“We are living through one of the most uncertain of economic times…

  Interview: Anil Gujadhur, Former Deputy Governor, Bank of Mauritius

* “Financial institutions, big and small, will try to circumvent controls. We may not have seen the end of the matter yet”

* “Stimulus packages have to be used with great care. Too much of it or an unwise dispensation of benefits can put an economy into unsustainable fiscal or external current account deficits”

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With his strong experience in the world of finance and economics, Anil Gujadhur, former Deputy Governor of the Bank of Mauritius, and Chairman of the Financial Services Commission, is sharing with us this week his insights into the current turmoil on global markets and what we need to do to steer a reasonable course of action for ourselves. 

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Mauritius Times: We are on target for an economic relapse and a rapid deterioration of economic indicators: stocks and interest rates plunged on Tuesday after signs of slowing of economies from China to the US. This does not bode well for the world economy as there are now fears of a global slowdown. Are we going to get burnt again by another financial crisis? In other words, is the worse indeed yet to come?

Anil Gujadhur: You are right. Even though governments in the most affected countries did all they could to stem the tide since 2007, the pace of economic and political upheaval has continued unabated. The crisis which hit the financial sector is not over yet. There have been a series of ups and downs in the stock markets and in the currency markets. This situation points out rather well that the element of confidence which is so basic to the smooth flow of economic factors is not yet in place. We are living through one of the most uncertain of economic times. It will be sufficient for one chap in one of those places which count to set his foot on the wrong pedal for disruption to sweep the entire marketplace. With dire consequences for all. This should be avoided at all costs.

I must tell you we are not there and one would prefer to avoid being there. However, markets are not looking, it appears, for those positive factors which help build up what has broken down. They are in a defensive mood. They are not alone. We saw the panic that seized the Euro zone when the Greek economic debacle came into full view, something that mature politicians should have averted in order not to precipitate the crisis to the entire zone. Finally, they have managed to draw attention to their weakened banking systems before they’ve had time to cobble them up as also to the other economies in the Euro zone that had been living beyond their means. It looked as if each one wanted to parry the blow for himself first and then look to the collective interest. That was enough to sap confidence and send the euro tumbling. It’s our good fortune that it did not continue to slip further after falling to around $ 1.20 per euro. Will it hold? I can’t tell you.

At a broader level, the pace of growth of rich economies has declined. These economies had been spearheading global growth. That’s why global growth has come down. America is doing better than Europe, though, and it has sufficient resilience not to allow itself to be knocked down without delivering a good fight. This generalised slowdown in the rich countries will obviously affect other countries, ourselves not excepted. To avert the catastrophe, we can only pray and hope that at least America should be able to resist going down, so as to pull the others up in time. If it goes, that will shake the foundation of the global economy. One should keep watching for the bad signs such as a sustained fall in prices, the generalisation of slow growth, rising joblessness and the spectre of financial problems haunting financial institutions’ and corporates’ future, and act before things get out of hand.

Even the G 20 at its recent meeting was hesitating between going for greater fiscal discipline and flogging up demand to keep up the tempo of growth. In any event, it will be a pity to let go all that has been achieved to stabilise a system that was almost plunging into deeper recession. A little bit of decisiveness should help to restore the lost confidence.

* However, according to the New York Times, economies of Southeast Asia look solid; it says that strong economic growth, helped by large monetary and fiscal stimulus packages adopted by governments to support domestic demand, has surprised analysts… pointing to a sharp ‘V-shaped’ recovery. Is there a lesson there for Mauritius?

We are not like those South and Southeast Asian countries. They have far bigger internal markets which they can employ to compensate themselves for falling external demand to quite an extent, employing such packages. A country like India has a growing internal market. This market can respond positively to stimulus packages but even they have been hitting against inflation already. So they have pressed down some pedals: interest rates have gone up. China’s extensive export activity has raised a significant middle class forming its even larger internal market. Despite its foreign exchange reserves in the trillions of dollars, China stimulated its economy up to some point and no more.

Stimulus packages have to be used with great care. Too much of it or an unwise dispensation of benefits can put an economy into unsustainable fiscal or external current account deficits. In our case, the internal market is not so significant. This means we have to be sure that whatever money is being spent to save production and jobs is spent optimally. Fall in external demand can cause enterprises to fail; if they are fundamentally viable, you can afford to spend public money on them. It means you will recover your money eventually. Choices have to be made even in such cases: if it costs more to save a job in an otherwise viable unit than to create one in another place, decision-makers have to get value for money. A situation of crisis does not justify throwing away money on bad projects. This is the bottom line.

* Given that clouds could be gathering again in spite of stimulus packages and trillions of dollars and euros injected in the monetary system to jumpstart the economy of so many countries around the world, would you say that Vishnu Lutchmeenaraidoo is right in saying that it’s time to act now – and act quickly. Or is he playing politics?

Any time is good for acting. One does not have to wait for crisis. What the failures of those stimulus packages are showing is that despite the policy initiatives taken in those countries, economic activity is not responding as expected. Tight credit market conditions have jeopardised the recovery in most of our external markets. The governments over there are doing their best to get the credit markets to move faster.

There is not much we can do over there. We have been faced with tough external market conditions before and we have got over them. Vishnu Lutchmeenaraidoo himself faced very tough economic conditions in the 1980s when he was Minister of Finance. A package of long-term policies was adopted under his stewardship in the span of a couple of years, which gave full expression to our industry, especially the export oriented enterprises.

The fallout for an economy like Mauritius from this kind of situation is to survive by seeking out those segments of export markets that have been relatively unaffected by the economic slowdown in those places. Diversification of markets is one more option and I for one will bow down before any of our enterprises that can snatch such an advantage on global markets in these tough times. But these are eminently the job of the private sector, not that of the government.

As far as I am aware, a modern private sector will not wait for the government to urge it to take on markets that are amenable to better profits and prospects. If certain local policies can help, it is again for them to persuade the government on the bien-fondé of their suggestion. No well-meaning government will allow policy bottlenecks to come in the way of generating more productive activity at home. Obviously, the government will have to balance it out when conflicts of interest are involved in the suggested policy recourse. But if the private sector has persuasive arguments, I do not see why the government will not act in such cases.

As concerns the government side, there is an urgency to get going on several projects which will give us the necessary structural reforms and the flexibility to do business better than we have done so far. The Minister has announced a series of measures. 

* Quarter to quarter GDP growth rates based on seasonally adjusted data show that the economy declined by 4.0% in the first quarter of 2010 as opposed to a growth of 3.7% in the fourth quarter of 2009. The decline is explained by a slowdown in activities in some sectors, mainly in “Construction” and “Wholesale and retail trade, etc.” as compared to the fourth quarter of 2009. One commentator says that’s the price we are paying due to a “politique d’attentisme”. Your opinion?

It is true that we are experiencing a slower growth in the first quarter of this year. Part of the reason for this state of affairs is due to falling demand from our export markets in the wake of the euro zone crisis.

In situations such as this, private parties themselves put on hold certain projects that they would have undertaken. This is because they are not quite optimistic about the future. They need to be incentivised or encouraged to carry on by throwing up the right signals. If this line of support doesn’t come, we would be unnecessarily losing opportunities.

I do admit however that certain actions which ought to have been taken a long time ago have not been, notably in the area of improving infrastructure. This kind of situation obviously becomes a tax – and a heavy one – on efficiency and on our ability to increase the production potential frontier of the country. It is important to note that various factors complement each other in the development process. It is sufficient for one of them to be lagging behind to provoke unnecessary delays and the stunting of growth. This has probably been one of our greatest failures. Explanations after the event will not help.

I recall that there was a time when forward looking economic plans were conceived by the Ministry specifically designated for the purpose. It gave a sense of direction. Those plans were not dirigiste but they were acted upon. They produced the desired results. We appear to have lost that kind of vision and sense of direction. We need such a list of priorities to make sure that we do not hit against decisional bottlenecks. 

* Do I take it therefore that you support the view that Finance Minister Pravind Jugnauth should come forward immediately with appropriate fiscal and monetary measures rather than proposing corrective measures in the next budget?

No, there is no need to take hurried decisions. If the private sector wants to have a sense of orientation now that a new government and a new Minister of Finance are in place, by all means. They just have to have a chat with the Minister or the Governor of the BoM to have a better view on short term factors which influence their investment or marketing decisions. You can consider these discussions as immediate corrective measures to which you are referring.

But the broader framework of financial and economic policies should, to my mind, be all-embracing and done in a well thought-out consistent long term plan. It tackles more issues than those pertaining to the current economic crisis in Europe and elsewhere. I would therefore think that it is better to chalk out a set of well designed mutually supportive measures that will serve us in the long term rather than start to ‘déballer’ the policies one by one.

 * What is it that, in your view, needs to be done now before we are overtaken by events?

 If the international economic situation were to degenerate, there’s not much we can do about it as such. At home, we can think out how to share out the benefits of a necessarily reduced range of economic activity more equitably and get over the storm.

We can make more ample use of our available resources to extend the range of our activities: more fishing and greater integration with our immediate economic region through joint projects should insulate us from the effects of the downturn in our traditional markets. Our essential mission should be to do all we can to capture more markets. We can do so by closing in diplomatic ties with friendly countries that can be activated to mutual advantage. All this goes necessarily through raising constantly local attitudes and standards of production. More people will have to be moved up from the less skilled to the higher skilled section of the work force. By constantly increasing the value of our inputs in all activities we undertake, we will leave the ranks of the mediocre and reach up the higher rungs whose products remain in demand even during economic slowdowns.

* Kee Chong Li Kong Wing says that double-digit growth is achievable “facilement”. All that is required, according to him: reform of education system and training, the rationalisation of budgetary expenditure, fiscal support to SMEs, and reduction of VAT rate to 10% — and an end to “copinage” and the sacking of all the “nominés politiques” in the wrong places – the square pegs in the round holes, I presume. He seems to believe that we live in a perfect world, isn’t it?

Not necessarily. If the elimination of “copinage” is bothering you as an unachievable or unrealistic objective in our context, you know better. Certain countries like Singapore have done it. If only the political class across-the-board could learn to discipline itself! In the case of Singapore, the degree of governance they have achieved in this respect may not be perfect but it may not be too far from it. However, it is the timeframe for doing the rest of the measures which he recommends, all of which are perfectly valid, that is crucial. If it took too long because we end up losing too much time on the details, as we usually do, things will become diluted and we will be chasing a receding target. It will be a classic case of fudging one more time and remain stuck in the starting stalls.

* Paul Bérenger has been saying lately that it’s the Governor of the Central Bank who is in fact running the show as far as the economy is concerned, he is sort of the de facto Minister of Finance. Are we having here a situation of the tail wagging the dog?

Must I tell you first of all that I have a great liking for dogs, tail, dog, everything? I see the dog as a well integrated creature which would have been not so nice to look at without its tail or without its head.

Mr Berenger knows, for having been both Minister of Finance and Prime Minister, that a very close collaboration between the central bank and the Ministry of Finance is highly desirable. The international economic crisis is bringing up this point quite clearly if at all it was necessary. It serves no purpose for the two to be working at cross purposes. That will bring about a harmonious coordination of monetary and fiscal policy. In the present circumstances, it will even lead to the very much needed rebalancing of the economy and impart the necessary flexibility for these two players to play their roles without trespassing on each other’s territory.

I have been in the central bank since its first governor and I must admit that I have never come across a governor of the bank surrogating for the Minister. Of course, we have had cordial relations but this has not prevented the central bank from strictly guarding its independence, which is something precious that you risk losing if ever you attempt to put on yourself the cloak of the Minister. Each to his craft, and the cows will be well looked after. As it is, Mr. Bheenick must be having enough on his plate so as not burden himself with more than his fair load.

* Speaking of the Central Bank, we have had this week judgement of the Commercial Court in the matter of “l’affaire MCB”. Do you have the feeling that there are many questions left unanswered?

I understand that the MCB filed a case against a fraud of which it had claimed to be the victim. It was reproaching one of its office-bearers with having defrauded the bank. The court has found in favour of the bank. This is an internal matter that the court has finally sorted out.

You know, all financial institutions (and for that matter, non-financial institutions as well) are liable to be defrauded. What caught the public attention at the time (2003) was the scale of the fraud at the MCB, something in the region of Rs 800 million. The depositor who was affected was fully indemnified by the bank. Our role at the BoM was to make sure that the incident did not spark off a loss of confidence in the bank itself, given its importance in the economy, and in the banking system in general. The matter did not finally have such negative repercussions which could have otherwise impacted negatively on the country’s international standing. Steps were taken to ensure that the necessary controls were reinforced. From here on, it was a matter of looking ahead and consolidating the scope of our financial sector as a whole. There was no going backwards.

* Time was when it was argued that big banks cannot fail. We know it was all wrong since we ended up with the financial crisis, in the wake of which it was then argued – at the expense of the taxpayer and the shareholder — that big banks cannot be allowed to fail. Have we made sure that another fraud like the one at the MCB will not be allowed to happen?

It would be immodest on my part if I were to say that we did not learn our lesson from that case. We made sure henceforward that not only should we have issued guidelines requiring banks to put in place adequate internal controls and systems, for them to employ persons who are Fit and Proper and for them to refrain from doing business except at arm’s length with Related Parties. We should also regularly spend our resources to monitor the implementation of these guidelines by dedicated and qualified persons within the banking outfits to ensure that they are actually fully implemented.

Can financial institutions that are too big to fail expose the authorities to the moral hazard of their failure? Yes, they still can. Look at the amount of attention being currently given by American legislators to see some sort of a separation between proprietary and non-proprietary trading. The aim is to keep those institutions small enough so that they do not misbehave to such an extent as to pose a systemic threat. The sheer scale of the abuse that has jolted the international financial system shows that, when not under appropriate scrutiny, financial institutions, big and small, will try to circumvent controls. We may not have seen the end of the matter yet.

* The Competition Commission has released its report on allegations of uncompetitive practices by the IBL. A first step in the right direction towards correcting the imperfections in the local market, would you say?

Yes, it is a step in the right direction. Abusive and restrictive business practices are so common in the country that there exists a real risk that people might take them to be the norms. There are dominant positions on the market which work to the detriment of the public. Once certain benchmarks are put in place by the actions of the Commission to establish certain market practices as abusive, it may well be that those unfair practices will diminish. There could be various reasons why consumers who feel the oppression being exerted on them by operators do not take the initiative to denounce them. It will help if the Commission took some initiatives of its own to achieve some amount of consumer activism to empower users more effectively against collusive or abusive business practices.

* Manou Bheenick has said in response to a query from the “Journal du Samedi” that there may be reason to inquire about any conflict of interest in the matter of a senior MCB banker sitting on the board of the bank’s client, namely La Sentinelle. Is he right?

Bankers do not normally sit on the boards of their clients, because that impairs their capacity to exercise fair judgement in the matter of granting facilities to those clients. It would be fair, in my opinion, for the central bank as regulator to identify whether from a regulatory point of view, there is any cause for concern in the given situation.

* You are no doubt aware of the position taken by the government and the Bank of Mauritius on the issue of rupee devaluation. How do you react to this statement of Minister Faugoo, as reported in Le Mauricien of 30 June 10, in response to an appeal of the Chamber of Agriculture: ” If the depreciation (of the euro) continues, small planters will be out of business and the whole industry will be affected. A solution to this dire situation appears to be a combination of monetary and policy measures. While monetary measures will yield immediate results, there would be a considerable time lag for policy measures to bear fruits. The ministry of Finance is giving serious consideration to the matter. “?

You mean ‘depreciation’ of the rupee, I believe? It is the role of the Minister to ensure the viability of stakeholders in his sector. I have no quarrels with that. I have seen small planters facing dire circumstances even before the recent sharp downturn of the euro on the markets; therefore, I am not quite sure whether the exchange rate of the rupee vis-à-vis the euro will have to bear the entire burden as regards the current plight of the industry and the small planters. Should not the sector also look at a long term integrated plan in which ad hoc changes in the exchange rate of external currencies will affect it to a lesser extent than having to go out of business altogether whenever shocks like the recent euro shock come about? In fact, a compromise position involving both the exchange rate factor and beefing up the set-up of production in the sector for the long term would be quite convincing as a way forward.

* One last question: How do you react to our own version of “Prison Break”. Failure of the State delivery of essential services at all levels? Failure of leadership? Or is there an attitude problem within the civil service?

After this episode, things will not be the same all over again. This matter came as a shock to the population. It is the price to pay when decisions are firstly not prompted at the right time and then, it takes a hell of a lot of time before they are implemented. How could it have taken so many years to get on with the project of a new prison? Departures from the norm as in this case add up to the many unattended issues which make the cost of living in society quite exorbitant. There was a Civil Service at the time I joined the BoM in 1967 in which you would not even dream about dereliction of duty as we see in this case. The British Civil Service was tough and result-driven; it was run by an iron fist in a silk glove. With results. Alas!

… it will be sufficient for one chap in one of those places which count to set his foot on the wrong pedal for disruption to sweep the entire marketplace”

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* Published in print edition on 1 July 2010