Editorial

Managing the Economy 

The euro has fallen to its lowest level since 4 years against the US dollar. Only some months back, it was exchanging at $ 1.47 per euro when it was seen as a refuge currency against a falling US dollar; it is currently down at $ 1.23 or 19.5% below the above-stated peak level due to the current crisis of confidence in the Euro zone. When the euro was at $ 1.47, it was exchanging for Rs 44 per euro locally; at $1.23, it is exchanging for Rs 40.50. Thus, the change in the rupee’s exchange rate vis-à-vis the euro reflects a strengthening of the rupee against the euro by only 8% whereas the rupee could have gone up against it by up to 19.5%. In other words, the rupee has not gone along in a linear fashion to reflect the euro’s full international decline. To the extent, the rupee’s potential appreciation has been hemmed in, it has supported our euro-denominated exports of goods and services. In the process, the rupee has depreciated against the US dollar, which means that items paid for in US dollar will cost consumers more than they should have cost.

We are not quite certain what the euro will be worth in some future time span. It could go further down or up, depending upon the amount of additional fudging up or otherwise the European politicians will indulge in to sap or not to sap the market’s confidence in the euro. Their delayed response to Greece’s international debt problem has done enough damage and sent the euro to the bottom. We should not therefore interpret the euro’s current predicament as a permanent situation. Should it sink further due to a perception that another economic crisis triggered this time by Europe is likely, there is a risk that the world economy as a whole could suffer. As the soaring price of gold is reflecting, there is no strong bet yet on the prospects of the American economy either.

Should the world economy take a knock altogether, this will require us to really tighten the seat belts as the jolt could be a massive one. We are not there yet. At least, not now. We should not therefore rush to depreciate our currency believing that we could continue trailing a falling euro, if that were to be the case, in a downward spiral. On the other hand, if the euro were to pick up soon enough through regained market confidence in the Europeans’ capacity to do their collective act more rationally in future, our exporters will stand to gain on the rupee’s depreciation already effected against the US dollar.

Some local exporters have already called not only for rupee depreciation in the wake of the recent events in Europe. They have also asked that interest rates on deposits (and therefore on bank lending to them) should be reduced further. As usual, they go for the maximum each time there is an apparent crisis. Others have claimed that they have worked out the return on their current export at an exchange rate of Rs 45 per euro whereas the exchange rate is currently at Rs 40.50. In other words, they would incur losses with the prevailing exchange rate. They are thus carrying the attendant threat of laying-off of workers. Even at its peak of $ 1.47, the euro exchange rate was less than Rs 45; it is therefore amazing how they could have factored in a rate of Rs 45 per euro when the euro is falling sharply from its highs on the market. They should not equate a situation in which they are facing a loss of export orders due to weakening demand in Europe with a situation arising from a theoretical currency misalignment. Manipulating the exchange rate will not cure falling export orders. One has to know with precision which is which to avoid misdirecting policy to line the pockets of a few persons without safeguarding the jobs.

It need also be noted that the foreign exchange rates in Mauritius are influenced daily by the actions of a few financial market players only due to cartelisation of the banking sector. The interest of the latter is not about the negative impact a depreciating currency will have on the public at large. Their interest lies in pushing down the rupee as far as possible so that their borrower clients remain as profitable as possible, ensuring that their loans do not turn sour. They also stand to profit on their own account by booking in exchange gains on their foreign exchange assets whenever the local currency is depreciated. This is why we need an intelligent central bank capable of striking the right balance in the exchange rate policy between preservation of economic activities and checking excesses against the public interest by powerful market forces operating in a quasi-monopoly situation.

Should the European crisis become entrenched however, there is more at stake than mere exchange rate considerations. In such an event, more uncertainty will come to cloud the prospects of consumers in Europe and elsewhere due to generalisation of the fears which have gripped the markets already. In this case, the main planks of our export activities, notably in the manufacturing, tourism and sugar activities, adding thereto the activities that have grafted on recently at the level of the international property market, could come under serious pressure. Any narrowing down of our economic horizons due to such factors will shrink our prospects that will be restored only when things start getting better on the global scale.

We are helpless against such exogenous factors. However, the internal market can come to the rescue to the extent we can continue to sustain local demand. We have scope to do so to the extent our resources will permit. This means that fiscal policy may then prop up local demand without going out into unmanageable budget deficits or incurring serious and unsustainable deficits in our balance of payments. As another accessory measure, we could also borrow externally if necessary to tide over short term difficulties if they came about. We are not there yet. We should therefore not panic and unbalance the equation unnecessarily by giving in to lobbies having only short term gains in view.

Those who have been talking of expanding the scope of our international rapport will realise how much we have been in deficit on this score. We are not referring here to the vague statements being made by Cehl Meeah about his special contacts and how he could fructify our opportunities through them. We need more than mere wind. Our policy makers should sit down firmly to break real new grounds, as it was done for the IT sector. We also need to look out for alternative markets to diversify into so as to insulate ourselves from temporary failures in traditional markets were that to happen.

In a moment of economic stress like the one created by the euro’s current downfall, it is always a good thing to avoid taking piecemeal decisions. A comprehensive approach to policy-making is preferable. This approach will be based on precise information about the impact each policy decision could have on key factors like employment, inflation, investment and saving and the current account of the balance of payments. The government should have already commissioned an internal report explaining the impact of alternative policy decisions, both in the short term and in the long term. It is on this basis that the comprehensive economic policy decision should be taken, not on the basis of partial analysis by distinct and interested economic stakeholders. Doing otherwise may introduce unwarranted distortions.

Overall, the economic situation is manageable, including the current predicament of the euro. This means that rushed-up decisions calculated to project a semblance of decision-taking should be avoided. Once the parameters of policy action are clearly identified, including opening up of the economic space, actions should be taken accordingly not only to cope with temporary rough ends but to set down the foundation for future balanced growth as well. More transparency than it has been the case so far in policy-making and its implementation will ensure that the public will team together with the policy makers and help in their successful implementation. Gone are the days when policy-makers considered themselves to be the sole and mysterious repositories of wisdom. It is better to share the why’s and wherefore’s of decisions to the maximum. This is where a new breed of entrepreneurs will be encouraged to take up the challenge by being well informed. We should adopt this route.

M.K.