In order to better understand the sad state of affairs at the Bank of Mauritius, it is important for readers to be well versed about how central banks should function. The primary objective and reason of being of a central bank is to help to bring about price stability to the country over a certain period and to ensure that systemic risks to the banking system are well managed and contained. In developed and emerging economies, the price stability objective is clearly defined and quantified by stakeholders and the central bank is made accountable for achieving this objective over a predefined period.
Typically, the Government and the central bank agree on the level of inflation that is consistent with price stability and the independent central bank then defines the best monetary policy framework that will allow it to achieve this objective over a certain period. Be it inflation targeting, exchange rate targeting or even nominal GDP targeting, the objective, which has to be clear and quantifiable, requires a clear communication strategy for economic stakeholders to be on same page. A central bank is not a company and cannot go bankrupt unless it has high foreign liabilities which means that its primary focus is not on making profits but on effectively conducting monetary policy which comes at a cost.
Without a quantifiable definition of price stability and a well engineered communication strategy however, monetary policy is largely ineffective and can turn out to be quite costly without any noticeable benefit to the country. The central bank also typically manages the foreign exchange reserves of the country which it typically accumulates as part of its monetary policy operations. In order to ensure that the Government of the day does not control the printing press, independence is not only guarantied in the law but in the way the Governor, other executive and independent board members and monetary policy committee members are screened, selected and then nominated.
Special and independent selection panels are setup led by knowledgeable experts in order to choose the best economists the country can lay its hands on locally or internationally. After a tough screening process and the Government and/or Parliament then nominates and confirms its choices from a pre-selected pool. Skin colour, cast, creed, the proximity of a candidate to occult forces or the need to have ethnic-based representation in technocratic posts have little place in the selection process. In order to ensure that the central bank functioning is not impacted by politics, the nomination periods go beyond an electoral cycle (and certainly beyond the current 3 year period in Mauritius), the nominees themselves avoid informal contacts with politicians while any conflicts of interest are immediately flagged. Politicians invariably focus on electioneering while central banks focus on the long term picture although a great dose of independence still renders them accountable to Parliament where they typically come to defend their performance annually.
The issue is not whether the central bank has made a profit or a loss but on why it has done so and whether it has been able to achieve its monetary policy objective or not. One of the main reasons why the Bank of Mauritius has made losses is precisely because it seems to have multiple and often conflicting objectives which drive up the cost of conducting monetary policy without any discernible benefit to the country. For quite some time now, it is clear to any economic observer that the central bank has been building up foreign exchange reserves in an attempt to weaken the Rupee. When a central bank buys foreign exchange, it puts Rupees into the system and if it does not fully sterilize this money, it creates excess liquidity. The supply of Rupees available for credit thus increases which pushes local interest rates lower. This should theoretically help to push the exchange rate lower. In the case of Mauritius, while the central bank was busy increasing the supply of credit, the realities of the real economy over the years has meant that the private sector has been demanding less credit.
The combination of higher supply and lower demand pushed rates further down, allowed the Rupee to depreciate along with the Euro in an attempt to provide breathing space to a reeling export sector but the lack of a formal communication strategy meant that the policy was only partly successful. However, this policy also created a huge disconnect between the Repo rate and market rates because officially the central bank is supposed to be focused on inflation which requires a certain level of interest rate depending on a quantifiable inflation target. Higher interest rates would in itself undermine the unofficial objective of having a weaker currency. In a country with an open capital account such as Mauritius, it can either do exchange rate targeting or inflation targeting. Doing both as has been attempted by the Bank of Mauritius given the huge accumulation of foreign exchange reserves has achieved little except for high sterilization costs in a vain attempt at defying basic economic principles.
In 2017, the Bank of Mauritius made a profit not only because it was able to consistently grow revenues from reserves since 2015 under the leadership of Ramesh Basant Roi but also because it also allowed a higher level of excess liquidity to remain in the system which would be consistent with a certain view on the level of the exchange rate. In 2018 however, the central bank tries to push interest rates higher by removing most of the excess liquidity but given the lack of a quantifiable and well communicated inflation target, it is debatable where it should have pushed these rates to. The central bank was tightening monetary policy throughout 2018 while global inflationary pressures remained largely subdued and even went as far as competing with banks’ deposits and investment companies in issuing more than MUR 9 billion of Jubilee bonds which has and will continue to cost the Bank of Mauritius dearly in the coming years with little in terms of tangible economic benefit to the country beyond political brownie points. The continued accumulation of foreign exchange reserves, the contradictory policy of removing excess liquidity created mostly by reserve accumulation itself, the odd policy of competing with commercial banks in issuing Jubilee bonds to help savers all point to multiple and often conflicting objectives that only drive up costs with little to show for it.
At the same time, revenues from reserves with the politically nominated Mr Googoolye and his deputies at the helm drops. The current Governor tries to justify this drop by claiming that 2017 was a year when the Bank, then headed by his predecessor, realized exceptional profits on the disposal of financial assets, but is buying low and selling high not part of the art of investing in the first place? As per the current Governor, reserves today have grown to more than USD 6.7 billion representing more than 11 months worth of imports. Should all revenues from reserves given the current size solely go to finance the rising costs of a mismanaged monetary policy and other costs including the salary of the Governor who today earns more than the chairman of the Federal Reserve of the United States with little to show for it?
Should the Bank of Mauritius not be more transparent on how it quantifies its mandate be it monetary policy or reserve management and given the size of international reserves, should there not be increased transparency on the way in which it is managed? Can political nominees who form part of the executive, board and monetary policy committee selected by the Prime Minister via an opaque process suddenly become experts in FOREX management and in monetary policy making? Mr Bheenick was an inflation hawk, Mr Basant Roi believed that the level of the exchange rate was important in an export oriented economy, while it remains unclear what Mr Googoolye believes in. Within the last 5 years, the central bank’s policy itself has consistently changed which can only add to market confusion. Should mandates handed out to Governors and board members not be longer?
The largest loss of all today is sadly not the accounting loss the Bank of Mauritius has made this year but its obvious loss of independence as a central bank in the eye of the market. If Mauritius wants to become a regional financial center of repute, it should perhaps first choose between keeping an increasingly outdated and nepotistic form of governance and one that is more consistent with the propaganda Governments like to promote in Mauritius.