Surprisingly it is not the BoM-which decides about our monetary policy stance-that is trying to justify the deliberate policy choice of an accelerated depreciation of the rupee , it is the so-called think tank (sic) of government-the EDB
They claim that their back-of-the-envelope analysis has led them to conclude that the depreciation of our rupee is leading to a considerable increase in exports to our main markets, …….You know what happens when monkeys are allowed to play with razor blades, they end up hurting themselves. This is what you can expect when the EDB tries its hands at what it calls analysis which is actually some simplistic and erroneous calculations as we do show below.
Applying their own faulty logic, we can show that over the month-to-month period of Jan 2020 to Jan 2019, despite an appreciation of the rupee vis-a-vis the South African rand, our exports to South Africa went up by 7 % and the depreciation of the rupee to the £ and the euro did not seem to boost our exports, whereas a more meaningful depreciation of the rupee to the euro over the month of Jan 2021 compared to Jan 2020 did not result in any substantial increase in our exports to France.
The depreciation of the Rs/$ show opposite exports results over the two distinct month-to-month periods. For Jan 2021 to Jan 2020, our experts of the EDB have tried to explain it “principalement par la fermeture d”Esquel, un important exportateur vers les Etats-Unis”. But how will they then explain that the higher depreciation of Rs/$ (10%) over the whole year 2020 led to a 21% decrease in our exports (including Esquel) to the US ?
This back-of-the-envelope analysis leads to inconclusive and conflicting results because (a) it should be analysing real and not nominal figures-the Exports (fob) figures are not in volume terms (b) it is not dealing with normal years – the pandemic has distorted the trend figures, (c) when export prices are set in US dollars or euros, a country’s depreciation does not immediately make goods and services cheaper for foreign buyers creating little incentive to increase demand, (d) the key sectors that would normally respond more to exchange rates—like tourism—are likely to be impaired by COVID-related containment measures and consumer behavior changes and (e) if the depreciation of the rupee is accompanied by a global strengthening of the US dollar, it is likely to amplify the short-term fall in global trade and economic activity, as both higher domestic prices of traded goods and services and negative balance sheet effects on importing firms, lead to lower import demand among countries other than the US.
A more profound analysis would have dealt with the effective real exchange rate which takes into consideration the changes in the exchange rate of other competitive exporting countries(textiles) and the inflation differentials.
Nevertheless , we are aware that, in response to large and unexpected external shocks, a meaningful depreciation or devaluation of the rupee to improve external competitiveness may , after a lag, give a little fillip to the economy via increased exports in the short term. We have pursued such policies over the past decades and the “belief that currency manipulation can spur export driven economic growth in the long term is a much devalued idea”.
Why ? because in the long term there seems to be poor price responsiveness of global demand for our goods, and especially our services and more importantly because our attempts at devaluation/depreciation have always worked its way back to increasing costs for our enterprises given the low value of our net exports as a % of exports which has not improved over time and the wage awards -compensating for the consequent inflation - that have generally outpaced the gains in productivity.
This relentless campaign waged by the exporters skilful lobbyists for rupee depreciation has often been criticised in the past as consummate examples of the perennial “fat cats” perpetually hiding behind competitive depreciation and pressuring government to generate a net transfer of national wealth to them like the fillip that they got from excessive depreciation of the rupee in the past,especially in 2006-2007 and 2015-16.
Even some of the people who are now on the other side of the fence , namely our friend J.P Arouff , ex-Chief Edititor of Business Magazine , now special advisor to the Miinister of Finance , had commented sometime back in January 2010 that « La compétitivité mauricienne se résume souvent à la fluctuation de taux de change » or our other friend, Mr Kee Chong Li Kwong Wing, who had caustically argued that « il y a une grande connivence, une unholy alliance, entre le pouvoir économique et le pouvoir de l’Etat. Aucune surprise donc si le secteur privé ne fait aucun effort d’innovation au niveau de la réflexion stratégique ou de la proposition de mesures pour améliorer cette compétitivité. Il a tellement bénéficié des concessions fiscales et de la dévaluation… Comment voulez-vous que ce même secteur privé apportera une quelconque solution durable afin d’accroître la productivité. » Autres temps, Autres mœurs !!!
But with Moody’s and the IMF breathing down our necks and with the new challenges adding to those we have chosen to sweep under the carpets instead of addressing them, the unsustainable fiscal and debt metrics combined with our rupee hitting new lows - all these do not bode well for our economy. This may be the worst time for our imports costs to rise and the possibility of oil prices hitting new highs may intensify the pain to Mauritius of imports paid with a falling rupee. Thus our experts of EDB should be cautious before they start rejoicing about the “ chute de l’importation (qui) peut favoriser les développement des enterprises locales, les domestic-oriented enterprises”.
Will we be seeing, as often in the past, another bout of the short-term, easy way out, policies of unduly relying on a falling rupee to stimulate economic activity without imposing the reforms that would ignite a true revival of the economy? The real source of competitive advantage does not lie in rupee depreciation but in fundamental reforms and cost structuring and productivity improvements.
