Interesting article in yesterday's l’express titled “Politique monétaire: La dépréciation de la roupie s’installe dans la durée”, by L.Melidor, which raises some substantive issues that will need to be addressed before it is too late.
An abstract for our readers:
Well argued and well structured in these 3 main parts:
Part I: It gives a thorough explanation as to why we are having such a high rate of depreciation of the rupee that could be summarised as:
>> The large-scale money printing ( the one-off BoM contributions to Govt for budget 2020-21)was already resulting in foreign exchange shortages at local banks, and govt had no intention of defending the rupee though it had enough of excess foreign reserves.
>> Though , it was intent on boosting the level of reserves – a kind of window-dressing to show that that external situation is under control- it was , however, more interested in deliberately accelerating the depreciation of the rupee to enable govt to obtain finance for its budget operations through the revaluation gains of the Special Reserve Fund, and
>> This policy of rupee depreciation was also pursued to deflate the real value of the mounting public debt and raise more tax revenue on the inflated value of consumption.
Part II : "Cette dépréciation elle ne s’arrêtera pas, elle s’installe dans la durée ..."
Factors that will cause further depreciation of the rupee:
>1. I have been arguing that Mauritius can be said to be suffering from the "Dutch disease", a term that broadly refers to the harmful consequences of large inflows of foreign currency.
For quite some years, the strong currency driven by the capital inflows in real estate projects and the Global Business sector have inevitably contributed to the hollowing out of other parts of the economy, meaning a weakening of the competitiveness of the country's exports and the shrinkage of the export sector. Our overvalued currency(in real terms) could not be sustained in the long run given that productivity gains had not proved to be sufficiently large to contribute significantly to enhancing export price competitiveness.
Thus, it is not wrong to state that low value-added and price sensitive export items have been adversely affected. These products, already facing intense competitive pressures, are likely to be further impacted as world trade and output growth continue to slow down. Thus, unless sector reforms are undertaken to generate productivity improvements in agriculture, industry, public utilities, health, education, etc, the country will continue to rely on rupee depreciation to enhance tourism and its exports. But a competitive real wage is no longer sufficient to attract foreign investments and create jobs in the new global environment; it’s only a short-term palliative to maintain existing production and jobs. See Table I
>2. The inflation spikes prompting countries to hike up their interest rates are likely to weaken our GBC financial flows and worsen the bop balance.
>3. BoM’s impotence in adopting anti-inflationary measures- these are reflected in the real interest rates that are being held at sharply negative levels.
>4. The repeated recourse of Govt to one-off BoM contributions ( the latest is Rs 25 bn to govt via MIC) is inexorably leading to further weakening of our rupee. It will become more and more difficult to insulate the rupee from depreciation pressures. The IMF had warned us that “the central bank should refrain from providing direct financing to the government and engaging in quasi-fiscal activities,…” See Table II
Part III: How to tackle “cette dépréciation soutenue de la roupie et cette tendance inflationniste” ?
---One of our top economists is proposing that “ la Banque centrale devra éponger l’excès de liquidité sur le marché. (Table II) Or, la BoM n’est pas assez solide pour augmenter les taux d’intérêt et cela aurait, de toute façon, des répercussions sur la capacité de remboursement des entreprises. Des mesures concrètes doivent être prises pour renforcer le bilan de la BoM à la suite de l’important transfert à l’État et pour couvrir les coûts d’une politique monétaire efficace.”
Indeed, 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.
---Another of our talented economists warns us that “ il n’existe pas de solution magique pour que la dépréciation de la roupie s’arrête par enchantement."
He recommends that «Il faut mettre en place tout un arsenal de solutions, à commencer par se concentrer sur la production locale, avec l’aide des nouvelles technologies, en plus de réduire nos dépenses d’importation, nous pourrons générer de l’emploi et donc de la valeur économique. Il nous faut trouver une solution pour employer plus de Mauriciens sur les chantiers pour tous les projets d’infrastructures, cet argent restera dans le pays au lieu d’aller à l’étranger. Pour l’investissement, il nous faut éliminer cette bureaucratie et accélérer les projets de digitalisation de la fonction publique. Pour les projets, il y a bien trop d’effets d’annonce et rien de concret. Nous avons plein de projets, dont développer la silver economy, l’économie bleue et verte. Commençons par attirer le maximum d’investisseurs dans ces créneaux. L’énergie renouvelable réduira notre dépendance à l’importation de carburants et l’économie bleue est un secteur d’avenir qui attire bien des convoitises.»
We wish to add that these will have to be accompanied by an effective monetary strategy to counter inflation and a programme of fiscal consolidation for steadying public debt, otherwise a debt crisis awaits us
The article rightly concludes on this cautionary note “Finalement, il est clair que cette politique de dépréciation de la roupie n’est à l’avantage de personne. Des actions concrètes doivent être prises séance tenante, car outre le long terme, il est primordial de penser à demain, car Moody’s nous attend au tournant."
Righly concluded on the risks of a Moody’s downgrade, why ?
Because the large scale money printing has already resulted in foreign exchange shortages, a sharp depreciation of the rupee and higher inflation. Real interest rates are being held at sharply negative levels despite rising inflation, reflecting the BoM’s impotence in adopting anti-inflationary measures. Instead, BoM is fuelling inflation with this latest shocking and irresponsible transfer to Govt. (Rs 25 bn) .The repeated recourse of Govt to one-off BoM contributions is inexorably leading the country towards greater financial instability and an eventual bankruptcy. We will have reason to thank our stars if Moody’s does not downgrade Mauritius straight to junk status in the coming months.
