You recall that in May 2020, the Bank of Mauritius (BoM) announced that it would finance a contribution of Rs60 bn to Govt through open market operations, i.e. by borrowing from the market through the issue of BoM securities. Govt received the total contribution in two tranches in the months of August and September 2020.
BoM then changed its story in May 2021 by stating that the contribution to Govt would be financed by the BoM’s Special Reserve Fund (SRF) which would write off an amount of Rs32 bn, and by BoM advances of Rs28 bn on future distributable profits.
We now learn from its audited accounts,submitted to Parliament,that the BoM has financed the contribution to Govt from (i) the Bank’s SRF by Rs52 bn, instead of Rs32 bn, and from (ii) the Bank’s General Reserve Fund (GRF) by Rs3 bn, with a balance of Rs5 bn to be “settled thereafter”. An amount of Rs55 bn has thus been written off from the SRF and GRF to finance the contribution to Govt, and a balance of Rs5 bn remains as an asset on its balance sheet.
Govt has depreciated the rupee deliberately to create valuation gains on external reserves for the BoM, in order to finance its fiscal deficit, thereby also fuelling inflation and reducing living standards. The BoM has been a willing party to this devaluation policy, in total contradiction to its role as independent institution responsible for controlling inflation.
The SRF stood at Rs40 bn in June 2020, boosted by exchange valuation gains of Rs35 bn in 2019-20 from rupee depreciation of over 12% against the US dollar during that year. BoM valuation gains due to continued depreciation of the rupee, by 6% against the US Dollar, further contributed to increase the SRF by Rs22 bn during 2020-21.
Adding these valuation gains and after a transfer of Rs8 bn to strengthen the Bank’s capital, the SRF increased by Rs14 bn to around Rs54 bn at June 21. To finance the contribution to Govt, an amount of Rs52 bn has been written off from the SRF. An extra amount of Rs3 bn was written off from the General Reserve Fund.
BoM has thus financed Govt mostly from valuation gains from the depreciation of the rupee in this financial year as well as the previous one. Depreciating the rupee has raised inflation, currently standing at a year-on-year rate of around 6%. To meet Govt deficit financing needs, BoM has totally surrendered its independence and responsibility to fight inflation.
The Bank appears inadequately capitalised, in view of the rising expenditures in the coming years from a likely increase in interest costs. The Bank’s weak capitalization will adversely affect public confidence in its effectiveness to conduct anti-inflationary monetary policy. The cost of monetary policy operations is already high at Rs2.5 bn in 2020-21. In addition to the servicing of BoM debt issues, the Bank will need to pay higher interest on its growing foreign loans. BoM started borrowing heavily in June 2020, and total BoM loans at end Oct 21 stood at a record high of Rs30 bn.
The Bank will also have to absorb potential future losses of the Mauritius Investment Corporation (MIC). MIC invested Rs8.6 bn by end June 2021, consisting of Rs6.2 bn in corporate redeemable convertible bonds, and Rs2.4 bn in property assets. The redeemable convertible bonds have already been been written down in value by 8%, which translated into MIC losses during 20-21. This valuation loss was predictable in view of the mispricing of the future conversion share price, well above current market prices.
( Please note that the utilization of the GRF to finance Rs3 bn of the Govt contribution is highly questionable, and is against the spirit of the Bank of Mauritius Act. The purpose of the GRF is to support the Bank’s capital, not to finance contributions for Govt. It is replenished annually by 15% of the Bank’s profits. To emphasize the GRF’s capital support role, sections 11(4) and 11(5) of the BoM Act provide that the GRF’s balance should match the Bank’s paid up capital, and that the Bank shall “endeavor” to keep the GRF in balance with the paid up capital .
The withdrawal of Rs3 bn from the GRF to finance Govt’s contribution is therefore in contradiction with the purpose of the GRF as provided the BoM Act. The word “endeavor” in section 11(5) should be interpreted to mean flexibility in reinforcing the GRF and not in weakening it.
Moreover, the Bank is empowered to grant any Covid-related amount to Govt to stabilize the economy, but the BoM Act only provides for such grant to be made from the SRF, under section 47(6). Covid-related Govt contributions should be financed from the SRF, not from the GRF. A legal challenge may even in order to clarify the legality of this doubtful utilisation of the GRF.)
The changing explanations of the BoM about the financing of the transfer of Rs60 bn to Govt reflect poorly on its governance, independence, and credibility. The central bank is a foremost institution responsible for banking and financial issues, and a central banker’s word is held to be his bond. Such confused decision-making and currency depreciation are highly misleading as well as potentially dangerous to financial market operators.
