Pierre Dinan, economist and external member of the Monetary Policy Committee (MPC) of the Bank of Mauritius, spoke to AfricaMoney on how the island economy must gear up its people for development, in order to emerge from the middle-income trap. He also explained the dynamics and debate behind keeping the key repo rate unchanged at 4.65% in the latest MPC meeting, noting that greater weightage was given to the need for the economy to grow, as against risk of inflation.
- During MPC’s press conference, Bank of Mauritius announced that the key repo rate has remained unchanged. What were the reasons for holding it steady?
For some time now, the main debate has been what respective weightages to give to inflation and to economic growth when setting the Key Repo Rate (KRR). As a rule, if greater weightage is given to the risk of inflation, then there may be a case for increasing the KRR. Conversely, if the risks to growth are judged to be greater than the risk of inflation, then the KRR stands to be reduced or maintained in order to ensure that growth continues. So the answer in short is that the KRR has been maintained in this particular case because inflation is presently quite subdued and, for the next few months, it would appear that there are no risks on that front, whereas for economic growth, we have recently had even Statistics Mauritius telling us that growth would not be as high as expected at the beginning of this year. So, the greater weightage has been given to the more pressing need to sustain growth.
- The banking system is suffering from excess liquidity. What can be done to get rid of this scourge?
We should first define what excess liquidity is. As you know, banks must comply with a cash reserve ratio (CRR), which is 9% of their deposits at present. This money does not earn any interest. Over and above this, any money they have should rightly be invested to earn a return, but it is currently estimated that for the first six months of the year, an average amount of Rs 9 billion has been available with banks for investment in projects but has remained idle because of lack of projects. This is excess liquidity.
One of the solutions is to increase the investment rate in Mauritius but we have faced to this problem for some time now and we do not seem to be finding our way out of that difficulty, although it remains the long-term solution.
A short-to-medium term solution could be for the public debt to come more from the ranks of loans contracted locally than overseas. Thus, this excess liquidity could come in handy to lend more to the Mauritius government for its needs and reduce the amount borrowed from abroad. The long-term and lasting solution must be economic growth, leading to investments. So, this is where growth comes again into the picture.
- It was mentioned, during the discussion on interest rate normalization among the MPC members, that a majority had the opinion that this process needs to be started. What are your views?
Again, we must understand what is meant by the word ‘normalization.’ What is being said is that the present KRR is not normal. In fact, throughout the world, the majority of countries are keeping their interest rates low. This is what is called an accommodative monetary policy and has been spurred by the global economic crisis, which is only just beginning to come to an end. When a question of normalization is raised, this means that the rate should go up. But are we indeed sure that any possibility of a repeat of the financial crisis is safely behind us?
We are an open economy and one of our main trading partners is France, which is still in trouble. This leads me to the question of normalization, to which I say yes, the process must be started but we must get a grip on all the issues which are still constraining growth. Then, we may find that the norm is not the one that was applicable before the crisis, but could be what is commonly known as the ‘new norm’.
With inflationary pressures staying moderate on one hand, but savings rate dipping on the other, is the balance swinging heavily enough in favour of an increase in the key repo rate?
Savings need not be only in the form of deposits held with commercial banks but can also take other forms like investing in securities over the stock exchange, or buying an asset. So, we must first root out the confusion between savings rate and savings held in banks. To explain further, bank savings are part of total savings but not the whole of savings. When you say inflationary pressures are moderate, it means by definition that there is a better chance for the real bank savings rate to come back to positive. On top of this, the Bank of Mauritius is presently issuing bonds on behalf of the government for an amount of Rs 2 billion at a rate of 6%. This is a good move for pushing up the savings rate. Absorbing excess liquidity would also be of help in pushing up the rate of interest on savings offered by commercial banks. To my mind, these are the measures to be taken before deciding to increase the KRR.
- Finally, please provide your views on the way forward for the Mauritian economy?
The Mauritian economy is at a crossroads at present. We can continue coasting along as we have been for the last few years with an economic growth of 3.5% to 4%, at least, I hope we can. It is common knowledge that Mauritius is now in what is called the middle-income trap. For the last 30 years, we have done rather well, generally applying sound economic principles, and there has also been a fairly good response from the Mauritian population as a whole.
Today, as the world economic crisis gradually ebbs away, we find ourselves a middle-income country as per IMF definition, with a GDP per capita of about USD 9000.The government of Mauritius has gone on record saying that we should reach a GDP per head of USD 12,750 by 2020, which is the lowest level required by the IMF to become a high income country.
Two institutions have in the course of July 2014 issued reports to the contrary; I am referring to the MCB Focus number 58 and a working paper by the IMF. Both questioned the possibility of our reaching high-income status by 2020. The MCB estimates that it will not happen before 2025, unless we take a number of decisions to improve the economic administration of Mauritius. The IMF working paper sets the target at 2021 instead of 2020 provided again we take stringent measures with an investment rate increased by 10 percentage points and some 20,000 more migrant workers. All this means that our economy can progress but only if we take the right decisions.
I, personally, would rather that we get our population ready to carry out this development agenda, and, quite clearly, we must begin with education followed by an increase in the productivity of labour, capital and management. It also goes without saying that the reform of public institutions and parastatals is necessary. In short, we can improve our situation but we must have the will to do it otherwise we will remain in the middle-income trap and we might even regress. This would be the most damaging alternative for the Mauritian population.
– By Marie-Lorry Coret and Cecilia Samoisi
[Edited excerpts from an exclusive interview]
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