We do not think so ! BoM has been struggling to hold the rupee below the USD1=Rs47 mark through recent interventions, but the rupee keeps on weakening(though lately mostly because of the strengthening of the dollar). But the present “colmatage” going on at Central Bank by focusing on controlling market trading structure and conditions is not helping. They must, first of all, send a strong signal to the market that they are getting things under control - starting by signaling a future increase in interest rate to be followed gradually by other short and long term measures -both monetary and fiscal. The stabilization of the rupee is going to be slow process and will not be painless.
They should start by announcing that the MPC may soon be increasing the interest rate to relieve some of pressure on the rupee and address to some extent the differential between foreign and local interest rates while boosting savings especially after the injection of some Rs18 bn as 14th month bonus payment. The more we delay, the greater the misalignment.
Our forex shortage is chronic, despite informal exchange rate rationing by banks. Market forces are unforgiving, eagerly waiting for a credible response but our Governor does not seem to see the urgency! The BoM has to act now , it cannot continue to give such lame excuses of waiting for appropriate fiscal consolidation measures.
Take the example of the Kenyan shilling which has strengthened significantly since mid-July 2024,now trading below 130 per US dollar—an appreciation of more than 20%. The Central Bank of Kenya’s Monetary Policy Committee (MPC) took decisive actions to tighten monetary policy. Between November 2023 and April 2024, the MPC had raised the Central Bank Rate (CBR) three times from 10.5% to 12.5%, and subsequently to 13.0%, signalling a strong commitment to containing inflation and stabilizing the shilling. If Kenya can do it, why can’t we?
The attempts at controlling market practices aimed at evading the restrictions on spot exchange rates, whatever the checks and controls imposed by BoM, are not working . The fact is that that there is excess FX demand, and customers are willing to pay a higher rate for forex, and banks will circumvent any kind of restrictions on the forex market. These measures are palliative.
Similarly, the measures aimed at raising market liquidity by preventing Mauritian top companies from meeting their forex needs in-house from their own forex earnings, without going through the forex market, is having a limited impact as our conglomerates have plenty of ways and means to circumvent the market, by relying on sophisticated financial instruments supplied by banks.
These measures, including a covert indirect kind of exchange control, may on the other hand constrain the trading operations of financial intermediaries and the GBC sector(and damage the reputation of our international financial sector) which can lead to greater exchange rate volatility.
Our Governor and the Ministry of Finance are confused as they are focusing on the symptoms rather than addressing the causes.
Their analysis is wrong at the start… The FX supply demand imbalance did not start with the Covid pandemic because though forex proceeds were not coming in, imports had also gone down…
The main reason explaining the imbalance is that you cannot fool the market all the time… neither can you , Governor ! The market was rigged by the deliberate depreciation of the rupee in a bid to inflate the Special Reserves Fund… A Central Bank that was so willing to pump money in the system led to massive anticipation of continuous rupee depreciation, resulting in an ultra-loose monetary policy and negative real interest rates whilst the rest of the world was witnessing an unprecedented rise of interest rates to fight inflation. We were thus left with a situation which encouraged rational individual & corporates to do carry trade, ie. borrow cheaply in MUR and invest in higher-yield foreign currencies.
Nothing extraordinary about that!!!! Simple economics…
Now to hold a one-hour press conference to say that we can resolve the FX imbalance by moral suasion, strategic communication and the above-named ineffective measures is the last nail in the coffin of the Mauritian Rupee… Because people out there, expecting to hear strong convincing stuff and appropriate actions from the Governor and team, must have been very disappointed and concluded that we do not have serious people at the helm of the Central Bank. Bring the experts, please, not these ones !
