One day Alice came to a fork in the road and saw a Cheshire cat in a tree. “Which road do I take?” she asked. “Where do you want to go?” was cat’s response. “I don’t know,” Alice answered. “Then,” said the cat, “it does not matter.”

Reluctantly, I write to you to express some viewpoints on a few key issues that stand on the way to a lasting and robust economic recovery. You should be familiar with the idea of ‘trade-offs’. In order to have more of one thing today, you have to accept less of something else. Thus, having too much today leads to having too little in the future. If, in the combination of consumer and producer goods the emphasis is too skewed towards consumer goods for too long, the economy is bound to shrink. Basic economics. Responsible policy-making invariably requires trading off some pain today for greater gains in the future. Hyman Minsky gave us this great quote, "Stability is unstable." "People experiencing long periods of relative stability are prone to excesses. We must thus remain vigilant against complacency." Having erred in making policy choices, we find ourselves caught in a string of unprecedented economic troubles. We are roughly in the same boat as has been Argentina in recent years but with a Mauritian twist as an added economic dilemma to the story. The Argentinian experience in instructive; the lessons conveyed are useful.

2.The Mauritian economy was already in a dire state before the pandemic. The gravity of the pandemic brought the economyto a standstill for two years. Unlike video games, economies cannot be paused and un-paused without deleterious effects. Afrosted economy causes severe systemic disruptions. The flow of cash and credit coagulates. At best, it moves but like molasses. Even if cash in the vaults of banks is increased, it does not circulate into the real economy. Banks do not lend. People do not borrow. Consumers do not spend. People sit and wait for the end of the depressed economic conditions. Defrosting an economy that is continuing to suffer from the hangover of the pre-pandemic excesses is obviously a formidable challenge. In this letter, I draw your attention, inter alia, to logjam situationsin policy making that you would need to break.

3.Not so long ago, we were about leadership, character, spirit, ethics and pride. Placing our economic goals ahead of any other consideration was the ‘de facto reason of state’. Economics trumped politics. Years of unwavering efforts in the pursuit of defined, agreed and endorsed economic goals conferred upon us an ambience of trust, self-confidence, adetermination to do better and better, comfort and economic security. A primordial template for economic success guided our policy makers and entrepreneurs. We built an economy that lasted. Importantly, politics was thought in terms of choices and scarce resources. Regrettably, the template did not evolve in line with evolving economic dynamics at home and abroad. Moss-covered old follies are forgotten; decision makers have been tripping over them anew. We are, as a result, not only outflanked but disgracefully nudged out of the pantheon of performing and smartly managed economies in the region. It is deeply saddening that we are being counted out – at times disrespectfully. We are left with our weathered past triumphs. It is not uncommon to come across men-in-the-street with untutored economic instincts being right in their diagnoses of our declining economic conditions. Politics is trumping economics. The authorities seem to be unwilling to aggregate enough intelligence about the impending threats to the economy. Increasingly, openly expressed opinions appear to reflect how poorly even simple brand of wisdom resonates with the jaded public. The sun may have already set on our ability to change course. Make no vain calculations and do not entertain delusive thoughts. Stay away from denial. If you do, in the end we will be compelled to do the right thing after having gone through trials and tribulations; the politically impossible will become the politically inevitable.

4.Inept macro-economic management is already producing bitter harvests. The longer the economy endures the maladroit play of the policy game, the worse the potential crisis could turn out to be. Do remember late MIT Prof. Rudi Dornbusch’s quip on economic dynamics, ‘In economics, things take longer to happen than you think they will, and then they happen faster than they could.’ In other words, economic laws get you in the end – gradually and then all of a sudden. The quip neatly captures the state we have been finding ourselves in for quite some years. What usually follows is very painful. It is not the time for flummoxed decision makers to offer morality tales to a perplexed public instead of a tough reckoning with facts. A vicious cycle of disruptive economic forces is inconspicuouslyat work; it requires integrity, a strong sense of commitment andbravery to confront. The appropriate abracadabra would be: make the plans and strategize, take the decisions, take the responsibility and pull the load. It is said that a thousand miles journey always starts with a single step. I am hopeful that you would put your best foot robustly forward in an endeavor to course correct.

5.Macro-economic imbalances have been building up for years. Our economic landscape is a mosaic of potholes, of gaping deficits: ruined Government finance with ever widening fiscal deficits and unsustainable budget deficits resulting into staggering levels of public sector debt, recurring current account deficits and overall balance of payments deficits, credibility deficit and a severely impaired central bank balance sheet with uncertain prospects of possible turnarounds. Balance sheets destruction, accelerated by the pandemic, in both the public sector and private sector is not uncommon. We have on the table a salad of multiple conflicting economic and financial forcesevolving dangerously; it is a highly combustible mix of internal and external imbalances. When the monetary authority and the fiscal authority sides of macro-economic policy making are bothwithout any firepower left to decidedly create conditions for sustained growth and development, what consequently happens can best be imagined in the following crude analogy that clarifies the distinction between fiscal policy and monetary policy: while monetary policy changes the water level affecting all ships in an economic system, fiscal policy aims at supporting them. The fate of the ships and ultimately of the system itself is best left for appreciation when these two arms of macro-economic policy making are gravely fractured. In all manners of thinking, neither of the two appears to be in good stead foreffectively stirring our strained economy in the desired direction.

6.Mis-stating our core problems does not help to formulate useful policy options that produce desirable results. Quick fixes do not resolve but worsen problems. As I had hinted last year, sustained growth and, importantly, economic expansion should constitute our overriding policy objectives. Stray pork-barreling projects that yield sporadic arithmetic improvements in our growth statistics is certainly not the way forward. Unfortunately, the exercise du jour is to torture numbers to persuade ourselves that what is optical illusion is real. Much of the growth in the past few years have occurred in the wrong sectors; it is an indication of failure, not success. Growth and economic progress are two distinct concepts; one must not be confused for the other. It seems that there is an attempt to shape up an economic strategy with long-term goals. No doubt, this is a commendable effort. But the successful pursuit of long-term goals requires the practice of delayed gratification for the sake of a future end. “Delayed gratification” should start, first and foremost, with the Government. How do we go about in a society which is impatient, a society seeking instant gratification giving precedence to short-term considerations over long-term goals? Obviously, it requires statesmanship, par excellence, to get back on rail. The basic question that we need to set to ourselves is: are the overall prevailing conditions conducive to sustained economic growth and development?

7.To begin with, we imperatively need to straighten out our emasculated institutions failing which no economic strategy, however intelligently conceived and designed, will pan out. How can mutual loyalties, trusts and commitments be sustained in institutions that have fallen or being continually reset to fit the non-economic imperatives of the day? Trust is not an essential element for a bazaar economy but is a vitally important one for sustained economic growth and development in an organizedfree-enterprise economy. Social capital, by which I mean relationships, trust and co-operation forged between different people and groups of people over time, has been an enormouslyenabling factor in our past impressive economic performance. Unfortunately, decision makers in the country are dismissive of the catalytic power of this crucial ‘soft factor’; it is seen as trivial, as trivial as the curve of bananas. Our social capital stockhas suffered depletion. Seen in the context of wider economic forces at home and abroad, a mix of deficient social capital and frightened physical capital might, at best, bring about a timid reversal of the current economic trends (that were already lacking in life force even before the pandemic) but not a recovery to self-sustained growth and development.

8.Do not tip-toe around the truths about the economy. Our economic forecasters must refrain from putting out overly optimistic forecasts before spectacularly scaling them down in the months that follow. We are made to inhale lungful of suffocating editorially-tortured statistics. Credible forecasting reflects seriousness. Putting ‘lipsticks on pigs’ does not help. The rates of inflation, public sector debt, economic growth rates etc. are widely believed to have false rings to them, rightly or wrongly. Statistics that correctly reflect realities provide a dependable basis for policy formulations. Take, for instance, our inflation rate. A grossly understated rate of inflation may appear to be a trivial issue to those who have never studied our exchange rate economics but its ramifications profoundly affect the economy. Few policy makers in the country realize that inflation statistics, in the same way as unit labour cost indices,are a key variable used by the Bank of Mauritius (BoM) to assess the appropriateness of the exchange rate levels of the rupee. An inflation rate that is wildly away from its actual rate misleads the BoM into taking wrong policy actions regarding re-alignments of misaligned exchange rate of the rupee. As you may be aware, misaligned exchange rate of the rupee, sustained over a protracted period of time, has awfully disruptive impactson domestic economic activities. Statistics must not veil economic realities. Truth as a tool for solving society’s problemsis incredibly powerful.

9.Inflation is back with full force. This time it is not old hat. Sustained price increases are likely to stay with us far longer than we would imagine. Inflation forecasting models for Mauritius (ever since exchange control liberalization in July 1994 that made supply side more responsive than before) amply demonstrate that spurts of price inflation are mostly attributable to the following factors: (i) depreciation of the rupee, (ii) rise in the domestic price of petroleum products and (iii) a substantial across-the-board upward revision of wages and salary levels.This time there is one more annoying elephant in the china shop:it’s the worldwide disruptions in the supply chains of goods. In short, the rising inflation rate is attributable to three of the factors, excepting (iii). Depreciation of the rupee and inflation synchronically perform a tango. Will the trends in thedepreciation of the rupee that impacts directly and more than fully on the price level in the economy be stopped? Unlikely. A closer look at Government finance and the BoM balance sheet suggest that a stop-go approach with respect to the depreciation of the rupee will continue to be on your radar screen. You will most likely be guided by the following considerations:

(i) the Government will continue to suffer from revenue shortfalls as revenue-enhancing economic growth to meet the over-blown recurrent expenditure and rising capital expenditureis conceivably a near-impossibility in the few years down the road;

(ii) the Government cannot keep on borrowing endlessly without ever defaulting on its recurrent payment obligations and debt repayments, in particular; and

(iii) additional tax measures in the context of declining real income is unthinkable. A further increase in tax rate is likely to induce capital outflows.

(iv) price of petrol is rising on its own. Raising it further for purposes of revenue collection could turn out to be politically suicidal.

You are, thus, most likely to keep relying on the massive‘low hanging fruit’ in the BoM balance sheet for meeting the financing gap in your budgetary operations. Governments that are guided primarily by short term considerations often rely on inflation as a policy option that obviates the need for unpopular economic adjustment measures. Debtors, speculators and the Government benefit from high rates of inflation. You are pretty well aware that rising rates of inflation knock down people into poverty. Basic common sense: for anyone to be ‘bailed out’ someone else has to be ‘bailed in’. The magnitude of ‘bail outs’ by the BoM lately has assumed worrisome dimensions. (Check out if the ‘bail outs’ funds have not been converted into foreign exchange in the open market for transfer abroad.) Long ago, J M Keynes laid out a road map for political survival amid an economic disaster of just this sort we are in: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction ……”. A massive transfer of wealth from the have-nots and the haves to the have-mores are under way. It is not observable; it is not seen. But it, actually, is happening.The public is now getting the point that inflation is a tax on them without any force of law. 

10.Likelihood is that we are in for continuing high inflation rates. Cheerful obfuscators, in trying to dis-colour views on the ill-effects of high rates of inflation, are making people believe that they are good for economic growth. If true, what is the usefulness of the BoM and its monetary policies to society? Forgive me for saying that osmosis brings a lot of the sewage to the people; a lot of it seeps in, unfortunately. It is an attempt to exploit the economic illiteracy of the public at large; it is a travesty. What rate of inflation is actually good for growth and macro-economic stability? Academic literature in monetary economics has dealt lengthily on this issue. Empirical evidence supports the view that an inflation rate of around 2.0 -2.5 per cent sustained over a long period of time does not hurt economic growth. (The technical analyses and reasons underlying this conclusion is a good read for economists). This is the reason why central banks worldwide seek to achieve and sustain an inflation of around 2.0 – 2.5 per cent (defined as low and stable or simply as price stability) over time in their conduct of monetary policies. An inflation rate of less than 2.0 per cent sustained over time tends to set forth deflationary forces while a rate of far above 2.5 per cent sustained over time tends to unleash harmful inflationary forces. Fighting high rates of inflation is known among policy makers to be as arduous a task for central bankers as putting toothpaste back in an emptied tube; they should be avoided by all means. The achievement of the 2.0 per cent target and its sustenance make it a predictable variable for the business community. When it is not predictable, uncertainties cripple business decisions. Capital formation in the economy suffers as a result and growth is subdued.

11. In the past, because we had a fledgling domestic foreign exchange market that often failed to adjust to market forces at home and abroad, the BoM used to continuously re-align the exchange rate of the rupee. The BoM did depreciate the nominal value of the rupee, did let the nominal value of the rupee to appreciate in a manner that was not harmful to the economy, and did forcefully intervene to prevent depreciation of the rupee whenever the domestic forex market failed. Excepting a few disturbances on the forex market following turmoil on abroad and a disastrous performance in 1997, the BoM, as the sole issuer of local currency, did its utmost to keep the real value of the rupee well aligned. The BoM was always guided by the conviction that exchange rate stability is a principal requisite for growth and development. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency” (J M Keynes dixit). In the Communist Manifesto, Lenin was of the same view. The BoM Act, as it now stands,have chilling effects on foreign investors.

12.A personal anecdote warrants its mention in this letter. I was about 20 years old and happened to be at the Government House soon after the establishment of the Bank of Mauritius. Walking behind the then Prime Minister, Sir Seewoosagur Ramgoolam in one of the old corridors leading to the exit door of the building, I had overheard him explaining to a Hon.Member (from a Constituency in the North) of the then Mauritius Legislative Council that the Bank of Mauritius is not established to print money and put in circulation freely and recklessly. Keep that in mind. I vividly recall him uttering something that rang follows: “Adding water to milk does not produce more milk. It surely produces the illusion of more milk. But it’s not real milk; it’s phony milk. It’s dishonest to trick people into thinking that they are getting more milk.” Wisecracks that pass as memorable epigrams and ripest countryside wisdom (unfashionable today), not from an economist but from a medical doctor!!! Isn’t it? Later that evening, I had gathered that the Hon. Member of the Council had stated in the Council that “with the establishment of the Bank of Mauritius we should be able to eradicate poverty by making more freshly printed money available to the public.” Poor fellow did not realize that printing money unbacked by rising productions is a sure way of promoting mass poverty. Members of the Council, as far back as in the second half of the 1960s, from both sides of the House had frowned at the statement. Yet, none of them was a trained economist. 

13.The 2020 amendments of the BoM Act stripped the BoM of its basic tenets of central banking; they disarmed the central bank. The principal mandate of the BoM is to conduct monetary policy with a view to achieving and sustaining low and stable inflation without jeopardizing economic growth. In simple terms, it means that in the pursuit of restrictive policies aimed at restoring and sustaining price stability, economic growth is not suffocated for want of finance and of funding reasonably priced. Neither should the process of growth and development be impeded by overly expansionary policies that are potentially inflationary. Simultaneously, an amendment that defeats the principal mandate of the BoM paved the way for the use of the exchange rate of the rupee as a lever for raising Government revenue and for growing money supply in the economy through the infamous window called MIC thus setting the economy on a perilous path of lasting inflationary pressuresin the economy. Think of a central bank that arrogates the lending functions of commercial banks, pumps high-powered money into the economy, lets the currency depreciate and fight inflation at the same time. A firefighter by statutory requirements and a pyromaniac by statutory requirementsconstituted in the same body makes of the BoM a central bank a ridiculous authority - as helpless as the worm in a fisherman’s hooks. A captured central bank does not inspire business confidence; it conveys an ominous signal to prospective investors.

The amendments of the Act do not have a sunset clause. Shock therapies of monetary easing and regular massive fiscal transfers and corporate bailouts will keep going. Enterprises willcustomarily expect the BoM to step in directly or through the Government Budget with a ‘free lunch’ program of easy terms and free cash to rescue them from their mistakes – and profligacy. You should be aware that resolving insolvency problems with liquidity solutions provided by the BoM directly or even through the Government does not help but corrupts the economy and further weakens the BoM. The cancer is saved but not the patients. Once a central bank starts lending through any mechanism to insolvent enterprises, there can be no orderly and unscathed exit. Obviously, the revised BoM Act has throttled the credibility of the BoM. Central banking in the country is thus rigged to fail. There is every reason to scrap all the recent amendments of the BoM Act if productive private sector investments, durable growth and development are truly believed to be our endearing economic goals.

14.A hard look at the forex reserves of the BoM kicks up something unknown wanting to be known. At the end of January 2022, the foreign exchange reserves of the BoM stood at US$ 7.9 billion. Between end December 2019 and end-January 2022, the BoM sold a net total amount of US$ 2.9 billion by way of interventions on the interbank forex market to banks and to the STC as also to other bodies off the market. It goes to say that the forex reserves of the BoM would have declined to US$5.0billion, in the absence of what, in balance of payments terminology, is referred to as accommodating capital inflows. Quite surprisingly, the official figure of the BoM’s forex reserves of US$7.9 billion for end-January 2022 includes a sizeable mysterious amount of close to US$800 million that landed in the BoM balance sheet in the form of what appears to be a cash deposit in December 2021. Without this deposit liability as shown in the BoM balance sheet and the accommodating capital inflows, the forex reserves level of the BoM would have posted a drop to US$4.2 billion by the end of January 2022. 

Replenishments aside, the basic point I want to drive home is that the drain on the BoM’s foreign exchange reserves is consequential. The benign neglect of the currency palpitations reflected in the nervous domestic forex market is worrisome; it seems to be taken as a welcome state of things for obvious reasons. In one of my articles last year, I had emphatically made my point on this likely outcome. Alas, central banking policy went wayward. This brief insight into the evolution of the foreign exchange reserves of the BoM and the nature of the capital inflows bear out three fundamentally important points: (i) foreign exchange earning capacity of the economy has taken a buffeting, (ii) the much-needed reforms, economic policy adjustments and stabilization policies are being postponed by having recourse to accommodating capital inflows, and (iii) the drain on the BoM forex reserves will continue. The drain is likely to be aggravated if the US and/or other reserve currency countries raise intertest rate to combat inflation in their respective countries. If unchecked, a balance of payments crisis would become inevitable. When premises and logic are both true, the conclusion must follow. The last time I checked, one plus one still equals two.

15.If interest rates abroad begin to rise, you would find yourself in a logjam situation. To maintain interest rate-parity you would need to raise interest rate across-the-board, including yields on Government papers in order to stem capital outflows. If you do raise, debt servicing burden of the Government would grow and high cost of funds would put both banks and the underperforming enterprises in bad postures. Output will take a toll. Financial stability could be further threatened. In terms of policy making you would end up with a mix of competing policy stands for conflicting goals. Perfect logjam. 

16.Having what I would call a ‘fortress’ balance sheet of the BoM is a strategic imperative in a world of economic and financial system riskier than any time in history. Way back in 2004, the authorized and paid up capital of the BoM was only Rs10 million (US$350,000). In 2004, the BoM raised the authorized and paid up capital to Rs10 billion (US$300 million).  In a fit of desperation, I recall having almost shouted at a Board Director (who stood on the side of the Ministry of Finance for a bigger transfer of BoM profits to Government) about the inadequacy of the BoM’s paid-up capital. By any standard, the capital base of the BoM remained ridiculously small for the central bank of a country that has kept on aspiring to become a regional financial centre. In its 2005 Act, the BoM provided for 15 per cent of the annual profit of the Bank to be set aside for gradually building its capital base up to an equivalent of at least US$10 billion over time. Unfortunately, the yardsticks for the measurement of the strength of financial centre are hardly talked about in the policy making circles in the country. Mistakenly, a restricted view of the accumulated reserves of the BoM was entertained by many commentators in the country. The balance sheet of a central bank cannot be viewed in the same light as that of a private sector firm. A severely undercapitalized central bank(in whose balance sheet not much is left on the right and not much is right on the left) is no better than a crippled duck. A credible financial centre should have a central bank with a respectable balance sheet that adequately reflects the rising risks in the world economy.   

17.Indebtedness brings colossal opportunity costs. Political decisions to trade the future for the present exacerbate the already decremented abilities to meet rising repayment obligations. Haven’t we seen that at the current debt-to-GDP ratio, each additional rupee spent by the public sector yields lesser and lesser than a rupee of growth? The current debt level is a drag on growth. Empirical studies have provided us with more than sufficient evidence to believe that a debt-to-GDP ratio of over and above 90 per cent knocks away 2.0 percentage points in the growth rates of indebted economies. A large debt with faster growth is preferable to a smaller debt sitting on no growth at all; it's infinitely better than a smaller debt on top of a contracting economy. Way back in 1983, our debt-to-GDP ratio had reached about 74 per cent but the prospects for economic expansion and high growth rates were bright and realizable. Repayment obligations were duly met. The key thing is about the pace of growth that raises income levels throughout the society thereby boosting up Government revenue to repay the debt. Over the last few years, productive investments have been in the gravitational pull of economic slowdown and of a business climate inhospitable to private sector investments. The economy is sitting on a ticking explosive device. Bringing down the level of indebtedness by means of free financing from the BoM would go against the principles of effective macro-economic management.

Lessons from debt crises in history emphasize the importance of putting a fence at the top of the cliff and staying away, rather than keeping an ambulance in wait at the bottom of the cliff. Once the fence is gotten rid of, risks associated with investments go up.

18.Every economic system that is not self-limiting within the bounds set by its environment grows until it exceeds the ability of that environment to support it. An economic system that does not self-limit is likely to get stuck in a growth trap or to simply collapse. No wonder our economy finds itself in an air pocket without a trusted solid driver of sustained growth and development. The fiscal arm of policy making has run out of ammunition. The BoM cannot be expected to have rejuvenating effect. It was wrong to believe in early 2020 that Quantitative Easing (QE), the Fed’s method of saving the US economy would work in Mauritius. It never worked in the US to begin with. Nor did it work in Japan where QE was first tried. We did not even apply the US method as religiously as it should have been.“Stimulus payments” out of central bank financing does not help anymore. If it did, there would have been nobody left to lift out of poverty anywhere in the world. Realistically, extra “stimulus payments” does not lead to capital formation. No business is going to expand or attract investment for expansion based on “helicopter money.” The prevailing conditions in the country are giving rise to what might be called ‘Kaleckian politics’ where a class of capital-owners does not invest as they already own everything, with the result that capital formation lags far behind the desired level and growth flattens out. If at all the capital-owners do invest, the investible funds would not be theirs but other people’s money; they would have no skin in the game. No skin in the game means what it means.

19.Finally, I reiterate a point I made last year. We have failed to construct a coherent consensus about what is happening to us. We have a famously simple society made complex by the politics of things. Many of the rigidities are removeable; the worst ones are in people’s heads. Transforming the country is a tour de force - a task beyond Hercules. I tend to believe that it falls outside the capacity of a single person to bring about a full-fledged transformation because you need much more to change the country, to change the administrative apparatus, to change political habits, to alter the course of our foreign policies, to change educational institutions etc. But one thing is left at large to your prudence and uprightness: a transformative budget withrealistic expectations in the immediate future. A cultural change is imperatively needed. We have to decidedly shape up a fresh narrative for our future. The constraints and rigidities are many of our own making. They are an economic version of chronic fatigue syndrome. Investors, local and foreign, abhor high and unpredictable rates of inflation. A regime that survive on the depreciation of the rupee on a stop-go basis repels productive private sector investments. Productive private sector capital does not go to places where it is devalued. The financial markets hate uncertainties. Ubiquitous deficits and forex shortages signal poor macro-economic management. High levels of indebtedness do not inspire confidence in an economy. These conditions are growth-killing. Revenue-enhancing growth that would obviate the need for the Government to have recourse to the BoM window is what you need. But that kind of growth isunimaginable at this moment. The alternative policy paths are clear; they are not products of an exalted scholarship. I would ask you to bear in mind a subtler point: the more the world relies on smart machines, the less is competitiveness and export prowess dependent on the depreciation of the exporting country’s currency to support its competitiveness and the less are domestic wages rates relevant. The depreciation of a currency to gain competitive advantage is a trick of the past.

With all the foregoing issues left unresolved, the future will be blighted by today’s indolence. If decision-makers get all the news they need from the weather report, as Simon and Garfunkel say in a prophetic song, there will be many stormy days ahead. Doris Day, “Que sera, sera. Whatever will be, will be.” Choose. You would have immediate challenges should you decide on reforms. You would have even bigger challenges should you decide not to. Unlike Alice, you, like many other smart economists and other professionals in the country, know the way. A rational combination of multiple decisions is conceivable. Statesmanship is the key word.

Best Wishes.