(Published in Le Mauricien 14 April 2020)
Sithanen is proposing Central Bank financing to give economic and financial firepower to government to tackle the Covid-19 and the economic crisis. His proposal is that the Central Bank buys the Govt bonds issued by government which will monetise the debt but will not impact on the level of debt. Sithanen got it wrong.
An eventual massive purchase of the newly issued debt by the central bank will facilitate its absorption but will not prevent the increase in the government' debt ratio.(Unless the CB cancels that debt or rolls it over when the bond matures. Such an intervention is likely to be considered inappropriate in many jurisdictions and a violation of the CB's independence). Please note in the reporting of Public Debt, the CB's holding of Govt securities is included.
The only way is by a transfer of central bank's capital reserves or profits to government or by a permanent annotation on the asset side of its balance sheet.Only such a transfer from the central bank to the government will not have an impact on the government's effective debt liabilities.
He also recommends that it must be timely and temporary.
My first issue is that this measure of flooding the market with liquidity is applicable mostly in developed economies where it is less likely to be inflationary because supply tends to respond more rapidly to the incentives provided. Here this is not the case. In an open economy like ours, it is more likely that the "helicopter money" will accelerate the depreciation of the rupee, aggravate the already high debt to GDP ratio and ultimately the economy will end up with soaring levels of inflation . The depreciation of the rupee will be a boon to exporters but we will have to pay the high price of social unrest as a result of falling real wages, falling purchasing power and increasing levels of poverty. And we should keep in mind the risk of downgrading by the rating agencies.
My second issue is as Martin Wolf puts it in FT "Il n'y a que le provisoire qui dure"; these so-called temporary measures are likely to become a permanent feature postponing the urgency for fiscal reforms and for creating the fiscal space to provide more resources for handling the contagion and protecting the population, especially the persons likely to lose jobs as a result of the crisis. Sithanen is off the mark; We have very difficult days ahead and we have to prepare the population for that not to give them false hopes via "helicopter money". Martin Wolf also warned that such helicopter money should be vIewed as simply another policy tool, not a cure-all. “The employment of supposedly irreversible monetary financing is just another policy tool. It has pros and cons, specific to the circumstances. It is neither the royal road to hyperinflation nor a panacea for today’s contraction of the real economy. Right now, when government deficits are exploding in the midst of a huge crisis, it is an obvious mechanism. Use it. Work out ways to manage it.”
Govt is bragging that Mauritius will be obtaining that much funds from the WB and the IMF under its Extended Fund facility. But this money will not come without policy actions, notably on pensions, employee remuneration, wage awards, civil service employment etc. This IMF assistance is not without a requirement for policy actions to strengthen the fiscal position.
Look what is happening in Tunisia. Tunisia has been under an IMF program for several years, after borrowing under the IMF Extended Fund Facility. Amongst other measures, it embarked on civil service reforms, like limiting recruitment in the civil service, as well as voluntary retirements.
Tunisia is borrowing about USD 750 million under the IMF’s Rapid Financing Instrument. It will have to pursue fiscal reforms. (Please note that fiscal and expenditure reforms should not be reduced to mean austerity measures but a reallocation of expenditure towards priority areas/sectors ) Can we really avoid fiscal reform ? I doubt it ! Neither does Sithanen if i'm not mistaken !
