The axe has kept falling on the poorer folk who have kept seeing their standard of living eroded continuously through price inflation. Those who entertained a glimmer of hope for a brighter future saw it dimmed in no time, being unable even to make ends meet. What better proof of the negative effect of such one-sided and biased practices can we have than to acknowledge that income and wealth disparities have kept increasing, at the poor man’s growing helplessness and bitter cost
Late last year, the euro started slipping heavily against the US dollar. From around $1.20 to the euro, the exchange rate fell in March/April 2015 to $1.06. This was a reflection of the sluggish or even near zero growth of the euro zone economy as compared with the slow but progressively upward march of the US economy. There also was the absence of a hint as to how the euro zone economy, caught up in a complicated internal conversation, would snatch itself out of its fundamental contradictions.
In the event, the Mauritian rupee which used to hover around Rs38 to the euro, started moving towards Rs34 due to the fall of the euro on international markets. The Bank of Mauritius (BoM) responded to this situation by depreciating the rupee against the US dollar.
As a consequence, the rupee which had hovered around Rs30 to the dollar under Manou Bheenick’s stewardship of the BoM till December last year, came sharply down to Rs36 per dollar at the peak of the rupee’s depreciation in the first quarter of this year. The rupee has been allowed to pick up partly and its exchange has come to around Rs35 to the US dollar currently. It has gained but it is still five rupees down compared with its average track record.
In the case of a net importer country like Mauritius, the impact of this kind of currency depreciation is felt on the price of imports. Where countries from which we import our commodities do not depreciate their currency against the US dollar in pace with us, our cost of imports from them increases in rupee terms.
The asymmetric behaviour of importers/wholesalers of Mauritius is well known. They did not reduce the prices of imported commodities when our rupee appreciated in value against other currencies (e.g., the South African rand, the Indian rupee) in the past, but when it came to the current depreciation of our rupee by the BoM, they immediately started jacking up prices. They put forward the argument that they had more rupees to pay per dollar of imports as compared to last year.
Thus, the direct consequence of the deliberate depreciation of the rupee first fell upon the members of the public. Their grocery bills shot up, despite buying up the same basket of goods as in the past. This is why price inflation – without wage compensation – brought about by currency depreciation, is said to be one of the most insidious forms of undeclared taxation of consumers, poor and rich alike. The public is therefore worse off after the depreciation of the rupee.
But the damage is not limited to items of current consumption whose prices get jacked up due to the depreciation. There are also long term consequences. For instance as the price of cement and other building materials go up in rupee terms, the rupee depreciation will make the acquisition of a house even more unaffordable to someone whose income is expressed in rupees, which is the case for 99% of the population. In a similar vein, private cars, motorcycles, TV sets, smartphones, kitchen equipment and so forth will cost more rupees than before, with a negative impact on personal budgets.
The public also loses money because of the effect of the depreciation on its savings in rupees. If a responsible parent has kept some amount of savings in rupees in a financial institution to support a child who is studying abroad, he would now have to pay more rupees for every single dollar he would buy up from such savings to meet the child’s living expenses, university fees, etc. In simple terms, the depreciation of the rupee eats away a part of the rupee savings a person has kept aside for a rainy day, both in terms of price inflation and in terms of its transfer value in foreign exchange.
The problem with our rupee depreciation is that it hurts the poorest people the most. Despite living in a world of unequal incomes, the poor will have to have to pay up the same number of additional rupees for an item whose price increased due to the currency depreciation as the ones with much higher incomes. Thus, rupee depreciation tends to worsen social and income inequalities.
But there are gainers on the other side of the scale.
The less well-off members of the population cannot afford either to borrow money in foreign currencies or to maintain foreign currency accounts. The richer members have access however to such facilities. Suppose someone having enough means went to his bank to borrow a million US dollars in December last year. Interest rates are currently negligible on US dollars, close to or even less than 1%. Dollar debt servicing does not cost much, as a consequence.
In rupees, the cost to him of this borrowing would be Rs30 million. Now, if he brought back the borrowed million dollars and sold them back to his bank in March 2015 at the new exchange rate of, say, Rs36 to the US dollar, he will get a sum of Rs36 million, that is Rs 6 million more than the debt he incurred barely three months ago. This currency trade would end up with his being roughly Rs6 million richer within a quarter, merely because he speculated on the rupee’s exchange rate. It represents a return of 20% over a single quarter of one year. Such is the impact of rupee depreciation on the better-off members of society.
The same kind of gain would be made by someone who kept his bank balances in US dollars, instead of in rupees. This is usually the practice of our exporters and, to a lesser extent, that of our importers. They would both stand to gain an enormous amount as in the example above within a short period of accelerated rupee depreciation. All they need to do is to convert, after the rupee’s depreciation, part only of their foreign currency holdings to cash huge gains in rupee terms. Unlike income, such gains are not taxable.
The argument is frequently made that there would be a need for currency depreciation in order to give a boost to our export activities. The argument has been employed for decades and, except over the period 2007 to 2014, the rupee has kept going down in value, just as it happened during the first quarter of 2015.
One may ask the question: has employment increased in the export sector? This has not happened. Have exports boomed up due to the benefits of currency depreciation? No, they are more or less stagnating for several years. For these exports to make real inroads, something much more than rupee depreciation is needed, such as improved access to markets, higher quality products, more innovation and technology and big productivity gains. Short of being able to move in this direction, our industry has contented itself by feeding on rupee depreciation.
This is the hard reality. It is harder still if it is borne in mind that the axe has kept falling on the poorer folk who have kept seeing their standard of living eroded continuously through price inflation. Those who entertained a glimmer of hope for a brighter future saw it dimmed in no time, being unable even to make ends meet. What better proof of the negative effect of such one-sided and biased practices can we have than to acknowledge that income and wealth disparities have kept increasing, at the poor man’s growing helplessness and bitter cost.
* Published in print edition on 22 May 2015