Former Governor of the Bank of Mauritius shares his views with «l’express» about the proposed amendments in the Covid-19 Bill and on the European Commission’s decision to blacklist Mauritius. As usual, his words of wisdom from afar detonate and resonate.. 

Mauritius is blacklisted by the European Commission. How do you react to this unfortunate but foreseeable development?  

Awful.Utterly disappointing.It is very frustrating – indeed, heart-breaking – to find Mauritius in a league of countries usually referred to as failed States.Disgraceful.What an insult to the Republic!!! It is outrageous; it hurts. Sometimes, in the middle of 2016, out of a sense of deep dejection with the looming spectre of gloom and doom in my vision, I had officially warned that ‘’high altitude persons (in an organization)…will turn out to be the pallbearers of the…on the day of reckoning” (confidentiality clause of the BoM Act is binding on me, unfortunately). Do we deserve to find ourselves in a basket of countries viewed as unfit for the world to do business with? 

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong>Regulatory-wise weren&rsquo;t we sending good signals to conduct global business... </strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US">Years ago, I was dead against the setting up of the Financial Services Commission(FSC). Having had hands-on experience as a regulator in Mauritius and discussed lengthily on the issue with former Governors of the Bank of England, Reserve Bank Australia and Reserve Bank of New Zealand, I am dead against it to this day. Years ago, we had tried to emulate the UK that had come up with the Financial Services Authority (FSA) that had yet to pass its litmus test. You may wish to recall that the FSA had cracked during the 2008 financial crisis. Let me say it emphatically again. A politician cannot be made responsible for a regulatory authority. Whatever the justification for having a separate regulatory authority for non-bank financial institutions, we must not turn blind eyes to the naked truth that a politician having upper hands on a regulatory authority in Mauritius is a one-man wrecking crew. The breadth and depth of multi-dimensional expertise needed for effective regulation and supervision are immeasurable. It is not given to a politician to fully grasp the kaleidoscope of expertise needed in the world of fast-evolving accounting techniques that also requires advanced knowledge of econometrics. A long-lasting self-inflicted malaise has finally reared its ugly head wildly...</p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong>&nbsp;But we have a Board, a Chairperson and a CEO looking after the business of the FSC. Isn&rsquo;t?</strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US">My good&nbsp;<span data-contrast="auto" xml:lang="EN-US">friend, Nad</span><span data-contrast="auto" xml:lang="EN-US">, we have seen enough of that movie. Have you forgotten how Álvaro was granted an investment banking license by the FSC whilst the BoM had not found him &lsquo;fit and proper&rsquo;? Haven&rsquo;t you seen how our state-owned financial enterprises have performed since the 1990s? In 2017, I was kindly asked by the Fed, once in Pretoria and the second time in New York, to conduct strict due diligence and exercise care because of the rising tide of suspicious transactions in our jurisdiction and in the neighbouring countries. If anyone in Mauritius believes that the BoMtook drastic regulatory actions arbitrarily during my second tenure of office, he is grossly mistaken. We live in a world of GPS. Even ships bearing fake names and registrations are closely monitored in the Indian Ocean. Do you think the desk officers of international organizations having Mauritius under their purview do not keep track of financial and regulatory events in the country? The realities on the ground are far different from the imaginary worldview of things many of us tend to construct and live with. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">Some folks I am familiar with told me that the European Commission is motivated by nonregulatory considerations. He seems to have suggested that the Commission&rsquo;s approach is similar to the way a cheetah would a sickly gazelle. Rather than exposing a tendency for blame game and issuing poorly conceived and crafted Communiqués, as self-respecting regulators, our officials should have already reacted, though belatedly, with bold initiatives to change course. It would have signalled determination and commitment to improve our regulatory framework. The significance of what the European Commission has said seems to have been unevenly understood. But the deeper significance of what the European Commission would not say about individual sovereign States does not seem to have been registered by the non-discerning observers. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong><span data-contrast="auto" xml:lang="EN-US">What should we do? </span></strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">We have been in a state of denial for too long, perhaps because of hubris&ndash; the excessive pride that brings down a hero &ndash;born of the economic success of the later 1980s. The chickens have now come to&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">roost. Start</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;with an accepted premise that reputational damage is already done to our jurisdiction. But it is,&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">however, repairable</span><span data-contrast="auto" xml:lang="EN-US">. Our regulatory authorities, in particular the FSC, must carry out the repair works immediately. Long before the axe is buried on us, our regulatory reforms have to be satisfactorily carried&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">out. In</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;fact, the regulatory and supervisory architecture for our financial industry needs a thorough review that would consume quite some&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">time. One</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;of the immediate steps is to phase out cash dealers and foreign exchange dealers. They have been eliminated in most countries for obvious reasons&ndash; known to all enlightened observers. They are a source of high risk. Besides, they cannot be regulated and supervised effectively. I did try in vain to raise the license fees of these enterprises to prohibitive levels in an effort to gradually phase them out.I was disarmed and overpowered. The least said, the better. We need to have our own version of Mao&rsquo;s Cultural Revolution. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong><span data-contrast="auto" xml:lang="EN-US">Do you think that the Government is in a position to fully meet the FATF requirements by the deadline set by the European Commission? </span></strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">I do not represent the Government of the day. But I can tell you that our banking industry will face intense pressures from a loss of correspondent banking facilities should the FSC and the BoM fail to comply. I guess pressures maybe mounting already. That would severely affect our foreign trade, growth and&nbsp;employment. In</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;a few of my public addresses, I do recall having laid due emphasis on this question in the past, after having been disarmed and overpowered. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong><span data-contrast="auto" xml:lang="EN-US">&nbsp;Does it mean that there is no other alternative than to comply?</span></strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">There is none. Should the Government fail to comply, correspondent banking facilities to our banks will be cancelled. That will be the end of the game and we will all be so poor that money will be the only thing we will leave with. And nothing else. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong><span data-contrast="auto" xml:lang="EN-US">&nbsp;I suppose you may have gone through the Covid-19 (Miscellaneous Provisions) Bill... </span></strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">Yes, I did. I read the section (2) of the bill and dropped dead. In a recent interview given by me followed by an article that appeared in your paper, I amply expressed my views on the issue of central bank financing and its medium and long term implications for the Mauritian economy. It is wasteful to go over it again. I cannot understand how economists could advocate massive central bank financing on an unprecedented scale in a situation characterized by billions of idle loanable money sitting on the balance sheets of banks. I am given to understand by some friends in the banking community that none of the banks has availed themselves of the Rs5 billion standing facility extended to them by the BoM. Why would banks make use of central bank financing when they are flushed with excess liquidity? And why inject more freshly created money to a system suffocated with and suffering from excess liquidity? The belief that what the Fed did for the US economy during the 2008 financial crisis should necessarily work in present-day Mauritian context stands on a faulty premise. It looks like an aberration. But I am not puzzled. There are other reasons that have motivated the amendment of the BoM Act. It is certainly not hard to speculate. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong><span data-contrast="auto" xml:lang="EN-US">You were very adamant about the use of funds from the Special Reserves Fund (SRF) in your post-2019-2020 Budget interview. The new amendment of the BoM Act says Covid-19 is having a negative impact on the economy. The BoM will grant funds from the SRF to Government in order to stabilize the economy. What&rsquo;s your take on that?</span></strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">I am still adamant about&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">it. First</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;and foremost, this section is self-</span><span data-contrast="auto" xml:lang="EN-US">contradictory. Once</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;we accept that there already does exist excess loanable funds sitting on the balance sheets of&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">banks, injection</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;of freshly created money by way of funds released from the SRF would itself represent a powerful source of instability. Aren&rsquo;t we expecting a substantial shortfall in export proceeds? Aren&rsquo;t we seeing exchange rate instability caused by the drawdown of funds from the&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">SRF? Aren&rsquo;t</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;we expecting a decline in the foreign exchange reserves of the BoM in US dollar&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">terms? Aren&rsquo;t</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;we expecting inflation to pick up inexorably a result? How would a drawdown of funds from the SRF that is itself a source of macro-economic instability help Government to stabilize the economy? Any right-minded Board of Directors adequately conversant with central banking will never approve the grant of funds from the SRF if it does stick to the letter and spirit of the&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">law if</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;this Bill goes through as it stands. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><strong><span data-contrast="auto" xml:lang="EN-US">A new amendment regarding the management of the foreign exchange reserves of the BoM is being&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">introduced. The</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;proposed amendment says that, with the approval of the Board, the Bank may invest part of its reserves in any corporation or company set up for the purpose of facilitating economic development. This is an area our readers are not so familiar with... </span></strong></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">Two points about this game plan right at the outset: (i) the idea behind this proposed amendment is very poorly conceptualized and, (ii) the amendment is vague and fraught with contradictions. These two initial remarks bear out clearly in my response below: </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">Firstly, this proposed amendment seems to suggest that the BoM would purchase shares or any other form of instrument in the private sector or in public sector companies or corporations. The question is how many of our local Companies and Corporations (apart from MCB Ltd and SBM Ltd in which the BoM as the regulatory authority would not invest)are rated by reputed rating agencies? If so, how many of the companies and corporations have a credit rating that would motivate the BoM to invest people&rsquo;s foreign exchange reserves in them? As far as I know, most of the public sector companies and corporations (except one or possibly two) are ailing. The existing BoM Act would not allow the Board of Directors to approve the investment in any of the corporation or company. Why?</span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">In mid-2018, the Government had amended a section of the BoM Act that deals with foreign exchange reserves management as follows:&nbsp;<strong><em>&ldquo;The Board shall determine the composition of the official foreign reserves and it shall aim to achieve their security, liquidity and return, in that order of priority</em></strong>.&rdquo;This amendment was made with the express objective of protecting and safeguarding the precious official foreign exchange reserves of the BoM. In other words, the risk of loss in the management of foreign exchange reserves was almost eliminated. The law, as amended, is emphatic. Security of investment of the foreign exchange reserves of the BoM is assigned the topmost priority consideration. It goes to say that the BoM can only invest in instruments of companies or corporations that are highly rated as are &lsquo;blue-chip&rsquo; companies and corporations abroad. Investment of the foreign exchange reserves of the BoM in unrated companies and corporations is, strictly speaking, ruled out right from the word &lsquo;go&rsquo;. Liquidity of investment is assigned the second priority. This means that if the BoM is in dire need of foreign exchange to sell on the market in times of currency shortages, it should be able to execute the sale readily &ndash; without delay. How far would the domestic market be liquid in terms of investment denominated in foreign currencies when shortages of foreign currencies hit the domestic market is more than doubtful. Return on investment is the last priority. If depreciation of the rupee is accounted&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">for, return</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;on investment in foreign currency terms would be far less attractive. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">It is mandatory for the Board of Directors to stick to the law. If the law would be adhered to, the Board would definitely not be in a position to approve investment of the BoM&rsquo;s foreign exchange reserves in local companies or corporations. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">Finally, if, by the amendment as proposed in the bill, it is somehow meant to establish a company or corporation that would manage part of the foreign exchange reserves of the&nbsp;</span><span data-contrast="auto" xml:lang="EN-US">BoM, the</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;Board of Directors would still not be in a position to give its approval. Why? Because that new company or corporation would not have a track record of performance in foreign exchange management. And if that company or corporation would hire the services of experts in fund management, the BoM is already hiring the services of the world&rsquo;s leading fund management experts; it would be pointless for the Board of Directors to give its approval for transfer of the foreign reserves to the company or corporation. </span></p>

<p paraeid="{a0ba0594-db18-4ca7-85b9-9eae961559db}{187}" paraid="2076568836" xml:lang="EN-US"><span data-contrast="auto" xml:lang="EN-US">And</span><span data-contrast="auto" xml:lang="EN-US">&nbsp;overall, what&rsquo;s your take on the Covid-19 Bill? Well, the only other section of the bill I read relates to the issue of public sector debt. It is a concoction of a cocktail Molotov.No more comments. I am fed up!</span>&nbsp;</p>