Making Monetary Policy

It may be said that the Governor of the Bank of Mauritius (BoM) and his deputies were put in minority for the nth (?) time at the last meeting of the Monetary Policy Committee (MPC).

The overturning majority decision is seen by some observers as a disavowal, by outside members, of the Bank’s quest to move up the country’s interest rate structure.

Unfortunately, the pattern of decisions given out by the MPC, in the past one year at least, mirrors a situation that we’ve been seeing in other economic decision-making: “Do not take risks. Let a given set of parameters operate at a level at which certain economic operators are habituated and do not do anything that risks tilting the balance against them. Do not upset those operators at their cosy level of comfort. It might have dire consequences if their cost of borrowing were to increase even by a few bips (basis points). They are too fragile and need to be handled with care. As for the others, savers and consumers and indebted persons, they do not count for much in the equation”. It is the same logic that drove ‘Wall Street’ to pauperize millions the world over.

Moving on to the bigger picture, we see a similar pattern. Many recognize that the country needs ‘economic reforms’ in order to put its economy on a sturdier course. However, many think that ‘reforms’ consist of privatising public sector assets, shifting the burden of taxation from the highest earners to the lower levels of society and making stringent labour laws, the tougher the better to encourage, so-to-say, enterprises to employ larger numbers. All this has failed to do what it was expected to do. One just has to ask oneself: has private investment perked up after all the reductions effected in the KRR? Figures show that it hasn’t.

The true reform is not this. It has more to do with breaking out of strait jackets we’ve put ourselves into. It is about breaking new grounds, expanding horizons to shake up existing economic activities from out of set patterns, bringing up new areas of activity and adapting out of untenable situations we’ve got used to for too long. It is this conservatism which needs to be constantly challenged to move on with the new economic order. Sustained economic growth comes out of this, not by depressing the interest rate as much as possible and thereby inviting household over-spending and inflation in the economy. Keeping the KRR low-bound after each MPC meeting amounts to stating that such true reform need not be undertaken.

However, the reality is that, confronted with our customary kindergarten conservatism, we are not even able to move interest rates up. We have to bear in mind that, unless we pluck up the courage to take the kids out of nurseries, they risk being stymied from the promise of blooming into adolescence. Would it be worth the while changing chairs on the deck of the Titanic when it might be too late? Are not events showing that we have not taken decisions enough to enlarge our scope, preferring to stay put, as in the case of the MPC?

* Published in print edition on 9 May 2014