Rundheersing Bheenick: Review of the year gone by and reflections on
the present and future outlook
Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis,
7 October 2011.
* * *
As I settled down to write this, it struck me that what I had described as "stressful and
extraordinary times" in my previous Statement seem set to last for quite some time. The
global economy has become even more unpredictable and much of the traditional thinking is
being put to the test as longheld paradigms are thrown overboard. Hopes of a quick and
easy recovery faded away rapidly. New threats have emerged. Persistent Eurozone
sovereign debt concerns have thrown markets into turmoil, driving bond-yields of vulnerable
economies to record highs.
The situation has been no less alarming on the other side of the Atlantic where Standard &
Poor's downgraded the credit rating of the US, a debt default was averted in extremis, and
financial markets plunged. Business sentiment and consumer confidence have nosedived as
businesses and households postpone spending and consumption. All these, together with
jittery markets hungry for good news that, when they come, prove all-too-fleeting, make this
super-cycle one of the most volatile ever witnessed.
In most advanced economies, the global recession had a negative impact on budgetary
conditions, with many governments gradually adopting austerity measures. Under the
pressure of market sentiment, fiscal consolidation and structural adjustments have become
the order of the day.
Emerging economies could not long survive unscathed. So it has been for Mauritius. As we
engaged to deal with these snowballing challenges, the Bank remained alert and nimble,
taking decisive and timely action to protect the interest of the Mauritian economy.
As in years past, let me recapture the highlights of the year gone by and briefly comment on
the present and future outlook.
 The financial health of our banks was at the top of our agenda. They remained
resilient and profitable, with aggregate pre-tax profits standing at Rs13.3 billion in
2010/11, as against Rs13.9 billion in the preceding year.
 A sure sign of the fine health of our banking sector was the entry of additional
operators on the banking scene, with (i) the conversion of a non-bank deposit taking
institution into a full-fledged bank in June 2010 and (ii) the first Islamic bank starting
operations in March 2011.
 The Monetary Policy Committee (MPC) took a number of proactive measures during
the year. When the economic climate showed signs of losing momentum, the MPC
decided unanimously in September 2010 to lower the Key Repo Rate (KRR) by a
full 100 basis points, to support the on-going restructuring of enterprises. This policy
decision went in the opposite direction of the stance that most central banks were
adopting at the time. We were vindicated in our decision when domestic data
releases in the first half of 2011 indicated that the economy was performing well
despite the uncertain global economic environment. However, since inflationary
pressures started building up, the MPC adjusted its monetary policy stance and
proceeded to two successive hikes in the KRR in March and June 2011. Inflation
rose sharply from 1.7 per cent in June 2010 to 5.1 per cent in June 2011.
 The year was characterised by a system plagued with excess liquidity, a situation
diametrically opposite to what prevailed in many leading economies. The Bank
innovated by issuing instruments of longer maturity, namely Bank of Mauritius Notes
of 2-Year, 3-Year and 4-Year maturities. To complement these measures, we raised
the Cash Reserve Ratio in successive steps from 5.0 per cent to 7.0 per cent. The
measures were so successful that the excess reserves disappeared, with the
system even experiencing short bouts of liquidity stress.
Faced with the impact of the low interest rates on our investments in the major

currencies, we actively pursued our reserves diversification strategy - you will
remember that we had more than doubled our gold holdings to around 6 per cent of
our reserves. We reduced our percentage holdings of US dollars which stood at
around 70 per cent in 2001 down to around 30 per cent currently. We increased our
holdings in high-yielding currencies - namely New Zealand dollars, Australian
dollars as well as the Danish krone and the Swedish krona - and our investment in
Fixed Income Securities. We entrusted a new mandate for the management of
150 million euros to the Bank for International Settlements. We added the Sovereign
Investment Partnership of the World Bank as a portfolio manager for an initial
tranche of 100 million US dollars. These initiatives are already bringing results and
have strengthened our balance sheet. Discussions are on-going for the investment
of part of our reserves in the securities of some BRICS, namely India, South Africa
and China.
 We have consolidated our foreign exchange reserves during the year. The gross
official international reserves of the country increased from Rs70.1 billion at the end
of June 2010 to Rs81.7 billion at the end of June 2011. Furthermore, the import
coverage of the country's net international reserves increased from 39.5 weeks at
the end of June 2010 to 41.5 weeks at the end of June 2011.
 Currency markets showed very high volatility throughout Financial Year 2010/2011.
In spite of this turbulence, we succeeded in maintaining a fairly stable exchange rate
during the year under review. As observed by the International Monetary Fund in its
Article IV Consultation Report of February 2011, our currency was broadly in line
with economic fundamentals.
 While in most advanced economies, there was a marked deterioration in the public
accounts, our public finances have proved to be quite resilient to shocks. Public
sector debt remained quite close to the statutory level of 60 per cent of GDP. From
57.7 per cent as at end-December 2010, it fell to 55.9 per cent at end-June 2011.
Moody's rating of Baa2 and stable outlook for Government of Mauritius bonds
reflected the healthy state of our public finances.
 We struck a major blow for transparency when we took the bold decision to publish
the CAMEL Ratings of all banks in the country. The first ratings were published in
April 2011 and it is hoped that making these ratings widely available will lead to a
better-informed consumer while encouraging banks to keep up their performance.
 The Bank, now a full member of the Islamic Financial Services Board, pursued its
efforts to consolidate the enabling environment for Islamic finance. We joined in the
global initiative to launch the International Islamic Liquidity Management Corporation
as a founder-member in October 2010, along with ten other central banks and two
multilateral organizations. We provided for staff training in Islamic finance under the
Memorandum of Understanding (MoU) which we signed with Bank Negara Malaysia
in October 2010.
We also joined the International Association of Deposit Insurers as an Associate

member as we are actively working towards the establishment of a deposit
insurance scheme for Mauritius.
 During the year in review, in collaboration with the banking sector, we put in
significant efforts to accelerate the upgrading of our national payment system to
enable the clearing of cheques electronically. I am pleased to report that the cheque
truncation system is now a reality in Mauritius and cheques are cleared in real time.
I shall come back on this development in my next Statement.
 We made much headway in consolidating our position on the regional front. The
Bank of Mauritius was appointed as the Settlement Bank of REPSS, the Regional
Payment and Settlement System, to assist the cross-border payment and settlement
needs of exporters and importers of COMESA member-states through their
respective Central Banks. We are all set for REPSS to go live soon. The System will
allow for same day settlement at much lower cost as compared to the current
system which relies on settlement via universal banks established in money centres.
We are also looking into the possibility of extending the REPSS platform to countries
beyond COMESA.
 In our endeavour to strengthen relations and bilateral ties with peers in the region,
we welcomed Governor Laporte of the Central Bank of Seychelles at the head of a
delegation to share our experience in certain areas of central banking. We hosted
the 31st Meeting of the Bureau of the COMESA Committee of Governors of Central
Banks in August 2010.
 A further focus this year was our enhanced Communication and Outreach
Programme. The most direct form of communication was through a program of
regular speeches by senior Bank officials, including myself. In fact, a record number
of speeches have been uploaded on the Bank's website to inform the public on the
thinking of the Bank on various issues of topical interest. The MPC Statement and
the post-MPC press conference have become reference points for the media and
the public at large, including Mauritius-watchers overseas. The decision-making
process of the MPC has thus become more transparent, enhancing its
accountability.
 We also received the visit of eminent speakers from abroad, namely Paul Collier,
Professor of Economics and Director of the Centre for African Studies, University of
Oxford who delivered a talk on "Central Banking Challenges in Africa", and Mr
Steven Barrow, Head of G10 Strategy at Standard Bank London, who addressed
the topic of "Making Policy in a Difficult Global Environment".
 As indicated in my previous Statement, we concluded and signed an MoU with the
Competition Commission of Mauritius to promote and maintain a competitive and
sound financial environment in Mauritius.
 As a responsible citizen, the Bank brought its contribution for a greener Mauritius
with the creation of a Bamboo Garden in the Midlands region situated in the central
part of the island. We sought the expertise of the Agricultural Research and
Extension Unit of the Ministry of Agro-Industry and Food Security to assist us in
developing the Bamboo Garden and we accordingly entered into an MoU with them.
At the time of writing this Statement, the project is under implementation.
 Still in the context of its programme of Corporate Social Responsibility, the Bank
sponsored the National Inter Club Youth Championship for the fourth consecutive
year in Mauritius and for the second time in Rodrigues.
 Tenders were launched for the construction, on a D&B basis, of the Bank's regional
office at Rodrigues.
 We pursued our policy to enhance the professional competence of our staff to
respond to the new exigencies facing central banks. Human resource development
continued to be one of our top priorities. Training was mainly in the fields of bank
supervision and macroeconomic modelling.
Looking ahead
Our monetary policy framework has achieved commendable credibility in a short period and
has even been held up as a model for similar countries by the IMF. But after four years of
operation, our MPC was ripe for a review. Sir Alan Budd, a well-known figure in the world of
finance in the UK and a founder-member of the Monetary Policy Committee of the Bank of
England, conducted an in-depth review of the MPC. One of the areas he was specifically
asked to look into was how to enhance transparency and communication. Sir Alan Budd's
recommendations took on board our proposals to publish both the minutes of meetings and
the pattern of individual votes. The recommendations will take effect as from the next MPC
meeting (December 2011). So we will be looking at a still more transparent MPC, which will
without doubt enhance its credibility.
We also have plans in the year ahead to deepen our financial market through the listing of
Government securities on the stock market and conducting single-maturity auctions. By the
time this Report would be in the public domain, we would be holding the online auctioning of
Government paper.
The global financial crisis has highlighted the issue of systemically important financial
institutions. In our case, the concern is the high degree of concentration in the banking
sector, which I have raised in recent public addresses. In view of the likely implications on
financial stability, the Bank intends to deal with this issue in collaboration with the banking
industry.
Our country has garnered considerable praise internationally for what we have achieved so
far. We continued with top rankings in leading league tables such as the Index of Economic
Freedom, the Corruption Index of the Mo Ibrahim Foundation, the World Bank's Ease of
Doing Business index, the Global Competitiveness Report etc. But, as investment advisers
are supposed to warn their customers, past performance is no guarantee of future results.
The heightened uncertainty and the turbulent external environment mean that the winners of
to-morrow will be those who can adapt and evolve faster than the competition to the
changing environment.
My gratitude goes to Dr the Honourable Navinchandra Ramgoolam, GCSK, FRCP, our Prime
Minister, for his unstinting support during my second term of office. The year under review
started with Hon. Pravind K. Jugnauth, MLA heading the Treasury. I record my thanks to him
for the cordial working relations that we enjoyed during his tenure of office. After the Cabinet
re-shuffle of August 2011, Hon. Charles Gaëtan Xavier-Luc Duval, GCSK, MLA, took over as
Vice-Prime Minister and Minister of Finance and Economic Development. I look forward to a
fruitful working relationship with him as the Treasury and the Central Bank, with collective
resolve, move the country forward.
I seize the opportunity to thank the Chairman and the Chief Executive of the Mauritius
Bankers Association, the Chief Executives of banks and all the stakeholders with whom I had
the pleasure of working and thank them for their collaboration and contribution to the
considerable work undertaken by the Bank during this past year.
I also extend my appreciation to my two Deputy Governors and to the staff of the Bank for
their contribution to the Bank's work.
As this Annual Report goes to press, the crisis is very much on and no one can really say for
sure where the global economy is heading. Against this brittle setting, we will put in every
effort to shore up our economy, particularly the banking sector, to make it less sensitive to
external shocks. We will ensure that we will not compound these external shocks by
domestic policy mistakes. The challenges on the horizon call for an exceptional degree of
vigilance and enlightened policymaking. I trust that our countrymen will live up to these
expectations.