Open Memorandum To Monetary Policy Committee … The imperative need for a rise of the Repo rate

1. Since the beginning of the year, there has been a large and rapid depreciation of the rupee against all the major currencies. At the end of December 2014, the indicative selling exchange rate of the US dollar, as published by the Bank of Mauritius, was Rs 32.10, that of the euro Rs 39.02, and that of the pound sterling Rs 49.94. The respective rates as at 27 March 2015 were Rs 36.77, Rs 40.16 and Rs 54.77. The rupee thus depreciated by 15% against the dollar, by 3% versus the euro and by 10% vis-à-vis the pound over a very short span of three months. This fast and across-the-board depreciation of the rupee warrants an immediate increase in the domestic interest rate to improve the attractiveness of the rupee.

2. The lack of attractiveness of the rupee may encourage capital outflows. As a matter of fact, there was a net foreign disinvestment of Rs 498 million on the Stock Exchange of Mauritius during the sole month of February 2015. Net sales by foreign investors on the stock market, to the tune of Rs 1.7 billion for the period August 2014 to February 2015, created further demand for US dollars on the domestic foreign exchange market, thereby accentuating the weakness of the rupee.

3. The rapid fall of the rupee makes it more difficult to attract foreign direct investment. This is because investors cannot take calculated risks in an environment of monetary instability. When foreigners having invested in Mauritius repatriate their dividends and earnings, they have to convert their rupees into hard currencies. If the rupee depreciates during the period of investment, this wipes out the gains of their investment return.

4. Since Mauritius needs to finance large current account deficits, it is particularly vulnerable to a weaker rupee and to capital outflows. Imports become more expensive for consumers, while producers using inputs with high import content cannot reduce their selling prices to be competitive. There is no guarantee that exports will eventually grow faster than imports to lower down the current account deficit.

5. According to the ministry of finance, the share of US dollar-denominated public sector external debt stood at 47.4% in December 2014. Following the relentless rise of the dollar, the Treasury will have to service its external debt with a weaker rupee. The debt servicing may become a burden for the government when the US Federal Reserve starts raising its key interest rate. As US interest rates rise, the Mauritian foreign exchange market will remain under pressure.

6. As the Fed accelerates its cycle of rate increases, the US dollar will further appreciate against the euro. The Economist Intelligence Unit expects the dollar to rise to an annual average of US$1.04:€1 in 2015, and further to US$0.99:€1 in 2016. The inevitable result of an appreciating US dollar will be higher interest rates in many developing economies. Mauritius will have to follow the trend. Otherwise, diverging monetary policy between the United States and Mauritius will keep the rupee weak for many years.

7. Inflationary pressures have already started building up again in Mauritius. The year-on-year inflation rate for February 2015, as measured by the change in the consumer price index (CPI) for February 2015 relative to February 2014, worked out to 2.0%, compared to 0.2% for December 2014. The CPI, excluding alcoholic beverages and tobacco, registered a monthly increase of 2.5% in January 2015 and of 2.9% in February 2015, hence a cumulative increase of 6.0% over two months. Following the accelerated depreciation of the rupee in March, inevitably inflation will continue rising as retailers revise their prices upwards.

8. Based on the above – sharp depreciation of the rupee, pick-up in domestic inflation and change in policy of the Fed – we are of the view that the Monetary Policy Committee of the Bank of Mauritius should act pre-emptively by raising the Key Repo Rate sooner rather than later.

Suttyhudeo Tengur
President APEC
1 April 2015

Posted by Minority Voice on Apr 1 2015. Filed under Actualités, Economie, Featured. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry