The rupee has depreciated by an average of about 8% against the currencies of our major trading partners between end Oct 22 and end Mar 23. The rupee depreciated by 4% against the US Dollar and by 13% against the Euro over this period. The continued depreciation of the rupee will further aggravate inflation, which was already in double digits, reaching 11.3% in Feb 23, on an annual average basis and still as high as 11.1% in March 23.
Rupee depreciation is however encouraged by the authorities as it contributes to produce valuation gains on the BoM’s forex reserves-Rs 9.4 billion as at June 2022- and thus to artificially strengthen the capital adequacy of the BoM, and offset the adverse impact of global rise in interest rates on foreign securities and other investments held by BoM.
Rupee depreciation and higher inflation also boost the amount of revenue collected by Govt, mainly though indirect taxation, such as VAT and petroleum taxes.
While inflation is severely affecting the cost of living of the lower income groups of the population, Govt will is probably counting on providing some relief through the significant increase in (CSG) pensions benefits as from July 23, as planned, and through some compensation for inflation as a budget measure, like last year.
The noise made by the BoM about holding banks responsible for rupee depreciation through currency speculation is mere diversion from the realities of our external payments situation. Imports are running much in excess of exports, leading to a current account deficit of Rs70 bn (USD 1.6 bn), or 12% of GDP in 2022, compared with Rs25 bn (USD 0.7 bn) , or 5% of GDP in 2019.
Based on the projections for 2023 by Statistics Mauritius, the current account deficit for 2023 is expected to be still high at Rs60 bn, or around 10% of GDP. If Govt does not make the needed monetary and fiscal adjustments to address the external current payments deficit, foreign currencies will remain in short supply, and the rupee will continue to weaken further.
The implicit foreign exchange control regime, in force since last year, has proved to be ineffective in holding up the rupee. The authorities may in fact be setting the scene for a formal re-imposition of exchange control, should the impending risks of a sovereign credit downgrade, or of global capital instability, materialize.
