BoM Governor Declares: “We Have Overturned the Bad Monetary Policy”

The Governor of the Bank of Mauritius (BOM), Rama Sithanen, flanked by First Deputy Governor Rajeev Hasnah and Second Deputy Governor Gérard Sanspeur, met with representatives of private banks yesterday to discuss operational and strategic issues.”We reviewed the money market, the foreign exchange market, and strategic matters such as the modernisation of the banking system,” Governor Sithanen stated.

Following the meeting, in a press briefing, he expressed satisfaction that the new leadership at the BOM had successfully reversed what he termed “bad monetary policy.”

Sithanen pointed to the previous administration’s actions, detailed in the State of the Economy of Mauritius report, as the root of the problem.

He stated, “Two things affected the Central Bank. First, excess liquidity due to the printing of 150 billion rupees, injected into the economy.

This included 81 billion rupees for the Mauritius Investment Corporation, with the remainder used to cover the budget deficit.”

According to Sithanen, this policy led to excessive liquidity in the system, triggering inflation.

The Central Bank absorbed a portion of this excess liquidity, reducing it from an estimated 34 billion rupees to 15 billion rupees.

“Secondly,” he continued, “this excess liquidity led to a depreciation of the rupee by over 20% between 2020 and 2024.”

“Inflation was at 28% during this period,” Sithanen explained.

“This is due to the fact that most of our consumer products are imported, and the trade deficit increased.

The rupee continued to depreciate, and inflation continued to rise.

There had been extreme politicisation of decisions taken by the Monetary Policy Committee (MPC).”

Sithanen further alleged that the MPC meeting in September 2024 was convened following external instructions.

“Technicians have a macroeconomic model to advise on what to do.

They recommended increasing the key interest rate that day because the rupee continued to depreciate, and inflation continued to climb.

However, the MPC made the opposite decision. As everyone knows, by lowering the interest rate, the gap between the dollar and the rupee increased, with the result that operators continued to hold onto their foreign currency.”

The Monetary Policy Committee, in its meeting last month, returned the key interest rate to its pre-September 2024 level.

“We have taken a decision that is gradual, cautious, and balanced,” Sithanen asserted.

The Governor emphasised the need to address the differential between the dollar and the rupee.

“Now, operators are agreeing to exchange their currency.

We have not solved the currency problem, but the situation has improved.

Furthermore, this rate encourages savers and those who have money in the bank,” he added.

“We are continuing to absorb excess liquidity and ensure that the monetary transmission mechanism works.

When inflation is controlled, and if the rupee stops depreciating, the population benefits because their real incomes improve, which is good for the people,” he stated.

Sithanen acknowledged the difficulty for the new team to reverse five years of accumulated issues but insisted that “the direction of travel is good.”

He pointed out that between January and 15 November of last year, the dollar appreciated by 5%, the pound sterling by 6.6%, and the euro by 2%.

However, since 15 November, when the new team took office, the rupee has stabilised against the dollar, despite the dollar’s international appreciation since the election of President Trump.

“The pound sterling has appreciated by 2.7%, while the euro has appreciated by 1.9% because we have taken measures to remove distortions in the market,” he stated.

Rama Sithanen maintained that, thanks to the measures taken by the Bank of Mauritius, “we have reversed the bad monetary policy that had aggravated the situation in terms of rupee depreciation and currency availability.

We will continue to combat inflation, ensure financial stability and currency stability, and promote orderly and balanced economic development.”

Source: Le Mauricien