(Published in Weekly, Issue 401, 11 June 2020)
In his reply to the PNQ by the leader of the opposition on the Balance of Payments, the Minister of Finance , new to the political scene but already developing quite some intolerance to queries and already habituated at playing fast and loose with the answers, was this time totally off the mark.
In trying to select the most juicy ones among the many answers doled out to him by his technicians, he confirmed our apprehensions that we were having affair with yet another among the merry band of neophytes who have peopled our National Assembly lately. (But quite adept at delivering copious paeans of praise for their leader.)
Unfortunately, his fluid French prose and digital dexterity, could not be of much help in his analytically flawed argument that as compared to 2014 when the country had foreign reserves equivalent to just 6.4 months of imports , it was “la stratégie d’anticipation visant a construire la résilience économique” that resulted in the stupendous increase of foreign reserves to 12.8 months equivalent of imports. The blunder lies in trying to pick out the "present level of foreign reserves" as a solid economic indicator of the state of the economy.
Dr Payadachy, more at ease with the politics and economics of inclusiveness and still struggling up the learning curve at his new job, could be excused for overlooking the fact that a country's foreign reserves are analogous to a person's checking and savings accounts. Also similar is the idea that for a lot of people, the majority of their net worth is not tied up in their checking and savings account. Instead, it is tied up in higher-yielding assets like their home and stock portfolio as well as the future salary and wages they can earn based on their individual productivity. This individual productivity is analogous to a country's GDP and for almost all countries out there, the vast majority of a country's "net worth" is not tied up in its foreign reserves, but in the sum or "capitalization" of its potential GDP production in the years to come. The truly wealthy, Dr Payadachy ,are that way not due to the size of their checking accounts but because they own assets like real estate or businesses that produce large amounts of scalable income.
Let us have a look at our checking accounts; we have Rs 280.6 billion of foreign exchange . How did we accumulate so much ? Following this analogy, we can say that much of it came from the sales of our precious jewels and very soon we will have little left to sell and quite a sizeable amount came from the renting of our rooms to foreigners who agreed to temporarily place their funds in our coffers. And we started building mansions on sand, so assured were we of our future, that we did not even bother to prop up our individual productivity, furnish and solidify our house for the years to come. We chose to live on borrowed time and we even allowed things to deteriorate.
Sorry to deceive you, Sir, the increase in our foreign exchange reserves by more than two fold has little to do with “la stratégie d’anticipation visant a construire la résilience économique” ; it is rather because of the increasing risks of the volatile capital flows of a larger offshore sector, that we followed IMF recommendation on the basis of its adjusted reserve adequacy metric, and we opportunistically built up reserves buffers to account for the financial sector vulnerabilities associated with Global Business Companies (GBC) deposits and the liquidity of commercial banks’ foreign currency assets. By the way, in its 2019 Staff Report Art IV consultation , the IMF expressed satisfaction with the level of FX reserves but given the vulnerabilities associated with a large offshore sector facing crucial challenges, they had recommended further reserve accumulation.
Thus though our international reserves have improved significantly with the support of the financial inflows to the offshore sector and the FDI flows to the real estate sector masking the widening external imbalance (11% of GDP if we exclude GBC), we have every reason to be wary of any disruption in global capital flows that can put at risk our financial stability.
The large current account deficit was just the tip of the iceberg. The economy at end 2019 was teetering on the verge of a crisis. Growth continued to be revised downwards, private sector investment was losing momentum, youth unemployment remained high, the elevated levels of the budget deficit and the public sector debt were unsustainable and several key sectors namely sugar, tourism, manufacturing and the financial services were in the doldrums. Resilience économique, you said !!!
To conclude and correct our dear friend, rather than the level of foreign reserves ,we have picked up some more meaningful indicators, as per international standards, to provide us a better picture of the state of the economy under the two different regimes . Some of the figures in the table below do make plain the severe distress the economy was going through pre Covid-19.
N.B: Quoting someone partially or out of context-if it's not being outrightly dishonest- may also get you a flawed analysis . Manou Bheenick espouses the Central Bank’s financing of development projects, especially the safeguarding of lives more than livelihood, but does not rule out the calamitous effects of inflation and rupee depreciation. And in case of Sithanen's helicopter money, it seems that he has meant it to be "targeted, timely, temporary and proportionate" , in a sense, to be used sparingly in combination with loans, equity or quasi equity.
