The latest “Central Bank Survey” (CBS) of the Bank of Mauritius (BoM) shows that BoM capital and reserves at end Oct 22 are practically wiped out. The BoM’s capital is almost totally impaired, which will weigh down heavily on the central bank’s effectiveness in achieving monetary policy and financial stability objectives.
The item “Shares and Other Equity” in the CBS amounted to only around Rs1 bn at end Oct 22, compared to Rs13 bn in June 22, and Rs20 bn in Dec 21. This item essentially comprises (1) the BoM’s paid-up capital of Rs10 bn, (2) reserves of Rs3 bn held since June 22, (3) any comprehensive income or loss, as well as (4) some minor BoM liabilities.
The monthly statement of financial position also published by the BoM reveals that a positive comprehensive income of Rs1 bn was recorded by the BoM in July 22, followed by a loss of Rs4 bn in Aug 22, and another loss of Rs4 bn in Sep 22, or a total comprehensive net loss of about Rs7 bn at Sep 22. BoM capital and reserves of Rs13 bn in June 22 were thus reduced by these net losses to around Rs6 bn at end Sep 22.
As shown in the table below, “Shares and Other Equity” in the BoM Central Bank Survey, amounted to Rs 7 bn at Sep 22, and only Rs 1 bn at end Oct 22, thus reflecting a major impairment in the capital and reserves of the BoM. BoM capital and reserves, net of losses, are close to nil at end Oct 22.
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 action in 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 Rs 55 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, 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.
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.
An eventual loss of investment grade status cannot be ruled out without the restoration of fiscal and financial discipline. Or else, Mauritius Kaput draws near.
