Is the downward trend of the local currency that has been observed since the first lockdown likely to continue? According to Paragraph 36 of the International Monetary Fund’s Article IV Consultation Staff Report on “External Competitiveness Structural Policies for a Sustainable and Resilient Recovery” released on Monday, June 28, the “real effective exchange rate (REER) depreciated by 8.1% year-on-year in 2020”. This “account gap was -13.3% and the domestic currency appears overvalued by about 30-40%”. The report further states that “the external assessment and the degree of overvaluation are subject to elevated uncertainty reflecting the adverse supply shock to the tourism sector as well as decline in income flows given Mauritius’ financial center position”.
The IMF staff believes that with the full re-opening of our borders, the “current account gap and the misalignment will be substantially reduced” as income flows increase from tourism mainly. Removal from the Financial Action Task Force (FATF) List of Countries under Increased Monitoring (Grey List) by October may also help to recover income flows as the Mauritius Jurisdiction meets international substance requirements
However, the IMF gives stern advice; calling on the Mauritian authorities to address structural issues. The report states that the “estimated current account gap and the overvaluation to an extent may point to long-term structural issues and the need for further reforms to enhance competitiveness, rather than indicate the extent of required nominal exchange rate depreciation”.
The following structural weaknesses have been highlighted by the IMF staff:
- Positive net international capital and financial flows declined by about 5.5% in 2020 compared to a year ago. This fall was “mostly driven by the net outflows from the domestic economy, partially offset by net inflows to the Global Business Company (GBC) sector”.
- The net investment position (NIIP) remained volatile due to the GBCs’ portfolio flows: it stood at 187% of GDP in 2019, much lower than its 2018 level (377%).
- International reserves covered 103% of the IMF’s Assessing Reserve Adequacy (ARC) Metrics at the end of 2020, which “remains within but closer to the lower bound of 100-150% adequacy range.
- Total public and private external debt increased from 91% of GDP in 2019 to 116% of GDP in 2020. The “large debt implies elevated exposures to unfavorable exchange rate movements and current account and rollover shocks”.
As a reminder, the BoM sold $25 million at a rate of Rs. 42.50 on Monday, June 28, which depreciated the rupee by 4%. The Bank of Mauritius sold $25 million at a rate of Rs 39.25 on January 11. At the current rate, the Mauritian Rupee is now 8% weaker than it was in January 2021.
