Central Bank: Comfortable on paper, international reserves will remain under pressure


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The Central Bank's Monetary Policy Committee is expected to meet again this Wednesday, October 20th.

The Central Bank’s Monetary Policy Committee is expected to meet again this Wednesday, October 20th.

Officially, the country’s gross international reserves increased by 9 billion rupees between July and August 2021. However, if reserves are not depleted, it is important to highlight the impact of the rupee’s depreciation and the level of public debt, among others in the Table, especially as an adequacy measure. reserves, ARA, remains low for Mauritius. With the uncertainty of the foreign exchange market, the pressure on our international reserves is really present.

The Central Bank’s Monetary Policy Committee will meet again this Wednesday, October 20, and if we do not expect major changes in the key rate, which is currently set at 1.85%, the Central Bank Governor’s comments on the inflation rate, forecasts and stability are expected. international reserves. Indeed, according to the latest estimate of Statistical Mauritius in its consumer price index, headline inflation is expected to reach 4% in 2021 versus 2.5% in 2020. Not surprisingly, inflation is a source of concern and frustration in all countries in the world today, Mauritius it can hardly be an ostrich in the face of an inflationary threat. How do we prepare for that? The question is open.

In the meantime, let’s look at the level of international reserves of the central bank. According to WM data, the country’s gross official international reserves appear to have increased by Rs 9 billion from Rs 311.3 billion, or USD 7.3 billion at the end of July 2021, to Rs 320.3 billion, or Rs 7.3 billion. $ 5 billion at the end of August 2021, representing 18.7 months of imports.

If these data show a positive trend, let’s look at what the numbers are behind. To begin with, it is worth emphasizing that it is quite unnecessary to be interested in the amount of rupee reserves, knowing that imports, incurred debts and offshore deposits are in foreign currency. Then, if the reserves may seem comfortable to us, it would be relevant to look at the uncertainty of its stability taking into account the IMF’s reserve adequacy measure for Mauritius.

According to Article IV of the International Monetary Fund (IMF) report published last June, at the end of 2020, international reserves covered 103% of ARA parameters, which remains within the lower limit of the adequacy range of 100 to 150%. The report specifies that the total public and private external debt increased from 91% in 2019 to 116% of GDP in 2020, and states that the size of the debt implies high exposure to adverse exchange rate fluctuations, among other things. Financial analyst Sameer Sharma tells us more: “We barely meet the minimum requirement in terms of adequacy, we are only 3% above the minimum rate. It is also irrelevant to rationalize the amount of international reserves in terms of imports because it is only one component, Mauritius is a service-oriented economy, there are both debts and global business, so it is important to see all these obligations. International reserves are there to deal with the ‘worst case scenarios’, we have to be very careful.»

In the meantime, what factors affect the amount of international reserves? According to economist Rajeev Hasnah, if we take into account the amount of reserves between August 2020 and August 2021, we see an increase of about 31 billion Rs, or about 2.3 billion USD, given that the exchange rate changed in different periods. “This includes an increase in special drawing rights estimated at 8.2 billion rupees between July and August 2021, and the rest is explained by a sharp depreciation of the rupee approaching 10%, and there are gains from the CoM’s investment abroad in goods or secondly, I will not talk about increasing the amount of reserves, but I will say that the good news is that there is no depletion of reserves. “

If the level of public debt refers more to the financial balance of the state than to the level of the central bank, it is appropriate to highlight various transfers from the central bank to the public treasury, including the budget decision of June 2019. it was announced that the Bank of Mauritius (BoM) should come to the rescue Ministry of Finance and withdraw Rs 18 billion from its Special Reserve Fund to repay public debt before June 2021, and we must not forget either “Don” of Rs 60 billion from BoM to the state on 22 May 2020.

Although it is now our practice to ask the CoM to repay our debts, the level of our public debt includes external debt, ie borrowing from governments and international institutions, such as Rs 5 billion from India, Rs 11 billion from Japan, EUR 300 million loan from France Development Agency (AFD) and 40 million yuan, or more than 200 million Rs from the People’s Republic of China. “It is important to take this factor into account, as we have seen over the years, every time the state finds itself in a lack of liquidity, it draws reserves from the CoM, it is basically taken from the right pocket to transfer to the left pocket without solving the basic problem. is our lack of revenue in terms of foreign currency. Let us not forget that the CoM maintains the stability of the foreign exchange market by intervening in the market by selling currencies. It should therefore be understood that the pressure on the reserves will be maintained for some time to come.Economist Kevin Teeroovengadum adds.

What about the current trend in the forex market? Allan Juste, head of Forex and derivatives in Afrasia, explains that the situation remains precarious. “The currency situation in the banking circle has hardly improved during this year. The imbalance between supply and demand in the foreign exchange market remains visible, and commercial banks depend more than ever on regular central bank interventions to mitigate this increased demand from economic agents. It should be noted that from April 2020 to date, the total amount of these interventions is close to $ 1.9 billion.»And to add: As for our international reserves (gross official international reserves), they amounted to USD 7.842 billion at the end of September 2021, according to data released by the Central Bank of Mauritius on October 7, which is an increase of 8.8% compared to in the same period last year. Note that this current level of reserves represents a very comfortable coverage of 19.6 months of imports, calculated on the value of imports of goods and services for the calendar year 2020. “

Once again, it is good to put in context the level of public debt knowing that sooner or later it will be necessary to repay well, not to mention the slip of the rupee which increases the amount of reserves in rupees. Finally, we will have to closely monitor the situation, because if tourists return, in terms of income, and thus foreign exchange inflows, we will need a little more time to restore health.

What are Special Drawing Rights (SDRs)?

The SDR is not a currency, nor is it a claim on the IMF. “It is a virtual debt that IMF member countries can use freely. The value of SDR in dollars is determined daily and is part of the BOM reserves. It should be noted that the SDR was created by the IMF in 1969 as an additional international reserve instrument under the Bretton Woods fixed parity system. Despite the collapse of the Bretton Woods system and after the transition to variable exchange rate regimes, the use of SDRs as global reserve assets was nevertheless crucial in supplying the global economic system with liquidity and replenishing countries ’official reserves. against the background of the global financial crisis “, explains economist Rajeev Hasnah.

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