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,
14 November 2013.
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The financial year 2012-13 has been challenging for the Bank as I had anticipated in my last
Statement, and we have continued to be tested by international and domestic pressures. The
long-running financial crisis has now entered its sixth consecutive year. The global economy
has remained under stress - the US witnessed timid growth, the euro area temporarily
slipped into recession, the UK avoided "triple-dip" recession, and growth in emerging
economies moderated. Occasional bouts of volatility in financial markets complicated the
lingering global uncertainty. With monetary policy loose and fiscal space limited, particularly
in the advanced economies, capital flows worldwide have been relatively more volatile as
investors responded to uncertainty in major advanced economies. This impacted adversely
on some emerging economies with rising inflation, capital outflows, and sudden depreciation
of their currencies. Policymakers around the world introduced several non-conventional
measures to calm financial markets and provide confidence to investors.
The Mauritian economy grew at a relatively healthy rate of 3.4 per cent in 2012 despite the
negative sentiment that prevailed during much of that year. Headline inflation came down
from 4.9 per cent in July 2012 to 3.6 per cent in June 2013 while year-on-year inflation
stabilized, decreasing marginally from 3.7 per cent to 3.6 per cent. The increasingly
diversified nature of our economy in terms of markets and products, and prudent and
appropriate fiscal and monetary policies implemented during the year, maintained
macroeconomic and financial stability in the country. We benefited from a steady flow of
foreign direct investment, not far from previous highs, during the period. Unemployment
hovered around 8.1 per cent in 2012, a level that I do not consider alarming in the current
context, especially if account is taken of chronic over-reporting, continued skills mismatch,
and labour market inflexibility which induces employers to have recourse to foreign labour.
During the year, the Bank was called upon to respond rapidly to the changing dynamics at
the international level as well as on the domestic front.
Operation Reserves Reconstitution
In June 2012, the Bank launched the Operation Reserves Reconstitution (ORR) - an
unconventional measure for the Bank of Mauritius which had pursued a free-floating foreign
exchange regime until as recently as November 2011. The currency appreciation was getting
quite alarming at the time and required urgent policy responses on our part. The ORR
allowed us to address not only the growing appreciation of the rupee but to build up our
reserves which crossed the Rs100-billion threshold in May 2013. We are today well on our
way to achieve the target of six months' import cover.
The ORR resulted, however, in excess rupee liquidity in the domestic money market and the
Bank had to conduct open market operations to mop up the surplus. We had to complement
the issue of Government securities with our own paper which reached a record level of
almost Rs19 billion. This came with a cost and weighed heavily on the Bank's balance sheet.
The continuation of open market operations at the same level as in recent months will rapidly
become unsustainable for us. A few years ago, I had flagged this issue. Today, I am
renewing my call to the authorities to share the burden as it is certainly not in the interest of
the nation to have a central bank with weak finances.
Ponzi Schemes
At the beginning of 2013, we were hit by a spate of financial scams. Scammers, using the
loopholes in the regulatory framework, lured the public into investing in schemes that
promised extravagant returns - which in fact turned out to be Ponzi Schemes.
This was a
wake-up call for regulatory and other authorities to review their operations as they relate to
detecting and combating financial crime. When the Ponzi Schemes were uncovered, the
Bank stepped in to manage the crisis and reassure victims by setting up a help desk to
attend to the grievances of the public. The number of known victims of the six companies
involved in the financial scams, who lodged complaints at the Bank reached 2,290 and the
total defrauded amount stood at Rs835 million by 28 June 2013. The figure is rapidly nearing
the Rs1 billion mark.
We undertook a series of actions to deal with the problem; most notably we sought the
assistance of the Reserve Bank of India (RBI), which has first-hand knowledge of the matter.
The RBI team's recommendations range from the reinforcement of Know Your Customer
procedures and due diligence in banks, the setting up of dedicated cells to gather market
intelligence, to enhanced coordination among regulators. These recommendations are in line
with the restructuring and redefining of our mandate. They reinforced our commitment
towards financial literacy, consumer education, and fair treatment of consumers, on all of
which we had initiated work in early 2012. The Task Force on Unfair Terms and Conditions in
Banking and related Financial Contracts was set up in July 2012 to investigate into the terms
and conditions of contracts, including fees, commission and charges. The public was invited
to make representations. We hope to be able to share the work of the Task Force with the
public in the course of the coming year and, hopefully, pave the way for a better deal for
users of banking and financial services.
Modernisation of the banking sector
We pursued our efforts to modernise the banking sector and enhance the soundness of our
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banks. We granted our bank licence to a new bank which started operations in February
2013. We were concerned with the need to protect the cross-border branches of foreign
banks operating in our jurisdiction from potential problems of their parents in their home
country. We encouraged foreign bank branches to convert into subsidiaries. The proposal of
Barclays Bank PLC Mauritius Branch, to convert itself into a wholly-owned subsidiary
provided us with the opportunity to expand our legal arsenal with new provisions to aid such
restructuring.
Our concern for ensuring financial stability further motivated us to consider the case of large
and complex local banking institutions - an ever-present danger in a country where 65 per
cent of bank assets are controlled by two banks. We are in the process of putting up a
framework for Domestic Systemically Important Banks, wherein stricter requirements
including the imposition of capital surcharge will be applicable. We issued a consultation
paper outlining our proposal to the industry for comments.
We also brought important changes in the board room of banks, requiring diversity of board
members, competence and periodic term renewal. I once reflected that a crisis is too good to
be wasted - the global regulatory reforms were mirrored in our own efforts to strengthen the
resilience of our banking sector. In May 2013, we issued a draft guideline on Basel III after
we had circulated a consultation paper to the industry in October 2012. We continued our
work on the setting up of Supervisory Colleges in Mauritius for our banks with cross-border
operations. We expect to hold the first Supervisory Colleges later in the year.
Our banking sector assets grew at the rate of 10.2 per cent. The month of May 2013 also
saw banking assets exceeding the Rs1.0 trillion mark for the first time. Profit after tax
maintained its upward trend and the capital adequacy ratio of banks remained well above the
regulatory requirement of 10 per cent. Nonetheless, the growing non-performing loans and
the concentration of risks in our banking sector continued to raise financial stability concerns.
We started work during the year on the introduction of a wide range of macroprudential
measures to contain banking sector risks.
At the heart of a modern economy is a robust and efficient payments system. The Cheque
Truncation System, introduced the year before, saw the end of physical exchange of
cheques on the Bank's premises on 31 January 2013.
International regional role
We continued to participate actively in regional fora organized by SADC, COMESA and
AACB and brought our contribution to discussions relating to regional issues. The COMESA
REPSS went live in October 2012. We were privileged to host in November 2012 the second
meeting in Africa of OMFIF, which regroups diverse players from the public and private
sector, central banks of developed and developing economies, sovereign wealth funds, and
academia. Nearly 100 delegates from Europe, Africa, Asia and Latin America participated in
the meeting.
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On 30 August 2012, at the conclusion of the Assembly of Governors of the AACB in
Algeria, I assumed the Vice-Chair of the AACB, with Governor Mohammed Laksaci of the
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Bank of Algeria in the Chair. In August 2013, the Bank hosted the Assembly of Governors
of the AACB - the first time in its 45-year history that the AACB has held its meeting away
from Continental Africa - and I took over the Chair for a one-year term. Almost
simultaneously, I was appointed by the FSB RCG for Sub-Saharan Africa as its non-FSB
member co-chair for a two-year term starting 1 July 2013.
Over and above the Governors who participated in OMFIF and AACB meetings in Mauritius
during the year, I welcomed Ms Christine Lagarde, Managing Director of the IMF, Dr Duvvuri
Subbarao, Governor of the Reserve Bank of India, and Mr Martin Redrado, former Governor
of the Central Bank of Argentina.
Monetary Policy Committee
Since its inception in April 2007, the Monetary Policy Committee (MPC) witnessed several
changes. 30 meetings have been held of which 29 were interest-rate-setting meetings. The
MPC was reconstituted, for the second time, in December 2012 and the total number of
members was reduced from nine to eight, comprising namely, the Governor, the two Deputy
Governors, two members appointed by the Prime Minister, and three members appointed by
the Minister of Finance and Economic Development. It was also explicitly laid down in the
Bank of Mauritius Act that the MPC has to take into consideration the views of the Bank, the
Ministry, and any other appropriate institution. Furthermore, the MPC adopted a Code of
Conduct for its members.
During 2012-13, the MPC met on four occasions. At the first three meetings, the Key Repo
Rate (KRR) was left unchanged at 4.9 per cent. In June 2013, the MPC, at its second
meeting in its third reincarnation, took the decision to cut the KRR by 25 basis points to
per cent by majority vote - outvoting my two Deputy Governors and myself who
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preferred to adopt a more prudent stance in the face of growing vulnerabilities in the financial
system. Monetary-policy-making is a forward-looking exercise, requiring objectivity and
independence of mind, and should, in my view, be ideally operationally-independent of
Government. The mandates of fiscal and monetary authorities are not necessarily
incompatible - the overriding objective remaining the well-being of the nation. Indeed, fiscal
and monetary coordination is a two-way traffic requiring mutual adjustment. At the June 2013
MPC meeting, the representation of the Ministry weighed on the final assessment of MPC
members and resulted in an interest rate decision that the Bank did not consider fitting in
then economic circumstances.
Transforming the Bank of Mauritius into a modern central bank
We carried on the process of modernising our statistical operations. We pursued our efforts
to meet the highest standards applicable to balance of payments and monetary and financial
statistics in terms of quality and frequency - SDDS+.
We launched our first polymer bank notes, a major innovation in bank note technology, in
August 2013. We seriously considered this alternative as far back as 2008 but our earlier
attempts to introduce polymer notes ran into legal hurdles and we first had to change the
applicable law before we could proceed - thus missing our chance to be the first in Africa. As
I write this Statement, polymer bank notes in three denominations of Rs25, Rs50 and Rs500
are circulating in parallel with paper bank notes.
In the wake of the global financial crisis, banking has become a 24-hr operation. Banks are
evolving in an extremely dynamic and competitive environment. Financial institutions are
more and more stretching regulations to outwit regulators; and we regulators, need to
continuously strive to keep ahead of them. The demands on the Bank are becoming more
and more exacting by the day. The restructuring of the Bank, which I initiated in 2007, is
ongoing. Our headcounts are among the highest, on a per capita basis, amidst our peers and a
more flexible approach is needed to attract new talents. Fresh skills have been recruited to
complement our pool of talents in new areas of business, for example, reserve management.
A review of the salary and conditions of service at the Bank was conducted to align them with
market trends, attract new talents as well as retain existing ones. The salary review includes
a Performance Management System which will be introduced this year, paving the way for a
mechanism that relates work performance and remuneration. These developments should
translate into efficiency gains and allow the Bank to keep up to the mark when it comes to
expected outcomes even if they exert pressure on our overhead expenses.
Words of Appreciation
In May 2013, our Prime Minister, Dr The Honourable Navinchandra Ramgoolam, GCSK,
FRCP, appointed me for a third term of office. I am deeply touched by this mark of continued
confidence in my abilities to lead the Central Bank. I will endeavor to uphold the trust placed
in me and I am sincerely indebted to him for the unflinching support he extended to me since
the beginning of my tenure of office.
I have worked closely with the Honourable Charles Gaëtan Xavier-Luc Duval, GCSK, Vice-
Prime Minister and Minister of Finance and Economic Development, and his team during the
year. We have often had diverging views on our assessment of the economic situation.
Indeed it is common for Treasuries and Central Banks to have occasional differences when it
comes to economic, financial and monetary policies - which our lively local media, and some
interested lobbies, magnified. Here, we have different mandates but we both have the
economic welfare of the Mauritian population at heart. I thank the Honourable Minister and
his team for the cordial working relations between ourselves and between our respective
staff, in particular at the level of different regular joint working committees.
I have a special word of appreciation for the strong bond of partnership that now exists
between the Central Bank and the banking community. Our regular dialogue and frequent
consultations have strengthened our collaboration. I therefore thank all stakeholders, in
particular, Chief Executives of banks and the Chairman and the Chief Executive of the
Mauritius Bankers Association, for joining our efforts for the advancement of the banking
sector.
Finally, I need to express my sincerest appreciation to my two Deputy Governors, the Head
of my Governor's Office, my Heads of Division, and the Staff of the Bank for their support
and commitment throughout the past year.
Looking ahead
There are increasing signs that we are nearing the end of the crisis with visible signs of what
looks like a sustainable recovery. I never tire of saying that the best contribution that the
Central Bank can make to the nation is to maintain price and financial stability - this is our
raison d'être. Our heightened profile at the international level puts us in a position where we
can make a significant contribution to issues of relevance to central banks well beyond our
own frontier.
Over the years, we have transformed our economy to make it more diversified and resilient.
Had we not engaged in, at times, painful reforms, we would have been hit harder by the
crisis. We need to pursue these reforms and develop new drivers of growth that can take our
economy out of the middle-income trap to a higher-income-level economy. Development, like
life itself, is a journey and not a destination. The reforms must continue if we are to maintain
our preeminent position in Sub-Saharan Africa.