The International Monetary Fund (IMF) has called off the bluff of the governor of the Bank of Mauritius (BoM) on the “one-off exceptional contribution of Rs 60 billion” of the central bank to government and on the Mauritius Investment Corporation as a wholly owned subsidiary of the BoM. It is from the Bretton Woods institution that citizens learn that “the central bank law is being reformed.” Such a reform, “including to preempt further exceptional transfers to the government”, should have been communicated to the public by the BoM for the sake of transparency. 

A modicum of self-respect would have led the BoM to admit a change in the treatment of the Rs 60 billion in its books. The governor had stated in the last annual report of the BoM that “this contribution has been financed through the issue of the Bank’s own instruments.” An increase in liabilities without an offsetting increase in assets naturally dilutes the level of equity. 
The IMF would never approve such contribution because a central bank, to be credible, cannot disburse more than its level of equity. Since the BoM has to keep a minimum capital of Rs 10 billion out of its Rs 45 billion of equity, “an amount of Rs 32 billion has been written off from the Special Reserve Fund”, according to the BoM public notice of 7 May 2021. A book entry has become money created and credited to the Public Treasury. The BoM, however, runs the risk of not having enough capital when the rupee appreciates. 

As for the second tranche, “the remaining balance of Rs 28 billion is being treated as advance against future profits distributable to Government.” Contrary to a grant that the BoM contribution was supposed to be, this advance has to be accounted for as part of government debt unless the law is amended to consolidate the balance sheets of the central bank and of the government into the balance sheet of the country, in which case the amount will net off. But even such creative accounting cannot discard the destructive inflationary power of money printing.

As things stand, gross public sector debt, which reached 91.3% of GDP in March 2021, now hovers around 98% of GDP. Henceforth, any profit made by the BoM will not be payable into the Consolidated Fund but will lower the outstanding value of the advance. The BoM does not rake in huge profits as most of its income comes from international reserves in a world of low interest rates. If the Rs 190 million distributed by the Bank of Mauritius to government for the year 2019-2020 is taken as an annual average, it will require 147 years for the BoM to pay itself back Rs 28 billion. One way to reduce the pay-back period is to devalue significantly the rupee every year, and another is to have a team of experienced asset managers at the BoM. 

Fortunately, the BoM will save itself from some 1.9 billion dollars in domestic distressed and illiquid investments held on its balance sheet as the IMF recommends “that the central bank should relinquish ownership of the Mauritius Investment Corporation (MIC), and financing of the MIC should be provided through the budgetary process.” The Public Treasury will have to fund the remaining Rs 14 billion of deals signed by the MIC. 

The MIC needs to be restructured as a transparent and independent Special Purpose Vehicle off the BoM balance sheet, the government to put equity into the SPV, and the central bank to lend money to it against bonds issued by the SPV to create leverage. The funds should be managed by an international asset management firm while the board should comprise neither people from the BoM – which as the regulator of banks has conflicts of interests with the MIC – nor lobbyists close to big business. 

Convertible bonds, the instrument by which the MIC invests into distressed companies (they have no free cash flows but poor debt service coverage ratios), are not loans. The bonds have been structured in such a way that the conversion option embedded in them has been rendered almost worthless. This cannot be offset by collaterals based on already inflated and illiquid assets (land) values. The BoM has yet to explain how it will mark to market these bonds and how its auditor will sign off on the valuation methodology.

The ranking of the MIC on the collateral will impact its recovery rate as big banks have top rankings and floating charges on everything. The MIC has taken most of the risk with a mere 3% coupon on some deals struck at par. Since recovery rates of junior debts are very low at time of default, the MIC should have invested in these distressed assets at a discount to par value and pushed banks to share the burden and apply haircuts to corporate debt. The MIC should also compel companies to raise more capital on the equity markets or sell assets to reinforce their balance sheet. 

In a radio interview on 29 May 2020, Harvesh Seegolam asked to be judged on results. The IMF gives a damning verdict: his accounting games are among international worst practices.