(Revised version, published in l'express of 27 Dec 2021)
In a statement to the press recently, the Governor affirmed that “The Central Bank(CB) does not currently require any capitalization and can conduct its monetary policy without any financial constraints…”
You recall that the exceptional Rs 60 billion of money creation by the Bank Of Mauritius (BOM) to finance a higher budget deficit -the monetary deficit financing as opposed to Quantitative Easing(QE) by many countries-was met with disapproval from the IMF-“The monetizing of deficits has undermined the ability of the BOM to keep inflation under control “ .
Now we have a situation that is witnessing a relentless surge in shipping and material costs, higher energy prices and persistent bottlenecks at ports around the world which have added to the barrage of problems affecting supply chains. Trade experts warned that the supply chain disruptions that threaten to stifle the post-Covid recovery will spill over into 2022 as freight rates soar. Locally, the depreciation of the rupee and the increase in pretroleum prices are adding to the inflationary pressures from the hike in international commodity prices and freights.( Government has intensified inflationary pressures by its deliberate policy of excessively depreciating the rupee ).
How is the CB tackling the yr-on-yr inflation that has reached 6.4% ? Is the BoM running out of ammunition to contain inflation ? What is the greater risk of a further hike in inflation ? How should the Bank tackle its undercapitalisation?
A rapid examination of the main money aggregates shows that the year-on-year growth of Broad Money Liabilities in September 2021 showed an increase of 17% whereas and the Monetary Base peaked up to all time growth of 90%- a reflection of the excess liquidity in the market and the problems ahead to contain the inflationary pressures . The growth in the money supply may have an impact in the long run but in the present economic environment with negative output gap or excess capacity in the economy and a combination of a supply and demand shocks ( the high level of household and corporate debts), the Central Bank is seeing the risks of the excess liquidity adding/increasing the price pressures in the current situation as minimal.
Thus, the BoM is not in a hurry to step up its open market operations to mop up the excess liquidity and adopt such measures that will provide an opportunity for the BoM to move decisively towards an explicit inflation targeting strategy. It prefers to kick the can further down the road rather than gradually raise the rates and risk slowing down the economy.
But in failing to convince our business people, investors and consumers that it is determined to contain inflation (by keeping monetary policy loose even as inflation soars) it will be affecting their expectations of inflation. The whole future trajectory of inflation today will hinge on this variable. This is the greater risk to the economy at present. This will unanchor inflation expectations and add to pressures on the rupee. We are thus in for a period of a foul amalgam of further rupee depreciation,higher inflation and economic distress.
Moreover, 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 thus further 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 Rs30bn.
The Bank will also have to absorb potential future losses of the Mauritius Investment Corporation (MIC). MIC invested Rs 8.6 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.
No, Mr Governor , we will not let you get away with it so easily; a Central Bank is supposed to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in the country and generally to operate the currency and credit system of the country to its advantage not to undermine the Bank’s effectiveness in conducting anti-inflationary monetary policy .
So, let an independent committee of experts assess whether BoM’s capital is adequate or not, just like the Reserve Bank of India did sometime back, before transferring a part of its internal reserves to Government. Or, Government can call on the RBI, IMF or the BIS for technical assistance to undertake such a capital adequacy evaluation.
That's what a responsible Central Bank should do !
