Should the Rupee be Depreciated?

The exchange rate is not the guilty chap; it is the lack of
re-engineering a sector which has been asking to be
re-invented for long

It is being reported that Business Mauritius, a think-tank and private sector lobby, along with the grouping of exporters, the Mauritius Export Association (MEXA), have been holding meetings with the Ministry of Finance and the Bank of Mauritius in an attempt to “set right” the exchange rate of the rupee. They appear to be making a case that the rupee would have gained in strength of late vis-à-vis the US dollar – in which over 50% of our exports are invoiced – and that this would be putting at risk the continued viability of the export activity.

The natural corollary to such argument has always been that, short of the rupee devaluing, enterprises would have to close down. It has even been stated that the export enterprise ‘Avant’ of Quatre Bornes closed down in the last days of August, laying off 200 workers, due to this factor. From what we know, workers of this enterprise were not paid their wage the past two months and also that the promoter/manager had already left the country, with no funds left behind to either settle the dues to workers or to pay back the passage costs of the majority of them who are foreign workers. This incident may conveniently be helping to make a case for giving other exporters windfall gains through currency depreciation.

In view of the fact that Mauritius’ annual exports of goods amount to barely half its imports and that a higher level of exports is required to bridge this unsustainable gap, there is a case for giving our exports an edge. Data show however that our exports have been stagnating if not declining outright over quite some years. Thus, Mauritius’ total exports amounted to Rs 94.8 billion in 2014, Rs 93.3 billion in 2015, Rs 83.9 billion in 2016 and are estimated at Rs 87.0 billion for 2017. The question to ask is whether this declining no-growth trend in our exports is explained by the rupee’s strength vis-à-vis other international currencies (USD, EUR, GBP), to which most of our exports are destined.

Data also show that average exchange rates of the rupee were Rs 36.2753 for the 12 months ended 31st July 2016 and Rs 36.1543 per US dollar for the 12 months ended 31st July 2017, barely appreciating by 0.3%. Has this affected adversely about 53% of our exports which are invoiced in US dollars? The respective average exchange rates for the Euro, accounting for 20% of our export invoices, over the same periods were Rs 40.2972 and Rs 39.5396, not much changed with a rupee appreciation of 1.9%; those for the UK pound, accounting for near 5% of our exports invoiced in this currency, were Rs 53.1167 and Rs 45.8195 respectively showing a more significant appreciation of the rupee vis-à-vis sterling by 15.9%.

But as regards the Euro and the UK pound, their own market dynamics has meant that the Euro which was almost on a par with the dollar at US$ 1.05 per Euro in December 2016 has now gone up to US$ 1.19 per Euro, whereas the UK pound which was US$ 1.50 in December 2015 has fallen to US$ 1.30 today, due to Brexit, despite the US dollar having gone weaker in the interval.

We can’t change those international market dynamics for major global currencies even though we could realign our rupee’s exchange rate to produce windfall gains for local exporters. The falling or stagnating trend of our exports speak another story however; they say that there is more to it than a simple exchange rate realignment of the rupee to boost our export performance.

Others, like Ethiopia, are expanding their textile exports but we aren’t. Others are adding more to the range of their export products, despite the given difficult international market conditions, but we aren’t.

One would have expected private sector investment, especially in export activities, to increase to give the sector a productivity edge over international competitors: investment in manufacturing actually declined by 38.5% and 0.6% in 2015 and 2016, respectively. At this rate, it would be expecting too much from our export sector for it to cut an edge on international markets. The exchange rate is not the guilty chap; it is the lack of re-engineering a sector which has been asking to be re-invented for long enough now towards higher value-adds.

Even FDI coming into the country has gone over the three years, 2014 to 2016, in order of magnitude, into the real estate (58%), hotels (17%), financial (10%) and construction (3.5%),with manufacturing which would have helped us drive an export edge accounting for only 3.8% of total inflows of capital over this three-year period. The emphasis is not where it should have been, i.e., export manufacturing, even though we can’t afford to look down on FDI inflows.

Consider now the impact a currency depreciation, as proposed by the business side, on the other side of the equation. Over 66% of our imports are invoiced in US dollars. A wilful currency depreciation will increase the cost of imports in rupee terms. This will be reflected in a higher domestic rate of inflation. Over the 12 months ended 31 July 2017, monthly average domestic inflation was 2.7%. Any hike in inflation will not only further erode consumers’ purchasing power; it will also affect the local cost of production, since higher prices of imported inputs (and wages) going into exports will rise in tandem. That will not help grow our exports.

There’s a structural factor negatively affecting the much-needed growth of Mauritius’ exports – lack of product diversification and a well-directed growth strategy. The proposed exchange rate depreciation, while providing temporary relief to companies’ bottom lines, is not the solution for the absence of dynamism seen over past years in export performance. There is a need actually to reverse as soon as possible the observed secular decline in Mauritius’ export growth.

 

  • Published in print edition on 8 September 2017

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