Why Mauritius needs to embrace an alternative economic model

KUGAN PARAPEN
Economist
Member of Rezistans ek Alternativ

- Publicité -

One British Pound was worth Rs. 13.30 on the 17th July 1979. Exactly forty years later, on the 17th July 2019, it was worth Rs. 44.70. What could have happened over this time period such that the value of the rupee compared to the pound lost more than three times its value?

When a currency loses its value, we refer to it as a depreciation of the currency. If we were to chart the currency of the Mauritian Rupee against all major currencies in this world, we would get the same result. Since Independence was proclaimed in 1968, the Mauritian Rupee has been on a major depreciating trend against all major currencies, including the US Dollar, the Euro and even the Japanese Yen. Should it be a cause for concern?

If we were an Amazonian tribe, living in the remotest areas on the planet and surviving on hunting and fishing to survive, we would not need to be concerned. We wouldn’t even need a currency to start with. Barter might be sufficient. But the fact remains that we are not an Amazonian tribe. The point of this article is not to challenge the ‘less is more’ mantra of minimalism. If anything, it should be championed as the societal way forward. But we cannot and will not make abstraction of the reality of things in this present exercise.
The Mauritian economy is today one of the most open economies in the world, that is the volume of bilateral trade with the rest of the world is among the highest respective to the size of the economy. While such a situation makes of Mauritius an economy which is particularly vulnerable to global economic sentiment, we should not see it as the fundamental flaw. The latter is rather a matter of trade imbalances between the rest of the world and us. Mauritius suffers from a chronic current account deficit, that it the value of our imports almost always exceeds the value of our exports. The latest figure puts the current account deficit at nearly 10.00% of GDP.

To understand the weakness behind the Mauritian Rupee, one has to grasp the interconnectedness between exports, imports and exchange rate. International trade is always settled in what is termed as ‘hard currencies’. When we travel abroad, we cannot use our Mauritian rupees as a currency. We have to convert them into ‘hard currencies’ like the US Dollar, the Euro or the Pound Sterling and then convert them again into the local currency of the country we are visiting. Similarly, whenever some tourist visits our shores, they always bring along with them hard currencies to be converted into Mauritian Rupees. The same logic applies to international trade where we sell our products like textile on the international market in hard currencies and buy things we do not product locally like oil in hard currencies.

Considering the imbalance between our exports and imports, that is, we always end up importing more goods and services than we export, it follows that we always systematically end up with a shortage of hard currencies. Given that it is a recurrent problem, building of currency reserves is not a sufficient and adequate method to deal with this issue as over time, those reserves are bound to be depleted if we were to rely completely on them.
“Mauritius needs Foreign Direct Investment!” Every one of us must have heard of this statement at some point or the other. Whether from some governmental official or from some local economic self-anointed economic expert. This is a fallacious statement! Our perceived need for FDI is in fact a mere function of our economic imbalance. The fact that we import much more than we export implies a shortage of hard currencies which must be financed in some way or the other. FDI is one easy way in which we can harvest foreign hard currencies because it works in the same way as the tourist visiting our shores, it comes with an inflow of hard currencies. At what price though? While the tourist is bound to go back, the foreign direct investor is here to stay and is willing to exploit our resources at our expense. Take the South African backed hotel project in Pomponette, this is an eminent example of FDI negatively impacting the quality of live in Mauritius.

The value of the Mauritian Rupee matters!

In the absence of FDI though, the other avenue to try solving chronic trade deficits is currency depreciation. When one country depreciates the currency, it makes its exports more competitive while increasing the price of imports. If $1 goes from being worth Rs. 10 to say Rs. 20, it implies that for each $1 that an exporter receives, the equivalent in worth twice more in Mauritian rupees. In parallel, it means that Mauritians now need to pay twice more than before to buy $1. Through the dynamics of demand and supply, currency depreciation will reduce the international trade deficit.

It is often said that the Mauritian economy is a miracle in that it has not experienced a recession since the end of the 1970’s. The devil is in the details. The Mauritian economy has not experienced a slowdown since then because at each time the economy was on the cusp of a recession, the local historic economic elite lobbied hard for the currency to depreciate to support their export-oriented business. Mauritian Gross Domestic Product has quadrupled over the last forty years in Mauritian Rupee terms. But what about in British Pound terms? It has barely doubled!

While many look at their inflated salaries as proof of progress and pride, they should be made aware that it is the purchasing power of that salary that matters. Take a good look around your house and make a note of everything inside it that is not produced locally. Now remember that those internationally produced goods are not bought in rupees but in hard currencies. Try converting the salary you earn now in Pound Sterling at the current exchange rate of GBP 1 = MUR 44.70 and calculate the equivalent you would be earning in 1979 at GBP 1 = MUR 13.30. After adjusting for inflation, the odds are that the increase in your salary would be meaningless. The Mauritian economy was never designed to make you better off, it was designed to make those hold the economic reins rich while keeping you servile.

Is it not time for Mauritians to embrace an alternative economic model?

- Publicité -
EN CONTINU

l'édition du jour