The Bank of Mauritius (BoM) capital is totally impaired, which will weigh down heavily on the central bank’s effectiveness in achieving monetary policy and financial stability objectives.
The latest statement of financial position published by the BoM reveals that an accumulated loss of of Rs11 bn was recorded between end June 22 and end Oct 22. BoM capital and reserves at end Oct 22 are thus totally completely wiped out, following losses in August, Sept, and Oct 22.
As shown below, BoM Capital and Reserves, which amounted to Rs45 bn at June 20 fell to Rs13 bn in June 21 and June 22, and turned negative in Oct 22. Recent increases in interest rates abroad have adversely impacted fixed income investments, leading to valuation losses in the BoM’s portfolio of external assets. The recent appreciation of the rupee against the US Dollar since June 22, or around 3%, has also contributed to some exchange valuation losses.
This capital impairment of the BoM could have been avoided had the BoM complied with Clauses 11(4) and 11 (5) of the Bank of Mauritius Act, which read as follows: “... the balance in the General Reserve Fund shall be at least equivalent to the amount paid as capital of the Bank. Where, at any time, the balance in the General Reserve Fund is less than the amount paid as capital of the Bank, the Bank shall endeavour to bring the balance to the required level”. But the priority for the BoM was to drain its capital reserves to fund Govt.
The BoM needs to be urgently recapitalized. The Bank of Mauritius Act already prescribes the required necessary actionin the event of capital impairment, as per Clause 10(5):”Notwithstanding any other provision of this Act, the Minister shall cause to be transferred in full ownership to the Bank, negotiable interest-bearing securities issued from time to time by Government at market rates for such amount as, in the opinion of the Board, is necessary for the purpose of preserving the amount paid as capital of the Bank from any impairment”.
How did BoM get caught in in such dire straits? In recent years, BoM systematically devalued the rupee to generate foreign exchange valuation gains and artificially boost its capital reserves for distribution of some Rs55 bn to Govt to meet fiscal needs in 2020-21. In addition, BoM engaged in massive money creation via the Mauritius Investment Corporation to finance Govt and prepay Govt debt through the artifice on an investment of Rs 25 bn in Air Mauritius Holding at end 2021. It appears a similar MIC investment is now planned in Metro Express.
Excessive fiscal spending and monetary easing fed a widening external current account deficit to over 10% of GDP, continuing rupee depreciation, and double-digit inflation. Net forex reserves declined by USD 2 bn over the year until Oct 22, and currently stand at around USD 5 bn. A chronic shortage of foreign exchange prevails, forcing the BoM to sporadically intervene in panic mode, while the rupee is propped up by unofficial exchange control measures. An offshore forex market in the rupee has started to develop. The BoM is compelled to align its policy interest rate to rising interest rates abroad to avert foreign capital outflows.
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The unsustainable build-up in public debt has already led to two successive downgrades in the country’s credit rating. Govt is hoping that the post-Covid recovery and a more competitive rupee will strengthen growth in the tourism, financial services and real estate sectors, relieve foreign exchange pressures, and reduce the public debt to GDP ratio. While soaring prices may initially contribute to reduce debt ratios and swell tax receipts, continued populist and unchecked fiscal pay-outs will lead to heavier external deficits, more rupee weakness and spiralling inflation.
Expectations of foreign financial assistance, including financial compensation for the use of Diego Garcia or Agalega, will also not resolve the fundamental and structural issues facing the economy. Chiefly, that Mauritius is living beyond its means, with an ageing population, a declining workforce and stagnant productivity. An eventual loss of investment grade status cannot be ruled out without the restoration of fiscal and financial discipline. Mauritius Kaput is also drawing near.
