Samad Ramoly

There is only so much central banks can do
Rupee Depreciation Won’t Heal Our Woes

Samad Ramoly

Price stability is not everything, but without price stability everything is nothing”

— Otmar Emminger, former President of the Deutsche Bundesbank

Every year, in the run-up to the budget presentation, there is a tug-of-war between representatives of employees, employers and government to agree on a quantum for the annual pay review. Now they sit together in the freshly set up National Pay Council (NPC) with an independent chairperson expected to settle the dispute with the proposal of a quantum after assessing the views of all parties. Nevertheless, the mechanism, however well-meaning, is still unable to meet expectations. Why does the cycle continue ad infinitum and ad nauseam?

On the one hand, trade unionists claim that pay review must solely be concerned by the redress of loss in purchasing power. Alternatively, from the employers’ perspective, and indeed the government’s, capacity of employers to pay the increment and productivity data must also be considered. Officially, the three parameters – compensation for erosion of purchasing power, capacity to pay and productivity – constitute the basis of the mandate of the NPC.

In practical terms, the parameters, all critical it must be emphasised, cannot be reconciled because they rest on flawed assumptions, among which the rate of inflation computed by the Central Statistical Office is the most notable. The rate actually measures average changes in the prices of a basket of goods and services which itself is an average representation of the spending patterns of the average household. But is there such a thing as a typical household?

The weight of say, food and electricity bills, in monthly expenses of different households varies according to their levels of income. The lower the income, the heavier the burden, especially when there is a surge in global food and fuel prices. Mauritian consumers are even more vulnerable since they live in a country which has failed to commit itself to a reasonable programme of food and energy security and must almost entirely rely on ever-costlier imports – to a large extent the inevitable consequence of the endemic slide of the rupee.

Econoclasm

In an interview, Cader Sayed-Hossen, Chairman of the Commission for Democratisation of the Economy, disclosed how, during a meeting with representatives of the Bank of Mauritius, a business tycoon was advocating rupee depreciation to accommodate the fall in sugar revenue, going as far as even suggesting a quantum. Ironically, a closer look at the behaviour of the rupee over the years reveals that, barring seasonal delusion of new-found vigour as recently, the quantum has already integrated the system.

Had their lobby been as mighty, employees would not have to content themselves with a quantum, the one validated by the government, that in most cases hardly mitigates the negative impact of inflation on their income. This is so because employees tend to be allocated the strict minimum in terms of increment as the income targeted for maximum increment is extremely conservative, if it reflects reality at all.

When the most cynical foreign currency earners fret over the international value of the rupee, they contend that a weak rupee is “good” for the Mauritian economy. Such rumination is dubious. Belief in the salutary effects of a depreciating rupee is based partly on the expectation that rising exports of manufacturing production will increase employment and spur economic expansion. Evidence in Mauritius confirms large recurrent swings in both job creation and economic growth despite persistent depreciation.

While the intimate relationship between inflation rate and currency valuation in a highly open economy like Mauritius cannot possibly be challenged, the alleged relationship between currency depreciation and real competitiveness draws its rationale from tunnel vision rather than from contextual thinking. As currency depreciation feeds into the system, it stimulates a vicious cycle. Sooner rather than later the illusion of short-lived relief wakes up to a situation of self-inflicted damage.

Brain Pain

Human capital is the key driver in the pursuit of higher competitiveness. Yet, the depreciation bias has dented the morale of citizens whether subtly, when the slide is smooth, or harshly, when the slide is steeper. Productivity cannot be conjured out of thin air by rewarding the few. Real wealth is generated when the system is imbued with the required incentives that energise the majority.

For decades exporters have been blessed with preferential market access and a weak rupee. To some of them, now that the era of preferential access is fading, there is only the depreciation lobby to cling to. Bad habits die hard. When policymakers give in to them, they also lose grip on strategising to keep up with global capitalism. Hence the tremendous lag in national logistics, such as road networks, port and airport facilities, water supply and so on, that strains operations.

The Bank of Mauritius cannot cope with the complexity of an economy alone. It is little wonder then that it is stuck in a role of a fire-fighter spraying the market with erratic moves. The country is at the crossroads, the time is ripe to rid itself of the aberration of rupee depreciation, arguably the most pervasive distorter and disincentive in the system. Jointly with corruption, producer capture and high risk premium due to low predictability, it skews market prices and embitters industrial relations. Contrary to conventional thinking, it is not always conducive to sound economic fundamentals, such as trade balances. Worse, it often destabilises them, when hit by staggering fuel prices for instance.

No doubt, the Federal Reserve, the Bank of England or the European Central Bank can provide the Bank of Mauritius with guiding principles. But when it comes to minimising the risk of rupee volatility, on either side, Mauritius must tailor its policies to its own specificities. Singapore and Hong Kong, two of the stars of globalisation with similar profiles to Mauritius, should instead provide us with the inspiration.

Successive Mauritian governments have earned themselves a reputation of heeding to all sorts of lobbies, no matter how insane, as long as they are loud enough. By adopting such an attitude, governments waste considerable amount of energy and time to manage the resulting distortions, discontents and their domino effect instead of focusing on how to address pressing issues. Under these circumstances, policies tend to be misdirected and eventually backfire.

Detox

Policymakers should get their bearings right regarding the grumblers of the export sector. It is not about profit bashing, but about exposing deception. Policymakers must not lose sight on: firstly, the actual returns which for some brush with the returns of luxury items retailers in terms of percentage; then, the fact that manufacturers import spirited workers to beat the demotivation of local workers; and finally, more pivotally, the high import content in the manufacturing process.

In a newspaper report, Serge Seeneyen, Managing Director of Soniawear, said that “when the rupee appreciates, it is up to businesses to take initiatives to mitigate its impact, reduce their operation costs and become more efficient. We are going through tough times, but I remain upbeat. I trust that in the future I will catch up with today’s losses”. What else but a typical expression of entrepreneurial spirit.

The signal that Mauritius is poised for globalisation will come when, namely, similar gung ho statements tweak self-indulgent headlines and when trade unionists are eager to let go of bonuses that are not performance-based. That is, when according to the gut feelings of the majority of businesses and households, regardless of what anointed statistics may boast, their efforts are being adequately rewarded.

Such transformation cannot be presided over. It can merely happen through an enlightened leadership capable of creating the synergy for long-term and sustainable economic expansion that is inclusive and non-inflationary.

Samad Ramoly

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