Hailing from Canada, Economist and ex-Central Banker Ramesh Basant Roi takes a comprehensive look at the State of the Economy and the «Decadence of our Society» with a disclaimer: «These are personal views(…) hope they will not offend anyone.» His assessment is straightforward and truthful : «The domestic market for forex is jittery. The rupee is depreciating. The domestic prices are rising. Government indebtedness has reached a peak.» Here are large excerpts of the in-depth conversation we’ve had with him two days ago...
How best would you describe 2020 for Mauritius?
Inauspicious 2020 brings to memory Nassim Taleb’s turkeys. Cool turkeys. They live imperturbably. Every day, the food gets dropped in the feeding pans. Every day, they grow bigger and bigger, fatter and fatter. Then, one day in November, it’s Thanksgiving dinner. With no warning whatsoever, comes the big knife...the slit...the collapse…the discontinuity. The 7-sigma event in the turkey’s life blows out everything. It is the end, tragically the end. The turkeys were on a lethal path already. Thanksgiving celebrations, not a random event like COVID-19, simply hastened the tragic end. 2020 taught us useful lessons about vulnerabilities. Pick them up for a fulfilling future. We have risen many more times than we have fallen since 1968.
2020 throws on the table answerable and unanswerable questions as to why our economy fell spectacularly out of bed. What went so wrong that people rubbed their eyes in disbelief? Those of your readers who have a suffocated sense of smell about the predicament we are in, could find my views displeasing. But they are views based on years of eagle-eyed look at the ‘ying and yang’ dynamics of our society that is now dismayed to find itself on a perilous path to a Kafkaesque nightmare. Seen in the light of the latest salvo in an anti-graft campaign, the Mauritian spirit is arguably still alive.
Yes, we got a brutal wake-up call – a call telling us that we had it good for many years, so good and delicious that we did not care to protect and preserve the very essence of what made our lives better. The economy teetered for many years. The ‘alarm call’ for radical changes in the way we make a living had kept on echoing. Heedless, we stayed put, believing that inflows of capital would keep giving us a comfortable living forever and ever. The itch for politics was and still is stronger than the itch for a sound and sustainable development at a time when our economic survival is seriously threatened by many fast moving parts in geopolitical conditions, by the exigencies of globalization and by the incredibly rapid progress in digital technology. Foolishly, we promoted wasteful consumption economics leaving out useful investment economics. Our cheese had been moved already. We cared not. 2020 was the year when we set to ourselves the key question, ‘who moved our cheese?’ “Who moved my Cheese?” Do you still recall this small bestselling 57-page 1999 parable by Dr Spencer Johnson? We find ourselves cast fittingly in the parable.
Tough tone. Promisingly insightful diagnosis, I must say. How do you view 2021?
As the years have gone by, anomalies and rigidities have built up one after the other in our economic system. Even before 2020, our economic model had been discharging signs of fatigue and withering away like a potted plant tossed harmfully by winds of change. A model crisis was perceptible. An unseen snowflake that set off an avalanche of bad news laid bare the flaws of the model. 2020 was an epic political moment for a bold and fundamental redefinition of our economic strategy, if at all we have one worthy of calling as such. We missed a unique opportunity to construct a coherent consensus for a better future. Soaked in a plethora of alleged scandals, decision-makers have stayed rather frozen, perhaps believing in the mystical aphorisms of fortune cookie.
Pessimism, seemingly sparking off of a friction between the fear of the known and the fear of the unknown, has reasserted itself in a far more threatening way than at any time in post-Independent Mauritius. An abundance of pessimism often gives reasons for optimism. Let us have a brief retrospection. History is instructive. Pessimism about the viability of our economy had crept in fast in the couple of years just after Independence in 1968. But we had visionary political leaders and other highly educated politicians surrounded by trustworthy brain powers of the time as well as towering leaders in the private sector like Maurice Patureau, Prof Lim Fat, Jose Poncini and several others with an arresting blend of profundity and pragmatism. A synergy of brain powers fueled with an elevated sense of national purpose from both the public and private sectors had given reasons for optimism. The triumphant ride from a mono-crop economy to a diversified one was rough though. Anyone who believes that a similar or even more influential coalition of visionary leaders with the same ideals, goal congruence and commitment having the gumption to get the country ahead of the curve should, of course, have reasons for optimism.
The big problem is: we are trapped in the labyrinth of a constellation of gruesome economic forces partly because we seem to have an infallible instinct for doing the wrong things at a time when they have to be religiously avoided.
How far do we stand right now from where we ought to have been standing in terms of our economic future?
As is known to all of us, the global economic playing field has changed dramatically and is continuing to change in very unpredictable manners. In response to the actual and anticipated changes, high-performing countries have positioned their societies for continuing success by putting emphasis on the development of 21st-century skills. They have all expanded and intensified their curricula for creating communicative, imaginative, tech-savvy, multilingual students for jobs that do not yet exist. These forward-looking countries have focused on attracting the best and the brightest to teaching. Educators in these countries are valued and revered. They occupy a position of central importance in society. Where do we stand? The much-vaunted ‘tablet’ distribution to our school children was an elementary step, a very simple initiative the fate of which says everything about our competence and sense of commitment for building 21st century skills. The standard of questions that used to be set, for instance, for Mathematics in School Certificate Examinations 55 years ago (with all the then lack of facilities) are now seen as too advanced for Higher School Certificate Examinations. The more the rigours of curricula and examination standards are relaxed, the lesser the efforts students put in for better performance. Experimental studies support this view. Once a Government begins to lower standards, it should expect demands for endless rounds of lowering of standards, a downward spiral ruining the quality of our only resource, human capital. A teenage population growing into adulthood, taking life’s test with a relaxed attitude, tends to stay relaxed for the rest of its life. Do I really need to further elaborate in order to give you a full measure of where we stand today? The lie of the land is deplorably bare.
You mentioned “an infallible instinct for doing the wrong thing”. What do you actually mean?
Examples abound. Let me mention two of them: a populist decision to thread a different needle was taken months ago. Given the prevailing conditions, no nation can tax itself to recovery and prosperity. Income tax was nevertheless raised. Raising tax rates, on the one hand, and amending the BoM Act to provide billions of freshly created cheap central bank money to enterprises afflicted by the pandemic, on the other, is an inconceivable act of incoherence in policy-making; it is an assault on reason. Winston Churchill would have said, it is like standing in a bucket and trying to lift yourself up by the handle. Our policy-makers do not seem to get the point that “capital” is a perpetually fickle and frightened animal; it goes to jurisdictions where it is taxed the least, more so in a world with increasingly competitive tax rates. When the politics is wrong, we cannot expect the economics to be right. Angry politics makes room for foolish economics.
Rwanda, a neighboring small African country. On a trek back from a gorilla park in Virunga National Park, a tourist kindly offered a ballpoint to a child watching the visitors pass by. The child rushed back to the bush with the ballpoint in great delight. The Rwandan tourist guide, a very unassuming fellow, imbued with the right values and attitudes, stopped the entire group and said, “You cannot do that. All you are doing is teaching these kids to be beggars. That is not acceptable to us.” Corrosion of character is baked in the pie of this simple act of what appeared to be an expression of kindness and generosity. This particular real-life anecdote is very telling about a country that went through genocide, healing and repair, and is finally rearing its head as a challenger in the Eastern and Southern African region. A fitting line from the American poet, Theodore Roethke comes to mind, “In the dark of time, the eye begins to see.”
Slavery does lesser damage to the well-being of a society as a whole than Government handouts to people without merits. You tax bad behaviour, you get less of it. You subsidize bad behaviour, you get more of it. The act of systematically giving something for nothing carries with it the seeds of corruption. The more you give, the more will be demanded; it becomes a form of addictive delirium. And if you keep giving something for nothing in return, you are indeed laying the foundation stone for corrupt behaviour and eventually a corrupt society. Systemic corruption bearing the imprimatur of the State gets fossilized.
You seem to be against the welfare state. Are you?
No. Not all. I am fully in favour of Government interventions in the life of a people so long as they are corrections of the inherent imperfections of the free market. For instance, healthcare is an area where free market forces do not produce the best outcomes for society. Government interventions are a must. In contrast, when the interventions become a self-serving instrument for politicians or an instrument for bargaining favours by voters, they turn out to be counterproductive and detrimental to moral standards of any society. The very purpose of a welfare state is challenged. As the British economist, Robert Skydelsky, a strong supporter of Keynesian thinking, puts it, the country eventually moves from a welfare state to an ill-fare state. Welfarism kills initiatives and creativity besides being distortionary. It is a question of judiciously striking a balance that keeps excesses out of the play.
Is this the only cause for rampant corruption in the country?
What I just narrated to you was simply an illustration of one of the unintended consequences of the generous acts of Governments. There is a toxic mix of determinants.
For instance, over the years, turbo-capitalism has been having an increasingly profound corrosive effect on the character of corporations and individuals worldwide. Societies have devolved to a perilous situation preeminently featuring infectious greed, envy and consumerism. People are living in a culture of envy. You see envy and irresponsible behavior everywhere. They have become part and parcel of their daily lives. Where greed has advanced to a state of limitless rapacity, the cast of ‘corruption characters’ has grown inordinately. Corruption manifestly reaches an epic proportion over time; mega-scandals becomes a regular feature. Your question takes me back to a number of observations made by Arianna Huffington, author of several books. She said it presciently as far back as in 2003 that ‘the stomach-turning revelations of corruption that have come to light (in the US) are surely only the appetizer for a far larger banquet of sleazy scandals.” Little did she know that the larger banquet of scandals would turn into an all-the corrupt-could-eat buffet that we customarily read about today.
Referring to Corporate America, Arianna Huffington mentions a teenage character, Tom Cruise in a 1983 movie, Risky Business. The young man reassures his parents that he can take care of himself while they are away. Once out of oversight of his parents, he brings in call-girls and throws an out-of-control party, turning his house into a makeshift brothel. In the unrestrained revelry, he crashes his father’s Porches. The pimps invited to the party steal all the furniture in the house. The teenager eventually gets trapped in debt. What we see around us today makes the Tom Cruise’s binge look like, if I may borrow a phrase from Arianna Huffington, a normal get together at Mother Theresa’s house. Absent a fail-proof regulatory framework and an effective law enforcement agency, Tom Cruise disastrous behavior gains traction and goes ballooning.
You seem to be suggesting that legislations for containing corruption matters most. Isn’t public morality as important?
I believe that even with the most sophisticated and watertight legal framework designed to combat and eradicate corruption, no society can be made corruption-free. Mr Bumble in Charles Dicken’s Oliver Twist, would have said to you at this moment that ‘the law is an ass.” Let us be realistic. The fight against corruption starts with oneself. It is a question of upbringing, a question of inner quality, a question of what timber one is made of. In short, it is a question of character - a commodity that is increasingly scarce.
We are humans……imperfectly humans. As the saying goes, if men were angels, no Government would be necessary. We need laws to govern us and laws that are applied effectively and uniformly. The political scientist, James Q Wilson, sums it up marvelously with an experimental observation that is illustrative of the importance of responsible citizenships and effective law enforcement. A broken window in a neighborhood, left unattended, signals that no one cares if windows are broken. It becomes a standing invitation to throw more stones at more windows, ultimately undermining moral standards of the entire community. Left unattended, cases of corruption, petty ones or high-profile ones, serve as an appealing poster for more and more corruption. The Chinese would say that we did not execute the chicken in full view of the public to scare the monkeys. No wonder more and more monkeys are having a field day, fearlessly and without due regard to the laws of the land.
You seem to have given thoughts to issues relating to corruption. May I ask you what explains the level of unprecedented decadence of our society?
I mentioned some earlier. There are several others.
In the quarter of a century before the mid-1990s, Mauritius was new, fresh, and growing flamboyantly. People believed in saving, in hard work and in frugality. These are still the basic qualities that are propelling the growth engines for performing and progressive societies today. In our case, they faded out quite quickly in the 1990s; Mauritius fell into decadence. Drifting away from the pinnacle of a smartly worked out economic success that earned the country respect and credibility, a people that prided itself of its achievements went off the rail. Unprecedented inflows of capital (that I will be too glad to talk about someday) made politicians, fiscal policy makers, professionals, businessmen and the vast majority of people believe that we were effortlessly riding the crest of yet another phase of economic prosperity the origin and character of which was scarcely understood by most people. Equitable sharing of the national pie became a major and recurring issue. A belief that Government should spend whatever it takes to take care of almost all of us became fashionable and gained popular approval. Most of the traditional functions of families and communities was thus handed over to the state. As late as about two weeks ago, socio-cultural groups appealed to the Government, but not to Papas and Mamas, to contain binge drinking by youngsters during the new year!!! This is a state-dependent mentality attributable to welfarism at its worst. Where government grows, corruption flows. If you dare fight corruption with imprimatur of the State, it fights you back. Systemic corruption now lays hidden in the grass; it is a deadly viper, always ready to bite before slithering back into hiding. And where corrupt people become a law unto themselves, the ugliness of human nature always prevails. Decadence follows. Drip by drip, we ingested what we ought to have kept ourselves away from. This is a common feature of a society nearing the end of its “run”.
Do you mean to say that the public at large share the blame for the current state of things in the country?
Yes Indeed, I do. Plato said it beautifully: the state is what the people are; you cannot change the state as long as you do not change the people. Haven’t you observed that voters in general show a marked preference for good entertainment, circuses and miracles but not for good government? Haven’t you ever observed that there are things, truths included, which the average person in the country is afraid to tell even to himself? ‘In lies, we trust’ is now culturally accepted. A complete ‘depatterning’ of the vast majority of people has been happening over the years. People have undergone a slow process of ‘conversion’ and ‘reprogramming’. A learned personality once told his audience about the two weaknesses that threaten the existence of democracy: widespread public ignorance and widespread apathy. One of the listeners turned to the other on his left and asked: "Do you think he's right?" The answer was: "I don't know, and I don't care." Indifference has progressively gained staying power. This attitude has not only undermined our democracy but also contributed to the gradual deterioration of what could have been an economy with a stellar performance.
Let me put a question rather bluntly to you: you seem to spare the politicians of the past and the present from any blame whatsoever for the mess we are in. Isn’t?
I suspended my political affiliations before talking to you. This is what central bankers instinctively do. I have been one in the past and I am accustomed to it.
As in the movie, Murder on the Orient Express, every suspect has a hand in the crime. Politicians are only half of the big picture. Politicians, elected usually for five years, take a short-term view of things, mostly because good intentions do not always readily translate into good outcomes. But the pursuit of a development strategy is a long-term endeavor the outcome of which often takes more than the 5-year term to crystalize. Governments come and go. Short termism continues. A series of short term makes a long term. And in the long run, as J M Keynes had put it decades ago, we are all dead. That is why, without fail, institutions in a democracy have to be robust, independent and manned by people made of the right timber; they matter more than politicians.
Epochal upheavals at the levels of economies, societies and politics have fractured the post-World War II order that brought about unprecedented economic prosperity worldwide. After a brief period of economic expansion in the 1980s, greatly facilitated by our trade arrangements in the then world order, we reached a crossroads in the 1990s and we have since stubbornly stood there motionless, contented and wrapped in a culture of denial. We have been having what behavioural economists call the ‘status quo bias’, sticking to what we love, what we have and what we know already. As opposed to forward-looking countries that have developed horizon-scanning capabilities, we chose to turn our back to new vistas and emerging horizons. We have shied away from giving a serious look into the future, studying emerging challenges and re-equipping and re-tooling appropriately so as to forge our way ahead. Still surfing on the dying waves of the late 1980s and the 1990s and staying afloat through the beginning of the new millennium, we lacked the force of spirit to react smartly, avoid pitfalls and change course. Accelerated change in the global living environment, largely attributable to progress in digital technology and globalization avalanched upon us for more than two decades. The blizzard is still on and in a much bigger way.
The future arrived, prematurely for us. Outside of us, things changed. Inside us, parallel changes occurred. The inside changes tested our abilities to keep going by the principles that used to define us. But we failed, lamentably.
I am sure readers would be eager to know about the outside and inside changes you are referring to. What are they?
The uneasy superimposition of an all-encompassing new culture, that is itself in turmoil, on our old one has given a large-scale tectonic shock to our society, without us realizing it. The future invaded the present. We have been grotesquely unprepared to cope with it. An overwhelming majority of the people in this country looks like having been suddenly drawn to an environment characteristically and substantially different. In this alien environment, we have been finding people with totally unfamiliar set of cues about how to react to time, space, love, sex, religion etc. and how to interact with each other in society. A simple act like telling the truth is a revolutionary act. Truth-tellers are seen as outcastes. The power of truth as an instrument for resolving society’s problems has been considerably reduced by the pervasiveness of falsehoods. The dislocations, standing out in our social landscape, are more severe than we imagine; they portend bad tidings. As a matter of course, we have ended up with a dizzying mass disorientation, irrationality and free-floating violence the atrocity of which is stomach-churning. Frustrations and fury spark off with disconcerting suddenness everywhere and anywhere. Surprisingly, even the coolest fellow is given to sudden, inchoate bursts of anger and profanity. A new social force has emerged – a force that has changed the way we feel the world around us. We no longer feel for others the way we used to feel for them in the past. This attitude is clearly perceptible within a family, within an ethnic group, within a community and across all the components of our society; it is an equal opportunity malady.
We have been ruining ourselves with frantic eagerness. In short, we are living in a seriously broken society. The weather has changed. The weather is doing what the weather does and we find ourselves caught in a situation best described as turbulence in the ‘twilight zone’ that sailors get into. Without first addressing these issues, none of us could reasonably expect a successful push for an agenda of economic development.
What can be done?
No alchemy of eloquence can atone for the decadence. Sustainable development is not only about macro-economic strategies and policies. We have been unkind to ourselves in forgetting that the roots of our economic progress also rested on the roots of moral order and civil social order. These roots are, without any doubt, complementary; they were found in the pages of our religious traditions, intellectual tradition and legal tradition. Regrettably, we have swayed, far away.
The starting point is to recognize and sincerely admit that the economy and the society are disastrously in disarray. Our economic system has sunk to its lowest point in history. A refusal to take cognizance of the current realities would translate into a stronger refusal for corrective policy initiatives. The shopping list for fundamental reforms is lengthy. Evidently, the country must get out of the political rots and re-define its economic priorities. The reconstitution of a new domestic order that rhythms with and makes impeccable harmonic sense with our own economic goals as well as with emerging new demands of the world economy is imperatively needed. From our Constitution down to the legal frameworks of our key institutions there is a pressing need for rationalization, failing which efforts to get the country out troubles will be fruitless. Good fences between key institutions and politicians would make good neighbours. Stronger and intelligent institutions and a thriving economy must constitute the immediate candidates for a comprehensive package of initiatives the urgency of which is widely and palpably felt. Without locking ourselves - politicians and the public at large – into a national commitment, supported by sustained effort and enduring sacrifice, we are bound to drop dead.
‘Stronger and intelligent’ institutions. Lately, they have weakened further. What, in your view, is the cause?
Clearly, they were weak already; they have further weakened. The US presidency over the past four years amply bears out one fundamental point that we need to draw lessons from. A majority of Americans and the American media in general have been continually slurring and attempting to drive out President Trump for as long as four years. Sustained and aggressive campaigns against the President weakened US institutions, a collateral damage that has gone unnoticed. Anyone who is familiar with US administrative system and the US Constitution will surely get the gist of the point I am making. Mauritius falls in the same basket. There is a case in Court regarding the legitimacy of the present Government. Somewhat less than a year has gone by. Either for or against, the hope for a fast and conclusive judgment in the winding processes of the legal disputes is dashed. When the legitimacy of a Government is rightly or wrongly questioned over a protracted period of time, the resulting strains and stresses are bound to undermine the standard of institutions.
Going back to the question of growth, do you believe that the massive stimulus funds would help getting the economy out of trouble soon?
What do you call ‘stimulus spending’ that does not ‘stimulate’? Will money created by a central bank on an industrial scale to assist private enterprises (suffering from a contraction of business turnover) and to provide finance free of charge to Government (running short of revenue due to overspending) stimulate or harm the economy? The BoM has already been in the process of creating Rs150 billion, representing as much as 35 per cent of GDP, 54 per cent of its own forex reserves and nearly 25 per cent of the broad money supply in our foreign trade and forex-dependent economy. These proportions are by no means a disruption-free trickle but an amount that inheres a, so to say, nuclear force that would spin our economy out of control and shut it down. Seen in the light of the series of amendments made to the BoM Act regarding the possibilities of limitless access to central bank financing of Government spending (due to continuing shortfall in Government revenue), the Rs150 billion sum is destined to grow bigger and bigger. A simple analysis would show that, under conditions of near economic stagnation, every Rs1.0 billion created out of a single stroke of the pen would cause a substantial drain on the forex reserves in the balance sheet of the BoM. The end result would certainly not be stimulation of a depressed economy.
There is a great idea in economics which is found in the Ricardian Equivalence that tells us why fiscal policy in situations like the current one is unlikely to be as effective as we would want it to be. Comparative advantage is a key concept. Out of nothing, we created the Offshore sector in 1989 and successfully managed to make a gain in terms of comparative advantage. A path is made by walking and we made it successfully thirty years ago. Nothing else, since. The length, breadth and depth of the economy remained broadly unchanged. Try to have a look at the 100 top companies in Forbes’ list of the early 1970s. Quite a good number of them is non-existent today. Why? Because like Kodak, a household name until the 1980s, they failed to scan the horizons and detect the tidal waves of upcoming technological innovations threatening their viability. “Who moved my Cheese?” turned out to be their swansong. We are not exempt from a similar fate. To believe that sugar cane, textile, tourism and offshore business are sufficient to keep us afloat indefinitely is an optical illusion. Out there, non-traditional games are being played aggressively by stunningly smart players. Turn our back on them, we are done.
Does it mean we are in a hopeless situation?
We would be, if we lacked the force of spirit. We need the ‘third wave’ entrepreneurs. We do have them. Bring them to a table and create the necessary pre-conditions for a renewed beginning.
We used to have a Ministry of Economic Planning and Development led by knowledgeable people; it was hived off to the Ministry of Finance. There is no more a Minister in the Cabinet in support of an economic development agenda to stand up to the all-powerful Minister of Finance wearing the glasses of short-termism. Short-termism has brought us to where we are today. Is there anybody who is aware of any economic development strategy for the country and of the path charted out to achieve medium and long-term economic goals? To begin with, does it exist? Have you ever heard of it in the years gone by? When is the last time we heard utterances of words like ‘economic strategy for sustained development’? We have no vision. We have no mission. We only have elections – and all the bells and whistles that go with them. This, of course, is not the road to economic prosperity. No wonder, we find ourselves in a quagmire. One of our respected diplomats, Vijay Makhan, had published an insightful article on the relevance of a Ministry of Economic Planning and Development in an African publication. It is a good read. I am sure he will be pleased to pass on a copy.
We are told that economic growth is expected to pick up to 7 per cent or more after the 2020 economic contraction. Is it not pointing to a recovery?
Let us not be fooled. We have to be clear about the concept of GDP growth rate. We may have economic growth with or without a sustained pace of economic development. GDP does not distinguish between growth in producing sectors and growth in consuming sectors. Much growth has been occurring in the wrong sectors. Read the economic ‘tea leaves’; they tell us that the growth rates being bandied around are unrealistic. Anyway, the trouble with GDP growth is that it simply tells us how fast the wheels are spinning; it does not tell if we are getting anywhere. In the current context, what matters most is where we are heading to in terms of sustainable economic development and a credible promise of a better economic future.
Aren’t prevailing conditions conducive enough for productive investment?
Every step of the way has been a step in the pathways to policy failures. The central bank is having recourse to printing money to finance Government spending on a scale far beyond the capacity of a small under-performing economy to neutralize. It means what it means for long term productive investors. Additional tax and other financial burdens have been imposed on enterprises at the most inopportune time. We have a huge trade deficit. The domestic market for forex is jittery. The rupee is depreciating. The domestic price level is rising. Government indebtedness has reached a peak. The debt-carrying capacity of the Government has dwindled. Governance is lacking. Institutions are failing. Rule of law does not inspire confidence. The jurisdiction is in the black list of the European commission. The threats posed by the pandemic are still making their weights felt. A succession of sleazy scandals is making regular headlines. Credibility that used to be our trade mark and confidence have dissolved into widespread skepticisms. Political and societal conditions are far from congenial. To the outsider we look like a people incapable of regaining our economic and societal foothold. Importantly, there is no declared comprehensive economic strategy for a sustainable development with well-defined long-term economic goals and the policy path duly outlined. Our selling points of the past as a haven for safe investment are all gone with the ominous winds blowing over the country for some years. In a nutshell, we have an unprecedented collection of all the toxic ingredients that go against the grain of business confidence building. True, exporters of sugar and manufacturing products are having a breathing space with the depreciation of the rupee. Will investment in the manufacturing pick up as a result? Would you still be optimistic with all these deterrents to investment? Place your bet, if you are a risk-taker.
Much earlier, you struck me with the statement that capital being ‘fickle and frightened’. What exactly you mean by ‘fickle and frightened’?
Like ‘fickle and frightened’ birds that take a sudden flight at the least ominous stir of leaves in a forest, capital is recognized as a perpetually ‘fickle and frightened’ animal. It is highly sensitive to poor policy-decision making and disturbances; it seeks comfort and reassurances. A few local examples would be useful.
Fernand Leclezio was one of the richest owners of sugar estates in Mauritius in the years before 1950. He sold his estate and decided to move to Europe with all the sale proceeds. The amount of the sale proceeds was huge, so huge that the transfer of the capital would have caused a serious balance of payments crisis. The then Government decided to introduce Exchange Control overnight. The transfer was halted. That was in 1951 (as far as I recall).
Owners of capital had serious misgivings about the viability of the Mauritian economy around 1968. An exodus of owners of capital and of other residents had put enormous demand pressures on the forex reserves of the country. Thankfully, exchange control had helped contain the flight of capital, failing which the newly independent Mauritius would have taken a fateful twist.
Owners of capital during the sugar boom of the early 1970s had sought better returns than were obtainable locally. Arguably, without exchange control, capital would have left the country for higher returns overseas. The then proponents of exchange control claimed that owners of capital were thus driven to invest in the economic sectors identified by the then Government.
Seasonal shortages of forex had always been a troublesome feature of the Mauritian economy until 2004. It is the reason why all sugar export proceeds were made to be compulsorily sold to the BoM until a couple of years after the suspension of Exchange Control in 1994. The gradual elimination of exchange control began after 1983. Even with an unprecedented upswing in the export performance of the Mauritian economy, inflows of capital were sluggish. The tendency of capital to stay out always haunted the BoM.
The barn door was opened indefinitely with the suspension of exchange control in 1994. Capital outflows, resulting from pent up demand, were clamped down by other means. In 1997 and 1998, the domestic forex market had lost faith in the BoM’s market intervention policy. Capital flight was the price paid by the country. Chaotic conditions displaced market discipline. An acute shortage of forex drove down the value of the rupee substantially. The forex level of the BoM had dropped. In 1999, the pursuit of credible policies helped restore confidence in the forex market. A couple of years later, interest income was made taxable; terrorized, a massive amount of capital rushed to the exit door. After a trouble-free period of almost sixteen years, the domestic forex market appears to be nervous again. The vulnerabilities of small island state cannot be taken lightly by our policy-making authorities.
How come, as you said, we had almost sixteen years trouble-free forex market conditions?
Way back in 1980, I vividly recall having explained to the then Prime Minister, Sir Seewoosagur Ramgoolam, how the hosting of an offshore financial centre could help resolve the recurrent shortages of forex in Mauritius. With testing questions set one after the other, I had found him exceedingly probing. I had to go to the extent of explaining to him how the City within the City of London operates and how the euro-dollar market came into being when the UK was running out money. He was very disappointed when I had told him that it was an inappropriate moment to begin hosting an offshore financial centre as we had a stand-by Arrangement with the IMF.
We launched the first leg of our Offshore Financial Centre in 1989. We could have gone for a launch of full-blown offshore activities. But we were held back as the process of exchange control liberalization had yet to be completed. Against advice, the BoM had opted for a dual licensing regime, one for onshore banking and one for offshore banking. In the new 2004 BoM Act and the Banking Act, I seized the much-sought opportunity to decisively replace, without much ado, the dual licensing regime by a single license requirement. This simple and laudable move permitted offshore and onshore activities to interact and allow for unhindered capital inflows. Almost a quarter of a century later, I executed what I had in mind. We thus got rid of seasonal shortages of forex and even succeeded in building a strong cushion of forex reserves. It was a visionary move that eventually made people feel wealthy despite none of the economic cylinders have been firing as we would have liked them to. The flip side is that the flush of capital inflows gave Governments and the people in the years after 2004 a false sense of economic security. A sense of complacency made politically bolder decisions to broaden our economic base not worth the bother. We did not seize the long period of financial stability, gifted to us, to invest in 21st century skills building.
The local forex market is jittery. Would you be happy with a level of forex reserves representing about 12 months of imports?
Measuring the adequacy of forex reserves of the BoM in terms of months of imports used to make sense in the days of exchange control. Capital flight was virtually impossible because of administrative restrictions on capital transfers. A 3-months import equivalence of forex reserves gave the BoM and the Government sufficient time for corrective policy actions if and when macro-economic imbalances caused excessive drains on the reserves.
With the suspension of exchange control in 1994 and the growth of foreign currency deposits with our banking industry hailing from the offshore sector after 2004, the criteria of 3-months imports equivalence of forex reserves lost its significance; it is not an appropriate metric for Mauritius. A simple click of the mouse is sufficient to set out billions of rupees on a virtual trip to any chosen jurisdiction in the world. The adequacy of the forex reserves of the BoM has to be necessarily seen in relation to the size of money stock (outstanding money supply in rupee terms, broadly defined), short-term foreign currency deposit liabilities banks’ balance sheets and short-term external liabilities of the public sector. These three aggregates taken together is quite a few times bigger than the forex reserves of the BoM. The liabilities are a nuclear-powered monetary aggregate. As expected, the underperformance of the export sectors and the blacklisting of the country knocked off over US$900 million from the forex reserves of the BoM in 2020. I only hope that the domestic forex market does not spin out of control.
Having read your lips, I am inclined to conclude that we are in a fix. Am I right?
May I take you back to your college days and help you with the unforgettable lines by Brutus in Julius Caesar: “There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and in miseries. On such a full sea are we now afloat…” Admittedly, fateful omissions have been made. In the endgame, we are undeniably in a fix. We are in an imperiled state. The kind of efforts we put in today will enable the reality of tomorrow. As I said at the very outset, we have risen many more times than we have fallen.