Rundheersing Bheenick: The role of international trade and trade finance
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the
Presentation on Afreximbank to the Mauritian Business Community, Port Louis, 16 June
2009.
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Good morning ladies and gentlemen
It is with great pleasure that I welcome you all today to this Presentation of the
Afreximbank. I extend a particularly warm welcome to Dr Oramah and Mr Chafa. This is a
critical element in what might be called our frontier expansion policy, creating extended
links between the core role of a central bank and the wider pastures of trade and the real
economy. Last month at about the same date, the Bank was co-hosting the first Seminar of
the Islamic Financial Services Board in Mauritius. Today's event is the fruit of the
collaboration of our two institutions, Afreximbank and Bank of Mauritius.
On the occasion of a Board Meeting of Afreximbank held in Mauritius in December last, I had
drawn the attention of the President and Chairman of the Board of Afreximbank, Mr
JeanLouis Ekra, on the lack of awareness about Afreximbank's programmes and facilities by the
business community and I had expressed my views on how a knowledge of Afreximbank's
products could represent a useful tool in the promotion of market and product diversification
of our trade. I am extremely delighted that the President of Afreximbank has responded
positively to my request and I convey my heartfelt thanks to him.
Today's event gives me the opportunity to share with you a few thoughts on the role of
international trade and trade finance, especially in the context of the current economic
turmoil, and as Paul Krugman has put it in his seminal book "The Return to Depression
Economics"; that "Malign neglect" of the "shadow banking system" that has led to the "Loss
of traction" of the central banks in steadying the real economy in the storm.
International trade
Over many years, we have seen that most countries have progressively opened their
economies to international trade, either through the multilateral trading system, increased
regional cooperation or as part of outward-oriented domestic reform programs. We have
gone beyond the system with the third world being merely the exporter of raw materials and
the importer of manufactures. International trade nowadays backed by the Internet has
created the efficiency for raising standards and conditions of living. It has enabled all nations
to produce on a higher efficiency scale. It has helped increase productivity. It has allowed the
instant spread of knowledge and ideas so that the range of choices available to consumers
has expanded continuously.
Trade and globalization have without doubt brought enormous benefits to many countries
and citizens of the world. We might disagree on the exact modalities and the sequencing of
trade and tariff reforms, but few of us would dispute that international trade has been a major
driver of global economic growth since the end of the Second World War. Trade expansion
boosted post-war economic recovery in the leading economies of today; Germany and Japan
are notable examples that come to mind. It figures large in the "growth miracles" of the Asian
Tigers, Mauritius, but also China! But this has not happened without those countries facing
their own crises.
The impact of the crisis on trade finance
Today we are facing the worst economic crisis in generations and this crisis is threatening to
undo the economic development that many countries have achieved so far. Undoubtedly
world trade has been one of the worst casualties in the global financial crisis. This is even
threatening to "erode people's faith in an open international trading system." The negative
impact on world trade finds its way through two main channels. First the credit crunch
resulting from the financial market turbulences has led to a fall in the supply of trade finance,
which has rightly been described as the oil of the wheels of international trade; and secondly
the spillover of the financial crisis into the real economy has caused the worst recession
since the Great Depression and fuelled a contraction of trade volumes. And those of us who
believe in open trade almost as an article of faith, have watched with growing disbelief as the
threat of protectionism started to rear its ugly head. As economic activity collapsed and
unemployment soared in many countries, protectionist sentiment has risen along with the
attraction of other trade-distorting policies. Many countries have implemented domestic
stimulus packages aimed at protecting their businesses and industries, favouring domestic
goods and services sometimes at the expense of imports. Policy-makers are perfectly aware
that such policy actions have international implications - in the short term they can boost
domestic demand but in the long term, they undermine the international trading system and
global wealth and welfare.
Outlook for world trade for 2009
If we look at the prospects for world trade for 2009, we see that the World Bank has
predicted that the volume of world trade in goods and services will decrease by around 6
percent. According to the World Trade Organisation (WTO), the collapse in global demand is
expected to drive manufacturing exports down by roughly 9 percent in volume terms.
International trade is thus forecast to continue deteriorating and there is even the emergence
of a wide consensus arguing that in 2009 the global economy will shrink as recession strikes.
Against this bleak backdrop, I believe it is important to put things into the right perspective.
Yes, trade can be a powerful engine to transmit shocks, whether positive or negative, from
one part of the globe to another. But, no, it is certainly not the cause of the collapse in
demand. The financial crisis, which transmuted into a global economic crisis, is what has
driven the world economy to where it is now!
Lessons from previous crises
Crises are, without a doubt, challenging times but they bring along a wealth of lessons and
opportunities for those willing to learn from past mistakes. As US President Obama has
recently put it: we must not waste the opportunities this crisis presents.
The destructive protectionist streak in the aftermath of the Great Depression serves as a
stark reminder about the dangers of reverting to the beggar-thy-neighbour policies of the
past. We have learnt the lesson that the scarcity of trade finance is unavoidable during
crises. The experience of South East Asian countries at the time of the Asian Financial crisis
a decade ago; of Russia during 1997-98; of Turkey in 2000-01; and of Brazil and Argentina
during the Argentine crisis of 2001-02, still resonates in our minds. Another lesson learnt is
that multilateral cooperation can also help make trade finance more affordable and resilient
in times of crisis.
WTO has advocated cooperation among all stakeholders in the trade finance market to keep
the flow of trade finance going. Among the measures proposed at the G20 Summit is the
injection of some USD250 billion to support trade finance. Here in Mauritius, despite the
resilience of our domestic banking sector, on the first signs of difficulty last November, the
Bank of Mauritius acted pre-emptively and created a line of credit of USD100 million for trade
financing purposes.
Doha Round
Reviving the Doha Trade Talks - which were not so long ago considered to be as dead as
our dear departed Dodo - is now increasingly seen as vital for global economic recovery.
Political leaders and policy-makers of the G20 have committed to expedite the conclusion of
the Round. This view is shared by WTO Director-General Lamy, who, underscoring the
importance of concluding the Doha Round, warned that "the stress test of the multilateral
trading system is still to come".
I align myself with the view that the mutual benefits of trade are too important not to be
preserved and it is in the interest of one and all to maintain and enhance trade openness at
all costs. Indeed I strongly believe that, protectionist sentiment notwithstanding, trade
continues to function as the hand-maiden of economic growth and will support global
economic recovery.
Regional cooperation/economic integration
In Mauritius, our trade policy has always been one of openness, whether it is to the world
economy or to the region. We have of course, never been averse to drawing benefits from
preferential trade arrangements.
We are a member of various important international organisations such as WTO and of
regional blocks such as COMESA and SADC. More importantly, we have been in the front
line of African countries to benefit from the African Growth and Opportunity Act.
For little Mauritius, Africa represents a sizeable market for our products and services and has
untapped potential. Many local companies are exporting to SADC and COMESA countries
and they envisage extending their export network to other parts of the continent.
The Mauritian Banking Sector has been quite resilient to the financial market turbulence, but
the interconnectedness that comes from living in a highly integrated world means that our
banks are not immune to contagion effects. In the words of Ngozi Okonjo-Iweala, the
managing director of the World Bank, we, in the emerging economies, are "innocent
bystanders" in the global recession created by developed countries. But we are determined
to avoid becoming victims of the credit crunch. We do recognize the need for collective
action in order to get through these harsh economic times.
This gives me the opportunity to articulate my position regarding the strong lobbying of some
of our exporters in favour of the continued depreciation of our currency. Export lobbies have
been clamouring for a depreciation of the Rupee to ensure their competitiveness, if not to
guarantee their very survival. But we need to look at the other side of the coin - consumer
and producer price inflation arising from pass-through of higher import prices. At a time when
one of our main concerns is protecting people and their purchasing power, intervention by
the Bank of Mauritius to keep the Rupee at a depreciated level would not only be
inappropriate, it would also be irresponsible!
And to put to rest, once and for all, the Rupee depreciation mantra, I need to add that a
recent IMF mission has proposed to re-classify our exchange rate regime from managed
float to freely floating. I am reminded here of the French writer, Jean Baptiste Poquelin -
many of you probably know him under his more famous name, Molière. Molière had one
well-known play, "Le Bourgeois Gentilhomme". Le Bourgeois Gentilhomme in Molière was
surprised to discover that he had been speaking prose all his life! We are surprised to
discover that for the last year or so, we've been a free floater, not a managed floater. And the
Fund has offered to re-classify us in the light of our past performance as a free floating
regime. This puts us in the top category of countries in the likes of UK and the US. This is not
an opportune time to embark on a drastic overhaul of our exchange rate regime; this
proposal however does offer food for thought about the shape of things to come under the
emerging new economic order. Financial mercantilism, whether at the level of countries or
institutions, is simply not a viable way to national economic competitiveness.
The Additional Stimulus Package and the Budget Speech has made it clear that life support
for moribund enterprises is not on the agenda. "Preparing for recovery" is!
In addition to the inescapable "regulatory soul-searching", the financial crisis and the global
recession also warrant a revolution in the ways we think about and conduct business. Going
down the well-trodden path of pessimism while waiting for the tide to turn is certainly
tempting, but ultimately our ability to harness the potential of the new internationalism will
depend on how willing we are to move away from established "comfort zones".
Afreximbank - opportunities for Mauritius
Today's event with Afreximbank is intended to serve as a reminder of the vast possibilities
that beckon for enterprises and financial institutions that choose to view this crisis as an
invitation to do things differently; to do things better!
The initiative of the Bank of Mauritius to lend its platform for Afreximbank to market its
products is one more step in the direction of regional cooperation and economic integration. I
know our local investors are looking forward to receive Afreximbank's support for their trade
with African countries and other countries in the region as well as with the rest of the world.
The Bank of Mauritius has always favoured an approach geared towards opening up the
banking sector to other players. We firmly believe that healthy competition always results in
more choices, coupled with a better service for the users of financial products.
Traders around the world rely on a high level of trust and confidence in the counterparty to a
trade operation. One of the things that traders look for in their exchange with buyers in other
countries is the assurance that they will indeed receive their payments. The 2009 Budget
Speech has proposed the setting up of an Export Credit Insurance Scheme. This reminds me
of the major role played by the Bank of Mauritius in the 1980's in setting up the Export Credit
Guarantee Scheme and in providing financial backing in setting up the Export Credit
Insurance Scheme. This scheme was meant to protect Mauritian exporters against credit
risks - both commercial and country risks. Both schemes were managed by the
Development Bank of Mauritius but it was the Bank of Mauritius that guaranteed settlement
of all claims in respect of the two schemes. The two schemes did not meet with much
success and were short-lived. I hope we'll have better luck with the new version now on the
drawing board.
Afreximbank is bringing to us today years of experience and know-how in providing
insurance and guarantee services covering commercial and non-commercial risks associated
with African exports. The experience and expertise of Afreximbank in this area could be quite
useful.
REPSS
As you know, the developing COMESA system, the Regional Payment and Settlement
System - REPSS will facilitate cross-border payment and settlement between Central Banks
in the COMESA region; it is presently in the final stage of testing and will be launched soon.
The system will stimulate and increase intra-regional trade by working in local currencies,
thus reducing costs and saving time. I extend an invitation to Afreximbank to join our clearing
system.
I now leave you in the able hands of Dr Oramah who will make a presentation on the range
of products of Afreximbank. Those of you who have booked slots with the delegation from
Afreximbank for one-to-one encounters will be able to attend the bilateral meetings in the
afternoon and tomorrow morning. I hope and wish you to make the most of this presentation
by Afreximbank.
Thank you all for your attention.