Have a look at the comments of some of the chatwas among the economist breed ! They see the economy on the mend, on its way to recovery, though inflation and high unemployment among the youth in the absence of a meaningful reskilling programme, remain areas of concern. For them we have come out of the malaise , the FATF grey list ; the financial sector growth will see the best it has been in the past few years and we will return to our trend level of growth soon .
"We are on track ; it is a good sign and it reflects business optimism. For many, it will be just a question of a growth rate between 4 to 5% now but we will be needing some remedial touches to sustain the economic recovery and achieve full growth potential."
Are they really following what’s happening in the economy ?
What are the risks to the economy with an irresponsible govt that continues to rely on BOM’s finances for its spending spree and thus succeed in containing Public Debt to GDP to around 100% ?
The IMF had recommended that “the central bank should refrain from providing direct financing to the government and engaging in quasi-fiscal activities,…” Why ? Why are the chatwas not denouncing this money printing via MIC ?
What are the risks of BoM becoming Govt’s piggy bank which our chatwa economists do not seem to be aware of ?
MORE ONE-OFF BOM CONTRIBUTIONS TO GOVT !
Previous BoM Transfers
During the financial year 2019-20, Bank of Mauritius (BoM) transferred Rs18 bn to Govt for prepayment of external debt, following an amendment to the BoM Act. Only about Rs7 bn was actually used to prepay the African Development Bank in early 2020, and the balance was used to finance the Govt deficit.
In 2020-21, after an amendment to the BoM Act to provide for grants to Govt to assist in its fiscal measures to stabilize the economy, BoM again transferred Rs60 bn to Govt for deficit financing, termed as a one-off contribution to Govt in the BoM’s financial accounts. These two transfers have been sourced largely from the BoM Special Reserve Fund, which is replenished annually by exchange valuation gains from the continued and deliberate depreciation of the rupee.
With these BoM transfers, Govt expenditure, including special funds, has surged to record levels, reaching 35% of GDP, and public sector debt currently stands at around 100% of GDP. Govt expenditures keep rising, notably with a new PRB award for public sector employees, and another sizeable increase in old-age pensions is projected for 2023-24.
On account of the high level of public debt, Govt is however wary of financing its growing expenditures through further borrowings, which could lead to a downgrading to the country’s credit rating by Moody’s to just one notch above junk status. Govt is therefore resorting to BOM transfers again to finance its spending and try to contain public debt at around 100% of GDP.
Latest BoM Transfer
For this financial year 2021-22, the Mauritius Investment Corporation (MIC), a recently created BoM subsidiary, transferred Rs25 bn to Govt in Dec 2021. This is the largest single disbursement made by MIC so far, with about Rs15 bn disbursed to several private companies. Press reports about the details of this MIC funding are unclear. Govt, BoM and MIC are immersed in deep yogic meditation, and have not considered it necessary to provide any public information.
Focusing on the use of this transfer of Rs25 bn to Govt, it appears that Govt has prepaid Rs13 bn of Govt securities held by the National Pension and Savings funds. This will reduce the current public debt by a corresponding amount, but also provide extra leeway for Govt to spend up to an extra Rs13 bn without exceeding the 100% debt/GDP ratio. The balance of the transfer, or Rs12 bn, has been used for additional Govt expenditure, namely, to fund a transfer payment to Airport Holdings Ltd in settlement of its creditors.
As regards the source of this transfer of Rs25 bn, it originates from the BoM and has been channelled to Govt via MIC to support fiscal spending. In reality, MIC is a Govt vehicle for utilizing BoM money to extend financial support to the economy, including to Govt itself. MIC is akin to a state-owned company, like the State Investment Corporation, except that it is funded and managed by the BoM as a nominee or shadow shareholder for Govt.
As a masquerade, Govt provided MIC with equity in Airport Holdings and other state-owned agencies in exchange for the transfer of Rs25 bn. The transfer of equity of state-owned companies from Govt to MIC for Rs25 bn is a deceptive transaction that only serves to detract from the real one, namely a transfer of Rs25 bn from the BoM to Govt to finance its expenditures.
MIC
MIC has been set up under section (6) (1) of the Bank of Mauritius Act, which gives powers to the Bank to “with the approval of the Minister, subscribe to, hold and sell shares of, provide capital to or invest in, any corporation or company set up for the purpose of facilitating economic development. MIC has interpreted its purpose somewhat more broadly as “to support and accelerate the economic development of Mauritius”.
It is doubtful whether the above section is meant for a company to be set up by BoM as a wholly-owned subsidiary, but which would rather apply to a company set up by Govt or the private sector. In contrast, section (6)(1)(oa) explicitly provides for the BoM to “set up a development fund for the benefit of small and medium enterprises”.
Even if BoM has the express power to set up and fund a company, it is critical that MIC should be managed independently, which is far from being the case currently. Like other state-owned companies, it will not be spared from brazen kleptocratic looting, and is well set to emulate, and possibly even outdo, Air Mauritius and SBM.
Sec 46(5) of the BoM Act also provides for investing its foreign exchange reserves in a company like MIC, provided the invested amount is not included in the computation of official foreign reserves of Mauritius. So far, official external reserves have not been netted by any BoM investments in MIC. The alleged funding of the MIC by BoM’s external reserves is a red herring. In effect, the BoM investment in MIC is another instance of a Covid-related grant contribution to Govt for fiscal purposes.
There are few examples worldwide of central banks taking equity stakes in state-owned or private companies in response to the Covid crisis. In June 2021, the IMF Executive Board had recommended that “the central bank should refrain from providing direct financing to the government and engaging in quasi-fiscal activities, and advised reforming the Bank of Mauritius law, including to pre-empt further exceptional transfers to the government. Directors also recommended that the central bank be recapitalized and relinquish ownership of the Mauritius Investment Corporation (MIC), with the financing of the MIC provided through the budgetary process”.
The MIC is truly a Govt vehicle for using BoM to extend finance to the economy. from BoM money. The IMF also warned that money printing via MIC would limit the BoM’s ability to counter inflationary pressures. MIC nevertheless claims that its establishment is in line with the BoM mandate.
Conclusion
BoM has become Govt’s piggy bank, and is also assuming the role of a development bank. Large scale money printing has already resulted in foreign exchange shortages, a sharp depreciation of the rupee and higher inflation. External reserves are currently boosted artificially by BoM foreign borrowings. 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. The masters at deception are still figuring out a way to fully rig price statistics. Maybe ICAC could help. 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.
