Local Currency’s Free Fall: BoM Strives to Stabilize the Rupee

The Governor of the Bank of Mauritius (BoM), Rama Sithanen, accompanied by Deputy Governors Rajeev Hasnah and Gérard Sanspeur, has expressed urgent concerns over the significant depreciation of the Mauritian rupee. Since 2020, the currency has lost 27% of its value, and a staggering 46% since 2014. According to Sithanen, stabilizing the rupee is now a top priority.

During a press conference held on December 19, 2024, Rama Sithanen acknowledged the challenges of appreciating the rupee in light of the country’s low productivity levels.

“It will be difficult to strengthen the rupee without improving our competitiveness,” he stated, emphasizing the need for a realistic approach to managing public discontent.

The decline of the rupee has been attributed to lax monetary and fiscal policies.

The Governor emphasized the importance of closely aligning monetary policy with fiscal policy to stabilize the local currency.

He explained that the BoM’s interventions on the foreign exchange market are intended to reduce volatility rather than fix exchange rates.

“If we successfully eliminate illegal operators and encourage those who have kept their money abroad to bring it back, the situation could improve,” he noted.

Although the reserves have decreased, they remain adequate, and strengthening them is vital for ensuring economic stability.

The BoM reassured the public that sufficient foreign currency is available, but highlighted the importance of correcting existing market distortions to prevent further depreciation of the rupee.

Pandemic Aftermath

Prior to the COVID-19 pandemic, the supply and demand situation for the rupee was manageable.

However, the pandemic severely impacted foreign currency-generating activities, such as tourism, leading to further depreciation of the currency.

From 2020 to December 19, 2024, the BoM intervened extensively in the domestic foreign exchange market, spending approximately $4.5 billion in efforts to stabilize the rupee.

Unfortunately, these measures have had the opposite effect, resulting in a 27% depreciation during that time frame.

Many countries have witnessed similar currency depreciations, but unlike Mauritius, they opted for restrictive monetary policies, implementing significantly higher interest rates to protect their currencies and control inflation.

The BoM has injected Rs 140 billion into the local economy, inadvertently exacerbating the rupee’s depreciation and inflation.

Rama Sithanen pointed out that the rupee’s appreciation is not solely dependent on the central bank’s actions.

He noted that the strengthening of the US dollar following Donald Trump’s election and ongoing fiscal policies have also affected the Mauritian rupee.

As a result, he reiterated the necessity for alignment between monetary and fiscal policies to achieve currency stabilization.

New Members of the MIC Board

The following individuals have been appointed as new members of the board of the Mauritius Investment Corporation (MIC):

• Rajeev Hasnah (Chairman, representing the sole shareholder)
• Gérard Sanspeur (Ex-officio, representing the sole shareholder)

Independent Members:

• Bhavna Ramsurrun
• Rehana Kasenally
• Vedna Mulloo
• Verena Tandrayen-Ragoobur
• André Chung Shui

Winners and Losers of Monetary Policy

Within the current monetary landscape, certain sectors have benefited:

• The export sector
• Commercial banks
• Integrated Resort Scheme (IRS) properties sold in foreign currency
• MIC beneficiaries, who received rupees at a lower rate, allowing them to maintain foreign currency
• The government, which benefits from a 15% Value Added Tax and Excise Duty on inflated values due to the rupee’s depreciation
• The Bank of Mauritius

However, the biggest losers remain the general population, who have borne the brunt of the rupee’s depreciation, resulting in inflation and a decline in purchasing power.

Measures Announced by the BoM Governor

To address illegal activities related to foreign exchange, the BoM announced several measures, including:

• Identifying unlicensed Foreign Exchange Brokers and requiring them to cease operations immediately, with an opportunity to apply for formal licensing.
• Ensuring that licensed entities under the Financial Services Commission (FSC) do not engage in foreign currency trading.
• Eliminating a parallel market to restore transparency and stability in foreign currency transactions.
• Prohibiting Customer-to-Customer (C-to-C) transactions, mandating that all currency transactions go through a bank.
• Strengthening oversight of forward prices and swaps to ensure fair pricing and prevent exploitation that could harm the population.

Additionally, the BoM will conduct rigorous inspections of Nostro and Vostro accounts, which connect local banks with their international counterparts, as foreign brokers often conduct transactions through these accounts.

Properties under the IRS scheme will now only be sold in rupees to Mauritian citizens, and companies seeking to convert foreign currencies for cash needs must do so exclusively in Mauritius.

This strategy aims to enhance foreign reserve management and improve local bank liquidity.

The BoM’s commitment to monitoring and reforming the currency system reflects its dedication to ensuring economic stability in Mauritius.

Source: Defi Media