Economist Ramesh Basant Roi has been in constant dialogue with l’express (on issues pertaining to the Interpretation of the Bank of Mauritius Act, 2004) since he left tenure as Governor of the Bank of Mauritius. His ongoing conversation with us touches today on the recent amendments of the Act and the one-off grant of Rs 60 billion through a Special Purpose Vehicle. From the get-go, we have endeavored to keep this dialogue as simple, non-technical, and pedagogical as possible, so as to facilitate public debate.
The amendments of the Bank of Mauritius (BoM) Act are already in force. What is your general impression?
A perfect storm of bad news. April showers brought May flowers - to only a few. Is there any other country, especially small island state, in the world, having freed itself of the pandemic, spending freshly issued hard cash by the central bank, equivalent to far more than 10 per cent of its GDP? Quo Vadis, Mauritius.
The dramatis personae in the gameshow are familiar characters. Like many keen observers, I was almost certain that the amendments of the Acts were foregone conclusions. I do not wish to dwell again in the three major amendments: the first one is about dipping hands directly in the vault of the BoM, the second is about dipping hands in the rupee-denominated notional item in the balance sheet of the BoM and the third is about dipping hands directly in the foreign currency reserves of the BoM.
I think it’s important to bear out pointedly that the Government has decided to take advantage of unlimited monetary financing of Government expenditure over an indefinite period from the BoM, free of charge and without repayment obligations. To use an obsolete BoM jargon, freshly created money will be made available ‘on tap’ to the Government. Government finance has been at ground zero for quite a few years; it does no more have the waves to surf on. The pandemic is the ex deus machina in the financial theatre to save the troubled Government finance.
BoM is the authority that sets interest rates. BoM is the authority that re-aligns the exchange rate of the rupee whenever it goes out line. BoM itself would be investing in enterprises. BoM, through its interest rate policy and regulatory policies, regulates bank credit and the BoM itself would be allocating credit preferentially for reasons other than providing liquidity. Does it make sense?
It is an unacceptable breach of established central banking practices and I am pretty confident that the IMF will be hard on Mauritius. Baked in the pie is a turbo-charged macro-economic destabilizer having the potential to disastrously undo the economy. We are in the initial stage of an economic spiral that does not augur well for the economy. The IMF will, in my view, strongly urge the Government to annul these amendments.
The BoM has speedily announced a one-off grant of Rs60 billion to the Government through a SPV created by itself. Is that all?
One-off? It’s an inaugural amount. When money is freely available, the appetite for spending is fathomless. Once a person gets used to spending like a drunken sailor, there is no end to it. Like drug addicts, the Government will progressively feel for the old ‘kick’ in larger and larger and more frequent doses.
Last year, the BoM Act was amended to make available to the Government any amount of money from the Special Reserve Fund (SRF) of the BoM for the specific purpose of external debt repayment. A token amount of Rs18 billion from the SRF was drawn down subsequently (partly) for purposes other than initially intended. This year it’s a one-off Rs60 billion forked out directly from the vault of the BoM, not from the Bank’s balance sheet. There is no sunset clause in the amendments of the BoM Act. Government finance at ground zero, we should expect more forking and forking over the next few years. Digging and forking will go on. The BoM is now the fathomless back-pocket Insurance Company of the Ministry of Finance.
Is this what you had referred to as ‘helicopter money’ in your post-budget interview last year regarding the use of the notional money in the BoM balance sheet?
I did not coin the term. Milton Friedman had coined it; it was popularized in an academic publication by Ben Bernanke long before he became Chairman of the Fed. To answer your question, yes, this is actually ‘helicopter money’ which means large scale transfers made by Governments to households and/or a central bank carrying out large-scale financing of government spending.
“One-off? Rs 60 billion is an inaugural amount. When money is freely available, the appetite for spending is fathomless. Once a person gets used to spending like a drunken sailor, there is no end to it. Like drug addicts, the Government will progressively feel for the old ‘kick’ in larger and larger and more frequent doses.”
How do you react to the various ideas and policy options bandied in the media lately but completely discarded by the Government?
Ask a Bundesbank economist, brought up in the stern discipline and unyielding culture of the bank, about the eventual outcome of such decisions. I am sure, you will be told expressively what Hitler did to the monetary system in Germany several decades ago. By the way, why is the Fed taken as a central bank to emulate lately but not the widely respected Bundesbank that has the best track record in the world since the end of World War II?
Irrespective of their political affiliations, several well-meaning thinkers and fair-minded analysts voluntarily made important contributions out of a sense of belonging to the country. All of them are perfectly aware that the Government has, since quite some time, irretrievably lost the waves to surf on in the foreseeable future. Fiscal largesse of the recent past has denied an effective fiscal response to the pandemic fallouts.
I had suggested a financing formula in keeping, as far as possible, with the spirit of the famous phrase, ‘maintain price stability and promote orderly and balanced economic development’, as mentioned in the Bank of Mauritius Act 2004. You will recall that I had suggested that the BoM could devise a Scheme, with a life of 2-3 years, for redeploying the massive excess liquidity sitting idle in the balance sheets of banks to needy enterprises at very low, or even zero, rates of interest.
The borrowing cost could be subsidized by the BoM and the credit risk could be shared between the BoM and the lending banks. Succinctly, this is the essence of what I had advocated: a calculated, measured and unorthodox intervention by the BoM that, in my view, was the least inflationary and the least disruptive policy option that the authorities in Mauritius could prudently adopt.
While casting a glance on the most recent central banking journal a few of days ago, I fell on an article that reveals a meeting of minds I have with the monetary economist, Charles Goodhart, Professor at the London School of Economics, and a former Member of the Bank of England Monetary Policy Committee, famously known for his enormous contributions to monetary economics. Let me share with your readers his skepticism: “I don’t really know how Macron’s (French President) proclamation will work. It could turn out to be a grand gesture with no substance behind it. In this crisis, governments have to encourage banks to lend, essentially by subsidising lending, and banks can manage that lending.”
He also warned that an open-ended guarantee from the government carries a big risk of unintended consequences: “There is a problem here, because if you are in government and you say ‘no business can go bust during this crisis’, what happens if a business just spends ridiculous amounts of credit, and then says it has to be declared bankrupt?” What I also note with a sense of satisfaction that the Bank of England approach looks like a cousin of the formula I suggested.
Do you mean the Fed is the wrong central bank to emulate?
Even the Fed is unhappy. On May, 17 the Fed Chairman, Powell, has frankly admitted. “The asset purchases that we’re doing are a multiple of the programs that were done during the last crisis……In the last crisis, the problems were in the financial system. So they were providing support for the banking system. Here, really, the problems are in what we call the real economy, actual companies that make and sell goods and services. And what’s happening to them is that many of them are closed or just not having any revenue.”
Powell has also admitted that the economic turmoil caused by the pandemic has not precipitated distress in financial markets. He goes on to make a damning admission: “the Fed is tasked with providing monetary stability and supporting financial markets, not directing the real economy. What’s happening right now is outside the Fed’s purview.”
“It is an unacceptable breach of established central banking practices and I am pretty confident that the IMF will be hard on Mauritius.”
You had ended your last interview with me with the statement, ‘I am fed up”, that had driven me on the edge of my chair. What has motivated you to speak out again?
There have been wrongful interpretations of the BoM Act aired repeatedly since the Covid-19 bill was made public. The elasticity of misinterpretations of the Act struck me; they have been overstretched to mean that the BoM is a Development Bank. The phrase ‘orderly and balanced economic development’ has been lifted out context and used dishonestly or foolishly in every manner to mislead the public.
As past Governor of the BoM, I find myself in an extremely uncomfortable position to refer to one of my predecessors who has been repeatedly airing misconceptions about the BoM Act to a crowd of listeners, unfamiliar with economics and central banking as he himself actually is. While I do appreciate the significance, in breadth and depth, of freedom of speech in a democratic society, I also cling to the belief that a past Governor of the Central Bank, unless genuinely mistaken, must refrain from misleading the public to a point. Using a prestigious past position of trusts to give a force of credibility to dishonest interpretation of the BoM Act is not an act of justice done to that very position. People expect educated views on central banking issues from a past, present or future Governor.
I am the person who completely overhauled and thoroughly revised the BoM Act and the Banking Act in 2004 (with the assistance of one Mr. Robert Effros, expert in central banking legislations, from the Legal Department of the IMF). I deem it a personal responsibility, whether I like it or not, to clarify an extremely important issue regarding the ‘Objects’ and ‘Functions’ of BoM as laid out in the Act.
In the lay persons’ language, what exactly is the issue?
Let me simplify it. But before getting into the heart of the issue, in an effort to enlighten your readers, let me lay out the background considerations that had led the BoM in 2004 to draft the “Objects” and “Functions” of the Bank as they actually stand even before the latest amendments.
In the beginning of the 1990s, the Reserve Bank of New Zealand (RBZ), under the stewardship of Governor John Brash (who by the way became the Prime Minister of the country later), was granted independence. The law as accordingly reviewed. The Governor’s contract of employment had clearly stated an inflation target he was required to achieve and sustain over time, failing which his term of office would be terminated.
In the pursuit of the objective of ‘price stability’, the RBZ had relentlessly pursued tight monetary policies. By the word ‘tight’, I mean the RBZ had made access to bank credit too costly by raising interest rates far above the desired level and maintained them for too long. But the inflation target was indeed met and sustained. In the fullness of time, the very tight monetary policy that helped achieving ‘price stability’ had caused collateral damage; it had impaired economic growth and employment creation. Whereas before the grant of independence to the RBZ, the pursuit of economic growth by way of loose monetary policies (excessive money creation in the financial system) had caused collateral damage to ‘price stability’, the relentless pursuit of tight monetary policies aimed at achieving and sustaining ‘price stability’ in the years after independence of the RBZ had unintendedly stifled economic growth and employment creation. These are two undesirable extreme outcomes when central bank legislations fail to provide for “price stability” and “orderly and balanced economic development” as an objective function of monetary policy formulation. In simple terms, while pursuing policies an independent central bank should stick to its primary goal of ‘price stability’ while ensuring that the policy instruments being utilized do not turn out to be harmful to ‘orderly and balanced economic development’. The achievement of one objective must not be to the detriment of the other.
So this was the case with the RBZ. Does it go to say that central banks elsewhere were on the same track as the RBZ?
Indeed, it was so. In the 1990s, the monetary policy-making organ of central banks, the Monetary Policy Committee, came to be infamously known as being too ‘hawkish’ in the pursuit of their mandate. The Committees worldwide had tended to err on the safe side in their endeavor to achieve ‘price stability’. In other words, Monetary Policy Committees were perceived as being unnecessarily too aggressive in their pursuit of the objective of ‘price stability’.
That central banks ought to have taken on board ‘sound and self-sustained growth and employment’ consideration in their monetary policy-making framework was, without any iota of doubt, a legitimate argument. A compromise between over-using restrictive policy instruments to achieve ‘price stability’ at the expense of ‘orderly and balance economic development’ and the unrestrained pursuit of economic development (by way of easy money) at the expense of ‘price stability’ was sought. The spectrum of economic and financial considerations for purposes of monetary policy making was thus broadened but the objective of ‘price stability’ remained as the primary objective of central banks.
Thank you. I got the point. But why are only central banks legally assigned the task of achieving low and stable price level?
The answer is simple. It’s because central banks are the sole issuers of currencies. As the sole issuers of currencies, central banks are the only competent institutions to check the pace of money creation and, as such, they are the only eligible policy making authority in a market economy to achieve the goal of low and stable inflation rate that is a necessary pre-condition - I emphasize on ‘necessary pre-condition - for ‘orderly and balanced economic development’. It’s important to bear in mind that the ‘orderly and balanced economic development’ is impossible without lasting ‘price stability’. Germany and its central bank, the Bundesbank, are proverbially known for their obsession with price stability.
We have to understand an important fact regarding the economic life of any society. A typical society in a democratic set up with a capitalist system or a variation thereof has several economic goals. The conflicting nature of economic goals make their simultaneous realization a near-impossibility. Prior to 2004, the BoM was assigned a few conflicting goals to achieve. Some of the BoM policy goals were seen to be best achieved by fiscal policy tools than by monetary policy tools. In the 1990s, politicians and central bankers the world over had conclusively reached an agreement that central banks should be mandated to achieve primarily one goal, ‘price stability’, since they are, as I said earlier, the sole issuer of currencies by virtue of which they are best capable of controlling money supply in the economy. Fiscal policy has many goals – and less conflicting ones - and they are best achieved by the Government by directly allocating resources. So we ended up with central banks (the monetary policy making arm of macro-economic policy) pursuing a specifically mandated goal of ‘price stability’ the pursuit of which must not be to the detriment of ‘orderly and balanced economic development’ and Governments (fiscal policy making arm of macro-economic policy making) with several but less conflicting economic goals to be met by direct resource allocations. The responsibilities are clearly defined in all organized and democratic societies.
Why do you stress on the words ‘organized and democratic societies’?
Well, every organized society has institutions assigned to perform specific functions. For instance, every market oriented democratic system has two arms of macro-economic policy making, one is fiscal policy making entrusted to a Minister, an elected representative of the people and the other is monetary policy making entrusted to the Central Bank headed by a Governor who is not an elected representative of the people. The rationale is simple. Politicians are elected for a short period and, understandably, they have a short-term vision.
Experientially, history of civilizations has taught that politicians cannot be trusted with the power to print money. The central banker is expected to have a long-term vision. The Governor of the central bank and not a politician is the custodian of the foreign exchange reserves of the people. He, and not a politician, is responsible for the vault of people’s money. This is why the person selected for the position is expected to be someone seen approvingly by the society as a person of ‘high character’ with a profound sense of public duty, someone who displays high ethical standards, someone who commands respects, someone who has the courage of conviction to put his foot down and say ‘No’ to politicians and someone with tried sagacity to give constructive and educated advice to them. Unlike politicians, the Governor is not supposed to be someone in a popularity contest. Yet he is not supposed to be politically ‘tone deaf’. In times of crises, it is expected of him to bring politicians back to reason - in the best interests of the economy. In short, the Governor is the most trusted person in the society, a reliable gatekeeper of the Bank’s vault. Accordingly, central bank legislations are so designed as to have ‘checks and balances’, transparency and accountability in the system.
Isn’t such a person a rare bird?
That is why the person for the position has to be the ‘best’ among the bests.
The picture is clearer now. If I get it rightly, the BoM Act 2004 is a product inspired by the experiences of other central banks. Isn’t?
Partly, yes. All central bank legislations are drawn from the same template and re-adapted to fit the specific conditions of the host country. By the way, the initial framework and spirit of the Act as envisioned in 2004 has been tampered with and disfigured with so many amendments every now and then, that the incoherence and incongruence with the basic philosophy of central banking are brazenly defiant of sound central banking practices. Read the amendments of the BoM Act. Two points are striking: first, the person who has drafted the amendments is conversant neither with economics nor familiar with central banking; second, it’s not the professional language of a bill drafter in any competent Government body but of an imposter. The Act, as it is today, looks more like a menu of mixed cuisines. As is said, when an Act is tampered with year in and year out, respect for the law is destroyed.
In the light of what I explained earlier, section 4(1) of the BoM Act, 2004 sets the ‘Objects’ of the BoM as follows: “The primary object of the Bank shall be to maintain price stability and promote orderly and balanced economic development.” Over and above what the common mortals understand by ‘too much money chasing few goods’ that the citizens are currently witnessing, it requires an insightful appreciation of the underlying economic principles and a comprehensive understanding of the mechanics of how excessive money creation feeds through our economic system upsets ‘orderly and balanced economic development’. The risk of an over-tightening of monetary policies to achieve and sustain ‘price stability’ was thus ruled out in the Act. Under the same heading, the other objects of the Bank are prescribed to be, ‘….. to regulate credit and currency in the best interests of the economic development of Mauritius’. This, by no means, is intended to say that the BoM is entitled to open the floodgate of money and credit creation in the economy.
How does the BoM achieve ‘price stability’ while ensuring ‘orderly and balanced economic development’ when the rupee is depreciating and inflation rate is picking up?
Under the heading, ‘Functions of the Bank’, the BoM Act stipulates at section 5(2) that the Bank ‘shall have such functions as are necessary to achieve the attainment of its objects and shall, in particular……. Conduct monetary policy and manage the exchange rate of the rupee, taking into account the orderly and balanced economic development of Mauritius’.
This is why I just mentioned to you that it requires a solid economic insight into the workings of money creation and how impactful is the latter in a small and highly open economy. It is highly technical. Let me give you a non-technical flavor of the processes: you are already seeing and suffering it anyway. A loose monetary policy combined with an unprecedented largesse in Government spending financed by the BoM is leading to a depreciation of the rupee. Prices are going up. As matters stand, there is no end to the depreciation of the rupee and no end to price increases and no end to scarcity of goods. Do you expect productive investment in an economy with continuing depreciation of the rupee and unstoppable rise in prices? Do you expect excessive reflation of the economy by way of pumping money into an already inflated system would deliver the desired results? Expect unproductive speculative activities but not ‘orderly and balanced economic development’. Do not expect solid and sustained wealth creation but unemployment and rampant poverty. It is abundantly clear that the financing of Government expenditure from an inexhaustible source will be to the detriment of ‘price stability’. In trying to resolve one problem, the BoM would inadvertently give rise to still more serious problems down the road.
But we are given to understand that the BoM has a more than reasonable cushion of foreign exchange reserves to support the economy which is in distress? Isn’t it?
In the world of finance, there are often unseen snowflakes that trigger an avalanche. A prudent central banker lives constantly with the nightmare of a potential avalanche waiting for a single snowflake to bring the whole mountainside crashing down. He has to be remain prepared for as long as he finds himself in the chair of that prestigious position. The world financial industry is not short of such snowflakes.
The foreign exchange reserves held by the BoM are valued in rupee terms at Rs280 billion, which is expected to decline as a result of the pandemic. Our banks have foreign currency deposits valued in rupee terms at over Rs800 billion or so, as far as I can make out. Mind the Gap. Do you believe that the BoM is adequately equipped in terms of forex reserves to successfully stem a capital flight that could occur (God forbid!) in the event of a loss of credibility in the BoM or a loss of confidence in the economy or yet another shock? Isn’t the risk of a substantial decline in the forex reserves of the BoM real and ominous? If we believe in the laws of gravity, we must also believe that water runs downhill, not uphill.
A final question. You had proposed among other things ‘burden sharing’ by the public at large in your last interview. Do you still believe it would have worked?
At the outbreak of the pandemic, I believe that people were prepared for burden sharing. “Fight any foe, bear any burden’ was the spirit of the day in the country. Policy and decision makers had fallen asleep at the wheels. The dynamics changed. Frustration and a loss of confidence followed.
I am survivor of a pandemic that hit Mauritius very hardly way back in 1949. This pandemic has revived old wounds. Down inside me, I feel them again - atrociously. Over and above all, economic growth is a consequence of people. People are not dispensable. They are important element, more important than hotels and factories. People need food and security. People need to be cared for. People need inspiration. People need motivation. People need to be reminded of what can still be dreamt about. Remember the song “Follow the fellow who follows a dream”, a dream that is people’s dream. This is a crisis that is hitting hard all classes of people. The hardest hit are those who were already in desperate situations and those who have lost their jobs as also those who run the risk of losing theirs. Our politicians need to be reminded of a piece of wisdom loudly shared by President John Kennedy way back in 1962: “Those who make a peaceful revolution impossible will make violent revolution inevitable.”