Mauritius devalued its currency twice in the 20th Century, notably in 1979 and 1981. However, there are arguments divided as to whether this was the best decision taken for the interest of the economy. Whilst some researchers and politicians say that it was not a wise decision, some economists, however, are of the firm view that the two consecutive devaluation of the rupee were optimal decisions taken at that time. This article analyses the reasons why the two consecutive devaluations of 1979 and 1981 were right decisions taken by the then Minister of Finance, late Sir Veerasamy Ringadoo.

TO UNDERSTAND why the two consecutive devaluation of the Mauritian rupee in 1979 and 1981 were justified, a review of the economic climate since the 1960’s is deemed pertinent. The Mauritian economy stagnated during the 1960s. Although the GDP at current factor cost grew at an average of 4.1 per cent per annum, the relatively high population growth rate of 2.4 per cent coupled with an inflation rate of 1.7 per cent turned the 1960s into a decade of zero economic growth. And prospects for future growth and development looked fairly bleak towards the end of the 1960s. The population had doubled to about 850,000 in a record period of 25 years. The increasing labour force could not be absorbed in agriculture as all the arable land had already come under cultivation. Importsubstitution industries, which had been actively encouraged during the 1960s, could not significantly contribute to employment creation given the limited size of the domestic market to which their production was geared. To alleviate the rising level of poverty, government introduced a public works programme whereby four days of work per week were provided to the unemployed so that they could have a source of income (The famous “Quatre Jours à Paris). The programme was able to absorb 16,000 persons out of a pool of about 40,000 unemployed, representing about 20 per cent of the labour force.

 

More daunting for policy makers was the task of devising an appropriate longterm strategy for the creation of 130,000 productive jobs by 1980 for the rapidly increasing labour force. The main longterm solution to the unemployment problem was seen to be the establishment of labour intensive industries geared to the
export market. It is in this context that government, with the collaboration of the private sector, put forward a strategy for the establishment of an Export Processing Zone (EPZ). Set up in 1970, the Mauritian EPZ made a timid start; it provided only 3,000 jobs after two years of existence. The turning point, however, came with the sugar boom of 1972-74. It helped to pull the economy out of its stagnation. Real wages in the agricultural sector and the non-agricultural sector increased considerably, ensuring a steady progression in living standards. Government increased its current and capital expenditures significantly. More importantly, the sugar boom provided windfall profits which were invested in the EPZ sector and the newly emerging tourist sector.

HIGH INVESTMENT RATE

The economy grew at an average rate of 6.9 per cent per annum in the 1970s, notwithstanding adverse climatic conditions in 1970 and 1975 when the growth rate was negative, notably following intense tropical cyclone Gervaise. The investment rate also remained fairly high at 26.8 per cent over the decade. However, as total expenditures consistently exceeded GDP as from 1973, the significant increases in wages and salaries have had severe repercussions in terms of high inflation rates averaging 15% per annum in the late 1975, which had the impact of eroding the competitive of the Mauritian EPZ exports and the chance of achieving full employment in 1980 was significantly reduced as EPZ companies lay off workers and the unemployment rate increased to very high levels.

The macroeconomic indicators were really in the red. On the other hand, on the external front, balance-of-payments deficits had become quite common as
from 1976, which was a watershed year. Increased disposable incomes had resulted in increases in consumption in the economy, which, in turn, had led to large increases in imports, since the latter amounted to quite a high proportion of GNP (about 50%). The deficits quickly turned into a balance of payments crisis and the country had to enter into a standby agreement with the International Monetary Fund (IMF). This was followed by four other standby agreements and two
structural loan agreements with the World Bank.

THE ROUTE TO DEVALUATION

Before the coming into operation of the Bank of Mauritius in August 1967, the Mauritian rupee was on a sterling exchange standard. Under this system, a
board of Commissioners of Currency was responsible for the issue of rupees in exchange for sterling at a fixed rate. The domestic monetary base expanded only
when revenue from sugar exports and loans and grants from the UK exceeded payments made for imports. This restrictive one-to-one relationship between net
sterling receipts and the domestic money supply was replaced by fractional reserve banking with the setting up of the Bank of Mauritius. However, the rupee continued to maintain its link with the UK pound, moving from a sterling exchange standard to a fixed peg. The pound sterling was sold by commercial banks at the fixed rate of Rs13.40, even after June 1972 when the pound began to float.

In the initial years of the sterling peg, over 75 per cent of Mauritian exports were directed to the UK and about 50 per cent of imports came from the sterling area.
Payment for imports originating from outside the sterling area caused no particular concern to traders who bought other foreign currencies at fixed exchange rates. However, as the share of imports originating from outside the sterling area began to increase rapidly, there was a rising pressure on the import bill and on the domestic price level, especially as the pound started to depreciate in international markets. The need was therefore felt for a new method of determining the exchange rate: The SDR peg (January 1976- February 1983). The rationale for pegging the rupee to the Special Drawing Right (SDR) was that positive and negative changes in the value of the rupee against the 16 currencies in the SDR basket would cancel out on average and would therefore lead to fairly stable exchange rates with the country’s trading partners. In fact, the 16 currencies included in the SDR basket accounted for about 75 per cent of imports in 1975. Pegging the rupee to the SDR would also promote price stability, which was another major objective of government.

The value of the rupee appreciated slightly over the period 1976-78 against four major currencies (the UK pound, the US dollar, the French franc and the South
African rand) which accounted for about 50 per cent of the country’s imports. However, this period witnessed acceleration in the demand for imports which had
started to increase significantly in the wake of the sugar boom of the early 1970s. The level of foreign exchange reserves dwindled from Rs 630 million at the end of 1976 to only Rs 15 million in August 1979. The country had to seek the assistance of the IMF and later the World Bank. One of the requirements of the stabilization programme was the devaluation of the rupee. There was a devaluation of 23 per cent against the SDR in 1979 and a second devaluation of 17 per cent in 1981.

As it appeared that the SDR peg would tend to lead to an overvaluation of the rupee, a new method of determining the exchange rate was adopted as from 28 February 1983 when the rupee was linked to an undisclosed basket of currencies of major trading partners. An examination of the sources of imports over the period 1980±94 shows that the French franc, the UK pound, the South African rand, and the Japanese yen were (and still are) among the important currencies required by Mauritius. Although imports from the US have always been negligible, the US dollar is an important currency for Mauritius as it is estimated that about 50 per cent of the country’s trade transactions are carried out in dollars.  In a nutshell, then, an analysis of the Mauritian economy would thus reveal that the two consecutive devaluations were part of the IMF and World Bank prescription and the decisions were really economically optimal in the light of the very bad economic performance at that time.