The Bank of Mauritius (BoM) announcement to raise Rs60 billion on the market to finance the similar grant to Government (Govt) is a masquerade.
Under pressure from the Press, the Opposition's requests for clarification, negative public comments, and probably also on account of International Monetary Fund (IMF) reservations expressed informally, BoM has been compelled to present a face-saving device. But the BoM grant to Govt will remain a printing money measure.
The BoM Act was amended by adding to its powers, under the new sec (6)(1)(oa), so that the Bank may "On account of the Covid-19 virus having a negative impact on the economy of Mauritius, grant such amount to Government as the Board may approve to assist it in its fiscal measures to stabilise the economy of Mauritius." The amendment does not refer to a grant of loans or advances, but means a pure grant, a donation to Govt.
On 22 May 2020, the BoM announced a one-off exceptional grant of Rs60 bn to Govt without mentioning that it would be financed by a BoM issue to capital markets for the same amount. A week later, the BoM Governor specified, in his statement on 29 May, that the BoM will finance Govt by raising Rs60 bn from the market:- "I must also point out that the Bank will finance this contribution by issuing its own instruments for the amount of Rs60 billion. The Bank is resorting to this issuance for the reason that there is and will be ample rupee liquidity on the market. These monetary operations will promote orderly condi-tions on the money market."
The Governor also observed that the details of the BoM issue are still being worked out. It is astonishing that BoM should decide to grant Rs60 bn to Govt, but announce only a week later that BoM will fund this from the market, without being able to provide further details, such as maturity, etc. This measure has been cooked up by BoM as an afterthought to pull the wool over the public's eyes.
BoM instruments are issued for strictly monetary purposes to enhance or reduce market liquidity, and currently represent a BoM liability of Rs100 bn. An additional Rs60 bn of BoM instruments will be issued, under the pretense of monetary policy, but actually for fiscal policy purposes. Whereas all central banks are injecting liquidity into the financial system, which is the very role of monetary policy in the current crisis, BoM will instead be mopping up liquidity for Govt. Monetary and fiscal policy are no longer distinct, and the perception of BoM as a fiscal arm of Govt is reinforced.
It would make far better sense for banks to lend the amount of Rs60 bn directly to Govt, rather than participate in the gymnastics of routing through the BoM. But Govt is trying to contain the increase in public debt, and only wants a grant from BoM, for which a statutory amendment was passed. BoM has therefore been driven by external pressures to perform a cosmetic and window-dressing exercise.
The proposed BoM issue of Rs60 bn as a monetary policy operation to absorb liquidity is an eye wash. In its wake, BoM can subsequently conduct other monetary policy operations to reverse course, and instead supply liquidity to banks by buying back BoM bills, notes and bonds. These offsetting monetary policy operations will mean that money is being created for Govt by BoM without any change in debt holdings by the private sector, i.e., simply printing money.
The announcement that money for Govt is not coming from the BoM's pocket, but from the banks' pocket, will ease public apprehensions. In fact, the BoM will take from the banks' right pocket, but replenish the banks' left pocket. And, hey presto, the trick is done.
BoM announced a Covid Support Programme on 13 March, including a Special Relief Programme to lend an amount of Rs5 bn to affected economic operators though commercial banks from 23 March to 31st July. BoM also proclaimed that this Special Relief would be financed by BoM 2-year 2020 Savings Bonds for an amount of Rs 5bn to be introduced to individual investors as from 23 March 2020.
Govt also announced that the State Investment Corporation (SIC) would raise an amount of Rs 2.7 bn through the issue of redeemable preference shares to fund its equity participation scheme and other support schemes. As of this date, about Rs2 bn has already been approved under the Special Relief Amount, but not a single rupee has been raised so far through the proposed BoM 2020 Savings Bonds, or by the SIC.
It cannot be ruled out that this new announcement of a BoM issue for Govt will meet the same fate, i.e., a finance-raising proposal that will not be implemented, or only partly implemented. The size of current excess liquidity at banks may not prove sufficient to meet BoM's fund raising target. Anyway, if some or all of the Rs60 bn has been credited by BoM to Govt deposits accounts pending the BoM issue, then money printing is already a reality.
The announced intention of BoM to raise finance for Govt creates the illusion of an improvement on the previous BoM decision to print money for Govt without any fund raising. But, any subsequent BoM monetary policy interventions to supply liquidity would leave the private sector's debt holdings unchanged. The grant of Rs60 bn by BoM to Govt thus remains an extreme BoM money creation measure that will aggravate depreciation and inflation risks. Exceptional measures are justified in exceptional circums-tances, but not if it means taking exceptional risks.