Foreign Currency Shortage Hits Mauritius Ahead of Year-End Imports

As the end of the year approaches, Mauritius is grappling with a significant shortage of foreign currency, a situation that has been exacerbated by sustained high demand for foreign exchange. Observers and analysts suggested that, despite the repeated interventions of the Bank of Mauritius (BoM), the scarcity of foreign currencies remains a pressing issue.

Since June, Mauritian importers have been proactively preparing for year-end purchases.

This period is crucial for trade, typically leading to a surge in demand for foreign currencies needed to finance substantial imports of consumer goods.

However, the current scenario has raised alarms, as a foreign currency shortage plagued the market, despite various measures taken by the BoM.

This year, preparations for the festive season began earlier than usual due to delays in shipping vessels reaching Mauritius. Importers are already placing their international orders to ensure they have enough stock for the holiday season.

The range of imported goods spans electronics, clothing, toys, and food products, all of which necessitate purchasing foreign currencies to pay suppliers.

According to a currency dealer, the demand for foreign currencies is particularly acute this time of year.

“Importers are unwilling to take risks. They preferred placing their orders early to receive their goods by November. Consequently, there is a significant demand for certain currencies, particularly the US dollar and the euro,” he explained.

He added that freight rates for containers coming from China have recently declined, prompting importers to make their year-end purchases now.

Financial analysts echo these sentiments, indicating that on one hand, importers are seeking substantial amounts of foreign currency for year-end purchases, while on the other, individuals are preparing for travel abroad.

Additionally, numerous businesses that receive payments in euros—such as hotels, textile companies, and those in the global business sector—are refraining from converting these funds into Mauritian rupees due to concerns over further depreciation of the local currency.

A Growing Distrust in the Mauritian Rupee

According to Alexandre Sanchini, CEO of Blue Ship Capital, acquiring foreign currencies has become increasingly challenging over the past few months.

“Commercial banks are often unable to provide clients with the currencies they requested, though it is happening occasionally,” he noted.

He pointed out that requests for foreign exchange are prioritized: for medical reasons, education, imports, and finally, requests from individuals or investors that are deemed less urgent.

He emphasized that the current shortage primarily impacts strong currencies, including the euro, the dollar, and the British pound.

Cédric Béguier, Head of Investment Strategy at AXYS, concurs, stating that the disparity between economic reality and currency availability can largely be attributed to a waning trust in the Mauritian rupee.

This situation is undermining the central bank’s role as a guarantor of financial stability. “It appeared that hoarding foreign currency has become an increasingly common practice among economic actors,” he observed.

“In light of the value erosion of the rupee due to significant inflation, economic participants and households are compelled to spend more and save less, or they are seeking more attractive returns in foreign currency.”

Since the beginning of 2024, the BoM has injected approximately $235 million (around Rs 11 billion) into the foreign exchange market.

Despite these interventions, the situation remained unchanged, prompting concerns about the sustainability of this approach.

“This measure offers temporary relief but does not resolve the underlying foreign currency shortage,” Sanchini commented.

Béguier agreed. Despite numerous attempts by the BoM to maintain a certain level of foreign currency availability in the market, the mechanism appeared to be stuck.

“On paper, things seem to be improving: while foreign direct investments are low, they are returning. Various economic sectors generating currencies are recovering, like tourism, which is near pre-COVID levels in terms of visitor numbers, and inflation is decreasing year-on-year,” he explained.

The BoM has indicated it will continue its market interventions as long as conditions warrant it.

Since March 2020, the Bank has sold $4.3 billion to meet demand and limit currency volatility, injecting $235 million since the start of 2024, with $230 million injected from July onwards.

The central bank has been intervening weekly since July 8 and will persist in doing so as market conditions dictate.

Insight from Kugan Parapen, Economist

Kugan Parapen noted that many businesses and individuals are currently experiencing a significant foreign currency shortage.

“This situation has persisted for several months, and everyone involved in this market will tell you it’s far from normal.

As with any shortage, the causes are inevitably related to supply and demand. We must first acknowledge the yawning trade deficit poised to reach Rs 200 billion in 2024, approximately 30% of GDP.

Thus, the Mauritian economy is structurally deficient in terms of foreign currency,” he explained.

He also highlighted a deep loss of confidence among Mauritians—including businesses—in the local currency, leading to widespread hoarding.

“Individuals holding foreign currency are reluctant to convert it into rupees unless absolutely necessary.

Essentially, the foreign currency shortage is a blend of natural and artificial causes, which is alarming for the country and its economy,” he concluded.

Consequences of Foreign Currency Shortage

The repercussions of this shortage on the local economy are significant. Firstly, many importers are struggling to procure adequate foreign currency in time to finance their imports, resulting in delays in the supply chain.

To mitigate their losses, some businesses may increase prices, leading to inflationary pressures.

Secondary effects included the emergence of a parallel market, with some commercial banks resorting to questionable practices like “forward pricing.”

Ultimately, it is the populace that bears the brunt of the elevated costs in this parallel market.

Furthermore, the foreign currency shortage has considerably dampened the willingness of international investors to invest in Mauritius, driven by fears of encountering difficulties in accessing their funds.

Potential Solutions from Financial Authorities

Restoring trust in the local currency among Mauritians and investors is essential. Until there is certainty and calm in the foreign exchange markets, the situation is unlikely to normalize.

The Bank of Mauritius needs to evaluate its options and adopt innovative, compelling strategies.

One key challenge is convincing the market that hoarding and speculation are not beneficial strategies, a particularly daunting task given the current economic climate.

Recommendations from Experts

Cedric Béguier suggested, “Incentive or coercive fiscal measures could be introduced to boost foreign currency flows.

Nevertheless, these initiatives may provoke strong resistance from the business community and could pressure the more vulnerable members of the private sector to withdraw.

Exporting sectors need the support of existing and future policymakers to thrive. This is including creating value chains and bolstering agricultural and livestock sectors to reduce our dependence on imports and alleviate trade imbalance.

A clear plan with tangible indicators for food and agricultural sovereignty, combined with sustainable development strategies, could therefore offer a significant long-term advantage for Mauritius.”

Alexandre Sanchini added, “Through its interventions in the foreign exchange market, the Bank of Mauritius also manages the exchange rate of the rupee against foreign currencies.

While it is challenging to ascertain its objective regarding the exchange rate, it is notable that the rupee has not depreciated significantly against the euro in the past three years.

Conversely, it has depreciated nearly 10% against the dollar during the same timeframe.

However, many countries have recently faced severe currency devaluations, such as Kenya, Nigeria, Ghana, Pakistan, Argentina, and Turkey, which have proven catastrophic.

Economic policy is a delicate balancing act. The efforts of the BoM to manage the rupee’s exchange rates amid external shocks like COVID-19 or ongoing currency shortages deserve recognition.”

Source: Defi Media