Apropos my recent PQ on the Ministry of Finance purchase of USD 100m
By Kee Cheong Li Kwong Wing
The press report on the exchanges that took place in Parliament on my PQ last Tuesday, 11 November 2012, to the Minister of Finance regarding the recent call for bids by the Accountant General to purchase USD 100m did not give a complete view of the complex technical issues surrounding the operation and therefore it would be helpful that I clarify the matter for the general public.
The crux of the matter is that the Ministry of Finance (through the Accountant General on behalf of the National Resilience Fund) went directly to the private commercial banks to buy USD “on auction”. This raises many, many questions.
First, why buy now? It will be remembered that the Minister of Finance had first called for a reduction in the repo rate, which the Governor of the Central Bank had resisted on ground of ineffectiveness to stimulate private investment. An initial rate reduction thrust on the Governor in a majority vote by nominees of the Minister at the MPC was immediately leaked out to the media before it was even announced officially by the Bank of Mauritius. A Police statement was recorded by the BoM at the CCID, which apparently is still investigating into the leakage.
Since then, the MPC has not reduced the repo rate further and therefore it could have no impact on the value of the rupee. But the Minister insisted that the rupee is too strong, and brandished a report of the IMF that it is overvalued by some 14%. The Governor disputed the measurement of such level of so-called misalignment and even Mr Michel Camdessus, former Director of the IMF, on a private visit to Mauritius guarded in a Press interview against too simplistic a reading of IMF comments. Yet the Minister “persiste et signe”, insisting that it is the rupee misalignment that has shaved his economic growth rate by 1%! Would anybody wonder why it’s now that the assault on the rupee was launched by the Ministry of Finance through Operation Dollar 100,000,000?
Secondly, why buy USD? The National Resilience Fund (NRF) is a cash hoard, accumulated over the years since this Government came to power in 2005 by way of overtaxation of consumers through duties, levies and VAT on petroleum products, motor vehicles, alcohol, cigarettes and consumer goods, etc. Why hold billions of rupees in idle deposits since years and not invest them in accordance with a strategic investment plan for sustainable growth?
Why has there been no National Development Plan but only piecemeal ad-hoc emergency decisions to invest in poorly designed or hastily cooked up projects? Why is it that short of any planning, strategy, or implementation capacity, the MoF chose to buy USD only to place it back at the Bank of Mauritius to earn zero interest again? In fact, the Minister replied to me that his Ministry has not used the USD purchased to place any deposit yet: “We have not placed any deposits yet. In fact, we are awaiting to accumulate a certain number…” (meaning, a certain minimum millions of USD, before placement with international banks). So, it means that the MoF has bought USD and is making no income, betting on capital gains.
The purchase of USD was therefore purely a speculative exercise, and a most risky one at this juncture, as the US Dollar is the currency subject to highest risk owing to the US fiscal cliff, the continued Quantitative Easing with further expansion of USD 85 billion per month from the printing press, and the uncertainty of sovereign debt crisis. Is this MoF operation sound investment management when SMEs and private operators are starved of funds?
Third, why go directly to the private commercial banks to buy USD? We all know how commercial banks make fat abusive margins on forex transactions. We all hear of rate fixing by the few dominant banks in the so-called free forex market. The BoM is even calling the public to submit all cases of abusive pricing through excessive commissions, fees and charges for investigations. A Special Ombudsman for financial services was to be nominated to redress all these abuses. So, why has MoF become another market player competing with STC, Air Mauritius and the banks for foreign currencies? Why is MoF so obsessed to intervene in the forex market, paying a premium to the commercial banks, in order to undermine the rupee? A qui profite le crime?
Fourth, why bypass and circumvent the BoM in its role as banker of Government and adviser on financial matters? The Bank of Mauritius Act says very clearly that the Government “shall make use of services of commercial banks, but only on terms to be agreed with the BoM,” meaning that advice should be sought, consultation be held and agreement obtained from the BoM.
“56. Government banker and financial adviser
(1) Subject to subsection (2), the Bank shall be the banker to the Government, its adviser on monetary and financial matters and the depository of the official foreign exchange reserves of Mauritius and of Government funds.
(3) The Government may maintain working balances, at such market rates as may be determined by the Bank, and shall generally make use of the services of banks on such terms and conditions as may be agreed between the Bank, the Government and the parties concerned.”
This is what the Governor had to say in this connection : “C’est notre rôle d’assurer la stabilité sur le marché des changes. C’est notre rôle de déveloper des politiques d’intervention sur le marché. Et c’est notre rôle d’être le banquier du gouvernement. C’est dans la loi aussi. » So, why did MoF usurp the role of the Central Bank in breach of the law ?
Fifth, by circumventing the BoM, did the MoF buy the USD at a lower rate from the commercial banks? This is what the Minister said in his reply to my specific query on this point: « Mr Speaker, Sir, from memory, I think it (i.e. the buying rate) was Rs 31.20. I don’t have the rate at which the Bank of Mauritius was intervening ». Would you believe? The whole subject matter of my PQ was the USD purchase and what an evasive answer! In actual fact, on the 18th October 2012, while MoF was paying Rs 31.20 for the USD, the bypassed BoM was ready to sell USD in the domestic foreign currency market at Rs 30.44. So, why pay that excess amount, if not for the privilege of making the dollar soar and the rupee plummet? And all this with public funds, taxpayers’money?
Sixth, did this unusual intervention of MoF destabilise the forex market & cause a speculative drop in the exchange value of the rupee? The answer cannot come clearer than from the Governor in his Press Conference after the MPC meeting: «Mais le 17 ou le 18 octobre quand le ministère des Finances à travers son National Resilience Fund a fait cette incursion sur le marché des changes, annonçant qu’il va acheter 100 millions de dollars dans un marché qui n’est pas très liquide, donc les prix ont flambé. C’est le genre de choses qui peuvent se passer sur n’importe quel marché – si vous allez sur le marché des légumes et vous voulez acheter 10 tonnes de pommes d’amour, quand il n’y a qu’une seule tonne sur le marché. Vous annoncez qu’il vous faut 10 tonnes mais les prix prennent l’ascenseur. C’est ce qui s’est passé.
« Immédiatement après il y a eu une pénurie de devises sur la place. Alors qu’on vendait les devises au National Resilience Fund, on voulait venir à la Banque acheter les devises. De sorte qu’il y avait ce qu’on appelle une opportunité d’arbitrage très conséquente. C’est le rôle de la Banque d’acheter ou de vendre pour maintenir la liquidité sur le marché. Mais quand c’est arrivé, on a préféré se retirer du marché et ne pas vendre bien qu’il y avait un manque artificiel de devises. On n’a pas vendu pendant une bonne semaine. Je crois qu’on a vendu les devises une semaine après – le 24. Mais entretemps il y avait un manque de devises et ce manque de devises devenait assez accru mais on ne voulait pas être les dindons de la farce en vendant les devises, disons à Rs30.40 de sorte que les banques qui s’approvisionnent chez nous, le vendent tout de suite à Rs31.20. Donc on ne voulait pas jouer ce jeu, ce n’est pas notre rôle. »
The Governor went further to say this: « On a préféré ne pas jouer ce jeu. Il nous a fallu presque 2 à 3 semaines pour que les choses retournent à la normale et se stabilisent. »
What does that mean? The MoF operation assault on the rupee had a dangerous destabilising effect in the forex market that took 2 to 3 weeks to clear the speculative fever. Had the BoM not played its role to remove the excess volatility but played the dumb watchman as a “dindon de la farce”, we would have had the one-way bet that had caused the freefall of the rupee, as we once had in the good old days of Rama Sithanen. Who would stand to lose in this dangerous game of MoF? MoF was using our own money to debase, devalue it. Making windfall gains for some and hurting the vast majority of consumers.
Seventh, the Minister claimed that there was coordination with the BoM on this MoF incursion in the market via commercial banks. He said that the matter was discussed at a Sub-Committee on Borrowing Requirements of Government. Since when is a decision regarding investment of a statutory fund like NRF discussed in a Sub-Committee of another Committee… on Public Debt? Is it not against the Rules and the Terms of Reference of such Committees?
Eighth, why did the Minister insist in Parliament that he has made a profit on the MoF purchase of USD 8.5m, when clearly it made a loss? After 18 Oct 2012, when MoF bought USD at Rs 31.20, while BoM was ready to sell at Rs 30.44, the rate at which BoM continued to intervene in the domestic forex market has never been more than Rs 31.20… until today itself. Also, the bid rate for the USD in the domestic forex market has always been lower than Rs 31.20 until today (around Rs 30.25). So, if MoF had sold the USD 8.5m even today, it would definite realize a loss. But inspite of this, that’s what he said on 2 occasions in reply to my PQ:
“(i) the rate today (11 November 2012) is significantly higher than the rate at which we purchased. So, a profit has been made.
(ii) As I mentioned, whatever the rate may have been… today, as we know, the rates are higher. So, in fact, it was a right decision.”
Right calculation? Right decision? What kind of accounting is this?
Unfortunately, running public finance is not simple bookkeeping and surely not colourable accounting. It has wide-ranging macro-economic implications, which cannot be ignored by a Minister of Finance, not even by the best one in Africa. And always remember that it’s not your money! So you can’t do as you wish.
* Published in print edition on 21 December 2012