My PQ on foreign debt management by Government

By KC Li Kwong Wing

I have tried through the PQ that I put to the Minister of Finance last Tuesday to draw attention to the dangers of continuing to contract new foreign loans without restraint or control.

The debate as reported by the Press does not correctly catch the significance of the exchanges that took place in the National Assembly, possibly owing to the usual attitude of government to defer disclosure of crucial information. Given the unfavourable implications of government’s external borrowings for the national economy in the present context, I have to put the points in their proper perspective.

While I do understand government’s need to have recourse to external borrowings should it be found necessary, I do not find economic and financial justification for more external borrowings given that the domestic market is already flushed with excess liquidity, as has been repeatedly alerted by the Governor of the Bank of Mauritius.

The following are the points that I tried to drive home in the National Assembly on Tuesday last:

  1. Billions of foreign currency loans have been contracted by government in recent years. In addition, foreign grants from the EU specially following the end of the Sugar Protocol, FDI as well as foreign portfolio investments have flushed the domestic market with rupee counterpart liquidity. As at March 2011, the outstanding foreign loans amounted to over Rs 22.5 billion, the servicing of which costs taxpayers an average of 4%, as revealed by the DPM in a reply to a recent PNQ on Bagatelle Dam.
  2. On the other hand, government is holding massive deposits of over Rs 10.7 billion (equivalent of US 300 million) with the Central Bank as at 31 March 2011, which is remunerated at about 0.5% p.a. The money has been placed in idle deposits at the BoM for a couple of years and has remained there during the whole year that the Minister of Finance is in office.

These facts raise 3 questions of concern to the taxpayers and the nation at large:

  1. How much is it costing to the Budget in annual capital and interest repayments to pay foreign financial institutions for the external loans which are unutilized and left as idle (lowly remunerated) cash at the Central Bank, waiting for implementation of capital projects? I have been trying to confirm from my PQ whether government is not wasting an annual amount of some Rs 400 million in this chronic mismanagement of foreign loans. It certainly does not make financial sense to borrow foreign currencies amounting to US$300 million on which government is paying 4 % annually and earning only 0.5 per cent on its rupee counterpart of Rs 10.7 billion held idle with the BoM as at 31 March 2011. Why on earth should taxpayers be made to pay for reckless mismanagement of borrowed financial resources? That’s the question.
  2. The excess liquidity generated by the massive inflow of external loans in excess of current use has serious implications on the economy as it serves to fuel inflation and encourage speculation in property and in the Stock Exchange. On the one hand, government policy action is causing a swelling of excess liquidity that is potentially inflationary and, on the other, the BoM is raising interest rates to stifle inflationary expectations with the effect of smothering the SMEs and adding greater financial burden on other enterprises. It’s tantamount to firemen running around with drums of gasoline.
  3. The constant influx of foreign funds due mainly to abusive recourse to so-called cheap external loans merrily contracted by government has given rise to an excess supply of foreign currencies in the local market. The end result is an artificial and rapid appreciation of the rupee that has intoxicated people into believing that we have a strong rupee because the fundamentals are strong, even if the increasing current account deficit is becoming unsustainable. We just need to look at the example of Thailand to understand how the frenzy of external borrowings denominated in lower-cost USD in the face of a rapidly appreciating bhat caused the collapse of the Thai bhat during the Asian Financial Crisis, literally wiping out the banking system and the savings of the population at large.

Conclusion: The entire debt edifice of government is just a house of cards that is bound to collapse at some stage. The Government of Mauritius is borrowing in foreign currency at much higher cost and placing large part of that borrowing in deposits at BoM at much lower return: what is the sense in this form of public debt management? But what’s disturbing is that Minister of Finance has no intention of stopping that addiction to foreign debt! This is tantamount to the spoilt adolescent abusing on credit cards that he leaves to his parents for settlement, except that this one is a sovereign credit card and poor taxpayers will be left to pay for generations, with absolute impunity and no accountability from the perpetrator.

* * *

The following extract from the Central Bank Governor’s Letter to Stakeholders in Jan 2011 is enlightening:

“24.2 External loans disbursed in 2010 increased significantly, marking a shift from Government’s traditional reliance on domestic issuance for financing purposes. As at end-December, central Government’s external debt amounted to the equivalent of Rs 22,118 million, with fixed-rate and floating-rate loans making for 38 per cent and 58 per cent of the total, respectively. Around 76 per cent of Government external debt was denominated in US dollars and euros – 44 per cent in US dollars and 32 per cent in euros.”

* Published in print edition on 27 May 2011

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