A Road Map For The Financial Sector


By R. Chand

We have been overwhelmed recently by the volley of bold claims that Mauritius is establishing itself as a regional financial centre — a gateway to the emerging world or that is perfectly positioned between Africa and Asia to become a financial hub to be counted on in the Indian Ocean region. Are we providing the financial sector the means to play this role? A road map for the sector is long over due. We have been waiting for a reengineering and modernization of the sector since 2006 with the objective of transforming it into a financial services sector that is characterized by speed and continuous innovation with an increasing ability to leverage capital markets, specialized skills and technology to innovate and create new products, processes and services. These are the prerequisites to becoming a sustainable premier financial centre that has both width as well as depth.

While some of our operators are setting their sights on driving Mauritius into more high-value added activities like private wealth management, others are persisting in locking the sector in low-value added activities and passive administration of foreign accounts established to benefit from double taxation treaties and agreements. The latter seems to be the people who were sent to Delhi to negotiate the doomed DTA treaty. And the Indian response was quite acerbic, fed up that they were with our dilly-dallying and our incapacity to propose anything concrete.

Mr Chindambaram, the Indian Finance Minister, was very blunt: “The Mauritius team that visited India did not have the authority or were not inclined to show any flexibility. So I am afraid it is back to the drawing board now.”

If we had a road map for a financial services centre that ensured tangible commercial substance and was oriented towards more value addition, we would have had more room to bargain with the Indian authorities in favour of a transition period that would allow us to gradually lessen our dependence on the global tax avoidance industry. It is true that the relative shortage of highly skilled and legal financial expertise represents a potential bottleneck to rapid growth of higher value added global financial services. But there is no reason why Mauritius cannot confidently aspire to be a financial services centre of greater substance within 10-15 years.

Singapore has made it, and Malta has recently chalked out an ambitious road map for its financial services sector aiming at doubling its contribution to GDP to over 25 percent. It is strengthening its regulatory structure to supervise some 350 hedge funds with a combined asset value of Euro 7.2 billion. Some 100-odd fiduciary companies are setting up trust and trustee services there as well as wealth management, pension funds and private banking companies and a score of non-retail professional funds that are regulated as collective investment schemes. It also aims at beefing up its 21-year-old stock exchange by listing companies from outside the island and Europe on its bourse which will be trading in trades stocks, gilts, treasury bills and corporate bonds. How quickly Malta succeeds is a matter of time. It surely has the will. Are we equally fired up with the need for developing such a road map for our financial services sector?

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As growth putters !!!

In our article in the first week of December last on our growth forecasts for 2013, we had noted that GDP growth would not likely exceed 3.2%; we had also argued that the economic slowdown is sharper and more broad-based than anticipated and is now deeply entrenched across all the sectors of the economy. We had also noted the absence of a new policy dynamism whether in the tourism and the ICT sectors, and with uncertainty dragging on we saw nothing capable of lifting the economy from its lethargy. We said that Mauritius was living in a denial mode about the real state of the economy.

In reality, the headwinds that the economy was facing continue to blow. The economy is possibly even weaker now than it was at the time of the last budget when comprehensive structural reforms, supported by a more expansive fiscal policy, could have helped to rev up growth. It is not just the domestic but even external factors are unlikely to be much better. The US economy is likely to grow by a mere 1.6 per cent during 2013; China is in the throes of a slowdown and Europe continues to struggle. More importantly, even global export powerhouses like China and Germany are experiencing a slowdown in their exports.

In such circumstances, it is time to debunk our undue concern for the level of public debt and our unwillingness and incapacity to give more room to fiscal policy. The politicization of the arguments of the RR school (Carmen Reinhart and Kenneth Rogoff -RR) had simplified their findings into political slogans that called for swingieng cuts in public spending and a reduction in debt to raise growth. But a recent paper by three economists from the University of Massachusetts at Amherst shows that the effect of rising public debt is nowhere as drastic as RR made it out to be. We cannot thus conclude that high debt to GDP ratios are the cause of low growth nor can we say that that low growth results in a high debt to GDP ratio.

Now that the issue of boosting our slackening growth is back on the agenda, we believe that the tempo of reforms and implementation of priority capital projects need to be speeded up. A set of supportive and bolder expansionary fiscal policies, along with initiating concrete steps to address supply-side bottlenecks and implementation capacity constraints, are imperative to boost up growth. This will have to be coordinated with a more supportive monetary stance.

The primary reason that would prevent a more expansionary monetary policy are the risks on account of the current account deficit that remains high though it may recede with commodity prices taking a downward trend. Indeed, it is difficult to see how the BOM can avoid adopting a looser monetary policy stance with the broader macroeconomic parameters like inflation and global commodity prices moving in a favourable direction and the persistence of weak growth and output gap indicators. Thus, the current slump, if handled skilfully, could be used to accelerate genuine economic reforms and capital project implementation which will restore growth and improve overall productivity in the economy without sacrificing a longer-term approach at the altar of short-term solutions.

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All authority and no responsibility

Some people have the bad habit of waiting for the choicest of moments to drop a big stone – the issue of regulatory gaps — in the financial scams pond and standing back to watch the ripple effect. It seems to be having the opposite effect. The common refrain is all authority and no responsibility. Civil society continues to wonder where the buck really stops after the serious dereliction of duty by some regulatory bodies in the financial sector is coming to light. But some analysts and local experts persist with the argument that these bodies cannot be held accountable for not taking preventive action against some dubious unregistered investor companies. The blame, they say, lies in the regulatory gaps in the financial system.

Whichever way you toss the coin, they are right. When it suits them, local experts are wrong; we should bring in foreign expertise — the IMF, the Singaporeans, the Swedes… you name it! When it does not suit them, foreign experts are not knowledgeable about the local context. For example, the model they had proposed for our Financial Intelligence Unit (FIU), with powers spread out to the other regulatory units, has led to the emasculation of its main functions. (As it has been well said by the CEO of the FSC, can we afford to have “un régulateur superpuissant”?)

Some go so far as to question the whole idea of an integrated Financial Services Commission (FSC) and are even suggesting its dismantling. The whole idea of a unified financial services authority to oversee a wide range of activities in the financial services sector has been imposed by the developments in the financial and business sectors which were undergoing profound structural changes eroding the clear-cut distinctions between banking, securities and insurance business. An integrated authority would thus be able to provide improved and more effective supervision to preserve financial stability, better protection for customers and enhanced order and transparency in different markets.

There has been no reinforcement of the law, and everyday we are hearing of more cases of unregistered companies running Ponzi schemes being criminally charged by the police for apparent offences of fraud and cheating. There is nothing seriously lacking with the exiting laws except their bad enforcement. Many of these dubious companies were operating well-crafted Ponzi schemes, camouflaged as unlicensed collective investment schemes. Our apex financial institutions have little justification for not taking action against these unlicensed companies that were collecting funds from the public and promising attractive returns. They have provisions in their financial legislations to initiate criminal charges against these companies.

Some of these Ponzi schemes could have been prevented if the regulatory bodies and other institutions concerned had acted in a concerted manner by ruthlessly going after all the unauthorised and illegal money raising schemes by any entity. Many of theses bodies were found wanting in initiating rigorous follow-up actions. We believe that we must also enlist the support of the Registrar of Companies, which may have to update its provisions aimed at neutralising the activities of promoters who operate under the guise of companies and dupe investors. There is also an urgent need for cautioning people against investing in unauthorised schemes and to create awareness about the precautions that have to be taken before investing.

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Teaching Entrepreneurship

We have been witnessing recently the cobbling together of all sorts of entrepreneurship courses in many institutions of learning. The idea that one can learn to be an entrepreneur in a classroom is laughable. Entrepreneurship is all about creativity and this is what is actually missing in our education system. Our rote learning education system should be reformed to bring out creativity in our students. Under the pressures of our fiercely competitive education system, the creativity and originality of our youth is being sacrificed. Yet these qualities are crucial to nurture critical thinking and problem-solving skills needed in today’s globally linked workplace.

Many education specialists emphasise the importance of developing the two aspects of the brain – the logic and the aesthetic side – in the wholesome development of the child. We need innovative teachers to create comprehensive learning and discovery environments and design entirely new models and methods of teaching mathematics and science – the logic side of the mind. This has to be reinforced by the teaching of the finer aspects of life – music, arts, human values – the aesthetic side. Both are needed in a reformed education system to endow students with the capacity to maximise their creative potential. Creativity is already present in everyone of us and it just has to be awakened and nurtured. How can you except our youth to be creative, to be entrepreneurs, after so many years of rote-learning from an education system that is more bothered about categorising them into successes and failures rather than encourage all of them to nurture their creativity?

Lee Kwan Yew, himself, acknowledged that Singapore lacked a class of entrepreneurs keen to start their own small and medium sized businesses because its ultra-competitive education system was geared towards churning out bureaucrats. The biggest weakness in Singapore’s education system was that it overlooked bright kids who would have made good entrepreneurs; some top schools and universities recently acknowledged that they would reduce the importance of results in selecting applicants and apply greater weight to activities such as sports and the arts.

Mauritius has to confront the perils of its failure to provide a modern education system suitable for the 21st century knowledge society – an education system that teaches academic as well as life skills to develop the challenging analytical and creative qualities needed for the modern world.

* Published in print edition on 3 May 2013

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