The recent measure by the Bank of Mauritius (BOM) of an upper limit of 70% in the credit to deposit ratio of commercial banks is an attempt by the monetary authorities to regain control of the money market after a too rapid relaxation of the quantitative controls in July 1997. It also reasserts the determination of BOM, since October 1998, to reorient monetary policy towards the exclusive goal of curtailing inflation.
In July 1997, the required cash reserve ratio was reduced from 8% to 6%. It now stands at 5.5%. The non-cash liquid asset ratio was brought down from 20% to zero percent.
By the end of June 1998, we note ( in Table 1) a considerable increase in the bank credit to the private sector (33%) which was substantially higher than the growth rate of narrow and broad money.
Table 1
Monetary Survey-Growth | ||||||||
Jun-94 | Jun-95 | Jun-96 | Jun-97 | Jun-98 | Jun-99 | |||
BOM Foreign Assets (Rs) | -7% | -8% | 33% | 10% | -13% | 3% | ||
Banks Foreign Assets (Rs) | 16% | 19% | 15% | 15% | 54% | 8% | ||
Total NFA | -4% | -3% | 29% | 11% | -1% | 5% | ||
BOM Credit to Govt | 144% | 35% | -35% | -55% | 202% | 87% | ||
Bank Credit to Govt | 20% | 22% | 21% | 15% | 0% | -23% | ||
Total Credit to Govt | 33% | 24% | 9% | 6% | 10% | -8% | ||
Total Credit to Pvte Sector | 30% | 15% | 5% | 17% | 33% | 22% | ||
Net Domestic Credit | 31% | 18% | 7% | 13% | 26% | 14% | ||
M2,Broad Money | 17% | 10% | 15% | 8% | 23% | 13% | ||
Demand Deposits | -5% | 26% | -7% | 12% | 20% | 10% | ||
M1,Narrow money | 1% | 16% | 1% | 8% | 14% | 7% | ||
Depreciation of the rupee vis-Ã -vis the $ | 13.5% | 4% | 16.3% | 1.8% | ||||
Thus the excess of domestic credit expansion over the increase in money stock (M2) resulted in a decline in the net foreign assets of the banking system. This excess found its way into foreign currency bank deposits which peaked at Rs 6.3 billion in June 1998 and led to an excessive depreciation of the rupee to the dollar of some 16%.
Moreover, the high expansion in borrowings by government from the BOM (202 %) and the above-average growth in M1 and M2 outstripping the nominal increase in GDPfy (12%) resulted with a lag to an upsurge in the inflation rate from 5.4 % in FY97 to 7.9% in FY98. The inflation rate would have been higher if had no benefited from the low prices of imports, as many commodity prices, including petrol, declined on international markets.
As from October 1998 there has been a marked difference in the emphasis of monetary policy. Instead of continuing to privilege export competitiveness or secure the right balance between maintaining export competitiveness and the protection of the purchasing power of Mauritians, the BOM went for the other extreme of reining in the main monetary aggregates to combat inflation.
This new emphasis was reflected by :
· increasing intervention in the money market to mop up the excess liquidity. The amount of Treasury bills put on tender showed a dramatic increase to reach a high of Rs7.4 billion in Jan 99 .
Auction of treasury bills | |||||||||||
Sept-98 | Oct-98 | Nov-98 | Dec-98 | Jan-99 | Feb-99 | Mar-99 | Apr- 99 | Aug-99 | |||
Amount put on tender (Rs miilion) | 3600 | 5800 | 3200 | 5500 | 7400 | 5200 | 5600 | 5950 | 3700 | ||
· the hike in interest rates
Sept-98 | Oct-98 | Nov-98 | Dec-98 | Jan-99 | Feb-99 | Mar-99 | Apr- 99 | Aug-99 | |||
Bank rate (%) | 10.12 | 10.30 | 11.43 | 12.49 | 12.76 | 12.71 | 12.66 | 12.62 | 12.74 | ||
· An exchange rate policy that was now geared to fighting inflation as is implied by the tracking of the US dollar and using it as a nominal anchor.
Between January and June 1999, the rupee appreciated by 10 percent against the Euro, and depreciated by only 1.6% percent against the US dollar compared to 16% over the last fiscal year.
· repatriation of foreign portfolio investments to shore up the rupee. Please note that the inflow in Dec 98 did boost M1 in the second semester 98.(Table2)
Have these measures tightened the money market and caused a credit squeeze ?
The main money aggregates on a semester and 3-month average basis confirm the trend noticed in Table 1.
Monetary Survey-Growth (%) | 1st semester 97 | 2nd semester 97 | 1st semester 98 | 2ndtsemester 98 | 1st semester 99 |
M1 | 14 | -2 | 8 | 2 | |
M2 | 9 | 14 | 3 | 8 | |
Reserve money | 4 | 7 | 6 | ||
Credit to the pvte sector | 7 | 14 | 13 | 14 | 9 |
There has been a decrease in the rate of growth of the main monetary parameters, including bank credit to the private sector. The slackening in the 3-month average growth rate of the latter also denotes that the tight conditions in the market is having some desired effects.
Table 3
3-month average growth
(%) | Jun 97 | Sept 97 | Dec 97 | Mar 98 | Jun 98 | Sep 98 | Dec 98 | Mar99 | Jun 99 |
Bank credit to the pvte sector | 4 | 8 | 8 | 5 | 8 | 7 | 7 | 4 | 4 |
. The rates of growth of M2 and bank credit to the private sector are still considered too high by BOM to win the crusade against inflation given that the real and nominal growths of GDP are likely to be significantly lower this year . The main culprit is the foreign currency deposits at the commercial banks, a component of M2. In spite of a 6 to 7 percentage point difference in yields favouring domestic Treasury Bills over US dollar deposits, capital continues to flow into foreign currency bank deposits, currently standing at a total of Rs7.3 billion. The monetary authorities believe that the increase in credit is being siphoned into foreign currency deposits, thus frustrating its aim of restoring confidence and strengthening the rupee .
While in July 1997 the monetary system was liberalised too rapidly, this time the brakes are being applied too promptly. After a meaningful outburst from exporters that our policies are pricing them out of the EU market, businessmen are now worried that they may be crowded out of the investment market and that the policy of high interest rates are starting to affect the growth prospects of the economy.
"Monetary policy now appears to be more exclusively devoted to an inflation goal and is conducted through the adoption of a fixed exchange rate to the US dollar as a nominal anchor. The re-orientation of exchange policy to beat inflationary pressures, however well intentioned, cannot attract credibility if it is not conducted in full transparency and with the support of fiscal, wage and other economic policies. Transparency and openness in monetary and exchange rate policies, especially in relation to the operating framework in implementation, are necessary to impart the desired credibility to the policymaking process"
EARS
18/10/99
