Mr Lincoln is off-track on inflation as he was recently on our level of public debt.
Most of our economists believe that present level of inflation in the country is much higher than 6.8%. We have every reason to believe their figures rather than those of Statistics Mauritius (SM) . All our prime institutions have been debased ,including SM, which saw its Director replaced, probably because SM’s forecast of tourist arrivals did not match the highly optimistic ones of the Ministry of Finance.
Thus given an inflation of around 10%, it will be irresponsible to go by Mr Lincoln’s advice that “l’inflation ne doit pas devenir une obsession. …il faut encourager la croissance économique plutôt que de traiter l’inflation “
Let’ s have a look at what IMF says in its Jan 2022 update of the “ World Economic Outlook, titled “Rising Caseloads, a Disrupted Recovery, and Higher Inflation .”
The main highlights :
• Elevated inflation is expected to persist for longer than envisioned …..with ongoing supply chain disruptions and high energy prices continuing in 2022. Assuming inflation expectations stay well anchored, inflation should gradually decrease as ……. monetary policy in major economies responds.
• Risks: …..Moreover, supply chain disruptions, energy price volatility, and localized wage pressures mean uncertainty around inflation and policy paths is high. As advanced economies lift policy rates, risks to financial stability and emerging market and developing economies’ capital flows, currencies, and fiscal positions—especially with debt levels having increased significantly in the past two years—may emerge.
• Monetary policy in many countries will need to continue on a tightening path to curb inflation pressures, while fiscal policy—operating with more limited space than earlier in the pandemic—will need to prioritize health and social spending while focusing support on the worst affected.
So instead of an effective monetary strategy to counter inflation and a programme of fiscal consolidation for steadying public debt, this government is having recourse to large-scale money printing ( continuing with the one-off BoM contributions to Govt ) which 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.
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, 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 .
The problem with this foul amalgam, of an accelerated depreciation of the rupee and recourse to central bank money printing for fiscal purposes, accompanied by large and unsustainable fiscal deficits and mounting public debt , fuels inflation and undermines the ability of the central bank to pursue an independent monetary policy to stabilize the rupee and prices.
The rupee has been depreciating steadily, since early 2020, and year on year inflation is on the upsurge – in double digit figures. 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. But only in the very short run. As employee compensation and other govt expenditure rise with inflation, the public debt GDP ratio will rise again. Failure to contain inflationary pressures will lead to a wage/price spiral through continued rupee depreciation.
Please note that the inflation spikes prompting countries to hike up their interest rates would impact on our GBC financial flows and worsen the BoP balance .
Mr Lincoln agrees that ”..notre dette publique dont le pourcentage en termes de PIB est à la limite du soutenable”; in the same sense, inflation has reached “ la limite du soutenable” .
But whether Mr Lincoln likes it or not, to avoid a debt crisis and a possible Moody’s downgrade, we will be compelled to give more attention to containing inflation.
