Economic History Of Mauritius Economics Essay

Mauritius gets its independence in 1968 and the economy at that time depends massively on the primary sector in the sugar cane field. Being small in economic size, not enough natural resources to exploit and apparently isolated from the world economy, Mauritius has made major development by transforming itself from a poor sugar economy into one of the most successful economies in Africa in recent decades, largely through reliance on trade-led development.

Basically, every economy is based on three sectors namely: primary, secondary and tertiary sectors. During the period of 1979 and 2010, the Mauritian’s economy move massively from primary to tertiary sector. The key industries were sugar cane and textile industries. There is a reduction in the primary sector production from 23% of the overall economy to 6%, the secondary sector increased by 5% from 23% to 28% and tertiary sector increased from 50% to nearly 70% of GDP. Hence with these transformations, since 1970s, Mauritius has recorded very high growth rates and sustained increases in human development indicators due to a combination of good macroeconomic policies and strong institutions.

The Mauritian economy has transformed to a newly industrializing economy in the 1980s from a monocrop economy in the 1970s because of various changes in financial and monetary policy, with the financial sector being established in the early 1970s composing mainly of the central bank known as the Bank of Mauritius, eight commercial banks and a limited range of non-bank financial institutions.

In the late 1970s, Mauritius’s economy was in a bad economic situation, there were high unemployment, external disequilibrium, sluggish growth and unsustainable fiscal imbalances. Hence with the help of the World Bank and the IMF, Mauritius adopted a comprehensive economic adjustment programme to enhance the economy during the period 1979 to mid 1986. Besides, the economy has experienced massive changes due to the financial liberalization programme in the late 1980s, such that after 1983, the programmes implemented were effective that result into suitable economic performance with averaging of 7% high and sustainable real growth rate lasting the 1980s. Achieving price stability and full employment also were the result of the programmes adopted.

Moreover, at the start of the 1990s, to develop the financial system more profound and to gain a place in the world economy which enabled to take full advantage of economic liberalization and maintain the growth momentum required movement in the financial and monetary regimes.

The monetary policy being monitored by the central bank has the primary objectives to maintain price stability, promotion of economic growth and attainment of internal and external equilibrium in the Mauritian economy according to the Bank of Mauritius Act.

Method of monetary policy implementation

Since 1970s, two major approaches towards monetary policy implementation have been adopted:

Direct techniques of monetary policy

The shift to an indirect market-based monetary control system: – The transition from direct techniques to indirect market based has been long for its establishment from 1990 to 1996.

Direct control mechanism

The main weapons of monetary policy until the early 1990s were reserve requirements, credit ceilings and interest rate ceilings which enabled the authorities to intervene intensively in the pricing and allocation of loanable funds

Reserve Requirement

Section 17 of the Banking Act required commercial banks to maintain reserve ratios consisting of cash in their vaults and balances with the Bank of Mauritius as well as non-cash liquid assets such as Treasury Bills, Bank of Mauritius Bills and Government securities. Through the reserve requirement credit creation can be controlled such that to increase the reserve for commercial banks if less credit wants to be in circulation.

Credit ceilings

Credit ceilings were introduced in 1973, as another main monetary policy tool in order to ‘restrained credit expansion’. This system of quantitatively controlling the availability and the direction of credit was used to achieve the objective of price stability and to sustain economic growth by directing financial resources to the priority sectors of the economy. Credit ceilings were abolished in 1993 to attain the objective of financial liberalization as well as reforming the monetary control system.

Monetary policy control reform

During the 1980s, enhancement in the monetary control system had been attributed to a large extent to the framework of economic and financial liberalization, which is a shift from direct techniques of monetary policy to an indirect market-based monetary control system which has been a lengthy process worth almost 6 years from 1990 to 1996. The process had been successful through various stages. In July 1988, interest rates were fully free up, henceforth, commercial banks adopted the guideline proposed by the Bank of Mauritius and the monetary authorities set the Bank rate and yields on Treasury Bills with which commercial banks pegged their interest rate. Bank of Mauritius Bills was introduced in June 1991 as short-term financial assets being the prime step towards market based. In July 1993, credit ceilings were totally abolished which brought to an entire end to the direct control system. In the following year, February 1994, the Bank of Mauritius built a secondary market cell which was required to improved the secondary bill market and strengthen open market operations as well as introduced the REPO rate system on a temporary basis. An interbank foreign exchange market was set up and the suspension of the exchange control in the on-going process of monetary reforms. The new framework of monetary policy implementation included the Monetary Policy Committee and Reserve Money Programme set up by Bank of Mauritius. Over the counter sales of Treasury Bills have been incorporated in the system by the Bank of Mauritius to ease the movement to a well established market-based financial system as well as render the open market operations as an effective tool of monetary policy.

The experience of Mauritius with the Lombard rate

The Lombard rate referred to an overnight interest rate determined by the central bank was adopted by the Bank of Mauritius in December 1999 to develop its monetary policy. The repurchase operations and Lombard facility was introduced by the Bank of Mauritius in December 1999 as two collateralized and indirect monetary instruments. In situation of unexpectedly shortfalls of liquidity, commercial banks can claim funds from the central bank as a lender of last resort through the Lombard facility which is the standing facility. The Lombard rate is the main interest rate that commercial banks pay to make use of the Lombard facility as well as help to monitor the central bank’s monetary policy stance. The overnight interbank market rate is charged by a premium. Two main instruments, Repurchase and Reserve Repurchase are used by Banks at the central bank’s own initiative in order to regulate short-term liquidity in between weekly primary auctions. The Lombard depends on the Repurchase facilities. The interest rate corridor required the two instruments for it to establish, where the Lombard Rate and Reserve Repurchase acted as a ceiling and floor to short term money market sales respectively. Bank of Mauritius is able to monitor the interest rate stably with the use of these instrument alongside provide short-term liquidity. In a developed money market, the central bank used the repo rate as the key official rate. In setting the Lombard Rate, the Bank of Mauritius generally takes a view of domestic economic conditions namely, the inflation outlook in the short to medium term, the nominal and real effective exchange rates, and the interest rate differential with the major international reserve currencies, adjusted for the appreciation or depreciation of the domestic currency exchange rate.

Launch of the Monetary Policy Committee at the Bank of Mauritius

The Bank of Mauritius has seized the 40th anniversary of the central bank to launch the Monetary Policy Committee as a statutory committee of the Bank of Mauritius. Evolution and new strategies are required to move alongside the dynamic economy as well as to maintain stable economic conditions. MPC Established under the section 54 of the BOM Act 2004 for its ultimate objective “to maintain price stability and to promote orderly and balanced economic development”. During the decade 2000,Mauritius faced the highest rate of inflation with two digits level, hence the central bank have to react to reduce it to one digit level as high inflation is harmful for an economy. Therefore, a new framework is adopted by the BOM for the conduct of monetary policy. Tools such as the supply of reserve money, the level of interest rates and money supply within the economy must be well manipulated to stay in line with its macroeconomic objective price stability. The monetary policy strategy based in a two-pillar approach where pillar one undertakes elements that measures short and medium term risks to price stability and on the other hand pillar 2 emphasis on the monetary developments and the associated long term risks to price stability. The new framework will make use of the Repo Rate instead of the Lombard Rate as the key policy rate to signal changes in its monetary stance. The Repo Rate became effective 18th December 2006 set at a rate of 8.50 per cent annum. A corridor was established providing a ceiling and a floor for overnight interbank interest rates in order to absorb excess money and inject shortage of fund.

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