6 February 2018

Mauritius: #50ansMoris - The eternal devaluation debate of the Mauritian rupee

What should the value of the rupee be? This debate is as old as the country itself. In 1968, the pages of «l'express» hosted an article extolling the benefits of devaluation: exports would be cheaper and more competitive, more expensive imports would lead to more consumption of home-based industries (these, remember, were the import substitution days).

But since that exhortation in the days of the nascent independent Mauritian state, devaluation of the currency has been a sobering experience in Mauritian political history and has often come at an exceptionally high political cost.

The first experience of dramatic rupee devaluation came in 1979. During the late 1970s, Mauritius faced a crippling economic situation: world sugar prices fell, hurting export earnings, and oil prices were climbing, hurting foreign exchange reserves. The then-Labour-PMSD government that had just managed to beat back the MMM in the 1976 elections was under pressure to deliver electoral sops to retain its support. Squeezed financially, the government faced a balance of payments deficit of US$ 111 million.

The then-Finance Minister, sir Veerasamy Ringadoo, lamented that the country was left with just enough to pay for two weeks' worth of imports. The economic difficulties were such, historian Sydney Selvon writes in his A comprehensive history of Mauritius, that Ringadoo was forced to turn to the International Monetary Fund (IMF) for help in October 1979. Part of the price for the IMF's aid was a 22.9 percent devaluation of the rupee, on 23 October 1979.

The step has massive political consequences for the government. The opposition MMM became even more critical of the government, the PMSD led by Gaëtan Duval and a coalition ally of government, threatened to split the coalition and a group of Labour party dissidents, led by Harish Boodhoo, who had been expelled from the party in July that same year, took a decidedly anti-government line. Jayen Cuttaree, in his Behind the purple curtain, an account of the history of the MMM, writes that the devaluation had plunged the country "in the midst of an economic crisis".

Cuttarree wrote that, following the move, the MMM became "sure of winning the next elections" and decided to beef up its own economic doctrine as an alternative to the results delivered by the Labour-PMSD coalition. The devaluation had the effect of electrifying an already robust op- position against the Labour-PMSD coalition and brought all these disparate currents closer together. This was demonstrated in December 1979, a few months after the fall of the rupee, when the MMM and Harish Boodhoo's newly-formed PSM jointly backed a no-confidence motion in Parliament.

This was a harbinger of the times to come. When the motion was presented to Parliament and was voted upon, according to Selvon, the government had barely just scraped through: 35 votes against the no-confidence motion and 33 in favour. It was not surprising to see why the 1979 devaluation had extracted such a heavy toll. In an official publication released in April 1981, the government had conceded that following the move, the cost of living had skyrocketed by 27 % in the space of one financial year. A government desperate to put its finances in order had tied its colours to the mast of economic shock therapy, and was paying the price for it.

But did the government's gambit work? Unfortunately, for the Labour-PMSD dispensation, the devaluation and a series of related measures to boost competitiveness and investments did not really pan out. The continuing fall in export earnings from sugar (because the British pound sterling was also weakening) coupled with two cyclones that hit sugar production hard as well as continuing mistrust by the private sector regarding the political instability in the country combined to ensure that, before long, Mauritius had to go cap in hand once again to the IMF.

In fact, far from pulling Mauritius' chestnuts out of the fire, 1980 was the only year in the history of independent Mauritius when the economy actually shrank. The price this time was another devaluation, by 16.7 percent on 27 September 1981. "Two massive devaluations in two years reflected badly on the fiscal policy performance of the government", said the former Governor of the Central Bank, Ramesh Basant Roi, in a speech summarizing the history of Mauritian monetary policy, in November 2017.

The cumulative effects of the 1979 and 1981 rupee devaluations, the most drastic in the history of independent Mauritius, had played a large part in the turning point of 1982, when the Labour Party, that had run the country since independence in March 1968, was overthrown in an election with a 60-0 verdict; putting an end to one phase of the Labour Party and inaugurating another for the MMM and, eventually, giving rise to another party in due course, the MSM.

Today, in 2018, the debate over what the value of the rupee should be has scarcely changed since it was first brought up on these pages in 1968.

And the question still remains the same: are the supposed economic benefits of devaluation - now termed depreciation - worth the political/social costs that they entail? 50 years on, the jury is still out on that one and we are no closer to a definitive answer.

The economic context of the decision

The Bank of Mauritius, in the 60s , and nowadays. The country went through two devaluations of the rupee in 1979 and 1981. sir Veerasamy Ringadoo. The cover of «l'express» on the 6 February 1968. The decision to devalue came at a difficult economic squeeze in 1979. Mauritius, at the time, was overwhelmingly dependent upon sugar exports for the bulk of its foreign exchange earnings: in 1979, the Export Processing Zone brought in just Rs 603.2 million and the tourism sector only brought in 129,360 arrivals that year. The issue facing the government in 1979 was that it was caught in a pincer: on one hand, the government had granted successive wage increases, which in turn fueled imports since the 1974 sugar boom. Between 1978 and 1979 alone, imports rose by 18.1 percent. On the other hand, the world price of sugar had dropped to £ 92 per metric ton by July 1979, and, significantly, oil prices too went up. With more foreign currency flowing out to pay for imports than coming in, the trade deficit ballooned from just over one billion rupees in 1978 to Rs 1.2 billion by 1979. All in all, the current account nosedived from a surplus of Rs 127 million in 1975 (shortly after the sugar boom) to a Rs 735 million deficit by 1978. But it wasn't just foreign exchange where the economy was taking a battering. Even the 1978-1979 government budget showed a deficit of Rs 283.6 million.

The government attempted to plug this widening gap on its books by approaching European states for loans, of which they could raise only approximately Rs 300 million. Not enough. And it was increasingly becoming clear that the state, from a combination of lower export earnings and increased imports and wages, was living way beyond its means. Faced with this conundrum, the government was finally forced to turn to the International Monetary Fund to help tide over its payments crisis and, in return, committed to devaluing the currency in 1979. When that proved to be not enough, they turned towards devaluation again as bitter medicine in 1981.

After the riots: 48% of students in Port-Louis schools stay home

On 6 February 1968, the capital was still in a state of insecurity. On this day, schools in the capital reopened once again only to find out that on the first day, 48 % of its students did not come to school due to security concerns. Within the capital too, the curfew regime put in place during the riots had been relaxed somewhat but with the capital still shuttered between 7 p.m. and 5 a.m.

Press reports from the day also gave details of arrests of those implicated in the violence : one inhabitant of Port-Louis sentenced to 3 months in prison by the Intermediate Court for possession of a firearm, two inhabitants of Cité Vallijee fined for breach of the peace and threatening a woman, amongst others. Amongst those arrested by the police while the violence was actually taking place, Ahmad Moussa Rughony pled guilty to illegal possession of a gun and six bullets. The French government has also announced that it was increasing its aid to third world countries. However, by 6 February 1968, it was still uncertain whether Michel Debré, then French Finance Minister and legislator elected from the French department of Reunion, as well as close friend of Gaëtan Duval, would be visiting Mauritius to attend its Independence Day celebrations on 12 March.

Pierre Dinan, economist: «Currency depreciation (... ) is just a non-transparent devaluation»

What was the context preceding the economic hard times that led to the devaluations of 1979 and 1981?

I have called the 1970s the wasted years. Mauritius had signed the commonwealth sugar agreement with the UK in the 1950s, since post-war Britain was suffering a sugar shortage and got its actual and former colonies to supply it with sugar in exchange for preferential prices. When the UK joined the European Common Market, Mauritius negotiated hard to keep that preferential pricing system and that resulted in the 1975 sugar protocol.

In 1974, there was a world sugar shortage. So, Mauritius negotiated and obtained higher prices from the UK and sold its excess output elsewhere at good prices too. 1974 was a boom year for Mauritius and the government was getting a lot in terms of taxes on sugar exports that went straight into the government coffers.

So, where did it start going wrong?

All this extra was used by the government at the time to mollify the opposition at home by rai- sing wages, laying the basis of the welfare state and the roots for the consumer society in Mauritius. This was a bad time from the governance point of view and promising these things was seen as one way of dealing with that. So, they promised a lot. But in 1975, sugar prices went down and the government found that it had made too many promises during the boom that it was finding difficult to sustain. But they could not go back on their promises either because of political constraints.

As the years went by, Ringadoo became more and more helpless and the government only got more and more popular as they tried to make up the shortfall by introducing all kinds of new taxes in each budget to meet the burden of public spending they had committed themselves to. By 1979, there was no money left in the kitty and they had no choice but to go to the IMF. And the devaluations followed from there.

Did the IMF succeed during those years in correcting the government's economic strategy?

Back then, we had a very confused strategy. On the one hand, we wanted to promote exports, but this was not really taking off in the late 1970s. While on the other hand, we wanted to encourage import substitution with all sorts of things like processed peas, toothpaste, razors and things like that. We were really following two strategies at the same time.

What the IMF, rightly, said was that we had to commit to exports. But by then, the government was already very weak. The MMM was already a major party by the 1970s and the devaluations just ended up digging the grave of the government deeper.

Were these experiences one reason why we moved to a floating rate in 1994 and stopped talking about devaluation but depreciation instead?

You would have to ask a former central bank governor for the technical details. But I suspect that, by then, we had already reached the age of floating currencies, keeping a currency pegged and forcing a devaluation like that had become outmoded. So, there was no point in going through that anymore. Then, there is another side. What is the currency depreciation that we talk about today? It's just a non-transparent devaluation. So, in that sense, it actually facilitates the job of the government and monetary authorities.

Colonial legacy and context: Can we de-ethnicise the Constitution while ensuring broad based representation? (Part 1)

By Dr Rama SITHANEN

Mauritius will celebrate its 50th Anniversary of Independence this year. The event is significant as it is a milestone in the life of a country. It is typically time to remember the past, to rejoice the present but also to reflect on our future. Time to take stock of our collective wealth of experience and examine our progress as a people. It has not been an easy journey. We have come a long way as one of the few sub Saharan African countries that have successfully made the structural transformation from an agricultural to a diversified economy and increased both the income and the standard of living of its population.

Socially, we provide free education, free health care, a relatively good welfare state and we have reduced poverty and raised the human development index. We are probably the only robust democracy in Africa with free, fair and regular elections that deliver frequent alternations in power and have a free press. Even if some developmental challenges remain and we are stuck in the middle income trap with economic inequality rising, it is an outstanding achievement as there was nothing that predestined Mauritius for such relative prosperity and human development. If anything, it underscores the pragmatism of the country since Independence in proving wrong some experts who prophesised a bleak future for us.

Regrettably, against this remarkable socio-economic and democratic progress which is hailed globally, we have not been capable, after 50 years of Independence, to find an acceptable compromise to remove the consecration of communal identity from our Constitution and our electoral system and to foster nationhood while promoting political inclusion and broad based parliamentary representation. The current ignominious classification of our population in four arbitrary ethnic silos is against republican values and tantamount to allowing the cancer of communalism to vitiate the very foundation of our democratic framework and our social fabric. It legitimises communalism, strengthens ethnic identities and inhibits nation building.

It is a blot on our impeccable record, a stain on our exemplary image. It damages our reputation, smears our brand, distorts our character, undermines our ethos and degrades our values. Especially as there are other viable mechanisms to promote diversity of representation as they exist in several plural societies. The 50th anniversary of our freedom constitutes a unique opportunity to reflect collectively on how we could find a workable solution to put an end to this predicament, to respond to the many human rights and judicial criticisms made against us and more importantly to consolidate and strengthen the nation where our fellow citizens cease to be categorised on the basis of their so called different 'ways of life'. What is required is the shaping and the consolidation of an enhanced Mauritian identity and the sharing of fundamental citizenship values as a source of augmented nation building. And one key component of this agenda is the deethnicisation of our Constitution and our electoral system.

The rationale underpinning the community based voting formula

40 Gerrymandered single FPTP constituencies

The voting formula is a legacy of our colonial history and of specific context and circumstances. The seeds of community inclusion in our Constitution and the electoral system were sown in the 1957 London Agreement signed by all stakeholders after a great deal of political bargaining. In view of the deep divisions among the major political parties, it was agreed that the electoral system had to meet two criteria that conceptually appear to go against each other.

(i) to facilitate the development of voting on grounds of political principles and party rather than on race or religion; and

(ii) to provide an adequate opportunity for all the main sections of the population in Mauritius to elect their representatives to the Legislative Council in numbers broadly corresponding to their own weight in the community;

'We hope, however, that it will prove possible for all parties in Mauritius to agree on the ultimate disappearance of such political arrangements for communities.'

There was an acrimonious debate on how to choose such a voting formula. Eventually the system recommended by the Trustram-Eve Commission was a unique combination of

(i) 40 single member First Past The Post (FPTP) constituencies that were gerrymandered to deliver the right ethnic mix of Members of Parliament (MP); and

(ii) The appointment of a maximum of 12 nominated MP by the Governor to correct for ethnic underrepresentation.

To entrench the ethnic dimension (and even other sub divisions) of the nominated members, the power of appointment of the Governor was subject to three additional conditions by the Colonial Administration so as to provide further assurances to the three communities. They were:

(a) the power of nomination was to be so exercised that each of the three main sections of the population was represented in the Legislature in numbers broadly corresponding to its proportion of the population as a whole;

(b) the Governor has to bear in mind that within the three main sections, there might well be important differences of opinion of which he should also take account;

(c) he should feel free to select candidates who had been unsuccessful at the elections if they had received a reasonable amount of support, as well as persons who had not stood as candidates. The ethnic makeup of the 40 constituencies was gerrymandered to ensure that the three major groups would have fair and equitable representation in Parliament, with few districts being very mixed in their composition. Two elections were held under that system in 1959 and in 1963.

20 Three-member constituencies and 8 best loser seats

Dissatisfaction with both the appointment of nominated members by the Governor and with single member constituencies grew at the beginning of the 1960s. It was felt that the rules and practices concerning these nominations could not continue for the purpose of a general election for the introduction of full internal self-government. While a consensus emerged against singlemember constituencies, there was still the necessity to find a suitable alternative to provide broad based communal representation in Parliament. This was deemed essential to ensure inclusivity and to preserve intercommunal harmony.

Interestingly, Professor de Smith, one of the best constitutional minds to advise our country, was extremely far sighted and fully understood the perils of an ethnic-driven system. He was against the inclusion of communities in our Constitution and forcefully objected to the ethnic-based voting formula. He recommended a mixed FPTP/PR (Proportional Representation) sys- tem instead to achieve the objective of a diverse legislature, as desired by the framers of the Constitution. There was also provision for the Governor to nominate a maximum of three members to represent special interests that could not obtain political representation through the electoral process. As the local politicians could not reach agreement on his proposals, we ended up with the Banwell Commission to recommend the electoral formula for the Independence elections.

The Banwell Commission was given some guiding principles as follows:

(i) the system should be based primarily on multi member constituencies;

(ii) voters should be registered on a common roll;

(iii) the system should give the main sections of the population an opportunity of securing fair representation of their interest, if necessary by the reservation of seats;

(iv) no encouragement should be afforded to the multiplication of small parties;

(v) there should be no provision for the nomination of members to seats in the Legislature;

(vi) provisions should be made for the representation of Rodrigues.

As expected, the main political parties had different views on the most appropriate electoral system for Mauritius, especially between those advocating FPTP formulae and those supporting PR systems.

The Commission reached the conclusion that fair representation of the main communities could be attained without reserved seats. It re- commended a mixed electoral system that was quite unique and which comprised three elements.

(a) 20 three-member constituencies returned through a FPTP mode in the Island of Mauritius and 1 twomember constituency in Rodrigues ;

(b) a 'constant corrective' of five seats as compensation for underrepresented parties and communities, allocated after the poll and chosen among the best losers. However to avoid a multiplication of parties along communal lines, a threshold of 10 % of the national votes and winning at least one seat out of the 60 were imposed as conditions to be eligible for the fixed correctives;

(c) a 'variable corrective' to ensure that a party that polls more than 25 % of votes is guaranteed to secure at least 25 % of the total seats, after taking into account the constant correctives. Thus, a party which polled more than 25 % of the votes would be in a position to ensure that there were no changes in the entrenched provisions of the Constitution without its support.

The recommendations of the variable correctives were strongly contested by many political parties as it was perceived as the introduction of PR through the backdoor. Under considerable pressure, the UK government sent John Stonehouse, Parliamentary Under Secretary of State for the colonies, to attempt to settle the controversies over the Banwell recommendations. Stonehouse disregarded the variable correctives which was the most controversial proposal of Banwell and proposed some amendments with respect to the fixed correctives. The country ended up with:

(i) 62 MP returned from 20 three-member and one two-member constituencies using FPTP; and

(ii) Eight Best Loser (BL) seats to compensate for communal underrepresentation.

Equally the requirements to poll 10 % of national vote and to win at least one constituency seat to be eligible for the Best Loser seats were dropped. And the 8 BL seats were divided into two sets of 4 seats.

Banwell proposed the Best Loser system in a very specific context of rising communal politics and ethnic polarisation in the run up to independence. It was intended as a purely temporary arrangement for three elections so as to facilitate the difficult political transition to the country's independence.

He stated optimistically that: 'We hope, however, that it will prove possible for all parties in Mauritius to agree on the ultimate disappearance of such political arrangements for communities'.

In spite of its temporary nature, all 11 elections since 1967 have been conducted with that formula as the political class has been incapable to agree on the ultimate disappearance of such political arrangements for communities.

This is in spite of many judicial admonishments by the Supreme Court since 1991 to cure the defects of our electoral system, frequent embarrassing postponements of a case pending before the Supreme Court, reprimands from the Privy Council that a system based on figures now nearly forty years old makes no sense, chastisements from the UNHRC in 2012 that some aspects of our voting formula are arbitrary and infringe the rights of our citizens, clear recommendations by many international experts to reform the system, proposals by Ministerial Committees, suggestions by White papers and acknowledgement by all parties to change the electoral system. All in vain because of a lack of political will and courage.

In the meantime, the colonial legacy of dividing us into arbitrary ethnic grids and erecting walls of segregation continues to shape Mauritian politics. It is a ter- rible blow to nation building and to shared citizenship.

(To be continued tomorrow)

Mauritius

Prime Minister Cautions to Take Severe Sanctions Against Unruly Drivers

The situation is alarming regarding the number of fatalities caused by road accidents. It is high time that we act so as… Read more »

Copyright © 2018 L'Express. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 800 reports a day from more than 140 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.