Rs186 Billion Crisis: BoM Navigates between 10-Year legacy & New Trade Policies

Rama Sithanen, the Governor of the Bank of Mauritius (BoM), laid bare the formidable challenges confronting the institution. He spoke with a sense of urgency, highlighting the weight of a legacy left by the previous government, which had spent a decade in power, and the daunting uncertainties wrought by the erratic trade policies of US President Donald Trump.

“We find ourselves in a climate of heightened uncertainty due to the tariffs imposed by the United States and their consequential impact on policy-making,” Sithanen cautioned during a ceremony Friday April 4th, which marked the transition of ABCB Holdings to the official Stock Exchange of Mauritius market.

“This decision will have negative repercussions across multiple parameters.”

The Governor elucidated the dire monetary legacy inherited from the previous administration, describing it as “extremely difficult.”

A staggering Rs 186 billion had been printed, with Rs 93 billion allocated to the government, Rs 81 billion to the Mauritius Investment Corporation, and Rs 12 billion to four state-owned enterprises.

This excessive liquidity in the market has ignited inflation, leading to a depreciation of the rupee and significant distortions in the monetary transmission mechanism.

Such effects have also strained the management of the BoM’s reserves, he explained.

Sithanen pointed to reckless lending practices, with funds being disbursed here and there often accompanied by a high risk of non-recovery.

He expressed particular concern over a controversial decision by the Mauritius Investment Corporation Limited, with Rs 25 billion invested in Airport Holdings and Air Mauritius for a project valued at a mere Rs 5 billion.

Costly Monetary Interventions

In a bid to rein in inflation, the Bank of Mauritius has been compelled to absorb excess liquidity through Open Market Operations, incurring an annual cost of approximately Rs 10 billion.

“Despite our sterilisation efforts, excess liquidity remains on the market, posing a significant challenge to economic stability.

Absorbing this liquidity is costly, yet we have had to do so, and fortunately, it has helped to reduce inflation,” the Governor stated.

With interest rates at a historic low, many liquidity holders have converted their rupees into dollars in search of better returns, exacerbating the local currency’s foreign exchange shortage.

To stabilise the situation, the Central Bank has raised interest rates and imposed stricter discipline on the foreign exchange market.

These measures have contributed to a reduction in inflation to levels lower than those recorded in November of the previous year and have stabilised the rupee against the euro and the pound, while it has appreciated against the dollar.

However, despite these stabilising efforts, Sithanen acknowledged a persistent backlog in the availability of foreign currency, appealing for patience from the public:

“In three months, we cannot resolve issues that have persisted for years. But rest assured, we are working diligently towards a solution.”

Global Chaos

Sithanen also addressed the broader challenges posed by global uncertainty, particularly the trade war instigated by the United States through the imposition of tariffs.

He warned that these tensions, coupled with retaliatory measures from China, threaten to disrupt international trade, economic growth, foreign investment, and inflation.

For Mauritius, this could manifest as a decline in exports and indirect impacts on tourism and trade with Europe, especially in the event of an economic slowdown on the continent.

The Governor underscored the heightened challenges facing central banks: “This climate presents additional difficulties for central banks in conducting monetary policy.

There is clearly a risk of a retreat from globalisation, or a form of globalisation that excludes the Americans,” he concluded, leaving a sobering reminder of the turbulent times ahead.

Source: Le Mauricien