Mario Draghi, president of the European Central Bank, saved the Euro Zone (EU) from collapse by taking a commitment: ‘We’ll do whatever it takes’ to save the euro. That was on 26 July 2012. He made this statement when public opinion the world over had lost faith in Europe’s politicians, unable to fix the problem of loss of confidence among markets about the very sustainability of the EU as a united economic bloc.
The markets had come to the conclusion that the wrangling politicians of the EU had no clue how to salvage not only the euro but the Euro Zone itself, at a time it looked like various periphery economies of Europe – Greece, Spain, Italy, Portugal – were on the brink of collapse in the face of enormous public debts that they did not have the means to honour. The interbank market had ceased functioning. A serious liquidity crisis was in the offing, threatening to hit at the heart of the financial market.
Many big European banks which had lent huge amounts to the affected countries would have fallen down as the first victims of the impending disaster. This would have ushered in a systemic crisis across the entire European financial system with banks taking turns to collapse. Fundamentally, the EU and the euro are still structurally caught up in the woods; the EU is hoping that by doing ad hoc ministrations in individual countries, it will eventually be able to take the affected European economies out of the woods.
But this is not what is keeping Europe together; it is those reassuring words Mario Draghi uttered on 26 July 2012. It means that when it comes to the crunch, market fears can be allayed provided the one who is giving the reassurance is credible and capable of delivering on his promise. In this instance, the European Central Bank carried credibility enough to hold the markets together at a time confidence in the EU governments was sapping. Any country which wants its institutions to carry the weight they should, painstakingly cultivates the quality of reliability on them by empowering them adequately, not by undermining their credibility.
Let them do their work unobstructed
It will be noticed that countries, which have made substantive economic and social progress and sustained it over time, are also the ones which are equipped with the best public institutions that are respected not only in the country in question but also at a global level. We ourselves trust the Privy Council of the UK. Why? Because we believe in our soul of souls that this institution will not stray from its main course, no matter what it takes in terms of the price to pay for sticking on to sound principles. We trust the UN to a much lesser extent because it is amenable to manipulation by the five permanent members of its Security Council as best it serves their non-coinciding interests.
Even though we don’t have much to do directly with the central banks of the US and the UK, we consider them to be attending to their duties objectively to the best of their faculties. Similarly, we trust the Monetary Authority of Singapore which will brook no hanky-panky when attending to its business as a central bank. Its government holds it in high esteem and will not tamper with its decision-making process at any cost. By contrast, we will not hold in high regard a central bank which is manipulated by politicians or their proxies, mostly to make them fall in line with the short term quests of the politicians in favour of a few but to the detriment of the many.
The three above-mentioned central banks are no doubt accountable to legislators but they are not made subservient to them and that is why they are respected not only in their own countries but the world over for the freedom and rigour with which they attend, unimpeded, to their work. If the US and the UK economies are slowly raising their head above water today, much of the credit for it rests upon the discreet but pragmatic decisions adopted by their central banks rather than upon the non-decisions of their bickering politicians caught up wrangling among themselves between fiscal easing and adopting blind economic austerity.
Mauritius also needs respected public institutions
Many times, the claim is made that Mauritius figures well in global country rankings in different domains, particularly in the African region. One should go a bit further and ask: who is bringing this credit to the country? After doing all the permutations and combinations, one will come to the conclusion that the credit is due to those of our public institutions which have not failed to deliver on the missions assigned to them. Like Singapore, we could have gone much further to stamp ourselves with the badge of stellar performance. But we can’t and the sole reason for it is political interference where it is least needed.
Consider the case of the Bank of Mauritius. Like it or not, it has an acknowledged record of achieving over the last 45 years of its existence: it has maintained confidence in the local currency; it has avoided a collapse of the rupee’s exchange rate as would have happened if it had yielded to political pressures for rupee depreciation; it has an excellent record of regulating the banking sector to the highest international standards, and it has a reasonably good international standing, notwithstanding an almost political campaign the Ministry of Finance has launched against its top administration to undermine it. This campaign has been a battle of vain words in which the main protagonists on the two sides have publicly exposed themselves. Self-respecting countries don’t allow such things.
How the hell do we want a premier institution of the country, such as the Bank of Mauritius, to live up to the highest standards if it were embattled with the Ministry for not kow-towing to the Ministry’s pedestrian demands, broadly against the public interest, notably to bring down the rate of interest and to devalue the currency at any cost? The point is if we ourselves, being placed in positions of high responsibility, do not respect our top institutions, how do we expect the rest of the world to do so? What kind of a vision does that kind of attitude project about where we want our public institutions to be in the global order? The country has definitely lost the gravitas which should have been its tool for making progress.
The noise about follow-on not-very-noble exchanges having taken place in public between the two sides since after the last MPC meeting has barely died. Another rumour is already afoot to the effect that there would be two new appointments at the head of the central bank, presumably being prompted by the Ministry. We hope that this is not true since we don’t really need the clash to undermine the authority of the central bank to do its duty while another MPC meeting is looming on the horizon. It may amount to an intimidating move calculated to encourage the kind of untoward and inexplicable downing of the country’s interest rate as it happened at the last MPC meeting.
Surely, holding the central bank hostage in this manner will contribute to undermine its hard-earned credentials over the years? This is in nobody’s interest.
Why this constant targeting of institutions which perform?
It would have made sense if non-performing public institutions were rather taken to task and brought up something near the level of the Bank of Mauritius. Not so, in our country. Ironically, it is public institutions which are performing that are increasingly targeted, by means of intrusions or otherwise, for public censure without rhyme or reason. Actually, their top management are being constantly disempowered with the risk of being thrown out if they don’t comply with unwritten directives. If they became demotivated due to this incessant and sterile assault, it could be a tragedy for the country.
Consider the uncovering lately of several Ponzi schemes that were being operated on the sly by shady characters to the detriment of those who trusted them. Clearly, the ones to blame are those who have undertaken financial business without securing an authorisation. They are not the only ones to cross the bounds in the country. There are others in diverse fields, public and private. But finance is a sensitive sector and the malicious germ should not have invaded it.
In any event, what happened in that context? It is the two regulators that were bashed up publicly for not acting to stop the rot when it started. Not the main culprits, the defaulters. Yes, the defaulters were mentioned but the axe was really being made to fall on the Bank of Mauritius and the Financial Services Commission. One doesn’t have to go too deep to see the unfairness of the accusations. Accidents happen. But once they happen, corrective action is required on the part of the public institutions in charge not to let them recur. That was our priority. We do not know whether the system has now been made fool proof in this regard but it ought to.
What do we hear now? Another rumour. That the Bank of Mauritius and the Financial Services Commission will be merged. What for? Presumably not to have recurrences of the kind of slippage as what happened with the Ponzi schemes. Anyone in his right mind can easily make out that this cannot be an earnest consideration on which to decide a merger of the two performing public institutions. It would make have made sense if the two came to a clear understanding as to how to trigger action jointly or severally to nip any unlawful activity in the bud. It does require a merger to achieve this.
There are several considerations before such a Rubicon is crossed. A regulator cannot and should not be burdened by what it does not really master. The result could be catastrophic as compared to the situation ex ante. People speak of the unified regulatory system operating in the case of the Monetary Authority of Singapore and ask for the same over here. There is a fallacious assumption here that what works well for Singapore will work just as well for Mauritius.
In contrast to places like Singapore, which have been operating in the unified mode since 1975, we have not raised the level of sophistication of our financial services sector from time to time. Over there, a complex built-in system that has had a natural growth and an element of complex synergy has been exploited to the maximum as it has evolved over time as the scope of the market deepened. We are still quite far behind. Let us not break specialisations in financial regulation which are doing the job they are designed for, given the level we are operating at in our financial sector.
From here, it is not difficult to conclude that the situation in Mauritius appears to be concentrating on settlement of private scores. It is not geared to developing a vaster and richer framework of financial intermediation that a system of sound financial regulation is expected to yield, unfettered by personal antagonisms or vacant grand standings of different sorts. This latter objective is not achieved by bringing in more players on the market; it is achieved by enriching the scope of the jurisdiction with the addition of more and higher skills. We have to grapple with the reality and make better things happen. That does not come about by destroying, for god knows what sake, the little we’ve been able to realize.