Nazim Esoof
6 August 2008
interview
Port Louis — The Monetary Policy Committe recently increased the Repo Rate, which some economic operators however disapproved. In this interview, suggestions are made as regards monetary policy.
Soon after the International Monetary Fund emitted a warning against the threat of inflation, the Central Bank of Mauritius raised the Repo Rate by 0.25%. What is your evaluation of the situation?
We are in for troubles. The rate of inflation for 2007 was around 10 per cent. It is likely to be in the region of 10 per cent in 2008 and will continue to be high in 2009, even if the price of crude oil goes down to below US$ 100 per barrel. The domestic price formation in Mauritius needs to be comprehensively understood and appreciated by monetary policy makers at the Bank. I had a very quick glimpse of a report in one of the local papers and found that the International Monetary Fund (IMF) has mentioned that a 1 per cent change in the nominal exchange rate of the rupee has a 0.2 per cent impact on the domestic price level in the short term. This is roughly the same figure we obtained and mentioned in one of my briefing papers, Director Research, for the Monetary Policy Committee in 1995 that used to be held under the Chairmanship of the then Minister of Finance Honourable Rama Sithanen at 10:00 a.m. on the last Thursday of every month. One would ordinarily have expected the misguided appreciation of the rupee to significantly impact on the domestic price level. But it did not. Nor did the monetary policy stance of the Bank of Mauritius (BoM) help boost the growth performance of the economy. In a nutshell, the monetary policy of the Bank, which is expected to combat inflation without impairing the growth performance of the economy, did achieve neither of the objectives. A free advice: foreign trade accounts for a very huge proportion of our Gross Domestic Product (GDP). As such, the exchange rate of the rupee is the most important price for our economy. All monetary policy games start with this price at the back of the minds of the policy maker. It's too important an economic variable to be left to the forces of the invisible legs - that have a proclivity to kick you out of the job - of the market. You do not need any consultant from overseas to tell you that, unless one is terminally ignorant. Policy makers in Mauritius should have an idea of the level of the exchange rate of the rupee that broadly strikes macro-economic balance. Don't like the advice? Throw it in the bin - with pleasure.
Aren't you simply trying to get even with the current administration?
In my humble opinion, the monetary policy of the Bank has lacked a defined and announced direction. For the monetary policy stance of the BoM to have a positive impact on the domestic price level, the policy makers need to have an 18-month vision. It takes roughly18 months for the monetary policy stance of the Bank to make a lasting dent on inflation. It is stupid of the Bank to come and tell us that it is pursuing a policy to combat inflation in a particular month and, two months down the road, the Bank valiantly announces that it is focusing on growth. Come on, the Bank needs to have consistency in its public statement. The Bank cannot make a public statement that it is pursuing the right monetary policy stance because the headline inflation rate published by the Central Statistics Office has gone down by a couple of decimal places, say from 9.7 per cent to 9.5 per cent in a particular month, and two months later the rate goes up by a few decimal places. Sounds like a joke.
The current global context is affecting world economy negatively. How can we emerge from this predicament?
The objective should be stated clearly. The difference in the monetary policy objectives of the Bank is not the same as that between an alligator and a crocodile. The monetary policy makers at the Bank should know and should let the public know on which leg it is and will be dancing. The public, in a democracy, has the right to know which policy objective the Bank is after. Let me not use a cosmetic language for I am neither an IMF-World Bank employee nor a Consultant: the monetary policy stance of the Bank in the last 18 months has certainly not been a credible one, let alone the palpable absence of an anchor of expectations. It certainly has lacked a credible direction. With the inflows of speculative capital, things seem to have been in a state of flotsam and jetsam.
Having said that, I do recognize that central bankers the world over are going through challenging times. The Bank is facing serious challenges. The price of the least policy mistakes would be painfully high. The people of Mauritius might not be realizing what it does mean to them when the Governor of the Bank of Mauritius increasingly seems to be on the minority side in his own Monetary Policy Committee. It appears to be taken as an entertaining drama with the victor on one side and the vanquished on the other. This is bad. For the Governor to be on the minority side on some occasions is a healthy indicator. It certainly is not when he is systematically or repeatedly on the minority side. Looking at the show from a distance, it does not seem to be a temporary flexing of muscles.
Should the story keep repeating, the Governor will not be morally as opposed to legally eligible to speak on behalf of the Bank. If he is somehow incapacitated or is not competently able to sell his policy views to members of the Monetary Policy Committee, he cannot by any canon of logic morally make his views represent the Bank's views to the public. For his views are questionable by the majority of the members of the Monetary Policy Committee. Let me stop at that.
Let me tell you one thing: it is dangerous to leave such a highly sensitive and critically important arm of macro-economic policy making of a country in the hands of a rainbow salad of belligerent guys. The Monetary Policy Committee seems to be speaking several languages. But the Bank should have one voice - one and only one loud voice - to combat inflation.
Did you, at your times at the Central Bank, privilege high growth over low inflation or vice-versa?
I had my tough days - tougher days than the present management of the Bank is facing. I sailed my way through successfully. Although the world price of oil had risen from around US$ 30 per barrel to nearly or more than US$ 70 per barrel by the time "fatwa politics" were initiated against me, and world commodity prices had shot up by about 143 per cent between 2000 and February 2007, the rate of inflation was contained to an average of around 5 per cent under my tenure of office. I do however agree that by the time I left, inflation was on a rising trend already. A Governor against whom "fatwa politics" is initiated cannot but be a defeated Governor.
The trick of the trade is to have the right set of leading indicators of the Mauritian economy that you can rely upon for monetary policy making purposes. You need to have a dependable econometric model to forecast the inflation rate for Mauritius over at least a period of 18 months. You need to have a good understanding of the monetary economics of Mauritius. In a sense, I was lucky to have Honourable Paul Berenger as Minister of Finance and later as Prime Minister who luckily understood the Bank's monetary policy framework and gave me the free hand to run the show, provided I delivered the goods. Honourable Pravind Jugnauth, the then Minister of Finance, too gave me the same free hand. I had introduced in 1999 a monetary policy framework that permitted the Bank to pursue an actively contractionary policy in the initial stage and then loosened the stance later. In December 2006, that monetary policy framework was upgraded to a sophisticated level and the Repo Rate was introduced. The Bank's monetary policy stance was on balance tight under my Governorship. There was no monetary policy committee. Without being overpresumptuous, I alone shouldered the responsibility - and I did it. I do not however mean that the Monetary Policy Committee should be scrapped. It's a very important arm of the Bank provided you have the right guys and not imposters as members. This I'm saying not as the past Governor of the Bank but as a citizen of Mauritius, for whatever these guys decide affects my economic well-being just like it does for everybody else. I would have liked to trust the entire bunch of them.
Is it possible to say that the monetary policy from 2000 to 2005 sought to keep inflation low and that this emphasis has since 2005 been put on growth rather?
The period 2000 to 2005 in your question conveys a touch of politics. Let me tell you one thing. The Government does not decide on the monetary policy stance of the Bank. That is why we have a monetary policy committee today. Even at that time, politicians did not come into the monetary policy picture although we have this bad habit of taking it for granted that all politicians interfere with monetary policy making, like they do with other organisations. I have had this unfortunate experience on two occasions with the same government. It turned out to be really disgusting.
First and foremost, any central bank has to strive to achieve low and stable inflation. Low and stable inflation has all the required virtues to foster the sound and sustainable growth of any economy. Once low and stable inflation is achieved and sustained, it is incumbent upon central banks guard against overtightening of its policy stance such that growth is not stifled. The point I want to make here is that the first priority should be the achievement of low and stable inflation. The smart central bank Governor peacefully keeps politicians away from this laudable endeavour. As Milton Friedman said, if you let government run the desert in sub-Sahara, you will very soon run short of sands. My policy emphasis was known to have been anchored on inflation expectations. The Bank's eyeballs should be focused on the rupee price of foreign currencies while it is pursuing its policy objective of price stability.
"Once durable price stability is achieved, sound growth of the economy would take care of itself. Of course, this is easier said than done. But it can be done provided all the policy ingredients are present."
Can there be an equilibrium between sustained growth and controlled inflation?
There is not necessarily a trade-off between growth and inflation. There is to a large extent a trade-off between full-employment conditions and inflation. This trade-off, though theoretically valid, did not make its weight fe0lt in the 1980s and the 1990s when most of the Organization for Economic Cooperation and Development countries had attained full-employment conditions.
As I said, the Bank should first and foremost focus on low and stable inflation. The Bank is the sole issuer of the Mauritian rupee. It's the duty of the Bank to protect the value of the rupee. This means that the primary responsibility of the Bank should be the achievement of low and stable inflation. Its policy should be ingenuously designed so that inflation does not erode the value of the rupee it is itself issuing. The Central Bank cannot debauch the currency it is itself issuing. Would you ever like to live in a society in which the length of a meter varies everyday? Would you ever like to live in a society in which the weight of kilogram varies everyday? I am sure you would not like. Uncertainties would definitely undermine the foundations of the civilised society. Investors dislike uncertainties. Savers, consumers and investors like things to be predictable in an economy. As a saver, I would not like my savings to lose its purchasing power in a manner that discourages me from savings. As a consumer, I would like to be certain about the weight of a kilogram or the length of a metre. I would also like to know long beforehand what my rupee could purchase. As an investor, I would like my cost of production to be stable and predictable. That is why inflation should be the primary concern of the Bank. Once durable price stability is achieved, sound growth of the economy would take care of itself. Of course, this is easier said than done. But it can be done provided all the policy ingredients are present.
"The monetary policy makers at the Bank should know and should let the public know on which leg it is and will be dancing. The public, in a democracy, has the rightto know which policy objective the Bank is after."
How can a country aspire to long-term development in a world ravaged by food and energy crisis?
The reply to this question would take the length of at least a booklet. To answer this question, one would need to really understand the factors that have led to rising price of oil and the food crisis. World Trade Organisation, IMF and the World Bank have, in a way, help build the pressure leading to the crises. The roots of the causes need to be appropriately tackled should there be a genuine attempt to resolve the crises once for all. The huge US and UK budget and trade deficits have helped flush the international monetary system with liquidity that is being exacerbated by the on-going liquidity injection by the Federal Reserve Board as a result of ailing financial institutions in the US. Market correction or no correction, the world economy and financial system will settle to new equilibria, but at higher price levels over time. That will take quite some time. Our economy has been on its usual growth trend of around 5 per cent of the last 18 years. I said it in one of my end of the year addresses: our economy is not consumption-driven; it is investment-driven. Commercial centres do not generate sustained growth. Invest, but go for quality investment that would help generate sustained growth in the years ahead.
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