The Governor of the Bank of Mauritius explains the decision to lower the Repo rate and comments the economic situation.

¦ The headlines announced your measure of reducing the repo rate as, “The governor of the Bank of Mauritius has finally given in.” Have you finally given in to the lobbies?

No. I would reject that accusation that we listened to lobbies. We do our job against the background of the world economy and the prospects of this world economy as reported to us by people who know better than most of us here in Mauritius. So it’s against this background that our decision has been made. Anyway we keep hearing the same music all the time.

¦ I don’t know what music you’ve been hearing but the song that the economic operators have been singing all along is that they wanted the repo rate to be reduced by 1% and we wake up this morning and hear that you have reduced it by 1 %!

We didn’t hear about anybody coming to us asking for only 1%. We’ve heard of requests from economic operators for cuts of 2.5%. What we did is, instead of giving the help in small bits and pieces, we preferred to do it in one fell swoop and we doubled it up with a very stern message to the exporters that they must use this opportunity to restructure, to reorient their markets, reexamine the product niche where they are, change product price, change target markets and, if required, change the base of their operations and not come to us in three or six months’ time saying “I’m going to lay off 30,000 people.” The message is that if they are not able to work within costs in Mauritius, then they don’t belong in Mauritius.

¦ Still, if I were an economic operator, I’d open a bottle of champagne, drink it and go to sleep.

You wouldn’t sleep peacefully for very long because if you do not use this breathing space I have given you to pull up your socks, look for new markets etc., you would come back to me in six months to get your next shot of currency fi x. You won’t get it because by then, there is nothing I’ll be able to do for you. I have no more room for maneuver: inflation will be picking up and the historically low levels that we’ve achieved will have been threatened. They will go up.

¦ During these six months, to borrow the imagery of your Second Deputy Governor, the population will actually be taking the medicine for those people who went out of their way to get sick.

I would sort of nuance that. If the population does not take the medicine now, in three months’ time, it would be taking medicines with much worse side effects. Because the exporters would have great diffi culties exporting, investors would not have resumed investing, bank credit would still be going begging for customers etc. and economic activity would have declined drastically.

¦ How are you going to ensure that I will use the generosity of the country judiciously?

Banks have already been put on notice to make sure that their wards do not continue to work on weak capital structures, that they use the opportunity given now through this reduction of cost of capital, plus the facilities they have been given through the Economic Restructuring and Competitiveness Programme (ERCP) to build up their capital and not fritter away the extra rupees that they are likely to get from the reduction of the finance charges in distributing dividends.

They are meant to rather use this breathing space to restructure their operations and pay greater attention to sustainable sources of productivity and competitiveness.

¦ When economic operators say that if you don’t devalue the rupee, 30.000 jobs may be lost, is that alarmist in your opinion?

It is alarmist. And we are not in the business of saving jobs. We are not in the business of saving lame ducks. We are in the business of fi nding new sources of productivity to make the country viable as an economy. We have to fi nd our way in an environment that has changed completely. This is not a message for our exporters only. It’s also a message for our workers. Because they are also used to having an annual pay grant whether their employer is making money or not. They also want to get a shot in the arm by an adjustment of salary. And this forced the government in the past to engineer currency depreciation. Having given in on the wage grant and having increased their cost base across the board, we used to be almost morally bound to do something “en douceur” to make it sustainable. To avoid all that, you have to reduce infl ation across the board which is what we did.

¦ But inflation does not seem to worry you this time, does it?

With or without the reduction of the repo rate, the infl ation rate will go up. We have reached historically low levels. The turning point was reached last October when inflation was at its lowest ever: 0.1% on the yearon-year measure. It is not going to go back there. On the other hand, the conjunction of what is happening with our unemployment levels is serious. Unemployment fi gures are going up. If there is no investment at all, there will be no job creation. If there is no job creation, growth prospects are going to stall.

¦ Are we in the danger zone?

Not right now. But the prospects for next year are pretty poor compared to the external environment that was confronting us when the Monetary Policy Committee last met. We then believed that the outlook was good for the second half of this year and that outlook is not as bright today. We have not thrown anything away. We are still focused on our mandate to maintain price stability, monetary stability and fi nancial stability. We are getting problems with two of them: monetary stability, partly arising from the excess of liquidity on the market, which is the result of what’s happening in our export markets. If there is no demand for products, there is no investment on demand from exporters who must meet the demand in the coming year. Having reduced the repo rate by 1%, we probably need to wait and see what happens to demand.

Now it’s possible that the environment that the economic operators are facing in this market may not be sufficiently attractive for them to invest anyway. I did say as well that we must pick up the slack through the public sector by accelerating the implementation of public sector projects, by revisiting procedures and so on that prevent government investments from taking off faster.

Otherwise economic activity in the country will slacken drastically which will lead to a steep fall off in economic growth in the fi rst quarter of next year. So we have to maintain conditions of stability in a deteriorating external environment where there is a loss of business confidence. Previously, we had achieved a rate of infl ation historically low and a level of unemployment that we could live with. But all these indicators are turning in spite of everything that we do. We could have maintained the level of the key repo rate, which would have driven the banks to have a bigger and bigger excess of liquidity, which would have driven the central bank further and further into the red to go and mop it up as borrower of last resort. We would have reached a situation where banks would stop taking your money as remunerated deposits. They would stop taking deposits. They would stop generating profi t for want of profitable lending avenues.

¦ Are we really in that situation of doom and gloom?

In the banking sector? We are well pastit. You think it makes sense for a bank to take money on deposit from you and me at 4.5, 5% and go and place it on the market at 2%? If the trend continues, not only will they stop taking your money, but they may even charge you to take it. Which happened in Switzerland. There was a time you had to pay for the privilege of having your money in a bank. They didn’t want it. So we are not too far from that kind of condition right now. Reaching it would constitute a real destabilization in the market.

¦ What is the responsibility of the banks in all this? You recently chastised bankers for what you called “lazy banking”. What do you expect from them?

We have a high amount of excess liquidity in the market. At one time it was as high as Rs 8 to 10 billion. While part of this could be due to redemption of T Bills by Government being more than fresh issues, we believe that the rather sluggish growth of credit is also a contributory factor. Banks have to push more credit through the door instead of seeking refuge in risk-free assets.

¦ Coming back to the repo rate, when you reduce it as drastically as you have, you know it’s going to have an effect on the value of the rupee and on inflation. Are you prepared to live with that?

The value of the rupee has strengthened enormously if you look at what’s happened to it over the last three or four years since I assumed office as governor. But we should not look at the value of the rupee in isolation. We should look at it together with what was happening on the inflation front at that time. We should also look at it with what was happening on the unemployment front and the growth front. So, take all that as part of the macro picture that we were confronted with. That is why, at that time, we adopted the monetary policy stance that we adopted. It was justifi ed by the circumstances confronting us at the time.

We were attacked by the same lobbyists most of the time and by others a few times after that. People didn’t share this perspective. But we managed to maintain a very stable monetary policy stance over nearly 18 months. We would have maintained that stance if global recovery was on track. We were expecting the global recovery in the second half of this year. That is what all of us believed. But what we see now is a second round. We see new concerns erupt about the debt crisis. To further complicate the matter, the old fears we had about a double dip recession were supposed to have disappeared, because the US National Bureau of Economic Research (NBER) had pronounced the end of the great recession in July 09. We are still waiting for real signs of recovery. At best it has been very timid. At worst it has slipped back into conditions that can best be described as recessionary. How else can you qualify continued closing of banks, continued foreclosures of houses, continued loss of jobs in major economies?

¦ You are almost shifting your stance concerning currency devaluation. I thought you were dead against it. Are you now saying it is the remedy?

It is not! I have stated loud and clear that devaluation is not the solution. It will never be. It is certainly not the solution to the euro crisis as it will lead to high infl ation rates, problems of balance of payments and a lack of rigour in economic management. And when inflation is high, demand for compensation will start surfacing resulting in an infl ationary spiral –something to be avoided at all costs. This is the kind of language we’ve systematically rejected in the past. We have reduced inflation to historically low levels and we did not see any need to go and decrease the value of the currency and destabilize the whole economy on the off-chance that somebody somewhere might get what they think is their due.

¦ Why does devaluation have so many advocates, then?

You devalue your currency so that it becomes weak and therefore competitive so that you can increase your exports. BUT in the current situation, you cannot increase your exports because your main markets are having problems themselves.

¦ When the rupee is low, exporters do not come and tell us how they are using their excessive profits but as soon as it goes slightly up, they come out in droves crying “wolf”, are we not in a situation of “privatizing gains and socializing losses” as Nobel economist Joseph Stiglitz says?

Oh, very much so! There is nothing exceptional if a currency appreciates. This happens in every country. And I will resist all attempts to come up with measures to suit some to the detriment of all.

¦ Does the debate about currency devaluation not boil down to the interests of the importers vs. those of the exporters and hotel operators?

In the short term, defi nitely. It is like robbing Peter to pay Paul. The Bank is mandated to look after the interest of the economy at large and cannot target its measures to ensure the profi tability of certain sectors only. Currency depreciation can make exports more competitive but at the same time it infl ates our import bill as import prices go up and can also fuel infl ation. It is not a panacea.

It is a short-term palliative. In the long run, competitiveness does not depend on exchange rate changes but on productivity enhancement. For too long, there has been a one-way bet on exchange rates by operators in this country.

¦ Since we import twice as much as we export, isn’t Peter going to suffer more than Paul in this equation?

Well, in terms of the external balance of the country, we have a structural balance of trade defi cit that is not likely to change overnight. We don’t produce what we consume - that is a reality.

¦ Won’t a low rupee worsen the situation?

Well, our import bill will cost us slightly more. Unless there is a major improvement in our export accounts, the balance of trade defi cit is likely to worsen. This year we have already faced a balance of trade deficit which is very high. We cannot allow that to continue. We can’t prevent that from happening by slapping on controls. We could impose import controls. You know, I hear people talk about food self-sufficiency and so on. Nice headlines. But the reality is we can’t grow wheat and rice, at least not at competitive prices. The cost of producing it would not be comparable to the price at which we import it. We can produce anything theoretically but there is a price for that. At international border prices, we are not competitive in comparison with most of the major countries. We need to maintain an open trade system. Because of the lack of balance between our imports and exports, our deficit is as big as our total exports. So 30 billion exports, 60 billion imports, 30 billion deficit.

¦ Still, you have intervened on seven occasions to try and reduce the value of the rupee. Is this intervention not likely to hurt consumers and the population in general?

We conduct monetary policy in the national interest and not in the interest of any particular sector. Our intervention in the foreign exchange market is not meant to offset market forces but to smooth out unwarranted volatility in the exchange rate. Recent interventions in the foreign exchange market were aimed at achieving a neutral position for the BOM on account of the direct sales of foreign currency by the BOM to the State Trading Corporation. The overall objective has been to maintain orderly conditions in the foreign exchange market.

We have a free floating exchange rate regime, which has served us well. We have never advocated a strong or weak rupee. We have said in many forums that the Bank does not have an exchange rate target and that we do not intervene in the market to offset the interplay of market forces. You may recall that in June of this year, when we suspected that currency manipulations might have occurred on the domestic foreign market, in the wake of the Euro crisis, we retained the services of a forensic auditor to probe into the suspected foreign exchange market irregularities and manipulation.

¦ Your detractors are saying that the aim of the measures you announced on Tuesday will only end up giving the lame ducks a shot in the arm.

I think that we have to maintain stable monetary conditions in the market where there is an increasing risk of loss of confi dence. So it’s not a shot in the arm for a few lame ducks. The aim in fact is for the lame ducks to actually get out of the picture.

¦ When the minister of Finance sends the disgruntled Joint Economic Council to you to sort out the currency problems on the grounds that he does not intervene in matters concerning the Bank of Mauritius, does that mean that you work totally independently and he has absolutely no say in the decisions you take?

The Minister of Finance is a lawabiding citizen. He observes the law scrupulously and so do I. I refrain from commenting on what falls outside the purview of the Bank - so does he! This is a fair exchange.

Interview by Touria PRAYAG

Touria PRAYAG