More Budgetary Nonsense and Rupee depreciation

By Rattan Khushiram

Government appears to be in a fix, desperately scrambling for cash to finance the expenditure gaps

The announced budget measure to raid the internal capital reserves of the Bank of Mauritius for an amount of Rs18 billion has attracted heavy criticism from a wide cross-section of economic and political observers. Government spendthrift policies are leading to mounting public debt despite hiked-up petroleum taxation and record foreign grants extended by China and India.

Government appears to be in a fix, desperately scrambling for cash to finance the expenditure gaps. The announced projected sale of Rs11 billion of state-owned assets, including MauBank and National Insurance Company, is unlikely to yield much revenue. Who would want to buy these lame ducks?

Government is also seeking to bring down public debt, to reassure the population that the country is not sliding into a financial crisis. It also wants to reduce external debt to allay the concerns of the IMF and international credit agencies, such as Moody’s and Fitch. A debt burden with a greater amount of domestic debt rather than external debt is generally seen as less hazardous to the economy, because of reduced foreign exchange risks.

As in previous years, Government could prepay its external debt by resort to greater domestic borrowings through the issue of Government securities, or resort to credit directly from the Bank of Mauritius. The Bank of Mauritius has already been utilised to extend credit of Rs3.5 billion to the National Property Fund to repay BAI policy holders. However more domestic borrowings to repay external debt would mean unchanged overall public debt. Hence, the cynical and dangerous brainwave to grab the internal capital reserves of the Bank of Mauritius, and thus reap a cash windfall to repay external debt and reduce total public debt.

Recourse to free cash from the Bank of Mauritius was not part of Government’s debt management strategy.

The Budget Estimates, 2019/20, contain an introductory chapter on the Medium Term Macroeconomic Framework, Fiscal Strategy and Debt Management Strategy. At para 27, it is mentioned that “Government debt portfolio will be downsized during FY 2019/20. This will be achieved through early repayment of relatively expensive foreign loans equivalent to some Rs15.6 billion and by having greater recourse to domestic financing.”

The intention was thus to change the mix of foreign and domestic debt, by reducing external debt and increasing domestic debt. The average interest rate on total Government debt was even expected to increase as a result, because interest on domestic debt is higher than on external debt. This is made clear in para 34 which reads as follows: “The average interest rate on Government debt is expected to pick up from 4.3% at present to about 4.8% over the medium term due to the higher share of domestic debt following the planned early repayment of foreign loans.”

The argument that a prepayment of external debt from the BOM cash windfall will save Rs400 million annually on interest is facetious. Prepayment of domestic debt from the BOM cash windfall would realize even greater interest savings. Prepayment of domestic debt by raising more external debt will also achieve interest savings, because external debt is cheaper. The foreign exchange risk would however be higher.

In response to the adverse comments made on the hold-up of the BOM capital reserves, the Minister of Finance held only one argument this week in the National Assembly, namely that he would take it up as a challenge to increase the capital reserves of the Bank of Mauritius in future. Well, these reserves already shot up by some Rs7 billion in recent months to reach Rs20 billion at June 2019, through BOM interventions to depreciate the rupee.

As the Minister is surely aware, the Bank of Mauritius is not profit-oriented. Presumably therefore, future replenishment of the Bank’s internal capital reserves will be done in the same manner as recently – by more rupee depreciation.


* Published in print edition on 19 July 2019

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