Since last year, the foreign exchange market in Mauritius has been subject to significant exchange control restrictions, leading to the emergence of offshore forex dealings, and a weaker offshore rupee exchange rate. The rupee depreciated sizeably between Oct 22 and Mar 23, whereupon certain banks were taken to task on their exchange dealings and fined by the Bank of Mauritius (BoM).
Following BoM interventions to sell US Dollars to meet the continuing chronic forex shortage, the rupee has again been set on a slight appreciation trend since Aug 23. With growing doubts about the Diego Garcia deal, there are now rumours fed by BoM about an imminent first payment by India for Agalega, to bolster market sentiment about the rupee.
On 18 Dec 23, BoM created a major surprise by intervening on the forex market not to sell but to purchase USD 0.6 mn. The next day, on 19 Dec 23, BoM again intervened to buy US dollars, mostly on a forward basis, at a forward contract date of 28 Dec 23, for USD5.5 mn.
BoM wants to signal that the forex situation has changed and that banks and the general public would be better off selling off their surplus foreign exchange balances and avoid a loss due to an expected rupee appreciation.
However, many observers consider the Agalega payment as fake news, and the BoM purchase of dollars as a stunt. It would appear that BoM is getting more desperate for forex, despite higher seasonal forex inflows in December, and a foreign loan of Euro200 mn signed with AFD for the water sector on 1 Dec 23.
BoM current net foreign reserves of USD5.1 bn (net of borrowings) are mostly illiquid because a sizeable amount of the BoM's investments in US Treasury Bills and other fixed income securities carry potential unrealised losses after the hike in global interest rates. BoM is borrowing up to USD1.5 bn to meet pressing forex needs.
Most likely, the recent BoM interventions have been staged with the help of a docile bank like SBM, as a gimmick to try to stabilize the rupee, despite the negative outlook on its intrinsic value. Although BOM projects a halving of the current account deficit in 2023 over the previous year, there is a suppressed demand for imports due to exchange control restrictions.
Even with contained imports, the current account deficit in 2023, in US dollars, is not lower than in 2019. The goods deficit in 2023 is about USD 0.6 bn higher than in 2019, while the services surplus, in US dollars, is about the same as in 2019, in spite of the recovery in tourism. Tourist arrivals are still below 2019 and gross tourism receipts are only USD 0.2 bn higher than in 2019.
Imports of goods, in volume, are still at 80% of the 2019 level. Exports of goods, in volume, have only recovered to the 2019 level, despite a more competitive rupee by 25%. The latest wage compensation and expected old age pension increases will further add to the pent-up demand for goods imports, while even official prospects for an expansion in goods exports are grim. Strong pressures remain for a wider current account deficit and a weaker rupee in 2024.
