L’express Weekly 11 June 2010

Editorial

Privatising gains and socialising losses     Weekly 11 June

Well, the needless panic about our currency has seemingly subsided. Now that the dust has started to settle a little and people have had time to take a step back and think rationally, they have come to realize that a willed engineered devaluation of our Rupee, which export sectors were clamouring for, arguing loss of their export revenue, denominated in Euro and Sterling, is neither desirable nor advisable.

For starters, competent fi nancial management of anything, from a household to a country, requires recognizing that the economy moves in cycles (boom and bust). What goes up will come down and nothing stays down forever either – after rain, comes sunshine. Hence, popular wisdom suggests “make hay whilst the sun shines”, implying one should store hay for the wintry cold, cloudy and rainy season. Even housewives and homemakers adhere to this wisdom of constituting reserves for when times are hard, and hard times there will be. When, for years, the Euro and Sterling were stronger than now against our Rupee, export sectors raked in buckets, even truckloads, of windfall gains. Some invested for productivity gains in their sectors (manpower training, equipment renewal and modernisation, process improvements, etc); others diverted their super profi ts to investment in other more lucrative sectors, such as property development and retail. Now that they are experiencing a temporary setback because of relative Rupee strength – in reality Euro and Sterling weakness – they plead vocally for what are effectively public subsidies.

Rupee devaluation is tantamount to a transfer of wealth from the larger community of defenceless savers, wage earners, pensioners and taxpayers, to a handful of business owners. These business owners are not the only stakeholders in the economy. Rupee devaluation would cause infl ation to surge out of control. It is effectively an insidiously and perniciously impoverishing tax on the public at large.

It is known that, unless there are serious fundamental macroeconomic imbalances which dictate devaluation as a last desperate resort which, I am made to understand, is far from being the case in

Mauritius, the permanent benefi ts of currency devaluation accrue only to a handful of exporters to the detriment of the toiling masses.

Even countries which live in the backyard of the Euro zone, like Morocco and Tunisia, have allowed their currencies to free-fl oat, thereby letting market forces and economic fundamentals determine their exchange rates.

Euro and Sterling weakness are due to the daunting, some might say self-inflicted, macro-economic problems of Europe and the UK (spiralling fi scal defi cits, high public debt, private corporate debt, domestic debt, external debt; banking insolvencies and bail-outs, credit crunch, housing crisis, household debt; etc). We mostly do not have these problems here. Therefore, as Governor Bheenick rightly says, let’s not make their problems (Europe and the UK) our problem to save the skin of a few, who did not save for lean days.

Besides, even if it were desirable to depreciate our Rupee, it is theoretically impossible. Manou Bheenick talks about the impossible ‘trilemma’: an open capital account, a free-fl oating currency and an independent monetary policy. ‘You cannot have all three in the same world,’ he sums up.

As Nobel economist Joseph Stiglitz puts it in his recently published book Free Fall, speaking of the lessons of the recent banking crisis, we ought to be leery of falling into the trap of “privatizing gains and socialising losses”. This is exactly what the exporters want the Government and the Bank of Mauritius to do for them. No way!

weekly@lexpress.mu