Rundheersing Bheenick: Comprehensive reflections on economic and
financial activities in Mauritius during 2008
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders,
Bank of Mauritius, Port Louis, December 2008.
The original speech, which contains various links to the documents mentioned, can be found on the Bank of
Mauritius' website.
* * *
Dear Stakeholders
As we begin 2009, every central bank Governor around the world must be asking himself
whether the worst is over yet. Except for a few überbears and habitual doomsayers, no one
anticipated the troubles of 2008. Now that we are caught up in a global slowdown, with most
of the major economies actually in recession, we have new concerns. What are the
prospects for 2009? Will the bail-out work? Why has Mauritius so far escaped the wreckage
of financial systems and banking around the world? Shall we see the end of the crisis this
year and if so, when?
The lessons are becoming clear and I believe it is possible to reshape the global financial
system to make it do its job again in promoting development, growth in jobs and the relief of
poverty. I am hopeful that the global economy will emerge fitter from this crisis. But there are
no quick fixes. The ability of Mauritius and other small states to elude the immediate impact
of the crisis can be put down to two broad factors; first: avoiding the worst aspects of global
credit delinquency through appropriate banking regulation and supervision; second: stability
and probity in accounting and banking methods, recognising risks for what they are, and
reducing exposure to potential losses, rather than grabbing gold-plated opportunities for
making a fast buck.
In 2007, we launched a new strategy for communication which culminated in the End-of-Year
Letter to
Stakeholders. The essential idea here is to share with you the experiences of the
Bank of Mauritius, the highs and lows of the year, and also to bring to you the outlines of our
future policy. This year, we continue with this tradition.1 We present a review of
developments in the banking sector in 2008, discuss some of the initiatives taken by the
Bank and adumbrate a foggy outlook for the year ahead.
The year 2008 has been unprecedented in global banking history and this has deeply
affected the pattern of our work at the Bank. It began with massive inflows of foreign
exchange powered by portfolio flows, investments in IRS projects and gilts, causing our
currency to appreciate significantly. The second part of the year saw global currency
movements and the scaling down of investments by foreigners. We closed the year with a
reverse situation. Between these two extremes, the Bank navigated sometimes in rough
seas but despite the storms, the Bank and its many partners have consolidated the financial
sector by keeping a steady course and taking some exceptional measures to protect our
economy from the effects of the global turmoil.
At the Bank, we have stepped up our vigilance and taken prompt action to sustain investor
confidence and long-term financial stability by tasking a special multi-divisional cell,
comprising senior officers from various disciplines, to monitor closely the evolution of the
crisis.
In the midst of all these uncertainties, I must admit we have also been lucky. Our banking
system has been steady and stable throughout the year, maintaining strong capital buffers
and high solvency ratios, all of which have ensured its resilience. The judicious lending and
investment practices of our banks have protected them from exposure to the toxic assets and
complex derivative products fatally linked to the US sub-prime credits and the over-valuation
of real estate. A key element in the soundness of our banking practices has been our greater
reliance on deposit funding rather than on money market or external funding. These classic
and simple safety measures have kept us relatively unaffected by the global financial crisis.
If banking has remained safe and secure in Mauritius, what can we say of the wider aspects
of the domestic economy? Or, in U.S parlance, what about Main Street?
Mauritius has not of course entirely escaped the spillover effects of the global crisis on the
real economy. Indeed, the impact is becoming increasingly visible. We are witnessing a
slowdown in levels of production and investment in Mauritius. This will have knock-on effects
on banking activities and there will be need for a revaluation of assets that are pledged as
security. Yet, the strong performance of our banks during the past year, their solid deposit
base, their low level of non-performing loans, and the continuous monitoring of all banking
matters under the watchful eye of your Central Bank, comfort us in the view that we are
wellplaced to confront the anticipated levels of external shocks that our wider economy will face.
(Click here for further details on Performance of the Banking Sector)
In the second half of 2008, the Bank has been working closely with the Treasury to respond
to the unfolding global crisis and further buffer the domestic economy. The Additional
Stimulus Package announced by Government in December was prepared in consultation
with the Bank as part of the closer policy dialogue between the Bank and the Ministry of
Finance. Furthermore, in response to tight liquidity conditions in global credit which might
have exerted an adverse impact on the cost and availability of short-term trade finance, the
Bank took pre-emptive action by making available a Special Foreign Currency Line of Credit
of US$ 125 million. This allowed local banks to maintain the flow of credit for international
trade, which is a vital lifeline for an open economy like ours.
Regulation and supervision
The flaws in the national regulatory systems of the major economies have been cruelly
exposed by the global crisis and its attendant financial scandals. Effective and timely
regulation, built on prudent, transparent and sound supervisory practices, must be at the
heart of a stable financial system. In the course of last year, the Bank reviewed its
supervisory structures and revisited most of its regulatory guidelines to ensure that the
supervision of the banking sector remains ahead of the game and meets a high standard
when gauged by international norms.
(Click here for further details on Supervisory issues)
The Bank has been actively engaged in both on-site and off-site supervision of banks. The
objective is to strengthen our system-wide approach to supervision and to prevent any
spillover into the system of any specific risk from individual banks. The exercise includes
cross-border banks, that is, subsidiaries as well as branches of banks outside Mauritius. This
is done through a mechanism of cooperation and information-sharing with home and host
supervisors.
(Click here for further details on Memoranda of Understanding)
Financial stability
Enhancing financial stability became a core task in 2008, and in this area, the Bank took two
important steps during the year. First, the Bank ensured closer coordination with the
Financial Services Commission through the new Joint Coordination Committee (JCC). The
enhanced collaboration helps to avoid regulatory gaps and the JCC will improve cooperation
on supervision, by establishing a lead regulator for each financial institution. The second
initiative in the pursuit of financial stability is the publication of the Bank's very first Financial
Stability Report (FSR) in line with an explicit requirement of our enabling Act. As I mentioned
Financial Stability Report provides a useful communication
in the Foreword of the FSR, "The
tool about existing and potential future risks to financial stability and can serve as a means of
focusing efforts to mitigate the key risks." The FSR identified certain areas of vulnerabilities
and proposed specific measures. It also unveiled the Mauritius Exchange Rate Index to track
the average value of our currency against currencies of our trading partners. The FSR will be
published twice a year.
(Click here for details on the Mauritius Exchange Rate Index)
Basel II
Notwithstanding some weaknesses in Basel II which have been brought to the fore by the
global crisis, the Bank endorses the stand of the Basel Committee on Banking Supervision
for a prompt implementation of the Basel II framework with its increased sensitive
measurement of risks and enhanced market transparency. The Bank issued various
guidelines required for the implementation of the standardised approaches of the Basel II
framework. The way was thus cleared for the Basel II framework to become operational as
from the quarter ending 31 March 2009.
(Click here for the January 2009 Communiqué on Basel II)
Islamic banking and Islamic money market
In 2008, we made significant progress in the introduction of Islamic banking in the country.
We issued guidelines on Islamic banking after a process of intensive consultation through a
multi-disciplinary sub-committee which the Bank spearheaded.
Guideline for Institutions Conducting Islamic Banking Business
The became effective at
endJune 2008, and amendments were brought to the Income Tax Act and other relevant Acts to
take into account the specificities of Islamic banking. The Bank approved two Islamic
Banking applications and we expect these institutions to start operation soon. One of these
entities is headquartered in the Gulf region.
The Bank has recently embarked on another major project, the development of an Islamic
money market and liquidity management framework. This will allow Islamic banking
institutions to conduct interbank transactions for the management of short-term liquidity and
have access to Sharia-compliant money market products. The Bank is working closely with
the Islamic Development Bank in this respect. In May this year, we shall be hosting an
international seminar on Islamic Capital Markets in collaboration with the Islamic Financial
Services Board.
AML/CFT measures
The maintenance of our reputation as a clean financial centre continues to be one of our
priorities. The Report of the Joint World Bank-IMF Financial Sector Assessment Programme
(FSAP) mission of 2007 commended the Bank on its Anti-Money Laundering and Combating
the Financing of Terrorism regime.
(Click here for excerpts of the FSAP Report on Money Laundering)
Reinforced regional presence
I have always been a firm proponent of regional economic cooperation as I believe that
building ties with other countries in the region is vital for a small country like Mauritius. In
2008, we have seen much progress on this front.
Following a decision of the COMESA Committee of Governors of Central Banks (Tripoli,
Libya, November 2007), the Bank was appointed to act as the settlement bank for the
Regional Payment and Settlement System (REPSS) of the COMESA Clearing House to
allow cross-border payments between COMESA member-states. In April 2008, the Bank
organised a workshop for all COMESA central banks on the functioning of the REPSS.
During the year, the Bank also hosted the Eastern Africa Sub-Regional meeting of Governors
of the Association of African Central Banks and facilitated the Board Meeting of the African
Export-Import Bank, which was held in Mauritius.
The global financial crisis also brought African Central Bank Governors together to explore
the way forward.
•
I attended the meeting of African Ministers of Finance and Governors of Central
Banks (Tunis, November 2008), which was convened jointly by the African
Development Bank, the African Union, and the United Nations Economic
Commission for Africa, to assess and exchange notes on the evolving situation and
to identify measures that could effectively be taken. At the end of the meeting, I was
privileged to join a handful of Ministers/Governors in a teleconference with the US
Treasury on the eve of the first G-20 Summit in Washington on the global crisis.
•
In December I attended the meeting of francophone Governors which the Banque
Centrale de L'Afrique de L'Ouest hosted in Abidjan to examine the impact of the
crisis on the countries of the African Francophone Group at the IMF and the World
Bank.
The comparative performance of our country in the region was very creditable, as illustrated
for example, by the World Bank's 2008 "Banking the Poor Report". Mauritius is the league
champion in terms of financial access with over 2000 accounts per thousand adults. We
came third, behind Malaysia and Singapore, in this global survey. This publication, which
explores associations between banking policies and practices with the level of financial
access in the selected countries, had its world-wide launch at the Bank of Mauritius
Headquarters in November 2008.
Monetary policy
The exceptional capital inflows at the beginning of 2008, to which I alluded earlier, put
significant pressure on monetary matters for our small economy. They cause the rupee to
appreciate and fuelled the rising rate of price inflation, already affected by the unprecedented
spike in oil prices and the steady increase in prices of food and commodities. The Bank was
therefore confronted with the combined challenge of combating inflation and preserving the
competitiveness of the export-oriented sectors. The Monetary Policy Committee (MPC),
normally set to meet on a quarterly basis, met eight times in 2008 with interim meetings
having to be called to deal with rapidly-changing conditions.
(Click here for further details on the work of the Monetary Policy Committee)
With rising inflation, the Bank continued with its tight monetary policy in the first quarter of
2008. Unpredictable developments on the international scene in the second quarter, coupled
with our own projected inflation, compelled the Bank to ease its stance a little in the second
quarter. An expansionary budget, handed down in June 2008, coupled with a generous
wage-award for the civil service which raised the spectre of wage push inflation, further
complicated the situation in the third quarter before currency volatility, stock market
nervousness, financial turmoil and the global economic slowdown threw things in complete
disarray in the last quarter. Policy actions were coordinated with Government. During 2008,
the Key Repo Rate was cut by a total of 250 basis points to stand at 6.75 per cent at the end
of the year.
(Click here for evolution of the Key Repo Rate in 2008)
The decisions of the MPC, which are taken by simple majority, became mired in controversy.
This, in turn, provided fertile ground for lobbyists and other pressure groups to seek to
influence outcomes in their favour.
In addition to the interest rate decisions of the MPC, the Bank had recourse to other tools to
respond to abnormal monetary and credit conditions. Owing to structural excess liquidity in
the system, the overnight rate had remained persistently outside its set limits (the corridor)
since the framework was introduced in December 2006. The Bank increased the Cash
Reserve Ratio (CRR) from 4 per cent to 6 per cent in August. This resulted in the rate falling
rapidly back within the limits of the corridor. However, in view of the rapidly-changing global
environment, the Bank subsequently reduced the CRR first to 5 per cent and then to 4.5 per
cent in December, to ensure that the system had sufficient liquidity. Another measure that I
considered necessary in the circumstances was the widening of the corridor from the
symmetric band of 50 basis points to a band of 125 basis points around the Key Repo Rate.
(Click here for further details on other measures aimed at strengthening the Monetary
Policy Framework)
When we compare with many other emerging economies, which are as dependent on
imports as Mauritius, we have little reason to be too unhappy as we have managed to keep
inflation at reasonable levels. And this year, we have the extra burden of having to counter
the knock-on effects of the global economic slowdown on Mauritius, especially on our
exportdependent sectors such as tourism and manufacturing.
To deliver on our mandate to fight inflation, the Bank invested resources in capacity-building.
In July 2008, the Bank hosted a regional seminar on Inflation Targeting, Modelling and
Forecasting, in collaboration with the Centre for Central Banking Studies of the Bank of
England (CCBS). Held at the Bank's Headquarters, and attended by central banks in the
region, the seminar set a new attendance record in the entire history of the CCBS.
We also published our first Inflation Report in November, to fall in line with a requirement of
the Bank of Mauritius Act 2004. This report retraced the historical pattern of inflation in
Mauritius, and offered valuable insights into the critical factors affecting fluctuations in prices,
which may serve as a guide for the future. We intend to publish Inflation Reports twice per
year.
Domestic debt management
An important development in 2008 was the take-over of debt management functions, both
Domestic and External, from the Debt Management Unit of the Ministry of Finance and
Economic Empowerment. The new arrangement, which took effect from 1 July 2008, under
an agreement reached by the Bank with the Ministry of Finance and Economic
Empowerment, also requires the Bank to advise on the debt management strategy. Jointly
with the Commonwealth Secretariat, the Bank organized, at the end of 2008, a
two-week Workshop on Debt Recording and Management for staff members of the Bank,
and officers from both the Ministry of Finance and Economic Empowerment and the National
Audit Office.
Domestic foreign exchange market
During 2008 there were erratic movements in the foreign exchange market. This reflected
rapid and substantial global fluctuations. The Bank intervened regularly on the market and by
the end of the year, we succeeded in significantly dampening volatility.
(Click here for further details on Intervention on the Foreign Exchange Market)
There have been different views, some quite vociferous, on how "weak" or how "strong" the
rupee should be, depending from which side of the market one is operating. Any
orchestration of demand for a central-bank-led depreciation of the Mauritian Rupee fails to
appreciate the serious ill effects of a highly devalued currency for a small import-dependent
open economy like ours. Its consequences could be disastrous if a self-accentuating
expectation is fuelled with instant pass-through into domestic inflation.
The Bank believes that both sellers and buyers should get a fair price. One way of achieving
this is by reducing the cost of intermediation. The Bank has been addressing this in two
ways. First, the Bank has agreed to buy and sell foreign currency directly in a structured
manner from/to those in the market that have, or require them, in large quantities. Second,
with a view to spurring greater competition, the Bank issued licences to 14 new Money
Changers and one Foreign Exchange Dealer on a revised set of conditions.
Whilst the Bank does not target any specific exchange rate against any particular currency
and is not itself in a market-maker, we do have a key role in market management. This is a
matter of continual review by the IMF which commented favourably on the functioning of our
interbank foreign exchange market in its 2007 FSAP Report. We can say that the foreign
exchange market has functioned well in 2008.
(Click here for excerpts on Exchange Rate from the IMF)
Changes in our financial landscape
The year 2008 witnessed some significant reshaping of the banking scene in Mauritius. Two
banks had new shareholders and two others merged into one, leading to three new names
being added to the list of operating banks, while four were de-listed. Whereas the current
trend worldwide is to effectively nationalise banks as part of the response to the credit
crunch, in Mauritius we have the reverse situation - the public sector selling its majority
interest in one of the banks to private sector operators.
Strengthening of interaction with the banking industry
At the apex level, collaboration between commercial banks and the Bank occurs through the
quarterly Banking Committee meetings in which Chief Executives of all banks and the
Mauritius Bankers Association (MBA) participate. The Banking Committee is not confined to
supervision and regulation alone but covers the entire gamut of issues relating to banks. I
have increased interaction with the banking industry since June 2008 when I initiated
meetings with the Bureau of the MBA, comprising the Chairman, the two Vice-Chairmen and
the Chief Executive, in-between the regular Banking Committees.
The Banking Committee operates a number of sub-committees to examine certain areas in
detail - compliance, treasury and payments system.
Information technology
Banking technology has been evolving rapidly and has become a key driver of financial
sector efficiency. On the technological front, the Bank has embarked on various projects
which are at different stages of implementation:
•
The Cheque Truncation Project
•
The Mauritius Automated Clearing and Settlement System
•
The Regional Payment and Settlement System
•
The Mauritius Credit Information Bureau
(Click here for further details on Information Technology projects)
Towards a more modern and efficient Bank
In 2008, we have moved to a new building, the Bank of Mauritius Tower. This has been a key
element in the transformation of the work of the Bank now that it is properly housed and
equipped with advanced information and communication technology.
(Click here for further details on the New Headquarters Building and the Regional
Office in Rodrigues)
The restructuring
A modern and efficient institution requires a workforce that has the requisite skills and
knowledge. In 2008, we rejuvenated and strengthened the workforce by recruiting additional
staff and promoting others in some critical functions of the Bank. To meet the need to
constantly upgrade and develop skills, more than 50 officers, out of a total professional staff
complement of around 125, were sent on training courses abroad. These covered a wide
range of topics, such as Monetary Policy, Payment and Settlement Issues, Supervision, and
Accounting and Auditing for central banks. The programme of continuing education and
training will make further progress in 2009 with a special focus on International Financial
Reporting Standards.
In 2009, we are organising a calendar of in-house training sessions for all levels to make the
Bank an organisation in which staff are multi-skilled, flexible, adaptable, innovative and able
to think laterally. Some of the courses include customer care, executive programmes for
effective management and leadership, efficient communication and a better understanding of
applicable law, including the Bank of Mauritius Act itself.
This year we are also targeting our Rodrigues Office for special attention. The staff will have
the chance to come to the head office at regular intervals on induction courses to involve
them more in the development of the Bank's operations and functions.
Bank charges - shop window for customers
Many people have complained to us about the variations in charges between banks and the
difficulties in finding out what they are. This is where a central bank can help to make
banking easier for the customers we all serve. We have addressed this issue during the year.
Since, November 2008, information on the fees and charges relating to normal services are
available, on a standard comparable template, to all customers online at
http://bom.intnet.mu.
Launching of commemorative gold coin
To mark the 40th anniversary of the independence of Mauritius, the Bank launched a limited
edition of a Commemorative Gold Coin to pay tribute to the Father of the Nation, Sir
Seewoosagur Ramgoolam. The Prime Minister attended the launch event. This gold coin
proved to be the fastest-seller in the Bank's history. The whole edition was sold within a
week. In 2009, we plan to launch a "Father of the Nation" platinum series.
Future projects
The Bank's financial markets function
In keeping with our modernization plan of the financial system, I will continue to encourage
the development of a vibrant futures and forward market. By mid-February 2009, the Bank
intends to move away from paper-based auctions of Government securities and Bank of
Mauritius instruments to online auctions.
Since I joined the central bank, it has been my aim to improve the returns on our foreign
exchange reserves. When I attended the International Monetary Fund/World Bank Annual
Meeting in 2007 and the BIS annual meeting of Governors last year in 2008, I engaged in
consultations with those bodies for a peer review of our reserves management function.
In June 2008, a team from the World Bank Treasury's Sovereign Investment Partnership
(SIP) conducted an on-site peer review of our reserve management operations. In
September 2008, the BIS, which manages a part of our foreign reserves, conducted a similar
review as well as an evaluation of our investment and risk-control processes. The
recommendations of the BIS and SIP are under study and appropriate changes will be made
to our Financial Markets operations. We will, at the appropriate time, revisit our accounting,
provisioning and profit allocation policies, in consultation with our shareholder, the
Government of Mauritius.
We envisage to recruit an expert with international experience in financial markets to give
effect to the changes that we shall be introducing.
Special Data Dissemination Standard
In 2009, we shall graduate from the current General Data Dissemination System of the IMF,
in which Mauritius has been participating since September 2000, to the Special Data
Dissemination Standard. This will enable us to meet the needs of global financial markets in
the provision of timely and quality macroeconomic data. We are committed to develop the
quality of data in the areas where the Bank has responsibility within our national statistical
system.
We are improving the coverage of the balance of payments and the international investment
position through the conduct of surveys of the Global Business Licence Holders. The Bank
has enlisted the collaboration of the Financial Services Commission, our sister regulator, in
this exercise.
(Click here for further details on General Data Dissemination System and Special Data
Dissemination Standard)
Ombudsperson for banks
I am confident that in 2009, the Bank will proceed with the appointment of an Ombudsperson
for banks. As I have said on many occasions, for a small country of our size and the
expected workload, a single Ombudsperson for the entire financial services sector would
have been more appropriate so that the customer does not face jurisdictional issues.
Financial Literacy and Outreach Programme
We started a Financial Literacy and Outreach Programme when the Bank commemorated its
40 years in 2007. In 2008, talks were delivered by eminent financial sector personalities,
including Central Bank Governors. Dr Guy Quaden, the Governor of the National Bank of
Belgium, spoke on "The First Ten Years of the Euro. Achievements. Challenges. Lessons for
Other Parts of the World". We also recently had a lecture on "Applicability of International
Financial Reporting Standards to Central Banks" by Mr Ian Ingram, Director of Internal
Finance from the European Central Bank.
The Bank also organised programmes in local languages on the local radio/television. The
Bank intends to make such programmes a regular feature.
I thought I should mention here that the Bank does not have a specialised unit to take care of
communications, events and functions. All events hosted by the Bank are co-ordinated by
the Governor's office and organised by Staff who volunteer for the assignment.
Meetings attended by the management
The Governor and the Bank's two Deputy Governors, the Chief Economist and the Head of
Corporate Services attended a wide range of international meetings and seminars in 2008,
as part of the remit of the Bank for furthering international contact and for keeping abreast of
international developments with a view to improving the effectiveness and efficiency of our
services.
(Click here for further details on Participation in International Meetings and Seminars)
Very sadly, 2008 witnessed the tragic loss of one of Mauritius' most reputed bankers, Mr Anil
Guness, who died in the terrorist attacks in the Taj Hotel in Mumbai in November 2008 in the
same week in which he last came to the Bank to attend our Banking Committee meeting. We
shall miss his wise counsel and the sound judgments he brought to the work of the State
Bank and within the banking sector in Mauritius and beyond.
Finally, I must emphasise that both the Management and the Board are strong in their
resolve to take the Bank of Mauritius to greater heights in the days to come.
If we are to achieve our objectives, we need sufficient autonomy to do so, built on a close
working relationship with the Government to ensure our polices and actions are
complementary in our joint pursuit of economic and social development in this country.
2008 has been a year that will go down as a turning point in the history of global banking and
finance.
Even, as the Bank wishes a very happy and prosperous year to all our stakeholders, we
must all be conscious of the trials and travails that lie ahead in 2009, a year that could prove
still more turbulent as the global crisis may very well intensify further. In 2009, the Bank
needs to continue to be alert to the global financial and banking volatility and must be
especially vigilant in protecting our interests and judiciously managing our reserves. No
country has been immune to the crisis, but as light craft can in safe hands weather a storm,
so this small, vulnerable and highly open economy of Mauritius may be buffeted but will
maintain course and shall not be sunk.
The Bank of Mauritius will do all that is possible to ensure a safe passage through these
difficult times in matters of banking and financial policy and practice.
Best wishes for 2009.