Honourable Prime Minister, Sir.

I hope this open letter finds you well. In the past few days, I tried to give a serious look at how Mauritius is addressing the problems arising out of the Covid-19 viral infection by contagion. I do not believe that any sensible person would disagree with the stand taken by the Government in favour of a lockdown, belatedly or not. You made a difficult but the right choice between ‘lives’ and ‘livelihood’. Hopefully, the existential danger is dwindling. Understandably, in a crisis situation, panic policy-decisions tend to get fast implemented. I deem it critically important that our economic policy choices at this ‘corona-viral moment’ have to be such that the medium and long term economic objectives are not compromised while the immediate problems are being tackled. There is nothing in economic theory or any economic literature that teaches us how to tackle, without fail and without unintended consequences, the current pandemic fallouts. But economists are capable of finding ways and means of extricating from a tight spot a society mired in what currently appears to be an irresolvable economic crisis with an on-going health crisis on the side. There is, however, no ‘silver bullet’ solution to the crisis. As in linear programming, our pre-Covid-19 economic and financial conditions impose a number of constraints within which not many measures could be devised to produce an optimal outcome, that is, an outcome with minimum economic and social costs without jeopardizing prospects for sustainable growth performance in the future.

First and foremost, the deadly viral infection is not anybody’s doing in Mauritius. The crisis resolution calls for a nation-wide effort, not by the Government alone, in a national endeavour to restore to normalcy the pace of economic activities. Before we decide to go for any re-ordering of our national priorities in the post-Covid-19 months, we should fix the existential problems with due attention paid to the likely outcomes of our policy actions. In the early 1970s, Mauritius has had its own ‘sputnik moment’ that gave birth to its sense of industrialism. Covid-19 is giving us a similar opportunity to revive the vision and the same sense of national sacrifice, endeavour and responsibilities for a renewed enterprise. Without the unflinching support of all of our citizens, a successful resolution of the current crisis without upsetting the re-emergence of a healthier economy for a better economic future is a near-impossibility.

Being away, I cannot claim to be thoroughly conversant with the economic and social consequences of the lockdown as a result of the viral infection, unexpected and unprecedented. But, from my reading of the happenings across the world and given my familiarity with the Mauritian economy, I seem to have a fair understanding of the present state of the economy, the economic challenges – now and beyond, and the policy concerns of the authorities. A few economists and non-economists in the country have made sincere and commendable efforts to suggest to the Government a mix of monetary and fiscal policies that could possibly help mitigate the distressing, if not calamitous, the impact of the extensive spread of the viral infection. The measures that have been debated about have merits but they do have demerits, too. In my humble capacity, I have weighed policy alternatives that could give policy-decision makers in the Government some additional ideas and policy options. They could possibly serve as a way forward while ensuring that poorly calibrated policy-decisions do not become, so to say, a cure worse than the disease. It is wiser to err on the safe side of the policy game than on the wrong side. I ask for your forbearance, Honourable Prime Minister, Sir, as I could be perceived as being slightly technical in what follows. 

The economic tea leaves are forming a pattern worldwide; it’s not pretty. It is not unusual for anybody, economists or non-economists, to look for historical precedents that might serve as a useful guide for crisis resolution. In times of crises, the question usually set is, “Which policy instrument worked last time we had a crisis?” What worked the last time must work this time, too, is a reaction often encountered with. The crisis Mauritius is currently going through is very much unlike the 2008 financial crisis that had wiped out trillions of US dollars of financial assets of financial institutions and other investors and of millions of debt-ridden householders. Almost overnight, failed financial institutions and the massive losses of assets by investors and householders had brought about a depression-like contraction of the afflicted economies of the world. The US Fed had come up with a program of assets purchases and Government bond purchases, similar to what Bank of Japan in a ‘hollowed out’ Japanese economy had been doing since 1990 in order to get out of its economic morass but without success. Allegedly, I emphasize, ALLEGEDLY, the asset purchases program et al is said to have worked as a massive fiscal stimulus for the US economy in the 2008 financial crisis. Would a policy package that allegedly worked in the wake of a disastrous financial crisis several years ago in a few of the advanced countries equally serve as a useful set of policies to resolve problems arising out of Covid-19 in a small and highly trade-dependent economy like ours without forfeiting sustainable growth in the future? In my opinion, what we ought to ask ourselves is, “which policy instrument did work when the world economy encountered with a similar shock?” Aptly, this should be the starting point.

The health and economic crises unleashed by Covid-19 are characteristically different. What exactly is the problem posed by Covid-19? The three foreign exchange earning sectors, Tourism, Manufacturing and Construction – vitally important for the Mauritian economy – are the worst hit. In the next 12-18 months or so, tourism is highly unlikely to get back to its pre-Covid-19 state. As long as the lockdown is maintained, manufacturing is halted; its earning capacity is stifled. Similarly, capital inflows attributable to the Construction sector are also halted. Overall, as of today, back-of-the-envelope arithmetic yields a shortfall of foreign exchange inflows that could fall tentatively somewhere in the range of Rs 75-100 billion in the next 2 years or so. If the pre-Covid-19 level and pattern of domestic expenditures continue, the Bank of Mauritius (BoM) would have to part with an equivalent amount of forex or more – a substantial drain on its foreign ex- change reserves if external borrowings are ruled out. Obviously, we should expect a further aggravation of the current account deficit in the foreseeable future. An unprecedented economic contraction is predictable. Given the precariousness of our balance of payments outlook, it would defy imagination if this crucial point is ignored or taken lightly in our policy formulation.

As a result, the three sectors mentioned above are bound to face cash flow problems. Which institutions know best the strengths and weaknesses of the balance sheets of all the firms operating in these sectors? Of course, it’s not the Government. Nor is it the BoM or any party other than the commercial banks. The banks are better placed than anybody else in the system to know and fully comprehend the cash flow problems of the firms brought to a halt in the lockdown. Banks, too, have skin in the game as they also face the threat of deaths. They do have more than sufficient idle loanable resources and as such their contributions are a decisive factor in a successful crisis resolution without side-effects as long as the BoM competently provides the necessary supports. Wouldn’t it be appropriate for considering a suggestion that the banks ease out the cash flow of enterprises by way of making available to the funds out of their own idle resources at, say, 0.5 per cent or even free of interest subject to an interest margin paid by the BoM to them and the credit risks shared between the BoM and the banks while bearing in mind that the latter’s robustness matters for macro-economic and financial stability? Banks are already lending to the Government by way of investment in treasury bills at a rate below 1.0 per cent (with the repo rate having been drastically cut down). In fact, the yield on 91-day treasury bills has gone down to 0.15 per cent.

What would prevent banks to ease out the cash flow of enterprises if they would have the benefit of a margin offered by the BoM plus its risk-sharing support? We must not overlook the point that the BoM has been mopping excess liquidity at an interest cost of about 4 per cent. Should the BoM proceed along this line the need for mopping excess liquidity and incurring a cost thereby would be obviated. A refined formula along this line, taking into account the term of lending etc. would, in my opinion, bring central bank financing to a very bare minimum and far less disruptive and destabilizing. Government and lobbyists would have their hands off in the game. 

Is the Mauritian economy facing a generalized ‘demand problem’ or a ‘supply problem’ as are conventionally understood? I would hold the view that it is neither. Apart from a handful of vegetables and canned foodstuffs, Mauritius imports almost every consumer goods. The country is not short of foreign exchange to meet its imports requirements. The Government is the largest employer in the economy and all public sector employees are being paid their regular monthly salaries. I am sure that many in the private sector, including banks and other financial institutions, Offshore Business Sector etc. are being paid their salaries. Old people are being paid their monthly pensions. Retired people are earning their monthly pensions. The class of citizens left out includes the self-employed and daily wage earners in the manufacturing sector. This group constitutes the core class of citizens who genuinely deserve due consideration. The basic problem is not about widespread and self-feeding demand and supply deficiencies as in a war-devastated economy that would require ‘helicopter money’. As any mortal is aware, the lockdown has simply frozen the mobility of labour.

 A suitably targeted support measure would be the most appropriate approach of assisting the temporarily unemployed. Ideally, each of the householders who have been out of the job due to the lockdown could have been issued with a special debit card with limits set for each week until the lockdown is lifted. In the design of policies, the additional burden on an already strained Government finance has to be avoided by all means. Nor should the BoM have any recourse to its printing press in the process. Where would the money hail from? Given the economic emergency and serious threat of job losses in vast numbers, the Government could justifiably call for burden-sharing and suspend payments of end-of-the-year bonuses across-the-board to all its employees and pensioners for one or two years. This could be made applicable to the private sector, too. Public sector employees would forego the travel grants paid to them during the lockdown period. These, along with the expected windfall gain from the massive drop in the price of oil would go towards constituting the Covid-19 Fund for re-allocation to the genuinely needy citizens and for saving our small enterprises in the private sector. Of course, these are unconventional and exceptional measures but are meant for resolving an extraordinary crisis at a time when fiscal space is lacking. This is not a full set of emergency economic measures. It could be complemented by other measures, too. Importantly, these decisions would obviate the need for having recourse to the printing press of the BoM. Government debt would be contained as a result. Aggregate demand, in the face of a further deterioration of the current account deficit of our balance of payments, would be clamped down to some extent. Pressures on the forex reserve of the BoM and on the exchange rate of the rupee would be lessened.

We are all familiar with the saying, ‘you cannot eat your cake and have it at the same time.’ If we eat the cake and still want to have it with total disregard to our own economic well-being, we will eventually get the kind of economy we deserve. The foregoing suggestions would be a ‘litmus test’ for all the high talks aired here and there about our capacity and willingness for nation-building. Only we, as a people, can hurt Mauritius. And only we, as a people, can save Mauritius from troubles, present or future. Uplifting one another is the surest way of getting the best out of the present crisis and paving the way for a stable economy in the years ahead. We need to be guided by this national objective. To achieve the national objective, we have to tune on our national spirit.

Financial stability matters. The three most important variables that we need to bear in mind in respect of the concept, debt-to GDP ratio, an important one for consideration in optimal policy decision at present making are income, interest rate and the magnitude of debt, irrespective of whether it is household debt, corporate debt or Government debt. A disaggregated empirical analysis of this concept leads one to conclude that interest rate is a far less important variable than income the coefficient of which is materially significant. Income is overwhelmingly more important. One would be inclined to argue that a low rate of interest sustained over time would help promote investment and raise income levels in Mauritius. Theoretically, yes. Does it, in practice, consequentially influence productive activities in the real sector of our economy in a big way given the prevailing state of the economy? And has it, so far? We have had roughly a decade of low-interest rates. With so low rates of interest, I would have expected a ‘bubble’ somewhere in the real sector of our economy instead of a ‘bubbling’ Government debt! In highly financialized financial centres, low rates are steroids for unproductive speculative activities. Literature is littered with evidence that below a certain level, interest rate loses its efficacy. If sustained for too long, low rates are very likely to turn out to be counterproductive. Regulators of our banking industry know that better. Excessive reliance on the interest rate as an instrument for easing access to finance needs to be weighed appropriately since banks have to strike a balance between risk and reward. It is quite a common feature, more so in times of crises, that even in advanced countries banks stick to their own terms and conditions of lending despite cuts in key policy rates by their central banks. Emphasis on growth enhancement by way of much-needed structural reforms – a can that has been kicked down the road for many years – is a far more meaningful strategy for growth enhancement than futile cuts in the key policy rate of the BoM.

“Our economic policy choices at this ‘corona-viral moment’ have to be such that the medium and long term economic objectives are not compromised while the immediate problems are being tackled.”

 As a citizen of Mauritius, having had the experience of successfully tackling a number of crises in the domestic financial markets, including two crises in our domestic foreign exchange market, I am taking the liberty to drive home a critically important point. Two further cuts in the repo rate have been effected in recent weeks. The MPC wing of the BoM has overlooked a consideration fundamentally important for the economic and financial stability of the country. Interest rates are a key regulator of capital flows. I worked out the interest rate parity for Mauritius and found that the level of interest rate has been depressed to a point that would rather encourage capital outflows. At this moment, with the rupee having taken a depreciating trend and the need for more foreign exchange being increasingly felt, decisions regarding repo rate ought to have been recalibrated to prevent capital outflows. The MPC has erroneously or rather recklessly, I should say, decided otherwise. If we have not heard about firefighters rushing to a building on fire with gasoline instead of water, this is what the BoM MPC been up to lately. I do not intend to be nasty but I do feel the pressing need, as a citizen of the country, to say that the MPC does not fully understand the usefulness of ‘interest rate’ in all its facets as a policy instrument in an economy having opted for full convertibility since July 1994. The yield of 0.15 per cent on 91-day treasury bills smacks of ignorance. Hopefully, things do not turn out to be sour in the months ahead. 

In the Pandemic Box of suggested policies, mention has been made of ‘helicopter money’ that involves recourse to the printing press of the BoM as if helicopters spraying water randomly over raging forest fires could stop it. There is some merit in this line of thinking, particularly in a war-devastated economy where all means of production have been destroyed. Ours is not a war devastated economy right now. All means of production are intact. The proposal, unfortunately, ignores one basic consideration that is harmful to small open economies like ours: ‘Print and spend’ in a system already flushed with excess liquidity, is very likely to bring about dislocations and distortions in the economy. This policy path has to be religiously avoided as it will leave our economy mired in slow growth and even deeper in debt in the years ahead. I do not wish to burden you, Prime Minister, Sir, with the technicalities of these issues. Suffice it to say that the policy of ‘print and spend’ in crisis times have made the rich richer and the poor even poorer. This is well documented.

Mauritius is not the US; it is not the Eurozone; it is not the UK or Japan either. These countries have currencies that are ‘reserve currencies’. And reserve currencies are currencies that investors world over are ready to deal in and hold as assets. From time to time, their Governments and central banks can afford to have safe recourse to the printing press in order to wriggle out of crisis situations without unleashing disruptive forces to their own economies and the world economy as well. As long as they ‘print and spend’ at a rate consistent with world economic growth, they and the world economy keep going in stable conditions. But these countries have been looking only at the money value of what is being bought and sold at the present time; they have stopped looking at the economy as a whole in structural terms, nor even over the longer term and hence their persistent sluggish growth performance and over-dependence on China that focuses on the real economy. Covid-19 has thrown on the table the huge risks associated with the overdependence, however virtuous globalization is said to be.

Ours is not a ‘reserve currency’. The Mauritian economy is having to do with a huge current account deficit that is expected to worsen. Fortunately, we have a good cushion of foreign exchange reserves that we have to preserve by all means. The more the government prints and spends, the more intense will be the pressures built on our foreign exchange reserves and on the exchange rate of the rupee. A large-scale ‘stimulus’ made up of sizeable increases in public spending out of money freshly printed for the purpose is an obstruction that eventually slows growth. Money is spent without productive outcomes. Labour is often misdirected into dead end forms of activity. Debt builds up with little or no increase in real output that allows the debts to be repaid. These are deep-fried truths but they do not hit the headlines. With a ‘print and spend’ policy stance, it will be easy in the beginning but tough in the end. Whereas, with the ideal set of measures mentioned earlier it will be temporarily tough for some (if at all) in the beginning but durably easy in the end. 

“Our economic policy choices at this ‘corona-viral moment’ have to be such that the medium and long term economic objectives are not compromised while the immediate problems are being tackled.”

For purposes of illustration, let me relate an anecdote for your appreciation. Way back in 1998, before I was appointed Governor of the BoM, the domestic forex market had crashed. Accelerated depreciation of the rupee, gone wild and out of control, had severely undermined social and economic stability. Soon after I was appointed Governor, I had raised yields on treasury bills to as high as 13 per cent and soaked up over Rs 5.0 billion borrowed from the BoM within a few weeks of my appointment. Once it was syphoned off the system, the domestic forex market had stabilized. ‘Print and spend’ for overspending carries with it a huge risk, more so when the balance of payments outlook is far from promising. Prudence dictates that our policymakers must not err on the wrong side. 

Honourable Prime Minister, Sir, there is no ‘first best’ or the ‘best practice’ for tackling the kind of crisis we are stuck in. In practical terms, Mauritius cannot but only apply tools that “best fit” its own prevailing conditions on the ground. Fear and misgivings inhibit our ability to think clearly, to cooperate fully and to change things radically as a community. I do not need to overstate that the well-being of any person is also dependent on the well-being of the person next door. If we, individually and collectively, fail as a community in making hard choices, many jobs will get destroyed and morality shattered with little hope for a durable economic revival.

In this ‘open letter,’ I have tried to be as concise as possible. I admit that I do not have all the information and details about the state of the Mauritian economy as most of the comprehensively designed Tables with key statistical trends (worked out as per the IMF Manual of Statistics for dependable economic analysis) for some sectors that used to be part of the main body of the Annual Report of the BoM have been replaced by glossy pictures. The suggestions made herein could possibly be taken by some as drastic and unfair measures. All of us need to keep in mind a simple truism: there is an unavoidable cost for crisis resolution, irrespective of the measures implemented by the authorities. And the cost is ultimately and indiscriminately borne by all the citizens of the country. It is rewarding to make a one-off payment for the cost than to let the cost works its way into the system and grow bigger and bigger in terms of economic dislocations, distortions, imbalances in Government finance and in external payments position and eventually sluggish growth in the future. Hard choices, as you are already aware, Honourable Prime Minister, Sir, are a politically difficult undertaking. We are not short of evidence of past Prime Ministers having made politically hard policy choices and won the hearts of our people. We have a mature and, after all, an understanding people. I trust.

In these trying times, I extend to you my kind regards and very best wishes.