Interview: Rundheersing Bheenick, Governor – Bank of Mauritius

Interview: Rundheersing Bheenick, Governor – Bank of Mauritius

“We’d better start improving our act now…

… the gap is closing and we will be pushed off our pedestal in no time if we do not embrace change”

“We should recognise the weaknesses of our MPC and address them in a way that does not make a mockery of monetary policy independence”

“Some major countries like France and Korea never gave up their Economic Planning Units… What do these countries know that we do not know?”

“We need the private sector to play a more active role in the economy – in most developed countries, investment and innovation are driven by the private sector”

Mauritius Times: The view has been expressed in certain quarters that the country is running out of steam. You are saying more or less the same thing in your Letter to Stakeholders 2013, with the reference to “national accounts data over the last few years” which “provide abundant evidence that our economy has gradually lost steam”. As a former minister in charge of the budget and as a former director of economic planning, and presently Governor of the central bank, you should be feeling frustrated at the gridlock situation in which the country has been finding itself lately?

Rundheersing Bheenick: Rest assured that I am not frustrated at all! I have been saying that things could be better, not that they are bad. If we look at our growth in five-year tranches, we’ll see that we logged an average annual growth of 4.9% in the 2003-07 pre-crisis years, and only 3.8% since.

The 1.1% drop is due ― not to an overvalued rupee or wrong monetary policy, as some would have us believe ― but to weak economic conditions in our traditional export markets.

Our 2013 GDP is 40% bigger than it was before the crisis. Our GDP per capita increased from USD5,700 in 2006 to USD9,400 in 2013.

Few countries can claim such an improvement in the size of their economic cake over this challenging period. No, there is no room for frustration ― any more than there is for complacency or celebration. Instead, I am rather excited by the new challenges that the situation actually poses to us as policymakers.

As erstwhile growth drivers lose potency, we must retool and re-engineer to get extra mileage from them even as we seek to harness new sources of growth and bring them up to speed.

* You said some time back that Mauritius would need to develop a vision for its medium to long term economic path just as it was done in the past when stakeholders from both the local private and public sectors sat together to put forth Vision 2020. What needs to be done has already been spelled out in various reports as well as in your own Letter to Stakeholders, namely “complex structural adjustments”, “a rebalancing of the economy, away from consumption and towards investment and exports”, “appropriate fiscal policies … supported by bold structural policies to raise productivity across public and private sector enterprises”, etc. Why does it seem that we are not able to get there?

A National Vision holds out the prospect of a future to which we can all relate ― the French equivalent, “prospective” encapsulates the idea rather better in my view, than “vision”, which is liable to be misinterpreted. The former President of India, APJ Abdul Kalam, defined it well: “A Vision is not a project or a plan target. It is an articulation of the desired end results in broader terms.”

Vision 2020 has served its time. The post-crisis world, and the inexorable march of technology, dictate a new visioning exercise. Many of the elements do exist, but they are scattered here and there. We need to bring them together, complement them with others, stimulate new thinking, and round off the exercise in a holistic manner while taking extra care to broaden participation in the preparatory phase to be able to achieve wider ownership of the end-result.

* That Vision 2020 facilitated our transition from an agricultural economy to a service-oriented is beyond doubt, but as far as the “knowledge-based economy” is concerned, it does not seem we are there yet. It is proving to be both an embarrassing and long-drawn-out teething process, isn’t it?

Many people tend to equate Government’s strategy of moving to a “knowledge-based economy” with the “knowledge hub” and, in the light of the raging controversies involving our tertiary education sector, jump to the conclusion that the move is premature or already failing. Nothing could be further from the truth. Let’s be clear about exactly what we mean by a “knowledge-based economy”. For me, this is an economy that encourages the ability to create, acquire, disseminate and apply knowledge in a global market of products and services that has become more technology- and knowledge-intensive. It is also an economy that derives an increasing share of its income from such activities. We are clearly moving in this direction. We could be moving faster, of course.

We should be able to harness technology to increase skills. There is a gap between our national aspirations and the job-seekers’ profiles. There is a growing mismatch between these and the skills that a knowledge-based economy requires. One out of every three job-seekers does not have a School Certificate and one out of every five is a CPE dropout. A knowledge-based economy should be able to produce jobs at the higher end which in turn cascade down into more jobs at the lower end for low-skilled service activities. Jobs for the unskilled will become scarcer and the capacity of Government to create jobs at the lower end will become progressively more difficult.

The drive towards a knowledge-based economy would be accelerated by drastic improvements in education, manpower, productivity, infrastructure and connectivity. We have made some progress in these areas. But are we doing enough? Take, for example, the Ease of Doing Business and Global Competitiveness indicators. If we care to look beyond the overall rankings, where we do well, to some of the sectoral rankings, we will find food for thought. There are areas where we are far at the bottom, e.g. Capacity for Innovation, Quality of Research Institutions, Country Capacity to Retain Talent, and Higher Education and Training Enrolment Rates. The poor rankings indicate priority areas on which we should urgently focus if we are to improve our future growth performance in a sustainable manner.

* We are also in a situation whereby the country’s economic planning is in the same hands as the ministry in charge of the budget. Would a far-sighted country have found it more reasonable to give a free hand to a separate ministry of economic planning or an autonomous such public body rather than run the risk of curtailing the ambitions of the country’s economic objectives to the means the budget thinks it could provide to it?

My answer comes with a health warning: I plead guilty to considerable bias as I spent some of the most rewarding years of my career in the now-defunct Ministry of Economic Planning and Development. I note that some major countries like France and Korea never gave up their Economic Planning Units, although they may have re-styled them. The EPU plays a key role in Malaysia. Uganda and Rwanda, both of which have been romping ahead in the economic growth stakes, are well-served by dedicated planning outfits. Nearer to us, South Africa has created strategic planning capacity in the Office of the President and has entrusted its direction to its former Minister of Finance, Trevor Manuel. What do these countries know that we do not know? My answer to your question is an unequivocal Yes! We need to recreate dedicated, stand-alone planning capacity, preferably at the highest level of political decision-making within the Prime Minister’s Office.

* Beyond the need for an economic planning body, and other prescriptive policies, what else would you say is/are required to ensure take-off towards the high-income economy that has been canvassed lately?

We need a think-tank – a forum where all economic operators and stakeholders, including the private sector, can put their heads together and bring their collective wisdom to bear on all problems/issues relating to the future of the country. We need to be able to align the skills of our labour force, and our outmoded reward systems, with the orientation that our economy is taking. We need the private sector to play a more active role in the economy – in most developed countries, investment and innovation are driven by the private sector. It does not seem to be the case in Mauritius, where we seem to wait for signals, via incentives of one sort or another, from Government or public agencies, before undertaking major ventures. We must discard this mindset, failing which red tape and other bureaucratic entanglements will continue to hamstring us in our efforts to avoid the middle-income trap. In fact, we need more private public partnerships.

I also believe that there must be greater ownership – people in all walks of life must buy into the need for change and help usher in a higher level of productivity and international competitiveness. We cannot impose on an unwilling population. Prescriptive policies, even if well-inspired, do not have an easy passage. We must not ignore the descriptive or the predictive either. They help an informed discussion. We must be driven by the urge to do better than our predecessors. We must have this commitment to leave a better place behind us. That is what Government is here for. That is what institutions that are here should be setting themselves as tasks. This seems to me to be the missing ingredient. Why is it missing? Democracies everywhere have a difficult time to resist popular measures that pull in other directions than those warranted by strategic considerations.

Policymakers should be able to raise their sights and focus on the common good for the common future. We are failing in CPE, SC and HSC. It is not a criticism of the minister, who is an old friend, but of the whole approach over a whole generation. The same thing can be said on policies of each and every other sector of economic and social activity. We need to steel ourselves up to pursue excellence and target the best international benchmarks. That mindset is missing and must be created. Because many of us still believe that we are the best performer in sub-Saharan Africa, therefore we do not need to reform and just go along with the tide. If we cared to look over our shoulders, we would notice that behind us, the gap is closing and we will be pushed off our pedestal in no time if we do not embrace change. We’d better start improving our act now.

* There have been differences of opinion at the level of the MPC for quite some time, which is perhaps normal. But does the fact that the same people in the MPC find themselves at opposite poles successively imply that there are irreconcilable ideological positions that are likely to endure. What should be done? Cut the Gordian knot?

As you said, it is quite normal to have publicly-aired differences of opinion at the level of an MPC constituted on the lines of ours where parties external to the Bank of Mauritius are voting members. What is unusual is that, in Mauritius, external voting members outnumber internal voting members 5 to 3. With the voting split into internal and external camps, one cannot escape the conclusion that this is far from the kind of open MPC we wanted. Why did we open up the MPC? To avoid groupthink among Bank-staffers, and also to get a fresh perspective, especially about the real economy where Bank insiders are deemed to have limited knowledge. Are we getting these fresh perspectives?

Differences of opinion are something that I value very much. That is why when I joined the Bank in early 2007, one of my first actions was to set up the MPC and operationalise the provisions relating to it which were in the revised Bank of Mauritius Act since 2004.

In my view, the first generation of the MPC set us on the right track with top-notch central bankers, including a former central bank Governor and the current Deputy Governor of the Bank of Ireland, as external foreign members on the MPC. Unfortunately, this first generation of MPC members made way for other theoreticians in areas where the central bank has always had competence and expertise.

There is at least one major central bank that is moving away from an internal MPC to one that is more open. I met the Governor recently when we discussed the matter. He may be opening his MPC to accommodate two external members which, in all likelihood, he will select and appoint himself.

So, what should be done? I think we should recognise the weaknesses of our MPC as it has gone through various mutations since April 2007 and address them in a way that does not make a mockery of monetary policy independence and central bank independence, with the strange result that the Governor is held accountable at the bar of public opinion for the economic and social consequences of decisions that were not his. We should take note that while the MPC has been sitting on its hands, year-on-year inflation has raced ahead and, as of end-February, is nearly 100 basis points above the Key Repo Rate. Sounds line a sick joke, doesn’t it?

* l quote from the Letter where mention is made of “the restrictive mandate of and the limited tools in the arsenal of the central bank” thereby “bounding our influence on every macroeconomic indicator”, notwithstanding which and despite the tussle at the level of the MPC “both inflation and inflation expectations have stayed at low levels, giving the country a stable macro-economic environment…” Is there a case therefore for an enhanced “operational independence in the formulation and implementation of monetary policy” for the central bank?

I am pleasantly surprised to note that you have been reading our Letter to Stakeholders so closely. I would encourage your readers who are interested in economic and financial issues to do so too. It is available on the Bank’s website. I use it as a vehicle to give readers an overview of the issues that the Bank has grappled with during the year and my (subjective) assessment of how successful it has been in achieving some of its objectives. The tools at our disposal are very limited and one of them, the Key Repo Rate, is not even at our disposal since the decision rests with the MPC. We at the Bank do not have the final say. It is of critical importance that external members should be appointed in strict conformity with the letter and the spirit of the law providing for this external involvement in this vital area of our work.

I have no difficulty in staying within the mandate of the Bank. Like all central banks, we are good at doing certain things, away from the day-to-day pressures of financial decision-makers in Government. We have ongoing debates about whether we should change from the current twin-peaks model to a single regulator. Views differ, obviously. My own preference can be deemed to be self-serving and biased, but I honestly believe that is the best way forward for our small jurisdiction.

So, what is missing in our operational independence? First, it’s the nomination process, and second, it’s the accountability. It would be advisable to give Bank insiders a numerical majority on the MPC and the Governor should have the right to appoint an external party as well. Some will recall that some time ago, we had a monetary policy decision that was leaked out before its official announcement. To avoid similar problems, we instituted a Code of Conduct for MPC members. As Governor, I am required to report to the Board of the Bank on the compliance of MPC members to the Code. In the same way, we need to put in place some arrangements to ensure compliance with the Bank’s mandate in respect of price stability. Some countries provide for periodic appearances in front of a Select Committee of Parliament. In short, we at the Bank are all for having greater independence, allied with greater ex-post accountability.

* Notwithstanding the “incontrovertible international evidence of superior outcomes from independent central banks, with governors immune to short-term political pressures”, can it be conceded that the central bank will have to give up some of its independence if only to give time for corrective fiscal decisions to fall in place? Are there risks for so doing?

The issue of compromising on our independence does not arise, and that for the simple reason that fiscal decisions are completely in the domain of the Ministry of Finance. The central bank can and should play an advisory role in determining the fiscal stance. This raises the issue of coordination between fiscal policy and monetary policy on strategies for the coming year, which in turn will enable the central bank to do a better job with its core mandate of ensuring price stability, given the fiscal options retained by political decision-makers.

Again, we should remind ourselves that, without compromising on central bank independence, the Minister of Finance and the Governor are required under the Bank of Mauritius Act to agree on the accepted range of inflation. If there are any risks, it is when parties who should not only respect the independence of the central bank, but be actually defending it, start talking publicly about the decision that they would expect from the central bank, or that they would support, thus bringing pressure and influence to bear on the Bank’s decision-making – this is where the bigger risks lie.

* Major rich-country central banks have been pumping a lot of liquidity in their economies for quite some time and, by extension, into the global financial system. They will bring it to a halt sooner rather than later if we reckon that some of those economies are coming out from the economic crisis. How do you foresee this playing out and what kind of consequences can we expect for other economies, including our own?

The massive injection of liquidity in western economies, including Japan, led to massive inflows of capital in many emerging markets in search of greater yields. It is expected that with the progressive end of “tapering”, these flows will be repatriated and lead to compensating outflows, reversing the earlier inflows. Mauritius was not a major beneficiary of this surge in inflows and therefore will not now be at the mercy of the outflows, at least not directly. However, in the global economy, all flows are ultimately interconnected. There may be indirect effects on Mauritius as international capital moving to emerging markets and frontier economies becomes scarcer. This may impact us on our capital account.

The good news is that we have no hot money flows coming our way and we need not fear their reversal. The short-term money flows into the money market in Government Bills are very limited: less than 2% is currently held by foreigners . The flows in the GBCs are largely self-cancelling and I do not see much difficulty there. I believe that the end of QE will have quite limited impact on Mauritius, in terms of flows.

Similar considerations apply to the probable rising cost of capital – our external debt is mostly fixed-rate institutional debt, not variable rate commercial debt. The situation is quite different for countries like the BRICS and for some other emerging economies where there have been massive capital inflows together with a surge in cheap foreign currency debt. Some of them, like Brazil, Turkey, South Africa and India have been severely hit by the beginning of tapering – there may be worse to come.

* When the East Asian crisis erupted in 1997-98, foreign investors abruptly pulling out their investments from the affected countries caused chaos in those countries. In the event capital were to flow out from the emerging countries now as yields improve in the West and go back home, would you say we are better prepared to parry the blow?

The situation will, of course, vary from country to country as I just said in my reply to the preceding question. Some of the consequences would not differ from what happened during the East Asian crisis. You will recall that some countries had invested massively in real estate, and the rising cost of capital led to many bankruptcies, leaving hundreds of unfinished projects across East Asia that took years to complete. With the greater use of macroprudential measures, this kind of outcome would be less likely.

Another reason that leads me to believe that developing countries are better-equipped to weather the storm is the debt situation. Debt levels, for both public and private debt, in developing countries are nowhere near those prevailing in the major economies ― which means that the higher cost of debt-servicing will not be as disastrous as it was during the East Asian crisis.

In one respect, developing countries are better prepared: there are now fewer fixed-peg régimes, requiring massive currency devaluations. Free floaters, or managed floaters like us, can adjust smoothly. Greater currency volatility is clearly on the cards, hence the need for prudent countries to manage their exchange rate and reserves with this prospect in mind. There is no reason to believe that we, in Mauritius, run any great risk form this kind of development as we have taken timely measures to contain the negative impact of such possible occurrences.

* Central banks emerged as the deus ex machina to salvage western economies when the economic crisis threatened to hit harder. Do you think they will keep enjoying a pride of place in economic decision-making even after the crisis is past? What more should they equip themselves with in order to keep swaying economic decisions as decisively as they’ve done recently?

Ah, I see that you seem to buy the argument that central bankers are the new Lords of the Universe, and Saviours of the World!

I, for one, do not see central banks as deus ex machina at all. I rather see them as finally waking up and doing the job that they should have been doing all along. Had the US FED not been so relaxed about its ability to cope with the aftermath of a bubble after it had popped, and had it instead exerted itself in preventing the bubble from being created and, after the sub-prime fiasco had been identified, had it applied itself to the task of unwinding the financial excess and engineering a soft landing, central banks would not have had to play the role that they have been playing. As the crisis spread in the globalised economy, there were few options for central banks beyond the FED than to move centre stage. In a normal situation, I believe that central banks will revert to their more traditional role and take a less activist stance than we have seen during the crisis. This is the way things should be.

Hopefully, central bankers and other financial sector regulators should have learned their lessons, and the current moves across international standard-setting bodies and financial sector watchdogs to make sure that the banking sector is strong in terms of quality capital, effective regulation and strong oversight, should suffice to allow the global economy to revert to its normal mode of operation. If I can make a rather osé analogy with a phenomenon which is mercifully quite rare these days – when faced with a coup d’état, the army is deployed to put it down. Once law and order is restored, the army is expected to withdraw to its barracks. So it should be with my confrères from the central banks.

* The Bank of Mauritius has a good track record, even standing up to ministers and their advisers, when the latter would want to tread on its toes. The way you see the situation evolving in Mauritius now, would you say that the Bank could still garner more laurels on its way forward?

The Bank of Mauritius is a creature of statute. Any attempt to try to get the Bank’s senior management to move in directions that they feel transgress the statutory provisions, will be resisted by any Governor worth his salt, irrespective of whether the push comes from a Minister, advisers of the Minister, Board members, business lobbies, or staff. The way for the Bank to garner any laurels is to get on with the job, as provided for in its statutory mandate, irrespective of circumstances and pressures exerted on it.

 


* Published in print edition on 21 March 2014

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