Mauritius: Background Papers and Statistical Annex

This Background Paper and Statistical Annex examines selected issues pertaining to the Mauritian economy, which are all related to the question of how Mauritius will be able in the future to sustain its export-led development and diversify its economy. The paper discusses the impact of the Uruguay Round agreement on the Mauritian economy. The paper also utilizes available data to assess Mauritius’s external competitiveness, which is a major issue as regards the sustainability of high export growth.

Abstract

This Background Paper and Statistical Annex examines selected issues pertaining to the Mauritian economy, which are all related to the question of how Mauritius will be able in the future to sustain its export-led development and diversify its economy. The paper discusses the impact of the Uruguay Round agreement on the Mauritian economy. The paper also utilizes available data to assess Mauritius’s external competitiveness, which is a major issue as regards the sustainability of high export growth.

IV. The New Interbank Foreign Exchange Market in Mauritius

The following is a descriptive account of Mauritius’s new interbank foreign exchange system, based on information collected in the course of discussions with a number of participants in the new market during the mission’s stay in Port Louis.

1. Background

Before July 1994, the Bank of Mauritius (BOM), using its undisclosed basket, each day had set a rate for the rupee against the pound, the dollar, the French franc, and the UAPTA (the Preferential Trading Area unit of account, which is used by the PTA clearing house), at which it was prepared to buy or sell foreign exchange. The buying and selling rates for the day were issued to the Mauritius Bankers Association (MBA) between 9:30 and 9:45 a.m. The MBA worked out cross-rates for that day for all the other currencies normally used in Mauritius and communicated these rates on a “rate sheet” to all its members, and to the State Bank of Mauritius (SBM). 1/

Originally, in calculating its daily rate for the major currencies, the BOM had used closing rates in New York on the previous day; these rates remained in force for the whole day. Subsequently, the BOM also started using rates in international markets on the same day in its calculations of its daily rate. In addition, from April 1993, the BOM started issuing rates twice a day, at 9:30 a.m. and then at noon (with the MBA establishing the cross-rates by 12:30 p.m.).

On July 15, 1994, as had been foreshadowed in the Minister of Finance’s budget speech in June, the BOM ceased to set buying and selling rates and the Mauritian rupee was floated, with the introduction of an interbank market in dollars. In addition, on July 27, 1994, the Exchange Control Act was suspended, so that the banks, and their customers, became free to buy and sell foreign exchange without restriction. 2/ There are no longer any repatriation, domiciliation, or surrender requirements for Mauritian residents receiving foreign exchange and there is no longer any legal limit on the banks’ net foreign exchange position other than that determined by prudential considerations, which are assessed by the BOM in the course of its normal supervision of the banks. In practice, the banks undertake very few transactions in the market on their own behalf, tending to balance any foreign currency deposits they receive with assets in the same currencies. However, due to the general shortage of foreign exchange in the market (as described by the commercial banks), those banks lacking foreign exchange-earning customers tend to be oversold in foreign exchange and thus vulnerable to any sharp upward movement in the price of foreign exchange.

2. The price-setting mechanism

The market uses a Reuters screen as a means of circulating price information and offers to buy or sell foreign exchange among participants; although, at present trades cannot yet be made electronically. Five domestic banks 1/--the Banque Nationale de Paris Internationale (BNPI), Barclays Bank PLC, the Hong Kong and Shanghai Banking Corporation (HKSBC), the Mauritius Commercial Bank (MCB), and the SBM--together with the BOM, have access to the system. By 9:00 a.m. each morning, the participating banks key into the Reuters system their proposed selling rate for dollars, based on the previous day’s close and world foreign exchange market developments overnight. The rates proposed by the four leading banks (MCB, SBM, HKSBC, and Barclays) are averaged and this average rate becomes the so-called “opening” rate. On behalf of the MBA, the MCB uses this rate and market cross-rates to produce the rate sheet for the day. The printed rate sheet is circulated to all the Mauritian domestic banks by messenger (not by fax) before the banks open for business at 9:30 a.m. The opening rate for the U.S. dollar is averaged over the month by the BOM and this constitutes the statistical exchange rate for the Mauritian rupee, although, as shown below, it is not the rate at which most transactions between rupees and foreign currencies are actually undertaken. 2/

The computerized banks enter the rate sheet data into their system for access by their branch network and these rates are used for all small transactions. Very occasionally, in the course of the day, if the markets move significantly (for example, following BOM intervention), the banks may announce a suspension of the rate sheet, and recalculate another using the latest rupee/$ rate and market cross-rates. 3/ Rates for large transactions are, however, subject to negotiation and large customers will usually get a better price than the rate sheet due to competitive pressures among the banks. In principle, transactions up to US$100,000 can be undertaken at the rate posted on the Reuters screen. The actual transaction involves, of course, a telephone call to the quoting bank with rupees being transferred between accounts at the BOM and the foreign currency through the books of corresponding banks abroad. For amounts over US$100,000, prices have to be negotiated, again by telephone. While the buying/selling margin is set by the MBA at 1 percent, the actual margin is reportedly less. In the view of the commercial banks, a major problem for the market is the tight foreign exchange situation. 1/ The banks provide a daily return to the BOM on interbank transactions.

In his budget speech announcing the new foreign exchange market system, the Minister of Finance indicated that, in order to increase competition in the interbank market, nonbank firms would be licensed to deal in foreign exchange. The legislation permitting the issue of licenses to such nonbank foreign exchange dealers has been passed by Parliament and the necessary regulations have now been drafted. The BOM fully expects to be able to license a number of well-qualified businesses--both bureau-type operations offering service to tourists and small-scale clients, as well as brokers seeking the best rates for large buying customers, either from banks or directly from large earners of foreign exchange. Such increased competition should reduce margins in the market and provide cheaper and more efficient foreign exchange services.

3. BOM intervention

When the Bank of Mauritius wishes to intervene in the market, it keys into the Reuters screen system a price at which it is prepared to sell dollars. 2/ This information appears on a so-called “trading page.” Banks wishing to buy at the posted price call and purchase. Banks can also place on this trading page the price at which they are prepared to buy dollars from the BOM, or from any other commercial bank.

To help it in its role in supervising and monitoring the new market, the BOM collects the following data on the market: (i) a daily return of transactions in the interbank market; (ii) a weekly report on the net foreign exchange position of each bank; and (iii) a monthly breakdown of foreign exchange transactions by purpose.

4. Forward markets

While some banks report that there are relatively few forward transactions in foreign exchange, others are already providing their customers with forward cover, in the following way. 1/ An importer, for example, needing foreign exchange in three months asks the bank to enter into a forward sales contract with him for the amount of foreign exchange needed. The bank uses its own liquidity to purchase spot foreign exchange in the amount needed, which it then places abroad until delivery (hence, in part, the big increase in the commercial banks’ net foreign assets). The forward price for the customer is therefore the spot price plus the differential between the interest rate in Mauritius and that in the domestic market for the currency in question--currently about 5-6 percent per annum for the U.S. dollar. The bank, of course, assumes the interest rate risk, that is, the risk that the differential may widen over the term of the forward contract. It is not clear whether such forward transactions are only undertaken by genuine importers needing foreign exchange in the future, or whether they were speculative, by individuals or banks, against the rupee. The price offered to forward sellers of foreign exchange was computed in a similar way, with the interest rate differential serving to increase the rate offered to the customer.

Table 1.

Mauritius: Growth and Structure of Gross Domestic Product, 1988/89-1994/95 1/

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Source: Central Statistical Office, National Accounts of Mauritius.

Sugar crops and milling included in fiscal year harvested; otherwise, averages of calendar-year data.

Table 2.

Mauritius: Expenditure on Gross Domestic Product at Current Prices, 1/ 1988/89-1994/95

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Sources: Central Statistical Office, National Accounts of Mauritius; and Bank of Mauritius.

Normalized with the balance of payments.

Table 3.

Mauritius: Macroeconomic Balances, 1/ 1988/89-1994/95

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Sources: Central Statistical Office; Ministry of Finance; and Bank of Mauritius.

Normalized with the fiscal accounts and the balance of payments.

Table 4.

Mauritius: Sugar Production, Earnings, and Investment, 1988/89-1994/95

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Sources: Mauritius Chamber of Agriculture; Mauritius Sugar Syndicate; and Mauritius Sugar Authority.

Crop harvasted in June-November and marketed through following June.

One arpent equals 1.043 acres, or 0.4221 hectare.

Table 5.

Mauritius: Employment by Economic Activity, 1988-94

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Source: Central Statistical Office, Surveys of Employment and Earnings.

Not elsewhere specified, mainly Development Works Corporation.

Table 6.

Mauritius: General Wage Settlements and Developments, 1968/89-1994/95

(In percent)

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Sources: Central Statistical Office; Ministry of Finance; Ministry of Labor; and staff estimates.

Averages. Generally tapered, with only lower-paid workers receiving full adjustment.

November 1988 “advance” cost-of-living adjustment for mid-1989 of 8-15 percent (tapered) for private sector.

The reference period is generally the previous 12 months.

Indicative only. Based on averaged survey data for larger establishments; employees paid on monthly basis weighted 4/5, and those on daily basis, 1/5.

From September 1987 to September 1988 only, i.e., before October (Chesworth) awards in public service and November “advance” cost-of-living adjustment in private sector.

Indicative only. Simple average of percentage increases for employees paid on monthly and daily basis. Excludes piece workers (roughly one fourth of EPZ work force, generally earning more per day than daily workers) and workers paid on other bases.

Reported averages through 1986/87, employees paid monthly thereafter (99 percent of total).

Averages of calendar-year estimates.

Table 7.

Mauritius: Average Earnings by Sector--Monthly Paid Employees, 1988-94

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Source: Central Statistical Office, Surveys of Employment and Earnings.

Not elsewhere specified.

Deflated by the consumer price index.

Table 8.

Mauritius: Labor Costs and Productivity in Manufacturing, 1/ 1982-94

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Source: Central Statistical Office, Digest of Industrial Statistics.

Excluding sugar milling and small establishments (fewer than 10 employees).

Table 9.

Mauritius: Price Indicators, 1988/89-1994/95

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Source: Central Statistical Office.
Table 10.

Mauritius: List of Public Institutions, 1995

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Source: Ministry of Economic Planning and Development.
Table 11.

Mauritius: Summary of Government Finances, 1/ 1987/86-1994/95

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Sources: Ministry of Finance; and Bank of Mauritius.

Budgetary Central Government, Government Financial Statistics (GFS) basis.

Table 12.

Mauritius: Evolution of Government Revenue, 1988/89-1994/95

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Ministry of Finance;
Table 13.

Mauritius: Evolution of Government Expenditure by Economic Classification, 1988/89-1994/95

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Source: Ministry of Finance.