Independence of Bank of Mauritius : myth or must?

Around the world the issue of central bank independence has been the subject of important academic work and debates. It is the same for Bank of Mauritius (BOM). On 17th November 2017, the governor of BOM Basant Roi, in his address for the annual dinner for major economic stakeholders, asked for real independence of the bank. This statement raises a lot of questions about the freedom of the bank. Experts in the field debate on the issue.

 Vineet Jugessur : “There is a degree of influence rather than interference”

Finance expert Vineet Jugessur underlines that in recent months, the public at large as well as economic and finance experts have all observed an explosion of numerous financial scandals, touching mostly all sectors of the economy, may it be the offshore financial, insurance, or co-operative sectors. “Following these scandals, one common reaction of various critics’ stakeholder groups, political observers, and finance experts was “questioning the existence, independence, responsibility and accountability of various institutions (including the Bank of Mauritius).

This repeated reaction from the different stakeholders has led to a general perception that the Mauritian institutions are not operating with full independence.”
He further states that in one of his interviews, the ex-Mauritius Central Bank governor pointed out that unlike most developing economies, the composition of the Monetary Policy Committee (MPC) in Mauritius makes up of more external members than bank members and that it was time to review the legislation to give the bank operational autonomy in the formulation and implementation of monetary policies.

“Based on the above, it can be said there is a certain degree of interference (or rather influence) via the Monetary Policy Committee, assuming the configuration of the MPC is still unchanged. However, it is equally important to highlight that an agency relationship exists between the government and the BOM and the latter has, to some extent, aligned directions with the former. The economic measures and strategies formulation and implementation should be in line with the government’s short term and long-term objectives. I would rather say that there is a degree of influence rather than interference.”

Before looking at the reasons for a central bank to be independent, it is important to understand the role of a central bank, says Vineet Jugessur. “A central bank is an institution that manages a country’s monetary policies, that is money supply and interest rates. It also sets the economic policy for the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

In simple language, the central bank controls the amount of liquid money in the market. For instance, by selling short-term government bonds for cash, they decrease liquidity in the economy hereby driving up short-term interest rates, and alternatively they can drive down short-term interest rates by buying such government bonds for cash and increase the amount of money in the economy.”

Additionally, he avers that politicians like the money supply to increase especially before elections, because a reduction in interest rates stimulates economic activity; consumers borrow more to consume, and businesses borrow more to invest in production.

“However, if the rate of money supply in an economy is faster than supply of goods and services, this may lead to an inflationary situation, decrease in purchasing power and various distortions in economic activities. Hence, if a nation’s central bank is not independent, it can be expected to reduce short-term interest rates at pertinent phases in the electoral cycle, and this tendency could lead to inflationary effect. Moreover, inflation can easily get out of hand, hereby decreasing the purchasing capabilities of the consumers.”

 Eric Ng : “It should be more independent and accountable”

Economist Eric Ng explains that there is flagrant interference of the government in the operation of the BOM. “BOM is always at the advantage of the Ministry of Finance. There are certain circumstances whereby the Ministry of Finance increases public expenditure and neglects inflation. At that particular moment, BOM has to combat inflation and work on monetary policies. Besides, we all know that BOM applies the budgetary policies of the government as well.”

He further adds, “Earlier, the advisor on the board representing the Ministry acted as observatory but since 2013, the advisor has the power for vote. Sometimes this has an influence over the monetary committee.”

The economist highlights that BOM should be more independent and accountable. “What would have been best for Mauritius is making BOM responsible for its own policies and be independent.”

 Extract of the speech of Basant Roi

The extract of the speech of the governor of BOM Basant Roi where he asked for independence for the BOM is as follows: It cannot but be appropriate – indeed very appropriate - at this juncture of my address this evening, to underline that the then Bank of Mauritius Act had an abhorrent sentence that read as follows: “The Minister may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, he considers necessary in the public interest.” Even where directives were not formally issued, the Bank was required to seek the nodding approval of the Minister on many policy matters.

It’s the responsibility of one and all to preserve and protect the independence of the Bank of Mauritius...

Obviously, the Bank was not an independent organization. Having gone through the trials and tribulations in the field of monetary policy making for years and spent a greater part of my life in the central banking community, I have to say that it’s the responsibility of one and all to preserve and protect the independence of the Bank of Mauritius in policy making and implementation from deplorable baskets of fake economists, self-seeking advisers and imposters in the veiled pursuit of self-interests.

It’s in the best interest of society to have a central bank that is truly independent. Independence of the central bank must be treated as sacrosanct. Never ever forget how a mafia-infested Italy was saved in the not so distant past from catastrophic situations. Two institutions are said to have saved Italy: the Vatican and the central bank of Italy.

Independence of the central bank must be treated as sacrosanct.

In his concluding remarks, he stated the following: “The Bank of Mauritius has since made relentless efforts to improve the jurisdiction’s institutional set up and constantly update its regulatory standards. A successful regulatory authority needs independence in the exercise of its powers.

The Bank of Mauritius was made legally independent in the Bank of Mauritius Act 2004. Along with the independence, the Act made allowance for the setting up of a Monetary Policy Committee. In the great spirit of responsible central banking, I have done what could possibly be done to maintain the independence of the Bank.”

Siv Potayya : “It will be a danger if BOM becomes independent” 

Lawyer Siv Potayya reveals that the BOM will never be independent. Recalling the history of the BOM, he says, “Banking Ordinance of Ordinance (1) of 1958 came into force on 17 September 1958 to regulate the business of banking and licensing authority was under the financial secretary. At that time, there were only banks, namely Barclays D.C.O, MCB Ltd and Mercantile Bank Ltd. In the year 1966, the BOM ordinance of ordinance 43 of 1966 came into force and empowered the bank to act as banker of the government. In 1977, a new banking act was voted and hence the ordinance was discarded.”

Therefore, for the lawyer the BOM can never be independent. “The government uses the BOM to make other banks respect the policies put into place by the government itself. Over time, the BOM has become the medium for government to execute government economic policies.”

He further underlines that the representatives of government who are on the board see to it that the policies of the government are being well implemented. “Similar to the Financial Services Commission (FSC) that regulates all non banking services, the BOM regulates banking services.

If the BOM is given much independence, there will be abuse. Wherever money is concerned, there are temptations. Hence, it will be a danger if BOM becomes independent. For the time being, as it is controlled by the government, the Leader of Opposition has got the right to ask questions on the policies and operations of the bank.” 

 Dr Tulsidas Naraidoo : “Power should be 51% to 49% for BOM”

Dr Tulsidas Naraidoo states that the BOM has prescribed responsibilities to the government and it has to provide evidence based advice to the government. “The BOM does not have much freedom. Government is the policy maker and BOM has to abide by it and has no freedom to do what it wants. It has a prudential regulatory role and a statutory responsibility. It is guided by the BOM Act.”

He believes that too much freedom and too much interference is neither good for the bank nor for the government. “The bank has already expert statisticians and specialists of monetary policies, they must be given the freedom to take decisions. It should be given a little freedom for operations and at the same time follow the government’s policies.

For the time being, there are a lot of government interferences. If Basant Roi has come forward and ask for more independence, it must be something predominant taking into consideration his long experience and expertise.”

As a solution for Mauritius, Dr Tulsidas proposed the distribution of power and liberty in the format of 51% to 49%. “The BOM must get 51% of the power and government 49%. This is best for organization.”