Sameer Sharma is an economist and a former Chief – Reserves Management Division of the Bank of Mauritius currently working as Senior Director, Data Science within the Global Risk Group of a major global bank in the US. We approached him for his insights into the economic situation following the publication of the International Monetary Fund report summary. A no holds barred interview.

The International Monetary Fund (IMF) team recently published their report summary on the Article IV consultation on the state of the economy. I have read the press release but, at the same time, read several comments of analysts raving about how well we are doing economically. What did I miss?

The perception that the press release gives us high marks is misplaced. Firstly, when it comes to the growth figures of the recent past, all the IMF has said is that Mauritius’ real GDP level in 2023 had finally surpassed that of its 2019 level.

Still good news, isn’t it?

Well, for the amount of debt fuelled fiscal and monetary stimulus we gave to the economy, the speed of our recovery to pre pandemic levels has been slow. As a percentage of GDP, Mauritius’ combined fiscal and monetary stimulus, which included the central bank literally printing money and financing the government, was in the top quartile of stimulus spenders in the world; yet, it still took the economy a very long time to play catch up. In some sectors like tourism, the recovery is ongoing and almost complete. Many other countries in our peer group had caught up with their 2019 real GDP levels well before we did. Given that the bulk of the recovery is behind us now, our economy will start to slow down and reconverge towards its potential rate of growth of 3% to 3.5% per year after 2025. If you look at the IMF medium term macroeconomic projections on Mauritius over the next few years, this is where our growth will be heading back to. You will see their real opinions buried in the eventual release of the Article 4 report itself rather than in the press release. The IMF has already pointed out for example that our fiscal stance is too accommodative with a primary fiscal deficit excluding grants expected to hover at 2.9% of GDP. They are also not satisfied with the way the monetary policy framework in Mauritius is functioning and have concerns about the level of our international reserves when compared to our external liabilities including any volatility to Global Business Deposits. As someone who used to be in the inside, my reading of the press release is more nuanced than many in the media and in the government.

What you are saying is that our recovery has come at a high cost. What is this cost?

Yes, the recovery has been very costly to the country in terms of higher public debt, a central bank that is severely under-capitalised, has lost a lot of its credibility and that has not even been able to publish its monthly balance sheet since the middle of last year, higher household debt, higher inflation, higher wealth inequality and a local currency whose official price level no longer reflects the real price level in terms of where the market wants it to go based on fundamentals. So the economy is recovering but the macro-economic stance is in such disequilibrium that the central bank has had to impose some 1980s foreign exchange quota-like system. “Water, water everywhere but not a single drop to drink!”

Coming back to the IMF, why are all these concerns not expressed in its report?

You will notice that wrapped around the diplomatic language, terms like rebuilding “macro-economic buffers”, “fiscal consolidation” where they talk about raising taxes and cutting spending, “enhancing the new monetary policy framework” and closer monitoring of “financial stability risks” also show up in there.

What kind of risks?

There are two main risks facing the Mauritian economy today. First is its lack of fiscal, monetary and external buffers; that is savings to face any internal or external shocks. If we get any global shock, Mauritius is sitting naked with no savings and too much debt to defend itself. The second risk is the ability of Mauritian macro-economic policy makers to gradually remove the drugs of very accommodative and unsustainable monetary policy and fiscal policies without killing the patient. Can the patient do well without the drugs?

What are the sources of data and information that the IMF base their report and predictions on?

The IMF will typically engage with Statistics Mauritius, the Ministry of Finance and the Bank of Mauritius and will review all data that they collect at their level.

So why are there so many discrepancies between the figures of, on the one hand, the Ministry of Finance, BoM, Statistics Mauritius, and, on the other hand, those of the IMF, especially when it comes to inflation, public debt and GDP growth rates?

Because fiscal dominance over key institutions including Statistics Mauritius and the Bank of Mauritius may have increased, though some of these institutions must still follow minimum requirements when it comes to the computation of macro-economic statistics.This data is pulled by the likes of the IMF and World Bank and right now we have discrepancies between the data we need to send and the data we want to show to the local population through the media.

Is that why inflation is one digit, according to Statistics Mauritius, while the prices of basic commodities are sky high?

Yes, we are likely under-reporting true inflation. Since the pandemic, the weight of food and fuel has likely gone up as a percentage of incomes.

How is inflation calculated by Statistics Mauritius?

Since the early 2000s, at least every five years, Statistics Mauritius conducts a Household Budget Survey looking at incomes and expenses in order to compile data about how much you spend on food, rent, electricity etc. in order to properly calculate inflation. For the first time in at least 20 years, we have not seen Statistics Mauritius publish an HBS on its website since 2017.There are also concerns about how Statistics Mauritius is computing the GDP deflator, which is a broader measure of inflation than that of the Consumer Price Index (CPI) basket as it measures inflation across the entire economy and forms part of nominal GDP.

Also, since 2022, Statistics Mauritius has without any explanation reclassified part of the Global Business Companies (GBC) net income (a whopping Rs90 billion) from what we call the primary income account which is not included in GDP calculations to the services account.

To massage the figures?

Yes, this makes our net export numbers look suddenly better and inflates GDP, which in turn makes all ratios like debt to GDP or external statistics look better. The Bank of Mauritius, which has to report Balance of Payment numbers to the IMF following IMF standards cannot do that! It would for example be hard to explain why suddenly GBCs would be disbursing more in terms of interest income and dividends than they are receiving should we follow the Statistics Mauritius logic.

But this is shocking! We can no longer even trust the official figures, can we?

Sadly, our national accounts are hard to trust these days. Many figures look bloated. What we do know however is that the government has relied a lot on inflation to bloat revenues. But you know, at the end of the day, Mauritians are not buying it. We cannot get a lot of volumes of dollars at the official exchange rate. The value of the currency never lies. There is more demand than there is supply of forex at the current official rate, hence the quotas. The Rupee is overvalued and in theory why would it be if the economy was so strong?

The Bank of Mauritius itself which made significant losses in its fair value through profit and loss accounting book of the international reserves portfolio had made significant dollar losses between 2022 and mid-2023 and was busy reclassifying securities from different accounting books to the Hold to Maturity Book in order to smooth the accounting reporting of losses and not show negative equity. Since I pointed out those very large losses, the highest in the country’s history, in my August 2023 article in l’express entitled The Cost of Random Nominations, the BoM has interestingly stopped publishing its monthly balance sheet figures which is a legal requirement. It is increasingly becoming hard to get a true picture of the economy because the reporting of facts and figures has become so politicised.

Some of our sources indicate that the IMF representatives this time did not talk to anyone from the opposition. Is that normally a requirement?

Typically the IMF will meet the leader of the opposition but there is no major requirement for them to meet opposition members. The IMF knows very well how the economy is doing but the problem is that the opposition seems to depend a lot on the IMF reports to attack the government instead of having the right people on their teams who can actually do the homework themselves.

Economic operators have been complaining about the chronic shortage of forex for some time now. Both the minister of finance and the BoM governor have used threatening language about alleged speculation against the local currency and warned that BoM possesses sufficient firepower to defend the Rupee. Does it?

The Mauritian Rupee will continue to remain under pressure until the market sees a more credible, transparent and well capitalised central bank with an appropriate monetary policy stance along with a credible fiscal consolidation strategy. Our external buffers are weak and our macro-economic stance needs adjustment as pointed out by the IMF. Our international reserves currently stand at USD 7.1 Billion but this includes 1 Billion in contingent liabilities i.e. money belonging to local banks placed at the central bank for foreign exchange liquidity management purposes and another USD 1.5 Billion of central bank borrowings on the international market. The bulk of the foreign exchange interventions witnessed last year was in fact financed by those borrowings, which were very expensive.

Why did the Bank borrow at high rates?

There was a lot of misplaced hope that the borrowings would be temporary because the British would give us a lot of money because of the Chagos situation. This was the messaging made to all banks last year but this did not happen.

The Bank still has a few billions left, doesn’t it?

Yes, it still has USD 4.6 Billion left but, unless we are planning to become the next Venezuela, we need to strip off USD 814 Million of our gold reserves and some USD 293 million in Special Drawing Rights (SDR) out of this USD 4.6 Billion. Out of the remaining USD 3.5 Billion of assets, you can imagine that the USD 1.5 Billion in BoM borrowings has collateral that is pledged. There is no free lunch in the City in London or on Wall Street after all. So the amount of ammunition is less than USD 3.5 Billion. Now, to make matters more complicated, the Bank of Mauritius had moved USD 2.1 Billion from one accounting book known as the Other Comprehensive Income (OCI) book to its Hold to Maturity (HTM book) because that would help it smooth losses.

How does it do that?

Because in this book, you do not need to mark to market your securities you made losses on or that you are pledging as collateral for your borrowings.

What’s wrong with that?

You cannot sell down this book until maturity. When I used to follow courses with the World Bank and the Bank of International Settlements on how to manage international reserves, the first thing they taught me was not to play with accounting and to manage your portfolio based on the principles of fair value through profit and loss but hey what do they know! So we have a liquidity problem. Local banks also have tighter foreign exchange liquidity. Right now, the excess foreign exchange liquidity position of local banks stands at Rs4.678 Billion (USD 102 Million) which is near historical lows. This is why you see such wild swings in the official rate, going down to 44.7 one day and 47.25 a week later and then down to 45.75 right now. There is no liquidity behind this official rate!

Does this creative accounting impress the IMF guys?

No. The IMF has a metric to estimate reserve adequacy known as the ARA metric, which does not just look at how many months of imports worth of reserves we have but at all our liabilities like external debt and the volatility of our GBC deposits which are significant in Mauritius. In December 2022, this ARA metric was at 100%, at the minimum of what the IMF defines as adequate. Since then, things have gotten a bit worse. Our short-term interest rates are de-anchored from the key policy rate and the entire monetary policy framework is messed up. I find it comical when local economists post opinions on where the repo rate will go next when the framework itself does not work.

The government wants low yields that are below inflation because of high public debt and wants to continue to have a very “expansionary” fiscal policy stance, which is why the monetary stance is messed up and which is why the Rupee is also under pressure. In many ways, the fiscal stance has countered the monetary policy stance and rendered it ineffective. No rational person would be holding onto Rupees at the current price level of MUR 45.75/USD. We are seeing more dollarisation in the economy, a parallel market because no one can get forex at the official rate with high volumes. So, there is more hoarding and, unless the United States Federal Reserves cuts interest rates more aggressively, we will not be able to depend on others to fix our local disequilibrium.

In its two most recent interventions, BoM made forward purchases of dollars at much higher than spot rates. Has this helped?

On the contrary, the BoM itself is now busy looking for dollars in order to help pay back the company that is supplying us with oil. Remember this fantasy story that some foreign firm would be supplying us with oil and was willing to settle in Rupees? Well, the Rupee is no international reserve currency so eventually we do have to pay them back in USD. Basically, the Rupee at current official rate levels is overvalued because our macro-economic stance is too loose and our buffers have been eroded.

A simple and direct question: did BoM sell 2 billion US dollars’ worth of forex to raise the capital necessary for MIC, or did it trigger its currency printing machines?

The MIC is funded via money printing which leads to depreciation and eventually sticky inflation.This story of selling reserves to fund the MIC was always a story more for public consumption rather than being technically accurate. Creating the so-called sovereign wealth fund to bail out the private sector at one-sided terms via money printing is a novel concept in economics.

There is one more budget awaited before the general election. A lot of people expect that it will dish out a lot of sweets – some say enough to increase the rate of diabetes. Doesn’t that mean that the government still has money to spare?

Since 2019 and even before the pandemic hit, the government has been funding its spending through money printing (the initial MUR 18 Billion transfer from BoM), debt and inflation. Inflation is a convenient way to boost tax revenues and create the money illusion too many seem to be impressed and doped by. Adjusting for the accounting tricks of Statistics Mauritius, debt levels are high and we need to rebuild our fiscal, monetary and external buffers very quickly rather than engage in more inflation and debt-financed goodies.

How likely is that to happen in an election year when the current government will seek another term?

As likely as pigs flying unless a crisis forces us to do it. The big worry is that given our weak external buffers, any exogenous shock would really at this stage take us to a very bad place. If the winds blow, the world will see very quickly that we are not wearing any underwear.

How close are we to Greece, Lebanon and Sri Lanka amongst other basket cases?

Our good fortune is dependent on a global economic soft landing but we are just one negative global shock away from a very bad place because we have over extended ourselves. Our external buffers are our weak spot. This is why we need to act in the now.