Our vulnerability is such that it suffices for a European butterfly to flap its wings for the Mauritian export sector to be ablaze.

This is what Rundheersing Bheenick, Governor of the Bank of Mauritius (BOM), wrote in a foreword to the Bank’s annual report for its FY2009/10, released late last year. In it, he highlighted the measures the Bank took before the global financial crisis and to which it planned to adhere, even though there were signs of an economic recovery.

The decision to stick to conservative policies, of which achieving and maintaining monetary and financial stability is a cornerstone, was well-taken, considering the world’s fear of another financial crisis – resulting in a possible double dip on the back of Europe’s sovereign debt crisis and America’s downrating by Standard & Poor’s.

This annual report, the latest available, explains the Bank’s latest decision to limit its foreign reserve exposure to the United States dollar and the euro, and to include more holding from trade partners such as China, India and South Africa.

According to Bloomberg, the Port Louis-based central bank has doubled its reserves to close to $3 billion since 2006 and has spread its risk over new commodity currencies such as the Canadian, Australian and New Zealand dollars, as well as Norwegian kroner and Swedish kronor. This is in addition to reserves denominated in pounds, euros and US dollars, Bheenick recently told reporters in Nairobi, Kenya in August 2011.

“We are busy looking at the possibility of buying Chinese bonds, also South African and Indian bonds, just to diversify away from too much dependence on the well-known euro and dollar currencies,” Bloomberg quoted him as saying.

BOM’s conservative policies were vindicated when the recent global financial crisis escalated as Bheenick had set up a Financial Stability Unit at the Bank in 2007 to identify vulnerabilities and risks in the system, and develop tools and policies to incorporate financial stability in its policy framework. He even introduced semi-annual financial stability reports.

The Bank’s timely policy response helped lower domestic inflation, shore up employment, avert an economic crisis, and fight off the spectre of recession. Through it all, it did not relent in strengthening its regulatory and supervisory framework, but instead enhanced existing guidelines on liquidity risk management, by releasing new guidelines on country risk management and by finalising work on guidelines relating to fair valuation of financial instruments.

Bheenick, whose term came to an end in February 2010, but who was reappointed in May 2010 after surviving a ‘vendetta’ against him (allegedly involving some of BOM’s board of directors and his former minister of Finance), had advocated dynamic provisioning, which he describes as “forward-looking” and which consisted, inter alia, of provisions out of profits in good times to meet expected losses in future years.

“It is an approach that is increasingly favoured by many central banks to finance open market operations,” he explained.

“I am somewhat dismayed that our balance sheet has borne the predictable consequences and registered a significant hit during the year in review because my call went unheeded.” ☑

Udo Rypstra