The MPC Fails To Deliver for the benefit of the country as a whole

The meeting of the MPC of 30 September ended up leaving the Key Repo Rate (KRR) of the Bank of Mauritius (BoM) unchanged from its level (4.65%) set at the MPC’s June meeting.

As at the previous meeting of the MPC, votes were divided between those who wanted an increase in the rate and those who were in favour of maintaining the status quo ex ante with an attendant risk of even lowering it below the level it has fallen to. The MPC’s decision was mildly applauded by the main private sector lobby which saw the decision to keep the KRR at its pre-existing as “not negative”. Others who had hoped that the error made at the last meeting by bringing the rate down by 25 basis points would be rectified, were disappointed.

The direction taken by the KRR, as it is well known, influences the interest rate paid by financial institutions to savers and depositors. Banks, for instance, take a cue from a fall in the KRR to bring down the rate they pay on deposits. As a rule, the lower the savings deposit rate, the less members of the public are inclined to set aside financial savings, preferring to consume and even resort to borrowings at low interest rates to exaggerate their consumption spending if only to “keep up with the Joneses”. The incentive to save is worse hit, as it is the case now, when the rate paid on deposits is less than the prevailing and foreseeable rates of inflation in the country.

It must be said that for several years now, back from the days Mr Sithanen was in office at the Ministry of Finance, considerable and sustained pressure has been exerted by the Ministry on the Committee for it to bring down the KRR. Had it not been for the resistance put up by the present Governor and his two deputies – also members of the MPC — the KRR might have come down tumbling to a much lower level than where it stands today. Credit must therefore be given to the officials of the BoM who have resisted the pressure and acted to apply the brakes before the Committee was turned into a simple instrument to carry out the misguided bidding of the Ministry.

Given, nevertheless, that the KRR has been on a declining trend for quite some time now with its consequential effect on the interest rate paid by banks to depositors, it is not surprising that the country’s overall saving rate (the ratio of income not spent on consumption to GDP) has been decreasing from year to year. Countries which have high international borrowing capacities to bridge the gap between what they produce and the higher amount they consume would not worry too much about a falling national saving rate. But countries like Mauritius which are dependent for their exports of goods and services on outside markets that are themselves not doing too well, cannot afford to go down this road. The other countries have a broad economic base and the resilience that goes with it; we don’t have. With a trade deficit (Rs 88 billion) expected to be even higher than our total exports (Rs 87 billion) in 2013, it will be very difficult for us to climb up that steep ridge.

Successive MPC meetings have been coming up with the decision to keep reducing the KRR on the assumption that lower KRR reflected in lower financial costs to enterprises should help the latter gain export competitiveness and, by exporting more, help push up the country’s overall economic growth rate. In reality, despite the successive reductions of the KRR since years now from which enterprises have kept benefiting, Mauritius’ growth rate has been falling from year to year. In 2013, GDP growth is expected to be 3.2%, down from 3.4% in 2012, which is itself lower than the growth rate of 4.2% recorded in 2010.

There is thus no evidence at the macro level to show that falling interest rates over the past years have actually contributed to raise our economic growth rate. No one has quantified the comparative contributions of, for example, financial costs, on the one hand, and managerial efficiency, on the other, towards helping our enterprises to secure additional market scope. So, blindly enough, the assumption is made that it would be the level of the interest rate that would be responsible factor standing in the way of our enterprises not making sufficient inroads in their markets. Yet, looked at from another angle, government budgets have for years been according various largesse’s to enterprises to help them, so-to-say, cope with challenges. It is years since the corporate tax was reduced from 30% to 15% uniformly. Has it helped? Not so, if one looks at the falling annual economic growth rates.

In that case, surely enterprises must be having other reasons to keep asking for the interest rate structure of the country to keep falling? An obvious quest in this regard would be for the enterprises to pay as little interest on their accumulated debts (including for sundry real estate developments) as possible. It is in this context that one has to pay attention to the statement made by the Governor of the BoM after the last MPC meeting. He stated that private debt has been increasing quite fast and that there were concerns. If that is interpreted to mean that servicing of that debt would prove difficult to sustain, our banks would be in for some rough riding either restructuring private debt or having to write them off eventually. Financial stability will be at stake if such is the trend actually.

Another quest behind the private sector seeking lower interest rates perpetually under pretext of the economic slowdown could be to encourage private individuals and households to borrow money at relatively low interest rates and to spend that away in sprawling shopping centres all over the country. Who cares for saving for a rainy day in such a case? Yet another consideration behind asking for interest rates to keep falling would be to make the rupee lose its attractiveness as an asset both locally and from the point of view of international investors. If foreign funds flowing into the country dried up in consequence, the rupee itself would be at serious risk of losing its value as available foreign exchange will not be able to cope with demand, thus inducing even more inflation through inflated import prices. The private sector lobby would be happy to pocket more rupees for every dollar it gets in the process especially if the bill for currency depreciation is passed on to the public to foot.

This sort of unfairness behind the MPC’s decision to keep the KRR on hold and the in-built bias in such a decision cannot go unnoticed. One would have wished to vindicate the MPC by pointing out to clear advantages being reaped from its policy decisions over such a long period. The reality is that there is nothing to show by way of returns for the continuing sacrifices imposed on the population except telling it on each occasion that the sword of Damocles is suspended over its head short of allowing the large private sector to have its way.

* Published in print edition on 4 October 2013