Strong and respected public institutions are an asset for a country. They are independent, decisive and know what they should be doing to set the balance right
The Bank of Mauritius stands out as one of the finest public institutions of the country. Its mission is clear.
It has kept delivering nicely on its mandate over the past 46 years after it was set up. Like any other institution, it has erred on occasion but it has broadly produced tangible results to emerge as one of the country’s most respected and productive public institutions.
It would be normal for any country to protect the good standing of one of its key institutions, notably its central bank. This has not lately been the case. One may even go back to 2007 for the start of a period when the Ministry of Finance did not easily reconcile its views with the central bank’s actions on the ground.
There are at least two reasons for this situation.
In the beginning, bending to certain exporting private sector lobbies, the Ministry would have wished that the BoM could have facilitated the gradual erosion of the rupee’s value by condescending to its continuous depreciation by market manipulators. The BoM resisted this demand. Not only is this contrary to the set-down objectives of the BoM. Continuous rupee depreciation would also have impacted negatively on the cost of living of the majority of the population without any matching gain in terms of additional local private sector investment generated into productive activities, thereby creating more and enduring employment for the population.
Another point the Ministry has been pressing hard has been to bring down the Key Repo Rate (KRR) of the BoM. This is determined by a committee of the BoM called the Monetary Policy Committee (MPC) at its regular quarterly meetings since it was put in place by the present Governor of the Bank in 2007.
The MPC is made up of the Governor, the two Deputy Governors, two members appointed by the Prime Minister and three others appointed by the Minister of Finance. Decisions are taken by majority vote. With the international economic crisis in the background, the MPC brought the KRR sharply down from around 8% at the start to 4.75% by September 2009. In November 2013, it brought it further down to 4.65% on the ground that world economic outlook was still weak.
In tandem with the fall of the KRR, commercial banks sharply and successively reduced the interest rate they pay on savings deposits of the public. This has now fallen to around 3.25%. It used to stand around 8% before the MPC was set up. Commercial banks have also reduced their lending rates to the various sectors though not by much but they keep to themselves a cut of 5% between the rate they pay to depositors and their average lending rate to borrowers.
As if this is not enough, the Ministry keeps pressing the MPC to bring even lower down the KRR. The BoM’s establishment remains unconvinced that the fact of bringing down the KRR by so much over the years has really benefited the economy by inducing additional investment where it matters, i.e., in new and better market adapted employment-generating productive activities. In fact, the rate of private investment has been falling in past years. Inroads into newer economic activities and onto sustaining external markets have been scant. What then, it asks itself, have all the successive reductions in the KRR served, if they have not extended the country’s production possibilities frontier? This zero-sum game is at the basis of the BoM establishment’s resistance to the MPC’s quest to continuously bring down the KRR.
Whatever had to happen has happened. In civilized places, any difference of opinion is accepted in the end, even though one may not be happy with the playout of forces underlying the “democratic” process. This does not appear to be happening since the last MPC meeting when the Minister of Finance came out openly to state how happy he was with the MPC’s latest decision to keep the KRR at its previous level of 4.65% when the BoM’s establishment had wished to nudge it up.
In a communiqué it issued on Friday last, the Ministry of Finance (MoF) went as far as to cast doubt on the BoM’s research and forecasting department as regards the country’s expected inflation rate. It also took to task the BoM’s market operating division. The Governor of the Bank then came out in public to state that while there might be inflation forecasting errors on the part of the BoM that were rectified subsequently in the light of new information, the Ministry has erred no less in its own budgetary projections. In other words, there was no justification for throwing stones by those who live in glass houses. Certain vegetarian arguments made first by the Ministry and used by the Governor of the BoM subsequently to retaliate are better left out as all this helps nobody.
Both sides took the IMF team which was on an Article IV consultation mission in the country at the time to express its views on who, between the Ministry and the BoM, should bear huge debt servicing costs associated with sterilizing excess rupee liquidity in the ten to twelve billion rupees generated by external borrowings resorted to by the government for its budget financing. By so doing, we were telling ourselves that those guys must know better than ourselves. A tragedy.
The importance of strong public institutions
The end result of all this is to project two of our top institutions, the BoM and the MoF, in poor light publicly. Strong and respected public institutions are an asset for a country. They are independent, decisive and know what they should be doing to set the balance right.
It is to the Federal Reserve of the US (Fed) and the European Central Bank (ECB) that recourse was had when the western economic edifice threatened to crumble at the lack of result from political decisions during the international economic crisis of 2008. Global markets are today watching carefully the least slip of the tongue the leaders of the Fed, the ECB or the Bank of England might make to take their investment decisions one way or the other. The economic fate of the world hangs in suspense on the lips of those central bankers. In contrast, the leader of the Zimbabwe central bank has, by meekly submitting to the diktat of the Ministry, imported huge amounts of inflation into the embattled country and nearly wrecked the Zimbabwe dollar.
* Published in print edition on 14 February 2014
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