rundheersing bheenick : surfing the second wave of the crisis and major developments in the banking and financial landscape of mauritius statement by mr rundheersing bheenick, governor of the bank of mauritius, in the bank of mauritius annual report 2009 – 10 transmitted to the vice - prime minister, minister of finance and economic development on 29 october 2010, port louis, 12 november 2010. * * * what a challenging and eventful year it has been! from my vantage point at the helm of the central bank during these stressful and extraordinary times, there is so much to say. but, confined by space, let me stick to the pattern of my previous statements, briefly recapture highlights of the year in review, touch on the present outlook and share my thoughts on the very uncertain future that lies ahead. the world economy in perspective the global context exerted a determining influence on our small open economy and heightened our vulnerability to external shocks, originating far from our shores. governments in developed economies and their central banks responded to the global crisis, the worst since the great depression of the 1930 ’ s, by resorting to unconventional measures and embarking on fundamental financial sector reforms. international financial institutions, and their governing bodies, having failed to be pro - active in anticipating and circumscribing the initial crisis, reacted with a plethora of initiatives while the economics profession, never a model of unity, polarised into opposing camps, with neokeynesians plugging the virtues of fiscal stimulus and monetary easing pitched against “ austerians ” sounding dire warnings about fiscal profligacy and debt sustainability, even as all agreed on the need to dump failing hypotheses on the efficiency of markets and the faulty models that had brought the world to the edge of financial armageddon. when the global economy showed signs of a gradual recovery in the second half of 2009, economists generally agreed that we had seen the worst of the crisis until the timid recovery hit another zone of turbulence in may 2010 with europe ’ s sovereign debt crisis. the euro 750 billion package, assembled by the european union and the international monetary fund, the austerity plans as well as the results of the european banking sector stress tests which indicated that the banking sector was in better shape than feared, appeased some of the worst fears and restored some calm on nervous markets. as i write this statement, the world economy is showing visible signs of recovery, with greater momentum coming from emerging - market economies.

the monetary and exchange rate framework used by the bank as being well - suited to the needs of the mauritian economy. the last imf article iv mission of october 2009 commended our monetary and exchange rate policy framework, which they qualified as a “ hybrid system of inflation targeting ”. the – against the backdrop of high uncertainty in global financial markets, the rupee behaved well and, on a real effective basis, the rupee recorded a slight appreciation of 0. 5 per cent over fy 09 / 10. we are satisfied that our free - float exchange rate regime worked well. – our close monitoring of the domestic foreign exchange market indicated that it was not functioning in a satisfactory manner during mid - may 2010. we had reason to suspect that there might have been some domestic currency manipulation in the wake of the euro crisis. in such an environment when the rupee was being talked down, adding fuel to domestic uncertainty in a thin forex market, we thought it proper to probe further. we enlisted the services of a forensic consultancy firm to conduct a review. – as we took these bold steps, exchange rate volatility subsided and the market returned to a fairly normal pattern, aided in this by our decision to meet the currency requirements of the state trading corporation, the largest local forex buyer. open market operations our money market remained liquid throughout fy 09 / 10. the build - up of excess liquidity towards the end of 2009 accentuated downward pressure on money market rates. we thus raised the minimum cash ratio by 0. 5 percentage point in june 2010 and, despite severe balance sheet constraints, we undertook a series of open market operations, namely special deposits, reverse repo transactions, and the issue of bank of mauritius bills, in an attempt to normalize liquidity conditions. bank ’ s balance sheet traditionally, the bank has been very conservative in managing its foreign exchange reserves. our foreign reserves are mainly invested with major central banks. – in the wake of the global crisis, these central banks systematically reduced the rate of interest payable on deposits. we suffered a drastic decline in our income derived from interest on foreign investments and this severely affected our profitability. our operating profit for fy 09 / 10 has nosedived to rs72. 4 million, compared with rs1. 4 billion in the previous year. – this development only served to place in sharper focus the concern which i had expressed when times were better over the state of the bank ’ s balance sheet and the