foreign currency debt still outstanding!!!

Just to satisfy your curiosity, try to simulate in a simple equation the desired depreciation of the rupee as a result of the part payment of the external debt as announced in the Budget speech. Make an assumption that the forex reserves of the BoM have not changed. Find out the extent to which the rupee will have to depreciate if the valuation change of Rs18 billion needs to be restored. Get the rupee value of the external debt still outstanding at the depreciated exchange rate. Compare this figure with the rupee value of the external debt outstanding before the early repayment. Is it worth proceeding with such a decision taking into consideration the reputational damage to our jurisdiction? I would urge the Prime Minister to get someone outside his team of advisers to do the calculations and examine critically if the proposal as stated in the Budget Speech is politically and otherwise useful.

In that case, the depreciation of the rupee prompted by the decision in the Budget would be tantamount to a form of indirect tax on Mauritian producers and consumers. Isn’t it?
Of course. You are absolutely right. You have hit the nail on its head. Oh, “deplorable basket of economists”!!! Whatever is dished out as free lunches in our government budgets is actually never free. As Milton Friedman had put it, there is no such thing as a free lunch. Mauritian producers and consumers will have to pay for the lollipops, one way or the other. Do not defy the laws of economics. Central banking is not a ‘hit and run’ business. Sooner or later you will be punished for your sins.

What if the banks cannot depreciate the rupee because of the forces stemming from an abundance of capital inflows?
Stay hopeful. No worry, be happy. Have a bagful of popcorn in your hands and watch how the drama will be played out. I have said it many a time that no country has ever raised the standard of living of its people and maintained it by raising consumption expenditure without sufficient compensating increase in production. At the Bank for International Annual Meetings I once attended in the early 1990s, an irritated Governor of an OECD central bank, gifted with a rare sense of humour, had this to say: “In my country, fiscal rectitude is an unknown principle. Rectal fesstitude is the name of the game.’’

It seems like the short term treasury bills rate collapsed a few weeks before the budget. Is it a normal feature?
Check out who in the Ministry of Finance manages Government debt and who decides on the yields on treasury bills. I said it earlier that the borrower is also the setter of the lending rates. You should expect the most bizarre trends.

With the proposed method of an early repayment of part of the external liabilities of the Government, involving the BoM, would not the latter lose its credibility?
Credibility of the central bank reflects the credibility of the Governor. Credibility is earned; it’s not available for sale on the shelves of supermarkets. They are the mirror image of each other. This announced method of an early repayment of part of the Government’s external debt is yet another serious blow to the credibility of the BoM and, by ricochet, to the jurisdiction.

With the amendment of the BoM Act, government will have easy access to interest-free financial resources at the BoM. Should we be concerned?
Do some reading on macro-economic management in the ‘failed states’ of the world. You will discover that this happens in countries that are worse than banana republic. Those who fully comprehend what central banks stand for will surely find it as blasphemous as blasphemy in Saudi Arabia. Man of reason would expect an emulsion of revulsion. It is outrageous. There is every reason to go ballistic.

If you were asked to tender an advice to the Governor, what would you ask him to do?
You remind me of one of Machiavelli’s adorable lines: “the Prince who is not himself wise can never be well advised. Good advice, wherever it comes from, depends on the shrewdness of the Prince who seeks it and not on the shrewdness of the Prince on good advice.’’

You have worked with him for many years. In the best interests of the economy would it not be a kind move by you to tender some useful advice to him at this juncture?
Yes, we have been colleagues for many years. I have never seen him making material contributions, unlike several other senior officers, in any in-house committee meeting. Possibly, others may have seen him performing. Occasionally, he has been seen reading out figures from bits and pieces of paper. He has always worn the look of a sealed envelope without an address lying on the table. No hidden depth in my opinion. Oh, I have read about Albert Einstein having had the same characteristic look.

It’s nearly impossible for an economist to make himself understood to professionals without a first degree in economics in the accountancy profession when it comes to issues related to the technicalities of complex monetary management and monetary policy making. I seize this opportunity to draw the attention of all our politicians to a serious flaw in the ways key economic policy makers are appointed. There are only two arms of macroeconomic policy making, one is fiscal policy and the other is monetary policy. In nearly all countries the persons for the Governor’s position and for fiscal policy making position at the Ministry of Finance are selected from a pool of the best economists available in the country. In case the right profile is unavailable locally, Government heads hunt for the professional economists overseas. In Mauritius, the two persons occupying the two positions are unfortunately accountants.

Monetary policy making requires specialized skills with a thorough understanding of the domestic economy, the world economy and of the intricacies of the international monetary and financial system that has grown so complex. Fiscal policy is not simply about accounting and balancing the budget as the media have the habit of telling the public at large. It’s about major economic orientation and promotion of sustained economic development. It’s about restoring internal and external balance, that is, about economic stabilization and it’s about equity, that is, about fair income distribution in a society. It is too much to expect some accountants to understand the monetary policy and fiscal policy nexus. These two positions are meant for seasoned economists, not for accountants or fake economists– of yesteryears.

In the latest IMF Article IV Consultation Mission mention is made of the need to strengthen the BoM forex reserves because of the risk of a withdrawal of Global Business Companies (GBC) bank deposits. Is our reserve position strong enough to prevent a disturbance caused by capital outflows?
In the event of a sudden massive withdrawal of GBC deposits (which is not unlikely in the kind of world we find ourselves), the forex reserves level would, by far, fall short of the amount that would be needed to maintain financial stability. The BoM is very much aware of this dilemma and hence the continuing effort to beef up its forex reserves position. In this respect, the BoM badly needs strong supportive policy actions from the Government. But the players at the BoM are playing for the opposing team, and scoring, too. Isn’t it match fixing?

What in your view are the biggest risks to the Mauritian economy and how can we tackle them when fiscal policy appears to be cash-strained? What do we need to do?
Let me highlight a few points for your readers to ponder over. In the 1970s, the Government had a comprehensive development strategy with emphasis on export promotion and import substitution. In the 1980s, the Government aggressively went for trade and financial sector liberalization. A carefully crafted exchange rate policy combined with a very prudent wage policy gave rise to a buoyancy of economic activities. Port Louis Stock Exchange was established. The Offshore sector was launched in 1989. Leasing activities were introduced. The Free Port became operational. In the 1990s, while economy suffered from ‘reform fatigue’ we lost our preferential access to foreign markets. We did not do much to sustain the competitiveness of our economy. The quality of our human capital did not keep up with the exigencies of emerging challenges posed by globalization. Our effort to direct human capital into the world of digital technology turned out to be very timid. Meanwhile, more than sufficient capital inflows caused an overvaluation of the rupee that lasted for a few years; it harmed the economy. Do we currently have a meaningful and comprehensive economic strategy that would put back our derailed economy on a path of sustainable growth in the future? If so, what is it? I don’t see one as I did in previous decades. As I have said it before, something terrible happened to our national character since the triumphal glow of the late 1980s. A central will, a central intellect and a national idea are palpably missing.

Since 2006 we have become over-dependent on capital inflows for our economic survival. Has anybody in the country dared to question the source of the capital inflows? I have probed into and I would tend to say that I do know. There is evidence that I did try to stem questionable flows that did not receive approval in some quarters. One has to be utterly stupid to believe that the inflows are attributable to the IRS scheme only. There is more to it than meets the eyes.

All the export sectors are underperforming. Two of them are on the way to extinction. Our offshore sector, 30 years after it was established, is no longer careering as in the years prior to 2015. The biggest risks? First risk is a balance of payments crisis. Second risk is our inability to eventually repay debt without severe austerity measures. The current debt level would require a growth rate of 5-6 percent on a sustained basis, failing which hard austerity measures would need to be introduced. Is a growth rate of 5-6 percent achievable on a sustained basis, more so when the Government is encouraging a ‘hollowing out’ of the economy? Capital inflows have made many of us believe that the economy is working for us; we should not be working for the economy. This attitude is perceptible. Stay prepared for a crash landing should capital inflows thin out.

Aren’t you too pessimistic?
Before stepping out of the BoM in January 2018, I had mentioned to a couple of staff members to keep a watch on how independence of the Bank will be fast undone. “You are being pessimistic.” This is what I was told. I now look back and say to myself that I was right. Isn’t pessimism morally superior to misplaced optimism?

How do you, as a former Governor, react to this decision of the Government?
Frankly, it seized me with a visceral force. It’s absolutely abhorrent, disgusting I would rather say. Anyway, such a state of our Government finance was predictable. I have hinted at it in my past interviews in your paper. First, this decision can be inarguably construed as a certified Government statement that it has run out of people’s money. Second, it’s an act of desperation, the financial equivalent of a derelict selling blood for booze. If the Government had been a private enterprise, it would have been on receivership already. This decision is a fiscal adventure that should have been avoided. Do you still recall my very measured statements about the deleterious impact of huge fiscal deficits on the economy and the ‘deplorable basket of economists’ in my 2017 end-of-the year Annual Address to Major Economic Stakeholders? They were not at all whimsical statements. They were a cri du Coeur.


Lundi 10 juin 2019 : dernier budget de l’actuel mandat du Premier ministre et ministre Finances, Pravind Jugnauth. Retrouvez tous les articles, les vidéos, analyses, sur cet exercice financier national.

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