Sugar Refinancing and The Liquidity Trap

Last week, we examined the legality of the decision of the Bank of Mauritius (BoM) to advance liquid funds to the Special Administrators of the erstwhile British American Insurance (BAI), now National Property Fund, against the security of a foreign company’s shares.

In particular, we found that while the BoM refused to initially grant a liquidity advance of Rs 350 million to salvage the former Bramer Bank, it ended up lending liquid funds amounting to Rs 4 billion to the Special Administrators of the BAI, thus injecting an even larger amount of liquidity into a domestic financial market it considers having already a surplus of Rs 20 billion liquid funds.

Sugar producers are effectively asking a question about this decision of the BoM, following the refusal by the BoM to renew the 80% sugar sector Advance Payment Scheme. The BoM has defended its refusal to grant the customary advance to the sugar producers, arguing that advancing the money temporarily to the sugar planters will not be compatible with the over-liquid condition of the domestic financial market. It will, in the view of the BoM, aggravate the excess supply of liquidity on the market.

Given this, the Mauritius Sugar Syndicate (MSS) has apparently borrowed an equivalent amount from commercial banks at the latters’ higher lending rate. The higher interest charged by the commercial banks, compared with the BoM, will be recouped by the MSS from the planters’ sugar proceeds.

So, the planters are asking: why did the recent injection of a large sum — Rs 4 billion in favour of the Special Administrators of the BAI – compared with what would have been paid to the sugar producers under the 80% Scheme, which has been going on since 2010, not raise the excess liquidity concerns on the local financial market?  The sugar planters have a point.

It needs be recalled that the 80% Advance Payment Scheme to sugar producers is just a bridging finance against the security of their expected sugar receipts during the same crop year. Unlike the intractable Kenya company’s shares provided as security to the BoM by the Special Administrators, the 80% Advance to sugar producers is backed by solid cash, foreign currency receipts from the export of sugar by the Mauritius Sugar Syndicate. In this case, the MSS itself repays the BoM from time-to-time sugar export proceeds as and when sugar exports reach their port of destination.

Besides, while the fate of the Rs 4 billion advanced to the Special Administrators of the BAI depends on the actual value and realizability of the shares of Britam Ltd, Kenya, pledged against the BoM advance, in the case of the 80% Advance Payment Scheme to sugar producers, the MSS will actually collect at source from sugar export proceeds the sums advanced to sugar producers to repay the money advanced to planters by the BoM within the same year. The certainty of repayment is greater in the case of the 80% Advance Payment Scheme.

The main advantage of the 80% Advance Payment Scheme to the planters is that they get enough funds on time to look after their replantation and crop maintenance expenditures at the beginning of the new crop year at a subsidized interest rate, instead of getting repaid irregularly and piecemeal during the year as and when sugar shipments reach destination.

To remedy this situation, planters previously used to borrow money at exorbitant interest rates from commercial lenders, brokers and moneylenders to meet their immediate expenditure needs. The 80% Advance Payment Scheme of the BoM was seen as an expeditious and softer alternative facility. It protected the planters against the higher commercial interest rates applied by lending banks and/or usurers to tide them over their liquidity gap.

The sugar planters appear to have a strong point in their favour. The liquidity they add in the system initially under the 80% Advance Payment Scheme is self-liquidating as and when sugar export receipts flow in and the BoM gets repaid within the year. On the other hand, the time frame in which the Special Administrators will repay the BoM’s line of credit of Rs 4 billion is not known.

In the meantime, SCBG policyholders are getting back as from 30th June 2015 the equivalent amount of liquidity which can only be neutralized provided the government issues new debt paper to mop it up and hence incurs additional debt servicing cost at taxpayers’ expense. This substantial liquid money inflow in the local circuit will also partly have the effect of inflating property prices even more, in the immediate.

On the face of it, sugar planters have a good argument. They are being denied access to their usual source of funding, notably the 80% Advance Payment Scheme, because there may be too much liquidity in the system. But is not the Rs 4 billion advance to the Special Administrators of the BAI adding more significantly to the excess liquidity condition on the domestic market than the sugar planters would have done, had the latter not been denied their customary short-term funding from the BoM?

*  Published in print edition 10 July 2015