Overvaluation of the rupee!!!


Over the past three years in these very columns we have been highlighting the fact that the rupee (REER) was misaligned but at the same time we did point out that while the Bank of Mauritius (BOM) has obsessively focused on maintaining interest rates and stabilising the rupee to contain inflation, it has also alerted to the dangers of relying unduly on a falling rupee to stimulate economic activity. “Improving the rupee’s external competitiveness in markets beset by a severe crisis and dampening global growth will offer scarce prospects of reviving demand, and provide limited relief to exporters’ bottom lines.

As the Mauritian economy retreats from a real estate and construction boom, some of its fundamental weaknesses are being exposed, including the insufficient levels of capital to support heavy debt burdens. Under-capitalization is a characteristic trait of family businesses, and our private sector will have to face hard choices if the looming crisis deepens. Lowering interest rates and weakening the rupee will be partial palliatives to address the inevitable need of enterprises for buttressing their capital base.”

You cannot have the cake and eat it at the same time. The Central Bank (CB) exchange rate policy has been beneficial in the short run. The strong exchange rate helped keep inflation low although oil and food prices were firming up internationally. The CB’s success at denting inflation and anchoring inflationary expectations earned the government considerable goodwill. Moreover, in the short term, rupee appreciation has forced the companies, which traditionally excessively relied on competitive depreciation, to plan for an appreciation of the rupee by hedging their foreign earnings. This however involves a cost and requires necessary efforts at improving manufacturing efficiencies and production. The logic was that, instead of tinkering with the nominal exchange rate to maintain external competitiveness, exporting firms were expected to work towards direct cost-cutting measures such as wage and operating cost reductions, improving labour productivity and enhancing capabilities.

A depreciation of the rupee, while enhancing export competitiveness, would have jeopardised all that has been achieved so far — a stable rupee, low inflation, declining interest rates and confidence in the currency and the country’s financial sector. Moreover, as a small open economy, the cost reduction from the depreciation can be quickly eroded through higher inflation. Worse, the higher inflation tends to become entrenched, with adverse consequences for the economy. But the generous wage policy, without a corresponding improvement in productivity, aggravated by the lack of sectoral reforms, has not helped in putting the money stance in a less stressful position.

It is only now after being alerted by the IMF on the “misalignment of the rupee” that there is concern that we have lost the opportunity of adding 1% to our growth rate. What if the misalignment dates back to 2009? Exchange rate estimates are an important input to forecasts of economic growth and inflation, and estimates of equilibrium exchange rates provide an anchor for exchange rate forecasts. As the MOF does not seem to have the skills to provide updated estimates of our equilibrium exchange rate and its misalignment and given that an overvaluation/misalignment does not necessarily imply that the only recourse is the depreciation of the currency, it means that the MOF had missed out on the opportunity during the past four years to adjust its policies accordingly including reforms to reduce supply bottlenecks and improve productivity and the business environment, etc.

The IMF 2011 Staff Report recommended that “… the authorities monitor real exchange rate developments in relation with its fundamentals going forward. Further real appreciation not warranted by fundamentals might be resisted through sterilized interventions, but such policies should also be supported by fiscal adjustment and productivity increasing reforms to facilitate external adjustment. These policies have not been forthcoming to support the BOM’s interventions in the foreign exchange market. They would have surely helped us to add some percentages to our growth rate.

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Our proposals for Budget 2013: Six main pillars

Mauritians need to feel that they are moving towards a better future built on the strong foundations of a credible path of reform. They do not want to be served the same recipe once more — the ones that have not offered a more cohesive explanation for the problems or any real solutions. A coherent, credible and holistic plan for the long-term economic growth rate of the country is needed. Even if it will take some years to reap the benefits, they want a recipe for long-term success. They are prepared to be part of the effort and drive to put in place, gradually and sometimes painfully, the building blocks – the main elements of our updated coherent and holistic long term strategy – of the National Long-Term Perspective Study (NLTPS) to realise our vision of Mauritius for the next 15 years. We believe that we can start by laying down the following building blocks in Budget 2013:

Education reform: We need a bolder overhaul of the system itself for an education system that instead of churning super rats for a rat race nurtures excellence and creativity and has the ability to provide learning to a broad cross-section of citizens, to advance national proficiency in Maths and Science and to create an adaptable labour force as well as to develop a national appreciation for discovery, entrepreneurship and the creative process.

Build Skills: The contribution of most sectors to economy-wide higher value addition will eventually stagnate if the sectors do not move up the technology ladder. Skills training is the essential prerequisite for greater competitiveness as well as for promoting inclusive growth in the country. We will need to identify the desired skill sets of tomorrow and look at systematic ways to mobilize massive resources to develop them rapidly. A National Skills Regulation System will monitor these programmes as well as the internships and apprenticeships schemes that can go a long way at filling the skills gap.

Competitive markets: We need to continuously and actively challenge entrenched economic privileges in order to ensure that markets are competitive (especially for our SMEs), information is transparent, and consumers have choice.

Focus on Innovation: In restructuring our existing economic activities and in initiating new ones, innovation will have to be a key driver of this change. We should encourage a new wave of industrial policies that strive to create a R&D culture and foster innovation by new instruments (competitive bidding for earmarked funds and a R&D tax credit). Given the fact that the private sector under invests in research, government can play a key role to support growth by investing in science and technology, by increasing its funding for research needs and creating the institutional environment that supports technological change. We need a technology strategy to address specific needs of innovation and technology diffusion. What about a publicly funded Mauritius Industrial Technology Research Institute (MITRI)?

Productivity focus: The Achilles heel of Mauritian economic performance in recent years has been weak productivity growth. We need to give more weight to those investments that boost growth and innovation (e.g., research, education, infrastructure, and information technology) and less to those that have little impact. We will have to speed up big industrial and infrastructure projects. We have to earmark projects that can be implemented quickly. Much of the expenditure on public works is now considered wasteful, so the focus should be on projects that boost productivity. Large projects are mired in delays and clearances. Each day of delay has translated into lost jobs, loss of revenue and lower growth. This will be accompanied by sectoral reforms to generate productivity improvements in agriculture, industry, public utilities, health, education, etc.

Export expansion and diversification: The proposal contained in past budgets for the setting up Trading Houses in COMESA and SADC regions which “would provide a shop front, warehousing facilities, marketing services, selling bulk and breaking bulk and taking orders for Mauritian products” and the pursuit of economic diplomacy by our embassies will have to be re-examined. Export market information requires urgent attention. Our institutions will have to think global with respect to matters related to international relations, marketing and investment options and secure trade offices in key markets by being based in the Mauritian missions abroad. This will enable global knowledge acquisition — acquiring crucial market knowledge, finding the right people, firms and institutions, building the contacts for insightful information and leads. It will also influence the ways our business sells and markets our brand, builds relationships, secures resources and negotiates the best deals and partnerships for our industrial and SME sectors.

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The PRB award: A futile exercise

It is time to do away with the Pay Research Bureau. The country needs rather a National Salary (or Resource) Commission (NSC), as proposed by the informed columnist of Week-End in her article of 14 October 2012, titled “Et la farce continue”. An NSC would be able to give a new orientation to the allocation of resources towards realising our vision of a more services-based knowledge hub or any other hubs that are more fashionable these days. This means that we should be privileging first of all teachers (especially scientists), not administrators.

In Germany and Finland, the best elements usually join the primary and secondary teaching sector, medicine, research and science-oriented professions. The more crucial and the riskier the jobs the higher the salaries or the allowances — special allowances for the policeman on patrol and for those carrying out special risky duties. Moreover, the greater the need for innovation and creativity needed for a job, the higher the pay packet — IT programmers, lecturers, scientific officers and researchers, etc. In specific areas of specialisation in the medical field, for e.g., we have to offer hefty pay packages if we want to address the shortage in fields such as anaesthesia, neurosurgery, urology amongst others.

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A strategic rethink of the tourism sector

Our tourism product “ne fait plus rever”. It is no more “un plaisir”. What used to be advantages have turned into disadvantages. Our inward tourists who bear a tiring long distance travel to discover an idyllic island that is being marketed by travel tours operators, find something else: du beton and more of the same that they are used to — commercial centres with the same products that are available at home. We have failed to hide the jungles of concrete behind a proper landscape of greenery. Our ecological fate — thus our tourism product — is being threatened as never before by the predatory impact of growth. Much of what we are witnessing today seems serendipitous rather than part of a strategy. We are surrounded by examples of this every day. It seems that everyone in Mauritius is on his or her own trip. Should we be surprised if Maldives and Seychelles are outperforming us in terms of growth of arrivals from the Euro zone?

Maldives has carved itself a niche for itself in the pristine undersea world. Subsix, the world’s first underwater nightclub, is light years ahead of the curve, offering purely hedonistic ocean pleasures and sub-aqua attractions. Seychelles invests in the long-term prosperity and sustainability of its tourism industries while ensuring that any exploitation is sustainable by guaranteeing that the integrity of its many natural attributes remain intact for future generations to enjoy and to benefit from.

To remain ahead of the curve in this very competitive changing business environment, we need to have a strategic rethink of our tourism sector that goes beyond such cosmetic changes like the new focus on some emerging markets. We need to re-think our product offering that will have to lean heavily on a development strategy tilted towards more ecological democracy based on the principles of environmental sustainability and environmental aesthetics, something that is already emerging and supported by a range of local and international grassroots movements and NGOs — a new tourism that is sustainable, environmentally and socially responsible, and characterised by flexibility and choice.

* Published in print edition on 27 October 2012

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