Why was it necessary to bring down the Key Repo Rate of the Bank of Mauritius?

The beast of burden will be the public, with no tangible gains to show but higher prices to pick up

By Murli Dhar

On 19^th March, the Monetary Policy Committee of the Bank of Mauritius (MPC) decided, on the basis of a split vote, to lower the central bank’s key Repo Rate from 5.40% pa to 4.90% pa, notably by 50 basis points. This massive reduction in the interest rate structure of Mauritius came as a shock In view of the fact that the MPC had parsimoniously and reluctantly allowed a drop of even 10 basis points from 5.50% to 5.40% at its preceding meeting a couple of months back. Like the last time, the MPC’s meeting was preceded by a substantial campaign in part of the media to get the interest rate down.

International economic conditions have not changed dramatically since the MPC’s previous meeting; in fact, some silver linings have appeared on the cloud of American economic performance which were not there before. On the other hand, people are generally convinced that the politico-monetary-union mess that Europe has churned up will take quite some time to unwind and all we can do is to wait and see whether and when this market will get back its springs again. We are supposed to be looking out for alternative new markets to export to, preferably in the Asia-Africa region to fill the gap if things really turn bad in Europe for our exports. Anne ma soeur, Anne…

It has to be reckoned that policy-making has been failing us: for example, we needed to develop quickly a super powerful well equipped state-of-the-art port to truly make of Mauritius an international reference and an economic hub to Africa to serve as a centre for all the accelerating Chinese developments being carried out over there since past years. We have done nothing to position ourselves strongly in this regard. We ought to have offered Mauritius as an efficient alternative shipping route against the dangers posed by Al Qaeda pirates to sea-going vessels in the region of Somalia, thus enhancing the value of the Cape route for maritime transportation. We have done nothing to improve our sea-going profile in this respect. This potential, once lost, cannot be made good as others in the region will take up the place if you do nothing for yourself.

In 2003, our textile manufacturing units started migrating to Africa to secure advantage under the AGOA which they would not have derived had they continued operating from Mauritius. This created quite some unemployment over here as well as the closure of certain manufacturing enterprises. Likewise, Madagascar is posing today as a serious contender of our ICT/BPO base of activities. Our labour costs are becoming less competitive than over there. We ought to have taken policy initiatives to beef up the sector’s competitiveness and entrench the activity with greater depth than what a start-up like Madagascar could provide. We haven’t so far. It is the right policy initiatives in these matters, e.g., Port development and BPO, that would have grounded the economy’s growth prospects more soundly than synthetic interest rate decisions instigated to achieve currency devaluation. It appears that monetary policy is being asked to take up the burden for shortcomings in the general economic policy framework.

Coming back to our economic performance, we observe that despite difficult economic conditions in our traditional export markets, our operators have been improving their economic performance: foreign exchange earnings from tourism have gone up in 2011 compared to the previous year; export oriented manufacturing enterprises have managed to increase their total export earnings to a record high last year despite the rupee not having been devalued.  On the other hand, ‘the services sector’ has been helping to mitigate the negative impact on the balance of payments current account  caused by the excessive visible trade deficit the country has been nurturing for quite some time. BPO and the financial services sector, which also work on external markets, proved to be among the most significant contributors to our economic growth last year, despite not having benefited from currency devaluation or having raised a scare about it just before the MPC meeting.

We have up till now managed to stall the classic successive devaluation of the rupee induced by dominant market manipulators (as it was the custom in past years). Despite the relative stability of the rupee in recent years (which is qualified as ‘strong’ by the interested segment of the private sector) , imported items of day-to-day use have seen their prices go on rising in this stable exchange rate interval. It is assumed that, seen purely from an exchange rate angle, the prevalence of a relatively steady exchange rate of the rupee has prevented the compounding of those supposed price increases of the imported items in their countries of origin, if at all, to the detriment of local consumers.

There are serious doubts as to whether import prices in the source countries have soared up at the rate wholesalers and retailers have reflected them on the local market and passed them on to local consumers successively. They might in fact have been testing consumer resistance by edging up the prices a little at a go each time and thus collecting “rent” from consumers placed in front of little by way of lower-priced alternatives. There has been no policy initiative to nip the worm in the bud, which has had the effect of a new type of “second-round” price increases prompted by importers having to be gobbled up by unsuspecting consumers.

A good part of this element of price acceleration of imported goods is not captured by official inflation statistics although consumers have to face them head on. Despite this, the current annual rate of inflation is running in the region of 6%. The decision to bring down the BoM’s Repo Rate at the MPC meeting of Monday 19^th March should accentuate price escalation. This is because the real intention behind a falling interest rate structure is to get at devaluation of the rupee. Right-wing policies have thus come back with full force, shifting the burden of deficit in terms of effective economic policy-making from the fiscal authorities to the Bank of Mauritius. Institutions are undermined in this manner as well.

The signs of an internal weakening of the government establishment are already here. For more than one week before the MPC meeting, the Minister of Finance, who hails from the PMSD wing of the ruling government alliance, has publicly been proclaiming that the rupee would be overvalued. The exchange rate of the rupee is the responsibility of the Bank of Mauritius according to law and it is clear where the blame is going to. His Financial Secretary followed him in his footsteps shortly after to echo concerns about the so-called ‘strong’ rupee. In other words, both have been looking for a devaluation of the rupee, no matter if it puts consumers under even greater price pressure. The big bosses have to bag in more profits, isn’t it?  All this has looked like a comeback of the days of a previous Minister of Finance who appeared to be dictating to the central bank what its policy decisions should be. Fortunately, the government’s majority was not dependent on marginal votes at that time. Marginal voters appear to be extracting a high price now for their allegiance. The risk is that they may end up throwing overboard the very philosophy under which the Labour government was elected in 2010.

This kind of interference in the business of the central bank sometimes hides failures in other compartments of public decision-making. When fiscal policy fails to deliver the expected results in terms of economic growth and employment, it looks for a scapegoat elsewhere in order to pass on the buck for its own non-performance to some other institution. Besides, it is not uncommon for certain Ministers to proxy for our legendary traditional rent-seeking private sector of all hues and colours wanting to get more rupees per Euro of exports of goods and services.

The latter always claim but never prove, by having recourse to actual figures, that any devaluation of the currency they have successfully induced through this type of lobbying, has actually improved demand for our exports. Can the country act on such unsubstantiated claims to make consumers bear the brunt of successive devaluation in terms of higher prices? Can a central bank which is placed at the beck and call of the Ministry deliver independently on its mandate? The latest decision of the MPC indicates that a split might have been created once again in this high level decision-making body according to the nominations recently made by the Minister and the Financial Secretary. It was clearly not necessary for the BoM to let the interest rate structure go down on such a scale. No one will know that banks will arrange for a few nominal interest rate reductions to flow to a few only of individual borrowers and SMEs as a result of this decision; however, the bulk of the benefits of devaluation will go to a few only of large portfolio wielders. The beast of burden will be the public, with no tangible gains to show but higher prices to pick up. That’s it.

* Published in print edition on 22 March 2012