The Mauritius Exchange Rate Index (MERI) depicted by the Central Bank escalated from 97.38 to 112.02 points between February 2019 and June 2020.  During that period strong currencies like the US dollar rose from Rs 35 to Rs 40, the Great Britain Pound from Rs 46 to nearly Rs 51 and the Euro from Rs 40 to Rs 45.  A five-rupee appreciation of strong currencies meant a rise between 12 to 14% of their value with respect to the Mauritian rupee.  The reasons for the depreciation of our local currency are quite clear.  Firstly, the economic situation has been severely affected by the COVID-19 pandemic which contracted by some 7 to 11 percent much higher than the International Monetary Fund (IMF) predictions.  There has been subsequently a decrease in the circulation of foreign currencies leading to their scarcity and rise in demand.  Additionally, Rs 118 billion have been transferred as a means of helping companies in dire financial difficulties including the setting up of a Mauritius Investment Fund.  With such a massive currency swap from the Central Bank reserves to fuel working capital, this exercise exacerbated our local currency.

A policy of constant depreciation

Without going deep in the history of currency evolution, it is good to know that, at the time of Independence, the Mauritian rupee was pegged to the British Pound and it was exchanged for Rs 11.40 initially.  It was Rs 5.00 for the US dollar and some Rs 1.25 for the French Franc.  In 1979 and 1981, under the pressure of the IMF to reduce the overwhelming economic deficit and make local goods competitive, the rupee was devaluated by 30% and 20% respectively. By 1982, the local currency entered managed float because the local economy was ailing with negative indices in almost every case (balance of trade, growth, job creation, unemployment, savings) and the nation entered its first industrial phase.  The so-far pegged rupee became more liberal in its management and was adjusted to the then prevailing economic conditions.  During that time, the British Pound exchanged up to Rs 20.  Afterwards, there was a unique historical cycle of economic boom from 1986 to 1990 and this allowed further adjustments, through depreciation, to monitor the rupee value and keep it at par with the evolving economy.  Since then, it is worth noting that economic growth has averaged 4% over the years and been adjusted to some 3.5% recently.  No growth beyond 8% has been evidenced and that dates more than three decades earlier.

Equating the rupee with the external market

The Mauritian rupee has become an ideal yo-yo in the currency movement game that looks more like latent movement of lava under volcanic rocks.  Since industrialisation, Mauritius has become a major exporter of clothing apparel, sugar including financial services as well as tourism which inflows huge capital to the economy. To keep Mauritian trade attractive, the rupee has become the currency of bargain.  Each time, there has been a lobby to depreciate it by duly considering it as a weak currency typical of developing economies.  Earlier, the Lombard Rate was a determinant for the rupee face value followed by a stronger variable known as the Repo Rate based upon monetary mass.  This is subject to a quarterly review to better address current and near-future economic needs.  In good times, the rupee appreciates and in bad times, it depreciates.  There has been a policy to frown upon an appreciating rupee stating that it is ‘une roupie très forte’ and that it stifles economic exchanges making our exports expensive and directly addressing impending issues like company closure and the threat of unemployment.  Let us not forget ‘dead growth’ as a consequence of an ailing economy. To address such a problem, the Central Bank offered, some years ago, a ‘breathing space’ to exporters by temporarily depreciating the rupee.

The industry lobby

Weak currencies are beneficial to exporters as prices slide and make goods competitive. At the same time, jobs can be preserved. Incidentally, imports become  expensive for an economy overly dependent on raw materials and foodstuff for its domestic use.  To counter this mechanism, possible outcomes are exchanging uniquely in strong currencies like the Euro or the Dollar or, at times, investing in gold, an investment known as ‘valeur refuge’ which is usually spared depreciation.

There is no lobby from the public and society at large.  The community accepts without constraints to the exchange rate established daily and pays higher by buying notes.  For those engaged in small scale online trade and, particularly those whose wards are studying in Europe and the USA, depreciation becomes a nightmare as more money has to be spent on expenses overseas.

At one time, a former Central Bank governor addressed to nonexistence of societal lobby against a fluctuating rupee making the public, that trades more often than before, accept the situation without compromise or bargaining power.

The rich country status

In a recent country review by the World Bank, the Mauritian economy skipped its ‘upper-mid-income rank’ to tailgate the ‘high-income’ country status with a Gross Domestic Product per capita slightly above $12,000.  Ideally, this should be $15,000. This incidentally showed that Mauritius is a rich country certainly not up to Singapore’s level but aspiring to become wealthier.  This is also a target set by the Mauritian government to reach this coveted status by 2030, revised from 2024 earlier. If the rupee slide has been around 12 to 14% and there is no confirmation regarding its future stability, the ranking will be waived incessantly compounded with COVID-19’s chaotic tremor on the global economy.

Can we digest that a persistent deterioration of the rupee value will lead to the desired growth and position of Mauritius in the international economy?  If 2021 is positioned as the year of the recovery, could we expect the rupee to gain strength and recover the downward slide of 12%?  There is no general magic wand in expecting a nation to firstly recover economically and gradually aiming for wealthy nation status if its currency is not a stable one. Imagine the case of the United Arab Emirates with is stable Dirham, Singapore with its resilient Singaporean Dollar and, ironically, the British Pound that always keeps par with the USD with a ratio between 1.2 and 1.4 at most.  We could claim that powerful nations have strong institutions, sound fiscal and financial policies as well as robust industries.  But then why does their currency not slide compared with weak currencies as all rupees, be it, Indian, Pakistani or Mauritian?

Then, there is also the confidence issue in the currency.  A stable rupee will guarantee better savings and lower expenses, more investment in productive areas including infrastructure and housing.  Equally lesser dependence of foreign currencies will lead to a lower demand, in liquid terms, of the Dollar and the Euro. But then, being supposedly newly rich addresses another question.  Let apart the constant currency depreciation, what about the existing infrastructure. Roads with potholes, streets still without electricity, water stress in urban and rural slums during rainy days and an increasingly expensive cost of living illustrate the reverse side of the coin. Compounded with these are an invisible disease and some social problems like child abuse, domestic violence. I would argue that the situation looks like swirling all issues in a hotchpotch but to some extent reflects the very nature of a frail economy and a weakened currency.  The debate could be long and heated but chronic depreciation since independence matters though it looks like it is a swing in the mood of time.