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Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Pailles, 6 December 2013. | Rundheersing Bheenick: Looking beyond vision 2020 Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Pailles, 6 December 2013. * * * “Without … extra resources, the only OMO’s that your Central Bank will be able to undertake will be, not Open Market Operations, but Open Mouth Operations – with no money to put where our mouth is!” 1. Before we begin may I ask you all to rise to pay our respects and tribute to that great leader in this region, Nelson Mandela, who passed away last night and whose character and example in his Long Walk to Freedom have inspired so many in Africa and the world. Nelson Mandela, Madiba, Thank you! Now let me welcome you all here tonight. For I want to bring some cheer to a year marked, once again, by the dismal lingering legacy of the global financial crisis. Tonight, I want us to raise our vision from the immediate past, beyond the immediate horizon, and even beyond Vision 2020, to a longer-term perspective for the country and for its people. Global revenge on the banksters abroad 2. For banksters abroad, it has been a year of retribution, regulatory condemnation, and multi-billion-dollar penalties: their just deserts! But here, in Mauritius, it has been different. We have suffered no contagion from questionable practices and misdemeanors which had become common currency in the top echelons of global banking and finance. By judicious regulation, by innovative intervention, by much prudent action by our banks themselves − and also, I must say, by a fair bit of luck − we have managed to avoid the calamitous plight of so many hard-hit countries in the world. 3. The Economist, examining some of the worst excesses of casino banking abroad, has declared that to politicians – not with us tonight – “banks are both incompetent behemoths waiting for public bailouts and conniving profiteers, pulling a fast one on their customers”1 The Economist might think that… But I could not possibly say so… could I? As we well know, our banks, here, are not too-big-to-fail, and are engagingly customer-friendly, most of the time. And they had better be, as I am pleased to see that the competition is really hotting up. Even as I speak, we have half a dozen different applications for bank licenses pending – a record number for us. 4. Elsewhere, bankers have traded recklessly − with other people’s money. They have been guilty of LIBOR rigging. You would have thought that the forex market – the largest and most liquid market in the world, with a daily trading volume of USD 4 trillion – would have been immune to market-rigging. Well, you would have been wrong! Bank forex trading desks fixed that, too. Bankers may yet be found guilty of commodity price rigging as well. They have made whole countries broke from the huge cost of the bank bailouts, spreading misery and devastation. You know, it’s almost as if these foreign banksters and traders have taken that Hollywood vamp, Mae West, as their mentor. Remember her quip? “Between two evils, I always pick the one I never tried before.” 5. The jury is still out, as they say, on the punishment for bank fraud. Business Week, in November this year, estimated that US banks have paid out USD 93 billion in fines and The Economist, 27 July 2013 BIS central bankers’ speeches penalties. The toll is still rising. Early this week, EU antitrust authorities fined eight banks a combined total of USD 2.5 billion for collusion to manipulate benchmark interest rates. Some in the West are now in jail. Four Iranian bank fraudsters copped the death penalty last year. And the Wall Street Journal reports that over 450 US banks have failed since 2008. 6. In the UK, Barclays has paid out over USD400 million in fines to US regulators. It also sacrificed its Chairman and Chief Executive. Little wonder, then, that the UK Parliamentary Commission on Bank Standards proposes to criminalise reckless misconduct in bank management and has recommended that all bankers should be licensed and sign up to standard rules. 7. But I suppose one thing that can be said after all this litany of misdemeanors and malfeasance, is that banking is no longer a boring subject. We have certainly all become more financially-savvy. Who would have thought that grand larceny on a global scale would have had such a favourable impact on financial literacy? A makeover for the real economy 8. But, tonight, it is not my intention to pillory the banksters abroad. We can safely leave that to the fearsome foreign regulators, the civil courts, and in some cases the criminal courts. Indeed the regulators, exacting such heavy fines, seem to be following the advice Ivana Trump gave to wronged wives: “Don’t get mad: get everything!” Moving closer home, some believe that a bash like this dinner tonight could not be complete without a dose of bank bashing – I wonder why? Let me assure you there is no such item on the menu tonight! What a sigh of relief I hear from our bankers present here! My subject tonight is the real economy in Mauritius and its future. Does it need a makeover? Lifting our eyes to the future 9. How well are we doing? Let us step back a little to gain some perspective. Let’s measure our progress against the where we thought we would be in our Vision 2020 some fifteen years ago, which I had the privilege to develop with many of you. Many of you, present here tonight, contributed to developing Vision 2020, as we looked ahead to what our country could become in the span of 25 years. Ownership could not have been more widespread. In what was probably a unique feature, Vision 2020 bridged the party-political divide. Conceived and conducted under Prime Minister Sir Anerood Jugnauth – who actually attended a working meeting with his entire Cabinet − it was delivered under the Prime Ministership of Dr Navin Ramgoolam who gave it a ringing endorsement in an enthusiastic preface, commending the final report to the nation. 10. Vision 2020 has remarkable come to pass. Since December 1990, our GDP has grown nine-fold, while GDP per capita shot up from Rs37,000 to Rs266,000 − more than seven times. We were spot on when we predicted that tourism and ICT would emerge as major contributors to jobs and incomes. They now account for an average of 8.2% and 6.4% of GDP. In parallel, King Sugar has been dislodged from its pedestal, falling from 10.3% of GDP in 1990 to just 1.6% in 2012. Manufacturing also fell from 23.6% to 16.7%. As anticipated, our economy transformed into a more service-oriented economy, with the weight of the services sector increasing from 57% in 1990 to 73% in 2012. Our openness and readiness to adapt to globalisation pressures to maintain our competitiveness, saw us judiciously combining foreign labour with the domestic labour force. The share of foreign labour in total employment thus increased from 0.2% in 1990 to 4.1% in 2012. Our transformation has been remarkable. 11. I believe that Vision 2020 served as a guiding star for our economic operators and policy-makers as we set out on separate, but convergent, ways to address the succession of BIS central bankers’ speeches obstacles that we encountered. Obstacles, of course, there will always be. The international environment confronting us today is extremely challenging. Uncertainty has increased. So has competition for market share as countries adjust to the new competitive requirements of global supply chains. 12 As we edge our way out of the still-lingering financial crisis, I believe the time is ripe for us to embark on a new visioning project to look Beyond Vision 2020 to realise the further promise of our potential. Our public-private partnership has gained in maturity. I see no reason why a thriving private sector cannot take the lead in setting our perspective for the future. Don’t wait for government. Set up your own think-tank on strategic issues. Let the government be the facilitator of change. I believe that we have now reached a stage of development where we can best flourish with government responding to your strategy, your initiatives, and your vision. This is my call to our private sector partners tonight, re-echoing the call at the launch of Vision 2020, that the private sector should take the lead in future national visioning exercises. Extending the miracle 13. We might begin by asking how well are we responding to current challenges. A new IMF working paper on Mauritius, tauntingly entitled “Mauritius: The Drivers of Growth – Can the Past be Extended”?2 examines our growth record as the economy revved up from an average growth rate of 2.4% in the 1960’s to 6% in the 1970’s, to then decelerate to 4.4% in the 2000’s. It uses the growth-accounting framework to decompose the respective contributions of capital and labour. It dissects the sources of past growth, and projects growth to 2030. It concludes that growth will most likely be in the 3–4% range. It could possibly reach 5% but this can only happen if strong pro-active policies are taken in five areas. First is an increase in investment rates. Second comes an increase in savings rates. Third is labour market reform. Fourth is education reform. And fifth is the need for further reforms to reduce bottlenecks and increase productivity. Except for the much-needed increase in our domestic savings rate, now alarmingly below 15% − or nearly half its historical peak – the measures are of a structural nature and not within the domain of monetary policy. The Bank has long been fighting to normalise interest rates to induce a greater savings effort but much of the time, as you are aware, it has unfortunately been a losing battle. 14. To return to the question put, can the past Mauritian “miracle” – be extended into the future? How are our institutions faring? Are we getting the best from our state-owned enterprises? They command such a large chunk of our national resources that they impact national competitiveness. Are we doing enough bench-marking with the best in the world? How far are our firms cutting costs, increasing competitiveness, and improving productivity? Embarrassing as some of the answers may be, such questions must be confronted head-on so that “the miracle”, if such it is, can be projected for generations to come? 15. The message of the past is adaptation or disaster. In the last two decades, in both commerce and banking, we have been confronted by seeming miracles of technological change. We have had the microchip, the fibre-optic cable, the World Wide Web, satellite media, the smart phone, CCTV systems, videoconferencing, call centres, on-line sales, nano-technology, and so on and on. Some of you have been quick to pick up the kit and adapt it to your needs, but much of the old Mauritius still surrounds us, with a reluctance to change. Svirydzenka K., and M. Petri, “Mauritius: The Drivers of Growth – Can the Past be Extended?”, IMF Working Paper, October 2013 BIS central bankers’ speeches Innovations in banking 16. In banking, I am pleased to report, we are in the midst of, not merely a spring cleaning, but a veritable banking reformation. It is a reformation that embraces the instant digital process of trade in bills of exchange, letters of credit, and the emergence of a global payments and settlements system. Mobile payments, electronic wallets, and internet banking are here to stay. We are moving into paperless banking and, indeed, to a cashless society. A new digital currency, Bitcoin, made headlines this year, challenging governments’ monopoly in the issuance of currency. Which means that even the new polymer notes may go the way of the Dodo. The financial management of commerce and banking is now being transformed in a generation by the very best in the business. But if we are all to be part of this new Mauritian miracle, then we must beware of being left out. The legacy of the global crisis: central banks taking a hit 17. Even as we ready up to face new threats, the legacy of the global crisis is still very much with us. Many central banks themselves have taken a hit. First, the revenue we derive from our reserves portfolio, which is the only source of revenue for the central bank, came tumbling down. It fell from Rs 2.1 billion in FY 2006/07 to Rs 794 million in FY 2012/2013 as the average annual yield declined from 4.4% to 0.8% over the same years. Second, is the hefty bill that came with the 2012 rescue job which the Bank had to do to protect our inherently vulnerable small economy from the global crisis. Allow me to sketch in the reality and cost of the action we had to take to prop up the economy and maintain financial stability in Mauritius. 18 The rupee was getting out of line with our economic fundamentals, gradually becoming overvalued, and beginning to affect trade. We had no option but to step up our intervention on the forex market to combat currency appreciation. We had very limited firepower – a fact not obvious at the time to some policy-makers who were inclined to believe that the Bank could just print all the rupees required to buy up the flow of foreign currencies. The constraint came from the other leg of the operation. To prevent the disruptive effects of the flood of rupee liquidity on financial and banking sector stability, the Bank had to buy up the rupees by issuing its own instruments. The cost of these instruments was a multiple of the yield on the currencies purchased. By way of example, let us take US dollars: reserves in this currency yielded 0.3% on average in 2012. The average cost incurred by the Bank to sterilise the proceeds of forex purchases stood at 3.4% in the same year – that is ten times higher. 19. Central Bank losses were expected and very much at the heart of our initial reluctance to intervene. We had support from the IMF who recommended that the cost of the process of sterilisation should be borne by the fiscal authorities up front, without waiting to recapitalise the central bank after it has incurred the losses. It was on that understanding, that we issued more than twice the volume of Bank securities than our normal level. That was indeed more than ten times our capital holdings. Our 2012 rescue job on the currency front cost us nearly Rs20 billion in Bank paper – that is ten times our capital. But it seems to be working although we are not yet out of the woods. ORR to the rescue 20. Our rapid response, with the Operation Reserves Reconstitution, halted and reversed the appreciation of the rupee, kept the export machine going and the economy purring along normally. But the Central Bank took quite a hit. And I must emphasise tonight that neither the pace nor the level of the ORR-style intervention can be sustained by the Bank on its own resources. BIS central bankers’ speeches The fiscal expectations of the monetary agent 21. We were, of course, not alone in being forced to play such an active interventionist role – and in paying for the consequences. Brazil protested that a “currency war” had been declared surreptitiously. It slapped taxes on inward capital flows. The Swiss central bank almost lost its shirt in trying, successfully, to contain appreciation of its currency, much to the displeasure of its cantonal shareholders. Last month, the Australian government made a massive capital transfer to the Reserve Bank of Australia to allow it to sustain its Open Market Operations. India suffered a severe bout of rupee depreciation, together with capital outflows. Zimbabwe has just taken over the debts of its central bank – but that is another story. 22. When “tapering” begins in earnest, the world will have to confront the new challenge of returning to a “normal” monetary policy. It’s a safe bet that still more currency volatility will follow, and even more vigorous action will be necessary to stabilise the affected currencies. But central bank balance sheets cannot keep taking hits like this. They cannot continue to rescue private sector balance sheets, prop up the economy, but go under themselves, with unsustainable losses. Central banks need to have up some extra cards their sleeve. 23. Topmost among these, I would place additional capitalisation, or resourcing, of central banks, as in Australia, without waiting for them to actually make losses first, as is the norm in central bank legislation. Dynamic provisioning, which flies in the face of accounting practice, is equally important. This would allow us to carry on the battle against currency volatility, conduct Open Market Operations, or OMO’s, in the low-yield environment. Without these extra resources, the only OMO’s that your Central Bank will be able to undertake will be, not Open Market Operations, but Open Mouth Operations – with no money to put where our mouth is! 24. As I reflect on the timing of “tapering”, an astute observation of a former Chairman of the US Federal Reserve, William McChesney Martin (Jr), comes to mind: “The job of the FED is to take away the punch bowl just as the party is getting going.” I suspect that the macroprudential measures, that we introduced recently, to minimise the risk of overheating in the construction sector, must have evoked similar sentiments in the industry. The Bank is now seen as the killjoy, preventing enthusiastic promoters from turning the whole country into a gigantic building site. Where they see only benefits, the Bank sees Risk, with a capital R. Igniting the new engines of growth 25. But let us not end on a dismal note for my hopes are high for a steady recovery. I believe Mauritius can move into the premier league of small states, and become one of the Tigers of tomorrow’s commerce, by igniting new engines of growth. 26. Writing, in the 1940’s, William Henry Beveridge, social reformer extraordinaire, defined the road to progress as the elimination of the five giants, of want, disease, ignorance, squalor and idleness. We have done much in Mauritius to eliminate want, disease, and squalor. We still have much work ahead to tackle more vigorously the giants of ignorance and idleness. We absolutely must increase savings; reform the public sector and make it more a servant than a master of the people; engage women more in our society, in our businesses and indeed in our banks; extract greater efficiency in education and health; and develop greater productivity and innovation in our economy. 27. I believe we shall see the drivers of growth sustained but we must do more, much more, to ignite innovation in business and in Mauritian society at large. The Mauritian miracle is not just a thing of the past. But it requires a new spirit of adventure to match our talents to the opportunities of the cyber age. We must overcome the new threats through a concerted BIS central bankers’ speeches pursuit of macro-economic and macro-prudential policy. Only then can we secure economic and financial stability and growth with equity. The keys to our future prosperity 28. The keys to the future are increased personal and corporate accountability and multisector collaboration. We need the private sector to take a lead role. We need more stimulation and nurturing of new start-ups. We need to challenge the monopolies of the past. We need a slimmer, more effective and efficient public sector, which is seriously in need of reform. Some task there! For it has been well said: “Reorganising the civil service is like drawing a knife through a bowl of marbles.” 29. But in racing ahead on this path, holding forth the torch of new technology, we must face up to the many risks of the cyber age. And in this, I am pleased to see, many of our brightest bankers are taking a lead. For, above all we need the continuing positive role of our highly competitive banking sector in an even closer and more effective working relationship with the real economy. And we need more inclusive management in the public and the private sector. Here I’m reminded of the story of that great British military leader, the Duke of Wellington, who vanquished Napoleon at the battle of Waterloo in 1815. Later he became Prime Minister and found government to be a harder nut to crack. After his first Cabinet meeting, he was heard to remark: “I gave them my orders, and then, damn it, they just sat down and started to discuss them all!” Hats off to our local bankers 30. So, let’s now take our hats off to our local bankers! They have never been part of casino banking. And they have a long history of serving the nation through their customers. As a central bank we are proud of our 46-year history: just imagine how much more so must be les grandes dames de la Place d’Armes!. MCB inaugurated here in 1838; HSBC in 1916; and Barclays in 1919. That is a span of over 175 years, with decades and decades of experience and skill, serving the people of this country. The State Bank of Mauritius − which as many may not be aware, was actually promoted by the Bank of Mauritius just after the country’s independence − is an upstart by comparison. And a very successful one, too. The brilliant new stars on the banking scene are keeping our established bankers all on their toes. I say to our bankers here tonight, Hats off to you all. The fundamental laws of the unproductive state 31. Finally, as is my wont on these occasions, may I leave you with two laws which may possibly inspire us in the pursuit of a second Mauritian miracle. In the past you have been served: Maradona’s law of interest rates, Einstein’s law of success, and Newton’s law on physical response, amongst others. For your delectation, I even rolled out Sutton’s law, named after a bank robber where he explained why he robbed banks. 32. In the same vein, I now turn to Parkinson – no, I am not referring to the Parkinson who gave his name to a debilitating disease which figures high on the risk map of humans in advancing years. I am invoking another Parkinson, Cyril Northcote Parkinson, who turned his attention to an equally-debilitating disease affecting, not persons, but institutions and corporates. Parkinson’s Law of Triviality may strike home for some habitués of board rooms. It states that: The time spent by a committee on any item on the Agenda will be in inverse proportion to the sum of the money involved. BIS central bankers’ speeches 33. This is where a trivial item, like the allocation of parking spaces, or the colour of new uniforms for staff, dominates discussion at the Board. This leaves no time to review strategic items such as a multibillion capital scheme. The big issue is then waved through on the nod. Members of the Board have exhausted themselves over the triviality and realise they must now break off for lunch! 34. Now, as we approach a festive season, when traders vie with one another with sales gimmicks, I thought I should do the same with our persiflage. May I therefore offer you two laws for the price of one? I am coupling the Law of Triviality with Parkinson’s Law of the Organisational Pyramid. It states that: The number of subordinates in any organisation will increase linearly by 5% a year, regardless of the amount of work to be done. We might call this the middle age spread of the middle income trap! 35. Finally, as I leave you ruminate over Parkinson’s Laws, I shall conclude, that such ineffable laws stand as warnings to us all. But if we can escape their pernicious embrace, I believe, our long-term future can be just as miraculous as our past. To achieve this, we must work together. We must put aside trivialities. And, above all, we must give strategic thinking and visioneering, priority on the national Agenda of economic operators and political decision-makers. It is high time to look beyond Vision 2020. BIS central bankers’ speeches | bank of mauritius | 2,013 | 12 |
Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 28 February 2014. | Rundheersing Bheenick: Unlocking our potential in these uncertain times... Letter by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, to stakeholders, Bank of Mauritius, Port Louis, 28 February 2014. * * * The original speech, which contains various links to the documents mentioned, can be found on the Bank of Mauritius’ website 1. The year 2013 saw the Bank scoring many “firsts,” reaching new “highs,” and establishing new records. We sharpened our focus on financial stability and macroprudential policy. It was also the year that marked the start of my third mandate as Governor, this time without any hullabaloo. I view this mandate as a vote of confidence in my stewardship of the Bank and would wish to take this opportunity to lay out the platform for taking the Central Bank and, by implication, the economy to still greater heights. Successfully tackling the challenges ahead does not rest on my shoulders alone, but depends crucially on the support of public policy-makers, Bank staff, and private stakeholders. 2. My personal experience at the helm of the Bank has been filled with ups and downs and I expect the third mandate to be no different on this score. Anybody hankering for a quiet nine-to-five life, five days a week, would be well-advised to stay well-clear of the shoes of a Central Bank Governor. Faced with the continual global economic uncertainty, I had to focus my efforts on maintaining domestic macroeconomic stability. Our achievements speak for themselves. Our failures generated substantial public scrutiny and media coverage. However, out of every failure comes a lesson and we have learnt our lessons over time. 3. The Letter to Stakeholders now forms part of our regular calendar and its release is eagerly awaited. We see it as part of our communication strategy to inform, enlighten, and explain. 1 We share our successes and failures sans états d’âme or chest-beating. At the start of my new mandate, I would also like to extend the traditional Letter to Stakeholders by sharing my personal strategic vision for the Bank and the economy. I hope that this provides food for thought for our public policy-makers, private sector operators, and decision-makers to better extend our footprints in the region and to better position the country globally. 4. The letter is structured as follows: Part I provides the context of domestic and global developments and gives a brief overview of trends in monetary policy. Part II focuses on some areas of concern, listed in the text below, and readers seeing this on the website can navigate to the issues of interest to them. Part III highlights the main developments of the past year. Keeping in line with past practice, issues are discussed in greater detail in the links at the end of the relevant paragraphs. As a departure from my previous Letters, details on operational developments are provided in the Annex and a Box is devoted to the Ponzi outbreak that threatened to rock the financial sector in the early part of the year. Part IV presents some other highlights of the year, not captured elsewhere, such as regional cooperation and the close association of the Bank in the work of the Financial Stability Board. Part V concludes. This letter was finalised on Sunday, 26 January. Its publication was, however, delayed on account of the rescheduling of the December 2013 meeting of the Monetary Policy Committee (MPC) to 3 February 2014, and the need for members to observe the silence period of two weeks before and after MPC Meetings in accordance with the MPC Code of Conduct. BIS central bankers’ speeches I. Context 5. Domestic developments. National accounts data over the last few years provide abundant evidence that our economy has gradually lost steam. Targeting the high GDP growth rates achieved in the 1970’s is mere wishful thinking today – unless complex structural adjustments are first made to very many areas of our economic life. Back in the 1970’s, our country had a reservoir of labour, together with access to preferential export markets, and high saving and investment rates culminating in high growth rates. Long gone are those days of sustained GDP growth rates above 5 per cent. Excluding the sugar boom of the early 1970’s, our natural rate of growth hovers around 4 per cent, which is a more realistic benchmark in the absence of deep structural reforms. Our sources of growth are qualitatively different from the growth drivers of most African countries; our human capital still remains key to our progress. We have to live up to the fact that drastic changes are needed and that we need to go beyond business-as-usual, undertake structural reforms, re-skill our labour, raise more capital, step up our saving effort, enhance productivity and competitiveness and accelerate diversification efforts. 6. A critical subject that I would like to highlight is the persistent rise of domestic credit as a share of GDP in our economy. Over the last ten years, we have constantly surpassed the credit growth rate of Sub-Saharan African countries and of small states generally. Credit to households and the private sector topped Rs300 billion for the first time in December 2013, representing over 83 per cent of GDP. While we have not reached the notorious credit growth peaks of Spain and Ireland, we are almost replicating the credit growth pattern of Singapore, without, however, the decisive steps which Singapore initiated to curb excessive leverage and cool property demand. This sustained increase in credit has gone hand-in-hand with rising indebtedness, in the household as well as the corporate sector, and increasing concentration of credit risk. As regulator, we had to take prudential measures to protect the financial sector and the economy at large. We deemed it advisable to introduce a series of macroprudential measures on loan-to-value ratio, debt-to-income ratio, sectoral limits and additional provision for certain sectors to manage the budding risks. 7. One of my goals in my third mandate is to reinforce the resilience of the banking sector and to foster its sustained growth. Regulators have learnt many lessons from the global financial crisis, chief among which is the need to improve the monitoring, surveillance and governance of financial institutions to guard against current risk as well as to prepare them for potential future shocks. In 2013, we took determined steps to improve the regulatory and supervisory landscape facing financial institutions and give it a more forward-looking approach. We addressed a number of both micro- and macro-level issues. We issued several new guidelines, and brought improvements to existing ones, to adapt the regulatory framework to the evolving needs of the financial sector, and to bring it closer to international best practice. As detailed elsewhere, we also enhanced our approach to off-site surveillance and on-site inspection of individual institutions. There was considerable interest from new players in gaining entry to the local banking sector; we received seven applications for a banking licence in 2013. (More on this issue) 8. I must concede that we still have to cover some ground to de-risk our financial system and add depth to the financial market. The Deposit Insurance Scheme, a special bank resolution regime, an Ombudsperson for the sector, a National Payment Switch (NPS), the introduction of Sukuks and cross-border resolution are some of the areas where we are trailing well behind. Not because we at the Bank have been sleeping at the wheel, but mainly because of lingering difficulties in securing the enabling legislation – except in one case, where despite the appropriate legislative amendments, a key player has not modified its behaviour to facilitate the objective which these amendments seek to further. I am mystified by such foot-dragging on initiatives designed to increase the safety of our banking and financial system. (More on this issue) BIS central bankers’ speeches 9. Global backdrop. At the global level, there was increasing evidence in the second half of the year, of the recovery taking hold in some key economies, but little sign of a takeoff as “escape velocity” continued to prove elusive. Lingering recession plagued the euro area for much of the year with, however, a significant improvement in the major Eurozone countries in Q4. Major emerging markets such as China and India slowed down. The deeper recession in the euro area has had a particular impact on global growth: the downward draft from weak balance sheets, depressed confidence, and low demand, worsened prospects for export-led recovery for trade partners such as Mauritius. Tight fiscal and financial conditions prevailed, with the spectre of a possible US debt-default arising from fiscal brinkmanship adding to the uncertainty. Mid-year speculation about possible “tapering” by the US Federal Reserve sparked increased volatility of capital flows which abated when “tapering” was actually launched – a clear sign of market nervousness in conditions of extreme uncertainty. 10. Regulators are still striving to reform the regulatory framework to minimise the likelihood of future financial crises and if they occur – as they surely will – to ensure that their systemic impact is contained. The sheer amount of public money pumped into ailing banks during the recent global financial crisis – either to bail them out, to avert collapse, or to provide liquidity support – has compelled policymakers to find ways and means to limit reliance on such recourse in future. Good progress has been made on rules on capital, leverage, and liquidity for banks. But there is still much ground to cover on the reform agenda. The implementation of new reforms has been uneven across countries worldwide and remains a challenge, especially as the pressure to reform has abated as the crisis has receded further in the past. 11. Financial institutions guilty of delinquency during and after the financial crisis are being pinned down by regulators. Banks have had to dig deep into their pockets to pay hefty fines for such offences as manipulation of the London interbank offered rate, Libor, rigging foreign exchange markets, and collusion among banks to undermine a government programme as in Hungary. Bank executives, directors, and traders have been fired or jailed. Regulators are becoming unyielding in bringing offenders to justice. Over time, it is expected that banks and other financial institutions will have to improve their internal controls to prevent irregularities and improper behaviour. 12. Trends in global and domestic monetary policy. The recent years of global economic mayhem have put monetary policy to a severe test. Central bankers everywhere have been scratching their head, reflecting on the ideal approaches to monetary policy formulation in the post-Global-Financial-crisis era. Faced with tough monetary policy dilemmas, many large central banks, grappling with the zero lower bound, resorted to “forward guidance” as an additional tool in their arsenal, with a focus on signalling their monetary policy intentions through an enhanced communication strategy. The prolonged period of ultra-loose monetary policies around the world brought to the forefront issues such as asset price bubbles, volatile capital flows, dollarization, and imported instability. The twists and turns of monetary policy in major economies have rocked the boat for smaller central banks, pushing them in uncharted waters, and forcing them to intervene to combat currency appreciation that threatened to throw their economies out of kilter if left unchecked. 13. Such has indeed been the case for Mauritius, where the situation is further complicated by two idiosyncratic factors. First is the entrenched divergence of opinion among Monetary Policy Committee (MPC) members, which surfaced during the year, pitting Bank executives against “external” members. Unlike the situation in most developing economies, our MPC comprises a majority of external members who outnumber the Bank members 5–3. A second issue is the raging controversy around growth versus inflation, with the Bank resolutely sticking to its last and not allowing itself to stray from its core mandate of price stability. Mercifully, the vociferous calls from some policy quarters and interested exporters’ lobbies for currency depreciation, which engulfed the Bank in the first half of 2012, were no longer heard. The voting pattern in the MPC inevitably weighs on the overall credibility of the monetary policy decision-making process. The time is ripe for a review of legislation to give BIS central bankers’ speeches the Bank operational independence in the formulation and implementation of monetary policy as is the case not just in most developing economies, but also in a number of major central banks, including the US Federal Reserve, the European Central Bank, the South African Reserve Bank and even the Bank of Japan. 14. An acid test for a central bank is the management of inflation expectations. Despite the tussle at the level of the MPC, I am pleased to report that both inflation and inflation expectations have stayed at low levels, giving the country a stable macro-economic environment which has led, in turn, to a higher level of support for the Bank and its policies among the wider population, notwithstanding much negative coverage in some parts of the mainstream press and in business publications. A sustained communication strategy, with increasing reliance on Open Mouth Operations, facilitated this outcome. However, the fight against inflation is a continuing one. At 4 per cent year-on-year in December 2013, inflation is far below the double-digit levels greeting me on arrival at the Bank in early 2007. We should not lose sight of the fact that many of our peers, in the various regional groupings on the continent to which we belong, are doing better on this score. The Association of African Central Banks (AACB) had a target of 3 per cent meant to be achieved by 2012. SADC has an inflation target of 3 per cent by 2013–2018 – which goes to say that we must step up our efforts to bring domestic inflation even lower. II. Areas of concern 15. Beyond Vision 2020 Vision 2020 was a futures exercise with a difference. It was conducted in the mid-1990’s. It sketched out a coherent view of likely future outcomes for our society and our economy. Wide participation in the exercise led to broad ownership, which facilitated our transition from an agricultural economy to a service-oriented and knowledgebased economy. I believe that we must explore all avenues to enable the Mauritian economy to avoid the middle income trap. Strategic planning is vital. We find ourselves in dire need of long-term vision – just as we did in the early-1990’s. Vision 2020 was led by the public sector and drew on the support of academia, business leaders, opinion-makers, nongovernmental organisations, and other stakeholders. Now, when the public sector is suffering from limited planning capacity and expenditure constraints while, in parallel, the private sector has burgeoned, I would encourage private sector organisations to take centre stage, set up a think-tank and take the lead in fashioning a strategy and a vision for the country. This will mark a new stage in our much-vaunted public / private sector partnership, that lies at the root of our economic success, and will signal that the private sector has come of age and is ready to look beyond self-interest to focus on the common good. 16. An adult approach to understanding monetary and fiscal policy. There has been an open debate between the Bank and the Ministry of Finance and Economic Development (MOFED) on several economic issues this year. Although I appreciate these vivid discussions, I fear that there is a discernible tendency in the press and among other economic commentators to blow some issues out of proportion, to fan dissension, and to spread misunderstanding, raising misguided questions about the independence of the Central Bank and the effrontery of an “unelected” Governor not heeding the wishes of elected officials. The incontrovertible international evidence of superior outcomes from independent central banks, with governors immune to short-term political pressures, is occulted. There is a failure to appreciate what “coordination” between monetary and fiscal policy means. In an ideal world, coordination would entail both parties working together for a common goal. However, if all adjustments have to be borne by one side, then this can hardly qualify as “coordination”. Regrettably, much of the time, this has been the case for monetary policy, where compromises were expected from the Bank. 17. Unfortunately – or fortunately, depending on where you stand on the issue – our hands are bound by the statute setting up the Bank, with the result that adjustments cannot come from the monetary policy side; and the Bank gets blamed unfairly for actually doing the job for which it was set up in the first place! I would make an appeal for a better-informed and BIS central bankers’ speeches more adult approach to understand the differing perspectives where coordination between monetary and fiscal issues is needed. The Bank’s monetary policy has been subject to much criticism by economic agents and doubts were cast on whether we should not throw overboard our IT-lite monetary regime in favour of – in the order proposed, and at roughly one-year intervals – (i) pegged exchange rates vis-à-vis each of three major currencies of export interest (which would have been quite a feat!), (ii) exchange-rate targeting and (iii) nominal GDP-targeting. Predictably, the Bank resisted these calls – just as we had resisted earlier calls from the IMF to move from our hybrid regime to a pure Inflation-Targeting framework. 18. Rethinking our economic strategy. A rethinking of our economic strategy is warranted in the light of the new global economic paradigm characterised by muted growth prospects in our traditional advanced economy partner countries, combined with a slowdown in growth momentum in emerging economies. I strongly believe that a rebalancing of the economy, away from consumption and towards investment and exports, is urgently required if we want to contain rising current account deficits, sustain strong growth, and graduate to a high-income economy. While monetary policy through an appropriate level of the Key Repo Rate (KRR), could contribute to a more balanced economy, it should be accompanied by appropriate fiscal policies and supported by bold structural policies to raise productivity across public and private sector enterprises. 19. New roles of central banks. Central banks have been responsible for cushioning some of the financial damage arising from the disorderly financial and monetary conditions triggered by the global financial crisis. However, this has come at a dear price, with central banks’ buffers dwindling and their fire-power compromised by the continued ultra-low returns on their investment portfolios. Central banks in key economies have become the new economic game-changers, taking the strain of propping up their financial sector and their economies on their own balance sheets. The Bank has faced similar challenges and has not been immune from some of the problems affecting its (bigger) peers elsewhere, such as the US Federal Reserve, the Bank of England, the Bank of Japan, the Swiss National Bank, and the Reserve Bank of India. 20. Restoring the health of the Mauritian economy is no longer the only item on the agenda anymore, as the Bank’s efforts to prop up the economy by combating appreciation and absorbing liquidity have combined with negligible returns on its reserves to raise serious concerns about the health of the Bank’s balance sheet. Expansionary monetary policy has recently been scrutinized by global fund managers and economists, who argue that the effect of monetary easing is felt only by big corporations and ignores SME’s. Some have gone even further, declaring that in recent times, expansionary monetary policy might have been of purely cosmetic benefit. Central banks such as the Bank of England and the US Federal Reserve have launched initiatives to aid SME’s, thus making their own policy decisions more significant. With the advent of the crisis, it is normal that the roles of central banks changed to tackle the issues in hand. Now that we are emerging from the crisis, there are increasing calls for central banks to return to their core mandate and avoid taking on extra responsibilities which they are ill-equipped to handle. 21. The continuing challenge of “negative carry” for the Bank’s balance sheet. Faced with a low interest-rate environment, compounded by heightened volatility in financial markets – especially in the fixed income space where bank reserves are traditionally concentrated – we have strived to generate a decent return on our reserve assets without compromising on their safety. The Bank was trapped in a pincer movement of low-yielding reserves and a rising volume of reserves. On the one hand, reserves continued to be affected by the near-zero return on US- and Euro-denominated assets and by the significant decline in gold prices in 2013. On the other hand, reserves increased as a result of our actions, prompting the structural excess rupee liquidity in the banking system which was showing disturbing signs of getting dangerously out of hand. We had no alternative but to issue longer-term paper, in the form of 5-Year Bank of Mauritius (BOM) Bonds, in addition to BIS central bankers’ speeches the BOM Bills and Notes which we have been issuing since 2010 to bring the excess liquidity to a reasonable level. The “carry”, that is the difference in yields between the rising volume of reserve assets in our portfolio and the weighted yield on BOM paper issued to mop up excess liquidity, continued to remain negative and currently stands at around 3 percentage points. 22. The impact on the Bank’s finances would have been even worse had we not pursued a conservative diversification strategy in search of safe, liquid, and higher-yielding currency assets. Because our statutory mandate as the international reserves manager of the country is security, liquidity, and then return, – in precisely that order – we have been constrained in terms of how much we could potentially expand the risk envelope in search of higher yield. With revenues generated from external assets showing little upside, considering the risk limits, and with the supply of Government paper remaining constrained, at least partly because of greater recourse to foreign currency debt, the Bank has suffered rising balance sheet stress. With the large volume of BOM paper outstanding at end-December 2013, the sterilisation cost is expected to reach Rs700 million in the coming year. 23. Danish debt management model. The transfer of the debt management function, for both domestic and external debt to the Bank, was an initiative of MOFED and was inspired by the Danish model. We did not, however, consider it appropriate to set up a fullfledged Debt Management Unit within the Bank as this was not justified by the low level of transactions and would have caused much duplication of work already done by other Divisions at the Bank. The International Monetary Fund reviewed the current debt management arrangements in December 2013. It identified some duplication in the work done by the Bank and within MOFED, and has noted several inefficiencies. These will need to be addressed, along with the obstacles preventing the development of a secondary market for Government paper. 24. The problem of excess liquidity exacerbated by Special Funds. Large and growing balances in Special Funds such as the National Resilience Fund, the Build Mauritius Fund and the Road Decongestion Program Fund, all financed by Budget measures and transfers, are creating difficulties for the Bank to achieve its objective of monetary and financial stability. The Treasury places these funds with commercial banks, further inflating the level of excess liquidity, and handicapping the Bank in the management of liquidity in the banking system. To add insult to injury, the Bank’s actions and authority were further undermined by the Treasury effectively acting as a lender of first resort via the deployment of these funds to cash-strapped commercial banks, which would otherwise have taken the normal route of seeking accommodation from the Bank and enabled the repo rate corridor to gain traction. I have complained against both of these practices as I believe that a Single Treasury Account, placed at the central bank, does represent best practice and that it is unhealthy for the single largest player on the financial market to frustrate the Bank by its actions. We are now exploring the possibility of requiring a higher Cash Reserve Ratio from Special Fund deposits in excess of transaction balances. 25. Dynamic provisioning – Too late in the game. At the core of the Bank’s problem lies a weak balance sheet. The combination of Operation Reserves Reconstitution (ORR), embarked upon hesitantly – and, that too, only after securing a now-problematic agreement to co-share the attendant costs with the Treasury −, open market operations at rising volumes, and low yields on reserve assets, allied with a “negative carry”, has proved lethal for the Bank’s finances. In a much-earlier letter, I had mentioned dynamic provisioning – allowed by the Bank of Mauritius Act 2004, incidentally – as a mechanism for the Bank to salt away some profits for the lean years ahead. We tried to apply this approach in July 2007 to our profits for the Financial Year 2006/2007. At that time, we were clearly ahead of the game – only to be charged with accounting trickery. Some will recall how the Bank was pressured into reversing these provisions and distribute them as profits via a second dividend payment in July 2008. Had the concept of dynamic provisioning then gained support from the Bank’s board and from the Treasury, the Bank would have been in better shape today and would BIS central bankers’ speeches have absorbed sterilization costs reasonably well. It is too late in the game to hanker after dynamic provisioning. I can only renew my call to the authorities concerned to help alleviate the Bank’s fragile balance sheet, and possibly draw some inspiration from Australia which shored up the fire-power of its central bank by a massive injection of resources in the final quarter of 2013. 26. Islamic banking products – On hold? Since 2007, we have taken a number of initiatives to promote the development of Islamic banking in Mauritius, including the establishment of an appropriate legislative framework for Islamic finance as well as becoming a full member of the Islamic Financial Services Board and a founder-member of the International Islamic Liquidity Management Corporation, both key institutions in international Islamic finance. The Public Debt Management Act 2008 was amended to provide for the issuance of Sharia-compliant instruments such as sovereign Sukuks by Government. Unfortunately, the public debt issuance calendar has never provided for the issuance of Sukuks, as proposed by the Bank in its capacity as debt adviser to Government, and this severely compromises the prospect of our jurisdiction playing a bigger role in the growing world of international Islamic finance. (More on this issue) 27. We are finalising preparations for the conduct of Commodity Murabahah Transactions (CMT’s) to provide Islamic Banking Institutions (IBI’s) operating in Mauritius with an instrument for liquidity management. The CMT’s, to be conducted under the umbrella of a Master Agreement, which will be finalised in consultation with the IBI’s and the banking industry, will extend the range of tools available to the Bank for the conduct of Open Market Operations. III. A year of measurable progress 28. Economy. The Mauritian economy maintained its positive growth momentum in spite of soft external economic conditions in our main trading-partner countries, thus maintaining its unblemished record of positive GDP growth throughout the global financial crisis. GDP is estimated to have grown by 3.2 per cent in 2013. All the major economic sectors recorded positive growth rates, with the exception of Construction and Agriculture. Rigidities in the labour market, coupled with a growing structural skills mismatch, continued. Female and youth unemployment remained matters of concern. First-time job-seekers were not helped by generous salary increases which went into effect in the second half of the year. Although downside risks to growth persist, mainly emanating from the uncertain recovery and soft external demand for our exports of goods and services, with their knock-on effects on subdued domestic private investment and consumer spending, there is some upside potential with the Eurozone expected to emerge from recession in 2014. (More on this issue) 29. Monetary policy. Recent MPC meetings have witnessed persistent divergence of views on the appropriate monetary policy stance between, on the one hand, the three Bank executives, and, on the other, the external members who predominate on the MPC. The majority held the view that given what they perceived to be subdued inflation risks, monetary policy should support growth and employment. My two Deputy Governors and I were in favour of a small hike in the KRR to signal our concerns about inflation risks, and risks to financial stability, stemming from a prolonged period of low interest rates in the country. We thus saw a 25 basis points cut in June to 4.65 per cent after fifteen straight months on hold. The cut was effected against a backdrop of rising inflation, from 2.9 per cent year-on-year in January 2013 to 3.7 per cent in May, the latest data point available to the June MPC meeting. We ended the year with year-on-year inflation at 4 per cent in December. (More on this issue) 30. In my opinion, negative real interest rates – relative to saving deposit rates offered by banks, typically 25–115 basis points below the KRR – have contributed to a significant decline in the savings rate, given a boost to consumption leading to a sharp deterioration in BIS central bankers’ speeches the current account deficit, and fuelled speculation in search of higher yield beyond the safety of bank deposits. Little wonder then that Gross National Saving continued its downward slide from 15.1 per cent of GDP in 2012 to 14 per cent in 2013. Low on-lending rates have in turn induced growing indebtedness of the corporate sector, driven partly by speculative investment in the property sector. The misallocation of credit has increased vulnerabilities in the banking sector and the economy at large. Given such risks, we strongly believe that the MPC should start normalizing interest rates. 31. Exchange rate policy. Stressed conditions on export markets sparked considerable support for currency depreciation among exporters and their lobbyists, including the cryptolobbyists embedded in different parts of the economic and financial establishment. Consumers rarely get invited to the debate on the subject and their voices go unheard. We thus tend to lose sight of the fact that Mauritius imports twice as much as it actually exports, with food and fuel accounting for a major part of the import bill, which makes the exchange rate a strong detonator for social unrest, if mismanaged. It is our responsibility to manage the exchange rate in the best interest of all our countrymen, as provided for in the Bank’s statutes. We have held the view that supporting a narrow sectional interest, at the expense of the wider public interest, is a matter of fiscal/industrial policy. 32. The year 2013 saw the Bank stepping up its intervention on the foreign exchange market – we intervened on 238 days, that is, almost every working day, and successfully transacted nearly 80 per cent of the time – to combat unwarranted appreciation not in line with fundamentals, smoothe out volatility, and continue the ORR programme on which we embarked in mid-2012. Have we succeeded in our objective of aiming for exchange rate stability? The exchange rate statistics speak for themselves. At the start of my first mandate as Governor in 2007, the rupee was under considerable pressure from speculative transactions and over-borrowing, resulting in a volatile currency. I am happy to record that our rupee did not suffer from the extreme volatility affecting most countries across all continents, whether BRICS, emerging markets, or frontier economies, during 2013. In SubSaharan Africa, our currency came second, behind the Botswana pula. I draw some satisfaction from the fact that we have been able to stabilise the rupee. This is no mean feat for a small open African economy, with euro-biased exports and dollar-biased imports. 33. Liquidity in the banking system. I have discussed earlier the factors underlying the excess liquidity in the banking system. We continued with our efforts to mop up/sterilise this veritable deluge of liquidity through the issuance of our own instruments – which reached an all-time record of Rs20 billion outstanding in August 2013. The management of this surplus liquidity, which threatened to de-stabilise domestic financial conditions, stretched the resources of the Bank. Given the structural nature of the excess liquidity, the Bank went beyond its traditional short-term liquidity management instruments and started issuing 5-Year BOM Bonds in addition to the 3-Year BOM Notes. We took extra care not to create any financial fragmentation by piggy-backing the issuance of BOM securities on the regular auctions of the corresponding tenors that we conduct on behalf of the Treasury. (More on this issue) 34. Debt management. The lengthening of the maturity profile of Government debt is part of the Debt Management Strategy, on which the Bank advised the Treasury, to mitigate rollover and refinancing risks. The exercise continued during 2013 with the issuance of more medium- and long-term Government securities, relative to maturing securities. Correspondingly, the share of short-term obligations by original maturity (inclusive of shortterm borrowings) was halved, plunging from 36 per cent in June 2007 to 18 per cent in December 2013. The share of medium- and long-term obligations surged from 64 per cent to 82 per cent over the period. In addition, greater recourse by Government, especially since calendar year 2009, to long-term foreign loans and grants to finance a significant part of its budget deficit – irrespective of its devastating double effect on rupee liquidity, which I discuss elsewhere – also contributed to lengthen the maturity structure of public debt. Provisional BIS central bankers’ speeches data for end-September 2013 record external debt at around Rs45 billion, three times the level of June 2007 when it was Rs13.5 billion. (More on this issue) 35. Reserve management. At the start of my Governorship in 2007, the reserve portfolio of Rs43.1 billion, or USD1,289 million, was overwhelmingly invested in USD, GBP and Euro which accounted for just above 75 per cent of reserve assets. This was not unusual for central banks as these were the three major currencies. We were ahead of the game when I initiated an active portfolio diversification strategy to hedge against portfolio risk arising from this concentration. We sought out currencies such as the Swedish Krona and the Norwegian Kroner, which were less correlated to the three major currencies, and included them in our reserve portfolio, thus reducing the key currencies to just below 60 per cent in December 2013. We diversified our reserve portfolio further through increasing our gold holdings, when we bought two tons of gold from the IMF Gold Sales in 2009. 36. Few now recall how we came under attack from two opposite fronts at the time: one charged that we should not have bought any gold in the first place while the other attacked for not buying a bigger volume! When gold prices soared in the period 2010–2012, there were murmurs of reserve mismanagement, supported by hypothetical estimates of the notional “losses” we suffered by not investing up to 50 per cent of our reserves in gold. Gold prices fell nearly 30 per cent to USD1,204 in 2013, its sharpest decline since 2001, pushing, for example, the Swiss National Bank to a SFR9 billion loss in 2013. I wonder how our Bank would have coped if we had followed the advice to invest half of our reserves in the yellow metal! In hindsight, the diversification strategy, which we pursued primarily in search of greater security, has clearly paid off, especially when viewed against the backdrop of several other central banks actually incurring capital losses in their portfolio during the financial crisis. 37. The Euro Zone struggled with recessionary conditions, with attendant risk to the global growth outlook for most of 2013. For a small economy like Mauritius, critically dependent on export demand from the Euro Zone, there is a clear need for more vigilance, and a more aggressive diversification drive. In mid-2012, when the country’s import cover was at 4.5 months, the Bank decided to embark on ORR to increase the level of Bank foreign reserves to 6 months’ import cover. The year 2013 saw the external reserves topping Rs100 billion for the first time, to stand at Rs103.5 billion at end-December 2013, or USD3.43 billion, representing 5.6 months of import cover. The Bank is well on the way to meet the basic objective of the ORR. 38. Forex intervention. We continued to intervene actively, almost on a daily basis, on the domestic foreign exchange market during the year to remove unwarranted volatility. The Bank purchased foreign currency of nearly USD1.1 billion – a record – and sold the equivalent of USD470 million. We thus doubled our foreign currency purchases from the level of the previous year when we bought nearly USD525 million. It would have been extremely dangerous for the Bank to envisage forex purchases at such elevated levels if we did not have an alternative to placing the accumulating reserves arising therefrom in lowyielding traditional reserve assets. We used a major part of the proceeds to provide foreign currency to the State Trading Corporation, at its request, to finance the import of food and fuel, major items in the consumer price basket, at stable exchange rates which in turn led to stability in the prices of these products in the domestic market. Our forex intervention has turned out to be the proverbial stone that helped us to bag the two birds of exchange rate stability and price stability, both major policy objectives of the Bank. (More on this issue) 39. Safety of systemically-important banks. We achieved definite progress in 2013 in our endeavours to enhance the resilience of the banking industry and reduce financial stability risks. Back in 2012, I had urged the large banks to reduce the complexity of their group structures and segregate their banking and non-banking activities. This measure seeks to limit the risk of contagion to the banks, enhance market discipline and transparency, and ensure that bank boards and management focus attention on the core business of banking. We also pressed for periodic rotation of directors at the level of bank boards. The BIS central bankers’ speeches restructure will benefit depositors, bank creditors, and shareholders. The law was reviewed in 2013 to facilitate the restructuring process. Three banking groups have already reached an advanced stage in reorganising their corporate structure, which will safeguard their banking activities from risks arising from other business segments of the same corporate group. Further, one bank, formerly operating as a branch of an international bank, incorporated as a subsidiary in May 2013. The objective is to protect affiliates of foreign banks operating in Mauritius from any potential problem affecting their parent banks in their home country. (More on this issue) 40. A long-standing characteristic of the domestic banking sector is the predominant presence of a few large banks. Any problem arising in these banks could trigger contagion across the financial system and affect the real sector. The Bank has the duty to mitigate this risk for the safety of the financial system and the economy generally. I first publicly flagged this issue for attention in September 2011. We are now proceeding to establish a framework for Domestic-Systemically Important Banks, drawing on the recommendations made by the Basel Committee on Banking Supervision in October 2012. The draft framework has been issued to the industry for comments. Under our approach, banks reckoned as systemicallyimportant will be subject to more stringent conditions, including the maintenance of a capital surcharge for their systemic importance. This measure will be applicable to banks as from the first quarter of 2016, thus giving them ample time to prepare for the change. 41. Macroprudential measures. We had to roll out quite rapidly a wide range of macroprudential measures to cope with rapidly-emerging vulnerabilities in the financial system. I first drew attention to the matter in my Statement of 5 October 2013, prefacing the Annual Report of the Bank for the Financial Year 2012–2013. We issued relevant guidelines in October 2013. The macroprudential measures are now being implemented. Banks will apply the measures in a phased manner to allow them and their customers to adjust smoothly to the new requirements. The measures encourage banks to adhere to more prudent lending standards, thus reducing the vulnerability of the banking sector to credit concentration and customer default risk in the targeted sectors. (More on this issue) 42. Basel III. We followed up on the Consultation Paper on the Implementation of Basel III in Mauritius, which we issued in October 2012, by circulating a draft Guideline on Scope of Application of Basel III and Eligible Capital to the banking industry. This sets out the rules and tentative timelines to implement some of the elements of the stronger Basel III capital framework. Higher capital requirements under Basel III will strengthen the ability of banks to operate under stress conditions and will help to protect depositors. We shall ensure that the transitional arrangements to implement the new standards allow the banking sector to meet the higher capital standards through adequate earnings retention and capital raising, while still supporting lending to the economy. 43. Disclosure of information to guarantors. Guarantors have rarely been apprised of their extant financial liability in case of default by any borrower whose original debt they may have guaranteed, typically years before the borrower defaults and the guarantee is actually enforced. I had asked for an amendment in the banking legislation to empower the Bank to require every financial institution to make a statement of account available to the guarantor of any credit facility. The law was amended in December 2012. Accordingly, we issued the Guideline on Disclosure of Information to Guarantors to the industry for consultation in September 2013, and it became effective in January 2014. The guideline provides guidance to financial institutions, setting out the framework, and prescribing the instances, for issuing statements of accounts in written or electronic form to guarantors of credit facilities. (More on this issue) 44. Future of banking. Rapid developments in the banking and payments technology landscape, combined with increasing competition for banking business, are fuelling a drive for more efficient, automated, and reliable delivery platforms and information systems. The year 2013 saw a number of domestic financial institutions upgrading their IT systems to reap BIS central bankers’ speeches efficiency gains, enhance their capacity to grow their business, cater for new products, and offer better service to their customers. Enabling technology allows banks to move closer to their customers, while gradually shifting from the conventional “brick and mortar” branchbanking model to adapt to the needs of customers on the look-out for faster, 24/7, on-thespot access to banking services. We are fast moving towards a cash-lite society, with consumers accessing banking services through the Internet and mobile phones. The entry of mobile financial service providers in the low-value payments space has brought some muchneeded competition, to the benefit of customers. To meet these challenges, we have been adapting our regulatory framework to cater for electronic delivery of banking services. We introduced the Guideline on Mobile Banking and Payment Systems in February 2013 to complement the Guideline on Internet Banking which we had issued in 2001. (More on the issue) 45. The Bank’s monitoring and surveillance functions require it to obtain and analyse a large volume of data from banks and other regulated financial institutions. We are concerned by the rising reporting burden on banks and run the risk of suffering from data overload at our end. We are now embarking on a landmark project to automate dataflow from financial institutions, set up a data warehouse, and introduce Business Intelligence tools for users. The project will radically improve the entire system of data management at the Bank as well as reduce the reporting burden on financial institutions. The technology envisaged for the transmission of information, XBRL – or eXtensible Business Reporting Language – is used by major regulators and authorities across the world. We expect to roll out the new system in the next 18 months. It will drastically improve the collection, storage, and processing of information at the Bank. (More on this issue) 46. Protection of customers of financial institutions. Ever since I joined the Bank, I have been stressing the need to have an Ombudsperson for the entire financial sector to provide a low-cost recourse for consumers of financial services to address and resolve their grievances. However, the law makes provision for the post of an Ombudsperson for banks only, to be filled by an officer of the Bank. This is clearly insufficient. Some progress has been achieved in the protection of customers with an amendment to the Banking Act 2004 in December 2012 to give powers to the Bank to require financial institutions to establish procedures to that effect. We accordingly issued the Guideline on Complaints Handling Procedures in August 2013, detailing a broad range of measures to be implemented by financial institutions to deal with complaints and grievances from their customers. The Bank has been collecting information on complaints received by banks. (More on this issue) 47. It has also been quite some time since I began urging banks to review their rates and charges. The increasing number of complaints received at the Bank from the public prompted us to set up a Task Force in July 2012 to inquire into the terms and conditions of banking and related financial contracts, including fees, commission and charges. Members of the public were invited to submit their comments and proposals. The Task Force has been considering the issues raised during the representations and will be releasing a public consultation document this year with a view to ensuring that both consumers and banks have a fair deal. The recent amendments to the Banking Act 2004 to protect consumers of financial services are welcome and support the same objective. (More on this issue) 48. Exchange of information among regulators. We broke new ground in sharing information with foreign regulators from countries where our domestic banks have extended their footprint. I felt it imperative to improve cross-border supervisory collaboration and sharing of information between ourselves as home regulator and the host regulators. We already had in place bilateral agreements, or memoranda of understanding, with the concerned host supervisors. We achieved a new milestone in cross-border supervisory cooperation by organising “Supervisory Colleges” for our two systemically-important banking groups, namely, the Mauritius Commercial Bank and State Bank of Mauritius, in November 2013. The Bank is among the first central banks in Africa to have organised such Supervisory Colleges. We capitalised on the presence of the host supervisors at the Bank to BIS central bankers’ speeches hold an inaugural workshop on Crisis Management for the two banking groups. (More on this issue) 49. Mauritius Credit Information Bureau. The Mauritius Credit Information Bureau (MCIB) has proved to be instrumental in supporting credit intermediation by offering a platform for information sharing on borrowers’ characteristics and indebtedness. We have successfully enlarged the range of participants in MCIB, which now includes utility bodies. MCIB has facilitated prudent lending by financial institutions. This is well captured in the Depth of Getting Credit index of the World Bank’s Doing Business 2014 survey where Mauritius has topped the list of African countries for several years. This year, we have scored 6 over 6 in the Depth of Getting Credit index and the country’s overall rank improved by ten notches to 42nd in the 2014 edition of the survey. 50. Reinforcing the surveillance process. The financial crisis has forced bank regulators and supervisors to re-examine their approach to fulfilling their functions. We drew on the experience of other countries and our own deep knowledge of local conditions to upgrade our compliance-based and risk-based approach to regulation and supervision. We enhanced our off-site surveillance by extending coverage of information collected, and the parameters monitored, which in turn enabled a deeper analysis of the evolving conditions. We streamlined the templates used to gather information. Concurrently, during the year, we reviewed the methodology for conducting on-site examination on the operations and affairs of financial institutions. The new risk-focused methodology is more comprehensive and is modelled on the internationally-acknowledged CAMEL framework – quite familiar to the Bank as we have been using it for years now for off-site surveillance. Emerging risks can be proactively identified, at the level of both individual institutions and the industry as a whole, and measures can be taken rapidly to address them. We applied this new approach in 21 on-site examinations carried out in 2013. 51. Shadow banking. The financial scam, unfurling over the country in early 2013, underlined the necessity to review the domestic regulatory and supervisory framework which is characterised by the presence of several agencies. Legislative changes were brought in December 2013 to transfer the supervision of credit unions and money lenders to the Bank from the Registrar of Co-operative Societies and the Accountant General, respectively. It is a step in the right direction towards consolidating oversight of financial intermediaries. We have already earmarked a dedicated team to look into the various issues associated with this added responsibility. However, credit unions and money lenders represent a small fraction of the financial sector. Insurance companies, for instance, are offering certain quasi-banking products and have a more dominant position in the financial sector. Financial intermediation outside the banking sector tends to undermine the role of the Bank in effectively conducting monetary policy and ensuring the soundness of the financial sector. We may have plucked the low-hanging fruit but much more needs to be done to minimise risk to the system and to our jurisdiction. 52. Islamic banking. In September 2013, I had the signal honour of being elected Deputy Chairman of the Governing Board of the International Islamic Liquidity Management Corporation (IILM) – a supranational body, launched in October 2010 and headquartered in Malaysia, which is engaged in issuing Islamic liquidity instruments to facilitate liquidity management by Islamic banking institutions. The Bank is a founder-member of IILM. This election raises the profile of our jurisdiction in the global Islamic financial services industry. We shall get a further boost from the 2014 Summit of the Islamic Financial Services Board (IFSB), which the Bank will be hosting in Mauritius in May 2014. This will see the participation of some 300 leading lights in the world of Islamic finance around the theme “New Markets and Frontiers for Islamic Finance: Innovation and the Regulatory Perimeter”. We ended the year with an application for an Islamic “window” operation from an established bank. (More on this issue) BIS central bankers’ speeches 53. Polymer banknotes. Another “first” in the year was the issue of polymer banknotes, in three denominations (Rs25, Rs50 and Rs500) from two different note-printers. Launching these new generation notes, on 22 August 2013 during the Annual Meeting of the AACB in Mauritius (itself, yet another “first”) – in the presence of a parterre of guests comprising 32 Governors and heads of central bank delegations representing 44 countries, the General Manager of the Bank for International Settlements, and the President of the African Development Bank – Dr The Honourable Navinchandra Ramgoolam, GCSK, FRCP, Prime Minister of the Republic of Mauritius, delighted his audience by calling Governors “the new rock stars of the day, with some of you actually younger than the Rolling Stones!”. The Mauritian currency-using public is also delighted by these notes and has given it an enthusiastic reception. Sadly, our attempt to introduce such notes several years earlier, in a previous currency procurement cycle, was stymied by a narrow, legalistic, interpretation of the applicable law in some decision-making quarters, which necessitated an amendment to legislation before we could proceed down this line. I am not aware of any other central bank which faced such a situation. Currency in circulation crossed the Rs30-billion mark for the first time in December 2013. (More on this issue) 54. Payments system. A robust and efficient payments system is at the heart of a modern economy. The payments landscape is evolving rapidly and its effective oversight is becoming a matter of increasing concern. I laid much emphasis on the full modernization of retail payments which impact on high-volume, low-value transactions. When I joined the Bank in 2007, Electronic Funds Transfer did not exist and cheques were cleared manually. We now have a modern and effective electronic clearing system, with the Cheque Truncation project fully rolled out on 5 December 2013. This was preceded by a historic event early in the year when cheques were cleared manually for the last time on 31 January 2013. In some countries, cheques themselves are becoming history as the world moves to a cash-lite or cashless society. 55. We are setting the scene to move to the next stage which will entail making still greater use of electronic money. Unfortunately, we have failed to make any progress with the NPS – on which we have been engaged since 2009 and to which I alluded in my 2010 Letter to Stakeholders. It has been delayed for reasons beyond the control of the Bank. While we are entangled in fighting incomprehension, in some decision-making quarters, and overcoming resistance from vested interests, Mauritius has become a laggard in this area as several African countries have gone ahead and implemented NPS’s to achieve greater efficiency and lower transaction costs in their jurisdictions. I believe the main hurdles have now been cleared and the Bank is moving ahead with the implementation of the project in the course of 2014. We have a lot of catching-up to do. (More on this issue) 56. Virtual currencies. It is quite possible that virtual or digital currencies may play an increasing role and become the currency of the future, replacing notes and coins. This would be the logical continuation of the process that includes electronic banking, electronic payments and electronic settlement. If such a scenario materialises, financial regulation and oversight will no doubt change beyond recognition to cope with the new financial landscape that will go hand-in-hand with a bigger role for virtual currencies. We are not there yet, and not likely to do so in the foreseeable future. 57. No currency is safe as such, but there is greater comfort in a currency issued by a sovereign, and regulated by an official institution. The virtual “currencies” making the headlines do not offer such comfort, even if they offer greater convenience in settlements in some cases. Additionally, some have a high degree of anonymity and can be misused for criminal activities. The growing popularity of Bitcoin, for example, ― which had seen at one point an increase in its value of 5,000 per cent – is tempting for individuals seeking rapid returns on their outlays. Whether such outlays should be termed “speculation” or “investment” is a matter of judgement. These virtual “currencies” are unregulated digital money and are not issued, or guaranteed, by any central bank. During the year, the Bank BIS central bankers’ speeches issued an Advisory, cautioning the general public to exercise utmost diligence when dealing with virtual “currencies”. Box – Ponzi schemes This year, the Bank exposed two large scams which seriously damaged thousands of Mauritians financially. The Ponzi schemes we uncovered followed the classic model of those in the USA in the 1920’s, where one fraudster, Charles Ponzi, offered abnormally high and unusually consistent yields from a fake investment scheme, paying out the returns not from profits, but from the capital, and then running off with the capital itself. Similarly, following complaints from victims, we discovered in 2013 that unscrupulous local criminals had slipped through the existing regulatory framework to trick people to invest their savings in similar Ponzi schemes. The ill-effects of the local Ponzi schemes soon gave rise to a growing number of complaints to regulators as many thousands of local people realised they were being defrauded. As the fraudulent schemes came to light in December 2012, I immediately informed the police, as the two schemes at the centre of the evident fraud had been set up by companies that were not licensed to receive funds for investment. I also then asked banks to provide details of any accounts they were handling for the two principal fraudulent companies involved, and the nature of the due diligence procedures they had carried out on these companies. In January 2013, the Bank began to conduct extensive on-site investigations of banks and other financial institutions to find the sources of the known fraud, to check for any similar undetected practices and to review action to prevent any further deception. In March 2013, in the light of the growing number of complaints and public controversy, I set up a help desk at the Bank for people to provide information on the investments they had made with the companies and to present any further complaints. We also allowed people to use the helpdesk to check the credentials of any other financial schemes in which they were proposing to invest, to ensure such schemes were properly licensed. From the date of setting up the help desk, the Bank had received by 31 December 2013, a total of 3,630 complaints covering a sum of Rs937 million identified by potential victims. The consequences of these scams on the financial sector were fortunately limited. By taking swift action, we at the Bank were able to limit the monetary damage done by this financial fraud. Furthermore, on the basis of the results of our investigations, we levied penalties on a number of banks for failing to protect their customers from the scams and failing to identify the fraudulent schemes operating through their systems. In addition, we called upon banks in Mauritius to radically review their oversight of customer accounts and their due diligence procedures for vetting financial schemes. Moreover, I considered it timely to have a thorough assessment of the flaws in our system that led to the failure to detect the Ponzi schemes. So I called on assistance from the Reserve Bank of India (RBI), which had had extensive experience in dealing with such types of financial scams. The two assessors from the RBI came up with 29 recommendations to improve our regulation of banks and their practices, out of which 25 measures are being implemented to tighten up our systems. The RBI report also noted that “different agencies and banks were appreciative of the pro-active role played by the Bank of Mauritius in handling the issues related to the Ponzi frauds.” They added that the “BOM’s examiners did a commendable job (at one bank) in bringing out KYC/AML weakness in the bank.” The RBI report revealed many dubious practices in the banks concerned and a lack of computerbased systems for screening for fraud. In particular, the RBI report was critical of the high proportion of large transactions in cash handled by the banks for these companies without this alerting them to the fraudulent activities. In addition, there had been strange events involving alterations in the status of the directors of the fraudulent companies, changes in BIS central bankers’ speeches company names which the banks had ignored, and no checks had been made on whether the companies had appropriate licences for the activities in which they were involved. The RBI report in its recommendations called for extension of the powers of the Bank in line with those of the Financial Services Commission under the Financial Services Act of 2007. This would allow it to take legal proceeding against such fraudsters and to freeze their assets. The RBI report considered that “the quantum of financial penalties imposed by BOM on banks is paltry and does not provide effective deterrence. There is a need to substantially increase the same. Moreover, imposition of these penalties also should be disclosed in the public domain.” Part of the radical improvement we are introducing is that the Bank has made it mandatory for all financial institutions to put in place an internal whistleblowing policy. Financial institutions have a special position of trust in the national economy, and employees working with them have an individual and collective responsibility regarding their conduct and practices. We believe that there should be a proper framework in place for people to report any irregularities or unethical practices within financial institutions where they work, without fear of recrimination. We have also extended our programme of customer education, our checks on hiring employees, and their in-service training to prevent Ponzi schemes going undetected in the future. In addition, the Bank has set up a Market Intelligence Cell which has been mandated to collect information from formal and informal sources to help detect any existing or potential financial crime and fraud, and carry out investigations. In the wake of the Ponzi scams and financial frauds, proposals were made to amend the existing Memorandum of Understanding between Bank of Mauritius and the Financial Services Commission to include a framework for handling exigencies, such as the Ponzi scams. We expect amendments to be agreed and implemented in 2014. Could these frauds have been prevented? There is no easy answer to this question. However, lessons have been learnt. I believe that one key way of preventing the recurrence of Ponzi schemes is through financial literacy programmes. Although the 2012 World Bank report indicates a relatively high percentage of adults accessing formal financial institutions (80.1 per cent in Mauritius, compared to 24.1 per cent in Sub-Saharan Africa), I believe that there is still room for improvement. Human nature often falls prey to greed and this has certainly been the case for thousands of our citizens in search of above-market returns. People need to recognise that if a scheme looks too good to be true, it probably is. They should take advice, before investing their lifetime’s savings. Promoting banking access to the uneducated and retirees should be a foremost priority for the banking sector, eventually resulting in benefit for both parties, but basic education about banking, its risks and advantages is clearly needed as part of the package. So too is the need for better surveillance by banks and regulators. (More on this issue) IV. Other highlights of the year 58. Regional cooperation. We scored another “first” on the regional cooperation scene in 2013 when the Bank hosted the 37th Assembly of Governors of the Association of African Central Banks in August and I assumed chairmanship of the Association. The Assembly was preceded by a Symposium on the theme “Financial Inclusion in Africa: the Challenges of Financial Innovations for Monetary Policy and the Stability of Financial System”. The Prime Minister of the Republic of Mauritius delivered the Keynote Address at the Symposium when, as mentioned earlier, he launched the first-ever polymer notes issued by the Bank. The presence of Mr Jaime Caruana, General Manager of the BIS, Mr Donald Kaberuka, President of the African Development Bank, and Mr Jaseem Ahmed, Secretary General of the Islamic Financial Services Board, amidst a record turn-out of Governors at BIS central bankers’ speeches AACB meetings, raised the profile of the meeting and enriched discussions. As Chairman of the AACB, my overarching priority for 2014 will be to operationalise the Community of African Banking Supervisors, established at the beginning of the year and help to carve out a coordinating role for it in overseeing the work and initiatives in this area at the level of the various sub-regional groupings on the continent. (More on this issue) 59. Financial Stability Board. Another honour bestowed on us was my appointment in July 2013 as the non-FSB Co-Chair of the FSB-RCG (SSA) for a term of two years. Let me elucidate these mysterious-sounding acronyms. First, the FSB, or Financial Stability Board: this is an emanation of the Group of Twenty leading economies (G-20) and was established in April 2009 when it was tasked with the coordination, at the international level, of the work of national financial authorities and international standard-setting bodies to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. The only African country in the G-20 is the Republic of South Africa. Second, the RCG: this stands for Regional Consultative Group, which the FSB set up in 2010 to extend its global reach beyond the G-20 membership and help it to address financial stability issues from a wider perspective. Six RCG’s have been set up and are supported by the FSB Secretariat, based at the Bank for International Settlements in Basel. Each RCG has two cochairs, one from the FSB members and the other from the non-FSB members. Third, SSA stands for Sub-Saharan Africa. We accepted the invitation to join the RCG (SSA) at its inception in 2011. As non-FSB Co-Chair of the RCG (SSA), I was honoured to participate in the November 2013 FSB plenary session at the Central Bank of Russia, under the Chairmanship of Governor Mark Carney of the Bank of England, where I reported on the work of our RCG and shared our concerns. 60. Overseas engagements. The Bank’s presence was well appreciated on the international scene by our peers and international financial institutions and this is reflected in the ever-growing invitations addressed to the Bank to attend regional and international events. Representing the Bank on the global stage offers benefits such as increased visibility, networking, sharing ideas and exposure to cutting-edge solutions to domestic issues. Key staff represented the Bank, at both regional and global level, attending conferences such as Financial Stability Board Regional Consultative Group, IMF/World Bank Annual Meetings, COMESA Committee of Central Bank Governors, and the Committee of Central Bank Governors in SADC. I believe that our exposure to the global community through meetings and conferences is indeed the way forward to broadening our horizon. 61. Corporate Social Responsibility: Bamboo Garden. Work progressed on the Bamboo Garden Project, which we launched as part of the Bank’s Corporate Social Responsibility initiative. The Garden, to be located at Dubreuil, Midlands, in the centre of the island, covers a plot of land of around 10 acres. We have enlisted the services of the Agricultural Research and Extension Unit, of the Ministry of Agro-Industry, Food Production and Security, for its implementation. The project also benefits from the support of an Advisory Panel which we have established to oversee the botanical, aesthetic, and design aspects of this innovative project. (More on this issue) 62. Corporate Social Responsibility: Athletics. We have been collaborating with the Mauritius Athletics Association since 2007 to organise the Bank of Mauritius Inter Club Youth Championship Competition. The 7th Edition of the Championship was held over two days in November at Maryse Justin Stadium, Réduit, and saw two new national records, bringing to 34 the rich harvest of records since 2007. Several commercial banks have joined us since 2011 to co-sponsor the Championship, enabling us to provide greater and more sustained support throughout the year to promising atheletes. (More on this issue) 63. Communication with stakeholders. I have continued to maintain the high degree of interaction with stakeholders which I initiated when I joined the Bank in 2007. I could not have engaged in the process of reinforcing the regulatory landscape without consultation with the banking industry. Effective policy-making is best achieved through discussion with BIS central bankers’ speeches stakeholders. Regular dialogue with them has undoubtedly helped the Bank to move quite rapidly on several fronts. Besides, the outbreak of the financial scams in early 2013 made it essential for the Bank to intensify communication with members of the public to keep them informed of developments as well as cautioning them against scammers and fraudulent schemes. 64. Here, I would like to highlight that, as far back as November 2009, the Bank had released a series of statements on its website under the caption Financial Education to draw the attention of the public to various types of financial frauds. The statements contain tips on how to identify scams and the procedures to report suspicious financial activities. I urge members of the public to visit the Bank’s website – which is itself in the process of being revamped to make it more user-friendly – to familiarise themselves with the recent updates and help us detect any suspicious financial activity. I wish to reiterate the necessity for the public to exercise utmost diligence when dealing with individuals or companies with whom they are placing money. (More on this issue) V. Closing remarks 65. I would like to place on record my deep appreciation for the work accomplished by Mr Iqbal Belath, former Second Deputy Governor, who left the Bank in October 2013 at the end of his tenure. He had complemented our senior leadership line-up with unparalleled commitment. I had much pleasure serving the Bank alongside him and drawing on his steady support. He facilitated the integration of his successor at the Bank during the handing-over period. I welcome Mr Issa Soormally, who took over as Second Deputy Governor, on this engaging journey in the top echelons of the central bank. 66. Although 2013 has been a relatively decent year for the Bank, I believe we could have achieved much more. Our successes – in areas such as price stability, exchange rate stability, and financial stability – are either taken for granted or only understood by the cognoscenti; our failures are exposed to the public eye and known to all and sundry. Although we have been fairly successful in achieving our mandate of price and financial stability, I am left to wonder how much better our results would have been with greater cooperation from our stakeholders. I can only renew my call for strengthened collaboration and hope that this time my call does not fall on deaf ears. 67. We are striving to find the right balance between inflation and interest rate in the context of slowing growth rate. Our exchange rate policy has yielded the desired results over time and we are confident we can further fine-tune our exchange rate management policies. The domestic economy remains exposed to growing threats such as elevated consumer imports, stagnating exports, a quasi-structural current account deficit, high corporate indebtedness, and low household savings. The mandate of the central bank is traditionally restrictive in nature and the tools in our arsenal are limited, thereby bounding our influence on every macroeconomic indicator. The public is quite right in having high expectations of its central bank, but these should not be unrealistic. 68. With a new year comes new challenges and we have to be ready to face them head on. The world economy is on a still nascent recovery path. As a small economy, dependent on the export outlook arising from this recovery, we have to remain vigilant to external threats, including a possible relapse, and the heightened volatility likely to be provoked by the withdrawal of the massive stimulus that has propped up developed economies. We have already borne the brunt of the prolonged global crisis without too much wear and tear. I have no doubt that 2014 will see brightening prospects for the country and its citizens. BIS central bankers’ speeches Annex Domestic developments New guidelines 7.1 Guideline on Mobile Banking and Mobile Payment Systems. The Bank issued the Guideline on Mobile Banking and Mobile Payment Systems in February 2013. The objective of the guideline, which is intended for providers of mobile banking and mobile payment services, is to promote a sound financial system in Mauritius and regulate the mobile banking and mobile payment systems. 7.2 Guideline on Complaints Handling Procedures. The amendments to the Banking Act 2004 in December 2012 laid down specific provisions in relation to the protection of customers of financial institutions. The Guideline on Complaints Handling Procedures was issued in August 2013. It requires all banks to appoint a complaints officer to deal with complaints and grievances from their customers. (More details on this issue are provided at paragraph 46.1) 7.3 Guideline on Disclosure of Information to Guarantors. The Guideline on Disclosure of Information to Guarantors, issued in September 2013, sets out the responsibilities of financial institutions towards guarantors. Section 37(7) of the Banking Act 2004 requires every financial institution to provide a statement of account to the guarantor of a credit facility extended by it, in line with guidelines issued by the Bank. (More details on this issue are provided at paragraph 43.1) 7.4 Guideline on Maintenance of Accounting and Other Records and Internal Control Systems. In November 2013, the Bank issued a new Guideline on Maintenance of Accounting and Other Records and Internal Control Systems. The purpose of this Guideline is to incorporate up-to-date best practices into the existing Guidance Note on General Principles for Maintenance of Accounting and Other Records and Internal Control Systems, issued by the Bank in November 1994. Revised guidelines 7.5 Guidelines on Section 46(2) of the Banking Act 2004 – Appointment or Reappointment of Senior Officers. The guideline was reviewed in July 2013 to enhance the definition of a senior officer and to introduce a cooling period for a senior officer who has taken up employment in another financial institution. However, the revised Guideline was kept in abeyance until further notice following representations made by the Mauritius Bankers Association. 7.6 Guideline on Credit Concentration Risk. The Guideline on Credit Concentration Risk was amended in September 2013 following the review of the aggregate large credit exposure limits that apply to banks and non-bank deposit taking institutions. The guideline was again reviewed in November 2013 to incorporate certain macroprudential measures, namely sectoral concentration limits to be put in place by banks. 7.7 Guideline on Standardised Approach to Credit Risk. In December 2013, the Bank reviewed the Guideline on Standardised Approach to Credit Risk. This Guideline now incorporates the new risk weights, as prescribed by the macroprudential measures, for claims secured either by residential property and/or commercial real estate. Click here to return to main document 8.1 In line with the mandate of the Bank to ensure the stability of the financial system, and using powers in the banking legislation, I decided to take the initial steps to implement a Deposit Insurance Scheme in Mauritius. In July 2012, after consultation with banks, I sent to the Ministry of Finance and Economic Development (MOFED) a Deposit Insurance Bill for BIS central bankers’ speeches submission to Parliament. In October 2013, I again approached the MOFED to bring the proposed Bill before Parliament. I am still awaiting a response from them. 8.2 One of the outcomes of the global financial crisis abroad was the adoption of new rules governing bank recovery and resolution. In December 2013, after nearly one year of deliberation, the member-states of the European Union finally reached an agreement to ensure that failing banks can be wound up in a predictable and efficient way, with minimum recourse to public money. It is now one of the requirements of the European Financial Stability Board (EFSB) that an effective bank resolution mechanism is provided in the banking laws. Similarly, one of the mandates of the Financial Sector Assessment Programmes of the World Bank and the IMF is to make sure that each country under review has an effective legal framework for bank resolution. Since an ailing bank which has an international presence may have cross-border implications, it is necessary that proper safeguards are provided in the law to address cross-border issues. In line with these measures abroad, we have informed MOFED of our decision to come forward with proposals for changes to the Banking Act 2004 to provide for an effective bank resolution mechanism for Mauritius. Click here to return to main document 26.1 Islamic banking products – On hold? The Public Debt Management Act 2008 amended the legislative framework to enlarge the scope of Government securities to include the issue of Sukuk bonds in Mauritius. Whilst this legislative amendment provides the Bank with the power to issue Sharia-compliant instruments, this project has not come to fruition yet. The Bank has continually pressed MOFED on this matter, but no progress has been made, no discussions held and no support provided to agree on a framework for the issuance and management of Sukuk bonds. My original aim was to position Mauritius as a regional financial centre that incorporates a niche market for Islamic finance. But other African countries have now taken the lead and already issued Sharia-compliant sovereign papers that have gained acceptance and recognition worldwide. So it seems we have missed the boat on this one. Click here to return to main document 28.1 Economy. Growth in the Mauritian economy slowed down to 3.2 per cent in 2013, from 3.4 per cent in 2012. All the major economic sectors however registered positive growth rates, with the exception of Construction where real output contracted by 9.4 per cent: Information and Communication expanded by 7.7 per cent; Finance and Insurance Activities by 5.3 per cent; Wholesale and Retail Trade by 3.5 per cent; Real Estate Activities by 2.9 per cent; Transport and Storage by 2.6 per cent and Accommodation and Food Service Activities by 2.5 per cent. Final consumption expenditure growth is estimated at 2.6 per cent. Excluding aircraft and marine vessels, investment posted negative growth of 5.7 per cent in 2013, compared with a marginal contraction of 0.8 per cent in 2012. The forecast for the savings rate is 14.2 per cent of GDP at market prices in 2013, compared with 15.1 per cent in 2012. Click here to return to main document 29.1 Monetary policy. Three major changes were brought to the MPC during 2013: first, the composition of the MPC was once again amended to provide, in addition to the Governor and the two Deputy Governors, for two external members appointed by the Prime Minister and a further three external members appointed by the Minister of Finance and Economic Development; second, the MPC published a Code of Conduct to govern the MPC meetings; and third, explicit provisions were made for the MPC to take into consideration the views of the Bank, MOFED and any other appropriate institution in order to improve the coordination between monetary and fiscal policy. BIS central bankers’ speeches a. Under the new arrangements, the MPC has to publish a Code of Conduct to govern its meeting and to report once a year to the Board of Directors of the Bank on how well it has complied with that Code. The objective of the Code of Conduct is to provide guidance and set ethical standards to be adhered to, at all times, by the members of the MPC. The MPC adopted a Code of Conduct for its members and this was published on the Bank’s website in July 2013. b. Under the new arrangements, the MPC has to take into account the views of the Bank, those of the MOFED and the views of such other institution or organisation as the MPC thinks fit to do its work. Accordingly, the Financial Secretary expressed the views of MOFED at the March, June and September 2013 meetings while representatives from the Association des Consommateurs de l’Ile Maurice and a freelance consultant shared their observations at the June and September 2013 meetings, respectively. I firmly believe that monetary policy needs to be forwardlooking, accompanied by transparent communication to the stakeholders. The presentations by the Bank’s Staff, MOFED, external consultants, and other organisations are henceforth published one week after the release of the minutes of the MPC meeting. 29.2 At the March 2013 meeting of the MPC, with domestic and external economic conditions still subdued and the threats to the growth outlook seen to continue outweighing inflation worries, the MPC decided, by majority vote, that the KRR remained broadly appropriate at the current juncture and left it unchanged at 4.90 per cent per annum. Then, at the June 2013 meeting, as the same majority considered the domestic economy still vulnerable to the subdued external environment against a benign global inflation outlook, the MPC cut the KRR by 25 basis points to 4.65 per cent per annum. In September 2013, the MPC maintained the KRR at 4.65 per cent, again by a majority decision. Click at • https://www.bom.mu/?id=20285&Archive=Y for the Minutes of the MPC meetings released in 2013, and • https://www.bom.mu/pdf/Research_and_Publications/Inflation_Report/Inflation Report_Oct13/contents.htm for the Inflation Report, October 2013. Click here to return to main document 33.1 Liquidity in the banking system The Bank reviewed the Cash Reserve Ratio (CRR) requirements, with effect from the maintenance period starting 26 July 2013, and banks are now required to keep cash reserves of their rupee deposit base in Mauritian rupees. For Euro- and GBP-denominated deposits, balances at the Bank should be in Euro and GBP, respectively. USD balances should be kept for USD-denominated as well as for all foreign currency-denominated deposits other than Euro and GBP. The CRR has now been imposed on all Government deposits as well. 33.2 To address the persistent excess liquidity in the banking system, the Bank further refined the computation of the CRR with effect from the fortnight beginning 4 October 2013. The average CRR on rupee deposits was increased from 7.0 per cent to 8.0 per cent, and the daily minimum for rupee deposits from 5.0 per cent to 5.5 per cent. The fortnightly average CRR and the daily minimum balance on foreign currency deposits were reduced from 7.0 per cent and 5.0 per cent to 6.0 per cent and 4.5 per cent, respectively. I am pleased to note that the increase in the CRR has indeed resulted in the normalisation of the money market rates. 33.3 Against the backdrop of recent rigging scandals of benchmark rates in some jurisdictions abroad, the Bank has been monitoring the procedures regarding contributions submitted for computation of PLIBOR, the Port Louis Interbank Offered Rate. In the light of developments taking place worldwide and in consultation with the stakeholders in the BIS central bankers’ speeches industry, the Bank decided to publish rates for tenors that are actively traded. So from 2 December 2013, the Bank only publishes Overnight and the One-Week tenors, where most of the transactions take place. 33.4 The Bank has continued to support the reforms in the sugar industry through stimulus packages. As part of this support, the Bank renewed the Protocol d’Accord with the Mauritius Sugar Syndicate to grant them facilities under the Special Line of Credit for Sugar Crop Year 2013 for loans to small and medium planters. The Bank has made Rs1.2 billion available, at the rate of 3 per cent, for banks to on-lend at a maximum rate of interest of 3.5 per cent. This facility has been extended up to 31 January 2014, with repayment at latest by 31 May 2014. The Bank has also continued the Special Line of Credit in Foreign Currency scheme, introduced in June 2012, aimed at enabling eligible export and tourism operators to refinance rupee-denominated debt to address currency mismatch between their income streams and their existing debt servicing commitments. 33.5 Unfortunately, I have to report there has been no real progress with the project for the secondary trading of medium- and long-term government securities. We have already made amendments to the Bank of Mauritius Act 2004 and to regulations made by the Financial Services Commission (FSC), in respect of fees. The main item yet to be agreed on is the exit facility for banks engaging in this line of business. We are still discussing a draft Memorandum of Understanding for trading of the securities on the Stock Exchange with the FSC, and the exit mechanism with MOFED. Click here to return to main document 34.1 Debt management. In 2013, the Bank issued Treasury Bills and Treasury Notes for nominal amounts of Rs33.3 billion and Rs12.3 billion, respectively. The Bank also issued 5-Year, 10-Year and 15-Year Government of Mauritius Bonds as well as 15-Year InflationIndexed Government of Mauritius Bonds for total nominal amounts of Rs6.9 billion, Rs3.3 billion, Rs2.6 billion and Rs1.0 billion, respectively. Overall, in 2013 the Bank issued a net amount of Rs9.4 billion as Government securities. Click here to return to main document 38.1 Forex intervention. During 2013, banks and foreign exchange dealers made total purchases in foreign exchange of the equivalent of USD4.1 billion, compared with USD3.9 billion in 2012, an increase of nearly 5 per cent. Total sales in 2013 in foreign exchange amounted to USD4.0 billion, compared with USD3.9 billion in 2012, an increase of just over 2 per cent. The total turnover of foreign exchange transactions in 2013 clearly shows that there was no liquidity constraint in this market and the level of business activity in foreign currency remained relatively stable compared with the previous year. Click here to return to main document 39.1 Banking sector performance. The banking sector continued to grow in 2013, with assets reaching over Rs1 trillion. Growth in banks’ assets was mainly driven by Segment A business. Banks remained profitable and adequately capitalised with a comfortable buffer over the minimum regulatory capital adequacy ratio of 10 per cent. One of the key strengths of our banks is the quality of capital, with Tier 1 capital representing a considerable proportion of the capital base. At end-December 2013, the Capital Adequacy Ratio stood at 16.4 per cent. 39.2 The quality of the credit portfolios of banks remained strong, despite a slight increase in the ratio of non-performing loans to gross loans. At the end of September 2013, non-performing loans accounted for 3.5 per cent of gross loans, against 3.1 per cent a year earlier. We are closely monitoring the evolution in credit quality. The cover ratio (specific provision to non-performing loans) was 41.3 per cent in September 2013. BIS central bankers’ speeches 39.3 Banks continued to expand their domestic network with six additional branches set up in 2013. This brought the total number of branches, including head offices, of banks operating in Mauritius to 227 at the end of December 2013, while there were a total of 450 ATM’s compared with 441 at the end of December 2012. Click here to return to main document 41.1 Macroprudential measures. The global financial crisis underscored the necessity to rely on macroprudential regulation, in addition to other measures, as a policy tool to curb potential systemic risk. The Bank introduced the following five macroprudential measures in October 2013: a. The loan-to-value (LTV) ratio aims at constraining excessive credit growth and restricting losses in the event of customer default, or decline in property prices, by imposing a cap on the size of the loans relative to the value of the properties financed. The Bank introduced the maximum LTV limits as a macroprudential measure to discourage speculation, prevent excessive leverage, and reduce systemic risk associated with the rapid expansion of credit in the construction sector. Customers borrowing from banks to purchase property for the first time will not be affected by these measures. b. The debt-to income (DTI) ratio provides protection to households from debt traps and aims at containing housing credit growth. Banks in Mauritius use the DTI as a microprudential measure to assess borrowers’ repayment capability. Concerned with the growing level of household indebtedness, we introduced the DTI ratio to ensure that borrowers are not overleveraged whenever they borrow for the purchase or construction of a property. c. The three additional macroprudential measures consist of risk-weighted assets, additional portfolio provisions, and sectoral limits. The measure on risk-weighted assets requires banks to maintain higher risk weights in the targeted borrower segments. The additional portfolio provision ensures early provisioning against future credit losses in more vulnerable sectors. The objective behind the sectoral credit limits is to contain exposure of banks to three sectors, namely, Commercial, residential and land parceling, Tourism and Personal. Overall, these measures should strengthen the resilience of our banking sector. Click here at http://www.bom.mu/?id=72427 for the guidelines on macroprudential measures. Click here to return to main document 43.1 Disclosure of information to guarantors. Section 37 of the Banking Act 2004 was amended in December 2012 to enable the Bank to require every financial institution to provide a statement of account to the guarantor of a credit facility extended by it, in accordance with guidelines issued by the Bank. Accordingly, a Draft Guideline on Disclosure of Information to Guarantors providing guidance to financial institutions was circulated to banks, to non-bank deposit taking financial institutions, and to the MBA for views and comments. Following the consultation process, the Guideline was issued to the industry in September 2013 and became effective on 1 January 2014. Click here at http://www.bom.mu/?id=90738 for the Guideline. Click here to return to main document 44.1 Future of banking. Technology is changing rapidly today and is having an impact on banks’ business models. Whilst electronic delivery channels for banking products and services have been around for years now, accessing banking services through the Internet and mobile phones is becoming increasingly popular in Mauritius. Consumers make payments using credit cards, debit cards and they transfer funds electronically or shop online BIS central bankers’ speeches instead of paying by cash or bank cheque. I welcome this trend as another step towards a cash-lite society. Click here to return to main document 45.1 A staff study visit to the Reserve Bank of India has led to a better understanding of the integrated system of data collection, storage and processing, using an automated system. It enabled the project team to prepare the Request for Proposal to invite bids for the envisaged system. The bids received are presently at evaluation stage. 45.2 As a producer of macroeconomic statistics, the Bank is an active player in national and international fora. The Bank has decided to implement the most up-to-date internationally-agreed standards. The Statistics Division has contributed to the preparation of the forthcoming IMF Balance of Payments Compilation Guide, due for release soon. In particular, we have shared our experience in the collection of data on offshore entities. With the new powers conferred upon the Bank to regulate credit unions and money lenders, the Depository Corporations Survey will eventually be extended to include these financial institutions as well. At the national level, together with other official data-producing agencies, the Bank has actively participated in the sub-committee on “Harmonisation of Business Surveys” to reduce the reporting burden of the private sector. 45.3 Keeping in line with usual practice, we have posted the Advance Release Calendar on our website at the start of the year to inform users of the forthcoming releases. For the 6th year running, the Bank has conformed with the Special Data Dissemination Standard by keeping the public briefed on the dates of specific data releases. According to set timelines, the Bank has conducted its annual Foreign Assets and Liabilities Survey, the annual Global Business Companies Category 1 Survey and the quarterly Inflation Expectations Survey in 2013. The Statistical reports with varying frequencies (daily, weekly, monthly and annual) are freely available and are published on the Bank’s website. Click here to return to main document 46.1 Protection of customers of financial institutions. Section 96A of the Banking Act 2004 requires all banks to appoint a complaints officer to deal with complaints and grievances from customers. Following consultation with the banking industry, we issued the Guideline on Complaints Handling Procedures in August 2013. It became effective on 1 November 2013. The key features of the Guideline are as follows: a. Banks have to set up a complaints desk, duly indicated for that purpose, at their main office to receive customers. b. For branches, there is no need to have a formal complaints desk but there should be a place for complainants, duly indicated, which may be with any front desk officer. c. Financial institutions are required to retain details of complaints for at least a period of 7 years as from the date of their receipt. d. Financial institutions are required to provide the Bank, on a quarterly basis, with information on complaints they have received. 46.2 In terms of information available at the Bank, the most frequent complaints made by bank customers are in relation to the following: – Funds have been taken from their accounts by the use of cheques with forged signatures – Early repayment fees – Insurance Premiums on loans – Excessive fees and commissions have been charged BIS central bankers’ speeches – Charges have been applied when the account falls below a minimum balance – Delay in crediting bank accounts on cheque deposits – Rescheduling of loans – Investment in banking products where capital is not guaranteed – Withdrawals on ATM – Fraudulent withdrawals over the counter – Interest rate on fixed deposits Click here to return to main document 47.1 The Economic and Financial Measures (Miscellaneous Provisions) Act 2013 brought amendments to the Banking Act 2004 for the protection of consumers of financial services. The new legal provisions have capped at 2 per cent the amount of penal interest rate that can be charged by financial institutions on a loan or credit facility granted in Mauritius currency to an individual on or after 1 January 2014. For borrowers who find themselves in difficulty, provision has also been made for the contractual rate of interest to cease to apply and for interest rate at the KRR to apply subject to certain conditions. I welcome these amendments to the law. 47.2 I hope to share the work of the Task Force on Unfair Terms and Conditions in Banking and Related Financial Contracts with the public in the course of this year which should pave the way for a better deal for users of banking and financial services. Click here to return to main document 48.1 Exchange of information among regulators. Supervisory colleges have evolved the world over as an important component of effective supervisory oversight of an international banking group. They assist in reducing supervisory overlap and filling in the gaps for better supervisory co-operation. The revised Core Principles for Effective Banking Supervision include the enhanced Core Principle on Home-Host Relationships. This requires the home supervisor to establish bank-specific supervisory colleges for banking groups. The Bank has endorsed this principle from the Basel banking-standards setter and has set up a Supervisory College for the two largest local banks which have established either subsidiaries or branches in several overseas jurisdictions. The initiative aims at dealing with supervisory issues and establishing a co-operation mechanism for cross-border supervision of these institutions. Each college comprises home and host supervisors of the Mauritius Commercial Bank and the State Bank of Mauritius on the African Continent and in the Indian Ocean Region. This has offered an excellent opportunity for the supervisors, as well as the banks themselves, to share information that will help the Bank in the conduct of consolidated supervision. Participants have expressed interest for the supervisory colleges to be held on a regular basis. Click here to return to main document 52.1 Islamic banking. Since joining the Bank in 2007, I have taken a number of initiatives to promote the development of Islamic finance in Mauritius. These include a legislative and regulatory framework for the conduct of Islamic banking in Mauritius. In November 2007, the Bank was admitted as an Associate Member of the IFSB and was subsequently upgraded to full membership in September 2009. Such adherence of the Bank to international organizations conveys the commitment of the Mauritian authorities towards the implementation of comprehensive Islamic financial services industry in our country. The IFSB Summit brings together a wide range of interested partners. This includes Governors and deputy governors of member central banks, senior officials from supervisory and regulatory bodies and other stakeholders of the Islamic financial services industry, BIS central bankers’ speeches representatives from international institutions, industry experts and academia participating as speakers at meetings and other events. Click here to return to main document 53.1 Polymer banknotes. The Prime Minister of the Republic of Mauritius was the Guest of Honour at the ceremony for the launch of the new polymer banknotes. After a video clip was shown on the history of banknotes in Mauritius, the new polymer notes were launched. The Chief Executive of De La Rue (printer of the new Rs25 and Rs50 banknotes) and the Representative of Oberthur Fiduciaire (printer of the new Rs500 banknotes) presented mementos to the Prime Minister. 53.2 The polymer notes of Rs25, Rs50 and Rs500 denominations have innovative security features designed exclusively for the polymer material. The polymer notes last longer than paper banknotes thereby reducing processing, replacement costs and environmental impact. The polymer banknotes are now in circulation alongside the paper banknotes. Following the issue of polymer banknotes on 22 August 2013, a total value of Rs761.8 million was in circulation by 31 December 2013. (This was made up of Rs82.2 million worth of the Rs25 notes; Rs100.2 million worth of the Rs50 notes; and Rs579.4 million worth of the Rs500 notes.) 53.3 The Bank of Mauritius Act 2004 was amended in December 2013 and a new section 43A entitled “Reproduction of currency notes, bank notes or coins” was added. It is now an offence for any person, without the written permission of the Bank, to use, in any size, scale or colour, any photograph of, or any drawing or design resembling, any Mauritius currency note, bank note or coin in any advertisement or on any merchandise or product which that person manufactures, sells, circulates or otherwise distributes. Click here to return to main document 55.1 Payments system. I have personally ensured that our payments infrastructure is modern, resilient and stable. In 2007, as part of a major re-structuring exercise, I set up a new division to look exclusively into payments system matters. Since then several new payment schemes have been introduced and existing ones are being constantly revisited and improved. In 2013 we took new initiatives to further improve the payments system. 55.2 The NPS will be a central infrastructure for routing all electronic-based payment transactions from cards, Automated Teller Machines (ATM’s), Point-of-Sale (POS) terminals, and mobile devices for local clearing and settlement. Current electronic-based payments, even for local transactions, mostly use international networks and are very costly for both merchants and consumers. The NPS has the potential to provide value-added services such as pre-paid cards, e-payment gateways and mobile payments. It should not be viewed as a replacement for card-based transactions as many people believe, but rather, as a public good to help the Bank achieve its statutory goals of maintaining financial stability, create new opportunities and provide a level playing field to all banks. 55.3 The Bank has put much emphasis on designing and being part of an integrated African regional payment system. We have pursued this objective through our presence in two main regional blocks, namely, the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA). Besides being a settlement bank, we also host the platform for the Regional Payment and Settlement System (REPSS) which is a cross-border payment system for COMESA. The Bank is also an active member of the SADC Payment Systems initiative. During the course of 2013, we have worked towards enhancing the REPSS by providing training and technical support to member-states. The Bank hosted delegations from Malawi and Burundi for on-site training and guidance which then led to Malawi joining Rwanda, Swaziland and Mauritius as active participants in the system. I expect that the system will gain further momentum through the forthcoming participation of Kenya and Egypt. BIS central bankers’ speeches 55.4 In order to further facilitate trade flows between Mauritius and region, the Bank has also taken the decision to join the cross-border payment system of the Common Monetary Area (CMA) countries. The CMA member-states are South Africa, Swaziland, Lesotho and Namibia. As South Africa is not a member of COMESA, participation in this initiative will allow all Rand-based payments to be cleared directly and at a lower cost within the same day. In the longer run, this system will encourage our importers to request their Southern African trade partners to invoice them in Rand rather than US dollars. Click here to return to main document Ponzi schemes. This year I initiated a series of actions to deal with the issues arising from the financial scams known commonly as Ponzi schemes. The recommendations of the RBI assessors ranged from the reinforcement of “Know Your Customer” procedures and due diligence in banks, to the setting up of dedicated cells to gather market intelligence and enhanced coordination among regulators. These recommendations are in line with the restructuring and redefining of our mandate. They reinforce our commitment towards financial literacy, consumer education and fair treatment of consumers, on all of which we had initiated work in early 2012. Among the lessons of the recent financial scam is the need for everyone – both young and old – to acquire a basic knowledge of finance and economics. Such knowledge is necessary for anyone who is faced with managing a household budget, making financial investments, and preparing financially for retirement among others. Click here to return to main document 58.1 Regional cooperation. Another priority for me as Chairman of the AACB is to enlist the support of my colleagues in the Bureau in our joint efforts to improve performance on meeting the convergence criteria set out in the African Monetary Co-operation Programme. This is all part of the overall objective of the long-term pursuit of regional and continental monetary union. Despite some positive signs of global economic recovery, we still have to remain vigilant in this region to protect our economies from adverse global shocks. The Bank hosted the meeting of the Working Committee on the Detailed Programme and Budget of the CABS, which was established upon a decision of the Association of African Central Banks Assembly of Governors taken at its 37th meeting. The meeting was held in Mauritius from 20 to 22 January 2014 to develop a comprehensive plan and budget as directed by the Governors. 58.2 The Bank hosted the meeting of the SADC Subcommittee of Banking Supervisors from 5 to 7 March 2013. Click here to return to main document 61.1 Corporate Social Responsibility. A Landscape Architect has been appointed for the design of the Bamboo Garden. A Project Management Committee, chaired by the Second Deputy Governor and including representatives of the Bank’s employees, oversees the project. The garden will initially have 120 varieties of bamboo, from both local and imported sources. 50 varieties of local species have been collected and propagated at Wooton, not far from the Midlands site, on our behalf by the Agricultural Research and Extension Unit. Additional varieties will be introduced subsequently. In addition to bamboo plants, the project will also include a bamboo museum, an administrative unit, a restaurant and an amphitheatre. The project, which is in line with the Maurice Ile Durable concept, is expected to attract local and foreign visitors. 62.1 Young athletes aged 9 to 14 years participated in the 7th Edition of the Bank of Mauritius Inter Club Youth Championship Competition held in collaboration with the Mauritius Athletics Association. The event, which has become part of the Bank’s Corporate Social Responsibility to the nation, and which is in conformity with the Government’s policy to democratize sports, has more than surpassed our initial objectives. A number of athletes who BIS central bankers’ speeches have competed in the Bank’s Inter Clubs Youth Championships since the maiden edition in 2007 are now representing Mauritius in international tournaments. This year, around 950 athletes, 650 athletes from Mauritius and 300 from Rodrigues participated in the event. The preliminaries in Rodrigues were held on 9 November 2013. During the two-day competition, two records were established: – Relay Colt 4x50 m – girls in 31.11s established by Jane Brabant, Selena Ramsamy, Laeticia Favory and Anastasia Monique of Beau Bassin Athletic Club as compared with the previous record of 32.08s; and – Pentathlon with 161 points established by Bryan Tonta of Rose Hill Athletic Club, improving his own previous record of 155 points. Click here to return to main document 64.1 Communication with stakeholders. Click here at http://www.bom.mu to access the section on “Financial Education” located in the menu of the Bank’s website. Information on financial frauds and their prevention is provided in the sub-sections “Types of financial frauds” and “Prevention of financial crime” under the section “Financial Education”. Click here to return to main document BIS central bankers’ speeches | bank of mauritius | 2,014 | 4 |
Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 13 October 2013. | Rundheersing Bheenick: Review of the financial sector in Mauritus Statement by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, Port Louis, 13 October 2013. * * * “Time for us to move on and sharpen our focus on our next destination – a high-income economy…” Looking back over the global landscape in recent years, characterised as it has been, by painful adjustments in financial and economic affairs, it is hard to avoid the conclusion that we have been lurching from crisis to crisis. We have continually seen elusive signs of recovery, buffeting both business confidence and consumer sentiment, and nurturing continued apprehensions about the adverse impact on world markets and on the vulnerable emerging economies in particular. Can we now, at long last, expect the global economy to secure itself on a firmer footing? What about the risks still looming on the horizon? I am a strong optimist – had it not been so, I can hardly imagine how I could have stayed on this job. Whenever I am asked how we, in Mauritius, an isolated, vulnerable, and small open economy turned in such a creditable performance in such an unpromising environment, I reply “We never allowed ourselves to lose our nerve, or our focus.” Despite global uncertainty, the Mauritian economy stood its ground and logged a growth rate of 3.2 per cent in 2013. This growth was driven by all sectors, except construction. Unemployment remained stuck around 8 per cent. We succeeded in anchoring inflation expectations. Indeed, since 2009, the annual average rate of inflation has been close to 4 per cent, and its volatility much reduced compared to previous years. We did everything within our statutory powers to achieve a low-inflation environment, hand-in-hand with a stable exchange rate, to ensure a solid basis for sustainable, equitable, and broad-based growth. Headline inflation and year-on-year inflation stood at 3.3 per cent and 4.0 per cent, respectively, in June 2014. Domestic and external imbalances remained contained. We continued with our reforms domestically to secure a sound financial sector through a series of initiatives detailed in the report. We expect our economy to grow by about 3.5 per cent in 2014, and inflation to remain below 4.0 percent in 2014. On current trends, we do not expect the international economic environment to improve significantly. It is time for us to move on and sharpen our focus on our next destination – a high-income economy. We should be under no illusion that we can get there without accelerating the pace of reforms and, preferably, embracing the commitment to reform as our national credo. Banking sector developments Our banking sector remained robust. Total assets, which had crossed the Rs1 trillion-mark in May 2013, grew by 7.5 per cent during the period under review. Total deposits and total loans increased by 6.0 per cent and 2.7 per cent, respectively. Banks were well-capitalised, with a capital adequacy ratio of 16.7 per cent and low non-performing loan ratios. In April 2014, we welcomed two new banks in our jurisdiction, the first to be granted a licence for stand-alone private banking business. Macroeconomic and financial stability The relative stability in our nominal effective exchange rate, contrasting sharply with the turbulence registered in leading emerging markets, benefited both domestic consumers and producers, while also enhancing our attraction as an investment destination and as an IFCin-the-making. BIS central bankers’ speeches Cross-border banking has been growing rapidly. We have supported its development by bilateral agreements with several international regulatory bodies to secure a better exchange of information between home and host supervisory authorities. In November 2013, we organised our first-ever Supervisory Colleges for our two largest banking groups to enable their host regulators in other jurisdictions, and ourselves, to get a holistic view of the risks posed by these institutions, within and beyond our borders. We are also actively engaged in several initiatives to harmonize regulatory and supervisory practices to promote financial stability within the region. The persistence of low interest rates led to excessive credit growth in some sectors which, if left unchecked, could have resulted in higher non-performing loans. In October 2013, after much soul-searching, we rolled out a suite of macroprudential measures to contain these risks. These measures which include “Loan-to-Value ratios”, “Debt-to-Income ratios”, “RiskWeighted Assets”, “Additional Portfolio Provision” and “Sectoral Limits”, became effective this year. We issued our guideline for dealing with domestic systemically important banks (DSIBs) in July 2014. It provides a framework for assessing the systemic importance of a bank based on key indicators such as size, interconnectedness, structure and complexity, amongst others. The banks, which would be identified as DSIBs, will be subject to a capital surcharge as from March 2016. We followed up on the recommendations of the Reserve Bank of India Team which came over to assist the Bank in the in-depth investigation of the Ponzi Schemes which we unearthed early last year. There was a clear need for a stronger framework to gather intelligence on financial transactions and analyse information on actual and/or looming financial breaches. In December 2013, we set up a dedicated Market Intelligence Cell to meet this need. In January 2014, we mainstreamed this cell with our work on compliance and enforcement. This will assist the Bank in fulfilling one of its new mandates, namely to carry out investigations and take measures to suppress illegal, dishonourable and improper practices, market abuse, and any potential breach of the banking laws. We made considerable progress with our plan to implement Basel III to enhance the resilience of the banking sector. The opening shot was the release in October 2012 of a consultation paper on the likely implications of Basel III implementation. In June 2014, we issued guidelines on the scope of application of Basel III and eligible capital. Monetary policy Throughout 2013–14, the Key Repo Rate (KRR) was kept unchanged at 4.65 per cent. One important development was the publication of the technical presentations made by various parties at the MPC meetings, once again highlighting our commitment to a fully-transparent decision-making process. The divergence of opinion regarding the monetary policy stance persisted. On the one hand, the internal MPC members called for a gradual and smooth exit from the current accommodative monetary policy stance. This view was motivated by the improving external environment, rapid credit growth, the rise in non-performing loans, and the need to halt the decline in domestic savings while also anchoring inflation expectations. On the other hand, the external MPC members were more concerned with stimulating domestic growth, which they perceived as being still fragile, and supported an accommodative monetary policy. In April 2014, the Bank started to use Taylor Rule estimates as a guide to monetary policymaking. Estimates of the neutral interest rate suggested that monetary policy was falling behind the curve. Internal members were of the view that it was high time to start the normalisation process. However, the majority of MPC members voted to keep the KRR unchanged. The Monetary Policy Transmission Mechanism, already weakened by the excess liquidity that had been plaguing the system for the past few years, broke down when some banks adjusted their savings rates downwards although the MPC had decided to leave the KRR on hold. At the July 2014 meeting, the MPC decided, by consensus, to keep the BIS central bankers’ speeches KRR unchanged at 4.65 per cent, with a majority of members agreeing that it was time to normalise interest rates, and giving forward guidance on the direction of the change in the KRR in the first quarter of 2015. We renewed our efforts to restore the monetary transmission mechanism. We made some progress in our efforts to persuade the Treasury to share sterilisation costs. We prevailed on the Treasury to introduce three savings products targeting individual savers, two varieties of Five-Year and one Three-Year Government of Mauritius Savings Bonds to mop up some of the excess liquidity. A Memorandum of Understanding between the Treasury and the Bank is at an advanced stage of negotiation: it will provide the burden-sharing modalities, and may necessitate some enabling changes in the Public Debt Management Act 2008. Improving customer experience In June 2014, we released the Report of the Task Force on Unfair Terms in banking contracts, Banking Your Future: Towards a Fair & Inclusive Banking Sector. It makes 100 recommendations, including the abolition of 19 fees and the review of 13 others, and a free basic bank account for all Mauritian citizens above 16 years old. These recommendations aim to improve the bank-customer relationship and help both banks and customers to achieve a fairer deal. The report is open for public consultation up to 31 October 2014. After the consultation period, the Bank will analyse the report, along with the feedback and decide on an action plan. It is the first time in the history of the Bank that a Task Force has been set up to look holistically into banking practices prevailing in the country, and the first time in the history of banking in Mauritius that these practices have been examined so closely with inputs from all categories of stakeholders. It seems that the customer around whom banks should centre their business has been gradually left on the side over the years. The Report seeks to provide a framework to bring the customer back at the heart of banking business. All stakeholders and the general public were invited to participate in this banking reform initiative by commenting on the proposed recommendations, making suggestions and proposals, so that together we can pave the way to a modern, efficient, and customer-centric banking sector. Regional and international involvement We pursued our involvement in regional fora. In October 2013, the Bank hosted the fourth meeting of the Financial Stability Board Regional Consultative Group for Sub-Saharan Africa, which I co-chair. In January 2014, the Bank hosted a meeting of the Committee of African Banking Supervisors of the AACB, which is chaired by a senior colleague from the Directorate of Supervision. In May 2014, the Bank hosted the IFSB Summit. Our work with SADC and COMESA continued apace, making further progress in the area of macroeconomic convergence, financial stability, and development of the regional payments system. We also welcomed a delegation of the African Union’s High Level Panel on Illicit Financial Flows from Africa, headed by His Excellency Thabo Mbeki, former President of South Africa. The visit offered an opportunity to share our experience on such matters as our due diligence process and the application of international best practices and standards in the field. The banking sector of the future I intend to spend the rest of my third mandate to prepare the transition of our banking sector to meet the needs of the high-income economy that is within our sights. We recognise that a lot still remains to be done, especially if we want to hasten progress in this direction – which is a perfectly legitimate objective in view of our past trajectory. We have continuously strengthened our regulatory and supervisory framework to reinforce the resilience of our BIS central bankers’ speeches banking sector. We have stepped up our efforts to modernise our payments system infrastructure, and floated international tenders for the National Payment Switch. This will revolutionise the payment space, reduce transaction costs, and level the playing field for smaller banks and other potential payment processors who cannot currently compete away the high margins prevalent in the industry because of the prohibitive cost of installing alternative platforms for the provision of new technology-driven products. We have amended legislation to allow differentiated banking licences in such areas as Islamic banking, private banking and investment banking. We have set out a framework to provide for agent banking for more efficient delivery of banking services and to promote financial inclusion. In parallel, the Bank has been vested with new powers, giving us explicit responsibility for promoting public understanding and awareness of financial products, and for conducting investigations. Credit unions with assets of more than Rs20 million have also come under our purview. We recognise the pioneering role that credit unions have played in improving financial access to previously unbanked segments of society and we shall apply proportionality in our approach to supervising and regulating the sector. We have launched the eXtensible Business Reporting Language (XBRL) project that will simplify data collection and reporting by banks and other regulated institutions while also facilitating in-depth and timely analysis at the Bank. We have continued with process re-engineering and organisational restructuring to deliver on our extended mandate, to meet new challenges, and to incorporate new technology. In addition to the Intelligence, Compliance, and Enforcement Section mentioned earlier, we also set up a specialised unit for reserve management to serve as the nucleus for a Middle Office and Risk Management Division which we created just after the period covered by this report. We re-jigged the Economic Research Division and tasked it with developing our forecasting and modeling capacity to support our expected move to an explicit Inflation Targetingregime. None of these moves would have been possible without recruiting new staff, with the requisite experience, at an appropriate level in the Bank’s hierarchy. Already a technologyintensive industry, banking will become a battlefield for still more disruptive technologies in future. An ageing staff, with dated skills and outmoded work habits, will be hard-pressed to cope with the emerging challenges facing the regulator. We placed considerable emphasis on upgrading our in-house skills and recruiting new blood. We opened our doors to regular graduate interns two years ago. We followed it up this year by launching a Graduate Trainee Programme which will allow the Bank to spot potential new recruits, enhance its professional competence, and rejuvenate its workforce. The Rupee goes polymer Last August, the Honourable Prime Minister launched our very first polymer bank notes, which have been in circulation since then. I am happy to say that two of the three polymer bank notes have received international recognition. The Rs25 polymer bank note and the Rs500 polymer bank note were shortlisted for their state-of-the-art security features at the International Association of Currency Affairs 2014 Technical Excellence in Currency Awards. Our Rs25 bank note came out 2nd in this contest. I am pleased to say that our efforts to adhere to the highest standards in all business areas have paid dividends. Words of appreciation I have always been guided by my sens du devoir in discharging the immense responsibility entrusted to me by the Prime Minister to lead the central bank of the country in the midst of challenging times for our economy and our people. It has not been an easy ride. My task would have been still more difficult, had I not received the support of the staff of the Bank, in particular my close collaborators in the Governor’s Office, the Policy Unit, and elsewhere, and my Deputy Governors and their key staff. Supporters and well-wishers beyond the Bank BIS central bankers’ speeches have played a crucial role, especially when my resolve appeared to flag. I wish to express my deepest gratitude to all of them. Our economy has reached a tipping point. If we unite our efforts and pull in the same direction, we will be able to carry through the much-needed reforms to take us forward to new levels of development. The tantalising prospect of a highincome economy beckons… Looking ahead Inclusiveness and sustainability of growth and development are the two areas where the Bank can make its biggest contribution to this transformation. This can best be achieved in the context of a dynamic and competitive financial sector, effectively serving the interests of both savers and investors. For our vision of a modern, fair, and inclusive banking sector to come to life, it is today that we must make a start on shaping it! BIS central bankers’ speeches | bank of mauritius | 2,014 | 11 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the opening of a new branch of AfrAsia Bank, Ebène, 24 October. | Rundheersing Bheenick: A new digital ecosystem for banking? Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the opening of a new branch of AfrAsia Bank, Ebène, 24 October. * * * It gives me great pleasure to address you this evening on the opening of this avant-garde branch of AfrAsia in Ebène. It is not quite branch-less banking. But it is nothing like any other bank branch in the country. It is a denizen of the new digital ecosystem for banking whose birth pangs we are witnessing. AfrAsia was the first bank that I licensed on taking office in 2007. In my address, at the inauguration of the bank, when they unveiled their logo, with the taunting tagline “Bank Different”, I had observed: … your business model is your business and the business of your directors, your Chief Executive and your shareholders. It’s up to you to ensure that you are profitable. “Bank Different”, yes, but “Bank Prudent” as well. “Bank Prudent, Always!” is what I say. In less than eight years, AfrAsia has turned into a force to reckon with, with assets worth Rs50 billion. It has extended its footprint beyond our borders. On the way, it has garnered a rich harvest of accolades, both locally and internationally. It is fitting, therefore, that AfrAsia should be revolutionising the staid world of domestic branch-banking, with this modern and digitalised branch, the first one of its kind in Mauritius to be using such state-of-the-art technology. It boasts pioneering digital features, which they have dubbed the three I’s – the I-Wall, the I-Table and the I-Display. The thought occurred to me that they have perhaps overlooked the fourth I, I-Location, I for Ideal, to make it the Ideal Location. Indeed, Ebène, also known as our Cybercity, is the right pick for such a pioneering branch. It is ideally located amidst the highest concentration of tech-savvy population in the country. These digital natives will no doubt push AfrAsia to go ever deeper into the world of digital banking. So congratulations to you, the management team of AfrAsia, for this innovative move! I secretly nurse the hope that where AfrAsia leads today, others will follow, fast on their heels, keen to compete away any momentary advantage resulting from this move. Age of digitalisation Banking is in a state of flux. This has little or nothing to do with the financial crisis that has rocked the industry and put both banks and regulators on the firing line. It is the result of the continuing digital revolution, building successively on the transistor, the microchip, faster and more powerful computers, broadband connectivity, cloud computing, smartphones and other communication devices. The media and entertainment industries have borne the brunt of the digital revolution so far. It may now be the turn of the banking and payments sector to benefit from a similar radical transformation. Paul Volcker, former Chairman of the US Federal Reserve, once said that the last truly great financial innovation was the invention of the ATM: “It really helps people, it’s useful.” What would he say about what we are unveiling today? This goes beyond cash and payment transactions of the ATM, and transforms the entire banking experience. Conditions are certainly ripe for such a transformation here in Mauritius. With a mobile phone penetration rate of 121%, of which 35 to 40% are smartphones, mobile banking is set to lead the way and take us to the Brave New World of digital banking. BIS central bankers’ speeches Customer behaviour and expectations What is driving this transformation in the delivery of banking services? Pressure to lower the costs of financial intermediation is obviously a powerful driver. Changing consumer behaviour and higher, more demanding, expectations are even stronger push factors. The biggest driver is, of course, technology. The digital ecosystem, now in the making, can disrupt – and even dislocate – myriad activities, traditionally dominated by banks. How are banks responding to this? The banking industry finds itself in the delicate position of the proverbial cat on the hot tin roof. It stands on a “burning platform”, red-hot with technological innovation, and attracting intense competition from mobile operators, internet companies, and many others occupying adjoining space. Bankers must not only defend their territory but also need to venture out to take on their nimble challengers. Their long-term survival depends on how well they respond to the growing expectations of consumers. As consumers become more confident in the use of the full range of current digital banking offerings, banks must be constantly on the lookout to offer products more tailored to individual needs. In the process, banks need to re-engineer outdated approaches and procedures: they must re-invent themselves to adapt to the new digital ecosystem. If banks are to remain as the core of financial intermediation, they must retain customers, now increasingly susceptible to be poached away by non-banks offering cheaper, more convenient services. To do so, they must move with the times. This was very much at the back of my mind when we empanelled a Task Force to examine the terms and conditions in banking contracts in response to growing customer complaints. A report containing 100 recommendations for improving the bank-customer relationship is currently under public consultation. While the need for a fair and inclusive banking sector is the raison d’être of this report, we also want to drive home the point that the long-term survival of banks rests on the extent to which they are able to place the customer at the centre of their business. Banks must work with their customers, not against them, and look for win-win outcomes. This is the “burning platform” I mentioned earlier which pits traditional banks against new entrants in financial services, offering peer-to-peer lending, crowd-funding, and cheap settlement in cryptocurrencies, amongst others. Innovation is key. It will emerge as the single most important factor driving sustainable topand bottom-line growth in banking. Innovation is not just the provision of new products or the creation of a new customer experience. It goes beyond this. It implies doing things differently right across the entire business model. Archaic structures need to be dismantled, and old mindsets discarded, to create a new, nurturing environment. Consolidated IT platforms will provide the launch pad for new successive waves of change. Digital banking will force-feed change in back-office procedures, payment and clearing processes, and bank documentation. One example among many is trade finance documentation which is changing very rapidly to adapt to the world of e-commerce and e-tailing. Implications for the regulator What about the regulator in all this ferment of change going on all around us? The Bank could hardly stand by as a spectator. We have been preparing for transition to a new business era. We are rejuvenating our staff, renewing and updating our skills set, and rolling out new rules and regulations. We have inducted a Director of Technology in the highest echelons of the Bank. Coping with the “Bank Different” credo of AfrAsia has itself been a learning experience for the Bank! We must continue on this path, enhance our supervisory agility, and step up our processes to remain effective in our oversight functions. Wherever BIS central bankers’ speeches possible, the Bank must catalyse change in our jurisdiction. Let me mention three such Bankdriven catalysts. First, the Cheque Truncation System. In July 2011, we transformed the clearing of cheques with the introduction of the Cheque Truncation System (CTS). This did away with the manual processing of cheques that had been going on for more than 44 years. The physical exchange of cheques was eliminated and replaced by their digital image, transmitted electronically by the presenting bank to the paying bank through the Clearing House at the Bank. A daily volume of 20,000 cheques for a value slightly more than Rs1 billion goes through the CTS. It has reduced processing time and brings efficiency in the entire banking system. Second, the XBRL project. XBRL – or the Extensible Business Reporting Language − will completely transform the entire data chain from collection, management, to processing, with powerful analytics as an added advantage. The Bank expects the project to be commissioned by next year. It provides for an advanced online reporting platform for banks, as well as a data warehouse, and a Business Intelligence platform for the central bank. The new system will bring efficiency gains in data processing and analysis, and timely availability of information which can be expected to improve policy formulation and decision-making. No wonder, therefore, that our fellow regulator, the Financial Services Commission, our fellow data gatherer, Statistics Mauritius, and the Registrar of Companies are all showing a keen interest in XBRL. The benefits are by no means limited to the providers of banking and financial services and their regulators. Customers also stand to gain. ING, a Dutch bank, announced last week that borrowers filing loan applications in XBRL will receive a reduction in costs. We are paving the way for similar initiatives in Mauritius. Third, the National Payment Switch. This is yet another transformative project which we have under way. It is slated to become a key element of our national payments infrastructure, serving as a sound, low-cost platform for future e-payments. It will enable us to handle domestic ATM and POS transactions without the extra charges now incurred as processing is done through card networks. Once the National Switch is in place, our payment system infrastructure can stand comparison with the best in the world. Bank different, but bank prudent, always These three projects show that the Central Bank is also moving rapidly to harness the power of new technology. We are working closely with our commercial banks and the Mauritius Bankers Association to ensure that these potentially disruptive projects proceed smoothly. AfrAsia is now stealing a march over its local peers. I had urged AfrAsia, at the launching ceremony of the bank, seven years ago, “Bank Prudent, Always!” These words of caution ring even truer today, in the aftermath of a little accident AfrAsia has had recently in Zimbabwe. Domestic depositors’ money was never at risk. The Central Bank had taken extra pains to ensure that “ringfencing” was in place before we gave our green light to this overseas foray. And, just to make assurance doubly-sure, we had also insisted on, and secured, a capital buffer – the kind of approach that will become more common once Basel III kicks in. I note that the Zimbabwe issue is being adequately addressed, in consultation with the host regulator. On looking back on the AfrAsia/Zimbabwe problem, one can wonder how the Central Bank could have been so pre-scient … but were we really pre-scient? I would like to believe it was more a case of prudence, not pre-science. The Bank practices what it exhorts its regulatees to do: “Bank Prudent, Always.” I acknowledge that you at AfrAsia bank differently. The evolution of your off-balance sheet business is very telling – it does show that your appetite for risk is different. There is nothing wrong with that. But, shareholders, directors, and executives of AfrAsia should always remember that their bank does not operate on a stand-alone basis, that it is one of several players, that it is part of a system, and that any laxity can spread contagion and inflict reputational damage to the jurisdiction. BIS central bankers’ speeches Our relationship with AfrAsia has often been marked by tension, occasionally by mutual incomprehension, but I know that you never doubted our motivation. You learnt to work with a regulator which you found intrusive at times. We at the Bank had to learn to work with a bank that was constantly pushing in new directions – and in the process, pushing my Bank inspectors beyond their comfort zone. But it has been worth it. Starting from a standing position, your bank has determinedly made its way up. Your growth has been remarkable. Over the six-year period to December 2013, your assets have risen 35 times, your deposits 38 times, and your loan book more than 40 times. We shall soon be opening the club of DSIB’s – Domestic Systemically Important Banks. In July last, we issued the conditions of membership by way of a guideline. Your explosive growth would appear to qualify you for membership of this exclusive club. You will then be held to even higher standards of behaviour and compliance. This is a matter that we shall be discussing with your management and your board of directors in the coming months. Concluding remarks Let me conclude. The banking industry is in transition. Banking and financial services can no longer be conducted according to a model where customers are the ones who have to adapt to the banking products on offer. The shoe is on the other foot: it is the product which must be designed around the customer. We are in a futuristic setting. AfrAsia’s new branch, with its pioneering digital features, promises what is, for now, the ultimate client experience. The customer has access to a range of information on markets and rates at his finger tips, and he can conduct banking transactions by a simple click of the mouse, or a tap of his finger on the smart screen. As we look around us this evening, we are left wondering what the banking landscape of the future will look like? Will there be fewer branches? Will they be fully digital? How do we retain the personal touch? We cannot halt the march of technology and its impact on so many areas of human activity. In banking, are we looking at a branchless, paperless, contactless banking? How distant is the prospect of a cashless society? Such questions, I am sure, must be exercising the minds of many bankers, their technology providers, and their potential competitors. What we are witnessing today is the strategic orientation of one bank which is already projecting itself in the future. I congratulate the management and board of AfrAsia for undertaking this first minitransformation which will take it nearer to a more digitalised bank. I wish you all the best as you branch out in this new direction. Thank you for your attention. BIS central bankers’ speeches | bank of mauritius | 2,014 | 11 |
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Pailles, 17 November 2014. | Rundheersing Bheenick: What legacy for the future of Mauritius? Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Pailles, 17 November 2014. * * * “At this stage of the development of our country, the best contribution that the Central Bank can make is to keep inflation low, stable, and predictable as the foundation for a fairer and more equal society.” In the heat of the election 1. The Annual Dinner in honour of Economic Operators has become a linchpin in the Bank’s calendar of events as it gives me the occasion to share with you my current thoughts and concerns as well as my vision for a better Mauritius from my vantage point as Governor. In the heat of election fever now gripping the country, I thought it timely to reflect on times ahead and the legacy of the economic operators for the future of this small island state of Mauritius. They say that a country gets the leaders it deserves. Happily for us, we have had some of the best in both business and politics. Although not all now running for office may prove to be so. Time will tell. 2. I am here reminded of that quip in Bernard Shaw’s Major Barbara 1, assessing a young man’s employment prospects: He knows nothing and thinks he knows everything. That points clearly to a political career. 3. But in this small island developing state of ours, as we all know, we are economically and environmentally vulnerable, and that demands continual decisive leadership. Perhaps, not so decisive as that of the Duke of Wellington. He was famed for his brilliant military record against Napoleon. Less well-known is that he actually was Prime Minister of Britain, twice. Thirteen years after defeating Napoleon, the bold Iron Duke conducted his first cabinet meeting. The experience must have jolted him as he confided to a friend afterwards: An extraordinary affair. I gave them their orders, (and damn it) they wanted to stay and discuss them. 2 4. I know the feeling after meetings of the Monetary Policy Committee here. And, I dare say, so do many of you heroes and veterans of boardroom battles where unwary captains of industry and corporate honchos meet their Waterloos. The future 5. Tonight, I want us to look into the future and ask how we are facing up to the prospects ahead. Do we have the resilience to survive as a nation, or indeed as a civilisation? Resilience is the capacity for bouncing back after shocks. Despite our small size and our isolation, resilience or anti-fragility has become our badge of honour. But is that enough? 6. We survived the 1960’s prediction of inevitable catastrophe of a future Economics Nobel prize-winner. We exorcised the ghost of Malthus, just as we have seen off the plague of malaria, that used to kill 2,000 of us a year up to the late 1940’s. We have developed remarkable defences against cyclones that are a regular occurrence in this part of the world. We have fought off dengue fever and chikungunya. And, now we are busy preparing our defences against the dreaded Ebola. We escaped the geopolitical risks of war. But more than George Bernard Shaw (1907), Major Barbara, Act 3: See: http://glopad.org/pi/en/record/production/738. Reported in national archives of number 10 Downing Street. BIS central bankers’ speeches this, we have come through in pretty good shape from the global financial and economic crises of recent years. Hardly a month goes by without the country garnering some new accolades from the likes of the World Economic Forum, the Heritage Foundation, the Mo Ibrahim Foundation and so on. Well done Mauritius! Well done our policy-makers! Well done you economic operators! To say nothing of you bankers: well done bankers, indeed! We are sitting pretty, aren’t we? 7. But, as we give ourselves a collective pat on the back, can we spare a thought to the risks to the future fortunes of this land? What steps are we taking to move towards a more inclusive society that leaves no-one behind? How far will our current plans and policies mitigate the worst economic and environmental ravages to come? How will they promote the job-rich and inclusive growth that the head of the IMF, Christine Lagarde, has recently been calling for? 8. So let me try my hand at prophesy. Did I hear a sharp intake of breath? I know that, sometimes, it is said, I have a slight streak of arrogance, though I trust not as much as the notorious Alfonso the Wise, King of Castile. Surveying the state of the world in 1252, he observed: Had I been present at the Creation, I would have given some useful hints for the better ordering of the universe. 3 9. Let me polish up my crystal ball and look forward to 2035, as I once did to 2020, in the sadly defunct Ministry of Economic Planning and Development, our long-term think tank of times past. What do I see, twenty or so years ahead? I see three major interrelated strands ahead: • First, there will be an inescapable and massive transformation of all aspects of society, underpinned by inexorable globalisation. • Second, this will be driven by transformational technologies, policy changes and international agreements. These will lead to greater availability and rapidly declining cost of communication, transport, health care, education and food. • Third, I see a complete make-over of banking, business, industry and social life. In short, in the next two decades to 2035, I see a substantial transformation of the world as we know it. 10. Think on it. How many of you here tonight, how many businesses that you run, will continue exactly as they are, or indeed survive twenty years? Not all: not many, I guess. So we must give a thought to our legacy. What will we leave behind? Prosperity? Or the decline and fall of the wannabe tiger of the Indian Ocean? 11. Global warming and sea level rise – that’s firmly on the cards: but that’s nothing compared to what else may be out there. For I see the driving forces of cheaper, faster and more reliable transport and communication running rough-shod over our present amiable tranquillity, unless we act now. Banking will be transformed: • Mobile may become the main delivery channel for banking and payment services. Alfonos the wise (1221–1284), On studying the Ptolemaic system of the Universe, Gingerich, Owen (1990), “Alfonos the Tenth as a Patron of Astronomy”, in Marquez-Villanueva, Francisco; Vega, Carlos Alberto, Alfonso X of Castile: The Learned King (1221–1284): An International Symposium, Harvard University, pp. 30–45. BIS central bankers’ speeches • We shall have bankless banking, no counters, no backrooms, no paper, no sky- high buildings. • There will be more common currencies and digital currencies, with corresponding declines in fewer exchange transactions. • In short banking will be cash-lite, with fewer staff, and still fewer bankers. 12. This is not a scenario of a distant future. Some of it is present reality. It is already happening. Just a couple of weeks ago, Lloyds Banking Group, a British bank announced plans to axe 9,000 jobs and close 200 branches as it “digitises” its business. Technology is already reaping barren harvest on jobs. Beyond banking, business will be transformed: • Not capital- or labour-intensive but knowledge-intensive. • Big offices going: big companies gone. • Weightless companies with minimal capital and staff. • Malls will re-invent themselves, becoming more a gathering place for socialising than shopping. • Shops going, internet sales with drop-off delivery. • Private on-line matching of buyers and sellers of goods and services. • More niche markets: applications markets, e-entrepreneurs. • Computer-controlled, driverless, electric transport: the internal combustion engine is history. • Pilotless drone airplanes, railways, shipping. • New businesses become small, agile, short life-span, not butterflies but impalas with many predators. Our life will be transformed: • Towns and Cities turn into integrated regions. Beau Bassin runs into Rose Hill and runs into Quatre Bornes. The Port Louis/Curepipe corridor, energised by the Light Rail Transit Systems, spills over neighbouring agglomerations. The likes of Flacq in the east, Rose Belle in the south and Goodlands and Triolet in the north will blur the rural/urban divide. The country will be well on its way to become a city-state. • Nation-states fading away with free movement of labour and capital. • Laws harmonised, lawyers going. Education transformed: • Massive Open Online Courses: teachers redundant. • Life-long learning becomes the norm. But, despite this rosy scenario, there are also some ominous clouds on the horizon. Without concerted action, the worse-case scenario is bleak: • Massive unemployment and underemployment. • Rising inequality: super-rich amidst a sea of poverty, and the collapse of the middleand lower-middle class. BIS central bankers’ speeches • Gated luxury estates: sprawling slums. • Social unrest, strikes, crime increasing. • Decline and fall of urban civilised life: extremist terrorist barbarians at the gates. 13. In case your worry levels are rising, let me hasten to add that this dystopian nightmare is not a fatality. It is certainly not beyond human ingenuity to envisage pre-emptive measures to temper the worst excesses that can push us in that direction. Tonight, I shall focus my remarks on inequality, not because I have a ready-made solution – nobody has – but to stimulate debate on what is often seen as a taboo subject in polite society. Rising inequality is a time bomb ticking away across the world and indeed here in Mauritius 14. Growing inequality is rapidly developing into a fault line that we ignore at our peril. Last month, addressing a conference on The Challenges of Job-Rich and Inclusive Growth on the eve of the IMF-World Bank Annual Meetings, Christine Lagarde, the IMF Managing Director, echoed recent OXFAM research findings: 4 …the world’s richest 85 individuals control as much wealth as the world’s poorest 3.5 billion people. 5 15. Thomas Piketty, in his massive tome, Capital in the Twenty-First Century 6, the 21st century sequel to Karl Marx’s great work, adds to the large body of evidence on rising concentration of income and wealth. Piketty argues that generally wealth grows faster than economic output. Slower economic growth has increased the weight of wealth in society, leading to higher inequality, which could pose risks to economic and political stability. We are living in an increasingly divided world where many Africans risk their lives on shaky boats to escape poverty and conflict while the super-rich chase their next billion to improve their ranking in the Forbes list 7. Even here in Mauritius, some of our top income-earners are being paid over two hundred times the wage of their office cleaners, and ten times more than the surgeons in our hospitals. Is that the society we want to perpetuate? Is that a society that is just and sustainable? The time bomb of growing inequality is ticking away. 16. We are a country trying hard to escape from the middle income trap. But we have no chance of doing that if we do not focus on the risks inherent in jobless growth, persistent high unemployment, and the widening divide between the haves and the have-nots. 17. Over the last decade, the Gini coefficient points to growing inequality, worsening from 0.371 in 2001/02 to 0.413 in 2012. Just over the last five years, households in relative poverty, defined as half the median household income per adult equivalent, increased from just below 8% of the total in 2006/07 to 9.4% in 2012. The distribution of income by quintile paints an even starker picture: the bottom 20% of households witnessed a fall in their share of total income of a full percentage point, from 6.4% in 2001/2 to 5.4% in 2012; this went hand-in-hand with a rise of more than three percentage points (3.4%) in the share of the topmost 20%, bringing it to 47.4%, not far from half the total income. Put differently, in still starker terms, between 2001/2 and 2012, the richest 20% of Mauritian households enjoyed an eight per cent Oxfam (2014), Still the lucky country? The growing gap between rich and poor is a gaping hole in the G20 agenda: https://www.oxfam.org.au/wp-content/uploads/2014/06/2014–66-g20-report_fa_web-2.pdf. Christine Lagarde (2014), Challenges of Job-rich inclusive growth, http://www.imf.org/external/np/speeches/ 2014/100814.htm. Thomas Piketty (2014), Capital in the twenty first century, translated by Arthur Goldhammer, Harvard University Press, http://piketty.pse.ens.fr/en/. Forbes list: http://www.forbes.com/sites/luisakroll/2014/03/03/inside-the-2014-forbes-billionaires-list-facts-andfigures/. BIS central bankers’ speeches increase in their incomes while the poorest 20% suffered a steep decline of twice as much. And, again, the same question arises: is this our idea of a just society? 18. There is much talk of faster economic growth paving the way to a higher-income status for the country. There has been learned, if often uninformed, debate about giving a monetary stimulus to push growth from its current 3.5% to the 5% of pre-crisis years. There has been much less concern over the quality of growth. This is dangerous. In a small country, with a heritage of skewed asset ownership, such myopia can turn out to be very costly. A headlong rush for growth can be the royal road to social instability and economic breakdown. What we need above all is growth that provides for all, a decent house, quality education, health, transport, food, leisure and respite from debt. 19. Growth is good; sustainable growth is better; sustainable and inclusive growth is best of all – absolute nirvana. Is it attainable? Here in Mauritius, with our population of only 1.3 million, and a policy environment never trailing too far behind best practice, we could have a stab at it. This is not a goal too far – not for us who have made a habit of punching above our weight. But we must work for it and encourage our policy-makers to press ahead with the reform agenda. And, while they are fixing the policy environment, we must accelerate our corporate social responsibility (CSR) drive. Since January 2012, profitable companies have been required to pay 2% of their book profit into a CSR Fund to finance social and environmental activities. This is no doubt a good basis to build on. But isn’t there a better way for corporates to carry and demonstrate their social responsibility? 20. Let us draw some inspiration from James Wolfensohn, former World Bank President. Ten years ago, at a function of the World Savings Bank Institute, he remarked: …I want to salute these banks [WSBI’s members] and encourage them to continue in their theme of a double bottom line: to think not just of profit, but to think also of social responsibility which savings banks carry so well. 8 21. Double bottom line reporting seeks to extend the conventional bottom line, measuring financial profit or loss, with which we are all familiar, by adding a second bottom line to measure their performance in terms of positive social impact. Indeed, to address our sustainability concerns, so well encapsulated in the overarching Maurice Ile Durable 9 concept, we can go one better and embrace triple bottom line reporting. This will include the valuation and protection of the rich resources of our beautiful natural environment. 22. Laying down more concrete, like guzzling fuel in traffic jams, increases our GDP; protecting our social and physical environment is better captured by the double and triple bottom lines in quality accounting. Rising inequality worldwide, and here in Mauritius, raises key issues on the role of monetary policy and its redistributive role. We need bold policies to reverse inequality. Planning ahead 23. So what are we to do? We certainly can’t ignore these threats which are already upon us. How best to wage war against poverty and inequality? As I cast about for possible answers, I am reminded of US President Eisenhower, who was a much-decorated US General and who knew a thing or two about wars. He declared: In preparing for battle I have always found that plans are useless, but planning indispensable. 10 http://www.savings-banks.com//SiteCollectionDocuments/Perspectives%2052.pdf – downloaded on 31 October 2014. http://sustainabledevelopment.un.org/content/documents/4074durable.pdf. Dwight D Eisenhower, US General and US President, 1953–1961. BIS central bankers’ speeches 24. I agree with Ike that we must have a battle plan. We must put our minds to the task of planning for both resilience and inclusive and sustainable growth, and audit the results on the triple bottom line. I can only reiterate my forlorn call for a strong and well-resourced strategic planning capacity at the heart of the policy-making establishment. For me there are seven essentials. First, become a learning country, not just adapting to change, but anticipating it, and thriving on it; Second, harness knowledge transfer, learning, and investment whether foreign or domestic, to increase our productive potential; Third, ensure life cycle education for all, as we adapt and re-adapt to a rapidly-changing environment; Fourth, transform our universities into centres for R&D and innovation, and put undergraduate teaching online; Fifth, attract and retain our best talents offering international rates for the job, for them and for our migrant diaspora; Sixth, build a strong targeted social safety net, with business incubators, incentives for startups and skills development; Seventh, shift the employer of last resort from the public to the private sector, and harness technology for your business and for national welfare. 25. Christine Lagarde at the IMF has called for more targeted subsidies and welfare schemes, with the savings put into education, training and improved infrastructure. There is one thing that we definitely must not do: and that is to increase the fiscal burden. We must obviously redouble efforts to extract greater efficiency from all public expenditure, whether recurrent or capital. 26. At this stage of the development of our country, the best contribution that the Central Bank can make is to keep inflation low, stable, and predictable as the foundation for a fairer and more equal society. Inflation is the worst form of taxation. It is regressive and enemy of the poor. Price stability promotes inclusive as well as sustainable growth. Exchange rate stability operates through the import channel to support price stability. Regular calls for what is euphemistically called “a competitive rupee” are an invitation to depreciate the currency. It is difficult to see how an unequal society, with an import-dependent economy, can depreciate its way to development. 27. The Central Bank is rightly concerned with the distributional effects of monetary policy. Borrowers have been subsidized for too long by savers. Savers have responded to persistent low interest rates by halving the savings effort over the last two decades. In parallel, low interest rates have boosted the wealth of asset holders and increased inequality. As the US ends Quantitative Easing and normalises interest rates, we must prepare for greater currency volatility and changing market sentiment. The Central Bank will have its hands full in combating these pressures to ensure continued stability. We must always bear in mind that price stability and exchange rate stability engender social stability – and that is the public good we should all be working for. The end 28. Without foresight, and concerted action now, we will leave a poor legacy for our children to live in a socially and environmentally degraded and deeply divided society. Change we must. For as the political philosopher Edmond Burke once declared: BIS central bankers’ speeches A state without the means of change is without the means of its conservation. 11 We should all be in the business of change. Change for the better is the order of the day. 29. After these weighty ponderings, let us turn to lighter things for a change. As we prepare to tuck into the delightful fare awaiting us, may I invite your attention to the First Law of Dietetics, as proclaimed by best-selling science fiction writer and noted biochemist, Isaac Asimov 12. When I tell you what this law says, you will understand why it must be taken with a pinch of salt, preferably a large one: If it tastes good, it’s bad for you. Salt or no salt, this First Law of Dietetics is suspended tonight. Dinner will be served and I prophesy it will be good, and taste good too. Thank you! Edmund Burke, reflections on the Revolution in France. Isaac Asimov, (1994) A memoir, published posthumously by New York, Doubleday. BIS central bankers’ speeches | bank of mauritius | 2,014 | 11 |
Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Bank of Mauritius Annual Dinner with major economic stakeholders, Flic en Flac, 27 November 2015. | R Basant Roi: Overview of recent economic and financial developments in Mauritius Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the Bank of Mauritius’ Annual Dinner with major economic stakeholders, Flic en Flac, 27 November 2015. * * * Hon Senior Puisne Judge, Eddy Balancy Distinguished Guests Ladies and gentlemen Nine years ago, I gave what was my last address to this august gathering of businessmen, bankers and professionals at the Sugar Beach Hotel in this very neighbourhood. It never ever crossed my mind that I would be back to the Bank of Mauritius someday. It’s a tryst with destiny. I am back and am pleased to address you on an occasion that has become an established tradition. Decades ago, when I was trying to decide on a subject for my dissertation, a famous professor advised me that if I wanted to maximize the probability of success I should be guided by two principles: one was to make sure to cover issues where I knew more than those who would be evaluating my work; and the other was to make sure, while putting together everything I needed, to travel from dialectics to such a logical conclusion that no one in their right mind would ever think of doing. I did not listen to the professor’s counsel. I remembered this counsel while I started writing this address a few days ago. This evening, I have decided to be somewhat guided by his counsel. In so doing, I hope not to cross the delicate line that every speaker fears and faces: the line that separates courage and stupidity. We, at the Bank of Mauritius, do not claim to have incandescent intellect whose every idle utterance is brilliant. We are certainly not gifted with cosmic wisdom for spinning regularly in public. We are just a team of modest central bankers who happen to be the powerhouse of information. The Bank is not omniscient though. One paradox in this age of near-perfect communication system is that nobody can claim to know what is actually happening. Given the nature of the functions we are called upon to fulfill, not all the information held by the Bank can be made public. We, too, like all the citizens of this country have to be law-abiding. We have the best interests of Mauritius as a very well-regulated and supervised jurisdiction at heart. I have ensured that the Bank’s decisions, in particular those regarding regulation and supervision of deposit-taking institutions, are not guided by prejudices. I want to be open. I want to be frank. I want to be candid. I want to be straightforward. I find no better audience than this gathering of businessmen and professionals to express freely some concerns of the Bank of Mauritius. For over 300 years, central banking policies have been guided by the ultimate objective of achieving sustainable economic growth. Central banks support sustainable growth through the pursuit of price stability and financial stability. Far from a desire to lecture on the meaning of price stability, I need to touch upon it since it keeps being variously misinterpreted after every MPC meeting. There does not exist a universally accepted rigorous definition of price stability. It is, however, generally meant to be a condition in which the rate of inflation is low – not far away from zero – and sustained over a period long enough such that expectation of changes in the general price level does not alter business and household decision making. In other words, people do not find the general price level a matter of concern in their day-to-day decision making. For the purpose of this audience, put in its simplest possible form, financial stability, on the other hand, is a state in which our financial system, that is, all the financial intermediaries, markets, and market infrastructures, can withstand internal and external shocks without any consequential disruption to financial intermediation and to the efficient BIS central bankers’ speeches allocation of savings to investment. Price stability and financial stability are the pre-requisites of sustainable growth. Economic, cultural and political pressures have, over the years, dictated emphases on central banks’ policy goals. In fact, the balance between policy goals has not always been the same. Most central banks had multiple policy goals in the decades before the 1980s. In the decades before the 2008 financial crisis, the policy pendulum swung strongly to price stability as the goal. Inflation rates dropped dramatically. Some central banks were even asking for a little higher rate of inflation to grease the growth process. Who would have ever imagined in the 1980s that there would come a time when some central banks would wish inflation rates to pick up a little? In the years after the crisis, against a backdrop of deflationary forces, the policy pendulum of central banks again swung and this time to achieving financial stability. Inflation stopped being an overriding policy concern for central banks. As many of you must be aware, many central banks have been pursuing aggressive unconventional policy action. Collectively, central bank policies since the outbreak of the crisis have made a crucial contribution to restoring financial stability. Given the depressed economic conditions and various challenges that have emerged, we, at the Bank of Mauritius, are expected not to lose sight of financial stability while formulating policies; it’s a dragon that we cannot afford to leave out of our policy calculations. Soundness and robustness of banks as well as financial stability are not a novel policy concern for Mauritius. Mauritius is one of the rare countries in the free world that has known free banking in the 17th and 19th centuries. Bank failures were as common a feature in Mauritius as in the US and elsewhere. A few years after Independence in 1968, more specifically after the breakdown of the Bretton Woods system in September 1971 that had rendered the international monetary system unstable, the Bank established a division that eventually evolved into what is known today as the Bank Supervision Department. Its objective was and still is to regulate banks and ensure financial stability. The Bank has hitherto not lost sight of the critical importance of financial stability to the economy. We have a bank-centred financial system. Total assets of our financial system are currently estimated at around 385 per cent of GDP. The banking sector alone accounts for around 300 per cent of GDP which goes to say that banking accounts for 80 per cent of the total assets of our financial system. Total assets of the most domestic systemically important bank in the country are nearly 70 per cent. The assets of the insurance sector are equivalent to 33 per cent of GDP while those of the pension sector stand at 25 per cent of GDP. The non-bank deposit taking sector, inclusive of leasing companies and finance companies, have assets equivalent to 16 per cent of GDP. These ratios suggest that the importance of banks in our financial system cannot be understated. If Government ever had to bail out banks in order to protect the economy from collapsing, our debt-to-GDP would fly through the roof. It goes to say that regulation and supervision of banks is a function of the Bank of Mauritius that cannot be taken lightly and politicians should stay out of the regulatory and supervisory arena. In particular, licensing of financial institutions should be free of political influence in the first place. However effective and robust the regulatory and supervisory framework in place, banks do fail. And they fail due to a variety of reasons. There is no magic elixir that grants immortality to banks. In the last 46 years, the Bank of Mauritius revoked the banking licences of five banks. The funeral list of banks has not been so long as to suggest that the Bank of Mauritius has been ineffective as a regulatory authority of banks. The US Controller of Currency wrote a letter of guidance to banks way back in December 1863. Three short lines in the letter give an idea as to why the five banks lost their banking licences. The lines read as follows: “Pursue a straightforward, upright, legitimate banking business. Never be tempted by the prospect of large returns to do anything but what may be properly done under the National Currency Act. ‘Splendid financiering’ is not legitimate banking, and ‘splendid financiers’ in banking are generally rascals or humbugs.” BIS central bankers’ speeches In 1996, the Bank of Mauritius had revoked the Banking Licence of the Mauritius Cooperative Central Bank Ltd (MCCB). The MCCB, as the bank was popularly known, suffered from serious capital deficiency. The bank had a scheme to attract deposits at the mind-boggling rates of interest of over 15 per cent. The rates were of course far higher than the then prevailing market rates. When the chicken had come to roost, the bank did not have liquidity. The bank’s shareholders and staff as well as informed depositors had started withdrawing funds. The bank barrelled towards failure and dashed around like a panicked headless chicken. The shareholders of the bank, representatives from the small-planters community and those personalities who were politically well connected clamoured for the Bank of Mauritius intervention. The then Bank of Mauritius was not yet independent. As per the Bank of Mauritius Act 1971, the Minister of Finance was fully empowered to issue directives to the Bank. Reluctantly, the Bank of Mauritius had intervened by way of capital and liquidity injection. Already, public trust in the bank was lost and irrecoverable. The death sentence of the bank was readable on the wall for quite some time. Yet, the Bank of Mauritius was asked to revive a clinically dead bank. The Bank of Mauritius had yet to learn a fundamentally important lesson when dealing with banks in trouble: a troubled bank can survive without capital for some time. But without liquidity, that bank is bound to collapse within hours. No amount of liquidity injection by tax-payers would be sufficient to rescue such a troubled bank. Once public confidence in a troubled bank is lost more so in a small gossip-ridden society like ours, it stays lost. This sad story and other equally sad stories about bank failures in Mauritius remind me of Hemingway’s conversation between Bill Gorton and Mike Campbell. Bill asks: “How did you go bankrupt?” Mike answers: Two ways. Gradually. Then, suddenly,” Final outcome: MCCB was put on liquidation. A large chunk of the funds injected by the Bank of Mauritius into the ailing bank has not yet been recovered; it never will be. Tax-payers lost what was then a colossal sum of about Rs375 million. In financial markets lexicon, it’s said, bulls made money, bears made money and the pigs got slaughtered. And the smart guys cleverly got away with criminal offences. Fortunately, the MCCB was not part of a bigger corporate group resembling a galaxy loaded with loss making planets of all sizes and orbits. The aftertaste of the MCCB episode – a low-intensity tremor in our banking industry though – still lingers in the soul of the Bank of Mauritius. One more dramatic episode. Same play, different acts. In 2001, the Bank of Mauritius was made aware by whistleblowers of several frauds totalling hundreds of millions of rupees in a bank. There were more policemen than bankers at the bank’s annual shareholders meeting. This was a bank that had obtained a form of Bank of Mauritius subsidy after its acquisition of the defunct Union Bank Ltd in 1996. A Bank of Mauritius subsidy means a subsidy granted by taxpayers. This is a phenomenon not easily grasped by the public at large. The Chairperson of the Board of Directors who was also the majority shareholder was unseated as chairperson in May 2001 and was respectfully asked to inject capital into his bank. Without the capital injection, the bank had no legal right to exist. The unseated Chairperson hurriedly left the country without injecting the capital and refused to show up in Mauritius despite repeated calls. That bank did not meet the deadline for capital injection. The Bank of Mauritius revoked the banking licence of the bank in early 2002. Still, he had refused to show up. But he battled from afar to win back his enterprise the liabilities of which had far exceeded its assets. The battle was just a public show; he abandoned the game - eventually. The bank was Delphis Bank Ltd and Chairperson’s name, just in case you have forgotten, was Ketan Somaia, a brilliantly nefarious thespian who finally failed to malinger his way out of prison in Kenya and the UK, just over a year after the revocation of the banking licence of his bank in Mauritius. The Bank of Mauritius did not receive a felicitous remark for its bold and pre-emptive decision to close the bank though it was profusely castigated by some politicians and a specific section of the population. These two banks and all the others in the funeral list of defunct banks were given a fair trial – and a fair hanging – by the regulatory authority. The Bank of Mauritius always ensured that depositors never lost their money in the bargains that followed. BIS central bankers’ speeches No single career officer of the Bank of Mauritius derives sadistic pleasures out of the revocation of banking licences because the aftertaste is known to be very unpleasant. The Bank of Mauritius does hold a licence to kill an ailing bank as many of you have been made to believe. The power to revoke a banking licence must never be construed as the itchy finger of a depressed man at the trigger of a loaded pistol. It is rather the equivalent to having a gun hanging on the wall. The Bank knows that once a while it shoots off, but it does not know when. The gun is there but the Bank has no pre-commitment to use it. Revocation of a banking licence is a very last recourse decision. May I emphatically state that the primary responsibility of a regulatory and supervisory authority is to rescue banks in trouble, not to act as a gunslinger. Financial stability is indeed an overpowering consideration for any responsible regulatory authority. The Bank of Mauritius as the regulatory authority of deposit-taking institutions in the country is not guided by prejudices. Several reasons have motivated me to come up with narratives regarding the revocation of the banking licences of the two banks in quite a distant past. One of the reasons is particularly important. I have to share it with you this evening. The tension between the regulator and the shareholders of the defunct banks engenders some kind of a social electricity. Every voice suddenly becomes a digital loudspeaker. People react to the revocation of banking licences with all kinds of biases and irrational impulses. They overreact to illusory threats and underreact to real threats. Some of them seem to instantly develop the deep torments of a retarded poet in a broken marriage. Revocation of the banking licences of the two banks had attracted unjustified criticisms. Aspersions were violently cast on the Bank of Mauritius by a specific section of the population for not having done enough to bail out the two banks and let down that ethnic group having affinity to those two banks. Extending liquidity to a very badly managed bank owned by almost a single person was tantamount to giving more liquor to an alcoholic to soothe his tremors – a short-term fix that does not do anything to solve the problem. Make him feel good enough, and soon he won’t feel anything again. In one of the three cases, an ailing bank needed a massive amount of liquidity from the Bank of Mauritius. The Bank of Mauritius does not lend to ailing banks, however desperate the situation, against fake collaterals – collaterals that have been already and secretly sold by the ailing bank. It is totally irresponsible to express vociferous opinion on a subject when you suffer from ignorancecultivated diseases. In the Delphis Bank ltd case, I was left with an impression that I ought to have given sympathetic considerations, at whatever the cost to taxpayers. One of my family members was even physically attacked. It requires enormous emotional stability not to allow personal misfortunes or sufferings to affect one’s judgment. Ladies and gentlemen, I need not underscore that there are some things you cannot learn from others. You have to pass through the fire. Everyone sees your exterior but few can discern what you store in the heart. It’s easy to take the role of victim, since we live in a world where most are looking for the shortest and fastest way out of a situation. In a society of instant gratification where we want it all and want it now, the default mechanism is to claim to be a “victim.” It’s a quick and dirty way to get it over with. Where the regulatory authority is involved, you just point a finger. The Bank of Mauritius told the truths with evangelistic fervour. No one believed in the truths. The shareholders told vociferous lies. People believed in their vociferous lies. It is said that power corrupts. We hardly realize that weakness also corrupts. Power corrupts a few. Weakness corrupts the many. George Orwell knew what he was talking about when he had described political language as “designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure winds.” Today, the Bank of Mauritius has become accustomed to the distortions of political speak. People who wear victimhood as a badge of courage get lots of attention. There are interpersonal and sociological components to this that run very deep in our society. Perhaps our society merits ecclesiastical review by common sense. Three of the five banks whose banking licences the Bank of Mauritius has revoked in its history have a common thread that runs through to their demise. Like a piece of an Indian classical BIS central bankers’ speeches raga, a theme plays throughout in different variations, tempos and pitch. In small, heavily politicized, clan-based societies, relations between politics, banking and business tend to become too cozy, not to say incestuous. The politically well-connected CEOs or the politically well-connected biggest shareholders have had a domineering influence in their respective banks. They found it difficult to imagine that anything bad could happen – a phenomenon known as ‘disaster myopia” – which makes them develop an infallible instinct to self-destroy and ruin their own banks. Another striking feature of the three defunct banks under reference is specific management weakness, particularly in the lending area, a frequent initial cause of financial distress known even to the most stupid external auditor of banks. By the way, external auditors generally have the right nose. Tragedy! They pretend to have sniffing deficiency. Bad lending practices, often motivated by considerations other than normal, opened the door to credit weaknesses and left the banks vulnerable to adverse economic cycles. One of our latest discoveries was massive lending to sister companies having fantasy science fiction balance sheets or no balance sheet at all. The tantalized regulator wondered whether he or she should believe in astrologists or physicists in astronomy. Non-performing loans and associated problems accumulated rapidly. The attitude and behaviour of top management permeated middle management and other organizational layers. A bad management culture is very difficult to change. The change for the better may take as long as the change for the worse. The regulator finds himself in an impossible position. From technical mismanagement, the defunct banks shifted to cosmetic management and then to desperate management. And finally, to fraud. It’s a sobering reminder of man’s capacity for folly. Ladies and gentlemen, this year a distressed insurance group involved in shadow banking fell tragically. At least Rs25 billion, that is, as big as 6 per cent of our 2014 GDP, passed through the shadow bank like the proverbial “dose of salts” to elsewhere. The insanity underlying the mind-boggling interest rates set to deceptively attract funds drove savers to fateful ‘sweet dreams’. A profile of the holders of the funds in the shadow bank reveals that they were mostly households, not necessarily low income households. Those who held the funds as part of their portfolio of savings were of course merry and felt wealthy. The ‘wealth effect’ on consumption expenditure, particularly on non-essential items, appears to have been significant. The loss of wealth seems to have had a dampening effect on consumption of non-essential items this year and is likely to last in the months ahead. Along with other developments, this dampening effect should be reflected in a narrowing of the current account deficit of our balance of payments. In the wake of the 2008 financial crisis, financial stability has assumed much more importance than before. Monetary policy transmission mechanism is severely disrupted when a financial system is crippled by instability. This is not news to most of you; financial papers are replete with discussions on this issue. Regulatory authorities are rightly placing greater emphasis on quality human capital in the financial services industry. They have come up with stringent requirements for appointment and accountability of senior officers and board directors. In some countries, the UK for instance, appointment for senior positions including appointment of board directors has to go through regulatory authorities. In the selection process, in-depth interviews of candidates are conducted by the regulatory authorities. This appointment procedure is now binding for the financial services industry. Shareholders, board directors and senior management are being called to assume greater responsibility than before. Failure of a bank does not happen overnight. The politics of credit decision making and other decisions detrimental to a bank are known to the insiders. Over time they build up to a point where the bank finally discovers that its capital is seriously impaired, its liquidity position is perilous and finally it is insolvent. The question is: should such a bank be bailed out without any accountability of the senior officers, directors of the board and shareholders? The latest trend is a set of new norms of conduct and accountability for senior officers and directors. They are being made personally liable in the event of malfeasance. A major improvement in the culture of banks is now an economic necessity. To the external auditors of banks, I have a few remarks that I do not believe should be restricted to private room conversations. When you make errors, make sure they are errors of judgment, BIS central bankers’ speeches not errors of principle. I do not intend to sermonize. We, as regulator, have noted that moral compasses of people in the business have been spinning erratically. I would like to share with you a piece from Lectures on Jurisprudence by the father of Economics, Adam Smith. "Whenever commerce is introduced into any country, probity and punctuality always accompany it . . . "When people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they can lose by the injury that it does to their character . . . "Wherever dealings are frequent, a man does not expect to gain so much by any one contract as by probity and punctuality in the whole, and a prudent dealer, who is sensible of his real interest, would rather choose to lose what he has a right to than give any ground for suspicion . . . "When the greater part of people are merchants they always bring probity and punctuality into fashion, and these therefore are the principle virtues of a commercial nation." This was said 240 years ago in Scotland. Someone I know of at Brunel University came up with a researched finding that we are undergoing a “cultural shift” in our attitudes to honesty. Jurors hold widely different views as to what constitutes dishonest behaviour. There is little consistency in the outcome of trials. A defendant could find himself convicted by one jury and acquitted by another. Jurors are asked to decide whether a defendant’s actions are “honest according to the standards of reasonable people”. That always seemed to work well enough in the past, but not now. The difference is that we no longer have a universal standard for honesty. Firms of Accountants do have a universal standard of conduct. Like a reckless and non-performing schoolboy who did not do his homework, an external auditor has no right to say at trilateral meetings with the regulator that his family dog ate his homework. Lately, I personally noted unethical behaviour and signs of rivalries that breached professional decency between what appeared to be gangs of external auditors. One firm turned into a guerrilla game player in order to grab an even bigger piece of the pie. It was an ugly sight. You might not like your neighbour across the street. But is it in your best interest to cause his property value to plummet? When external auditors fail in their duties because of greed and recklessness, they put an entire financial industry in jeopardy. Greed is good only if it leads to honest wealth creation. Take due cognizance of what’s happening the world over and in the country. Over the past three years, there has been a significant decline in correspondent banking facilities. The regions that have been the hardest hit are the Caribbean, Eastern Europe, Central Asia, East Asia and especially small jurisdictions with significant offshore banking activities and high-risk jurisdictions. The threats posed by the decline in correspondent banking are serious. Regulators, including the Bank of Mauritius, the Financial Services Commission, the Financial Intelligence Unit and most importantly external auditors of financial institutions have to be extraordinarily diligent in tracking the nature of financial flows failing which the economy could be seriously affected. The realities and challenges have been mutating fast due to crosscurrents of forces in recent years. I ask external auditors to wake up and smell the coffee; it’s a far different coffee. I would have very much liked to end this address right now. But I would feel something missing if I resume to my seat without highlighting an issue. Our bank supervisors have observed that one of the key reasons for loan delinquency and rising non-performing loans is due to borrowers diverting funds from the main activity for which funds are directed. The ease with which a client in arrears opens another operating account with a new bank with a view to diverting funds for financing non-business related activities is a serious concern from the standpoint of financial stability. Disaster lies in wait for bankers who smoke the same hashish they give out to other bankers. It is no doubt the duty of a banking industry to put a stop to such diversion of funds. Any well-meaning and competent association of bankers with a sense of purpose for the promotion of a robust banking industry ought to have resolved this issue already. An effective association of bankers has to be representative of all the banks, not to be a representative of one or two persons. In 1982, I happened to be in the campus of l’Université de Bordeaux, France. I was asked by a friend why the guy from Belgium goes to sleep with one glass full of water and one empty glass next to his bed. I could not give the correct reply. And I was then told that the Belgian guy never knows if he’ll be thirsty or not BIS central bankers’ speeches when he wakes up in the night. When an association of bankers start resembling the Belgian guy, I believe it has no raison d’être in our banking industry, more so if issues affecting its own members are not resolved in-house. I have been open. I have been frank. I have been candid. I have been straightforward. You have choices to make. The Bank of Mauritius, too, has choices to make. Ladies and gentlemen, on behalf of the Board of Directors, Members of the Monetary Policy Committee, the staff of the Bank and my wife, I extend to you all and your families Happy Holidays. Thank you. God Bless You. BIS central bankers’ speeches | bank of mauritius | 2,015 | 12 |
Speech by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the IMF's Africa Training Institute, Ebène, 29 July 2016. | Rameswurlall Basant Roi: Recent Developments in Regulation and Supervision Speech by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the IMF’s Africa Training Institute, Ebène, 29 July 2016. * * * Ladies and gentlemen Good morning This visit is my first to the Africa Training Institute of the IMF in Mauritius and I am pleased to address you on the concluding day of the course on Core Elements of Banking Supervision. Thank you, Mr Ravi Mohan, Adviser to the AFRITAC, for giving me this opportunity to reflect briefly on a subject like regulation and supervision of banks that has increasingly occupied a centrally important seat in policy discussions in the past quarter of a century. The Africa Training Institute is by now a well-established training institution for the region in economics, finance and central banking matters. I have no doubt that this well-inspired session on banking supervision has equipped you all with critical knowledge and useful professional skills to perform your job better and better. Seventeen years ago, more specifically, in December 1998, in my first stint as the Governor of the Bank, I gave my first address to a gathering of the main players in the Mauritian economy. The Asian crisis was hitting hard a few of the Far Eastern economies. I had announced that the Bank of Mauritius would completely overhaul and recast its regulatory and supervisory framework in line with international best practices. Deposit-taking institutions would be required to adhere to a comprehensive set of prudential norms. To this effect, guidelines would be issued. On-site and off-site examinations of banks would be re-styled and would be made more rigorous than before. External auditors would be required to be familiar with the Basel Core Principles and to see to it that banks are operating in line with established prudential norms. Oblivious of the fact that banks, by the very nature of their deposit-taking activities, are the most leveraged enterprises on the planet, many disliked this initiative of the Bank of Mauritius. The Bank’s initiative was perceived as an unwarranted intervention by the regulator in what was a free market-based banking industry. Bankers and external auditors had continued to comfortably hang on to the belief that markets are self-regulating and efficient. How could an unregulated individual be deemed self-regulating? In the Bank’s thinking, selfregulation meant no regulation at all. Quite expectedly, regulation of banks’ activities and operations attracted hateful criticisms. The tendency of some groups, like a special-forces warrior, to fight every new regulation had reached a vexing point. Despite resistance from pressure groups to resist, the Bank had proceeded with its regulatory reforms and soldiered on effectively. It took quite some time for players in our economic system to fully realise that banking is a different kind of business and financial systems are not and will never be totally free market systems. Over the years much has been achieved in terms of the health improvement of deposit-taking institutions in the country. Effective banking supervision is an evolving discipline. Free flows of capital in a globalised world marked by all kinds of disruptions, unleashed by economic and non-economic forces, the quests for high returns by investors and quick profits by speculators, fraudulent practices, excessive risk-taking and violent economic cycles, amongst others, have made regulation and supervision of financial institutions an unprecedentedly challenging task. The regulator’s job has become increasingly complex and demanding in terms of skills and clairvoyance, more so after the August 2007 international financial crisis. As regulators, we need to constantly bear in mind that any capitalist economy inevitably progresses from conservative finance to reckless speculation. The economy has financing regimes under which it is stable and financing regimes under which it is unstable. In other BIS central bankers’ speeches words, over a period of prosperity, a capitalist economy transits from financial relations that make for a stable system to financial relations that make for an unstable system. We also need to bear in mind that it’s in the personal interests of the CEOs of banks to show profits, often by any means, for the benefit of their shareholders. And it is simply not true that the pursuit of their individual interests will lead to financial stability. What’s good for an individual CEO may not be necessarily good for the banking industry as a whole. The self-interests of bankers and levered investors do occasionally lead to economic contractions and a loss of human welfare. I need not emphasise to a crowd like this one that financial stability is an indispensable precondition for economic growth and human welfare. There is every reason for regulatory authorities to act proactively in order to prevent financial crises from developing in the first place. With the recent experience that the Bank of Mauritius had with regard to an ailing bank, I cling to the view that regulators must broaden their scope and take initiatives to prevent the development of practices that favour financial instability. Jurisdictions that have regulatory gaps are more prone to fraudulent practices. Regulators must guide the evolution of financial institutions by favouring stability-enhancing and discouraging instability-augmenting institutions and practices. Regulators often have to act as bomb disposal experts when confronted with a potential risk of financial instability. Those at the helm of regulatory authorities bear in mind one thing: if they don’t hear any explosion, it means they are dead already. Last year, the Bank of Mauritius revoked the banking license of a 7-year old bank that was part of one of the biggest corporate bodies in the country. It was a systemically important Group of companies. Poor corporate governance, fraudulent practices, related party transactions, poor asset quality, capital deficiency, liquidity crisis, amongst so many other factors, brought down the bank. This bank failure provided us with invaluable lessons that regulation and supervision of financial institutions cannot be taken lightly. No bank forming part of a broader group of companies should ever be overseen by the regulator in isolation from the other related entities. Regulatory framework should indispensably allow for consolidated supervision. Those who fail to learn from history are doomed to repeat it. The economic and social costs of policy errors are enormous and, indeed, very painful. As I said earlier, regulation and supervision of financial institutions has kept evolving and will keep on evolving. As we have been progressively moving along over the last twenty five years, we have faced new challenges in terms of regulatory and supervisory improvement. I will digress here to say that in a small open economy like Mauritius, we have an additional but very tricky regulatory challenge: to get the balance right such that the solution does not become part of a bigger problem. In the wake of the 2007 financial crisis, effective regulation and supervision of financial institutions was brought back to the table with an elevated sense of seriousness. Basel III gained greater importance worldwide. This awakening has brought with it several new challenges for regulatory authorities, not only in sub-Saharan African countries but also the world over. Digital technology has made far-reaching inroads in the financial industry. The inherent risks associated with digital technology in banking and finance cannot be understated. Regulatory authorities in most parts of the world face a formidable task: to get the right kind of skills for a job that needs to be done right now!! One of the most obvious challenges is capacity building. We, at the Bank of Mauritius, have been constantly tooling and re-tooling, equipping and reequipping and beefing up our regulatory and supervisory capacity in the past fifteen years. It’s a never-ending exercise and will never be. I understand many of you here are from regulatory authorities in the region. I am sure, you must have acquired additional knowledge for sharpening your regulatory and supervisory skills over the past two weeks. I wish you a pleasant trip back home. Those who are from the Bank of Mauritius, get back to work. Thank you. BIS central bankers’ speeches | bank of mauritius | 2,016 | 8 |
Speech by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Forum of Accountants, organised by the Mauritius Institute of Professional Accountants, Balaclava, 11 August 2016. | Yandraduth Googoolye: Growing prominence of the role of auditors – a central banker’s perspective Speech by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Forum of Accountants, organised by the Mauritius Institute of Professional Accountants, Balaclava, 11 August 2016. * * * Good Morning First of all, I would like to thank the Mauritius Institute of Professional Accountants – MIPA – for giving me the opportunity to address this select audience today. The Importance of Auditors The importance of Auditors in this time and age cannot be over emphasised. Being myself a fellow of the Chartered Association of Certified Accountants, UK and a Fellow of the Association of International Accountants, I am very much alive of the expectations which regulators, stakeholders and members of the public generally have from auditors. They expect auditors – internal and external auditors alike – to be the watchdog of their respective institutions. Today, however, I am wearing my other hat – that of the regulator of the banking sector – and I will share with you a few reflections on the growing prominence of the role of auditors in the financial sector, particularly the banking industry, from a prudential perspective. Unlike other companies, most of the funds used by banks to conduct their business belong to their creditors, in particular to their depositors. Since they act as intermediaries between savers and users of capital, banks operate within a controlled regulatory and supervisory framework where sound corporate governance and effective internal control systems play a predominant role. Following the financial crisis and other blows to market confidence and integrity of the financial sector – amongst which the LIBOR rigging scandal – corporate governance as well as the role of auditors has been under a strong and critical public spotlight. The potential systemic implications of weak internal control systems of a bank on the integrity and stability of the whole financial system had the consequence of raising investors’, regulators’ and other stakeholders’ expectations of boards and senior management, and of those charged with providing an independent review of a company’s operations and financial accounts. There were concerted efforts worldwide to improve standards of corporate behaviour and transparency through the international harmonisation of accounting standards, strengthening the principles of corporate governance, lifting the bar on the ‘fitness and propriety’ of directors and senior officers and introducing improved market disclosure standards. Auditors were also subjected to higher levels of scrutiny by the regulators and their professional bodies. Quality of Audit One of the tenets of the Core Principles for Effective Banking Supervision, developed by the Basel Committee on Banking Supervision in 2006 and revised in 2012, is that banks should have in place internal control frameworks to establish and maintain a properly controlled operating environment for the conduct of their business taking into account their risk profile, which should include, inter alia, appropriate independent internal audit and compliance functions to test adherence to these controls as well as applicable laws and regulations. In addition, the bank’s Board and management have the responsibility for ensuring that the financial statements issued annually to the public bear an independent external auditor’s opinion as a result of an audit 1/4 BIS central bankers' speeches conducted in accordance with internationally accepted auditing practices and standards. Therefore, both external and internal auditors have a key role to play in strengthening corporate governance as they are the third line of defence within the combined assurance frameworks after the risk management control and compliance functions. The internal audit function is one of the fundamental “checks and balances” for sound corporate governance, designed to provide an independent assurance to the board of directors and senior management on the quality and effectiveness of a bank’s internal control, risk management and governance systems and processes, to help the board and senior management protect their organisation and its reputation. While external auditors, on the other hand, are responsible for providing reasonable assurance that the financial statements are free from material misstatements and prepared according to international financial reporting standards. The global financial crisis, however, not only revealed weaknesses in risk management, control and governance processes in banks, but also highlighted the need to improve the quality of external audits of banks. While until now, the “three lines of defence model” has been used traditionally to model the interaction between corporate governance and internal control systems, international standard setters and policy-makers are calling for a stronger interaction between banks and supervisors, particularly on the governance of risk. According to the four-lines-of-defence model, the external auditor would be required to provide an autonomous assessment of the first three lines. In March 2014, the Basel Committee on Banking Supervision issued new guidelines on external audit of banks in aiming at reinforcing the key role the audit committee plays in promoting quality bank audits through effective communication with the external auditor and robust oversight of the external audit process. Though the external auditor does not have direct corporate governance responsibility, he must provide a check on the information aspects of the governance system, notably, whether the financial information given to investors and other stakeholders is reliable to help foster their confidence in the financial reports, are in line with the accounting standards and disclosure requirements and faithfully portray the economics of a transaction. Independence of Auditors To foster confidence in the bank’s financial statements, it is imperative that the independence of the external auditor is preserved. As far back as the late 90s, the banking legislation in Mauritius was reviewed necessitating the rotation of the audit engagement partners every 5 years. Further, the appointment of external auditors by financial institutions under our purview for the yearly audit of their financial statements is subject to the approval of the central bank. To reinforce this independence, we have proposed that it is the firm of auditors itself which is subject to rotation every 5 years as opposed to solely the engagement partners. The Relationship between the Supervisory Authority, the Internal Auditor and External Auditors As the work carried out by the internal auditor involves review of the internal controls, risk management and governance processes, the supervisor holds consultations with the internal auditors to discuss the functioning of the internal audit department and the findings of the department, particularly in areas presenting a significant risk and reviews the internal audit reports to identify control problems and areas of potential risks. 2/4 BIS central bankers' speeches In many respects, the work of banking supervisors and external auditors may be perceived as complementary as they often look at the very same issues from a different point of view. In light thereof, the supervisor place reliance on the work of the external auditors, such as their report on the internal controls system in place at the banks and their management letter for a more efficient oversight of banks. In Mauritius, every bank is required to appoint annually an external auditor to audit its accounts, and such appointment is subject to the approval of the Bank of Mauritius. The external auditor must be independent, experienced in the audit of financial institutions and have the necessary resources to undertake audits of financial institutions on a consolidated basis. If the financial institution fails to appoint an auditor approved by the central bank, the central bank may itself appoint the auditor. The role, duties and powers vested on the auditor are clearly spelt out in Section 39 of the Banking Act 2004. Auditors are required to submit a report on the financial statements of the financial institution, wherein, amongst others, the auditor must state whether the financial statements – (i) have been prepared in accordance with International Accounting Standards and any additional prudential requirements set out in guidelines issued by the central bank; (ii) are, in his opinion, complete, fair and properly drawn up; (iii) present a true and fair view of the affairs of the financial institution; The Banking Act 2004 also empowers the Central Bank to, inter alia, impose on an auditor of a bank a duty to carry out an extended scope audit or other examination and make recommendations as necessary. The Bank of Mauritius may also require the auditor to submit a report as to whether, in his opinion, the systems of credit provisioning and write-offs specified by the central bank are being complied with and whether or not measures to counter the possibility of money laundering or the funding of terrorist activities have been adopted by the financial institution and are being implemented in accordance with any enactment relating to anti-money laundering and prevention of terrorism and with guidelines or instructions issued by the central bank. The Bank also issued a Guideline on Transactions or Conditions respecting Well-being of a Financial Institution Reportable by the External Auditor to the Bank of Mauritius. This Guideline was reviewed in February 2014 and lays down the ground rules respecting certain types of relationships between financial institutions and their external auditors. The relationships are described in terms of categories of transactions or conditions impinging on the well-being of financial institutions that must be reported by their external auditors to the Bank of Mauritius. Additionally, in terms of Section 39 of the Banking Act and the Guideline on Transactions or Conditions respecting Well Being of a Financial Institution reportable by the External Auditor, the external auditors have an obligation to report directly to the Bank of Mauritius if they become aware of serious issues during their audit that the supervisor should know about in the public interest. In furtherance of a more effective and efficient oversight, the Bank of Mauritius holds trilateral meetings with the banks and their external auditors on an annual basis after the publication of the audited financial statements to review the financial results and discuss any issue of concern. Concluding Remarks No governance system, however well designed, can fully prevent a financial institution from being victim to frauds and other malpractices. The BAI case is a crying lesson to be learnt where 3/4 BIS central bankers' speeches deceptive practices enabled the group to mask the huge losses of the BAI Group since December 2010. The auditing profession has an important role to play in ensuring that financial reports reflect the way the business has actually been run or the risks to which the business has actually been exposed. The ethical values, integrity and impeachable professional conduct expected from auditors cannot be underscored enough in the promotion of a stable and sound financial system. I am sure that the other distinguished speakers will also touch upon these issues during this Forum. I wish you all fruitful deliberations. Thank you. 4/4 BIS central bankers' speeches | bank of mauritius | 2,016 | 10 |
Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Annual Congress of the Association of Human Resource Professionals of Mauritius, Balaclava, 5 August 2016. | Rameswurlall Basant Roi: “The Growing Role of Human Resource Managers in Modern Business Organisations” Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Annual Congress of the Association of Human Resource Professionals of Mauritius, Balaclava, 5 August 2016. * * * Mr Areff Salauroo, President of the Association of Human Resource Professionals of Mauritius Professor Donald Ah Chuen Professor McKenna Distinguished Guests Ladies and Gentlemen Good evening I am delighted to be here with you this evening. Thank you, Areff, for having invited me for the celebration of the 40th Anniversary of the Association of Human Resource Professionals of Mauritius. My warmest congratulations to you all. I understand you are also having your Annual Congress over two days carrying the theme “The Growing Role of Human Resource Managers in Modern Business Organisations” which, I believe, fits well in the current social and economic context. As you are aware I re-joined the Bank as Governor again after a long break of eight years which I spent mostly overseas. Having seen the human resource landscape in Mauritius after so many years and the quality of human capital relative to the exigencies of the day, I should express my appreciation to the Association for having chosen this topic. There is an unprecedented gap between the quality of human resources we have at our disposal and the quality of human capital needed to escape the middle income trap we find ourselves in. Humans are slow learners. It takes longer for humans to reach maturity as a percentage of their lifetimes than any other species. Having had the experience as a Director of a Department at the central bank and as a Governor for several years, I am more than convinced that getting human resources in the country do what needs to be done for enterprises in the private sector and institutions in the public sector to survive in an increasingly competitive world must be a daunting challenge for human resource managers. How do we get people give their best shots when the character of the modern individuals is threatened by an economic system that has shifted from capitalism to turbo-capitalism? How do we get people give their best shots when the feelings of authenticity have become more and more scarce? How do we get people give their best shots in times of individualization and a serious lack of true and sincere connection with each other within a team in an organization? How do we get people give their best shots if they lack insight, quickness and a can-do attitude? And how do we get people deliver what they are paid for when corrosion of character is so pervasive? I come from a profession that has little to do with the practical aspects of human resource management. I am an economist, not a human resource professional. I have my own style of resolving human resource problems that is not necessarily the ideal one. It was 1998. I had just been appointed Governor of the Bank. The Bank’s operations were partially computerized. There 1/3 BIS central bankers' speeches were a few senior employees who, despite having had the benefit of many sessions of training, were still averse to the use of computer. I had seized the opportunity of a meeting with staff to drive home a key point. I vividly recall having said that people hate change. The world hates change. Yet it is the only thing that has brought progress. The sophisticated quality of their cars they were driving, the electrical appliances that have greatly enhanced the quality of their lives, the advanced medical facilities that have reduced suffering were some examples of the products of “change” that successful organisations have adapted to. I had gone on to quote Harold Wilson, former British Prime Minister of the UK, “He who rejects change is the architect of decay. The only human institution which rejects progress is the cemetery.” My eyeballs rolled, on and on, on those who were aversive to the use of computer at the Bank, while I stressed that we had to reinvent ourselves continually. It is not the strongest or the most intelligent that survives; it is the one that is most adaptable to change. It was compelling for us to tool and re-tool, equip and reequip ourselves and keep on moving ahead if we had to keep earning a salary at the Bank. The bad news was that re-engineering in any enterprise requires hard decisions. The hard decision was that those who are against change would have to head towards the exit door. Guess what? Samuel Johnson said it beautifully: “When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” The same day the senior guys unpacked themselves to learn the difference between business ignorance and business tragedy. Not long after, the same guys became the champion for change. They are still employed somewhere in the private sector, even after the age of 65. They turned out to be winners. Winners are often losers who have evaluated themselves. CEOs, Heads of Departments/Divisions and Human Resource Managers often face the extremely difficult task of identifying what one is best capable of doing. I have seen how an established system have often labelled people possessing enormous talent as “losers”. I find no better example than the Beatles. No one had ever noticed that Paul McCartney had any musical talent in his schooldays. In the 1950s, a schoolteacher in Liverpool had half of the Beatles in his class. The teacher missed it. My point here is that talent is often buried deep; it’s not lying around on the surface. But one thing the Beatles had that many individuals in Mauritius don’t have it today – the sense of sacrifice, the strong commitment to a goal, hunger for success and recognition through perseverance. I regularly meet with CEOs of enterprises in the country and I am given to understand that complacency is a phenomenon quite pervasive in the private sector and in the public sector as well. I am often told of people who have been in their position for years. They are good at what they have been doing. They are respected. They have a likeable boss and a job that brings them distinction in society. It’s great to be in that position. Problem is that they feel too comfortable in the job and they get less vigilant. The urge for new learning evaporates and they eventually lose their edge. Once someone goes to work simply in order to work rather than to improve oneself, one becomes invariably incompetent. As CEOs, we often hear staff members saying, “This cannot be done. And that cannot be done. This is an impossible task. That is an impossible task.” Mentally, the guys are pensioned off. In the world of athletics, the Kenyans’ refusal to discount anything as impossible is well illustrated in the game of ‘Catch the Impala’. The impala is a supremely fast animal. Run after it. The impala will stop at some stage to rest. Before you get too close, it starts running again. This stop-chase race can go on for about 40 kilometres. After that point, the impala is tired and one is able to pat it on the backside. To the Kenyans, ‘Catch the Impala” is the ultimate test of perseverance. Mike Boit, a former Olympic 800 meters winner, once said, “When I returned home to Kenya, they actually respected me more for my ability to catch the impala than for having brought the Olympic medal.” The idea of someone running barefoot to catch a wild impala seems impossible. The Kenyan runners make the impossible possible. The power of positive thinking, rather than getting sunk into a world of impossibilities, which allows the Kenyans to go beyond what appears to be an ultimate frontier has lessons for the business world as well. 2/3 BIS central bankers' speeches Right from the day we are born, we pick up ideas, attitudes and convictions from the world around us. Friends, parents, teachers and so many other agents sell to us their version of the truth. The one we accept, consciously or unconsciously, forms our belief as to what is possible and what is not. The problem is that many people end up accepting a ‘truth’ that limits rather than open up the frontiers of possibilities for them. What we need to hammer on our people is that, whether one is a business executive, an employee or someone running a sandwich shop, if anything extraordinary is to come out, then something extraordinary must go in. And if something extraordinary has to go in, then our people need to have extraordinary qualities. I am here reminded of the qualities of the Russian woman who can stop a horse in full strides. She can walk into a house on fire and come out with the beauty of a queen. So much is the hunger for success and a bold commitment to make a difference. Hunger to win, to improve and a willingness to do whatever it takes. These are the intrinsic qualities of outstanding performers. Do not ruin the raw materials in people. It takes a lot for a human resource manager to get that right. Bear in mind one thing: nothing is more common than unsuccessful people with talent. May I wish you a Happy 40th Anniversary and plenty of success in your endeavours. Thank you. 3/3 BIS central bankers' speeches | bank of mauritius | 2,016 | 10 |
Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the annual dinner for major economic stakeholders, Point Aux Piments, 25 November 2016. | Rameswurlall Basant Roi: Tackling vulnerabilities and emerging risks in an uncertain external environment Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the annual dinner for major economic stakeholders, Point Aux Piments, 25 November 2016. * * * Distinguished Guests Ladies and gentlemen Good evening This is the 19th Annual Dinner being hosted by the Bank of Mauritius for major economic stakeholders and it’s my 11th address to this august gathering of decision makers in the private sector. This evening I will dwell briefly on the state of the external environment the Mauritian economy has to interact with and on an area of risk in the Mauritian economy that makes it highly vulnerable to a conceivable development that could throw our financial industry out of balance with consequences deleterious to the economy. We have all been seeing in recent times that even those who are exceptionally gifted with horizon-scanning capacity are left flabbergasted and totally disarmed by unexpected twists and turns of events. Unexpected outcomes have hit hard the business community at home and abroad. Every one of us, whether we are in the business of manufacturing for exports, trading, fund management or macro-economic policy making, faces heightened risks of going utterly wrong, not because of recklessness or incompetence but because of developments beyond our cerebral capacity to foresee. Volatility is a phenomenon we have to reckon with. Surprises are unusually aplenty. It’s a complex external environment – taxing to the brain – that we have to cope with. The convolutions of happenings abroad are characterized by a phenomenon known as “Knightian uncertainty”: “There are known knowns; there are things we know we do know. We also know that there are known unknowns; that is to say, we know that there are some things we do not know. But there are also unknown unknowns – the ones we don’t know that we don’t know.” If there is one thing investors and the market do not like, it is uncertainty. We are in a world fraught with surprises the outcomes of which defy conventional thinking. Utterances that sound prophetic are a risky business to get into. It’s a fool’s game to predict that everything is going to be fine. Either it’s going to be fine, in which case none of you will ever remember who made the prediction or something painfully unacceptable happens in which case all of you will remember – without fail. I will try not to make any forecast, projection or prediction. The optimist says, “The glass is half full.” The pessimist says, “The glass is half empty.” The rationalist says, “This glass is twice as big as it needs to be.” I will stick to facts and lay bare the disruptive forces underlying the emerging external economic environment for your appreciation. Models from the Ricardian comparative advantage to the Heckscher-Ohlin factor endowment theory tell us that free trade is a win-win game for trading partners. Free trade is widely believed to make countries better off. Gross Domestic Product goes up and the standards of living of the trading countries improve as a result. As we know it, free trade is the core constituent of globalisation. In the past three decades, as the pace of globalisation accelerated to a sustainable gait, all over the world, people were made to believe that globalisation will keep on lifting human conditions to heights never seen before. In fact, it did lift hundreds of millions of people out of poverty in developing countries. What proponents of globalisation did not openly admit is that free trade also creates victims. Poor people have been elevated at the expense of wealthier nations, thus creating a good deal of resentment. The wealthier nations’ coloured perceptions of the benefits resulting from globalization have ultimately cracked. Built into the trade models is the 1/7 BIS central bankers' speeches conclusion that free trade will have potentially adverse distributional consequences. In other words, it will have winners and losers. It punishes those who do not have the required skills or do not have appropriate training or are victims of poor macro-economic management that prices them out of the market by the forces of competition stemming from low wage economies. Those of us familiar with Paul Samuelson’s factor price equalization theorem in trade theory will better appreciate this point. As is aptly said, “Free markets are not pain-free markets.” The standard response to this problem is to argue that the gains from free trade are sufficient to more than adequately compensate the losers by way of training that will equip them with new skills. But it has never been clear what kind of training can transform a 50-year old factory worker into a computer programmer or a web designer. As though factory workers in our export sectors would retool, re-equip and make a giant leap forward, within a short timespan, to become knowledge workers in a flexible new economy wherein their new skills would get them higher wages. Jobs are being lost to automation at a rate faster than we had imagined in the early years of the 21st century and 50 per cent of the jobs we have today will be gone by the year 2030 according to certain credible estimates. How then do we prepare young people for a world that does not yet exist and cannot be foreseen? Occasionally, there have been serious re-tooling agendas in various parts of the world as the centrepiece of a much needed adjustment process. In practice, the adjustment has often failed to materialize. Economists and public intellectuals portrayed the shift from a manufacturing economy to a post-industrial service-based economy as not only inevitable but also desirable. The state of things at the global level bear out ominous turns of events. Good politics has the capacity to clear up the mess left by bad economics. But will it? Two seminal events took place this year. One of them is Brexit. Since 1971, there have been seven times when the pound sterling fell 15 per cent or more against the US dollar in the space of 6 months. Brexit hit hard a few exporting firms. The euro has been having a rough ride ever since it was introduced. The US dollar, itself being challenged from time to time in the last fifteen years as a star currency, has been sailing on choppy waters. The behavior of these three major currencies and the almost sudden rise of the renminbi reflect the underlying disruptive forces at work and the tectonic shifts occurring at the global level. The second seminal event is known to you as much as it is to me. It’s best left of this address. The world order that business communities and policy makers across the world are accustomed to has been going through a noticeable process of de-construction for quite some years. Lately, the process has accelerated. We witnessed, in recent years, competitive devaluation of currencies, mostly among advanced countries. The dangers of a global retreat into protectionism are all too real. De-globalization appears to be afoot. It’s sort of a poetic justice that the fervent supporters of free trade are the very ones who are its biggest victims. This sounds like a really good lawyer’s brief, for the wrong side. The intellectual challenge is to find out if it is at all possible to unwind globalization without seriously affecting national economies and the global economy, the objective being some trade-off between a little GDP for greater income equality. The “big ideas” might be out there, but they’re buried in a blizzard of abstractions, qualifiers, pros-and-cons, excuses and rationalizations, the truly annoying and pathetic deflections, even counter and counter-counter arguments. The clash between economics and politics is assuming a dimension that does not augur well for the world economy. The ratios of world trade to world output have been flat since 2008, making it the longest period of stagnation since World War II. Does it suggest that globalization is no longer driving world growth? Has globalization reached its limit? If the process is coming to an end, or even going in reverse, it would not be the first time since the industrial revolution, in the early 19th century. Two phenomena might threaten democracy: continuing weak productivity and what has come to be known as secular stagnation, a terminology coined by Larry Summers. We commonly 2/7 BIS central bankers' speeches understand democracy as a system that takes scores of voters to say ‘yes’ before reforms are implemented. Democracies also have loud voices. Those are voices that wait for a fight to break out and take a swing at the guy they have always wanted to hit. Whether or not the guy had anything to do with starting the fight is beside the point. It takes only a few loud voices that cherish democracy to say ‘no’ to stop the reforms. Press the ‘no’ button for reforms, the path to economic recovery becomes unnavigable. No wonder it takes long for democracies to come out of recession. A blistering cocktail of unsettling forces is militating in most societies. The vast majority of people finds the word ‘austerity’ abhorrent. We are not exempt. Voices, particularly the louder ones, suffused with vice and folly with some form of addictive delirium, are more about ‘taking’ than about ‘making’. It leaves one rather uninspired when it comes to the ‘mental tone’ underlying people’s actions. Unlike in the distant past, more precisely in what used to be called a peasant society, a man is no longer sized up by the number of children he has. He is today sized up by the number of Rolex watches and number of tweeter followers he has. Remember the famous lines from William Yeats that many of us must have come across in our schooldays: “Things fell apart. The centre did not hold. Mere anarchy was loosed upon the world…” We are left to guess what happens next. I believe none of us has the oracular capacity to precisely say what’s next. One can only state that world economic outlook is what it is, given the political developments in recent months. A couple of days ago, the UK slashed its growth rate for 2016 drastically. Singapore published a significant contraction of its third quarter GDP for 2016. Many of us here must be aware that the world economy is growing below its potential. In the very early years of the 21st century, the world economy used to grow, on average, by about 4 per cent. In the years after the 2008 international financial crisis, the world economy has been growing by roughly half the rate. Similarly, the medium to long term growth rate of our economy used to be somewhere between 5 and 6 per cent. In the post-international financial crisis years, the growth performance of the Mauritian economy also has been roughly half the rate it used to be. If anyone of us wonders why we are stuck with a growth rate of around 3 per cent for the past several years, I would ask him to cast his mind back to the 1980s. The Government had successfully created a congenial business climate – a business climate conducive to growth. By this I mean, Government had positively demonstrated a strong commitment to a battery of measures. The measures were coherent and comprehensive. Abolition of import licenses and import quotas, removal of cash deposit scheme for imports, dismantling of high tariff walls, Government’s greater reliance on indirect taxes rather than on income tax, gradual scaling down of income tax rates, gradual liberalization of the financial sector, including exchange control liberalization are some of the key ingredients that had inspired business confidence in the economy. At the highest level of the civil service we had a class of disinterested, well-groomed and exemplary movers and shakers, with an elevated sense of purpose and with a strong sense of commitment to the precisely defined development agenda. Importantly, a pragmatic approach to exchange rate policy along with a very prudent wage policy had set the economy into a high growth path. The benefits of the broad based policy efforts had reached out to all segments of the Mauritian society. This is history. If history is not a language in which the dead speak to the deaf, we have to learn the lesson that the recipe for growth does not rest on a single monetary policy tool, but on a comprehensive set of bold reforms and other associated policy initiatives. Society has to own them. Is there progress without sacrifice where everyone is a winner? There is no such thing. Truths need to be told bluntly, without prevaricating and without obfuscation, as otherwise people tend to delude themselves into believing that nothing fundamental needs to change if the future economic performance is to match the past. We need to re-create the kind of business climate I just outlined. We need coherence. We need stronger commitment. We need to fully comprehend the dynamics of a digitally-driven world of technology – a phenomenon that we cannot at all afford to take lightly. It’s not a world of cows and cattle; it’s a world of cybernetics and robotics. We 3/7 BIS central bankers' speeches need to drop 20th century instincts and develop 21st century instincts. The context is riddled with complexities. In a world that is out of order, a world that is pulling apart, the scale and scope of challenges are far wider, deeper and tougher than they were in the 1980s. Absent a strong dash of commonsense, society as a whole is bound to bear the brunt of painful adjustments in the future. Most of the economic policies that support robust economic growth in the long run fall outside the province of the central bank. If we really want to have sustained good growth back, we can only do it through exports of goods and services. In a very resource scarce country like ours, aggregate income levels can meaningfully rise only if exports of goods and services go up. This is a story that has only one simple conclusion: we have to be, first and foremost, competitive. It’s a conclusion that, despite overwhelming evidence, many of us conveniently put a lid on, perhaps because human beings cannot digest too much of reality in a single shot. When everybody in a society ends up believing that everybody can live at the expense of everybody else, something terrible happens to the national character. Free riders multiply; they off-load individual responsibilities. The gradual shift from a belief in individual responsibility to a belief in which the emphasis is more on social responsibility, whatever that means, is deplorable. There always comes a time when the Government will not be able to produce the proverbial rabbits out of its fiscal hat. Our only resource is human capital. Endowed with poor human capital, no country in today’s dog-eat-dog world can comfortably find itself in a good stead to compete. Poor human resources combined with lop-sided industrial relations legislations are certainly not a recipe for modernization and growth. The quality of human capital matters enormously if we do want to break out of the middle income trap. The unfortunate thing about building a dependable human capital stock is the very long gestation period of investment in human resources. This is a problem readily remediable. Just open up; import the talent and the skills. Two other factors, amongst others like innovation, that are critically important for the sustenance of competitiveness are the exchange rate of the rupee and wage levels in the economy. For quite some years in the past we have had a strong rupee. Capital inflows in the equity market and in other areas of the economy appreciated both the share prices and the exchange rate of the rupee which, in turn, attracted more investors thus carrying the exchange rate of the rupee considerably away from its fair value. The sustained large current account deficit for several years reflected the extent to which the rupee had deviated from its fair value. As is well known, an overvalued exchange rate encourages consumption, particularly of imported goods, and is a deflationary factor as far as the domestic economy is concerned. Sustained over a long period of time, an overvalued exchange rate undermines the competitiveness of the export sector. In our situation, competitiveness was further aggravated by an anachronistic system of determining wages and salaries that completely ignores the health of the economy. It’s a system that works like drug. The more you give the shots, the more you get addicted – until you drop dead. There is a correct value of the exchange rate of the rupee that balances the needs of growth on the one hand and consumption on the other. In 2015, there was a consequential re-alignment of the exchange rate of the rupee. The structure of the Mauritian economy has evolved over the years. In this regard, I need to underscore one point for the benefit of the business community present here tonight: an exchange rate level that is good for our exports sector is not necessarily good for the financial sector and an exchange rate that is good for the financial sector is not necessarily good for our exports sector. Both sectors are vitally important though for Mauritius. In the mind of central bankers, there is not an optimal, model-produced exchange rate level. Our aim at the Bank is to have an exchange rate that is broadly stable at an adaptive and equilibrium level. Yet, the exchange rate of the rupee is often singled out of all the key macro-economic variables and blamed for all the sins in the economy. What about the inordinate, unrelated-to-productivity 4/7 BIS central bankers' speeches increases in wages and salaries at regular intervals that also undermine competitiveness of the economy? Don’t they impact on the exchange rate of the rupee? Yes, they do. We have a system of review of wages and salaries that needs to be scrapped, a system that worked as long as the exchange rate of the rupee was administratively determined by the Bank on a daily basis in the days of exchange control. I understand that if one wishes to gain the badge of social membership in the country, one should avoid reference to this administrative arrangement of determining wages and salaries so adorable to so many. What is needed is a new nondistortionary formula – a formula that respects prevailing economic conditions. Problem is, we want to eat the cake and have it at the same time. Full-time obfuscators make us all believe six impossible things before breakfast and a dozen more before dinner. By any cannon of logic, the current account deficit in our balance of payments is large and not sustainable, more so when viewed in the context of emerging risks and challenges. Do people realize that they buy things they don’t need with money they don’t have? Households have come to despise the past and neglect the future. The lessons of the dead and the desires of the unborn are both ignored. Instead, all that seems to matter is consumption, here and now. A large part of what people spend in this country is indeed financed by the savings of the rest of the world. The rest of the world saves; we spend their savings merrily. When everybody is making money in a euphoric situation, nobody is concerned about looking closely at where the money is coming from – or even if it is real or fictitious money as was the case in the Super Cash Back Gold scheme. This is a kind of consumer behaviour that takes me back to a conversation between Sherlock Holmes and Dr Watson: They are both camping out and well protected against the wind and the chill of the night inside a tent in a forest. In the middle of the night, Sherlock Holmes wakes up and gives Dr Watson a nudge. “Watson,” he says, look up in the sky and tell me what you see.” “I see millions of stars, Holmes,” says Watson. “And what do you conclude from that, Watson?” Watson thinks for a moment. “Well,” he says, “astronomically, it tells me that there are millions of galaxies and potentially billions of planets. Astrologically, I observe that Saturn is in Leo. Horologically, I deduce that the time is approximately a quarter past three. Meteorologically, I suspect that we will have a beautiful day tomorrow. Theologically, I see God is all too powerful, and we are small and insignificant. Uh, what does it tell you Holmes?” “Watson, you idiot! Someone has stolen our tent!” Fortunately, we have a number of exporting firms in the private sector that have given their best possible shots and strived to survive in an extremely difficult world economic environment. Fortunately, the Government and private sector enterprises made joint efforts to diversify the source-markets for our tourism industry. And fortunately, our banking industry is well capitalized. But the economy has drifted to a higher level of vulnerability lately. The matrix of deficit and debt, wage levels and interest rate levels, growth, current account deficit and regulatory policies is a conundrum of our time – a Rubik’s cube of tricky policy moves. Until recently, regulatory and supervisory systems were designed to retrospectively identify at what point in time, so to say, a thief stole your money, not to alert you when he is actually stealing it. The rogue banker could beat the system and beat the house as well. A bad bank anywhere can affect good banks everywhere. In the wake of the financial crisis and given the rising 5/7 BIS central bankers' speeches frequency of destabilizing shocks to financial systems the world over, regulatory and supervisory systems have undergone significant improvements. The Bank has made important strides in the improvement of its regulatory and supervisory system. One of the initiatives that the Bank has taken relates to stress testing of banks. This is a highly technical forward-looking exercise whereby the financial position of a bank is projected under a baseline scenario and an adversely stressed scenario. The objective is to examine if the bank has the financial muscle and strength to withstand shocks. The Bank, along with the prized assistance of an econometrician, Associate Professor, Jameel Khadaroo, of the University of Mauritius, has developed a stress testing framework for producing a suite of macro-prudential models for in-house use by the staff of the Bank. The findings of the last stress testing exercise indicated that the domestic banking sector is indeed strong and resilient to shocks with some grey areas that need close monitoring. I need to share with the audience two more findings: a reduction in interest rates sustained over a long period of time with a view to stimulating the economy tends to raise credit risk, measured in terms of nonperforming loans in sectors like manufacturing, construction and personal. A depreciation of the rupee aiming to promote the export sectors reduces credit risk in the manufacturing and tourism sectors but it increases the credit risk to the trade sector because of our dependence on imports. Six months have gone by since the protocol on the Double Tax Avoidance Agreement was signed. It was feared that the revision of the Agreement would trigger a flight of Global Business deposits. At the end of March 2016, aggregate deposit liabilities of the banking industry stood at Rs855 billion, out of which GBC deposits were Rs320 billion. Rather than dropping as initially feared, GBC deposits had gone up to Rs350 billion by the end of September last. Even after allowing for exchange rate effects GBC deposits have increased considerably in the last six months. The rising level of GBC deposits, despite the signing of the protocol, does not go to say that the Bank or anyone of us should be complacent about. With the expiry of the grandfathering clause by 2019, the risk of an erosion of the deposit base of banks is clear and present unless all participants in our jurisdiction come up with innovative and meaningful business strategies. Already, there are indications of a growing demand for Mauritius to position itself as treasury centres for multinationals operating in Africa. A few international banks are actually engaged in promoting this business. The Bank of Mauritius stands ready to support such initiatives. A drop in GBC deposits would deprive the country of foreign exchange inflows for the financing of the current account deficit. The Bank had feared that a drop in GBC deposits would adversely impact on the liquidity positions of banks. A large scale drain of liquidity, if unmatched by sufficient liquid assets, generally leads to a crisis. The Bank conducted stress test to assess the impact of a potential sudden Global Business deposits flight on the banking industry. The stresstest revealed that, in a worst case scenario, banks have adequate liquid assets to meet sudden withdrawal of GBC deposits. This, too, should not leave us complacent. Ours is a jurisdiction that still is viable and has a bright future provided there is a coherent national strategy to chalk out a path for sustained growth and development. The Bank of Mauritius along with some banks is already engaged in this pathfinding exercise. Ladies and gentlemen, I come from a family wherein each of the kids had to have a guru, a wise person to teach and guide them in life. One of the stories told to me by my guru in the early 1950s was about Siddhartha Gautama. Siddhartha became the Buddha, later in life. At his birth, a soothsayer had foretold that Siddhartha would either become a ruler of the world or an enlightened person. Siddhartha’s father had locked him in the palace to make sure that he followed the path of power and rule the world. One day, Siddhartha happened to venture out of the palace. He encountered a corpse. This encounter turned him into a seeker of truth. Many of us – in fact, too many of us – from the lowest to the highest levels, dream of becoming a ruler. We do come across corpses; we walk over them. 6/7 BIS central bankers' speeches I have tried to offer an honest, heartfelt and engaging message, which is true to both the spirit and the contents that drive the message. The devil is so entirely in the details, nuance and caveats that the message sometimes tends to get lost. I sense that all too often, the message gets trivialized, too. And when the chickens come home to roost, the eyeballs get focused on the vault of the Bank for bail outs. It’s a vault tightly guarded by the Board of Directors and Monetary Policy Committee members of the Bank of Mauritius. The Board of Directors, the Members of the Monetary Policy Committee, the staff of the Bank of Mauritius and my wife join me in wishing you all and your families Happy Holidays and the very best for 2017. Thank you. 7/7 BIS central bankers' speeches | bank of mauritius | 2,016 | 12 |
Opening address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Joint IMF/BCBS/Making Finance Work for Africa Conference, IMF Africa Training Institute, Ebene, 1 February 2017. | Rameswurlall Basant Roi: Cross-border banking and regulatory reforms - implications for Africa from international experience Opening address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Joint IMF/BCBS/Making Finance Work for Africa Conference, IMF Africa Training Institute, Ebene, 1 February 2017. * * * Managing Director of the IMF, Madam Christine Lagarde Chairman of the Basel Committee on Banking Supervision Fellow Governors Executive Directors and Senior Officials of the IMF Distinguished Guests Ladies and Gentlemen Good afternoon I am pleased to welcome you all to Mauritius. I wish you a pleasant stay with us. I thank the organizers of the Joint IMF/BCBS/Making Finance Work for Africa Conference for inviting me to give the opening address today. May I extend my appreciation to the Mauritius IMF Africa Training Institute for hosting this Conference. When I was here recently, I was asked to give a closing address to a house-full audience of course participants. I had shared with them my personal experience as regulator of all deposit taking institutions in Mauritius. While narrating to them a number of enlightening anecdotes related to events leading to the revocation of banking licenses, problems associated with crisis resolution and presenting them with the risks and challenges that regulators face in the globalized world, I read in their looks the enthusiasm and the eagerness to take their regulatory and supervisory responsibilities seriously. Interestingly, I found out that regulators in Africa are keen to have better regulatory structures. Understandably, one hampering factor – apart from an acute shortage of highly skilled and seasoned bank examiners – that overwhelms all other considerations is national interests as opposed to the soundness and stability of financial industries at the regional, pan-African or global level. The political will is thus seen to be missing. It’s a problem not confined to Africa only. I believe that it’s in order for me to give a very quick and broad brush-stroke of our experience with the regulation and supervision of banking and cross-border banking activities. Mauritius was a regional hub for payments and settlements since the 17th century. Traders from the West, the Middle East, India and China crossing this part of the world used to regularly meet here in Mauritius for purposes of payments and settlements. The piastres, Indian rupee, Pound sterling, the US dollar, gold and silver used to be the means of payments and settlements. A characteristic feature of the hub was free banking. There was no regulatory authority and therefore no licensing authority. Banks used to issue their own paper currencies. And, of course, banks used to collapse quite often. The seed of frequent bank failures resided mostly in the recklessness with which banks issued their respective banknotes. The authority’s anxiety with regard to the sustenance of confidence and stability in the then monetary system had led to the setting up of the Board of Commissioners of currency in 1864, the first in the world. By the end 1/3 BIS central bankers' speeches of the l9th century the hub had lost its significance. Rivalries between bankers had led to the establishment, in 1838, of what is today the largest domestic bank in Mauritius. Two British banks having large cross-border banking activities the world over have been present in Mauritius for more than a century. Soon after World War II, it was realized that our financial system needed to be regulated. Licensing of banks was introduced. To prevent banks from collapsing due to stresses and strains caused by massive repatriation of funds, exchange control was introduced in 1951. Ever since the establishment of the Board of Commissioners of currency a running thread of preoccupying concern has been the soundness and stability of our financial system. Regulation and supervision of banks started formally in the very early 1970s. Of the 8 banks then in operation, 5 were branches of international banks. A mix of home-host country regulations guided their operations. In the first half of the 1980s, we initiated steps to gradually liberalize our financial sector. In 1989, we established the offshore banking centre. Two types of banking licenses were issued, one for banks carrying out exclusively offshore banking business and the other for banks carrying out domestic banking business. By July 1994, with the suspension of our Exchange Control Act, the gradual liberalization of the financial sector was completed. The heightened pace of globalization and financial integration posed serious challenges for the banks operating in Mauritius and for us as regulator. Admittedly, like other regulators in many jurisdictions we were not prepared for the challenges. Subsequently, banks operating in the offshore sector were brought within the purview of more or less the same regulatory and supervisory norms as those applicable to domestic banks. The dual-licensing regime was done away with. One of the most meaningful developments, yet unrecognized, in the Mauritian economy over the last 27 years has been the introduction in 2004 of a single license regime for banks operating in our jurisdiction. It allowed what formerly were offshore banks to interact actively with the domestic money and foreign exchange markets and with the domestic economy in general. Cross-border banking activities decisively picked up. The Bank of Mauritius Act and the Banking Act were both overhauled and suitably recast to meet emerging regulatory challenges. Previously, quite some prudential norms set by the Bank of Mauritius used to be introduced by way of regulations made by the Minister of Finance. They sometimes used to be lobbied against in the halls of Government. By making the guidelines legal in the Bank of Mauritius Act 2004, the Bank does not have to have recourse to Government for issuing guidelines to banks and is therefore free pressures from the banking industry and other related parties. So far, the Bank of Mauritius has issued 35 Guidelines to the banking industry. They all have authority. As the financial integration accelerated, cross-border banking activities also accelerated in the 1990s. Today, cross-border banking activities account for 60 per cent of our banking industry’s businesses. Total banking assets are around 300 per cent of our GDP. The risks and vulnerabilities to our financial industry and the economy are by no means negligible. Since the beginning of the new millennium, the Bank of Mauritius took a number of regulatory and supervisory initiatives a few of which are as follows: 1. The Bank entered into MOUs on cross border supervision and information sharing with 16 of its counterparts. The MOUs set forth a statement of intent between the Bank and its counterparts to establish a framework for mutual assistance, cooperation and exchange of information in the fulfilment of the institutions’ respective supervisory responsibilities; 2. The Banking Act allows for cross border cooperation in terms of group audit from parent bank of the subsidiaries and branches of foreign banks in Mauritius; 3. Besides carrying out onsite examination of overseas subsidiaries of local banks, the Bank has also engaged with its foreign counterparts to carry out joint examinations of entities falling under its purview. The Banking Act allows host supervisors to conduct examinations of banks in our jurisdiction; 2/3 BIS central bankers' speeches 4. Two years ago a huge financial conglomerate failed in Mauritius. The Bank of Mauritius Act and the Banking Act were amended to enhance both consolidated and conglomerate supervision; 5. The Bank of Mauritius attends the supervisory colleges of almost all the subsidiaries and branches of foreign banks operating in our jurisdiction. The Bank has a policy of holding supervisory colleges for the two largest domestic banks that have subsidiaries and branches overseas; 6. A major risk associated with cross border operations is money laundering. The Bank of Mauritius has continuously upgraded its guidelines on AML/CFT in line with FATF recommendations. Strict enforcement of the guidelines has led to severe regulatory sanctions against non-compliant institutions which explains why the Bank is unpopular, and 7. Given the acceleration of cross-border banking activities, the Bank of Mauritius is currently strengthening its risk-based supervisory framework. These initiatives are by no means adequate for effective regulation and supervision of our banking industry. A lot more has to be accomplished. At some point in time this year, we would be having a crisis resolution framework for Mauritius. Crisis avoidance, more so in an increasingly digitalized financial world, requires far bolder initiatives to strengthen regulatory and supervisory frameworks not only in Mauritius but in every other country in the African continent. We are told that in the years ahead we will continue to be provided with banking and financial services but banks, as we know them today, will no longer exist. We, regulators, have to be steps ahead. Our regulatory and supervisory experience clearly demonstrates that effective regulatory structures for cross border banking activities are indispensably needed. The absence of a regional or pan-African regulatory structure is palpably felt for quite some years. The idea, mooted already, of having a regulatory structure for overseeing banks having significant crossborder banking activities does hold water. This could be a starting point. Regulatory challenges keep multiplying on the regulators’ table. For instance, we observe in our jurisdiction here that the distinction between subsidiaries and branches are blurring. Instead of being incorporated locally as completely separate legal entities, subsidiaries of big banking groups are being organized along business lines. Different subsidiaries of the same banking groups are being set up in different jurisdictions with different facilities and advantages. Would a failure of one of the subsidiaries not bring down the entire group? Ladies and gentleman, there is a multiplicity of complex regulatory issues that need to be resolved by governments and regulatory authorities in the African continent. I do not wish to preempt the panelists. We have the distinguished presence of seasoned regulators as panelists for the Conference. I am confident that we will leave this place with a lot of ideas and options to contemplate about. May I thank the Managing Director of the IMF Madam Christine Lagarde and the Chairman of the Basel Committee on Banking Supervision, Mr Stefan Ingves for being with us during the Conference. I, once again, thank the Director of IMF Africa Training Institute for hosting the Conference. Thank you. 3/3 BIS central bankers' speeches | bank of mauritius | 2,017 | 2 |
Opening remarks by Mr Vikram Punchoo, Second Deputy Governor of the Bank of Mauritius, at the IMF Afritac South Seminar on International Financial Reporting Standards 9, Ebène, 3 April 2017. | Vikram Punchoo: International Financial Reporting Standards IFRS 9 Opening remarks by Mr Vikram Punchoo, Second Deputy Governor of the Bank of Mauritius, at the IMF Afritac South Seminar on International Financial Reporting Standards 9, Ebène, 3 April 2017. * * * Ladies and Gentlemen A very good morning to you I feel privileged to be here today with you all speaking at the opening session of this seminar on IFRS9. I am grateful to the Director and senior people of Afritac South for having taken on board a suggestion I made during the Steering Committee held in Mauritius in 2016 to host a seminar on IFRS9. I wish to thank them for their commitment and dedication to improve in many ways the work of supervisors in Sub-Saharan Africa. Often we fail to appreciate the organisational efforts required to bring together so many participants and getting the experts to fly down to Mauritius to share their technical expertise. A big thank you to the organisers of this seminar. I am sure IFRS 9 will be less of a conundrum at the end of this seminar for all the participants and they will gain a lot of insights about how best to implement IFRS9 in their own respective jurisdictions. I am looking forward to hear from the Bank of Mauritius participants in particular on how best we can implement IFRS9 in Mauritius as from next Monday. This seminar on IFRS9 comes at an opportune time indeed though I would have wished it had happened earlier. The implementation of IFRS 9 is a major challenge not only for the banks but also for the Regulator as well. It is a race against time as January 2018 is only 9 months away. I am still unclear about the state of preparedness and extent of understanding about IFRS9 among the domestic and smaller banks and this makes me quite nervous. International banks present in Mauritius would lean on their group expertise. At the outset, let me tell you that I am not an accountant and accounting was something I did not really like at college. So you would not expect me to talk to you about all the intricacies, subtleties and complexities of IFRS9. I am an economist by training. My interest in IFRS9 is very recent and confined to its implications for banking regulation. To be honest, the first time I came across IFRS9 was at a meeting at the Bank with KPMG experts from South Africa sometime in late 2015 or early 2016. I was briefed about how KPMG in anticipation of the rolling-out of IFRS9 had to enlist the services of statisticians, economists, and econometricians. And the discussion, surprisingly, was not about accounting but about data, databases, and building models – a realm in which economists and econometricians, unlike accountants, generally excel. The rest of my remarks will touch briefly on IFRS9 as a new accounting standard in replacement of IAS39, thereafter the initiatives of the Bank of Mauritius with regard to the implementation of IFRS9 will be reviewed and finally, I’ll end with a concluding note. The circumstances which brought about IFRS9 are well known by now. Post GFC 2008, at the request of the G20 and the Financial Stability Board, the International Accounting Standards Board (IASB) stepped up its work to replace IAS39, which had started in the early 2000s, and in July 2014, the IASB released the new accounting standard IFRS9. There are 3 aspects of IFRS9 namely (1) classification and measurement of financial instruments; (2) Impairment; and 1/3 BIS central bankers' speeches Hedge Accounting. The main focus of my remarks will be on impairment. Loan-loss provisioning under IAS39 was deemed to be too little too late as the incurred loss model required objective evidence of impairment, such as an actual loss event occurring, in order for provisions to be booked. The backward-looking incurred loss model was conflicting with the prudential regulation on credit risk management as enunciated in the BCBS core principles for effective supervision. IFRS9 expected loss model is forward-looking and more aligned to prudential regulation with regard to credit risk management. The expected loss model computation will not only use historical loss experience data but also all information available whether current or future, including macroeconomic factors. Further, banks will have to start provisioning on the very day the loan is booked based on expected losses over a 12-month period, i.e. on Stage 1. Should credit risks increased significantly as a result of macroeconomic or financial factors relative to the initial recognition at stage 1, provisioning would increase accordingly based on lifetime expected losses computation. The move from stage 1 to stage 2 will depend on whether there is a significant change in credit risks. Stage 3 is where there is evidence of impairment. Deloitte’s Global IFRS Banking Surveys have revealed that the Expected Credit Loss Model would substantially increase banks’ loan loss provisioning and severely impact on their regulatory capital. This direct impact on banks’ cost of capital would be amplified by massive changes in banks’ systems and processes, significant investment in people and IT infrastructure and a change in mind-set altogether at Board and Management level. It is very likely that banks would pass on these costs to borrowers and depositors. In view of the impact on regulatory capital and the limited time remaining to 1 January 2018, the Basel Committee on Banking Supervision released a statement on 31 March 2017 on the interim regulatory treatment of accounting provisions and standards. The statement, while encouraging the use of the Expected Credit Loss Model noted its significant impact on regulatory capital and banks’ provisioning practices in ‘qualitative and quantitative ways’. The BCBS would also “thoroughly review the longer-term regulatory treatment of provisions” and that “jurisdictions may adopt transitional arrangements to smooth any potential significant negative impact on regulatory capital arising from the introduction of ECL accounting.” Initiatives taken by the Bank of Mauritius The Bank is also in the process of adopting IFRS9 and we have been working closely with our external auditors to review systems and processes at the Bank. At this stage, it is still work-inprogress. With regard to the Bank’s supervisory role in overseeing that banks meet the deadline of 1 January 2018, a meeting was held with External Auditors of banks in March 2016 to gauge their state of preparedness and the comfort was given to the Regulator that they will lean on their group support and expertise to assist banks in transforming their systems and processes to meet the requirements of IFRS9. The External Auditors were told that the Bank would not wish to see the same accounting firm providing consultancy and advisory services to the client on the one hand and concurrently be the one validating and auditing the model on the other hand. In this respect, the central bank envisages to hire the services of an accounting firm to carry out the validation exercise on its behalf as it might not have the expertise to do so as early as January 2018. Subsequently in April 2016, the Bank of Mauritius requested banks to submit an IFRS 9 implementation roadmap vetted by their external auditors. A follow-up letter was issued in November 2016 to request banks to submit an IFRS 9 action plan with defined timelines, provide 2/3 BIS central bankers' speeches quarterly progress reports on the implementation status, and to make a presentation to the Bank covering various aspects of their institution’s state of preparedness. As of date, out of 23 banks, 20 have made presentations at the Bank on their IFRS 9 implementation plans. The remaining banks are scheduled to make presentations shortly. It is observed from the information submitted by banks that subsidiaries of the international banks were, as expected, better prepared than others to implement IFRS9 given the technical expertise available at Group level. Domestic and smaller banks have hired the services of accounting firms to assist them in the implementation of IFRS 9. The main challenges faced by banks are the unavailability and poor quality of historical credit loss data - under IAS39, banks have been delaying provisioning on non-performing loans by evergreening or restructuring these loans -, the absence of good databases, inadequate IT systems and lack of skilled and well-trained human resources. The Bank of Mauritius has directed banks to embark on a trial run from this year with a view to assessing the likely impact of IFRS9 implementation on their profitability. Given that IFRS 9 is also applicable to the non-bank deposit-taking institutions, the latter was also requested to submit to the Bank an implementation plan and to make a presentation on their state of preparedness. Internally, the Bank of Mauritius has constituted a team of supervisors which is tasked to periodically review implementation progress of IFRS 9. Concluding note At this juncture, we are cautiously optimistic that we shall be able to roll-out the implementation of IFRS9 on the due date but lots of uncertainties remain. We have started very late in the process of implementation, i.e., in 2016, when we should probably have done so as early as beginning 2015. Cleaning of the data and constituting a long-enough historical database at the required granularity for deriving meaningful model results remains the single biggest challenge. Furthermore, it is highly likely that banks within the same jurisdiction would apply the new accounting rules differently through their own different methodologies and approaches to ECL modelling – some may be closer than others to the “true” or “correct” ECL Model. The challenge for the supervisor would be to have superior knowledge to be able to assess the data quality as well as which approaches to ECL modelling would yield the correct numbers. The Deloitte’s global banking survey of IFRS 9 in 2016 had a question on the state of readiness for IFRS 9 by the deadline of 1 January 2018 and almost 50 per cent of the respondents said that “they do not have enough technical resources to deliver their IFRS 9 project” and almost 25 per cent of the respondents did not think that “there will be sufficient skills available in the market to cover shortfalls.” The worst case scenario is that the Bank ends up, after 1 January 2018, with the subsidiaries and branches of international banks successfully implementing IFRS9 while the domestic and smaller banks are unable to do so. Thank you for your attention. 3/3 BIS central bankers' speeches | bank of mauritius | 2,017 | 5 |
Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the IMF Afritac South Seminar on International Financial Reporting Standards 9, Ebène, 7 April 2017. | Rameswurlall Basant Roi: Recent reforms in banking regulation, supervision and prudential accounting in Mauritius Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the IMF Afritac South Seminar on International Financial Reporting Standards 9, Ebène, 7 April 2017. * * * Ladies and gentlemen Good morning I am happy to be here with you this morning. Thank you Mr Ravi Mohan, Resident Advisor to the IMF’s AFRITAC South, for inviting me to share my views on recent reforms in the area of banking regulation and supervision, including on prudential accounting, in Mauritius. In 2012, the BCBS released the revised Core Principles for Effective Banking Supervision to address weaknesses that came to light during the 2007–08 global financial crisis. In recent years, supervisors around the world – including the Bank of Mauritius – have taken radical steps to improve the regulatory and supervisory framework by drawing lessons from the crisis and by raising standards in line with the revised core principles and other internationally-accepted norms. The 2007–08 crisis demonstrated how easily a failed financial institution – in particular, systemically important ones – could send tremors across jurisdictions worldwide. Shockwaves can be transmitted, for instance, directly via the liquidity channel by way of severe constraints to access funding or indirectly via second-round effects resulting from an economic slowdown. It is thus important that financial institutions build up resilience to be able to absorb both internal as well as external shocks. Many regulators have made stress testing an integral component of the capital planning exercise for financial institutions. The Bank of Mauritius has recently developed stress testing models to independently assess the resilience of banks to shocks, both at macro and micro levels. Banks are being required to implement an internal capital adequacy assessment by conducting stress testing for key risks at least once a year. In line with international trends, the Bank of Mauritius issued guidelines on capital conservation buffer back in June 2014. Domestic systemically important banks are called upon to build adequate capital buffers that can be used in the event of stressed financial and economic conditions. Whereas some supervisory authorities have already developed a risk based supervisory framework, a good number of authorities are still in the process of constructing their own framework to ensure that resources and compliance requirements are commensurate with the risk levels as well as the systemic importance of financial institutions. The Bank of Mauritius has initiated a phased roll out of a robust risk-based supervisory framework. One of the BCBS core principles for Effective Banking Supervision is consolidated supervision. Financial conglomerates can be faced with various risks, unknown to regulators looking only at one segment of their operations. Further, large financial groups may operate across jurisdictions, with possibly differing regulatory regimes. The core principles emphasise an effective framework for consolidated and cross-border supervision with appropriate home-host coordination. The Bank of Mauritius has been working on these recommendations and not later than last year the banking legislation was amended to allow for consolidated supervision of banking groups. 1/3 BIS central bankers' speeches The Bank of Mauritius actively engages with the host regulator of subsidiaries of local banking groups as well as with home regulators of foreign groups through regular supervisory colleges. The Bank of Mauritius has also entered into Memoranda of Understanding with other regulators for the purpose of fostering exchange of information and facilitating regulation and supervision of entities with affiliates falling under the purview of other regulators. A strong liquidity base is key to ensuring robustness of a regulatory and supervisory framework. The BCBS has reviewed liquidity standards, including the need for High Quality Liquid Assets to safeguard survival under stressed scenarios and a Net Stable Funding Ratio to guarantee that banks have appropriate level of stable funding. The Bank of Mauritius has lately released its upgraded liquidity guidelines, which are presently under consultation and are expected to be finalised in 2017. Another Core Principle for Effective Banking Supervision requires an appropriate crisis management and resolution regime to minimize disruption in the financial system as well as the reduces both the impact and probability of failures. This also requires adequate collaboration across regulators to ensure that responsibilities are discharged in a coordinated approach. The Bank of Mauritius is currently reviewing the existing regime with assistance from the IMF to cater for an effective resolution and crisis management regime. The establishment of a deposit insurance scheme is one of a series of reforms initiated with a view to preserving financial stability. The Deposit Insurance Scheme Bill has been finalised by the Bank of Mauritius and sent to government to be enacted. Nine years after the global financial crisis, loan loss provisioning and asset quality remain key issues for banks and regulators. Accounting standards around the world are currently based upon the incurred-loss impairment model. This approach permits recognition of impairment losses centred on “objective evidence” – which basically means that loan loss provisions are computed on ex post losses. The existing model is, in many cases, applied by banks so that impairment is only recognised just before the default of a loan. The existing standards for provisioning thus do not meet supervisory requisites. IFRS 9 is a complex accounting standard relating to financial instruments. The key reform with IFRS 9 is that provisions for loan losses will be based on an expected loss model for credit losses. This is a distinct improvement as it will make it difficult for banks to hide problem assets on their balance sheet. I don’t need to dwell at length on this topic knowing that you have just participated in the course. The Bank of Mauritius has engaged with external auditors and banks as from March 2016 to ensure smooth implementation of IRFS 9. Banks have been requested to submit the implementation plans to the central bank and are required to make quarterly presentations on progress achieved and roadmap to complete implementation. The Bank of Mauritius has already conducted a first round of discussion with most banks to better understand their plans and challenges as well as guide them in terms of our expectations. The Bank of Mauritius is envisaging parallel runs by financial institutions to allow for a good transition as well as provide management and the regulator and external auditors with sufficient time to verify the reliability of the models and the assumptions. In addition, the Bank of Mauritius has issued several guidelines which would be assisting in ensuring the safety and soundness of the banking sector during the implementation phase. In April 2016, the Bank of Mauritius added prudential norms for credit classification and provisioning requirements to the existing Guideline on Impairment Measurement and Income Recognition. This was in response to difficulties in comparing information across banks, given that there could be significant differences on how banks identify and report their asset quality. In addition, as highlighted earlier, the global financial crisis revealed that the existing accounting 2/3 BIS central bankers' speeches framework resulted in “too little and too late” provisions. The Guideline Impairment Measurement and Income Recognition prescribes rules for valuation of collateral given that that proper valuation of collateral is important for an accurate estimate of expected losses. The Bank of Mauritius has included provisions for the treatment of restructured loans to address the risk of ‘cosmetic’ restructuring to postpone expected losses and the setting aside of adequate provisions. As regards loan loss data, credit profiles currently available on the Mauritius Credit Information Bureau, which is hosted by the Bank of Mauritius, is in the process of being upgraded to provide default history. The new information would then be used in assessing expected losses. The Banking Act 2004 sets out the duties of external auditors which, among others, requires them to report any breach of regulations and or material issues to the Bank as well as to certify that the financial statements represent a true and fair picture of the affairs of the financial institutions. Sound credit risk management is a key factor in the accuracy of expected loss models. The Bank of Mauritius issued a Guideline on Credit Risk Management back in 2003 which establishes sound principles of credit risk management whilst at the same time establishing the responsibilities and accountabilities of senior management and the board of directors. There are several other regulations regarding credit risk management and adequacy of provisions which in addition to the ones I have just stated will assist in the maintenance of the safety and soundness of banks and other deposit taking institutions through the transition period. Will the new standards on IFRS 9 help to avoid the next crisis? The concept of expected credit loss model aims to recognise losses adequately and in time. It will address the ‘too little and too late’ provisioning problem. However, the model itself will be largely dependent on underlying data, expert judgement, subjective estimates of macroeconomic parameters as well as adequacy of the internal control framework notwithstanding the IT infrastructure and analytics. Subject to these challenges being effectively addressed, boards and senior management of banks will take informed decisions to proactively manage provisions. Banks’ senior management, board of directors, external auditors as well as supervisors all have a critical role to play in the smooth transition and implementation of the new prudential accounting regime. Thank you. 3/3 BIS central bankers' speeches | bank of mauritius | 2,017 | 5 |
Acceptance speech by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, for the 2017 Central Bank Governor of the Year Award for Africa, Port Louis, 7 April 2017. | Rameswurlall Basant Roi: Acceptance speech - 2017 Central Bank Governor of the Year Award for Africa Acceptance speech by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, for the 2017 Central Bank Governor of the Year Award for Africa, Port Louis, 7 April 2017. * * * Excellencies, Members of the Diplomatic Corps Mr James King, Africa and Middles East Editor for “The Banker” Fellow Bankers Distinguished guests Ladies and gentlemen Good afternoon It’s an exceptional honour to have been selected for the 2017 Central Bank Governor of the Year Award for Africa by “The Banker” magazine. I am humbled to have received the award this afternoon. I thank “The Banker” for giving recognition to the work of the Bank of Mauritius. This accolade comes as a pleasant assurance that we have not been erring in terms of decisions and actions. It also reflects the high central banking standard that the Bank is striving to maintain. This afternoon’s event is also, in some sense, a magnificent celebration of the progress made by our jurisdiction. I am summoned to briefly reflect on myself in the central banking profession. I wish not to be presumptuous and I ask for your forbearance. It’s just that I am a central banker who has spent his life doing his job with an elevated sense of duty and devotion. I have been in the central banking arena for about 40 years. And 40 years of central banking – an honourable profession that imposes rigours and military-like discipline on the person holding the office – have moulded me into what I stand for today. It has been and continues to be a weary long march from dripping dusk to drizzling dawn and to dripping dusk again. Barely a few months after I had joined the Bank of Mauritius in 1976, I had a very brief encounter with the then Governor of the Bank. That memorable encounter had instantly made me, as someone neither uber-ambitious nor loquacious as many of today’s young professionals, realize that the road to success is always under construction. I was made to understand that education does not always lead to more success in the real world. The better you perform in the world of academia, the worse you may turn out to be at solving real world’s problems. In academia, problem solving involves only a part of the brain – the rational part that reads and writes, retains information and connects the dots. This is the kind of skills that are tested in examinations. They are, as we must all be knowing, tests of scholastic aptitude. If you succeed in playing the tricks the tests require, you end up having distinction at schools. Over time, I found that life throws out volleys of tests on your paths. Unlike the tests set at schools, life’s tests involve many more variables. In fact, we get overwhelmed by so many variables popping up about us. Take, for instance, the human face. It’s capable of so many 1/4 BIS central bankers' speeches different expressions, often beaming in custom-built face for every occasion, open to so many interpretations. In schools, tests are anticipated. In life outside the schools, we don’t know when we will be tested and what we will be tested on. But once we are at the workplace, we are faced with an entirely different set of tests. We might happen to be in the midst of a test and still be unaware that we are being tested. Many years later in my career, I realized that I have been tested again and again and again. The tests have at times been stressful, so unbearably stressful that I had once decided to quit. But a quitter can never be a winner. And I had swallowed my bitterness and decided not to quit. I was reminded of Friedrich Nietzsche’s “That which doesn’t kill us makes us stronger.” I told to myself that as long as the Almighty wakes me up in the morning, it can’t be over. It’s never over as long as we have the unerring faith and willingness to give the best of ourselves. This is a game in which you don’t compete with others; you compete with yourself and try to outdo your own previous performance, more so when the lie of the land is a sleeping beauty waiting for the kiss of change. Just for a moment, imagine a mathematical meteorologist. He has come up with a set of wonderful equations for an ideal atmospheric state. No rain. No troublesome snowfall. No fog. No dark clouds. No high velocity wind. Nothing annoying. It’s just beautiful, pleasant and peaceful sunshine out there. In theory, such an atmospheric state might exist, but it’s far from reality. The meteorologist’s job is to study the chaos in the atmosphere, to forecast and to announce to the public the atmospheric state and weather conditions. He cannot change the weather. He cannot prevent turbulences. He cannot prevent hurricanes, floods, draughts or earthquakes. Financial markets are like the atmosphere. There is a meaningful similitude between the two. Interacting forces in the markets, as in the atmosphere, are abundant. Like the meteorologist, the central banker has to come up with equally wonderful equations for forecasting purposes and sustaining a stable financial market. No wonder astro-physicists and other engineers turn out to be the professionals with the right skills for financial markets. But unlike the meteorologist, the central banker’s job is to prevent turbulences and earthquakes in the financial markets. He is constantly tested by conditions in the financial markets. Make a mistake. You get soon penalized by the market. But make no mistake. The job is not at all about tucking files from one table to the other. Central bankers are often viewed as a ruthless class of people. They are often misunderstood. Any central banker, made of a solid central banking timber, is religiously guided by the unwritten principles of having to conduct the business of central banking in ways that best serve the interests of the economy and the society at large, regardless of the aspersions, often very caustic, cast at him. The humility of central bankers has seldom been an occasional act; it’s more of a constant attitude. But it’s cast off and dismissed lightly. The central banker is instead labelled as arrogant. It’s an optical illusion. Quite often, this perception, as amply discussed in central banking literature, leads to clashes with the elected representatives of the people. Whereas the central banker, by the very nature of his responsibilities, takes a long term view of the economy, the elected representatives of the people take a short term view, shaped and limited by the length of their tenure of office. This is quite understandable for they don’t get elected on the basis of their beautiful political philosophies. However, it does not go to say that central bankers always have a highly polished Cartesian rationalism with an impeccably faultless idea of reality. Although I have had years of experiential learning in the art of central banking, I, like a couple of my predecessors, have not been exempt from such clashes. One of the virtues of independent central banks is that, unlike politicians, they do not have to pay attention to opinion polls. Perhaps, that’s why elected representatives of the people are not charged with the task of conducting monetary policy, for monetary policy, if systematically misused, could overreact, and overreact disastrously. In the process, I have learned two invaluable lessons as a central banker: first, I resolved quite a few crises from forex market crises to bank failures. I learned what a responsible Governor must religiously refrain from doing failing which Government would feel the compulsion to have 2/4 BIS central bankers' speeches recourse to taxpayers’ wallets later. Second, in situations that demand the central banker’s independent advice and honest actions, a responsible Governor must never nod to the masters like the cuckoo in a cuckoo clock. Otherwise, the Governor himself ends up holding the paper bag full of water. When it starts leaking society inevitably pays the price for the leakage. Domestic violence cannot be argued to mean love story. Those are the moments when the central banker’s integrity is tested. The central banker is, plot-wise, not like the Roman playwrights who had recourse to the dramatic device, deus ex machina, in which one of the gods was hoisted over the stage and dropped in to resolve an inchoate drama. In financial markets, particularly in an evolving jurisdiction facing numerous challenges in uncertain times, the central banker is expected to embody credibility – credibility par excellence. A memorable 1963 event in the UK, even when the concept of independent central banks was unknown, crystallizes the point I am making. That was the year when banks in London were treated to a display of the Bank of England’s political muscle. The Bank’s governor Lord Cromer had decisively forced Britain’s new Prime Minister Harold Wilson to throw away half of his election promises and slash government spending. This bold attempt of the Governor had prompted Prime Minister Wilson to shout in one debate, “Who is Prime Minister of this country, Mr. Governor, you or me?” This question gives a full scope and measure of the real world’s direct as well as infinitely nuanced challenges that Governors of central banks have to regularly deal with. Most of us here will recall the decades of political upheavals in Italy that had brought the country to the edge of a failed state in the no so distant past. Two very influential and powerful institutions are said to have saved Italy: the Vatican and the central bank of Italy led by intellectual giants as honourable Governors. If you plan for one year, you better plant sugar cane. If you plan for 10 years, you better plant trees. And if you plan for more than 10 years, you better think and do like responsible and visionary central bankers. I believe this best summarizes the long range vision of policy makers in central banks. Unhappily, I neither possess the poetry of imagination, nor the brilliance of metaphors for expressing all the ups and downs, the successes and failures and the pleasures and pains of a long standing central banker. Standing here, I seem to be like a lonesome traveller looking back at his footprints the tone and tint of which vanish with the passage of time. The footprints have taught me to be unbending in honest failure, but tenderly in success; not to look for the path of comfort, but to boldly face the challenges; to stand up firmly in stormy situations but to always have compassion on those unable to cope with; to have a heart that is indeed clean and a goal that is right and high; to look through into the future but never ever to ignore the past; to be modest so that I never lose sight of the simplicity of true greatness, true strength and true wisdom. Those are footprints that have given me a temperamental predominance of courage over timidity that was my childhood characteristic. They have taught me to have the right relationship with money. They have taught me to be an honest central banker and, as far as possible, a gentle central banker. If my contributions as a central banker have ultimately made people’s lives better, the Prime Ministers of the Republic of Mauritius who made the decision for me to get appointed Governor of the Bank are the ones who first deserve the congratulations. This award, first and foremost, honours my wife and my two daughters who have stood by me in very testing times. Years ago my elder daughter then about 12 years old used to tease me in a cryptic style of her own: “Dad, you are a great leader. But you have a big problem; you have no followers.” I do, however, have an amazing staff and a cast of highly capable and engaging people at the Bank today. This accolade goes to them as well. On their behalf and on behalf of the Board of Directors of the Bank, and on my own behalf, I once again thank “The Banker” magazine for the award. 3/4 BIS central bankers' speeches Thank you very much. 4/4 BIS central bankers' speeches | bank of mauritius | 2,017 | 5 |
Address by Mr Rameswurlall Basant Roi, Governor, Bank of Mauritius, at the Forum of Accountants organized by the Mauritius Institute of Professional Accountants, Flic en Flac, 20 July 2017. | Rameswurlall Basant Roi: The role of accountants in the process of economic development Address by Mr Rameswurlall Basant Roi, Governor, Bank of Mauritius, at the Forum of Accountants organized by the Mauritius Institute of Professional Accountants, Flic en Flac, 20 July 2017. * * * Hon Minister of Financial Services, Good Governance and Institutional Reforms Chairman, Mauritius Institute of Professional Accountants Distinguished guests Ladies and gentlemen Good morning Thank you for having invited me to speak to an audience of accountants. It’s a first for me. On the occasion of this Forum organized by the Mauritius Institute of Professional Accountants (MIPA), it’s my pleasure to share with you some of my thoughts on the role of accountants in the process of economic development. Let me at the very outset stress that contributions of accountants to the process of economic development are generally not direct. But their services as external auditors of financial institutions make direct contributions to the efficient functioning of financial markets which, in turn, allocate scarce resources to economic sectors and facilitate the process of economic development. I am an economist and a central banker by profession. An economist who is also a regulator of financial institutions does not always make a delightful company with accountants in the external auditing profession. A Cambridge University economist, Joan Robinson, who happened to have lectured me at one point in time, had once observed that the reason one must study economics is “to avoid being deceived by economists.” Decades ago, when I had joined the Bank of Mauritius which is also the regulator of various types of financial institutions in the country, I had told to myself that I need to have a good understanding of accountancy in order to avoid being deceived by accountants. I am sure, you must be familiar with the phenomenon that some people talk in their sleep. Economists are sometimes said to talk in other people’s sleep. In November 2015, the year when the banking license of the Bramer Banking Corporation Limited was revoked, I had given an address wherein, I hope, I had not talked in other people’s sleep. And I hope, I will not do so today. More than a quarter of a century ago, I was asked to speak briefly on the causes for the deteriorating conditions of a financial institution at a Rotary Club meeting. The laws of the land did not and still do not allow me to speak on matters that are classified as confidential. I chose to speak, in general terms, on the failures of in-house accountants and of external auditors to caution boards of directors of financial institutions on a number of vitally important issues even when the issues are clearly driving them to the edge of a cliff. A few years before this particular event, the Bank for International Settlements had already come up with the Cooke Committee Report, referred to as the Basel I nowadays. I had expected any accountant present there to have already taken cognizance of the Report. Sadly, an accountant, seated in the crowd, listened to me – restlessly and visibly quite irritated. When I was over with my very brief intervention, it was question time. Unhappy with my remarks, he tirelessly gave a lengthy exposé on the origin of the word audit, which I approvingly found scholastic, but ended with a strong conclusive statement that it is not the duty of auditors to caution board directors of financial institutions on, 1/4 BIS central bankers' speeches for example, their deteriorating prudential ratios. I later learned that the accountant had spent most of his professional life in a car dealer’s warehouse. This narrative is illustrative of how many of our accountants had failed to recognize how fast the auditing profession was evolving and how critically important are their roles in an economic system. I am more inclined to believe that, today, our accountants are very much aware that there are more differences, indeed very many important differences, than similarities between auditing a corner shop and a financial institution. When a corner shop goes bankrupt for whatever reason, it’s not news. The owner or owners of the shop and the creditor or creditors, if any, are the only ones who are the losers. When a financial institution goes bankrupt, it’s headline news. The differences of importance and of implications for a society cannot be much clearer. If the financial institution is systemically important, the entire industry, the economy and the society as a whole bear the brunt of losses, in one way or the other. We have been witnessing for a decade how the banking industry across the world has been forced to reconstruct its balance sheet at the same time. Lord William Rees-Mogg has put it fittingly that, “it is like the married couple who both feel chilly at night when they only have a single bed blanket on a double bed. Everyone is trying to maximize their cash take from everyone else.” I need not elaborate on how the process of economic development is arrested and the economic well-being of the vast majority of people takes a buffeting once financial instability sets in. Accountants are one of the several key players whose role in the promotion of financial stability is decisively crucial. At the pinnacle of the accountancy profession lies the International Accounting Standards Board, the IASB, whose mission is testimony to the importance of the profession. As you are aware, the IASB is the standard-setter tasked with the responsibility of developing International Financial Reporting Standards that bring transparency, accountability and efficiency to financial markets around the world. The Constitution of the IASB is unambiguous about the need to promote public interest. Its work serves the public interest by fostering trust, growth and long-term financial stability in the global economy. Accountants are, indeed, a vital cog in the successful carriage of the endeavour. Accountants perform several roles in an economic system including, amongst others, auditors, consultants, financial analyst, tax planners and business advisers and influence the lives of millions of people globally. Their skills and competence are sought by companies, ranging from the smallest ones to the large multinationals and their audit reports are viewed by millions, including shareholders, governments, regulators, investors and the public at large. They must inspire trust at all times in the eyes of the people. Trust is the cornerstone on which our society, as any other society, operates. It is essential to commerce. Trustworthiness gives the accountancy profession its touch of honour. A lack of trust is generally fatal to business success. Without trust, we end up having what is called a “bazaar economy.” Without trust, economic prosperity disintegrates. Way back in 1913, J.P. Morgan testified to the US Senate that “a man I do not trust could not get money from me on all the bonds in Christendom.” Trust is a precondition for mobilizing capital and ensuring its efficient reallocation to different sectors of the economy. Savers will only be willing to entrust their funds to other economic agents if they can trust the information provided by the recipients of these funds. As such, accountants’ responsibility is to give comfort that the financial information provides a true and fair picture of the affairs of the borrowers. Any misrepresentation of the financial condition eventually perpetrates distortions in financial markets. In the globalized world we find ourselves, accountants are expected to have thorough knowledge of the financials of companies and to be familiar with the numerous economic and political forces at work. The risks are too many. They certainly need to have in-depth knowledge of the drivers of performance and provide independent opinion on the opportunities and risk profiles of companies. It is the quality, reliability and objectivity of such information which stakeholders rely 2/4 BIS central bankers' speeches upon to make informed judgment and allocate resources efficiently, which is so essential to the process of economic development. Let me digress to remind the accountants present here of the BAI Group episode. You will recall that the Bank of Mauritius had hired the services of nTan Advisory Ltd of Singapore to investigate into the various causes that led to the demise of the BAI Group. I personally went through a bulky document of more than 10,000 pages attached to the main Report. Suffice it to say, they do not speak well of the in-house accountants and the accountants in the external auditing profession. Had the external auditors given a true and fair picture of the financial standing of the Group, I am sure the nonsensical game, to use a very polite phrase, would have been avoided and the disruptive forces unleashed by its failure prevented from stalling the growth process of the economy. When external auditors validate the books of fraudulent companies, the bill of indictment becomes burdensome. When auditors issue favourable opinions knowingly on doctored balance sheets, they stop serving public interest. They do not facilitate the process of economic development; they destroy it. Accountants, like some economists, are artists. They have a noticeable tendency to paint what their patrons, who pay them, want to see. I glossed over quite some files on the revocation of banking licenses by the Bank of Mauritius over the years. In all of the cases, external auditors had been regularly issuing a clean bill of health. Remember one thing: forget economic development, nations are often made bankrupt by fraudulent practices in financial institutions. In-house accountants and those in the external auditing profession have an immense responsibility to maintain rigors and financial discipline in financial as well as nonfinancial enterprises. In the banking business, the so-called ‘disaster myopia’ that characterized many of the external auditors who had oversight responsibilities over these banks may lead to malevolent financial stability consequences. Three issues come to the fore in these cases. First, many external auditors have often limited themselves to the microcosmic world of compliance and failed to comprehend the new financially engineered risks that banks undertake. Second, there may have been an agency issue similar to credit rating agencies: as I mentioned earlier, external auditors are often remunerated by those very banks that they oversee. They may, thus, be tempted not to report evidence of any simmering malfeasances for fear of losing their business and third they may not fully endogenise the financial stability implications and may limit themselves to audit rules while discharging their duties. An externally audited account undoubtedly constitutes a thumbmark of the quality of reporting. However competently conducted, it cannot be interpreted as a blanket cover that everything is perfect in an organization. The instances of corporate failures that had escaped the radar screen of external auditors and gained notoriety afterwards as with Enron, WorldCom, Nortel, Tyco and Parmalat are still vivid in our minds. Accounting irregularities at leading corporate entities are a stark reminder as to how much the absence of accurate, timely and comparable financial information can impede the effective working of markets. Auditors were the first ones to face a backlash and in some instances, their independence was even questioned. I cannot overlook the criticality of international standards in my remarks this morning. The implementation of international standards provides credence to our financial system and facilitate comparison across jurisdictions. Countries’ financial systems are increasingly built on a compendium of best-practice international standards. The International Financial Reporting Standards (IFRS) form part of them. IFRS optimizes the decision making process by helping investors better identify opportunities and risks. These investors not only include individuals but also the big powerhouses such as sovereign wealth funds, pension funds and asset management companies, with billions of dollars and thousands of employees concerned. They need to maximize returns, minimize risks and maintain a diversified portfolio. As funds are invested in many countries, the adoption of IFRS has simplified matters when compared to the 3/4 BIS central bankers' speeches pre-IFRS world of wildly diverging national accounting standards. I have, so far, highlighted the importance of accountants in the process of economic development of a country. As a final remark, let me very briefly reflect on a subject that many of us refrain from referring to for fear of being politically incorrect. It’s on greed, governance and ethics. In financial markets, devoid of proper institutional rules and discipline, there is the law of the jungle – because of greed. In my view, depending on how the concept of greed is understood, there is nothing wrong with greed. In fact, our capitalist system can be interpreted as being based on the concept of greed. It’s only when you are far removed from the domain of wisdom that greed takes a strong and pre-dominant foothold in your profession. Greed, the predator’s gene, has to be tempered by fear of losses. Unfortunately, we do not have the philosophical capacity to issue a guideline on greed but we have, years ago, issued a guideline on corporate governance. I urge you all to pay special attention to governance while conducting audits. I am particularly happy to note that there are increasingly more interactions between the accountants in the auditing profession and the Bank of Mauritius, not only on matters relating to governance but on many aspects of the auditing profession. The Bank of Mauritius gladly welcomes the interactions. And, finally, a few words on ethical behaviour in the auditing profession. Remain loyal to your profession and always guide your clients to the best practices. Yours is an honourable profession. Maintain the standard required of you. Some high profile corporate failures in the past have been caused by creative accounting and concealing the true risks of the companies which were, in certain cases, moved off balance sheet. In some cases, accountants working for these companies devised such financial shenanigans which were facilitated by compliant or complacent auditors. These short term gains often result in long term pains, both for the individuals and the economy, too. Never condone such practices. We cannot compromise our reputation by resorting to such questionable practices. A strong and stable banking system is vital to the robustness of an economy. You, as auditors, must refrain, at all cost, from producing audit reports that, instead, contribute to a weakening of the banking system. I am pretty well aware that the Bank of Mauritius is said to have been very tough and often quite rude with some of you as with others. As I have always said, the Bank of Mauritius is “cruel only to be kind” to you and our jurisdiction. I urge the accountants to reflect on emerging challenges that the profession is facing and request the MIPA to collectively take steps to meet those challenges. You must be aware that a lack of skills in certain areas of auditing is now being palpably felt. Your association is having a formidable agenda for action. May I wish you all very fruitful deliberations during the Forum. I thank you for your attention and wish you well in taking the profession forward. 4/4 BIS central bankers' speeches | bank of mauritius | 2,017 | 7 |
Speech by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the conference hosted by the Mauritius Commercial Bank Limited for Le Club des Dirigeants de Banques et Etablissements de Credit d'Afrique (Club of Leaders of Banks and Credit Institutions in Africa), Balaclava, 21 July 2017. | Rameswurlall Basant Roi: Regulatory challenges in a fast-evolving banking system Speech by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the conference hosted by the Mauritius Commercial Bank Limited for Le Club des Dirigeants de Banques et Etablissements de Credit d'Afrique (Club of Leaders of Banks and Credit Institutions in Africa), Balaclava, 21 July 2017. * * * Ladies and Gentlemen It’s always a great pleasure for me, as a career central banker, to be in the midst of bankers. Thank you Mr Pierre Guy Noel for inviting me to address this august audience of prominent bankers from our Continent this morning. In such a gathering of bankers, I cannot find a more relevant subject to speak on than “Regulatory Challenges in a Fast Evolving Banking System”. As you must be aware, regulators have been challenged by episodic currency crises, debt crises, banking crises and financial crises in general over the past few decades. Let me begin with an analogy drawn from history. For centuries, nation states were meant to be sovereign in their territory. Authorities from outside had virtually no role in a nation’s domestic affairs. Sovereignty was sustained through a system of borders, armies, guards, gates and guns. Mobility of people in and out of the country was controlled. Movements of goods and services across countries were controlled through customs and structures established for the purpose. We have lost that kind of sovereignty today. It’s an online world. Bits and bytes flow freely across borders without restrictions. Compare a bank robbery decades ago with the infamous 1994 Internet bank robbery carried out by a single person from his apartment in St Petersburg, Russia. That person was accused of hacking the bank accounts of the corporate customers of a large US bank. He had left no fingerprints, no DNA evidence at all, no trace whatsoever. Just a mouse and a keyboard did the job. Which country had jurisdiction over the case? Is it the US where most of the victims lived or Russia from where the crime was allegedly committed? We still have the physical borders as in the past. Yet, we have to do with a borderless world in our profession. Many of the barriers of the earlier world have been dismantled. One can imagine the formidable challenges that regulatory authorities world over are faced with. In the post-Bretton Woods system era, the banking and finance industry has innovated considerably and is technologically mutating. The ubiquitous manifestations of a new banking reality have been with us for quite some time now. Throughout the world, the banking sector has undergone game-changing transformations, both in coverage and scope. Some changes, propelled by the forces of de-regulation in the 1980s, were revolutionary and some are driven by regulatory overhauls triggered by episodic financial meltdowns in some of the world’s major economic hotspots. Quite some radical innovations have been prompted by the inexorable inroads made by digital and other technological breakthroughs into banking activities. Our financial industries in Africa have certainly not been impervious to the game-changing transformations.This is an area where Africa has conspicuously not played absent. The paradigmatic changes that have swept the world’s financial landscape have engendered compelling forces requiring regulatory authorities to construct new regulatory structures and to come up with new regulatory and supervisory toolkits. The transformations have been so fast that even the toolkits have had to be updated again and again as evidenced by the Basel I followed by Basel II and further followed by Basel III. Central banks that fail to appreciate the importance of adapting their regulatory and supervisory toolkits in line with the new exigencies of the banking business have often been left to repair the financial and reputational damages they 1/5 BIS central bankers' speeches suffered in the aftermath of some form of financial crisis. Topping the list of central banks’ preoccupations about regulatory and supervisory implications of banking sector transmutations are the following: i. financial engineering and complex risk transfer mechanism, ii. complexity and opacity resulting from banks operating under the aegis of banking groups or conglomerates, iii. the role of financial technology in morphing the nature of the banking business, and iv. enhanced macroeconomic sensitivity of banking activities. Each of the aforesaid developments creates opportunities as well as threats to banks. It becomes imperative for discerning central banks to develop the required foresight to protect the banking system with the right suite of toolkits – such as robust risk-based supervisory and stress testing frameworks. Before outlining what we, at the Bank of Mauritius, have been doing in these areas, let me elaborate each of these elements in some finer details. Financial engineering and complexity The 2008 financial crisis demonstrated, in no ambivalent terms, that the range and scope of the banking business has become unprecedentedly multi-faceted and highly complex. Partly driven by a desire to exploit regulatory loopholes across borders, banks had increasingly engaged in networks of overlapping contractual claims with other financial institutions domestically or abroad. A poignant reminder of this is the repeal of the Glass-Steagall Act in the US in 1999 that coaxed banks to indulge into non-bank activities, including investment banking and insurance. The incursion of banks into financial market activities, including concocting financially engineered products, constituted one aspect of the new banking order that gave awful headache to regulators. Opacity in many of banks’ activities – including creation of off-balance sheet Special Purpose Vehicles (SPVs) – and the addition of collateralized obligation terminologies had mushroomed and escaped scrutiny by regulators worldwide. I believe, as bankers, you know as much as I do in this area. The urgency of building international rules as a firewall against banks’ mounting risk-taking appetite and of developing supervisory capacity to assess, detect, pre-empt, and monitor such behaviour rapidly became the cause for concern to central bankers and regulators. In the years that immediately followed the 2008 financial crisis, concrete actions finally superseded rhetoric and the new Basel rules were developed. Cross-border expansion and affiliates of Holdings In the wake of the fall of barriers between countries, banks have been quick at tapping into the enormous opportunities offered by cross-border banking. As you must be aware, cross-border banking activities within the African continent have intensified. The challenges posed by this development are more daunting than it used to be in the past. The lack of proper regulatory oversight of many bank holding groups on the continent is often inimical to consolidated supervision. While many of cross-border operations take the shape of separately capitalised subsidiaries, the issue of contagious transmission of a crisis from the subsidiary to the parent bank is not completely suppressed. Consolidated supervision is important for proper risk assessment of banks expanding across borders, either through subsidiaries or branches. In a world fraught with risks it’s imperative to have a framework for ensuring effective coordination with host countries through properly defined Memoranda-of-Understanding (MOUs). The Bank of Mauritius has signed MOUs with seven domestic authorities and with thirteen overseas regulators where local banks conduct business. More than MoUs, what we need to do 2/5 BIS central bankers' speeches in Africa is to have appropriately designed regional regulatory structures. In my personal opinion, this would be a bold attempt and an effective way forward that our regional and pan-African political and other official organisations need to take on board aggressively. I would urge you to give a push to this idea because, after all, risks are clear and present and increasingly so. I cannot help mentioning that one of the biggest challenges is to have an effective and efficient crisis resolution framework – one that duly takes into account rules, laws and by-laws of the home-host countries. Enhanced macroeconomic sensitivity The nexus between the macro-economy and the banking sector has become more intricate and intensively inter-twined. Banks lend to sectors whose performances are linked to overall economic activity (e.g., construction, trade, manufacturing, tourism, GBC etc). For instance, the relatively high degree of euro-centricity of the Mauritian economy makes it vulnerable to a protracted period of slower growth in Europe and to the vicissitudes of any shocks that are peculiar to Europe. As a result, tourism and trade, as well as FDI, could all take a hit, should a shock materialise in Europe (e.g., fallouts of Brexit or European banking crisis). Similarly, geopolitical events affect international commodity prices and consequently influence domestic inflation and the exchange rate. Such a setback can spark off worries for banks that have lent to economic sectors for which the exchange rate, for instance, is a critical element. Indeed, while micro-surveillance of the banking system remains essential, it needs to be topped up by macro-surveillance mechanisms, including macro-prudential policy measures, aimed at reinforcing the battery of defence mechanisms available to central banks. Economic convention has often stressed on the impact of banks on the macro-economy as the ‘financial accelerator’ which creates financial cycles that may not be in sync with traditional business cycles. On the other hand, macroeconomic measures (e.g., interest rate policy) may create new avenues for financial fragility, including the so-called ‘risk channel’ of monetary policy. Central banks have given attention to the relationships between monetary policy and financial stability and have frontloaded this interface in designing monetary and financial policies. Initiatives taken by the Bank of Mauritius The Bank of Mauritius has, over time, deployed an array of stringent prudential and regulatory rules, leveraging its supervisory capabilities, to protect the banking sector and consolidate the reputation of the Mauritian jurisdiction. At an early stage in the post 2008 financial crisis, the Bank of Mauritius was mindful of the importance of aligning its capital regulatory toolkit with international best practices. The Bank of Mauritius phased in the Basel III capital requirements, the regulatory framework for Domestic Systemically Important Banks and macro-prudential measures in 2014. Not only do Basel III standards contain dampeners that stymie excessive risk-taking behaviour by banks, but it also carries a sound macro-prudential overlay in the form of capital conservation buffers and countercyclical capital buffers. Our supervisory capacity is currently being reinforced to embrace a more risk-based approach. Going forward, our levers for conducting supervisory work will carry more risk-sensitive elements. Macro-prudential measures are helping to contain excessive risk-building among banks and borrowers, with limits on the loan-to-value ratio and debt-to-income ratio, and higher portfolio provisioning risk weights for certain categories of exposures. These measures coalesce to cement the resilience of banks. The importance of addressing the systemic importance of banks in funding activities of groups to which they belong, had been flagged in the aftermath of the East Asian crisis of 1997. The socalled Korean ‘Chaebols’ or Japanese ‘Keiretsus’, generic terms to describe complex systems of 3/5 BIS central bankers' speeches conglomerates with interlocking contractual arrangements and shareholdings, were brought to the limelight in view of the profligacy displayed by some banks in lending to these groups in the absence of prudential regulation and supervision in these countries. More recently, in Mauritius, we witnessed an event that was reminiscent of the Chaebol–Keiretsu saga: the demise of the BAI group in April 2015, amid unbecoming practices by the group’s flagship bank, the defunct Bramer Banking Corporation Limited, which also served as the group’s pivotal purveyors of funding. The Bank more determined than ever to end such malfeasance. In September 2016, a number of amendments were brought to the Banking Act 2004 and Bank of Mauritius Act 2004 to empower the Bank of Mauritius to discharge effective conglomerate and consolidated supervision. The Bank of Mauritius is now empowered to request information from any financial entity with a view to conducting in-depth analysis for financial stability purposes. Further initiatives are in the process of implementation to enhance consolidated and conglomerate supervision. In recent years, the Bank of Mauritius has made great strides in enhancing its prudential guidelines with updated regulatory elements in line with international best practices. For financial stability purposes, the Bank of Mauritius came up with a guideline for dealing with systemically important banks in 2014. Five banks have been identified as being systemically important on the basis of a number of metrics, namely size, interconnectedness, exposure to large groups, complexity and substitutability. These banks are now required to maintain a capital surcharge ranging from 1.0 to 2.5 per cent for their systemic importance, effective 1 January 2016. The surcharge will have to be met over a four-year period. Liquidity requirements under Basel III are in the process of being applied in Mauritius. The draft guideline on Liquidity Coverage Ratio (LCR) has already been released to the banking industry for consultation and will be issued to the industry this year. The credibility of a financial jurisdiction depends on a host of factors such as the regulatory regime, reporting systems of licensees, transparency, disclosure standards, and accountability. Malfeasance practices can easily undermine confidence in such a manner that it can shatter a jurisdiction’s reputation. Promoting transparency and fortifying the anti-corruption toolkit are mandates of central banks keen to preserve the integrity of the banking sector. Indeed, robust anti-money laundering rules and managing risks associated with politically exposed persons are important elements of a sound regulatory regime. These are usually topped up by a robust system of corporate governance and by measures designed to stimulate a culture of integrity in banks. The Bank of Mauritius has travelled a long way in the endeavour to combat money laundering. We have aligned our AML/CFT and our corporate governance guidelines with international best practices. Since 2016, the Bank has established a dedicated team to monitor AML/CFT issues and it will shortly start conducting specialised on-site inspection of financial institutions. Against a backdrop of heightened risks associated with an increasingly challenging environment, the Bank of Mauritius has established a distinct financial stability division with the aim of conducting macro-based surveillance, macro-prudential policies, and carrying out micro as well as macro-based stress testing of banks. The stress testing framework is assisting the Bank of Mauritius to assess whether individual banks and the banking system as a whole is adequately capitalized to withstand shocks. Results from the Bank’s stress testing model indicate that the Mauritian banking system as a whole is relatively robust to credit losses resulting from macroeconomic shocks. The Bank has also embarked on the following main projects aimed at containing build-up of vulnerabilities and at enhancing resilience of the financial system: i. a complete review of the banking legislation and the inclusion of a crisis management and resolution framework within the revamped legislation; 4/5 BIS central bankers' speeches ii. a deposit insurance scheme; iii. the setting up of an Asset Management Company to strengthen the balance sheet of banks, and iv. a national payments system legislation. At the start of this address, I referred to cyber-risks. The more banks, like individuals, are plugged to the global information grid, the more vulnerable they become to criminals familiar with the underlying technologies. When everything is connected, everyone is vulnerable. The cyber underworld is not short of people conversant with the art and craft of digital criminality. The financial sector is an appealing target for cybercriminals, the more so given that they can access the core systems of financial institutions even from far removed places in the world. Payment systems are increasingly relying on sophisticated IT platforms for clearing and settlements. Systemic risks are very much present, with potential loss of confidence of the public at large should anything go wrong with the payment systems. These risks do pose a genuine threat to the very foundation of a financial institution and to financial stability in general. Regulatory and supervisory authorities worldwide have taken measures to address cyber risks. But they are never adequate. The digital underworld is an ever growing threat to financial stability. Prevention of cyber-attacks is a constant challenge for both the bankers and the regulatory authorities. Ladies and Gentlemen, no matter how elaborate, effective and comprehensive our regulatory and supervisory firepower will be, there will always be some element of residual risk that will defy our endeavours to contain them. The Mauritius Commercial Bank Ltd hosts events elegantly. I am sure you will be pampered amply by the bank’s proverbial hospitality. I wish you all a pleasant and memorable stay with us. Thank you for your attention. 5/5 BIS central bankers' speeches | bank of mauritius | 2,017 | 8 |
Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Seminar on "Enhancements to the Basel Process: Recent developments relating to Basel II & Basel III", hosted by AFRITAC South, International Monetary Fund, Africa Training Institute, Ebene, 21 August 2017. | Rameswurlall Basant Roi: Evolution of the Basel capital adequacy requirements Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Seminar on "Enhancements to the Basel Process: Recent developments relating to Basel II & Basel III", hosted by AFRITAC South, International Monetary Fund, Africa Training Institute, Ebene, 21 August 2017. * * * Ladies and Gentlemen Thank you Mr Ravi Mohan, Resident Advisor to the IMF’s AFRITAC South, for inviting me again to share my views on this very interesting topic: Capital Adequacy Framework. It’s a great feeling to be in the midst of so many regulators from our continent. I said it’s a “great feeling” because of “fellow feeling”. Our contributions as regulators and supervisors of financial institutions to financial stability are seldom recognized. But we always hit the news headlines when all the sins of an ailing or a failed financial institution are conveniently heaped on us. As regulators, we however need to have the unswerving faith in our abilities to regulate and supervise financial institutions that have become increasingly complex in a world where trillions of dollars flow across the world in a single day by the simple click of a mouse. True, at times, the weight of the regulatory and supervisory burden turns out to be exceedingly demanding, so demanding that it takes a serious toll on us. I am nevertheless truly happy – and very happy indeed – to be here, this morning, to address the participants of the AFRITAC South Seminar today on a topic that constitutes the very foundation of a safe and sound financial sector. To set the backdrop for the sharing of your regulatory and supervisory experience during this Seminar, I believe it’s fitting to go back into history in order to give it a sense of perspective. But before I do so, let me narrate a short childhood story about myself. In my native village which is in the southern part of this country, there was only one, what used to be commonly known as, barber’s shop. The barber was a plain and financially lean countryside fellow. My parents used to send me to that barber’s shop for a haircut about once every month in the early 1950s. Once seated in the chair for a haircut, no person could miss a framed picture of what looked like smartly dressed businessmen in an office with one of them in a standing position talking to the rest. A line at the top of the picture read as follows: “For Credit, Come Tomorrow.” I was six years old or thereabout when I had first read it. And I had not then understood what it meant and why was this colourless picture glued against the wall side by side with a mirror in the full view of all the barber’s clients. As I grew up, I had slowly started to get the gist of this line. Years later, I had asked a school friend about the barber who was not around anymore. I was told that the barber had gone out of business because he had given up the idea of, “For Credit, Come Tomorrow.” I had then asked myself the question, “What if the principal business of an enterprise is not to give haircuts to people but to extend credit out of other people’s money?” Once I joined the Bank of Mauritius as an economist in the mid-1970s, I got a very wide angle view and a fullscale appreciation of the importance of capital for any enterprise, more specifically for financial institutions. Regulators have long realised that capital is the backbone of a bank; it absorbs losses and it can prevent bank failures. What the capital base of a bank should be is a grand question. The determination of the right amount of capital has always been a very demanding exercise. Why is it so? It is primarily because of credit and the risks associated with it. By definition credit is the disposition of one person to trust another. It is singularly varying. In the 1950s, the US Federal Reserve used the Analysis of Bank Capital to bring up a formal evaluation basis for banks’ capital adequacy. This approach was dropped in 1970 as it proved 1/5 BIS central bankers' speeches difficult to precisely determine the adequate quantum of bank capital in the face of the growing complexity of the system. The long period of financial repression, that is, direct control on bank lending to the private sector and force-feeding banks with government debt instruments had made the core business of commercial banks safe between the mid-1930s and the early 1970s. Central banks’ function of maintaining financial stability by way of regulation and supervision had atrophied. Questions were vigorously set as to how monetary policy could be better applied to forestall booms and busts. The collapse of the Franklin National Bank of New York and the collapse of the infamous Bankhaus Herstatt in 1974 had turned out to be a clarion call for putting emphasis on regulation and supervision of banks. The then financial crisis found both central banks and banks ill-equipped and lacking in respect of skills in risk management. They were both unprepared for disruptive shocks to financial stability. For many years, a select group of central bankers used to meet regularly at the Bank for International Settlements in Basel. Supervisory officials, too, forming part of the central banking community had joined in to discuss matters of common interest. The Basel Committee on Banking Regulation and Regulatory Practices eventually took shape. If I understand correctly, it later came to be known as the Basel Committee on Banking Supervision (BCBS for short). The concerns for financial stability in the wake of the collapse of the two banks in 1974 I referred to earlier and the breakdown of the Bretton Woods system that subsequently ushered in a phase of financial sector liberalisation, including exchange control liberalization worldwide, gave rise to quite a wide spectrum of risks. If unchecked, they could jeopardise financial stability. The first Basel standard, Basel I, also known as the Basel Accords, was a product of the Cooke Committee, after Peter Cooke from the Bank of England who chaired the Basel Committee for more than a decade. The Cooke Committee Report was agreed in 1988, a response to the collapse of the Franklin National Bank and of the Bankhaus Herstatt in 1974 and to other considerations. Basel I had set a minimum capital requirement for internationally active banks. The minimum ratio of regulatory capital to total risk-weighted assets was set at 8 per cent of which the ‘core capital’, a restrictive definition of eligible capital labelled as Tier I capital, stood at 4 per cent. It was designed to be implemented by the members of the BCBS by 1992, only four years after it was agreed. Basel I was amended in 1996 to take into account market risks in banks’ trading books, whereby an additional capital charge was introduced to cover market risk. Although Basel I was meant for implementation by members of the BCBS, many non-member countries with internationally active banks also started implementing the Basel standards. Basel I had weaknesses. It did not differentiate enough the risks associated with individual loans, thus providing banks with opportunities for regulatory arbitrage. Basel I, overlooking operational risk, focused on credit and market risk only. These deficiencies demanded an improvement in the Basel standards. After years of intense debates and negotiations, Basel II was finally agreed in 2004. While leaving some basic parameters of Basel I unchanged, Basel II aimed at ensuring that the regulatory capital reflected actual risks banks were taking. In other words, Basel II dramatically altered the system for risk-weighting of assets. It, of course, goes to say that Basel II moved away from compliance- based supervision to a more complex risk-based supervision. Basel II thus assigned a pivotal role to the players, that is, banks and external credit rating agencies, in the workings of risk assessment. Banks were allowed, under the foundation Internal Ratings-Based approach, to use their own models for risk assessment by using metrics set by the supervisors. I am sure most of you here must be aware that Basel II requirements were more elastic and institution-specific. They brought on the scene a risk management regime whereby banks could opt for either the standardised approach with its fine-grained risk categories linked to external credit ratings or the internal ratings approach where sophisticated mathematical models could be used. The years following the implementation of the Basel II Accord saw a surge in the reliance on various models by large international banks. 2/5 BIS central bankers' speeches The 2008 financial crisis revealed weaknesses in Basel II. The risk-sensitivity of Basel II capital requirements were questioned as they were found to have exacerbated pro-cyclicality with deepened likelihood of crisis. The need to effectively address risks associated with securitization, counterparty credit exposure arising out of derivatives and securities financing was palpably felt. Basel III was thus agreed between 2010 and 2014; it seeks to increase the quantum and quality of banks’ capital beside introducing liquidity standards and macro-prudential measures for preventing the build-up of systemic risk. With a view to giving a broad perspective of what is required of regulators in today’s world, let me give you a broad brush stroke of what Basel II and III are made of. Basel II, whose focus was mainly on refining the risk sensitivity of assets, encompasses the following: 1. Standardised Approach to credit risk; 2. Foundation Internal Ratings-Based approach to credit risk; 3. Advanced Internal Ratings-Based approach to credit risk; 4. Basic Indicator approach to operational risk; 5. Standardized Approach to operational risk; 6. Advanced Measurement approach to operational risk; 7. Standardized Measurement method for market risk; 8. Internal models approach to market risk; 9. Pillar 2 which is the Supervisory Review Process, and 10. Pillar III which is market discipline. Basel III has enhanced the capital framework and introduced stringent liquidity standards along with a macroprudential flavour. The innovative elements of Basel III are: 1. Upgraded quality of capital; 2. Capital conservation buffer; 3. Countercyclical capital buffer; 4. Leverage ratio; 5. Liquidity Coverage Ratio; 6. Net Stable Funding Ratio; 7. Risk coverage – counterparty credit risk; 8. Capital surcharge on Global Systemically Important Banks; 9. Capital surcharge on Domestic Systemically Important Banks; and, 10. Total Loss Absorbency Capital (TLAC). The foregoing gives a full view of what are expected of regulators in the standard-setting countries as well as in the standard-taking countries. It’s a formidable task for all of us. The majority of the world’s regulators are ‘standard-takers’ as far as international banking standards 3/5 BIS central bankers' speeches are concerned. They have no say in the standard-setting exercise and have no formal obligation to adhere to the standards. Yet many countries falling outside the BCBS are implementing them. Regulators in developing countries face enormous implementation challenges not only because of the complexity of the standards and the recalibration needed to reflect local contexts before they can be fully implemented but also because of gaps in financial market infrastructure and the lack of sophistication of the financial markets. Where these are missing, one could only expect low levels of implementation. We have a bank-centric financial system in Mauritius. Of the 21 banks operating in our jurisdiction, 12 are foreign international banks. Two of our locally-owned banks have gone international. We therefore find it obligatory to adhere to the principles established by the standard setters of the BCBS. Basel I Accord was adopted in our jurisdiction way back in 1993. The Capital Adequacy Ratio initially set at 8 per cent was raised to 10 per cent in 1998. Basel II became operational in Mauritius as from March 2008 on a one-year parallel run with Basel I and was fully implemented as from March 2009. Of the three options for the measurement of credit risk, Mauritius elected to go by the Standardised Approach. Foreign banks were, however, given the latitude to compute their ratios using the more advanced approach for reporting to their head office. Pillar I, Pillar II and Pillar III were adopted in a phased approach. This allowed banks the necessary timeframe to align their risk management framework with the requirements of Basel II. To keep pace with international norms, Mauritius adopted Basel III in relation to its capital framework as from 2014. The capital framework included the conservation buffer of 2.5 per cent which is graduated for full implementation by 2020 when banks will need to maintain a ratio of 12.5 per cent. This does not represent a challenge for our banking industry as they are already maintaining a ratio averaging 17.8 per cent. With regards to the liquidity requirements under Basel III, the Bank of Mauritius has revised its Guideline on Liquidity requirements to incorporate Liquidity Coverage Ratio in line with the Basel III standards. By October this year, the Guideline is expected to become effective. The two large and locally-owned banks which account for over 60 per cent of the domestic market and a few of the foreign banks are considered systemically important. The Bank of Mauritius has come up with a Guideline for Dealing with Domestic Systemically Important Banks. They are required to maintain a capital surcharge ranging from 1.0 to 2.5 per cent as from 2016, in addition to the capital adequacy ratio and the capital conservation buffer. Even with the implementation of Basel III, the question remains: are good quality and quantity of capital sufficient to avert systemic shocks? Regulators and supervisors are pretty well aware that they are not. Basel III sets down the minimum standards. However, rules alone, no matter how well written and how consistently implemented, will not be enough to maintain the financial health and stability of the banking system. Poor risk management, interlinkages and common exposures can still give shocks to the financial system. For example, a bank’s capital ratios can be rendered meaningless or highly misleading if they are based on inaccurate assessment of asset quality, off-balance sheet exposures and contingent liabilities. A bank may be reporting high capital ratios when in fact it may be insolvent due to poor asset quality and inadequate provision for losses. Furthermore, stringent capital requirements may be of little use if the corporate governance system of banks are deficient. Capital merely acts as a cushion against losses and can never be a substitute for poorly managed organisations. On-going vigilance in respect of corporate governance of banks as another over-arching priority in the supervision of banks is critically important. Micro-level supervision, thus, effectively supplements the largely macro-prudential nature of the Basel III capital adequacy framework. Behavioural changes in banks, including change in culture, should top-up risk management practices for the effectiveness of any capital adequacy framework. Let me take leave of you with a final thought: do never forget the story about the barber that dates 4/5 BIS central bankers' speeches back to the years before the 1970s. His business had collapsed not because of the variety of risks stemming from the rapid pace of technological progress (Schumpeter’s creative destruction) but because of the risk associated with misplaced trust. The world has since changed cinematically and dramatically. In the decades before the 1960s, the life of tools, equipment and machines for production of goods and services lasted for 25 to 30 years. The cycle of obsolescence was so long that the risks of enterprises going bust because of technological progress were lower than they are today. Lending institutions faced lesser risks in those days. With digital technology, the cycle of obsolescence has accelerated. Just imagine the average lifespan of a phone app is a mere 30 days. We do not have enough time to master anything in today’s world before it is displaced. The risks of enterprises and along with them lending institutions going bust are indeed unprecedentedly heightened. It’s very difficult for any lender to appropriately assess risks arising out of digital advancement – and more so for any regulator. Lending institutions indisputably need much stronger capital buffers than in the past in order to meet the challenges of the unknowns. With this final thought, may I wish you all the very best in your pursuit to know more about how best to implement the Basel standards of regulation of banks. The regulatory and supervisory community in Africa faces enormous challenges. I fervently hope that by the end of this Seminar you will have learned from each other quite some ways and means of improving your approach to regulation and supervision of financial institutions. Thank you. 5/5 BIS central bankers' speeches | bank of mauritius | 2,017 | 9 |
Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the Inaugural Ceremony for the Opening of The Bank of Mauritius Museum, Port Louis, 3 November 2017. | Inaugural Ceremony for the Launching of the Bank of Mauritius Museum Address by Mr Rameswurlall Basant Roi, G.C.S.K., Governor, Bank of Mauritius, November 3, 2017 Honourable Prime Minister Honourable Madam Speaker of the National Assembly Honourable Ministers Excellencies, Members of the Diplomatic Corps Members of the National Assembly Royal Mint and de La Rue Representatives Distinguished guests Ladies and Gentlemen Good afternoon I welcome you all to the Bank of Mauritius on this special occasion marking its 50th Anniversary celebrations. I am particularly delighted to welcome you to this newly constructed auditorium. In the central banking community, the first Governor of any central bank occupies a seat apart in its institutional memory. Mr Aunauth Beejadhur, a journalist and politician, exceptionally known for his intellectual and journalistic skills, was the first Governor of the Bank. He was entrusted in 1966 with the extremely delicate and demanding task of starting and building a central banking institution for the country before independence in 1968. Assisted by two senior officials of the Bank of England, he set up the operational system of the Bank on a foundation, the strength of which is little known to those not familiar with the Bank. Mr Aunauth Beejadhur successfully set the Bank afoot. Those of us at the Bank, having had the privilege of working under his stewardship, reminiscently recall Mr Aunauth Beejadhur as someone who was gifted with an unusual clarity of mind. Although the business of central banking was then relatively unknown in Mauritius, he had clearly understood that it was a noble struggle that requires more self-command, judgment and inner toughness than one would ordinarily imagine. And the nobility lies in the struggle for preservation of what is best for our common life as a people. On the occasion of the 50th Anniversary Celebrations of the Bank, the Board of Directors decided to dedicate this auditorium to late Aunauth Beejadhur in recognition of his pivotal contributions to the foundation of the Bank of Mauritius. It’s more than fitting that after so long, the Bank is paying a long overdue tribute to its first Governor, Mr Aunauth Beejadhur. I am indeed very happy to welcome members of his family from overseas and from here in Mauritius to today’s functions. On behalf of the Board of Directors of the Bank, myself included, I thank the Beejadhur family for having acceded to our request that this auditorium bears the name, Aunauth Beejadhur. Thank you so much. It is expected of me to look back with you all into the 50 years of history of central banking in Mauritius on this very special occasion. It’s beyond the scope of this address to cover so many years of achievements - and failures – in a few paragraphs. I will limit my address to some key institutional aspects of the Bank over its 50-year history. But before I do so, let me go back to the first half of the 19th century when Mauritius had entertained a regime of free banking, meaning that anybody could start a banking business with limited capital in an environment free of regulation. Each bank was allowed to issue its own banknote in the same way as private individuals are liberally issuing bitcoins and altcoins today. Because, amongst other things, banks used to issue banknotes and coins more than necessary, bank failures were a common feature. The concerns for financial stability were so pre-occupying that the then Government had decided to establish in Mauritius the Board of Commissioners of Currency in 1849 – the first in the world. A mild version of regulation of banking activities was introduced thereafter. By the way, this crisis and crisis resolution story of ours is similar to the one that had led to the establishment of the US Federal Reserve System in 1913. The rupee became our national currency in 1877. The exchange rate of the Mauritian rupee was set at Rs2.00 for US$1.00. Soon after the Second World War, Mr Fernand Leclézio, one of the richest man in Mauritius sold his sugar estate to settle down in Europe. The transfer of the sale proceeds was so large that it had worsened our balance of payments position and the foreign currency reserves of the country suffered a troublesome drain as a result. Expeditiously, the then Government had introduced exchange control which, after more than two centuries, brought to an end an era of unrestricted transfers and payments for international trade transactions and free capital convertibility. It was 1951. The Treasury Department of the Government was made in charge of the Exchange Control Office. In the context of the Bank of Mauritius Ordinance 1966, some of these functions were hived off to the Bank of Mauritius. On July 1, 1967, Governor Aunauth Beejadhur assumed office. The functions of the Board of Commissioners of Currency were vested with the Bank, a month later, in August 1967. Equipped with an exchange control office, an office for the day-to-day basic banking operations and an administration department, the Bank became officially operational on September 2, 1967. Thus began central banking in Mauritius, just over six months before independence in March 1968. Barely two months through the business of central banking the Bank faced its first tough challenge – a kind of challenge that any central banker used to feel extremely uncomfortable in the days of the Bretton Woods fixed exchange rate regime. Great Britain, under the then Prime Minister, Harold Wilson, devalued the Pound sterling, to which the rupee was pegged at Rs13.33 by 14 per cent in November 1967. It was the first significant price shock to the Mauritian economy after the establishment of the Bank of Mauritius. The Bank had steered through successfully. Governor Aunauth Beejadhur was tested right at the very beginning of his tenure of office. In 1971, major amendments to the Bank of Mauritius Act were carried out. Pressingly, a Research Department was created the purpose and objective of which was to conduct research and economic analyses and policy recommendations to the management. In 1974, Herstatt Bank, a privately owned German bank, went bankrupt in a famous incident that serves to explain settlement risks to students of banking and finance. As a result, the Bank of England then decided to focus a lot more on regulation and supervision of financial institutions. That incident had paved the way for the Basel Committee on Banking Regulation and Supervisory Practices. At around that time, the Bank of Mauritius, one among the very few central banks in sub-Saharan Africa, having observed how the fringe crises in the early 1970s and the serious disturbances triggered by the collapse of Herstatt Bank, had set up an Inspection Division that eventually evolved into what is currently our Supervision Department. In 1979, because of a balance of payments crisis, Mauritius adopted a Stabilisation Programme under a Stand-by arrangement with the IMF that lasted until August 1986. Financial sector liberalisation, properly sequenced by the Bank, initiated in 1983 was underway. Once the Stand-by arrangement with the IMF was over an old paper on offshore banking (written by me in 1980) that had been shelved was dusted off. The Bank of Mauritius Act and the Banking Act were recast in 1988 with a view to accommodating the development of the first leg of an offshore financial sector. Offshore banking, a project led almost entirely by the Bank, was launched in August 1989 by the then Prime Minister, Sir Anerood Jugnauth at the Chancery House, Port Louis. In September 1993, Mauritius adopted Article VIII of the Articles of Agreement of the IMF and all restrictions on transfers and payment of international trade transactions were eliminated. By July 1994, the Exchange Control Act was suspended. Mauritius thus moved to a regime of full capital convertibility. Since nowhere has it ever been mentioned, let me underline that the Bank made vitally important contributions to the setting up of the Port Louis Stock Exchange and to the introduction of leasing activities in the country around the mid-1980s. In the first half of the 1990s, the Bank re-constructed its organisational structure to include an IT Department. By the end of the last century, the Bank decidedly changed the regulatory and supervisory framework with a view to making our banking industry sound and robust. Having introduced the Real Time Gross Settlement system and the Mauritius Credit Information Bureau, the Bank created a new Division, the Payment Systems Division. In the light of constantly emerging challenges, the Bank of Mauritius Act and the Banking Act 1988 were completely overhauled. It’s an exercise that took the Bank 8 years of work diligently done. In 2004, a thoroughly updated version of the Bank of Mauritius bill and a banking bill were put forward for enactment. Whereas in the previous Act, the Minister of Finance could give directives to the Bank, in the new Act, this power to issue directives to the Bank was done away with. The Bank of Mauritius was given full independence. A major review of the Bank of Mauritius Act and the Banking Act 2004, aligned to the Deposit Insurance Scheme bill and the National Payments System bill, is practically over. The draft bills are being given final touches. In the last two years, the organisational structure of the Bank has been reconstructed once again to include a Reserve Management Division led by a group of highly competent professionals responsible for managing about US$5 billion. A lot more could be mentioned here and a lot more has yet to be accomplished. You might be wondering why I have chosen to focus on the evolution of the organisational structure of the Bank and the regular amendments of the Bank of Mauritius Act and the Banking Act. The foregoing brief survey tells one important story. The organisation and re-organisations of the Bank’s structure and the high frequency of amendments to the two Acts are reflective of the fact that the Bank has never stopped from re-engineering and re-inventing itself since 1967. Having myself gone through the thick and thin of things during part of the history of the Bank, I may venture to say that the Bank is probably the only institution in Mauritius whose legal framework has been so frequently amended and that its organisational structure has been so often re-cast, re-shaped and re-oriented to meet constantly emerging challenges. The Bank has never been a dormant institution in its first 50 years. We are here primarily for the inauguration of the Bank of Mauritius Museum for banknotes and coins. In the online Wild West where the sheriffs are mostly absent, there has been a wild rush of noise in respect of cryptocurrencies, a form of virtual currencies that goes unregulated. And, lately, a few curveballs have been thrown at the Bank of Mauritius in respect of cryptocurrencies. There is a tendency to over-react to illusory attractions and under-react to realities. It’s an equal opportunity disease. Following the release of Panama Papers through wikileaks, bitcoins evangelists have mushroomed. Cryptocurrencies are found to be attractive to those seeking anonymity. It means what it means. This is rightly an occasion for me to clear the cloud surrounding the Bank of Mauritius stand with regard to cryptocurrencies. But before I proceed any further, let me stress that the Bank does endorse and has already envisaged to go for blockchain technology in some specific areas of its operations. But with regard to bitcoins and altcoins in the manner they are being currently issued, there is a very big question mark in the central banking community. Those of us who are conversant with the evolution of capitalism as an economic system and with the monetary history of the world must be aware that there always have been anarchists aggressively seeking to undermine the sovereignty of the state. Why governments should impose taxes? Why should we pay taxes? Why governments, through central banks, should be the sole issuer of banknotes and coins? And why not the private sector be allowed to issue them? These are examples of questions that are often asked by anarchists even today. The politics of bitcoin reflects this attitude, to some extent. Much of the economic and political thought on which bitcoin is based stems from ideas that travel all the way from the Chicago School economics of Milton Friedman to the Federal Reserve System conspiracy theorists. Bitcoin enthusiasts may not be subscribing to these theories. It just happens that the assumptions and concepts stem from the very far right. In bitcoin literature as much as in central bank conspiracy writings, the Fed is said to hide “its real purpose; that it steals money from some private citizens and put it in the hands of the ‘elites’ that control the Fed; that the Fed itself is covertly run by a shadowy group of elites, often made up of Jews and members of the English banking families such as the Rothschilds”. They also put forward more subtle arguments ‘that inflation and deflation are caused by monetary policy rather than by more conventional aspects of economies like commodity and assets prices, productivity and other aspects of labour and so on.’ Whilst the argument that cryptocurrencies eliminate fees, charges and other cost of intermediation is no doubt valid, the argument that they are a very convenient means of laundering money is equally valid. Some observers say bitcoins and altcoins are not currencies but commodities that are being traded like any other commodity on the exchanges. They are currently serving as speculative investment instruments playing almost no role as a means of payment. In terms of economic significance, they are said to have minor importance. Some others say it’s just a scam. It does not physically exist. It is invisible. But a golden coin on posters is used for purposes of advertisement. It is also said that the word ‘mining’ in the digital creation of the bitcoin and altcoins is used to give the impression that it’s gold that is being mined. Still some others argue that it’s a convenient means to avoid income tax and VAT payments. Central bankers have been seeing this game differently from afar since 2009. What is money? What’s the definition of money? How broad is the definition of money? If cryptocurrencies are money, anything else can, of course, be construed as money. Take for example the banknotes and coins in your wallet. They are an asset owned and held by you. The same banknotes and coins appear on the liabilities side of the balance sheet of the legally constituted issuing authority which is the Bank of Mauritius. It necessarily means that the Bank has an obligation of the stated amount vis-à-vis you, and is accountable to you. At any point in time, anyone of you can examine the balance sheet of the Bank of Mauritius to see the quality and the value of assets held against the currency in your wallets. In the case of cryptocurrencies, the question of liabilities does not arise at all. They are your assets if you acquire them but they are liabilities of nobody in this world. Nobody has an obligation to the holders of cryptocurrencies in the manner a central bank does have for the currency it has issued. I do not wish to burden the audience this afternoon with technicalities and arguments that might sound academic to disbelievers but which are indeed of fundamental importance to central bankers having financial stability as one of its mandates. Reportedly, there are more than 1,300 cryptocurrencies registered on different exchanges worldwide. It necessarily goes to say that there are more cryptocurrencies than national currencies. How do we recognize them and who is who in this vast jungle? And how do we effectively regulate them? Since 2011, there have been at least three dozen heists of cryptocurrency exchanges. Nearly one million bitcoins equivalent to over US$4 billion at current prices have been found missing between October, 2011 and April, 2017. Legions of investors and speculators have been left holding their bags empty; they are at the mercy of the exchanges for any possible compensation. Would you as a money-lender accept cryptocurrencies as collaterals? Does it augur well for financial stability? Anyone of us sufficiently conversant with digital technology, must be aware that clever algorithms churn through a massive history of everyone’s behaviour in the internet to predict your own behaviour. And those who have a compulsive gambling behaviour needs to bear in mind that cryptocurrency exchanges are not manned by professors of ethics and morality. May I however seize this opportunity to state that in discussions about cryptocurrencies one crucial aspect in the digital evolution of the means of payments and settlements is often overlooked: a vast majority of money in a modern economy is already electronic money. In Mauritius, nearly Rs3 trillion of transactions are settled electronically on an annual basis. This figure represents 6 times the GDP of Mauritius implying that our payments and settlements by electronic means are quite intensive and are ever growing. We expect the value of transactions settled electronically to shoot up with the introduction our National Payment Switch. Honourable Prime Minister, Ladies and gentlemen, I have to reassure you that the Bank is very digital minded. The Bank was one of the first, along with South Africa, in sub-Saharan Africa to go for real time electronic payments and settlements in 2000. The Mauritius Credit Information Bureau established in 2005, the first electronic platform for sharing borrowers’ information established in subSaharan Africa has been ranked first by the World Bank doing business indicator for several years in succession. All returns from our regulatees are electronically submitted and automatically processed as from this year. The National Payment Switch which will be launched next year will become a pillar of the Mauritian digital economy. This will bring about a kind of revolutionary change in the Mauritian economy that many of us still fail to take cognizance of. It will be a giant leap forward for the Mauritian economy. This is a Bank that performs noiselessly and without chest-beating – in the quietness of an insulated and well-guarded building. The Bank does realize that at the centre of every significant change taking place in our lives today, there is indeed some technology of some sort involved. Every kind of thing that is made is becoming something else. We do realize that nothing is done yet. Nothing is finished for good. And all is flux – constant flux, meaning that this never-ending change is the pivotal axis around which the modern world rotates. Central bankers in general have thoughtfully taken a few steps back from the cryptocurrencies debates in the past several years. Increasingly more and more researched and in-depth studies conducted by responsible organisations are being published on the subject. Digital currencies like bitcoins and altcoins are being viewed by central bankers as having the potential to make future financial crises even more devastating. There is now a slowly emerging acceptance that if digital currencies have to be issued, central banks should necessarily be the issuer. But it’s also being recognized that the risks associated with digital currencies are far from minimal. In a world characterised by a dense traffic of post-truths and fake news, policy makers need to consult research studies produced by responsible organisations. Truths are turning out to be underpowered antibiotics. Let’s exercise prudence. This brings me to the Knowledge Centre the Bank of Mauritius has decided to host in this very premise. It’s an idea that I had romanced with since my days I was Director of Research here at the Bank of Mauritius. In the past, the power of the priesthood was demolished by the circulation of the Bible to all those who wanted and needed it. The power of priesthood in Hinduism was demolished by the circulation of Hindu scriptures to all those who wanted and needed them. The religion that once belonged to the priesthood finally belonged to the people. Unless we make our professional world a better world, a fairer world, many of our younger ones will continue to fade out silently - saddened and embittered. Opportunities for a fuller intellectual and professional life would only become available if our workplaces are emptied of all the barriers that frustrate the roaming and capricious possibilities of the human spirit. Openness frees up organisations. The emerging future is very demanding but very exciting as well. We have no excuse for ignorance in the age of information. Organisations that thrive in this age of information are those that have successfully evolved into what is termed as Learning Organisations. When information is open to all, power is re-distributed. When power is re-distributed, hierarchies in organisations are replaced by networks. In the process, it converts employees into free agents. Until today, one often hears stories about how information is curtained off and made available to only the licensed ones in many organisations. Filing cabinets are sometimes said to be more knowledgeable that the officer in control of the cabinets. Where information is not curtained off, power and authority dissolve. Only the bests are filtered in. The decision to host a Knowledge Centre, on the occasion of the 50th anniversary celebrations, in this newly designed building is expected to go a long way towards making precious reading materials freely available to bankers and to the relevant faculties of the University of Mauritius and other similar institutions. The Bank subscribes to several economic journals like the American Economic Review, American Economic Literature, Cambridge Law Journal and many other treasured publications, not yet accessible to students and professionals outside the Bank. We are seeking to electronically connect to US and UK University libraries in such areas as economics, banking and finance, law and Information Technology. Commercial banks have all agreed to contribute to the financing of the Knowledge centre. I requested bankers in 2015 to re-invent the Mauritius Bankers’ Association (MBA). I understand its Chairman appointed a Consultant to find out how best to re-invent the MBA and raise it to the same level as in advanced jurisdictions. Once the MBA is ready, the financial industry will be authorised to make use of this very auditorium, jointly with the Bank of Mauritius, for purposes of professional training to young bankers. We are overwhelmingly reliant on quality human capital. There is clearly a shortage of professionals in the industry with higher kills. There is no way we can move to higher income levels without a good stock of quality human capital. The Bank is glad to provide these facilities to the jurisdiction on the occasion of its 50th Anniversary Celebrations. Finally, the Bank of Mauritius Museum. Walk studiously amidst the displays of banknotes and coins in the museum and you will make out that Mauritius was about three centuries ago a regional financial centre. I do not wish to be overly presumptuous. The museum is of a class apart. It is interactive, reflecting that the Bank is, in practice, digitalising its operations. The Board of Directors of the Bank, myself included, is pleased to gift the museum to the people of Mauritius on the occasion of the golden jubilee celebrations of the Bank. We have in our midst Mr Paul Van Bodegraven, from Holland, a numismatic expert who is recognized as an unquestioned authority on early Indian Ocean region currencies. The Bank enlisted his services to assess the genuineness of each and every coin and banknote displayed in the museum. I was thrilled to learn from Mr Van Bodegraven that the Museum has in its collection a Dutch Jakarta Tael (pronounced TA-EEL) of the early 17th century. It is a coin so rare that even coin reference books do not have a real photograph of it but just a drawing. I have even been given to understand that just a handful of living persons may have ever laid their eyes on such a coin across the last century! It’s a very precious coin owned by the Bank of Mauritius. You will also have the privileged to actually see the origin of the US dollar sign. The museum is only the first leg of the project. It will soon be made much more interactive. The second leg of the project will be the incorporation of financial literacy in central banking. As I speak to you here at this very hour, the Bank of Mauritius has become a fullfledged member of the International Federation of Financial Museum based in New York. About 50 per cent of the rarities displayed in the museum are the property of the MCB Group Ltd. I, in fact all of us, must be thankful to the MCB Group Ltd for having so generously agreed to display its collections. I extend to Mr Pierre Guy Noel, CEO of MCB Group Ltd, my warmest thanks for having so graciously accepted to take up my request to his Board of Directors for consent and approval for the display of MCB’s highly valuable artefacts. Mr Christopher Murray, CEO, of HSBC (Mauritius) Ltd also kindly agreed to offer precious rarities for display in the museum. Without their invaluable contributions, the museum would have been far less telling of our history. Thank you, Mr Pierre Guy Noel. Thank you Mr Christopher Murray. We have a very long relationship with both the Royal Mint and de La Rue. May I extend my warm thanks to Royal Mint and de La Rue for having agreed to display in the museum a number of highly valuable items. We have in our midst Messrs Owen Griffiths, Ms Marina Carter and Mr Jean-Marie Huron. In 2015, I met with Mr Owen Griffiths and we agreed on the publication of a book that bears the title, “From Piastres to Polymer”. It’s a comprehensively researched work on the history of banknotes of Mauritius. The book is under print and before this year is out, we will have the pleasure of reading it with enthusiasm. I thank the Honourable Madam Speaker of the National Assembly for having granted the permission to re-print the 1966 Sessional Paper on the Bank of Mauritius. I also thank the Prime Minister’s Office for having granted the permission to use the updated Coates of Arms of Mauritius on the cover of the Sessional Paper. I thank the Honourable Prime Minister for having so kindly accepted to grace the inaugural ceremony of The Bank of Mauritius Museum. On behalf of the Board of Directors of the Bank, myself included, I wish to thank you all for your presence. Thank you. | bank of mauritius | 2,017 | 11 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the IMF's Africa Training Institute, Ebene, 17 November 2017. | Yandraduth Googoolye: Core elements of banking supervision Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the IMF's Africa Training Institute, Ebene, 17 November 2017. * * * Course on Core Elements of Banking Supervision I wish to begin by thanking the ATI for organising this very informative course on the “Core Elements of Banking Supervision”. This course is a must for any aspiring bank supervisor. However, allow me to humbly state that this course is but a stepping stone towards understanding banking regulation and supervision. To become an astute supervisor, one needs to effectively marry theoretical underpinnings with practical insights. In this respect, I will encourage you to constantly monitor even the minute anecdotal information that you come across during your day at work. And I am able to share these tips because I started my career at the Bank of Mauritius over three decades ago as a bank supervisor. And during my career, I have overseen not only the transformation of the banking sector in Mauritius and abroad, but also, the revolution behind banking supervision and regulation. Finance and banking are necessary for growth and development. Besides contributing adequately to the economy’s gross domestic product, the financial services sector intermediates between savers and borrowers, efficiently allocates financial resources, improves economic development, and creates employment opportunities. Thus, the promotion of a sound financial services sector is central to safeguard the economy’s resilience. Trust and stability are other key elements that add towards the well-functioning of the financial system. In the absence of these elements, the economy’s ability to mobilize savings for economic use would be jeopardised. Stability is key because it gives the assurance for participants to trade in financial markets and use the services of financial institutions. Financial market infrastructure refers to the platforms that provide the services and facilities to support activities, such as exchanges, clearing houses, and payment and settlement systems. These platforms are crucial in the financial system as they are the nodes to mitigate systemic risks. The safe operation of these various platforms, even under extreme adverse conditions, is a prerequisite to ensure financial system stability. An efficiently working financial infrastructure would typically ease friction, diminish transaction costs, and take full advantage of financial intermediation. The need for regulation and supervision of the financial system arises because financial intermediaries and markets are subject to asymmetric information. Thus, the major aim for financial regulation and supervision is to foster the effective functioning of the financial system in order to enhance the ability to absorb shocks and maintain financial stability. Financial instability arises as a result of shocks hitting the financial system, which impede with the payment system and, ultimately, affect the smooth running of business and trade. Regulators and supervisors across the globe are charged with managing the health of banks and other financial institutions and preserving the stability of the financial system for two basic reasons: consumer protection and maintain financial stability. Accordingly, the ultimate objective of any regulator is to ensure that the banking sector attends to its traditional role of a shock absorber to the financial system. The banking sector has to work towards mitigating any risk between the financial sector and the real economy. Let me remind you that banks are also the channels through which the central bank transmits monetary policy to the economy. On this count, the central bank is definitely concerned with bank soundness for the effective transmission of monetary policy. In addition, thanks to its role as lender of last resort, the central bank is also compelled to have complete information on the financial soundness of 1/4 BIS central bankers' speeches any bank that might call for emergency liquidity assistance. The route towards a framework for bank supervision and regulation can be traced back towards the end of 19741, when the then Committee of Banking Regulations and Supervisory Practices was established by the central bank Governors of the Group of Ten countries in the aftermath of serious disturbances in international currency and banking markets (notably the failure of Bankhaus Herstatt in West Germany). The Committee, headquartered at the Bank for International Settlements in Basel, was established to improve the quality of banking supervision worldwide, and to serve as a forum for regular cooperation between its member countries on banking supervisory matters. Starting with the Basel Concordat, first issued in 1975 and revised several times since, the Committee has established a series of international standards for bank regulation, most notably its landmark publications of the accords on capital adequacy which are commonly known as Basel I, Basel II and, most recently, Basel III. . It is surely not my intention to walk you through these various developments. In 1997, the Basel Committee issued the Basel Core Principles for Effective Banking Supervision, which have since been revised from time to time. These BCPs are the very gospel of effective banking supervision as they provide the lifelines for a sound banking sector. Bank supervisors naturally have to engage not only in off-site analysis of banks’ performance but also in extensive on-site inspections to assess the soundness of banks Now, allow me to share a few notes on the developments of supervision and regulation in Mauritius. This year marks the 50th anniversary of the Bank of Mauritius. The enactment of the Banking Act 1971 together with attributes in the Bank of Mauritius Act 1966 laid down the basic legal framework governing the operations of banks in the domestic financial system. The subsequent promulgation of the Banking Act 1988 set the basis for the development of a reputable offshore banking sector in Mauritius. In this context, emphasis was laid on the supervisory responsibilities vested upon the Bank, providing for mandatory trilateral meetings to be held with banks and their external auditors. After a few sporadic changes over the years, these two Acts were completely overhauled and replaced with two pieces of legislations in November 2004, namely the Bank of Mauritius Act 2004 and the Banking Act 2004. The independence of the Bank of Mauritius was reinforced, together with an added responsibility of ensuring the stability and soundness of the financial system of Mauritius. The Banking Act 2004 eliminated the separation between domestic and offshore banking activities and provided for a single banking licence to cover both activities. In 2016, the functions of the Bank were broadened with the added responsibility of regulating and supervising the locally incorporated, ultimate and immediate financial holding companies of banks and non-bank deposit taking institutions licensed by the Bank. Alive to the fact that the Bank of Mauritius Act and the Banking Act still fall short of meeting the international standards for bank resolution and crisis management, the Bank sought assistance from the International Monetary Fund to strengthen the legal frameworks in these areas. In the same vein, the Bank opted for a review the Bank of Mauritius Act 2004 and the Banking Act 2004 in line with international best practices imposed not only by the Basel Committee of Banking Supervision (BCBS) but also the Financial Stability Board (FSB), the International Association of Deposit Insurers (IADI), the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF). Here, allow me to extend our deepest thanks to Mr Ravi Mohan, who was instrumental in this endeavour and supported us throughout. We also have a couple of bills in the pipeline, notably, the Deposit Insurance Scheme Bill and the National Payment Systems Bill, both of which aim at strengthening the stability and soundness of the financial sector. The Bank of Mauritius has already adopted the macro-prudential perspective in financial regulation to curb excessive risk on certain sectors. Guidelines have been issued for the implementation of macro-prudential policy measures such as caps on loan to value ratio, debt2/4 BIS central bankers' speeches to-income ratio, higher provisioning and capital requirements for certain sectors. The macroprudential rules have been reviewed from time to time in the light of variations in the vulnerabilities of the system. One among the essential aspects of supervision that are crucial for macro-level monitoring is the efficient exchange of information between supervisors, both at home and abroad. Such an exchange provides an essential supervisory tool to support the supervision of banking groups. In this respect, the Bank has signed Memoranda of Understanding (MoUs) with several domestic and foreign regulatory authorities. The Banking Act 2004 allows the Bank to share information with any other central bank, under conditions of confidentiality. We are mindful, at the Bank, that exchange of information is crucial with regulators of countries where our banking groups hold a regional presence. The Bank has, in this context, held three Supervisory Colleges since 2013 with its host regulators. In Mauritius, a Memorandum of Understanding (MoU) was drawn since December 2002 between the two supervisory authorities, namely the Bank of Mauritius and the Financial Services Commission, on information sharing. Over the years, the cooperation and coordination of these two institutions have been enhanced through the setup of a Joint Coordination Committee (JCC) and several working groups to coordinate supervisory work on common supervisory areas. The JCC typically meets every two months and reviews areas of interest. In addition, as the First Deputy Governor of the Bank, I have been appointed Vice-Chairman of the FSC since June 2017. This appointment makes the cooperation between the two institutions more efficient and focused. As part of its reform strategy to reinforce the domestic banking sector, the Bank also initiated changes to the corporate structure adopted by the two largest banking groups in Mauritius. The separation of banking activities from non-banking activities limits the risk of contagion from nonbanking business to the bank, and allows management to focus on their core business of banking. In line with Basel III requirements, these banks are made to hold higher capital requirements. Five domestic banks have been identified as being domestic systemically important banks, and since 1 January 2016, these banks have been required to hold, in a phased manner over a four-year period, an additional capital requirement ranging from 1 to 2.5 per cent of their risk weighted assets depending on their systemic importance. An area, where we, at the Bank, are very mindful is the improvement in AML/CFT processes. We have a zero tolerance approach for breach of AML /CFT rules and offending institutions are subject to fines. We have also instructed our banks to put in place a fully automated system for the detection of suspicious transactions and monitoring of the level of activity in customers’ accounts. The legal and regulatory landscape will, undoubtedly, undergo further changes driven primarily by innovative companies and applications – such as fintech companies and start-ups, distributed ledgers, blockchain and other crypto-currencies, which are transforming the financial services and banking sector landscape. The recently issued Basel Committee on Banking Supervision consultation document on the implications of fintech for the financial sector assesses how technology-driven innovation in financial services, or “fintech", may affect the banking industry and the activities of supervisors in the near to medium term and advocates 10 key recommendations for banks and bank supervisors to address the challenges of fintech. I will urge you to go through these documents and to keep abreast of such developments as they will be of key importance in the near future. Ladies and gentlemen, regulation and supervision should not be limited to only banks and/or financial institutions. We often make this mistake of holding a narrow view on this subject matter. We have to see the bigger picture, instead. There is the need to focus on financial stability, which is encompassing and also address the regulation and supervision of financial market infrastructure. Going forward, the domain of bank supervision and regulation will keep its dynamism and a potential issue is the challenges for regulators which new technology is bringing 3/4 BIS central bankers' speeches to the banking industry. The emphasis on financial technology would entail identifying where risks lie. Putting forward a pro-active framework for regulation and supervision is high on the agenda. And this requires the collaboration and cooperation of stakeholders. We must not forget that gains achieved over years of development can be wiped out through lax financial regulatory standards. Thank you. 1 Source: History of the Basel Committee, Bank for International Settlements 4/4 BIS central bankers' speeches | bank of mauritius | 2,017 | 11 |
Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the annual dinner for major economic stakeholders, Flic-en-Flac, 17 November 2017. | Rameswurlall Basant Roi: Monetary and exchange rate policies, and challenging reforms undertaken by the Bank of Mauritius Address by Mr Rameswurlall Basant Roi, Governor of the Bank of Mauritius, at the annual dinner for major economic stakeholders, Flic-en-Flac, 17 November 2017. * * * Distinguished guests Ladies and gentlemen Good evening I am pleased to welcome you, once again, to the Bank of Mauritius Annual Dinner. Ever since I initiated this annual ritual of holding a dinner with major economic stakeholders way back in December 1998, I have often been told by a few that my speeches tend to be lengthy. I have a problem. And the problem is that short speeches take too long to write; it also requires an exhaustive use of my cerebral capacity. Long speeches take less time to write. This evening, I’ll ask for your forbearance once again because the Bank of Mauritius is 50 years old. There cannot be a more fitting occasion to travel back into 50 years of central banking policies than one of golden jubilee celebrations. In an address that I gave exactly two weeks ago on the occasion of the Inauguration of The Bank of Mauritius Museum, I focused on the institutional development aspects of the Bank over the 50-year period. This evening, I have chosen to give a very broad brush stroke of monetary and exchange rate policies as they have evolved in Mauritius and of the financial sector reforms and regulatory and supervisory reforms undertaken by the Bank over the years. Against a backdrop of high unemployment rates and widespread poverty, the overriding need for leading the Mauritian economy into a self-sustained growth path had set the agenda for monetary, exchange rate and fiscal policies quite soon after independence. The rupee was then linked to the Pound sterling at the rate of £1 = Rs13.33. In view of the predominance of the United Kingdom in the trade and payments position of Mauritius, a fixed relationship between the pound sterling and the rupee was found to be favourable to the expansion of trade and capital flows between the two countries. In a global context of fixed par values, a single currency peg for Mauritius facilitated the mechanics of trade and payments both within the sterling area and with the rest of the world. For any country in a dreadful state of underdevelopment seeking to foster economic growth, the link to the Pound sterling was clearly a major handicap. Because of the link to the Pound sterling, interest rates in Mauritius had to move synchronically with interest rate movements in the UK. The Bank’s ability to pursue an independent monetary policy was thus severely constrained. In other words, the prevailing interest rates in Mauritius were unrealistic as they were not at levels consistent with the economic development objectives of the time. The pressing need for creating conditions conducive to sustained growth required financing at rates of interest affordable to risk takers, more so in an economy with a plethora of drawbacks and deficiencies, including investors having limited commercial skills. The Bank had thus purposively effected successive rounds of interest rate cuts in 1969 and 1970 that severed the connective relationship between its policy rate, that is, the then Bank Rate, and the Bank of England key policy rate. With an expansionary monetary policy stance combined with an expansionary fiscal policy stance, began an eventful chronicle of macro-economic policy making in Mauritius. As opposed to a free market system, Mauritius had in place a regime of direct monetary control. The then Bank Rate, deposit rates, lending rates and yields on Government papers were all 1/7 BIS central bankers' speeches administratively set by the Bank of Mauritius. Transfers and payments for international trade transactions and capital transfers required prior approval of the Bank of Mauritius. This regime of direct monetary control and exchange control, seen in the light of the then prevailing economic and financial conditions, were arguably a legitimate strategy. In the early years of the 1970s, selective credit controls by economic sectors were introduced for channeling funds to priority economic sectors with limits set on the overall bank credit expansion with a view to containing the surge in aggregate demand in the economy. Quite expectedly, bank credit grew far above the desired rate. The inordinate bank credit expansion in a contextual excess liquidity situation largely attributed to the then sugar boom, the oil price shock of 1973 combined with an across-the-board increase in wages and salaries had given rise to double-digit inflation rates, thus putting a stop to a very long period of price stability. Rising cost of living had made it compelling for the Government to introduce what is today known as the annual cost of living compensation. Inflation had turned out to be a serious policy concern. In today’s free market context, one would have ordinarily expected the cost bank credit to go up, meaning that interest rates would have had to be stepped up. Instead, the costs of bank credit to export promoting and import substituting enterprises were intentionally kept low, reflecting the authority’s objective of creating an enabling environment for the expansion of the manufacturing sector. One of the most dramatic events that marked the first half of the 1970s was the breakdown of the Bretton Woods system on the 15th August, 1971. Overnight, the world financial system had moved from a fixed exchange rate regime to a floating exchange rate regime. Exchange rates of the world’s major currencies had ceased to be linked to gold, directly or indirectly. Their determination was thereafter left to the inter-play of market forces. Many developing countries had adopted some kind of a pegged exchange rate regime which meant pegging the national currency to such a major reserve currency that best served the country’s economic and financial interests. The Mauritian rupee had continued to be pegged to the Pound sterling. Since the Pound sterling floated as did other major currencies in the wake of the breakdown of the Bretton Woods system, the rupee floated along with. A flush of liquidity, unsterilized, that had swelled aggregate demand side-by-side with an ever growing fiscal deficit also heavily financed by the central bank money had triggered a tension in the exchange rate of the rupee. The tension was exacerbated by a weakening of the Pound sterling as from May 1975. Weeks later, on the 30th June, the Pound sterling suffered one of its sharpest falls. The effective depreciation of the pound sterling against other leading currencies compared with the Smithsonian agreement of 1971 was nearly 30 per cent. It meant that along with the Pound sterling, the rupee also had depreciated significantly thus adding further pressures on domestic prices. The double digit inflation rates had turned out to be a major policy concern. Inevitably, the exchange rate regime had to be reviewed. On the 5th January, 1976, the rupee was de-linked from the pound sterling and pegged to the Special Drawing Right (SDR) of the International Monetary Fund at the central rate of SDR1 = Rs7.713759. Seen in the light of the trade pattern of Mauritius, the SDR, a basket of currencies with the US dollar having the preponderant weight, was obviously an import-biased basket. The principal objective of the new peg, while intended to help minimize volatility of the exchange rate of the rupee, was to ward off pressures on internal prices stemming from the external front. So much was the Government concerned about the inflationary conditions in the economy that the new peg was decided upon even at the expense of deteriorating external payments position. The economic development objective was not adequately reflected in selection of the peg. Whereas the peg to the SDR favoured imports on the one hand, the qualitative and quantitative controls on imports were designed to check imports on the other. It did not make much harmonic sense in policy making. Because of the preponderance of the US dollar in the SDR basket, the peg of the rupee to the SDR could only stabilize the exchange rate of the rupee against the currencies of its major trading partners during a period of relative stability in the US dollar. In a world economy where 2/7 BIS central bankers' speeches authorities were desperately grappling with the problems arising out of the breakdown of the Bretton Woods system and the unprecedented oil price shock of 1973, the resulting volatility of exchange rates of major currencies seemed to have been taken lightly in deciding on the appropriateness of the new peg. Given an export-oriented strategy, the appropriateness of the new peg has remained a moot question. In spite of a relatively tight monetary policy stance, demand conditions, fueled by an expansionary fiscal policy, had continued to be buoyant with the result that the balance of payments posted successive years of deficits. There was a clear and persistent gap between the level of import demand and the country’s foreign exchange earning capabilities. The basic causes of the deficits were the adverse terms of trade, the high level of public expenditure and deficit financing, the excessive growth in wages and salaries and the distortions in the domestic cost price structure. All the policy sins committed by decision makers were ultimately disastrously reflected in the balance of payments position of the country. The ill-effects of unchecked fiscal deficits year in and year out on the economy via excessive monetary expansion were conveniently left at the doorstep of Bank of Mauritius for resolution. The emerging precarious situation was indicative of an urgent need for bold measures. Instead, Government had recourse to foreign borrowings in an attempt to postpone painful adjustment measures. Humans, being what they are, the moment for under-spending almost never comes. Like fat people at a wedding feast, fiscal policy makers told to themselves they would eat less after the party was over, to make up for it. But in public finance, there is never a good time for fasting. The die was already cast. Bold measures, as always, need bold political courage. The second oil price shock of 1978 gave yet another blow to the economy. The foreign exchange reserves of the Bank of Mauritius had dwindled. The situation was desperate. Drastic measures could no longer be delayed by having continued recourse to foreign borrowings. In October, 1979, the IMF agreed to an economic and financial programme under a Stand-by Arrangement. On the 23rd October, 1979, the Mauritian rupee was devalued by 22.9 per cent against the SDR basket to foster, inter alia, export-led growth. The devaluation was expected to restore the profitability and external competitiveness of Mauritian exports and to encourage import substitutions in the economy. The economic and financial programme was designed to stabilize the economy by bringing about a balance between the demands for and the supply of resources and to correct the balance of payments disequilibrium in the medium term. The measures under the programme included an exchange rate depreciation supported by restrictive budgetary, incomes and credit policies. The objective was to depress the demand for imports by way of the resulting higher rupee import prices. But, against all principles of good economics, the government had decided to grant a massive across-the-board increase in wages and salaries thus mitigating the positive outcome expected of the devaluation of the rupee. A central banker’s job, it’s often said, is to take away the punch bowl just as the party gets going. Way back in 1979, Government had decided to keep the bar open. Bad politics destroyed good economics. The economy continued to face a number of difficulties which were caused by factors beyond the authorities’ control. Adverse weather conditions which prevailed in early 1980 had led to a heavy shortfall in sugar exports in 1980–81. A fall in the rupee price of sugar exports which was due to the weakening of the pound sterling weakened the country’s external payments position. A realignment of the external value of the rupee became inevitable and the rupee was devalued once more – not to use the euphemism “re-adjustment” – on the 27th September, 1981, by 16. 7 per cent in terms of the SDR. Two massive devaluation in six years reflected badly on the fiscal policy performance of the Government. But we do have to recognize that the world economy was facing numerous challenges throughout the 1970s. The external economic environment was far from being hospitable to countries in a state of under-development. The breakdown of the Bretton Woods system had given rise to serious disturbances. The unprecedented oil price shocks of 1973 and 1978 had 3/7 BIS central bankers' speeches unleashed destabilizing forces the world over. Authorities were learning for the first time since the end of World War II how to cope with a situation never seen before and resolve new problems posed by the two traumatizing events. The world economy had dipped into its worst economic recession since the end of the post-World War II. Stagflation, a state of high inflation rates and no growth, characterized the world economy. Governments and central banks the world over were having a very hard time resolving problems never known before. In Mauritius, recurrent strikes by trade unions, demands for higher wages and salaries, recurrent inclement weather conditions, high inflation rates fueled by high prices of oil and high unemployment rates were certainly not ideal conditions for a take-off to self-sustained growth. It was a decade of restlessness and crises in many respects. Admittedly, the economy did however undergo meaningful transformation. Policy mistakes were made. Right policies would have lessened the pains economic adjustment later. There are great lessons that all of us need to draw from the policy mistakes of the past. If we don’t learn from our experience, we’ll never learn at all. I was dismayed to see how the honest economist became a lonely voice of reason, and thus, a very valuable voice, but ignored most of the time arrogantly rather than nonchalantly. Ultimately, society, in particular the less privileged class, paid the price of the policy mistakes and arrogance of the charlatans. It cannot but be appropriate – indeed very appropriate – at this juncture of my address this evening, to underline that the then Bank of Mauritius Act had an abhorrent sentence that read as follows: “The Minister may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, he considers necessary in the public interest.” Even where directives were not formally issued, the Bank was required to seek the nodding approval of the Minister on many policy matters. Obviously, the Bank was not an independent organization. Having gone through the trials and tribulations in the field of monetary policy making for years and spent a greater part of my life in the central banking community, I have to say that it’s the responsibility of one and all to preserve and protect the independence of the Bank of Mauritius in policy making and implementation from deplorable baskets of fake economists, self-seeking advisers and imposters in the veiled pursuit of self-interests. It’s in the best interest of society to have a central bank that is truly independent. Independence of the central bank must be treated as sacrosanct. Never ever forget how a mafia-infested Italy was saved in the not so distant past from catastrophic situations. Two institutions are said to have saved Italy: the Vatican and the central bank of Italy. By 1982, the world economy had bottomed out of one of its worst recessions since the end of World War II. A new era in monetary and fiscal policy making began. On the fiscal side, the sales tax that evolved into what we refer to as VAT (Value Added Tax) was introduced as part of a wellmeaning and determined effort to curb the budget deficit. On the Bank of Mauritius side, a fundamentally important strategic policy move was made. As I mentioned earlier, the rupee had been linked to the SDR with a view to reducing the exchange rate variability of the rupee. With the steady strengthening of the US dollar especially since 1981, the SDR had appreciated against other major currencies which in turn resulted in an appreciation of the rupee on a trade weighted basis. More or less the same problems were baked in the SDR peg as in the Pound sterling peg. The time was up to do away with the SDR peg. With effect from the 28th February, 1983, the rupee was delinked from the SDR and pegged to a trade-weighted basket of currencies, which was more representative of the external trade pattern of Mauritius. The pegging of the rupee to the new and a much simpler basket of currencies was expected to be more effective in stabilizing its exchange value. It was a heavily export-biased basket designed to be a perfect fit for an export-oriented growth strategy. Concomitantly, a number of key measures was announced for implementation decidedly. Government had given its unwavering political commitment to pursue the measures to the finish. Never in the history of Mauritius were monetary and exchange rate policies so harmoniously orchestrated and finely tuned with a host of fiscal and trade liberalization policies for the achievement of a common economic goal. In the scheme of things, trade liberalization 4/7 BIS central bankers' speeches meant, inter alia, elimination of quota on imports, removal of import licenses, gradual reduction of tariffs and customs duties etc. On the fiscal side, the pre-eminent measures were a planned reduction of the then high corporate tax and income tax. A prudent wage policy was deemed a key element in the overall policy package to beef up the competiveness of the Mauritian economy. On the central banking side, a few policies aimed at complementing measures for strengthening competiveness and financial sector reforms were set as an agenda for immediate execution. The export sectors were the first policy target. The Bank’s exchange rate policy was immediately geared towards one prime objective: achieve and maintain the competitiveness of the export sectors. Following the introduction of the new currency peg, the Bank of Mauritius monitored the exchange rate of the rupee on a daily basis. Corrective steps were taken as and when they were deemed necessary. In this exercise, constant attempts were made to keep the exchange rate of the rupee (I mean real effective exchange rate of the rupee) stable. The exchange rate of the rupee, deftly managed, in an imperfect financial market eventually enabled exporters to better predict costs and prices of their products. The previous two currency pegs had not permitted the re-alignment of the exchange rate of the rupee on a regular basis. The new peg did. Investment in the economy shot up. The manufacturing sector, in particular the export sectors, underwent an unprecedented expansion. The economy fired in all its cylinders. Entrepreneurs mushroomed. Like boats in the rising tide of economic prosperity, new enterprises floated profitably. Exports shot up. The economy attained a state of full employment conditions. The foreign exchange reserves of the Bank of Mauritius rose to levels never attained before. Economic prosperity reached the lowest strata of the population. Government revenue collections improved substantially despite cuts in corporate and personal income tax rates and reduction in tariffs and customs duties. It’s certainly not my intention to claim that the unprecedented economic prosperity of the second half of the 1980s is attributable solely to the Bank of Mauritius. Far from it. I am sure, you will agree with me that entrepreneurship and industrial success do not occur from a void. They thrive in the soil of political structure and a culture comprising many essential elements. Those combined elements give rise to synergy and to a mood of optimism. A critically important element in addition to the ones I mentioned earlier, was the decision to go for financial sector liberalization. The objective of doing away with exchange control was announced in 1984 and accordingly measures were taken to gradually do away with the regime. By the mid-1980s, the foreign exchange reserves level of the Bank of Mauritius had reached more than comfortable levels and the budget deficit drastically curbed to a point that Government repaid quite a chunk of its external repayment obligations ahead of due dates. In August 1986, the Stand-by Arrangement with the IMF was over. Economic recovery was well under way. The balance of payments position for Mauritius had improved considerably. The then prevailing economic conditions did not warrant yet another Stand-by Arrangement with the IMF. The launch of offshore banking in August 1989 portended an acceleration of the elimination of exchange control. Proper sequencing of financial sector liberalization required that the inter-play of market forces be promoted in the financial industry. It was a strenuous walk away from the era of financial repression. Ceilings on bank credit expansion – the long established method of containing bank credit expansion – began to give way to market forces. The Bank gradually let go the administrative determination of interest rates in the economy. Effective open market operations imperatively required market determination of the prices of Government debt instruments. In 1992, the Bank moved away from a rule-of-thumb method of determination of prices for Government papers to a method of weekly auctioning. While the process of financial sector liberalization was well under way, Mauritius adopted Article VIII of the Articles of Agreement of the IMF in September 1993. Prior approval of the Bank of Mauritius was no longer required for transfers and payments of international trade transactions. By July 1994, the Exchange Control Act was suspended. A new framework for monetary policy making was adopted and a Monthly Monetary Policy 5/7 BIS central bankers' speeches Committee Chaired by the Minister of Finance with the support of late Prof. Maxwell Fry of the University of Birmingham was set up. Mauritius was among the very few countries in the world to have had a Monetary Policy Committee in 1994. In subsequent years, the monthly meetings were held in house under the chairmanship of the Governor. With the suspension of exchange control, began a full-fledged market based financial services industry in Mauritius. Normally, a market based financial industry presupposes fiscal discipline and, more importantly, rigors in public finance if monetary and financial stability has to be maintained, particularly, in relatively smaller jurisdictions. In the years just after abolition of exchange control, government borrowings from the central bank had reached very high levels because of expanding budget deficit. Excess demand for foreign exchange on the domestic foreign exchange market invited the Bank to more than frequently intervene on market up to a point it no longer was willing to proceed with intervention for fear of depleting its foreign exchange reserves. It was a typically monetary economics textbook illustration of what happens to the financial markets via the current account balance of payments when the fiscal position of Government is persistently out of line with economic realities. The end result was a chaos in the domestic foreign exchange market. The market ran short of foreign exchange. The rupee depreciated at an accelerated pace and the Bank of Mauritius, for some reasons, failed defend the rupee. The market desperately needed a shock therapy. In the dying days of 1998, the Bank of Mauritius gave a counter shock to the money market by causing yields on treasury bills to shoot up and selling them directly to the public. Central bank financing of the fiscal deficit was soon completely replaced by financing from the public. The Bank regained its lost credibility and equilibrating forces worked their ways into the market. Order in the market was restored. The tight monetary policy stance of the Bank along with the “massaging” of the exchange rate of the rupee in a highly imperfect market gave the country, for the first time in its history, four successive years of current account surpluses in the initial years of the new millennium. Both the domestic money market and the foreign exchange market were still in their fledgling state of development. Even five years after the suspension of exchange control, players in the money and foreign exchange markets were still operating with the same frame of mind as in the days prior to the abolition of exchange control. They shied away from such elementary operations as forward sales and purchases of foreign currencies. The risk-averse attitude was worryingly pervasive. Since the Mauritius Sugar Syndicate (MSS) was the single largest seller of foreign currencies in the market, the Bank forcefully drove the MSS to actively engage in forward sales of sugar export proceeds. It had required the CEO and the accountant of the MSS the gall and guts, the audacity to persuade their very conservative Board of Directors to be innovative. The then treasurer of Barclays Bank, a forward-looking young professional in finance, with the explicit support of the Bank of Mauritius threw his weight in the game and gave the kick-start for an innovative approach of treasury management. The domestic money and foreign exchange markets wherein millions of US dollars are traded today started right then and there. It’s in the best interests of our financial industry and, by extension, to the economy as a whole that these two markets grow healthily at a sustainable gait, without which the effectiveness of monetary policy transmission mechanism is seriously impaired. One of the most important contributions made by the Bank of Mauritius in the past seventeen years finds its roots in a fundamentally important amendment to the Bank of Mauritius Act in 2004. The dual licensing regime, one for offshore banking and the other for domestic banking, introduced in 1988 before the launching of offshore banking in Mauritius in 1989, was done away with; it was replaced by a single banking license regime. The removal of the regulatory wall between offshore banking activities and domestic banking activities was a turbo-charged enabler of the widening and deepening of the domestic money and foreign exchange markets. Isn’t awesome that the foreign exchange reserves of the Bank of Mauritius have gradually risen to a record level of about US$5 billion despite consequential declines in export proceeds over the past 6/7 BIS central bankers' speeches several years? No importers, no Mauritian travelling abroad, no student studying abroad has had any problem of foreign exchange for ten years unlike it often used to be in the past. The Mauritian economy has had ten years of enduring stability in the domestic foreign exchange market. We often take this for granted and insult the man, the institution that gave the country this precious gift of stability. That stability, indeed a very rare gift to any economic system for so long a time, ought to have been taken full advantage of for purposes of durable social and economic development. There are risks of instability in the offing that hopefully will be effectively tackled by the Bank and other agencies in the years ahead. Thus far, the Bank has taken the stand that if the risk-taking behaviour of financial institutions cannot be regulated perfectly, it must impose some kind of prudential ratios to curb the volume of transactions. Otherwise the Bank would commit the same fallacy as gun control opponents who argue that “guns do not kill people, people do”. As we are unable to regulate fully the behaviour of gun owners, we have no choice but to restrict the circulation of guns more directly. In an ever changing technological environment, new risks, new threats and greater regulatory challenges keep emerging. They intensify the regulatory burden for achieving financial stability. Our current regulatory and risk management systems are designed to retrospectively identify at what point in time a thief stole your money, not to alert you when he is actually stealing it. They are expected to change soon with the Bank’s risk-based supervision approach. Regulation and supervision of financial institutions is fast moving to a state of things where you might possibly beat the system but not the house. It does not necessarily go to say that the Bank will be regulating for zero failures. Such an approach would of course stifle financial innovation. Human nature. I come back to an important element in Hyman Minsky’s financial instability hypothesis. The longer people make money by taking risk, the more imprudent they become in risk-taking. It’s self-fulfilling when the going is good. If everybody is simultaneously becoming increasingly more risk-seeking, the value of things like, say, privately issued cryptocurrencies, goes up. This increases the ability to lever and the game keeps going. Human nature is inherently pro-cyclical. Human beings are not inherently given to equilibrium; they’re inherently given to manic depression. Once the process of financial sector liberalization was over, the Bank of Mauritius threw its weight on setting in place the building blocks for financial stability towards the end of the 1990s. The Bank came up with a completely new regulatory and supervisory framework for deposittaking institutions. The Bank of Mauritius has since made relentless efforts to improve the jurisdiction’s institutional set up and constantly update its regulatory standards. A successful regulatory authority needs independence in the exercise of its powers. The Bank of Mauritius was made legally independent in the Bank of Mauritius Act 2004. Along with the independence, the Act made allowance for the setting up of a Monetary Policy Committee. In the great spirit of responsible central banking, I have done what could possibly be done to maintain the independence of the Bank. Ladies and gentlemen, on behalf of the Board of Directors of the Bank, myself included, my wife, Meera, and the staff of the Bank, I wish you all Happy Holidays and the very best for 2018. Thank you. 7/7 BIS central bankers' speeches | bank of mauritius | 2,018 | 1 |
Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Workshop on the Legal Aspects on the National Payments System, in achieving compliance with Principle 1 of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) organized by the IMF's Regional Technical Assistance Center for Southern Africa (AFRITAC South), Ebene, 27 November 2017. | Yandraduth Googoolye: Legal aspects on the National Payments System Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Workshop on the Legal Aspects on the National Payments System, in achieving compliance with Principle 1 of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) organized by the IMF's Regional Technical Assistance Center for Southern Africa (AFRITAC South), Ebene, 27 November 2017. * * * Ms L. Effie Psalida, AFRITAC South Coordinator, AFRITAC South Delegates from member Central Banks Learned Resource Persons Ladies and Gentlemen Good morning. I extend to you a warm welcome to Mauritius. Thank you for the privilege to providing the opening for the Workshop, indeed very timely for Mauritius, as we are currently finalizing our National Payment Systems Legislation and working towards a National Payment Switch. I am also delighted to see Ms Onnene Partsch in our midst today. Ms Onnene Partsch has, as part of the IMF Technical Assistance Mission, provided assistance to the Bank of Mauritius in reviewing our draft National Payment Systems Bill. I am confident that she, as well as all the resource persons, will partake their invaluable experience and knowledge with you during this week. Amidst its basic traditional functions, a central bank is called to ensure that liquid resources in the economy are efficiently managed. This function allows for the use of cashless payment systems by economic agents. Cash payments make economic agents incur costs in terms of interest foregone and higher security risks. A primary function of a central bank is to conduct monetary policy, the impulses of which are typically transmitted from banks to the rest of the economy. The operational features of the transmission, however, rests upon the smooth functioning of payment infrastructure. If the operation of payment systems is underdeveloped, these institutions will opt to retain a higher buffer of central-bank money for liquidity management purposes, with a view to better manage their liquidity. This, in turn, leads to weaker than intended monetary-policy impulses from the central bank. Another primary function of the central bank is to ensure stability of the financial system. This implies that the financial system is robust to systemic risk. Financial stability allows the financial system to withstand shocks without impairing the processing of payments in the economy, and ultimately, the allocation of savings to investment opportunities. Accordingly, a robust and resilient market infrastructure is key to financial stability. The interest of central banks in financial stability can be traced as far back as late June 1974, when the closure of the Herstatt bank left transactions half-done due to the time-zone difference between Frankfurt and New York. This incident led central banks to develop a continuous linked settlement platform, whereby commercial banks manage settlement of foreign exchange amongst themselves on a payment versus payment basis. More often than not, we have tended to underestimate the role of payment systems in an economy. At one point in time, we even took the payments system for granted, assuming that transfers will be settled as expected, and that the system will perform as solidly under market stress as it does under normal conditions. Let me reassure you… central banking is a serious 1/4 BIS central bankers' speeches job and we do acknowledge that payment systems play a critical role in the design of the broad spectrum of a central bank’s policies. Thus, it is in the interest of the central bank to ensure that the payment system is efficient, as it enables the orderly functioning of the interbank, money and capital markets. This also reduces the cost of exchanging goods and services, expands opportunities for commercial and financial transactions, and supports higher investment and economic activity. Settling payments in accounts at the central bank still provides the link with the latter’s two main tasks, namely monetary policy and financial stability. In sum, a national payment system is a vital mechanism for ensuring a country’s economic development, since almost all transactions involve some kind of payment and maintain confidence in the domestic currency both in normal times and during crisis times. Central banks are also required to nurture the various characteristics that underpin the design and development of the payment system. Specifically, a central bank has to put forward the legal framework through the establishment of rules and regulations, standards, and policies that will govern the nation’s payment and settlement services; while facilitating payment finality. It is also called upon to regulate private agents in the payment system; and to administer payment services, especially the large-value payment systems that underpin financial activity. Last but not least, the central bank musty also provide credit for participants in the payment system. As the lender of last resort, the central bank ought to have the required information and means to oversee and, if necessary, assist the institutions participating in the payment system. The central bank has to exercise oversight on the design and the operations of payment arrangements to improve the speed and reliability as well as reduce financial risk, transactions costs and the risks of fraud, errors and other major types of risks inherent in the payment system. A well-developed statutory and regulatory framework for the payment system, thus, reduces uncertainty and risk, and provides the needed clarity. Let us recall that payments systems are but one of the five key types of Financial Market Infrastructures (FMIs). The four others being the Central Securities Depositories, Securities Settlement Systems, Central Counter Parties and Trade Repositories. FMIs are key components of the financial system. They play a critical role in the smooth functioning of the financial market and can be a source of both financial stability and operational efficiency by, inter alia, establishing and ensuring secure arrangements for the timely clearing and settlement of obligations between counterparties. To manage the relationships among the various counterparties and stakeholders and also to mitigate risks, it is imperative for the National Payment System (NPS) to operate on sound legal premises. Legal certainty brings confidence, and Principle 1 of the CPSS-IOSCO Principles for Financial Markets Infrastructures underscores the importance for FMIs to have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of their activities. The CPSS-IOSCO Principles further set out the five key considerations in order to fully comply with the first Principle, which are as follows: 1. the legal basis should provide a high degree of certainty for each material aspect of an FMI’s activities in all relevant jurisdictions; 2. an FMI should have rules, procedures, and contracts that are clear, understandable, and consistent with relevant laws and regulations; 3. an FMI should be able to articulate the legal basis for its activities to relevant authorities, participants, and, where relevant, participants’ customers, in a clear and understandable way; 4. an FMI should have rules, procedures, and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the FMI under such rules and procedures will not be voided, reversed, or subject to stays; and 2/4 BIS central bankers' speeches 5. an FMI conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflict of laws across jurisdictions. A proper understanding of these key considerations is, thus, mandatory for central bankers. I need not dwell further on these as they would surely be covered by the resource persons in the Workshop. The legal framework must accordingly provide explicit and defined authority of Central Banks over payment systems, including amongst others the powers to license, authorise or designate payment systems and clearly define their oversight functions. The basis for cooperation with the regulators of other domestic FMIs as well as foreign FMIs must also be clearly spelt out in the law. We must not ignore the regional dimension to this lively subject. Cross-border trade in the region is rapidly expanding and various initiatives are evolving for the continent. To facilitate payment transactions, Africa is host to a number of cross-border payment systems: the SADC Integrated Regional Electronic Settlement System (SIRESS) and the COMESA Regional Electronic Payment and Settlement Systems (REPSS), West African Monetary Zone (WAMZ), the East Africa Payment Systems (EAPS) of the East African Community (EAC). I am sure that AFRITAC member states must be participants to at least one of them. The Bank of Mauritius is itself a participant in the REPSS and SIRESS. However, there is currently no harmonised legal and regulatory framework for payments in the Continent and member states are at varying stages of development of their legal and regulatory frameworks for their respective NPS. In the SADC Region, for example, in the absence of an appropriate SADC wide legal and regulatory framework, Member States participating in the SIRESS have structured the legal arrangements between themselves through a number of multilateral agreements, in view of providing for legal certainty. SADC countries have, however, already committed themselves to harmonise their legal and regulatory frameworks and to establish institutional and organisational structures conducive to the establishment of an integrated payments market. Ladies and gentlemen, payment services are considered to be the stepping stone for financial inclusion. People’s demand for ever faster, more convenient and flexible means of payments has led to a dramatic evolution in the payment ecosystem, especially in the retail payment services. Today, the contours of the global financial system are different from what they were, say, a decade before. Major developments have underscored the implications for payment systems and financial stability as they have exposed central banks to additional sources of risks. For instance, the issuance of new financial instruments, the increasing size and complexity of financial systems, and globalization of financial markets have contributed to generate new areas of risks. Financial innovations, due to technological advances in information and communications, have impacted strongly on the speed, variety and costs of transactions. These have increased the size of the financial sector vis-à-vis the real economy and the number and volume of transfers that take place through the payment system have magnified significantly. Consequently, the smooth running of the financial system and the economy is turning out to be very reliant on the non-stop provision of market liquidity and, obviously, on the orderly functioning of the payment system. Fintechs are nowadays the new kid on the block. They are rapidly positioning themselves as the key players in the financial industry, partly due to some sort of regulatory void in which they have been operating so far, and partly as some regulators around the world have adopted a somewhat adaptive approach to regulation in order not to stifle innovation. Since financial companies are creating faster, cheaper, and more convenient payment systems out of technology, a customer 3/4 BIS central bankers' speeches centric approach for service is emerging with the notion of anytime, anywhere payments. At the same time, the payment service provider is moving out of the banking domain to the non-banking one. The regulatory challenges thrown up by Fintechs can be summarised thus: i. the need to focus on activity rather than technology and literally educating the consumer of risks involved; ii. when an activity is innovative, or embedded within the underlying technology, regulators need to understand how they work, while allowing such activities to mature at the same time, the so-called, “Regulatory Sandbox” which enable regulators to address the potential risks of new technologies without stifling innovation; and iii. with applications built on the Blockchain technology, regulators are faced with the challenge of ensuring the right balance between transaction transparency and privacy. The Basel Committee on Banking Supervision has lately issued a Consultative Document, which assesses how technology-driven innovation in financial services may affect the banking industry and the attendant activities of supervisors in the near to medium term. At the Bank, we have established an internal committee as well as an inter-bank committee on Fintechs and Distributed Ledger Technologies to study Fintech models and propose the regulatory frameworks and technological infrastructures conducive to promote an enabling environment for emerging technologies. Broadly, central banks have to ensure that they remain in sync with the markets. As they become more global and interconnected, authorities have to cooperate more closely in their oversight and operational activities, and towards mitigating risks associated with Fintech. In this rapidly changing environment, regulators need to show flexibility but, at the same time, they have to ensure that there is no regulatory arbitrage. As the boundaries between banks and non-banks involved in financial activities get thinner, regulators need to closely collaborate in order to come up with smart regulation for the jurisdiction as a whole. Ladies and gentlemen, I am confident that this Workshop on the Legal Aspects of NPS will provide the basis to better understand key requisites for devising or revising legislation regarding the payments system. On this note, I wish you all a fruitful workshop and a pleasant stay in Mauritius. 4/4 BIS central bankers' speeches | bank of mauritius | 2,018 | 1 |
Speech by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Training Workshop for Senior Management of Law Enforcement Agencies in collaboration with the Commonwealth Secretariat, Ebene, 6 December 2017. | Yandraduth Googoolye: Combatting financial crime in Mauritius Speech by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the Training Workshop for Senior Management of Law Enforcement Agencies in collaboration with the Commonwealth Secretariat, Ebene, 6 December 2017. * * * Ladies and Gentlemen, Good Morning. I am delighted to be here today to address such a distinguished and expert audience. I will try to be short as it is said that it is better that you leave your audience before your audience leaves you. The country should be one and unified. We are all servants of the state. Having different factions within the state inhibit progress. Building fictitious walls arise sometimes out of ego. Pulling in different directions does not help. It is with concerted action and co-ordination that progress can be achieved. Co-operation within the different organs of the state is therefore imperative. We need to put our heads together for our common benefit. A piece of information standing alone is like being part of a puzzle. It is when different organisations fighting for a common goal put whatever information they have together that a bigger picture can emerge and better preventive action can be taken. The Bank of Mauritius has been in the forefront of the war against financial crime for around 15 years now. It issued its first Guidance Notes on AML/CFT setting out the minimum standards to be applied by all financial institutions under its purview, on 19 December 2003, thus setting the stage for a credible banking sector. A strong legal and regulatory framework is the basis of any effective regime. The Guidance Notes is a dynamic document which over the years, has been updated to reflect the latest global developments, as well as to incorporate emerging best practices recommended by international standard setters, namely the FATF and the Bank for international settlements. The Guidance Notes have been revamped in 2017 to include, amongst others, the following, (i) Proliferation Financing regarding the transfer and export of nuclear, chemical or biological weapons. (ii) Duty of financial institutions to identify and assess ML/TF risks on an enterprisewide level. (iii) Information to be collected by financial institutions for natural, legal person and legal arrangements with a view to developing an initial customer risk profile. (iv) Enhanced due diligence to be performed by financial institutions in respect of wire transfer transactions to ensure that wire transfer systems are not used by criminals as a means to break the audit trail. In the fight against AML/CFT, there is a standing committee since 2004, between the Bank and Compliance Officers of banks, which meets quite often where issues of utmost importance, amendments to the Guidance Notes and decisions are taken in consensus and in a spirit of dialogue with the banking sector. In addition, there is a Banking Committee which is chaired by the Governor of the Bank and comprise Senior Management of the Bank and CEO’s of banks which meets on a quarterly basis where important AML/CFT matters are discussed as and when necessary. We also have a trilateral meeting with the FSC and the FIU where AML/CFT issues are discussed. In June 2015, the Bank of Mauritius held a tripartite meeting with the FIU and 1/3 BIS central bankers' speeches MLRO’s of banks. This meeting provided an opportunity for the Bank, FIU and MLRO’s to share their views on how to make the existing system of reporting of transactions works better. We have set up for some years now a Joint Coordination Committee between the Bank and the FSC. Under that Joint Coordination Committee, there is a working Group on AML/CFT to interalia promote standardisation and harmonisation of our Guidance Notes on AML/CFT and encourage information and knowledge sharing on AML/CFT issues. We already have memoranda of understanding for co-operation and the sharing of information with the Independent Commission against Corruption, Statistics Mauritius, the Mauritius Revenue Authority, the Financial Intelligence Unit, the Competition Commission of Mauritius and the Financial Services Commission. These are all testimony that the Bank of Mauritius understood very early the need of cooperation in the fight against financial crime. While we had those memoranda of understanding on a bilateral basis, the agenda now is to have a memorandum of understanding on a multilateral basis, for a better and concerted approach against financial crime. We also have signed MoUs with 16 foreign counterparts which set forth a statement of intent between the Bank of Mauritius and its counterparts to establish a framework for mutual assistance, cooperation and the exchange of information. The Bank of Mauritius remains committed in enhancing its network of co-operation with other counterpart institutions which have regulatory and law enforcement functions in different parts of the Mauritian economy. Technology, as you know , is moving at a pace far greater than ever before. For the financial industry to maximise the overall benefit of this progress, we must acknowledge both the advantages and the risks of such rapid technological advancement while keeping abreast with the latest innovations. New devices, software, applications and inventions will continue to emerge. The challenge for us is to keep pace and ensure that industry players understand the potential benefits as well as the risk they bear. As the financial industry evolves into digital, it is inevitable that the industry becomes vulnerable to various new threats and risk factors, especially in the domain of financial crimes and terrorism financing. It is inevitable therefore that we pool together to be able to meet the challenges posed by those new technological advancements. The Bank of Mauritius will continue to strengthen the AML/CFT regime to maintain relevance and effectiveness for the Banking Sector. The requirement now emphasises on measures that commensurate with risks, an effective risk based approach (RBA) to AML/CFT. The application of RBA should have meaningful application. Misinformed RBA could lead to unjust financial exclusion and unnecessary financial costs to institutions. Beyond implementing robust risk management frameworks and systems the industry’s resilience should be strengthened by developing stronger risk cultures and mind-sets. Having a sound risk culture will help institutions to be vigilant to financial crimes, take a questioning approach to unusual client requests or transactions, and involve the entire organisation. Institutions’ board and senior management must play a pivotal role in keeping the organisation on the right and ethical path. They must set a strong tone from the top that profits do not come at the expense of unethical behaviour or misconduct. This must also be translated into real actions throughout organisations, and not just remain as talk from the top. Strengthening risk culture, governance and controls will go a long way towards fortifying our defences, but there is more we can do. We can work together and work smarter. Finally, I would be remiss if I did not mention that it is up to all of us to prevent financial crimes. Institutional partnerships or new analytical tools would count for little without the trained, dedicated professionals to make effective use of them and exercise sound judgements. In this respect, this workshop is timely and commendable. 2/3 BIS central bankers' speeches Conclusion Let me conclude by saying that by working together, we can collectively be more effective at combating financial crimes. Upholding high standards of integrity in the financial industry is an absolute priority. Our reputation as a clean and trusted financial centre depends on our ability to protect it from abuse, and we depend on each other to make it a success. Thank you. 3/3 BIS central bankers' speeches | bank of mauritius | 2,018 | 1 |
Speech by Mr Mahendra Vikramdass Punchoo, Second Deputy Governor of the Bank of Mauritius, on the Impact of Basel III reforms in the implementation of Basel II/III in Emerging Market and Developing Economies, Port Louis, 24 July 2018. | Mahendra Vikramdass Punchoo: The impact of Basel III reforms in the implementation of Basel II/III in emerging market and developing economies Speech by Mr Mahendra Vikramdass Punchoo, Second Deputy Governor of the Bank of Mauritius, on the Impact of Basel III reforms in the implementation of Basel II/III in Emerging Market and Developing Economies, Port Louis, 24 July 2018. * * * The Director of AFRITAC South, Ms Effie Psalida The Resident Adviser AFRITAC South, Mr Ravi Mohan Ladies and Gentlemen, A very Good Morning to you all. Last year, in August, I delivered a speech on the same topic and at the same venue. The seminar was so successful and I recall that many participants expressed interest that such seminars feature again in the annual work programme of AFRITAC South. I am happy that AFRITAC South has obliged, giving this opportunity to as many participants as possible. Such high-level exposures to the intricacies of Basel III do not come spontaneously to us in this part of the World given the relative unsophistication of our banking system and limited experience. That so many high-calibre technical experts should fly down to Mauritius is in itself a testimony of the commitment the International Monetary Fund, through the presence of AFRITAC South, has towards member countries in promoting best practices in the business of regulation and supervision of banks. Under Basel II banks had too little capital and were highly leveraged. Their incentive to take risks was disproportionately high. The flexibility given to these banks under the internal ratings-based approach for credit risk had led them to significantly under-estimate the risk-weighted assets so much so that banks with similar portfolio, risk profile and business models had widely dispersed risk-weighted assets. In addition, their increasing reliance on the interbank market to fund assets made them vulnerable to a liquidity squeeze. Basel III has not only improved the quality of the capital that banks are required to hold but also increased the capital requirements. Higher quality capital in the form of Common Equity Tier 1 capital and comprising mainly of equity and retained earnings, has been raised from 2 per cent to 4.5 per cent of the risk-weighted assets while Tier 1 capital has been increased to 6 per cent. To deter banks on the IRB approach from taking undue advantage of the model-based approach to credit risk, Basel III has introduced a floor for risk-weighted assets. For banks under the standardised approach to risk-weighted assets, Basel III determines a more detailed risk weighting and lesser reliance on external credit ratings. Banks are also required to hold “capital conservation buffers” of an amount equal to at least 2.5 per cent of the risk-weighted assets, in the form of CET1 capital, which would be available in times of stress. However, the minimum level for total capital requirements remains at 8 per cent of risk-weighted assets. In addition, banks would have to keep a Leverage Ratio as a percentage of total assets inclusive of off-balance-sheet items such as derivatives and letters of credits to constrain their debt build-up. Finally, banks would have to keep a countercyclical buffer from their retained earnings during periods of high economic growth to even out any stress on their capital during periods of economic downturns. In the case of global systemically important banks (GSIBs), they would be subject to additional capital requirements. 1/4 BIS central bankers' speeches In effect, these higher common equity requirements would undoubtedly incentivise shareholders, investors and senior management including Board of Directors to take less risk. Liquidity risk, implicitly covered in Pillar 2 under Basel II, is a stand-alone risk requirement under Basel III. The liquidity risk is addressed by the introduction of the Liquidity Coverage Ratio, which would provide banks with enough high-quality liquidity instruments for 30-days in the event of stressed conditions, and the Net Stable Funding Ratio for stressed liquidity conditions of up to one year. Both the LCR and the NSFR seek to reduce the excessive mismatch of banks’ assets and liabilities structure. In Mauritius, Basel III implementation has been a gradual process. Prior to July 2014, the year Basel III was introduced, banks in Mauritius had to maintain a 10 per cent minimum capital adequacy ratio consisting of a ratio of 5% Tier 1 capital and a similar ratio of 5% Tier 2 capital to risk-weighted assets. Tier 1 capital consisted of equity, general reserves, statutory reserves (15%) and retained earnings. Tier 2 capital, limited to 100% of Tier 1 capital, consisted of subordinated debt of maturity of at least 5 years, which can only be redeemed after approval has been received from the Regulator, revaluation reserves with a 55% haircut and other instruments as may be approved by the Regulator. Under Basel III, Tier 1 capital to risk-weighted assets has been set at 8% with CET1 capital to risk-weighted assets set at 6.5 % while the minimum capital adequacy ratio has been maintained at 10%. The migration to Basel III capital requirements did not prove challenging as around 90% of the banks’ capital base was already in the form of Tier 1 capital. In addition to the capital adequacy ratio, the Bank of Mauritius introduced a capital conservation buffer of 2.5%, with its implementation staggered over a period of 4 years. A first tranche of 0.625% became effective on 1 January 2017 and thereafter on every 1 January, the capital conservation buffer would increase by a tranche of 0.625% until it reaches 2.5% on 1 January 2020. In lieu of the counter-cyclical capital buffer, the Bank of Mauritius introduced macro-prudential measures to limit the build-up of risks in three key economic sectors, which had witnessed unprecedented growth rates. These measures took the form of additional portfolio provision and higher risk weights for specific categories of exposures as well as debt-to- income ratio and loan-to-value ratio (LTVs were removed effective 6 July 2018). In June 2014, the Bank of Mauritius introduced a Guideline for dealing with domestic-systemically important banks, which set out the methodology for assessing the systemic importance of banks. In addition to four parameters identified by the BCBS namely, size, interconnectedness, complexity, and substitutability, a fifth indicator identified as the exposure to large groups was added to the annual assessment to reflect a specific concern about the Mauritian economy. The capital surcharge, determined to be in the range of 1.0% – 2.5% for the five banks identified as DSiBs has been effective as from 1 January 2016 and would be implemented over a four-year period to give the D-SIBs ample time to meet the enhance capital requirement. There are many factors, which explain why banks in Mauritius are required to maintain a higher minimum capital adequacy ratio of 10% compared to the BCBS recommended 8%. First, in the absence of an effective and efficient capital market, banks are the main credit providers in the economy and bank failures usually adversely affect the economy. A higher capital adequacy ratio provides a greater insurance against risks. Second, the recovery process of non-performing loans entails unduly long and costly court procedures; and third, market risk may turn out to be a significant risk given the lack of depth and breadth of financial markets. Over and above these considerations, banks may voluntarily hold a higher capital adequacy ratio if they want to maintain or even improve their credit ratings, especially if they intend to access the international capital market. Two internationally credit-rated banks in Mauritius have CAR well above 10%. 2/4 BIS central bankers' speeches With respect to the implementation of the Liquidity risk requirements, the Bank of Mauritius reviewed its Guideline on Liquidity Risk Management in October 2017 to incorporate the Liquidity Coverage Ratio. By virtue of Mauritius being a regional financial centre, banks were required to maintain the LCR by major currency. Effective 30 November 2017, banks should maintain on a monthly basis an LCR of 100 per cent in MUR, 60 per cent in each significant currency and 60 per cent on a consolidated basis. The LCR requirement in each significant foreign currency and on a consolidated basis was increased to 70% on 31 January 2018 and will be gradually increased every year to reach 100% by 31 January 2020. Largely due to the prevailing excess rupee and foreign currency liquidity, the average LCR for the banking sector in MUR, USD, EUR and CNY as at 31 April 2018 stood at 266%, 108%, 77% and 83% respectively. On a consolidated basis, the average LCR for the banking sector was 174% as at End-April 2018. A higher CAR and appropriate liquidity do not on their own guarantee zero risk of failure. Best practices in corporate governance and good risk management practices are complementary actions favoured by the Regulator. Let me conclude with four remarks, which you may wish to reflect upon: The first remark is about the growing recognition that the “one-size-fits-all” regulatory framework may not be optimal. Increasingly, in several countries, the principle of proportionality in regulation is being discussed and implemented. What is meant for internationally active banks may not or should not be indiscriminately applied to all! While there seems to be a strong case for proportionality in regulation – banks with simple business models should not fully implement Basel III -, it is not at all simple to decide which features of Basel III should not apply and which features should apply. Generally, proportionality in regulation tend to be an outcome of a riskbased approach to regulation. The second remark is about the unintended consequences of stringent capital requirements of Basel III. One European bank has already exited Africa, including Mauritius. Two others are in the process of exiting the Mauritian jurisdiction as the Group review the business models, refocus operations on their core markets, cut down costs by running down their less profitable and noncore business lines, reducing their geographical footprint and investing heavily in technology to optimise capital within Group. A case in point is the divestiture of Barclays Plc in Barclays Africa Group Limited. Barclays in Africa was a successful story of over 100 years which is about to end not because it was not profitable – Barclays Africa generated nearly £1 billion profit before tax in 2015 – but because, according to its Group CEO, of increased CET1 requirements by the UK regulatory authority, GSIB Buffer, TLAC, and the UK Bank Levy. In the Barclays CEO’s review for the Annual report 2015, Barclays Africa has become “non-viable economically under current regulatory capital rules”. He further writes “Barclays UK has to carry 100 per cent of the financial responsibility for Barclays Africa and receive only 62 per cent of the benefits.” It is worth noting that Barclays UK has also exited its retail banking operations in Italy, France, and Pakistan and sold its Wealth & Investment Management business in Singapore and Hong Kong. The third remark relates to the unintended consequences of the introduction of the Liquidity Coverage Ratio. Basel III restrictively defines liquidity as an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30 calendar day liquidity stress scenario. In Mauritius where there are not enough liquid assets, banks have to keep large amounts of cash with the central bank at zero interest rates instead of interest-earning placements with banks abroad. In turn, this could adversely impact customers with banks charging higher fees, charges and commissions. The fourth and final remark relates to the impact of Basel III Rules on Trade Finance. Basel III could significantly undermine cross-border trade finance activities. Several provisions of Basel III, 3/4 BIS central bankers' speeches such as the leverage rule, risk weighting requirements and the liquidity rules raise the costs of banks’ extending trade finance, which is already a low margin business. The leverage ratio requires banks to hold top quality tier one capital equal to 3% per cent of their total assets, including off-balance sheet assets such as trade finance commitments. In addition, because trade finance involves the importer’s bank and the exporter’s bank through a letter of credit, the changing risk weight on loans between financial firms is likely to adversely affect trade finance. Finally, the liquidity rules, which require banks to match long-term obligations with long-term funding could also penalise trade finance. I thank you for your attention and wish you the best. 4/4 BIS central bankers' speeches | bank of mauritius | 2,018 | 8 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Mauritius International Financial Centre - Forward Looking conference, organized by the Financial Services Commission, Balaclava, 20 September 2018. | Yandraduth Googoolye: technologies in Mauritius Enabling framework for financial Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Mauritius International Financial Centre - Forward Looking conference, organized by the Financial Services Commission, Balaclava, 20 September 2018. * * * Thank you Lord Desai. Let me first wish a very good morning to the other panelists and the distinguished guests present at this Conference. It is indeed a great pleasure for me to be part of this Panel today to share the Bank of Mauritius’, as well as my personal views, on fintech. We all agree that fintech — that is technology-enabled innovation in financial services — has developed significantly over recent years and is impacting the way financial services are produced and delivered. The Bank of Mauritius, as the regulator for the Banking Sector and also having been mandated to ensure the stability and soundness of the financial sector, has been following closely the evolution of Fintech. I must, nonetheless, highlight that the application of technologies in financial services is not new. The banking sector, for example, has been subject to gradual transformation through technological advent over the past decades – the advent of ATMs, credit cards, cheque truncation, internet banking, cross border transfer of funds, amongst others are just a few examples. Technological evolution of the financial services sector therefore is a natural phenomenon which happened in a phased and orderly manner. The legal and regulatory landscape has been continuously amended to adapt to the technological changes in line with the recommendations of international standard setters. Similarly, we are preparing ourselves for the fintech revolution. The announcements in the Budget Speech of this year clearly show the commitment of our jurisdiction to adopt and accept the fintech revolution. The building blocks of these announcements, which in my view, are the key drivers in the development of an enabling framework for fintech, are: (i) The Regulatory Sandbox Licence (ii) Creating a regulatory framework for Digital Assets and investment in crypto currency as a digital asset. (iii) The need for cyber-security and cyber-resilience policies and capacities. (iv) the harmonization of the AML/CFT framework in line with development in Fintech. Regulatory Sandbox Licences as a prelude to the enabling regulatory framework As the demand for technologically enabled financial services, continued to increase, and in the absence of an appropriate legal framework to govern same, in 2016, provision was made in the Investment Promotion Act for the Board of Investment (now the Economic Development Board) 1/4 BIS central bankers' speeches to grant Regulatory Sandbox Licences. Applications for Regulatory Sandbox Licences in a variety of fields, such as crowdfunding, peerto-peer lending, cryptocurrency, initial coin offering, amongst others, were received. Regulatory Sandbox Licences, however, are granted for a specific period of time, usually not exceeding one year, pending which either the Bank of Mauritius or the Financial Services Commission, depending on the activity, would propose the appropriate regulatory framework to regulate the fintech company. This, however, was not a simple task as the Bank of Mauritius is not only the regulator of the banking sector, but also the guardian of the safety and soundness of the financial sector. The regulatory framework cannot be amended nor overhauled in a haphazard manner as it must ensure that the stability and soundness of our financial system nor the reputation of our jurisdiction is not jeopardized in the process. This is why we are following closely the works and guidance offered by international standard setters such as the Basel Committee on Banking Supervision, the Financial Stability Board, the International Monetary Fund, the Financial Action Task Force, to name but a few, which have realized that fintech must be properly regulated to maintain the stability and soundness of the financial systems. Most, if not all, international standard setters have underscored that fintech have resulted in new business models, applications, processes, or products. These changes have, in turn, had an effect on financial markets and institutions which may have a potential impact on the monetary and financial stability. It is therefore crucial for the Mauritius International Financial Centre that its enabling framework for fintech be in line with the latest discussions taking place at the level of these organisations to ensure that, in setting up the fintech regulatory framework, the Mauritius International Financial Centre provides the proper biosphere for the fintech ecosystem while affording appropriate safeguards to investors. In a Paper issued in February 2018, the Basel Committee on Banking Supervision considered that while bank supervisors must remain focused on ensuring the safety and soundness of the banking system, they should be vigilant for opportunities to enhance both safety and soundness and financial stability while monitoring for current practices that might unduly or unintentionally hamper beneficial innovation in the financial industry. This consideration, in my view, is applicable to the non-bank financial services supervisors as well. Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department, for his part, in a recent speech expressed the view that adopting well-designed standards can promote both certainty for innovators and safety for consumers. Hence, to maximize the full potential of new financial technologies, policymakers must strike a sensible balance, namely, creating a supportive space for innovation while maintaining a robust regulatory framework. Amongst its terms of reference, the Fintech and Innovation-Driven Financial Services Regulatory Committee chaired by Lord Desai was tasked to advise on the development of a regulatory framework for fintech in Mauritius. The Regulatory Committee found that the applicable laws in Mauritius are essentially technologyneutral and that statutory provisions pertaining to the innovative application of technology for financial services are practically non-existent. 2/4 BIS central bankers' speeches The Regulatory Committee advised that two approaches may be considered in this respect – namely extending the existing regulatory and supervisory perimeter to accommodate fintech or setting up a fintech-specific regulatory framework. I hope that these issues are considered by the National Regulatory Sandbox Committee. Digital Assets and crypto currencies The Financial Services Commission has recently issued a Guidance Note on the recognition of digital assets as an asset-class for investment by sophisticated and expert investors. The Guidance Note clarifies that cryptocurrencies are not legal tender in Mauritius but have “value” since they are exchangeable for other things having value, thereby showing characteristics akin to physical commodities such as precious metals. I expect that this Guidance Note will clarify a number of queries regarding cryptocurrencies. The Financial Service Commission will surely have regard to the framework developed by the Financial Stability Board, in collaboration with the Committee on Payments and Market Infrastructures (CPMI), to monitor the financial stability implications of the developments in crypto-asset markets. While the Financial Stability Board believes that crypto-assets do not pose a material risk to global financial stability, it recognises the need for vigilant monitoring in light of the speed of market developments. Moreover, having regard to the international trend, I wonder whether the Bank of Mauritius, as the sole issuer of legal tender in Mauritius, could possibly consider issuing central bank digital currency in the coming year(s). The implementation of the National Payment Switch, which is well underway, is expected to add more impetus and dynamism to the payment systems infrastructure by providing a multifaceted inter-bank switching platform for various payment channels that will easily integrate local and international payment systems. Additionally, instantaneous access to bank accounts has become the basis for digitalisation of the economy. The change in consumer attitudes and new technologies has led the Bank of Mauritius to embark in the implementation of an Instant Payment System, concurrently to the National Payment Switch. The implementation of the Instant Payment System will, further, support the e-government initiative by promoting electronic payments through all channels in the Government agencies through instant or near real time payments. Cyber-security and cyber-resilience policies and capacities In 2017, the Financial Stability Board (FSB) assessed the financial stability implications from fintech and noted that addressing the following three priority areas is seen as essential to supporting an authority’s efforts to safeguard financial stability while fostering more inclusive and sustainable finance. These priority areas are – Firstly, managing operational risk from third-party service providers; Secondly, mitigating cyber risks; and Thirdly, monitoring macro-financial risks that could emerge as fintech activities increase. The Bank of Mauritius is currently enhancing its supervisory guidelines in line with the recommendations of the Financial Stability Board. A new guideline on Information Technology Risk Management is currently being finalized and will be issued to financial institutions. The Guideline will provide a framework for the establishment of sound practices and processes for managing the risks that emanate from the use of IT systems. 3/4 BIS central bankers' speeches With respect to macro-financial risks, the Bank of Mauritius and the Financial Services Commission have been collaborating to mitigate such risk and enhance the stability of the financial services sector. Enhancing the Regulatory framework against money-laundering and terrorist financing in line with development in Fintech. To mitigate potential AML/CFT risk, the legislative framework must be made applicable to fintech driven financial services as well as the companies offering them. The framework must also be extended to crypto currencies and crypto assets. The Financial Action Task Force (FATF) has engaged, since 2016, a constructive dialogue with fintech and regulation technology (Regtech) sectors to support innovation in financial services, while addressing the regulatory and supervisory challenges posed by emerging technologies. The FATF has agreed to initiate a project on investigative best practices related to virtual currencies/crypto-assets to assist law enforcement in the light of the growing risks. Additionally, the FATF’s guidance and standards are being reviewed to determine if changes are necessary to clarify their application to virtual currencies/crypto-assets and promote a more consistent regulatory approach, taking into account the results of FATF’s stocktake exercise of the different national regulatory approaches. We must therefore follow progress made on this matter and adapt our legislation accordingly. Conclusion Fintech is definitely here to stay. Regulators must therefore brace themselves to accept new technologies as forming an integral part of the financial landscape. In the process, the Bank of Mauritius is ensuring that it has specialized and trained resources to assist it in fulfilling its mandate and better understand innovative and disruptive technologies. I must nonetheless emphasise that fintech must be encouraged specially where, rather than disrupting the whole system, it adds value and facilitates certain processes or activities such as transaction monitoring, client on-boarding process, regulatory reporting. It can also enhance supervisory capabilities. The use of innovative technology in financial supervision can indeed assist in this endeavour. Supervisory technology (suptech) can help to digitise reporting and regulatory processes, resulting in more efficient and proactive monitoring of risk and compliance at financial institutions. The Bank of Mauritius and the Financial Services Commission are collaborating in ascertaining that any potential regulatory gaps are addressed and regulatory arbitrage eliminated. I am confident that the financial services sector has a bright future ahead and together with fintech firms, regulators, services providers and customers can embark on this transformational journey and design a new regulatory landscape and financial ecosystem for Mauritius. Thank you for your kind attention. 4/4 BIS central bankers' speeches | bank of mauritius | 2,018 | 10 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the ICSA Mauritius Graduation ceremony, Port Louis, 15 November 2018. | Yandraduth Googoolye: Importance of corporate governance at ICSA Mauritius Graduation ceremony Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the ICSA Mauritius Graduation ceremony, Port Louis, 15 November 2018. * * * Mr Ambrish Maharahaje, ICSA President, Mauritius Branch Mr John Heaton, ICSA President for United Kingdom, Republic of Ireland and Associated Territories Mr Simon Osborne, ICSA Chief Executive for United Kingdom, Republic of Ireland and Associated Territories Council Members and staff of the ICSA Mauritius Association Dear Graduates Ladies and gentlemen Good afternoon. Thank you for making me part of the celebration of your success. Your hard work is being rewarded by earning an internationally-recognised qualification that ICSA confers upon you. I congratulate you for the academic commitment you have displayed and for the passion within you to contribute to the business community and the country’s progress. The Companies Act makes provision for a company secretary in both private and public sector companies. Section 166 of the Act states that “The duties of a secretary shall include but shall not be restricted to (a) providing the Board with guidance as to its duties, responsibilities and powers; (b) informing the Board of all legislation relevant to or affecting meetings of shareholders and directors and reporting at any meetings and the filing of any documents required of the company and any failure to comply with such legislation”. This clearly demonstrates the importance of such a function in an organization. And the Board of directors of a company have to ensure that the Secretary has the requisite knowledge and experience to discharge his/her functions. The role of a company secretary is also visible in the 2016 National Code of Corporate Governance, where it is explicitly mentioned that “all organisations should have a Company Secretary. The Company Secretary acts as a vital bridge between the Board and the executive management. The Company Secretary must have access to Board members (executive, nonexecutive, CEO and Chairperson). The Board should consider assigning the tasks of applying and implementing the principles in the Code to the Company Secretary. Boards should ensure that the Company Secretary be competent to carry out his or her duties.” Ladies and Gentlemen, your functions are already well defined and you have the duty to ensure that you comply with them. Gone are the days when a company secretary was merely taking “notes” or “minutes”. The dynamics of the boardroom are constantly evolving. Chairpersons and directors recognize such changes and acknowledge the need for specialist skills and technical knowledge. The Board trusts the company secretary to advise, amongst others, on directors’ statutory duties as prescribed by law, board processes, disclosure obligations, listing rule requirements, and the requisites of corporate governance and practices. These functions have modernized the role of a company secretary and put them among the key governance professionals within an organisation. 1/3 BIS central bankers' speeches There is no doubt that you have learnt a myriad of critical subjects that spanned through your curriculum. You will soon be joining (or, may, even have joined) firms in the country or abroad to discharge the duties for which you have been groomed. You have undeniably pushed the boundaries in some areas so as to specialise in a given field. I am certain that you have seen how much the world has changed across the last two decades and how interconnected and inter-dependable countries, economies and people are. The world has taken more complex twists than the Gordian sociological and corporate scenarios that the American writer and futurist Alvin Toffler even imagined in his ‘Future Shock’ best-seller. Governance is more than just complying with laws, regulations, standards, and codes. Governance also aims to nurturing a culture of good practice. Good governance sources from an institution’s internal processes and controls. This calls for another important function of a corporate secretary – to identify the required corporate governance practices of an organisation. The corporate secretary is intended to be the link between the board and management; and between the organization and its shareholders and stakeholders. And to accomplish this function, the corporate secretary needs to be fully aware of the powers, rights, duties, and obligations of all of these groups so that he/she can inform, communicate and advise appropriately. Above all, he or she is also expected to perform his/her role with the highest integrity and independence. Ladies and gentlemen, allow me to quote former South African Supreme Court judge and governance guru Mervyn Eldred King, father of the famed King Report on Corporate Governance, for this landmark statement, I quote: “It is clear that good corporate governance makes good sense. The name of the game for a company in the 21st Century will be to conform while it performs! “ There is no doubt that accountability and transparency are major pillars in the architecture of governance. We, at the Bank, value these elements to their core. This is the reason why we have issued a Guideline on Corporate Governance. The Bank monitors adherence to the Guideline through its supervisory and regulatory functions. Bank supervision and regulation cannot function well if sound corporate governance is not in place. It is imperative to instil the levels of accountability and checks and balances within each bank. This principle should also be your motto in your organisation. At the Bank, we engage in dialogue with our stakeholders and pursue consultative meetings with them to gauge their views, which are vital to enhance effective policy formulation and decisionmaking processes. We stand guided by the vision of our Board and operate independently within the parameters of the Bank of Mauritius Act. This notion of full impartiality also applies to our Monetary Policy Committee, where by law, members act independently and are free to express their views in full objectivity. This is what helps the Bank to seamlessly implement its core mandates to better serve the people of Mauritius. Our country has made significant strides over time and the World Bank, in its Ease of Doing Business Report 2019, has ranked Mauritius in the Top 20 countries in the world for its ease of doing business and first in Sub Saharan Africa. This recognition is testimony of the hard work of every Mauritian. Whilst proud of this achievement, we should continue to work for the betterment of our country and contribute to enhance our standard of living, converging to a high-income country. The world’s economy is fraught with uncertainties and challenges. We must put our minds together to address these challenges and move the country ahead. We need your contribution to that effect. Ladies and gentlemen, the emphasis I have laid on governance underscore the sacrosanct aspect of the company secretary’s duty to enforce governance and compliance. We have to 2/3 BIS central bankers' speeches compose with a fast-moving environment where Kenneth Blanchard’s once revolutionary management concepts of One Minute Goals, One Minute Praisings and One Minute Reprimands no longer seem to respond to today’s business imperatives. Dear young graduates, you have built your success on hard work, on hopes and efforts borne by your parents and your loved ones and your own aspirations of being the best in your league. May I congratulate you once again and wish you the very best. May you always discharge your responsibilities in a most exemplary manner. Never forget that your prime duty is to protect the integrity and repute of your country. I thank you for your attention. 3/3 BIS central bankers' speeches | bank of mauritius | 2,018 | 11 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Celebration of the 125th anniversary of the Mauritius Civil Service Mutual Aid Association Ltd, Port Louis, 15 November 2018. | Yandraduth Googoolye: The importance of financial services to the economy and the need for good governance Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Celebration of the 125th anniversary of the Mauritius Civil Service Mutual Aid Association Ltd, Port Louis, 15 November 2018. * * * The Honourable Prime Minister and Minister of Finance and Economic Development, Mr Pravind Kumar Jugnauth The Honourable Minister of Civil Service and Administrative Reforms, Mr Cyril Eddy Boissezon The First Deputy Governor of the Bank of Mauritius and Chairman of the Financial Services Commission, Dr Renganaden Padayachy The members of the Board of Directors of the Mauritius Civil Service Mutual Aid Association Ltd Ladies and Gentlemen Good Afternoon 125 years in the life of a financial institution is indeed an occasion to celebrate especially when the central bank is only 50 years old. As your regulator, we are proud to collaborate and walk alongside to ensure your sustainability. This achievement takes more sense of pride when we consider how the Mauritius Civil Service Mutual Aid Association Ltd came into being. From November 1893 to date, the Association has undergone changes. Launched by a group of civil servants at a time when there was only one bank, the Association has carved its way to coexist commendably in the financial sector after obtaining a deposit taking license on 17 June 2005 from the Bank of Mauritius to mobilise fixed deposits from the general public. Over the years, the Association has gradually grown to become the largest non-bank deposit taking institution in Mauritius, accounting for over half of the sector’s total assets. The Association has broadened its customer base, having extended its facilities outside of the civil service with a total assets base of around Rs43 billion, about a tenth of our GDP. The deposits mobilized by the Association have increased by five-fold, from Rs5 billion in 2005 to Rs27 billion as at end of September 2018, which resulted into solid increase in advances from the Association. The importance of financial services in an economy is undeniable on account of the benefits they provide to the economy at large. Financial services facilitate domestic and international transactions, mobilize and channel domestic savings and broaden the availability of credit for firms, including SMEs, and households. The Association has broadened its range of products on offer to cater for the specific needs of its members and the public at large. Its attractive interest rates promote healthy competition, whilst contributing to financial access and inclusion. We are well-versed with the economic benefits that non-bank deposit taking institutions have created. But we must also be aware of the risks to financial stability that they can engender given that they evolve alongside banks. And their activities are, in many respects, intertwined with those of banks and have vulnerabilities similar to those of banks. Weak, ineffective and inappropriate governance and risk management infrastructure may compromise the safe conduct of business. The Bank of Mauritius has enhanced the regulatory arena for non-bank deposit taking institutions by extending the majority of the prudential requirements standards applicable to banks, such as, corporate governance, capital, liquidity and provisions for impairment, etc. to those institutions. 1/2 BIS central bankers' speeches The Bank expects financial institutions to maintain strong, effective and appropriate governance and risk management infrastructure so as not to compromise the safe conduct of their business. The financial institutions are subject to regular examinations to ensure their compliance with prudential and regulatory requirements. The Bank is focusing on the implementation of a risk based supervisory framework for banks. The pilot testing of the project has been rolled out to banks. The Bank is considering extending the framework to non-bank deposit taking financial institutions. Institutional anniversaries like this one are appropriate to reflect on achievements and challenges incurred, but should also lay grounds to ponder on what can be achieved going forward. They also provide the opportunity to remind about the Association’s fundamental ideas, aims and visions, and to gauge the extent to which they are being accomplished. Given that the Association has grown to the equivalent of a medium-sized bank in terms of assets and even to some big banks in terms of profits, we may consider granting it a banking license should it decide to apply for one. More so that it has invested in a Core Banking Systems to support its expanding transactions and has joined the Port Louis Automated Clearing House to make electronic payments and thus ensure faster payments, including to its customers. Thus, all the ingredients are present to support this conversion. I leave this to the Board of Directors to ponder upon, as this will contribute to widen the Association’s range of financial services, indulge in cost savings and reduce risk through diversification. Ladies and Gentlemen, the future is bright and the Association has an immense contribution to make to the financial industry of Mauritius. I commend the role that the Association has played in the Mauritian society. And so, happy anniversary and congratulations to all the members and staff of the Mauritius Civil Service Mutual Aid Association Ltd. Thank you for your attention. 2/2 BIS central bankers' speeches | bank of mauritius | 2,018 | 11 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Annual Dinner with major economic stakeholders, Port Louis, 23 November 2018. | Yandraduth Googoolye: Accountability at the Bank of Mauritius and the importance of explaining its actions Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Annual Dinner with major economic stakeholders, Port Louis, 23 November 2018. * * * Your Lordship, Meghnad Desai Excellencies Ladies and Gentlemen Good Evening! As a new central bank governor, but having been serving the central banking community for nearly 34 years, it is my immense pleasure to welcome you to the Bank’s Annual Dinner in honour of economic stakeholders. Your presence tonight pays testimony to the longstanding cooperation between the Bank and economic agents and players of Mauritius. Over the years, we have been fortunate to forge a bond together with you… a bond of friendship, trust and mutual respect. A major thread that has been running throughout the years has been that of collaboration and partnership. As Charles Darwin put forth “In the long history of humankind (and animal-kind, too), those who learned to collaborate and improvise most effectively have prevailed.” When we started this event in the mid-90s, at the time when Governor Maraye was around, we were never aware it would go on to become one of the much-sought happenings in the Bank’s calendar of activities. We have come a long way from the days when central banks were considered as mysterious institutions, shrouded in secrecy, and markets left guessing on what the policies could actually be. In 1981, Karl Brunner, a famous monetary economist, said, “Central Banking thrives on a pervasive impression that it is an esoteric art. Access to this art and its proper execution is confined to the initiated elite, while its esoteric nature [is] revealed by an inherent impossibility to articulate its insights in explicit and intelligible words and sentences.” Since then, the veil on the mystique of central banks has been lifted and it is very well recognized both in academia and in central banking circles that central banks have to become more accountable. Accountability requires increased transparency and effective communication. But this brings its own challenges of how to communicate and how much to communicate. It is imperative for not only stakeholders, but also the public, to fully understand what the central bank is trying to do and the impact of its actions on the future course of the economy. Nothing can undermine independence more quickly than being opaque and unaccountable! Over the years, the Bank has been producing and disseminating more detailed financial accounts. We are in discussions with our external auditors to see how much more transparent we can be in publishing the accounts, while at the same time not compromising the requirements of international financial reporting standards. Communication is not just about our interaction with markets. We have deemed it appropriate to communicate with different stakeholder groups in the broader civil society through our financial literacy programme. We regularly meet business associations from different sectors of the economy. We find it useful not only to express our own views but also to hear the views of 1/6 BIS central bankers' speeches market participants. It is important for us to know what the thinking about the Bank and our policies are. Although we may not be always successful in changing perceptions and misconceptions about the Bank and its policy, we have found that these interactions and initiatives have helped to create a greater appreciation of the challenges we face. A more candid relationship between the Bank and the media will accompany us in our mission. It does not mean that the media should be our porte-parole nor report uncritically on our actions. This has more value to the central bank than an uncritical media. Media is perceived as a source of objective and independent information and analysis and whatever is reported in the local press has an international coverage, which could affect the credibility and image of the jurisdiction. Even my predecessors have reiterated on this point in their previous addresses. Let me reassure you that we operate within the parameters of the Bank of Mauritius Act and assume our duties and responsibilities independently. The Act grants the Bank operational independence to implement its policies. Section 12 of the Act states that “the Board of Directors … in the exercise of their functions, shall not be subject to the direction or control of any other person or authority”. I take this opportunity to thank all my Board Members for having displayed an independence of thoughts and for their guidance and support. Further, Section 55(3) stipulates that “in the discharge of its functions, the Monetary Policy Committee shall not be subject to the direction or control of any other person or authority”. Again, let me commend the impartiality of the Members in their assessments and for voting independently on interest rate decisions. The MPC Minutes are so transparent that they reflect the voting pattern of each individual Member. We are also mandated to manage the official foreign exchange reserves of Mauritius in the manner specified in the Act. That is, we need to take into account, while investing, first, the security of the reserves, second, their liquidity and, then, return. Foreign exchange reserves are part of a country’s macroeconomic toolkit, and are considered a key indicator of the strength of the economy. So it is fundamental that we judiciously manage them for the benefit of the country. It is but natural for me to start by giving you an overall perspective on the role of the Bank in the Mauritian economy. Of course, monetary policy formulation is a key function of the Bank, but the public attention, at times, obscures the other important tasks that the Bank undertakes. In this respect, I will brush on some major achievements during the year and point on how they have assisted in maintaining the stability and efficiency of the Mauritian economy and financial system. We do not perform our work in isolation. We require the participation and contribution of various stakeholders in our decision-making process. 2018 has been quite an eventful year, as it coincided partly with our 50 th anniversary celebrations. I dare not dwell too much into our contributions to the economy over these 50 years, but you will appreciate that we are here to serve society and ensure that macroeconomic conditions are conducive to economic prosperity. We marked our golden jubilee’s existence with the opening of the Bank of Mauritius Museum to the public. The Museum displays over five hundred artefacts related to the history of our monetary system. We released the book “From Piastres to Polymer”, which provides for a comprehensively researched work on the history of banknotes of Mauritius. I strongly recommend you and your family a visit to the Museum and to own the book, which is available in the main libraries. 2/6 BIS central bankers' speeches Ladies and Gentlemen, banknotes are part of a defining symbol of a country’s identity. We encourage our people to cherish and respect our banknotes and know their characteristics and features. On this count, the Bank has issued a “Know Our Banknotes” leaflet incorporating the security features of all banknotes currently in circulation. To address counterfeiting issues, we intensified media campaign on banknote security features and maximised public awareness on how to detect fake banknotes. We even brought over specialists from UK-based De La Rue to conduct a two-day seminar on ‘Counterfeit Detection’ for our stakeholders, a first of its kind! In view of the forthcoming festive periods, we intend to invite the specialists again to talk to consumer associations, retail outlets and merchants. The importance of savings is essential for both economic development and upholding macrofinancial stability. As individuals, we save in good times for bad times, thus protecting ourselves from any contingencies. We also save to plan long-term investments. Saving is also beneficial for the entire society, as it is one of the key factors which the economy’s investment level depends on. A significant portion of the savings is channelled into our banking system, thus providing stable sources of financing to domestic banks. Deposit growth provides a solid basis for increase in lending activity and deepening of financial intermediation. There is no doubt for a need of investment growth in our country, thereby meaning an undisputed requirement for encouraging domestic savings in order to reduce the gap between domestic savings and investments. Otherwise, the gap will need to be financed to a significant extent by external sources. Last March, the Bank came up with the issue of a 3-Year Golden Jubilee Bond for retail customers and NGOs. The issue was well received. The Bond is listed on the Stock Exchange of Mauritius for trading and I thank the CEOs of banks for their collaboration. We also invite banks to come up with attractive deposit schemes to enhance the savings culture. Since the beginning of the year, the Bank has improved the operational efficiency of its monetary policy, bringing the short-term money market rates within the corridor of the Key Repo Rate. Through the conduct of open market operations to remove structural excess liquidity from the system, the disconnect between the KRR and money market rates was corrected. The excess liquidity legacy which has hindered the transmission of monetary policy, and subject to concerns in various quarters, has been addressed. The focus on excess liquidity is often blurred by the reference to balances that are kept over and above statutory requirement of the cash reserve ratio. However, the excess liquidity comprises both rupee and foreign currency excess liquidity. The Bank introduced a liquidity standard under BASEL III as from November 2017, which is the liquidity coverage ratio (or the LCR for short). The LCR was introduced to promote short term resilience of the liquidity risk profile of banks to ensure that they have sufficient High Quality Liquid Assets (HQLA) to survive a significant stress scenario lasting 30 calendar days. Keeping foreign currency balances with the Bank count towards the HQLA. Almost all of foreign currency excess liquidity would be reckoned towards balanced held for the maintenance of the LCR. We conducted a survey among banks as to why they were keeping rupee excess balances and the results showed that a sizeable part was being held by them voluntarily as a precaution. These balances have been estimated between Rs4-6 billion, depending on circumstances. Therefore, the analysis of rupee excess reserves should exclude these balances. And currently, we estimate that the true rupee excess liquidity in the system would be around Rs2 billion, which is more or less manageable. In the coming weeks, we foresee rupee excess reserves to go down. The Bank has recently been focusing on the 91-day Bill yield as its short-term operating target. The 91-day Bill yield, which is market-determined, can be viewed as an appropriate measure of the efficiency of the Bank’s operations. The Bank has successfully been able to manage liquidity by sustaining the level of the 91-day Bill, since March 2018, at a level consistent with its monetary 3/6 BIS central bankers' speeches policy stance. The relative stability of the 91-day Bill also reflects on the rupee excess liquidity situation. If there would have been a higher level of excess liquidity, the yield on the 91-day Bill would have dropped. However, as mentioned earlier, the 91-day Bill yield has been evolving around the Key Repo Rate. Our conduct of monetary operations entails costs, which have a bearing of the operations of the Bank. The correction of the interest rate disconnect together with the increase in the Bank’s issue of its own securities have cost the Bank Rs2.4 billion in 2017/2018 compared to Rs1.9 billion in 2016/2017 and Rs1.4 billion in 2015/2016. But, you will appreciate that the cost of monetary policy is nothing compared to the benefits that monetary policy imparts. The rise in the short-term money market rates has widened the spread vis-à-vis savings deposit rates. For instance, the weighted average yield on Bills accepted at primary auctions has increased from 1.78 per cent in November 2017 to 2.91 per cent in February 2018 and further to 3.60 per cent in October 2018. While over this period, the weighted average savings deposit rate has been around 1.7 per cent. That’s why I have been making an appeal to banks to increase their savings deposit rates so that savers can benefit from a higher return. And I thanked those banks which have already increased their rates. The increase in yields on risk-free Government and BoM instruments can also benefit savers and can prove to be viable alternative investment instruments. We have engaged with banks with a view to opening up access to these instruments to the public for trading on the secondary market. It is noteworthy that outstanding investment by individuals on the secondary market increased from Rs1.8 billion as at end-December 2017 to nearly Rs6.0 billion as of date. We thank banks for creating the awareness for these attractive instruments and broadening their access to the public at large. The development of bond markets has been on the agenda of the Bank since long and we cherish the idea of seeing a vibrant bond market in Mauritius. We issued a Guideline on Commercial Papers last June. Commercial papers are short-term money market instruments issued by companies in the form of promissory notes, which can be subscribed by the public. The introduction of commercial papers in Mauritius is expected to support the development of financial markets and allow issuers to diversify their sources of short-term borrowing and ensure price discovery. We recommend companies to consider issuing these new types of instruments, which would be beneficial to the issuer and the local investor. When I was appointed vice-Chair of the FSC last year, I saw the benefits of the synergy between the Bank and the FSC. Today we are lucky to further cement the bond between the two regulators, with our First Deputy Governor as Chairman of the Financial Services Commission. We are jointly collaborating to create a Centralised E-KYC Registry. The Registry will be the national repository for KYC information of individuals and corporates. Our next project will be the implementation of a staff exchange programme as from next year, for an effective surveillance of the financial system. In the same spirit, we have signed a tripartite MoU with the FSC and FIU. We shall soon start discussions with the Police for a memorandum of cooperation on moneylaundering and counterfeiting issues. Let me emphasise that the Bank considers AML/CFT supervision among its key priorities. You will recall that the strengths and weaknesses of Mauritius have been identified in the mutual evaluation report of the ESAAMLG. Already, a host of laws have been amended and regulations passed to comply with recommendations of the ESAAMLG. We have also set up a dedicated unit for AML/CFT supervision at the Bank and we are cooperating actively with the FSC, FIU, MRA, ICAC and soon with the Police in this combat. I would like, once again, to call upon CEOs of banks to ensure that they take all precautions to keep our jurisdiction clean. To accompany the country as international financial centre of repute, we need to ensure that our banking industry is appropriately equipped and resilient. Capacity building was identified as a key 4/6 BIS central bankers' speeches priority to the banking sector, and we backed the MBA’s initiative for a Professional Banker Certificate course offered by the Chartered Institute of Bankers of Scotland. We will soon roll out more targeted courses. As you are aware, the Government has set up the Fintech Regulatory Committee under the chairmanship of Lord Meghnad Desai. The Committee has already submitted its Report and the main recommendations are being implemented. We even had a meeting today, hence the presence of Lord Desai and Ms Loretta Joseph of the OECD. The global financial crisis has been an eye-opener on so many counts and made us realised the importance of a well-regulated and supervised banking industry. It also brought forth that traditional micro-prudential regulation and supervision do not suffice. We did not stay behind. We enforced a range of supervisory and regulatory measures to make our banking sector resilient. The level of bank capital in Mauritius are broadly adequate to meet a range of shocks. We are toiling hard to roll out a risk-based supervisory framework, which will entail, amongst others, the development of a risk profile for individual banks. A more resilient banking system will better absorb the impact of future downturns, with more sustainable funding positions and greater capacity to tolerate a decline in the credit environment. This framework is data-intensive and we rely on the collaboration of our partners, including the accounting firms, to bring to fruition this project. The role of payment systems in an economy is critical. As the guardian of the stability of the financial system, it is imperative for the Bank to ensure that the payment system operates efficiently. I am therefore glad that the National Payment Systems Bill, whose main objective is to provide an enabling framework for the regulation, oversight and supervision of the national payments systems, has been approved at the National Assembly on Wednesday. In the same vein, development of a payment infrastructure through the National Payment Switch has been an item high and dear in the Bank’s agenda. I am pleased to announce that the National Payment Switch is operational. A quick word on the global economic environment. At the time I had assumed office as Governor, there was widespread optimism that the global economic outlook was robust. This optimism, unfortunately, did not last long. A series of events have created dimmer prospects for 2019 global growth. Against this uncertain backdrop, domestic economic and financial conditions have remained largely stable and commendable. Our concern remains the recent trends in private investment and exports. These issues need to be addressed to sustain growth and employment creation. I am convinced that each and every Mauritian is proud of the progress we have achieved so far since the independence. Mauritius has successfully reinvented itself in the wake of various global shocks and following decades of positive growth momentum, we have emerged as a resilient country. Let all the partners – public sector, private sector, civil society, the press – join hands to capitalize on our strengths to tap opportunities emerging from our strategic location between the two fastest-growing continents, which are Asia and Africa. As Winston Churchill put it, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." I wish to thank all members of the Board of Directors, my Deputy Governors, MPC Members and staff of the Bank for their unflinching support and commitment, without whom the Bank would not have been able to achieve so much. I also commend all economic stakeholders for their contributions to the economy. On behalf of the Board of Directors, the Members of the MPC, my Deputy Governors, staff of the Bank of Mauritius, and my own behalf, I wish you all a Merry Christmas and a Happy New Year 5/6 BIS central bankers' speeches 2019. 6/6 BIS central bankers' speeches | bank of mauritius | 2,018 | 11 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Launch of the Barclays Africa Financial Markets Index in Mauritius, Port Louis, 22 November 2018. | Yandraduth Googoolye: Importance of financial markets to growth as Barclays launches Africa Index Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Launch of the Barclays Africa Financial Markets Index in Mauritius, Port Louis, 22 November 2018. * * * Members of the Board of the Bank of Mauritius Chairman of the Mauritius Bankers Association Head of Barclays Africa Trading, Mr George Asante Chief Economist and Head of Research of OMFIF, Ms Danae Kyriakopoulou Chief Executive Officers of Financial Institutions Ladies and Gentlemen Good Afternoon and Welcome to the Bank of Mauritius We are pleased to welcome ABSA and OMFIF at the Bank today. The Bank and the Financial Services Commission were admitted as members of OMFIF June last. OMFIF regroups diverse players from the public and private sector, central banks, sovereign wealth funds, and academia who meet to exchange views and share experience. We look forward as member of OMFIF in the future. Finance has been compared to being the lubricant of the process of economic growth such that the role of financial markets in the economic development of any country cannot be underplayed. According to Robert Merton, the primary function of any financial system is to facilitate the allocation and deployment of economic resources. The interactions of these functions work to influence saving and investment decisions, which ultimately translate into the efficient allocation of funds in an economy. The Bank of Mauritius has long recognized the role of financial markets in Mauritius and set up a Financial Markets Department as far back as in 2000. The Bank has also established a Financial Markets Committee that meets under its Chairmanship and comprises Heads of Treasury from all banks. The Financial Markets Committee acts as a forum for discussions on developments in the domestic markets and also on existing and future market practices and instruments. Through this forum, banks and the central bank endeavor to foster the development of money and foreign exchange markets in Mauritius. The Bank has been contributing to the development of financial markets from various perspectives. With a view to improving market efficiency, all information, pertaining to the financial markets are disseminated on our website in a timely and transparent manner. On 29 March 2018, the bank in collaboration with Bloomberg launched an E-Bond trading and market surveillance system, which is a new electronic trading system for Mauritian government bonds. The implementation of E-Bond has brought more efficiency and greater depth to the secondary market in Mauritius. It has allowed the development of a benchmark yield curve, which will go live to-day at noon London time. The yield curve will enhance price discovery for a range of money market instruments and other corporate bonds. Measuring financial development is quite challenging and we recognize the effort required to put up an index to gauge the impact of financial intermediation on real economic activity. We welcome the initiative and effort of both ABSA and OMFIF. The Africa Financial Markets Index provides a toolkit for countries seeking to strengthen their financial markets infrastructure. It tracks progress on financial market developments annually across a range of countries and indicators. It will serve as a platform to build resilient and dynamic financial markets within the 1/3 BIS central bankers' speeches African continent. As an independent think- tank, OMFIF provides the seal for good governance and unbiased analysis. The Africa Financial Markets Index, now in its second edition, ranks and compares the depth of financial markets in twenty African countries which are assessed against six broad pillars: financial markets depth; access to foreign exchange; market transparency and regulatory environment; macroeconomic opportunity; enforceability of agreements; and capacity of local investors. This recent index for Africa is a window on the potential of the continent. Despite some episodic challenges in the shape of developmental, social or political issues, Africa has grown into a mature, strong and forward-looking continent, much in line with the vision of the African Renaissance so dear to one of Africa’s most illustrious sons, Nelson Mandela. It is, therefore, not surprising that Africa has turned into a geo-political centrepiece. Such is the continent’s potential that developed economies are literally racing against one another to tap the opportunities of this new Eldorado. And what makes Africa’s CV all the more noteworthy is the fact that it has made remarkable progress on the front of democracy and good governance whilst also demonstrating commendable economic growth. On this front, allow me to underline that over the past eight years, Africa has been registering gross direct investment inflows of around USD50 billion, on average every year according to 2018 World Investment Report released in June last. These figures speak volumes about the significance of the emerging markets across the African continent as well as the efforts of a number of countries to promote their potential as investment destinations. Ladies and gentlemen, the Africa Financial Markets Index brings to light the fact that dynamic and efficient financial markets are pre-eminent triggers of economic growth by virtue of their capability to crystallize the elements that investors look for: optimized product offerings, high returns, good governance and strong regulatory and legal frameworks. For the 2018 edition, three countries – Angola, Cameroon and Senegal – joined the index, thus bringing the number of countries tracked to 20. The country measures were also broadened to include elements of financial inclusion and levels of investor education. South Africa topped the index this year again, followed by Botswana, Kenya, Mauritius and Nigeria. While some may dwell on the fact that Mauritius ranks fourth among the twenty countries, I invite them to examine the positive elements underlined in the report, and like we say, the glass can also be half-full rather than half-empty: The level of foreign exchange reserves which has grown substantially in Mauritius. Today, we have a level of gross official reserves of about USD6.3 billion, representing nearly 10.6 months of imports of goods and services, which we manage judiciously under a legal mandate of security, liquidity and, then, return. On that point, I would like to stress that Mauritius is a notable exception with regard to investment in complex assets. As quoted in the report “There is a wide range of investment options and relatively strong demand for more complex assets, including different types of derivatives products’. [Unquote]. The report commends Mauritius for its strong legal and regulatory framework and highlights that Mauritius is amongst the top countries as regards market depth, market transparency, tax and regulatory environment as well as the legality and enforceability of financial markets master agreements. 2/3 BIS central bankers' speeches The Africa Financial Markets Index comes at an opportune time when positive changes are being witnessed on the domestic financial landscape. Mauritius aims to double the size of its financial sector as spelt out in the Government’s Vision 2030 document and the financial sector blueprint. We have broadened the access to the purchase of Government and Bank of Mauritius Securities by the public. The development of a secondary market for risk-free instruments has helped individual investors to benefit from the increase in yields registered since the start of 2018. Today, Treasury Bills and Bonds are proving to be viable alternative investment instruments to term deposits. Increased accessibility and enhanced public awareness has led to a three-fold increase in the amount of securities held by individuals, from Rs1.8 billion as at end-December 2017 to Rs6 billion currently. You may recall that the African Development Bank along with Bloomberg launched the Africa Domestic Bond Fund, which is listed on the Stock Exchange of Mauritius since 18 September 2018. This Fund tracks the performance of a Bond Index, comprising local currency sovereign bonds of eight markets: Botswana, Egypt, Kenya, Namibia, Nigeria, South Africa, Ghana and Zambia. Mauritius is also expected to join the index in the near future with the recent developments on the secondary market of Government/ Bank of Mauritius Securities. As I conclude, allow me to thank ABSA for its initiative to launch the Africa Financial Markets Index in Mauritius. The Index will be yet another benchmark that will provide precious insights to our country which is busy positioning itself as a leading international financial centre and a gateway to Africa, with a clear vision to join the sphere of high-income countries. Ladies and Gentlemen, I thank you for your attention. 3/3 BIS central bankers' speeches | bank of mauritius | 2,018 | 11 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the ADC Global Blockchain Summit, Adelaide, 27 March 2019. | Yandraduth Googoolye: Cross-border regulation in relation to digital assets Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the ADC Global Blockchain Summit, Adelaide, 27 March 2019. * * * The Honourable Steven Marshall, Premier of South Australia Major General the Honourable Michael Jeffery, Forum Patron Excellencies Ladies and gentlemen All protocol observed 1. Introductory Remarks It is a great pleasure for me to be in the midst of such an august gathering today. First of all, I would like to thank Honourable Steven Marshall MP, Premier of South Australia for the invitation to attend this Summit 2019 and share my thoughts, as a central bank governor and regulator of the banking sector in Mauritius, on cross-border regulation of Digital Assets. I would also like to thank Loretta Joseph, Fintech Adviser to the OECD, for having facilitated my participation to this Summit. 2. Fintech and Digital assets and central bank digital currencies Fintech and digital assets are areas that the Bank of Mauritius has been following closely. The international community has also shown keen interest in this sector. The Financial Stability Board (FSB), Financial Action Task Force (FATF), International Monetary Fund (IMF), Bank for International Settlement (BIS) and fellow foreign international standard setters and regulators have shared their thought, concerns and recommendations regarding fintech and digital assets. We must obviously distinguish between digital assets and central bank digital currency. While the latter are usually created and issued by central bank and is legal tender, digital assets, on the other hand, are not “legal tender, and are not backed by any government or public authority” as the Basel Committee on Banking Supervision clearly puts it. The FATF recommends countries to consider virtual assets as “property,” “proceeds,” “funds”, “funds or other assets,” or other “corresponding value”.” 3. The need to regulate Digital Assets History has shown that regulatory gaps or vacuum have contributed to perpetuate fraud, led to financial crisis and undermined confidence in the financial services sector, amongst others. The BIS, in its September 2018 Quarterly Review, reported that news pointing to the establishment of legal frameworks tailored to cryptocurrencies and initial coin offerings coincide with strong market gains. 1/5 BIS central bankers' speeches There is need, therefore, for Digital Assets to be regulated. Indeed, regulation brings legal certainty, legitimacy, trust and confidence in markets and will undeniably act as a catalyst in promoting acceptance of digital assets. These regulations should, nonetheless, not be too intrusive, but rather, it must be optimal and enabling so as to promote innovation in this technology-driven sector. 4. International Standards and recommendation regarding Digital Assets Prudential Norms The Basel Committee on Banking Supervision has, on 13 March 2019, issued a Statement on Crypto-Assets wherein the Basel Committee opines that “the continued growth of crypto-assets trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.” The Basel Committee has accordingly set out its prudential expectations related to banks’ exposures to crypto-assets and related services. The Basel Committee views that on account of their high degree of volatility, crypto-assets present a number of risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks. The Committee therefore expects that if a bank is authorised and decides to acquire cryptoasset exposures or provide related services, it should at a minimum: Firstly, perform due diligence prior to acquiring exposures to crypto-assets or providing related services, Secondly, have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services; Thirdly, publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures; Fourthly, inform its supervisory authority of actual and planned crypto-asset exposure or activity in a timely manner and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks. As regulators, it is our responsibility to ensure that supervised institutions are operated safely and soundly and comply with applicable laws. Within that framework, however, we also have a strong interest in permitting beneficial innovations to flourish, while ensuring that the risks are appropriately managed. It is, therefore, of paramount importance to ensure that regulatory and supervisory structures are constantly adapted to changing technologies and business models for them to remain effective. At the level of the Bank of Mauritius, our approach has been characterized by open minds and open door policy. We welcome change in banks so long as they are able to demonstrate that the risks are being appropriately and adequately managed. Moreover, as all prudent central banks, the Bank of Mauritius will also pay special attention to the recommendations of the Basel Committee and require banks operating in Mauritius to ensure strict compliance thereto. 2/5 BIS central bankers' speeches Addressing the concerns regarding Money Laundering and Terrorist Financing risks Concerns have been expressed to the effect that digital assets offer some form of anonymity to its holders if not properly regulated and controlled and may be subject to heightened money laundering and terrorism financing (ML/TF) risks. In an era where ML/TF risks are assuming increasing significance and may even result in international sanctions and loss of correspondent banking facilities, regulators need to be extremely vigilant. International Standard Setting Bodies have also identified the potential ML/TF risks that could rise from digital assets and they have been prompt in providing necessary guidance. As far back as 2015, the FATF identified certain key risks associated with Crypto Assets, including ML/TF, cross border nature of operating systems and non-face to face client relationships which facilitates anonymity. In October 2018, the FATF, recognising the need to adequately mitigate the money laundering and terrorism financing (ML/TF) risks associated with virtual asset activities, adopted, changes to the FATF Recommendations to clarify how the Recommendations apply in the case of financial activities involving virtual assets. The FATF recommended countries to ensure that virtual asset service providers are regulated for AML/CFT purposes, and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations. More recently, in February 2019, the FATF announced that it is setting out more detailed implementation requirements for effective regulation and supervision/monitoring of virtual asset services providers which are expected to be adopted at the June 2019 Plenary of the FATF. As the FATF Recommendations are globally accepted standards, it is very likely that, when establishing the regulatory framework for digital assets, countries will adhere to these standards. 5. The experience of Mauritius in regulating Digital Assets – Development of regulatory frameworks in line with international standards Allow me to share the experience of Mauritius in regulating Digital Assets. Last year, the Government of Mauritius took the initiative of setting up a Regulatory Committee on FinTech and Innovation-Driven Financial Services chaired by Lord Desai and comprising amongst others Loretta Joseph, Rajesh Ramloll S.C., Deputy Solicitor General at the Attorney General’s Office, Mauritius, the Chief Executive of the Financial Services Commission, other eminent experts from in fintech regulation, blockchain as well as artificial intelligence industry and myself. The Regulatory Committee was tasked to advise on the development of a regulatory framework for fintech in Mauritius. The Regulatory Committee identified priority areas in the fintech space to be considered for regulation in Mauritius and recommended the approach to be adopted in regulating this emerging sector of activities. Further to the report of the Regulatory Committee, the Financial Services Commission, Mauritius, which is the integrated regulator for the non-bank financial services sector and global business in Mauritius, was identified as the most appropriate authority in Mauritius to promote the regulatory framework for digital assets in Mauritius. In September 2018, the Financial Services Commission issued Guidance Note on the 3/5 BIS central bankers' speeches recognition of digital assets as an asset-class for investment by sophisticated and expert investors. Subsequently, on 05 November 2018, the Financial Services Commission issued a Consultation Paper seeking feedback from stakeholders and the public on the proposed regulatory framework for the Custodian Services (Digital Asset) Licence, which allows its holder to provide custody services for Digital Assets. The Consultation Paper has now been translated in a set of Rules which became effective as from 01 March 2019, thereby positioning the Mauritius IFC as the first jurisdiction globally to offer a regulated landscape for the custody of Digital Assets. The Financial Services Commission has ensured that the distinct regulatory frameworks are in line with international standards set by institutions like the Organisation for Economic Cooperation and Development and the FATF. Mauritius has participated fully in discussions at the level of the OECD on the governance and regulation of Digital Financial Assets and the regulatory framework for this activity segment has been developed in reference to these international consultations and the FATF Recommendations have been fully considered in the regulatory approach taken by Mauritius to regulate the custody of digital assets as a business activity. As technology is a constantly evolving affair, we need to be at the forefront of the latest development. This requires specialized skillsets which might not be available in all regulatory bodies, thereby heightening the need for continued upskilling and capacity building. 6. Cross-border regulation With the globalisation of financial services, collaboration has always been a requirement for financial services regulators across the globe. The need for cross border cooperation between financial services regulators is becoming even more crucial in relation to fintech. Adherence to a common set of standards will foster standardization of the regulation across countries and facilitate cross-border regulation of digital assets. Obviously, cross border regulation implies cooperation and collaboration between regulators. It is common practice for financial services regulators to sign Memorandum of Understanding (MoU) with their counterparts for cooperation and exchange of information in the field of conventional financial services. These MoU may now have to be extended to collaboration in Fintech and financial innovation. It may be foreseen that such collaboration will improve the cross-border regulation of fintech and digital assets through: a. Harmonised/Equivalent fintech regulatory frameworks across jurisdictions which is an effective tool against regulatory arbitrage and will enable licensed fintech business to have access to other markets; b. Bridging the expertise gap between jurisdictions for efficient framework development; and c. Capacity building and knowledge sharing in the field of fintech supervision for financial services regulators. Concluding remarks 4/5 BIS central bankers' speeches The launch, in January 2019, of the Global Financial Innovation Network1 aims at acting as a network of regulators to promote information and knowledge sharing on emerging innovation trends as well as promoting joint policy work and regulatory trials by enhancing collaboration between regulators on key policy questions with the view to support the work of standard setting bodies, amongst others. All of us in this room who have a keen interest in promoting financial innovation should collaborate and support this initiative in the hope that a standardized and agreed sets of principles and practices for fintech and digital assets may unfold soon for the benefit of the market participants and regulators alike. Summits, similar to this one, acts as incubators for sharing our thoughts and vision for this innovative sector. I am confident that this Summit will foster cooperation and collaboration between regulators, investors and international organisations. I wish us all success in this area. GFIN has been established by an international group of financial regulators and related organizations is an indication of the willingness of the global community to promote financial innovation in an efficient and orderly manner 5/5 BIS central bankers' speeches | bank of mauritius | 2,019 | 3 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, Prelude to Banquet in the context of the ADC Global Blockchain Summit, Adelaide, 27 March 2019. | Yandraduth Googoolye: Blockchain technology’s potential to benefit society and the economy Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, Prelude to Banquet in the context of the ADC Global Blockchain Summit, Adelaide, 27 March 2019. * * * Honourable Steven Marshall, Premier of South Australia Major General the Honourable Michael Jeffery, Forum Patron Excellencies Ladies and gentlemen All protocol observed Good Evening I feel truly privileged to address such a distinguished audience. I would like to thank the Honourable Steven Marshall and the Australian Davos Connection for the invitation which gives us such a unique opportunity to attend this ADC Global Blockchain Summit in Adelaide, the gem of South Australia. South Australia is a region that is known for its proverbial welcome and hospitality. It is a region that is not only culturally and aesthetically marvellous but which also has to its credit some astonishing feats. Astonishing indeed is one of the anecdotes I have come across with regard to South Australia: I do not think that there is in this second millennium, any other place in the world where the iconic Coca-Cola has been outsold by 3 to 1 by the Farmers Union Iced Coffee. I hope there is some around as I definitely look forward to having a sip of this beverage. Ladies and Gentleman, I shall now get back to the reason behind this august gathering, the ADC Global Blockchain Summit. This platform stands out by the fact that it has brought together world leading entrepreneurs, financiers, regulators, researchers, innovators and business leaders to focus on strategies and practical applications for business growth. From what I have gathered, this is the largest and highest level of speakers ever assembled in South Australia for a Blockchain event involving C-level, owner, entrepreneur and minister level participation from over 30 countries across various geographies. It is a privilege that we shall, across the days, hear and learn from the most respected authorities worldwide all that needs to be understood on one of the most intriguing yet promising technological breakthroughs… I am referring to blockchain… Ladies and gentlemen, blockchain technology has tremendous potential to positively impact the social and economic landscapes. Its attributes are several. Its feature of full transparency across networks makes blockchain stand out as one of the most likable and adaptable technologies out of different technologies available in the market. Add to this the element of robust security that makes blockchain networks virtually impermeable and you have a solution that simply stands out as the most favourable digital value-based technology. For me, as a central banker, there is one aspect of blockchain that I am very eager to understand. It is the fact that blockchain, by mitigating the burden on the financial industry, is a game changer in an environment where traditional financial transaction models are quite expensive. 1/2 BIS central bankers' speeches This shift in concept and the new patterns of behaviour and business this will create, is of topical significance, the more so that we are stepping in the second generation of the internet which, from what we can foresee, will significantly bring down transaction costs within the banking and finance industry. Alex and Don Tapscott, the world-renowned authors of the seminal book ‘The Blockchain Revolution’, have been adamant to underline that blockchain goes far beyond the second phase of the internet. Allow me to emphasize Alex Tapscott’s view that, I quote, ” With its advent, we will not need to trust each other in the traditional sense, because trust is built into the system itself.” Unquote. Just imagine exploring myriads of opportunities that blockchain is already opening up… This being said, the world is far from being filled with selfless individuals and we unfortunately must also come to terms with the fact that the genie is out of the bottle and that its powers must be properly harnessed if we want them to be used constructively. Ladies and gentlemen, I am sure that I am not the only one within the audience for whom the ADC Global Blockchain Summit is key to understanding the way forward regarding not only the benefits and application but also the regulation of blockchain technology. This is of utmost importance if, like me, you are steering a central bank in a small island nation that endeavours to use technology to build a better, brighter and more inclusive tomorrow for its people. At the Bank, we have set up a dedicated Blockchain Committee to see how best we can use this innovative technology to pave the way for a modern banking landscape. Mauritius, where I come from, is working hard to give itself the means to achieve its socioeconomic ambitions by exploring the potential of fintech for shaping an innovative banking and financial services industry. The Mauritian Government has set up a Regulatory Committee on Fintech and Innovation-driven Financial Services. Another high-level team is also working on a strategic blueprint for financial services with the support of world-acclaimed experts. May I take the liberty of paying tribute to two of these respected authorities who happen to be with us tonight… I have named Ms Loretta Joseph and Lord Meghnad Desai… Ladies and Gentlemen, I am certain that this ADC Blockchain Summit will provide us all with the answers we are hoping for and that this unique platform will help us forge mutually beneficial relationships between stakeholders and participants. I once again wish to thank the Honourable Premier Steven Marshall and the Honourable Michael Jeffery as well as the ADC organising team and sponsors for their priceless initiative and endorsement. I look forward to learning and discovering as much as I can on a technology that is set to take on the world. On this, Ladies and Gentlemen, I thank you for your attention. 2/2 BIS central bankers' speeches | bank of mauritius | 2,019 | 3 |
Remarks by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Financial Connectivity Thematic Forum on "How African countries can play an active role in the Belt and Road Initiative", Beijing, 25 April 2019. | Yandraduth Googoolye: How African countries can play an active role in the Belt and Road Initiative Remarks by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Financial Connectivity Thematic Forum on "How African countries can play an active role in the Belt and Road Initiative", Beijing, 25 April 2019. * * * Excellencies Good Morning and Thank You for giving me the opportunity to address such an eminent audience. Last October, at the official opening of the Belt and Road International Financial Exchange and Cooperation Seminar organised by the Bank of China, I had stressed on Africa’s eagerness to be part of China’s vision to enhance cooperation and connectivity among countries that will be part of the Belt and Road Initiative. Africa is endowed with considerable human capital, millions of acres of arable land and a myriad of natural resources. Therefore, ladies and gentlemen, the combination of China’s capital, technology, market, enterprises, talents and experiences and Africa’s abundant resources, huge demographic dividend and great market potential should create economic wonders. Testimony to Africa’s willingness to support the Belt and Road initiative is member states of the African Union endorsement of “Agenda 2063: The Africa We Want”, a roadmap for structural economic transformation over a fifty-year time scale. Whilst the Initiative will undoubtedly enable a smooth flow of goods and services against efficient mechanisms of payment flows, Africa must also see to it that adequate and timely resources are geared towards the modernization of financial market infrastructures as well as to the opening and promotion of free trade areas. These will be instrumental in supporting the expansion of the trade corridor between China and Africa and in upholding cross-border e-commerce. Ladies and gentlemen, a key target of the Initiative rests on financial integration and cooperation. Besides enhancing financial regulation cooperation, it will increase the scope and scale of bilateral currency swaps and settlements as well as the issuance of bonds in Chinese Yuan. It is, therefore, to the advantage of countries across Africa to encourage commercial equity investment funds and private funds to participate fully in the construction of key projects stemming from the Belt and Road Initiative. The Initiative will also push forth an additional currency of choice and set the RMB among the reserve currencies for African countries. A currency that can be used, not only for trade between Africa and China, but also for intra-African commercial flows. African central banks and other regulatory entities must fully embrace the crucial role they will be called upon to play. African monetary policymakers will in effect be required to come up with strong frameworks that will build sufficient macroeconomic and institutional capacity to absorb investment flows, tap benefits and manage associated risks. Another key area of focus for African countries is the payment infrastructure. Indeed, while most countries are upgrading their payment infrastructures, the African payment landscape remains fragmented into regional blocks such as the COMESA, SADC and Western and Central African States’ monetary unions. Though some initiatives are underway at the level of the Association of African Central Bank for the setup of a fully integrated African payment system, I believe that this initiative needs to be encouraged. African countries equally need to consider whether the 1/2 BIS central bankers' speeches adoption of a federal approach to an integrated payment system can be a boost. Financial Technology is another key area if Africa ambitions for an innovative financial industry as well as an inclusive development. Infrastructure expansion is a priority for effectively linking countries across the continent so that they are poised to tap the opportunities offered by the Belt and Road Initiative. In that regard, our sister countries must urgently focus on the development of appropriate land, sea and air transport logistics and framework. This will contribute to bringing down the obstacles that stand on the path of the economic evolution of the continent. Before concluding, let me quote a Chinese proverb that I deem fitting. I quote: “One bee cannot produce honey; one grain of rice cannot produce a meal”. Unquote. Ladies and gentlemen, if the common goal is the overall development of our respective nations, then the only way forward is for us all to join hands in furtherance of friendship, unity and progress for our people. I thank you for your attention. 2/2 BIS central bankers' speeches | bank of mauritius | 2,019 | 4 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the 15th Meeting of the FSB Regional Consultative Group for Sub-Saharan Africa, Port Louis, 2 May 2019. | Yandraduth Googoolye: The need to adapt regulatory and supervisory structures to changing technologies and business models Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the 15th Meeting of the FSB Regional Consultative Group for Sub-Saharan Africa, Port Louis, 2 May 2019. * * * Honourable Governors, Ladies and Gentlemen, Good afternoon and welcome to this fifteenth meeting of our Regional Consultative Group. It gives me great pleasure to share my thoughts with this august forum whose work serves as inputs for the FSB Plenary. We must all take pride that the democratic deficit at the level of the participation of developing economies in international discussions has been gradually addressed. The establishment of the different Regional Consultative Groups in 2011 was a step in the right direction. It has enabled our voice to be heard. The global financial system has undergone positive transformation in the past decades. Improvements in technology, product innovation, market integration, fierce competition, as well as policy and regulatory reforms have resulted in a dynamic and sophisticated financial industry. The pace of development and innovation in the financial industry even surpassed the authorities’ ability to adequately regulate and establish suitable oversight mechanisms. Ladies and gentlemen, I need not reiterate the importance of a stable financial system as a prerequisite for sustainable and inclusive economic development. We are all aware of the causes of the run-up to the global financial crisis and the consequences. We have seen percentage points to economic growth and employment rate being knocked off. Many countries relied on taxpayers’ money to bailout distressed financial institutions. Returns to savers are now relatively lower and borrower’s access to credit has become more complex. Standard-setters and regulators need to ensure that the financial industry continues to deliver on its essential services, whilst doing their best to correctly regulate and oversee the financial system. Regulating a financial industry has nothing in common with how other industries are regulated. Failures in the financial industry have devastating consequences on the real economy. Adequate understanding of the financial sector as well as identifying risks and vulnerabilities should therefore be of prime concern to regulators and supervisors. Financial stability is today one of the most widely discussed themes in economic literature. The relevance of analyses on financial stability stemmed from the late 90s international financial crises. It was reinforced by the financial and economic crisis that unfolded in August 2007. These economic tremors accentuated the need for constant up-to-date and exact snapshots of a given country’s financial sector. We should aim not only at promoting efficiency, but also transparency around operations in the financial system and about participants. In our region, the availability of information on the financial services industry needs to be further broadened, and financial literacy further enhanced. A comprehensive, timely and globally comparative collection and dissemination of information is critical. This will undoubtedly benefit all stakeholders, ranging from industry and markets players to the public at large. 1/4 BIS central bankers' speeches Another element that requires our attention is the proliferation of new investment products. These products are often fairly complex. We must remain vigilant over the operations of non-bank institutions that, in some form, take part in financial intermediation using complex products. This sector may include brokerage firms, investment funds, insurers and other forms of entities. Investment opportunities have also expanded far beyond national borders. While this allows individuals to invest in a broad range of assets and currencies, it also opens the doors to mistakes which can be costly both at the micro and the macro level. Ladies and gentlemen, knowledge of the financial system constitutes not an option but a must! Indeed, when evaluating the stability of the financial industry, we need to have the resources and information needed to assess the degree to which it is capable of resisting shocks, both external and internal. We need to be confident that we have the tools to identify and mitigate the risks that can potentially trigger financial instability. At its last meeting, the FSB identified four main priorities for 2019. These are: How to address new and emerging vulnerabilities in the financial system; How to finalise and operationalise post-crisis reforms; How to evaluate the effects of the reforms; and How to reinforce outreach to stakeholders. All of these are of concern to the economies of our region. This meeting comes at an opportune time as we shall be able to discuss these topics and take stock of the latest developments on the global front. Speaking of development, allow me, ladies and gentlemen, to share with you some of the work that the Government of Mauritius has been doing to shape the future of our country’s financial industry. A financial sector blueprint was prepared in 2018. It has identified three strategic pillars as key drivers of the growth of the Mauritian IFC: First, cross-border investment; Second, cross-border corporate banking and private banking; and Third, wealth management. All of these fall either directly or indirectly under the work programme of the FSB. We will indeed be called upon to ensure that Mauritius adequately mitigates risks and that it remains a wellregulated and properly supervised jurisdiction. As a small country with a population of nearly 1.3 million, the limited size of the Mauritian domestic market constrains opportunities for banks in the domestic segment. This is what has paved the way for diversification of banks’ operations by offering cross-border banking services. As at date, cross-border banking assets of our banks account for 60 per cent of total banking sector assets. However, cross-border banking entails risks which are not present in domestic banking. These include differences in legal frameworks and political risks. In that regard, the Bank of Mauritius is coming up with a Guideline on Cross Border Lending Risk Management. This guideline will set out a minimum set of standards to which banks wishing to enter into cross-border lending will need to adhere. These requirements will vary depending on the structure of those banks and on whether a banking group already has a presence in the foreign country where lending is being effected. The identification and assessment of money laundering risks remain one of the overarching priorities of the Bank of Mauritius. This is particularly important in view of the far-reaching implications on the correspondent banking field and reputation of the jurisdiction. At the level of 2/4 BIS central bankers' speeches the Bank of Mauritius, we have a zero tolerance approach for breach of guidelines, particularly those relating to anti-money laundering and financing of terrorism. Mauritius had recently undergone a Mutual Evaluation Exercise under the auspices of the ESAAMLG. Some areas warranting remedial action in the AML/CFT regulatory and supervisory framework had been identified. The country has already taken the necessary corrective steps and addressed many of the shortcomings. The legal framework has been enhanced with relevant amendments to the Banking Act and Bank of Mauritius Act. We are also upgrading our supervisory and regulatory framework. As from September 2018, the Bank has a full-fledged unit for monitoring AML/CFT risks and conducting on-site examination in institutions. We are also in the process of moving towards a risk-based supervisory approach. A separate module is being developed to capture AML/CFT risks. The Bank has also signed a tripartite memorandum of understanding with the Financial Services Commission and the Financial Intelligence Unit to enhance, among others, the effectiveness of the implementation of AML/CFT measures. Once the risk-based supervisory framework becomes fully operational, banks posing higher risks to the system will be subject to more intensive supervision. We have also introduced a framework for Domestic–Systemically Important Banks since July 2014. All banks which have been identified as being systemically important are required to hold a capital surcharge in the range of 1% to 2.5%. Mauritius, as a highly open economy, has a few large corporates that dominate economic activity. These corporates require a close monitoring. A large exposure limit is in place to curtail the exposure of any borrower or group of borrowers. The basis for computing the large exposure limit was recently enhanced from capital base to Tier 1 capital. Further, in our framework for Domestic–Systemically Important Banks, exposure to large groups is a supplementary indicator. These large groups have been defined as having an exposure of at least Rs2 billion to the banking sector. Another topic that warrants attention is climate change and the reduction of global carbon emissions. The financial services industry has an important role to play in that area. I know that some central banks are already at an advanced stage in their work and that much work has already been done on that subject at the level of the FSB. In Sub-Saharan Africa, central banks have not focused extensively on climate change. We are eager to know more about the work that has been carried out by the FSB. Climate change related measures could also, perhaps, be on the agenda for future meetings. An area on which we must also focus is that of the application of technology in finance. The emergence of FinTech represents an opportunity for Africa. Advances in areas of finance-related technology, such as blockchain, mobile payments and Artificial Intelligence are opening up new possibilities for financial service firms. This is an area where regional cooperation will be of paramount importance. The setting up of the FinTech Association will give the impetus to position Mauritius as a Regional Hub for that industry. Ladies and gentlemen, our common ambition is to transform Africa into an innovative and technologically-enabled continent. However, as regulators, we have an important role to play in fostering innovation. It is our responsibility to ensure that banks operate safely and comply with applicable laws. This is why we must ensure that our regulatory and supervisory structures remain effective by constantly adapting them to changing technologies and business models. Since 2017, banks are allowed to have recourse to cloud-based services subject to the fulfilment of certain conditions. Our approach is one of open-mindedness. We indeed welcome change by banks. But this change is welcome so long as banks are able to demonstrate that risks are being appropriately and adequately managed. Our staff will make a presentation on cloud-based 3/4 BIS central bankers' speeches services in this meeting. I look forward to some stimulating debates for our common benefit. Ladies and Gentlemen, I am convinced that our agenda will stimulate exciting and constructive discussions. The presence of our partners from the IMF, World Bank and the FSB can only enrich the debate. Let me end by quoting Timothy Geithner, the 75 th US Secretary of the Treasury who served under President Barack Obama. I quote: “Looking past the immediate crisis, a more resilient system must be built on stronger and better designed shock absorbers, both in the major institutions and in the infrastructure of the financial system ”. Unquote. Ladies and gentlemen, this is for what we must ultimately aim. Along these lines, I wish all of you a pleasant stay in Mauritius and fruitful deliberations over these two days. I invite those of you who have some spare time to experience the beauty of our island. Thank you. 4/4 BIS central bankers' speeches | bank of mauritius | 2,019 | 6 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Continental Seminar of the AACB for the year 2019, Balaclava, 6 May 2019. | Yandraduth Googoolye: Renewed protectionist tendencies - some implications for macroeconomic policy in Africa Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Continental Seminar of the AACB for the year 2019, Balaclava, 6 May 2019. * * * Deputy Governors Mr Papa Lamine Diop, Executive Secretary of the AACB Delegates from member central banks Ladies and Gentlemen Members of the media Good Morning and a warm welcome to you all in Mauritius for this 2019 AACB Continental Seminar. This is the first time that the Bank is hosting this event. We are pleased to have participation from 24 member central banks and 12 institutions. I am given to understand that we have about 70 participants. The large turn-out demonstrates the importance of the chosen theme. The Bank of Mauritius has participated actively in AACB meetings and activities over the past years. Mr Diop, who is with us today, can bear testimony to this. We hosted the Governors’ meetings of the AACB Eastern Africa sub-region in July 2007 and July 2008 and we also hosted the AACB Annual Meetings in August 2013 in our capacity as Vice – Chair of the Association. Last year, as Chair of the sub-region, the Bank hosted for the third time the Governors’ meeting for the Eastern Africa sub-region. The theme for this 2019 Continental Seminar: ‘Renewed Protectionist Tendencies: Some Implications for Macroeconomic Policy in Africa’ is highly pertinent and topical. In its latest Regional Economic Outlook for sub-Saharan Africa, the IMF has estimated growth to pick up from 3 percent in 2018 to 3.5 percent in 2019. The economic recovery under way is a positive development. However, one can reasonably argue that current and expected growth levels are somewhat inadequate to lift millions of people out of poverty and provide decent jobs to an estimated 20 million new entrants to labour markets each year. The IMF has also cautioned against downside risks stemming from heightened trade tensions, slower growth in China, lower commodity prices, and tighter global financial conditions, which could lower growth in sub-Saharan Africa by 2 percentage points this year. As expected, the impact would be more pronounced for commodity exporters and countries with stronger links to China and global markets. A review of the performance of African countries with respect to the African Monetary Cooperation Program criteria in recent years indicates clearly that African countries are not building adequate fiscal and external buffers to cope with a range of shocks – both internal and external. Our economies rely too much on mineral resources and agriculture. They also face significant infrastructural gaps and have fragmented markets. Regional integration is also relatively low. Africa is far more dependent on overseas trade than any other economic region or global player. The fact is that Africa is integrated asymmetrically in global trade. Originating mainly from 1/3 BIS central bankers' speeches resource-rich countries, African exports are concentrated in raw materials and agricultural products. These range from crude oil, gold and diamond to cocoa and timber, fruits and nuts, copper, natural gas, cotton, iron ore, uranium, just to name a few of these. Imports are mainly dominated by capital goods. Openness to trade brings many benefits to the supply side of the economy. That is why we cannot but welcome the African Continental Free Trade Area agreement which, once completed, will establish a market of 1.2 billion people with a combined GDP of 2.5 trillion dollars. The agreement could significantly boost intra-African trade whilst promoting foreign direct investment and technology transfers. This can potentially raise the competitiveness of African economies and enhance their integration into the global economy. Before the global financial crisis, trade growth has been a major engine of global growth and an enhancer of living standards worldwide. The integration of economies into global trade, notably through participation in global value chains, has improved incomes. It has also moved millions of people out of poverty. Since the crisis, trade has generally lagged behind output growth. Some economies have borne the brunt of open trade. A number of them have been running a persistent trade deficit and have been facing intense competition. We have also witnessed scenarios of protectionism resulting in an increase in non-tariff barriers. The anti-globalisation sentiment which emerged since the crisis has been gradually cemented through what has been termed a “trade war", leading to a broader reversal of globalisation. Some economies have even announced retaliatory measures. Recourse to trade protectionism has been posited to foster recovery from economic downturns. This, by creating barriers aiming at protecting the economy from the negative impacts of open trade and improving their trade balances. Ladies and gentlemen, protectionist measures impact on the free movement of goods and services and they obviously affect economic performances across the world. Higher tariffs have an effect on growth and inflation whilst influencing financial conditions, expectations and confidence in the near to medium term. For us central bankers, such elements can influence the conduct of monetary policy. Higher tariffs could translate into higher import prices and these could increase firms’ production costs. This could ultimately reduce households’ purchasing power. Ultimately, depending on the severity of these impacts, they would weigh on consumption, investment and employment, which could negatively affect the GDP performance. The uncertainty about growth prospects is bound to postpone investment decisions. This is something that we would never wish to see. Barriers to trade would also cause both productivity and potential output to decline. What this means is that protectionism does matter for central bank policy. And that is why this Seminar will enable our participants to ponder on the implications of protectionism. Before I end, allow me to quote former US President Barrack Obama… I quote: “There are legitimate concerns and anxieties that the forces of globalisation are leaving too many people behind – and we have to take those concerns seriously and address them. But the answer isn’t to turn inward and embrace protectionism. We can’t just walk away from trade”. Unquote. Ladies and gentlemen, there cannot be winners in trade wars. Protectionism is not the right answer to the economic challenges that some economies are witnessing. On this thought, I wish you all fruitful deliberations. I look forward to your report for consideration of Governors at the 2019 AACB Annual Meeting 2/3 BIS central bankers' speeches scheduled on 01 August 2019 in Kigali, Rwanda. Thank you. 3/3 BIS central bankers' speeches | bank of mauritius | 2,019 | 6 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Correspondent Banking Academy hosted by Standard Chartered Bank, Port Louis, 27 May 2019. | Yandraduth Googoolye: The importance of promoting and safeguarding correspondent banking Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Correspondent Banking Academy hosted by Standard Chartered Bank, Port Louis, 27 May 2019. * * * Distinguished Guests Ladies and Gentlemen Good morning It is a great pleasure to be in your midst today. I wish to thank Standard Chartered Bank (Mauritius) Ltd for having organized this Correspondent Banking Academy and for inviting me to share my thoughts with you. I understand that the Academy was launched in 2015. The Standard Chartered Group has already reached out to more than 1,000 banks in over 70 countries through such academies. As an internationally active bank with a presence in more than 60 markets around the world, Standard Chartered Bank is an excellent launch pad for this session on correspondent banking. Events such as these offer valuable opportunities for stakeholders to engage and share ideas. Respondent banks will be provided with unique insights on the expectations of a global player offering correspondent banking services. I would, therefore, urge bankers to make the most of this initiative. It will help them clear out any doubts they may have on correspondent banking facilities. Correspondent banking is as old as international finance. It is the lifeblood of international payments and financial flows, and provides vital support to economic growth and development. Global trade, remittances, portfolio and direct investment flows, and even humanitarian financial flows across countries are fundamentally dependent on correspondent banking services. Today, more than ever, our financial system is inextricably linked with those of other countries. As with any other products offered by banks, the provision of correspondent banking services entails certain risks. These risks stem predominantly from AML/CFT. In the recent past, several international banks have been fined heftily for shortcomings in their AML/CFT controls and processes. As this line of business carries high volume but a thin margin, many banks have reconsidered their involvement in correspondent banking services. International banks have indicated that the cost of compliance dwarfs the business returns from smaller territories, particularly if these are classified as high-risk clients and deal with high-risk products. The Financial Stability Board had previously highlighted that the corridors for correspondent banking services were shrinking on a global basis.1 Fewer institutions are now providing such services. However, given that the volume of transactions is not declining, this development is increasing the concentration risks posed by the reliance on only a few institutions. The strategy of many international banks to retreat from the provision of correspondent banking services has resulted in unintended consequences. Many banks have even shunted jurisdictions by closing down their operations or disposing of them to other local players. Emerging markets and developing economies are most affected by such moves. I need not delve on the turmoil our continent could face if deprived of access to correspondent banking services. The implications would be on several fronts, including trade, economic prospects, education, health, and poverty. Only two weeks ago, I had pointed out during the 2019 AACB Continental Seminar that Africa is 1/4 BIS central bankers' speeches far more dependent on overseas trade than any other economic region or global player. Correspondent banking has therefore a particular resonance to the continent. In 2018, the World Bank released a report on the decline in access to correspondent banking services in emerging markets.2 The report highlighted that de-risking has had cross-border spill over effects, especially in the Southern African Development Community. Pan-African banks have been under pressure from their correspondents to refrain from conducting certain businesses with neighbouring countries to preserve access to correspondent banking services. Consequently, USD clearing has been terminated or restricted in several countries. This has in turn further weakened some local economies. The report also stated that there are concerns that de-risking has resulted in the creation of new, informal channels. Money is now flowing through these channels, driving financial transactions outside regulated channels. This development could potentially undermine AML/CFT objectives. One of the suggested avenues in the World Bank Report to address the issue is to establish or maintain open channels of communication between correspondent and respondent banks. The aim is to increase the awareness of both correspondent and respondent banks on the country context and their respective AML/CFT concerns. The initiative of Standard Chartered Bank to host today’s event is indeed commendable. We all share a common goal: that of safeguarding the financial system from abuse. The Correspondent Banking Academy constitutes an excellent communication platform between Standard Chartered Bank (Mauritius) Ltd with its respondent banks and vice versa. It facilitates fruitful exchange of experience and action plans put in place to address the AML/CFT concerns in correspondent banking relationships. It is my hope that today’s engagement will cement more progress in this area. One of the key takeaways for respondent banks should be the specific measures they can implement to reduce both their perceived and actual risk profiles to the satisfaction of correspondent banks. At the level of the Bank of Mauritius, our approach has been characterized by an open door and open dialogue policy. We are ever ready to have an open dialogue with correspondent banks to explain the supervisory framework in Mauritius and give reassurance on its robustness. AML/CFT is one of the key priorities for Mauritius and the Bank of Mauritius. As you are certainly aware, the Mutual Evaluation Report (MER) of the assessment of the AML/CFT measures of Mauritius was published by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) in September 2018. The MER revealed that Mauritius had not done enough to keep up with the changes which the FATF brought in 2012 to the International Standards on combating money laundering and the financing of terrorism and proliferation. Following the revision of the FATF Recommendations in 2012, the assessment of compliance with the FATF Recommendations is not limited to technical compliance and the forty recommendations made. It also involves an assessment of the effectiveness of a country’s AML/CFT systems with a view to ascertaining whether the country’s “financial systems and the broader economy are protected from the threats of money laundering and the financing of terrorism, thereby strengthening financial sector integrity and contributing to safety and security.” I must say that even before the publication of the Mauritius MER in September 2018, Mauritius had already started bringing legislative amendments to various pieces of legislation—including the Financial Intelligence and Anti-Money Laundering Act and the Banking Laws—to address the deficiencies. New regulations were promulgated under the Financial Intelligence and Anti-Money Laundering Act in October 2018, which mirrored the provisions of the FATF Recommendations. Following these legislative changes, Mauritius submitted an application for Technical Compliance Re-rating of 12 recommendations, among which 11 were successfully upgraded. 2/4 BIS central bankers' speeches Just last week¹, two new pieces of legislations were voted at the National Assembly. These are the United Nations (Financial Prohibitions, Arms Embargo and Travel Ban) Sanctions Bill, and the Anti-Money Laundering and Combatting the Financing of Terrorism and Proliferation (Miscellaneous Provisions) Bill. _____________________ ¹ Tuesday 21 May 2019 The legislation reinforces the arsenal of Mauritius in the fight against financial crimes. They will support the country’s second application for Technical Compliance rerating on 20 FATF Recommendations. These are clear testament of the progress made in addressing the deficiencies identified in the MER. Technical compliance with the FATF Recommendations, however, is not sufficient. Mauritius must also demonstrate that its AML/CFT systems and measures are effective. The fight against financial crime and AML/CFT is one that requires the involvement of all stakeholders. As a means of fostering closer collaboration amongst local authorities, two new MOUs were signed on 19 September 2018 among the Financial Services Commission (FSC), Bank of Mauritius and Financial Intelligence Unit (FIU) on the one hand, and the FSC, FIU and Independent Commission Against Commission, on the other hand. These two tripartite MOUs add to the gamut of existing bilateral and multilateral MOUs. In terms of coordinated actions with foreign authorities, we have, as of date, signed memoranda of understanding with some 17 supervisory authorities for sharing of information and collaborative actions. The Bank of Mauritius has also enhanced its internal supervisory framework on AML/CFT by setting up a dedicated AML/CFT team. We have upgraded the AML/CFT off-site monitoring supervisory toolkit through a revision of reporting requirements by banks. Further, with technical assistance from the World Bank, we are implementing a Risk-Based Supervisory Framework which includes a separate module for ML/FT risk. Significant progress has been achieved and we expect to conduct a series of pilot run exercises shortly to test the frameworks. Banks, on their part, are expected to migrate to risk-based internal audit framework to complement the risk-based supervisory framework. Concurrently, the Bank of Mauritius is working towards implementing a Central KYC Registry to facilitate the KYC procedure of banks. Ladies and Gentlemen, you will appreciate that no matter how elaborate, effective and comprehensive our regulatory and supervisory framework is, there will always be some element of residual risk that has to be managed by banks. Let me also underscore that the fight for a clean and attractive international financial centre like ours is the concern of one and all, and is an ongoing process. Your input is and will remain valuable as we continue to modernize our regulatory framework. We shall continue to work towards a financial system that is as safe as possible. You will remain a privileged partner in that process as we cannot achieve anything of substance without your cooperation. We look forward to continued collaboration with all of you as usual. With this final thought, I hope that by the end of today’s academy, we will have learnt from each other ways and means of improving our approach to strengthening the risk management framework for AML/CFT risks associated with correspondent banking relationships. On behalf of the Bank of Mauritius, and in my own name, I wish every success to this event. Thank you. 1 The Financial Stability Board. “FSB Correspondent Banking Data Report – Update Nov 2018.” 3/4 BIS central bankers' speeches 2 The World Bank. 2018. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions.” 4/4 BIS central bankers' speeches | bank of mauritius | 2,019 | 7 |
Address by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Launch of the Mauritius Central Automated Switch, Port Louis, 14 August 2019. | Yandraduth Googoolye: Mauritius launches Switch payments system to spur digital economy Address by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Launch of the Mauritius Central Automated Switch, Port Louis, 14 August 2019. * * * Honourable Pravind Kumar Jugnauth, Prime Minister Honourable Deputy Prime Minister Honourable Ministers Board directors of the Bank of Mauritius Your Excellencies Members of the Diplomatic Corp His Lordship, The Lord Mayor of Port Louis Former Governor, Present and Former Deputy Governors Chairman of the Mauritius Bankers Association Chief Executives of Regulatory Authorities, Banks, and Other Financial Institutions Members of the Press Ladies and Gentlemen Good afternoon. Thank you all for being here with us to mark another landmark in the Bank’s functions. We often associate central banking with monetary policy, financial stability, supervision and regulation of banks and deposit-takers, amongst others. However, we tend to minimise another major function of central banks: that of promoting a safe, secure, and efficient payment system. An efficient payments system reduces the cost of exchanging goods and services. It is indispensable to the functioning of the money and capital markets. The system is necessary to promote financial stability, assist in the conduct of monetary policy, and improve the efficiency of the financial system and the economy as a whole. Payment systems have always rested at the heart of the banking and financial system. Over time, they have evolved from the traditional narrow channel for transferring funds into a broader integrated network for creating additional forms of value. The establishment of networks and systems for retail payments has acted as a catalyst in supporting financial access in developing countries. Since independence, transactions in Mauritius have been primarily cash-based, with cheques being the only alternative to cash. The seed for a modern payment infrastructure for Mauritius was sown around 1995. In the first phase, an interbank fund transfer system in real time was implemented. This culminated with the implementation of a real-time gross settlement system on 15 December 2000, known as the Mauritius Automated Clearing and Settlement System (MACSS). The MACSS allows interbank transfer of funds and links electronically all banks operating in 1/4 BIS central bankers' speeches Mauritius as well as the Ministry of Finance to the Bank of Mauritius via a secure, reliable and efficient payment network. Effective 14 January 2009, the MACSS application was upgraded. It now has a more resilient architecture that supports multi-currency transactions. That is, we are able to settle payments not only in local currency but also in major international currencies, the first of its kind in sub-Saharan Africa at that time. The automation of the Port Louis Clearing House constituted the second phase of the modernisation of the payment systems. This phase required, as a pre-requisite, the standardisation of cheques using Magnetic Ink Character Recognition. This process was completed in 2003 and led to the electronic settlement of cheques. The last leg of the second phase consisted of carrying out clearing of cheques based on the electronic images of cheques, known as Cheque Truncation, and was completed in September 2011. Honourable Prime Minister, through this initiative, the Bank supports the development of Mauritius into a digital economy. MauCAS is a payment ecosystem designed to benefit all stakeholders of the payment industry, from end-customers to merchants and service providers as well as the Government. MauCAS will be a game changer in the way payments are carried out in Mauritius and creates many firsts in Mauritius: As the first national payment platform to operate round the clock, a feature attributable to a handful of countries in Sub-Saharan Africa, MauCAS effects retail payments outside official operating hours. This will change the dynamics of currency circulation in the country, reduce float in the system and allow banks and businesses to manage their liquidity more efficiently. It sets rolling the Instant Payments System, which will enable customers to effect transfers between any two accounts in any two institutions within seconds. Instant Payment services will also comprise instant direct debits and credits. It introduces the concept of dissociating an account from a payment service. Thus, any person can avail the service offered by any operator, bank or non-bank, and tie it with an existing account in another bank. This will allow new payment services to emerge while letting banks maintain their customer base. MauCAS allows non-bank payment service operators to access selected account details of their customers in banks through the Bank of Mauritius under strict security norms. This provision represents our adherence to the European Payment Service Directive 2, which sets the legal framework for banks to open their core banking systems through application programming interfaces (APIs). MauCAS which is API enabled, will permit operators to come up with open banking solutions. It introduces the concept of payment through Alias, where customers make payments through easy to remember pseudonyms such as email addresses while keeping account numbers safe and secure. The Alias feature of MauCAS will be managed centrally by the Bank of Mauritius. It initiates nationwide bill payment facilities where billers such as utility companies will digitally interface with MauCAS to upload their billing information. Service providers will be able to tap on such information to provide embedded services to their customers. MauCAS allows the sharing of ATMs as well as other value-added services. Government can use this technology to issue special purpose cards for transport and for the provision of social benefits. Similarly, other sectors of the economy can embark on this facility and avoid issues associated with the handling of physical cash. We expect MauCAS to contribute to: 2/4 BIS central bankers' speeches Lower transaction costs. MauCAS will act as a direct intermediary between operators to bring about the much needed efficiency and will charge much lower routing fees to operators, bringing down the cost of payments. Reduce operating costs. As the central payment infrastructure, MauCAS allows operators to connect through low-cost interfaces such as APIs. Operators that target the domestic card segment will gain from reduced operational costs, which will be expected to be passed on customers. Increase the number of payment operators. MauCAS will encourage the flourishing of payment services providers through the provision of more electronic payment options which will develop products that leverage on the switch as a service infrastructure. The Bank of Mauritius is providing a level playing field for bank and non-bank operators, which will offer a variety of novel services to customers. Support E-government services. MauCAS will offer government a national payment gateway to set up services on the MauCAS platform to boost the acceptance of electronic forms of payments for all government agencies and deliver online services. The idea of a payment switch germinated some time in 2010, but it was not until an amendment to the Bank of Mauritius Act in 2015 that the ground work began. The pathway to MauCAS was not without thorns. Throughout our journey, the Bank was subject to a number of criticisms and indirect pressures to discourage it to move forward. Please allow me to rebut some of those criticisms. There was a fear that the Bank would be competing with banks and other operators. Ladies and Gentlemen, no responsible central bank will ever attempt this. The Bank has national interests above all. With MauCAS, the Bank aims to ensure that our payment system is up-to-date and in line with Digital Mauritius. The involvement of the Bank in the setting up of MauCAS emanates from the Bank of Mauritius Act and the National Payment Systems Act. The Bank is mandated to oversee as well as own payment schemes. The perception of collusion or conflict of interest does not arise as the Bank will have separate teams for operations and oversight. The Bank has always adopted an enabling approach with regard to new technology in order not to stifle innovation. MauCAS is a testimony of the Bank’s commitment towards maintaining an innovative, yet secure, payment system ecosystem. The launch of MauCAS is not the end in itself. It is the start of a fantastic journey. The Bank will go around improving the system and adding new features. The Bank intends to establish bilateral ties with switch operators from other countries with a view to bringing down the cost of transactions for trade in goods and services, including for tourism purposes, with these countries. The creation of a payment card for the islands in the region is another project that will contribute to higher trade among these countries. The Bank has other projects in the pipeline for the benefit of financial institutions and the public at large. On the regional front, Mauritius is already a member and host of the COMESA Regional Payment and Settlement System (REPSS). MauCAS may serve as a regional switch to the participating countries. It can be used for cross border retail payments through mobiles and cards, with settlement being carried out on REPSS. Honourable Prime Minister, in your 2016/17 Budget Speech, you mentioned that the Bank of Mauritius will come up with a National Payment Switch as well as introduce a National Payment Bill. Both have materialised under your guidance and support. Testing but interesting times lie ahead as digital transformation brings about fundamental changes in working modes and business models of the financial sector as well as changing 3/4 BIS central bankers' speeches customer preferences. Such openings can be but beneficial to our society and economy. We must not only take advantage of the opportunities but also be alert to manage any accompanying risks. Now that the Bank is launching MauCAS, I invite banks and non-bank operators to make extensive use of this platform. The opportunities to develop new payment services are immense. Both payment service providers as well as consumers stand to gain from this modern system. Operators in Fintech can also leverage this platform to launch new products and services. This journey would not have been as fruitful without the support of our partners, banks and other economic stakeholders. I thank all Chief Executives of banks for their assistance and cooperation to deliver on MauCAS, which will benefit one and all. Last but not least, I thank the Bank’s Board of Directors, my two Deputy Governors and the staff of the Bank for their guidance and hard work. Thank you. Payment systems have always rested at the heart of the banking and financial system. Over time, they have evolved from the traditional narrow channel for transferring funds into a broader integrated network for creating additional forms of value. The establishment of networks and systems for retail payments has acted as a catalyst in supporting financial access in developing countries. 4/4 BIS central bankers' speeches | bank of mauritius | 2,019 | 8 |
Keynote address by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Seminar on "International Financial Reporting Standards (IFRS 9) - Implementation Issues", Ebène, 19 August 2019. | Yandraduth Googoolye: International Standards (IFRS 9) - implementation issues Financial Reporting Keynote address by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Seminar on "International Financial Reporting Standards (IFRS 9) - Implementation Issues", Ebène, 19 August 2019. * * * Ladies and gentlemen Good morning. I thank Mr Abdoul Aziz Wane, the Director of AFRITAC South and the Africa Training Institute, and Mr Ravi Mohan, Resident Advisor, for inviting me to address you this morning. The AFRITAC South (AFS) has been instrumental in promoting capacity building in this side of the continent. It has hosted a few seminars on International Financial Reporting Standards (IFRS) for countries in Sub-Saharan Africa to enable them to prepare for the implementation of IFRS9. In case you are not aware, the origin of these seminars was from a suggestion made by the Bank of Mauritius at one of the Steering Committee meetings of the AFS. Let me thank the AFS for its efforts to build capacity in this region. With the onset of the global financial crisis more than a decade ago, bank supervisors were heavily criticised for having failed to spot the risks building up in the financial system and the inadequacy of provisions made by banks. The incurred loss model of provisioning came under heavy criticism, as it resulted in too little provisions too late. In the midst of public backlash, the International Accounting Standards Board was faced with the need to review the provisioning methodology to make it more forward-looking. This triggered the development of the expected loss model under IFRS9. IFRS9 is a complex accounting standard. It relates to financial instruments and requires great deal of understanding and application on the part of prudential supervisors and auditors of financial statements. Intricately connected to IFRS9 are two other accounting standards, namely IFRS7 (Financial Instruments: Disclosures) and IFRS13 (Fair value measurement of financial instruments). This seminar, I understand, covers important aspects of these three standards. Rest assured, I will not go into the details but leave it to the experts to delve into the technicalities of IFRS9. It is essential that supervisors and regulators are well aware of the underlying concepts of IFRS9. They need to be equipped with the right tools and techniques to conduct supervision of banks and financial institutions in the most effective way. It is only then that they will be able to gain adequate insights into the implications of IFRS9 on credit risk models and blend the IFRS9 requirements with existing methods and models used for risk and regulatory purpose. Given the complexities of IFRS9, many jurisdictions still consider that it can be very beneficial to share country experiences on implementation issues and challenges. Allow me, ladies and gentlemen, to share the experience of Mauritius in the implementation of IFRS9. I will also brush over some of the recent developments in the regulatory and supervisory framework of the jurisdiction. Experience on implementing IFRS9 As an International Financial Centre, Mauritius is committed to adopting international standards and best practices. IFRS9 became effective since January 2018 in Mauritius. To meet the deadline of January 2018, the preparatory work for the execution of IFRS9 started as early as 1/3 BIS central bankers' speeches 2016. The Bank of Mauritius introduced a programme to closely monitor progress by each bank and non-bank deposit-taking institution in implementing IFRS9. As from March 2016, the Bank of Mauritius held a series of consultations with external auditors and banks to ensure smooth execution of IFRS9. Regular meetings were held with each licensee to discuss their execution plans and the potential impact of the new standards. The central bank started requesting for quarterly progress reports from concerned institutions to monitor progress. In the light of the complexities involved, these institutions were requested to complete a comprehensive survey, where they were asked details about the impact of IFRS9 on their profitability and capital adequacy as well as the expected completion date. The survey revealed that the increase in provisions would generally range between 2 to 87 per cent, with an average increase of 18 per cent. Eight banks out of a total of 21 reported that there would not be any increase in provisions. The predicted impact on the Capital Adequacy Ratio ranged from 0.1 per cent to negative 2.20 per cent, with an average impact of negative 0.48 per cent. The survey also revealed that banks used varying models to estimate credit losses given that IFRS9 is a principles-based standard and thus was not prescriptive on the calculation of the expected losses. However, judgement was required in choosing forward-looking parameters for the model used and in identifying significant increase in credit risk. The Bank of Mauritius was aware that banks might lack the required historical data on defaults in order to estimate losses accurately. This might partly explain the varying potential impact of the standard on the provision required by banks. Conscious of the challenges ahead, the Bank of Mauritius revised its Guideline on Credit Impairment Measurement and Income Recognition, which will come into effect as from 1 January 2020. To ensure consistency and address the concerns on modelling risk, the Guideline sets regulatory floors for provisioning. That is, when a financial institution makes accounting provisions lower than the regulatory floors, the shortfall will be accounted for either through additional provisions or a charge to the equity of the financial institution. The Bank of Mauritius is equally considering the possibility of a phase-in period of one year for provision levels to be met so that financial institutions have ample time to make the necessary adjustments. In March 2019, the Bank of Mauritius conducted a workshop on IFRS9 in collaboration with the Mauritius Bankers Association and a consultancy firm. The Bank of Mauritius has also hired a Consultant to train supervisors on IFRS9 and to assist in the development of a set of IFRS9 returns to be submitted by the financial institutions. The returns will capture data on the calculation of expected credit losses under IFRS9 and on governance as well as the model’s methodology and set of assumptions. The draft returns are expected to be finalized shortly. Recent developments Ladies and gentlemen, as we now reach the second part of my remarks, I will provide an overview of some of the recent developments in the regulatory and supervisory landscape in Mauritius. The Bank of Mauritius is actively working on the modernization and consolidation of its supervisory framework. We have embarked on the implementation of a full-fledged risk-based supervisory framework. Our supervisory approach is evolving from a compliance-based framework to a risk-based framework, which is expected to be completed by end-2020. A separate module on Money Laundering/Fighting against Terrorism risks is being incorporated in our risk-based supervisory framework. The Supervision Department now has a dedicated unit to monitor Money Laundering/Fighting against Terrorism risks in the banking sector through offsite surveillance as well as on-site examinations. 2/3 BIS central bankers' speeches Many of you might be aware of the Mutual Evaluation Report published by the ESAAMLG in September 2018 on the assessment of the AML/CFT measures of Mauritius. We have since made significant strides in addressing the deficiencies highlighted in the Report. In a follow-up Mutual Evaluation Report published in April 2019, the ESAAMLG concluded that Mauritius has made significant progress in resolving the technical compliance shortcomings. Further, Mauritius submitted an application for Technical Compliance Re-rating of 12 recommendations, of which 11 were successfully upgraded. The Financial Services Commission, the Bank of Mauritius and the Financial Intelligence Unit closely collaborate to fight financial crime. A memorandum of understanding between the three regulatory institutions was signed last year. The central bank is currently working on the establishment of a Deposit Insurance Scheme. The legislation was approved by Parliament and received Presidential Assent in April 2019. However, it is yet to be proclaimed. The central bank has already started working on the operational aspects of the Scheme, which will guarantee coverage to eligible depositors up to a specific amount. At the same time, we are also working on a crisis resolution framework. Collaboration with Supervisory Authorities Many jurisdictions represented here are host to Pan-African banking groups and Mauritius is no exception. Some of our local banks have also extended their footprint on mainland Africa. Home and host authorities are increasingly required to work closely for effective supervision of banks. The Bank of Mauritius has signed Memoranda of Understanding with 17 foreign regulatory authorities, which include banking sector regulators of Kenya, South Africa, Nigeria, to name a few. Consolidated supervision is now part of our supervisory toolkit and is conducted on a regular basis. Home and host regulators are able to share their insights on the risk management framework of banking groups in supervisory college meetings. New areas such as cyber risks are closely monitored. In March 2019, the Ombudsperson for Financial Services was appointed. Complaints from consumers of financial services against financial institutions licensed by the Bank of Mauritius and the Financial Services Commission are now handled by the Ombudsperson’s Office. This is expected to fast-track complaints resolution. It is also incumbent on the Office of Ombudsperson for Financial Services to inform and educate the general public on investments in financial services offered by financial institutions. My address will be incomplete if I do not mention the significance of corporate governance in banks. Although a risk-based supervisory framework will ensure the strength and credibility of our financial system, it cannot eliminate the possibility of failure of an institution. I constantly remind my officers to keep a close watch on the governance practices of banks. It is an advice that I extend to all of you. Concluding note I am sure that the seminar will provide you with a good insight into the challenges of implementing IFRS9 as well as key takeaways from the experiences of other countries. Learning from others’ experience will undoubtedly assist you all to improve your own supervisory practices. I am delighted to open this Seminar on “International Financial Reporting Standards: Implementation Issues” and wish you all fruitful deliberations. Thank you. 3/3 BIS central bankers' speeches | bank of mauritius | 2,019 | 8 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, on the occasion of the celebration of the centenary of the presence of Barclays in Mauritius, Port Louis, 15 November 2019. | Yandraduth Googoolye: The need for banking and finance to evolve through technology and innovation Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, on the occasion of the celebration of the centenary of the presence of Barclays in Mauritius, Port Louis, 15 November 2019. * * * The Chairman and Board Members of Barclays Bank Mauritius Limited Mr Ravin Dajee, Managing Director Distinguished Guests Ladies and Gentlemen Good Evening I wish to thank Barclays Mauritius, which is now part of Absa, for inviting me on this auspicious occasion which is the celebration of the hundred years of presence of Barclays in Mauritius. Soon to be renamed Absa, Barclays Bank Mauritius Limited has itself been through a series of changes of name such as Barclays Dominion, Colonial & Overseas, Barclays Bank International, etc. This event underlines the rich history of our banking industry. Barclays is the second oldest bank in the country, though Mauritius has been an international trade and financial centre as far back as the 17th century. If you want to know more about our financial history, there is very interesting book entitled “From Piastre to Polymer” which was issued in 2018 in the context of the Golden Jubilee of the Bank of Mauritius. Some of the banknotes and coins used in those days are in our currency museum, which I invite you to visit. Ladies and gentlemen, history shows how players succeed when they know how to adapt to evolution and when they respond adequately to the needs of customers and clients. Institutions also thrive in a competitive environment when they do not fear to embrace change and when they come forward with innovative products and services. Barclays Bank has an enviable track record in Mauritius, which goes much beyond the anecdotal dimension. It is a bank that can pride itself of having narrowly missed the First World War, of having gone through the Second World War, and sailed through economic crises. Barclays is now fighting on all fronts across the global banking sector. Ladies and gentlemen, over and above being the owner of the building with the first lift in Mauritius, Barclays has a rich history filled with many firsts. I would like to highlight some milestones: First foreign bank to start operations in Mauritius that is still going strong… First bank to employ ladies in Mauritius… with the ratio of female employees currently standing at 56 per cent First bank to employ people with disabilities… First bank to obtain an offshore banking licence… I remember this very well as I was closely associated with the issue of the licence itself. The banking law was revised in 1988 and proclaimed in 1989. The first licence was subsequently issued to Barclays in May 1989. Further, Barclays was the first bank to set up a branch in Rodrigues. This fact must be 1/3 BIS central bankers' speeches underlined as it shows Barclays’ willingness to be at the forefront of serving all the citizens of Mauritius, irrespective of the geographical boundaries. And, as we speak of Rodrigues, I would like to thank Barclays for having carried out operations there for and on behalf of the Bank of Mauritius until we opened our office in 1999 on the island. Were it not for this invitation, I would have been in Rodrigues tonight in the context of the Interclub Youth Championship. This is an event sponsored by banks and spearheaded by the Bank of Mauritius. Ladies and gentlemen, it is a fitting moment to pay tribute to someone who has played a critical role in the success of Barclays in Mauritius. Mr Jacques de Navacelle, the first non-British CEO, must be thanked for having believed in the potential of Mauritius and for having persevered to grow the business instead of closing it down. Were it not for his efforts and those of the staff he led, Barclays would not be celebrating 100 years in Mauritius. My thoughts also go to some former British MDs of Barclays whom I have known personally, including Mr Ian Knapman, Mr P. H. Noble and Mr Andrew Fair. I also vividly recall Mr Dajee joining Barclays as Corporate Director and his appointment as Managing Director of Barclays Mauritius. Barclays must be congratulated for its pioneering stance on the social front and for its contribution towards building a better, healthier and more inclusive society. Barclays has not forgotten that a bank is not only a key driver of economic growth but also an enabler of positive change in the community. This is a role that banks must always bear in mind in their business strategies so that they always put customers and citizens at the centre of everything they do. The social mission of banks is something about which the Bank of Mauritius regularly reminds stakeholders. Since its establishment in 1967, the Bank of Mauritius has been actively working for the socio-economic development of the country. As regulator and facilitator, the Bank of Mauritius has been accompanying banks in their transformative journey. Though the oldest banks in Mauritius have had a longer journey than the other banks and even the central bank, there is still a very long way to go! Though Barclays is licensed primarily by the Bank of Mauritius, it is also regulated by the Financial Services Commission for some of its activities. Its business is thriving and its contribution to the financial sector is expected to grow further over time. Banks should invest to tap the local as well as the regional market further to expand the contribution of the financial sector to GDP, from its current level of around 12 per cent. Ladies and gentlemen, the Bank of Mauritius makes forecasts but it can’t predict the future. Yet, the only certainty which can shape our steps is that there is an urgent need for the banking and finance industry to reinvent itself if it wants to stay relevant in an increasingly competitive global environment and with rapid digitalisation of banking business. In this regard, the Bank of Mauritius wants to give an even greater dimension to our competitiveness and resilience through technology, discipline and innovation. Barclays, from what I understand, has been very busy lately in the area of Fintech and blockchain. Barclays has a Tech Forum consisting of leading Fintech and IT professionals. Last year, it has filed two patents on Secure Digital Data Operations and Data Validation and Storage system with the U.S. Patent and Trademark Office. I therefore invite the Management of Barclays Mauritius to support the Bank of Mauritius’ vision for the banking industry by contributing in terms of expertise and technology. The Bank of Mauritius has focused on modernising the banking infrastructure. Just a few months ago, we launched MauCAS, our Mauritius Central Automated Switch. Barclays will be joining the Instant Payment System next month and the Card Payment System early next year. MauCAS is a game changer that will open up new possibilities for banks, businesses and entrepreneurs. The new payments ecosystem will also allow for the participation of banks and non-bank operators. 2/3 BIS central bankers' speeches I am pleased to share that we are working on several ground-breaking projects that will propel our financial jurisdiction in a new era. I shall be sharing the details in two weeks’ time at our Annual Dinner with Major Economic Stakeholders. Do bear with me as I want to keep some surprises in store for that day… Ladies and gentlemen, the celebration of the 100 years of presence of Barclays in Mauritius is an opportunity for me to congratulate Barclays for its journey and to make the same wish for other younger banks and financial institutions. On behalf of the Board and staff of the Bank of Mauritius and in my own name, I wish a happy centenary to Barclays and I congratulate the Board Directors, the bank’s management and its employees for steering the venerable institution in a new century. I wish the very best to Barclays and Absa in their new Pan-African adventure. Ladies and gentlemen, I thank you for your attention. 3/3 BIS central bankers' speeches | bank of mauritius | 2,019 | 11 |
Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Annual Dinner for Major Economic Stakeholders, hosted by the Bank of Mauritius, Flic en Flac, 29 November 2019. | Yandraduth Googoolye: Shaping the new banking landscape defining the priorities and leveraging new technology to propel the Mauritian financial system forward Speech by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Annual Dinner for Major Economic Stakeholders, hosted by the Bank of Mauritius, Flic en Flac, 29 November 2019. * * * Your Excellencies Former Governor D. Maraye Chairman of the Mauritius Bankers Association Limited Chairmen and Chief Executives Distinguished Guests Members of the Press Ladies and Gentlemen It is an honour for me to welcome you tonight to this customary annual event of the Bank of Mauritius. This year, I will depart from the way I made my speech last year. I will not go over the Bank’s achievements, as these have been amply reported in the media. For those who want to refresh their minds, they may wish to visit the website of the Bank. Our accomplishments will also feature prominently in the Bank’s Annual Report which will be released shortly. We shall send you an electronic copy of the Report once it is released. I am pretty sure you are looking forward to hear my message tonight. Please feel free to share with me directly your comments and criticisms later. This space is too often filled by the media. It would be good, for a change, to hear about what stakeholders think. Ladies and gentlemen, Let me start with a statement that will be the weft of my discourse: ‘Much IS happening and much WILL happen!’ A look at what is happening in the world reminds me of Charles Dickens, whom I quote from his book ‘A Tale of Two Cities’: I quote: ‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity’. End of quote. You will agree with me that it befits our times, especially in the light of conflicting messages that we get all the time from all sides… High Inflation is worrying; too low an inflation is upsetting! Excess liquidity is dangerous, but lack of liquidity is as troubling; The exchange rate is never favourable, whether for exporters or for importers; The policy rate, when it is high, is not helping businesses and borrowers and, when it is low, it goes against those who want to save… I could go on and on with the never-ending dichotomy of views and criticisms. Indeed, it is a tale of two cities! Ladies and gentlemen, 1/5 BIS central bankers' speeches Let me draw your attention to some facts which are true cause for concern for us as policymakers. The global economic uncertainty has worsened. The IMF and the World Bank have revised down their global growth forecasts for 2019 and 2020. The economic environment is becoming more challenging. Monetary policy is becoming more and more accommodative, as many central banks—both from advanced and emerging market economies—have been cutting policy rates aggressively to nearly all-time lows while others have embarked on quantitative easing to support their economies. To complicate matters, debt levels in many countries are constraining fiscal manoeuvres. The fact is that there is lesser and lesser room for dodging the bullet in case of a global recession. Some are concerned that our policy rate, currently at 3.35 per cent, is at its alltime low. We are not alone in this low policy rate environment. This being said, there IS hope, ladies and gentlemen! Amid the global uncertainty and the materiality of downside risks, the Mauritian economy has remained resilient. Mauritius stands as a buoyant jurisdiction and is progressively growing into a leading international financial centre. In today’s unforgiving competitive environment, success is achievable only if the highest standards are maintained. On that front, I am blunt: There is NO compromise from our side! At the outset, let me reiterate that the Bank is pursuing its mission of preserving monetary and financial stability, whilst supporting Mauritius’ transition towards becoming a digital economy. Ladies and gentlemen, as a prelude to the second part of my speech, allow me to set a few elements in perspective… First, inflation. It reached a low of 0.7 per cent in October 2019 and is expected to remain below 1 per cent in the coming months, before rising to an estimated 1.5 per cent in 2020. Second, the excess rupee liquidity has dropped to tolerable levels thanks to the Bank’s costly open market operations. Third, monetary policy is currently highly accommodative and is expected to support the economy going forward. It will help the economy sail through the choppy waters of global economic slowdown. In 2018, I announced a shift in the monetary policy operational target from the overnight interbank interest rate to the yield on 91-Day Bill. I am pleased to underline that, what was a long-overdue shift, has borne positive results in terms of steering short-term interest rates close to the policy rate. The Bank introduced the 28-Day Bank of Mauritius Bills in September 2019. Presently, a net amount of Rs2.8 billion has been issued to banks. This instrument has contributed significantly to improve liquidity management and ensure a smooth yield curve. There is a fourth element that I wish to highlight. I am speaking of climate change, which is fast emerging as a priority for many countries. The 2019 edition of the annual World Economic Forum publication lists extreme weather events, natural disasters, and failure of climate-change mitigation and adaptation among the top five threats most likely to occur in the next 10 years. Some 42 central banks and other regulatory authorities have set up the Network on Greening the Financial System. This forum focuses on climate risk management in the financial sector and fosters the transition toward a sustainable economy. There is a clear economic case for building resilience to climate change as it may directly affect financial institutions’ balance sheets. The Bank has included climate change on its agenda and I will encourage all of you to do the same. I intend to engage with banks on this issue in the near future and request them to consider to what extent climate change is, or can be, factored in their decision-making process. 2/5 BIS central bankers' speeches Last but not least, we are constantly improving our regulatory framework to better align it with international standards and reinforce the soundness as well as the attractiveness of our financial industry. The Bank is sparing no effort to support the country’s strategy to become a leading regional financial hub. In line with the country’s Africa Strategy, the development of regional payment facilities will be accelerated to transform Mauritius into a gateway for cross-border payments. Before proceeding to the second part of my speech, let me spend a few minutes on two specific issues. The quality of macroeconomic statistics is of utmost importance in policymaking. As the official compiler of external sector statistics, the Bank has to measure cross-border transactions and reflect them in the balance of payments and international investment position for Mauritius. The Bank has been conducting an annual Foreign Assets and Liabilities Survey (FALS) with entities from various sectors, which calls for specific information on our country’s foreign assets and liabilities. I strongly encourage all those entities to provide their responses accurately and in a timely manner. Let me now dwell on recent exchange rate developments, a topic on which I have been frequently solicited from various quarters. As I said at the post-MPC press briefing last Wednesday, the rupee has depreciated against the US dollar both in nominal and real terms since the beginning of 2019. This depreciation was mostly driven by the appreciation of the US dollar on the international market and partly by domestic economic conditions. Concerns regarding an overvaluation of the rupee at the beginning of the year have receded substantially. You will recall that the IMF has mentioned in several of its Article IV Consultation Staff Reports that the rupee was overvalued. This seems to have been corrected. I wish to also highlight that the Bank has not intervened at all on the FX market since mid-August 2019. This brings me to the second part of my speech which is about what WILL happen. I will now dwell on the core elements of the roadmap that the Bank has drawn to pave the way for a jurisdiction that fully embraces technology. The successful shift in the operational target of monetary policy has enabled us to lay down a solid foundation for a thorough revamp of the monetary policy operational framework. We propose to roll out a new framework next year, which is being reviewed to infuse greater dynamism into the money market and set the basis for a more reliable benchmark yield curve. As part of its new strategy, the Bank will strengthen its forward-looking monetary policy framework. The overall communication on monetary policy will be upgraded, complemented by more regular dialogue with stakeholders. These improvements will help anchor inflation expectations and enhance clarity on policy formulation and objective. Financial players, especially banks given their prominence in the sector, have an important role to play in the transmission mechanism of monetary policy signals to the economy. At my last meeting of the Banking Committee in October 2019, I had urged bankers to ensure that market interest rates are adjusted in a timely manner to changes in the policy rate in order to ensure the effectiveness of monetary policy. To boost the development of the FX market, the Bank is considering various measures, such as improving transparency on exchange rates, heightening efficiency on the FX market, and the adoption by the industry of the Global FX Code. These measures would enhance dynamism in the FX market and offer greater opportunities to market operators to manage net open positions and hedge exchange rate risks. A more dynamic 3/5 BIS central bankers' speeches money market, a likely consequence of the new monetary policy operational framework, will provide considerable support to the FX market and stimulate its development. Macroeconomic policies in the past few years have attracted FX inflows. There is, however, a need to address the numerous challenges facing the export sector given the weakening economic prospects in major exports markets. Structural reforms and measures to attract foreign direct investment in productive sectors are prerequisites to the strategy to rekindle the export sector. Ladies and gentlemen, the country’s foreign exchange reserves have attained an all-time high of USD7.3 billion. Though the current account remains in deficit, the capital and financial accounts of the balance of payments have steadily generated positive FX inflows which have helped to finance this deficit. The one-year level of import cover is a solid insulation against adverse external shocks. As you all know, the management of the central bank’s balance sheet has wide-ranging macroeconomic implications. The balance sheet comprises mainly FX reserves and monetary policy instruments. A strong and sustainable balance sheet position ensures that the Bank can fulfil its policy goals effectively. In the light of the low yield global environment and the high costs inherent to conducting monetary operations, the Bank has recently received technical advice for an optimisation of its balance sheet management. Further, the Bank intends to increase transparency in the conduct of its operations through additional disclosures in its financial statements. Ladies and gentlemen, the protection and consolidation of our financial industry’s ecosystem is a priority. We have strengthened the legal and regulatory frameworks through the issuance of new guidelines and enhancement of existing ones and the enactment of several key pieces of legislation. These pave the way for innovations in payment systems and the protection of consumers of financial products and services. [ The main ones are the National Payment Systems Act 2018, the Ombudsperson for Financial Services Act 2018, and the Mauritius Deposit Insurance Scheme Act 2019.] The Bank is also finalising the revision of the Bank of Mauritius Act 2004 and the Banking Act 2004. These revised enactments will modernise the central banking legal framework in sync with international as well as domestic developments. The upgrading of the banking laws and revisions of the regulations will help keep pace with the progress in this industry and fast evolving financial ecosystem. Cloud technology, artificial intelligence, cyber-security, Fintech, RegTech and SupTech are intricately linked to banking and cannot be overlooked. The crisis management and resolution framework, also embedded in the revised legislation, will ensure a reliable safety net for customers in the event of a banking crisis. The deposit insurance scheme and the centralised KYC will be rolled out in the near future. In the pursuit of financial stability, the Bank regularly assesses the soundness of the financial system and publishes a Financial Stability Report twice a year. Regular stress tests are carried out to gauge whether it can safely withstand a variety of extreme but plausible macroeconomic shocks. The Bank is moving to a full-fledged risk-based supervisory framework. Concurrently, the Bank has completed the enhancement of its risk-based supervisory framework for Anti Money Laundering and Combatting the Financing of Terrorism (AML/CFT). Alongside this process, the Bank is working on an outreach programme for the banking sector jointly with the Mauritius Bankers Association Limited and has also enhanced its interactions with other licensees. Work is ongoing with the OECD with a view to making Mauritius a stronger IFC. All stakeholders 4/5 BIS central bankers' speeches have to work closely for the benefit of the financial sector of Mauritius, especially within the parameters of the National Strategy for Combatting Money Laundering and the Financing of Terrorism and Proliferation 2019–2022. This strategy sets out the approach to tackle money laundering, terrorist financing and proliferation threats over the next three years. We are also closely engaging with banks and our licensees on compliance with AML/CFT requirements to ensure that all the risk mitigating systems are well in place. Speaking of the payment systems infrastructure, a notable achievement this year was the implementation of the Mauritius Central Automated Switch which combines the Card Payment System and the Instant Payment System. MauCAS provides an innovative digital platform that significantly broadens the range of financial services offered to customers. It also makes banking, e-commerce and mobile payments inter-operable, and promotes a ‘cash-lite’ society. We expect to on-board all banks on the platform over the next six months. I also invite non-bank stakeholders to leverage this new platform for channelling local payments. MauCAS will foster the emergence of Fintech start-ups and e-government initiatives. There are unprecedented opportunities to tap in this industry and its development will help shape digital Mauritius. To keep pace with international developments in the digital currency space, I have engaged discussions with some international institutions for the introduction of a central bank digital currency for retail and wholesale payments in Mauritius. We are determined to make our country a leader in the region, where a well-regulated central bank-issued digital currency becomes a reality. I am pleased to announce that, as part of its financial literacy strategy, and to contribute to the emergence of a new breed of Mauritian tech entrepreneurs, the Bank will launch early next year a Fintech competition. This competition will target college and university students and will serve as an incubator hub to develop apps that will benefit consumers of financial products and services. Cybersecurity remains paramount for the Bank. We are living in a world where cyberattacks on the banking industry are increasing and are being committed with more sophisticated tools. The Bank is already monitoring the SW IFT Customer Security Programme. It is conscious that additional tools and precautions must be taken by the industry as a whole. The Bank wishes to have an industry approach to this problem and proposes to come up with an enhanced cybersecurity framework for the banking industry. This framework will be based on the latest Bank for International Settlements and the Financial Stability Institute standards and principles. My vision is a banking landscape where technology will redefine bank-customer interaction. I want a dynamic banking landscape without impediments for mobility, flexibility, accessibility, and security. Let the future of the banking industry show the truth in the statement uttered by the great Charles Darwin. I quote: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change!” End of quote. Ladies and gentlemen, we need to own the change process of our country. Whether you are from the business community or from the media, you all have a determining role to play in sketching this new economic and financial landscape. I hope that you are as eager as I am to dive into the future! On that note, I take this opportunity to convey to you, on behalf of the Board of Directors, staff members of the Bank and in my own name, our warmest regards and best wishes for the upcoming festive period. I thank you for your attention. 5/5 BIS central bankers' speeches | bank of mauritius | 2,019 | 12 |
Keynote address by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Seminar on "Risk-Based Approach to AML/CFT Supervision", organised by the IMF Regional Technical Assistance Center for Southern Africa (AFRITAC South) in collaboration with the Bank of Mauritius, Port Louis, 21 January 2020. | Speech of Mr Yandraduth Googoolye, Governor, Bank of Mauritius, At the Seminar on Risk-Based Approach to AML/CFT Supervision organised by the IMF Regional Technical Assistance Center for Southern Africa (AFRITAC South) in collaboration with the Bank of Mauritius Aunauth Beejadhur Auditorium Bank of Mauritius Port Louis, Mauritius 21 January 2020 Ladies and Gentlemen, Good morning. I welcome you all to the Bank of Mauritius. It is my pleasure to deliver the keynote address at this seminar on Risk-Based Approach to Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Supervision organised by the IMF Regional Technical Assistance Center for Southern Africa, the AFRITAC South, in collaboration with the Bank of Mauritius. I must thank Mr Abdoul Aziz Wane, the Director of AFRITAC South, and Mr Ravi Mohan, Resident Adviser, for having acceded to my request to organize this seminar for the staff of the Bank of Mauritius and other competent authorities dealing with AML/CFT matters in Mauritius. I extend my appreciation to the experts of the IMF, who are here to share their extensive knowledge and rich experience to assist us in building supervisory skills in the area of AML/CFT supervision. This four-day Seminar will focus on the measures that AML/CFT supervisors should adopt to establish risk-based mechanisms, tools and practices to oversee the effectiveness with which their licensees manage their money laundering and financing of terrorism (ML/TF) risks. Indeed, the Financial Action Task Force (FATF) has laid a lot of emphasis on the implementation of a risk-based approach (RBA) to AML/CFT by all countries and jurisdictions in its International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued in February 2012. The foundation stone to an effective risk-based approach to AML/CFT is an enabling legal framework. Indeed, last year, the Ministry of Financial Services and Good Governance issued the National Strategy for Combating Money Laundering and the Financing of Terrorism and Proliferation. The first objective of the National Strategy is the strengthening of the AML/CFT Legal and Regulatory Framework by establishing a comprehensive legal and regulatory framework that is consistent with international standards and which is effective in mitigating money laundering and terrorism financing risks. On this score, I must highlight that Mauritius has spared no efforts to address the technical compliance deficiencies identified in the Mutual Evaluation Report published by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) in September 2018. The amendments brought to existing laws, the Financial Intelligence and AntiMoney Laundering Act (FIAMLA) amongst others, as well as the adoption of new laws and regulations have enable Mauritius to be rerated Compliant or Largely Compliant on 35 out of the 40 FATF Recommendations, including the 6 Core and Key Recommendations. This is indeed a remarkable achievement for our jurisdiction. I understand that the process is not over yet and Mauritius endeavours to obtain Compliant or Largely Compliant ratings on the remaining 5 FATF Recommendations. The National Strategy further clearly acknowledges in the mission statement that its aim is, I quote “To adopt a risk based approach to effectively protect Mauritius from the threats of money laundering and the financing of terrorism and proliferation.” Unquote. The adoption of a risk-based approach is therefore central to the effective implementation of the FATF Recommendations at the national level, be it by policy makers, supervisors, law enforcement authorities and regulated entities, amongst others. One may ask about the reasons underlying such a change in approach to AML/CFT. The reasons are simple: First of all, this approach is more flexible. Secondly, it allows for a more efficient application of resources. Third, it focuses on assessing and devising preventive measures commensurate to the nature of money laundering and terrorism financing (ML/FT) risks in financial institutions. Higher ML/TF risk therefore calls for higher intensity of supervision. Competent authorities can thus take informed decision on proportionate measures to mitigate the ML/TF risks that they have identified. Risk-based supervision is often contrasted with rule-based regulation, a more compliancebased supervisory approach limited to the verification of adherence to applicable rules, legislation, regulations or policies. Risk-based supervision, in contrast, goes much beyond the compliance approach. It focuses on the principles of sound risk management and on areas/institutions where the risks are higher. The completion of the National Risk Assessment (NRA) in August 2019 paves the way to the implementation of a risk-based approach to combating money laundering and terrorism financing activities, thus making AML/CFT Supervisors and regulated entities and individuals more effective in their efforts. The NRA Report aims at identifying, understanding and assessing the money laundering and terrorist financing risks faced by Mauritius, while its results provide valuable guidance to articulate policies and strategies to address the risks identified and to allocate our resources to areas that have the greatest impact in the fight against financial crime. While traditionally the financial sector was seen as the most vulnerable sector to ML/TF risks, in the face of heightened regulatory focus and more advanced AML/CFT legislation and procedures governing this sector, money launderers started to resort to the nonfinancial sector to conceal their proceeds of crime. In response, the FATF increased its focus on the Designated Non-Financial Businesses and Professions (DNFBPs) that have similar potential to financial institutions to be used for money laundering. Casinos, real estate agents, dealers in precious metals and stones, barristers, attorneys, notaries, accountants and trust and company service providers – referred to as the DNFBPs in the FATF Standards – are, since May 2019, subject to the same AML/CFT requirements and preventive measures as financial institutions regulated by the Bank of Mauritius and the Financial Services Commission. The need to enhance the regulatory and supervisory capabilities of the AML/CFT Supervisors of DNFBPs can, thus, only be underscored. Ladies and gentlemen, the scale and complexity of evolving financial products and technologies bring along new risks. To identify, evaluate, mitigate and monitor those risks, operators in the financial and non-financial sectors alike have to put in place robust risk management systems and ensure they are periodically upgraded. Obviously regulators and supervisors have to keep pace with the rapid evolution of risk associated with new services, technologies and products. These require new resources and regular upgrading of skills both among supervisors of the financial and non-financial sectors. Risk-based supervision is gradually taking precedence in AML/CFT supervisors’ approach around the globe. This approach is evidently much more data-centric and thus more demanding technically. Risk-based supervisory frameworks require AML/CFT supervisors to continuously identify, understand, assess and monitor the risk profiles of their licensees. These institutions are monitored both for compliance with the rules and how they approach and adopt risk management. Ladies and gentlemen, let me now say a few words on what the Bank of Mauritius has been doing on AML/CFT in recent year. The implementation of the risk-based approach was one of the key recommendations of the Mutual Evaluation Report of 2018 to enhance the effectiveness of the AML/CFT system. The Bank of Mauritius has spared no effort to set up an AML/CFT risk-based supervision framework. This innovative framework has been implemented with the technical assistance from the World Bank. To complement this initiative and to enhance its internal AML/CFT supervisory framework, the Bank has established a dedicated AML/CFT team within the Supervision Department. The Bank’s AML/CFT risk-based framework is based on a comprehensive set of quantitative AML/CFT returns submitted by financial institutions on a quarterly basis. The data inform the risk-based model in identifying the risk profile of financial institutions. The results of the risk-based supervision model determine the frequency and depth of supervisory monitoring. The surveillance is proportionate to the risk profile of financial institutions. As such, more intense and frequent supervisory reviews are conducted for institutions deemed as presenting higher risks The implementation of a risk-based approach should assist regulated entities in strengthening their institutional risk assessment, which is mandatory in terms of the FIAMLA. Furthermore, the adoption of this approach will create, both for supervisors and regulated entities, a convergence towards a common understanding of ML/TF risks. The Bank will also engage with the industry and develop outreach programmes to enhance compliance and understanding of the regulatory requirements. Ladies and gentlemen, let me now elaborate on the subject of training. Risk-based supervision requires a honing of supervisory skills to enhance supervisory judgment, as there is no one-size-fits-all approach for the AML/CFT supervision. This seminar is yet another endeavour of the Bank of Mauritius to increase the effectiveness of supervisory resources. The programme is tailored to provide you with vital insights into the concept of the risk-based approach, the variety of risks confronting financial systems, understanding money laundering and terrorism financing risks as well as adapting supervisory practices to the findings of the NRA for Mauritius. The experts will take you through this interesting journey over the next few days. Ladies and gentlemen, in an era where money laundering and financing of terrorism are real threats, appropriate and timely action by competent authorities is crucial. This training, therefore, comes at an opportune time, when the implementation of the AML/CFT risk-based approach ranks high on the agenda of all AML/CFT Supervisors in Mauritius. Let me conclude by inviting all participants to ponder upon this statement of the FATF. I quote: ‘the risk-based approach to AML/CFT supervision is not a ‘zero failure’ approach, as financial institutions may, in spite of all the reasonable measures taken to identify and mitigate risks, still be used for ML/TF purposes.’ Unquote. We supervisors are fully aware that the perfect supervisory regime does not exist. It is, however, our duty to aim for optimal results by adopting methodologies that make full use of our supervisory resources and skills. Ladies and gentlemen, I thank you for your attention and wish you all an enriching seminar. | bank of mauritius | 2,020 | 1 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, to the press, Port Louis, 29 May 2020. | Harvesh Seegolam: Measures of the Covid-19 Support Programme and setting up of the Mauritius Investment Corporation Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, to the press, Port Louis, 29 May 2020. * * * Friends from the media, Ladies and Gentlemen, Good Afternoon. Welcome to this press conference. I will provide you with an insight on the current economic situation and also elaborate on the latest measures which the Bank has announced under its ongoing Covid-19 Support Programme. Let me at the very outset give you an overview on where the global economy stands. What we are experiencing today are unprecedented economic conditions. Major companies around the world have shown worrying signs of distress leading to rapid job losses. The ensuing implications on financial stability are serious. I must emphasise that there is still substantial uncertainty on how the pandemic will evolve and what will be the ultimate impact on economies. As you are aware the world continues to face an unmatched crisis. Global productive capacity and demand have shrunk massively as the pandemic intensified. Both production and the global supply chain have been severely disrupted by the “Great Lockdown”, as termed by the IMF. The global economic outlook has turned gloomier since April 2020, as countries struggle to contain the pandemic. Most economists no longer see a ‘V’ shape recovery of the global economy and predictions are for a much longer downturn. More than 150 countries around the world will be facing a GDP contraction. Policy responses by central banks Faced with such worsening situations, Central Banks around the world are finding themselves in the frontlines. Since the onset of the pandemic, central banks have resorted to all kinds of measures, whether conventional and unconventional measures to salvage their respective economies. Central banks are being looked up as saviours in these testing times. Domestic economic outlook and risks Mauritius, as well, is not being spared by this global crisis. Much has already been said about the impact and threat that the pandemic increasingly poses to our economy. The sectors most at risk include tourism, manufacturing in particular exports of textile, wholesale and storage, business and administrative activities, ICT/BPO, transportation amongst others. These sectors account for nearly 40 per cent of GDP. The contraction in output this year will be severe and we have estimated that the economy could contract between 7.5% and 15%. The Bank is monitoring the situation closely. 1/4 BIS central bankers' speeches Export sector and balance of payments The export of goods and services sector is expected to slump massively, as external demand plunges amid severe economic contraction in our main exports markets. The significant drop in export earnings will amplify the current account deficit, projected at about 12% of GDP in 2020. This year, the overall balance of payments is forecast to record a deficit. The tourism sector is a major supplier of foreign exchange. The foreign exchange loss from this industry alone has been estimated at around Rs12 billion for April and May 2020. Last year, tourism receipts amounted to Rs63 billion. This year, as long as the tourism industry remains inoperative, there will be significant shortfalls in foreign exchange receipt. The pressure on foreign exchange earnings will be amplified by the shortfall in export earnings in other sectors as well, such as textile and fish products. The Bank, in line with its mandate, has taken necessary measures to maintain stability on the foreign exchange market and address any deficiency in foreign exchange liquidity. The Bank has sold USD172 million to banks since 18 March 2020. In addition, the Bank conducted swap transactions with banks for a total of USD100 million under its support programme. Furthermore, the Bank has also provided the State Trading Corporation Ltd (STC) with foreign exchange for a total of USD55 million since 26 March 2020. The Bank will continue to provide foreign exchange to the STC to ensure adequate supply of essential goods to the public. I have to highlight that Mauritius has a floating exchange rate regime, as per the IMF classification. The recent fluctuations of the exchange rate of the rupee is the result of the interplay of market forces, both domestic and international. The Bank is continuously monitoring activities on the domestic foreign exchange market. It stands ready to intervene as required to contain excessive exchange rate volatility. At this point, let me reiterate the core mandates of the Bank: to maintain price stability, to promote orderly and balanced economic development, and to ensure the stability and soundness of the financial system. As such, and given the current context, the Bank of Mauritius will do whatever it takes to safeguard the economy. All the measures taken by the Bank since March 2020 are a reflection of this commitment. Concretely, these measures aim at alleviating the financial burden of economic operators, SMEs, households, and individuals affected by COVID-19 and protecting jobs. It must be noted that under the Special Relief Scheme a total of Rs2 billion has been approved by commercial banks to economic operators to date. With respect to moratoria, commercial banks have approved the following: For economic operators, an amount of Rs6.6 billion has been granted as moratorium on capital repayment for a period of six months on outstanding loans amounting to Rs45 billion; For SMEs, an amount of Rs467 million has been granted as moratorium on both capital and interest payments for a period of six months on outstanding loans amounting to Rs3.1 billion; For individuals, an amount of Rs53 million has been granted as moratorium on both capital 2/4 BIS central bankers' speeches and interest payments for a period of six months on outstanding loans amounting to nearly Rs600 million; For households, an amount of Rs140 million has been granted as moratorium on capital repayments for a period of six months on outstanding loans amounting to nearly Rs2.3 billion. The Bank will be paying interest for households earning a combined monthly basic salary of up to Rs50,000. Contribution of Rs60 billion to government As the effects of the COVID-19 pandemic continue, Mauritius is undergoing its worst economic downturn since its independence. It is within this spirit that last Friday that we announced two specific measures aimed at supporting the economy. First, the Board of the Bank has decided to provide an amount of Rs60 billion to the State for economic stabilisation. As per the Bank’s mandate, this contribution aims at sustaining economic activity and mitigating risks to financial stability stemming from a weakening economy. I must also point out that the Bank will finance this contribution by issuing its own instruments for the amount of Rs60 billion. The Bank is resorting to this issuance for the reason that there is and will be ample rupee liquidity on the market. These monetary operations will promote orderly conditions on the money market. Mauritius Investment Corporation Ltd Let me now elaborate on the second measure that we announced. It relates to the setting up the Mauritius Investment Corporation Ltd (MIC) which will support and accelerate economic development and build a value base for the current and future generations of our country. The MIC is being set up as a fully-owned subsidiary of the Bank of Mauritius. It will: First, assist systemically large, important and viable companies in Mauritius, which are financially distressed as a result of the COVID-19 pandemic. These companies represent a direct threat to financial stability. I must here stress that should this not be done, companies would face difficulties in servicing their financial obligations, thus adversely impacting the banking sector. The risk of citizens losing their jobs is high. In this respect, MIC will invest in large- and medium-sized enterprises having a minimum annual turnover of Rs100 million; Second, invest in companies geared towards building self-sufficiency in key basic necessities; Third, invest in companies enhancing Mauritius as an innovation-driven economy; and Last but not least, it will support the development of return-generating key strategic assets and projects. To meet its objective, up to two billion US dollars from the foreign exchange reserves of the Bank will be made available to the MIC. MIC will invest and manage these funds with a view of building a value base for the citizens of Mauritius. I must again point out that globally returns are in negative territories. By promptly investing part of our reserves in our country in these testing times, we are investing and building the future of Mauritius, hence allowing for orderly and balanced economic development. I must reassure the public that, should the full amount of USD 2 Billion be used, the foreign exchange reserves of the Bank would still remain at an adequate level which is well above the 3/4 BIS central bankers' speeches international norm. MIC will invest in eligible companies through a number of investment tools including both equity and quasi-equity instruments. Transparency, good governance and independence will be the bywords of the MIC. The MIC will be run within a strict governance structure and in line with international norms. The Board of Directors of MIC will comprise an independent Chairman, the First Deputy Governor, the Second Deputy Governor, and two Non-Executive Directors. I am pleased to announce that Lord Meghnad Desai, Member of the House of Lords of the UK and renowned economist, has agreed to chair the Board of the MIC. There will be two distinct committees that will be set up: An Investment Committee, made up of independent experts who will assess all projects and make appropriate recommendation to the Board of MIC. An Asset Management Committee will manage the assets under MIC. MIC will work closely with commercial banks in achieving its objectives. MIC will publish its audited financial statements and an annual report covering its activities during its financial year. The financial statements will be consolidated with that of the Bank. Concluding remarks Amidst this rising uncertainty, the Bank of Mauritius is focused on working towards an economic recovery, while mitigating any potential impact on the stability of the financial and banking system in our country. I also wish to underline that the Bank has consulted, and is keeping the IMF fully briefed about all measures it is taking. We, at the Bank, stand ready to put in place what is required, and we will do whatever it takes to save our economy. I thank you for your attention. 4/4 BIS central bankers' speeches | bank of mauritius | 2,020 | 6 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post-MPC press conference, Port Louis, 8 July 2020. | Harvesh Seegolam: Current economic conditions and outlook Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post-MPC press conference, Port Louis, 8 July 2020. * * * 1. Representatives of the media, good afternoon. 2. As you know, the Monetary Policy Committee met today. My two Deputies and myself are pleased to welcome you to this post-MPC press conference. 3. Before I move on to the MPC deliberations, on behalf of the Bank of Mauritius and the MPC members, I would like to express our sincere gratitude to all the frontliners and employees in essential services who went beyond their call of duty during the confinement. 4. I equally commend banks for having ensured continuity of services. 5. As I stated at the last post-MPC press conference on 10 March 2020, the MPC remains vigilant and will continue to monitor risks to our economy. In this respect, a special MPC meeting was convened on 16 April 2020. Swift policy actions were accordingly taken. 6. Today the MPC deliberated on the current economic conditions and outlook. I have to say that the elevated level of uncertainty makes it exceedingly challenging to say how economies will fare in the near future. 7. Let me now share with you the MPC’s assessments. International economic developments 8. I will start with the global economic conditions. 9. The COVID-19 pandemic has triggered a very deep global recession. In the words of the Managing Director of the IMF, this crisis “is more severe, more complex, and more global than anything we have seen in living memory.”1 10. The imposition of lockdown across many countries brutally and briskly impacted production, consumption, investment and trade. Economic data for the first quarter of 2020 reveal substantial output contractions in most of our main exports markets. 11. Output contractions will definitely be more severe and widespread during second quarter of 2020. The UK economy is projected by the Bank of England to shrink by 25 per cent, on a year-on-year basis. The European Central Bank has projected a contraction of 13 per cent for the euro area. The US Federal Reserve Bank of New York has estimated the US economy to contract by 15 per cent. 12. Conventional as well as unconventional fiscal, monetary and financial policy measures were rapidly implemented across the world to contain the economic consequences of the pandemic. After significant tightening of financial conditions, these policies helped restore confidence in financial markets across the globe. 13. Major international organisations have further slashed their growth forecasts to historical lows: a. In its June 2020 World Economic Outlook (W EO) Update, the IMF has downgraded its global growth projection to –4.9 per cent for 2020, from –3.0 per cent in April. Advanced economies are forecast to contract by 8.8 per cent in 2020, with the euro area shrinking 1/5 BIS central bankers' speeches by 10.2 per cent. Emerging market and developing economies are projected to contract by 3.0 per cent. b. The World Bank has lowered its global growth projection for 2020 to –5.2 per cent. c. The OECD’s forecast shows an economic contraction of 7.6 per cent in 2020. 14. Substantial downside risks still prevail given the resurgence of COVID-19 infections in several parts of the world. 15. Brent oil prices are currently at around USD43 a barrel, well below their 2019 prices. Commodity prices, excluding precious metals, remain weak reflecting the demand shock. 16. Inflation has remained below central banks’ targets. The IMF projects inflation in advanced economies at 0.3 per cent in 2020, from 1.4 per cent in 2019. For emerging market and developing economies, inflation is forecast at 4.4 per cent, from 5.1 per cent in 2019. 17. Both fiscal and monetary policy measures will continue to accompany the global economic recovery process. In its June 2020 W EO Update, the IMF has assumed that major central banks will maintain an accommodative monetary policy stance up to the end of 2021. Domestic economic developments 18. I will now turn to domestic developments. 19. The Mauritian economy is already being buffeted by the pandemic. Moreover, household consumption and private investment are expected to remain subdued in 2020. 20. The tourism sector has been the hardest hit, together with the manufacturing and trade sectors. The timing of the resumption of air travel and cautious behaviour by travellers could further weigh on the performance of the sector. Statistics Mauritius estimates tourist arrivals to drop by around 70 per cent in 2020 compared to 2019. 21. On average, tourism revenue in the first half of 2020 would fall short of 2019 receipts by around Rs18 billion. In the event the national borders remain closed for the rest of the year, the shortfall could rise to around Rs50 billion. This represents a significant drop in FX inflows from the tourism sector. 22. Latest data from the World Tourism Organization shows that international tourism was down by 22 per cent in the first quarter of 2020 and could decline by a maximum of 80 per cent in 2020. The World Tourism Organization has projected that nearly 1.1 billion individuals will not travel in 2020. 23. Statistics Mauritius has estimated an economic contraction of 2.0 per cent in the first quarter of 2020. The fall in real output occurred primarily in the accommodation and food service sector, the manufacturing sector, and the distributive trade sector. Real output is projected to decline substantially in the second quarter of 2020. 24. Domestic inflation has remained low and stable. Inflation in June 2020 was 1.8 per cent. 25. The economic fallout is adversely altering labour market dynamics. Foreign exchange market 26. Since the onset of the crisis, activity on the foreign exchange (FX) market has been low. FX turnover fell by around 53 per cent in the second quarter of 2020, relative to the corresponding period of 2019. 2/5 BIS central bankers' speeches 27. The Bank has been consistently supplying FX to the market. Since 18 March 2020, taking into account swap transactions, the FX lines of credit to banks and FX interventions, the Bank has supplied an aggregate of USD656 million (or equivalent to around Rs26 billion) to the banking sector. The Bank has sold USD242 million directly to banks through intervention. Over and above, the Bank has supplied the State Trading Corporation a total of USD67 million. The Bank stands ready to intervene and supply FX to the market as and when required. 28. Exchange rate movements in the past few months have reflected domestic macroeconomic fundamentals as well as international factors. The Bank is committed to ensure orderly conditions on the FX market and support the floating exchange rate regime. Balance of payments and FX reserves 29. The current account deficit worsened in the first quarter of 2020, reaching 4.2 per cent of GDP from 3.2 per cent in the first quarter of 2019. The country recorded an overall balance of payments deficit of Rs5.9 billion in in the first quarter of 2020 as against a surplus of Rs7.4 billion in the first quarter of 2019. For 2020, an overall balance of payments deficit of Rs40 billion is projected, primarily due to a drop on exports proceeds and lower capital inflows. 30. The FX reserves stood at USD7.2 billion as at end-June 2020, representing 13.2 months of imports of goods and services, and 18 months of imports of goods only. Bank of Mauritius COVID-19 Support Programme 31. The COVID-19 Support Programme of the Bank of Mauritius, supplemented by the timely cumulative 150 basis points cut in the Key Repo Rate, has been well received by economic operators. Allow me to share a few key figures on the impact of the measures on beneficiaries, and the economy at large, as at 3 July 2020. a. For economic operators (excluding SMEs), an amount of Rs8.1 billion has been granted as moratorium on capital repayment. b. For SMEs, the total moratorium on capital and interest has reached Rs710 million. c. Individuals have availed a total of Rs73 million as moratorium on both capital and interest repayments. d. Households have benefitted from an amount of Rs178 million as moratorium on capital repayments. In addition, the Bank has provided interest relief to households out of its own funds. e. Banks have reported a total of Rs3 billion loans approved under the Special Relief Amount as at 7 July 2020. 32. I have to reiterate here that economic operators, SMEs, households and individuals who have availed themselves of moratorium facilities on loans granted by banks will not be penalised in terms of reporting to the Mauritius Credit Information Bureau. 33. The setting up of the Mauritius Investment Corporation Ltd (MIC) by the Bank of Mauritius further complements the Bank’s Support Program. The operations of the MIC will support employment, investment and exports. 34. I must highlight the timely transmission of policy rate changes to interest rates in the banking sector. Lower interest rates have eased the financial burden on borrowers. Savings on debt servicing reaped by households and corporate entities are estimated at around Rs1.4 billion and Rs2.2 billion, respectively, up to end-May 2020, that is an estimated total of Rs3.6 billion. 3/5 BIS central bankers' speeches 35. Liquidity in the banking system has gone up since March 2020, partly reflecting the policy decision to substantially ease monetary conditions and ensure the financial system had sufficient liquidity to withstand the crisis. The Bank is gradually normalizing liquidity conditions in the banking system. Financial stability 36. The banking sector continues to maintain strong capital and liquidity positions, above the regulatory limits. The ratio of non-performing loans to total loans stood at 4.5 per cent in March 2020. The Bank is closely monitoring the situation and is conducting regular stress testing exercises. MPC decision 37. I now come to the decision of the MPC. 38. The MPC discussed the implications of the pandemic on the domestic economy and the previous cumulative 150 basis points cut in the KRR. Members viewed that the cuts are still working through the economy and that the current monetary policy stance is appropriate. 39. Given the risks facing the domestic economy, the Bank is projecting real GDP to contract by 12.5 per cent in 2020. However, real GDP growth is projected at about 7 per cent in 2021. 40. Barring exogenous shocks, the Bank is expecting headline inflation at about 2.5 per cent in 2020 and at about 2.0 per cent in 2021. 41. The MPC has unanimously voted to keep the Key Repo Rate unchanged at 1.85 per cent per annum. 42. The MPC remains vigilant and will continue to monitor risks to the domestic economic outlook. 43. The next MPC meeting is scheduled on Wednesday 23 September 2020, but the MPC stands ready to meet in between its regular meetings if the need arises. Extension of Bank of Mauritius COVID-19 Support Measures 44. Let me now move on to the Support Programme introduced by the Bank in March 2020. In consultation with relevant stakeholders, the Bank has reassessed the measures and has taken the following decisions to further assist economic operators, households and individuals. a. The Bank’s Special Relief Amount of Rs5 billion has been extended from 30 June to 30 September 2020 to enable economic operators impacted by COVID-19 to have access to concessionary credit facilities at 1.5 per cent from banks. b. The repayment period is also being extended from 30 months to 48 months. c. The moratorium period is being increased from 6 to 9 months. d. To continue supporting the FX market, the Bank is extending the size and validity period of two measures. i. First, the Bank is increasing the amount earmarked for swap transactions by an additional USD100 million. This facility will be available to banks for the next 6 months. ii. Second, the Bank is raising the amount of the FX line of credit to banks from USD300 million to USD500 million, that is by an additional amount of USD200 million. This facility 4/5 BIS central bankers' speeches will be available to banks for the next 6 months. 45. The Bank considers it important to build a strong bridge towards economic recovery for households and businesses. All the measures I have announced are expected to sustain domestic demand by fostering conducive conditions for consumption and investment. 46. I wish to highlight that Moody’s has reaffirmed the Baa1 sovereign rating of Mauritius in a statement released on 6 July 2020. 47. As in every crisis, people are worried about the future. Risks from COVID-19 are real. The Bank remains alert and I assure you that we will continue to do whatever it takes for as long as conditions warrant to maintain price stability, orderly and balanced economic development as well as financial stability. 48. I now welcome your questions. Keynote Speech by the Managing Director of the IMF, 2 July 2020, “National Development Bank in Lithuania: Aims and Effective Governance.” 5/5 BIS central bankers' speeches | bank of mauritius | 2,020 | 7 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Workshop for Money Laundering Reporting Officers, organised by the Bank of Mauritius in collaboration with the Financial Intelligence Unit and the Financial Services Commission, Port Louis, 7 August 2020. | Harvesh Seegolam: Latest developments in the Anti-Money Laundering and Combatting the Financing of Terrorism landscape in Mauritius Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Workshop for Money Laundering Reporting Officers, organised by the Bank of Mauritius in collaboration with the Financial Intelligence Unit and the Financial Services Commission, Port Louis, 7 August 2020. * * * His Excellency Mr Keith Allan, British High Commissioner to Mauritius, His Excellency, Mr Janesh Kain, Deputy High Commissioner of India to Mauritius, First Deputy Governor and Chairman of the Financial Services Commission, Second Deputy Governor, Director Financial Intelligence Unit, Heads of organisations, Representatives of regulatory bodies and law enforcement agencies, Fellow members of the media, Dear delegates, Ladies and Gentlemen, I wish you all a very good morning. I am pleased to welcome you to the Bank of Mauritius for this workshop on the latest developments in the Anti-Money Laundering and Combatting the Financing of Terrorism landscape in Mauritius. This entire workshop has been crafted keeping in mind the cross-sectoral population of money laundering reporting officers (MLROs). Today with us, we have MLROs from the banking and non-banking financial services sectors as well as designated non-financial businesses and professions (DNFBPs). The effective implementation of robust anti-money laundering and combatting the financing of terrorism and proliferation measures remains a key priority for all of us. As Governor, I have placed the fight against money laundering very high on my agenda. Strengthening the regulatory confidence that investors have in Mauritius is of paramount importance, more so given our role as a long established International Financial Centre. As such, we will not make any compromise on this score. Non-compliance with the set standards will not be tolerated by the Bank and will entail severe sanctions. I have given clear directives so that we collaborate on a permanent basis with the competent domestic and foreign authorities engaged in the fight against money laundering and terrorism financing to this end as well. As MLROs of your respective institutions, it is extremely important for you to understand the national and international ML/TF risks to enable you to perform your duties in an effective and efficient manner. The Financial Intelligence and Anti-Money Laundering Regulations 2018 require reporting persons to appoint a MLRO to whom an internal suspicion report shall be made. It is also incumbent on the MLRO to make Suspicious Transaction Reports to the respective competent authority, 1/7 BIS central bankers' speeches namely the Financial Intelligence Unit. The resource persons will undoubtedly provide you with guidance in fulfilling your mandate during the course of this workshop today. Ladies and Gentlemen, The initiatives and actions taken by the Bank of Mauritius and other competent Authorities to address the gaps identified in the 2018 Mutual Evaluation Report of Mauritius bear the testimony of our commitment to adhere to the highest AML/CFT norms and standards. The Mutual Evaluation Report, published by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) in September 2018, sets out the extent to which Mauritius has implemented the technical requirements of the FATF Recommendations. The report presented the key findings of the assessment team and the priority actions for Mauritius in view of strengthening its AML/CFT system. When the Mutual Evaluation Report was published in September 2018, Mauritius was rated noncompliant on 13 Recommendations, partially compliant on 13 Recommendations, largely compliant on 11 Recommendations and compliant on only 3 recommendations. In September 2019, that is exactly one year after the publication of the Mutual Evaluation Report and after two successful applications for technical compliance rerating, Mauritius has been rated compliant on 26 Recommendations, largely compliant on 9 Recommendations, partially compliant on 4 Recommendations. The figures and the remarkable improvements in compliance speak for themselves. Mauritius, as at now, is therefore compliant or largely compliant to 35 out of 40 FATF Recommendations, including the so-called Big 6 FATF Recommendations, which are: Recommendation 3 on Money laundering offence Recommendation 5 on Terrorist financing offence Recommendation 6 on Targeted financial sanctions related to terrorism & terrorist financing Recommendation 10 on Customer due diligence Recommendation 11 on Record keeping Recommendation 20 on Reporting of suspicious transactions We are among the few countries having such a remarkable score in terms of technical compliance. This further testifies the commitment of Mauritius, at all levels, in ensuring its compliance towards the best norms on AML/CFT matters. It is worth noting that out of the big 6 recommendations, 3 have been obtained during the period from September 2018 to September 2019. Mauritius has always, and continues to, put a strong emphasis on its legal and regulatory frameworks to adequately combat money laundering and terrorism financing. As a result, we have seen key and enabling legislative and regulatory frameworks reviewed and introduced with the aim of: (a) further consolidating our adherence to FATF Recommendations pertaining to terrorism financing and proliferation financing and implement the restrictive 2/7 BIS central bankers' speeches measures under all the United Nations Security Council Resolutions; (b) enhancing the existing legal framework for preventive measures that apply to financial institutions and Designated Non-Financial Businesses and Professions; (c) extending the scope of the Financial Intelligence and Anti-Money Laundering Act to include the financing of proliferation; and (d) establishing a legal framework to support the National Risk Assessment exercise. The Bank of Mauritius has been fully committed to this transformation that the country has embarked on. The Bank of Mauritius, as a proactive and future-focused institution has equally played a crucial role and revisited a number of its regulatory frameworks and adopted a risk-based approach to AML/CFT supervision. Same is the case with other key regulatory bodies in Mauritius. Ladies and Gentlemen, Regulatory institutions, Law Enforcement Agencies and other competent Authorities have engaged and are building bridges which would further encourage domestic inter-agency collaboration with the aim of commonly tackling AML/CFT matters. A vivid example is the tripartite agreement that exists between the Bank of Mauritius, the Financial Services Commission and the Financial Intelligence Unit, which was entered into in September 2018. I am convinced that the fight against money laundering and terrorism financing may only be won if all relevant stakeholders work together in a concerted, coordinated and collaborative approach. It is worth noting that tripartite meetings are held under this agreement on a quarterly basis where all concerned institutions discuss ongoing matters of common interest including but not limited to ongoing investigations, outreach campaigns, sharing of experiences, secondments and legislative changes. Similarly, the Bank has entered into bilateral MoUs and Memorandum of Cooperation with other domestic authorities, as well as foreign central banks with a view to exchanging information on AML/CFT matters, both spontaneously and upon request. Ladies and Gentlemen, Mauritius has also adopted its National Strategy for Combating Money Laundering and the Financing of Terrorism and Proliferation 2019–2022. By doing so, we have set out the approach which Mauritius will adopt to tackle money laundering, terrorist financing and proliferation financing threats over the near future. To assist in achieving technical compliance with the remaining 5 FATF Recommendations, The Anti-Money Laundering and Combatting the Financing of Terrorism (Miscellaneous Provisions) Act 2020, which brings amendments to 19 pieces of legislation, was enacted in July 2020. On the strength of this legislation and additional progress made by the competent Authorities, Mauritius has already submitted a third application for technical compliance re-rating of these remaining 5 FATF recommendations. 3/7 BIS central bankers' speeches Ladies and Gentlemen, While technical compliance is essential, it is equally important to note that only achieving technical compliance with the FATF Recommendations is not the sole determining criteria of the FATF. The effectiveness of the legislative and regulatory frameworks is crucial. As stated by Mr Liu, the former FATF President, “T he challenge many countries face today is not the absence of comprehensive global standards, but the effective implementation of those standards.” Compliance is a continuous process. We have chosen to embark on this journey and we are highly dedicated to it. In this regard, I must say that we, at the Bank of Mauritius, are deploying substantial efforts on the effectiveness front to fully comply with the AML/CFT standards recommended by international organisations. When we refer to effectiveness, the FATF expects financial institutions and designated nonfinancial businesses and professions (DNFBPs) to – i. understand the nature and level of their money laundering and terrorist financing risks; ii. develop and apply AML/CFT policies (including group-wide policies), internal controls, and programmes to adequately mitigate those risks; iii. apply appropriate CDD measures to identify and verify the identity of their customers, including the beneficial owners, and conduct ongoing monitoring; iv. adequately detect and report suspicious transactions; and v. comply with other AML/CFT requirements. The duties, powers and responsibilities vested on the existing AML/CFT Supervisors, including the Bank of Mauritius, as regulator for the banking sector, and the Financial Services Commission, as regulator for the non-banking financial services and global business sectors, have been enhanced. The Bank of Mauritius implemented a risk-based approach to AML/CFT supervision. The Guidelines on AML/CFT were reviewed in the light of the changes brought to the domestic legislative framework and issued to the industry earlier this year. In addition, new AML/CFT Supervisors have been designated for the different categories of DNFBPs. The FIU, which at inception was envisioned as an intelligence gathering agency, is now the AML/CFT Supervisor for five distinct categories of DNFBPs, namely the three branches of the legal professions, the Real Estate and Jewelry sectors. The AML/CFT supervisors have benefitted and continue to benefit from training on the implementation of the risk-based supervision in line with the international standards and have all issued guidance to their licensees which sets out the parameters within which they should operate in order to ward off money laundering, terrorist financing and proliferation financing risks. In this regard, Mauritius has obtained technical assistance from the EU funded AML/CFT Global Facility and the German Government through the German Development Agency, the GIZ to support the implementation of the FATF Action Plan. On its part, the Bank of Mauritius conducted outreach for the industry on various AML/CFT topics. As at date, we have already hosted 7 training sessions for the industry and AML/CFT supervisors. All of them were facilitated by international experts on AML/CFT. On 28 July this year, the Bank hosted a virtual training delivered by the Office of Financial Sanctions Implementation of the UK HM Treasury on the implementation of financial sanctions 4/7 BIS central bankers' speeches for the Mauritius Authorities involved in the implementation of the United Nations (Financial Prohibitions, Arms Embargo and Travel Ban) Sanctions Act. The virtual training saw the participation of more than 100 representatives from the various agencies and authorities. I’m pleased to inform you that 7 additional training programs are scheduled until the end of this very month. Ladies and Gentlemen, Within one year of the publication of the Mutual Evaluation Report, Mauritius demonstrated positive and tangible progress on 53 of the 58 Recommended Actions in the Report – which is indeed a monumental task within such a short span of time. Mauritius was placed on the FATF List of Jurisdictions under increased monitoring, in February 2020, with respect to the remaining 5 Recommended Actions for which the FATF has, in consultation with Mauritius, devised a detailed Plan of Action with specific deadlines to remedy the identified shortcomings. Mauritius has, in February 2020, given a high level political commitment to the FATF to implement the Action Plan within agreed timelines. I must here say that there is a concerted effort at all levels among respective Ministries, Regulatory Bodies, Law Enforcement Agencies and other competent Authorities in view of implementing the Action Plan. This concerted effort is another tangible proof of our commitment to deliver on the Action Plan by September 2020, which is well before the agreed timeline of the FATF . The seriousness of Mauritius to implement all actions is also testified by the fact that a high level Committee placed under the chairmanship of the Honourable Prime Minister has been set up to monitor progress made on the said Action Plan. There is also a dedicated Core Group which has been established to monitor the implementation of the Recommendations of the Mutual Evaluation Report. Much has happened in terms of effectiveness since the February 2020 FATF plenary meeting in Paris. Ladies and Gentlemen, No later than last week, Mauritius has submitted its Progress Report on the implementation of the Action Plan to the Joint Group of the FATF for necessary consideration. Our relevant agencies have completed their respective comprehensive plan to implement the FATF action Plan as follows: Regulatory bodies have adopted risk-based supervision for their respective segments (IO3 and IO4); A beneficial ownership registry has been set up for providing timely access of information to competent authorities (IO5); Law enforcement agencies have embarked on intensive training programme and are conducting parallel complex financial investigations (IO7) and Competent authorities have conducted outreach on targeted financial sanctions and proliferation (IO10 and IO11). In this respect, I reiterate as a member of the Core group, that we remain fully committed to ensure our full compliance and effectiveness towards all the FATF standards. 5/7 BIS central bankers' speeches Ladies and Gentlemen, While we have been focused on the implementation of the FATF Action Plan over the recent months, we cannot ignore the consequences and threats that the Covid-19 pandemic has brought in its wake, not only socio-economic upheavals, but also exposed new and emerging financial risks. The FATF has cautioned financial institutions to remain vigilant as criminals were seen to be taking advantage of the pandemic to carry out financial fraud and exploitation scams. These scams included advertising and trafficking in counterfeit medicines, offering fraudulent investment opportunities, engaging in phishing schemes that prey on virus-related fears, malicious or fraudulent cybercrimes, fundraising by fake charities, and insider trading, to state merely a few. The FATF further laid emphasis on that, I quote, “criminals and terrorists may seek to exploit gaps and weaknesses in national anti-money laundering/counter-financing of terrorism (AML/CFT) systems while they assume resources are focused elsewhere making risk-based supervision and enforcement activity more critical than ever. Financial institutions and other businesses should remain vigilant to emerging ML and TF risks and ensure that they continue to effectively mitigate these risks and are able to detect and report suspicious activity” unquote. The pandemic has also been a change in the payment habits with an increase in the use of mobile, electronic, digital and contactless payments. Such a behaviour converges towards our initiative to promote the digitalization of the banking sector, in line with our common vision for the digital transformation of Mauritius. It is likely that such a transformation will increase the scope for criminals to exploit vulnerabilities of such systems and commit cyber-attacks and frauds. Appropriate safeguards, controls and risk mitigating measures must therefore be implemented to identify, mitigate and manage the associated risks. Earlier this year, in the height of the pandemic, the FATF encouraged financial institutions to make appropriate use of financial technology such as digital or contactless payments and digital onboarding to facilitate the delivery of banking and financial services in response to the pandemic while mitigating money-laundering and terrorist financing risks. The FATF further proposed a range of measures to enable financial institutions to use a riskbased approach to their customer due diligence, including rolling out responsible digital identity and other innovative solutions for identifying customers at onboarding and while conducting transactions. To this end, I’m pleased to inform you the Bank has been very proactive and has already embarked on the process of developing a centralized e-KYC platform. This project will facilitate the verification of the identity and will help enhancing KYC control across various segments of activities in the country. The platform will equally have access the national InfoHighway for the validation of the KYC information. Ladies and Gentlemen, In light with emerging technology and new practices, reporting institutions must accelerate efforts to further expand and develop their AML/CFT toolkit to deal with new and emerging risks I therefore take this opportunity to stress that your role as MLROs is to continuously be kept abreast of the digital risks and developments. You can only expect your duties and 6/7 BIS central bankers' speeches responsibilities to grow. This is why attending such workshops is fundamental. This Workshop is part of a series of training and outreach programmes aimed at enhancing the skills of our licensees. Targeted outreach programmes such as this one will promote clear understanding of money laundering and terrorism financing risk. Our aim is to promote strong AML/CFT measures which are imperative in protecting Mauritius as a leading International Financial Centre, recognised for its socio-economic stability, good governance and strong institutions. The responsibility vested on us is a huge one, and first and foremost a collective one. The fight against money laundering and the terrorism financing must be a concern to us all. This fight may only be won if all relevant stakeholders work together in addressing the common cause. Proper coordination and exchange of information among domestic and international authorities remains a critical point for the implementation of an effective AML/CFT regime and strengthen our current regulatory frameworks and processes. On a final note, I wish to thank the Financial Services Commission and the Financial Intelligence Unit for their continuous support and collaboration. Ladies and gentlemen, I wish you all fruitful deliberations. I am sure that you are all keen to hear from our experts today. Thank you. 7/7 BIS central bankers' speeches | bank of mauritius | 2,020 | 8 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post-MPC press conference, Port Louis, 23 September 2020. | Harvesh Seegolam: Current economic conditions and outlook Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post-MPC press conference, Port Louis, 23 September 2020. * * * 1. Representatives of the media, good afternoon. 2. My two Deputies and myself are pleased to welcome you to this press conference to brief you on the outcome of the Monetary Policy Committee (MPC) meeting held today. 3. The COVID-19 pandemic continues to be the major concern globally. The ongoing challenge of monetary authorities remains responding to the economic and financial impact caused by the pandemic. 4. In this context, I wish to reiterate that the Bank of Mauritius is strongly committed to deliver on its mandate of maintaining price stability, promoting orderly and balanced economic development, and ensuring the stability and soundness of the financial system of Mauritius. 5. Before I move on the decision of the MPC, I will give you a general overview of recent economic developments both globally and domestically. International economic developments 6. I will now start with the global economic conditions. 7. As expected, output contracted significantly in several major economies in 2020Q2. a. The US experienced its biggest post-war economic contraction, with a year-on-year decline of 9.1 per cent for the quarter. b. In the Euro area, the numbers were even worse with a year-on-year economic contraction of 14.7 per cent. 8. The damage caused by such output contractions will have serious consequences on economic structures, especially on potential output and labour productivity. 9. There are some positive signs, though. 10. High frequency indicators suggest some economic recovery is underway in several major economies, backed by support from monetary and fiscal authorities. 11. The J.P. Morgan Global Composite Output Index rose to 52.4 in August 2020, its highest level since March 2019. It is encouraging to note growth in new orders and stabilisation in employment. 12. The September 2020 economic forecast of the Organisation for Economic Cooperation and Development (OECD) points to a global GDP contraction of 4.5 per cent in 2020. As a comparison, in June 2020, the OECD had projected a contraction of 6.0 per cent for 2020. a. The OECD has projected that the US economy could shrink by 3.8 per cent, while the Euro area could contract by 7.9 per cent in 2020. b. The world economy is projected to recover in 2021, with an estimated growth of 5.0 per cent. However, a strong resurgence of infections or stringent containment measures could remove some 2 to 3 percentage points from this global growth forecast. 1/5 BIS central bankers' speeches 13. At this stage, an extended ‘U-shaped’ recovery may appropriately describe the global economic recovery process. 14. Global inflationary pressures remain contained. The combination of low commodity prices, muted wage pressures and weak aggregate demand are keeping inflation at bay. 15. Crude oil prices have been relatively volatile, rising from June to August 2020 and falling to an average of USD42 a barrel for the first three weeks of September 2020. 16. Commodity prices rose across the board in August 2020, partly reflecting higher demand due to improved economic conditions in China. Global supply chains have equally started to recover from COVID-19 related restrictions. 17. The FAO Food Price Index rose by 2.0 per cent in August 2020 compared to July 2020, and was higher by 2.2 per cent compared to August 2019. 18. Central banks have continued to respond to the pandemic with rapid and decisive policy measures, which have contained the adverse feedback loops between the real economy and financial markets. 19. Besides aggressive cuts in policy rates, many central banks in both advanced and emerging economies have implemented, amongst others, liquidity swap lines, bond purchase programmes and repurchase agreement facilities. 20. Fiscal authorities have also responded with prompt policies. I must highlight that the combined policy responses by the fiscal and monetary authorities have prevented an even larger drop in economic activity worldwide. 21. Two weeks ago, the IMF warned that the coronavirus crisis is “far from over” and, to ensure that the recovery continues, it is essential not to prematurely withdraw fiscal and monetary support. Domestic economic developments 22. I now turn to the domestic economic situation and outlook. 23. In these unprecedented and challenging times, the domestic economy has been operating well below productive capacity. Cautious spending patterns and economic uncertainty continue to impact both household consumption expenditure and private investment. 24. However, here again, there are some positive signs in economic activities. 25. Several economic indicators such as currency in circulation, registration of new and second-hand vehicles, and monetary transactions, have been gradually pointing towards an improvement in economic activity. 26. Equity indices such as SEMDEX and SEM-10 have partly recouped their losses since the resumption of trading operations on the Stock Exchange of Mauritius. 27. The labour market has seen an increase in unemployment but not to the extent initially anticipated. Fiscal support has mitigated the anticipated deterioration in the rate of unemployment. 28. The lacklustre performance of exports continues to negatively impact domestic output. On the other hand, imports have declined further, reflecting supply-chain disruptions as well as a fall in demand. 2/5 BIS central bankers' speeches Inflation 29. Consumer prices remain under the influence of weak demand-side and mild cost-push pressures. Subdued inflationary pressures persisted in August 2020, due to low international commodity prices. 30. Despite the recent rise in prices of some products, the impact on the Consumer Price Index has partly been offset given their relative share in households’ expenses and the normalisation of prices of fresh vegetables. 31. Headline inflation has stabilised at 1.8 per cent in the three months to August 2020. Year-onyear inflation has dropped to 1.5 per cent in August, from 1.7 per cent in June 2020. Foreign exchange market 32. Activity on the foreign exchange (FX) market has picked up since the last MPC meeting, though the value of transactions remains below normal levels in current circumstances. 33. The Bank has continued to supply FX to the market, mostly through regular FX interventions, to ensure adequate FX liquidity and to support economic activity. The Bank has sold a total amount of USD823 million to the market since March 2020 to date. 34. In addition, the Bank has put at the disposal of commercial banks a total of USD1 billion since March 2020 in the form of FX lines of credit and FX swaps. 35. The exchange rate of the rupee has more or less stabilised in the past few months. 36. I meet with bankers every fortnight to review and assess conditions on the FX market. The Bank’s timely policy responses have allayed fears of FX shortage and ensured adequate supply of FX. The Bank continues to closely monitor conditions on the FX market. 37. The Bank remains committed to maintain orderly conditions on the FX market and support the floating exchange rate regime. Balance of Payments 38. The current account deficit is now estimated to rise to 14 per cent of GDP for 2020, compared to the July 2020 estimate of 13.5 per cent, as a result of the significant drop in tourism receipts. 39. The gross official international reserves of Mauritius stands at USD6.93 billion as at today, representing 12.6 months of imports of goods and services. 40. The Bank has estimated that the country could lose, on a net basis, about Rs58 billion in terms of foreign exchange earnings in 2020, mainly arising from revenue losses from tourism and exports of goods and services. 41. The Bank estimates that Mauritius has received nearly Rs7 billion of gross direct investment flows as at end-August 2020. For 2020, it is projecting around Rs10 billion of inflows. 42. Viewed against various traditional reserve adequacy metrics and more rigorous methodologies used by the IMF—notably with regard to imports, exports, broad money and short-term debt—the current level of reserves is assessed to be adequate. They provide a buffer against headwinds over the next few quarters. Money market 3/5 BIS central bankers' speeches 43. With regards to the money market, liquidity in the banking sector is adequate to support the accommodative monetary policy stance of the Bank. The Bank has been gradually bringing excess liquidity to a tolerable level. 44. Outstanding Bank of Mauritius instruments stand at Rs111 billion as at today, an increase from Rs85 billion on 8 July 2020. 45. Excess liquidity dropped recently as a result of the net issuance of Bank of Mauritius securities and regular interventions on the FX market. Interbank transactions remained relatively low, as most banks have an excess rupee position. 46. Several central banks had started reviewing their monetary policy framework, even before COVID-19 in a context of low interest rate and below-target inflation rate. Given the current context and changing dynamics, the Bank will bring up to date its monetary policy strategy. Financial stability 47. Bank loans to the private sector continue to rise, growing year-on-year by 5.1 per cent in July 2020, from 4.1 per cent in May 2020, the highest pace recorded since May 2019. Annual growth in bank loans was supported by both households and corporate borrowings. 48. The capital and liquidity positions in the banking sector remain strong, well above the regulatory limits. The aggregate Capital Adequacy Ratio was 19.5 per cent as at end-June 2020, a 1.3 percentage point improvement over March 2020. 49. The different measures taken by the Bank have helped alleviate pressure on commercial banks’ capital and liquidity positions, and ensured continuous flow of credit to the economy. 50. The ratio of non-performing loans to total loans of commercial banks has increased to 5.3 per cent in June 2020, from 4.5 per cent in March 2020. The Bank has established a Task Force on Banking Resilience, comprising the Mauritius Bankers Association Limited and bankers, to closely monitor the impact of COVID-19 on the banking system. 51. The Bank continues to deploy its financial stability surveillance toolkit to assess any potential risks to the financial system. 52. The Bank stands ready to introduce additional regulatory measures to contain the effects of a more pronounced setback in key sectors of the Mauritian economy on the banking system. 53. You will recall I had appealed to the public to use electronic payments channels back in March 2020. Indeed, electronic payment transactions—in particular mobile payments—have recorded significant increase since. 54. I am pleased to announce that all banks offering domestic retail payments have successfully on-boarded the Instant Payment System (IPS) in August 2020. There is growing interest from FinTech and PSP companies to use the IPS, as it provides an enabling platform for innovation in the payments domain. 55. As Mauritius moves to a digital era, I continue to encourage the public at large to make greater use of electronic payment channels. MPC decision 56. I now come to the decision of the MPC today. 57. The MPC discussed the global economic context and the performance of the domestic 4/5 BIS central bankers' speeches economy. 58. The domestic economy is still facing the disruptive effects of the COVID-19 pandemic. The contraction in major trading partners’ output would result in weaker demand for our exports. 59. Consequently, Bank staff has revised its projection for real GDP growth for 2020, from –12.5 per cent to –13.0 per cent. For 2021, real GDP is projected to grow at about 7.5 per cent. 60. Domestic inflation continues to remain low and stable, as demand-side and supply-side pressures remain at bay. In the absence of further exogenous shocks, Bank staff is projecting headline inflation at about 2.5 per cent in both 2020 and 2021. 61. Considering the international and domestic economic outlook, the MPC views that the current monetary policy stance of maintaining the KRR at 1.85 per cent per annum is appropriate. 62. The MPC will continue to monitor the economic situation closely and stands ready to meet in between its regular meetings, if the need arises. 63. The MPC will issue the Minutes of its meeting on Wednesday 7 October 2020. 64. The Bank is committed to support economic recovery by maintaining price stability, orderly and balanced economic development, as well as financial stability. The Bank will make use of all its firepower to steer the economy towards a strong and lasting recovery path. 65. The next meeting of the MPC has been convened on Wednesday 25 November 2020. 66. I now welcome your questions. 5/5 BIS central bankers' speeches | bank of mauritius | 2,020 | 11 |
Speech of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the Workshop on the Implementation of Targeted Financial Sanctions, Port Louis, 20 November 2020. | Mardayah Kona Yerukunondu: Implementation of targeted financial sanctions Speech of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the Workshop on the Implementation of Targeted Financial Sanctions, Port Louis, 20 November 2020. * * * Mrs Jennifer Bairner, Counter Illicit Finance Advisor at the British High Commission, Ladies and Gentlemen, I wish you all a very good morning. It is indeed a great pleasure for me to welcome you at the Bank of Mauritius Auditorium for this Workshop on Implementation of Targeted Financial Sanctions. I must, at the outset, extend our sincere gratitude to the British High Commission and the Financial Intelligence Unit for having provided us Mrs Jennifer Bairner, Counter Illicit Finance Advisor and Mrs Anushka Radhakissoon-Pochun, Manager Legal of the Financial Intelligence Unit, to partake their experience with us during this workshop. Ladies and Gentlemen, this workshop forms part of the Bank’s outreach programme specifically designed to enable licensees to better understand their legal obligations. It also serves as a platform for the Bank of Mauritius, as the AML/CFT Regulator for the banking sector, to convey to its licensees its expectations regarding the implementation of their legal obligations. You will, today during the workshop, be provided with guidance to enable you to fulfil, in an effective manner, your obligations under the Targeted Financial Sanctions Regime. The United Nations has during the past decades imposed a number of sanctions regimes. Sanctions, in fact, are important tools in the hands of the international community to promote international peace and security. Some of these sanctions regime, however, have been criticised for causing excessive suffering to civilian populations or inflicting economic damage on third states. To address these concerns, the concept of “targeted sanctions” was developed. These sanctions are designed to focus on groups of persons responsible for the breaches of peace or threats to international peace and security. The Financial Action Task Force (FATF) as the global standard setter on AML/CFT, has also made it mandatory for countries to implement the targeted financial sanctions regimes to comply with the United Nations Security Council resolutions relating to the prevention and suppression of terrorism and terrorist financing as well as the prevention, suppression and disruption of proliferation of Weapon of Mass Destruction and its financing. The term targeted financial sanctions means both asset freezing and prohibitions to prevent funds or other assets from being made available, directly or indirectly, for the benefit of designated persons and entities. The FATF considers that if implemented effectively and with respect to applicable human rights provisions by countries and the private sector, targeted financial sanctions are an important means to deprive terrorist and proliferation financiers of their funds, thereby protecting citizens from the threats of crime, terrorism and weapons of mass destruction. In order to be effective, however, these measures also have to be implemented and enforced in practice. 1/2 BIS central bankers' speeches As an international financial centre, Mauritius is committed to protecting its financial services sector from abuse. As a member of the United Nations, Mauritius has given effect to the sanctions regime under the UN Security Council Resolutions as well as the FATF Recommendations 6 and 7 though the enactment, in May 2019, of the United Nations (Financial Prohibitions, Arms Embargo and Travel Ban) Sanctions Act 2019 – the UN Sanctions Act as it is more commonly referred to. The UN Sanctions Act imposes a number of obligations on financial institutions, namely – Prohibition against dealing with funds and other assets (asset freeze) of a designated or listed party; Prohibition against making funds and other assets (and financial services) available to, or for the benefit of listed parties; Reporting Obligations and Reporting of Suspicious Information, amongst others. The UN Sanctions Act further requires financial institutions to implement internal controls and other procedures to enable a financial institution to effectively comply with the UN Sanctions Act. It is therefore imperative for financial institutions to have adequate policies and procedures, systems and controls in place to enable the financial institutions to, amongst others, – identify the existing accounts, transactions, funds or other assets of designated persons and entities; immediately freeze any identified funds or other assets held or controlled by designated persons and entities and prevent designated persons and entities from conducting transactions with, in or through them. As the central bank of the country and the AML/CFT Regulator for the Banking Sector, the Bank of Mauritius must safeguard not only the financial stability and soundness but also the integrity of the Banking Sector. Non-compliance with the AML/CFT obligations, including the Targeted Financial Sanctions, will therefore, be severely dealt with by the Bank. On those notes, allow me, ladies and gentlemen, to leave the floor to our panel of distinguished speakers who will guide you on the implementation of these obligations. I thank you for your kind attention and wish you a fruitful workshop. 2/2 BIS central bankers' speeches | bank of mauritius | 2,020 | 11 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the opening of the informative session on the MauCAS and the SADC and COMESA cross-border payment systems, Port Louis, 16 December 2020. | Harvesh Seegolam: Opening of the informative session on the MauCAS and the SADC and COMESA cross-border payment systems Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the opening of the informative session on the MauCAS and the SADC and COMESA cross-border payment systems, Port Louis, 16 December 2020. * * * First Deputy Governor Second Deputy Governor Members of the Board of Directors of the Bank of Mauritius The President of the Mauritius Chamber of Commerce and Industry The Secretary General of the Mauritius Chamber of Commerce and Industry The Chief Executive of the Mauritius Bankers Association The President of the COMESA Business Council Members of the business community Representatives of the media Ladies and Gentlemen I am pleased to be with you this morning for this informative session on the MauCAS and the SADC and COMESA cross-border payment systems. This session is organised by the Bank in close collaboration with the MCCI. Ladies and Gentlemen, Central banks have traditionally been associated with monetary policy, regulation and supervision of banks and financial stability. However, over the past two decades, central banks have been at the forefront of providing safe, secure and efficient payment systems. This function has gained importance on account of the growing recognition of payment systems and the fact that secure, stable and well-functioning payment systems are critical for maintaining financial stability, enabling effective monetary policy implementation as well as promoting economic development. In this respect, the Bank of Mauritius has played – and continues to play – an important role in the development of the payment ecosystem in Mauritius. The Bank has invested in a sustained manner in the improvement of payment systems infrastructure for more efficiency and faster payment cycles. Globally, payment systems have witnessed high levels of innovation and modernization. Central banks have equally evolved and come a long way in how they have supported the development of an enabling ecosystem. Likewise, the Bank of Mauritius has constantly progressed from interbank payments effected by telex transfers in the nineties to the implementation of an innovative and technology-enabled digital platform allowing for payments around the clock. In the year 2000, the Bank implemented a real-time gross settlement system, the Mauritius Automated Clearing and Settlement System. The MACSS, as it is commonly known, has been the cornerstone of a new payment processing infrastructure. The MACSS is the centrepiece of all interbank fund transfers in the country. While providing a means for real-time interbank payments, the MACSS is also used for settlement of cheque clearing positions of the Port Louis Automated Clearing House (PLACH). The PLACH was established in 1967 for the collection of taxes and other revenues for the government. 1/3 BIS central bankers' speeches The introduction of mobile payments was yet another important milestone in the digitalization process. However, in the absence of a central platform, service providers operated their private schemes in a silo model and this initiative did not have the expected impact. To bridge this gap, the Bank established a National Payment Switch, the Mauritius Central Automated Switch. Branded as MauCAS, the switch is a 24/7 digital payment system based on novel state-of-the-art technology. This innovative digital platform makes banking, e-commerce and mobile payments interoperable and encourages cashless means of payment. Fintech firms can leverage on this platform to offer value-added services and provide banks with opportunities to collaborate with emerging technologies service providers. This synergy not only brings more efficiency in the system but also acts as a catalyst in the digital transformation of the economy. Ladies and Gentlemen, When I assumed office in March this year, I took several initiatives to pave the way from a cashbased to a highly electronic and digital structure. The upgrading of the MACSS and the Bulk Clearing System, the setting up of a platform for facilitating digital customer identification and the implementation of an infrastructure to support digitalization of government payments are some of these initiatives. My vision is to uplift the payment ecosystem in Mauritius to a level comparable to that of advanced economies, and make it a key pillar for the digitalization of the economy. I am pleased to share with you that, as a result of an effective collaborative approach with all banks since April this year, all banks offering retail payment services in Mauritius have already joined the MauCAS platform. I thank all banks for having delivered on what seemed to be a tall order in April this year, that too despite the lock-down period. In line with our strategy to expand the payment landscape, we are now actively facilitating the integration of non-bank operators to the National Payment Switch as well. Work is equally ongoing on a number of key initiatives which will further facilitate digital transformation of banking and payment services. These include digital identification using new technologies such as facial recognition and other associated tools as well as the establishment of the central KYC system to enable digital customer on-boarding in both the banking and nonbanking space. Another ground-breaking forthcoming innovation that the Bank is currently embarked on is the introduction of a framework which will allow digital banks to operate in Mauritius. Our role in the payment space is not limited to the domestic market only. The Bank is also participating in the cross-border regional payment initiatives of the SADC and COMESA, in line with our role as an active international financial centre in the region. The Bank had been closely involved with the COMESA Clearing House in the setting up of the Regional Payment and Settlement System – the REPSS – with the overall objective of encouraging intra-trade in the COMESA region. The Bank is currently the settlement bank of the REPSS and settles transactions in US Dollars and Euro on the same day for 9 central banks in the COMESA region, namely those of the Democratic Republic of Congo, Egypt, Eswatini, Kenya, Malawi, Rwanda, Uganda, Zambia and of course Mauritius. Regional payment systems enable settlement of cross-border transactions faster without having to rely on intermediary banks outside the region. This offers several advantages to countries in the region in terms of cost savings and transaction time. As Intra-Africa and regional trade continues to grow, the MauCAS will play a key role in further 2/3 BIS central bankers' speeches facilitating the integration of our domestic payment infrastructure with regional payment systems. The MauCAS platform, through the IPS – the Instant Payment Switch – has far-reaching potential for commercial transactions. With the IPS, we can even go much further in respect of crossborder operations by tapping into new digital payment infrastructure through open application programming interfaces (APIs). Very soon, these regional payment infrastructures will be integrated with other regional payment systems of the African Continent. This will expand the horizon for business and trade at cheaper costs. The Bank is actively participating in this initiative as a member of the Association of African Central Banks. In November this year, we have been designated Deputy Chair of the Committee working on a Pan-African Integrated Mobile Payment System. At the level of the Bank, we remain highly committed to the sustained development of an enabling ecosystem. To this end, I have set up a FinTech Committee comprising the Bank, the Financial Services Commission, leading local and global operators and service providers in the FinTech space. This committee will assess and provide clear and actionable recommendations on the way forward for the development of FinTech in the banking and non-banking financial space. The first report of the Committee is expected in Quarter 1 2021. I am equally pleased to share with you that, as part of the commitment to continuously innovate and improve service to the business community, the Bank is embarking on an assessment of improving efficiency in its real-time gross settlement system and potentially making the MACSS operate on a 24/7 basis. This will improve ease of doing business and enable the business community to better handle their payments. Ladies and Gentlemen, I have noted low adoption of payment infrastructure by the local business community. I therefore encourage all of you present today and, through the MCCI, the entire local business community to adopt payment infrastructures and to improve efficiency for themselves and their clients by taking full advantage of the initiatives the Bank is rolling out for payment systems both domestically and regionally. I hope that today’s informative session will provide you with deeper insights on the merits of the MauCAS and the SADC and COMESA cross-border payment systems. The Bank’s Payments team will take you through detailed presentations and I encourage you to make the session as interactive as possible by asking your questions. With these words, Ladies and Gentlemen, I wish you a very fruitful session and deliberations. I also take this opportunity to wish you and your close ones our best wishes for the New Year. I thank you for your attention. 3/3 BIS central bankers' speeches | bank of mauritius | 2,020 | 12 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the IMF Monetary and Capital Markets Department & Africa Training Institute Online Course on Core Elements of Banking Supervision, Port Louis, 12 April 2021. | Harvesh Seegolam: Launch of the IMF Monetary and Capital Markets Department & Africa Training Institute Online Course on Core Elements of Banking Supervision Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the IMF Monetary and Capital Markets Department & Africa Training Institute Online Course on Core Elements of Banking Supervision, Port Louis, 12 April 2021. * * * Ladies and Gentlemen, Good morning and a very warm welcome. It is my pleasure to address you today virtually in the context of this seminar on “Core Elements of Banking Supervision”. I wish to thank Mr Wane, the Director of IMF Africa Training Institute, and Mr Mohan, Expert for the IMF on Banking Supervision at AFRITAC South, for facilitating this seminar. The course, crafted for supervisors who recently joined the world of central banking, has indeed evolved into a flagship program of the IMF. It surely reflects the importance of capacity building in banking supervision. I must say that this course is very topical as African countries, just like other nations across the world, are grappling with COVID-19 which is straining not only financial institutions but also supervisors. Ladies and gentlemen, The COVID-19 crisis has underlined the frontline role of central banks as providers of immediate response to economic wildfires. Indeed, central banks have demonstrated their capacity to muster substantial financial resources rapidly. Since March 2020, the Bank of Mauritius has been actively mitigating the impact of the pandemic on the financial system. In addition to swift monetary policy actions, a blend of conventional and unconventional measures was introduced under the Bank’s COVID-19 Support Programme. The measures aim at providing flexibility to banks and economic stakeholders, and safeguard the economy. To support businesses, a Special Relief Amount, a Special FX line of credit and swap arrangements for import-oriented businesses were introduced. The setting up of the Mauritius Investment Corporation was a milestone in our endeavour to protect the economy by avoiding the collapse of Covid-impacted systemic businesses. Capital preservation and regulatory forbearance are other important tools adopted by the Bank. In that regard, guidance was given to banks and non-bank deposit taking institutions on the application of IFRS 9 in the current context. Optional transitional arrangements were provided for the regulatory capital treatment of IFRS 9 provisions. The Cash Reserve Ratio was lowered, and the implementation of the last tranche of the capital conservation buffer was extended. The Bank of Mauritius also focused on alleviating the pressure on vulnerable households through moratoriums on loan repayments, with the Bank even bearing the interests on household loans on two occasions for a total period of 6 months. Ladies and Gentlemen, 1/3 BIS central bankers' speeches While maintaining financial stability and supporting businesses and households is high on the agenda of regulators, there is no compromise as regards AML/CFT. I am pleased to note that in this training session, the IMF experts will take you through the fundamentals and mechanics of rigorous international banking supervision best practices. The banking sector is the most intensely regulated industry worldwide, and with good reason. Risk-based approaches to Anti-Money Laundering and Combating the Financing of Terrorism and Proliferation are, now more than ever, of prime importance. Since last year, I have been responsible for leading the Mauritian team in the discussions with the Financial Action Task Force, to underline the progress achieved by Mauritius. We have equally set up an Interagency Cooperation Committee regrouping all supervisory authorities with an AML/CFT mandate in Mauritius. This Committee operates under my chairmanship and we remain fully committed with respect to national and international AML/CFT efforts. Under the ICC, we are coordinating with all supervisors to share hands-on experience in riskbased supervision and in delivering AML/CFT outreach sessions, be it to banking, financial services or DNFBP stakeholders. In this COVID-generated maze, having the proper regulatory and supervisory tools and techniques is instrumental, especially in view of new or rising challenges. The Bank of Mauritius has spared no effort to uphold the soundness and resilience of the banking system and protect the interests of depositors and the public at large. The Bank has kept abreast of the evolution of Basel I, II and III standards. It is essential that central banks move towards a risk-based approach, and that the regulatory and supervisory frameworks be also strengthened. We have to continuously invest important efforts and resources to ensure our staff is duly equipped in terms of supervision skills and they are kept abreast of latest developments. Ladies and Gentlemen, Additionally, during these testing times, new risks are surfacing with the sudden accelerated digital transformation of the banking sector spurred by the pandemic. Mobile payment applications, digital banking, data analytics, artificial intelligence as well as unprecedented largescale remote working are impacting IT resources and are giving rise to cybersecurity risks. The increased usage of digital channels is equally having a bearing on financial crime. Customer expectations are showing new trends. Concurrently, as part of the banking evolutionary process, changes are happening on the front of climate change, FinTech, cloud-based services, digital banks and artificial intelligence to name a few. Supervisors should be able to navigate within the new confines of the banking environment. They should be capable of reacting to the unexpected, and crafting adequate regulatory and supervisory responses. More importantly, they should be capable of striking, at the very first go, a near-perfect balance between the soundness of the financial system and sustaining economic activity. This is why, as forward-looking regulators, central banks have to fully embark on the digital journey. At the level of the Bank of Mauritius, with the Technical assistance of the IMF, we are currently developing our own Central Bank Digital Currency. The upcoming deployment of a digitalised c-KYC platform as well as the forthcoming introduction 2/3 BIS central bankers' speeches of a dedicated licence for digital banks are some of the other major projects the Bank is currently working on. We are also closely monitoring heightened conduct risks and cybersecurity issues. Ladies and Gentlemen, The pandemic is also prompting enhanced monitoring and shrinking the timelines for the implementation of corrective measures. I can anticipate that regulators will need to engage in a process of perpetual risk and priority reassessment. Policies will be bound to focus on crisis-generated risks and their impact on credit portfolios and liquidity pressures. Data requirements need to be reviewed and a higher frequency may be required for reports that support supervisory duties. Similarly, fundamental supervisory tools like stress testing and onsite inspections call for an evolution of their operational modality so that supervisors can remain abreast of situations requiring urgent action. As banks and financial institutions operate regionally and globally, increased cooperation and coordination between local and foreign regulatory counterparts become equally vital. Such collaboration enhances exchange of information and home-host supervision, while facilitating any required collective upgrade of supervisory regimes. In this regard, I am a fervent proponent of cooperation. In that regard, since March last, the Bank of Mauritius has signed several memoranda of understanding with other central banks and regulatory agencies, and have many others in the pipeline. Ladies and Gentlemen, The risk of recurring waves of pandemic is material and calls for adaptability. As this varies from country to country, supervisors will have to focus on commonalities rather than divergences. They should learn from peers about practical solutions, institutional arrangements, legal improvements, and market practices implemented in other countries. This being said, as budding supervisors, you should be wary of one fact: there is no one-sizefits-all solution. An approach that works in a jurisdiction may not necessarily work in another due to countryspecific variances in the structure of the banking and financial systems, supervisory capacity, legal framework, regulatory standards, availability of financial resources and the level of economic sophistication. Before I conclude, I would like to emphasise one very important aspect in supervision. Like I just said, sharing of experience and expertise is a key ingredient not only for continuous improvement but also for efficiently discharging your duties. I therefore encourage all participants to make this event as interactive as possible, and to use it as a springboard for networking opportunities. With these words, I wish you a very fruitful seminar. 3/3 BIS central bankers' speeches | bank of mauritius | 2,021 | 4 |
Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, on the Maiden Edition of the Bank of Mauritius Thought Leadership Series on "Banking Resilience: Global and Domestic Perspectives", 23 July 2021. | Harvesh Seegolam: Banking resilience - global and domestic perspectives Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, on the Maiden Edition of the Bank of Mauritius Thought Leadership Series on “Banking Resilience: Global and Domestic Perspectives”, 23 July 2021. * * * First Deputy Governor Second Deputy Governor Chairman of OMFIF Members of the Bank of Mauritius Advisory Committee Chairperson and CEO of the Mauritius Bankers Association CEOs of banks Ladies and gentlemen A very good morning and afternoon, depending from where you are joining us today. It is my pleasure to welcome you all to this maiden edition of the Bank of Mauritius Thought Leadership Series. An initiative that the Bank is bringing to the banking community and other stakeholders in general, on topical matters in this fast changing world in which we are today living. I wish to thank the OMFIF for partnering with the Bank of Mauritius for this inaugural edition. The Bank’s Thought Leadership Series will allow us to gain from the precious insights of worldacclaimed experts and personalities on key topics impacting, directly or indirectly, the banking and financial world. It will serve as an ongoing platform to generate ideas on how we need to adapt or re-adapt ourselves and our value propositions. This becomes even more important for highly open small-island economies, like Mauritius, dependent on tourism and financial services. The Bank of Mauritius will make its Thought Leadership Series a regular feature on topical matters. Our choice of the theme for the debut of the Thought Leadership Series – Banking Sector Resilience: Global and Domestic Perspectives –is explained by the importance of preserving stability and resilience of the banking and financial system amidst the global COVID-19 pandemic that has struck us since March last year. As a matter of coincidence, I started my governorship at the Bank of Mauritius with the outbreak of the pandemic. This theme is attracting significant attention globally. The BIS, IMF, OECD, OMFIF and many central bankers are relentlessly reflecting on how best to maintain stability and resilience of the banking sector. I am more than determined to continuously engage with our international partners as well as our local stakeholders in this ongoing reflection exercise. My objective has been to ensure that our banking and financial system stands the test of this unprecedented crisis that Mauritius is facing. Maintaining trust and confidence in the banking sector is a very high priority on my agenda. The more so that sound banks mean that individuals, households and the business community can be supported in both good and bad times. The escalation of the pandemic led to the closure of borders and the imposition of confinement measures which significantly disrupted activities in our key sectors. As a result, in 2020, the economy witnessed its worst contraction ever. The economic impact could have been more damaging without the support of the central bank. In delivering on this objective, the Bank of Mauritius has, since March last year, introduced its COVID-19 Support Programme. Faced with this unparalleled situation, the Bank has been very 1/3 BIS central bankers' speeches pro-active and effective in rolling out a mix of both conventional and unconventional measures to deliver on its core mandate which includes maintaining price stability and promoting the orderly and balanced economic development of Mauritius as well as preserving financial stability. Some of the key measures are: the lowering of the policy rate and the Cash Reserve Ratio in line with the accommodative monetary policy stance; the introduction of a Special Relief Amount through banks to allow businesses, including SMEs, to meet cash flow and working capital requirements; a one-off exceptional contribution to Government for economic stabilisation purpose; the introduction of moratoriums to alleviate financial strains on individuals, households and businesses; and a panoply of other regulatory forbearance measures. In addition, the Mauritius Investment Corporation Ltd (MIC), which the Bank set up in May last year, has been instrumental in preserving resilience in the banking sector. The MIC has successfully prevented potential failures of systemically important domestic companies. This has mitigated contagion risks from the real sector to the banking sector. The MIC continues to play a critical role in re-shaping the economic landscape of our country. Furthermore, in delivering on its mandate, the Bank has bridged the significant shortfall of foreign exchange inflows by regularly supplying foreign exchange to the market. By so doing, the Bank has been able to avoid heightened economic and financial vulnerabilities that would have posed a major risk to price stability in the country. The pertinence of our strategy to preserve banking sector resilience is evidenced by the stability that we continue to experience on that front. Indicators are self-explanatory. Banks remain well capitalised, with a Capital Adequacy Ratio of 18.7 per cent, which is well above the minimum regulatory requirement. The asset quality has also remained strong with overall non-performing loan ratio improving to 5.0 per cent as at end-March 2021 from 5.4 per cent as at end-September 2020. The Liquidity Coverage ratio stands at 250.6 per cent as at end-March 2021, well above the required level of 100 per cent. Ladies and gentlemen, what matters most, and especially for our CEOs of banks, is the fact that the banking sector continues to be profitable. Profitability enables banks to continue building buffers. Stress tests conducted by the Bank confirm that banks remain resilient. However, the reality is that we cannot sleep on our laurels. This is the time for us to gear up for the challenges ahead. We are well aware that, sooner or later, the support measures would need to be unwound in a phased manner. The critical point is to ascertain that any unwinding of support measures does not lead to financial stability risks. The phasing out of any measure must be done very cautiously. This is the reason why it continues to retain the attention of central banks around the world. To this end, the ongoing collaboration of the Bank with international organisations and counterparts is critical. The banking sector has played a key role in the application and success of the above support measures. I have to place on record the ongoing support of all stakeholders in navigating the banking sector through the pandemic. The two Taskforces that I set up in March last year, notably, the Task Force on COVID-19 Support Measures and the Taskforce on Banking Sector Resilience, chaired by the First Deputy Governor and the Second Deputy Governor respectively, continue to work in very close 2/3 BIS central bankers' speeches collaboration with the banking industry with the aim to maintain soundness of banks. In conclusion, it is important to note that the banking industry is being looked upon globally as a catalyst for economic recovery. Same is the case in Mauritius. I look forward to the banking industry playing its role in the domestic economic recovery and boosting the country’s resilience. The choice of banking resilience as the main theme today translates my commitment for the Bank of Mauritius to leave no stone unturned in accompanying the banking industry in this task. To this end, the Bank of Mauritius will continue to do whatever it takes. Ladies and gentlemen, although we cannot have all of you physically present here with us today due to prevailing sanitary conditions, I look forward to interactive discussions from CEOs of all banks present in this room. I have also taken note with satisfaction that the entire banking industry is following this discussion today through virtual means. For our first edition of the Bank of Mauritius Thought Leadership Series, I would like to thank our panellists also. We are indeed privileged to have with us Professor the Lord Mervyn King, Dr Vera Songwe, Dr Natacha Valla, Dr Robert Wardrop and Mr Daniel Essoo. I also thank Mr David Marsh, Chairman of the OMFIF who has kindly accepted to moderate today’s panel discussion. On this note, I wish you all successful deliberations. Ladies and gentlemen, Thank you for your attention. 3/3 BIS central bankers' speeches | bank of mauritius | 2,021 | 8 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Climate Change Centre, Port Louis, 14 October 2021. | Harvesh Seegolam: Launch of the Bank of Mauritius Climate Change Centre Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Climate Change Centre, Port Louis, 14 October 2021. * * * Mr Frank Elderson, Chairman of the Network of Central Banks and Supervisors for Greening the Financial System Ms Danae Kyriakopoulou, Senior Policy Fellow at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science Distinguished guests Online viewers Ladies and gentlemen Good afternoon It is my pleasure to welcome you, both physically and virtually, at the Bank of Mauritius for the launching of the Bank of Mauritius Climate Change Centre. The last decade has witnessed growing interest among policy practitioners, including Central Banks, for onboarding climate change considerations into policy design and implementation. This can be substantiated by the manifold risks that climate change directly or indirectly poses to the mandates of Central Banks, namely price stability and financial stability considerations, with potentially disrupting effects on the financial system and economy at large. Looking back, I can say that the landmark 2015 speech “Breaking the tragedy of the horizon – climate change and financial stability” by Mr. Mark Carney, former Governor of the Bank of England, then Chairman of the Financial Stability Board, and currently UN Special Envoy on climate change, might have triggered the interest of Central Banks in the climate change topic and put the pressure on them for initiating climate actions. Further, with the UN Intergovernmental Panel on Climate Change (IPCC) recently highlighting potential global warming of above 1.5 degrees Celsius, unless actions are taken for deep reductions in carbon dioxide and other greenhouse emissions in coming decade, the onus is definitely now on Central Banks to take forward the climate change topic as part of their sustainability agenda. Ladies and gentlemen, Climate change is increasingly being regarded as the next main global threat to economic activity after the COVID-19 Pandemic. Indeed, recent polls show increasing awareness of climate change particularly at the level of youngsters. More than half of the people in middle-income and least developed countries, and nearly three-quarters among people in small island states and high-income countries deem it a global emergency. The COVID-19 pandemic has brought 43 percent of the world’s population to worry about climate change. However, unlike the Pandemic which is largely recognized as a ‘Black Swan’ event in view of its unpredictability and large magnitude, climate change is more of a ‘Green Swan’ event, that is more predictable in nature but still large in magnitude with large potential negative cross-border externalities. Although climate change cannot, per se, be reversed, its effects on society can nonetheless be managed through appropriate risk prevention and transfer mechanisms. Here, we can turn on to the wise tenets of environmental economics for appropriate guidance. Action regarding climate change should not be limited to one individual country only. Due to its cross1/4 BIS central bankers' speeches border nature, negative externalities have to be somewhat contained. The public policy response should also contain appropriate incentives to prevent free-riding by some states which may ultimately defeat the collective response needed to tackle climate change in a sustainable way at a global level. As a result, a collective action is needed from stakeholders across the world to help contain the nefarious cross-border effects of climatic changes on our bio diversities, our socio-economic fabrics and our economies at large. Ladies and gentlemen, I am particularly pleased to see that in Mauritius, conscious of the climate change impacts, we have integrated climate change into policy actions at various levels in fact, emphasis is being placed on sustainable development along four pillars namely (i) investing in clean energy, (ii) shifting to a cleaner and greener Mauritius, (iii) mitigating risks from climate change and (iv) protecting our marine resources. The urgency of the situation is unfortunately such that actions by governments alone would now not go a long way towards addressing climate change risks. Other actors such as nongovernmental organizations, scientists, academics and even consumers and investors will have to step up their efforts in their respective areas to make the fight against climate change as meaningful as possible. In this stride, Central Banks are increasingly leading the way in internalizing the negative externalities of climate change into their decision-making and support efforts for greening the economic landscape. At the Bank of Mauritius, we have embarked upon initiatives to set the ball rolling on the climaterelated front for quite some time now. In fact, one of the first measures I took on assuming Governorship of the Bank was to apply for membership at the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). This was positively considered and the Bank was admitted as member in July 2020. The NGFS has already accomplished a lot in coalescing research on climate change risk into global policy avenues and I must say that its guidance has unequivocally supported us in furthering our own climate agenda. In this respect, ladies and gentlemen, please join me in thanking our distinguished guest, Mr Frank Elderson, the Chairman of the NGFS, for his continued belief in the Bank of Mauritius’ initiatives. Indeed, the Bank of Mauritius has been very active in promoting the sustainability agenda amongst its regulatees. The Bank, as you are aware, has launched in June this year, the Guide for the Issue of Sustainable Bonds. In September, we released for consultation a draft guideline on climate-related and environmental financial risk management to banks and non-bank deposittaking institutions. Beyond that, the Bank is diversifying its investment portfolio to factor in the element of sustainability. As regards our efforts, I am glad to announce today that we are establishing a Climate Change Centre in line with international trends and what many central banks around the world have initiated. I earnestly hope that other Central Banks will follow suit, given the urgency of addressing climate change risks. Ladies and gentlemen, But before I explore together with you the new frontier of possibilities that the Climate Change Centre brings to the Bank of Mauritius, it is important that we first delve into the raison d’être of our action against climate change risks especially against the backdrop of our unique vulnerabilities. On the economic front, climate change, creates uncertainties with potentially systemic consequences. First of all, natural calamities spurred by climate change can disrupt entire supply chains and drive price levels upwards. Secondly, in the longer term, the transition to a lower carbon economy may, in the absence of an interim plan, turn a whole gamut of so-called brown businesses into sunset industries with risks of layoffs further depressing economic activity. But most importantly, I have in mind the possibly stagflationary effects of climate change – we may have on hand both rising price levels and slowdown in economic activity. 2/4 BIS central bankers' speeches Ladies and gentlemen, Mauritius has, despite its limited energy and financial resources, embarked on an ambitious path to reduce its carbon footprint. In fact, as a citizen of Mauritius, I have to say that I am proud to see that Mauritius has ratified the Paris Agreement and has committed itself to reducing its greenhouse gas emissions by 30 per cent by 2030. A series of other green measures have also been adopted in the last national budget and as we continue our journey in a climate change impacted world, these measures are likely to multiply and the currently nascent global green megatrends will undeniably gather pace. Indeed, in the coming weeks, at the COP26 meeting, countries will be reflecting on more ambitious climate actions considering the urgency of the situation. However, as Central Banker, I am concerned by the possible impact of these measures, as well as those of extreme weather events and environmental disasters, on financial institutions and, by ricochet, the stability and soundness of the financial system. Ladies and gentlemen As I have explained, and as international standard setters such as the NGFS and Financial Stability Board have pointed out, climate change may have important consequences on price stability, financial sector stability and the economy at large. This is why the Bank of Mauritius is today taking resolute action on climate change risks through the establishment of the Bank of Mauritius Climate Change Centre. Central Banks that have decided to act on the climate issue are doing so through a myriad of different structures based on the uniqueness of the challenges that they face, while they tend to have some common ground in their initiatives. At the Bank of Mauritius, we have decided that the Climate Change Centre will spearhead our efforts in measuring, analysing, managing and mitigating climate change risk. The Climate Change Centre will regroup the efforts of the different departments of the Bank in tackling climate related and environmental risks. We also feel that its dedicated focus and also ability to co-opt scientific resources will swiftly enable us to break new ground on this front. With regards to the objectives of the Climate Change Centre, we have decided that, for now, these will be in the form of a quadriptych. Indeed, the Climate Change Centre will seek to enhance the resilience of the financial system against climate change risks, support the development of sustainable finance and endeavour to embed climate-related and environmental risks considerations in the conduct of our monetary policy as well as in our physical operations. We also expect that the Climate Change Centre will support our international engagement on the climate agenda. I hope that we will soon be able to assist our fellow regional Central Banks in devising their own roadmaps for managing climate change risks. The Second Deputy Governor will shortly tell you more about our Climate Change Centre. Ladies and gentlemen As a Small Island Developing State, we have been particularly hardly hit by the economic consequences of COVID-19. This notwithstanding, we remain resolute in pushing ahead with our initiatives against climate change risks. However, the effects of climate change are rapidly intensifying and are also become increasingly intertwined with environmental degradation. Hence, it is the need of the hour for all key stakeholders of our society, including scientific resources and private businesses, to combine their efforts for the national climate action of Mauritius to become really meaningful and inspire positive change internationally. As we look ahead, if we aim to achieve sustainable and inclusive recovery, we should not be oblivious to our green credentials. Indeed, building a greener, more sustainable and more climate-resilient economies is now an important part of the growth equation. We, at the Bank of Mauritius, have 3/4 BIS central bankers' speeches already begun this journey by taking the right step in launching the Climate Change Centre. Four Task Forces have been set up, and I invite all stakeholders to actively interact with them, and with the Climate Change Centre, to further the climate change agenda and contribute to the elaboration of strategies. The involvement of stakeholders is key especially as regards capacity building, exchange of information and data sharing. There is a dedicated webpage which the Bank has created. You can see it on the screen right now. The webpage contains all the relevant information and contact details. Ladies and Gentlemen, The launch of the Bank of Mauritius Climate Change Centre is indeed a major step for the country. It is a legacy for future generations. It is even more timely, as it comes to us as a prelude to COP-26, which is due next month. With these words, I thank you all for your attention and look forward to having a meaningful discussion with you during the break-out session. 4/4 BIS central bankers' speeches | bank of mauritius | 2,021 | 10 |
Speech of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the opening of the workshop on "Beneficial ownership disclosure frameworks", Port Louis, 23 November 2021. | Mardayah Kona Yerukunondu: Beneficial ownership disclosure frameworks Speech of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the opening of the workshop on “Beneficial ownership disclosure frameworks”, Port Louis, 23 November 2021. * * * Mr Alexander Taymans, Mr Arnaud Stien and Mr Igor Bereza, Experts of the EU Global Facility Isabel Yadira Vecchio, Technical Secretary, Ministry of Economy and Finance of Panama Samya abdel Rahman Abou Sharif, Chief – Anti Money Laundering and Financing Terrorism Unit Jordan Representatives of the Financial Services Commission Ladies and Gentlemen A very good morning to you! It is my pleasure to welcome you to this workshop on Beneficial Ownership. Allow me first and foremost to express the sincere gratitude of Mauritius to the European Union for the invaluable support provided to competent authorities to implement the ICRG Action Plan and exit the FATF Grey list. We understand that the exit of Mauritius from the EU list of High Risk Third countries has to undergo a certain process, but we are confident that such exit is imminent. Our appreciation also goes to the Experts of the EU Global Facility, a key partner for Mauritius on our AML/CFT journey to improve the effectiveness of our AML/CFT systems. We are indeed grateful for the technical assistance which you have provided in the various AML/CFT areas, including the theme of Beneficial Ownership. Your assistance to improve our Guidance and Supervisory manuals is highly appreciated, as these will be highly instrumental to bring industry practices at par with global standards. Ladies & Gentlemen, the theme of Beneficial Ownership has been high on the agenda of the FATF and consequently, on that of supervisors and legislators worldwide. Media sources have highlighted numerous global scandals and high-profile cases showing that one of the ways through which criminals still manage to launder their illicit proceeds without any hurdles is through their ability to obscure the ownership of their tainted assets while still retaining control over them. Allow me to bring to mind that as supervisors, you are at the forefront of the combat against money laundering and financing of terrorism. The sectors under your purview are the first lines of defence for the country against these risks and you are the overseers of their AML/CFT systems. Therefore, your role in ensuring the adequacy of governance, controls and processes in the financial institutions under your supervisory purview is crucial. Though sanctions have long been known to be an effective supervisory tool to ensure compliance, the tool of education should be used in the first instance for more effective results. The FATF has highlighted the importance of education which is a key supervisory tool for effective AML/CFT systems. Supervisors are students and also trainers, not only instilling knowledge, but also transforming compliance cultures of regulated entities. 1/2 BIS central bankers' speeches So, Ladies and Gentlemen, may I wish you fruitful deliberations in this workshop, which I hope will bring added value to your work in the area of Beneficial Ownership. Thank you for your attention. 2/2 BIS central bankers' speeches | bank of mauritius | 2,021 | 12 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the workshop on "Countering terrorist financing risks in the non-profit organisation sector, Port Louis, 25 November 2021. | Speech of Mr Harvesh Seegolam, Governor, Bank of Mauritius at the Workshop on Countering Terrorist Financing Risks in the Non-Profit Organisation sector Thursday 25 November 2021 Le Méridien Hotel Mauritius Madame Zitha, Co-Chair of FATF’s Africa Middle East Joint Group Mr Hotte, Team Leader of EU AML/CFT Global Facility Dr Beekarry, Director General of Independent Commission against Corruption and Co-Chair of the AML/CFT Core Group Mr Yerukunondu, First Deputy Governor of the Bank of Mauritius and Chairperson of Financial Services Commission Mr Purmessur, Permanent Secretary at the Ministry of Financial Services and Good Governance Experts joining us from the EU AML/CFT Global Facility Heads of Competent Authorities Members of the press Ladies and gentlemen A very good morning to all of you. I am particularly pleased to address you this morning at this workshop, which is part of a series of workshops facilitated by the EU AML/CFT Global Facility since last week. This initiative reaffirms the ongoing commitment of Mauritius in its sustained fight against money laundering, terrorist financing and proliferation. The theme of the workshop - “Countering Terrorist Financing risks in the Non-Profit Organisation sector’’ is indeed a topical one which remains high on the agenda of FATF. It is a subject matter which all countries are currently very closely working on as the NPO sector remains very prominent globally. Similarly, in Mauritius, in line with our Action Plan which was spelt out by the FATF in February last year, we have been working on all identified deficiencies, including those under Immediate Outcome 10, that concerns the NPO sector. Through the high-level political commitment and enhanced collaboration between all competent authorities, we have been able to successfully demonstrate to the FATF Joint Group, the ICRG and the Plenary that we have largely addressed all action items well ahead of our specified timeline. This journey has however required a lot of efforts across various levels. It has entailed, amongst others, the development of appropriate National AML/CFT Strategy encompassing amongst others, an overhaul of the AML/CFT legal and regulatory frameworks, implementing comprehensive risk-based supervision frameworks, enhancing regional and international cooperation, consolidating capacity building, training and outreach programs. In this process, the Core Group, which has now been entrenched in the legal framework, was set up under the chairmanship of the Financial Secretary and co-chaired by myself and the Director-General of the Independent Commission against Corruption to develop and coordinate the strategies, policies and actions to ensure the implementation of the recommended actions in the 2018 Mutual Evaluation report. The Core Group now has the mandate to ensure the sustainability and continuity of the AML/CFT reforms and to take appropriate actions for any emerging AML/CFT risks. I must here express my deep-felt gratitude to the EU Global Facility which has been instrumental in the process for Mauritius to exit the FATF list. Continuous support and assistance have been provided by the EU Global Facility since September 2019 when they came to Mauritius to carry out a scoping mission for delivery of technical assistance, the objective of which was to help Mauritius implement relevant actions with respect to AML/CFT. In this respect, I would like to enumerate some of the specific fields where support was provided to Mauritius: i. Technical assistance to the Gambling Regulatory Authority to implement the risk-based supervision framework, capacity building for staff and provision of outreach to the Gambling sector; ii. Assisting Mauritius in conducting the NPO Terrorist Financing Risk Assessment, training of the NPO regulators, the law enforcement agents, including the Mauritius Revenue Authority; iii. Training on the requirements of Beneficial Ownership for the financial sector and banking sector and DNFBP supervisors. This includes the formulation of a specific Guidance and supervisory manual on Beneficial Ownership for Bank of Mauritius’ licensees and staff. These two documents provide more granular guidance for alignment with international standards on BO information; and iv. Coaching the Mauritian Authorities for reporting to FATF on the ICRG Action Plan. This is indeed to mention just a few of the projects where we have collaborated. Many others are in the pipeline also. Ladies and gentlemen, Given the exit of Mauritius from the FATF list of countries under increased monitoring ahead of its timeline, the country is now being looked upon to provide assistance and sharing experience with other countries in the ICRG process. In this regard, Jordan and Panama are among the first countries to have benefited from the experience of Mauritius. This will not have been possible without the support of the EU Global Facility team. I am equally pleased to share that at the level of the Bank of Mauritius, we are in discussion with a number of other Central Banks across the African continent on the topic of AML/CFT and will soon be starting sharing expertise and experience in this field. Ladies and gentlemen, The exit from the FATF list heralds a new era where new challenges await us, such as ensuring sustainability of progress achieved and continuously adapting ourselves. Building resilience in AML/CFT matters should be at the forefront of the agenda of all Competent Authorities. Over the past two decades, the FATF has been driving regulatory change to improve safeguards against money laundering, terrorist financing, and the financing of weapons of mass destruction. These standards are constantly being revamped to address new and emerging risks. Through the mechanisms which we have set up, we will continue to undertake the necessary reforms on an ongoing basis. We will continue to work closely with our key partners, including the ESSAMLG and international counterparts in this process to ensure compliance and effectiveness; thus, maintaining the sustainability of reforms over both the medium and long term. Ladies and gentlemen, Turning to the topic of today, NPOs are uniquely positioned to harbour vulnerabilities that make criminal exploitation more likely, particularly for terrorism financing. Cross-border Terrorist Financing risks, the abuse of cash and remittance systems are areas of concern for the NPO sector. This is where at the level of the Bank of Mauritius, we are sparing no efforts in our actions to ensuring that banks and financial institutions work very closely with us to identify, mitigate and address any such risks. It becomes even more important given the risks that it may cause to financial stability as well in the country. To this end, the Directorate of AML/CFT at the Bank of Mauritius is being constantly equipped with the necessary know-how and expertise. This is to ensure that regulated entities take appropriate actions to mitigate their AML/CFT risks effectively and comply with AML/CFT obligations. In the area of technical compliance, Mauritius was rated as non-compliant for Recommendation 8, i.e Non- Profit Organizations in the Mutual Evaluation Report of 2018. Today, we have moved to a Largely Compliant rating after taking various initiatives such as the introduction of amendments to strengthen laws applicable to NPOs, monitoring of the NPO sector and the conduct of a NPO Risk assessment, in line with the requirements of the FATF. We recall that the risk assessment was carried out with technical support from the EU-funded Global AML/CFT Facility Consultants, our partner on our AML/CFT journey. The results of the risk assessment show that the overall inherent risk of terrorist financing abuse of NPOs in Mauritius is Low-Medium. However, given the growing global threat of terrorism, terrorism financing risk should nonetheless remain at the forefront of our agenda. Ladies and gentlemen In view of the risks associated with the NPO sector, supervisors should continue to exercise their power of oversight to monitor NPOs and ensure their overall adherence to AML/CFT obligations. It is crucial to maintain the effectiveness of the lines of defence and ensure that they are equipped at all times with effective risk management tools, to prevent criminals from using their activities and systems for conducting terrorist financing. Another very effective tool to protect the sector from the risks of terrorist financing, is the conduct of regular outreach and training to ensure that both the NPO sector and supervisory staff as well as the private sector are aware of any updates in risk understanding. We understand that the NPO sector has been subject to extensive outreach sessions. The authorities in Mauritius are well aware of the importance of education in the area of AML/CFT. We have set up a coordination mechanism, namely the Interagency Coordination Committee (ICC), which I chair, and comprises financial sector, DNFBP and NPO supervisors, to, inter alia, disseminate informational and educational programs to both oversight authorities and the private sector. The ICC is a platform for improving supervisory effectiveness namely, through pooling of resources for joint training and outreach for the industry and for experienced financial sector supervisors to provide assistance to DNFBP and NPO sectors. Coordination among the authorities remains a powerful tool to increase the effectiveness of AML/CFT endeavours, and in the area of education, it creates a ripple effect as knowledge and experience are shared among supervisors. Since February 2021, the ICC has conducted 10 AML/CFT outreach and training programmes. Along the same lines, the Bank of Mauritius and the Financial Services Commission have launched an AML/CFT Graduate Program where 100 graduates would be trained on AML/CFT for one year. This Program will ensure adequate human resources in AML/CFT across all sectors. The actions taken by Mauritius have set the stage for further positive amendments for the NPO sector. In my capacity as the Head of the Mauritius Delegation for our discussions with the FATF’s Africa Middle East Joint Group, I wish to reiterate that Mauritius will leave no stone unturned to enhance the efficiency and effectiveness of its AML/CFT regulations and systems in line with FATF requirements and best standards. I take this opportunity to underline that the Authorities are fully committed to have the upper hand in the combat against money laundering and terrorism financing. I also take this opportunity to once again thank the EU AML/CFT Global Facility for the ongoing assistance and guidance. Our journey with the EU Global Facility will be sustained in the long term for further building resilience across our sectors on AML/CFT matters. One such forthcoming project with the EU Global Facility covers correspondent banking. I look forward to yet another successful project together. We also look forward to our continuous engagements with respect to the exit of Mauritius from the EU list of high risk third countries in the near future. With these words, ladies and gentlemen, I wish you all fruitful deliberations in this workshop. I hope that it will enhance your knowledge and bring added value to your work. I thank you for your attention. -------------------------------------------------------END OF SCRIPT---------------------------------------------Governor Harvesh Seegolam Le Méridien Hotel, Mauritius | bank of mauritius | 2,021 | 12 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Annual Edition Magazine and celebration of the 45th anniversary of the Association of Human Resource Professionals of Mauritius and 9th Anniversary of the African Human Resource Confederation, Balaclava, 17 December 2021. | Harvesh Seegolam: Implications of the COVID-19 pandemic for human resource professionals Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Annual Edition Magazine and celebration of the 45th anniversary of the Association of Human Resource Professionals of Mauritius and 9th Anniversary of the African Human Resource Confederation, Balaclava, 17 December 2021. * * * The President and Vice President of the Association of Human Resource Professionals of Mauritius and the African Human Resource Confederation Members of the Executive Committee of the Association and of the Confederation Distinguished Guests Ladies and Gentlemen Good evening. It gives me great pleasure to be with you tonight. I would like to thank the Mauritius Association of Human Resource Professionals for inviting me to celebrate the Association’s anniversary as well as that of the African Human Resource Confederation. I understand that the 2021 edition of the magazine focuses on a very topical theme, namely, I quote: “CORONAVIRUS PANDEMIC HAS AMPLIFIED THE SIGNIFICANCE OF HUMAN RESOURCE MANAGEMENT.” End of quote. The COVID 19 pandemic has indeed had a very disruptive effect on the world as we knew it. It has impacted the economy, the social fabric, human interaction and our working environment and business methodologies. Just two days ago, at the press conference following the Monetary Policy Committee Meeting, I underlined the unprecedented challenges that have stemmed from the onset of the COVID-19 pandemic since March 2020. These challenges prompted the Bank of Mauritius to swiftly introduce its COVID-19 Support Programme. It contained a series of both conventional and unconventional measures to support businesses, households and individuals financially impacted by the pandemic. Another milestone solution was the establishment of the Mauritius Investment Corporation Ltd. Through a bold array of measures, the Bank of Mauritius has contributed to salvaging the economy, saving jobs and shielding businesses, especially systemic corporates, against the economic backlash of the pandemic. Just as I have underlined the economic imperatives, I can fathom from a human perspective how profoundly COVID-19 has affected the lives of people. At its core, the COVID-19 pandemic is a human crisis and I appreciate that this has caused human resource professionals to revisit all the fundamentals around which they had built their strategies. It is in that spirit that, since the outbreak of the pandemic, the Bank of Mauritius and its regulatees worked hand in hand to find the right strategies for maintaining business continuity across and beyond the confinement period. While serving customers was a priority, the Bank also saw to it that all required sanitary protocols were adhered to in order to protect both the public at large and employees in the banking industry. 1/3 BIS central bankers' speeches The Bank of Mauritius too initiated several measures to ensure the safety and health of its employees whilst also ensuring that operations were maintained. With a view to mitigating propagation risks, a work from home strategy was implemented in August 2021. Currently, around 30 per cent of staff are working from home and we see to it that the disinfection of the Bank’s premises is conducted on a weekly basis. Thinking and working as a team and making no compromise on our staff’s safety has allowed all functions to be operational during the pandemic. The Bank’s internal COVID protocol is being continuously adjusted in the light of latest information on the evolution of the coronavirus. Ladies and Gentlemen, Digitalisation and distributed work arrangements may be the answer to some of the pressing challenges that organisations are facing in the wake of the COVID-19 induced disruption. The pandemic has in effect accelerated the shift towards technology-driven and sustainable processes. It is a fact that no enterprise, no organisation, or country can aspire to sustained growth without a healthy, skilled and motivated workforce. This is justly why I am fully committed to enabling the Bank’s staff to acquire the necessary skills and provide them with the most appropriate tools and work environment. The objective is to ensure that the Bank can continue to seamlessly deliver on its statutory objectives even in worse case scenarios. I know that, just like the banking industry has endeavoured to come to the rescue of the economy, all of you too, as human resource leaders, have played a key role in tackling resourcing and efficiency challenges posed by the pandemic. It is important that due tribute be paid to you for devising solutions to maintain business continuity and to help employees cope both professionally and psychologically with this unprecedented crisis. COVID 19 has indeed changed the experience of work for the vast majority of employees. It has forced organisations, both locally and across the globe, to revisit how work is organised and how jobs are designed. Another consequence of the pandemic is that the potential for fractures between employee groups has also increased. An example of such fractures is that there now exist groups of people who can work from home and those who cannot, those who remained on payroll versus those furloughed. There are also those in different business units who have been impacted differently. Needless to say that the pandemic has scarred current generations, and that it will also affect future ones. For that reason, I am truly appreciative of the fact that beyond handling the aftershocks of COVID-19, the focus of HR professionals is also on learning and development. These two elements add more value to organisations and help them muster resilience through capacity building. With the pandemic, virtual training programmes and seminars have known a boost, driving costs downwards and resulting in many of them being offered on free of charge basis. These online trainings have been warmly welcomed by all, ensuring that uplifting of knowledge, skills and motivation of employees are maintained. The coronavirus outbreak has forced us to rapidly adapt and rethink our priorities. But it has equally, in what we now term the ‘New Normal’, reminded us of the true meaning of complementarity, mutual support and working hand in hand, not only to provide financial security, but also to have a shared sense of purpose and belonging. The crisis has also brought to the fore how much we all rely on the work of others – be it healthcare professionals, retail staff, delivery drivers or the myriad of other formidable men and 2/3 BIS central bankers' speeches women who are risking their lives to keep the rest of us healthy, fed and safe. This is perhaps the best lesson that the pandemic has taught us and which we must endeavour to sustain. I wish to congratulate all human resource professionals who are having to make tough decisions, based on the limited and fast-movinginformationand with significant impacts, while also juggling concerns about their own family, friends and income security. Thank you for your contribution to bringing out the best in people, be it through generously sharing materials, expertise, time and perspectives or by making important personal gestures to keep friends and colleagues motivated through these difficult times… Ladies and Gentlemen, I would like to conclude by congratulating the Association of Human Resource Professionals of Mauritius and the African Human Resource Confederation for their anniversary celebration. It is also an occasion to put on record their commendable work to stand as a bedrock of professional excellence and for their unflinching effort to create a modern workplace that responds to the needs and ambitions of our country. As we emerge from the effects of COVID-19 and we embark on the process of recovery, it becomes clearer that the very structure of our economy is called upon to change. We must now focus on identifying new economic avenues for our future generations. My call to all HR professionals in Mauritius is to keep pace with our economic development as you have the key responsibility of preparing our labour force of tomorrow, not only for the banking and financial sector, but across the economy. On this note, as we all pray for better days, may I wish you and your families Happy Holidays. I thank you for your attention... 3/3 BIS central bankers' speeches | bank of mauritius | 2,022 | 2 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Bank of Mauritius Financial Literacy Strategy 2022 and the Second Edition of the Bank of Mauritius Thought Leadership Series on Financial Literacy in a Digital Era, Port Louis, 28 January 2022. | Harvesh Seegolam: Bank of Mauritius Financial Literacy Strategy Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Bank of Mauritius Financial Literacy Strategy 2022 and the Second Edition of the Bank of Mauritius Thought Leadership Series on Financial Literacy in a Digital Era, Port Louis, 28 January 2022. * * * Ms Flore-Anne Messy, Executive Secretary of the OECD International Network on Financial Education Deputy Governors Members of my Advisory Panel, Dr Vera Songwe, Dr Robert Wardrop and Mr John Cusack CEOs of banks and financial institutions attending this event either physically or virtually Managers and Heads of financial institutions operating in Rodrigues Members of the media Viewers following us live on social media Ladies and Gentlemen I wish you all a very good afternoon. It is a great pleasure for me to welcome you to the launch of the 2022 Bank of Mauritius Financial Literacy Strategy which we are rolling out today on a national basis, and to the second edition of the Bank of Mauritius Thought Leadership Series. The theme for the round table discussion that will ensue is ‘Financial Literacy in a Digital Era’. Our eminent panellists, who are also members of the Bank of Mauritius Advisory Committee, will be providing us with their unique insights on the importance of financial literacy, and how to best implement related strategies in Mauritius. I wish to announce that the Bank’s Advisory Committee has two new members, namely Mr John Cusack who is an authority on combatting financial crime, and Mr Robert Ophèle, Chairperson of the Autorité des Marchés Financiers of France and former Deputy Governor of the Banque de France. Given the importance of the subject matter, it could not have been more fitting to hold this event in the very year in which the Bank is turning 55. The unprecedented environment in which we continue to operate, and which is marked by the shadow of the COVID-19 pandemic, magnifies the pertinence of today’s event. I would not do justice to the significance of the financial literacy strategy being launched today if I fail to highlight the dangers of financial illiteracy. Indeed, a lack of financial literacy inevitably results in implementation of poor financial decisions, thereby dragging down the quality of life of citizens, and severely impacting the very efficiency of our banking and financial systems. Ladies and gentlemen, We cannot speak about financial literacy without taking heed of how past events have played a major part in reshaping the global thinking on this front. The effects of the global financial crisis on markets are indeed still fresh in our minds. 1/4 BIS central bankers' speeches History – and a too late array of empirical evidence and research – has shown how the lack of awareness on the part of consumers in advanced economies drove them to make flawed decisions on the subprime mortgages and synthetic instruments used for trading. The drive for higher returns, coupled with a lack of visibility on the risk side, prompted many people to invest in these securities. These events eventually highlighted the critical importance of financial literacy, prompting its inclusion as a matter of priority on the agenda of policy makers globally. In September 2009, at the G-20 Leaders’ Summit in Pittsburgh, a pledge was made, I quote, t“o support the safe and sound spread of new modes of financial service delivery capable of reaching the poor”. Unquote. The pledge also called on financial standard-setters to promote successful regulatory and policy approaches and elaborate standards on financial access. A year later in Seoul, the G-20 committed to the launch of the Global Partnership for Financial Inclusion and developed a Financial Inclusion Action Plan. At the level of the United Nations, financial inclusion is positioned as an enabler of other developmental goals in the 2030 Sustainable Development Goals, where it is featured as a target in eight of the seventeen goals. Ladies and Gentlemen, Poor financial decisions are often not only the result of financial recklessness, but also of bad planning, and lack of information. The implications of these shortcomings can easily spiral beyond control. Undeniably, in today’s world, many of these decisions originate from – or are based upon – the increasing use of technology. Add to that the consequences of ‘buy now pay later’ targeted campaigns which can unfortunately fuel poor spending habits and ballooning debts. We are all aware that trust is the cornerstone for the effective functioning and stability of the financial system. As the system evolves and becomes more complex, access to financial services also becomes easier. What this implies is that there needs to be an appropriate level of financial education to enable customers to make informed decisions about the suitability of financial products to their specific situation. Concurrently, a robust financial consumer protection framework must be in place to shield consumers from abuse and make them become judicious users of financial products and services. This is precisely the rationale behind the elaboration of our 2022 Financial Literacy Strategy, and the subsequent initiatives that will be rolled out. In devising its Financial Literacy Strategy, the Bank has endeavoured to create content that will meet the requirements of a wide target audience, encompassing our youth, active population and senior citizens. The strategy is intended for all consumers, and I am pleased to share that consultations have already started with our regulatees in Rodrigues for holding Train the Trainer sessions and financial literacy programmes for the benefit of our Rodriguan brothers and sisters. By the way our thoughts are with them in these dire times. The programme content focuses on providing consumers with information on banking products and services, their rights and obligations, as well as how they should protect themselves and their hardearned money. The strategy also brings to the fore the dynamic and technology-driven banking environment in which consumers of financial products are evolving. This being said, I would also like to make an appeal to providers of financial services. My call is that you should always act in a transparent manner with your customers by disclosing all important facts. Do not focus only on the business side and on the bottom line. 2/4 BIS central bankers' speeches More importantly, in your communication to customers, do not omit details which, though they may seem insignificant or superfluous, may have a huge impact on the obligations and rights of customers or clients. Otherwise, in the short run, the improvement of business may come at a hefty price, be it in terms of rising delinquencies, complaints, law suits or even reputational risks. As a central banker and regulator, I need not emphasise that short term gains are not worth a longterm pain. Ladies and Gentlemen, It is a sobering reality that the COVID-19 pandemic has tragically claimed the lives of millions of people worldwide. The COVID-19 pandemic has not only led us all to rethink our existing practices, but to also factor in unexpected scenarios and reimagine opportunities. Whilst technological advances like mobile phones, internet banking and other digital technologies were already present in our daily lives, the pandemic has resulted in an acceleration in the pace of digitalisation of financial services. As I fathom the radical changes occurring around us, digitalisation is bound to amplify, both in terms of speed and the dimension of its impact, the transformation of the banking and financial landscape. While electronic channels are indeed convenient to the great majority of consumers, we should also be wary of the downside risks that they can bring. Threats of unscrupulous agents exploiting loopholes, mis-selling and other legal risks are just some of these. I am sure that you need no further convincing about the place that financial literacy should occupy in our lives. Its benefits extend well beyond stronger household balance sheets. Indeed, financial literacy contributesto the promotion of a more resilient financial system and, ultimately, to the more efficient allocation of resources within the real economy. However, the launch of a financial literacy strategy is not, on its own, a sufficient condition for diffusion among the population. Collaboration and support at all levels of the banking industry remain the prerequisites for an optimal implementation. To muster additional resources to support the implementation of its financial literacy initiatives, the Bank has been strengthening its relationships with other central banks as well as with leading international financial organisations and financial literacy promotion entities. The Bank is currently benefitting from the support of the Bank for International Settlements to craft a strategic plan on data protection. In addition, with a view to widening the scope of its consumer education strategy and reaching out to the greater number, the Bank is participating to an initiative driven by the GSBF, the Groupe des Superviseurs Bancaires Francophones. I am also pleased to share that the Bank of Mauritius is a proud and active member of the FINCONET, the International Financial Consumer Protection Organisation. To further our efforts, I have personally ensured that the Bank joined, no later than last year, the OECD International Network on Financial Education. I am pleased to announce that the Bank of Mauritius will participate to this year’s edition of the Global Money Week, an initiative spearheaded by the OECD/INFE, and which will take place from the 21st to the 27th of March next. We have even engaged with the OECD/INFE to be the National Coordinator for the roll out of the Global Money Week initiatives in Mauritius. Ladies and Gentlemen, As I come to end of my address, I wish to express our gratitude to Ms Flore-Anne Messy for 3/4 BIS central bankers' speeches being with us today as keynote speaker. I also thank our prime stakeholders, specifically the Mauritius Bankers Association and its members, for their valuable contribution in terms of views and input in crafting this programme and supporting its roll out. I rely on your cooperation to make the strategy a success. On our side, you can rest assured that the Bank will leave no stone unturned to reach out to the population. I thank you for your attention. 4/4 BIS central bankers' speeches | bank of mauritius | 2,022 | 2 |
Keynote speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Infosys Finacle Mauritius Banking Connect 2022, Turtle Bay, 4 October 2022. | Harvesh Seegolam: Digitalisation as a transformative force in banking Keynote speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Infosys Finacle Mauritius Banking Connect 2022, Turtle Bay, 4 October 2022. *** First Deputy Governor and Chairperson of the Financial Services Commission Chief Executive of the Financial Services Commission Chairperson of the Economic Development Board Vice Chairperson of the Economic Development Board CEOs and representatives of Banks Representatives of Infosys Distinguished guests joining us from Mauritius & abroad Ladies and gentlemen Good afternoon. It is a pleasure for me to be in your midst for this Infosys Finacle Mauritius Banking Connect 2022. Today's session is highly pertinent due to its special focus on digitalisation in the banking world. I seize this opportunity to commend Infosys for such an initiative at a time when going digital is gaining traction in all corners of the globe. Some time back, the pandemic was at the forefront of discussion in all spheres, including banking. While it unfortunately resulted in millions of casualties and brought down the world economy to its knees, it, nonetheless, resulted in a fundamental rethink in the way we operate. One of its offshoots has been an acceleration in the pace of digitalisation. Digital transformation is now a prerequisite for banks' survival. Changing customer demands together with pressure to reduce costs and increase efficiency are leaving banks with no option but to use modern technology. Banks must adapt to this change if they want to be successful. This automatically implies a constant review of the business models. More importantly, the skill set of the board must be regularly diversified to include members with expertise on the latest developments. Board membership should never be viewed as lifelong positions as it might stymie the adoption of new ideas. Digital transformation has made inroads faster than anticipated. Incumbent banks are poised to re-invent themselves and embrace new technologies such as cloud computing, machine learning, artificial intelligence and blockchain. In this digital revolution, barriers to entry are being eased. Fintech companies are viewing it as an 1/5 BIS - Central bankers' speeches opportunity to penetrate new markets and use their technological acumen to entice customers with easy to use digital applications. Examples of digital transformation abound. Digital adoption concertinaed from years to months. In Europe, for instance, the digital adoption rate jumped from 81 percent to 95 percent in the aftermath of the COVID-19 crisis. In July 2020, in the US, the Office of the Comptroller of Currency provided guidance that federally chartered banks may provide crypto custodial services for Fintech using crypto assets and stablecoins. In Mauritius, the Regulatory Committee on Fintech and Innovation-driven Financial Services was set up in 2018 to facilitate the adoption of Fintech and other innovative services. The Committee identified different priority areas within the Fintech space. The recommendations of this Committee provided the foundation for the Virtual Asset and Initial Token Offering Services Act (VAITOS) 2021 which was brought into force in February 2022. The VAITOS provides for a regulatory framework for new and developing activities regarding Virtual Assets (VAs) and Initial Token Offerings (ITOs) in Mauritius, as well as to safeguard against money laundering and financing of terrorism associated with VAs. With the coming in force of the VAITOS, Mauritius is one of the few countries to be in compliance with all 40 recommendations of the FATF. Also, cognisant of the challenges associated with the opening of accounts by new Fintech players, the Bank has set up a Committee comprising different stakeholders to specifically look into these issues. The Bank is also updating its regulatory and supervisory toolkit with respect to virtual assets. Ladies and gentlemen, Banking is no more just a brick and mortar affair. It has become a hotbed for innovation and technological prowess. As an international financial centre of repute, our jurisdiction has to follow the latest developments and customize them to its requirements. In that regard, the Bank is supportive of new ideas and recognises that those changes can drive improvements in how the industry meets customers' needs. At the recent Governors' Meet held in the context of the 55th anniversary celebrations of the Bank, I emphasized the importance of innovation in central banking. I ensured that a panel consisting of Governors and other eminent participants discussed specifically on this issue. The "Future of Banking Report" for Mauritius was also officially unveiled. The Report charts out the roadmap for our banking sector in the next decade and it has extensively covered digitalisation. I would advise the audience to refer to the Bank's website for a copy of the report. Let me now take you through the various initiatives on the digital front at the level of the Bank. We have constantly invested in the evolution of the country's Payment Infrastructure and can today boast of a modern eco-system. One of the hallmarks of the digital transformation of the payment space has been the implementation of the Mauritius Central Automated Switch (MauCAS), a state-of-the-art digital platform for routing payments among operators on a 24x7 basis. This innovative digital platform makes banking, e-commerce and mobile payments interoperable and encourages cashless means of payment. Fintech firms can leverage on this platform to provide value added services and provide banks with opportunities to collaborate with providers of emerging technologies. 2/5 BIS - Central bankers' speeches As part of the digital transformation of the economy, the Bank is also developing an infrastructure to integrate all Government payments to support digitalisation of Government services. The work has progressed satisfactorily and the relevant testing has been completed. We intend to formally launch the project soon. To facilitate further instant payments, the Bank has also introduced a national QR Code earlier this year. Branded as the MauCAS QR code, it is designed to be fully interoperable hence allowing the public to make payments at any merchant location. On the cross-border front, the Bank has already made significant progress to enter into bilateral agreement with payment schemes of jurisdictions with which Mauritius has strong commercial relationships. A first project has been initiated with the National Payment Corporation of India for retail payments through RuPay cards and mobile phones. The project is well on track. Ladies and gentlemen, The evolution of the banking sector needs to be accompanied by changes in the relevant legislative and regulatory frameworks to capture new trends and at the same time protect customers. In November 2020, I established a multilateral Fintech Committee comprising various agencies to chart a roadmap for the financial industry to embrace fintech and adapt the regulatory framework accordingly. We have been updating and revamping our frameworks to align to the new environment we are operating in. We continue to ensure that the legislations and regulations are regularly reviewed and amended to reflect changes in line with the new environment in which we operate. One such innovation relates to the licensing of digital banks. At the full height of the pandemic in 2020, the Bank was empowered to license digital banks, that is, banks which can carry on banking business exclusively through digital means or electronically. Thereafter, the Bank put in place, with the assistance of the IMF, a conducive licensing and regulatory framework for digital banks in Mauritius and issued its Guideline for Digital Banks in December 2021. In line with best international practices, the Bank introduced, in its Guideline, a phasedin licensing process for digital banks wherein they are subject to a restricted phase during which these new entrants conduct operations in a flexible but controlled environment. I have some encouraging news to share with you in the field of digital banks. The Bank has received enquiries on the setting up of digital banks from a cohort of well-established foreign banks and we look forward to the licensing of full-fledged digital banks in the near future. The digital journey cannot be complete without digital customer on-boarding which may entail ML/TF risks if not properly managed. The Bank is a proponent of the use of technology for customer end-to-end digital experience while, remaining committed to FATF recommendations when it comes to combatting ML/TF. The country has an infrastructure, the InfoHighway, which gives access to databases of information /documents relevant to KYC process as well as a digital document wallet service containing documents which may be used for KYC. 3/5 BIS - Central bankers' speeches The Bank is leveraging on the Infohighway to facilitate access to digital KYC documents against independent, reliable source data, in line with the requirements of the FATF. This is another project on which we have been working in collaboration with most stakeholders and which we aim to pilot in the near future. The Bank is also establishing a framework for the use of technology, adequate governance, processes and procedures that provide appropriate levels of confidence and produce accurate results. Ladies and gentlemen, As pressure accentuates on commercial banks to reduce costs, the use of cloud computing is becoming increasingly popular. It allows expenses to be turned into smaller operational expenses which are more easily managed. Further, with cloud computing banks are only charged with what they use and therefore may be more effective than spending on relatively large IT infrastructure. Cloud-based services being a novel area, it is, thus, imperative for regulators to translate their expectations to the industry. Last month, in the margins of the celebrations of the 55th anniversary of the Bank, the Bank introduced a Guideline on Use of Cloud Services after extensive consultation with the industry, cloud service providers and experts. This guideline has created a level playing field by coming up with a minimum set of requirements that must be followed by all regulatees before having recourse to cloud-based services. Ladies and gentlemen Let me reiterate that the Bank will always have an open mind and open-door policy as far as the use of innovative technologies is concerned provided that the risk management process is adequate. We are conscious of the importance of innovation in financial services. The Bank is also working on the establishment of an innovation hub and digital lab. The main objective of the innovation hub and digital lab is to foster innovation and the use of emerging technologies in the provision of banking and financial services. In parallel, the Bank is enhancing the framework for Regulatory Sandbox Authorisation together with the Financial Services Commission to create a more conducive ecosystem for fintech, regtech or other innovation-driven financial services. Ladies and gentlemen I am optimistic about these technological changes. In particular, I see benefits for customers and the prospect of a more competitive banking sector, which should encourage banks to pursue useful forms of innovation. However, you will agree that innovation comes with new forms of risks. The more we foster digitalisation, the more we make ourselves open to attacks through digital means. As such digital channels are relatively new to staff and customers, they may not be aware of the security issues to which they may be exposing themselves. There is therefore a need to consolidate the knowledge concerning Information Technology and Cybersecurity Risks, through running of regular outreach programmes, to ensure that staff and customers alike are able to carry out their transactions in a safe and secure manner. 4/5 BIS - Central bankers' speeches To this end, the Bank is developing a cyber-security strategy as well as relevant frameworks for incident reporting, information sharing and testing for the banking sector with a view to enhancing the resilience of the financial system to cyber risks. A draft Guideline on Cyber and Technology Risk Management has been issued to all banks for consultation and is currently being finalised. I am aware that the road to digitalization also entails recourse to third party service providers. This could result in a risk of concentration in the market for the provision of third-party services to banks as they tend to rely very heavily on the services of few providers for their technology-related outsourcing. Such heavy reliance on a few players across the market could contribute to systemic risk. It is important, therefore, for banks to have a holistic perspective of the risks involved and how they can be mitigated before deciding on the adoption of a new technology, process or even product. Ladies and gentlemen My address will not be complete if I omit to cover an aspect that concerns every citizen of our planet – climate change. We are facing grave dangers ahead and the rise in temperature must be limited to 1.5 degrees Celsius for us to even have a fighting chance. The financial sector is a massive consumer of energy and digitalisation can, to some extent, reduce the global carbon footprint. Sustainability is attracting attention from all stakeholders and the time is now ripe to embrace sustainable principles. If you miss the sustainable bus, it will be at your own perils. At the level of the Bank, we launched our Climate Change Centre last year to speed up the transition to a greener financial system. We are fortunate that we are able to meet physically in Mauritius due to the easing of travel restrictions. I seize this occasion to encourage the foreign participants to take some time out of their schedule to visit the island. With these words, I thank you for your attention. 5/5 BIS - Central bankers' speeches | bank of mauritius | 2,022 | 10 |
Address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Governors' Meet, Le Morne, 8 September 2022. | Harvesh Seegolam: Celebrating the 55th Anniversary of the Bank of Mauritius - adapting to our future Address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Governors' Meet, Le Morne, 8 September 2022. *** A very good morning to all of you. It is with immense pleasure that I welcome you today to mark the 55th anniversary of the Bank of Mauritius. We have come a long way since the Bank was officially opened on the 1st of September 1967. I feel privileged to continue the tremendous work that my predecessors have accomplished for this apex institution which has always been at the forefront of our economic trajectory. To commemorate its 55th anniversary, the Bank launched the Emerald Jubilee Bond on 18 July 2022. I am pleased to share with you that, as of yesterday, a total amount of Rs6 billion has been invested by individuals. This is indeed a success beyond our expectations. Ladies and Gentlemen I will now highlight a few achievements of the Bank of Mauritius. You will all agree with me, that the world is a changed place since 2004 and we need to gear up to ensure that we continue to stay ahead of all disruptions and revolutions the central banking world is facing. In this light, updating our legal framework is key to adapting to evolution. We have already progressed significantly on our proposed new Bank of Mauritius Bill. Engagements are under way with the IMF for their views also. We intend to submit a final draft to Government for consideration in October. Ladies and Gentlemen The hallmark in the evolution of the Bank of Mauritius has been its institutional strength. During the five and a half decades of its existence, the Bank has regularly come up with well-crafted policies. In difficult situations during the post-independence history of Mauritius, these policies have fostered macroeconomic stability. More recently, since 2020, with the onset of the pandemic, we all as central bankers were faced with completely unprecedented situations and shocks which halted our entire day to day. Problems and issues lying on our tables were of a magnitude and complexity we had not seen in living memory. Central banks had to be bold in their actions and decisions, while maintaining independence as monetary authorities. Being independent gives central banks autonomy for policy making to sustain macroeconomic 1/4 BIS - Central bankers' speeches stability, and to attain this very objective they had to look in the same direction as their governments to salvage the economy during the pandemic. We had to safeguard and ensure the continuity of our financial systems, such that citizens do not lose trust in our banking systems. Though the pandemic and successive shocks had different implications for our respective economies, the goal was to minimise economic scars to protect individuals, households and corporates alike. There was no one-size-fits-all solution as each country has its own specificities and, therefore, solutions had to respond to economic realities on the ground. In this vein, the Bank of Mauritius rolled out a series of timely, tailor-made and bold measures which protected our financial system. The Bank of Mauritius COVID-19 Support Programme included both conventional and unconventional, but very necessary, measures. After taking office in March 2020, my biggest concern was to preserve and protect the banking system. To do so, we had to launch a series of measures to avoid any contagion to the banking system from macrofinancial turbulences. We were concurrently faced with a decline in returns from investments of our foreign exchange reserves. Faced with these elements, we had to rapidly deploy appropriate measures. When I look back now, I can confidently affirm that the measures have reaped the expected results. The banking system has successfully weathered the crisis unscathed. Also, our foreign exchange reserves have remained at a level that satisfies any adequacy metrics, even the most stringent ones. Today we stand at 15 months of import cover. Furthermore, as inflows of foreign exchange plummeted – especially with the tourism sector coming to a halt during of the pandemic – the Bank has intervened and sold a total amount of USD3.3 billion to the market up to now. The sheer size of our intervention helped to contain unwarranted excessive volatility in the exchange rate. The proactive approach adopted by the Bank has saved jobs, prevented economic scarring and preserved financial stability. As a prudent central bank, we have unwound most of the support measures by June 2022. We are now rising from the crisis with the production structure almost unscathed, though we are still battling with other challenges – such as high inflation and uncertainties for the global economic outlook. Ladies and Gentlemen To ensure the Bank of Mauritius fulfils its responsibilities effectively, I have launched several initiatives since I joined the Bank in challenging times in March 2020. Before this year is out, the Bank will replace its current monetary policy framework – dating back to 2006 – with a new forward-looking, flexible inflation-targeting framework adapted to the realities of today for the Mauritian economy. The new framework will enhance the effectiveness of monetary policy, with an improved transmission mechanism. At the same time, the Bank is enhancing its surveillance of risks to safeguard financial stability, complemented by a comprehensive macroprudential surveillance and policy toolkit. 2/4 BIS - Central bankers' speeches Ladies and Gentlemen Central bankers are today faced with – if I may say so – traditional challenges as well as new disruptions taking place in the economy and in the global financial architecture. We are already seeing the impact of climate change on the economy and financial system in several parts of the world. Technology is also constantly disrupting the delivery of and access to financial services. Central banks are having to grapple with these challenges in a rapidly-evolving environment. The Bank of Mauritius has been proactively working on these fronts with concerned stakeholders. This led us to establish the Bank of Mauritius Climate Change Centre in October 2021. The Centre is working towards integrating climate-related and environmental financial risks into the Bank's regulatory, supervisory and monetary policy frameworks, while supporting the development of sustainable finance. Along the same line, digitalisation of the financial sector has remained high on my agenda. The Bank is well engaged in this exciting journey to harness the potential of technology in the digital transformation of our financial landscape. CBDCs are today a near reality for many central banks in the region and internationally. In Mauritius, we are looking forward to the pilot run of our Central Bank Digital Currency – the Digital Rupee – that may transform our currency and payment ecosystem in the years to come. I therefore here wish to make a plea to my fellow central bank Governors, both present physically with us today and those who have not been able to make it due to their prior engagements, for us to join hands together for the elaboration of a regional model using CBDC with a view of improving cross-border payments. Many regions across the world have deployed same and we have to be at par also. I also make a plea for central banks in the region to collaborate in other key areas where we can tap the expertise of one another. Ladies and Gentlemen, I also launched an initiative in July 2020 to chart the path for the future of banking in Mauritius. The banking sector plays a prominent role in the economic landscape of any country. But it is called upon to adapt and even undergo transformation to be future ready. It has become imperative to enhance its resilience, whilst also be more innovative. Conscious of the significance of this task, I initiated a deep industry-wide reflection to devise a strategy for the banking sector in Mauritius going forward. I have to express my appreciation to the Mauritius Bankers Association and the CEOs of banks and other stakeholders for their unflinching support in developing the roadmap. This roadmap translates the vision and strategic objectives for the banking sector into an actionable plan. The key initiatives in the roadmap focus on the domestic market, the global business strategy as well as products and services. The fundamental factors 3/4 BIS - Central bankers' speeches that will support the sustained expansion of the banking industry – such as the regulatory framework, ESG, and capacity development – are also at the forefront of the strategy. I thank the Oliver Wyman team present here with us today which has relentlessly engaged with stakeholders locally and globally in crafting this report. Going forward, the Bank will ensure the execution of this roadmap in close collaboration with the banking industry and other stakeholders. In a few moments, we will have the privilege to see the Honourable Prime Minister launch the report on the Future of Banking in Mauritius. Ladies and Gentlemen I have set the scene for what the Bank has in store for the coming years. These strides will contribute to boost confidence in the banking and financial system as well as unleash greater opportunities for the Mauritian economy. Over the next two days, we will have the opportunity to discuss many of these themes in greater depth and listen to expert views. Before I conclude, I wish to express my gratitude to the Honourable Prime Minister and also to the Honourable Minister of Finance, Economic Planning and Development for being among our midst today to mark the Bank's Emerald Jubilee. Last but not least, I thank all Governors and representatives of central banks who have joined us to mark this momentous occasion. We look forward to working closely to adapt ourselves for our future. On behalf of the Bank of Mauritius team, I wish to thank you all for your presence today. Thank you for your attention. 4/4 BIS - Central bankers' speeches | bank of mauritius | 2,022 | 10 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Forum "Public-Private Partnership in Combatting Financial Crime", Flic en Flac, 8 December 2022. | Harvesh Seegolam: Speech - Forum on public-private partnership in combatting financial crime Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Forum "Public-Private Partnership in Combatting Financial Crime", Flic en Flac, 8 December 2022. *** The Honourable Pravind Kumar Jugnauth, Prime Minister, Minister of Defence, Home Affairs and External Communications, Minister for Rodrigues, Outer Islands and Territorial Integrity Dr the Honourable Renganaden Padayachy, Minister of Finance, Economic Planning and Development Chairperson and Members of the Parliamentary Committee Excellencies and members of the diplomatic corps The Director General of the ICAC The First Deputy Governor The Second Deputy Governor The Solicitor General Heads of Institutions Members of the press Ladies and Gentlemen All protocols observed A very good morning to all of you. It is indeed a pleasure for me to be amongst you to mark the opening of the discussions on yet another major initiative in line with our commitment to continuously fight money laundering, terrorism financing and financial crime. Together with other stakeholders and regulators, the jurisdiction, after an immense and unprecedented collaborative approach managed successfully to exit the Financial Action Task Force (FATF) List of Jurisdictions under Increased Monitoring, commonly known as the 'Grey List'; the UK List of High-Risk Third Countries; and the EU List of High-Risk Third Countries. This achievement would not have been possible without the full commitment and involvement of the Government, authorities and the private sector. 1/4 BIS - Central bankers' speeches The institutional set up and mechanism put in place in Mauritius during this process has indeed paid its dividends. The personal involvement of the Honourable Prime Minister himself, all members of his Ministerial Committee, the Core Group on AML/CFT, the National Committee on AML/CFT, the National Sanctions Committee, and the Interagency Coordination Committee have collectively contributed to Mauritius today becoming a role model in AML/CFT for many countries. As we speak, we are collaborating with a number of other jurisdictions to partake our experience. At the level of the Bank of Mauritius, we have set up joint technical teams to assist 6 other central banks in Africa and Europe. This week itself, we are receiving at the Bank a senior delegation from a counterpart African central bank to assist them. Ladies and Gentlemen, The criticality of AML/CFT in maintaining the integrity of the financial sector, and by ripple, financial stability, cannot be underestimated. It is with this in mind that the Bank devised, in a very timely and proactive manner, key initiatives to further enhance the regulatory and supervisory frameworks with the objective of mitigating any ML/TF risk for the financial sector. Since the release of the last Mutual Evaluation Report, the banking sector has been subject to continuous enhancement with the aim of ensuring sustainability and effectiveness of our AML/CFT framework. The Bank of Mauritius has continuously been engaging with the World Bank on the AML/CFT front. We developed our Risk-Based Supervisory and Regulatory Framework on AML/CFT, and introduced a dedicated AML /CFT Manual which has been a vital tool for the Bank of Mauritius in its monitoring of its licensees. The Bank also issued its revised Guidelines on AML/CFT in 2020, which are aligned with the FATF's recommendations, and which provide necessary guidance to its licensees. Together with the World Bank, we have now embarked on a process to further improve our Risk-Based Supervisory and Regulatory Framework to reflect the emerging risks which Virtual Assets pose to the sector. The Framework will henceforth enable the collection of information on Virtual Assets and Virtual Assets Service Providers to monitor associated risks. In this respect, a public consultation is currently under way until the end of this month on the Bank's Draft Guideline for Virtual Asset related activities. I will here like to invite all stakeholders, both locally and from abroad, to contribute by sharing their views on this topic. The current exercise will also provide the Bank with a more structured approach to assess the safety and soundness of banks in Mauritius. It will equally help the Bank in the allocation of its supervisory resources according to the different risk levels. It will provide our supervisors with the tools to have a comprehensive and forward-looking view of risks faced by our licensees. The Bank also adheres to the FATF Standards, the Basel Core Principles as well as the ongoing works at the level of the Basel Committee on Banking Supervision and the 2/4 BIS - Central bankers' speeches Bank for International Settlements. In February last year, the Bank has become a member of the BIS Consultative Group which deepens the committee's engagement with supervisors around the world on banking and supervisory issues. Ladies and Gentlemen, AML/CFT and fighting financial crime is the responsibility of each and every one of us. Collaboration, and cooperation, between regulators, law enforcement agencies, and the private sector underpin an effective system to combat financial crime. In this respect, we have developed for the banking sector numerous platforms to partake information and intelligence. On a quarterly basis, I personally chair the Banking Committee comprising all CEOs of banks, as well as the forum regrouping CEOs of Foreign Exchange Dealers and Money Changers. We also have the Committee between the Bank and Compliance Officers of licensees. Since August 2020, a Memorandum of Cooperation was concluded by all AML/CFT Supervisors overseeing the financial services sector and the designated non-financial businesses and professions (DNFBP) in Mauritius. This led to the creation of the Interagency Coordination Committee (ICC) chaired by myself. The ICC facilitates policy formulation, exchange of information and operational coordination to effectively combat ML/TF and proliferation. It also formalises capacity-building among the AML/CFT Supervisors and for operators both in the financial and DNFBP sectors. As at date, around twenty capacity-building sessions have been conducted under the aegis of the ICC, allowing our licensees to interact with the regulators, and amongst themselves, on topical matters related to AML/CFT. The 20th meeting of the ICC is scheduled for next week. Ladies and Gentlemen, At the end of last month, the Bank co-hosted the Plenary Meeting of the Group of International Financial Centre Supervisors (GIFCS). The meeting which was attended by regulators from 20 member countries reflected largely on AML/CFT and the need to strengthen partnerships. On a related note, the Bank became a member of the 'Groupe des Superviseurs Bancaires Francophones' (GSBF) in September 2020, and not later than last month, its members unanimously elected the Bank as their new Chair. The first strategic focus under our chairmanship is AML/CFT. In this regard, in March 2023, we will be hosting GSBF members including Central Banks and Prudential Authorities to discuss on the role and challenges of banking supervisors on AML/CFT matters. Ladies and Gentlemen, All these initiatives are part of our quest to promote continued open dialogue, thereby ensuring a sustainable system. Today's forum on Public-Private Partnership in Fighting Financial Crime could not be more timely. It will allow us to conceptualise and roll out initiatives that will complement the current components of our AML/CFT environment, in line with our objective of promoting an effective AML/CFT system. 3/4 BIS - Central bankers' speeches Rest assured that the Bank will spare no effort in ensuring that its licensees continue to adhere to the best AML/CFT practices with a view to enhancing trust and confidence in Mauritius as a premier International Financial Centre, in line with our Future of Banking Strategy. With these words, I wish you all fruitful deliberations, and I thank you for your attention. 4/4 BIS - Central bankers' speeches | bank of mauritius | 2,022 | 12 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 14 December 2022. | Harvesh Seegolam: Current economic conditions and outlook Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 14 December 2022. *** Ladies and gentlemen, members of the media, good morning. Welcome to this press briefing for the fifth Monetary Policy Committee (MPC) meeting of the year. Today's MPC meeting was held in the background of latest global developments with the objective to further shield the country and its people against the growing pressures. At the outset, I wish to put in context the situation. You would recall that, at the very start of the pandemic, the MPC had promptly adopted an accommodative stance and reduced the KRR in line with that was needed across those testing times. There had been two successive cuts, one to the tune of 50 basis points, and the other to the tune of 100 basis points, which brought the Key Repo Rate to 1.85% from 3.35%. It should also be noted that year on year inflation rate in March 2020 was at 2.9%. The accommodative stance was maintained for the last two years. Thereafter, the MPC decided to embark on a normalisation process in the light of the pace of economic recovery and inflationary pressures. This means that the KRR is now being raised because the economic conditions warrant such a normalisation approach. International Economic Developments I will now provide you with an overview of global economic developments. The global economy continues to be characterised by challenges amidst high price pressures due to the ongoing geopolitical conflict and slower growth momentum stemming from rapid global monetary policy tightening in advanced economies, leading to a slowdown in economic activities in several countries. The IMF, in its October 2022 World Economic Outlook, maintained global growth at 3.2 per cent in 2022, amidst growing uncertainties tied to the ongoing war and China's zeroCOVID strategy. The OECD, in its November 2022 Economic Outlook Report, has forecast global growth at 3.1 per cent for 2022. Inflation remains elevated in many countries amidst the delayed pass-through of past increases in food and energy prices. Price pressures are now deemed to be more broad-based, extending beyond food and energy prices and spilling over to higher core goods and services inflation. In October 2022, year-on-year inflation stood at 7.7 per cent in the US, 10.6 per cent in the euro area and 11.1 per cent in the UK. In emerging economies, inflation continues to surge. For instance, in Turkey, it has reached 85.5% and in Nigeria it reached 21.09%, in Argentina it reached 88% and in Ghana it stood at 40.4% in October 2022. 1/6 BIS - Central bankers' speeches Central banks across both advanced and emerging economies became aggressive in tightening their monetary policy to prevent high inflation from becoming more entrenched and anchor inflation expectations over the medium term. The US Fed, the ECB and the BoE are all expected to raise their policy rates at their forthcoming meetings today and tomorrow. On the positive side, global commodity price pressures are moderating. This may augur well for medium-term global inflation. Brent crude oil prices averaged $91 per barrel in November 2022 compared to $94 per barrel in the previous month. The Food and Agriculture Organisation (FAO) Food Price Index was down for the eighth successive month in November 2022. Similarly, the Baltic Dry Index which measures the cost of shipping goods worldwide has been on a declining trend over pretty much of the second half of the year, barring a brief uptick in September. Domestic Economic Developments While economies across the world are experiencing deceleration in their economic activities, the Mauritian economy continues to recover. The domestic economic recovery has progressed well, supported by greater dynamism across key sectors of the economy. The services sector strengthened further in 2022Q2, underpinned by the buoyancy in tourism, with positive spill over effects to other areas of the economy. Tourist arrivals reached 755,655 during the period January to October 2022. This week, the MTPA announced that Mauritius welcomed 870,000 tourists from January to end of November. Bookings for the tourism sector show that tourist arrivals are expected to gather further momentum due to the high season. The target of one million tourists set by the authorities remains attainable. Gross tourism earnings amounted to Rs 6.7 billion (USD150 million) in October 2022 compared to Rs5.4 billion (USD149 million) in October 2019. Since the start of the year, gross tourism earnings amounted to Rs48.3 billion (USD1,090 million) compared to Rs50.5 billion (USD1,436 million) for the period January to October 2019. The performance across most economic sectors is expected to be sustained in the last quarter of this year. The manufacturing, financial services, construction and wholesale and retail trade sectors continue to maintain good momentum and prospects are promising going forward. The recovery in economic activity impacted favourably on the labour market. The unemployment rate further fell to 8.1 per cent in 2022Q2, from 8.7 per cent in 2022Q1. Labour market conditions are expected to improve further and move closer to prepandemic levels as overall economic activity continues to pick up. The current account deficit is projected to be slightly lower at 14.0 per cent of GDP in 2022 compared to the previous estimate of 14.7 per cent, mainly reflecting a much better-than-expected performance of the services account in 2022Q3. This helped offset the deterioration in the goods account. The Mauritius IFC continues to attract robust financial flows as global economic activities picked up from pandemic level, and cross-border investment activities continue to remain buoyant. With respect to the non-GBC flows, the real estate sector 2/6 BIS - Central bankers' speeches continues to support the influx of foreign direct investment in Mauritius, in particular, as a result of easing of travel restrictions in 2022. Mauritius is also expected to receive fresh sources of foreign direct investments amid the emergence of new sectors of activities. The EDB has forecast FDI for this year to be above Rs20 billion. Inflation Inflation in Mauritius, majorly driven by external factors, has been pronounced through 2022 due to a mix of international and domestic factors. Headline inflation accelerated further to 10.3 per cent in November 2022, from 9.9 per cent in October 2022, while year-on-year inflation rose from 11.9 per cent to 12.1 per cent. Money Market Short term yields moved in line with the 100 basis points increase in the Key Repo Rate (KRR) at the last MPC meeting and remained within the interest rate corridor. The 91Day Bill yield, which is the current operating target, increased by 150 basis points up from 1.75 per cent as at end October 2022, to 2.80 per cent by mid-November 2022 and was at 3.25 per cent on 9 December 2022 moving closer to the Key Repo Rate. Following the open market operations conducted by the Bank, the level of rupee excess liquidity in the banking system stood at Rs9.9 billion on Friday 9 December. As part of the New Monetary Policy framework, the Bank continued to issue the 7-Day BoM Bills to all banks, with a weekly average issuance of around Rs8.5 billion. The level of outstanding BoM instruments, which stood at Rs113.1 billion on 28 September 2022, increased to Rs118.3 billion as at 9 December 2022. Securities totalling Rs129.2 billion were issued against maturing securities to the tune of Rs124.0 billion, resulting in a net issuance of Rs5.2 billion. Concurrently, sale of FX by the Bank absorbed rupee excess liquidity equivalent to around Rs18.1 billion over the period 28 September 2022 to 13 December 2022. Foreign Exchange Market The month of November was marked by the significant intervention amount of USD300 million, representing the highest amount sold by the Bank in any given month. In the month of December, the Bank has intervened for an amount of USD50 million. From January to 06 December 2022, the Bank injected a total amount of USD1.0 billion in the domestic market. Activity on the FX market remained buoyant, with total turnover for the last eleven months hovering around USD8.6 billion, a significant improvement of 21 per cent compared to the corresponding period of last year. FX turnover in November itself amounted to USD1.2 billion. The evolution of the exchange rate continues to reflect domestic economic fundamentals as well as international exchange rate movements. Since 28 September 2022, the rupee has appreciated by 3.3 per cent against the US Dollar. 3/6 BIS - Central bankers' speeches The Gross Official International Reserves (GOIR) remains at a level sufficient to provide a buffer against adverse external conditions. The GOIR stood at US$6.7 billion as at end-November 2022, representing 13.9 months of imports. Financial Stability The banking sector continues to be resilient, sound and thriving. The normalisation of interest rates is not expected to undermine the soundness and stability of the banking sector. The capital buffer of the banking sector remained well above minimum regulatory limit, with the Capital Adequacy Ratio at 19.0 per cent as at end-September 2022. The banking system also held robust liquidity buffers. The aggregate Liquidity Coverage Ratio (LCR) was 231 per cent in October 2022, exceeding the regulatory limit of 100 per cent. In terms of material foreign currency, the LCR was at 173 per cent. The high LCR denoted adequate liquidity buffers to support short-term net outflows in both domestic and foreign currencies, as well as safeguard the resilience of the banking system against liquidity strains that could impact credit flowing to the economy. The banking sector provided continuous support to the economy by ensuring constant flow of credit. Bank credit to the private sector grew, on an annual basis, by 2.4 per cent in October 2022 compared to 3.1 per cent in July 2022. Credit to the corporate sector contracted at an annual rate of 4.2 per cent in October 2022. This contraction was primarily due to the decline in debt securities issued by the corporate sector and held by banks. Moreover, key sectors have been reducing their FX borrowings from banks since November 2021. As economic activity continued to gain momentum, the corporate sector has been taking on more loans denominated in Rupees – the main component of bank credit to the corporate sector – with the growth rate remaining in positive territory since August 2022. Bank credit to households continued to grow strongly, with an annual rate of 13.6 per cent in October 2022 compared to 14.5 per cent in July 2022. The asset quality for the banking sector has continued to improve and remained below pre-pandemic levels. Non-performing loans represented 4.4 per cent of gross loans and advances as at end-September 2022, an improvement from 4.6 per cent as at end-June 2022. The drop in the NPL ratio was driven by an improvement in the NPL ratio for both the domestic and non-resident credit portfolio. The average NPL ratio in the two years preceding the pandemic, that is 2018 and 2019, was around 5.5 per cent, indicating stronger asset quality currently. The latest stress testing exercise supported the resilience of the banking sector to absorb and limit the amplification of plausible shocks emanating from the lingering pandemic and prolonged Russia-Ukraine war. The capital and liquidity buffers of the banking sector as at end-September 2022 were adequate to provide cushion against potential shocks. The Bank maintains its prudent approach in assessing and monitoring risks to financial stability arising from within and outside Mauritius. MPC Decision 4/6 BIS - Central bankers' speeches In a bulletin released on the 9th of December, the BIS stated that monetary policy involves deciding on 'how fast, how far and how long' to tighten. The choice is often complex and entails trade-offs. Over-tightening can cause a drag on real sector activities and, in an environment characterized by relatively high indebtedness, induce stress to financial markets and create financial stability risks. Under-tightening can result in a de-anchoring of inflationary expectations and result in more entrenched inflation, with potentially most costly and welfare-reducing actions down the road. In Mauritius, we opted for a gradualist and cautious approach towards normalisation in 2022, whilst being mindful of the importance of not undermining the recovery and growth objective along the way. The pace at which we tightened monetary policy over the last four MPC meetings has been broadly appropriate to help anchor expectations. It is expected that headline inflation will come down to 5-6 percent in 2023, from 10.6 per cent in 2022. However, we need to remain vigilant about the potential effects that further tightening policies by the US Federal Reserve Bank and the European Central Bank may have on yield differentials. These could create pressures on the local currency, if unaddressed, and could generate further inflationary pressures. In view of the continued upturn in economic activity, Bank staff maintain their real GDP growth forecast above 7 per cent for the year. The economy is forecast to grow by around 5 per cent in 2023. The MPC noted that these growth projections remain subject to headwinds stemming from current global uncertainties. At its meeting today, the MPC observed that the strong growth performance across all major economic sectors provides the Bank with leeway to respond accordingly. We should not be oblivious to the fact that the MPC had lowered the policy rates down to 1.85 per cent after two successive cuts to the tune of 150 basis points during the pandemic so as to help relieve the financial hardship of borrowers during testing times and prevent a real sector shock from undermining the financial system. Interest rates in Mauritius remained at relatively low levels for nearly two years. The ongoing economic recovery which is well entrenched has provided the MPC with leeway to continue with the normalisation process in the face of heightened inflation since the beginning of the year. The MPC unanimously decided today to raise the KRR by 50 basis points to reach 4.5 per cent. Here, I would like to also re-assure the population that the normalisation process is a necessary response to help contain the negative effects associated with a high inflationary environment. The inflation we are seeing remains largely imported, and has a relatively big share of commonality with other countries. Central banks worldwide have engaged in monetary tightening, with many continuing to do so. The long-term losses of high inflation may outweigh the short-term pitfalls associated with policy normalisation. 5/6 BIS - Central bankers' speeches In this regard, to accompany the population and the business community, the Bank of Mauritius is rolling out a series of measures. First, banks are being provided with greater flexibility to restructure loan facilities such that bank customers can continue to fulfil their financial obligations. Second, the Bank is engaging with commercial banks to introduce a package of measures geared towards households and SMEs with the objective of easing their debt servicing. Third, the Bank of Mauritius will also come up with additional macro-prudential measures to ensure that the banking sector remains resilient. Fourth, the Task Force on Financial Sector Resilience continues to meet, monitor, analyse and make necessary recommendations. The Task Force will meet on the 20th of December. The Bank is also putting a dedicated channel at the disposal of businesses, households and individuals should they need any support or clarification, or should they encounter any issue with their bank. Queries and issues may be channeled by phone on 202 3800 or the [email protected] dedicated email. I also wish to inform you that the Bank has completed its series of consultations with respect to the New Monetary Policy Framework. The framework will be officially introduced in January 2023. Under the new framework, the Bank is introducing flexible inflation targeting. The inflation target for the country has been defined to be in a range of 2 to 5 percent, with the aim to achieve 3 per cent in the medium term as recommended by the IMF. The Key Repo Rate will also be replaced by the Key Rate. As part of the introduction of the new Monetary Policy Framework, you will recall that the Bank started, with effect from the 4th of August 2022, the issuance of a 7-Day Bank of Mauritius Bill to all banks. This instrument will further improve the transmission mechanism of monetary policy signals and help anchor short-term money market rates. The operational target, which is currently our 91-Day Bill, will be replaced by the overnight interbank rate. An awareness and outreach campaign targeting various stakeholders will also be rolled out in January. Rest assured that the Bank will continue to work in the best interests of the country and its population. We will continue to monitor the situation closely, and stand ready to convene the MPC as and when necessary. Before I end, I seize this opportunity to wish you and your family a joyous festive season and a very Happy New Year 2023. Thank you. I now welcome your questions. 6/6 BIS - Central bankers' speeches | bank of mauritius | 2,022 | 12 |
Address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, on the occasion of the G20/OECD Task Force on Financial Consumer Protection, Port Louis, 26 April 2023. | Harvesh Seegolam: Address - G20/OECD Task Force on Financial Consumer Protection Address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, on the occasion of the G20/OECD Task Force on Financial Consumer Protection, Port Louis, 26 April 2023. *** Ms. Nisha Arora, Chair of the G20/OECD Task Force on Financial Consumer Protection Mr. Chris Green, Chair of FinCoNet Members of the OECD The FinCoNet Governing Council I wish you all a very good morning or good afternoon, depending in which geography you currently are if you are attending this event virtually. At the outset, I would like to thank the G20 / OECD together with FinCoNet for organising this event at such a critical juncture where the advent of technology is revolutionising the delivery of financial services, thereby creating additional challenges for financial consumer protection. Unfortunately, due to professional commitments, I could not make it in Paris. However, as you can see, technology has made wonders not only in the financial services sector but also to enable us to connect from all corners of the globe. Financial consumer protection has been high on my agenda since my appointment as Governor in March 2020. I am pleased to share with the audience that from the 22nd to the 24th of November this year, the Bank of Mauritius will host the Annual General Meetings of FinCoNet. You are all cordially invited to attend and further details will be provided by FinCoNet as we draw closer to the meeting. I am pleased to share my views on such an important topic as consumer education and consumer protection, particularly in a global financial environment that technology is radically transforming. It would not be proper to underscore the importance of financial education and consumer education if we fail to comprehend the hazards of not educating and protecting consumers of financial products. Indeed, failing on these two fronts would inevitably result in citizens making poor financial decisions, thereby affecting their quality of life and, by ripple, undermining the efficiency of our banking and financial systems. It is with these imperatives in mind that I have initiated a number of projects. In January last year, the Bank of Mauritius rolled out a nation-wide strategy with specific focus on financial literacy in a digital era. The strategy, which benefitted from the OECD INFE's endorsement, aims at fostering an appropriate level of financial education to enable customers to make informed decisions about the suitability of financial products to their specific situations. Concurrently, the Bank is actively building a robust financial consumer protection framework to shield consumers from abuse and make them become judicious users of financial products and services. 1/4 BIS - Central bankers' speeches We have made significant progress since the launch of our financial literacy strategy. In just two years, the Bank has physically reached out to more than one quarter of the target audience of students aged 15 to 18. Our online and social media platforms have catalysed dissemination to the public at large. Our Bank of Mauritius Museum Facebook platform, which is a key element of our financial education outreach strategy, has actively been followed. While these do comfort us, we are not resting on our laurels. As I speak, the Bank of Mauritius, which is the national coordinator for the OECD's Global Money Week again this year, is spearheading initiatives in the country with the participation of the Mauritius Bankers Association and NGOs. I here wish to thank the OECD and the G20 Indian Presidency for the focus they are placing on financial education and financial inclusion, and for having kindly invited the Republic of Mauritius to be part of some of the working groups. The Bank of Mauritius is honoured to be contributing to the discussions on the Global Partnership for Financial Inclusion and on Financial Sector Issues. The learnings from these interactions will undoubtedly support the Bank in its endeavours. Ladies and Gentlemen, While financial inclusion is a priority around the world, we need to be conscious that addressing gender gaps in the financial system also forms part of solving the equation. Significant gender gaps still prevail in several geographies. While the figures are stark in developing economies, advanced economies are also not spared. In our common quest for inclusiveness, gender equality stands as a vital component of financial education and consumer protection. On this front, we cannot fail to underline how the OECD's relentless work on gender equality and the Recommendation of the Council on Gender Equality in Education, Employment and Entrepreneurship go a long way in the financial empowerment of women and girls. As regulators, let us work together to ensure that our consumer education and consumer protection strategies contain specific components to address the additional financial literacy needs that women may have. Ladies and Gentlemen, The global financial system is surfing on the crest of technology. As online services and adoption of technology become increasingly the norm in the financial services industry, the possibility of wrongdoers abusing the system also increase. While the scams and other attempts at fraud are impossible to eliminate, they can, nevertheless, be mitigated to a tolerable level. On that front, financial education and digital financial literacy are key components to meet our objective. Wary of the challenges that technological disruption may give rise to, we are sparing no effort to craft strategies that will leverage technology to bolster consumer protection and financial inclusion in a digital era. In the face of the expansion of digital financial services around the world, we need to upscale financial literacy into digital financial literacy and digital financial inclusion. This 2/4 BIS - Central bankers' speeches is a priority that I have already identified and is justly what is driving the Bank of Mauritius to fully support the G20's current Global Partnership for Financial Inclusion efforts to prioritise their implementation. I also need to underscore the importance of clear and adequate disclosures. It is this information that would help consumers make informed decisions as well as ensuring that the products are suitable for them. Providers of financial services should, therefore, provide the right information to their customers in a plain and simple language so that they are aware of all benefits and risks before going for a product. I agree that it may entail some additional costs on their side. However, focusing only on short term profits could entail long term pain for both consumers and providers of financial services as it could result in costly lawsuits, both in financial and reputation terms. At the bank, we are currently working on the roll out of a CBDC, the Digital Rupee. We believe that CBDCs, by the very fact that they are issued by central banks, will provide a springboard for enhancing digital financial literacy. Ladies and Gentlemen, It is imperative that we all work together towards creating the conducive policy environment. Progress in access to finance today largely depends on mobile phone penetration as much, or even much more, than just the banking system. In that regard, banking and financial regulators need to leverage the ubiquity and affordability of internet access. The interoperability of systems and the availability of low-cost switches for financial transactions are equally important. As digital payments become more common and the cost falls, many private businesses will be able to pay their workers and suppliers electronically. While we should endeavour to promote the digitalisation of payments, we must also focus on enhancing consumer protection frameworks and regulations to ensure that financial and technology companies adhere to safe and fair practices. Ladies and Gentlemen, Over the past decade significant progress has been made around the world to strengthen financial consumer protection regulatory frameworks. Policy makers have been incorporating a broader range of regulatory approaches to protect consumers from inappropriate market practices, assist consumers to make better-informed decisions regarding the use of financial products and services, and ultimately achieve better outcomes for consumers. However, to be effective, such regulatory frameworks must be operationalized, including through supervision. Around the world, authorities are increasingly turning to the task of developing appropriate supervisory processes and frameworks to monitor and implement Financial Consumer Protection regulation effectively. This being said, undertaking Financial Consumer Protection supervision can be a daunting task given the wide range of financial products, providers, and issues to be considered, combined with limited supervisory capacity and resources. Ladies and Gentlemen, 3/4 BIS - Central bankers' speeches At this point, I would like to make a call on all Banking and Financial regulators to join efforts and share experiences so that we can leverage on each other and jointly address consumer protection and consumer education issues. The Bank of Mauritius has been an active member of the FinCoNet since 2016 and I look forward to furthering our collaboration, not only for Mauritius, but also in the African region. I also look forward to welcoming you in person in November this year for the Annual General Meetings of the FinCoNet. With these words, I thank you for your attention. 4/4 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 6 |
Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the International Monetary Fund/World Bank Community of Central Bank Technologists workshop on the theme of "The Future of Central Bank Money in a Digital World", Port Louis, 26 April 2023. | Harvesh Seegolam: The future of central bank money in a digital world Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the International Monetary Fund/World Bank Community of Central Bank Technologists workshop on the theme of "The Future of Central Bank Money in a Digital World", Port Louis, 26 April 2023. *** Members of the Board of Directors of the Bank of Mauritius First Deputy Governor, Bank of Mauritius of the International Monetary Fund and of the World Bank Representatives of other Central Banks The Chairperson, and the Chief Executive of the Mauritius Bankers Association Chief Executives of banks and financial institutions Members of the Media Distinguished guests Ladies and Gentlemen A very good morning. I am pleased to welcome you at the Bank of Mauritius. At the outset, I wish to put on record the proactiveness we witnessed from the International Monetary Fund, the World Bank, the Bank for International Settlements and other Central Banks with respect to this event. The mere presence of international institutions and Central Banks representatives from across the world testifies both the willingness and interest in the future of money and the role of Central Banks I wish to convey my gratitude to the IMF/World Bank Group Community of Technologists for allowing the Bank of Mauritius the opportunity to host this meeting, the more so that I understand that it is for the very first time that this meeting is being held outside Washington D.C. Ladies and Gentlemen, It is very fitting that the theme for this landmark meeting is "The Future of Central Bank Money in a Digital World". For us as central bankers, preparing for the future means getting everything right, now itself. Central Bank Digital Currencies – CBDCs as we commonly call them - entail much more than mere digital representations of a central bank currency. CBDCs may have critical implications on both domestic and international economic and financial stability. Like it or not, the fact remains that unexpected frictions inevitably emerge when it comes to designing a CBDC or implementing and operating it. Central bankers have their own legitimate apprehensions which drive them to always tread very carefully. Sometimes, even too carefully to the taste of FinTechs or operators of new payment technologies. Cooperation, information and experience sharing among 1/5 BIS - Central bankers' speeches the central banking community are therefore necessary to help address concerns and learn from peers on how to overcome stumbling blocks. One of the major stumbling blocks in my opinion is coming to terms with the notion that a CBDC cannot be a "near-cash" option. It needs to be "cash-like". It needs to be as convenient, safe and trusted as cash, though digital in nature. A CBDC must be construed as a type of payment instrument to be made available to one and all. Hence, it should be working just as efficiently as any other existing mode of payment. Otherwise, adoption and acceptance of the CBDC will become very complex. This is particularly more pronounced in countries with well-established payments systems as end-users may have little motivation to switch to another payment mode. It goes without saying that Industry buy-in and the public's trust are very critical in the CBDC experimentation. As a matter of fact, the success of CBDCs hinges on awareness. CBDC experiments can be subject to various challenges, often unexpected ones. That is why it is critical that central banks collaborate with each other, and with international institutions, as well as with their respective stakeholders for meaningful implementation of CBDCs. Amidst the growth of private payment systems, the incursion of bigtechs in the payment arena and the potential risk of partial displacement of legal tender by private crypto assets, central banks started a few years ago to explore the possibility of the issuance of their own digital currency. The extensive research conducted by International organisations including the Bretton Woods institutions and the BIS have significantly contributed to our understanding of CDBCs. Ladies and Gentlemen, Two weeks ago, the IMF launched its handbook on CBDCs in prelude to an International Monetary Fund panel on CBDC in the context of the 2023 IMF-World Bank Spring meetings. I was delighted to contribute to the panel by showcasing the Mauritius experience, and sharing our experience and lessons learnt. This handbook stands as a beacon for central banks along their journey towards creating and rolling out their respective CBDC. In this ethereal digital environment, a number of central banks have adopted a "wait and see approach" on how CBDCs evolve, both conceptually and in practice. Other central banks have, for their part, been actively working to gauge the pertinence of digital currencies, and understand the challenges and benefits that stem from them. This is the case for the Bank of Mauritius. Shortly after I assumed office in 2020, I deemed that working on the creation of our CBDC, the 'Digital Rupee' was to be one of our key priorities. As a central banker, I need not stress upon the determining role that CBDCs can play, not only in protecting monetary sovereignty but also in assisting central banks and regulatory authorities on the front of AML/CFT. Ladies and Gentlemen, 2/5 BIS - Central bankers' speeches CBDCs have been gaining traction globally. It is reported that 114 countries, representing more than 95 percent of global GDP, are currently exploring a CBDC. While only 35 countries were considering a CBDC in May 2020, today 60 countries are in an advanced phase of development, pilot, or even launch. As of December 2022, all G7 economies have embarked on the elaboration of a CBDC. Project Cedar, which is the FED's wholesale CBDC project, has moved the United States from research into development. 18 of the G20 countries are equally now in an advanced stage of CBDC development. Of those, 7 countries are already in pilot phase. In spite of the number of CBDC experiments being carried out in various geographies, the sum total of insights on CBDCs is limited to the available research done so far, and the few proofs-of-concepts and even fewer pilot projects that have been implemented. To that effect, I mustered technical assistance from the IMF to ensure that our "Digital Rupee" was elaborated in the best possible conditions. I must put on record that the Bank of Mauritius was the first Central Bank to benefit from an IMF technical assistance in this respect. We, at the Bank of Mauritius, have adopted a prudent and cautious approach when we embarked on our CBDC journey. In the preliminary stage, in mid-2020, the Bank interacted with experts from different units of the IMF who provided opportunities to strengthen our team's analytical and technological capability through brainstorming workshops. These laid out an early formulation of a thinking through framework for a potential CBDC for Mauritius. Following this, our team investigated objectives, pain points, use cases, technology, infrastructure, cybersecurity readiness and the Bank of Mauritius' role. Further investigation was carried out on the design choices and the related legal foundations. The Bank also engaged with the private sector assisted by the IMF. The decision has been taken for our CBDC, the Digital Rupee, to be interest free. Additionally, we have decided to adopt a two-tier distribution model to manage potential risks to monetary policy and financial stability. This two-tier model will also ensure that commercial banks continue to be fully-involved in our CBDC journey and that there is no disintermediation of banks in the CBDC distribution. The milestone of our ongoing engagement with the IMF is the drafting of a feasibility study report. The feasibility study allowed the Bank to identify design features that would make the CBDC more attractive in the Mauritian context. In parallel, we identified gaps in our technical knowhow and solicited the support of the technology arm of international institutions and other central banks from the G20 community. We took the decision to set up a sandbox in December 2022 to start experimenting various features. 3/5 BIS - Central bankers' speeches The findings will guide us to craft the Digital rupee based on the Mauritian specificities. We are contemplating the rolling out of our Digital Rupee on a pilot phase, post the sandboxing exercise and finalisation of design attributes of our CBDC, in November this year. Not later than yesterday, the Steering Committee on the CBDC met with banks' representatives along with those from the IMF and our chosen partner for the sandbox. I understand that this session was very interactive as commercial banks had the opportunity to have a better insight of the work undertaken by the Bank of Mauritius. I would here encourage all CEOs of banks to be closely follow developments in this area, and engage with their teams, given the strategic importance of CBDCs. The Bank of Mauritius does not envisage to limit its exploration at the domestic front but is considering the use of CBDC for cross-border transactions as a Phase 2. This may be a solution to current frictions in cross-border payments and a means to achieve the G20 objective for faster, cheaper, more transparent and secure cross-border payments. I am also pleased to share that the Bank of Mauritius has been invited to join a Commonwealth initiative for the promotion of technology and Artificial Intelligence. We are eager to share our experience as regards the development of the Digital Rupee and how CBDCs can help improve customer experience and financial inclusion while allowing for better supervision and oversight. Ladies and Gentlemen, The IMF/World Bank bi-annual meetings, which we are currently hosting in Mauritius, allow us to put the spotlight on all concerns we may have, and discuss the solutions for overcoming existing challenges and anticipating potential ones. It is indeed a preeminent platform whereby technical discussions on topical matters allow central bankers to have candid discussions on the best approaches to be adopted. True it is that the implementation of CBDCs touches the core of central bank mandates of monetary and financial stability and that each country should consider its own requirements and subsequently adapt the design features of its CBDC to ensure the intended policy objectives and specificities are met, while mitigating associated risks. In the new post-Covid global financial architecture that is currently taking shape around us, the potential of the use of CBDCs is, and will be, prominent. It is therefore vital that we are able to adapt ourselves and be ready to act in the most appropriate manner in this new financial architecture. At the Bank of Mauritius, we are already gearing up for this. I have noted that the agenda across the 3 days is a very packed one. But I am certain that what participants will reap in terms of knowledge, experience and sharing will be simply priceless. We are fortunate that eminent subject matter experts from all continents have willingly accepted to put their expertise at the disposal of the central banking community. 4/5 BIS - Central bankers' speeches We are very eager to hear about the participants' experiences on their respective CBDC journeys, not only on the payment system side, but also on the monetary and financial stability sides. The lessons on consumer experience, including challenges and solutions for service delivery will benefit the greater number. Pertinent questions from market players and consumers will keep rising and, as central bankers, it is our duty to reflect on them, and provide meaningful answers. Ensuring strong privacy safeguards while meeting financial compliance rules, who will be able to access sensitive CBDC payments data and for what purpose, are some of the questions which we currently face and need concrete answers to. My call to all participants is to make the most of this opportunity for interacting with peers, sharing experiences and working together to devise the best possible approach for the elaboration and roll out of CBDCs. Before I end, I would like to reiterate the need for close collaboration between participants, stakeholders and the public in general. Next month, the Bank of Mauritius will be issuing a document for public consultation on CBDC. I encourage all stakeholders concerned to be fully involved in the discussions and share their views. I wish you all a fruitful workshop. Ladies and Gentlemen, I thank you for your attention. 5/5 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 6 |
Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the signature of Grant Agreement between the Regional Centre of Excellence and the Organisation for Economic Cooperation and Development, Balaclava, 18 May 2023. | Harvesh Seegolam: Keynote address - Grant Agreement Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the signature of Grant Agreement between the Regional Centre of Excellence and the Organisation for Economic Cooperation and Development, Balaclava, 18 May 2023. *** Dr. Carmine Di Noia, our special guest from the OECD, Director of Finance and Enterprise Affairs, OECD First Deputy Governor of the Bank of Mauritius and Chairperson of the FSC Second Deputy Governor of the Bank of Mauritius Director General, Independent Commission against Corruption Chairperson of Information and Communication Technologies Authority Board members of the Bank of Mauritius Board members of the Financial Services Commission Chief Executive of the FSC Chief Executive Officers of industry associations Chief Executive Officers of banks and other institutions Members of the RCE Governing Board Members of the Press Ladies and Gentlemen All protocols observed Good afternoon It gives me immense pleasure to address this forum today for the Signature of the second Grant Agreement between the Regional Centre of Excellence (RCE) and the Organisation for Economic Cooperation and Development ("OECD"). I am deeply honoured to witness this momentous event as Chairperson of the Governing Board of the RCE. The gratification I have in seeing that the RCE, an institution, the setting up of which was done by me in my then capacity of CE of the FSC, in 2019 is living fully to its expectations is even more overwhelming. I would like to congratulate the RCE team on their dedication to establish the institution as a reference in our region. The genesis of an RCE for the region is found in the 2018/2019 budget. At that time, the creation of a Regional Centre of Excellence was announced with the objective of strengthening and supporting effective regulation, sound corporate governance and good conduct in the Southern and Eastern African regions. This was followed by the signature of a Memorandum of Understanding between the Government of Mauritius and the OECD in September 2018. The RCE was launched in April 2019 and is the first of its kind institution to collaborate with the OECD on the African continent. Ladies and gentlemen, 1/4 BIS - Central bankers' speeches Capacity-building institutions abound in the world. But very few are tailored to the pragmatic elements that are pertinent to the work of financial regulators and law enforcement agencies. The latter often has to grapple with a number of complex objectives, ranging from macro-objectives, namely: maintaining financial stability and safeguarding financial integrity of a jurisdiction, to more micro ones, including consumer protection, without compromising on technological developments. Our partnership with the OECD can only provide more credence to our jurisdiction as an international financial centre of repute and will, at the same time, strengthen and facilitate adoption of international best practices. Under the agreement signed today, we shall cooperate in key fields covering a wide spectrum of economic and financial sector policies. In the long term, this initiative will not only be confined to cooperation but will also provide a range of exciting network opportunities for our benefit. It will build the capacity of the regulatory bodies and law enforcement agencies in our region. I look forward to witnessing the relationship flourish over time and becoming a reference in our region in the elevation of African specialists in the financial services and law enforcement fields towards excellence. Ladies and gentlemen, I need not remind you of the numerous challenges over the past few years, ranging from the COVID-19 pandemic to geo-politically inflicted global inflationary environment, and more recently to some financial market turmoil in the US and Europe with the onset of financial trouble in certain US banks. As such, as regulators, we need to comprehend that we are at the epicenter of seismic shifts in macroeconomic and macro-financial environment and that these changes have implications on our work. These events are reminiscent that we are in need of continuous adaptation in order to survive the new rules of the game in a new world economic order. Being ahead of the curve is the norm. It is crucial for us, regulators, to uphold the public good and to deliver on our sociallymandated goals with panache by taking cognizance of all scenario-based challenges as well as by being adequately equipped with the appropriate toolkits for dealing with those challenges. In this realm, I can positively confirm that, through its rich program delivery over the past few years, the RCE has ceremoniously assisted regulators in the region in taking cognizance of these manifold challenges. The RCE has organised various workshops in the past year in a number of topical areas, including financial technology, climate change and combating financial crime, to name just a few. Developments in these fields are taking place at breakneck speed and are consistently plaguing the regulatory landscape with new insights that were hitherto outside the purview of regulators. The rapid inroads of technology and blockchain innovation into the payments landscape, for instance, has a number of ostensible implications for financial inclusion and access but requires concerted efforts of all regulatory bodies, including those overseeing fintechs, techfins and telcos, so as to avoid regulatory capture and regulatory arbitrage. There is a growing interest in participating in the activities of the 2/4 BIS - Central bankers' speeches RCE. It has, so far, conducted 10 workshops and trained over 2,800 participants around the globe. My key message here, ladies and gentlemen, is that we are no longer living in a microcosmic world but in a heavily interconnected one. Actions in one jurisdiction have wide-ranging and far-reaching cross-border implications for other jurisdictions. As such, regulatory excellence in a jurisdiction cannot be achieved on a stand-alone basis without being mindful of these potential cross-border externalities. That is why knowledge exchange, as well as information dissemination and collaboration between different jurisdictions become a sacrosanct exercise. To illustrate, sustaining efforts to tackle corruption and financial crimes so as to uphold the financial integrity of a jurisdiction has become a policy priority for many jurisdictions worldwide. However, as the case of Mauritius illustrates when the country exited the high-risk lists of a number of international institutions, this can only be effectively discharged through a collaborative approach among all stakeholders within and across jurisdictions. I would therefore encourage regulators from the region to continue leveraging on the unique opportunity offered by the RCE as the fulcrum for capacity-building, knowledge transfer and advocacy in fields that they are privy to. Ladies and Gentlemen, The Governing Board remains committed to providing the jurisdiction and the region with the appropriate human resources, expertise and guidance to improve the soundness and resilience of our financial systems. In fact, the signature ceremony is being accompanied by a two-day hybrid workshop on "Promoting good corporate governance" covering inter-alia the G20/OECD Principles of Corporate Governance and sustainability. I am sure that each one of you present here today will agree that a sound corporate governance framework is the linchpin for the effective functioning of any organization. This is even more critical in the financial services industry dealing with massive funds. History is littered with examples of failures of institutions, including venerable ones, due to poor corporate governance practices. Our governance structure needs constant adaptation to changes to ensure its continued relevance. It cannot be a one-size-fits-all approach. I am happy to see that members of the National Governance Committee are also present. It serves us as a stark reminder that the perennity of any organization cannot be ensured in the absence of an adequate system of corporate governance. The workshop will provide you with valuable insights on the latest developments in the area of corporate governance and will be the perfect springboard for necessary reforms that you wish to bring in this particular area. Ladies and Gentlemen, 3/4 BIS - Central bankers' speeches We have embarked on an initiative that will provide benefits to strengthen our reputational legacy not only to us but also to our future generations. It is therefore my conviction, that with the expertise and experience of the OECD, we can take our respective financial systems to new heights. Ladies and Gentlemen, Before I conclude, I would like to put on record the excellent support that we have been having from the OECD all throughout the last few years and we look forward to further nurturing these working relations. I would also like to put on record the excellent support I have been receiving from all members of the Governing Board to achieve what we have been able to achieve so far. There is certainly a more exciting journey awaiting us going forward. With these words, Ladies and Gentlemen, I would like to wish you all every success in that construction process and I thank you for your attention. 4/4 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 6 |
Remarks by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the opening of the 3-day training on Basel III reforms by the Deutsche Bundesbank, Port Louis, 31 May 2023. | Harvesh Seegolam: Remarks - opening of the 3-day training on Basel III reforms Remarks by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the opening of the 3-day training on Basel III reforms by the Deutsche Bundesbank, Port Louis, 31 May 2023. *** Bank of Mauritius Board Director The Chief Executive Officer of the Mauritius Bankers Association Chief Executive Officer of banks Distinguished resource persons from Deutsche Bundesbank Colleagues Ladies and gentlemen, Good morning. It gives me immense pleasure to welcome you on the occasion of the training on Basel III Reforms by the representatives of the Centre for International Central Bank Dialogue of the Deutsche Bundesbank. Our ties with the Centre date back to December 2020 when we signed a Memorandum of Understanding on technical central bank cooperation matters. This was followed by close interaction between teams from the Bank of Mauritius and from the Deutsche Bundesbank. I can proudly affirm that our collaboration with the Bundesbank has reached new heights with tailor-made virtual courses organised for staff of the Bank of Mauritius in IT audit and green finance. Concurrently, some of our staff have had the opportunity to attend on-the-job training in Germany as well. I seize this opportunity to commend the Bundesbank for partaking its expertise with our staff. Ladies and gentlemen, Training and human resource empowerment have always been at the kernel of my priorities since I joined the Bank of Mauritius as Governor back in March 2020. The banking sector, being a talent-intensive service industry, is subject to a wide range of transformations which percolate through the various strata of the sector and which ultimately affect the quality of its throughput. With talents and professionals occupying a centerpiece of the sector's output function, productivity in the sector, and its underlying competitiveness, can only be enhanced through constant upskilling strategies. Endowing our pool of talent in the banking sector with the latest hard and soft skills, especially those pertaining to regulatory overhauls and to digitization, is tantamount to implementing labor-embodied technological progress in the sector. This is our passport towards ensuring a competitive and resilient sector that can navigate fearlessly through various storms, whilst ensuring enhanced contribution to our GDP. Today, it is the first time, under our MoU, that staff of the Bundesbank have come in person to impart training to our staff and to the banking sector at large on a topic of high 1/3 BIS - Central bankers' speeches relevance to the banking sector. The items on the agenda are practitioner-focused and facilitated by highly experienced personnel who offer first-hand knowledge and experience. I will, therefore, urge all of you to extract maximum benefit and make the different sessions as interactive as possible. I am confident that the three days intensive training will enrich your knowledge and widen your perspective. The topic of the day, namely Basel III Reforms, is highly seminal as it germinated from a sad reality of modern finance: the 2008 Global Financial Crisis. Basel III represented a long-running but fundamental overhaul of the global regulatory capital regime and focused on quality of capital. While parts of the Basel III standards have already been implemented, some have been refined over time and are sometimes referred to as Basel 3.1. The new Standardised approach introduces more granularity and risk differentiation to the capital requirement calculations. Other amendments pertain, among others, to market risk, credit valuation adjustment, leverage ratio framework and operational risk. The primary objective of the revisions to the current framework is to improve the reliability of capital ratios, by making standardised approaches more risk-sensitive, addressing limitations of Internal Models, and restricting the benefits that Internal Models can provide by introducing an 'output floor'. This would improve both the measurement of risk and the comparability across firms. These changes are set to fundamentally alter the market dynamics and might require banks to reassess their strategies to ensure optimal use of capital. As with major reforms, the Bank of Mauritius favours a consultative approach with its regulatees. The presence of commercial banks over the three days bears ample testimony to this. All of us will be provided with the crux of the reforms as well as the possible challenges and impact. As commercial banks will be required to implement same, I would expect that their representatives raise the practical issues that they could potentially face with the experts for their opinions. I wish to underline that, as an International Financial Centre of repute, Mauritius subscribes to the adoption of international standards and best practices. Basel III is the norm for the banking industry, and it is imperative for us to complete the necessary reforms to maintain our competitive edge and preserve the reputation of our jurisdiction. Ladies and gentlemen, The banking sector has remained resilient despite the impacts of the pandemic, volatile currency markets, regional liquidity issues in hard currencies and rising interest rates. I am convinced that part of the secret of the resilience and strength of our banking sector lies in our early adoption of specific Basel III measures. I look forward to continuing the implementation of the remaining Basel III measures and, accordingly, we have planned the roll out of a slew of regulatory upgrades including: 1. the introduction of the Net Stable Funding Ratio which will ensure that banks maintain a stable funding profile over the long term; 2. the introduction of a Leverage ratio as an additional measure to limit excessive leverage in the banking sector; 2/3 BIS - Central bankers' speeches 3. the alignment of regulatory risk weights for credit, liquidity, market and operational risk exposures with Basel III; and 4. improving our disclosure and reporting requirements which will also comprise climate-related disclosures. A three-day exposure might not be enough for you to master all the reforms but the journey must start somewhere. This is what we are doing today, together with you. While the Bundesbank experts will be taking us through the contours of Basel III, I am confident that at the end of sessions, you will have a solid understanding of the main amendments required to our existing framework as well as the challenges ahead. This is why in addition to the early adoption of certain Basel III measures, I have since assuming Governorship in 2020 ensured that the ongoing upgrade of the Bank of Mauritius' overall supervisory and risk management framework be targeted at the specificities of our own risk topography. In this respect, we are expediting the full implementation of our Risk-Based Supervision framework which is an innovative supervisory toolkit and which provides us with a novel capacity to deep-dive into specific risk areas and even look for feedback loops at the financial stability level. It will blend particularly well with the risk-centric approach of Basel III. In particular, I have in mind the market risk module which is providing us with important insights during the current period of heightened interest and re-pricing risk. Nevertheless, existing regulatory toolkit and planned upgrades have to be complemented by continuous skills training for our supervisors for them to be really effective. Our supervisors are at the center-stage of our rapidly evolving banking sector and banking regulation and, perhaps, the pace of change we are witnessing here is far greater than in more mature jurisdictions. In this respect, we are particularly keen on ensuring that our supervisors have the required skills to keep abreast with latest developments through a combination of local and overseas training sessions. I would here encourage all banks to continuously invest in the capacity-building of their professionals. As you may be aware, ladies and gentlemen, Continuous Professional Development programs are to the trained professional's mind what exercise is to the body. This training by the Deutsche Bundesbank conspicuously embraces this very spirit. With these few words, I thank you for your attention and wish you a productive training and deliberations ahead. 3/3 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 6 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 15 June 2023. | Harvesh Seegolam: Current economic conditions and outlook Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 15 June 2023. *** Ladies and gentlemen, members of the media, good morning. Welcome to this press briefing for the Monetary Policy Committee (MPC) meeting, marking the 67th sitting of this Committee. At the very outset, I wish to contextualise the holding of this meeting. As I communicated before, in light of the introduction of our new monetary policy framework in January this year, we decided to give ample time for the framework to be well entrenched into the operations of banks and financial markets. In fact, the Bank had reviewed its monetary policy framework, which had been in place since 2006, and introduced the new framework effective as from 16 January 2023. The Bank worked on the new framework, in consultation with the IMF. We have been actively monitoring the operational implementation of our new framework across banks since it was launched and have conducted interactive sessions with the IMF for our MPC members. Before delving into the latest developments on the economic and financial landscape, I would like to touch upon a measure recently announced by some banks. Three banks – namely MCB, SBM and MauBank – have decided to offer preferential interest rates on housing loans of up to Rs2 million to households with a monthly income not exceeding Rs100,000 and for a period of one year. This industry-driven measure principally aims at supporting the vulnerable and middle-class households. We also take note of the support from Government of Rs1,000 per month announced in the Budget Speech 2023-2024 for those households which have taken a housing loan of up to Rs5 million. I shall now provide an overview of the latest international and domestic economic and financial developments and outlook before announcing the MPC decision taken today. International Economic Developments The global economy continues to recover despite a challenging economic environment amidst tightening of financial conditions. The IMF, in its April 2023 World Economic Outlook, has revised down its global growth projection for 2023 by 0.1 percentage point to 2.8 per cent compared to its January 2023 forecast. Growth in advanced economies is projected at 1.3 per cent in 2023 while emerging market and developing economies are expected to grow by 3.9 per cent. Leading economic indicators, such as the Purchasing Managers Indices (PMIs), were already pointing towards an improvement in global economic activity in 2023Q1. They 1/6 BIS - Central bankers' speeches expanded further in the second quarter. This was supported by a marked expansion in the services sector amidst higher output growth and rising intakes of new orders. While activity in the manufacturing sector remained subdued, the rate of expansion improved to an 11-month high. Inflation is declining in many countries, partly as a result of aggressive interest rate hikes by central banks. The easing of price pressures also reflects the fall in shipping costs and lower global energy and food prices as global supply chains are improving. Food prices declined on the back of ample world supplies and subdued global demand. Energy prices maintained their general downward trajectory. Brent crude oil prices declined to an average of US$75.7 a barrel in May 2023 amidst worries over weakening demand from China which outweighed progress over the US Debt Ceiling Bill. The Freightos Baltic Index, which measures global container freight rates worldwide and used as a proxy for shipping stocks, maintained its downward trajectory. However, underlying core inflation is yet to peak in most economies and remains well above pre-pandemic levels. The cooling effects of monetary policy tightening on core inflation are expected to be felt in the latter part of 2023. The IMF forecasts global inflation to recede from 8.7 per cent in 2022 to 7.0 per cent in 2023. Towards the end of the first quarter of 2023, it has been noted that many central banks have preferred to maintain status quo given the growing trade-off between inflation and output growth. In fact, since march 2023, 77 decisions of MPCs globally have been to maintain status quo. Yesterday, the US Federal Reserve kept its policy rate unchanged. The US Federal Reserve has given to understand that this pause is out of caution and that it would, in the interim, assess the need for hikes, and that such hikes, if any, would not be as aggressive as before. Going forward, many central banks are likely to leave their interest rates unchanged with inflation being on a downward trend. Some of these central banks – such as the Reserve Bank of India and the central banks of Czech and Hungary – are not expected to tighten monetary policy further. Domestic Economic Developments The Mauritian economy maintained its recovery path in 2022, buoyed by sustained dynamism in key economic sectors, including services and manufacturing. A growth of 8.7% was recorded in 2022, in line with initial BoM projections but much higher than projections made by international organisations. The tourism sector performed remarkably well in 2022, posting an exceptional growth of around 200 per cent, after two consecutive years of contraction, with positive spillover effects onto other sectors of the economy. In 2022, 997,290 tourists visited Mauritius, representing 72 per cent of the 2019 level. Tourism earnings worked out to around Rs64.8 billion, well above the 2019 level. Prospects for the tourism sector remain strong. For the first five months of 2023, tourist arrivals reached 514,258 while tourism earnings aggregated Rs28.9 billion during the period January to April 2023, higher by 72 per cent compared to the same period of 2022. Improved air connectivity and efforts to promote the attractiveness of Mauritius as a tourist destination will provide further impetus to the sector. For 2023, Statistics Mauritius projects around 1.3 million tourists to visit the island. 2/6 BIS - Central bankers' speeches The recovery in economic activity continues to positively influence the domestic labour market. The unemployment rate maintained its downward trajectory to 6.8 per cent in 2022Q4. Labour market conditions are expected to improve further as the domestic economy sustains its growth momentum. The current account, deficit as a ratio to GDP, was estimated at 12.2 per cent in 2022, down from 13.1 per cent in 2021. The improvement largely reflected a better performance of the services account, in particular, in the second half of 2022. The current account deficit is projected to narrow further to 8.3 per cent of GDP in 2023 on account of continued healthy performance of the tourism sector as well as a larger surplus on the income account which is expected to benefit from higher interest rates in the US and Europe. The Mauritius IFC continues to attract robust financial flows as global cross-border investment activities remain buoyant despite challenging global conditions brought about by the lingering Russia-Ukraine war, higher interest rates and the recent banking crisis. With respect to non-GBC financial flows, the country recorded all-time high gross foreign direct investment (FDI) flows of Rs27.7 billion in 2022, led by the real estate sector. Looking ahead, Mauritius is projected to keep on attracting significant gross FDI into this sector as well as other sectors of activities. Inflation Recent price dynamics have indicated an easing of domestic inflationary pressures amidst normalisation of global supply chains and decline in commodity prices. Headline inflation stood at 10.6 per cent in May 2023, down from 11.3 per cent in February 2023. Year-on-year inflation has also declined steadily to 7.9 per cent in May. Core measures of inflation also indicate a sustained softening of underlying price pressures, with a decline in both CORE1 and CORE2 inflation. Money Market The Bank had held a number of sessions with key stakeholders on the new monetary policy framework. Indeed, financial market participants being the fulcrum of the monetary policy transmission mechanism, it was imperative to have ample interactions, through various committees, with the banking community at large to clarify any concerns they might have about the new monetary policy framework and to set expectations. Let me now provide you with some uplifting figures on the money market which reveal that the new monetary policy framework has already started to pay dividends. Since 16 January 2023 and up to 31 May 2023, a weekly average amount of Rs62.6 billion of 7-Day BOM Bills was issued at 4.50 per cent per annum. Banks have availed of the Overnight Deposit Facility for a daily average of Rs6.8 billion since the introduction of the new MPF. These operations by the Bank have resulted in a significant decline in rupee excess liquidity in the banking system to a daily average of Rs2.4 billion over the period 16 3/6 BIS - Central bankers' speeches January to 31 May 2023. The Bank has also mopped up an amount of Rs2.3 billion through foreign exchange intervention since the beginning of the year. Furthermore, the level of outstanding BOM instruments issued to manage excess liquidity stood at Rs130.8 billion as at 31 May 2023, with a major proportion of 55 per cent maturing within 7 days. The new operating target, the overnight interbank rate, hovered between 3.90 per cent and 4.50 per cent over the period 16 January 2023 and up to 31 May 2023, which is well within the interest rate corridor of the new MP framework. This clearly demonstrates that the new monetary policy framework introduced in January this year is leading to improved effectiveness in the monetary policy transmission mechanism. Foreign Exchange Market The recovery of the domestic FX market remained strong in 2023. Total turnover stood at USD5.1 billion from January to May 2023, constituting an increase of 41 per cent relative to USD3.6 billion registered in the corresponding period of 2022. FX interventions by the Bank amounted to USD50 million from the beginning of the year up to now. This represented an important reduction compared to injections totalling USD489 million during the same period last year. You would recall that warning letters were issued to four banks and monetary fines were imposed on eight banks for speculation on the FX market. I am pleased to report that banks have taken corrective actions, as a result of which exchange rate movements are now more reflective of actual market conditions and are less volatile. In line with domestic economic fundamentals as well as international exchange rate movements, the exchange rate has been reflecting market forces and the FX market is now operating in a much more orderly manner. The Gross Official International Reserves (GOIR) remain comfortable, providing adequate buffer against potential adverse external shocks. The GOIR stood at US$6.4 billion as at end-May 2023, representing around 10 months of imports. Financial Stability I will now provide you key insights into the resilience of the banking and financial system. Monetary policy has remained unwaveringly geared towards bringing down inflation to within the target range over the policy horizon. Still, I must highlight that concurrently the trade-offs between monetary policy and financial stability are closely monitored and carefully managed. The hikes in interest rate have obviously raised debt servicing costs for both the household and the corporate sectors. However, no evident signs of financial distress have emerged so far in these sectors. 4/6 BIS - Central bankers' speeches The macroprudential metrics for the household sector – such as debt service to income – are broadly comparable to pre-pandemic levels, suggesting that any financial strains are well borne by the sector. There is, of course, a segment of the household sector that is more vulnerable to rising interest rates and high inflation – in particular, those at the lower end of the income ladder. Here, I would like to reiterate the importance of the targeted measures taken by some banks to support the household sector with preferential interest rates for housing loans. The banking sector remains sound and resilient, though risks to financial stability remain elevated. The degree of vulnerabilities in the banking system has receded in the first quarter of 2023, as demonstrated by the stress test exercise conducted during this year. The domestic macroeconomic and financial environment are not expected to induce significant increases in risk to financial stability during 2023. Banks were particularly robust, with comfortable capital and liquidity buffers. In particular, the CAR for the banking sector was 20.4 per cent as at end-March 2023, well above the minimum regulatory requirement imposed by the Bank. Similarly, the aggregate Liquidity Coverage Ratio (LCR) stood at 237.5 per cent in March 2023 while the LCR for material foreign currencies was at 210.3 per cent – largely exceeding the regulatory floor of 100 per cent in both cases. The availability of ample high-quality liquid assets provided adequate cushion against the materialisation of any liquidity risk arising from both domestic and external shocks. The ongoing economic recovery is well supported by the sustained flow of bank credit to the economy. Bank credit to the private sector grew, on an annual basis, by 9.3 per cent in April 2023, up from 2.4 per cent in October 2022, driven mainly by growth in credit extended to the corporate sector. Bank credit to corporates picked up as from November 2022 and registered an annual growth of 6.1 per cent in April 2023. Similarly, bank credit to households continued to grow at an annual rate of 14.1 per cent in April 2023, from 13.6 per cent in October 2022. In terms of asset quality, the credit portfolio of the banking sector continued to improve, as evidenced by a drop noted in Non-performing loan (NPL) ratio. Specifically, NPLs represented 4.1 per cent of gross loans as at end-March 2023, down from 4.4 per cent as at end-September 2022. Concurrently, the NPL coverage ratio stood at 56.4 per cent as at end-March 2023. The Bank continues to assess and monitor closely risks to the stability of the financial system, while pursuing its price stability mandate. MPC Decision I will now focus on the decision of the MPC. The MPC carefully reviewed the recent economic developments taking place at the global level and assessed their potential impact on the Mauritian economy. Inflation is anticipated to decline in the coming months and reach 6.8 per cent in December 2023, supported by an easing of global supply and logistics disturbances, thus enabling a normalisation in global commodity prices and subsequent downward 5/6 BIS - Central bankers' speeches adjustment in domestic food and fuel prices. The upcoming relaxation of requirements for the importation of labour will contribute towards lowering cost-push pressures on inflation. The gradual normalisation of monetary policy is expected to work through the economy and keep core inflation in check. Inflation expectations are expected to be well anchored. Domestic demand will remain supported by sustained private and public sector consumption and investment spending. Household consumption will receive a boost from the 2023-24 budgetary measures, in particular, the overhauling of the personal income tax regime and implementation of a range of social measures. Measures to facilitate business and competitiveness will support exports and private investment while public investment will be upheld by the construction of social housing units, the extension of the Metro Express project and the expansion of road networks, amongst others. Moreover, the measures announced specifically for improving the business environment in Mauritius will further boost confidence among investors and will provide further impetus to economic activity. The bank forecasts economic growth to be more than 6% for this year, along the same veins as 2022. The MPC noted that the growth projection remains subject to headwinds stemming from current global uncertainties. The MPC discussed lengthily the latest developments on the macro-financial landscape, both globally and on the domestic fronts. The Committee analysed various scenarios, including a potential increase in the policy rate. It balanced the risks to the inflationary and to the growth outlooks. Accordingly, the MPC decided that a further increase is not warranted at this stage. As a result, the MPC unanimously decided to keep the Key Rate unchanged at its current level of 4.50 per cent per annum. The MPC will continue to monitor the economic situation closely and stands ready to meet in between its regular meetings, if the need arises. The next meeting of the MPC is scheduled for August this year. Thank you. I now welcome your questions. 6/6 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 7 |
Speech of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the Pan African Central Bank Conference on Risk and Reserve Management, Port Louis, 22 June 2023. | Mardayah Kona Yerukunondu: Reserve management - what to expect and watch out for in the next decade? Speech of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the Pan African Central Bank Conference on Risk and Reserve Management, Port Louis, 22 June 2023. *** Governor Deputy Governors Representatives of GIZ and Allianz Global Investors Distinguished guests Ladies and Gentlemen All protocol observed Good morning It is with great pleasure that I address you on this very interesting topic 'What to expect and what to watch out for in the next decade' in the world of reserve management. We have had two and a half days of fruitful conversations and knowledge sharing which have already set the tone for the future of reserve management. One decade is short or long, depending on how one views it. In reserve management, time horizon is a key factor influencing our decisions. In the decade to come, we will be bound to see foreign exchange reserves evolve further in terms of size, composition and adequacy. Recent events underscore the necessity for central banks to continue building reserves to consolidate economic and financial resilience against shocks, including Black Swan events. But the core investment principles for reserve management by central banks are broadly expected to remain the same. Ladies and Gentlemen, marked changes have been observed in reserve management style during the past few years. There have been the reinforcement of governance around the investment framework, increased reliance on technology, and diversification away from traditional reserve assets to a broader spectrum of asset classes such as corporate and agency bonds, equities and even alternatives. Let me now elaborate on the various points that we central bankers need to consider when managing reserves going forward. Ladies and gentlemen, I would like to share with you the comments made by the Deputy Governor from the Banco do Central do Brasil, Mr Bruno Serra Fernandes, when he was conferred the Best Reserve Manager of the Central Banking Awards 2023. I quote: "Managing - reserves amidst an adverse environment - requires a great precautionary capacity to deal with multiple market and operational risks while having openness and flexibility to rethink pre-established processes and promote innovative solutions in the face of new paradigms." Unquote. 1/4 BIS - Central bankers' speeches This viewpoint sets the tone for reserve managers for the years to come. They will have to adapt their investment style, governance structure and risk management processes to navigate volatile market dynamics. Investment in human capital and systems will be a priority to keep pace with higher volatility and growing complexity of financial instruments and markets. The survey done by the Official Monetary and Financial Institutions Forum – the OMFIF – in 2022 provides further insights in what reserves managers foresee over the next few years. Most of them believe that inflation will remain high for longer or at least be more volatile. The majority of reserves managers indicated they will not make any fundamental change to their investment approach. But they can become more active and opportunistic in the day-to-day management of reserves. Portfolios will be designed to weather economic turmoil, such as by extending duration. They will be more prudent and will put in greater efforts into capital preservation and to ensure liquidity of the portfolios. Ladies and gentlemen, capital preservation and liquidity remain the prime investment objectives of reserve management. Return maximisation has been only a secondary objective. However, the challenges of falling reserves and exchange rate pressures in recent years have drawn greater focus on return, particularly in emerging economies, as evidenced by recent reserve management surveys. Although safety and liquidity will remain the core principles of investment frameworks, a rise in the importance of return over the coming years is anticipated. The increased focus on return is already more apparent among emerging economies. For instance, some central banks have to generate further return to make up for growing operational and funding costs. We have seen a steep and rapid rise in interest rates in the past year or so. Going forward, the search for better yielding avenues may prompt more central banks to expand their universe of eligible asset classes, including venturing into emerging market debt and equities. The integration of new asset classes as well as currencies in the reserve portfolio and the need to access new markets will require further operational enhancements and strengthening of the governance framework. Central banks in our region are increasingly hiring the services of external managers to manage complex investment solutions that require specialised skills and infrastructure. Ladies and gentlemen, investors generally mitigate risks to portfolios by diversifying into assets classes that have negative or low positive correlations. However, with the change in market dynamics since the Global Financial Crisis, the traditional correlations across asset classes have broken down. This phenomenon is nowadays more pronounced across diverse asset classes and is anticipated to persist in the years ahead. Reserve managers will have to make up for the loss of diversification with new investment strategies. Recent surveys have revealed a shift by central banks globally towards integrating ESG considerations into their investment framework. This transformation has been taking place at a faster-than-expected pace in recent years and is bound to gather further momentum. We have also heard several experts in this gathering talking about the 2/4 BIS - Central bankers' speeches efforts made in various fora to incentivise and facilitate access to ESG products that meet central banks' investment criteria. Many central banks already have an official ESG framework in place, namely the Monetary Authority of Singapore, Sveriges Riksbank and Danmarks Nationalbank. Other central banks use ESG labels or use of proceeds as a means of embedding ESG in their reserve portfolios. In the years to come, technology, policy and societal preferences will continue to drive the proliferation of ESG products. ESG datasets and business intelligence platforms are continuously being developed, providing support to investors in their search for investment opportunities. The de-dollarization paradigm shift is taking place, albeit at a gradual pace. This trend is widely believed to continue into the next decade, amid ongoing geopolitical fragmentation. In the past fifteen years or so, the share of the US dollar has been trending down with less traditional currencies making inroads into reserve assets. Going forward, other currencies like the Renminbi, Indian rupee, Australian dollar, New Zealand dollar and Swedish Krona are expected to gain at the expense of the greenback. Hence, reserve managers would need to build competencies to tap into these currencies and markets. We also expect to see more geographical diversification in reserve portfolios. Aside from Latin America, India or China, we believe there are great opportunities to unlock within Africa itself. For instance, at the Bank of Mauritius, we have developed and are fostering relationships with leading Pan African financial institutions. As we look to further diversify our portfolios, we believe that more reserve assets could be invested on the continent for its long-term sustainable growth. Some central banks firmly believe that digital currencies could become an eligible asset class for reserve portfolios at some point in the future. Others are avoiding such assets for various reasons. Virtual assets and cryptocurrencies are still far from the reserve management world today, given their intrinsic volatility. These factors are expected to keep them away from reserve portfolios in the decade. With all these new investment and diversification strategies, central banks will inevitably have to invest more in human capital and IT systems to rise to the challenge. Regular training for reserve management staff alongside frequent interactions with asset managers and peer central banks are paramount. Sharing of experience among central banks in Africa has to be encouraged and facilitated. I here have in mind the regional groups – such as SADC, COMESA and the Association of African Central Banks. They can play important roles in setting up the right fora for the sharing of knowledge and expertise. Of course, the collaboration with international institutions and national agencies fostering international cooperation – like the GIZ – will be of great assistance. Central banks will also have to keep pace with technological advances to ensure a secure and efficient environment for the management of reserves. As a complement, proper risk management solutions would need to be in place to ensure consistent approach in the management of portfolio risks. 3/4 BIS - Central bankers' speeches In the aftermath of the pandemic and ongoing geopolitical tensions, African central banks experienced significant exchange rate pressures and witnessed a decline in reserves. This further exac¬erbated a funding crisis in the continent, leading to a surge in external debt service burden. Based on IMF statistics, a slow-down in foreign exchange inflows and central banks' interventions to finance imports led to about a quarter of countries in Sub-Saharan Africa with reserves levels less than three months of imports at the end of 2022. Countries with the most significant declines in reserves include Angola, Gambia, Mauritius, Mozambique, Kenya and Ghana. For Mauritius, the pre-pandemic reserves level was USD 7.4 billion in December 2019. Being a tourist destination, the impact of the pandemic on our domestic FX market was quite severe. Since March 2020, the Bank has sold a total amount of approximately USD3.8 billion to support the domestic foreign exchange market. I can assure you that managing reserves during such challenging period warranted a major overhaul of the reserve management strategy at the Bank of Mauritius. Before I conclude, I will highlight some key takeaways on what to watch out and what to expect over the next decade. First, the global macroeconomic landscape will remain challenging. Geopolitical tensions are expected to linger. Business and interest rate cycles could recur over shorter time span relative to historical trends. Second, financial market dynamics will bear the ramifications of a testing economic environment. Moreover, higher sovereign debt levels could constrain the ability of fiscal policy to lean against economic downswings and smoothen economic volatility. Third, reserve management in an evolving economic and financial environment will require investment in specific skillsets, a strong governance framework, welldefined risk appetite, up-to-date IT systems, and ongoing scrutiny of new investment opportunities. Continuous capacity building is key to dispense the requisite knowledge and skills to our central banking staff. Central banks managed to steer their way out of those stormy waters and are still doing so. They had no choice than to innovate by adjusting their investment guidelines and principles, expanding their eligible currencies and asset classes. It is as important to acknowledge that there should be clear understanding of what central banks can and cannot do, as well as an appreciation of the possible conflicts between the different objectives. We, on the African continent, need to adapt ourselves to new trends and seize opportunities to resolutely face the future. It is imperative for our reserve managers to be more dynamic to respond quickly to new market conditions. I strongly believe that there is a lot we can collaborate on to make the continent more attractive to foreign capital and international trade in order to grow our foreign assets. This will assist countries safeguard macroeconomic stability and foster sustained economic growth. Ladies and gentlemen, I thank you for your attention. 4/4 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 7 |
Keynote speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Pan African Central Bank Conference on Risk and Reserve Management, Port Louis, 22 June 2023. | Harvesh Seegolam: Current challenges and the pathway to the greening of Reserves Management Keynote speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Pan African Central Bank Conference on Risk and Reserve Management, Port Louis, 22 June 2023. *** Governor Deputy Governors Distinguished Guests Members of the press Ladies and Gentlemen All protocol observed A very good morning to all of you. Let me join my Deputy Governors in extending a very warm welcome to the Governor, Deputy Governors and representatives of central banks to Mauritius. It is with pleasure that the Bank of Mauritius is hosting this Pan African Central Bank Conference on risk and reserve management. I am sure that the last two days have broadened your perspective and equipped you with the requisite knowledge to enhance your skills in the subject matter. I would also want to laud the German Agency Cooperation (GIZ) and Allianz Global Investors for this initiative across the SADC region, as well as acknowledge the continuous support of the Wits Business School, University of Witswatersrand from South Africa. My address today will be on a highly topical issue which is increasingly hogging the limelight of sustainable central banking. Ladies and gentlemen, According to the World Economic Forum, around 50% of global GDP is moderately or highly dependent on nature. Weather-related disturbances around the world are becoming more frequent and chaotic. Climate-related disasters and their unpredictable patterns have been detrimental to many economies. What is striking with these disturbances is that a localized weather-related shock can unsettle the entire climate pattern throughout the world and generate weather-related hazards in other parts of the world. Examples abound, like wildfires in Australia, droughts in Africa, and floods in Haiti. The list goes on. We have already reached the tipping point regarding the climate issue and the sustainability agenda needs to be at the forefront for us to stand at least a fighting chance. Failure to do so will irremediably move us from the COVID frying pan into the climate fire. Due to the negative externalities that a weather hazard can pose across countries, efforts spearheaded to address those cannot be limited at the individual country level. Rather, it has become increasingly conspicuous that a global coordinated effort is required to mitigate the problem and adapt to it so that we may protect the planet and preserve inter-generational legacy. 1/4 BIS - Central bankers' speeches With this in mind, leaders of nations signed the Paris Agreement in 2015 which was, in its own ways, unique compared to previous multilateral agreements that have been signed on climate change. The Paris Agreement is a major catalyst to raise awareness against global warming and directed the world to the path of low-carbon emissions. However, we still have a long journey ahead of us to limit global warming below the targeted 2 degrees Celsius by 2050. This is not an easy task but I still believe is still achievable. Progress toward this target demands a multilateral approach topped up with appropriate incentive mechanisms and requiring a common effort from each and every one of us to achieve a 'global public good' that we would not otherwise be able to achieve. This is what environmental economists would call avoiding a collective action problem. To this end, multiple initiatives have been launched: the UN-convened Financial Centers for Sustainability (FC4S), the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and the G20 Sustainable Finance Working Group (SFWG), to name a few. Ladies and gentlemen, Central banks played an active part in this journey towards a greener and more sustainable global economy. Launching the NGFS in 2017 was a milestone in that direction. Central banks can support the greening of the financial system in various ways. These include: the integration of climate-related risks data into financial stability assessments; usage of adequate taxonomy; proper disclosure requirements; and most importantly, the management of foreign exchange reserves in a more sustainable way. Traditionally, reserves have been managed under the three main objectives of security, liquidity, and return. With a growing number of central banks becoming more 'climatechange conscious' or rather building an aversion to climate-change, Environmental, Social, and Governance – the so-called ESG - considerations have recently been frontloaded into policy decision-making processes. As a result, they are now emerging as an essential artefact of reserves management objectives. Central banks that seek to integrate ESG factors into their reserves management decision-making process face somewhat distinct challenges. This is reflective of the diversity among central banks' balance sheet structures and portfolio management philosophies and processes. Much also depends on the level of financial market development, as well as the macroeconomic topography and the degree of monetary policy sophistication. Some central banks which hold insufficient levels of reserves or which pre-dominantly hold reserves as insurance mechanism against external economic shocks, face constrained choices regarding the composition of their reserves portfolio. As a result, they remain committed to liquidity and security constraints and their Strategic Asset Allocation (SAA) allows little room for ESG-based holdings. Other central banks with adequate levels of reserves may have more flexibility in diversifying their portfolio composition to ensure a reasonable dosage of ESG-compliant holdings. Usually, the incorporation of ESG criteria by central banks falls under three categories: The first is negative screening which is the most widely used. It simply consists of excluding sectors or companies from the investment universe based on ethical, moral or scientific grounds, e.g., companies with poor environmental credentials. In our case, 2/4 BIS - Central bankers' speeches we have invested in an ESG fund denominated in Euro. As part of our internallymanaged corporate bond portfolio, we have adopted the negative screening and exclusion (UN sanction list). The second category is thematic investing. This directs investment towards specific themes which are expected to improve risk-adjusted return and as well as bring along ancillary societal benefits. The third category is impact investing which is more results-oriented and which looks at policy outcomes alongside financial outcomes. To illustrate, some central banks have already taken steps to incorporate environmental sustainability considerations within their reserve management framework. Progress on this front is varied. Banque de France, Banco de Mexico, Norges Bank are pioneers in the fields. Others are still at the beginning of the journey, as challenges persist. In the case of the Bank of Mauritius, in June 2021, the Bank came up with a Guide for the Issue of Sustainable Bonds. The document provides an overview of the requirements and process for the issuance of Sustainable Bonds and the listing of these Bonds on Exchanges licensed in Mauritius. It also seeks to ensure the integrity of the sustainable financing ecosystem in Mauritius and to prevent inter alia "green washing". According to the World Bank, challenges are four-fold. First, a uniform definition of ESG is still lacking. Second, there is a lack of coherent and consistent accounting and reporting framework and disclosure requirements across jurisdictions. Third, measuring the impact of ESG considerations on financial returns is still inconclusive. Fourth, monitoring progress and appraising performance is difficult in view of lack of availability of proper benchmarks. Challenges tied to the process of gathering and analyzing data may also inhibit the smooth incorporation of ESG considerations into an investment and asset allocation framework. Ladies and gentlemen You will concur with me that building internal expertise amongst reserve managers is paramount, given the esoteric and erudite nature of reserves management. According to the NGFS capacity-building is a real challenge across all its members. I am pleased to note that, as indicated in surveys conducted by the Institute of International Finance (IIF) in 2022, central banks are rolling out their plans to upskill their workforce in a myriad of areas surrounding reserve management. At the height of the pandemic, the Bank came up with the novel idea of setting up of the Mauritius Investment Corporation as a subsidiary. The MIC as it is known in short has been provided with an amount of USD 2 billion out of our reserves to build up the domestic portfolio for generation of wealth for future generations. I must say that the decision has contributed to improve the profitability of the Bank by generating satisfactory returns. The Gross Official International Reserves (GOIR) remain comfortable, providing adequate buffer against potential adverse external shocks. The GOIR stood at US$6.4 billion as at end-May 2023, representing around 10 months of imports. As our economy continues to recover, the Bank has set as objective the consolidation of its reserves. 3/4 BIS - Central bankers' speeches The more so that reserve management practices in central banks lag behind the sophistication of other asset managers in institutions which take a more long-term view towards asset management, e.g. pension funds, life insurance companies, endowments and intra-generational Sovereign Wealth Funds (SWFs). Reserve management activities in central banks tends to be more geared towards establishing a pedestal between short- and long-term considerations. The peculiar nature of central banking in that front means that it is crucial for us to get together and to peer learn from each other's experiences. Collaborating with more experienced asset managers to help transform the reserves portfolio is also an option that may be explored. Ladies and gentlemen Sustainability as a reserve management objective needs to be in line with the traditional tenets of safety, liquidity, and return. Being predominantly fixed-income traders, a simple investment avenue that reserves managers may consider is green bonds. In general, the safety and return aspects of green bonds support their incorporation into reserve portfolios. Adding these bonds to a conventional bond portfolio may also generate diversification benefits. However, some challenges remain. These bonds' accessibility and liquidity still pose some constraints. Benchmarks on returns and risks on these asset classes still have to be developed. Persistently high levels of inflation continue to deplete the real value of investments. Together with this, the past year has been one of the worst years for financial markets for fixed income. It has indeed not been an easy period to navigate. Central banks of developed market countries are yet to end their monetary policy tightening cycle. There is still work to be done to bring inflation down within target. With this backdrop, further market volatility is expected over the short to medium term. The proper management of those market volatilities remains a key priority for central banks. Nevertheless, the potential benefit of integrating sustainability elements into the investment framework should not be overlooked. After all a key objective of transitioning towards a sustainable investment and risk-based framework within reserve management is for a better management of long-term market volatility. Ladies and gentlemen I am aware that a graduation ceremony will take place after my remarks. Those of you who will be in that cohort would have successfully passed the test. However, as with other disciplines, reserve management is also fast evolving. It will require that you constantly update your skill set to ensure its continued relevance in a changing world. The prudent and efficient management of our country's reserves rests in your able hands and there cannot be a better motivation to the pursuit of excellence. Your hard work has eventually paid off and I congratulate you on your achievement. I am sure that down the line, there will be many more opportunities for celebration. With these words, I thank you for your attention. 4/4 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 7 |
Welcome address of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the launch of the Regional Centre of Excellence workshop on Sovereign Debt Management, Sustainable Bonds, and Debt Transparency, Ebene, 26 July 2023. | Mardayah Kona Yerukunondu: Welcome address - launch of the Regional Centre of Exellence workshop Welcome address of Mr Mardayah Kona Yerukunondu, First Deputy Governor of the Bank of Mauritius, at the launch of the Regional Centre of Excellence workshop on Sovereign Debt Management, Sustainable Bonds, and Debt Transparency, Ebene, 26 July 2023. *** Dr The Honourable Renganaden Padayachy, Minister of Finance, Economic Planning and Development The Honourable Mahen Kumar Seeruttun, Minister of Financial Services and Good Governance Mr Harvesh Kumar Seegolam, Governor of the Bank of Mauritius and Chairperson of the RCE Governing Board; Mrs Sadhna Sewraj-Gopal, Second Deputy Governor of the Bank of Mauritius Mr Rajeshsharma Ramloll, Senior Counsel, Solicitor General and Vice Chairperson of the Financial Services Commission Mr Sarwansingh Purmessur, Permanent Secretary of the Ministry of Financial Services and Good Governance Heads & members of diplomatic corps in Mauritius Board Members of the Financial Services Commission Board Members of the Bank of Mauritius Members of the RCE Governing Board Mr Carmine Di Noia, Director for Finance and Enterprise Affairs of the OECD Chairpersons of institutions Representatives from the OECD Distinguished Panellist and Speakers Members of the Press Distinguished Guests Ladies and Gentlemen It is my singular pleasure, to welcome you and all the participants to yet another event hosted by FSC Mauritius, through its Regional Centre of Excellence. The Regional Centre of Excellence (RCE), as you know, was established, in 2019, in collaboration with the OECD. The Governing Board of the RCE is chaired by the Governor of the Bank of Mauritius, and comprises amongst others, the Director of the Independent Commission Against Corruption and members from the OECD. The RCE has as objective the delivery of capacity-building programmes for the Southern and Eastern African region. Ladies and gentlemen, the Regional Centre of Excellence is situated at the 'Rue du Savoir' in Ebène. For those who do not understand French, 'Rue du Savoir' means 'Knowledge Street'. So this is the address of the Regional Centre of Excellence. It's all about learning, and knowledge, and this time our organising team chose the theme 'Sovereign Debt Management, Sustainable Bonds & Debt Transparency'. This theme is highly topical as, in the aftermath of the COVID-19 pandemic, many countries 1/3 BIS - Central bankers' speeches are struggling with high debt levels, soaring funding costs and deteriorating market conditions. Distinguished guests, sovereign debt is necessary to finance governments' operations and meet their financial obligations. Its importance can be understood from various perspectives: 1. It plays a vital role in maintaining economic stability. Governments borrow, to fund public infrastructure projects, social welfare programs, and other development initiatives, that stimulate economic growth and improve the standard of living of their people. 2. Sovereign debt, also allows governments to cover budget deficits and maintain the smooth functioning of public services. 3. Sovereign debt provides governments with the necessary funds to respond swiftly and effectively to economic crises, as we have witnessed, during the global financial crisis and the COVID-19 pandemic. In the words of Alexander Hamilton, the founder and chief architect of the American financial system, 'A national debt, if it is not excessive will be to us a national blessing." Governments that manage their debts responsibly and repay their obligations on time build investor confidence. This leads to lower borrowing costs and encourages both domestic and foreign investments. This in turn, helps maintain a stable currency and promotes economic growth. However, ladies and gentlemen, excessive sovereign debt poses significant risks and challenges. Lack of financial discipline has already resulted in a few casualties, Lebanon, Sri Lanka, Tunisia and Zambia, to name a few. As beautifully put by Henry Wheeler Shaw, a 19th century American humorist, "Debt is like any other trap, enough to get into, but hard enough to get out of.' Sovereign debts were already at record highs when the COVID-19 pandemic hit the planet. As central banks pursue policy normalization and debt reaching unprecedented levels, it is becoming more difficult for developing countries to obtain finance. This has translated into challenging market conditions and increased vulnerabilities, especially in developing and emerging economies. There is a need for governments and policymakers to keep a balance between borrowing for development and ensuring debt sustainability. Debt transparency can play a crucial role in allowing creditors to take informed lending decisions and support the effective use of debt for growth-enhancing projects. The sustainable bond market has been growing rapidly since a few years. Sustainable bonds aim to finance green and social projects that are aligned with internationally accepted principles. Distinguished guests, I'll share some figures to showcase our efforts. Mauritius has managed to bring down its public sector debt ratio to GDP from 96.2 per cent in June 2021 to 81.9 per cent in March 2023. The Honourable Minister of Finance here present opted to adopt a prudent fiscal stance. 2/3 BIS - Central bankers' speeches Given the growing importance of sustainable finance in recent years, a number of initiatives have been taken by both the public and the private sectors in Mauritius. A technical team comprising representatives from the Ministry of Finance, Economic Planning and Development and the Bank of Mauritius is currently working on the Environmental, Social and Governance framework. In June 2021, the Bank of Mauritius published a 'Guide for the Issue of Sustainable Bonds in Mauritius', that lays down the foundation for the issuance of Green, Blue, Social, Climate and Sustainability Bonds in Mauritius. In December 2021, the FSC released its 'Guidelines for the issue of Corporate and Green Bonds in Mauritius". In January 2022, a non-bank financial institution became the first Mauritian company to issue green bonds and plans to raise Rs3 billion over next five years. In February 2023, the same organisation announced the creation of a new Rs9 billion Medium-Term Note Programme. Significant strides have been made on the global front. During the 3rd G20 Finance Ministers and Central Bank Governors Meeting held in Gujrat, India, just one week ago, Finance Ministers and Central Bank Chiefs opened talks on debt restructuring deals, multilateral bank reform and finance, to tackle climate change. The aim was to steer the global economy towards strong, sustainable, balanced and inclusive growth. For the Group of G20, addressing debt vulnerabilities in lower and middle-income countries, in an effective and comprehensive manner, is a priority. Accordingly, it has tasked the International Financial Architecture Working Group to develop a G20 Note on actions to be taken to enhance financing for Sustainable Development Goals, in line with the G20 Sustainable Finance Roadmap, with due consideration to country specificities. As fixed-income markets recover, a more selective approach to bond buying is likely to favour sustainable bonds. There is already a strong demand from investors and rising expectations for governments and organizations to deliver on their ESG commitments. I have no doubt that the discussions over the next couple of days will be enriching, with some key take-aways for each of us. Climbing the debt-transparency ladder requires sound legal and debt-management practices. A sustainable world means working together to create prosperity for all. Ladies and gentlemen, I wish you all well. I thank you for your kind attention. 3/3 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 7 |
Remarks by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Regional Centre of Excellence workshop on Sovereign Debt Management, Sustainable Bonds, and Debt Transparency, Ebene, 26 July 2023. | Harvesh Seegolam: Remarks - launch of the Regional Centre of Exellence workshop Remarks by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the launch of the Regional Centre of Excellence workshop on Sovereign Debt Management, Sustainable Bonds, and Debt Transparency, Ebene, 26 July 2023. *** Dr The Honourable Renganaden Padayachy, Minister of Finance, Economic Planning and Development The Honourable Mahen Kumar Seeruttun, Minister of Financial Services and Good Governance Members of the Diplomatic Corps Mr Carmine Di Noia, Director for Finance and Enterprise Affairs, OECD The First Deputy Governor of the Bank of Mauritius and Chairperson of the Financial Services Commission The Second Deputy Governor of the Bank of Mauritius Members of the Governing Board of the Regional Centre of Excellence Board Directors of the Bank of Mauritius and of the Financial Services Commission Chairpersons and Chief Executive Officers of para-statal bodies and other authorities Chief Executives of banks and financial institutions Members of the media Ladies and gentlemen Distinguished guests All protocol observed I wish you all a very good morning and a warm digital welcome to those who are joining us online. I am pleased to join you this morning for this workshop on sovereign debt management, sustainable bonds and debt transparency, representing the 12th workshop organised by the RCE since its establishment. Ladies and gentlemen, The theme of this two-days' workshop is indeed very timely. Moreso, that it comes at a moment where most countries are rethinking their debt strategies. The global economy is still recovering from the onset of the COVID-19 pandemic; the energy and food crisis; the challenges associated with climate change; and the geopolitical tension associated with the war in Ukraine. Talks about the way forward regarding sovereign debt have been in the limelight, especially when we bear in mind that the first casualty of this polycrisis, has been the sovereign debt situation of countries globally. Against a backdrop of rising interest rates, capital outflows, stalling growth, plummeting currencies and increased frequencies of natural catastrophes, the debate about which direction to take regarding the future of sovereign debt has never been so pertinent. To do justice to the debate, however, we need to re-cast debt using an appropriate and well-balanced context. Not all debt is malignant! 1/3 BIS - Central bankers' speeches Taking a stroll down memory lane, one cannot be oblivious of the various episodes of heavy sovereign indebtedness that plagued many parts of Latin America and Africa in the 1980s, partly as a result of the oil price hikes which accentuated the headaches of many oil importers and imperilled their current account situations, and partly due to the hyperinflationary episodes that was a ubiquitous feature of that decade due to profligate fiscal policies. As a result, many countries fretted with the so-called 'Debt Overhang' syndrome which swept them inside a vicious cycle of increased external indebtedness, rising risk premia, higher interest rates, higher budget deficits and higher debt. Declines in commodity prices have also had their toll on external situation of commodity exporters, many of which were Low-Income Countries. Now, fast way forward to recent times, the COVID pandemic, thoughts of which are still vivid in our minds, necessitated extraordinary measures to stave off the consequences of an economic crisis. As you may be aware, for such Black Swan events, policymakers around the world had to dig deep into their repertoire of measures, and fish out extraordinary but specially calibrated measures to prevent real stoppages from percolating through to the financial sector. In so doing, sovereign debt worldwide shot up. Ladies and gentlemen, Over the last year, the mathematics of sovereign debt dynamics has become more complicated. Rising interest rates from monetary policy tightening globally have led to increasing debt servicing costs. One has to be cognizant of the fact that not all is doom and gloom yet. The issue about debt dynamics is that it should not be accumulated till the point when it becomes unsustainable, i.e., starts spiralling out of control and, therefore, will require painstaking macroeconomic adjustments in the future. Many of us are familiar with the famous law of motion equation of debt dynamics which posit that to grow out of debt sustainably, it is imperative to lay the foundation for strong macroeconomic performance. In the case of Mauritius, efforts have been deployed on numerous fronts for a favourable macroeconomic outturn and a healthy debt trajectory. This has been confirmed by the most recent sovereign ratings by both Moody's and Standard and Poor's which have reaffirmed the position of Mauritius as an investment grade jurisdiction. Ladies and gentlemen, The road to recovery has recently seen sovereigns favouring more sustainable debt instruments as well. With the onset of extreme weather-related disturbances, countries are earmarking a relatively greater share of their fiscal space to build their resilience to physical and transition risks. In parallel, on the funding side, the sustainable bond market continues to develop rapidly. These instruments serve as a catalyst for mobilising capital towards projects that address Environmental, Social, and Governance (ESG) challenges. The ESG debt universe is fast approaching the $5 trillion mark, up from $3.4 trillion in 2021. Many of you will recall that at the COP 26 in Glasgow, governments committed to finance the transition to a greener future. As an International Financial Centre (IFC), we ambition to evolve as a green finance hub for the region as well. 2/3 BIS - Central bankers' speeches In this respect, the Bank of Mauritius has been very active in promoting the sustainability agenda amongst its regulatees. In June 2021, we released a Guide for the Issue of Sustainable Bonds paving the way for the issue of Green and Sustainable Bonds in Mauritius. We also established our Climate Change Centre in October 2021 and in June 2022, the Guideline on climate related and environmental financial risk management was issued. In the area of Reserves Management, we have also embedded sustainability considerations in our internal investment strategy. In the journey that we are charting for Mauritius as an IFC of choice in sustainable finance, banks – locally and regionally – will have a critical role to play. I would here make an appeal to all banks not to shy away from exploring opportunities on this new trajectory and join us in creating more depth and breadth for sustainable and ESGrelated finance for our continent. I also wish to take this opportunity to make a call on all African central banks and nonbanking financial services regulators to join hands in the region in creating the appropriate regulatory regime to support the development of sustainable finance in the region. Ladies and gentlemen, Proper management of sovereign debt requires cross-fertilization of sound policies and discipline from related policy areas, including fiscal and monetary policy. I have no doubt that the topics on the agenda for this 2-day workshop will spark enriching and interactive exchanges and promote further dialogue amongst relevant stakeholders. I understand that more than 200 delegates are joining us virtually from many parts of the world as well. I look forward to collaborating with the OECD on such workshops of high pertinence to our region in future. Before finishing, I would like to thank the members of the Governing Board and the staff of the Regional Centre of Excellence for their continued support and delivery of the mandate of the RCE. With these words, I thank you for your attention and wish you fruitful deliberations for the remaining sessions. 3/3 BIS - Central bankers' speeches | bank of mauritius | 2,023 | 7 |
Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the FinCoNet/ Bank of Mauritius International Seminar on Market Conduct Supervision in Challenging Times, Pointe aux Piments, 24 November 2023. | Harvesh Seegolam: Market conduct supervision in challenging times Speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the FinCoNet/ Bank of Mauritius International Seminar on Market Conduct Supervision in Challenging Times, Pointe aux Piments, 24 November 2023. *** The First Deputy Governor and Chairperson of the Financial Services Commission The Second Deputy Governor Members of the Board of the Bank of Mauritius The Chair of the International Financial Consumer Protection Organisation Representatives of the OECD, FinCoNet Secretariat Chief Executive Officers of banks and other financial institutions Chief Executive Officer of the Mauritius Bankers Association Distinguished guests Ladies and gentlemen All protocol observed. I wish you all a very good morning or good afternoon, depending in which geography you currently are if you are attending this event virtually. At the outset, I would like to extend a warm and digital welcome to all of you on the occasion of the FinCoNet International Seminar which is being organised in Mauritius for the first time. This year represents a special landmark as FinCoNet is celebrating its ten years of existence. I seize this opportunity to congratulate the founders on their vision for the laudable initiative of creating a network dedicated to financial consumer protection. The turnout for this event, both physical and virtual is testimony to the increasing importance of consumer protection in the financial services industry. I am further informed that we have participants from all around the globe. Ladies and gentlemen The financial services industry occupies a pivotal position due to its fiduciary nature. Consumer protection is, therefore, a linchpin for a safe and sound financial system. This has been epitomised by the United Nations General Assembly, in its resolution on consumer protection of 22 December 2015 which recognized that "consumer confidence and trust in a well-functioning market for financial services promotes financial stability, growth, efficiency and innovation over the long term and that the recent financial crisis places a renewed focus on consumer protection, calling for effective regulatory, supervisory and enforcement frameworks in the financial sector to contribute to the welfare of consumers". The UN Guidelines for consumer protection inter-alia makes reference to the establishment of appropriate controls and insurance mechanisms to protect consumer assets, including deposits. As we all know, the delivery of financial services transcends national borders. Countries, therefore, need to take cognizance of developments at international level in 1/5 BIS - Central bankers' speeches strengthening their own consumer protection environment. A forum like the one today is the perfect opportunity for sharing experience, information and insights as well as for discussing issues and challenges at hand. I have no doubt that the topics on the agenda will stimulate enriching discussions and provide participants with key takeaways that will be useful for the benefit of their respective populations. Ladies and gentlemen By the nature of our functions and mandates, it is a matter of pride for all of us to see our jurisdiction progress and thrive. Unfortunately, the pandemic stymied progress temporarily, claimed millions of lives globally and put a drag on global growth. However, one of its offshoots has been an acceleration in the pace of digitalisation. This has resulted in digital financial services gaining traction globally. While the benefits have been immeasurable in terms of convenience, facilitating access and reducing cost, it is of essence that we also focus on the consumer protection angle. The frameworks in place must be adapted to the changing landscape to foster the buildup of consumer resilience and trust in a digital era. The approach and mechanisms adopted to protect consumers will vary due to the specificities of each jurisdiction and the level of development of the financial system. Consideration of country-specific circumstances is important for crafting relevant and effective consumer protection and education infrastructures. Individual countries need to customise the consumer protection and education framework to their environment, taking into account factors such as the stage of economic and regulatory development, the structure of the financial system and the level of consumer sophistication. As I speak to you, I am tempted to share a real-life situation that impacted many people in Mauritius recently and which exposes the naivety of potential victims. Indications are pointing to a potential scam that could have been perpetrated through social networks. With the advent of technology and the speed with which information flows on social networks, wrongdoers are using ingenious means to entice people to invest in unregulated companies by promising spectacular returns. We constantly remind our population to deal with regulated entities and the list of our licensees is updated on the website of the Bank on a real time basis. However, some people still fall prey to these scams. The emergence of social network as a means of communication and the possible consequences of its misuse for consumers of financial services could be a topic for FinCoNet to consider in future seminars. Ladies and gentlemen While digitalisation remains a formidable tool to expand inclusive access to financial services, it has also introduced new types of risks. According to the Leadership Essay Series on "Rethinking Consumer Protection: A Responsible Digital Financial Ecosystem" by the Consultative Group to Assist the Poor last year, the novel risks 2/5 BIS - Central bankers' speeches include mobile app fraud, biometric ID fraud, algorithmic biases, crypto related frauds, and authorised push payment scams. These types of frauds were unheard of a few years ago. By being exposed to these risks, consumers incur direct losses and at the same time trust in the use of digital financial services could be eroded. You will concur with me that trust forms the bedrock for an efficient financial system. Its absence can easily cascade into a loss of confidence in the use of digital technologies and lead to their rejection. At such a critical juncture where central banks are investing massively for the modernisation of the payment ecosystem, including the introduction of Central Bank Digital Currencies, citizens must be provided with the necessary comfort in the digital field to get their buy-in for embracing future changes. Ladies and gentlemen With the dynamic nature in which we operate, we may expect increasing complexity and sophistication of the financial markets. It is imperative for the elevation of our financial system to new heights to go hand in hand with a robust financial consumer protection framework and a nationwide strategy for financial literacy and education. Since my Governorship in 2020, the development of a financial literacy and education strategy has been one of my over-arching priorities. The Bank launched its nation-wide financial literacy strategy last year. Our strategy, which benefited from the OECD International Network on Financial Education's (INFE's) endorsement, lays emphasis on an appropriate level of financial education. This is critical to equip the population with the requisite knowledge on the suitability of financial products to their specific situations before committing to invest. The Bank is also building a robust financial consumer protection framework to shield consumers from abuse and make them become judicious users of financial products and services. Financial education needs to start from grassroots level to have an in-depth knowledge of the financial environment. In this vein, the Bank also targets future users of financial services, students. In just two years since the launch of our financial literacy strategy, the Bank has physically reached out to more than one quarter of the target audience of students aged 15 to 18. Our online and social media platforms have catalysed dissemination to the public at large. Though almost every Mauritian holds a bank account, we believe that educating our population is a non-stop process in the pursuit of a stable and inclusive financial system, especially in the light of innovation and digitalisation. Ladies and gentlemen All of you present here have been heavily involved in tailoring policy measures for financial consumer protection. We continue to devote resources to empower our population through financial education and enhance protection for consumers. 3/5 BIS - Central bankers' speeches However, it is also the duty of financial services providers to adopt sound business practices and promote fair and equitable treatment of consumers. A satisfied customer will pave the way for further business through favourable reviews. On that front, I also need to underscore the importance of clear and adequate disclosures. It is this information that would help consumers make informed decisions as well as ensuring that the products are suitable for them. Providers of financial services should, therefore, furnish the right information to their customers in a plain and simple language so that they are aware of all benefits and risks before going for a product. I agree that it may entail some additional costs on their side. However, focus on short term profits could entail long term pain for both consumers and providers of financial services. Ladies and gentlemen It is essential to have regular dialogue with our licensees on this topic. At the level of the Bank, quarterly meetings are held with the Chief Executive Officers of banks to discuss topical issues, including those pertaining to bank customers. At the level of the Bank, we have initiated a joint committee comprising representatives of the Bank and commercial banks to discuss financial literacy and consumer protection matters. Further, a Guideline on Control of Advertisement is in place which sets out the broad principles applicable while framing out an advertisement. We are also working on the establishment of the Deposit Insurance Scheme of Mauritius. To this effect, the Mauritius Deposit Insurance Corporation is being set up as we speak. This initiative is the result of a collaborative approach with all participants to the scheme. The Bank is currently in discussion with the International Association of Deposit Insurers to learn from best practices as we move forward. Consumer protection will not be effective if redress becomes a protracted process. In view of improving effectiveness, a dedicated Financial Crimes Division has been set up. This no doubt reinforces the position of consumers and give credence to their rights. Ladies and gentlemen My remarks will not be complete if I fail to mention an aspect which is of high relevance to all of us, namely gender equality. Women play an important role in the economic development of a country. At the Global level, gender equality was reflected by the G 20 Leader's Declaration where the need for women and youth to gain access to financial services and financial education was recognised. OECD studies have also highlighted that women have lower financial knowledge than men in a large number of countries. As we work towards the promotion of an inclusive society, financial education and consumer protection are vital components to promote gender equality. 4/5 BIS - Central bankers' speeches I would like to commend the OECD for its work on gender equality. The Recommendation of the Council on Gender Equality in Education, Employment and Entrepreneurship is a right step in the financial empowerment of women and girls. As regulators, we must ensure that the requirements of women are factored in our consumer education and consumer protection strategies to address the additional financial literacy needs that women may have. To conclude, I will say that creation of a conducive policy environment is a sine qua non condition for adoption of novel technologies. While we should endeavour to promote the digitalisation of payments, we must also focus on enhancing consumer protection frameworks and regulations to ensure that financial service providers adhere to safe and fair practices. I will encourage other central banks to become a member of FinCoNet for a good cause benefitting our population. At the same time, I seize this opportunity to remind all financial institutions to play their roles fully in ensuring that customers are treated fully and provided with accurate information. I thank you for your attention and wish you successful deliberations for the rest of the day. 5/5 BIS - Central bankers' speeches | bank of mauritius | 2,024 | 1 |
Keynote speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Bloomberg Financial Forum for the Mauritius Discovery Series, Port Louis, 27 September 2023. | Harvesh Seegolam: Development of financial markets and digital transformation in Mauritius Keynote speech by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Bloomberg Financial Forum for the Mauritius Discovery Series, Port Louis, 27 September 2023. *** Mr Giuseppe Netti, Regional Head for the Middle East and Africa, Bloomberg Members of the press Ladies and gentlemen Good afternoon It is a pleasure to be with you today at the Bloomberg Financial Forum for the Mauritius Discovery Series. At the outset, I would like to thank Bloomberg for inviting me to share a few thoughts on development of financial markets and digital transformation in Mauritius. This event is very timely as Mauritius pursues several initiatives for the development of its financial market. Digitalisation is ostensibly a game changer in a world characterised by datafication and increased connectivity. It entails a fundamental paradigm and cultural shift in the modus operandi of financial markets. The Mauritian financial market has undergone a series of transformational changes over the years and is on par with modern financial markets in more advanced jurisdictions on numerous fronts: financial market legislations, instruments, institutions, and stakeholders. As you are aware, Mauritius was ranked second place in SubSaharan Africa in the latest OMFIF Absa Financial Market Index. This index evaluates financial market development of 26 countries over six key pillars namely: market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macroeconomic stability and legal standards and enforceability. Mauritius scored highly in each of these areas. This bears ample testimony to the success of all efforts spearheaded by the authorities. But we cannot rest on our laurels. More still remains to be done. We need to think outside the box. And to think big! Most importantly, we need to be ready to leverage on the plethora of opportunities that digitalisation throws at us so that we may catapult ourselves in the vanguard of Avant Garde countries with sophisticated financial markets. As an international financial centre of repute, our jurisdiction subscribes to best practices and standards. Mauritius joined the African Bond Indices (ABABI) in January 2021. As you all know, the ABABI is calculated by Bloomberg and is administered by the African Development Bank. The inclusion of Mauritius in the ABABI index has helped to improve the overall credit quality of the ABABI, the more so as Mauritius is one of the only two investment grade sovereigns in Africa. As a proactive central bank, the Bank of Mauritius has embarked on a journey to further accompany the development of the financial market. The Bank of Mauritius has been broadening the depth of our financial market, including through the release of a guideline for the issue of Money Market Instruments in 2019. The objective is to 1/7 BIS - Central bankers' speeches introduce a minimum set of requirements for issuers to follow while at the same time protecting potential investors. There has been growing interest from corporates for the issuance of MMIs on the local market, with a view to lowering their short-term funding cost. Three companies have been approved by the Bank of Mauritius to act as Issuing and Paying Agent (IPA) to assist MMI issuers. The Bank of Mauritius has granted five MMIs licences since the introduction of the Guideline, for a total amount of Rs7.2 billion of which Rs2.0 billion was issued as recently as this month. In July 2023, the reputation of Mauritius as an IFC was further consolidated through two important decisions by international credit rating agencies. Standard & Poor's confirmed the 'Investment Grade' status of Mauritius - the only IFC with such a rating across Africa, while Moody's released a Credit Opinion upgrading the scorecard-indicated outcome of Mauritius from Baa3-Ba2 in May 2023 to currently Baa1-Baa3. Going forward, we can only expect a better outlook for the country's balance of payments and for its international liquidity position. At the level of the Bank of Mauritius, we continue to work together with all stakeholders through the Committee on International Developments to share information and discuss latest updates in view of improving the ratings of Mauritius. Ladies and gentlemen I will not do justice if I fail to mention the improvement in the foreign exchange market operations. The situation has markedly improved since the pandemic, thereby resulting in a scaling down of the frequency and magnitude of the Bank of Mauritius FX intervention on the domestic FX market. FX injections by the Bank of Mauritius, which amounted to USD164 million since beginning of the year, are much lower than the amount of USD621.8 million during the same period last year and USD1,132 million during the same period in 2021. However, as this period of the year is tantamount to the building of end-of-year stocks, the Bank of Mauritius stands ready to provide support to the FX market in case of need. It is worth noting that, in line with promoting the integrity and effective functioning of the Mauritian wholesale FX market on the international FX market, banks operating in the jurisdiction have now all adhered to the FX Global Code since June 2021. This in itself is a landmark achievement. With respect to the performance of the Rupee, you will have noted that it continues to reflect economic fundamentals. Ladies and gentlemen It has been observed across several markets that some banks are not taking sufficient risks to service their customers' FX requirements. In Mauritius, banks have to abide by the "Guideline for Calculation and Reporting of Foreign Exposures of banks" to ensure an orderly functioning of the foreign exchange market. The provisions of the guideline enable banks to run overbought or oversold positions up to a maximum limit of 15 per cent of their Tier 1 capital. The Bank of Mauritius is closely monitoring compliance with the Guideline and is looking forward to all banks playing their roles fully. Ladies and gentlemen The development of financial market goes hand in hand with complementary initiatives. It is now time for me to provide you with an overview of both recent and future 2/7 BIS - Central bankers' speeches developments. In August 2023, the Sustainable Finance Framework for Mauritius was launched. This document, which has been worked jointly by the Bank of Mauritius, the Government and other stakeholders, governs the issue of green, social, sustainability and thematic bonds, loans or other debt instruments or sustainability-linked bonds, loans or other instruments. We anticipate such instruments to gain popularity in view of the pledge of the country to transition to a sustainable and carbon-neutral economy. All these developments further consolidate the reputation of Mauritius as an IFC in the region on ESG matters. Financial market developments also entail bringing necessary refinements to the Monetary Policy Framework. In this line, I had announced a review of our framework back in September 2020. The new framework became effective as from 16 January 2023. It provides greater transparency on the monetary policy strategy to further strengthen the monetary policy transmission mechanism. The overnight interbank rate replaced the yield on the 91-Day Bill as the operational target for monetary policy. The main instrument of monetary policy operation is now the 7-day Bank of Mauritius Bill, which is used to steer the overnight interbank rate within the corridor set around the " Key Rate" and provide a nominal anchor to short-term money market rates. We have further pursued active liquidity management to ensure orderly liquidity conditions in the domestic financial market and to align market interest rates with the policy rate. As from August 2023, the Bank of Mauritius resumed issuances of BoM Bills of maturities up to 1 year and BoM Notes in the 2-Year and 3-Year Tenor while it is issuing on a weekly basis 7-Day BoM Bills. Under the new Monetary Policy Framework, Overnight Deposit and Lending Facility are available to banks at their discretion. Ladies and gentlemen While the pandemic created manifold challenges, the Bank of Mauritius also managed to turn those into stepping stones. In partnership with the banking industry, we designed a strategic roadmap to chart the way forward for the sector over the next 10 years. The strategic roadmap aims at supporting the sustained expansion and innovation of the banking sector and reinforcing the position of Mauritius as an IFC. The strategic roadmap "future of banking in Mauritius" was launched in September 2022. The roadmap is the result of discussions held with various stakeholders – including the public and private sectors, the civil society as well as foreign experts and specialists across Africa, Europe and Asia. The roadmap contains a series of initiatives targeting specific strategic areas. In terms of market access, they cover the Asia and the Africa global business strategy. Several other measures will assist the banking sector to demarcate itself in terms of the range of products and services offered as well as the respective delivery channels. Additional initiatives relate to the fundamental building blocks that are deemed critical to enhance the attractiveness and soundness of the banking sector – such as the regulatory regime, digitalisation, and ESG. 3/7 BIS - Central bankers' speeches The translation of the roadmap into reality is overseen by the Bank of Mauritius, in close partnership with all concerned stakeholders. Its implementation will be staggered over the next few years. Three task forces have already been set up to work on some of the initiatives. One of the key initiatives relates to promoting the setting up of regional treasury headquarters in Mauritius by multinational corporations. Some of the initial conditions are already in place. Progress on several other fronts is ongoing to lure players in the corporate treasury activity sphere. Once treasury management offerings expand and become more visible, banking business is set to benefit from scaled-up operations. Giving the right incentives alongside building awareness and confidence lie at the core of our strategy. Ladies and gentlemen We cannot predict the future with certainty. However, I can safely say that digitalisation in Mauritius is likely to reach new heights in coming years as its potential is endless. While the Bank of Mauritius has an open mind and open-door policy as far as new technology is concerned, it is nevertheless imperative for us to have a full grasp of the potential implications on economic activity, financial stability, reputation and even inflation. I assumed office in March 2020 at a time when the pandemic was at its peak. This challenging period spurred us into taking several decisions for the benefit of the citizens. I need not delve on each of the measure as I am sure that you would have amply come across them. We rolled out a series of unprecedented measures, including the creation of the Mauritius Investment Corporation, during the pandemic to preserve stability of financial markets and of the financial sector at large. The Mauritius Investment Corporation has played a pivotal role in ensuring that shocks to the real sector are not transmitted to the financial system through its support to systemically important corporates. On the legislative front, the law was amended to give the Bank of Mauritius the power to grant digital banking licence. There is significant interest from operators to set up digital banks in Mauritius and a few applications are already in the pipeline. We have equally been encouraging existing banks to explore and launch digital banking services or to enhance their digital service offerings. Most of our banks offer online banking facilities. One bank is also providing services through artificial intelligence-enabled system. Equally noteworthy are the strides that have been made in the payments landscape. A national QR code, namely, the MauCAS QR Code, based on international standards, was introduced in September 2021. This initiative not only allowed payments with any mobile app but was also instrumental in the democratisation of digital payments. Small merchants who could not previously afford expensive cards point of sale machines, are now able to accept payments through QR codes. 4/7 BIS - Central bankers' speeches The QR code has also facilitated the digitalisation of Government payments and supports the Government's e-services initiatives. The Bank of Mauritius has further established a payment portal to bring more efficiency in Government payments and services. The official launch is planned in the coming weeks. Ladies and gentlemen Interoperability is a prerequisite for a robust payment infrastructure. Easing of consumer payment options necessitates interoperability among diverse payment instruments and arrangements. On that note, open banking has been enabled on the MauCAS Instant Payment System through Application Programming Interface which facilitate integration among operators in the payment space. The Bank of Mauritius has also opened settlement accounts for non-banks in its Real Time Gross Settlement, thereby bringing a reduction in settlement and credit risk in the national payment systems while simultaneously guaranteeing the ultimate settlement of payments. Our involvement in the payment sector extends beyond the domestic market. The Bank of Mauritius is collaborating with other central banks and stakeholders in Africa, Asia and Middle East to improve cross-border payment to facilitate the lives of our citizens, tourists and the business community. As with other central banks, the Bank of Mauritius has embarked on the implementation of a retail Central Bank Digital Currency (CBDC), the Digital Rupee. Work is already at an advanced stage. A Consultation Paper was released to the public and comments obtained. We have now entered the experimentation phase and expect to move to a pilot run over the next couple of months with the assistance of other service providers and other central banks which have already been involved in successful pilot runs. Ladies and gentlemen A sound legislative and regulatory framework facilitates adoption of technology and gives credence to its development. Cloud-based services have gained traction recently in several parts of the world and Mauritius had to follow suit to maintain its competitiveness. The Bank of Mauritius adopted a collaborative approach as with the adoption of other latest standards. To this end, we consulted the industry, cloud service providers and experts in the domain on a more extensive regulatory framework for cloud services and came up with our Guideline on Use of Cloud Services in September 2022. The Bank of Mauritius is also establishing its own central KYC system to facilitate verification of customers' identity more efficiently while ensuring compliance with international standards and recommendations from organizations such as the FATF. The project has reached its final stages and will be launched shortly. I am also pleased to share with you that some of our licensees have already kickstarted the process of onboarding clients digitally. 5/7 BIS - Central bankers' speeches In parallel, the Bank of Mauritius is closely keeping an eye on the evolution of the virtual asset market subsequent to the proclamation of the Virtual Asset and Initial Token Offering Services Act 2021 (VAITOS Act) in February 2022. The regulatory and supervisory frameworks with respect to virtual assets are being enhanced and the Bank of Mauritius Guideline for Virtual Asset-related Activities is currently being finalised following a round of consultation with the industry. It is worth recalling that Mauritius is one of the very few jurisdictions to have achieved the status of compliant or largely compliant with respect to the 40 recommendations of the FATF. Mauritius, which serves as a reference considering its rapid exit from the FATF list, continues to upgrade its AML /CFT regime through the necessary legislative amendments and adoption of a riskbased supervisory framework. Ladies and gentlemen Introduction of Fintech and its acceptance requires prior testing. The Bank of Mauritius is establishing its innovation hub and digital lab, which will provide a testing environment for the development of fintech solutions and will facilitate the hosting of ideations, hackathons and exploratory programming sessions, amongst others. We are collaborating with other central banks and Innovation Hubs. We are confident that these initiatives will accelerate the development of technology-enabled banking and financial services. The use of innovative solutions also introduces new risks such as cybersecurity threats. The Bank of Mauritius has taken proactive steps and has developed a clear-cut cyber risk and resilience strategy. We are conscious that a cyber incident may, at any point, assume magnitudes of systemic proportions since each stakeholder in the chain represents a point of vulnerability. With this in mind, I have established the Mauritius Financial Sector Cyber Committee (MFSCC) to enhance the cyber resilience of the financial sector and, by ricochet, the overall stability of our financial system. I chaired the first meeting of this Committee on 15 September 2023. The upcoming projects of the Committee include the establishment of relevant frameworks for the sharing of information and intelligence and the conduct of cyber simulation exercise. The 6th Annual Cybersecurity Workshop, which was held at the IMF Headquarters earlier this year, was attended by representatives from over 60 countries. Mauritius emerged as a notable case study. The workshop highlighted the evolving role of central banks in supervising cyber-related activities among their licensees. Mauritius stood out as an example, showcasing a collaborative approach between its Supervision team and its Information Security team as they jointly conducted onsite supervision. Many countries have expressed their intent to follow Mauritius' approach in strengthening their own cybersecurity frameworks. Several central banks have contacted the Bank of Mauritius to benefit from our experience and initiatives we have been taking. I am fully confident that Mauritius will develop into a regional hub of cyber excellence as it implements the Cyber Risk and Resilience strategy. Ladies and gentlemen 6/7 BIS - Central bankers' speeches To wrap up, the effective development of financial markets and its digitalisation are important to ensure sustained growth. The potential of financial markets for the African region is immense. We have to ensure that all necessary efforts are harnessed in designing the right enabling environment and ecosystem in this pursuit. It is important for all stakeholders including policy makers, central banks, regulators and operators to collaborate in this endeavour, not only locally but also at the regional level for a sound ecosystem. We will continue to play our role and to play it well to ensure optimisation of our potential. With these notes, I would like to thank you all for your attention and I wish you fruitful deliberations. 7/7 BIS - Central bankers' speeches | bank of mauritius | 2,024 | 1 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 3 April 2024. | Harvesh Seegolam: Current economic conditions and outlook Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 3 April 2024. *** Ladies and gentlemen, members of the media, good morning. I welcome you all to this press briefing for the 70th sitting of the Monetary Policy Committee, the first for 2024. This year shall be remembered for many reasons. The efforts spearheaded by the authorities in the previous years to overcome the crisis, to further consolidate our underlying economic structure and to top it up with the right policy mix, have borne fruits. Our economic agility and recent performance have been largely praised by international organisations. Let me share some of the upshots of the latest reports of the Mauritian economy undertaken by major international institutions: The IMF, following the 2024 Article IV Consultations, stated in its press release that the prompt deployment of pre-pandemic buffers has helped the Mauritian economy rebound strongly from the pandemic and that growth prospects remain favourable. Inflationary impulses have subsided in 2023 and are projected to ease further this year. Moody's, in its January 2024 Credit Opinion, has maintained the country's Baa3 credit rating with a stable outlook. This stable rating outlook reflected mainly the agency's favourable assessment of the country's fiscal and debt metrics as well as sizeable foreign reserves which provide a cushion against external vulnerability risks. The March 2024 country report of the Economist Intelligence Unit also paints a very optimist outlook for Mauritius, with growth expected to remain buoyant in the near term and inflation maintaining a downtrend. d. Fitch Ratings, in its 2024Q1 Banking and Financial Services Report, assessed that Mauritius ranks high relative to its regional peers for being politically stable, coupled with an improving internal balance amidst recovery in the tourism sector and subsiding price pressures. These plaudits have one common thread. They all point towards favourable growth and inflation outlooks for 2024. They also enunciate on the key role played by the Bank of Mauritius in macroeconomic stabilisation and safeguarding our financial system. Before I zero-in on our diagnosis for 2024, let me first walk you through the latest global and domestic economic and financial developments. After that, I shall conclude with the decision taken by the MPC today, based on our own assessment regarding the outlook for 2024. International Economic Developments Divergences in economic activity continued to persist at the end of 2023, with sustained resilience of the US economy, while the euro area stagnated and the UK economy slipped into recession. India, on its part, preserved its status as the world's fastest 1/7 BIS - Central bankers' speeches growing economy and the Chinese economy remained buoyant despite lingering woes in the property sector. Leading indicators of global economic activity pointed towards sustained expansion in the first two months of 2024. This reflected mainly continued growth in the services sector while the manufacturing sector has begun to pick up, supported by improved order books and efforts to complete backlogs of work. The global disinflation process has also been faster than expected, with the lagged effects of monetary policy tightening and favourable global supply developments contributing to keep inflationary pressures at bay. The IMF forecast global inflation to drop to 5.8 per cent in 2024 and further to 4.4 per cent in 2025 on the back of lower food prices, softening labour market conditions and lower core inflation. Oil price movement remains highly uncertain as increased risks regarding the attacks of commercial ships in the Red Sea and geopolitical tensions in the Middle East have contributed to the build-up of price pressures since December 2023. The announcement of an anticipated extension to voluntary OPEC+ production cuts through 2024Q2 as well as additional voluntary production cuts by Russia are expected to further weigh on demand-supply imbalances. By contrast, global food prices maintained their declining trend owing to higher supplies on the back of favourable harvesting conditions and strong competition among exporting countries as well as subdued global import demand. Global monetary policy has embarked on a new cycle, with policymakers switching to a more dovish stance. While some advanced economies are holding their rates steady to ensure that inflation pressures have fully eased and that disinflation is fully entrenched, some emerging market economies have already started to cut policy rates. Since the beginning of the year, out of 114 MPC decisions globally, 70 decisions (representing roughly 60 per cent) have been to leave policy rates unchanged. Domestic Economic Developments The domestic economy sustained its growth momentum, expanding by 7.3 per cent in 2023Q4 and by 7.0 per cent for the year 2023. Key sectors which supported domestic economic activity were 'Construction' and 'Accommodation and food service activities' on account of ongoing major infrastructural projects and robust tourist arrivals. Growth was also bolstered by the resilience in consumption and investment spending. The tourism sector remains on a strong footing, supported by robust global demand for travel and tourism. In addition, the appeal for the Mauritian destination remains high, especially amongst European countries. The target of 1.3 million tourist arrivals for 2023 was almost achieved, with tourism earnings reaching Rs86 billion, the highest on record. Going forward, the tourism sector is expected to maintain its momentum, continuing to benefit from strong demand for holiday travel, improved flight connectivity and ongoing efforts to diversify the tourism base. 2/7 BIS - Central bankers' speeches Investment, as measured by the Gross Fixed Capital Formation (GFCF), grew by 30.9 per cent in 2023, supported by FDIs reaching the record-high level of Rs35 billion for the past year. Labour market dynamics strengthened further in 2023Q4, with a decline in the unemployment rate to 6.1 per cent, its lowest rate over the past 25 years. Female and youth unemployment rates are also near historically low levels. Looking ahead, further expansion in economic activity and policy measures to tackle pertinent structural rigidities are projected to enhance labour market conditions. The current account deficit significantly improved to 4.5 per cent of GDP in 2023, as a result of higher surpluses of the services and primary income accounts which mitigated the widening trade deficit. For 2024, the current account deficit is projected to improve further to 4.0 per cent of GDP as robust tourism earnings and higher income earned on external assets of residents would outweigh a rise in the trade deficit. The Mauritius IFC continues to attract robust financial flows as global cross-border investment activities remain resilient despite challenging global conditions brought about by the lingering Russia-Ukraine war, high global interest rates and heightened tensions in the Middle East. With respect to non-GBC financial flows, the country recorded robust growth in gross foreign direct investment flows in 2022 and 2023. The country's Gross Official International Reserves remain comfortable, providing adequate buffer against external shocks. The GOIR stood at US$7.2 billion as at endMarch 2024, representing more than 11 months of imports. Inflation Inflation maintained its downward trajectory, with headline inflation easing to 6.1 per cent in February 2024, due to favourable global commodity price developments. However, year-on-year inflation, which subsided progressively throughout 2023, increased to 6.2 per cent over the same period. Heightened volatility in food prices, associated with domestic supply disturbances due to adverse weather conditions, largely underpinned the reversal in year-on-year inflation. Core measures of inflation, which provide a better assessment of underlying demand pressures by controlling for volatile energy and food components, softened further. The lasting effects of past monetary policy tightening as well as the absorption of a significant amount of rupee excess liquidity from the banking system under the new monetary policy framework, continue to work through the economy, while keeping inflation expectations well-anchored. A more granular analysis reveals that the proportion of pro-inflation items in the CPI basket has been gradually decreasing. Items in the CPI basket that were viewed as 'highly inflationary', i.e. generating above target range inflation of more than 5 per cent, have halved from almost 70 per cent in February 2023 to around 35 per cent in February 2024. In contrast, items that were 'deflationary', i.e. having less than 0 per cent inflation, increased to roughly 18 per cent. These dynamics serve as a litmus test that inflation is gradually converging towards the Bank's target range for inflation. 3/7 BIS - Central bankers' speeches Money Market The Bank continues to conduct open market operations in line with the new monetary policy framework implemented since January 2023, with some operational changes brought to the conduct of the main monetary operations. The 7-Day BoM Bills are issued at pre-determined tender amounts at the Key Rate of 4.50 per cent. The interest rate corridor has been widened from 200 basis points to 300 basis points. Consequently, banks avail of the Overnight Deposit Facility at 3.00 per cent. Since the last MPC meeting, 7-Day BoM Bills for an amount of Rs1.0 billion have been issued weekly to all banks on tender basis. As part of longer-term operations, the Bank issued BoM Bills for an aggregate amount of Rs25.1 billion in the 91-Day, 182-Day and 364-Day tenors between 28 November 2023 and 28 March 2024. Overnight Deposit Facility placed with the Bank averaged Rs23.7 billion over the same period. In order to mop up the structural excess liquidity from the banking system, the Bank issued Two-Year BoM Notes for a total amount of Rs7.0 billion. These operations by the Bank have resulted in a significant decline in rupee excess liquidity to a daily average of Rs3.0 billion over the period 28 November 2023 to 28 March 2024. The Bank has also mopped up a net amount of Rs1.9 billion through FX interventions since the previous MPC meeting. The outstanding amount of BoM securities issued to manage excess liquidity, which stood at Rs133.4 billion as at 28 November 2023, dropped to Rs121.3 billion as at endDecember 2023, thereafter increasing to Rs138.4 billion as at 28 March 2024, of which more than 50 per cent maturing within one year. The new operating target, the weighted average overnight interbank rate, ranged between 3.10 per cent and 3.15 per cent over the period 28 November 2023 to 28 March 2024, hovering closer to the lower bound of the interest rate corridor of the new monetary policy framework. Foreign Exchange Market The domestic FX market remained upbeat, benefitting from robust tourist arrivals in 2023. Over the period 28 November 2023 to 27 March 2024, total turnover stood at US$4.5 billion, with an almost perfect balance between inflows and outflows. You would recall that the Bank had resumed its regular FX interventions between September and early-December 2023 in order to ensure an adequate supply of FX on the market, particularly with respect to importers building up end-of-year stocks. The signs of recovery were largely satisfactory. This year, the Bank intervened on the domestic foreign market on 1 April 2024 to sell USD5 million at the rate of Rs46.40 /USD with a view to smooth excess volatility in the exchange rate of the rupee. The Bank has also purchased FX from banks to the tune of US$7.8 million in December 2023. 4/7 BIS - Central bankers' speeches The Bank continues to closely monitor the FX market to prevent any manipulation of exchange rates by unethical participants. The rupee continues to reflect key economic fundamentals of demand and supply, as well as international currency movements. Financial Stability I will now provide you with key insights on the stability of the banking and financial system. Financial stability concerns have subsided considerably over the past year. In particular, a consistent drop in banking sector vulnerabilities has been noted. The improvement in macroeconomic conditions together with enhanced resilience of the banking sector have helped to contain macrofinancial risks. The Systemic Risk Indicator (SRI) – the barometer of systemic risk used by the Bank – confirms that risks have moderated across the macrofinancial landscape. The decline in inflation is one of the key contributors. On the external front, the rise in the FX reserves of the country to US$7.3 billion as at end-December 2023 has helped to consolidate the country`s resilience against external shocks. Risks from the banking sector have fallen considerably with strong capital and liquidity buffers. At the aggregate level, both the household and corporate sectors have been exhibiting sound financial positions, despite relatively high interest rates and inflation. Risks to financial stability from the household sector have subsided. Key debt serviceability metrics of the household sector have improved. In particular, the ratio of debt servicing cost to income and to GDP are below pre-pandemic levels – at 16.8 per cent and 6.0 per cent respectively, in December 2023. In addition, household indebtedness relative to GDP has gradually declined, as the economy expands. The financial resilience of the household sector is further evidenced by its robust asset quality. The ratio of non-performing loans to total loans of the sector with banks fell to a multi-year low to reach 1.8 per cent in December 2023. Corporate sector activities maintained good momentum amid a favourable macroeconomic landscape. Corporate indebtedness to banks relative to GDP dwindled further while earnings grew in tandem with the sustained economic expansion. Credit risk from the corporate sector stayed relatively low, demonstrating benign risk from the business environment. The banking sector ensured continuous flow of credit to the economy. The annual growth of credit to the private sector reached 5.1 per cent in January 2024, from 6.5 per cent in September 2023. The growth was primarily led by the expansion of household credit at an annual rate of 10.5 per cent in January 2024, as against 11.8 per cent in September 2023. Corporate credit grew at an annual rate of 1.5 per cent in January 2024, relative to 2.8 per cent in September 2023. The asset quality of the banking sector improved in the last quarter of 2023. The overall non-performing loan (NPL) ratio dropped to 4.4 per cent in December 2023, from 4.8 per cent in September 2023. This decline was prompted by an improvement in the asset quality of banks' credit portfolio allotted to the domestic segment. Non-performing 5/7 BIS - Central bankers' speeches loans were adequately provided for, with the coverage ratio at 46.7 per cent in December 2023. Banks held strong capital and liquidity buffers. The Capital Adequacy Ratio of the banking sector rose to 21.0 per cent as at end-December 2023, well above the minimum regulatory requirement set by the Bank. The Liquidity Coverage Ratio (LCR) also stood above the regulatory floor of 100 per cent, with aggregated LCR at 298.6 per cent and the LCR for material foreign currencies at 232.0 per cent in December 2023. The resilience of the banking sector progressed further in the second half of 2023, as banks consolidated their capital and liquidity buffers. The new stress testing framework – upgraded to cater for the evolving macrofinancial environment – demonstrated the robustness of banks to weather exogenous shocks. Risks emanating from the global economy did not induce strains on the banking sector. As the domestic economy paves its way to solid growth, banks are expected to continue consolidating their buffers to cushion potential shocks. The Bank maintains its focus on promoting price and financial stability with the aim of supporting sustainable economic growth. MPC Decision The global economy has continued to show resilience, with growth estimated to have been stronger than expected, reflecting robust consumer and government spending. The IMF, in its January 2024 World Economic Outlook Update, projects global growth at 3.1 per cent in 2024 and slightly higher at 3.2 per cent in 2025. Growth forecast for 2024 has been revised upwards on account of greater-than-expected resilience in the United States and several large emerging market and developing economies, as well as fiscal support in China. I will now elaborate on the decision of the MPC and the motivations behind this decision. The MPC carefully reviewed the recent global economic developments and outlooks and assessed their potential impact on the domestic economy. Inflation is projected to maintain its downward trend this year and be within the Bank's target range of 2% - 5% for inflation. Barring any shocks, headline inflation is forecast to close 2024 at 4.9 per cent. The downward adjustment in inflation is likely to be driven by the continued decline in global food prices and trading partner inflation that would percolate through to domestic prices. The effects of past policy rate hikes are also expected to continue to work through the economy and keep core inflation at bay and ensure that inflation expectations remain well-anchored. Across-the-board buoyancy in main economic sectors of activity is expected to sustain the domestic growth momentum this year as well. Incoming data are already painting a bright outlook for the economy. As such, Bank staff projects real GDP growth at 6.5 per cent in 2024. Based on these outlooks, the MPC has unanimously decided to keep the Key Rate unchanged at 4.50 per cent. 6/7 BIS - Central bankers' speeches The MPC will continue to monitor the economic situation closely and stands ready to meet in between its regular meetings, if the need arises. The next meeting of the MPC will be announced in due course. Thank you. I now welcome your questions. 7/7 BIS - Central bankers' speeches | bank of mauritius | 2,024 | 4 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 28 November 2023. | Harvesh Seegolam: Current economic conditions and outlook Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press briefing, Port Louis, 28 November 2023. *** Ladies and gentlemen, members of the media, good afternoon. Welcome to this press briefing for the third Monetary Policy Committee (MPC) meeting of the year, marking the 69th sitting of this Committee. As you may recall, at the two previous MPC meetings held during the year, we emphasised on the need to allow some time for our new Monetary Policy Framework to become entrenched into the operational aspects of the banking sector and financial market operators. The Bank continues to monitor progress made by market players in embracing the new framework, while taking note of the challenges identified and adjustments needed, if any. The Bank is cognizant of the need to continuously review the framework so that it suits the requirements of our evolving economic environment. In this respect, the Bank is following up on its overhauling process of the monetary policy framework and is engaging in extensive consultations with reputed central banks and other international organisations. This rightly underscores our aspiration to align our monetary policy framework with the best practices in other central banks and monetary authorities. Let us now zero-in on the topic of the day. At its meeting today, the MPC discussed lengthily domestic economic prospects, whilst considering the latest developments taking place on the international front. I shall now elaborate on the essence of those elements covered extensively in the MPC policy deliberations. International Economic Developments The global economy remains resilient and continues to recover despite divergences noted across regions and sectors. The IMF, in its World Economic Outlook of October 2023, projects growth at 3.0 per cent for 2023, unchanged from the last projection made in July 2023, and higher by 0.2 percentage point compared to its April 2023 projection of 2.8 per cent. The US economy showed signs of improvement in 2023Q3 supported by robust consumer spending amid a strong labour market, while continued sluggishness was observed in the euro area and in the UK. The Chinese economy is still facing the effects of the downturn in its property sector, while India is well poised as one of the fastest growing economies. Purchasing Managers' Indices (PMIs), key leading indicators of economic activity, pointed towards continued expansion in 2023Q3, albeit a lower growth in global 1/9 BIS - Central bankers' speeches services and a downturn in global manufacturing were noted. The lower growth in global services could be attributed to a contraction in the level of new order intakes and falling backlogs of work notably in the US as well as in Europe. Headline inflation continues to decline mostly due to the normalisation of food prices and easing supply chain conditions. Core inflation is also declining at a much slower pace as a result of the tight labour market conditions and stickier services inflation across many countries. The IMF, in its World Economic Outlook of October 2023, projects global core inflation to decline gradually from 6.4 per cent in 2022 to 6.3 and 5.3 per cent in 2023 and 2024, respectively. Crude oil prices declined in October after maintaining an uptrend in 2023Q3. Production cuts from the OPEC kept upward price pressures on crude oil, while geopolitical conflicts in the Middle-East portend to potential supply disruptions. On the other hand, global food prices maintained their declining trend on higher supplies and strong competition among exporting countries, as well as subdued global import demand. The Freightos Baltic Index, which measures global container freight rates worldwide and used as a bellwether for shipping costs, declined at a slower pace in 2023Q3. There are increased expectations that the rate tightening cycle might be over in certain countries and is nearing so in others, while inflation is on the decline. The vast majority of central banks have so far opted to leave their monetary policy stance unchanged amidst lower inflationary pressures. Since the beginning of the year, out of 481 MPC decisions globally, 263 decisions (representing roughly 55 per cent) have been to leave policy rates unchanged. We see evidence that this proclivity to keep the status quo has become more entrenched as we navigate into the third quarter of 2023 with 77 decisions out of 137 (representing 56 per cent) representing unchanged policy rate decisions. Since the last MPC meeting held on 15 September 2023, 67 out of 101 global policy rate decisions (representing 66 per cent) related to keeping monetary policy unchanged. In advanced economies, major central banks have opted for 'high for longer' stance as dis-inflation strategy by keeping their policy rates unchanged at their respective monetary policy meetings and stated that they would continue to assess their macroeconomic situation and undertake a careful re-balancing of risks to their outlooks before deliberating on whether to adjust their respective monetary policy stance in forthcoming meetings. Domestic Economic Developments The domestic economy remained on a steady growth path in 2023Q2, following robust performances in 2022Q4 and 2023Q1. The economy expanded by 6.0 per cent in 2023Q2, up from 5.8 per cent in 2023Q1. Economic activity continues to showcase signs of resilience, with the 'Accommodation and food service activities', 'Construction' and 'Transport and storage' sectors being the locomotives of growth amidst the strong momentum in tourist arrivals and ongoing major infrastructural projects. The tourism sector, being one of the key pillars of the domestic economy, heralds encouraging performance for the year, underpinned by continued strong demand for the Mauritian destination. Around 1,026,700 tourists visited the island from January to 2/9 BIS - Central bankers' speeches October 2023, representing 93.1 per cent of the 2019 level, and almost 45 per cent higher compared to the same period of 2022. In line with the resurgence in tourist arrivals, tourism earnings were also buoyant, aggregating Rs60,798 million during the period January to September 2023, higher by 46 per cent compared to the corresponding period of 2022 and well above the 2019 level. We project tourism earnings at Rs85.0 billion for 2023, significantly higher than the 2022 level of Rs64.8 billion. Going forward, the tourism sector is expected to maintain its momentum, benefitting from pent-up demand for holiday travel, increased flight connectivity and diversification of markets. Labour market conditions remained robust in 2023Q2. The unemployment rate maintained its gradual decline and dropped to 6.4 per cent in 2023Q2. The female unemployment rate has increased slightly, standing at 9.1 per cent in 2023Q2, while youth unemployment rate declined to 18.1 per cent – the lowest reading since 2010. Labour market conditions are expected to improve further as the domestic economy sustains its growth momentum. The current account deficit as a ratio to GDP declined to 11.5 per cent for 2022, from 13.1 per cent registered in 2021. The improvement largely reflected the considerably better performance of the services account. The improvement in the current account persisted during January to September 2023, with 2023Q1 registering a deficit of only 2.9 per cent of GDP, the lowest since 2018Q1. The current account deficit is projected to narrow significantly to reach 5.6 per cent of GDP in 2023 on account of continued healthy performance of the tourism sector as well as larger surplus on the primary income account, which is expected to benefit from the elevated global interest rates and continued growth in residents net foreign assets. Gross Tourism earnings continue to surge, with the period January to September 2023 registering Rs60.8 billion, rising by 46.1 per cent compared to Rs41.6 billion during the corresponding period a year ago. Moreover, for the fiscal year 2022-23 gross tourism earnings reached a record high of Rs81.3 billion compared to Rs39.6 billion in the previous fiscal year. The Mauritius IFC continues to attract robust financial flows as global cross-border investment activities remain resilient despite challenging global conditions brought about by the lingering Russia-Ukraine war and heightened tensions in the Middle East. With respect to the non-GBC financial flows, the country recorded a 34.0 per cent increase in gross foreign direct investment (FDI) flows to the tune of Rs13.5 billion in 2023H1, led primarily by the 'real estate' and 'food and accommodation' sectors, reflecting positive dynamics and buoyant investor sentiment in these sectors. The Gross Official International Reserves (GOIR) position continues to remain at a comfortable level, providing adequate buffer against external shocks. The GOIR stood at US$6.7 billion as at end-October 2023, representing 10.0 months of import cover. Inflation Inflation in Mauritius eased further in October 2023 supported by the normalisation of global supply chains and easing of global commodity prices. Headline inflation 3/9 BIS - Central bankers' speeches remained on a downward trajectory and moved from double digit reading of 10.0 per cent in July 2023 to 8.4 per cent in October 2023. The year-on-year inflation maintained its downward trend from 5.9 per cent in July 2023 to 4.6 per cent in October 2023. Underlying inflationary pressures, as gauged by Core inflation measures, also moderated in 2023Q3, reflecting to some extent the dissipation of the second-round effects of the supply shocks witnessed earlier. On a 12-month average basis, CORE1 inflation subsided from 8.0 per cent in July 2023 to 6.3 per cent in October 2023, while CORE2 inflation retreated from 6.7 per cent in July 2023 to 5.8 per cent in October 2023. Analysis of the price dynamics of items that constitute the CPI basket were encouraging as items in the CPI basket that were viewed as 'highly inflationary', i.e. generating above target range inflation of more than 5 per cent, have dropped from around 68.1 per cent in March 2023 to around 46.3 per cent of the CPI basket in October 2023. In contrast, items that were 'deflationary', i.e. having less than 0 per cent inflation, have increased from 5.1 per cent to 13.7 per cent over the same period. With y-o-y inflation already below 5 per cent, inflationary dynamics provides concrete signs that headline inflation is gradually converging towards the Bank's target range for inflation. Money Market The Bank continues to conduct open market operations in line with the new Monetary Policy Framework implemented since the beginning of the year. The main tool for monetary policy operations, namely the 7-Day BoM Bills, are issued at the Key Rate of 4.50 per cent, while banks avail of the Overnight Deposits Facility at their discretion. Since the last MPC, weekly issuance of 7-Day BoM Bills averaged Rs1.8 billion, and Overnight Deposit Facility placed with the Bank averaged Rs24.1 billion. As part of longer-term operations, the Bank also issued BoM Bills for an aggregate amount of Rs24 billion in the 91-Day, 182-Day and 364-Day tenors between 15 September and 15 November 2023. In order to mop up the structural excess liquidity from the banking system, the Bank issued Two-Year BoM Notes for a total amount of Rs12.2 billion up to mid-October 2023. These operations by the Bank have resulted in a significant decline in rupee excess liquidity to a daily average of Rs3.4 billion over the period 15 September to 15 November 2023. The Bank has also mopped up an amount of Rs7.8 billion through foreign exchange interventions since the previous MPC meeting. The level of outstanding BOM instruments issued to manage excess liquidity dropped to Rs128.1 billion as at 17 November 2023, with a major proportion of 53 per cent maturing within one year, as compared to Rs140.5 billion as at 15 September 2023. 4/9 BIS - Central bankers' speeches The new operating target, the overnight interbank rate, hovered between 3.10 per cent and 3.35 per cent over the period 15 September to 15 November, which is close to the lower bound of the interest rate corridor of the new MP framework. Foreign Exchange Market The recovery of the domestic FX market remained encouraging in 2023. Over the period 15 September to 17 November 2023, total turnover stood at USD2.0 billion, constituting an increase of 8 per cent relative to USD1.8 billion registered in the corresponding period of 2022. Since the beginning of September 2023, the Bank has resumed its regular FX interventions to ensure adequate supply of FX on the market in view of end-of-year stock building by importers. An aggregate amount of USD225 million was sold to banks between 06 September and 15 November 2023. Since the beginning of the year, the Bank has sold a total amount of USD310 million. In my last MPC press statement, I had mentioned that the Bank has enough firepower to intervene in the FX market to address any shortfalls. Let me reassure the market that this continues to be the case. In parallel, we are pursuing efforts to monitor and detect any case of exchange rate manipulations or deviations from best market practices among FX participants. We want to ensure that our exchange rate is immune from manipulative practices and that it continues to reflect our economic fundamentals as well as domestic and international market conditions. Since 15 September 2023, the rupee has appreciated by 1.6 per cent against the US dollar and this confirms what I averred to in my last MPC statement that the appreciation will continue as conditions in the FX market normalize. Financial Stability I will now give an overview of the key developments in respect of the stability of the banking and financial system. But first I will start with a few highlights on the stability of the global financial system. In its October 2023 Global Financial Stability Report, the IMF underscored the importance of both price and financial stability to support sustainable economic growth. The prompt response of central banks worldwide and in Mauritius has successfully set inflation on a downward trajectory. However, interest rates may need to stay higher for longer in many economies – advanced and emerging economies alike – to bring down inflation to the desired level. Despite high interest rates, there is optimism about a soft landing of the global economy, thus avoiding an acute recession and extreme financial markets volatility. High interest rates obviously require close monitoring and complementary measures to uphold the stability of the banking and financial system. The Bank continuously monitors risks to financial stability as part of its core functions and has been upgrading its toolkits to make better assessments, including its stress testing framework and its Systemic Risk Indicator. 5/9 BIS - Central bankers' speeches The sustained progression of the domestic economy has undeniably helped to contain risks in the macrofinancial environment. In particular, the systemic risk landscape has been positively influenced by improving economic conditions, financial market dynamics, robust banking sector performance and a deceleration in household credit growth. The Systemic Risk Indicator has, on average, fallen in the first three quarters of 2023 relative to 2022. The household and corporate sectors have demonstrated remarkable resilience even though interest rates went up by a cumulative 265 basis points since the beginning of 2022. The current monetary policy stance together with receding inflation and strong economic dynamism have alleviated financial stability concerns from both sectors. Debt servicing costs have stabilised while corporate earnings have continued to grow with strong economic momentum. The evolution of macroprudential metrics indicates subsiding risk from the household sector. Further progress was observed in key debt servicing metrics – such as the household debt service cost-to-income and the household debt-to-GDP metrics. These metrics remain close to pre-pandemic levels. The asset quality of the household sector was sustained at around 1.9 per cent in September 2023. The targeted measures by banks and the fiscal authority have been providing some relief to the hard-pressed segment of the household sector. Debt restructuring by banks has eased the financial burden of vulnerable borrowers. The total value of restructured loans rose to Rs52.5 billion in June 2023, up by 2.9 per cent from March 2023. Nonetheless, the quality of restructured loans has improved, signifying lower overall credit risk. The corporate sector continued to thrive. Falling corporate indebtedness relative to GDP coupled with growing earnings have reduced financial stability risk from the sector. The asset quality of the corporate sector in the banking system stayed broadly sound. The economy continued to be supported by bank credit flows. Credit to the private sector expanded at an annual rate of 6.5 per cent in September 2023, compared to 7.5 per cent in July 2023. Demand for household credit was the main driver of bank credit, growing by 11.8 per cent in September 2023 relative to 12.2 per cent in July 2023. Housing loan growth decelerated, rising at an annual rate of 12.8 per cent in September 2023 from 18.4 per cent in June 2023. Corporate credit rose by 2.8 per cent in September 2023, compared to 4.4 per cent in July 2023, suggesting that growing earnings was supporting the funding requirements of the corporate sector. The credit portfolio of the banking sector remained sound. The NPL ratio of the banking sector was estimated at 4.7 per cent in September 2023, up from 4.6 per cent in June 2023. The NPL coverage ratio stood at 53.2 per cent in September 2023. Banks maintained ample capital and liquidity buffers. The aggregate Capital Adequacy Ratio (CAR) was at 20.3 per cent in September 2023, well above the minimum regulatory requirement. The Liquidity Coverage Ratio (LCR) of the banking sector also stood above the regulatory floor of 100 per cent, with aggregated LCR at 278.9 per cent in September 2023 while the LCR for material foreign currencies was 213.1 per cent. 6/9 BIS - Central bankers' speeches The Bank's stress test results showed continued resilience of the banking sector, based on its upgraded framework. The new stress testing framework includes forward-looking elements and new modules to cater for evolving macrofinancial conditions. As the domestic economy expands further, banks are expected to consolidate their buffers to absorb potential shocks. The Bank continues to monitor risks to the stability of the financial system, while focussing on its price stability mandate. Mauritius Investment Corporation (MIC) Before I come to the MPC decision, let me quickly underscore the pivotal role played so far by the Mauritius Investment Corporation (MIC) in our economy. As you may be aware, the MIC has played a key role in assisting systemic corporates in their recovery process post-COVID, thereby safeguarding the safety, soundness and stability of the financial system of Mauritius. It has also played an important part in the Bank's investment strategy and in diversifying the Bank's portfolio. I am pleased to enlighten you that the entity has performed well during the financial year 2022-2023. From inception to 30 June 2023, MIC's Assets Under Management (AUM) increased to reach nearly MUR 83 billion. Investments undertaken by MIC have generated value and benefitted the economy. As you would recall, I mentioned in May 2020 that the MIC would be a strategic tool to generate value for future generations. We expect profits from operations to continue to increase. Going forward, the ongoing recovery in economic activity, both globally and domestically, can only be expected to solidify the performance of the MIC and improve its performance. This will, by ricochet, strengthen the Bank's financial performance and endow it with further ammunition to conduct its monetary policy operations effectively. MPC Decision I now come to the decision of the MPC. The MPC thoroughly reviewed developments taking place at the global and domestic level, and deliberated on their implications on domestic growth and inflation trajectories for 2024. The MPC took note of the steady decline in the different measures of inflation, which indicates that the process of dis-inflating the economy back to our targeted inflation range is well on track. Headline inflation is now projected to close 2023 at around 7.0 per cent and reach 4.0 per cent by end-2024, barring any shocks. A mix of domestic and international factors are expected to contribute to downward pressures on inflation. The normalisation in global food and energy prices and the reduction in freight costs are expected to restrain import price pressures. The lingering effects of past policy rate hikes are helping in keeping core inflation from gaining traction and anchoring inflation expectations. 7/9 BIS - Central bankers' speeches The toolkits that we deploy to gauge short-term dynamics, which comprise an assortment of High-frequency indicators, nowcasting and near-term forecasting tools, all provide encouraging signs that the robust strength in domestic economic activity, is likely to persist for the remainder of 2023 and throughout 2024. As a result, the Bank projects real GDP growth to remain firmly entrenched at above 7.0 per cent in 2023. The growth momentum is expected to be underpinned by broad-based expansions across the main engines of economic activity, notably 'Accommodation and food service activities', 'Construction' and 'Financial services' sectors. It is worth mentioning that tourist arrivals are expected to revert to pre-pandemic levels in 2024, and would greatly support the momentum in other related sectors. 'Construction' will be a key contributor to growth as well, with important infrastructure development projects going into full swing. Firmer growth performance is expected for 'Financial and insurance activities', on account of proactive efforts by relevant authorities to consolidate the status of Mauritius as an IFC of international repute and of substance on a wide assortment of areas including AML-CFT, Fintech, digitalization, and cyber-security. Renewed optimism in aggregate demand indicators is expected to support domestic activity, with solid growth in consumption, investment and net exports. Household consumption spending will improve as inflation dynamics enable a swift recovery in real wages, alongside policy support by Government. Progress in major development projects is expected to drive the robust expansion in investment spending, going forward. The MPC took note that the strong growth performance that spans across a wide spectrum of sectoral activities, is occurring against a backdrop of declining inflation. Both outcomes are encouraging and reflect the fact that the macroeconomic stance and direction in which we are firmly embarked on, is the correct one. Here, I would like to emphasise the role the MPC had played during 2022 by raising the policy rate by a cumulative 265 basis points and which has now started to bear dividends. However, the MPC acknowledged that both the growth and inflation outlooks, while strong, are susceptible to adverse risk factors stemming from abroad and over which we have absolutely no control, that could derail these trajectories and worsen policy trade-offs. The Committee examined several hypothetical case scenarios and carefully balanced out risks to the inflation and growth outlooks under each. Severe downside risk scenarios hypothesizing a set of tail-risk events influencing the external sector were also duly considered. Based on a cost-benefit welfare-centric exercise, the Committee deliberated that we should continue to allow time for the effects of past rate hikes to work through the economy so that medium-term inflationary expectations are not dislodged. This is crucial to assess the ongoing success of our dis-inflation efforts and will ensure that projected inflation is well saddled on a downward trajectory and be in conformity with our inflation target range by 2024. As a result, the MPC unanimously decided to maintain the Key Rate at 4.5 per cent. The MPC will continue to monitor the economic situation closely and stands ready to meet in between its regular meetings, if the need arises. 8/9 BIS - Central bankers' speeches The next meeting of the MPC will be announced in due course. Rest assured that the Bank will continue to serve the best interests of the Mauritian population. This has always been the case and shall always be the case. Thank you. I now welcome your questions. 9/9 BIS - Central bankers' speeches | bank of mauritius | 2,024 | 4 |
Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Stock Exchange of Mauritius and Risk Insights ESG GPS Partnership Launch, Port Louis, 15 March 2024. | Harvesh Seegolam: Keynote address - the Stock Exchange of Mauritius and Risk Insights ESG GPS Partnership launch Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the Stock Exchange of Mauritius and Risk Insights ESG GPS Partnership Launch, Port Louis, 15 March 2024. *** Mr Mardayah Kona Yerukunondu, First Deputy Governor and Chairperson of the Financial Services Commission Mr Kevin Rangasami, Chairperson of the Stock Exchange of Mauritius Mr Sunil Benimadhu, Chief Executive of the Stock Exchange of Mauritius Mrs Anushka Bogdanov, Founder and Chair of Risk Insights Directors of the Stock Exchange of Mauritius Chief Executive Officers of Listed Companies Captains of the Industry Ladies and gentlemen Good morning. It is a great pleasure for me to deliver this address to mark a significant development in the ESG landscape of our country. This has indeed come at a critical juncture, the more so that our capital market will increasingly be called upon to play a prominent role in building a more inclusive and environmentally-sustainable nation. Financial markets, climate change and economic development form a triumvirate and are a recurrent rhetoric in the conclaves of policymakers. With buzzwords, leitmotivs and catchphrases such as 'resilience' and 'sustainability' obstinately percolating through the strata of decision-making processes, one cannot remain oblivious to the fact that there is now a well-concocted dichotomy between environmental considerations and macroeconomic outcomes. For central bankers, climate change considerations are not just random tail-event shocks. The increased frequency, likelihood and severity of weather-related disturbances create state-contingencies on macroeconomic outcomes and we cannot, but, ensure that we build appropriate crisis-proof preventive mechanisms, whilst being fully poised to tackle any residual risks through targeted and robust mitigation measures. In a nutshell, we cannot expect a resilient economy in the absence of policies that favour environmental considerations. The World Economic Forum has estimated that around 50% of global GDP is highly or moderately dependent on nature. But this interpretation should be handled with utmost care. Let's not remain impervious to the fact that countries are generally heterogenous. Some are affected relatively more than others in the face of common shocks. In the case of Mauritius, our insular state, topographical features and geographic position in the Indian Ocean coalesce to make us highly vulnerable to weather-related hazards. I won't be thrifty on the use of harsh verbiage here: but events that would, in the past, occur once-every1000 years can now materialize once-every-five years. Thus, we should be on our guards and have the wherewithal to accept apocalyptic scenarios as a fact of everyday life. 1/6 BIS - Central bankers' speeches The climate crisis represents an existential threat to humanity due to its manifold, longlasting and far-reaching consequences that easily cut across various aspects of our lives. At a time when the COVID-19 pandemic still serves as a poignant reminder of what an enormous shock of unimaginable proportions can do, we need to stand ready to accept the fact that the climate crisis, if mishandled, can generate shocks of even greater magnitude than the pandemic. We, ostensibly, can do what we can do. Scientists and so-called climate change experts have attributed the bulk of the genesis behind weather-related disturbances to human action. And that's where the lion's share of efforts must be geared towards. We must reduce our environmental footprint or else risk another global crisis that could sprawl beyond control. Remember that no vaccines can ever be developed as immunization strategies against climate change, unlike the pandemic! The focus on ESG and sustainability is, therefore, timely as both the economic and environmental landscapes are now marred, among others, by extreme weather conditions and biodiversity loss. In this respect, at the corporate level, ownership, accountability and responsibility of the issues at hand should be showcased at the very top level. Indeed, corporate boards and senior management are the cornerstones for responding with alacrity by activating a corporate culture built on strong ethical considerations that epitomises inclusiveness and sustainability. Looking at the turnout this morning, I can easily sense that the topic has garnered the required attention on the agenda of your respective boards. Ladies and gentlemen While the public sector has a significant role to play in charting out the main contours and leading by example for accelerating the transition to a green economy, much of that transformation will, nevertheless, be investor driven. Mauritius requires funding of USD 6.5billion for meeting its Nationally Determined Contributions which would entail a reduction in our greenhouse gas emissions by 40 per cent by 2030. The government and domestic private sector would fund an amount of USD 2.3billion while the remaining USD4.2 billion would have to be financed externally. Tangible signs are already perceptible with an increasing demand for financial instruments and products that are ESG compliant. The Stock Exchange of Mauritius (SEM) will have a critical role in spearheading the mobilisation of climate finance. I would like here to place on record the contribution of the SEM well before sustainability considerations became an over-arching priority in the financial world. It introduced the SEMSI in September 2015, a sustainability index which evaluates the practices of listed companies based on ESG criteria. To date, there are eighteen companies participating in this index. SEM has also proceeded with the listing of the first Green Bond in October 2023. The SEM remains a reference in the region. I am sanguine that it will continue to remain a pioneer in our region and position Mauritius as a hub for sustainable finance. I would, however, make an appeal to the SEM to ensure that all international norms and best practices are being adhered to as they pursue the development of this important niche. The collaboration between the SEM and Risk Insights has come at an opportune time to elevate the sustainability agenda of our jurisdiction to new heights. Both listed and unlisted companies will now be able to access a comprehensive set of ESG rating tools, 2/6 BIS - Central bankers' speeches disclosure insights, analytics and ESG intelligence impact reports. This will indubitably improve the quality of ESG reporting within Mauritius while showcasing our ESG credentials on the global stage. Ladies and gentlemen We are all aware that climate change has already made significant inroads into the mainstream of finance by becoming a key consideration in the decision-making process. A study by Standard Chartered Bank in June 2021 concluded that by 2025, 78 per cent of multinational corporations (MNCs) will remove suppliers that endanger their carbon transition plan. These MNCs are expected to exclude 35 per cent of their current suppliers as they transition away from carbon. Any company that deals with these MNCs, either directly or indirectly, run the risk of being excluded from future business opportunities if they do not start to adapt their businesses to ESG practices. You will need to redefine your processes and business strategy for a smooth transition. I concur that the re-engineering could entail additional expenses. However, I would urge you to consider the following two dimensions that stretch beyond pure cost-benefit imperatives: the intertemporal dimension, meaning that such adaptations are likely to yield 'green' benefits in the form of a less climatesensitive environment and that stretch beyond pure pecuniary ones; and the intergenerational dimension, meaning that we are bequeathing to generations of tomorrow a cleaner and safer environment. Looking at things from the vantage point of both dimensions, I can assert that the benefits far outweigh the costs and will result in positive externalities. In fact, looking back 20 years from now or beyond, finance pundits will be in a better position to ascertain the 'green component' from various returns on investment or on capital metrics. I understand that the importance of green finance is gradually increasing in the banking sector. As at 30 June 2023, the banking sector's total exposure in MUR to sustainable projects was estimated at Rs 6.9bn, compared to Rs4.2bn a year earlier. Ladies and gentlemen At this juncture, it is imperative that we follow the international best practices to uphold our reputation as a trusted international financial centre. Investors will require adequate confidence to channel funds to our jurisdiction. A robust disclosure framework will need to take centre stage to calm down the nerves of potential investors regarding the possibility of greenwashing. On that front, Mauritius cannot lag behind in terms of the implementation of globally agreed standards and practices. Companies would have to master the reporting in accordance with the requirements of the International Sustainability Standards Board, more specifically Sustainability Standards 1 and 2. Failure to do so may result in small countries such as ours losing not only on climate finance flows, but on revenue as well as exports are likely to face difficulties fitting into value chains of developed country industries because of upstream climate reporting exigencies. I take this opportunity to call upon listed and unlisted companies to start reflecting on how to take on board ESG considerations in their businesses and strategies in anticipation of the future phasing in of IFRS S1 and S2 disclosure requirements in Mauritius. I am informed that the Financial Reporting Council will hold a workshop in 3/6 BIS - Central bankers' speeches May 2024 on how to operationalise and implement the IFRS Foundation's International Sustainability Standards Board (ISSB) S1 and S2 Standards. Ladies and gentlemen Let me now provide you with some insights on climate change at the level of the Bank. Climate change is already anchored in the realm of central banking given its crucial implications on our statutory objectives namely, price stability and financial stability. In fact, one of the first measures I took upon assuming Governorship of the Bank in March 2020 was to apply for membership at the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). The Bank was admitted as member of the NGFS in July 2020. In October 2021, I set up the Bank's Climate Change Centre, amid the pandemic. The main objectives of the Centre are to integrate climate-related and environmental financial risks into the Bank's regulatory, supervisory and monetary policy frameworks, while supporting the development of sustainable finance. The Centre is also expected to review the Bank's internal operations with a view to reducing its carbon footprint. The Climate Change Centre has already pursued some key initiatives to drive its climate agenda. It has created awareness in the financial sector about climate-related risks and opportunities from the transition to net zero. In particular, the Guideline on Climate-related and Environmental Financial Risk Management, issued in April 2022, will assist financial institutions to better assess and manage climate-related risks in their lending and investment activities, thus minimizing risks of losses from the adverse impact of Climate Change. The Guideline contains disclosure requirements which enhances market transparency and support the assessment and pricing of risks for green projects by businesses and investors. The Bank has also worked together with the Ministry of Finance, Economic Planning and Development and other stakeholders to put in place the appropriate regulatory frameworks for the issue of sustainable bonds by financial institutions, the corporate sector and Government. In this respect, the Bank has released its Guide for the Issue of Sustainable Bonds in June 2021. The Guide acts as a preliminary yet compulsory consultative document which lays the foundation for the issuance of Green, Blue, Social, Climate and Sustainability bonds in Mauritius. The Guide sets out the requirements to be followed by the issuer such as pre-issuance structure, use of proceeds and reporting. Disclosure requirements with regard to Use of Proceeds which constitutes one of the major criteria that an issuer of Green Bond need to fulfil prior to engaging with potential investors. The Sustainable Finance Framework for Mauritius was published in August 2023. It governs the issuance of specific types of sustainable debt instruments by the Government of Mauritius, aimed at financing the implementation of the Mauritius sustainability roadmap. The proceeds from these instruments will be channelled towards ESG projects such as renewable energy and access to essential services such as education and healthcare. 4/6 BIS - Central bankers' speeches The adoption of ESG by Central Banks should be consistent with the existing reserve management framework. In our case, we consider ESG not only for financial reasons but also to manage reputational risk and to set a good example. We strongly believe that ESG analysis could improve risk management functions and support the safety objective of reserves in the long run. Nevertheless, for the portion of reserves allocated to high quality agency and corporate bonds, we have incorporated ESG considerations. We also focus on impact investing. Over the past few years, we have gradually built up a portfolio of labelled bonds, commonly known as Green bonds, social bonds and sustainable bonds. We believe that ESG integration, using tools like ESG scores, can broaden investment and risk analysis and allow our reserve management team to account for emerging risks from a new lens. There is broad consensus across the world that sound climate information architecture, in terms of reliable data, green taxonomy and disclosures as per global standards, is key to improving market confidence, safeguarding financial stability, and fostering sustainable finance. Lack of data severely impedes the ability of Governments, regulators and businesses to prepare for and respond to climate change. Investors need reliable, accurate, timely, relevant and comparable data to assess risks and identify investable green and transition projects. Unfortunately, the climate-related data capture ecosystem in many parts of the world, including Mauritius, is limited due to numerous challenges. This is a common phenomenon plaguing nearly all countries in Africa. Currently, climate disclosure requirements are not mandatory for private and public firms in many countries but we expect this state of affairs to evolve with time. Let me share with you how data gaps have constrained the Bank of Mauritius from imposing wider disclosure requirements on our regulatees. Our Guideline requires banks to disclose, in their annual reports as from 31 December 2023, information on climate risks on four pillars, namely Governance, Strategy, Risk Management and Metrics and Targets. Banks have also been advised to consider guidance provided by the Financial Stability Board's Task Force on Climate-related Financial Disclosures. The Bank conducted a survey in September 2023 to assess the level of compliance of banks with respect to the provisions of the Guideline. It was noted that while banks have incorporated climate risks in their governance, strategy and risk management frameworks, they were facing challenges with respect to disclosures on Metrics and Targets due to the lack of reliable GHG emissions data from their clients' portfolio. As a result, the Bank issued revised disclosure requirements on 08 December 2023 such that financial institutions would not be required to compulsorily disclose information on their climate-related metrics and targets for the time being. The Bank and the Ministry of Environment, Solid Waste Management and Climate Change have collaborated on the development of a comprehensive database comprising historical and projected data points for a set of pre-identified climate-related risk drivers. This database has been made available to financial institutions since July 2023. Collaborative efforts under the ambit of a goal congruence initiative are currently ongoing between the Bank of Mauritius, the Ministry of Environment, Solid Waste 5/6 BIS - Central bankers' speeches Management and Climate Change, the University of Mauritius as well as the private sector to address numerous aspects including the lack of granular climate data for use in stress testing and scenario analysis. In addition to data and disclosures, the development of a National Green Taxonomy is key to promote investor confidence and catalyse climate investment in Mauritius and in the African region, while addressing greenwashing concerns. A green taxonomy is a classification system for identifying activities or investments that will move a country toward meeting specific targets related to priority environmental objectives. The Bank is actively following up on the matter. Ladies and gentlemen We are sailing in unchartered waters but do have the advantage of knowing the destination (global temperature rise must be limited to a maximum of 1.5 degrees above pre-industrial level). But getting to our destination is what matters and we need to ensure that we successfully navigate our ship firmly against all vagaries of the ocean and vicissitudes of thunderstorms. We have a Sisyphean responsibility towards the future generations who will judge us by the quality of legacy we shall bequeath to them. Our actions will impact generations to come and may be irreversible. In this labyrinth of shocks-actions-reactions that is eerily reminiscent of a snakes-and-ladders game of grand scale, we have the moral compass of convincing our future generations that we did everything we could since timing is of essence. We need to act now and to do so smartly! I shall ostensibly never fail to end my remarks on climate change issues with this hope-carrying message. We, therefore, need to join forces collectively to tackle the looming climate crisis before it is too late. With these words, I thank you for your attention and wish you plenty of success in your sustainability journey. 6/6 BIS - Central bankers' speeches | bank of mauritius | 2,024 | 4 |
Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the UN Country Team Strategic Retreat, Balaclava, 4 April 2024. | Harvesh Seegolam: Keynote address - UN Country Team Strategic Retreat Keynote address by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the UN Country Team Strategic Retreat, Balaclava, 4 April 2024. *** The Hon Mr Naadir Hassan, Minister of Finance, National Planning, and Trade, Republic of Seychelles The Hon Mrs Marie-Celine Zialor, Minister for Youth, Sports, and Family, Republic of Seychelles The Hon Mr Justin Valentin, Minister of Education, Republic of Seychelles The Hon Mr Flavien Joubert, Minister of Agriculture, Environment and Climate Change, Seychelles Ms Charlotte Pierre, British High Commissioner to Mauritius Mrs. Lisa Singh, United Nations Resident Coordinator for Mauritius and Seychelles United Nations Regional Directors United Nations Heads of Agency Members of the Diplomatic Corps in Mauritius and Seychelles Distinguished Guests Ladies and Gentlemen Good morning. It is a pleasure to be with you today at the 2024 United Nations Country Team Strategic Retreat. I would like to thank you for inviting me to share a few thoughts on the topic of Sustainable Development Goal (SDG) financing among Small Island Developing States (SIDS), a topic of utmost relevance and importance for us here in Mauritius, as we chart the way forward in an increasingly unpredictable global economic context. Ladies and gentlemen, Over the next fifteen minutes, I will contextualise the macroeconomic issues that SIDS are subjected to, as these will form the basis of our discussions on scaling SDG financing. Although SIDS are quite diverse, ranging from high-income to least developed countries, they share inherent structural vulnerabilities due to their small populations, geospatial remoteness, narrow resource base and susceptibility to climate change and natural catastrophes. The narrow resource base results in heavy reliance of SIDS on external markets for goods. As a result, many SIDS grapple with heavy fluctuations in import and export prices. In the current post pandemic context, these economic and financial vulnerabilities have been amplified even further by macroeconomic factors. These include global inflationary pressures, high fiscal deficits and public debt levels and capacity limitations that restrict the ability of SIDS to scale domestic resource mobilization, private finance and FDI opportunities towards Sustainable Development Goals. Further, the impact of climate change has added to the financial quagmire of many SIDS. 1/5 BIS - Central bankers' speeches In fact, the pandemic had particularly disastrous consequences for SIDS in economic and fiscal terms, most of which are largely dependent on international trade, external finance and few key sectors, often tourism. In 2020, it was estimated that GDP of SIDS dropped by 6.9 per cent versus 4.8 per cent in all other developing countries. In Mauritius, we equally witnessed a major GDP contraction of around 15 per cent in 2020, one of the highest in the world I must say. Ladies and gentlemen, Against such precarious macroeconomic backdrop, we all agree that an effective implementation of the SDGs is key to our development to achieve a more equitable and sustainable future for all. However, as most of you here may be aware, the UNCTAD reported that in 2022, SIDS collectively received around USD 8 billion, representing 0.6 per cent of global FDI flows and a 39 per cent increase from 2021. While this is certainly a step in the right direction, it is still inadequate and disproportionately distributed as the top five SIDS recipients received around 85 per cent of the inflows. The top five recipients were Dominican Republic, Bahamas, Maldives, Jamaica and Timor-Leste. Among the five African SIDS, Mauritius saw its FDI flows grow by 48 per cent from 2021 to reach USD 625 million in 2022. Climate funds were set up by developed nations to assist less-developed countries. While these amounted to USD 35 billion, it is estimated that only some USD 11 billion has been actually disbursed, with the share flowing to SIDS being even less significant. SIDS are on the frontline of the climate emergency, bearing the brunt of more frequent and intense extreme weather events, increasing temperatures and sea level rise, all of which threaten people's livelihood and food security, with important ripples on economic and financial stability. These figures are disconcerting but more importantly, they emphasise the urgency of the work ahead of us for removing potential obstacles to mobilise adequate SDG finance. Allow me to illustrate with the case of Mauritius: to meet its climate obligations by 2030 under the 2015 Paris Agreement alone, Mauritius requires funding estimated at USD 6.5 billion, 35 per cent of which would be funded by the Government and domestic private sector while the remaining 65percent or USD 4.3 billion would have to be financed externally by 2030. This results in a yearly financing requirement of around USD 700 million, which is no small feat. There is no magic formula or one-size-fits-all solution when it comes to mobilising SDG finance. Each country needs to muster its capital requirements in consideration of its own local needs, capacity and priorities. However, in order to accelerate the momentum of moving capital towards the SDGs, there are three key considerations: FIRST, there is the need for a concerted and urgent effort by all stakeholders including government, NGOs, financial institutions, regulators, academics, investors and even consumers. By leveraging public-private partnerships, we can complement FDI inflows through blended finance initiatives towards sustainable projects. In this vein, the 2/5 BIS - Central bankers' speeches Mauritian Government is actively engaged in developing, under the National Vision 2030, investment opportunities that align with the objectives of the SDGs to attract private capital to sustainable development needs. SECOND is the imperative of incentivising domestic and international investors to mobilise private financing into SDG projects by maximising the financial returns on such investments. Project bankability is especially challenging for SIDS due to limited technical expertise and access to natural resources which may explain why less than one-third of the available climate funds has been disbursed so far to developing countries and SIDS. In this regard it may be helpful to seek technical and financial assistance from external institutions like the World Bank, the IMF, the United Nations and the Agence Française de Développement (AFD) to mention but a few. International banks must also develop relevant instruments and vehicles that will attract private investors. In Mauritius, with the expertise of international partners, two private companies were able to issue green bonds in 2022 and 2023. The bonds are currently listed and trading on the Stock Exchange of Mauritius (SEM). The SEM introduced the SEMSI in September 2015, a sustainability index which evaluates the practices of listed companies based on ESG criteria. To date, there are eighteen companies participating in this index. Some local banks have also availed of external financing in the form of credit lines and guarantees from institutions like the AFD for subsequent deployment as green/sustainable loans. Ladies and gentlemen, I will also say that for SIDS which are the stewards of some of the largest ocean territories, the sustainable blue economy agenda could be transformative for national development agendas. Blue bonds are emerging as an innovative way to fund ocean and water-related solutions, create sustainable business opportunities, and signal responsible ocean stewardship to the market. I would invite all SIDS to give due consideration to the opportunities that can be untapped through such issuances. The THIRD key aspect is the building of robust regulatory frameworks that enhance the resilience of the financial system and increase the credibility of the SDG strategies and products being offered. As I iterated earlier, SIDS tend to have structural vulnerabilities that make them more susceptible to external shocks. It is therefore primordial to have the right policies in place to preserve monetary and financial stability and thus boost public confidence and facilitate capital flows across the financial system. In addition to maintaining a resilient and credible financial system, SIDS central banks may also be strategically positioned to promote the growth of domestic climate financing through enhanced risk and opportunity discovery by working towards improving climate information architectures and climate finance market structures. Ladies and gentlemen, When it comes to the climate agenda, the Bank of Mauritius has taken the lead in facilitating an enabling environment for the development of sustainable finance across Mauritius. The reality is that SIDS generally, have less developed financial markets 3/5 BIS - Central bankers' speeches which makes raising funds on the international markets difficult. SIDS equally face the challenge of rating agencies actions. As you are aware, rating agencies play a vital role in generating trust and confidence in debt instruments beings issued by sovereigns in the private sector. In Mauritius, we have given due consideration to these challenges and have invested ourselves in developing the right eco-system to accompany the development of SDGfinancing. This adds to the fact that Mauritius is rated by both Moody's and S&P as the only investment grade IFC in Africa. The banking sector in Mauritius also continues to play a pivotal role in attracting international investors. At the level of the Bank of Mauritius, we have left no stone unturned when it comes to further modernising the banking sector and its offerings to compete in international markets for sustainable finance. Starting in June 2020, the Bank engaged with financial institutions to create awareness of climate-related risks as well as opportunities from the transition to net-zero. In July 2020, the Bank joined the Network of Central Bank and Supervisors for Greening the Financial System (NGFS) to widen its collaboration with other central banks regarding sustainability-related research and technical resources. In June 2021, the Bank of Mauritius published a guide on the issuance of sustainable bonds which aims to ensure the integrity of the sustainable finance ecosystem in Mauritius and prevent greenwashing. The guide recommends that the bonds be aligned with international standards such as the Green Bond Principles of the International Capital Market Association and the International Climate Bonds Standards of the Climate Bonds Initiative. In October 2021, the Bank set up a Climate Change Centre (CCC). The Climate Change Centre acts as a focal point for addressing the macroeconomic implications linked to climate-related and environmental financial risks by integrating such risks into our regulatory, supervisory and monetary policy frameworks. With a view to further consolidating the appeal of Mauritius for international sustainable finance investors, the Climate Change Centre has also collaborated with the Government and other key stakeholders on a number of projects. These projects include amongst others the development of a nation-wide ESG framework for issuing green and blue bonds, and collaboration in view of the elaboration of a National Green Taxonomy to provide a common framework for investors wishing to invest in sustainable goods and services. Currently, the Climate Change Centre is also working with international partners to develop a high-integrity carbon trading framework for both blue and green credits. All of these initiatives aim to promote a resilient and credible sustainable finance ecosystem in Mauritius and through the Mauritius International Financial Centre in the region. I am pleased to report that the work of the Climate Change Centre over the past three years is on the right track as demonstrated through a 64 percent increase in bank exposures towards sustainable projects, and a 53 percent increase in loan applications for sustainable project financing over the period June 2022 to June 2023 as per the survey conducted by the Bank in 2023. 4/5 BIS - Central bankers' speeches Ladies and gentlemen, Like most SIDS, we have much work in front of us to bridge the SDG-financing gap. We have started this journey and are going in the right direction. However, to reach our destination, it is important that we continue to develop collaborative partnerships, incentivisation strategies and credible architectures that will help maximise our full potential for mobilising SDG finance. We have the responsibility towards the future generations who will judge us by the quality of legacy we shall bequeath to them. Our actions will impact generations to come and may be irreversible. In this labyrinth of shocks-actions-reactions that is eerily reminiscent of a snakes-and-ladders game of grand scale, we have the moral compass of convincing our future generations that we did everything we could since timing is of essence. I therefore call on all of you to do your utmost best in contributing to build a sustainable and resilient SDG friendly financial system. Before I end, I will equally suggest that like-minded SIDS come together to reflect on the challenges and also share expertise and learnings on this journey. Central Banks of SIDS can undoubtedly begin with this collaborative approach. On this front, I would suggest that the Bank of Mauritius and the Central Bank of Seychelles set the tone. Other central banks from the SIDS region may subsequently join us in the process. Ladies and gentlemen, We need to act now and we need to do it smartly. With these words, I thank you for your attention. 5/5 BIS - Central bankers' speeches | bank of mauritius | 2,024 | 5 |
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press conference, Port Louis, 20 September 2024. | Harvesh Seegolam: Current economic conditions and outlook Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post Monetary Policy Committee (MPC) press conference, Port Louis, 20 September 2024. *** International Economic Developments Global growth continues to be resilient. In its July 2024 World Economic Outlook (WEO) Update, the IMF projected global growth to remain stable at 3.2 per cent in 2024 and 3.3 per cent in 2025. Growth performances across key advanced economies were encouraging in 2024Q2. The US economy grew faster than expected on the back of solid gains in consumer spending and business investment. The euro area was well on a recovery track in 2024Q2, helped by robust services activity and higher consumer spending. The UK economy also remained buoyant, owing to stronger government expenditure and household consumption. Leading economic indicators pointed towards sustained expansion in economic activity during 2024Q3, with the J. P. Morgan Global Composite Output Index rising to 52.8 in August 2024. This was mainly supported by positive performance in the services sector on account of rising new order intakes and improved new export business. Global inflation remains on a downtrend, gradually converging towards major central banks' respective targets. This reflected largely favourable global commodity price developments and the effect of past monetary policy tightening. Since the last MPC meeting, global food prices have declined, while the Freightos Baltic Global Index, a measure of freight costs, showed some signs of stabilisation. Oil prices exhibited some volatility, moving in line with the decision of OPEC+ production cuts and economic concerns. The IMF, in its July 2024 WEO Update, forecast global inflation to fall from 6.7 per cent in 2023 to 5.9 per cent in 2024 and further to 4.4 per cent in 2025. In view of these favourable outturns, interest rate cuts from major central banks are well underway. Since the last MPC meeting, 47 decisions of monetary policy committee meetings globally have been to maintain the status quo, 44 decisions were about cutting rates as opposed to 5 decisions to raise rates. The US Fed and the European Central Bank have lowered their respective policy rates by 50 basis points and 25 basis points at their September 2024 meetings. The US Fed will be convening two more meetings till the end of this year, and the market expects two further policy rate declines of 25 basis points each. The tendency globally has been to move towards a policy rate decline, as evidenced by around 120 decisions from central banks around the world to lower their respective policy rate since the start of 2024. Domestic Economic Developments On the domestic front, first-quarter GDP growth stood at 6.4 per cent, led by robust performances of main economic sectors, including 'Accommodation and food service activities', 'Construction', 'Financial and insurance activities', 'Transportation' and 'Wholesale and retail trade'. Domestic consumption and investment continued to rise at 1/4 BIS - Central bankers' speeches a solid pace, supported to a large extent by ongoing capital projects and buoyant household spending. The tourism sector continues to be a key engine of growth, largely reflecting upbeat demand for travel and tourism and effective promotional campaigns. Tourist arrivals aggregated 865,523 for the period January to August 2024, constituting a recovery rate of 99.2 per cent relative to the 2019 level. Arrivals were up by 7.7 per cent compared to January-August 2023. Tourism earnings were also buoyant, totalling Rs51.3 billion over the period January to July 2024, higher by 42.5 per cent and 6.6 per cent compared to the corresponding periods of 2019 and 2023, respectively. The current account deficit is projected to improve from 4.5 per cent of GDP in 2023 to 4.3 per cent of GDP in 2024, on account of healthy tourism earnings and higher interest income. Gross Official International Reserves of the country remained comfortable at USD7.9 billion as at 17 September 2024, representing around 12 months of import cover, thus providing adequate buffers against potential external shocks. The banking sector remains resilient with strong capital and liquidity buffers. Inflation Inflation in Mauritius has continued to decline, mostly reflecting the benign global food and energy price environment, lower shipping costs as well as the fading out of domestic shocks. Headline inflation fell from a peak of 11.3 per cent in February 2023 to 4.0 per cent in August 2024, marking 18 months of successive decline and stayed within the inflation target range of 2 to 5 per cent since the last four months. Core measures of inflation also remained engaged on a firm downward trend, standing at 2.3 per cent in August. A more granular analysis reveals that the proportion of pro-inflation items in the CPI basket has been gradually decreasing. In particular, the share of CPI items that were generating inflation of more than 7 per cent, shrunk from 42 per cent in June 2024 to around 24 per cent in August 2024. Concurrently, the share of items with appreciable inflation rates (in the range of 0 to 5 per cent) worked out to 44 per cent in August 2024, while the share of items that were deflationary (less than 0 per cent) was relatively unchanged at 19 per cent. These dynamics provide concrete evidence that inflation will stay within the target range of 2 to 5 per cent, and converge towards the Bank's midpoint target for inflation, namely 3.5 per cent. Money Market The Bank maintained its open market operations to prevent the build-up of rupee excess liquidity in the banking system. However, in 2024Q3 the Bank reduced the amount of Bank of Mauritius (BoM) Bills issued in the 91-Day, 182-Day and 364-Day given that a significant amount of rupee excess prevailing on the domestic market was being absorbed through regular FX interventions. BoM Bills for an aggregate amount of Rs12.85 billion were issued between 11 July to 13 September 2024, in addition to the weekly issuances of Rs1.0 billion in the 7-Day tenor. While a rupee equivalent of Rs12.5 billion was mopped up through sale of foreign currency on the market. 2/4 BIS - Central bankers' speeches Surplus funds at the end of the day were placed with the Bank under the Overnight Deposits Facility at the rate of 3.00 per cent per annum, effectively containing the rupee excess at a daily average of Rs3.0 billion since the last MPC. Consequently, the outstanding amount of BoM securities issued to manage excess liquidity decreased from Rs144.8 billion as at 11 July 2024 to Rs135.8 billion as at 13 September 2024, of which 54 per cent maturing within one year. The weighted average overnight interbank rate hovered closer to the lower bound of the interest rate corridor ranging between 3.10 per cent and 3.15 per cent since last MPC. Foreign Exchange Market The domestic market remained driven by the high volume of transactions by the financial sector, importers of goods as well as tourism operators. From 11 July to 18 September 2024, FX turnover stood at USD8.9 billion and net sales of USD202 million were registered. In order to cater to the FX requirements of importers building their stocks ahead of the end-of-year period, the Bank intervened on a regular basis since 08 July 2024. A total amount of USD270 million was sold to banks between July and 18 September 2024. The rupee continues to reflect key economic fundamentals of demand and supply, as well as international currency movements. Between 11 July and 18 September 2024, the rupee has appreciated by 2.2 per cent against the US dollar. Financial Stability I will now share with you key developments on the soundness of the banking and financial system. Risks to financial stability have continued to subside, driven mainly by improving macrofinancial conditions. Debt sustainability and serviceability metrics have stabilised as household income and corporate earnings grew steadily. The asset quality of banks stayed sound with no signs of debt servicing distress. Credit flow by the banking sector to the economy has remained on a steady upward trend since the beginning of the year. Bank credit to the private sector grew annually by 7.6 per cent in July 2024. Household credit – a major contributor to the demand for bank credit – expanded at an annual rate of 11.0 per cent in July 2024. Similarly, bank credit to non-financial corporations in Mauritius registered a yearly growth of 5.1 per cent in July 2024. The banking sector maintained its resilience, supported by robust capital and liquidity buffers. The Capital Adequacy Ratio was 20.9 per cent as at end-June 2024 and the Liquidity Coverage Ratio (LCR) improved to 328.5 per cent in July 2024. The stress test results, based on June 2024 data, showed improved resilience of the banking sector as the number of banks showing vulnerabilities has been declining. The 3/4 BIS - Central bankers' speeches banking sector held robust solvency and liquidity buffers to withstand the series of shocks applied under the various scenarios, including in the forward-looking scenarios. The Bank continues to monitor risks to the stability of the financial system while ensuring price stability. MPC Decision I now come to the decision of the MPC. Recent price dynamics confirm that the Mauritian economy is firmly engaged on a disinflationary path – helped by some favourable driving forces, notably limited pressures on international commodity prices, normalisation of freight costs and weakerthan-expected passthrough to domestic prices as well as fading domestic demand and supply imbalances. In the absence of any shock, headline inflation is projected to be around 4.0 per cent at by the end of 2024 – settling within the inflation target range. As I mentioned before, inflation has been declining over the past 18 months and has, over the past four months, remained within the target range. Going forward, this trend is expected to continue. With regards to the growth outlook, it is expected that the domestic economy will sustain its robust momentum. The tourism sector is expected to maintain its strength, benefitting from increased demand for travel and tourism, enhanced connectivity, diversification of the tourism base, with the target of 1.4 million tourists maintained for 2024. Activity in the construction sector will be underpinned by major public infrastructural projects such as building of social housing units and enhancement of road networks. The financial sector will also be supportive of growth leveraging on the remarkable reputation of the Mauritian IFC. The Bank maintains its projection for real GDP growth at 6.5 per cent for the year. The MPC deliberated that, while growth remains consistent, the ongoing disinflationary process is well entrenched in 2024 and looks set to achieve the medium-term target of 3.5 per cent, with upside risks to the inflation outlook subsiding. The MPC was thus of view that this environment creates space for a lower policy rate, without compromising on other macroeconomic objectives. The MPC decided unanimously to lower the Key Rate by 50 basis points from 4.5 per cent to 4.0 per cent. The MPC will continue to monitor the economic situation closely and stands ready to meet in between its regular meetings, if the need arises. The next meeting of the MPC will be announced in due course. On this note, I conclude my intervention. I will now be pleased to address your questions, if any. Thank you. 4/4 BIS - Central bankers' speeches | bank of mauritius | 2,024 | 9 |
Presentation by Mr Peter Tari, Deputy Governor of the Reserve Bank of Vanuatu, at the Reserve Bank of Vanuatu, Port Vila, 7 June 2006. | Peter Tari: Overview of the Vanuatu economic performance Presentation by Mr Peter Tari, Deputy Governor of the Reserve Bank of Vanuatu, at the Reserve Bank of Vanuatu, Port Vila, 7 June 2006. * * * Overview and performance • Vanuatu’s economic performance has been affected by a number of factors, including the smallness and isolations of the islands, globalizations and gradual loss of preferential markets, natural calamities, lack of capacity and political instability. • Vanuatu is made up of some 80 mostly volcanic islands that extend approximately 1,176km in a north-south direction. The total land area is 12,281.25 Km² and the current crude population density is estimated at 17 persons per Km². The country’s population growth rate is 2.6 percent per annum and a real GDP per capita estimated at USD718 in 2004. The current population is estimated to be around 240,000, of which 80% are said to be living in rural areas and are engaging agriculture. • Agriculture is the mainstay of the economy, and it makes up approximately 70 percent of the country’s exports. Despite the fact that agriculture supports the bulk of the population, it is not the leading contributor to GDP. In the last six years agriculture make up on average 18.3 percent of GDP. The services sector dominates the economy, accounting for around 73% of total GDP followed by the agriculture. Within the services sector, the wholesale and retail sector dominates with around 40%. Tourism, which makes up around 16% of GDP, is becoming an important sector of the economy generating around 75% of the total foreign exchange earned by the country. • Economic growth since independence in 1980 has been erratic. The fluctuating trend in Vanuatu’s economic growth was caused by a number of factors including political instability, the country’s vulnerability to natural disasters and changing international prices for Vanuatu’s exports, and a whole of other factors. • The last five years also saw marked variations in growth. After two successive years of contraction in 2001 and 2002, real GDP rebounded in 2003 and has since been recording positive growth. Growth in 2003 and 2004 ranged from 4-5% and has been driven by Agriculture and Services sectors. Positive real GDP growth continued in 2005 but at lower magnitude compared the preceding two years. In 2005, the services and industry sectors continue to grow therefore more than offset a negative contribution from the Agriculture sector. The services sector grew by 4.7 percent in 2005, with much of the growth being attributed to growth in transport and communication by 12.1 percent and in Finance and Insurance by 16.3 percent. • The Agriculture sector declined in 2005 after experiencing growth for 2003 and 2004. The downturn in Agriculture is driven by copra which in turn was caused by a drop in copra prices which had an effect on production. Cocoa also indicated a decline in 2005, mainly due to a drop in export prices. Kava also experienced a decline in 2005, following a temporary ban in Fiji for Vanuatu kava. This lower decline in agriculture output continues towards the first half of 2006 but is expected to improve towards the end of the year. • On the fiscal front, the Government has for the past few years achieved fiscal consolidation. Much of the improvement has been attributed to improving economic conditions and inflows of donor funds but also to good control measures over expenditures. Reflecting the good outturn in fiscal operations the Government managed to retire some of its domestic debts in 2005. Also the Government is no longer heavily dependent on the overdraft facility at the Reserve Bank of Vanuatu given its improve fiscal management. • The Reserve Bank makes regular assessment of the economy and adjusts its monetary policy stance accordingly. Last year in June 2005, the Bank, following its regular assessment of the economy was satisfied that macroeconomic stability has been achieved and that the macroeconomic variables that it monitors against its policy settings have improved. Based on this assessment it relaxed its monetary policy stance by reducing its rediscount rate from 6.5 to 6.25 percent. On 15th March 2006 the Bank further relaxed its monetary policy stance by reducing its official interest rate from 6.25 percent to 6.00 percent. Challenges for Vanuatu 1. Continue to maintaining macroeconomic stability in order to promote growth; 2. Promoting private sector development as an engine of growth; 3. Political Stability has to be maintained for a conducive investment climate; 4. Raising investments by removing impediments 5. Promoting Small and Medium Enterprises so that economic growth is more balanced and broad based; The private sector development is more challenged because of good governance issues, unpredictable policy environment, poor infrastructure and the need for improvement of law and order. Outlook • The current favorable performance of the economy is expected to continue in 2006 and for the next two years. In 2006, the economy has been forecasted to grow by 3.9 percent and by 4.3 percent during 2007. The services sector is expected to continue to drive the economy forward but also the industry sector is expected to contribute favorably if the Millennium Challenge Account projects are implemented. The agriculture sector is also anticipated to improve in 2006. • The Balance of Payment of the country outlook appears favorable. Official international reserves have increased to a comfortable level of 6 months of import cover in May 2006, and are expected to continue to increase in 2006. | reserve bank of vanuatu | 2,006 | 9 |
Keynote address by Mr Odo Tevi, Governor of the Reserve Bank of Vanuatu, at the National Financial Inclusion workshop, Port Vila, 9-10 August 2012. | Odo Tevi: Financial inclusion in Vanuatu Keynote address by Mr Odo Tevi, Governor of the Reserve Bank of Vanuatu, at the National Financial Inclusion workshop, Port Vila, 9–10 August 2012. * * * Honorable Minister of Finance and Economic Management, Deputy Governors, Development Partners, Distinguished Speakers, Bankers and Financial Services Providers, Public Figures from other jurisdictions in the Pacific and from Vanuatu, Distinguished Guests, Ladies and Gentlemen, World leaders now recognize Financial Inclusion as an important tool to promote sustainable economic growth and development. This was evident during the G20 Pittsburg Summit in November 2009, where the leaders made fresh commitments to improve access to financial services to low income people by supporting the spread of safe and sound modes of financial services capable of reaching the low income earners and the remote rural population group. What is Financial Inclusion? Financial inclusion is about the delivery of affordable and sustainable financial services to the underserved. Specifically it is about making readily available safe savings products, appropriately tailored loans, and insurance and payment services affordable to low income earners, women, and those living in the rural areas. In the pacific region, in 2009, the Forum Finance and Economic Minister Meeting have agreed that each Pacific island nation be committed to achieve the Money Pacific Goals by 2020. This is a commitment that our Governments have already made and I sincerely thank the Honorable Minister of Finance for re-affirming the Government’s full support towards greater financial inclusion in Vanuatu this morning. The Money Pacific Goal number one recognizes the importance of financial literacy and therefore aims to incorporate financial education in the core national school curriculum. This approach aims to impart a basic life-skill to our children on understanding money and managing income to benefit their families and their communities and sustainably participate in economic activities. The Reserve Bank of Vanuatu is currently working with the ministry of Education to address this goal and I am glad to mention that the Ministry of Education is keen on this initiative. The Money Pacific Goal number two focuses on adult financial education and is aimed to make it available to all adults in each respective nation in the Pacific. On this, I wish to sincerely acknowledge the National Bank of Vanuatu and VANWODS Microfinance for their financial literacy programs on the Radio. I would also like to acknowledge ANZ Bank, Westpac Bank, Vanuatu Agriculture Development Bank, the Department of Cooperative and Ni-Vanuatu Business, and other institutions I did not mention, for their extensive community based financial literacy and business up skilling programs. All of these organizations have committed a lot of efforts and resources to offer financial education to those who need it but are underserved. I am also delighted for our donor partners who have acknowledged the importance of financial inclusion and I look forward to working with you to expand the financial literacy further. Goal number three is aimed at putting in place a simple and transparent mechanism to protect consumers of financial services. I am happy to inform us this morning that at the request of the Pacific Island Financial Inclusion working Group in a meeting last year at the BIS central bankers’ speeches Reserve Bank of Vanuatu, I have agreed that Vanuatu will take the lead in implementing the Consumer Protection Goal. The Reserve Bank is currently working with other related Government ministries on this. It is highly expected that the application of a proper consumer protection mechanism will enhance the confidence and trust and encourage low income earners and rural dwellers to access readily available financial services. Money Pacific Goal number four, as an overriding Goal, aims to reduce, by half, the number of people who do not have access to even the most basic financial services. Ladies and gentlemen, To achieve the common purpose of a great inclusive financial environment, all stakeholders need to work together. The Reserve Bank of Vanuatu in collaboration with the Financial Inclusion Programme and the Alliance for Financial Inclusion has purposely organized this workshop as a starting point to facilitate this partnership work approach. I acknowledge the commitments and efforts taken by the National Bank of Vanuatu, Digicel, VANWODS Microfinance, the Department of Cooperative and Ni-Vanuatu Business and other small financial institutions not mentioned, for reaching out and making basic financial services available to the low income earners, women and the remote rural community dwellers in deferent islands throughout the country. Financial inclusion strategies can be defined as road maps of actions, agreed and defined at the national level that stakeholders follow to achieve financial inclusion objectives. Successful strategies coordinate efforts with the main stakeholders, define responsibilities among them, and state a clear planning of resources by, for example, prioritizing targets. A strategy can promote a more effective and efficient process to achieve significant improvements in financial inclusion, and is ideally prepared with the private sector in order to establish and achieve shared, achievable goals for financial inclusion. The Reserve Bank of Vanuatu, like all other central banks in the region, is committed to promote a coordinated partnership work approach between stakeholders to enhance efficiency and to achieve greater financial inclusion in Vanuatu. This commitment was materialized in 2011 when the Board mandated the Reserve Bank of Vanuatu to incorporate financial inclusion in its tasks. By extending its role to include Financial Inclusion, the Reserve Bank of Vanuatu aims to reinforce the Bank’s function in promoting monetary stability and sound financial structure and to foster the financial conditions conductive to the orderly and balanced economic development of Vanuatu, in line with the Reserve Bank of Vanuatu Act [CAP 125], Part II, Section 3. A lot of ni-Vanuatu does not have insurance. This is a sad reality after 32 years of independence. It is now important that insurance especially relating to micro-insurance becomes part of the financial inclusion strategy. I am sure that this topic will be discussed in our workshop and in the next few years I would like to see it integral part of our communities. Ladies and Gentlemen, The workshop theme “Medium Term Strategy for Financial Inclusion in Vanuatu” is timely. Financial inclusion is essential to our efforts in fighting poverty and inequality and being innovative and thinking outside the box is key to achieving greater access. We see it in real life, we see it on TV, we hear it on the radio, and we read it in the newspapers. How people in the rural and outer islands struggle to make ends meet is a sad reality for us. Dokowia sang a song about “Class Six” and the difficulty of finding a job and putting food on the table. Hearing young people saying that their parent could not afford to pay for their education fees is difficult to accept. BIS central bankers’ speeches These are the gloomy realities of how some of our people live. Whilst we sit in the comforts of our homes and within the precinct of this luxurious hotel, there are others in our communities that do not have that comfort and living standards that they should have. I am sure that we all have a role to play in Financial Inclusion and if we all make an effort to play that role well, we can make a difference in the lives of many of our people. After this meeting I would like to see concrete outcomes and I believe that with your experience and expertise it is possible. Last but least, I take this opportunity to thank the Government, sponsors, presenters and all the participants to this workshop and wish you all a fruitful discussion for the next two days. Thank you tumas. Merci beacoup. BIS central bankers’ speeches | reserve bank of vanuatu | 2,013 | 1 |
Address by Dr Ishrat Husain, Governor of the State Bank of Pakistan, to the English Speaking Union in Karachi, 5 July 2001. | Ishrat Husain: Why do perceptions about the Pakistani economy differ? Address by Dr Ishrat Husain, Governor of the State Bank of Pakistan, to the English Speaking Union in Karachi, 5 July 2001. * * * An extremely important question has been raised by several commentators and observers of Pakistan economy: Why is it that the external donors believe that Pakistani economy is doing well while the public and press in Pakistan think otherwise? This question needs to be analysed carefully and dispassionately in order to identify the factors responsible for such differing perceptions. I have dwelt on this subject earlier also but I thought I should deal with it at some length once again. We should begin by specifying the initial expectations of the two groups. The external donors had concluded that successive Pakistani Governments had entered into agreements during the last 10 years with promises of serious structural reforms but failed to deliver on most of these promises. In their view Pakistan suffered from a serious credibility gap and, until and unless, the present Government demonstrated a strong commitment and delivered most of those unfulfilled promises upfront, there was no way Pakistan could qualify for any medium-term assistance. Pakistan, therefore, was asked to prove its seriousness by first completing all those actions the previous governments had promised but not fulfilled. These actions covered the entire range of economic activities and sectors and affected every segment of the population. There were many actions which were required to be taken and I have spelled them out elsewhere and will therefore not repeat them here. It is not implied that these actions did not make any economic sense or were not justified in Pakistan’s own economic interests but the important point to note is that all these actions had to be completed within a period of 12-15 months in order to qualify for the Stand-by-Arrangements (SBA), balance of payments support loans from ADB and World Bank and rescheduling of external debt owed to bilateral creditors. The timing, sequencing and phasing of these reforms were not necessarily those which the Pakistani authorities would have preferred had they complete say in the matter. The Government of Pakistan has either completed or is implementing most of the above actions. This has established a favorable track record and restored the country’s credibility among the international financial community and bilateral donors. IMF has already released two tranches under the SBA and the third tranche is likely to be released by mid-July. The World Bank has released the Structural Adjustment Credit which would add $ 350 million to the country’s foreign exchange reserves. The ADB has so far provided $ 333 million. The country has been able to reschedule $ 2.8 billion which it had to pay to external creditors this year. Despite this relief, it maybe pertinent to mention that the country still had to pay $ 4 billion in cash foreign exchange out of its own resources to service its external debt. The Pakistan Development Forum gave a resounding endorsement to the reforms Pakistan is undertaking. Credit rating of Pakistan has improved. Overall, there is a perceptible and positive change in Pakistan’s standing with the international financial community. This is, therefore, the genesis for the improved perception of external donors about Pakistan’s economy. In addition to the IMF program implementation there are some key reforms this Government has embarked on its own – survey and documentation of the economy to widen the tax net and improve tax compliance, devolution of power to the grass root level whereby the common people are empowered and the old bureaucratic system is dismantled; accountability of those who had looted national wealth in the past; recovery of bank loans from defaulters, utility bills and evaded taxes. These measures, on the top of others implemented as part of the IMF program, have created their own dynamics and shaken the foundations of the rent seeking culture prevalent in the economy for such a long time. But the sad part is that the rent seekers, who were keeping the overall economy buoyant have withdrawn from the scene. Consumption expenditures emanating from the rent-seeking class are much lower than what they used to be in the past. Their investment activities have come to a halt. Most of them are trying to find safe havens abroad for their wealth. While the Group of external donors is pleased that the country had taken all the tough decisions which were postponed by the previous governments for such a long time the same decisions and other measures adopted by the Government, have created hardships domestically for several classes of economic agents. What were the expectations of the various domestic classes? It may be pertinent to recall that the expectations from the present Government were quite high as the country had faced an atmosphere of uncertainty and despondency for a long time and the Military was considered as a savior of the economy. The urban educated unemployed felt that new employment opportunities will be created to absorb them. The fixed income groups thought that the wages, salaries and pensions frozen since 1994 will be raised. The traders and service sectors were looking for a higher demand for their goods and services translated into higher incomes for them. The rural income groups wanted the prices of their agriculture output raised. The large industrialists clamored for more concessions and exemptions in order to expand their operations. As far as the press was concerned a number of those who write on economic issues are either retired government officials subsisting on pensions and income from National Savings Schemes Certificates or those earning salaries. Their incomes have remained fixed and thus eroded in real purchasing power terms while the burden of higher expenditure particularly the utility bill charges hit them hard. These columnists and reporters extrapolate their own experiences and those of their peers to depict the adversity hitting the common man. They are therefore unsympathetic and unconvinced about any good emanating from this reform package. Against these expectations what were the ground realities and what options were available. The preceding five year period had resulted in stagnant per capita incomes, no new large scale investment, rising unemployment and underemployment, worsening incidence of poverty, declining public expenditures and expanding fiscal deficits, an exceptionally high debt servicing burden, and dysfunctional public sector corporations hemorrhaging public finances. Under these conditions, the new Government was faced with two choices. The first option was to adopt a populist approach and use large scale public expenditures to create new employment opportunities, contracts for private sector, raise the level of aggregate demand and subsidise electricity, petroleum and gas prices so that the consumers are protected from increase in prices. In order to do so, an expansionary fiscal policy and an accommodating monetary policy were required to be pursued. In the short-term this set of policies would have won the applause from all classes domestically. From the viewpoint of the present Government, which was in office for three years, this would have been an attractive and expedient solution because the disastrous consequences of these actions over the medium term would have been faced by their successors and not by them. What would have been the consequences of following this policy option? The country would have been forced to default on its external debt, fiscal deficit would have been around 10 per cent of GDP financed by borrowing, inflation rates would have hit the roof hurting the poor more than any one else, external and public debt burdens would have escalated, and private investors would have found an environment of macroeconomic instability. The international financial institutions would have shunned Pakistan as a pariah economy and Pakistan would have been isolated from global economy. But this Government instead chose the second but more difficult option as it felt that strong fundamental structural reforms had to be put in place, the institutional decay had to be arrested through better governance, transparency, and debt relief had to be obtained from international creditors to revive the economy on a sustainable basis and to reduce dependence on the International Monetary Fund in the 3-5 year time horizon. The country can reassert its economic sovereignty and get out of the stranglehold of the IMF programs by adopting a strategy in which it can generate sufficient resources to take care of its financing needs over this period. What are the elements of this strategy? First, we must establish our credibility, secure some fiscal space to undertake employment generating development expenditure, avoid contracting short-term expensive debt, and augment our foreign exchange earning. The rulers were also of the opinion that the benefits of economic revival should be shared by a wide majority of the population and not by a chosen few. This simultaneous pursuit of macroeconomic stabilization, structural reforms, improvement in economic governance and poverty alleviation required a course of action for which the rescheduling of external debt and assistance from the international financial institutions was a sine qua non. The tough measures taken by the present government, though quite right and desirable, are hardly expected to be welcomed. How can the simultaneous burden of higher utility prices, rising petroleum prices, increase in prices of imported goods due to depreciating exchange rate and lowering of returns on National Savings Scheme be borne by a class whose household incomes are at a standstill? Thus the reaction of the wage earners, salaried class, the pensioners and other fixed income groups who form the bulk of our middle class is quite understandable and their perception about the economy is quite different from those of the outsiders. To the educated youth, who were expecting the present government to revive the economy quickly so that employment opportunities could become available to them, the curtailing of development expenditure for attaining the fiscal deficit target was a disappointment. Neither the employment opportunities through higher public expenditures could be expanded nor the crowding-in of private investment could take place. But the more troubling aspect is that those who are engaged in spreading and disseminating the negative perception and sentiments about the economy are the interest groups who were the beneficiaries of the old system and are likely to be big losers, if the proposed structural reforms are fully implemented and take hold. The main line of resistance comes from these particular groups. Let us examine how their interests are going to be compromised. Most of the “people” who are vocal against the current reforms belong to the class populated by politicians, bureaucrats, business leaders, land owners, traders and professionals. It should be clarified that we are not including all persons who pursue these professions but only those who have been the beneficiaries of the old system of the past. Each one of this vested group is hurt by the deep-rooted structural reforms which the present government is attempting to undertake. This group of politicians and bureaucrats strongly believe that their power and privileges will be eroded if the devolution to district governments takes place according to the plan. Some of the former and prospective members of the provincial and national assemblies consider the nazims and deputy nazims as their potential rivals in which the latter are likely to have more administrative and financial authority and will thus divert the public attention and importance away from the MPAs and MNAs. The award of development projects and government contracts, the postings and transfers of key officials which they could easily manipulate with the active connivance of a few bureaucrats, will no longer be possible. The Deputy Commissioners and their class are unhappy that they had joined the civil service to wield undivided authority over the population in their jurisdictions. It is unpalatable to them to take orders from half literate elected nazims – many of whom would have had difficulty in getting an appointment from the Deputy Commissioner under the existing set-up. The officials of other 13 departments who will now formally report to the District Coordination Officer are resentful that they will no longer be able to evade responsibility which they presently can under the loose and undefined supervisory arrangements in place. Those business leaders, who had amassed wealth not by dint of hard work, enterprise or innovation but by evading taxes, defaulting on bank loans, stealing electricity and getting SROs issued to favour them selectively have indeed stopped “investing”. But to think of it, was it real investment or a hand out from the public exchequer to chosen few which was then invested in their own names. Those chosen under one political set up had to wait out for a couple of years while other chosen few availed of their turn. The accountability, tax survey and recovery of loans and utility bills are pinching them for the first time. They are being forced to part with some of the ill-gotten gains they had made and their reaction is that of wrath and hostility. The big landlords have, also for the first time, been unsuccessful in thwarting the imposition of agriculture income tax. The avenue for leakages in non-agriculture income tax has been closed by clubbing the incomes from both sources. So this is a double whammy for a very influential group which has so far enjoyed the corridors of power without any restraint on their wealth accumulation or sharing it with the State. The traders and professionals in the service sector are unhappy because they have also been brought under the tax net through GST. But it is not the GST, which they can pass on to the consumers in full that is bothering them, but the disclosure of their sales and profits upon which income tax can be levied. If you have gotten away by not paying any taxes for that long, won’t you resist this new dispensation. Thus it is obvious that the losers from the structural reforms underway are identifiable, alive and kicking while the winners are to emerge in some distant future provided these reforms are continued and sustained over an extended period of time. For example, several thousand workers will immediately lose jobs as a result of the restructuring and downsizing of the nationalized commercial banks. The benefits to the economy will occur over time when the lending and deposit rates are improved and service standards upgraded. The difficulties and problems the businesses are facing in relation to tax administration will be resolved when the reforms pertaining to the restructuring of CBR are completed. This will take some time to show results but the exporters are facing liquidity problems today. The limited efforts to target the poor through rural and urban Khushali Program, the Food Support Program, the Micro-credit Bank and Zakat, are so diffused and wide spread and their beneficiaries are so disorganized and inarticulate that they do not make any perceptible difference. It must be conceded that there are adverse consequences of these perceptions held by the domestic constituents. Private sector investment and consumption spending will not resume until businesses and households change their perceptions and regain confidence. Unfortunately, exogenous factors such as severe drought and consequential slump in agriculture production, high international prices of petroleum products and decline in unit prices of textile exports have made the situation even more difficult. A less than 3 per cent rise in GDP is hardly inspiring to regain confidence in the economy. How can the perceptions of these two groups be ever reconciled or would they continue to differ? No Government – Civilian or Military – can afford to ignore the genuine aspirations of its domestic constituents. But there is a transition period before which the new goal of shared and equitable growth can be achieved. In a society where sifarish, connections and exchange of favors have propelled the governance of the country for such long time it is very difficult to change the mind set or the prevailing value system. Equally difficult is to convince that any ruling class can take decisions which are not based on their personal interests. For the next three to five years, Pakistan has to stay the course, continue on the reform path it has set for itself steadfastly and bring about fundamental structural changes in our governance and institutional structure. This hard struggle is the only sure way to reduce our vulnerabilities and dependence on the IMF. Why can’t this be done now or earlier? Because the resource generation capacity of the economy is still and will remain below the debt servicing obligations for several years. Once we have attained the stage where our fiscal and external accounts are no longer in such a state of chronic imbalances as they are today we will be able to attain our economic sovereignty. This will provide the Government ample fiscal space for increasing development expenditures, expanding infrastructure facilities and thus enabling the private sector to reduce its cost of production and distribution, and most importantly allow public sector to invest in technology, skill development, training and other aspects of high level manpower upgradation which will help our competitiveness in global market place. At the same time, the rules of game for the private sector have to be changed where privileges, protection and pampering of a chosen few should give way to a level playing field for all where work ethic, enterprising behavior and productivity enhancement are rewarded. The community and non-government organizations should also engage along with the local governments in promoting primary education, basic health services, potable water supply and sanitation to the vast majority of the population. This public-private-community partnership will lead Pakistan into the era of self-reliance, economic growth and social stability and poverty alleviation. There are those who argue that alternative solutions which gives primacy to growth should have been adopted. As an economist I am not quite sure as to how this can be done on a sustainable basis. Economic management involves trade offs and choices among various competing demands. Government can, of course, inject a lot of money to give a jump start the economy and create employment throughout the country. This was indeed done until the mid 1990s and what were the results – burgeoning fiscal deficits, increased domestic and foreign borrowing, inefficient and dysfunctional institutions and inability today to service our debts fully. Is this what we want again? We can insulate the consumers of electricity, gas and petroleum by freezing the prices they pay. Again, the utility companies will have no funds to invest in expansion, modernization, maintenance. We will have outages, shortages, shutdowns at a much larger scale hurting our agriculture and industry. Alternatively, the Government may have to provide subsidies out of the budget. But given the fact that it can hardly meet its current expenditures out of its revenues, it will have to borrow and increase our indebtedness. Is this a good choice for the country? To sum up, the differing perceptions have arisen due to mismatch in timings of reforms undertaken by the present government. The international financial community is pleased that we have undertaken within a short span of time all those tough measures which were committed by the previous governments but were never implemented. Thus our credibility in their eyes has been restored. But the impact of these measures in an environment of stagnant incomes, declining investment for past several years and limited fiscal space was quite severe on domestic economic agents. This has been further exacerbated by some other fundamental structural reforms which have hurt the interests of the traditional rent-seeking classes in the country. The benefits from these reforms will accrue after a lapse of at least 3-5 years. The losers are visible right now but the gainers will emerge in distant future. The perception of the people and press in Pakistan should, therefore, be viewed in this context. | state bank of pakistan | 2,001 | 7 |
Address delivered by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 18th Annual General Conference on Pakistan Society of Development Economics held at Islamabad on 15 January 2003. | Ishrat Husain: Regulatory strategy of the State Bank of Pakistan Address delivered by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 18th Annual General Conference on Pakistan Society of Development Economics held at Islamabad on 15 January 2003. * * * The two major determinants of functional efficiency of financial system are market structure and the regulatory framework and the challenge for any Central Bank is to strike a right balance between the two. Over regulation can stifle financial innovation while an imperfect market structure can impair the efficiency of the system and penalize the consumer interests. Market structure consists of the degree of competition, and interlocking control between financial institutions and business enterprises as well as the degree of specialization within the financial sector. It is influenced by the internal organization and management of financial intermediation. These in turn, are affected by the degree of government ownership and control. The regulatory framework includes regulations imposed both for monetary policy as well as prudential purposes. An adequate framework can help ensure financial stability by reducing the probability of bank failures and the costs of those that do occur. Regulation is about changing the behavior of regulated institutions because unconstrained market behavior tends to produce socially sub-optimum outcomes. The regulator therefore has the responsibility to move the system towards a socially optimum outcome. The strategy followed by the State Bank of Pakistan aims at improving the market structure and competition on one hand and optimizing the overall regulatory regime on the other. The steps taken to stimulate completion and improve the market structure consist of lowering entry barriers, abolishing interest rate ceilings, privatizating government owned banks, promoting mergers and consolidation of financial institutions, enlarging the economies of scope for banks, liberalizing bank branching policy, and removing directed credit regulations. The so called dichotomy between regulation and market mechanism is in practice a false one. There needs to be appropriate internal incentives for management to behave in appropriate ways and the regulator has a role in ensuring that internal incentives are compatible with the regulatory objectives. Market imperfections and failures, information asymmetries, externalities and moral hazards associated with safety net arrangements make it difficult in developing countries for incentive structures within financial institutions to be aligned with regulatory objectives. Let us first define as to what the regulatory objectives of the State Bank of Pakistan are. These can be summarized as: (a) Avoiding adverse selection in bank entry by ensuring that individuals likely to misuse banks do not get bank licenses. For this purpose, the owners are required to provide equity capital of some considerable magnitude, cross ownerships are discouraged and character stipulations for bank ownership are laid down. (b) Aligning the incentives of bank owners with those of depositors by making sure that the bank owners stand to make substantial losses in the event of insolvency. Capital adequacy requirements and loan loss provisions fulfill this role. (c) Preventing excessive risk taking more generally. This means limiting bank holdings of excessively risky assets, preventing lending to related parties, requiring diversification and making sure that banks have appropriate credit appraisal, evaluation and monitoring procedures in place. Components of regulatory regime What are the various components of the regulatory regime which can help achieve these regulatory objectives and what is the State Bank doing in respect to each of these components. There are at least seven core components which form the basis of the regulatory regime in Pakistan. First, prudential regulations have been established by the SBP, disseminated widely and act as the ground rules and guidelines for the financial industry. Mostly these regulations pertain to capital adequacy, quality of assets, classification and provisioning of loan losses, liquidity requirements, risk concentration and management etc. Basel I capital ratios are enforced strictly and action taken against those falling short. Although the stock of non-performing loans is being tackled through a variety of measures the flow of loans does not suffer from this problem. Since 1997, only 5 percent of loans disbursed have become non-performing indicating an overall improvement in the quality of banking assets in Pakistan. Second, once the regulations have been put in place the SBP monitors and supervises the banks. This is done through an integrated approach of on-site inspection, off-site surveillance and market information. Supervision techniques have been aligned with the best practices of other Central banks in the world and the CAMELs rating system is used to assess the health of the banks. A banking desk responsible for monitoring a few banks continuously reviews the available data and flags early warning in cases where prompt corrective actions are required. The Enforcement Unit then moves in and gets the remedial action implemented. Third, the incentive structures faced by regulatory agencies, consumers and banks have to be aligned to the maximum extent feasible. Mark-to-market valuation of assets, forced sale value of collaterals, greater and regular disclosure of financial information, mandatory credit ratings of the banks are some of the tools, which have been used for this purpose. Consultation between regulators and regulated institutions ensures consistency between external regulations and internal risk control procedures. The SBP has developed a regular consultative mechanism whereby the views and comments of Pakistan Banking Association are sought and incorporated in the draft policies, circulars and regulations. Fourth, the role of market discipline and monitoring has to be enhanced. Privatization of nationalized commercial banks (NCBs) is largely motivated by this particular consideration because these banks have ill-defined incentive structure and are not subject to the normal disciplinary pressures of the market. Their owners - the Government - do not systematically monitor their behavior and the market cannot exercise the corporate controls which, through the threat of removing incumbent management, is a discipline on managers to be efficient and not endanger the solvency of their banks. It is quite well known that management of the NCBs have faced pressures to make loans on political considerations. Interference by the ministers and bureaucrats in the operations of such banks and the unwitting encouragement of bad banking practices can itself become a powerful ingredient in bank distress. After Habib Bank’s impending privatization, 80 percent of the banking assets in Pakistan will be owned and managed by the private sector and thus become subject to market discipline and monitoring. It is for this reason that 20 percent of the shares of National Bank of Pakistan have been off-loaded for flotation at the Karachi Stock Exchange. The feedback from the market in terms of its share prices will act as a powerful disciplining tool to the management and the board. Fifth, intervention arrangements in the event of compliance failures ought to be credible and biting as they provide a deterrent against errant behavior by the bank managers, owners and directors. In the last three years, the SBP has cancelled the licence of one of the commercial banks - the first of its kind, has changed the ownership of two banks, allowed mergers and amalgamation of half a dozen banks, forced change in boards of directors and debarred a few directors and managers from banking profession. These punitive measures and weeding out process have helped strengthen the overall health and soundness of financial system in Pakistan. Sixth, the role of internal corporate governance arrangements within financial institutions has been defined, reinforced and closely monitored. In addition to the code of corporate governance prescribed by the SECP the banks have been provided explicitly defined criteria for the selection of Chief Executives and Directors. Family representation on the Boards has been limited to 25 percent and the remaining directors have to be drawn from non-family members. External audit firms have been screened, categorized and rated for purpose of auditing the financial institutions. Two top firms were blacklisted and this sent a strong message to the audit community for upgrading the quality of their audit. Conflict of interest rules have been explicitly laid down barring those having any potential conflict from becoming involved in the management and oversight of banks. Seventh, the accountability arrangements applied to the State Bank of Pakistan have been strengthened to minimize the potential dangers arising from its monopolist regulator position. An independent Board of Directors consisting of seven eminent persons of repute and integrity provide the overall oversight on the affairs of the SBP and its management. Greater disclosure and transparency have been introduced and International accounting standards with a new Audit Charter have been put in place. The financial reports and accounts of the SBP are audited both by the Auditor General of Pakistan and firms of established external auditors. A Monetary and Fiscal Coordination Board headed by the Minister of Finance reviews the monetary and exchange rate policies of the SBP. Quarterly and Annual Reports on the state of economy and the affairs of SBP are regularly submitted to the Parliament which, at times, holds hearings and asks questions on important issues. The IMF has made an assessment of the SBP’s corporate governance and Internal Controls under its safeguards clause and found them in consonance with international practices. We also observe various International Codes and standards on Corporate governance, Auditing and Accounting. Capacity building within the SBP Most importantly, the State Bank has to have a strong capacity and core competencies to implement the above strategy. To this end, a major restructuring and reform program is under implementation for the last several years. The largest automation project in Pakistan today is the Technology upgradation program at the S.B.P. It will cost more than $24 million at its completion but equip the SBP with automated banking solutions, enterprise resource planning tools, data warehouse and connectivity and net working among its field offices and the headquarters. SBP will be able to access real on-time information on the banking institutions and not wait for three months to receive the reports. The ability of the SBP to take timely corrective and remedial actions will thus be enhanced. The most critical asset of a regulating institution is its human resource base. The SBP is undertaking massive retraining of its professional staff in technical skills and recruiting talented young men and women directly from the market through a rigorous merit based competitive process at all levels. For example, 11000 applications were received for entry level Banking Officers’ positions. About 2600 qualified at the written exam and 50 were finally selected after interview. Those selected receive a 9 months extensive training at NIBAF and 6 months on-the-job training in commercial banks and various departments of the SBP. Middle level managers have also been recruited through the same competitive process. We have hired more than 20 Chartered and Management Accountants, more than 100 high level IT Professionals including three from Wall Street to fill in our skill gap. Higher educational opportunities are available to staff to improve their academic qualifications or upgrade their professional skills. Foreign training and attachment with Central Banks in England, Australia, Malaysia, Singapore and Federal Reserve keep the staff abreast with the recent developments and techniques of central banking. The SBP provides full scholarships to young Pakistanis who can obtain admission to Ph.D. program in Economics and Finance at any of the top 20 universities of the world. The Bank has also set up endowed chairs at Economics Departments of five Pakistani universities to upgrade the quality of Economics Education. Another element of SBP reform program is business process re-engineering under which the existing procedures, processes and reporting requirement are being streamlined, simplified and redundancies eliminated. With the commissioning of the data warehouse project the banks will no longer need to earmark dozens of their employees to fill in the various forms and reports required by the SBP. Delegation of authority has empowered officials at the various rungs of hierarchy to take decisions and dispose of the cases. As part of its organizational restructuring the SBP has set up an independent subsidiary - the Banking Services Corporation (BSC) to handle all retail banking functions. All the 16 field offices have been transferred to the control of the BSC which is run by a Managing Director. This arrangement has allowed the Governor and Senior Management to concentrate their attention and energies on the core central banking functions. Despite the above achievements we are fully aware that there is no room for complacency. The world around us is changing rapidly and we have to keep up with these changes and adapt ourselves constantly to the new requirements. A dynamic organization cannot afford to stand still we will be faced with unforeseen events. But if the SBP is transformed into a flexible, agile and competent organization the chances of meeting the new challenges successfully will be high. We have still a long and arduous path to travel. | state bank of pakistan | 2,003 | 1 |
Convocation address by Dr Ishrat Husain, Governor of the State Bank of Pakistan, at the Institute of Business Management, Bahauddin Zakariya University, Multan, 4 February 2003. | Ishrat Husain: The role of the private sector and government in Pakistan’s economic development Convocation address by Dr Ishrat Husain, Governor of the State Bank of Pakistan, at the Institute of Business Management, Bahauddin Zakariya University, Multan, 4 February 2003. * * * Mr. Vice Chancellor, Dean of Faculty, Director IBM, Distinguished guests, Faculty members and dear students, I would like to thank the Vice Chancellor, Faculty of the Dean and Director of the Institute of Business Management for inviting me this evening at their graduation ceremony. I would extend my sincere felicitations to all those who will receive their M.B.A. degrees today and also to their parents. As an employer who recruits about 50 candidates from among several thousand applicants through a competitive process every year I am quite sure to see some of you in the State Bank of Pakistan in near future. We already have more than 50 graduates from this University and the Institute and they have demonstrated high standards of integrity and professional competence. As your Director has pointed out some of the able graduates of this Institute are unable to cross the threshold of 70 percent marks at the M.B.A. examination used by the S.B.P. to screen the candidates because of your rigorous grading. But you must realize that we receive 11,000 applications every year and it is not possible for us to test all of them. Hence we have to adopt a certain cut-off point. We would examine other possibilities such as ranking of the Universities and Business Institutes to adopt alternative system of screening. Today, as it is a tradition on such occasions I am going to address on an important topic i.e. the role of private sector in the economic development of Pakistan. Most of you will end up in this sector and I would therefore like to give you some advice – as to what role you should play. Pakistan has made considerable progress during the last 55 years since its independence. A country with about 30 million people in 1947 was heavily dependent on imported food, imported cloth and imported energy to sustain itself. There were serious doubts raised at that time about the country’s economic survival. Today, in 2003 Pakistan one of the largest countries in the world with a population 145 million is not only self sufficient in food grains, meat, milk and poultry but also exports wheat and rice. Pakistan does not only clothe its population but is one of the leading exporters of textiles in the world. More than 50 percent of the energy needs of the country are met from local reserves of natural gas and hydel power. Pakistan was one of the few developing countries that achieved an impressive economic growth of 6 percent annually for over four decades and tripled its per capita income. Incidence of poverty had declined from almost 50 percent of the population to less than 20 percent by the late eighties although it has resurged to 34 percent by the late nineties. An average Pakistani today has higher life expectancy, enjoys higher food per capita and consumes more calories than his father’s generation. We have built large dams such as Tarbela and Mangla, motorways, super highways and modern ports. We are better connected to the rest of the world through fast means of telecommunications, internet, cable and satellite channels. Despite these spectacular achievements for which we should thank Almighty Allah for His blessings we are still a poor and underdeveloped country and the benefits of this progress have not been shared universally. Too many people have been left out: One-third of the population still lives on about Rs.60 per day, one-half of the population is illiterate with extremely low female literacy rates in the rural areas, a large segment of population does not have access to safe water for drinking and personal hygiene; disease, malnutrition, infant and maternal mortality rates are still quite high, population is growing more rapidly than other countries in the region and income and regional inequalities are rising. In essence, we have lagged behind in our social and human development indicators and our performance has been much below our potential. This lack of social progress has also created problem of social cohesion. This therefore, brings me to a series of questions: How can we catch up with the rest of the world and start improving on our social and human development indicators? What can we learn from our own historical experience and the mistakes we have made in the last? What can we extract from the success stories of other developing countries and apply them to Pakistan? Although there is always a lack of unanimity among economists about the prescriptive aspects of development let me venture to share my own thoughts with you today. The last five decades of development experience have taught us clearly that the respectively roles of the Government and private sector should be clearly delineated, defined and put into practice. Those who think in terms of dichotomy between market and government are sadly mistaken. Government has the primary responsibility to (a) provide security – internal and external to its citizens (b) maintain law and order (c) dispense quick and fair justice and enforce contracts (d) build physical infrastructure (e) provide basic social services such as education, health and water supply (f) implement good governance (g) maintain macro economic stability, (h) regulate the markets where there are monopolies, externalities, economies of scale (i) build social safety nets for the poorest and vulnerable segments of the population. Markets need government and government needs markets. The state is not a substitute for the market but a critical complement and that Government action is essential to ensure that development process is inclusive and the benefits of growth are not pre-empted by a small class of elite in the country. Private sector, on the other hand, has the capacity and ability to produce, distribute and trade goods and services in the economy efficiently and at least cost. There is hardly any justification for the Government or the bureaucrats to be running businesses. The record of public sector enterprises and nationalized commercial banks in Pakistan for the last 30 years speaks volume of the damage that has been inflicted on our economy. To just give you one example, if 50 percent of the allocation of Rs.100 billion which was made last year to bear the losses of the public sector corporations and enterprises was diverted to education, health and other social services, imagine how much it would have helped the common man in this country. Profit making is not dirty provided it is made through competition, hard work, entrepreneurship, in an environment where there is a level playing field for all economic sectors, where the rules of game are applicable to every one, where implementation of policies and regulations take place across board, where taxes and other government dues are paid on time and loans are repaid without any write off. Under such circumstances private enterprises generate production, employment, opportunities and create income in the economy. This will only happen when they make profits and invest those profits in expansion of their existing businesses or creating new businesses. Economic growth takes place through this investment, incomes rise and the countries get prosperous. Those of you who still believe in old socialistic ways of thinking in which profits were condemned as socially exploitative should shed this thinking as this is flawed and empirically incorrect. Privatization, Deregulation and liberalization are the key instruments through which private sector can flourish and thrive. Those of you who believe that Governments should create jobs for all educated youth are sadly mistaken as it only burdens the Government budget with artificially inflated and unsustainable, wasteful expenditures and results in larger fiscal deficits. These deficits can only be financed through borrowing or printing currency. If the former route is taken then we are caught in a debt trap and if the latter route is adopted we are in any inflationary bind. Both of these routes lead us to a path of disaster and instability for the economy. You must realize that the private sector employs 90 percent of the labor force in Pakistan and Public sector hardly 10 percent. Private sector is thus not only the main engine of growth but also the main provider of economic opportunity and activity. 60 percent of the country’s labor force is employed in agriculture through tenancy, self-employment, owner-cultivated land or farm and non-farm labor. 80 percent of the non-agricultural labor force depends on small and medium enterprises including small shops, hawkers, thela wallas, hotels and restaurants, social and personal services, construction, transport services. Only 20 percent of non-agricultural labor force is employed in organized sectors in Government, manufacturing, electricity, gas and water, financial institutions and other services. Thus private sector growth, particularly of smaller firms and farms, is vital to both employment generation as well as reduction of poverty in Pakistan. How can the private sector, particularly small and medium enterprises and agriculture be encouraged to expand, invest and generate employment? First and foremost, good economic governance must prevail and be practiced. Unless there is transparency, predictability, consistency, rule of law and uniform application of law, private sector would not be forthcoming as the uncertainties in economic governance do not allow them to make accurate calculations of their costs and benefits. Bureaucratic harassment, corruption and extortion are all damaging to the investment climate as they impose barriers to entry, add to operating costs and create uncertainty once the firm is established. Second, there should be sound economic policies in place – fiscal discipline, market determined exchange and interest rates, lower trade barriers and tariffs, reasonable taxation levels, openness to trade, and well functioning financial system. In absence of sound, clear and consistent economic policies the private entrepreneur will always be reluctant to part with his capital. Unsustainable fiscal policies crowd out private sector and make it more difficult for them to access credit from financial system at reasonable price. Third, changes in political regime should not create abrupt and radical shifts in the underlying rules of game. Contracts and projects approved by the preceding governments should be scrupulously honored by the subsequent governments without any interruption or hiatus. Commercial disputes or allegations of corruption should be tackled according to the due process of law and arbitration procedures. Whims and caprices of individuals should not be allowed to play havoc as they not only undermine the confidence of existing firms but also deter new investors from engaging in production. Fourth, the Government has to ensure that physical infrastructure and adequately trained and educated labor force are available in sufficient quantities so that the private firms derive benefits from reduced cost of production. If electricity or water charges are exorbitant, transportation costs are overbearing or the educational level of labor is quite low the returns to prospective investment are considerably reduced and the investor is unwilling to commit his funds. Fifth, adequate credit availability from financial institutions to agriculture and SME sectors has been one of the major constraints for growth. The SBP has taken measures recently to accelerate credit delivery to these sectors by involving commercial banks on a large scale and giving them incentives. Prudential regulations are also being revised to remove the hurdles in the way of credit delivery to small and medium enterprises. The multiplier effect on the economy through higher credit and enlarged access to the economic actors in these two fields is likely to be quite large and sustainable. As both these sectors are labor intensive they would generate a greater demand for labor absorption. China was able to reduce rural poverty from 250 million people in 1978 to about 34 million in 1999 by focusing on agriculture and Town and Village enterprises (TVEs). There is no reason as to why we cannot succeed in achieving the same results over the coming decade. But, in facilitating the private sector to play the role we have outlined above I come back to the need for investing in education and training at all levels – higher, secondary, vocational and primary. It is not only the quantity that matters but also the quality of education. At this point I must commend the faculty and students of Bahauddin Zakaria University for maintaining high standards of education. I am confident that the students graduating from this University will be highly competitive and earn the respect of employers. These days, the reputation of institutions matters a lot and this reputation can not be acquired overnight. It is also not the buildings and infrastructure which contribute to this reputation but the curriculum, instruction, assimilation of knowledge, and its application to day to day life, problem solving approach which distinguishes one institution from the other. It is also easy to lose reputation although more difficult to acquire it. Therefore I will appeal to the faculty as well as students of this august university not to become complacent but remain on their toes. They should continually try to excel in their respective fields, maintain high standards and traditions of knowledge seeking and discourage the bad habits of memorizing the material, cheating at the exams, skipping the classes, selecting only the material which is likely to appear at the exam. Those of you who devote themselves to continuous and inquisitive learning will come ahead in life. No amount of sifarish or nepotism or connections with the right people will help you in the long run. It is only the innate qualities of hard work and systematic learning which will keep you in good stead. I wish all those who are graduating today the best of luck in their careers. | state bank of pakistan | 2,003 | 2 |
Closing remarks by Dr Ishrat Husain, Governor of the State Bank of Pakistan, at The Daily Times Seminar on Pakistan Economic Horizons, 2003 and beyond, held at Karachi, 31 January 2003. | Ishrat Husain: Pakistan’s economic horizons, 2003 and beyond Closing remarks by Dr Ishrat Husain, Governor of the State Bank of Pakistan, at The Daily Times Seminar on Pakistan Economic Horizons, 2003 and beyond, held at Karachi, 31 January 2003. * * * I would like to emphasize that we are now entering the next phase of our economic revival strategy aimed at reaching a trajectory of 6 percent growth rate by 2004-05. This country had witnessed growth rates of 6 percent over a long period of time and as a consequence poverty was reduced from 40 percent to 18 percent in 1988-89. Thus it is imperative that we go back to that growth path of 6 percent to be able to make a dent in unemployment and poverty. Why do we feel that we can attain this target rate within the next two years and why has the growth record been so poor during the last three years. Let me address the second question first. The period 1999-2000 was devoted to get the country out of the debt trap and move towards a path of economic self reliance and economic sovereignty. In 1999, Pakistani economy was already under the shell shock of the May 1998 events, the freezing of foreign currency accounts, nuclear sanctions, suspension of bilateral and multilateral assistance. The take over of the Government by the Military in October 1999 further made the problems worse as additional sanctions were imposed for suspension of democracy. The attitudes of the main donors and multilateral institutions, who used to fill in the gap between our external resource requirements and the availability of external finances from our own resources, became much hardened and harsher. The country’s unencumbered liquid foreign reserves were hardly sufficient to meet the imports of next two to three weeks and we didn’t know as to how we will meet our oil payments or debt servicing tranches. This was a totally unsatisfactory situation and we had to find a durable and long lasting solution for our external debt. The first order of business was therefore to get out of the debt trap. For this to happen, fiscal deficit had to brought down from the level of 7 percent of GDP to 4 or 3 percent by raising revenues and reducing expenditures. The Government’s focus thus was on stabilization. When you have a situation where a patient has heart disease, liver disease and pains, you first have to get things in working order. In 1999-2000, the country’s debt servicing obligations amounted to $ 7.8 billion and there was no way we could repay such huge amount of money out of our foreign exchange earnings. This amounted to 60 to 70 percent of foreign exchange earnings including the SBP purchases from kerb market. We made all possible efforts to ensure that no payments to foreign portfolio investors or foreign companies such as Hubco were stopped so that the country’s credibility which was very low at the time could be restored. Credibility had to improve as we were engaged in public dispute with IPPs and foreign Investors were shying away for this and other reasons. Our worst critics also admit that Pakistan’s standing in international financial markets has improved quite significantly and our sovereign ratings are gradually moving upwards. To improve debt sustainability the following actual cash payments were made by SBP on account of external debt servicing during the last three years. Rs. billion 1999-2000 3.756 2000-2001 5.101 2001-2002 6.327 15.184 These amounts include retirement of $ 4.5 billion of commercial and short term debt and other foreign currency liabilities. These payments were possible because of purchases of workers remittances through the kerb market in the first two years and heavy inflow since September 11, 2001. We were able to manage debt servicing in an orderly manner because the following amounts due on debt servicing to Paris Club and other creditors of Rs.9.1 billion were rescheduled. Rs. billion 1999-2000 4.081 2000-2001 2.795 2001-2002 2.243 9.119 This strategy of debt reprofiling of Paris Club debt over a period of next 38 years, early and pre-payments of commercial and short term debt and substitution of soft term loans by international financial institutions for hard term loans has gradually led to lowering of our external debt indicators. We are committed to retiring non-concessional loans of World Bank, Asian Development Bank and IMF before time. The new loans from these institutions are all concessional in nature – zero interest rate, 10 year grace period and 30 years repayment. If the current trends persist we expect that external debt servicing ratio which has already come down to 40 percent will further decline to 25 percent of our foreign exchange earnings. This is a level where we will feel comfortable, as we will be able to meet these obligations from the country’s own resources without recourse to exceptional balance of payments financing from international financial institutions. I must also submit that the period of stabilization has taken longer than we had originally envisaged. But this is how the real world works. Man proposes and God disposes. If the country did not have to face four different shocks the stabilization would have been completed in two years instead of three. The prolonged drought for last three years dwindled irrigation water supplies and affected our main economic sector i.e. agriculture. September 11, 2001 made Pakistan the front line state in the war against terrorism and inflicted a lot of damage to the economy including cancellation of export orders. Border tensions with India and mobilization of troops raised our defence expenditure which the Government had frozen in nominal terms since 1999-2000. Domestic violence against the foreigners such as bomb blasts in Karachi and Islamabad did deter the foreign businessmen from visiting Pakistan and intensifying economic relations. Had these events not taken place the first phase of stabilization could have been completed at least a year earlier. We are now entering the second phase of economic revival i.e. stimulating growth and employment in the country. All indicators so far suggest that there is a strong likelihood that GDP growth this year (2002-03) will be 4.5 percent. We believe that if all things remain constant and no unforeseen adverse event takes place the growth rate in 2003-04 will range between 5 and 5.5 percent and hit the target of 6 percent in 2004-05. What are the underlying assumptions, parameters and factors that lie behind these projections? First, we think that the effects of drought will whither away and irrigation water supplies for both rabi and kharif seasons will resume to their normal levels. Water conservation techniques adopted by the farmers in the hard times will increase overall agricultural productivity and agriculture value added will increase at the historical rate of 4.5 percent. Livestock will continue to expand its share within sectoral value added. Second, barring a fierce and prolonged war in Iraq, global recession will begin to dissipate and all the three main blocks – US, Euro area and Japan – will show buoyancy. Increased demand for goods and services from these blocks will induce further exports from Pakistan. Third, as a result of lower debt servicing costs and higher tax revenue collections the size of public sector development expenditure will rise from Rs.130 billion to Rs.150 billion in 2003-04 and Rs.180 billion in 2004-05. This will help give a spur to private sector investment also. Tax revenues are projected to increase from Rs.460 billion this year to Rs.560 billion in 2004-05. You may recall that tax revenues have already risen by Rs.100 billion or 33 percent in last three years. The projected increase of 21 percent in the next two years is therefore very much in line with the past performance. Fourth, as all of you know the large investment in balancing, modernization and replacement in textile industry during last few years will start paying dividends in form of better quality and higher value added exports. The share of value added items in total textile exports has already exceeded 60 percent and it is postulated that this share will be almost 70 percent by 2004-05. Fifth, monetary and credit policies and banking sector reforms implemented so far will show some results in form of expansion in credit to housing, consumer financing, SME, agriculture sectors. As these sectors have strong backward and forward linkages the multiplier effects of aggregate demand expansion will reinforce growth impulses in the economy and induce supply and production response. Sixth, the devolution of powers to local governments to deliver essential services at the grass root level will improve the effectiveness of development spending. As most projects will be driven by the demands of the community rather than imposed unilaterally by central planners, it is expected that waste and leakages will be kept at a minimum level. Seventh, one of the major drivers of cost in the economy is electricity tariffs. Both the households as well as industrial units are facing unviable power tariffs. With the commissioning of Ghazi-Brotha project, the thermal-hydel mix will change. As more thermal power is switched to natural gas from furnace oil, losses in transmission and distribution are curtailed and financial charges of IPPs are cut down by prepayment of expensive debt power tariffs should come down and benefit the consumers. Finally, the standards of governance set by the government in last three years should be sustained and further steps are taken to minimize corruption and leakages in financial transactions. Merit remains the basis for recruitment and promotion in public service and nepotism and favoritism are no longer the norms. As you can see from the above that in this scenario we haven’t still relied on private sector investment as the engine of growth. Public sector investment will go up fro 4.7 percent of GDP to 6.2 percent in 2004-05 while private sector investment will remain at 9.4 percent – not much different from the current level of 9.2 percent. Let me conclude by saying that if the existing policies continue, standards of good governance are not weakened, institutional reforms and restructuring are implemented and the country does not face any setbacks in the future, Pakistan would be able to attain a 6 percent growth path and thus reduce poverty and unemployment. There is no doubt in my mind that this is a realistic goal to achieve – something we have done in the past for four decades. But this requires hard work, dedication and honest dealings by every Pakistani whether in the private or public sector. | state bank of pakistan | 2,003 | 2 |
Remarks delivered by Dr Ishrat Husain, Governor of the State Bank of Pakistan, as Chief Guest at the launching ceremony of the Financial Sector strengthening program of the Swiss Agency for Development and Cooperation, Islamabad, 26 February 2003. | Ishrat Husain: Strategy for development of Microfinance in Pakistan Remarks delivered by Dr Ishrat Husain, Governor of the State Bank of Pakistan, as Chief Guest at the launching ceremony of the Financial Sector strengthening program of the Swiss Agency for Development and Cooperation, Islamabad, 26 February 2003. * * * I would like to commend the Swiss Government and the Swiss Agency for Development and Cooperation (SDC) for launching the Financial Sector Strengthening Program (FSSP). I believe that the lack of adequate human and institutional capacity, shortage of local expertise and weak coordination among the various stakeholders are indeed the factors inhibiting the growth of microfinance sector in Pakistan. The initiative taken by SDC to overcome these constraints is therefore both timely and appropriate. But I do expect that once the FSSP has successfully demonstrated the business model for capacity building it will be adapted and internalized by our own network without any further recourse to external donors. The transfer of technology and its adaptation to our own circumstances is the most effective way to utilize external resources. At the outset let me place microfinance in the overall context of the efforts the State Bank is making to expand the outreach of financial services and help the goal of poverty alleviation in the country. The SBP is, in addition to microfinance, encouraging the provision of credit to small and medium entrepreneurs through a newly set up SME Bank, to small farmers through a newly restructured Zarai Taraqqati Bank Ltd and Cooperative Banks, to women entrepreneurs, individuals and small firms through the First Women’s Bank. These institutions will work as the protype in developing the methodology and expertise in these areas and then this protype will be replicated through the mainstream financial institutions in the country. This is the only durable basis through which the poor can benefit from financial sector of the country. Pakistan has adopted a sectoral approach to microfinance in Pakistan and assimilated learnings from the experience of other developing countries which have been active in this area for decades. Microfinance is still in its infancy and has a long way to go. Some momentum has been built up during the last three years as bulk of the disbursements has taken place since June, 1999. Although there has been a big spurt in these three years the numbers of the beneficiaries and the volume of credit disbursed is still quite low in relation to the needs and demand of the intended target group. We have therefore decided to adopt a holistic, “let thousand flowers bloom”, and inclusive strategy for promotion and spread of microfinance in Pakistan. This strategy consists of the following six elements. First, there is a strong political commitment towards supporting microfinance as an integral tool of poverty alleviation program. President of Pakistan has taken keen personal interest in the nurturing and growth of this sector and has directed the Ministry of Finance to monitor and track the microfinance sector on a regular basis. The Government has invited the World Bank, ADB and other bilateral donors to actively assist us in this sector. Consequently the enabling environment for development and growth of MF is highly conducive. The constraints, snags and problems faced during the implementation of the program are removed in consultation and full involvement of the stakeholders. Second, the program involves multiple actors and institutions - community organizations, NGOs, public sector, private sector, Rural Support programs - in the delivery of microfinance. The extent of poverty prevailing in Pakistan requires ‘all hands - on the deck’ approach rather than and exclusive monopoly of the Government or the public sector as has been the case in the past. Khushali Bank is owned by several leading financial institutions - private, public and foreign - rather than by the Government of Pakistan. This has allowed it to function in a professional manner. Third, the complementarities between microfinance and other elements of poverty alleviation such as Investment, Infrastructure, Social services and Capacity building are clearly recognized and built in the program. Income generation by the poor cannot take place only through availability of credit if there is no infrastructure, or markets for selling their produce. Similarly without building the knowledge base and enlarging capacity of the poor there won’t be any scope for sustainable microfinance. Fourth, the government is experimenting with a variety of institutional models for delivery mechanisms and outreach to the poor. For example, we have a wholesale organization such as PPAF which is successfully disbursing a $ 100 million line of credit provided by the World Bank. We have Khushali Bank which is a retail bank and has already reached out to 100,000 customers and is targeted at 700,000 by 2007. Then there is First Mcirofinance Bank established in the private sector which is expanding its branch network throughout the country. We have integrated program vehicles such as the NRSP, PRSP etc. which combine Microcredit with other services. There are several single product Microfinance NGOs such as Kashif Foundation in Lahore. Two commercial banks are also providing lines of credit for microfinance. Leasing companies have also begun to take some interest and two of them are already engaged in the sector. In addition there are several self standing donor supported projects delivering microfinance. We don’t know as to which particular delivery mechanism will be effective and that is why there is a need to experiment with plurality and diversity. Fifth, an innovative feature of the Microfinance Sector Development is that as the poor segments of the population are much more prone and vulnerable to shocks they need to be protected. Thus a bad harvest or drought or strikes in the cities or violence completely wipe out the earning capacity of the poor and disable them from repaying their credit obligations on time. As labor is their only asset and the returns on labor are disrupted for no fault of theirs a risk mitigation mechanism had to be created to insulate the poor borrowers from these unforeseen hazards. A Risk Mitigation and Deposit Protection Fund has been created to provide protection to the MFIs borrowers and depositors. They can seek recourse to this fund under adverse circumstances beyond their control. Sixth, the regulatory regime adopted by the SBP for Microfinance sector is that of a facilitator, guide and problem solver. We do not prescribe for MFIs the same onerous regulations which prevail for other financial institutions. We have a light regulatory oversight and are learning together with the practitioners and adopting ourselves to the changing circumstances. We have a Consultative Group drawn from the representatives of stakeholders who guide us in the development of our regulations and prudential norms. To conclude, the strategy for microfinance development will undergo continuous review and modification to make it responsive to the needs of the poor. The government, State Bank, NGOs and all other MF practitioners have to work together to make this strategy work and accelerate the speed with which we can reach out to the potential beneficiaries. On the part of the SBP I can assure you our full commitment and support to this strategy. We look forward to working together with you in these endeavors. | state bank of pakistan | 2,003 | 3 |
Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Conference on Islamization and the Pakistani Economy, Washington DC, 27 January 2004. | Ishrat Husain: Economy of Pakistan - past, present and future Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Conference on Islamization and the Pakistani Economy, Washington DC, 27 January 2004. * * * In this shrinking global village internet chats, cable TV, talk shows and transmissions through satellite dishes have made perceptions more powerful than realities in influencing public opinion. There is a widely held perception in Pakistan - right or wrong - that the popular American view of the U.S.S.R. as an evil empire and communism as a threat to economic and social stability of the world is beginning to resonate itself with Islam replacing communism and Pakistan and other Muslim countries, standing in for the USSR. Those who hold this perception point out, as an example, to the recent Council of Foreign Relations Asia Society Task Force Report which aptly sums up the popular American view about Pakistan in the following sentence: “Pakistan presents one of the most complex and difficult challenges facing US diplomacy. Its political instability, entrenched Islamist extremism, economic and social weaknesses and dangerous hostility towards India have cast dark shadows over this nuclear-armed nation”. It is in this context that the Woodrow Wilson Center deserves our commendation for organizing this Conference to explore in depth one of the elements of this newly emerging conventional wisdom about Islam and Pakistan - although each one of the components of the above statement deserves further analysis and discourse to sift out the facts from myths. I hope that the candid discussion today will enlighten many of us, clarify a number of issues and debunk some of the popular myths surrounding Islam and Pakistan’s economic direction. I have chosen to focus my remarks today on the one aspect of Pakistan and Islam that is, in my view, hardly discussed, least known but creates a lot of jitters in the U.S. This issue has received increased importance since the elections of October 2002 when an alliance of religious parties won power in the province of NWFP. I propose to walk you through the past and current trends of Pakistani economy, sketch the future direction and offer my own assessment of how the adoption of an Islamic economy, if it indeed happens, will affect Pakistan’s future. This paper is divided into six sections. The first section deals with the past achievements and failures of Pakistan’s economy. The second section presents a synopsis of economic performance during 1999-2003 - a period of intensive restructuring and reforms of the economy. Section III distils the policy lessons learnt from the historical and most recent experience of Pakistan’s economic management. Section IV attempts to lay down the contours of the future direction of Pakistan’s economy based on the lessons learnt and development experience gained from in-country and crosscountry record. Section V assesses as to how the attempts to introduce Islamic economic model in the country, if successful, will impact upon this future direction. The final section provides insights into the economic prospects of Pakistan in the medium term. Section I Past achievements and failures: Pakistan was one of the few developing countries that had achieved an average growth rate of over 5 percent over a four decade period ending 1988-89. Consequently, the incidence of poverty had declined from 40 percent to 18 percent by the end of the 1980s. Table I lays down the main economic and social indicators in 1947 and compare them with 2003. The overall picture that emerges from a dispassionate examination of these indicators is that of a country having made significant economic achievements but a disappointing record of social development. The salient features of Pakistan’s economic history are: • A Country with 30 million people in 1947 couldn’t feed itself and had to import all its food requirements from abroad. In 2002, the farmers of Pakistan were not only able to fulfill the domestic needs of wheat, rice, sugar, milk of 145 million people at a much higher per capita consumption level, but also exported wheat and rice to the rest of the world. • An average Pakistani earns about $500 in 2003 compared to less than $100 in 1947. In US current Dollar terms the per capita income has expanded more than five fold and in constant terms three times. • Agriculture production has risen five times with cotton attaining a level of more than 10 million bales compared to 1 million bales in 1947. Pakistan has emerged as one of the leading world exporter of textiles. • Pakistan hardly had any manufacturing industries in 1947. Five decades later, the manufacturing production index is 12,000 with the base of 100 in 1947. Steel, cement, automobiles, sugar, fertilizer, cloth and vegetable ghee, industrial chemicals, refined petroleum and a variety of other industries manufacture products not only for the domestic market but in many cases for the world market too. • Per capita electricity generation in 2003 was 10,160kwh compared to 100 in 1947. Pakistan’s vast irrigation network of large storage reservoirs and dams, barrages, link canals constructed during the last five decades has enabled the country to double the area under cultivation to 22 million hectares. Tubewell irrigation provides almost one third of additional water to supplement canal irrigation. • The road and highway network in Pakistan spans 250,000 km - more than five times the length inherited in 1947. Modern motorways and super highways and four lane national highways link the entire country along with secondary and tertiary roads. • Natural gas was discovered in the country in the 1950s and has been augmented over time. As of now, almost 26 billion cubic meters of natural gas is generated, transmitted and distributed for industrial, commercial and domestic consumption. • Private consumption standards have kept pace with the rise in income. There are 30 road vehicles for 1000 persons in 2001 relative to only one vehicle for the same number of population in 1947. Phone connections per 1,000 persons have risen to 28.6 from 0.4. TV sets which were nonexistent adorn 26.3 out of every 1,000 houses. These achievements in income, consumption, agriculture and industrial production are extremely impressive and have lifted millions of people out of poverty levels. But these do pale into insignificance when looked against the missed opportunities. The largest setback to the country has been the neglect of human development. Had adult literacy rate been close to 100 instead of close to 50 today, it is my estimate that the per capita income would have reached at least $1000 instead of $500. Pakistan’s manufactured exports in the 1960s were higher than those of Malaysia, Thailand, Philippines and Indonesia. Had investment in educating the population and upgrading the training, skills and health of the labour force been up to the level of East Asian Countries and a policy of openness to world market would have been maintained without any break, Pakistan’s exports would have been at least $100 billion instead of paltry $12 billion. Had the population growth rate been reduced from 3 percent to 2 percent, the problems of congestion and shortages in the level of infrastructure and social services would have been avoided, the poor would have obtained better access to education and health and the incidence of poverty would have been much lower than what it is today. But as if this neglect of human development was not enough, the country slacked in the 1990s and began to slip in growth, exports, revenues, and development spending and got entrapped into deep morass of external and domestic indebtedness. As a result the incidence of poverty rose from 18 percent in 1988-89 to 33 percent by the end of the 1990s. This was due to both fundamental structural and institutional problems as well as to poor governance and frequent changes in political regimes. With short life spans, succeeding governments were hesitant, if not outright unwilling, to reform the rent-seeking activities of the ruling elite- consisting of a small class of politicians, bureaucrats businessmen, feudal landlords and other vested interests and desisted from taking tough unpopular economic decisions to set the economy right. Understandably, they were more preoccupied with the imperatives of retaining political power and making such decisions could have further exposed them to the risk of removal from office. Moreover, the average lifespan of two to three years was clearly inadequate for meaningful policy or institutional change. The external environment was also unfavourable as the inability of successive governments to meet their commitments with international financial institutions led to a serious credibility gap among the donors and intermittent withdrawal of assistance. The event of May 1998, when Pakistan conducted its first nuclear test, and its aftermath led to further economic isolation of Pakistan and a considerable erosion of confidence by domestic and non-resident Pakistanis. Economic sanctions were imposed against Pakistan by the western governments. By the late 1990s Pakistan had entered almost a critical state of paralysis and stagnation in its economy particularly in its external sector. The freezing of foreign currency accounts had resulted in a significant drop in workers’ remittances, export growth was negative, IMF programme and World Bank assistance were suspended, bilateral donors had terminated their aid while debt payments due were in far excess of the liquid foreign exchange resources the country possessed. Pakistan was almost at the brink of default on its external payments. Section II Economic performance 1999-2003: It was at this stage that the military government under General Pervez Musharraf assumed power in October 1999. The initial period was devoted by the economic team of the new government in managing the crisis and making sure that the country avoided default. A comprehensive programme of reform was designed and implemented with vigour and pursued in earnest, so as to put the economy on the path of recovery and revival. The military government did not face the same constraints and compulsions as the politically elected governments. It was therefore better suited to take unpopular decisions such as imposing general sales tax, raising prices of petroleum, utilities and removing subsidies so badly needed to bring about fiscal discipline and reduce the debt burden. The IMF and the World Bank were invited to enter into negotiations on new stand-by and structural adjustment programmes. Although the canvas of reform in Pakistan was vast and corrective action required on a number of fronts, there was a conscious effort to focus on achieving macroeconomic stability, on certain key priority structural reforms and improving economic governance. The structural reforms included privatization, financial sector restructuring, trade liberalization, picking up pace towards deregulation of the economy and generally moving towards a market-led economic regime. A stand-by IMF programme was put in place in November 2000, which was successfully implemented followed by a three-year Poverty Reduction and Growth Facility (PRGP), which will expire in November 2004. What have been the outcomes of the economic reforms undertaken during the past four years? Macroeconomic stability: There has been considerable progress in achieving macroeconomic stability. Strong fiscal adjustment has led to primary budgetary surplus and significant reduction of the fiscal deficits. Current account has turned around from chronic deficit to a surplus of more than 5 percent of GDP, mainly due to renewed export growth and resurgence of workers’ remittances. Monetary aggregates have been contained and inflation rate is below 4 percent. External debt burden has been reduced in absolute terms from $38 to $35 billion and as a proportion of GDP from 62.5% to 46%. The risk of default on external debt, which loomed large on the horizon in 1999 and 2000, was mitigated and the country's capacity to service its restructured debt has considerably improved. Exchange rate has not only stabilized but appreciated during the last two years. Table II shows the changes in the key economic indicators between October 1999 and September 2003. Structural reforms - privatization, deregulation, liberalization: The Musharraf Government actively pursued an aggressive and transparent privatization plan whose thrust was sale of assets in the oil and gas industry as well as in the banking, telecommunications and energy sectors, to strategic investors, with foreign investors encouraged to participate in the privatization process. This plan is being followed by the newly elected government under Prime Minister Jamali. To demonstrate the seriousness of the government in encouraging foreign investment flows in Pakistan; there has been a major, and perceptible liberalization of the foreign exchange regime. Foreign investors can now bring in and take back their capital, remit profits, dividends and fees etc., without any restrictions. Foreign Portfolio Investors (FPI) can also enter and exit the market without any restrictions or prior approvals. In the Karachi Stock Exchange with a market capitalization of $15 billion, over 700 listed companies showed average returns of 15 per cent that were higher than those in most emerging countries. This makes Pakistan an attractive place to invest for foreign portfolio investors. As part of this liberalization, non-residents and residents are allowed to maintain and operate foreign currency deposit accounts, and a market-based exchange rate in the inter-bank market is at work. Allied to this effort, the trade regime has been opened up and the maximum tariff rate has been cut down to 25 per cent with only four slabs and the average tariff rate is down to 14 percent. The financial sector too, has been restructured and opened up to competition. Foreign and domestic private banks currently operating in Pakistan have been able to increase their market share to more than 60 percent of assets and deposits. The interest rate structure has been deregulated and monetary policy uses indirect tools such as open market operations, discount rates etc. Domestic interest rates on lending have dropped to as low as 5 percent from 20 percent substantially reducing financial costs of businesses. Central to the economic reforms process has been a clear progression towards deregulation of the economy. Prices of petroleum products, gas, energy, agricultural commodities and other key inputs are determined by market. Imports and domestic marketing of petroleum products have been deregulated and opened up to the private sector. The markets do not always function effectively. Independent regulatory agencies have been set up to protect the interests of consumers and end-users of utilities and public services. Despite this movement towards a liberalized and deregulated regime, old habits die-hard. Bureaucratic hassles at lower levels continue to be irritants for the business community. Tax reforms: Taxation reform has figured prominently on the government's agenda, as this is another area where the business community has innumerable grievances and dissatisfaction with the arbitrary nature of tax administration. Tax reforms are aimed at broadening the tax base, bringing in tax evaders under the tax net, minimizing personal interaction between tax payer and tax collector, eliminating the multiplicity of taxes and ultimately reducing the tax rate over time. A massive survey and documentation drive was undertaken to widen the tax base, extend incidence to all sectors of the economy and develop the data for purposes of assessment. Despite these reforms, the business community remains dissatisfied with the performance and attitude of tax officials particularly at the lower level. Complaints of delays in refunds of sales tax persisted throughout the three-year period. The Central Board of Revenue (CBR) is being restructured to improve tax administration including taxpayer facilitation. Economic governance: The most dramatic shift introduced by the military government is in promoting good economic governance. Transparency, consistency, predictability and rule-based decision-making have begun to take roots. Discretionary powers have been significantly curtailed. Freedom of press and access to information has had a salutary effect on the behaviour of decision makers. The other pillars of good governance are, (a) devolution of power to the local governments who will have the administrative and financial authority to deliver public services to all citizens, and (b) an accountability process which will take to task those indulging in corruption through a rigorous process of detection, investigation and prosecution. Despite these positive outcomes and their impact on the business community and other stakeholders, within the country as well as abroad, the incidence of poverty is still quite high and unemployment rates are worrisome. The challenge therefore for the next phase of the reform process is to accelerate growth rate and reduce poverty and unemployment. Section III Policy lessons learnt: I now turn to the policy lessons learnt from the experience of last 50 years and the success achieved in reforming and restructuring Pakistan’s economy during the last four years. With experiments running from state controls, liberalization, socialism, reversal to market mechanism, deregulation and privatization, there is today almost a consensus on the broad contours of economic policy in the country although the modalities, policy instruments and nuances differ as they ought to. My reading of the last 15 years suggests that the general thrust of Pakistan’s economic policies broadly reflects the following lessons learnt from the past: (a) Central planning has been a failure as it leads to low productivity, lack of innovation, lack of incentives, poor quality goods and services and low investment in human resources. Bureaucratic judgment is a poor substitute for market’s judgment on allocation of scarce resources. (b) Licensing to open, operate, expand, close business by the government functionaries is a sure way to promote rent-seeking in the economy for the benefits of a few while keeping the majority poor. The basic business decisions should not be made for the businessmen by the bureaucrats. (c) Public sector ownership and management of business, production, distribution and trade do not capture the commanding heights but lead to a fall into the deep morass of inefficiency, waste and corruption. (d) Import substitution behind high tariffs not only protects a few thousand inefficient producers but also penalizes the millions of consumers with shoddy and expensive goods, which they do not particularly want. Profits at world prices are negative in these protected industries thus leading to inefficient utilization of capital and labour. (e) Over regulation, controls and inspection of all kinds on the private sector not only hike up the cost of doing businesses, subdues entrepreneurship but also make a few wily politicians and bureaucrats rich at the expense of the prosperity of the country. Private monopolies and oligopolies were nurtured under the cover of these controls. (f) High tax rates on individuals and corporates are counter-productive as they raise costs, discourage effort and initiatives and lead to widespread tax evasion and have unintended consequences of lowering overall revenue collection. (g) Banks and financial institutions owned and managed in public sector offering cheaper credit and/or directed credit have a pernicious effect on economic growth as credit decisions are made on the basis of political connections rather than on the merit of the proposal. Value subtracting enterprises are set up while real opportunities for businesses that contribute to output and employment are missed. (h) Administered prices of key commodities and utilities are the worst possible means of insulating the poor segment of the population from the onslaught of market forces. Instead these prices create shortages in the economy and hit the poor hardest by denying them access to essential commodities or services. (i) Subsidies on inputs such as fertilizers, seeds, electricity, water, gas, petroleum, etc. incur heavy budgetary costs but benefit the well-to-do classes and highly influential individuals rather than those for whom the subsidies are intended. (j) Foreign investment and multinational corporations are not evils that should be shunned but are the most important conduits for transfer of technology, managerial skills, organizational innovation in addition to much needed capital and foreign exchange. They should be welcomed and made to feel comfortable in their operations. Section IV Future direction: The lessons learnt from its historical experience, the development literature based on Cross-Country record and the imperatives of globalization have led to emergence of a broad consensus on some key policies and parameters. These views are shared by majority political parties, military, businesses, bureaucracy and other stakeholders in Pakistan. It will be fair to surmise that investors in Pakistan should feel confident that the future direction of economic policy making will be guided by the following principles although in a dynamic and ever changing world, economic management will have to be responsive to the needs of the time and events. i. Outward-looking strategy that promotes exports and integrates Pakistan into the world economy is in the best interest of the country for accelerating growth and reducing poverty. Tariff reductions have been quite drastic from 220 percent to current maximum of 25 percent helping the businesses to become cost competitive. Anti-export bias has been significantly removed and export promotion is the stated policy objective. ii. Private sector is the main vehicle for producing and exchanging goods and services for the domestic economy as well as the rest of the world. Prices should be determined by the market forces but monopolies regulated by independent agencies. iii. The role of the state is to provide security of life and property, have an independent judiciary that can arbitrate disputes and enforce contracts, build physical infrastructure, nurture human skills and train manpower and maintain an enabling macroeconomic and regulatory environment in which businesses can flourish. iv. Public sector enterprises and government trading houses should be privatized through a transparent process so that the Government can focus its attention on its basic responsibilities to the citizens. Selling these enterprises to private entrepreneurs has stopped the hemorrhaging of government finances. v. Pakistan will continue to have a liberal foreign exchange and low tariff regime without recourse to any non-tariff barriers. Raw materials, components, machinery and equipment, consumer goods can enter the country free of restrictions. Foreign investors are free to bring in and repatriate capital, dividends, profits, remittances, royalties, etc. without any approvals. vi. The value of Pakistani currency in relation to other foreign currencies will be determined through supply and demand in the foreign exchange markets and not by administrative fiat of the Central Bank. A freefloating exchange rate policy is being pursued at present and will continue in the future. vii. The Central Bank or the Government no longer controls interest rates on government securities, corporate borrowing, deposits, etc. They are totally deregulated and the banks are free to charge the spreads according to risk assessment of the borrowers. There are no priority sectors to which credit is directed. Government is not allowed to borrow from the banking system beyond a specified limit. viii. Foreign companies, individuals, multinational corporations can own 100 percent shares in locally incorporated or unincorporated firms. They can raise equity through national stock markets, borrow from the local banking system and sell their goods or services abroad or domestically. They enjoy a level playing field with the domestic investors and do not face any barriers to entry or exit. They can expand capital or wind up business without permission from any government department. ix. Consumers have choices to purchase foreign goods or domestically produced goods. This has compelled the domestic manufacturers to improve the quality and reduce the prices of their products or face extinction at the hands of imported goods. The competitiveness of industry has been boosted by the unhindered availability of foreign goods. Section V Impact of islamization on the future direction: I now turn to the main theme of the Conference today. The basic premise of this Conference is that there are many protagonists in Pakistan who are pushing the country towards adopting an Islamic economic system. Western analysts and observers view such a move with apprehension and feel that this will lead to Pakistan’s decoupling from the global economic system and its isolation from mainstream economic thinking. In their minds such behaviour will create greater instability and amplify risks for the rest of the world. Pakistan is a moderate and progressive Islamic country that is committed to the war against extremism and terrorism and, thus, any suggestion that it will adopt policies that may be risky for the rest of the world is untenable. President Musharraf is already paying a high price in combating the menace of terrorism and extremism in the country. These policies may have short- term costs but are essential to set the country on its course of enlightened moderation. Unfortunately, most of the assumptions and premises on which the hypotheses about the Islamic economic system have been constructed are seriously flawed. Pakistan is and will remain a responsible member of international community and is committed to utilize the vast opportunities provided by globalization and financial integration of world markets for the benefit of its population. There is no suggestion whatsoever by any significant group of people or political parties in favour of isolation or withdrawal from international economic system. Secondly, the pre-conditions for a robust and well functioning Islamic economic system are missing in Pakistan. The Islamic moral values that emphasize integrity, honesty, truthfulness and full disclosure and transparency are not yet widely practiced by Pakistani businesses. Once these pre-conditions are established the adoption of a real Islamic economic system will lead to superior welfare outcome for the majority of Pakistani population. How can the Islamization of the economy affect this future direction of Pakistan economy and improve the welfare of its people compared to the present system? The extensions that the true practice and application of Islamic economic model can bring about will, in fact, help in overcoming the weaknesses inherent in the capitalist model of economy. Before that, let us recapitulate the basic principles upon which Islamic economic system is built upon. Unlike positive economics the entire edifice of Islamic economy is built upon a set of objectives or maqasid. In other words, Islamic economics is normative in nature with the objective of the Shariah being to promote the well being of all mankind which lies in safeguarding their faith, their human self, their intellect, their posterity and their wealth. At the micro level, the precepts of profit maximization and utility maximization are retained intact but are supplemented by a set of interlinked objective functions. Islamic system tries to promote a balance between market, family, society and the state. It does so by promoting both the material and the spiritual urges of the human self, foster peace of mind, enhance family and social solidarity. Some western thinkers and anti-globalization activists decry the western economic model as being suppressive of collective human rights, community and social well being, disruptive of family values and too much focused on selfish individual interests. Behavioral economists have also begun to challenge the assumption of rationality in the choices and preferences an individual makes in day-to-day life. Thus, the merit of Islamic economic model therefore lies in its extension of western model in some fundamental and beneficial ways. It introduces into the objective function an additional argument which keeps self interest within the bounds of social interest by limiting individual preferences to conform with social priorities and eliminating or minimizing the use of resources for purposes that frustrate the realization of the social vision. This may help promote harmony between self-interest and social interest. This second argument complements the market mechanism by making the allocation and distribution of resources subject to a double layer of filters. It attacks the problem by first changing the behaviour and preference scale in keeping with the demands of the normative goals. Claims on resources are then exposed to the second filter of market prices. In this process, the influence that initial resource endowments are able to exercise in the allocation and distribution of resources may be reduced substantially. Faith tries to accomplish this by giving self-interest a longer-term perspective - stretching it beyond the span of the world to the Hereafter. This interest in Hereafter cannot be served except by fulfilling his or her social obligations. This may induce individuals to voluntarily hold their claims on resources within the limits of general well being and thus create harmony between self-interest and social interest even when the two are in conflict. The promotion of simple living and the reduction of wasteful and conspicuous consumption may help reduce excessive claims on resources and thereby release a greater volume of resources for needfulfillment by others who are not so well off. It may also help promote higher savings and investment and thereby raise employment and growth. At the macro level, Islamic economic model in its ideal form tends to combine the positive aspects of the capitalist economy and socialist economy while minimizing their negative consequences. Capitalist economy based on private property and market mechanism allocates resources efficiently but as it takes initial resource endowment as given, equity considerations do not figure in this system. Socialist system is very much concerned with equity and welfare of its population and ensures benefits from cradle to grave for its citizens. But as it relies on state ownership and bureaucracy it is poor in allocating resources thus creating inefficiency, waste and value subtraction. Islamic System overcomes the deficiencies of both the systems as it is solidly based on private property and market mechanism but has also explicitly built in equity and distribution through compulsory deduction of Zakat i.e. transfer payments from the asset holders to the poor segments of the population. The western economic model is criticized today as it is unable to address the issues of unemployment, poverty and income inequities in developing countries. Islamic economic model addresses the distribution issues explicitly after market has allocated the gains. It does so by a compulsory deduction of 2.5 percent of tangible wealth and net asset holdings from the incomes generated by the market mechanism for transfer among the vulnerable, sick, handicapped, indigenes and poor segments of the society. Although the deduction is compulsory the transfers are made voluntarily by the well-to-do to their poor relatives, neighbours and other whom they know to have legitimate needs. Thus the leakages, waste and corruption that are inherent in a state administered system of welfare payments are conspicuous by their absence under this system. Only really deserving persons and families or mustahaqeen receives these payments. In Pakistan, it is estimated that private transfers made voluntarily to the poor account for 2 percent of GDP annually. These welfare payments are a potent force in reducing poverty, helping the vulnerable to earn their own livelihoods and lower income disparities. At the sectoral level, the introduction of Islamic banking should result in deepening of the financial sector. There are believers in Islamic Faith who do not use the Conventional banking system because of their strongly held views that this system is based on riba. They will willingly deposit their savings into Islamic banks and borrow from these banks for expansion of their businesses or new investment. Thus a significant segment of population that is currently outside the organized financial sector will be brought into its fold deepening financial markets. The primary principle of Islamic Banking is the prohibition of Riba (usury), which is believed to be a means of exploitation of the masses. Trade is the preferred mode of business in Islam. The goal of the banking is the general economic improvement of the public at large rather than of few groups. What are the characteristics of the Islamic bank? • One of the most distinguishing features of Islamic banking is that being part of a faith-based system, it is obligatory on Islamic banks from pursuing activities that are detrimental to the society and its moral values. Thus Islamic banks are not allowed to invest in casinos, nightclubs and breweries, etc. It is pertinent to note that casinos are one of the prime vehicles used for money laundering and dealing with them could expose the conventional banks to such risk. • The second distinguishing feature of the Islamic banking is that in addition to the rules and regulations applicable to the conventional banks, the Islamic banks have to go through another test, i.e. fulfill exhaustive requirements to be Shariah compliant. This requires that the clients of Islamic banking must have business that should be socially beneficial for the society creating real wealth and adding value to the economy rather than making paper transactions. Therefore, a stringent Know Your Customer (KYC) policy is inherently an inbuilt requirement for an Islamic bank since the Islamic bank has to know the customer and his business before getting into a socially responsible Shariah compliant transaction. KYC is the first line of defense against money laundering in any banking system. • Third, by their very nature, Islamic mode of financing and deposit taking discourages questionable/undisclosed means of wealth that form the basis of money laundering operations. The disclosure standards are stringent because the Islamic banks require the customers to divulge the origins of their funds in order to ensure that they are not derived from un-Islamic means e.g. drug trade, gambling, extortion, subversive activities or other criminal offences. On the financing side, the Islamic banks must ensure that funds are directed towards identifiable and acceptable productive activities. Most Islamic financing modes are asset backed, i.e. they are used to finance specific physical assets like machinery, inventory, equipment, etc. • Fourth, the role of the bank is not limited to a passive financier concerned only with timely interest payments and loan recovery. The bank is a partner in trade and has to concern itself with the nature of business and profitability position of its clients. In the case of loss in business, the Islamic financier has to share that loss. To avoid the loss and reputational risk, the Islamic banks have to be extra vigilant about their clientele. To sum up, it can be said that banks that judiciously follow Islamic banking principles are less likely to engage in illegal activities such as money laundering and financing of terrorism than conventional banks. However, the existence of rogue elements cannot be ruled out in any type of organization. It is the duty of the state and the regulators to ensure that despite these in-built safeguards, there are adequate pieces of legislation, regulations, and enforcement mechanisms to take action against the potential offenders. Pakistan has taken a policy decision that it will allow both the Conventional and Islamic banking systems to operate in parallel. The choice will be left to the consumers whether they wish to migrate from the Conventional to the Islamic system or stay with the Conventional system. The State Bank of Pakistan has a transparent system of licencing, regulating and supervising the Islamic banks in Pakistan. There are three ways in which this type of banking can be set up (a) through a stand-alone exclusive Islamic bank (b) the existing Conventional banks establishing a subsidiary or (c) earmarking some of their branches for Islamic banking. A Shariah Board consisting of scholars, economist, accountant and banker as members will determine whether the products and bankers as members will determine whether the products and services offered by these institutions are compliant with Shariah or not. The MMA Government in NWFP has earmarked one of the branches of a Provincial Government owned bank as Islamic bank and only on the basis of the experience gained they will gradually move to convert other branches to this mode. You can therefore see that contrary to the alarmists’ cries the Provincial Government has been extremely prudent and responsible in moving gradually in this direction. They have fulfilled all the standard requirements which the Central bank had stipulated and no exception was made in granting the licence for this branch. Business and Commercial considerations will determine the future evolution of Islamic banking in the province. To sum it up, Islamization, if adopted and practiced in its true form, at any time in the future will strengthen the economy particularly income distribution and poverty alleviation which have proved elusive under the present economic model. This will, in fact, eliminate the sources of instability, violence and propensity towards terrorism arising from a sense of deprivation. Section VI Economic prospects in the medium term: As the full fledged operation of a true Islamic economic system in any of the Muslim Countries and particularly Pakistan is far from realization in the near future, only gradual and slow changes will take place. Thus, the burning issues of poverty, income distribution and unemployment will remain to preoccupy the attention of economic managers and policy makers - as the remedies available under the Islamic economic system to resolve them are unlikely to be applied. Under this scenario what does the future hold for the Pakistan economy and what are the prospects for addressing these issues? Empirical evidence from the past history of Pakistan suggests that there is a direct relationship between rapid economic growth and poverty reduction. After the annual economic growth rate crosses the threshold of 6 percent or more on a sustained basis there is a strong probability that the incidence of poverty will begin to decline. There is little doubt that GDP growth rate can recover to the historic levels of an average of 6 per cent and more provided structural reforms are continued and further deepened, productivity gains in agriculture sector are achieved and a set of non economic factors including governance are put in place. This will not only reduce the incidence of poverty but also unemployment and to some extent regional disparities. It is also projected that the inflation rate will remain contained within the 6-8 per cent range provided appropriate monetary and fiscal policies are followed. The latter is geared to bring the budgetary deficit down to 3 per cent of GDP in the next three years; increasing the Tax-GDP ratio to over 15 per cent, containing the growth in non-development expenditure but raising the share of social and poverty-oriented programmes. What is the agenda for getting back on this trajectory? The realization of the projections outlined above will depend upon the interplay of evolution in political and social developments, economic policies to be pursued, the quality of governance and institutions, external environment and most important, investment in human development. It has become quite obvious from both Pakistan's own history and the experience of other developing countries that sustained economic growth and poverty reduction cannot take place merely on the strength of good economic policies. Political stability, social cohesion, supporting institutions, and good governance are equally important ingredients coupled with a benign external environment for achieving economic success. The economy will suffer from temporary shocks, both domestic and externally induced, but will develop resilience to tolerate these shocks with minimum disruption and dislocation if these ingredients are present. So what do essential ingredients for transforming Pakistani economy entail? What are the pillars on which the foundations of Pakistan’s rapid economic development will be built in the future? Pakistan's chequered and uneven record on political instability and lack of democracy has deprived the country of a long-term vision, direction and continuity of economic policies. The rapid turnover of governments and the actual and imminent threat of the dismissal of governments through extra constitutional means have certainly proved to be an inhibitor to investment, innovation and institutional development. Democracy in Pakistan is still interpreted in a fairly narrow sense, i.e. holding general elections and allowing political parties to compete. While this is necessary, other pre-requisites of a well functioning democracy, i.e. rule of law, civil liberties, freedom of expression, checks and balances on the powers of different organs of state and religious and ethnic tolerance have not yet taken root. Parliamentary elections are not meant to provide licence to those elected to rise above the law and do whatever pleases them. Separation between executive and legislature, with the latter exercising effective controls on the former, is still missing due to the entrustment of executive powers to the ruling party in the legislature. As there is no other countervailing mechanism, excesses committed by the executive have only been corrected by dismissals or extra-constitutional measures. These extraordinary steps create uncertainty and unpredictability, which are inimical to long-term economic growth. Thus an effective watchdog legislature and a vigilant judiciaryenforcing rule of law including enforcement of contracts and protection of private property will obviate the need for frequent changes in the government. Political parties themselves have to shift the emphasis on dialogue to broad-based strong growth rather than narrow-minded slangs and personality-oriented cults. A stable and orderly political system ingrained and practicing all the elements of democracy is the first pillar for transforming the economy. Although democracy does mediate between different ethnic, religious and regional groups, Pakistan has witnessed growing polarization and division along sectarian, ethnic, linguistic, and cultural lines in the decade of 1990s particularly after the defeat of the Soviet forces in Afghanistan. Social capital, which is a glue for fostering economic development has been depleting. Although Islam teaches us tolerance and harmony, the violent sectarian killings and the consequential law and order problems need to be curbed effectively. Social cohesion, trust and tolerance and inter-provincial harmony on the back of a true participatory and well functioning democracy, a vibrant civil society and a shared sense of fair play in allocation of national resources are the second pillar for robust economic transformation. Recent empirical evidence and common sense strongly suggest that sound economic policies cannot make any difference to the lives of the common citizens if the country does not have strong institutions to implement those policies. Pakistan had inherited a strong civil service, judiciary, and police, which could meet the demands of thirty million people. But as population expanded, and the nature of problems became more complex, the capacity of these institutions did not keep pace with the emerging demands of the economy. On the contrary, these institutions were politicized and captured by a small elite group to serve their own narrow interests and those of their masters. The consideration of common good was replaced by self-aggrandizement and the process of institutional decay crept in and gradually eroded the foundations of most of these institutions. These dysfunctional institutions were unable to deliver the basic services to ordinary citizen. Crude estimates suggest that if institutions and legal system were working well Pakistan's GDP would grow at least by two percentage points faster e.g. if the land titles were clear, actively traded, mortgaged and exchanged without much hassle; if tax assessment, tax code and tax collection methods were simplified, made less arbitrary and free from discretion of tax officials, the tax base would be much wider and Tax-GDP ratio much higher; if the court system is unclogged the enforcement of contracts would be quicker and reduce transaction costs substantially. The fourth pillar is good governance. There is an overlap between the other three pillars described above and good governance. Rule of law, transparency, predictability are the essential elements of good governance. Authoritarian governments have relatively better record of governance in Pakistan, but these gains have proved to be short lived. Only democratic governments with clear rules of transition and strong functioning institutions can provide the platform for embedding good governance in the work ethic. It has to be demonstrated during the next five years that democracy and good governance are not mutually incompatible and that a democratically elected government can also serve collective interests in contrast to their personal interests, and that the quality of governance can be better. The interplay of voice and accountability, civil liberties and free media, which form the core of democracy reinforce the quality of governance. Three recent steps, devolution of powers to local governments, National Anti-Corruption Strategy and National Accountability Bureau and encouragement of private-public-community partnerships, will fill in the missing gaps in effective implementation of governance. Table I Long-terms structural change and growth Population In million Income GDP(current m.p.) Rs.bln 3,231 GDP (US $)billion 3.8 10.8 72.3 Per Capita Income (Constant Rs.) 1,638 2,541 5,383 Per Capita Income (US $) Per Capita Income (Current Rs.) 28,980 Production Index Fiber Production Index Water Availability (MAF) Wheat Production (m. tons) 3.3 7.3 19.2 Rice Production (m. tons) 0.7 2.4 4.8 Cotton Production (m. bales) 1.1 3.0 10.4 Fertilizer per ha. Crop (kg) Manufacturing Production Index 12,633 Steel Production (000 tons) Cement Production (000 tons) 11,000 Chemical Production (000 tons) Sugar Production (000 tons) Veg. Ghee Production (000 tons) Cloth Production (000 Sq. meter) 29,581 60,544 576,000 Per Capita Electricity Generation (Index) 10,160 50,367 72,153 249,959 Agriculture Industry Infrastructure Per Capita Electricity (kwh) Road Length (km) Consumption Social indicators Area under Canal Irrigation(mill. ha) 7.9 18.0 Natural Gas billion cu. Meters 2.9 26.1 Road Vehicles per 1,000 Persons Phone Connections per 1,000 Persons 0.4 2.5 28.6 TV Sets per 1,000 Persons 1.5 26.3 Primary Enrolment Rate Population per Doctor 23,897 4,231 1,484 Population per Nurse 369,318 13,141 3,560 Literacy Rate Infant Mortality Rate N.A. Total Fertility Rate N.A. 6,3 4,7 Population with Access to Safe Water N.A. Under Five Mortality Rate N.A. The devolution of powers to local governments since 2001 is undergoing a phase of consolidation and is facing some teething problems. But this devolution has an in-built capacity to respond to the demands of the common man for obtaining basic services such as security, education, health, water supply, sanitation, etc. This system is facing fierce resistance from all those groups who had vested interests in the old centralized, highly personalized top-down system of Administration. The system needs to be carefully nurtured, monitored, its structural and operational deficiencies and weaknesses removed, but any attempt to dislodge it or make it impotent will adversely affect the access of the poor and disenfranchised to public expenditures and public goods. Finally, most important among all the factors that will impinge upon the future shape of Pakistan’s economy is accelerated investment in human development. In fact, this underdevelopment of human capital is the most daunting challenge facing Pakistan. High population growth - one of the fastest in the world - has given rise to a young dependent population and increased unemployment among the youth. One half of the population is illiterate making it more difficult to impart new skills to the everburgeoning labour force. The average years of schooling remains quite low. Investment in higher education, science and research has been almost insignificant and has hurt the competitiveness of Pakistani firms in world market. Low level of female education and literacy have made one half of the population less than adequately prepared to participate in the domestic labor markets and deprived the country of many externalities that arise from a literate female population. A comprehensive package of educational sector reforms, a medium term health strategy, fiscal restructuring and devolution of administrative and financial powers to local government, public-private partnership in delivery of social services, community involvement and participation are some of the ways that need to be put in practice with full commitment. The above survey of Pakistan’s past, present and future should reassure the Western Community that if and when Islamization of the economy takes place it will not pose a threat to Pakistan’s journey towards stability, growth and poverty reduction. Along with good policies, good governance and good luck it will create conditions that are conducive for growth and poverty reduction Pakistan is very much and will remain integrated into the world economy and fully utilize the opportunities thrown open by globalization to benefit its population. Table II Changes in key macronomic indicators October 1999 September 2003 GDP growth rate Inflation Fiscal deficit/GDP Current account/GDP Domestic Debt/GDP External Debt Remittances Exports Tax Revenues Rupee-Dollar Parity Foreign Direct Investment Foreign Exchange Reserves 4.2% 5.7% -6.1% -3.2% 52.0% $ 38 billion $ 88 million per month $ 7.8 billion Rs. 391 billion Depreciating $ 472 million $ 1.6 billion Poverty Incidence Poverty related expenditure Unemployment 33% Rs. 133 billion 6% 5.3% 3.3% -4.0% +5.0% 43.4% $ 35 billion $ 300 million per month $ 12 billion Rs. 510 billion Appreciating $ 500 million $ 12.0 billion Data not available but perhaps rising Rs. 161 billion 8% Change in the Indicator Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Positive Negative Positive Negative Note: All indicators in Column 1 pertain to 1998-99 or October 1999. All indicators in Column 2 pertain to 2003-04 or end September 2003. | state bank of pakistan | 2,004 | 2 |
Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the South Asian Federation of Accountants Conference held in New Delhi, India on 28 August 2004. | Ishrat Husain: Harmonization of the banking sector in SAARC region Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the South Asian Federation of Accountants Conference held in New Delhi, India on 28 August 2004. * * * Harmonization of the banking sector should not be seen as an objective in itself for the member countries of SAARC region but it should be considered as a tool for achieving a large objective. South Asia has the largest number of poor people in the world. Any objective must therefore aim to address this particular issue in a perceptible way. Thus there must be a broad agreement and consensus that the objective should be greater production and exchange of goods and services among the regional countries so that the larger market achieved through intra-regional trading is able to generate economies of scale, lower cost of production, increase efficiency and lead to higher growth rate and reduce the incidence of poverty. Unless all the stakeholders in the countries of the region strike a consensus, forge a strategy and action plan in a sequenced and structured way the likelihood of an enlarged South Asian market becoming fully effective will remain low. • Leaders of SAARC Region have, after a long hiatus and slow start, agreed to weave together the South Asia Free Trade Agreement (SAFTA) in 2006. The practical implementation of SAFTA is therefore a priority for all the member countries. Careful planning and sequencing will be required along with strong political will to move in this direction. Some of the preparatory steps for making SAFTA take off in a meaningful way are: • Trade facilitation through expeditious border crossings, quick custom clearance, efficient port facilities, improved transport links should precede or take place simultaneously with the expansion of volume of cross border trade. • Domestic tax, tariff and subsidy policies that affect production and trade incentives should be harmonized to avoid recurrence of trade disputes and frequent use of anti dumping laws. As India provides a lot of subsidies to its producers in various forms and shapes the smaller countries are hesitant to allow MFN status to India. The recourse to a long negative list that restricts the volume of trade should be avoided at all costs. • Macroeconomic policies such as fiscal and monetary policies should be harmonized to achieve a stable, non-discriminating macroeconomic environment for all the countries in the region. • Supporting institutions to manage and facilitate integration, for example, setting standards, establishing regional development funds and for dispute resolution should be created. • Communication and transport infrastructure between the bordering countries should be improved and upgraded to facilitate increased trade and factor mobility. • Legal regulations for investor protection, intellectual property rights enforcement, anti-trust law, commercial law, labor relations, financial institutions should be harmonized. • Financial markets should be widened and regulatory changes introduced to promote crossborder investment, listings, syndication, bond issues etc. After laying out the entire edifice of the preparatory measures required I will attempt to lay out an analytical framework for financial sector and banking sector harmonization in South Asia and then apply this framework to the case of Pakistan. Empirical evidence and theoretical literature have now conclusively demonstrated that the more efficiently the financial sector carries out its intermediation role, the greater will be the volume of investment. More efficient financial intermediation also increases the average productivity of investment. Two major determinants of this functional efficiency of financial sector are market structure and the regulatory framework. Market structure consists of the degree of competition, concentration and interlocking control between financial institutions and business enterprises as well as the degree of specialization within the financial sector. It is influenced by the internal organization and management of the financial intermediaries. These, in turn, are affected by the degree of government ownership and control. The regulatory framework includes regulations imposed both for monetary policy as well as prudential purposes. Steps taken to stimulate competition are lowering the barriers to entry, abolishing interest rate ceilings, removing directed credit allocation, and privatizing government owned banks. The privatization of government owned banks is still controversial in most of the region but it must be obvious by now that these banks suffer from three terminal diseases i.e. high volume of non-performing loans, high intermediation costs and loss of initiative and entrepreneurship. • Thus harmonization of the banking sector in the South Asian countries should be driven by these two considerations i.e. to eliminate the distortions in the market structure and to strengthen the regulatory framework prevailing in each country. This agenda for market structure improvement should therefore aim to achieve the following outcomes: • Freeing interest rates so that they are determined by market forces Abolishing or lowering reserve and liquidity requirements. • Removing directed credit regulations and reservation of certain sectors as preferred ones. • Adopting indirect instruments of monetary control instead of credit ceilings. • Liberal branch opening and closure policy. • Opening up or easing entry into the financial sector including privatization of state owned banks. • Restructuring operations and elimination of excess or redundant manpower. We should also be cognizant that a liberalized system described above would also be more vulnerable including possible systemic breakdown in which many financial firms and businesses may go out of business. If the political leadership have cold feet and do not allow terminally sick and financially unviable firms to die their natural death then the financial sector would always remain saddled with unnecessary burden exacerbating the event risk of banking crisis at some unknown time in the future. • Having discussed the pre-requisites of a market structure that will improve the efficiency of financial intermediation let us now turn to describe the essential elements of a desirable regulatory framework. Banking regulation should ensure that: • Adverse selection in bank entry is avoided by making certain that individuals more likely to misuse banks do not get bank charters, banks have adequate capital investment, cross ownership is proscribed and character stipulations for bank ownership are enforced. • The incentives of bank owners remain aligned with those of the depositors so that bank owners stand to make substantial losses in the event of insolvency. Loans loss provisions and capital adequacy regulations play a key role in bringing about such as alignment. • Excessive risk taking by bank managers is prevented by close scrutiny and supervision of their asset management. This includes measures limiting bank holdings of excessively risky assets, preventing lending to related parties, requiring diversification and making that banks have appropriate loan appraisal, documentation, follow up and classification procedures. Along with the issues of harmonization of market structure and regulatory environment in the SAARC Region there is another issue that impinges upon the efficient functioning of financial sector i.e. autonomy and independence of the central banks among various countries. Assuming that the countries in the region are able to implement the measures required to achieve harmony in the market structure and regulatory environment the capacity of the central banks to taking appropriate actions on right time without interference, approval or reversal by another layer of decision makers will be quite critical. Thus the imperative of attaining central bank independence at an even keel in each country assumes an important dimension. After laying out the analytical framework and specifying the characteristics essential for harmonization of banking sectors in the region it may be useful for me to narrate the progress Pakistan has been able to make in respect of each of the three dimensions discussed above. I do not wish to imply by presenting the experience of Pakistan that this should be the reference print for harmonization of banking system in South Asia but only to suggest that other countries should review where they stand at present and what needs to be done in the future. Market structure (a) Four out of five large nationalised commercial banks have been privatized while fourteen private domestic and eighteen foreign banks were allowed to enter the banking sector. State ownership of banking assets has declined from 92 per cent in 1992 to 20 percent at present. (b) Governance structure of banks has been strengthened, better disclosure and transparency standards have been introduced and credit ratings of banks have been made mandatory and disseminated widely to the public at large. Fit and proper criteria have been prescribed for the directors and senior managers. (c) Artificially high rates of return on National Savings Schemes run by the Government were putting bank deposits at an intrinsic disadvantage and creating uneven playing field against the banks. These returns have been radically rationalised and aligned with market-based benchmarks so that the choice of the savers between NSS and bank deposits is no longer tilted. (d) Foreign exchange markets have been totally liberalized. All current account transactions and most capital account transactions have been made convertible while exchange rate is market determined. Formation of exchange companies has encouraged further liberalization of capital movements. (e) Government borrowing from the banking system is market based and the annual volume of borrowing is limited and pre-announced. Mandatory credit allocations or subsidised interest rates have been abolished and the Central Bank does not have any preferred sectors. (f) Financial instruments of varying tenure such as Pakistan Investment Bonds have been introduced by the Government to serve as the benchmark enabling a corporate debt market to function. (g) An online Credit Information Bureau is maintained by the Central Bank for sharing information with the commercial banks on the credit history of the borrowers, and particularly those who are not servicing their debt on time. This information is extremely useful to the banks in making informed credit decisions. (h) Diversification of risks has been attempted by encouraging bank lending for agriculture, SMEs, consumer financing, mortgages etc. and widening and strengthening the customer base in place of a narrow concentration on public sector borrowers and corporates. Regulatory framework (a) Central bank’s capacity to supervise and regulate banks, effectively monitor non-performing loans, enforce actions against banks found violating regulations and laws has been strengthened. In the last four years, licence of one bank was revoked while appropriate intervention resulted in change of ownership and management of three banks. Several institutions were forced to liquidate or merged with strong institutions. If these actions were not taken these banks would have collapsed with disastrous effects for the financial markets. (b) Several development financial institutions have either been closed, wound up, privatized, converted into a bank, restructured and adequately capitalized for eventual sale to the private sector. (c) An independent assessment of the financial sector by a joint World Bank-IMF team has concluded that the financial soundness indicators of Pakistani banking system are robust and can withstand exogenous shocks. Observance of internationally accepted standards and codes has found to be quite high. (d) Minimum capital requirements of banks have been raised twice during the last four years to weed out weak banks and allow mergers and consolidation to take place so that fewer but stronger banks operate in the system. (e) Stringent measures have been laid and enforced on classification of non-performing loans, loan loss provisioning, tier 1 and tier 2 capital adequacies, write off of unrecoverable debt and allocation of capital against market risk. (f) Three different sets of regulations specifically tailored to manage the risk profiles of corporate, consumer and SME lending have been issued by the State Bank in consultation with the banks and businesses. Central bank autonomy Central banks are required to promote the establishment and operation of a safer and sound financial system i.e. the framework of prudential regulations and supervision as well as payment and settlement systems. Central banks also play a critical role in crisis management through provision of emergency liquidity assistance. Finally, price stability has to be assured to lay the foundation for long-term sustainable growth. For these functions to be performed effectively the central banks require a degree of autonomy. State Bank of Pakistan has gradually won a substantial amount of autonomy and independence during the last several years. The laws governing the Bank have been modified from time to time to provide adequate decision making authority and powers in respect of the conduct of monetary policy, banking supervision and regulation, exchange rate and foreign reserves management and payment and settlement system. A Monetary and Fiscal Coordination Board has been set up to coordinate monetary and fiscal policies. An independent Board of directors consisting of seven eminent individuals drawn from various walks of life oversees the activities of the Bank and formulates policy guidelines. The Ministry of Finance has only one representative on the Board and exercises a single vote in decision-making. The Governor and the Board cannot be removed by the Government until they complete their tenure. The exercise of autonomy is, however, very much a function of the competence and capabilities of the Central bank. Therefore, concerted efforts were made to upgrade the technology, human skill base, reengineer the business processes, and delegate powers, restructure the core and non-core functions, and introduce modern management practices. This improvement in capacity was essential for the Central bank to assert its independence while winning the respect of the stakeholders. Next steps As a practical measure we should begin the process of harmonization of banking sector in our region. The starting point could be that the definition of the soundness indicators, the uniformity of prudential regulations and the availability of financial infrastructure such as payments and settlement system are worked through developed and agreed upon for adoption by all the countries. For example, capital adequacy requirements on the basis of risk-weighted assets vary within the region, the classification rules for non-performing assets differ widely, provisioning criteria are wide apart. Capital reserves representing surplus from the sale of assets are treated differently, the constituents of core capital prescribed by each central bank have large variation. This list can be expanded and enlarged to present a comprehensive picture but the practices in each country can be evaluated and brought in line with international standards. Consolidation of financial information of the banks operating in various countries of the region should be made mandatory so that cross-border risks are fully understood. The bank branch opening by the South Asian banks in each other’s countries should be facilitated and encouraged. Payments and settlement system should be linked in order to expedite transfer of payments across the borders in the region. These four steps alone would take some time but pave the way for other steps in the sequence to be followed subsequently. Conclusion This paper has set out the analytical framework for harmonization of the banking sector in South Asia region. The three pillars of this framework are market structure, regulatory framework and institutional autonomy of the Central Bank. The paper then applies this framework to the case of Pakistan in respect of each of the three pillars. Although this case study should by no means be used as a benchmark but it provides insights to each country as to how much distance they have already traversed in respect of these three dimensions and how much they have to move further. | state bank of pakistan | 2,004 | 9 |
Speech by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Central Bank Anniversary Lecture 2004, Colombo, Sri Lanka, 26 August 2004. | Ishrat Husain: Future challenges facing South Asian economies Speech by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Central Bank Anniversary Lecture 2004, Colombo, Sri Lanka, 26 August 2004. * * * The first decade of the 21st century is bringing about several fundamental structural changes in the economies around the world. South Asian economies have to accelerate the pace of internal transformation of their economies if they choose to benefit from the opportunities presented by these structural changes. There is a need to shift from the old paradigm of dependence upon official aid and putting blame on the unjust international economic order for their woes to the new paradigm of becoming an active participant in the emerging globalized economy. What are the key characteristics of this new globalized economy? First and foremost is an open trading environment in which low cost and reliable producers of quality goods and services are able to deliver them just in time will derive maximum gains. The countries in this environment will have to compete for market shares in their quest for selling goods and services to the rest of the world. Second, the integration of financial markets and liberal flows of cross border capital particularly foreign direct investment provide ample scope for supplementing domestic savings and raising investment levels to accelerate the pace of growth and poverty reduction. In South Asia, the earnings and remittances of workers employed overseas do play a key role in accumulation of net foreign assets. Third, rapid changes in information technology and communications can lead to efficiency improvement in the utilization of capital and labour and thereby to total productivity increase. But, at the same time, it places severe burden on the prospects of employment for unskilled labour. Fourth, a silent revolution in expectations of the so far voiceless voters is taking place due to a perceptible impact of electronic media and skilful management of these expectations and delivery of tangible results against promises is assuming a new dimension in good governance. This evening I would like to address the following question: To what extent are the South Asian Economies prepared to face these four major challenges and what is the agenda that they should follow in the next ten years or so? Before I share my views on this question, let me offer a few thoughts on the process of decision-making that should be followed by the leaders of South Asia in order to bring about the paradigm shift I have talked about. Each country must begin by preparing a long-term vision and the road map to translate this vision into action with milestones and timelines. This vision and road map must have a non-partisan and national consensus and all political parties must be agreed and committed to the broad thrust and the direction of the economy. Of course, there will be many nuances and approaches to implementation and the road map will be altered in light of experience gained but, at least, the investors and economic actors will be assured that there will be no abrupt reversals and significant derailments. China offers an excellent example of this process where the vision and the road map adopted by Deng XaoPing has been followed, with some modifications and alterations, by successive governments. The skeptics may contest this conclusion by arguing that the same political party has remained in power since 1978. While this is true, but the point I wish to underscore is that in plural democratic societies when even the contesting political parties have a broad agreement on the vision and direction of the economy, the voters will judge their performance by their relative success in implementing the programs, policies and projects and bringing about an improvement in the living standards of their electorate during their respective tenures. It is the differentiation in their relative performance that will distinguish the record of one political party from the other and win and lose the support of the electorate. Past achievements and current status. Let me now turn to the substantive question that I have raised, i.e. the state of preparedness of the South Asian economies in meeting these future challenges. South Asia has shown a remarkable growth about at 5.6 percent in the last ten years which is above the average of developing countries. Most countries have been able to achieve and maintained macroeconomic stability i.e. low inflation, low domestic interest rates, stable and flexible exchange rates. They have built up foreign exchange reserves to cushion themselves against external shocks. Fiscal consolidation and discipline have begun to set in with fiscal deficits being brought down to manageable levels. Private sector has become the main vehicle for investment, production and distribution of goods and services while state intervention has been limited to provision of physical infrastructure, social services and other public goods in support of private investment and making markets function efficiently. Trade liberalization has proceeded quite rapidly and average tariff rates have declined drastically. Export promotion is being actively pursued and inward looking import substitution and protection of domestic industry have been abandoned as principles of public policy. Financial sector and capital market reforms have been stepped up in almost all the countries and are at various stages of implementation. New laws and regulatory mechanisms have been adopted to strengthen the banking sector and securities markets. Directed credit and credit ceilings, administered and subsidized interest rates have gradually given way to market-based allocation of credit and determination of prices. India has become a leader in outsourcing of information technology enabled services. Low wages, large English speaking technical manpower, availability of venture capital and networking with the U.S. firms have brought about a major expansion in I.T. exports. Pharmaceuticals, health care, biotechnology, research and development are also beginning to attract attention from multinational companies. Indian firms are also beginning to acquire firms abroad and are integrating themselves in the global economy. However, other countries in the region are still way behind and have a lot of catching up to do. Services sectors account for 60 percent of the output of developed countries and many services are becoming mobile across border due to breakthrough in technology and communication. Thus the outsourcing of services is a sensible strategy. These improvements in macroeconomic fundamentals have led to up gradation of credit worthiness of India and more recently Pakistan. Both the countries have established access to international bond market at fine pricing. It will, therefore, be fair to surmise that economic fundamentals have improved to a very large extent in all the South Asian countries in the last decade or so. Broad political consensus on the content and direction of economic policies and their credible and consistent pursuit should provide some signal to the markets that the South Asian economies can be relied upon in the exchange of goods and services and inflow of capital. Agenda for the future. However, the challenges ahead and tasks for economic managers in the region are simply daunting. Sri Lanka and India have almost one quarter of their population living below the poverty line. The estimates for Bangladesh are in the mid 40 percent, while Pakistan has one-third of its population living below the poverty line. Unemployment rates are quite high and Human Development indicators are dismally low. Moreover, these task have to be pursued in the context of a more volatile economic environment - both domestic, as well as, international. Capital inflows and outflows have much greater potential to destabilize markets, exchange rate and interest rates. Technological, communication and media revolution especially the satellite television and cable channels have raised the expectations of the common man through the demonstration effect of conspicuous consumption by powerful and affluent classes. These expectations are placing enormous pressures on the ruling classes for providing access to basic necessities of life to the majority of the population. At the same time, the state apparatus for delivery of these services in most South Asian countries has become largely dysfunctional due to induction of poor quality personnel, corruption, inertia, waste and institutional decay. How to narrow this widening gap between the rising expectations of the common man and the declining capacity of state institutions is one of the most difficult tasks for the leaders of South Asia. South Asia is lagging behind the East Asian economies and have a lot of catching up to do and, that too, in the shortest period of time. I do not wish to go into the details of all the comparative indicators of the two regions which are well known to all of us, but suffice to say that we are way behind China, Indonesia, Malaysia, Thailand and the Philippines both in levels as well as the rate of improvement. What can be done to reduce poverty and unemployment and catch up with the East Asia? We should recognize this region is our benchmark against which we should evaluate our performance although it is our biggest competitor in the global markets, particularly China, which is becoming an industrial giant. Let me offer some thoughts on this issue but also hasten to add that these are by no mean exhaustive and are being presented only in the spirit of provoking a broader debate and discussion in our countries on this important subject. (a) Between 1980 and 2001, South Asia received $17 billion as Official Development Assistance (ODA). However, between 1990 and 2001 ODA inflows have declined both in per capita terms as well as percent of GDP. There was a change in the composition of external capital inflows with a declining share of aid in relation to other types of inflows. This change in composition suggests that the influence of the official donors and particularly the International Financial Institutions (IFIs) is thus likely to wane in the future while that of the fund managers, rating agencies, equity research houses, investment banks and multinational companies is likely to gain ascendancy. Thus, credibility of economic policies pursued by the countries assumes a much important role than the relationships nurtured with donors and the IFIs. The market’s power to penalize imprudent policies and breach of commitment is more damaging to the economy than the slippages in the observance of IMF or World Bank conditionalities. If we recall Mexico had to suffer heavily when the incoming Zedillo regime reversed the pre-commitment made by the Salinas regime to the markets on the exchange rate. The country witnessed huge and sudden capital outflows, depreciation of currency, inflation and economic recession. To keep access to the international financial markets the South Asian Countries will have to maintain not only open and liberal foreign exchange regimes, sound and robust financial sector but pursue consistent, credible and transparent economic policies. (b) Along with sound economic policies there is growing evidence about the critical role of good governance and institutional quality in the growth-poverty reduction nexus. The features of weak governance that is normally associated with South Asia are corruption, political patronage, lack of transparency, low observance of rule of law, absence of level playing field, heavy tilt in delivery of scarce of public goods and services towards the privileged and elite classes. The political leaders are now beginning to realize that the disenchantment of the electorate with these poor governance practices increases the burden of incumbency and puts their survival at serious risk. Thus, improved governance should be on the top of the agenda of all political parties in South Asia if they are interested in assuring their electoral sustenance. Bureaucratic hassles, long drawn procedures, un-even application of rules and regulations, excessive discretionary powers in the hands of lower level bureaucracy, shortages of essential infrastructure facilities and low productivity of labor force have made the region not such an attractive place for foreign investors. Consequently, Foreign Direct Investment (FDI) has not yet made any significant impact on the economies of the region. FDI accounts for 0.5% of GDP with India receiving $3-4 billion annually and Pakistan about $1 billion. Portfolio investment to India had taken an upward trend but suffered a set back in the aftermath of the recent elections. A major overhaul of the structure of Civil Service, Judiciary, Police and Local Government Institutions, Business process re-engineering and inculcation of modern management practices will be required in all the countries of the region. (c) Political and geopolitical risks in the region are still quite elevated. The long standing hostility between India and Pakistan, the acquisition of nuclear and missile capability by the two countries and the consequential sanctions imposed upon them, the active frontline status of Pakistan in the war against terrorism, the prolonged civil war between Tamil Tigers and the government in Sri Lanka, and the frequent strikes called by the opposition parties against the government in power in Bangladesh have added risks to doing business and locating investment in these countries. The external perceptions about our region are, therefore, heavily biased due to these risks. The sooner we can overcome these problems, the better off the region will be a reliable trading partner, active participant in the international capital markets and a choice location for foreign investment. (d) Investment in education and human development in countries other than Sri Lanka has been inadequate in volume, deficient in quality and lacking in relevance. The most recent census data for 2001 shows that India’s literacy rate has gone up to 64 percent but female literacy rate is less than 50 percent. It also demonstrates that at least one third of its population and labor force is not fully equipped to take up the ever changing and more complex tasks of the economy trying to outclass other competing countries. In Pakistan and Bangladesh almost half of their population and two-third of female population are illiterate. This large proportion of women among illiterates is a cause for serious concern. Sri Lanka is the only country in the region with almost one hundred percent literacy. But this full literacy level raises another stark fact in our face i.e., the growing imbalance between the demand for skills imposed by market economic forces and the supply of skills produced by our educational institutions. There is a surfeit of highly educated graduates who are not employable and there is a shortage of workers who can carry out routine technical jobs in production and service. India produces good quality Science and Engineering graduates every year who can cater to the high end of the job market but lack of attention to nonUniversity technical education and its quality have created wide gaps at the middle end of the job market. This situation is much aggravated in Pakistan and Bangladesh where the issues of quality, relevance and numbers are all intertwined. Sri Lanka has no problem with the numbers but high level of unemployment among University graduates testifies to this mismatch in the skills. The widespread frustration among the parents and graduates on one hand and a high level of dissatisfaction among the employers in finding the right persons for the right jobs are further evidence of the imbalance in labor market. (e) This skill imbalance and lack of employability has serious repercussions for the composition and growth of the basket of goods that can be exported. The most dynamic and rapid growing sectors of exports in the world market today and in the medium term are those associated with high technology and to some extent medium technology. While India is making some headway in increasing its penetration of high technology exports the record of other countries in the region is not very promising. They are still stuck in the low technology exports particularly textiles and clothing which have a declining shares in the world trade. Thus the need to overcome the skill obsolescence and turn towards medium and high technology exports was never as apparent as it is today. One particular means through which this change in the composition of exports can be accelerated is by removing the barriers and constraints in the way of foreign investors and Multinational Corporations (MNCs). FDI is an important force for integration for this as MNCs have set up supply chains and integrated production networks that tend to locate each stage of production in the country with the lowest cost. Affiliates of a MNC in one country often export to another for eventual sales in a third country market. These affiliates act as the on-the-job training grounds for the acquisition and dissemination of the skills needed for production and minimizing costs. These skills are then disseminated and multiplied throughout other firms in the country. (f) There is a very little intra-regional trade-taking place in South Asia. Intraregional trade has remained stagnant at less than 2% of the total trade in the last twenty-five years. A study carried out by the Pakistan Ministry of Commerce in 1996 concluded that due to low transportation costs, cultural similarities which influence taste and cause profitable complementarities to emerge and low transaction costs, the economic benefits of liberalizing trade with India outweigh costs. Despite this, the trade between the two neighbouring countries has remained negligible. Regional trading arrangements have made a huge difference in North America, Europe and East Asia, but they have been unsuccessful in South Asia. The recent attempt to revitalize SAARC is in the right direction and will stimulate trade and growth but only to the extent that it unleashes competition that lowers domestic prices, enables achieving economies of scale and acquiring new technology. SAFTA arrangements can be successful in the coming year but they require a number of important preparatory measures. These are described below: • Trade facilitation through expeditious border crossings, quick custom clearance, efficient port facilities, improved transport links should precede or take place simultaneously with the expansion of volume of cross border trade. • Domestic tax, tariff and subsidy policies that affect production and trade incentives should be harmonized to avoid recurrence of trade disputes and frequent use of anti dumping laws. As India provides a lot of subsidies to its producers in various forms and shapes the smaller countries are hesitant to allow MFN status to India. The recourse to a long negative list that restricts the volume of trade should be avoided at all costs. (g) • Macroeconomic policies such as fiscal and monetary policies should be harmonized to achieve a stable, non-discriminating macroeconomic environment for all the countries in the region • Supporting institutions to manage and facilitate integration, for example, setting standards, establishing regional development funds and for dispute resolution should be created. • Communication and transport infrastructure between the bordering countries should be improved and upgraded to facilitate increased trade and factor mobility. • Legal regulations for investor protection, intellectual property rights enforcement, antitrust law, commercial law, labor relations, financial institutions should be harmonized. • Financial markets should be widened and regulatory changes introduced to promote cross-border investment, listings, syndication, bond issues, etc. South Asian countries should tap the enormous potential of their large expatriate population in mobilizing investment capital, foreign exchange earnings, skilled manpower and exports of ethnic products and services. India, Pakistan, Bangladesh and Sri Lanka together receive about $20 billion of remittances from their workers annually but their contribution in domestic capital formation is insignificant. Unlike overseas Chinese Community that has played a substantial role in foreign direct investment, nonresident Indians have been a source, to some extent, of professional, technical and managerial skills but not much in terms of large financial outlays. The non-resident deposits transferred to India account for only a miniscule proportion of their wealth holdings abroad. These flows are quite stable in nature and should be able to augment domestic savings for accelerating the pace of investment without creating future debt obligations. Innovative products and investment vehicles to attract the savings of nonresident South Asians should be encouraged with the help of regulatory agencies. South Asian countries have so far missed the boat by not becoming a part of global value chain and participating in international supplier chain arrangements. There is no single business model for participating in this chain and there can be many phases of transition and many modes of involvement. For example, joint ventures, franchising, purchasing by international firms, licensing, sub-contracting, fully owned firm, original equipment, manufacturing, original design and manufacturing, strategic partnerships for technology, overseas acquisition of equity are the diverse means whereby developing country enterprises can gain wide access to international markets at their own level of capability, climb the technology ladder and benefit from globalization. East Asia is a major participant in this global supply chain and produces parts and components for a variety of manufactures. It is time that South Asian countries do make an attempt to get engaged in this value chain. Finally, I turn to the impact of WTO. I wish to clear the confusion that as if something drastic or unexpected or unknown is going to hit us in the near future due to WTO. All the countries in the region are already members of this organization since 1995 and have made binding commitments to maximum tariffs. In some cases the applied tariffs are lower than the bound tariffs. In actual practice, the South Asian countries have liberalized their imports and have been flooded with cheaper imports from China in the recent years. There could be no greater threat to the survival of domestic industry than competition from Chinese goods. Some industrial firms could not face the onslaught of this invasion and have died. Others have taken up by the challenge by cutting the fat, taking up the slack, becoming cost efficient, improving quality are competing with the new entrants. Thus the process of restructuring and transition is ongoing and should not pose any systematic threat to the industries of the region. What we all seem to be focusing upon is the abolition of the textile quotas under the Multi-fiber agreement and the adoption of new agreement on Clothing and Textiles in January 2005. The impact of this new pattern of textile trade on the economies of South Asia region is highly varied and differentiated. Most simulation studies and modeling exercises carried by the World Bank, USITC and independent consulting firms give credence to the view that China followed by India and Pakistan will be the main beneficiaries of the abolition of quotas. These countries are all vertically integrated i.e., from producing cotton all the way to finishing, dyeing, stitching, etc. and enjoy low wage costs and low raw material costs. Pakistan, for example, has invested $3 to 4 billion during the past five years to modernize and acquire state-of-the-art machinery that can produce quality goods according to the varying specifications and changing demand patterns of the buyers. On the other hand it is not obvious if all the ready made garment exporting firms in Bangladesh and Sri Lanka will be able to survive in the post 2005 markets. Both countries are seized of this problem and are taking measures to assist their firms and their workers. Whatever the benefits of regional trading blocks they are no substitute for participation in multilateral trade arrangements. Multilateral arrangements provide a much larger market to exploit which is several times the size of any regional block, enlarge the market access substantially and permit wider competition, larger scale of operation and greater specialization all of which increase productivity and growth. Thus the successful completion of Doha Development Round is very much in the interests of South Asian countries but the deferential impact on the various countries in the region has to be handled carefully, imaginatively and expeditiously. Short-term adjustment costs to the workers and business have to be absorbed in the long run interest of expansion in those activities in which these countries have dynamic comparative advantage. Conclusion South Asian countries have undergone remarkable improvement in their economic landscape during the last ten years or so and despite many vicissitudes and shocks have been able to maintain positive growth momentum. The challenges for the coming decade are however, of different nature. While the policy reform and good management of the past will certainly help the internal transformation of these economies the task facing the leaders of these countries are formidable. To maximize the benefits from globalisation and thus help reduce the incidence of poverty the future agenda should focus on good governance and institutional reform, investment in skilled manpower, shift away from low technology exports, aligning with international value chain of production, attracting foreign private capital flows including that from expatiate nationals, promoting intra-regional trade and mitigating political and geopolitical risks. | state bank of pakistan | 2,004 | 9 |
Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 54th Annual General Meeting of the Institute of Bankers, Pakistan, Karachi, 14 October 2004. | Ishrat Husain: Pakistan’s financial sector - a roadmap for 2005-2010 Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 54th Annual General Meeting of the Institute of Bankers, Pakistan, Karachi, 14 October 2004. * * * The first generation of reforms in the financial sector of Pakistan is about to be completed successfully and we have to lay down the proposals for eliciting wide discussion on the second generation of reforms. The reforms should be implemented in the next five years, although they have to be reviewed continuously to adapt them according to the changing circumstances both domestically and internationally. The objective of the second-generation reforms is to further deepen the financial sector and integrate it into the global economy. Before we lay down the proposed road map, let me recapitulate briefly as to what we have learnt from our experience so far and what we have accomplished so far. Lessons learnt: First, financial sector functions effectively and efficiently only if the macroeconomic situation is favourable and stable. The need to maintain macroeconomic stability will thus remain imperative for the coming period too. Second, reforms can be successfully implemented only if there is consultation, involvement and consensus building among all the stakeholders throughout the process. An institutionalized mechanism for this interaction and collaboration has to remain in place. Third, there has to be an active champion for conceptualizing, formulating, sequencing, implementing and monitoring reforms. In the absence of such a champion, there is a serious risk of derailment, reversal or abandonment. Fourth, application of technology, intensive use of human resource competencies and managerial skills are the key tools for achieving results and have to be carefully nurtured and upgraded continuously. Fifth, the regulators have the responsibility to communicate and explain the rationale, progress and outcomes of their policies and keep the market players fully informed. Results accomplished: (a) Financial markets in Pakistan have been liberalized and have become competitive and relatively efficient but still remain shallow. (b) The array of financial instruments available for various types of transactions in the market has widened but the evolution of new instruments has to remain on track. (c) Financial infrastructure has been strengthened but the legal system is still too time consuming and costly for the ordinary market participants. (d) Regulatory environment has improved and the capacity of regulators to oversee and monitor is much better today but the enforcement and prompt corrective action capabilities need to be further enhanced. (e) Financial soundness indicators of the system show an upward moving trend in almost all dimensions but there are weaknesses and vulnerabilities that require to be fixed. (f) Corporate governance rules have been clarified and conform to best international practices but their consistent application and voluntary adoption by the industry remain uneven. (g) Financial sector is opening up to the middle and lower income groups but the commitment and mindset of the providers are still out of sync with the new realities. It can be seen from the above catalogue of accomplishments that we have made a lot of progress but, at the same time, challenges ahead of us are quite formidable, the agenda for action is a lot more complex and the need for remaining alert and agile is even more pressing. The industry and regulators cannot afford to become complacent on our achievements but strive to work harder and together to move forward on the road we have set for ourselves. What needs to be done? The second generation of reforms should be built on the strengths of the financial system, work on removing the weaknesses and gaps and agree upon the speed, contents and phasing of these reforms. In my humble view, there are at least ten areas in which these reforms will produce promising results. (a) Broadening access to middle and lower income groups: The banks have learnt that by broadening their client base, adding new products to their portfolio and offering new types of services, they can not only diversify their risks but also earn higher returns. We should continue to move along these lines and aim to reach out to at least three million households in agriculture sector and two million small, medium and micro enterprises in the next five years. The economies of scale and economies of scope make these goals quite feasible but I must also warn that only those who have imagination, agility and capability will be successful while others will fail. Reckless lending or optimistic forecasting that the current low interest rate environment will remain unchanged in times to come, is bound to get your institutions into deep trouble. I would urge you to be enterprising but prudent, strategic but not risk averse and flexible but not too indulgent in reaching out to the small farmers, small firms or individuals with microfinance or consumer financing needs. (b) New liability products: The industry has paid adequate attention so far on developing new products on the asset side but neglected the savers and depositors. It is myopic for us to have such one sided approach as it is the savers and depositors who provide the wherewithal for the industry to perform its basic function of intermediation. The banks and non-bank institutions have to come up with innovative solutions tailored to the needs of 28 million depositors and savers of Pakistan. The Government has made the playing field level for you by removing the preferential returns in the National Savings Scheme, which has hurt the scheme holders badly. It is a wake-up time for all of us to begin looking after the interest of this vast majority of small savers and mobilize and utilize their savings in a much better way than we have done so far. Development of new liability products should be on the top of the agenda for the next five years. This is a serious weakness that we cannot afford to live with any more. (c) Corporate restructuring: Financial Sector Reforms in absence of corporate sector restructuring i.e. pruning costs, reducing debt and increasing efficiency will have only shortterm beneficial effects. The ratio of total corporate debt to GDP should be lowered, capacity has to be expanded and labour productivity needs to be raised. Firms have to be in better shape and invest in productive activities while new firms have to enter credit markets. Firms will fail in their businesses for a variety of reasons. Bankruptcy law will provide a mechanism for an orderly settlement of obligations. Bankruptcy separates bad managers from potentially valuable assets, lifts debts from shoulders that cannot support them and preserve value that alternatives such as liquidation might destroy. (d) Infrastructure financing: The traditional mode of financing infrastructure projects only through Public Sector Development Programme has resulted in congestions, shortages and bottlenecks. The experiment with the independent power producer types of arrangements in the private sector has not proved satisfactory from the viewpoint of the consumer. We have, therefore, to find some other ways of fostering privatepublic partnership in the areas of infrastructure development, and like other countries, the banks and capital markets have to take the lead. You should look at the successful experiences in other emerging markets and adapt them to our conditions. The State Bank of Pakistan (SBP) is prepared to work with you and we plan to hold a conference next year in which we will bring all the stakeholders together to ponder over this issue and come up with some practical course of action. (e) E-banking: It is gratifying to note that a lot of progress has been made in establishing the platform for Electronic banking. With the deregulation of telecommmunication sector in Pakistan, the opportunities for further value added services to underpin banking transactions have multiplied manifold. While small and medium banks can now offer on-line services to their customers, the large banks have to move more expeditiously so that the E Banking network can be utilized optimally. Transaction costs will become lower and customer service will improve. A variety of new services can then be offered. Our ATM penetration ratio is still quite low and we should expand ATMs more aggressively while maintaining them in good stead. (f) Private equity, pension and provident funds: There is still a mismatch between the growing appetite of institutional and contractual saving institutions for long term investment vehicles and the demand for long gestation mortgage, infrastructure, real estate and project financing. Private equity and venture capital funds, private pension and provident funds and insurance companies can play an important role in filling in this market segment. I would very much urge those who are always so keen to obtain a traditional banking licence to exploit the vast potential by setting up these new types of funds which are almost non existent in the country but are badly needed. I can assure you, on the part of the SECP and SBP, that we will render all possible assistance to those who wish to move into the fields of private equity funds, venture capital funds, private pension and provident funds, real estate investment trusts and similar other vehicles. (g) Investment banking: The role of investment banking in Pakistan has remained quite murky so far. The spread of universal banking model in the country has led to a certain degree of ambiguity as far as the market niche in which investment banks can operate. In my view, the corporates will always require investment banks to render services such as investment advisory, corporate restructuring, distressed assets acquisition and disposal, mergers and acquisitions, equity and debt financing. The investment banks have to get away from their aspiration to mimic commercial banks and build up their capabilities in the areas, which are begging for help. Commercial banks will never be able to compete with them either on costs or customer satisfaction even if they all profess that they can provide total banking solutions to all the clients needs. Several investment banks have merged into commercial banks but those who are serious players in this field should re-examine their strategies and direction and build up their human resource capabilities. (h) Human resource development: I wish to thank all the Chief Executives of banks who have put in place transparent and merit based system of recruitment of entry-level bankers. The next step in this value chain of human resource development is the continuing education, training, testing and progression of in-service employees and identification of future managers of the financial industry. Recently, I had a very productive meeting with the Human Resource Heads of some of your institutions at the IBP and we have agreed that this area needs your personal attention and commitment. We, at the SBP, have gained some experience in this endeavour and we are willing to share that with you. The IBP has been given a much larger mandate, the NIBAF facilities have been opened up to the whole industry and the five large banks have offered to upgrade the quality of their training institutions which can then be available to other banks, leasing companies, etc. I attach a lot of importance to this particular area of work and I will take personal interest in developing a cadre of professional bankers in Pakistan who are of international standards and can move into multinational banks without much difficulty. (i) Risk management: The advent of Basle II regime in a couple of years imposes a sense of urgency on both the regulators as well as the financial industry to put their act together as far as risk management is concerned. I have very little doubt that the foreign banks operating in Pakistan will have any serious problems in making the transition successfully but I remain very much worried about our domestic banks - large, medium and small. Although we all have been talking about Basle II for sometime, our response in preparing ourselves have been at best patchy. The SBP has installed capacity for risk management within the institution and we intend to keep on expanding this capacity but I see that our large banks have not yet woken up to attract the human resource of the right kind, set up the internal rating systems and the supporting technology. We have started the training courses in real earnest and I have asked the IBP to give priority to this area but we need trainable material from the banks. I hope that the Pakistan Banks Association (PBA) will form an internal working group to bring their member institutions to reach minimum standards by certain timelines. (j) Promotion of Islamic banking: I have been very much encouraged by the enthusiastic response to the setting up of Islamic banks and branches in the country. This is an extremely positive development as it brings into the fold of formal financial sector those who have remained outside because of their faith and beliefs. From my interactions, I can tell you that their numbers are in millions and not in hundreds of thousands. That is why we have a highly liberal licencing policy for opening Islamic banks, subsidiaries or branches. But I must caution you that we do not wish to transform this into another façade by moving too quickly and too imprudently. You should have all the ingredients in place - Shariah Advisors and Auditors, credit appraisers and marketing specialists, product development capacity, systems and technology - before you approach the SBP. Merry-go-around a few experienced individuals in this field by offering them attractive compensation packages will soon out price Islamic banking products from the market. This is not in our long-term interest that such kind of reckless actions put the future of Islamic banking in Pakistan at risk. Ladies and gentlemen, there are many more tasks we have to do but I thought if I had too many items on the platter it would not be possible for us to manage it within the timeframe of the next five years. But, as I said earlier, these are only some proposals and suggestions for your consideration, critical review and scrutiny. You may have some other priorities in mind which may make better sense. Please feel free to articulate them as I do not have any pretensions of having monopoly on wisdom. My purpose is to initiate discussion, debate and dialogue as to what we ought to be doing together in the next five years. I hope that all of you will come back to me with your feedback and ideas and then we can arrive at a consensual roadmap. In the end, I wish to thank each one of you for your support, cooperation and assistance to my colleagues at the State Bank of Pakistan and myself. Without your active collaboration we could not have achieved what we have done so far and we look forward to even better relationships in the future to meet these difficult challenges together. | state bank of pakistan | 2,004 | 10 |
Remarks by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the World Bank OED Conference on Effectiveness of Policies and Reforms, Washington DC, 4 October 2004. | Ishrat Husain: Effectiveness of policies and reforms - a country perspective Remarks by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the World Bank OED Conference on Effectiveness of Policies and Reforms, Washington DC, 4 October 2004. * * * The OED has done all of us a great service by carrying out evaluations of Bank Country Programmes in a systematic manner using a common framework. The findings of these studies should be of value not only to the Bank’s own operational staff but also to the economic managers of the client countries. As someone who has had the good fortune of working on both sides of the table, I would like to share some of my thoughts with you on the findings of these studies. First, let me begin by saying that I find myself in agreement with some of the conclusions of this report and there are at least three such broad areas: (a) I believe, just like the OED Report, that Aid is neither necessary nor sufficient for good policy. Aid can complement and catalyze the political and administrative processes by fostering and reinforcing the development of ownership but aid per se is no substitute for ownership. (b) I also think that conditionality per se is ineffective in linking aid with reform because the incentive structure makes it difficult for donors to disengage when conditions are not met. The donors should avoid micromanagement and focus on results. (c) I am more emphatic, than the OED is, on the relationship between policy reform and growth. There is strong empirical evidence at country level (not clearly sorted out in cross-country regressions) that this relationship is indeed robust. The experience of Pakistan since 2000 exemplifies that prudent fiscal balances, appropriate exchange rate, open trade regime, etc. do lead towards good growth outcomes and absence of these policies in the 1990s had decelerated growth and raised poverty level. Having agreed with these broad findings let me elaborate on some other nuances and lessons which should be taken seriously at the time of formulation of policy reforms. (i) Policy reform process is not always linear and we should expect slippages, setbacks and reversals during implementation. This should not throw donors off and they decide to disengage, withdraw or reduce planned assistance. The donors should stay on the course if the long-term direction, framework for action and overall strategy pursued by the country is clearly defined, followed and shared by them. (ii) Donors, including the World Bank have a vast array of instruments at their disposal and they should use the appropriate instruments judiciously and imaginatively at different stages to support the strategy. For example, if it is determined by the World Bank AAA work that a particular institution is not ready for lending because it is in bad shape, the appropriate response is not to wait until there is a turnaround in the institution but to deploy technical assistance, capacity building, advice, best practice dissemination and dialogue to prepare the institution so that it is ready to become eligible for lending. (iii) There is a convergence of interest between the sectoral ministries in the country and their counterpart sectoral departments of the Bank. So they form a lobby group and agitate for higher allocation of resources for their respective sectors and projects in an additive mode. There is little effort to explore trade-offs in a constrained resource situation and assign weights to the outcomes which can contribute towards the achievement of the strategy and desired results. On the other hand, complementarities and linkages between different sectoral programmes and interventions are not fully exploited and the planning and sequencing of different forms of reforms do not always reflect the synergies arising from such complementarities. For example, those who design the education policy interact with those responsible for labour policy only at a superficial level but not in an integrative manner. (iv) The behaviour, response and advice extended by the donors to the countries should be counter-cyclical in nature. When there are good days and booms, they should not be carried away by excessive affection for the country manifest in form of higher lending, AAA work and all kinds of assistance. The donor staff should desist from the temptation to shine in the glory of their countries. I would suggest that it is during these times that the donors should render advice of caution to the country and exercise prudence in their assistance. But when the country faces bad days or difficulties it is incumbent upon donors to continue engagement and not pull the plug. They should not sound tough at those moments but work with the country’s reformers to get the country out of the difficult patch. The trust and goodwill generated during these times will foster closer relationship between the Bank, or the donors, and the authorities of the country on a long-term sustained basis. Let me conclude by thanking the organizers of this Conference who have provided this opportunity to share my views with such an august gathering of practitioners, policy makers and donors. | state bank of pakistan | 2,004 | 11 |
Chief guest address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the launching of UN Secretary General¿s Report on Unleashing entrepreneurship, Karachi, 28 December 2004. | Ishrat Husain: Unleashing entrepreneurship Chief guest address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the launching of UN Secretary General’s Report on Unleashing entrepreneurship, Karachi, 28 December 2004. * * * I wish to commend the FPCCI and UNDP for launching the Report of the Commission appointed by the Secretary General on Unleashing entrepreneurship. The Commission had learned scholars and practitioners such as Prof. C. K. Prahalad and Mr. Hernando de Soto as members for whose views on poverty alleviation are highly refreshing and I have great respect for them. The Report reflects their views and hence the Report is not only useful but practicable. The Commission has made an extremely important contribution to the debate on how to harness the energies and entrepreneurs of the private firms, farmers, businesses - big or small, corporate or individual - for the larger benefit of the majority of the poor. It is also gratifying to note that the fear about the power and domination of multinational corporations and private businesses that has become a rallying point for anti-globalization forces has given way to a more balanced and sobering analysis of the role of private sector and private-public partnership in the Report. The rhetoric against liberalization of trade has been replaced in the Report by the consensus view that open markets support economic growth. The Commission has rightly distilled the lessons of last five decades’ experience of development. It argues that favorable global and domestic macro 1environment, physical and social infrastructure and rule of law are the foundations for the private sector. And a level playing field, access to financing, access to skills and knowledge are the pillars of entrepreneurship. If I examine the findings of this Report in light of what we have tried to do in Pakistan during the last five years we can proudly claim that we have made strides in fostering and ensuring a stable domestic macroeconomic environment, taken initiative in building physical and social infrastructure, and made serious endeavors to ensure a level playing field for all economic players whether large or small, domestic or foreign. We have, however, not been able to make much headway so far in our quest for achieving rule of law across the board particularly for the poor in our country who still face enormous difficulties. We have also remained slack in skills and knowledge development. There is a mismatch between the skills required by the economy and the skills produced by our educational institutions. We are way behind other developing countries in these two aspects. One of the most gratifying aspects of our reforms in the financial sector during the last five years has been broadening access to financing by the middle and lower income groups. The banking sector which dominates our financial system (it controls more than 90 per cent of financial assets) had traditionally catered to the needs of the Government for meeting their deficit financing, or to the large and well established corporate sector and also financed international trade. Through the reforms undertaken in last 5 years we have tried to open up the financial sector by promoting and encouraging non-bank financing companies which through leasing, modarabas, mutual funds etc. can reach out to new type of borrowers and savers. As most of the poor derive their livelihoods from agriculture, SMEs or have no tangible assets, the State Bank of Pakistan is facilitating flow of agriculture credit, SME loaning and microfinance to help them. Four years ago, ZTBL was the only major provider of credit to agriculture. Today, the commercial banks have overtaken ZTBL as the main sources of agriculture credit. During this period the volume of credit to agriculture particularly small and subsistence farmers has almost tripled and this year we hope to cross Rs. 85 billion. Similarly, from a modest start the outstanding loans for SMEs now account for 18 to 19 per cent of all private sector loans. Khushali Bank, Pakistan Poverty Alleviation fund and other microfinance institutions and NGOs are now serving about half a million poor mostly the women in rural areas. Our aim is that 50 per cent of our agricultural households should be able to obtain bank credit in the next five years while we plan that microfinance institutions should reach 3 million borrowers from the current level of half a million borrowers. In small and medium enterprises the banks’ efforts will be focused on financing at least two million enterprises throughout the country. Interestingly, the banks find it profitable to lend for microfinance, SMEs and agriculture as their target group is small holders, small businesses and the poor particularly the women. Their track record in loan recovery is far superior to that of the large business houses and large farmers. The default rate was 25 per cent when the banking system in Pakistan was serving the traditional target group of corporates and large holders. Today, the default rate is less than 5 per cent when the banks are gradually shifting their lending to the underserved sectors, underprivileged households and undercapitalized enterprises. The experience with the banking sector reforms in Pakistan has therefore exploded the myth that the formal finance can only be made available to the organized firms and well-to-do families and individuals. The conventional wisdom that the banks will lose money if they broaden their access to rural population or small enterprises does not hold any grounds looking at the results achieved by the banks in the last few years. For the middle class who form the backbone of any economy, we have allowed the commercial banks to offer mortgage financing, auto financing, consumer financing and Islamic banking. There has been an impressive response to these products. Most of the autos are now purchased through bank or lease financing. The banks have attracted million or so new customers from the middle and lower income groups who have availed of financing in these new areas. I fully endorse the view of the learned authors of the report that large incumbent companies in developing countries can stifle entrepreneurial energy and initiative but a dynamic financial sector, in which new entrants and incumbents can get finance under competitive terms, can create competitive pressures in the market. This is exactly what Pakistan is trying to do. We have done away with effectively subsidizing large private sector firms which were selling low quality products at high prices under a regime of controls. We have allowed liberal entry and sale of imported goods and inputs and also removed high tariffs and quotas so that small firms can also produce goods domestically at low prices. Least that I am misunderstood that we have reached nirvana I wish to make it clear that we have just made a modest beginning in this journey towards reaching out to the poor and the middle class. The journey is long, tortuous and the road ahead is full of stones and boulders. We have to work hard to remove these impediments on our way and continue marching towards our destination without getting fatigued. I hope the recommendations of the report will not only be disseminated widely but also acted upon faithfully. | state bank of pakistan | 2,005 | 1 |
Remarks by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Plenary session of the First International Conference on Volunteerism and Millennium Development, Islamabad, 7 December 2004. | Ishrat Husain: Global partnership for development Remarks by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Plenary session of the First International Conference on Volunteerism and Millennium Development, Islamabad, 7 December 2004. * * * I will begin my remarks by taking a stock of the progress that has been made in the implementation of MDG agenda so far before I dwell on the Goal 8 specifically. My main sources of information are the Global Monitoring Report 2004 prepared by the World Bank and the Human Development Report 2003 prepared by the UNDP. A reading of this evidence suggests the following broad conclusions: • In regard to income poverty goal of halving income poverty between 1990 and 2015 the situation remains uneven. Due to the marked improvement in China and India, the World’s two most populous countries, the goal is likely to be met. East Asia has already met it as the number of people living on less than $1/a day has halved just in the 1990s. However, Sub-Saharan Africa (SSA) is seriously lagging behind. Low income countries under stress (LICUS) about half of which are in Africa are at risk of falling far short. • Prospects for meeting education goals appear more promising than in health. It is at least comforting that the goal of providing universal primary education will be achieved in most regions with the exception of Sub-Saharan Africa. However, gender gap are quite stark. Two-thirds of the illiterate adults are women and three-fifths of the children out of school are girls. These gaps are likely to persist and gender equality goal will be missed. • Overall the goal of halting and reversing the spread of HIV/AIDS and other major diseases appear daunting. Their incidence continues to rise, further aggravating conditions affecting child and maternal mortality and entailing broad and serious economic and social consequences. Health system in poor countries are seriously underfunded with average public spending at almost one third of the WHO’s estimate of bare minimum of basic health services. • The health goals are rendered more difficult by the large gaps in access to safe drinking, water and basic sanitation. The gaps are largest in SSA for water and in South Asia (SA) for sanitation. The goal of halving by 2015 the proportion of population without access to safe water and sanitation means providing an additional 1.5 billion people with water and 2 billion with sanitation. With current rates of progress only about one fifth of countries will achieve the target increase; among low income countries (LICs), only about one-tenth will make it. In overall terms, East Asia will meet the goals as it has countries such as China and Thailand, which have already made it. At the other end Cambodia and PNG are seriously off track. In general, middle income countries (MICs) are much better positioned to achieve the MDGs than the low income countries (LICs). The MICs will still have 280 million people living on less than $1/day and 870 million people living less than $2/day. There are 59 top and high priority countries identified by UNDP where failed progress and terribly low starting levels undermine many of the goals. Now I turn to the question: what needs to be done in the next ten years i.e. until 2015 by different partners in this business. The achievement of the development goals will require rising above current trends and accelerating the pace of development and doing so swiftly. There is a need to scale up the action and there are three ways to do so. 1) Accelerating and deepening reforms to achieve stronger growth, 2) Empowering and investing in poor people - stepping up action to improve the delivery of services affecting HD, 3) Matching stronger developing countries efforts to spur growth and improve service delivery to poor people with stronger support from developed countries. What is required by each of the partners in this compact is briefly outlined in the following paragraphs. Developing countries: Developing country policies have improved most notably in Asia but also in many countries in Sub-Saharan Africa. But public sector governance remains the weakest area of the reform agenda in most countries. Institutional dimensions of reform are critical both for good macroeconomic management as well as delivery of services. A) Economic and financial policies The developing countries should continue to pursue; • Prudent fiscal management and sound public financial management for reducing vulnerability to crises. • Outward-oriented strategies by reducing tariff and non-tariff barriers and trade liberalization. • Deregulation and strengthening institutions - especially property rights, rule of law. • Implement stronger and deeper financial sector reforms to channel savings to productive uses and broaden access to finance. B) Human development • Allocate more resources and ensure more effective use of these resources for accelerating HD. They can increase the impact of existing spending by proper targeting of subsidies. • Put in place well targeted social safety nets that protect poor and vulnerable. • Empower women. C) Public sector governance • Accelerate governance reform - institutions to manage development interventions. • Decentralize delivery of services with financial and administrative powers. • Control corruption and promote transparency and accountability. D) Environmental management • Build appropriate policy and institutional framework. Developed countries Developed countries have to carry out the following responsibilities. • Trade barriers are a major impediment to global well being. Trade policy reforms particularly in removing agriculture subsidies will be a major source of gains for the world economy and poor countries. • Liberalization of services trade, including migration will help raising incomes in developing countries. • A substantial increase in ODA from the present level of $58-60 billion in 2002. or 0.23% of GNI in line with the Monterrey Consensus to 0.7 percent of GNI. • Improving the allocation of aid - selectivity on basis of country performance. • Increasing the effectiveness of aid through improved alignment and harmonization. • Providing aid in forms that are responsive to country circumstances and needs. • Provide debt relief and debt sustainability to Heavily indebted poor countries. International financial institutions and the UN family • Work towards debt sustainability for the Heavily indebted poor countries. • Increase financial and technical assistance to Sub-Saharan Africa. • Put in place crisis prevention and crisis management mechanism. • Help build capacity building in poor countries. • Play advocacy role vis a vis developed countries. NGOs and voluntary groups • Actively participate in the provision and financing of basic services to the poor. • Mobilise the poor and the target groups for participation, empowerment and capacity development. • Learn from the successes and failures of the innovative models of delivery to the poor. • Share and disseminate critical success factors in mobilizing communities and voluntary groups. • Complement the efforts of the governments, international organizations in verifying the progress and results of the MGD. Academia, research institutions and statistical agencies • Timely statistics on the development outcomes, fill in the gaps in data collection, and build statistical capacities in the developing countries. • Research on transmission mechanisms and relative weights of the various determinants of growth and poverty reduction and interrelationships among them. Media groups • Communicate, highlight and disseminate widely the success stories of projects and programs of countries, and innovative models of delivery of services and outreach to the poor. • Promote awareness and keep a vigilant eye on the various stakeholders in meeting their commitments. Conclusion To conclude, the global partners must now onwards focus on the lagging regions such as Sub-Saharan Africa, lagging countries within the achieving regions such as Cambodia and Papua New Guinea and lagging provinces, states and districts within the successful countries such as Guizhou, Yunnan and Xinjiang in China. There is a strong evidence to confirm the existence of virtuous cycle linking education and economic growth. Education is critical to better health and nutrition. Better education, health and nutrition increase the productivity that leads to economic growth. Growth then generates resources that are deployed to finance improvement in health and education, further raising productivity. Critical in this cycle is the female education which has the highest direct and indirect rates of return among all types of investment. Educated and healthier women participate in the labor force, contribute to higher productivity by adopting new techniques and innovations and thus raise level of household incomes. The higher growth outcome achieved in this benign way also reduces incidence of poverty. Thus investment in female education must be given the highest priority. Within a country, the scale and effectiveness are the two main determinants of achieving the millennium goals. The scaling up effort cannot take place without the active involvement and capacity of the government at all levels. Planning, coordination, monitoring and filling in the capacity gaps by the government are essential ingredients of any meaningful scaling up. Improved delivery of education and health services as well as availability of water and sanitation to the poor people can best be done by the government. These not only require investments but also reforms in policies and institutional framework. On the other hand the effectiveness of the delivery of services and right targeting are difficult to achieve without the active involvement and serious efforts of the communities for which volunteers and voluntary organizations are best suited. The capabilities of poor people to participate in and benefit from growth will have to be upgraded and that can be done only by the volunteers and community leaders. Successful innovations such as EDUCO in El Salvador, the PROGRESO programmed in Mexico, Female Secondary School assistance in Bangladesh are good examples of community engagement in effective service delivery. In Bangladesh are good examples of community engagement in effective service delivery. In Porto Alegre, Brazil, public monitoring of local budgets has brought huge improvement in services. The various stakeholders involved in this global partnership i.e. the developing countries, developed countries, international financial institutions and the UN family, NGOs and voluntary organizations, the academia and media should examine their own role, responsibilities and attainments. They should mainly focus on the system-wise issues and the lagging regions, countries and areas to give them a helping hand in boosting their outcomes. | state bank of pakistan | 2,005 | 1 |
Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 12th General Council and General Body Meeting of the Asia Oceania Tax Consultants Association, Karachi, 26 November 2004. | Ishrat Husain: Comparison of Pakistani economy with Asean economies Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 12th General Council and General Body Meeting of the Asia Oceania Tax Consultants Association, Karachi, 26 November 2004. * * * It is now widely accepted that the Asian economies have done extremely well in terms of economic growth and poverty reduction during the last three to four decades or so despite the crisis of 1997. Three decades ago, China was among the world’s poorest countries with 80 percent of the population having incomes less than US$ 1 per day and only a third of all adults able to read or write. By 2000 the proportion of the poor (income less than US$ 1 per day) had declined to around 16 percent. Korea and Pakistan had identical per capita incomes of $100 in 1960. Korea has now graduated as an OECD country and reached per capita income of approximately $10,000 while we haven’t even crossed the threshold of $1,000. Asia’s share in World GDP (at PPP) has risen from 24 percent in 1973 to almost 40 percent in 2003. Foreign currency reserves of Asian central banks now account for 70 percent of the World currency reserves and financed more than half of the current account deficit of the United States in 2003. There was a time in the late 1960s when Pakistan’s exports exceeded total exports of Indonesia, Malaysia, Thailand and the Philippines. But, unfortunately, all these countries have moved ahead whereas Pakistan is still struggling to reach $14 billion target. Had Pakistan maintained its economic progress of the 1960s, its economy would have been akin to the East Asian ones and moved into the middle income group by now. Our per capita income is still around $650 and we are stuck in the low income category. Whereas it took the United Kingdom almost a century, United States of America 50 years to double their per capita incomes, most of the Asean+3 countries1 (Asean + Japan, China and Korea) achieved this goal in less than half a century. Japan did this in 40 years, Korea in 25 years and China in 10 years. Pakistan should learn from the experience of these countries and there are many lessons which should be followed by us if economic progress has to be sustained. The evidence on economic development Asean+3 countries suggests some common factors which have been critical to their success. (a) Work ethic; discipline; trust: The foremost principle for economic progress was strong work ethic and discipline in the work force and creation of trust among each other. The labour force, in each of these countries, is highly disciplined, works extremely hard and carries out the orders of their supervisors ungrudgingly. The workers mind their own business without disrupting others’ work, focus on the task given and take pride in producing results. Trust and social capital have a positive impact on the quality of development by enhancing collective action, mitigating risks, promoting accountability and reducing transaction costs. Korea and Japan produce more scientists and engineers than lawyers as these countries work on the basis of trust and avoid protracted litigation which wastes a lot of productive time and dissipated energy. Another characteristic of East Asian economies is the reliability of contract fulfillment. When a contract is given in China either for production of goods, delivery of services or construction of a project, you can be rest assured that it will be completed mostly ahead of time, within the stipulated specifications and without incurring any cost overruns. The attributes of reliability and low cost have made China the world’s largest manufacturing factory that has been able to attract almost all Fortune 500 Companies to locate their facilities in China. Unless every single worker and manager in this country begins to abide by his word in honouring contracts - whether oral or written - we would remain on the fringes of the global expansion. (b) Savings: Pakistan would have to improve its domestic saving which was amongst the lowest in the Asia region at round 16 to 18 percent as against 30 to 40 percent in other countries. China’s domestic savings rate has consistently exceeded 40 percent providing ample resources for Most of the discussion in this paper is focused on Japan, Korea, China, Malaysia, Thailand, Singapore, Indonesia and Philippines. Other Asean countries such as Brunei, Cambodia, Laos, Myanmar and Vietnam are not covered. investment. So is Malaysia’s rate of savings 43 percent and Thailand’s 33 percent. It is only when a country does not have adequate domestic savings it has to indulge in foreign borrowing in order to attain a modest investment. Correspondingly, East Asian countries retired, in net terms - $28 billion of debt during the last four years. External debt-GDP ratio in China is only 13 percent, one of the lowest among the developing countries because it relies mainly on its own savings to finance investment. In contrast, Pakistan’s low savings rate compelled it to borrow abroad. This excessive foreign borrowing resulted in a financial crisis for Pakistan in the late 1990s as the country was not able to service its loans. The reduced debt burden that has been recently achieved can be sustained if the national savings rate rises consistently over time. (c) Investment in human development: Investment in human resource development has made a significant contribution to growth, reduction in the incidence of poverty and improvement in social indicators in the East Asian countries. The average years of schooling in Korea are 9.6 years; 6.3 years in Malaysia and 6.0 years in Singapore compared to 3.2 years in Pakistan. The emphasis on female education led to reduced fertility, thus mitigating the adverse effects of population pressure and increased supply of educated labour. In Pakistan, female education rates remained dismally low with the attendant problems of high fertility rates, high population growth rates and a low labour participation rate. There is an urgent need to bring women in the mainstream and give priority to their education, health care, nutrition. This will not only control the rate of population growth but expand the base of educated and skilled labour force in the country. Almost half of the population in Pakistan is illiterate and it is imposing a heavy drag on achievement of Pakistan’s economic potential. On the other hand, most Asean+3 countries have almost 100 percent literacy rates with high life expectancy, low infant and maternal maternity and universal primary education. The productivity effects of such elevated social indicators on the economies of these countries are quite obvious and productivity is the key variable determining how fast the economy can grow. (d) Labour force quality: Related to this phenomenon is the training and skill upgradation of the labour force. Asian countries do not only hire educated and literate workers but provide continuous training to these workers in acquiring new knowledge, techniques of production or improvement in processing. In 1991, a U.S. manufacturing worker was 40 times more productive than his Chinese counterpart. By 2000 that gap had narrowed to only 10 times. Chinese labour productivity has increased four fold in the past decade thus lowering the unit labour cost in manufacturing. China’s wage rate is 61 cents per hour compared to the US rate of $16. Taking into account the labour productivity differences between the two countries, the unit labour cost in China is still only $6.10 per hour. The firms in Pakistan consider training expenses as additional costs and not investment. This short sighted view has kept the unit cost of labour i.e. taking into account labour productivity differentials quite high relative to China and Asean countries. (e) Openness of the economy: Another fundamental which has served the Asean+3 countries well is openness of their economies to trade and foreign investment. Tariffs rate are uniformly low - in single digits - and non tariff barriers are hardly existent. Market access to these countries has stimulated both import and exports of goods and services to the extent that in Malaysia the trade-GDP ratio exceeds 100 percent. China and India both had almost identical level of exports of $10 billion in the late 1970s. A relatively more open trade policy pursued by China has enabled it to increase its exports to more than $400 billion last year while India was able to each about $60 billion. Similarly, FDI flows are welcomed by all the Asian countries as they benefit the domestic economies in form of new technology, better managerial skills, networking with the global supply chain and infusion of foreign capital. FDI flows to East Asia during the last four years amounted to $208 billion. China alone receives $50 billion annually and most foreign enterprises produce goods not only for the Chinese markets but also for exports. 65 percent of China’s increase in exports in the last ten years was generated by foreign firms and their joint ventures. This policy of openness makes a lot of sense. Our entire economy is $100 billion and even if we are able to double it within ten years, it will only grow to $200 billion whereas, as world exports today are $7 trillion and if we aim at capturing 2 percent of world trade, our exports alone will increase to $140 billion - ten times the 2004 level. So you can see what a tremendous difference it will make in boosting Pakistan’s economy if we aggressively integrate ourselves into the world economy. This is the way the Asean+3 countries have done it. Those who favour inward like strategies relying simply on domestic economy and argue against exploiting the opportunities offered by globalization are, in fact, condemning us to a perpetual state of backwardness, poverty and misery. (f) Tax culture: One interesting feature of the development story of Asean+3 countries is the high tax compliance by the population and low incidence of tax evasion. In the 1970s when Japan had not yet joined the ranks of developed countries, tax recovery was almost 96 percent of the total tax assessments. The high degree of revenue collection helps a nation to build infrastructure like roads and highways, bridges, ports, etc. and to spend on education and health. In the absence of adequate tax revenue mobilization, the government is unable to carry out these basic responsibilities of development well. In Pakistan there is a widespread tendency to evade taxes by concealing incomes. Presently, there were only 1.1 million tax payers in a population of 150 million people. This number should be increased to at least three million. Once the tax base is broadened the tax rate can come down from 35 to 25 or even 20 percent and the heavy burden borne by a small segment of the population can be eased by sharing with a larger segment. As tax consultants, you bear an enormous responsibility for the sake of the nation’s cause to help plug the holes of tax evasion and maximize the number of tax payers in the country. (g) Role of the government: The role of the government in Asean+3 countries has been to facilitate, guide and help the private sector in fostering economic growth and development. By maintaining macro economic stability, by charting out a long term vision and strategic direction and by pursuing consistent and predictable policies, the governments in these countries gave confidence to local as well as foreign investors. The long term path chosen by China in the late 1970s under the leadership of Deng Xao Ping is still being followed with suitable adaptation and modification despite changes in the leadership of the Communist Party during the last two decades. The same was done by Japan where a separate ministry called Ministry of International Trade and Industry (MITI) was created to develop industrial strategy and vision and to assist the private sector in these industrial pursuits and export expansion. Unfortunately, we have been changing our policies, programmes and priorities every two to three years in the 1990s with every single change in the government giving confusing signals to the investors, nurturing uncertainty and leading to disruption in the momentum of economic activities. The continuity and consistency of policies since 1999 and the level playing field created for the investors has started paying dividends as investment rate has begun to show an upward trend. (h) Science and technology: As a nation, we have to give greater importance to science and technology as a tool to capture the commanding heights of the global economy and to achieve the required level of growth of 7 to 8 percent. Korea and Taiwan (a non Asean country) sent teams to recruit their nationals working in the United States and offered them lucrative and attractive packages to hire them back to their countries of origin. These scientists and engineers taught at the universities and colleges, set up research institutes, worked in the laboratories and on product development of industrial conglomerates and trained hundreds of thousands of young men and women in the modern tools of science and technology. The enormous progress that these countries have achieved during the last thirty years would not have been possible without this huge investment in research and development. In Pakistan, we started extremely well and our educational institutions were turning out scientists and engineers of high caliber in the 1960s but then we neglected these fields to the serious detriment to our economic progress. It is only during the last five years that higher education, science and technology have come back on the radar screen of the Government but it will take us some time before we can make up for the lost time. (i) Private sector: In Asean+3 economies the private sector was allowed a free hand in the production, distribution and trade of goods and services. Japan did it through big industrial conglomerates Keiretsus/Zaibatsus and so did Korea through Chaebols. Taiwan adopted a different strategy and that was to promote industrialization through small and medium enterprises. China, Thailand, Indonesia, Philippines and Malaysia encouraged foreign direct investment and joint ventures. The success of these strategies can be gauged from migration of product cycle. In the 1970s U.S. firms such as RCA and Westinghouse dominated domestic appliances markets in the world, in the 1980s Sony, Sanyo and National of Japan took over this market, in the 1990s the production shifted to Korea with Samsung, LG, etc. and in this decade it is the Chinese companies such as Haier who are beginning to assert themselves. Private sector firms were responsive to changing market conditions and took full advantage of lower costs of production in adapting to these changed conditions. Pakistani scene after the 1970s has been riddled with inefficient and highly bureaucratic public enterprises who were subtracting rather than adding value and causing enormous losses. It is only more recently that the speed of privatization has picked up and private sector has been assigned its due role. (j) Leadership and institutions: In almost all these countries, a common feature has been strong leadership and strong institutions that could provide the helping hand and clear direction to the entrepreneurs, firms, farming community, exporters, businesses and delivering essential public services to the population at large. In Korea, General Park, in Singapore Lee Kuan Yew, in Indonesia General Suharto, in Malaysia, Dr. Mahatir Mohammad, in the Philippines General Ramos after Marcos were the shining lights in their respective countries. Whatever their faults they took upon themselves the responsibility to steer the course of economic development and produced tangible results for their nations. In the absence of strong leadership or strong institutions, the difficulties are compounded and the time taken to reach the goal post is elongated. (k) Regional integration: Finally, the Asian economies have been recording very high growth rates in times of turbulence in the world economy, slow down in the US and European economies and overall stagnation. They have been able to do so because regional trade integration has insulated them from these external shocks to a very large extent. The rising share of intra-regional trade has in fact created a barrier against the tidal waves of adversity in world economy. This can be seen from the differential growth in intra-regional trade in East Asia and the growth in world trade. The intra-regional trade has grown at an annual rate of 16.4 percent between 1975-2001 while world exports have grown at 8.2 percent per annum. China has become a pivot around which the countries in the region revolve around. This linkage may prove to be a liability at some future point of time if something goes wrong to the Chinese economy but even then the trade among these countries other than China has also picked up. 30 products account for half of the intra-regional trade. Of these, 20 are inputs for further production. The basis for intraregional trade is that they buy raw materials and commodities from each other to make labour intensive products for the US and European Markets. South Asia, on the other hand, is the only region in the world where the tentacles of regional integration are least spread out and intra-regional trade linkages hardly exist. The potential for rapid economic growth through improved trading relations in the region is quite high but political differences have not yet allowed this potential to be harnessed. Given the fact that this is a region which has the highest number of the poor in the world, the sense of urgency is quite obvious but lack of political will has so far retarded the progress. The above comparison clearly brings out that some of the important factors responsible for the economic turnaround of Asean+3 countries were not practised consistently in Pakistan and that is why we are left behind. But, let me conclude on an optimistic note. Whatever progress has been achieved during the last five years by following a set of continuous and consistent policies and reforms if it is allowed to move on the chosen course, I am confident that Pakistan will also be able to emulate the example of the Asian Countries. We will be able to leave a prosperous and progressive Pakistan for our children to live and enjoy. | state bank of pakistan | 2,005 | 1 |
Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Seminar organized by the Pakistan Bankers Association UK, London, 17 January 2005. | Ishrat Husain: Future outlook and challenges for Pakistan’s economy Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Seminar organized by the Pakistan Bankers Association UK, London, 17 January 2005. * * * H.E. Dr. Maleeha Lodhi, Mr. Anjum Iqbal, Distinguished Ladies and Gentlemen, I am delighted to be back once again in your midst this year and wish to thank you for inviting me this evening to share my views about Pakistan’s economic prospects with this distinguished gathering. I would like to address the following three questions that are of great interest to every Pakistani, whether living in Pakistan or abroad. (a) What has been accomplished so far? How sustainable these reforms and policies are? (b) What is the future outlook and prospects for Pakistani economy? and (c) What are the challenges and risks facing the economy? Accomplishments made so far: There is a general agreement both within and outside Pakistan that there has been a remarkable turnaround in the economy during the last five years. What are the main accomplishments that have laid the foundations for sustainable growth and poverty reduction in the future? I would list at least eight such factors that have made a significant positive difference in the economic landscape of our country. 1. Fiscal discipline: The major cause of Pakistan’s economic ills lay in the imprudence of fiscal policy where the governments indulged in excessive spending in relation to their revenues and incurred deficits in the range of 6 to 7 percent of GDP. These persistent imbalances led to accumulation of public debt that reached unsustainable level of 100 percent of GDP by 1999-2000. The Musharraf Government has taken tough measures to introduce fiscal discipline in the country and has been successful in bringing fiscal deficit down to 2.4 percent last year. How has this been achieved? There are three ingredients responsible for this outcome. First, revenue mobilization has doubled from almost $300 billion to $600 billion in this period through a combination of improved tax administration, reducing the discretion of tax collector and minimizing interaction between tax payer and tax collector, rationalizing the tax rates and structure and widening the tax base to some extent. Universal self assessment system for income tax has increased both the number of voluntary filers as well as tax collection. Second, the burden of debt servicing has been radically lowered. Five years ago, more than 50 percent of government revenues were preempted by interest rates. But, the carefully designed strategy of debt management implemented during this period has led to decline in this ratio to almost 25 percent with a downward moving trend. This has not only allowed lowering of fiscal deficit but provided fiscal space for doubling development expenditure. Third, the hemorrhage caused by the losses incurred by the public sector enterprises has been stopped and either these enterprises are being privatized or their performance has improved as a result of good governance and tighter management. 2. Financial sector reform and restructuring: The financial sector has become the lynchpin of the revival of economic growth in Pakistan. Not only that the sector has become sound and healthy and strong enough to withstand exogenous shocks but has played a major role in broadening access to the middle class and lower income groups. Average bank lending rates have come down to 6 percent from 15-16 percent five years ago and 21-22 percent in the 1990s. This decline is a result of lower demand for credit by the public sector as it reduced fiscal deficit and plugged in losses; the competition between the private sector owned and managed banks who now hold 80 percent of the banking assets; the removal of drag of non-performing loans by tackling them in a decisive way; the lowering of corporate tax rate on the banks; the assumption of affairs of banks by professional management and a vigilant role played by the Central Bank in supervision and regulation of the system. Lowering of interest rates gave a kick start to the private sector credit that, in turn, led to better capacity utilization and higher output in manufacturing sector recording growth rate of 17 percent last year. Higher manufacturing growth contributed towards the achievement of 6.4 percent GDP growth last year and is making similar contribution this year. Pakistan’s banking system by opening its doors for mortgage, automobile, consumer, credit cards, SMEs, agriculture and microfinance has broadened the borrower base and brought in its fold firms, farmers and individuals who had never used bank credit for their productive activities or financing needs. This movement is still in its infancy and a lot of efforts have to be made in order to maintain this momentum. 3. Macroeconomic stability: Even the worst critics of the present government do admit that Pakistan has been able to achieve macroeconomic stability although according to them the benefits have not trickled down to the common man. Macroeconomic stability that had eluded us for a long period of ten years in the 1990s is the foundation for sustainable economic growth. All indicators, whether current account balance, inflation, fiscal balance, exchange rate, interest rates, foreign exchange reserves, point clearly to a positive direction. The challenge for the economic managers is to maintain this stability so that private investors can make investment decisions with full knowledge of the expected profitability in an environment where there is little turbulence or swings in the key prices. The continuity, consistency, predictability and transparency of economic policies are essential to foster this environment. In this complex world of interdependence and interconnections there would be moments of tension and uncertainty but better communication, fuller disclosure of facts and information to the markets and regular interaction with the economic players will keep things under control. 4. External debt vulnerability: Along with high fiscal deficits, Pakistan was faced with rising and unmanageable external debt burden. By 1999/00 the external debt as a ratio of GDP had reached almost 52 percent. The new Government that assumed power took upon itself the task to bring down this burden to an acceptable level. It designed a strategy of debt management that consisted of a long term reprofiling of Paris Club bilateral debt, substitution of non-concessional loans from IFIs by concessional loans, early repayment of expensive commercial and short-term debt and fiscal consolidation. This strategy has been successfully implemented and the absolute stock of external debt and liabilities has, in fact, gone down from $38 billion to $35 billion. The ratio of external debt to GDP in 2004-05 is likely to be around 33-34 percent and is on a downward trajectory. Average interest rate on the stock of debt has more than halved and external interest payments as a proportion of foreign exchange receipts have gradually dwindled to less than 25 percent providing a breathing space and freeing the country from the undue pressures of crisis management. 5. Deregulation: In a number of areas such as petroleum, natural gas and agriculture inputs and outputs the prices and trade have been completely deregulated. Market forces determine the prices that are no longer controlled or administered by government decrees or regulations. Although the mindset of the administrators has not changed and instances of petty harassment and extortions by these officials are rampant, the government policy has been quite clearly articulated. For example, the cotton farmers are free to export their produce without any taxes or duties if there is excess supply domestically and no permits or licences are required. Similarly, the spinners are at liberty to import cotton at the prevailing international prices without any duties or barriers if they believe that the domestic crop is short. Government no longer imports petroleum and petroleum products but the task has been assigned to the private sector. Nor are the fortnightly prices of local POL products determined by the Ministry of Petroleum but by the distributors themselves. Subsidies on fertilizers have been removed and most of the production, marketing and imports or exports are carried out by the private sector. The prices of end products rise and fall according to the dynamics of supply and demand. Trading Corporation of Pakistan does step in on occasions but its main task is to intervene in the market where shortages or excesses threaten orderly market conditions in essential commodities. The most successful experience of deregulation has taken place in the telecom sector. The monopoly of the state owned PTCL has been broken and new licences have been issued for Local Loops, Long Distance and International Lines. Cellular telephone segment has shown highly impressive growth during the last few years and two new international investors have purchased licences through open auction. The subscriber base in cellular phone has jumped from 3 million to 7 million in the last one year and it is expected by 2005 the number will cross 15 million - an unprecedented feat. 6. Privatization: The Government has made it clear that it is not in the business of running enterprises and it is, therefore, divesting its interests in state owned enterprises by selling them to strategic investors in the private sector. Most of the banks, industrial companies, etc. have already been transferred to the private sector. The shares of some utilities and infrastructure companies have been floated through stock exchanges. But now is the turn to sell large ticket items such as PTCL, PSO, Power distribution and generation companies, integrated power utility such as KESC. The calendar for future privatization is quite crowded and it is expected that most of these companies will be off the books of the government by the end of year 2005. The efficiency gains, tax revenues accruing to the government instead of subsidizing their losses, improved customer service and expansion through new investment are some of the direct and indirect benefits to the economy from privatization. 7. Trade liberalization: Pakistan was known for its extremely high tariff rates that were used to raise government revenues and also to protect domestic industries. In the early 1990s the maximum tariff rate was more than 100 percent. These higher tariff walls, in fact, had highly pernicious effect as wide spread smuggling discouraged domestic production and promoted imported goods. Pakistan’s tariff rates have been gradually brought down to the current maximum rate of 25 percent. The average tariff rate is as low as 13-14 percent and should be further lowered. Contrary to conventional wisdom the reduction in tax rates has not only ended smuggling of a large number of imported goods and stimulated domestic production, but has also raised custom duty collection. Lower tax rates and absence of discretionary measures by the customs officials have, in fact, created disincentives for tax evasion and helped accurate declaration and classification of imported goods. It is seldom realized that high tariffs act as a tax on exports that are not able to obtain the required imports and raw materials for meeting their production in a cost effective manner. 8. Financial sovereignty: Pakistan had lost control on its economic management and thus virtually conceded the right to design policies to international financial institutions particularly the IMF. We had lost our credibility as a serious development partner because we entered into successive agreements and made commitments on policy reforms and institutional changes. But, we were good at drawing down the first tranche of the loan and then abandoning the programme. It is only since the year 2000 when Pakistan entered into a stand-by arrangement with the IMF (successfully completed in 2001) followed by a threeyear PRGF programme that the country has shown serious mindedness and a commitment to fulfill its obligations. By the end of 2004 Pakistan had drawn down 12 tranches in succession on time without any hiatus and decided to forego the remaining two tranches voluntarily after the review was completed by the IMF Board. Pakistan has thus been able to regain its financial sovereignty and is no longer dependent on the whims and caprices of the international financial institutions or large bilateral creditor countries who control these institutions. Sustainability of reforms and policies: How can one be sure that these reforms and policies will be sustained in the coming years? To address this question, let us first look at the history of economic policies and reforms pursued by different political parties who come to power in the 1990s and at their party manifestos to gain some insight into the future direction of policies. The most comprehensive reforms aimed at liberalization, deregulation and privatization of the economy were initiated by the Nawaz Sharif Government in 1991 and institutionalized under the Protection of Economic Reforms Act 1992. These same policies were followed subsequently by Benazir Government, the second Nawaz Sharif Government, the Interim Governments, the Military Government of 1999-2002 and the Elected Governments since 2002. There has been uneven or slow implementation of these reforms, there has been economic mismanagement but, at no stage, these policies were rejected, derailed or abandoned. The Economic Reforms Act of 1992 is still in force after 12 years of its inception. The manifestos of all political parties subscribe to the same set of policies although their priorities, sequencing, phasing, points of emphasis are different and more nuanced. Thus, there should be little fear in the minds of anyone about the reversal of these reforms and policies by any future government in Pakistan. There have been some irreversible changes that have set in the country’s economic landscape that augur well from sustainability and continuity perspective. The Parliament is expected to pass a legislation called Fiscal Responsibility and Debt Limitation law which will limit fiscal deficit and target reduction in debt-ratios every year. As fiscal indiscipline has been the bane of Pakistan’s economic problems in the past, this particular initiative will restrain the successive governments from indulging in reckless spending and excessive borrowing. The Country’s Parliament rather than the IMF will act as the watchdog on the Government’s finances and it will be difficult for any Government to deviate from this path unless there are cogent reasons to do so. Fiscal transparency has also been entrenched as the Federal and Provincial Governments are obligated to publish audited quarterly statements of accounts. These statements are available to the public at large and can trigger questioning of fiscal policy decisions taken by the Government. The Auditor General is an independent and constitutional position who submits an annual report to the Public Accounts Committee (PAC) of the National Assembly on financial irregularities and the officials concerned are answerable to the PAC for their actions and decisions. The Central Bank has been made autonomous and given constitutional protection. Its affairs are supervised and controlled by an independent Board of Directors consisting of nine eminent members of stature drawn mainly from the private sector and having only one representative from the Ministry of Finance. The Ministry’s Representative does not enjoy any veto power and all decisions are taken by a majority vote. Neither the Governor nor the Board Members can be removed arbitrarily by the Federal Government. The State Bank of Pakistan (SBP) has acquired core competencies and technology to perform its functions and submits Quarterly and Annual Reports to the Parliament on the State of Economy regularly. Similarly, the Securities and Exchange Commission of Pakistan (SECP) and the Central Board of Revenue (CBR) have been reformed, strengthened and made autonomous to promote corporate governance and tax mobilization respectively. These key economic institutions will thus carry out their obligatory functions in a professional manner insulated from the interference of the government. The Nationalized Commercial Banks (NCBs) had acted as the main conduit for political favors in the financial sector. Most of the appointments of Chief Executives and the Boards of Directors were not made on considerations of merit and competence, but for their loyalty to the Prime Minister of the day. Consequently, most of the loans were approved to favour individuals and firms connected with the ruling party. This state of affairs had led to large accumulated losses, huge non performing loans and weak governance. As almost all the NCBs except one have been privatized, this linkage between the Government and the financial sector has been severed. Healthy competition among the banks has infused high standards of professionalism in the banks and the financial sector has become strong and efficient. It is unlikely that any future government will ever attempt to bring about status-quo ante and nationalize the banks. Pakistan has entered international capital markets which will also be watching and monitoring the economy as the investors in Pakistani Bonds have developed stakes in economic well being of the country. Any wrong policy actions or poor governance will be severely and instantaneously penalized by the markets and Pakistan will have to bear the adverse consequences of this fall out. Governments will therefore have to be extremely careful and responsible in their management of the economy. Pakistan has also entered into a multilateral trade agreement with the WTO and committed that it will keep its markets open to goods and services, liberalize trade regime, remove non tariff barriers and provide equal and nondiscriminatory treatment to all countries. These commitments provide a solid assurance about the stability and transparency of trading regime in Pakistan in future. Finally, the media - print, as well as, electronic - in Pakistan has emerged as a fierce and independent watchdog on the activities of the government. Poor economic governance was the other key factor responsible for Pakistan’s weak economic and social outcomes in the 1990s but there is greater awareness today that we cannot afford to slip into the past mode. Any wrongdoing or malpractice is exposed by the media and thus helping spread of good governance in the country. Outlook for the future: Pakistan’s past economic history suggests that rapid economic growth has been associated with poverty reduction. Once GDP growth rate persists over 6 percent per annum over a long period of time the incidence of poverty begins to decline. GDP growth rate is projected to rise to 7 percent in the current fiscal year with inflation rate hovering around 7 percent. The next five years plan envisages an average GDP growth of 7 percent reaching a level of 8 percent in 2010 and inflation contained to average 5 percent. With the population growth rate declining to 1.5 percent, this growth rate will translate into 6.5 percent rise in per capita incomes which should double at this rate in the next 10 to 11 years. Empirical studies indicate that the best way to achieve higher rates of economic growth is to raise investment and to improve the quality of institutions. An increase in investment ratio by 5-6 percentage points over the next 5 years and improving the quality of institutions could result in the postulated increase in the per capita growth. What are the prospects for raising investment? The successful implementation of Debt Management Strategy in the last five years has not only brought the debt burden down to sustainable levels in the future, but also reduced interest payment out of the budget significantly. The public sector investment programme that was constrained due to these high interest payments is now expanding. As a result, development expenditure will continue to rise - both in absolute terms and as a ratio of GDP - pushing up the overall investment rate for Pakistan. As the private sector is able to obtain the infrastructure services and the social services it needs, the cost of production will become lower for capacity expansion or investment in new areas of business. The recent experience suggests that investment rate will rise and productivity of investment will improve, making it possible to attain 6 to 7 percent GDP growth rates. Pakistan has committed itself to bringing the incidence of poverty down to 16 percent by 2015 under the Millennium Development Goals (MDGs). Other MDGs for Pakistan are: (i) literacy rate of 86 percent and gross enrolment ratio of 100 percent; (ii) ratio of literate females to males reaching 0.93; (iii) infant mortality rate down to 40 with under five mentality to 52 and more than 90 percent of children fully immunized (iv) 100 percent coverage by lady health workers of target population (v) sustainable access to safe water available to 93 percent of population with 55 percent having access to sanitation. These goals have been incorporated in the Poverty Reduction Strategy Paper (PRSP) as well form part of the next five year plan. The achievement of per capita growth targets and Millennium development goals will very much depend upon political stability, sound leadership committed to growth and poverty reduction and to the extent the challenges facing us are tackled successfully by the government, private sector and the civil society together. These challenges though formidable are by no means insurmountable. Challenges for the future: Despite the impressive studies made on several fronts in the recent past Pakistan has a number of challenges to reduce incidence of poverty to half its current level by 2015. This will require sustained GDP growth rates of 7 to 8 percent per annum, targeted poverty interventions and accelerated investment in human development. Some of these challenges are listed below: 1. Diversification of export base: Two thirds of Pakistani exports are based on Cotton textiles while in the world market textiles are not a dynamic commodity. Technological base of Pakistani exports is low and the share of engineering goods is almost negligible. Not only the share of engineering goods in the world market is almost 50 percent but is rate of growth is above average. Thus the need for diversifying away from textiles to medium technology exports is quite obvious. Greater emphases on technical and vocational education as well as integration into world supply chains are critical for this diversification. Reliance on a single commodity based exports is neither desirable nor beneficial in the long run and is prone to serious risks. 2. Development of human resources: It has been well established and there is a broad consensus that among all the factors that will make a difference to Pakistan’s economic and social goals is the extent to which we are able to step up investment in human development. Indeed this is the single most dominating factor that has kept the country below its potential. High population growth has given rise to a young dependent population and increased unemployment among the youth. The average years of schooling of labor force (3¼ years) remains quite low making it difficult to impart new skills to the burgeoning labour force. Raising this by 1½-2 years could have raised real per capita economic growth rate by about ½ percentage points per year. Investment in higher education, science and research, vocational and technical education, female education thus should be the highest priority for the next ten years. This can only be achieved if there is a strong public-private-community partnership in the governance and provisioning of education and health. Investing in human development through better education and health care benefits the poor directly but these should be well targeted. 3. Investment in infrastructure: Higher economic growth rates can be sustained on a long term time horizon only if the bottlenecks, shortages, disruptions and breakdown in supplies, in power, gas, oil pipelines, ports, railways, and congestion in roads and highways are removed. This requires huge investment in each of these areas. Public Sector development program can finance only one half of the annual requirements of US$ 3 billion. The remaining requirements will have to be filled in by the private sector. 4. Regional hub: Another reason for large investment in physical infrastructure is to exploit the potential of Pakistan’s strategic location as a regional hub for the Middle East, Central Asia and Western China and South Asia. Gwadar port is being developed to take advantage of this potential but developing a network of highways, warehouses and terminals, oil and gas pipelines, power generation plants, facilitation of cross-border trade, harmonization of tariffs and duties are some of the ingredients that will pave the way for meeting this objective. Peaceful relations with the neighboring countries and greater cooperation in areas of trade and transit will lay the solid foundations. 5. Productivity increase in agriculture and industry: Compared to the countries in East Asia and China that should serve as the benchmark for Pakistan’s competitiveness we lag behind in total factor productivity as well as productivity gains in commodity producing sectors. Although the yields per hectare of major crops have risen over time these are still lower than those in Indian Punjab and Haryana. Except for export industries the productivity levels in manufacturing are sub optimal. On-the-job training and injection of new skilled workers are some of the short term measures that can help but in the long term, emphasis on technical and vocational education rather then producing graduates with generalized education will yield the desired results. 6. Judicial and legal reforms: It is believed that the financial sector and real sector of the economy will benefit immensely if land titles were clear, coded, actively traded, mortgaged and exchanged without much hassle; if the court system is unclogged and the enforcement of contracts is much quicker with low transaction costs and if the poor have equal access to the Police and the judiciary for redressing wrongs done to them. In Pakistan, the slow and cumbersome legal system combined with unequal access to the poor to the system have to be put right both for efficiency gains as well as for attaining a just and equitable distribution. 7. Widening the tax base: The tax administration that has been practised in Pakistan has deployed indirect means, presumptive assessment and compulsory withholding taxes to collect most of the taxes. This system has not only kept the tax-GDP ratio stagnant but also restricted the growth of tax base and tax payers. The recent reforms of the Central Board of Revenue give some hope that tax base will be widened so that tax-GDP ratio can rise and a more equitable incidence of burden takes place. A natural corollary of this widening of tax base is that the tax rates particularly for individual income tax and corporate tax can be reduced gradually and thus discourage the incentives to evade taxes. Tax collection in Pakistan has been much higher when the rates are low supporting the supply side hypothesis. Risks to the future outlook Several observers of Pakistan economy appear to be overly obsessed with the political risk arguing that the country may end up with a situation in which the Islamic extremist parties or their sympathizers in the Army wrest control over the country’s nuclear arms. The victory of the MMA in the NWFP and Balochistan and their apparent anti-American stance have fortified the beliefs of these observers mostly in the western think tanks and the media. Both the main components of the Alliance Jamaat-e-Islami and Jamiat Ulema Islam - have no history or links with religious extremist groups who have created violence in the country. This risk is also highly exaggerated as more than 88 percent of Pakistani population voted for the mainstream moderate political parties at the most recent elections. Pakistan Army is a highly disciplined, organized and modern force and the support for the extremist parties in the ranks of Army is almost non-existent. These western observers have very little familiarity with the strength and resilience of Pakistan’s polity. Pakistan’s nuclear assets will remain safe as country has developed an effective command and control system. The geopolitical risks facing Pakistan have also been mitigated as a composite dialogue has been opened with India and the relations with the Karzai government in Afghanistan have been normalized and strengthened. The first democratic elections in Afghanistan took place peacefully reflecting the cooperation and support of Pakistan government. The intensity in exchange of people, cultural troupes, sporting teams, media representatives between India and Pakistan has brought about a new atmosphere of harmony and goodwill in the two countries. Although the political and geopolitical risks remain paramount in the minds of the western observes there are residual risks that can possibly slow down the trajectory of high economic growth and poverty reduction. First, it is assumed above that the country will continue to face a benign external environment and will remain free from major upheavals and unanticipated exogenous shocks. In case the external environment becomes hostile or some other major internal disturbance takes place, it is unlikely that the high growth momentum can be maintained. Second, the implementation capacity and weakness of institutions are still major obstacles. The need to inculcate professionalism, expertise, competence and systems to make the civil services meet the realities of the 21st century is being met through reforms but will take some time. In the meanwhile, the nature of the government has dramatically changed; public expectations have heightened while implementation capacity of government policies, programs and projects as well as the delivery of public services has been seriously impaired. Sound policies can see the light of day only if the institutional capacity is strengthened and reoriented. Public-private-community partnership provides a way forward to mitigate this risk. The reform of civil service is on the agenda but needs to be expedited. Third, the legal and judicial system is out-of-sync with the requirements of modern business practices. Contract enforcement, sanctity of property rights and dispute resolution mechanisms leave much to be desired. Congestion of courts, cumbersome and time-consuming procedures, inadequate training of judges in commercial and banking laws and physical infrastructure facilities are some of the constraints for the present state of affairs. Reforms of laws and judiciary have to be given priority attention by political leaders. The Asian Development Bank (ADB) is assisting the government through its Access to Justice programme. Fourth, the most important missing link in Pakistan’s competitive edge and what is posing as a serious threat to its economic progress are the poor indicators of human development. Adult literacy and the skill level of the labour force are low, health status is precarious with low productivity, high absenteeism and gender disparities are large. The country has to devote more attention and resources to invest in education, health, nutrition and gender programmes to equip the labour force to excel in its area of specialization. Finally, Pakistan has embarked on a program to devolve administrative functional and financial powers to local tiers of government. This experiment is extremely critical for providing essential public services at the doorsteps of the poor people. The teething problems and legal snags confronting the local governments if unresolved, could create a potential difficulty in reaching out to the poor. These risks, except those arising out of adverse or unanticipated exogenous shocks, can be mitigated through a series of reforms. Institutional capacity can be strengthened, judicial and legal processes can be revamped, human development can be accelerated and devolution of powers can be expedited. The balance of risks therefore suggests that given a benign global economy and domestic political stability, Pakistan can move forward in its march towards meeting its economic and social goals. | state bank of pakistan | 2,005 | 2 |
Article by Mr Ishrat Husain, Governor of the State Bank of Pakistan, reproduced from Blue Chip - The Business People¿s Magazine, January 2005. | Ishrat Husain: Banking sector reforms in Pakistan Article by Mr Ishrat Husain, Governor of the State Bank of Pakistan, reproduced from Blue Chip - The Business People’s Magazine, January 2005. * * * Why did we need reforms in the banking sector in the first place? Why is it so important to have healthy and buoyant banks? What is the exact role of State Bank of Pakistan and how does it go about performing this role? Where does the Government come in this picture? How do these reforms serve the interests of a common citizen as a consumer, depositor, and businessman? These and a host of other questions arise in the minds of a layman who is not so familiar with all the jargon and specialized terminology of finances. We start with the simplest proposition: Financial Sector Development and Economic Development are inter-related. No economy can grow and improve the living standards of its population in the absence of a well functioning and efficient financial sector. Banks in Pakistan account for 95 percent of the financial sector and hence good health of banks is directly related to economic growth and development of Pakistan. What was wrong with the Pakistani banking system that such massive reforms had to be undertaken? Banks in Pakistan have been catering basically to the needs of the Government organizations, subsidizing the fiscal deficit, serving a few large corporations and engaging in trade financing. There was no lending to small and medium enterprises, to the housing sector or to the agricultural sector, which create most of the growth and employment in Pakistan. Most important, the financial system suffered from political interference in lending decisions and also in the appointment of managers. The middle class which is the backbone of any economy was not given due attention by the banking sector. There were legitimate reasons for such an errant behaviour. First, the government’s fiscal deficit was so high that most of the deposits the banks used to get, were loaned to the government and government corporations. This was safe lending which fetched good returns and the banks made good profit out of it. Naturally, there was little incentive for them to do anything else except lend to the Government which was both risk free and highly remunerative. Secondly, the government owned most of the banks. In the government banks the staff worked like typical government employees, coming to office at 9:00 a.m., checking files; having nothing important to do and leaving at 5.00 p.m. without doing much work. These banks suffered from a high bureaucratic approach, overstaffing, unprofitable branches and poor customer service. Administrative costs were high reducing profits of depositors. Thirdly, recovery rate was so low that almost 25% of the loans were stuck up as a large number of loans to the private sector borrowers were not given on the merit of the proposal but on political considerations. These influential borrowers hardly repaid their loans. Fourth, banking industry faced a high tax rate of 58 percent while the rest of the corporate sector paid only 35 percent. This high punitive rate along with the burden of stuck loans and inefficiency of the staff was passed on to the customers in form of high lending rates and low deposit rates. The banking industry was not attractive for new entrants who could foster competition and improve efficiency. Because of these factors, i.e. high administrative costs, burden of stuck-up loans and excessive tax rates, the average interest rate for lending was about 21% per annum. The middle class borrowers could not afford to get credit on such high interest rates and pay it back. Banking sector reforms were thus needed badly to address these and other constraints so that the banks could play their due role in the economic development of the country. Although, there is no room for complacency and a lot still needs to be done, even the worst critics of this government do concede that if there is one sector which has undergone basic transformation that is the banking sector. The IMF and the World Bank who are not always very generous or effusive in their praise had this to say about the Banking sector in Pakistan after completing a comprehensive and thorough review in early 2004. Quote: “far reaching reforms have resulted in a more efficient and competitive financial system. In particular, the pre-dominantly state-owned banking system has been transformed into one that is predominantly under the control of the private sector. The legislative framework and the State Bank of Pakistan’s supervisory capacity have been improved substantially. As a result, the financial sector is sounder and exhibits an increased resilience to shocks”. Unquote. What was the role of the State Bank of Pakistan in these reforms and how did it go about performing this role? The State Bank of Pakistan (SBP) has four major functions to perform under the law: • ensuring soundness of the financial sector. • maintaining price stability with growth. • prudent management of the exchange rate. • strengthening of the payment system. It was felt and agreed between the Government and the State Bank of Pakistan that major deep rooted reforms had to be undertaken as cosmetic changes have not achieved anything tangible. As a regulator and supervisor as well as adviser to the Government, the SBP carried out diagnostic studies, prioritized the constraints facing the banking sector, designed the reform strategy and action plan, sought the assistance of the Government of Pakistan and international financial institutions, monitored the progress and made policy, regulatory and institutional changes to facilitate the process. Where does the Government come in the picture and what did it do? The Musharraf Government made some critical policy decisions, i.e. they will not keep the banks under Government ownership and control but privatize them. Politically tough problems such as reducing the labour force and closing down redundant and unprofitable branches were dealt with boldly. The Government injected Rs. 30.7 billion to offset the losses incurred by these nationalized commercial banks and recapitalize them. Professional bankers were appointed as Chief Executives and persons from private sector enjoying reputation of competence and integrity on the Board of Directors. I must say that the Nawaz Sharif Government in 1997 had initiated some of the reform measures by appointing Chief Executives, Boards of Directors on non political, nonpartisan basis for the first time. That Government had also injected fresh equity to strengthen the capital base of the nationalized commercial banks. Both Sartaj Aziz Sahib and Ishaq Dar Sahib were very much committed to put these banks on sound footing. They did away with the undue interference of labour unions in decision making process of the banks, abolished the Pakistan Banking Council and gave autonomy to the State Bank of Pakistan. The point I would like to highlight in this context is that continuity of reforms and sound policies that transcend political partisanship and survive political regime changes are good for the country and also for these political parties. What were the major reforms that had been implemented during the last seven years? I would not go into the details of each one of them, but summarize some of the salient features: (i) Privatization of NCBs: All the nationalized commercial banks, except one, have been privatized. As a consequence their domination of the banking sector has been reduced from almost 100 percent in 1991 to about 20 percent by June 2004. Even in the case of National Bank of Pakistan 23.5 percent shares have been floated through Stock Market mainly aimed at small retail investors. (ii) Corporate governance: Strong corporate governance is absolutely essential if the banks have to operate in a transparent manner and protect the depositors’ interests. The SBP has taken several measures in the last four years to put in place and enforce good governance practices to improve internal controls and bring about a change in the organizational culture. (iii) Capital strengthening: Capital requirements of the banking sector have to be adequate to ensure a strong base, ability to compete and withstand unanticipated shocks. The minimum paid-up capital requirements of the banks have been raised from Rs. 500 million to Rs. 1 billion and have again been raised to Rs. 2 billion (by December 31, 2005). This has already resulted in mergers and consolidation of many financial institutions and weeding out of several weaker banks from the financial system. (iv) Improving asset quality: The stock of gross non-performing loans (NPLs) that amounted to Rs. 252 billion and accounted for 22 percent of the advances of the banking system and DFIs has been reduced to Rs. 225 billion i.e. 14 percent of advances. More than two-thirds of these loans are fully provided for and net NPLs to net advances ratio has come down to as low as 5 percent for the commercial banks. The positive development is that the quality of new loans disbursed since 1997 has improved and recovery rate is 95 percent. (v) Liberalization of foreign exchange regime: Pakistan has further liberalized its foreign exchange regime and set up foreign exchange companies to meet the demands of Pakistani citizens. Pakistani Corporate sector companies have also been allowed to acquire equity abroad. Foreign registered investors can bring in and take back their capital, profits, dividends, remittances, royalties, etc. freely without any restrictions. (vi) Consumer financing: By removing restrictions imposed on nationalized commercial banks for consumer financing, the State Bank of Pakistan has given a big boost to consumer financing. Middle class employees can now afford to purchase cars, TVs, air7 conditioners, VCRs, etc. on installment basis. This, in turn, has given a large stimulus to the domestic manufacturing of these products. (vii) Mortgage financing: A number of incentives have been provided to encourage mortgage financing by the banks. The upper limit has been raised from Rs. 5 million to Rs. 10 million. Tax deduction on interest payments on mortgage have been allowed up to a ceiling of Rs. 1 million. The new recovery law is aimed at expediting repossession of property by the banks. The banks have been allowed to raise long term funds through rated and listed debt instruments like TFCs to match their long term mortgage assets with their liabilities. (viii) Legal reforms: Legal difficulties and time delays in recovery of defaulted loans have been removed through a new ordinance i.e. The Financial Institutions (Recovery of Finances) Ordinance, 2001. The new recovery laws ensures the right of foreclosure and sale of mortgaged property with or without intervention of court and automatic transfer of case to execution proceeding. A Banking Laws Reforms Commission is reviewing, revising and consolidating the banking laws and drafting new laws such as bankruptcy law. (ix) Prudential regulations: The prudential regulations in force were mainly aimed at corporate and business financing. The SBP in consultation with the Pakistan Banking Association and other stakeholders has developed a new set of regulations which cater to the specific separate needs of corporate, consumer and SME financing. The new prudential regulations will enable the banks to expand their scope of lending and customer outreach. (x) Micro financing: To provide widespread access to small borrowers particularly in the rural areas the licensing and regulatory environment for Micro Credit and Rural financial institutions have been relaxed and unlike the commercial banks these can be set up at district, provincial and national levels with varying capital requirements. There is less stringency and more facilitative thrust embedded in the prudential regulations designed for this type of institutions. Khushali Bank and the First Microfinance Bank in the private sector have already started working under this new regulatory environment. Khushali Bank has already reached a customer base of 125,000 mainly in poorer districts of the country and its recovery rate is above 95 percent. (xi) SME financing: The access of small and medium entrepreneurs to credit has been a major constraint to expansion of their business and up gradation of their technology. A Small and Medium Enterprise (SME) Bank has been established to provide leadership in developing new products such as program loans, new credit appraisal and documentation techniques, and nurturing new skills in SME lending which can then be replicated and transferred to other banks in the country. Program lending is the most appropriate method to assist the SME financing needs. The new prudential regulations for SMEs do not require collateral but asset conversion cycle and cash flow generation as the basis for loan approval. The State Bank is also contemplating to develop capacity building among a select group of banks for SME lending. This will revitalize the lending to SMEs particularly export oriented ones. (xii) Taxation: The Government has already reduced the corporate tax rate on banks from 58 percent to 41 percent during the last four years and it is envisaged that the rate will be reduced gradually and brought at par with the corporate tax rate of 35 percent in the next two years. This will, in turn, help in reducing the spread between the deposit rate and lending rate and benefit financial savers. (xiii) Agriculture credit: A complete revamping of Agriculture Credit Scheme has been done recently with the help of commercial banks. The scope of the Scheme which was limited to production loans for inputs has been broadened to the whole value chain of agriculture sector. The broadening of the scope as well the removal of other restrictions have enabled the commercial banks to substantially increase their lending for agriculture by a multiple of four times compared to FY 1999-00 thus mainstreaming agriculture lending as part of their corporate business. Unlike the previous years when they were prepared to pay penalties for under performance they have achieved consistently rising higher targets every year. The private commercial banks have also agreed to step in and increase their lending to agriculture. (xiv) Islamic banking: Pakistan has introduced Islamic banking system to operate in parallel with the conventional banking providing a choice to the consumers. A large number of Pakistanis have remained withdrawn from commercial banking because of their strong belief against riba-based banking. These individuals and firms - mainly middle and low class - will have the opportunity to invest in trade and businesses by availing of loans from Islamic banks and thus expand economic activity and employment. A full-fledged Islamic bank has already opened the doors for business and several banks have branches exclusively dedicated to Islamic banking products and services. The State Bank of Pakistan has set up a full-fledged Islamic Banking Department and a Shariah Advisory Board to help it in the promotion of Islamic banking in the country. (xv) E-banking: There is a big surge among the banks including NCBs to upgrade their technology and on-line banking services. During the last three years there has been a large expansion in the ATMs and at present about 700 ATMs are working throughout the country. The decision mandating the banks to join one of either two ATM switches available in the country has provided a further boost. Progress in creating automated or on-line branches of banks has been quite significant so far and it is expected that by 2005 almost all the bank branches will be on-line or automated. Utility bills payment and remittances would be handled through ATMs, kiosks or personal computers reducing both time and cost. (xvi) Human resources: The banks have recently embarked on merit-based recruitment to build up their human resource base - an area which has been neglected so far. The private banks have taken lead in this respect by holding competitive examinations, interviews and selecting the most qualified candidates. The era of appointment on the basis of sifarish and nepotism has almost come to an end as the private owners want to attract and retain the best available talent which can maximize their profits. This new generation of bankers will usher in a culture of professionalism and rigour in the banking industry and produce bankers of stature who will provide leadership in the future. (xvii) Credit rating: To facilitate the depositors to make informed judgments about placing their savings with the banks, it has been made mandatory for all banks to get themselves evaluated by credit rating agencies. These ratings are then disclosed to the general public by the SBP and also disseminated to the Chambers of Commerce and Trade bodies. Such public disclosure will allow the depositors to choose between various banks. For example, those who wish to get higher return may opt for banks with B or C rating. But those who want to play safe may decide to stick with only AAA or AA rated banks. (xviii) Supervision and regulatory capacity: The banking supervision and regulatory capacity of the Central Bank has been strengthened. Merit-based recruitment, competency-enhancing training, performance-linked promotion, technology-driven process, induction of skilled human resources and greater emphasis on values such as integrity, trust, team work have brought about a structural transformation in the character of the institution. The responsibility for supervision of non-bank finance companies has been separated and transferred to Securities Exchange Commission. The SBP itself has been divided into two parts - one looking after central banking and the other after retail banking for the government. (xix) Payment systems: Finally, the country’s payment system infrastructure is being strengthened to provide convenience in transfer of payments to the customers. The Real-Time Gross Settlement (RTGS) system will process large value and critical transactions on real time while electronic clearing systems will be established in all cities. These reforms will go a long way in further strengthening the Banking sector but a vigilant supervisory regime by the State Bank will help steer the future direction. Outcomes: What have been the results of the above reforms? We have been working for the last five years to decrease the lending rates to the extent that middle and low-income professionals, who have no other source than their monthly income, may get a home or a car on installments from the banks. If he/she is a small entrepreneur he/she can get loans from SME. Agriculture, the largest sector of economy, which the commercial banks had neglected, has now begun to receive large allocations. The commercial banks are giving more agriculture loans than the ZTBL. If this trend persists, the rural households will be able to intensify the use of modern inputs and raise their productivity and income. Credit cards, debit cards, personal loans and consumer durable loans are catching up fast. Refrigerators, air conditioners, VCRs, Televisions are now available on credit. The consumers are forced to save when a specific amount is cut from their salary every month to pay the installment. Mortgage financing is one way in which wealth is created. For example, you bought an apartment for Rs. 100,000 and paid Rs. 20,000 as equity and borrowed Rs. 80,000 from the bank. Next year, let us say that the value of the same apartment rises to Rs. 120,000/-. Your loan is still Rs. 80,000, but your own equity has now doubled from Rs. 20,000 to Rs. 40,000. In this way, growth of the middle class wealth takes place through judicious use of bank credit. As the lending rates have come down drastically from 21% to 5% the banks find it profitable to extend the customer base for mortgage and auto loans, agriculture credit, small business and consumers. For the first time in the history of Pakistan, the middle class is beginning to benefit from the banking system. Before these reforms only 400,000 farmers used to get loans from the Agriculture Development Bank, but this year, more than one million farmers have been granted loans by the banking system. For the poor, who don’t have anything to mortgage, we have established microfinance banks where no collateral is required. They can get up to Rs. 20-25 thousand in micro loans. Many people have availed this opportunity, some bought a cow, some bought a milch buffalo or opened a small shop and female borrowers bought sewing machines. They have started income-generating activities and recovery is no problem from the micro-finance banks. Approximately, 125,000 poor people have been given loans in the last two years. The customer base of the banks has more than doubled during the last few years and covers almost 2 million households in agriculture, SMEs, Microfinance, Credit Cards, consumer loans, mortgage and auto loans, etc. Another initiative taken by the State Bank of Pakistan was to revive sick units which were lying closed due to unsustainable debt burden. Now these sick industries can be revived through a well designed and transparent scheme. If the loanees pay 75% of the forced sale value to the bank, then these units would be handed over back to the owners. They can run the units and create employment opportunities. If it’s an export industry, it will increase exports. This scheme is for all and sundry, across the board and round about 51,000 borrowers will be benefiting from it. The banks will be able to clean up their balance sheets by transforming these stuck loans into paying loans. Pakistan is one of the few developing countries where the public sector banks went to the private hands in a very short span of time. The government only owns the National Bank, while 80% of the bank assets are in the private sector. And there is tough competition among the banks as in the private sector everything is performance-based. Unlike the public sector or the Government, any employee not producing results is fired because he affects profit of the organization. The bankers these days go out of their cozy offices to market their financial products and build up customer base. The seller market has changed into a buyer market. The customer may choose the bank with best products and services. There was a time - only a few years back - people used to go to the banks and the staff treated them shabbily, was generally uncooperative and unfriendly. Now, they are after the customers. Cynics say that banking reforms are also promoting consumerism but when you give loan to a consumer, he goes and buys a car. But loan is given to a person who can demonstrate that he has sufficient disposable income to repay the monthly installments after taking care of his family needs. Before 1999 only 30 thousand cars were produced but in the last fiscal 100,000 cars were being produced. 70% of the parts and components for these cars are manufactured in Pakistan which is creating employment. Those who are producing the auto parts have made an investment of millions of rupees and generated new job opportunities. As they have attained economies of scale, Pakistani auto parts are being exported to Dubai and other countries. The whole industry is benefiting from it. Very limited numbers of air-conditioners were manufactured here but now they are produced in hundreds of thousands, similarly several hundred thousands of refrigerators and television sets are manufactured locally. If a company produces such products, they make huge investments in industry, people are employed and incomes are generated. This is not consumerism; rather we are stimulating demand in the economy by giving purchasing power to the people who can afford to pay them not in one shot but in installments spread over several years. If domestically manufactured goods are bought it’s boosting the industrial growth. How have we achieved 17% industrial growth during the last fiscal year? The private sector is doing all this because they see a rising demand for their goods. For the first time in the history of Pakistan, the private sector received bank credit worth more than Rs. 325 billion. They used this money to invest in the industry and expand their capacity. This is a complete cycle - banks provide credit to consumers who purchase goods with this money, the manufacturers respond to this higher demand by investing in new capacity and employing more people. As the new employees receive income they also add to the demand for these goods. Similarly, the housing industry where steel, cement, paint, timber wood, electric gadgets, etc. are used is creating many more jobs in this sector. Unless there is credit available, except the millionaire/billionaire, the common man doesn’t have enough money to build a house for himself. Credit increases his purchasing power. Home is a basic need. He will cut his monthly expenses but pay installments to the bank to keep his house. It will change his thinking. This is a kind of motivation for him. Everybody wants to have a home and a car. The banking sector is catering to such needs all over the world. One of the adverse effects of lower interest rates in the country has been erosion of rates of returns on bank deposits. Small depositors who keep their savings in the banks have been badly hurt as they hardly get a decent return these days. The Government, therefore, had to come up with some scheme to safeguard the most vulnerable groups of our society whose only source of livelihood is their savings. To compensate the senior citizens, pensioners and widows we have launched “Behbood Scheme” through which they get 10.25% per annum. These returns are not affordable by the Government as they have reduced their fiscal deficit and do not need this money. Moreover, people used to misuse the saving schemes. They were in the habit of buying national saving certificates and then getting loans against those certificates and again buying more saving certificates. As interest rates move up in the economy, it will be the depositors who will get the benefit while the borrowers will have to a pay higher price. This is the normal cycle through which market-based economies work. If we have chosen to live with this type of economy, we have to bear its costs along with its benefits. But it is our duty to protect the poor and vulnerable groups of the society. Here the Behbood saving schemes, Bait-ul-Mal, Zakat, Microfinance loans and Poverty Alleviation Funds come handy. It can be seen from the above description and analysis that in the banking system the interests of depositors and borrowers are quite different. What we have been able to ensure is that competition reduces inefficiencies in the system and the gains are passed on to both the depositors and the borrowers. But, beyond this, there will always remain a tension between depositors who want higher returns on their savings and the borrowers who want lower interest rate on their loans. To sum up, banking sector reforms have brought in competition within the system, improved internal efficiency, reduced the lending rates significantly and broadened access to the middle class. While these results are encouraging, a lot more needs to be done and, therefore, we have spelled out the agenda for the second generation reforms in the financial sector covering the period 2005-2010. | state bank of pakistan | 2,005 | 2 |
Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Expo 2005 Conference, Karachi, 3 February 2005. | Ishrat Husain: Economy of Pakistan - an overview Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Expo 2005 Conference, Karachi, 3 February 2005. * * * Pakistan was one of the few developing countries that had achieved an average growth rate of over 5 percent over a four decade period ending 1988-89. Consequently, the incidence of poverty had declined from 40 percent to 18 percent by the end of the 1980s. Table I lays down the main economic and social indicators in 1947 and compare them with 2004. The overall picture that emerges from a dispassionate examination of these indicators is that of a country having made significant economic achievements but a disappointing record of social development. The salient features of Pakistan’s economic history are: • Pakistan is self sufficient in most food production. • Per capita incomes have expanded more than six-fold in US Dollar terms. • Pakistan has emerged as one of the leading and successful producers of cotton and cotton textiles. • Pakistan has developed a highly diversified base of manufactured products for domestic and world markets. • Physical infrastructure network has expanded with a vast network of gas, power, roads and highways, ports and telecommunication facilities. These achievements in income, consumption, agriculture and industrial production are extremely impressive and have lifted millions of people out of poverty levels. But these do pale into insignificance when looked against the missed opportunities. The largest setback to the country has been the neglect of human development. Had adult literacy rate been close to 100 instead of close to 50 today, it is my estimate that the per capita income would have reached at least US$1200 instead of US$640. Pakistan’s manufactured exports in the 1960s were higher than those of Malaysia, Thailand, Philippines and Indonesia. Had investment in educating the population and upgrading the training, skills and health of the labour force been up to the level of East Asian Countries and a policy of openness to world market would have been maintained without any break, Pakistan’s exports would have been at least US$100 billion instead of paltry US$13-14 billion. Had the population growth rate been reduced from 3 percent to 2 percent, the problems of congestion and shortages in the level of infrastructure and social services would have been avoided, the poor would have obtained better access to education and health and the incidence of poverty would have been much lower than what it is today. But as if this neglect of human development was not enough, the country slacked in the 1990s and began to slip in growth, exports, revenues, and development spending and got entrapped into external and domestic indebtedness. This was due to both fundamental structural and institutional problems as well as to poor governance and frequent changes in political regimes. With short life spans, succeeding governments were hesitant, if not outright unwilling to take tough and unpopular economic decisions to set the economy right. Moreover, the average lifespan of two to three years was clearly inadequate for implementing meaningful policy or institutional changes. The external environment had also become unfavorable after the event of May 1998, when Pakistan conducted its first nuclear test. The aftermath of this test led to further economic isolation of Pakistan and a considerable erosion of confidence by domestic and non-resident Pakistanis. Economic sanctions were imposed against Pakistan by the western governments. By the late 1990s Pakistan had entered almost a critical state of paralysis and stagnation in its economy particularly in its external sector. There was a significant drop in workers’ remittances, export growth was negative, IMF programme and World Bank assistance were suspended, bilateral donors had terminated their aid while debt payments due were in far excess of the liquid foreign exchange resources the country possessed. Pakistan was almost at the brink of default on its external payments. Economic growth was anemic, debt ratios were alarmingly high, and the incidence of poverty had once again risen to 32 percent. It was at this stage that the military government under General Pervez Musharraf assumed power in October 1999. The initial period was devoted by the economic team of the new government in managing the crisis and making sure that the country avoided default. A comprehensive programme of reform was designed and implemented with vigour and pursued in earnest, so as to put the economy on the path of recovery and revival. The military government did not face the same constraints and compulsions as the politically elected governments. It was therefore better suited to take unpopular decisions such as imposing general sales tax, raising prices of petroleum, utilities and removing subsidies so badly needed to bring about fiscal discipline and reduce the debt burden. The IMF and the World Bank were invited to enter into negotiations on new stand-by and structural adjustment programmes. Although the canvas of reform in Pakistan was vast and corrective action required on a number of fronts, there was a conscious effort to focus on achieving macroeconomic stability, on certain key priority structural reforms and improving economic governance. The structural reforms included privatization, financial sector restructuring, trade liberalization, picking up pace towards deregulation of the economy and generally moving towards a market-led economic regime. A stand-by IMF programme was put in place in November 2000, which was successfully implemented followed by a three-year Poverty Reduction and Growth Facility (PRGF), which was successfully completed in December 2004. It is a matter of pride that Pakistan decided not to draw down the last two tranches although it was eligible to do so. The IMF has also decided that Pakistan will not be subject to the usual post-program monitoring due to its good economic standing. Pakistan’s economic turnaround during the last five years is even more impressive because the country was faced with a critical and fragile regional and domestic environment with constant threats to security (a result of playing key role as a frontline state in the war against terrorism) a prolonged and severe drought, tensions with India and high oil prices. Macroeconomic stability: Macroeconomic stability has been achieved through reduction in fiscal deficit, acquiring a surplus on the current account balance of payments, lowering of inflation, and a transformation of external debt profile. These have been brought about partially through the support of international financial institutions and the Paris Club bilateral creditors which significantly eased the external payments position that had been a major and consistent risk to the economy since 1998. Fiscal deficit was reduced by pursuing a combination of four set of policy measures (i) mobilizing additional tax revenues (ii) reducing subsidies to public enterprises and corporations and (iii) bringing about a significant decline in debt servicing payments and (iv) containing defence expenditures. Monetary policy was kept reasonably tight during the first two years with money supply growth at about 9 percent. Expansion in private sector credit, in the subsequent years, did not put much pressure as the government borrowing was limited to a manageable level. As the monetary conditions improved the interest rate came down gradually to a single digit and demand for credit by the private businesses picked up resulting in higher capacity utilization in manufacturing and increased industrial production. External debt management focused on (a) reprofiling of the stock of official bilateral debt, (b) substituting concessional loans for non-concessional from international financial institutions, (c) pre-paying expensive loans and (d) liquidating short term liabilities. Debt ratio was thus reduced from 100 percent of GDP to 60 percent in five years time. Trade policy in Pakistan has been categorized by the World Bank as one of the least restrictive in S. Asia along with Sri Lanka and this policy has gradually provided incentives to exporters to increase their market share in the global markets. Exchange rate policy was pursued to maintain stability in the foreign exchange markets while at the same time keeping the competitiveness of Pakistani exports intact. Large accumulation of foreign reserves played an important role in stabilizing the exchange rate. Current account has turned around from chronic deficit to a surplus, mainly due to renewed export growth and resurgence of workers’ remittances. Inflation rate during the last four years remained below 4 percent. External debt burden has been reduced in absolute terms from US$38 to US$35 billion and as a proportion of GDP from 62.5% to 46%. The risk of default on external debt, which loomed large on the horizon in 1999 and 2000, was mitigated and the country's capacity to service its restructured debt has considerably improved. Table II shows the changes in the key economic indicators between October 1999 and October 2004. Structural reforms - privatization, deregulation, liberalization: The Musharraf Government actively pursued an aggressive and transparent privatization plan whose thrust was sale of assets in the oil and gas industry as well as in the banking, telecommunications and energy sectors, to strategic investors, with foreign investors encouraged to participate in the privatization process. This plan was followed by the elected Government under Prime Minister Jamali and by the present Prime Minister Shaukat Aziz. To demonstrate the seriousness of the government in encouraging foreign investment flows in Pakistan; there has been a major and perceptible liberalization of the foreign exchange regime. Foreign investors can now bring in and take back their capital, remit profits, dividends and fees etc., without any restrictions. Foreign Portfolio Investors (FPI) can also enter and exit the market without any restrictions or prior approvals. In the Karachi Stock Exchange with a market capitalization of US$33 billion, over 650 listed companies showed average returns of 15 per cent that were higher than those in most emerging countries. This makes Pakistan an attractive place to invest for foreign portfolio investors. As part of this liberalization, non-residents and residents are allowed to maintain and operate foreign currency deposit accounts, and a market-based exchange rate in the inter-bank market is at work. The financial sector too, has been restructured and opened up to competition. Foreign and domestic private banks currently operating in Pakistan have been able to increase their market share to more than 80 percent of assets and deposits. The interest rate structure has been deregulated and monetary policy uses indirect tools such as open market operations, discount rates etc. Domestic interest rates on lending have dropped to as low as 5 percent from 20 percent substantially reducing financial costs of businesses. Central to the economic reforms process has been a clear progression towards deregulation of the economy. Prices of petroleum products, gas, energy, agricultural commodities and other key inputs are determined by market. Imports and domestic marketing of petroleum products have been deregulated and opened up to the private sector. The markets do not always function effectively. Independent regulatory agencies have been set up to protect the interests of consumers and end-users of utilities and public services. Tax reforms: Taxation reform has figured prominently on the government's agenda, as this is another area where the business community has innumerable grievances and dissatisfaction with the arbitrary nature of tax administration. Tax reforms are aimed at broadening the tax base, bringing in tax evaders under the tax net, minimizing personal interaction between tax payer and tax collector, eliminating the multiplicity of taxes and ultimately reducing the tax rate over time. A massive survey and documentation drive was undertaken to widen the tax base, extend incidence to all sectors of the economy and develop the data for purposes of assessment. Universal self assessment system has been introduced for tax collection whereby the returns submitted by the tax payers are taken as final settlement of their tax liabilities. Only a random sample of returns is picked up for audit. This system has been welcomed by the tax payers. The Central Board of Revenue (CBR) is being restructured to improve tax administration including taxpayer facilitation. Tariff reforms Pakistan made significant efforts in liberalizing its trade regime during the 1990s. The maximum tariff rate has declined from 225 percent in 1990-1 to 25 percent; the average tariff rate stands at just 11 percent compared to 65 percent a decade ago. The number of duty slabs has also been reduced to four. Quantitative import restrictions have already been eliminated except those relating to security, health, public morals, religious and cultural concerns. The number of statutory orders that exempted certain industries from import duties has been phased out by June 2004 and import duties on 4,000 items were reduced. These measures have brought down effective rate of protection, eliminated the anti-export bias and promoted competitive and efficient industries. A number of laws have also been promulgated to bring the trade regime in conformity with World Trade Organization regulations. These include antidumping and countervailing measures intellectual property rights. Financial sector reforms Financial sector has made the farthest progress by transforming itself into a market oriented, private sector dominated sector performing efficient intermediation. The regulatory and supervision functions of the State Bank of Pakistan have been significantly strengthened, and strict enforcement of prudential regulations have led to widespread recapitalization and a consequent improvement in the efficiency and profitability of banking system. More than 80 percent of banking assets are now owned and managed by the private sector. The ratio of net Non-Performing Loans (NPLs) to total advances in Pakistan has been brought down to less than 5 percent through a variety of strategic measures. An asset management company, the Corporate and Industrial Restructuring Corporation (CIRC), has taken over a large volume of non-performing loans of NCBs and DFIs at a discount and disposed them off to third party buyers. Development Financial Institutions (DFIs) have been restructured through mergers and acquisitions, closure, liquidation and reorganization. Auction of Pakistan Investment Bond (PIB) for tenures of five to ten years government paper and a burgeoning corporate bond market has begun to emerge bringing together long term institutional investors and borrowers interested in long term sources of financing. Economic governance: The most dramatic shift introduced by the military government is in promoting good economic governance. Transparency, consistency, predictability and rule-based decision-making have begun to take roots. Discretionary powers have been significantly curtailed. Freedom of press and access to information has had a salutary effect on the behaviour of decision makers. Pakistan’s history provides ample evidence that foreign enterprises have never been expropriated or taken over by any government during the last 57 years. Even when the Z.A. Bhutto government nationalized domestic manufacturing, banks, insurance companies, etc. the foreign companies were exempted and left untouched. Thus, the risk of expropriation of foreign capital is almost zero in Pakistan. Foreign investors are treated at par with domestic investors for purposes of equity ownership, access to domestic financial market, tax and tariff regime and legal rules and regulations. This level playing field is one of the strong and distinctive features that make Pakistan an investor-friendly country. The other pillars of good governance are, (a) devolution of power to the local governments who will have the administrative and financial authority to deliver public services to all citizens, and (b) an accountability process which will take to task those indulging in corruption through a rigorous process of detection, investigation and prosecution. The cornerstone of the governance agenda is the devolution plan which transfers powers and responsibilities, including those related to social services from the federal and provincial governments to local levels. This plan was put into effect in 2001. The development effort at the local level is expected to be driven by priorities set by elected local representatives, as opposed to bureaucrats sitting in provincial and federal capitals. Devolution of power will thus strengthen governance by increasing decentralization, transparency, accountability of administrative operations, and people’s participation in their local affairs. Other essential ingredients for improving economic governance are the separation of policy and regulatory functions, which were earlier combined within the ministry. Regulatory agencies have been set up for economic activities such as banking, finance, aviation, telecommunications, power, oil, gas etc. The regulatory structures are now independent of the ministry and enjoy quasi-judicial powers. The Chairman and Board members enjoy security of tenure and cannot be arbitrarily removed. They are not answerable to any executive authority and hold public hearings and consultations with stakeholders. The National Accountability Bureau (NAB) has been functioning quite effectively for the last five years as the main anti-corruption agency. A large number of high government officials, politicians and businessmen have been sentenced to prison, subjected to heavy fines and disqualified from holding public office for twenty-one years on charges of corruption after conviction in the courts of law. Major loan and tax defaulters were also investigated, prosecuted and forced to repay their overdue loans and taxes. Despite these positive outcomes and their impact on the business community and other stakeholders, within the country as well as abroad, the incidence of poverty is still quite high and unemployment rates are worrisome. The challenge therefore for the next phase of the reform process is to accelerate growth rate and reduce poverty and unemployment. Concluding remarks: Pakistan today meets most of the essential requirements that the foreign businesses and investors are looking for. Macroeconomic stability, deep-rooted structural reforms, high standards of economic governance, outward looking orientation, liberalized trade and investment regime, easy access to policy makers, low production costs, sophisticated financial sector and its location as a regional hub make it a highly attractive country for business and investment. Investors’ concerns about security, law and order are being addressed and the situation is improving gradually. But the negative perception that prevails about Pakistan abroad due to the hype created by the median can only be removed if the potential businessmen and investors visit Pakistan and make onthe- spot assessment for themselves. Table Long-term structural change and growth Population Income Agriculture Industry Infrastructure Consumption Social Indicators In million GDP (current m.p.) Rs. billion GDP (US$)billion Per Capita Income (Constant Rs.) Per Capita Income (US$) Per Capita Income (Current Rs.) Production Index Fiber Production Index Water Availability (MAF) Wheat Production (m. tons) Rice Production (m. tons) Cotton Production (m. bales) Fertilizer per ha. Crop (kg) Manufacturing Production Index Steel Production (000 tons) Cement Production (000 tons) Chemical Production (000 tons) Sugar Production (000 tons) Cloth Production (000 Sq. meter) Per Capita Electricity Generation (Index) Per Capita Electricity (kwh) Road Length (km) Area under Canal Irrigation(mill. ha) Natural Gas billion cu. Meters Road Vehicles per 1000 Persons Telephone Connections per 1,000 Persons TV Sets per 1,000 Persons Primary Enrolment Rate Population per Doctor Population per Nurse Literacy Rate Infant Mortality Rate Total Fertility Rate Population with Access to Safe Water Under Five Mortality Rate 3.8 1,638 3.3 0.7 1.1 29,581 50,367 7.9 0.4 23,897 369,318 N.A. N.A. N.A. N.A. 10.8 2,541 7.3 2.4 3.0 60,544 72,153 5,458 92.5 5,767 37,495 17,047 12,957 657,887 9,924 255,856 22.0 26.1 33.4 26.3 1,397 3,261 4.0 2.9 2.5 1.5 4,231 13,141 6.3 Table – II Changes in key macronomic indicators October 1999 October 2004 Change in the Indicator 4.2% 5.7% -6.1% -4.1% 100% 52% 50% 6.4% 4.6% -2.4% +1.4% 68% 37% 25% Positive Positive Positive Positive Positive Positive Positive Poverty Related Expenditure Unemployment Rs. 133 billion 6% US$ 300 million per month US$ 13 billion Rs. 600 billion Stable US$ 950 million US$ 12.0 billion Data not available but perhaps rising Rs. 161 billion 8% Positive Exports Tax Revenues Rupee-Dollar Parity Foreign Direct Investment Foreign Exchange Reserves Poverty Incidence US$ 88 million per month US$ 7.8 billion Rs. 391 billion Depreciating US$ 472 million US$ 1.6 billion 33% GDP Growth Rate Inflation Fiscal Deficit/GDP Current Account/GDP Public Debt/GDP External Debt/GDP Interest Payments/Govt.Revenues Remittances Positive Positive Positive Positive Positive Negative Positive Negative Note: All indicators in Column 1 pertain to 1998-99 or October 1999. All indicators in Column 2 pertain to 2004-05 or end October 2004. | state bank of pakistan | 2,005 | 2 |
Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the high level seminar organised on the occasion of the Asian Cooperation Dialogue, Islamabad, 5 April 2005. | Ishrat Husain: Economic cooperation in Asia Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the high level seminar organised on the occasion of the Asian Cooperation Dialogue, Islamabad, 5 April 2005. * * * During the past five decades developing countries in Asia have provided the most persuasive and credible story as to how poor countries can progress and bring about prosperity for their downtrodden people. Beginning with Japan, followed by NICs particularly Korea, ASEAN countries and now China, these countries have not only doubled or quadrupled per capita incomes in a record time but also significantly reduced the incidence of poverty. There are several different interpretations of the East Asian miracle and every school of thought has taken the credit for the unprecedented success of more than 1.5 billion people inhabiting this region. Those who believe in the supremacy of state led industrialization have attributed the turn around to the selective interventions by the Government through directed credit, subsidized foreign exchange, tax concessions, tariff exemptions and picking the winners. Those whose faith in pure market mechanism remains unblemished argue that unilateral trade liberalization, integration with the global economy, attracting foreign investment and technology and generally pursuing market friendly economic policies were responsible for these spectacular results. A more dispassionate analysis would reveal that no single extreme model can satisfactorily explain this phenomenon. There are, however, several common elements of strategy that have also been practiced outside East Asia and have also generated similar results. There is now a wide consensus that participation in international, inter-regional and intra-regional trade enhances the market size for sale of goods and services substantially relative to those who remain confined to the domestic markets. This added purchasing power accelerates the pace of economic growth and shortens the period required for doubling incomes. Second, as the poor countries have low domestic savings in relation of their investment needs they have to draw on foreign savings either in form of official flows, commercial loans or foreign direct investment to supplement this inadequate pool of domestic savings. The only exception is China whose citizens save a remarkable 40 percent of their income in form of savings. The contrast between China and other comparators is evident in the time it took China to double its per capita income. Third, even if the countries have large pool of domestic savings they cannot transform this pool into productive and remunerative investment over sustained period unless they acquire, assimilate and disseminate the latest technology in production, process and marketing. Embodied in foreign investment is the transfer of technology that can be adapted and internalized to suit the local conditions. Fourth, the state has a major role to play and cannot retreat to the sidelines as a disinterested bystander. Maintenance of macroeconomic stability, pursuit of sound economic policies, provision of physical infrastructure, assuring security of property and person, adjudicating disputes, respecting property rights and enforcing contracts, investing in research and development and more generally in public goods are some of the elements of the enabling environment that Governments create for private businesses to flourish. Fifth, no country in the world can aspire to achieve sustainable improvement in the living standards of its people unless it has invested in education health, nutrition, drinking water, in other words, in human development. This is going to be even more pressing in the 21st century as the world becomes a knowledge-based economy. A literate, healthy, educated and continuously learning and adapting labor force will make the difference between the success and failure of countries. It is against this background that we should examine the future course of Economic Cooperation in Asia. There is no way that increased cooperation can be wished. It has to be embedded in the confluence of interests of all the participants and anchored in ground realities. Intra-regional trade and investment among the ASEAN + 3 countries has insulated this region from the vagaries, vicissitudes and volatility of the western economies. The correlation and dependence of the region’s economy on the rest of the world is weakening and as the share of intra-regional trade and investment flows further increase the link will become unimportant. South Asia and Central Asia, on the other hand, have neither benefited from integration within their respective regions nor with the ASEAN + 3 region. The market size, the increased purchasing power, the nature of economic reforms and pursuit of liberal and open door policies, a large pool of trained manpower and the emergence of India as the reservoir of scientific and technological manpower do create a win-win situation for all the participants in the Asian Cooperation Dialogue. Pakistan has completely turned its economy around during the last five years and is now experiencing 7 percent plus growth rate with a fast emerging middle class of 15 million people. Similarly, the other countries of South Asia are also making considerable progress economically. Thus together the South Asia and Central Asia offer an expanding and buoyant market and also provide source of supplies to the value chain for the more advanced countries of the region. Japan and Korea are already using ASEAN Countries and China as the platform for production of goods in a cost effective way while providing design, technology, specifications and taking care of marketing and sales. Malaysia is beginning to feel the pinch of labor shortages and is looking towards South Asian Countries for relieving this pressure. Singapore and Malaysia are capital surplus countries with high foreign trade-GDP ratios and limited domestic markets. They are now looking towards the middle classes of South Asia whose incomes are rising fast and whose appetite for goods and services is voracious. India alone is adding about 2 million cellular phone subscribers every month while Pakistan has increased the size of cellular phone market from 3 million to 8 million within just one year. This example can be multiplied for fast moving consumer goods, energy, infrastructure, services of all kinds. Thus investment in these countries can be beneficial for both the capital surplus and large market size countries. Central Asia has huge energy resources but is geographically disadvantaged as it is landlocked. Infrastructure development providing access to seaports as well as gas pipelines, hydroelectric power transmission lines can make their economies more competitive and at the same time ease the energy shortages in India and Pakistan. China, because of its tremendous success, is facing or likely to face growing restraints and impediments in expanding access to the Western markets for its manufactured goods. Joint Ventures between Chinese companies and relocation in other parts of the region with low costs of production combined with availability of ample labor would be in the economic interest of both China as well as the recipient countries. India’s proven prowess in information technology, Internet-related services, Biotechnology and other intellectual fields can be used to enhance the productivity across the board in all the countries of Asia. Given the growing demand of skills among the Asian economies the inter operability of skilled manpower across the territorial boundaries of each individual country will help meet this demand. This above scenario is doable in my view but it requires a shared vision, a long term strategy, political will and commitment, a time bound action plan, an institutional mechanism for implementation and monitoring, and a machinery for follow up, dispute resolution, and problem solving. If the foreign ministers present at Islamabad this week can proceed along this road map I am quite confident that all the countries in region will be winner and nobody will be loser. Historians will then rightly describe 21st Century as the Asian Century just like the past three centuries were the American and European centuries. Thank you very much. | state bank of pakistan | 2,005 | 4 |
Welcome speech by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Anti-Money Laundering Seminar, Islamabad, 29-30 March 2005. | Ishrat Husain: Seminar on anti-money laundering Welcome speech by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Anti-Money Laundering Seminar, Islamabad, 29-30 March 2005. * * * Mr. Prime Minister, Distinguished Guests, Ladies and Gentlemen: Good morning. I am honoured to welcome you all to this international seminar on anti-money laundering. I am grateful to the Prime Minister for taking time out of his busy schedule and inaugurate this seminar. I would like to extend a special welcome to the foreign visitors and wish them a pleasant and productive stay in our country. The topic of the seminar is of great importance in today’s world. One of the main objectives of this seminar is to discuss the core issues, which significantly involve financial sector in the fight against money laundering and terrorist financing. I hope the seminar comes up with practical suggestions for effective tackling of money laundering and terrorist financing. While the speakers would be highlighting the technical aspects of money laundering and terrorist financing, I would like to mention a few general observations about the menaces. The process of laundering dirty money by way of placement, layering and integration is harmful for each and every segment of the society. Its ill effects on society, institutions and governments have been enormous. The tainted money adversely affects productive sectors of the economy in multifarious ways. The financial sector is particularly hurt if used for laundering of ill-gotten proceeds. The adverse consequences for financial institutions include reputational risk, operational risk, legal and concentration risks. It costs the financial institutions, in the following ways: • Loss of profitable business • Liquidity problems through sudden withdrawal of funds • Termination of correspondent banking facilities • Investigations costs and fines/ penalties • Assets seizures • Loans losses • Use of senior management’s time in doing damage control. • Declines in the stock value of the financial institution concerned. Society, as a whole, bears the costs of money laundering in multiple ways. Unchecked money laundering enables criminals to enjoy the profits of their crimes who in turn commit more crimes. When there are more frauds and robberies in banks, depositors will receive less return on their deposits and will have to pay high rates on their loans. When public projects are inflated by corruption, citizens have to pay in the form of more taxes. These acts further distort equitable distribution of wealth and, hence, increase in the incidence of poverty. Terrorism in its all forms and facets is one of the greatest challenges of today’s world. One of the key measures to check terrorism is to choke of financial resources flowing toward perpetrators of terrorist acts i.e. counter finance terrorism. Terrorist financing is in a way a case of “reverse money laundering”. In money laundering, crime precedes the process of laundering whereas in terrorist financing clean or dirty money is pooled to support a violent act in future. The tackling of the issues is by no means an isolated activity. It needs coordinated effort of host of stakeholders including financial institutions, regulators, law enforcement agencies and active involvement of host of other government functionaries to frustrate money laundering and terrorist financing. However, financial sector is believed to be at the core of the problem. Let me briefly mention some of the steps which State bank of Pakistan has taken to prevent use of banking sector from crime proceeds. • Introduced a comprehensive regulatory framework by issuing prudential regulations for banks/ DFIs. These regulations cover the necessary features of AML regime for financial institutions as required under FATF recommendations. Implementation of these regulations is ensured through on-site examination and off-site surveillance. Our inspectors specifically verify the adequacy of KYC policies and other Antimoney laundering safeguards. • Another major step is the replacement of Money Changers with properly regulated Exchange Companies, hence, formalizing the business of money changing and the underlying transactions. • State Bank of Pakistan has been instrumental in freezing bank accounts of proscribed entities and individuals as per UNSC Resolutions. Report of freezing accounts is called from banks and proper record of frozen accounts maintained. • State Bank of Pakistan has signed MOUs with a number of Central banks for exchange of information and expertise, which also covers the anti-money laundering and terrorist-financing areas. • The banks in Pakistan were issuing Traveller Cheques in local currency called “Rupee Travellers Cheques” (RTCs) in exceptionally high denomination of up to Rs.500,000 which was not in line with the true spirit and purpose of Traveller Cheques. Instead of using RTCs to meet the needs of travellers, the holder of these instruments often used them as a mode of settling undocumented transactions thereby, defeating the objective of the Government of documentation of the economy. SBP, therefore, prohibited the issuance of RTCs in denominations exceeding Rs.10,000/- in May, 2002. • Various kinds of bearer instruments were previously available in the market which have been gradually phased out in collaboration with the Federal Government. The measure is helping the Government’s efforts towards documentation of the economy. I would urge upon the leaders of the banking community present here, to avail this opportunity of learning from the international and regional experiences and highlight concerns, if any. Your involvement is vital for success of the seminar and the subject matter itself. We are fortunate to have with us today resource persons who are professionals of international repute. At the same time, State Bank, in its capacity of regulator, welcomes suggestions and recommendations for improving regulatory and supervisory systems for a clean and healthy banking sector. In conclusion, I would like to acknowledge that the Prime Minister’s presence has provided us tremendous support and confidence. This is reflective of the government’s resolve and priority in tackling the issues of money laundering and terrorist financing. I would like to acknowledge the support and cooperation of World Bank and IMF in hosting this seminar. | state bank of pakistan | 2,005 | 4 |
Article by Mr Ishrat Husain, Governor of the State Bank of Pakistan, reproduced from the Pakistan Supplement Global Agenda, World Economic Forum Annual Meeting 2005, Davos, January 2005. | Ishrat Husain: Pakistan’s economic turnaround - an untold story Article by Mr Ishrat Husain, Governor of the State Bank of Pakistan, reproduced from the Pakistan Supplement Global Agenda, World Economic Forum Annual Meeting 2005, Davos, January 2005. * * * Pakistan has come a long way since 1998/99 crisis when the country was on the brink of default and international reserves had been depleted, economic growth was anaemic, debt ratios were alarmingly high, confidence of the investor community was at its lowest ebb and credibility among international financial institutions was eroded. In a critical and fragile regional and domestic environment with constant threats to security, (as a result of playing a key role as frontline state in the war against terrorism), a prolonged and severe drought and high oil prices Pakistan has made an impressive economic turnaround within a short period of five years. Economic growth rate has reached solid 6 percent plus, inflation has been contained to 5 percent or so, exchange rate has been stabilized, fiscal deficit has been drastically reduced, domestic interest rates have declined dramatically, international reserves have jumped twelve times their 2000 level, debt ratios have fallen significantly and investment is booming. Pakistan’s creditworthiness has been upgraded to B+ by S&P. It is one of the few developing countries that has graduated from a successful completion of an IMF program to directly accessing international financial markets. How has this remarkable turnaround taken place? Amidst the hot news of Al-Qaeda, Osama bin Laden, assassination attempts on President Musharraf, nuclear proliferation by Dr. Abdul Qadeer Khan and tension with India, the story of Pakistan’s economic achievement remains confined to a small segment of informed observers around the World. This turnaround has not occurred all of a sudden but is the outcome of deliberate and carefully designed program of economic reforms undertaken over last five years, some of them still ongoing. The comprehensive strategy announced by President Musharraf in December 1999 consisted of four key elements: (a) Restoration of macroeconomic stability and Pakistan’s relationship with the international financial institutions. (b) Structural reforms to remove distortions. (c) Improving economic governance and reviving key institutions. (d) Poverty alleviation through targeted interventions and social safety nets. The interconnection between economic growth, poverty reduction, structural reforms and improved governance is fairly strong in the case of Pakistan. Macroeconomic stability and the consequent rapid economic growth help reduce poverty in conjunction with investment in social sectors, targeted interventions and social safety nets. Structural reforms are needed to strengthen the underpinning of macroeconomic policies and to remove microeconomic distortions affecting key sectors of the economy thus paving the way for accelerating economic growth. Improved governance affects the quality of growth by allowing realization of higher returns on investment and is also conducive to poverty reduction through better delivery of social services to the poor. Poverty reduction, as we know by now, can be achieved with rapid economic growth, structural reforms and improved governance. Macroeconomic stability Macroeconomic stability has been achieved through reduction in fiscal deficit, acquiring a surplus on the current account balance of payments, lowering of inflation, and a transformation of external debt profile. These have been brought about partially through the support of international financial institutions and the Paris Club bilateral creditors which significantly eased the external payments position that had been a major and consistent risk to the economy since 1998. Fiscal deficit was reduced by pursuing a combination of four set of policy measures (i) mobilizing additional tax revenues (ii) reducing subsidies to public enterprises and corporations and (iii) bringing about a significant decline in debt servicing payments and (iv) containing defence expenditures. Monetary policy was kept reasonably tight during the first two years with money supply growth at about 9 percent. Expansion in private sector credit, in the subsequent years, did not put much pressure as the government borrowing was limited to a manageable level. As the monetary conditions improved the interest rate came down gradually to a single digit and demand for credit by the private businesses picked up resulting in higher capacity utilization in manufacturing and increased industrial production. External debt management focused on (a) reprofiling of the stock of official bilateral debt, (b) substituting concessional loans for non-concessional from international financial institutions, (c) pre-paying expensive loans and (d) liquidating short term liabilities. Debt ratio was thus reduced from 100 percent of GDP to 60 percent in five years time. Trade policy in Pakistan has been categorized by the World Bank as one of the least restrictive in S. Asia along with Sri Lanka and this policy has gradually provided incentives to exporters to increase their market share in the global markets. Exchange rate policy was pursued to maintain stability in the foreign exchange markets while at the same time keeping the competitiveness of Pakistani exports intact. Large accumulation of foreign reserves played an important role in stabilizing the exchange rate. Structural reforms Tax reform Tax reforms have attempted to widen the tax base, strengthen tax administration, promote self-assessment, eliminate whitener schemes, reduce multiplicity of taxes and tackle the culture of tax evasion and corruption. A new Income Tax Ordinance has been introduced in 2001, which allows for universal self-assessment, uniform tax rates, removal of non-adjustable withholding taxes, elimination of exemptions and detailed audit. Moreover, the tax survey and documentation drive during 1999-2000 has allowed the CBR to bring in additional income tax payers and new sales tax payers in the tax net. It has also profiled 600,000 tax payers which will help enhance the effectiveness of tax assessment, and help detect tax evasion and under-reporting. Tariff reforms Pakistan made significant efforts in liberalizing its trade regime during the 1990s. The maximum tariff rate has declined from 225 percent in 1990-1 to 25 percent; the average tariff rate stands at just 11 percent compared to 65 percent a decade ago. The number of duty slabs has also been reduced to four. Quantitative import restrictions have already been eliminated except those relating to security, health, public morals, religious and cultural concerns. The number of statutory orders that exempted certain industries from import duties have been phased out by June 2004 and import duties on 4,000 items were reduced. These measures have brought down effective rate of protection, eliminated the anti-export bias and promoted competitive and efficient industries. A number of laws have also been promulgated to bring the trade regime in conformity with World Trade Organization regulations. These include antidumping and countervailing measures intellectual property rights. Privatization Public sector corporations have been a constant source of burden on the budget as well as quasi-fiscal accounts. As much as one-third of the fiscal deficit could be directly attributed to the losses of public corporations. In addition, nationalized commercial banks had been carrying a large burden of these corporations. A new law was promulgated under which privatization can take place. This step was necessary to ensure transparency, provide an institutional and legal framework, avoid unnecessary delays and litigations, and outline the process through which the transactions are to be carried out. Three major banks along with several other key public sector units have already been sold to strategic investors in the private sector. Shares of large companies such as Oil and Gas Development Company Ltd. and Pakistan Petroleum Ltd have been divested through public offerings. Plans to sell the Pakistan Telecommunications Co. Ltd (PTCL) and Pakistan State Oil (PSO) - the two giants - are under implementation. Deregulation As Pakistan has embarked on the process of creating competitive markets and eliminating direct or implicit consumer and producer subsidies, a number of steps have been taken to deregulate prices and trading in various sectors. The most far-reaching reform has taken place in the oil and gas sector. Imports and pricing of petroleum products have been deregulated and the private sector is now free to import and fix prices. An automatic price adjustment formula for consumer prices of petroleum products linked with international prices has been adopted. Price distortions in natural gas have also been eliminated and new pricing framework has been put in place. The government has freed up agricultural prices by moving towards market based pricing. With a view towards allowing farmers to receive international prices for their produce, all restrictions on the import and export of agricultural commodities have been removed. Wheat procurement and trade, which was until recently an exclusive monopoly of the state, has been opened up to the private sector. Exports of wheat and wheat products have also been allowed to the private sector. Financial sector reforms Financial sector has made the farthest progress by transforming itself into a market oriented, private sector dominated sector performing efficient intermediation. The regulatory and supervision functions of the State Bank of Pakistan have been significantly strengthened, and strict enforcement of prudential regulations have led to widespread recapitalization and a consequent improvement in the efficiency and profitability of banking system. More than 80 percent of banking assets are now owned and managed by the private sector. The ratio of net Non-Performing Loans (NPLs) to total advances in Pakistan, has been brought down to less than 5 percent through a variety of strategic measures. An asset management company, the Corporate and Industrial Restructuring Corporation (CIRC), has taken over a large volume of non-performing loans of NCBs and DFIs at a discount and disposed them off to third party buyers. Development Financial Institutions (DFIs) have been restructured through mergers and acquisitions, closure, liquidation and reorganization. Auction of Pakistan Investment Bond (PIB) for tenures of five to ten years government paper and a burgeoning corporate bond market has begun to emerge bringing together long term institutional investors and borrowers interested in long term sources of financing. Governance and institutions The cornerstone of the governance agenda is the devolution plan which transfers powers and responsibilities, including those related to social services from the federal and provincial governments to local levels. This plan was put into effect in 2001. The development effort at the local level is expected to be driven by priorities set by elected local representatives, as opposed to bureaucrats sitting in provincial and federal capitals. Devolution of power will thus strengthen governance by increasing decentralization, transparency, accountability of administrative operations, and people’s participation in their local affairs. Other essential ingredients for improving economic governance are the separation of policy and regulatory functions, which were earlier combined within the ministry. Regulatory agencies have been set up for economic activities such as banking, finance, aviation, telecommunications, power, oil, gas etc. The regulatory structures are now independent of the ministry and enjoy quasijudicial powers. The Chairman and Board members enjoy security of tenure and cannot be arbitrarily removed. They are not answerable to any executive authority and hold public hearings and consultations with stakeholders. The National Accountability Bureau (NAB) has been functioning quite effectively for the last five years as the main anti-corruption agency. A large number of high government officials, politicians and businessmen have been sentenced to prison, subjected to heavy fines and disqualified from holding public office for twenty-one years on charges of corruption after conviction in the courts of law. Major loan and tax defaulters were also investigated, prosecuted and forced to repay their overdue loans and taxes. Institutional reforms Civil service reforms aimed at improving recruitment, training, performance management, career progression, right sizing of ministries and attached departments, and improving compensation for government employees are the reforms that have been initiated for building strong institutions in the country. In order to depoliticize recruitment, promotions and career development, the independence and responsibilities of the Federal Public Service Commission (FPSC) have been enhanced and is now fully in charge of meritbased recruitment and promotions. The Civil Service Act has been amended to reflect performance based career progression and would enable the government to retire civil servants who are inefficient and/or corrupt. The public sector educational training infrastructure is also being restructured to strengthen skillbased training of civil servants at all levels. The reforms in some of the most important federal institutions – the Central Board of Revenue (CBR), Securities and Exchange Commission (SECP), the State Bank of Pakistan (SBP) and Pakistan Railways - initiated some years ago - are already beginning to take some hold and making a difference as far as governance is concerned. Reforms in access to justice will deal with delays in the provision of justice, case management, automation, and court formation systems. In addition, human resources, management information systems and the infrastructure supporting judicial system are being revamped and upgraded. Small Causes Courts have been established to provide relief to the poor who have small claims. Extensive police reforms have been introduced to separate the law and order, investigation, and prosecution functions of the police and promote functional specialization. Public Safety Commissions have been set up at the federal, provincial and district levels, which will institutionalize public accountability of Pakistan’s Police Force. To improve the overall performance of the policy, enhancing efficiency, logistics, communication, mobility and training are being given greater emphasis. The example of motorway police in this respect is illustrative of the quick turnaround that can be brought about through better incentives and logistic support. Poverty reduction Pakistan’s economic growth rate has picked up to 6.4 percent in 2003-4 (population growth rate is 2.0 percent). A key element of the poverty reduction strategy is to sustain this high rate of economic growth. Towards this end, the government has identified four major areas; agriculture, SMEs, oil and gas sector, and information technology as the drivers of growth. With relatively low investment, these sectors are likely to generate higher employment opportunities and thus have direct impact on poverty reduction. Poverty targeted interventions Economic growth is a necessary, but not a sufficient condition for poverty reduction. Where poverty is endemic, high economic growth must be accompanied by direct poverty alleviation measures. Towards this end, poverty targeted intervention programs consisting of several major elements are being introduced. These elements include: (i) integrated small public works programme in both urban and rural areas (Khushal Pakistan Programme), and the (ii) development of microfinance sector to help improve credit access of the poor. Public works Khushal Pakistan program had generated economic activity in the country through local public works. The provinces, in close collaboration with the local authorities and communities, completed almost half a billion dollar of small projects creating about 1 million job opportunities along with essential infrastructure in rural and low income urban areas. The program has resulted in construction of farm-to-market roads, rehabilitation of water supply schemes, repair of existing schools, small rural road, streets, drains, and storm channels in villages. Moreover, the program has been supplemented with the schemes for lining of watercourses and laser land leveling, desilting canals, and provision of civil amenities in towns, municipal committees, and metropolitan corporations. Microfinance The role of microfinance in poverty alleviation and employment generation has been widely accepted. The government has established a micro-credit bank (Khushali Bank), as a prototype institution for providing credit access to poor households. This bank has so far reached out to 200,000 poor households throughout the country. The work of this bank has been reinforced by the Pakistan Poverty Alleviation Fund, which through a network of partner organizations in non-governmental sector has reached out to another 300,000 poor families. Education and health Pakistan’s poor educational outcomes have become a major constraining influence on its quest for integration in the global economy. High rates of illiteracy, particularly among women, low educational attainment of the labour force, and lack of qualified technical and scientific manpower have impeded economic growth. The strategic thrust of Education Sector Reforms (ESRs) consists of (a) achieving universal primary education and adult literacy; (b) improving the quality of education; (c) renewed focus on technical and vocational education. Higher education and Science and technological research capacities are also being bolstered in the country. Madarassahs are being brought into the mainstream educational system so that their products can find gainful employment in the economy. The National Commission on Human Development is mobilizing community volunteers to bring out-of-the school children into the system. Female educational enrolments have jumped in the province of Punjab since the girl students were awarded monthly stipends to support their education. The new health policy follows a “health for all” approach based on accessibility, affordability and acceptability of health services by the general population. The health strategy places greater focus on a continuous shift from curative services to preventive health services by improving the primary health care system. Improvements in health status are taking place mainly through maternal and child health, communicable and infectious disease control and elimination of nutrient deficiencies. The budget for the Expanded Program of Immunization has been increased and coverage is being expanded in rural areas as well as among women. A sound tuberculosis control program, HIV/AIDS program, and anti-malaria program are also under implementation. The shift of public expenditures from tertiary to primary and secondary health care and devolving and decentralizing financial and administrative powers to local tiers form the crux of the health sector reforms. This new approach provides a clear signal that preventive rather than curative health care will be given priority in allocation of expenditures. Poor access to water supply and sanitation are often associated with poor health outcomes. At present only 63 percent of the country’s population has access to safe drinking water, whereas proper sanitation facilities are available to only 39 percent of the total population. The government is planning to increase water supply facilities and sanitation facilities to reach 100 percent of population as part of Millennium Development Goal. Construction of drinking water supply and sanitation facilities is already receiving prime importance under the Khushal Pakistan Program. Social safety nets As part of Social Safety net programme, the government has launched direct cash-transfer programmes for poor families through medical assistance, and educational stipends from the Bait-ul-Maal (a public welfare programme). The Food Support Programme covers 1.2 million of the poorest households with monthly incomes of up to Rs.2,000 per family (US$35). A system of needstesting has been adopted for the identification of beneficiaries by linking the programme with the zakat system. The zakat programme that targets widows, orphans and the disabled has been strengthened. About two million beneficiaries received assistance from the Zakat Fund, of which 0.5 million receive assistance on a regular basis. It is envisaged that an additional 1.5 million will be added to the list of zakat recipients through rehabilitation schemes, which will provide micro loans of Rs.10,000 (US$160) to Rs.50,000 (US$800) each for starting up small businesses. An allocation of Rs.5 billion (US$80 million) has been made for these schemes in addition to the normal stipends to mustahqeen (the needy) out of the Zakat Fund. It is estimated that zakat contributes 10-15 percent to the government’s poverty reduction programme. The school feeding programme for female students (Tawana Pakistan Programme), which was successfully piloted in a few districts will be replicated throughout the country. This programme will help address malnutrition in female students as this has resulted in low enrolment, high absenteeism/dropout rate and low cognitive achievement. It is estimated that community mobilization will strengthen ownership of this programme and lead to a 30 percent decrease in the dropout rate. The Employees Old-age Benefits Institutions (EOBI) and provincial social security institutions provide pension and medical care benefits to private sector employees. Sindh and Punjab provide medical care benefits to about 700,000 beneficiaries and their dependents. Similarly, the Workers Welfare Fund provides social security support to workers and their families. Moving ahead Despite the progress made during the last five years the challenges ahead remain daunting. To meet these challenges and the MDGs by 2015, Pakistan remains committed to keep the momentum of structural reforms high, to maintain prudent macroeconomic management, to further reduce the debt ratios to keep the current account in balance to improve revenue performance without any relaxation of fiscal stance but to expand education and health services. The thrust of the monetary policy would be not to allow inflationary expectations to become entrenched while providing credit and liquidity to private sector. The efficiency of the energy sector will be enhanced by privatizing the distribution companies encouraging private investment in low cost generation projects and laying cross border gas pipeline. The efforts to attract foreign direct investment particularly export oriented industries and services will be stepped up by further improving the business climate and governance. The judicial framework will be strengthened to enforce property rights and contracts. Investment in human capital to upgrade the quality of labor force and improve the opportunities of employment for the poor would remain a priority. The quality of institutions will be improved through reforms of civil service and law enforcement agencies. The current policy stance of an open trading regime with low tariffs and non-existent non-tariff barriers, a liberal foreign investment environment with no restrictions or prior approvals of any kind, a market-based financial sector working under competitive structure, a dynamic private sector producing goods and services with an enabling public sector providing infrastructure and social services will remain in place. | state bank of pakistan | 2,005 | 4 |
Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at a seminar held at the Embassy of Pakistan, Washington DC, 15 April 2005. | Ishrat Husain: Pakistan’s economic achievements, prospects and challenges Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at a seminar held at the Embassy of Pakistan, Washington DC, 15 April 2005. * * * During the last five years, Pakistan has traversed the road from a difficult default situation on its external payments to a vigilant program under the International Monetary Fund and finally reestablished access to international capital markets. GDP growth rate has exceeded 6 percent, inflation had remained under control for four out of five years, fiscal deficit has been reduced significantly, public debt ratios have declined, external debt burden has been lowered, exchange rate has remained stable, exports have almost doubled, tax revenues are recording double digit growth, interest rates had never been at such low levels in the history, remittances of Pakistanis overseas have multiplied by a factor of four, foreign exchange reserves have expanded twelve times from their 1999 level and unemployment is on a downward slide. Can these impressive achievements be sustained and not reversed with the change in political regime? What has happened to the Pakistani economy that is different from the past this time around? I would submit that there are at least eight factors that have contributed to the sustainability and will make the difference: 1) There is a wide recognition in Pakistan now that prudent macroeconomic management and sound fiscal and monetary policies are pre-requisites for achieving high growth rates and maintaining stability in the markets. 2) Continuity, consistency, predictability and transparency in economic policies have a better pay-off in terms of restoring the confidence of investors in particular and economic actors in general. 3) Structural reforms such as privatization, deregulation and liberalization are critical for attaining macroeconomic stability and economic growth. In Pakistan, all the political parties are not only agreed upon this agenda but have implemented these reforms. It should be recalled that it was the Nawaz Sharif Government which introduced these reforms in 1991 that subsequently were pursued by the Benazir Government when it came to power. The same policies have been implemented with vigor in the last five years. 4) A number of checks and balances have been built in the system that will minimize the risk of slippages and reversal and ensure prudence and faithful implementation of the reform agenda. These are: (i) Fiscal responsibility and Debt Limitation Law which puts limits on fiscal deficits and thus ensures fiscal discipline. (ii) Independence of the Central Bank and separation of regulatory agencies from policymaking. (iii) A fierce and independent media that acts as a watchdog on wrongdoings and corruption. (iv) Emergence of stronger civil society organizations which reinforce the role played by the media. 5) There has been a shift in the structure of production, distribution and trade from the public sector owned, managed and controlled enterprises to private sector firms and entities. Competition among the firms and the markets will promote efficiency in the resource use and require lower inputs per unit of output enhancing the overall productivity in the economy. 6) Allocation of Capital – an important factor of production – through private banks, financial institutions and Capital Markets will be more efficient than the politically-motivated loans granted by the nationalized commercial banks. The restructured financial sector has also extended its outreach to provide broader access to the middle income and lower income groups and underserved sectors such as agriculture and SMEs. 7) The quality of governance has improved at least at the top and the impending reforms should be able to remove excessive discretionary powers employed by the lower functionaries in the bureaucracy. For example, the introduction of Universal Self Assessment Scheme has eliminated the discretionary powers of income tax collectors. The use of technology and business process re-engineering should further reinforce this tendency. 8) Globalization, financial market integration and access to global capital markets will force the governments towards continued good behavior and performance as the markets can penalize the countries indulging in infractions instantaneously and heavily. The market discipline will act as a brake upon the egregious behavior of the Government. What are the possible areas of concern or risks to the future sustainability of the growth path and towards achieving the Millennium Development Goals set by Pakistan, the most important being the reduction in poverty by one half? I can identify at least seven challenges that the country has to deal with in the coming years which can otherwise derail the journey: (a) There should be no major shift in the direction of economic policies and the quality of economic management that have been followed so far. The year 2007 is the test case for establishing the seriousness and credibility of Pakistan’s economic program. Should the newly-elected political regime continue to move in the same direction, of course with some changes suited to the circumstances, Pakistan would be perceived in the same vein such as China and India. China has been following the same economic path set by Deng Xiaoping in 1980 with modifications and adaptations to the changing external and internal condition – despite changed political leadership. India, which started its reform process under the Congress in 1991, was finally accepted as a credible reformer only after the BJP Government forcefully and vigorously moved on the same path since 1996. (b) The external environment remains favorable. The present oil price hike has created serious pressures on the current account balances and it is essential for an oil-importing country such as ours to see some moderation in the prices of oil. The other burning issue is the increased market access to Pakistan’s textile exports to the U.S. and the EU. The tariff discrimination and anti-dumping duties against Pakistan’s exports have tilted the playing field against us. The developed countries can assist Pakistan not by increasing the burden on their taxpayers in the form of aid but by reducing the prices of apparels and textiles for their own consumers in the form of enlarged market access. (c) Pakistan has been a laggard in human resource development for quite some time. The “All hands on the- deck” approach in which the Government, private sector, non-governmental organizations, charities, communities and philanthropists combine their efforts to effectively deliver education, health, drinking water to the poor towns and villages at affordable prices will work. The Government has an obligation to finance the education of the lower income groups but it is not necessary that they should be the providers also. Only those who are efficient and effective and can reach out to the poor communities should be encouraged to provide these services financed partly or wholly by the Government. Technical and vocational education should be given priority to produce the skills that are required by the economy while minimizing the unemployment among the educated youth. (d) Higher growth rates for an extended period of time in the range of 7 to 8 percent annually are possible only if energy, water resources and infrastructure needs are fully met. Otherwise, shortages, congestions, and bottlenecks will slow down the growth process. Government’s budget can absorb only one half of these requirements in a non-inflationary environment. The other half has to be raised through public-private partnerships with recourse to capital markets. Innovative ways of financing have to be explored for this partnership to take off and produce results. (e) One of the most interesting experiments initiated in Pakistan in 2000 was devolution of administrative and financial powers to the local governments. This experiment has run into some snags since the elections and a stable equilibrium between the provincial and local governments has not been found as yet. But there is no doubt that for bringing about demand-driven balanced regional development and delivering basic services to the vast majority of the poor, there is no better vehicle than the district, tehsil and union-level governments. The sooner the problems facing this transition are resolved, the greater will be the impact on development of backward areas and the services to the poor. (f) Growth alone will not suffice to reduce the incidence of poverty. It has to be accompanied by poverty-targeted interventions and social safety nets. The Khushal Pakistan program initiated by the Musharraf Government in 2000 was a success in building minor but essential infrastructure projects at the local level and creating employment opportunities. Zakat, Baitul Mal, and Food Stamps are some other programs that can distribute the benefits of growth to the vulnerable and disadvantaged segments of the population. These programs need to be revamped and revitalized in order to become effective social safety nets for the poor. (g) Pakistan’s export base is still quite narrow and highly concentrated. Cotton textiles account for two-thirds of total exports. Dynamic export, products that are all dependent on medium and high technology are conspicuous by their absence. In order to maximize the benefits from globalization and buoyant world trade, we have to gradually build up our capacity to produce medium and hi-tech exports. This will not only diversify the base but also insulate us from fluctuations and volatility in cotton and textile output and trade. (h) Even if all the above mentioned challenges are successfully tackled, the economy and the people, particularly the poor, will not be able to derive full benefits unless our institutions are restructured and their capacity strengthened. Civil Service, Judiciary and Police are the key institutions that affect a common man’s daily life. Regulatory impediments are still hampering new businesses. Reforms of these institutions have to be put on top of the agenda and pursued relentlessly. The Thana-Kutchery Tehsil nexus that has remained intact since the colonial days has instilled a sense of fear and insecurity in the minds of the poor and unconnected and locked in their initiative and drive so critical for any growing economy. 1) The unleashing of their energies in a more supportive institutional environment will do a lot of good to higher growth and poverty-reduction goals. In the short term, however, we are grappling with the problem of inflation. After four years of low inflation rate below 4 percent, the rise in aggregate demand arising from rising per capita incomes, the monetary expansion policy pursued since 2001, the oil price spike and the food shortages have all combined to intensify inflationary expectations in this fiscal year. The State Bank is already tightening the monetary policy and raising interest rates. A bumper wheat crop is expected this year and oil prices are beginning to slide downward. These factors should be able to dampen inflationary expectations in the coming months. | state bank of pakistan | 2,005 | 4 |
Inaugural address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Seminar on Management of Pakistan Economy, organised by the Lahore School of Economics, Lahore, 28 April 2005. | Ishrat Husain: Key issues in managing Pakistan’s economy Inaugural address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Seminar on Management of Pakistan Economy, organised by the Lahore School of Economics, Lahore, 28 April 2005. * 1. * * Introduction Pakistan was one of the few developing countries that had achieved an average growth rate of over 5 percent over a four decade period ending in 1990. Consequently, the incidence of poverty had declined from 40 percent to 18 percent by the end of 1980s. But the 1990s proved to be a lost decade for Pakistan; growth in per capita income dropped to slightly over 1 percent. Poverty resurfaced and about one-third of the population now lives below the poverty line of $1 per day. Social indicators became worse than those of other countries with comparable incomes. The country became one of the heavily indebted countries and was declared as one of the most corrupt countries in 1996. The challenge facing the government which assumed power in October 1999 was to put the economy back to its pre-1990 track. Pakistan has come a long way since the 1998/99 crisis when the country was on the brink of default and international reserves had been depleted, economic growth was anemic, debt ratios were alarmingly high, confidence of the investor community was at its lowest ebb and credibility among international financial institutions was eroded. Economic growth rate has reached a solid 6 percent plus, inflation has been contained to 5 percent which has only recently started rising, exchange rate has been stabilized, fiscal deficit has been drastically reduced, domestic interest rates have declined dramatically, international reserves have jumped twelve times their 2000 level, debt ratios have fallen significantly and investment is booming. Pakistan’s creditworthiness has been upgraded to B+ by S&P. It is one of the few developing countries that have graduated from a successful completion of an IMF program to directly accessing international financial markets. I would start off with an overview of the economic reforms and policies put in place by the government since 2000, examining their main components, their aims and objectives and the degree of success achieved. I will then offer an assessment of the experience during this period and then offer some concluding remarks. 2. Economic management since 2000 The turnaround witnessed in the economy has not occurred all of a sudden but is the outcome of a deliberate and carefully designed program of economic reforms undertaken over the last five years; some of them still ongoing. The comprehensive strategy announced by President Musharraf in December 1999 consisted of four key elements: (a) Restoration of Macroeconomic Stability and Pakistan’s relationship with the International Financial Institutions. (b) Structural Reforms to remove distortions. (c) Improving Economic Governance and reviving key Institutions. (d) Poverty Alleviation through targeted interventions and Social Safety Nets. The interconnection between economic growth, poverty reduction, structural reforms and improved governance is fairly strong in the case of Pakistan. Macroeconomic stability and the consequent rapid economic growth help reduce poverty in conjunction with investment in social sectors, targeted interventions and social safety nets. Structural reforms are needed to strengthen the underpinning of macroeconomic policies and to remove microeconomic distortions affecting key sectors of the economy thus paving the way for accelerating economic growth. Improved governance affects the quality of growth by allowing realization of higher returns on investment and is also conducive to poverty reduction through better delivery of social services to the poor. Poverty reduction, as we know by now, can be achieved with rapid economic growth, structural reforms and improved governance. 2.1. Macroeconomic stability Macroeconomic stability has been achieved through reduction in fiscal deficit, acquiring a surplus on the current account balance of payments, lowering of inflation, and a transformation of external debt profile. These have been brought about partially through the support of international financial institutions and the Paris Club bilateral creditors which significantly eased the external payments position that had been a major and consistent risk to the economy since 1998. Fiscal deficit was reduced by pursuing a combination of four sets of policy measures (i) mobilizing additional tax revenues (ii) reducing subsidies to public enterprises and corporations and (iii) bringing about a significant decline in debt servicing payments and (iv) containing defence expenditures. Monetary policy was kept reasonably tight during the first two years with money supply growth at about 9 percent. Expansion in private sector credit, in the subsequent years, did not put much pressure as the government borrowing was limited to a manageable level. As the monetary conditions improved, the interest rate came down gradually to a single digit and demand for credit by private businesses picked up resulting in higher capacity utilization in manufacturing and increased industrial production. However, with the mounting of inflationary pressures in recent months, the State Bank is taking measures to tighten its monetary policy; the interest rates are expected to go up gradually in the coming months so as not to hurt the growth of the economy. External debt management focused on (a) reprofiling of the stock of official bilateral debt, (b) substituting concessional loans for non-concessional from international financial institutions, (c) pre-paying expensive loans and (d) liquidating short-term liabilities. Debt ratio was thus reduced from 100 percent of GDP to 60 percent in five years time. Trade policy in Pakistan has been categorized by the World Bank as one of the least restrictive in South Asia along with Sri Lanka and this policy has gradually provided incentives to exporters to increase their market share in the global markets. Exchange rate policy was pursued to maintain stability in the foreign exchange markets while at the same time keeping the competitiveness of Pakistani exports intact. Large accumulation of foreign reserves played an important role in stabilizing the exchange rate. 2.2. Structural reforms Financial sector reforms Financial sector has made the farthest progress by transforming itself into a market oriented, private sector dominated sector performing efficient intermediation. Reforms that have been successfully implemented since 2000 spanned over a whole range of initiatives. Prominent among them were (a) privatization of nationalized commercial banks and fostering competition, (b) strengthening regulatory supervisory and enforcement capacity of the SBP, (c) lowering the cost of capital by dealing with non performing loans, reducing corporate tax burden and bringing cost-income ratios down, (d) revising the legal structure particularly the foreclosure laws (e) broad basing access to the middle income and lower income groups by opening up provision of credit for agriculture, SMEs, consumer financing and micro credit (f) introducing and enforcing stringent corporate governance, internal controls, transparency and enhanced disclosure standards (g) liberalizing the foreign exchange regime and (h) promoting technological upgradation of the banking industry through Ebanking, ATMs etc. A financial sector assessment carried out jointly by the World Bank and the IMF conclude that Pakistan had been able to establish a sound, efficient financial system that can withstand exogenous shocks. The restructured financial system has responded well to the expansionary monetary policy that was pursued during the period 2001/02 – 2003/04 to stimulate aggregate demand and kick-start the economy. Tax reforms Tax reforms have attempted to widen the tax base, strengthen tax administration, promote self-assessment, eliminate whitener schemes, reduce multiplicity of taxes and tackle the culture of tax evasion and corruption. A new Income Tax Ordinance has been introduced in 2001, which allows for universal self-assessment, uniform tax rates, removal of non-adjustable withholding taxes, elimination of exemptions and detailed audit. Moreover, the tax survey and documentation drive during 1999-2000 has allowed the CBR to bring in additional income tax payers and new sales tax payers into the tax net. It has also profiled 600,000 tax payers which will help enhance the effectiveness of tax assessment, and help detect tax evasion and under-reporting. Tariff reforms Pakistan made significant efforts in liberalizing its trade regime during the 1990s. The maximum tariff rate has declined from 225 percent in 1990-1 to 25 percent; the average tariff rate stands at just 11 percent compared to 65 percent a decade ago. The number of duty slabs has also been reduced to four. Quantitative import restrictions have already been eliminated except those relating to security, health, public morals, religious and cultural concerns. The number of statutory orders that exempted certain industries from import duties has been phased out by June 2004 and import duties on 4,000 items were reduced. These measures have brought down effective rate of protection, eliminated the anti-export bias and promoted competitive and efficient industries. A number of laws have also been promulgated to bring the trade regime in conformity with World Trade Organization regulations. These include antidumping and countervailing measures and strengthening of intellectual property rights. Privatization Public sector corporations have been a constant source of burden on the budget as well as quasi-fiscal accounts. As much as one-third of the fiscal deficit could be directly attributed to the losses of public corporations. In addition, nationalized commercial banks had been carrying a large burden of these corporations. A new law was promulgated under which privatization can take place. This step was necessary to ensure transparency, provide an institutional and legal framework, avoid unnecessary delays and litigations, and outline the process through which the transactions are to be carried out. Four major banks along with several other key public sector units have already been sold to strategic investors in the private sector. Shares of large companies such as Oil and Gas Development Company Ltd. and Pakistan Petroleum Ltd. have been divested through public offerings. Plans to sell the Pakistan Telecommunications Co. Ltd. (PTCL) and Pakistan State Oil (PSO) – the two giants - are under implementation. Deregulation As Pakistan has embarked on the process of creating competitive markets and eliminating direct or implicit consumer and producer subsidies, a number of steps have been taken to deregulate prices and trading in various sectors. The most far-reaching reform has taken place in the oil and gas sector. Imports and pricing of petroleum products have been deregulated and the private sector is now free to import and fix prices. An automatic price adjustment formula for consumer prices of petroleum products linked with international prices has been adopted. Price distortions in natural gas have also been eliminated and new pricing framework has been put in place. The government has freed up agricultural prices by moving towards market based pricing. With a view towards allowing farmers to receive international prices for their produce, all restrictions on the import and export of agricultural commodities have been removed. Wheat procurement and trade, which was until recently an exclusive monopoly of the state, has been opened up to the private sector. Exports of wheat and wheat products have also been allowed to the private sector. Deregulation and liberalization of the economy have given rise to an interesting by product – weakening of the public functionaries’ power to collect rents, extort bribes and exhibit arbitrary behaviour. This has a positive impact on the quest for improved governance in the country. 2.3. Governance and institutions The cornerstone of the governance agenda is the devolution plan which transfers powers and responsibilities, including those related to social services from the federal and provincial governments to local levels. This plan was put into effect in 2001. The development effort at the local level is expected to be driven by priorities set by elected local representatives, as opposed to bureaucrats sitting in provincial and federal capitals. Devolution of power will thus strengthen governance by increasing decentralization, transparency, accountability of administrative operations, and people’s participation in their local affairs. Other essential ingredients for improving economic governance are the separation of policy and regulatory functions, which were earlier combined within the ministry. Regulatory agencies have been set up for economic activities such as banking, finance, aviation, telecommunications, power, oil, gas etc. The regulatory structures are now independent of the ministry and enjoy quasi judicial powers. The Chairman and Board members enjoy security of tenure and cannot be arbitrarily removed. They are not answerable to any executive authority and hold public hearings and consultations with stakeholders. The National Accountability Bureau (NAB) has been functioning quite effectively for the last five years as the main anti-corruption agency. A large number of high government officials, politicians and businessmen have been sentenced to prison, subjected to heavy fines and disqualified from holding public office for twenty-one years on charges of corruption after conviction in the courts of law. Major loan and tax defaulters were also investigated, prosecuted and forced to repay their overdue loans and taxes. Transparency in public policy making, the watchdog role of a fierce and independent media and vigilance by an emerging set of civil society organizations are also beginning to make a contribution towards better governance. Freedom of Information Act has provided the legal basis for dissipating the opacity of the decision making process. The nascent role of the Parliamentary Sub-committees on various ministries and the strong and visible role of the Public Accounts Committee (PAC) are also acting as a brake on the whimsical and discretionary behaviour of public officials. But it has to be realized that most of the accounting and financial rules are outdated and do not meet the requirements of modern management. This tension between strict observance of antiquated rules and the imperatives to take timely actions and implement policies can only be resolved if an exhaustive review of the rules is undertaken. The fear of the PAC and NAB will otherwise end into a paralysis of decision making by the bureaucracy. Institutional reforms Civil service reforms aimed at improving recruitment, training, performance management, career progression, right sizing of ministries and attached departments, and improving compensation for government employees are the reforms that have been initiated for building strong institutions in the country. In order to depoliticize recruitment, promotions and career development, the independence and responsibilities of the Federal Public Service Commission (FPSC) have been enhanced and is now fully in charge of merit based recruitment and promotions. The Civil Service Act has been amended to reflect performance based career progression and would enable the government to retire civil servants who are inefficient and/or corrupt. The public sector educational training infrastructure is also being restructured to strengthen skill based training of civil servants at all levels. The reforms in some of the most important federal institutions – the Central Board of Revenue (CBR), Securities and Exchange Commission of Pakistan (SECP), the State Bank of Pakistan (SBP) and Pakistan Railways – initiated some years ago - are already beginning to take some hold and making a difference as far as governance is concerned. Reforms in access to justice will deal with delays in the provision of justice, case management, automation, and court formation systems. In addition, human resources, management information systems and the infrastructure supporting judicial system are being revamped and upgraded. Small Causes Courts have been established to provide relief to the poor who have small claims. Extensive police reforms have been introduced to separate the law and order, investigation, and prosecution functions of the police and promote functional specialization. Public Safety Commissions have been set up at the federal, provincial and district levels, which will institutionalize public accountability of Pakistan’s Police Force. To improve the overall performance of the policy, enhancing efficiency, logistics, communication, mobility and training are to be given greater emphasis. The example of motorway police in this respect is illustrative of the quick turnaround that can be brought about through better incentives and logistic support. The progress on institutional reforms in Pakistan has not made any serious strides with a few exceptions such as the State Bank of Pakistan, Securities and Exchange Commission of Pakistan (SECP), Auditor General and more recently the Central Board of Revenue. Devolution to local government which started off very well on a good footing in 2001 has got stuck in sorting out the provincial - local government relationships. Similarly, the reforms of Civil Service, Police and judiciary have to be intensified as part of the second generation reforms in the next five years. As these are quite tough to implement and cut across many structure and boundaries, a suitable mechanism has to be put in place to manage this process. 2.4. Poverty reduction Reducing poverty is a medium-to-long term phenomenon and it is unrealistic to expect a significant decline in the incidence of poverty in the short term. It took almost 12 years for poverty to rise from 18 percent in 1988-89 to 33 percent in 2000-01. It will take at least another decade to halve it to 16 percent, if appropriate strategy is pursued. Therefore, it becomes essential to examine the elements of this strategy and come to a conclusion whether this objective is attainable or not. The medium term strategy for poverty reduction enunciated in the Poverty Reduction Strategy paper consists of four elements (a) Accelerated Economic Growth (b) Increased Public Expenditures (c) Poverty Targeted Interventions (d) Social Safety Nets. (a) Accelerated economic growth From a low of 1.8 percent GDP growth recorded in 2000-01 the growth rate picked up gradually to 5.5 percent in 2002-03, 6.4 percent in 2003/04 and most likely to reach 7.5 percent this year. Therefore the key is to sustain this high rate of economic growth over the next ten years. Investment ratios have to rise from the present level of 19 percent to 25 percent by 2009-10 and the productivity of investment has to improve at the same time. The drivers of growth identified in the PRSP are agriculture, SMEs, construction and housing, oil and gas and information technology. While the first three will certainly accentuate the pro-poor pattern of growth and help in poverty reduction energy, security will be attained from oil and gas exploration and productivity gains from extensive use of I.T. (b) Increased public expenditures Agriculture sector growth in Pakistan is highly correlated with availability of water for irrigation. The reservoirs built in the 1960s and 1970s have made a huge difference to food security of Pakistan. But these reservoirs are getting silted while the requirement for water is on rise. Thus public expenditure will give priority to water resource development through new reservoirs, rehabilitation of existing canals and barrages, lining of water courses and conservation of water. Public expenditure on education have to be doubled from 2 percent of GDP to 4 percent in the next five years and similarly health, water supply and sanitation will be given higher allocations. (c) Poverty targeted interventions Economic growth is a necessary, but not a sufficient condition for poverty reduction. Where poverty is endemic, high economic growth must be accompanied by direct poverty alleviation measures. Towards this end, poverty targeted intervention programs consisting of several major elements are being introduced. These elements include: (i) integrated small public works program in both urban and rural areas (Khushal Pakistan Program), and the (ii) development of microfinance sector to help improve credit access of the poor. Public works Khushal Pakistan Program had generated economic activity in the country through local public works. The provinces, in close collaboration with the local authorities and communities, completed almost half a billion dollars of small projects creating about 1 million job opportunities along with essential infrastructure in rural and low income urban areas. The program has resulted in construction of farm-to-market roads, rehabilitation of water supply schemes, repair of existing schools, small rural roads, streets, drains, and storm channels in villages. Moreover, the program has been supplemented with the schemes for lining of watercourses and laser land leveling, desilting canals, and provision of civil amenities in towns, municipal committees, and metropolitan corporations. Microfinance The role of microfinance in poverty alleviation and employment generation has been widely accepted. The government has established a micro-credit bank (Khushali Bank), as a prototype institution for providing credit access to poor households. This bank has so far reached out to 200,000 poor households throughout the country. The work of this bank has been reinforced by the Pakistan Poverty Alleviation Fund, which through a network of partner organizations in non-governmental sector has reached out to another 300,000 poor families. Education and health Pakistan’s poor educational outcomes have become a major constraining influence on its quest for integration in the global economy. High rates of illiteracy, particularly among women, low educational attainment of the labour force, and lack of qualified technical and scientific manpower have impeded economic growth. The strategic thrust of Education Sector Reforms (ESRs) consists of (a) achieving universal primary education and adult literacy; (b) improving the quality of education; (c) renewed focus on technical and vocational education. Higher education and Science and technological research capacities are also being bolstered in the country. Madarassahs are being brought into the mainstream educational system so that their products can find gainful employment in the economy. The National Commission on Human Development is mobilizing community volunteers to bring out-of-the school children into the system. Female educational enrolments have jumped in the province of Punjab since the girl students were awarded monthly stipends to support their education. The new health policy follows a “health for all” approach based on accessibility, affordability and acceptability of health services by the general population. The health strategy places greater focus on a continuous shift from curative services to preventive health services by improving the primary health care system. Improvements in health status are taking place mainly through maternal and child health, communicable and infectious disease control and elimination of nutrient deficiencies. The budget for the Expanded Program of Immunization has been increased and coverage is being expanded in rural areas as well as among women. A sound tuberculosis control program, HIV/AIDS program, and antimalaria program are also under implementation. The shift of public expenditures from tertiary to primary and secondary health care and devolving and decentralizing financial and administrative powers to local tiers form the crux of the health sector reforms. This new approach provides a clear signal that preventive rather than curative health care will be given priority in allocation of expenditures. Poor access to water supply and sanitation are often associated with poor health outcomes. At present only 63 percent of the country’s population has access to safe drinking water, whereas proper sanitation facilities are available to only 39 percent of the total population. The government is planning to increase water supply facilities and sanitation facilities to reach 100 percent of population as part of Millennium Development Goal. Construction of drinking water supply and sanitation facilities is already receiving prime importance under the Khushal Pakistan Program. (d) Social safety nets As part of Social Safety Net Program, the government has launched direct cash-transfer programs for poor families through medical assistance, and educational stipends from the Bait-ul-Maal (a public welfare program). The Food Support Program covers 1.2 million of the poorest households with monthly incomes of up to Rs2,000 per family (US$35). A system of needs testing has been adopted for the identification of beneficiaries by linking the program with the zakat system. The zakat program that targets widows, orphans and the disabled has been strengthened. About two million beneficiaries received assistance from the Zakat Fund, of which 0.5 million receive assistance on a regular basis. It is envisaged that an additional 1.5 million will be added to the list of zakat recipients through rehabilitation schemes, which will provide micro loans of Rs10,000 (US$160) to Rs50,000 (US$800) each for starting up small businesses. An allocation of Rs5 billion (US$80 million) has been made for these schemes in addition to the normal stipends to mustahqeen (the needy) out of the Zakat Fund. It is estimated that zakat contributes 10-15 percent to the government’s poverty reduction program. The school feeding program for female students (Tawana Pakistan Program), which was successfully piloted in a few districts, will be replicated throughout the country. This program will help address malnutrition in female students as this has resulted in low enrolment, high absenteeism/dropout rate and low cognitive achievement. It is estimated that community mobilization will strengthen ownership of this program and lead to a 30 percent decrease in the dropout rate. The Employees Old-age Benefits Institutions (EOBI) and provincial social security institutions provide pension and medical care benefits to private sector employees. Sindh and Punjab provide medical care benefits to about 700,000 beneficiaries and their dependents. The Workers Welfare Fund also provides support to workers and their families. 3. Assessment and conclusion 3.1 Assessment In making the assessment of the last five years. I will address two questions that are uppermost on the minds of most Pakistanis within or outside the country. The first question that arises in the discussion of Pakistan’s economic turnaround is as to how much of this can be attributed to the favourable external environment created as a result of 9-11 and how much is due to better economic management. My own assessment of the situation is that while the favourable external environment has definitely helped and reinforced the thrust of the economic policies and reforms, its impact would have been short lived and transitory in absence of the reforms and policies and improvement in governance that have been undertaken during the last five and a half years. The macroeconomic indicators had started looking good even before Sept. 11 but the removal of sanctions, resumption of assistance, and diversion of remittances through the banking channels did definitely provide an impetus. I would argue that the reprofiling of Paris Club Debt would have taken place in any event as the IMF had agreed on the three-year PRGF and debt reprofiling upon the successful completion of the 9-month Stand-by Program before Sept. 11. It should be kept in mind that the impact of Sept. 11 upon the Pakistan’s economy has not been, by any means, an unmitigated blessing. Export orders were cancelled and export target for that year was missed by $1 billion. Shipping freights and insurance premia were raised substantially, foreign investors and buyers stopped visiting Pakistan and the fledgling I.T. industry suffered a severe set back. Some of the consequences of that shock are still lingering on in form of a negative perception of Pakistan in the Western media. The quantum of assistance from the U.S. accruing to Pakistan does not form a significant proportion of our foreign exchange receipts. If we combine all the bilateral official flows from the U.S. they do not, on average, exceed $1 billion annually. Pakistan’s foreign exchange earnings will amount to $25 billion this year. Thus, contrary to the popular belief that Pakistan’s economy will collapse if the U.S. withdraws its official assistance, the truth of the matter is that the amounts involved are too insignificant. What we really need from the U.S. is better market access to our exports on the same terms as allowed to the Central American, Caribbean and African States. Pakistan can earn twice as much as it will receive in official assistance from the U.S., if this market access is allowed. The second popular view that is commonly prevalent is that we do not have independent economic policies and that we follow the policies dictated to us by the IMF and the World Bank. It is true that when we needed the IMF’s assistance to reprofile our Paris Club Debt we had no choice at that time but to comply with the conditionalities set by them. But once we had achieved that objective and had set our own house in order, it was no longer necessary to agree to all their conditionalities. We did agree and implement those which were beneficial to our own interests. Most of the policies prescribed by them e.g. fiscal discipline, mobilizing tax revenues, removing tariff barriers, privatizing public enterprises, maintaining low inflation, etc. all make perfect sense and no economist in his right mind could take an issue with them. Where the shoe pinches is that these policies are reduced to quantifiable targets and performance criteria for each quarter and for any slippages or deviations, however, legitimate they may be during that particular quarter, the country is penalized and its reputation is put in jeopardy. This sort of micromanagement is resented by the economic managers of the developing countries. I would argue that as long as the country is moving on the right path in implementing the desirable set of reforms, the speed, phasing and sequencing should be left to the economic managers and not controlled by the IMF. As you are all aware that we have said good-bye to the IMF since September 2004 and did not draw down the last two tranches to which we were entitled to on the basis of our performance. In the past, if we were confronted with the oil price shock that we are facing today, we would have certainly run to the IMF for balance of payments support and enter into a program. But, the resilience of our economy has been tested in the wake of this large oil price increase and we have been able to maintain a stable exchange rate, high reserve accumulation and low external debt ratios. Going forward, Pakistan is faced with several major challenges. In the short term, as the inflationary pressures have become quite intense in the last 9 months, serious efforts have to be made to bring inflation under control. The poor, vulnerable and fixed income groups are the worst affected by this menace. On the demand side, monetary policy is being tightened and interest rates have been raised. On the supply side, the new wheat crop should be able to quell the food inflation. There is still great uncertainty about oil prices. If they start receding from the peak levels this will have a favourable effect on the general price level and help in moderating inflationary expectations in the coming months. The other challenge is the management of balance of payments situation. As imports of machinery and equipment along with the higher oil bill have pushed the level of imports, trade deficit has widened. So far, increased flow of workers’ remittances, foreign direct investment and other concessional flows have been able to finance this deficit but, in the long run, widening of our export base, penetration in new markets and increasing the productivity of textile exports are the only safe ways to minimize trade imbalances. Pakistan’s Tax-GDP ratio has remained stagnant at low levels and the tax net is limited to 1.1 million tax payers of which 0.45 million are salaried workers. Thus, the dependence on regressive indirect taxes has created a disproportionately high burden on the middle and lower income groups. Tax reforms underway should aim to increase the buoyancy and elasticity of the tax system. The biggest problem that has retarded equitable growth in Pakistan has been low investment in human development, particularly the female education. More recently the active participation of private and non-governmental sector has given rise to some hope that quality of education will improve. But the critical question of access to education by the poor quintiles still has not been satisfactorily addressed. Government has the responsibility to finance the poor households’ education and health needs but it can provide these services through other providers rather than itself. As the economy moves on the path of 7 to 8 percent sustained growth over the next decade, the shortages, congestion and inadequacy of physical infrastructure will become quite apparent. Under the given fiscal envelope the public sector development program can only finance one half of the annual requirements. The other half has to come through the private sector or privatepublic partnership. For the latter, we have to work out contractual arrangements whereby the end users can easily afford to pay the cost of these services. Finally and the most important bottleneck, in my view, is the way of rapid economic growth and poverty reduction will be the lack of capacity of Civil Service, Police and Judiciary to function as effective institutions in implementing the policies and programs, treating the citizens equitably and with respect and redressing their grievances in a just manner. The politicization of these institutions has ingrained an attitude of risk aversion and apathy, an instinct of survival and an indifference towards competence and merit. Unless comprehensive reforms of these institutions are undertaken, we will have serious difficulty in maintaining the speed of growth and spreading its benefits to the poor. 3.2 Conclusion Pakistan has achieved macroeconomic stability, introduced structural reforms, improved economic governance and resumed the path for high growth rates. But there is no room for complacency as we are confronted with challenges of poverty reduction, employment generation, balanced regional growth, upgrading social indicators and containing inflation. The second generation reforms aimed at strengthening the country’s institutions and their capacity to deliver basic services along with the continuation of sound and consistent economic policy and investment in human development and infrastructure will be able to steer the country on the right course. | state bank of pakistan | 2,005 | 5 |
Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, as chief guest at the Symposium Organized by the Public Relations Management Group, Karachi, 29 April 2005. | Ishrat Husain: Sustainable growth in the financial sector of Pakistan Address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, as chief guest at the Symposium Organized by the Public Relations Management Group, Karachi, 29 April 2005. * * * It is pertinent to ask whether the reforms brought about in the financial sector of Pakistan will persist generating sustainable growth in the sector or quickly dissipate. In my view there are at least eight factors that attest to the sustainability of growth in the financial sector. Of course, the sector cannot be divorced from the overall external, domestic and macroeconomic conditions. If there is a breakdown in political stability or macroeconomic situation is under stress, then these factors will not be operative. This analysis assumes stability, continuity of good policies and good governance. What are these factors? First, capital base of the banks has been strengthened by raising the minimum capital requirements from Rs. 500 million to Rs. 2 billion. This will be raised further in the coming years. In addition, the capital adequacy ratio which reflects the amount of capital to finance the risk weighted assets is now at about 11 percent for the banking industry as an average against the minimum requirement of 8 percent. As the banks mainly use the depositors’ money to take risks they should also have their shareholders’ money at stake too. This high capital adequacy ensures that the bank management exercise caution and prudence in granting of loans. Second, the quality of assets of the banking system has improved during the last few years. Gross Non performing loans to Gross advances for the commercial banks have come down from 25 percent to less than 10 percent while the provisions held by the banks against these NPLs cover about 70 percent of gross NPLs. Consequently, the net NPL to net advances ratio has shown a remarkable decline to 3 percent while is comparable to international standards. The flow of NPLs has dwindled to less than 5 percent that means that 95 percent of the loans in banks’ portfolio are being fully serviced on time. Third, the earnings of the commercial banks have risen not because they have invested in stock market or real estate but because healthy competition and restructuring have resulted in efficiency gains. The spreads between the deposit and lending rates now range between 3.5 to 4.5 percent compared to 7.5 to 8 percent five years ago. The spreads have declined because the drag of NPLs has disappeared, the corporate tax rates on the profits of the banks have been lowered from 58 percent to 41 percent and 35 percent in the next two years and excess labor has been eased out through golden handshake schemes in the three major banks – NPB, HBL and UBL. Cost – Income ratios have therefore fallen from 74 percent to less than 60 percent and administrative costs range between 2.1 to 3.2 percent. The stable earning stream from core banking business allows the banks to build up reserves for facing unforeseen contingencies and strengthens their balance sheets. Fourth, the accesses to banking services have been broadened to a much wider customer base particularly the middle and lower middle income groups. No country can aspire for sustainable and equitable growth in absence of a strong and healthy middle class. In Pakistan, the banking system was intermediating the savings of millions of depositors primarily to fund the fiscal deficit and the losses of the public sector, to meet the working capital of 200 top named companies and to engage in letters of credit for business and international trade. The number of active borrowers was limited to less than half a million at best. By allowing the banking system to offer new products and services such as agriculture credit, SME financing, mortgage loans, automobile leasing, personal loans etc. a new vista has opened up. Commercial banks that were always hesitant to channel credit to agriculture sector are now the single most source of agriculture financing. This year almost 1 million households will receive about Rs. 100 billion of loans for agriculture. Similarly, the Khushhali Bank, PPAF and other microfinance institutions will reach out to half a million households providing them small unsecured loans ranging between Rs. 5,000 to Rs. 25,000. The beneficiaries of these loans are mainly the landless, the women and other poor classes who never had access to bank financing. Salaried classes have also begun to leverage their incomes by receiving personal loans the installments of which are deducted from their monthly pay checks. At least another half a million families have availed of these loans. This broadening of access not only eases the credit constraint faced by a dynamic segment of the population and transfers purchasing power in their hands but also diversifies the risk for the banks and allows them to earn a decent return on their loan products. This enhanced purchasing power in the hands of a large number of families stimulates aggregate demand in the economy, helps in the expansion of production of manufactured goods and in the higher growth of the economy. Fifth, with the privatization of nationalized commercial banks the role of the regulatory and supervisory authorities has also changed. A strong regulator is needed to act as a vigilant watchdog on the banks and banking industry as a whole. Prudential regulations and norms and their effective enforcement is one of the potent instruments to perform this function. But ensuring good corporate governance is another way to do so. The SBP has laid down fit and proper criteria for the appointment of the Boards of Directors, Chief Executives and Senior management of the banks. Those who meet this test can hold the office for the prescribed tenure but in case there is deviation and the appointees do not meet the test the SBP advises the banks to replace the individuals concerned by more appropriate persons. In my reckoning 50 percent of the job of the regulator is completed if the right persons are appointed and the corporate governance guidelines are observed in letter and spirit. Sixth, there have been certain apprehensions expressed about the risks to which the banks have been exposed or will be exposed in the future in light of the rising interest rates. There are two strands of criticism on this count. There are those who believe that there will be more defaults on consumer loans as interest rates go up. It is always true that the default rate will be higher under a rising interest rate scenario compared to low interest rates. But for the last five years the banks have been asked to earmark reserves of 1.5 percent against their secured consumer loans and 3 percent against unsecured loans in their portfolios. This pool of money will enable the banks to deal with in the event they are stuck with higher defaults. At the same time the repossession laws have been strengthened and repossession of automobiles or houses has become much easier for the banks and liquidate their collaterals against which the loans have been given. A second criticism is that the banks are fuelling the speculative activities such as stock market share trading and real estate purchases. The banks have been restricted by the SBP and their total exposure to shares can not exceed 20 percent of their equity. If we assume, for the sake of argument, that all the banks have collectively used up this maximum limit of exposure their investment of the banking sector in shares would be small – about Rs. 32 billion. This accounts only 1.6 percent of the total assets of the banking system and it can be seen that it does not pose any serious risk to the bank. As far as real estate is concerned, the banks cannot finance purchase of plots of land and only against housing. The direct lending for mortgage is miniscule but indirectly the banks can be put to risk because of inflated values of property held as collateral. The SBP insists that only the forced sale value and not the market value should be taken into consideration for valuing the collaterals. This will save the banks from downward movement in the market prices of the real estate. Another risk mitigating measure taken by the SBP is to extend the coverage of all loans – corporate and consumer - in the Credit Information Bureau. This real time on-line information service which is currently limited to the corporate borrowers will enable the banks to appraise the credit worthiness of prospective consumer loanees, determine their aggregate repayment capacity and verify the credit history before approving the loans. Thus, a card holder who already has four to five credit cards and reached his borrowing limit will find it difficult to get a card from another bank. Seventh, the human resource base of the banking system is being upgraded. Emulating the example set by the SBP in recruitment of new employees through merit based competition, other banks have also started following the same system. I am, therefore, sanguine that the new breed of bankers will be infused with professional skills. We have formed a task force consisting of the HR Managers of all the banks and mandated them to come up with industry wide standards for training, promotion, compensation and benefits, severance and continuing professional education. The banks have to move away from the old paradigm of seniority as the sole criterion for career advancement. In future the promotions should be based on upgradation of skills and demonstration of performance. In a knowledge-based economy and a service-oriented sector, it is absolutely imperative that investment in human skills is given utmost priority. Eighth, five years ago the technological base of the banking industry was not even at a rudimentary stage. The SBP embarked upon a Technology upgradation project which will be completed this year after five years’ serious efforts. The banks have also followed the lead and from almost a scratch we have more than 800 ATMs and almost half of the branches nation-wide are connected on-line. By the end of 2005 it is expected that most branches will have on-line and internet banking facilities. The Real Time Gross Settlement System (RTGS) will allow inter-bank transfer of funds from any place in the country thus increasing the efficiency and providing convenience to the customers. The cost of transactions will be reduced significantly once the ATM network and on-line banking become firmly entrenched. It is estimated that the average cost of processing a cheque is around Rs. 50 while that of ATM withdrawal is Rs. 15. Thus, the cost savings will result in further efficiency of the banking system and increased volume of business. Conclusion The above analysis shows that the fundamental reforms carried out in the financial sector have brought about significant changes in the structure, processes, regulation, technology and human resource base of Pakistan’s banking sector. The reforms have initiated a virtuous cycle of economic growth which is pro-poor. These changes and their future continuation provide the foundation for sustainable growth in the financial sector and the virtuous cycle in economy. | state bank of pakistan | 2,005 | 5 |
Inaugural address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the South Asian Federation of Accountants International Conference on the Transformation of Accounting Profession organised by the Joint Committees of ICAP and ICMAP, Karachi, 6 May 2005. | Ishrat Husain: Globalisation, regional integration and national development. Where does South Asia stand? Inaugural address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the South Asian Federation of Accountants International Conference on the Transformation of Accounting Profession organised by the Joint Committees of ICAP and ICMAP, Karachi, 6 May 2005. * * * I would, at the outset, like to welcome the foreign delegates and particularly those from the countries in the South Asia Region. I am extremely happy to join you on this occasion and thank you for inviting me, once again, to this important event. The views that I would like to share with you this evening will focus on the economic situation globally, regionally within Asia and South Asia and nationally within the South Asian Countries. I will then briefly examine the prospects and challenges that face our region in moving forward in this age of globalization and integration to bring prosperity to the lives of more than 1.5 billion ordinary people living in this region – more than one third of them living below the poverty line. World economic growth was quite buoyant in 2004 recording 5.1 percent growth in World GDP – the strongest in three decades. It will moderate in 2005 but, to a more sustainable level of 4.3 percent. Growth has been strong in most emerging economies led by China. Inflationary pressures remained subdued and monetary tightening underway in most countries will keep these pressures well contained. This benign and favourable outlook is likely to persist if the key risks are mitigated adequately. The key risks to the global outlook are (i) a further sharp increase in oil prices; (ii) continued fiscal and current account imbalances in the United States and (iii) sluggish demand in European Union and Japan. There is no doubt that the U.S. is living beyond its means. Whether it is the relative attractiveness of the U.S. economy that is attracting foreigners to place their savings at the disposal of the U.S. businesses, consumers and the Government or it is the lack of demand in other global centers is beyond the scope of this discourse. All I have to say is that, unlike the past, the financing of US Current Account deficit is at present largely being provided by the Central Banks of the Asian Countries who have accumulated large reserves and have invested these reserves mainly in the U.S. paper. This has enhanced the overall risks to the global economic system. The abrupt and simultaneous withdrawal of the Asian Central Banks out of the U.S. financial instruments may lead to destabilization in foreign exchange markets and a hard landing within the U.S. The second order effects of a recessionary U.S. economy on the rest of the world, particularly the emerging markets are not likely to be pleasant. With regard to oil prices, non-oil producing emerging market countries will have to watch the movements in oil prices and they are likely to forego some buoyancy if the prices continued to remain tight in the foreseeable future. The volatility in oil markets and the risk premia prevailing do not permit us at this stage to make any helpful prognosis. Growth in other industrial countries has fallen short of expectations and the chances for an upturn remain weak in the Euro area and Japan. Structural reforms have to be undertaken in the EU Countries, sooner than later, to remove rigidities in goods and labour markets and provide a boost towards a more balanced expansion of the global economy. Japan has once again shown a faltering performance and can no longer be relied as a possible stimulant for global economic expansion. As the combined weight of the OECD countries in the global output and trade remains quite high, the above risks will have to be mitigated in order to create a benign external environment for the emerging market countries to prosper. On the international trade front, agriculture and improved market access for developing countries remain critical to sustain growth. For South Asian Countries the transition from Multi-Fiber Agreement (MFA) to Agreement on Cotton and Textiles (ACT) will have serious consequences in the coming years. The impact is likely to be highly differentiated contingent upon the response capacity of each country to the changed market conditions. The onus lies mainly on the governments and the exporters in these countries to capture increasing market share by enhancing productivity, improving quality, cutting costs and reengineering logistics supply chain. As cotton textiles are relatively labour intensive, a rising share in the world market will not only help expand their exports and foreign exchange earnings, but also help in mitigating the unemployment problem in the region. Coming to the region – the larger Asia and the sub-region of South Asia – we remain extremely optimistic about the economic prospects and outlook. Led by China, the Asian Countries remain the front runner in the race for economic growth, international trade and capital flows. High savings and investment rates, competitiveness of exports, growing domestic market size, favourable business environment and sound economic management have reinforced the strengths of these economies to take full advantage of the opportunities provided by globalization. I do not see any serious signs of slack in the Asean +3 Group. Of course, the question of currency alignments will remain highly contentious in the near term. In South Asia, liberalization and deregulation have, by and large, removed the incentives for rent seeking activities although the debris has not been completely thrown off the grounds. Removal of subsidized credit, reduction in import tariffs, current account and partial capital account liberalization, increased dependence on market mechanism to allocate resources, withdrawal of the Government from running businesses have ushered in higher rates of investment, greater efficiency in resource use and promoted more rapid export growth in most of our countries. This raised platform has, therefore, heightened the potential of the South Asian economies to achieve accelerated growth and reduction in poverty. While continuation of sound policies and prudent macro economic management is a pre-requisite, there are several challenges ahead which have to be confronted by each of our countries. South Asia is still way behind the East Asian countries on almost all economic and social indicators. Although we started from the same place the divergence over the last forty years has created enormous disparities in the per capita income growth, incidence of poverty, share in global trade, adult literacy, enrolment ratios, status of females, health and well being, physical infrastructure, etc. To give you just one example: our region has almost the same number of people as East Asia. But FDI flows to East Asian in 2004 were about ten times as high as those to South Asia. We have, therefore, a lot of catching up to do and that too, quite fast. The paradigm shift that is taking place in our region makes me confident that we will be able to meet these challenges successfully. But all of us, in whatever capacity we are working, will have to strive hard to bring about the result. In the short run, the impact of uneven monsoons and higher oil prices will have to be managed carefully and inflationary pressures arising from these shocks have to be moderated. Fiscal deficits will have to be brought down to manageable levels and business climate will have to be improved by removing bureaucratic controls, hassles and irritants to allow the private sector to operate in a healthy competitive environment. Financial sector which is now exposed to international interest rate and exchange rate risks has to be further solidified. The structural reform agenda of tax administration, trade and tariff policy, labour markets, capital markets, energy sector will have to be implemented more vigorously than has been the case so far. Infrastructure bottlenecks, shortages, congestions in form of frequent power break-downs, inadequate gas supplies, inordinate delays in the inland transportation of goods, backlog in clearance at the ports, etc. will have to be tackled effectively in order to allow the growth trajectory to remain on track. Intra-regional trade, capital flows, technology transfer and dissemination, exchange of teachers and students at the top universities and research institutions and opening of bank branches among the countries of this region will have tremendous externalities and spillover effects over the long run. The changed perception that the South Asian Countries are living at peace with each other, facilitate flows of goods, services and people easily, are integrating themselves in the global economy actively will not only reduce the risk premium but pay higher dividends. One specific example which pertains directly to you, the participants of this Conference, is the production of qualified accountants and auditors for supply to the advanced countries. Since the Sarbanes-Oaxley Legislation and the unfortunate demise of Arthur Andersen, the demand for accountants and auditors in the USA, UK, and European Union has risen substantially. The high quality of professionals from this region has endeared the South Asians among the employers in the advanced countries. We should, therefore, attract, train and produce more of them without compromising on the quality. I found out that in Pakistan the major constraint was the lack of qualified teachers. I suspect that this may be the case in Bangladesh, Nepal while India and Sri Lanka have a surplus of qualified teachers and I stand to be corrected if this is not true. Even if there is no overall excess supply of qualified teachers, why can’t a body such as SAFA pool their teaching resources, develop a common curriculum and testing and evaluation procedures, make increased use of videoconferencing, broad band connectivity, electronic discussion groups, virtual teaching and economize on physical presence of the teachers. I am quite sure that if you put your heads together you will be able to come up with a process that will increase the production and supply of qualified professionals in your field ending up with a win-win situation for all the member countries of the South Asia Region. I leave this thought for your exploration and consideration and, if you are able to do nothing but to accomplish this particular goal or make headway on it, this Conference would have been highly successful from my narrow viewpoint. In the end, let me once again thank the organizers conferring the honour of inaugurating this Conference. I wish all of you a pleasant stay in Karachi and successful deliberations during the next two days. | state bank of pakistan | 2,005 | 5 |
Welcome address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Conference on SME Financing: Issues and Strategies, Lahore, 10 May 2005. | Ishrat Husain: SME financing - issues and strategies Welcome address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Conference on SME Financing: Issues and Strategies, Lahore, 10 May 2005. * * * Mr. President, Distinguished Guests, Ladies and Gentlemen: It is an honour for me to welcome you all and particularly Mr. President to this Conference on SME Financing: Issues and Strategies. I wish to thank you Mr. President, Sir, for your continued support in our efforts to develop a vibrant SME sector as an integral part of the poverty reduction strategy. You have spelled out this strategy on several occasions very clearly and I would like to dwell upon it this morning. But I would like to assure you that this conference is a modest contribution towards the fulfillment of that strategy. I would also like to welcome our foreign speakers and wish them a pleasant stay in our country. The overall objective of the Conference is to bring together all the stakeholders in the SME sector to generate debate on the issues confronting the sector and look at the various strategies being developed at the regulatory and policy level to increase the flow of credit and financial services to this very important sector of our economy. The speakers of this Conference will provide us with valuable insight into main issues as well as some of the “nuts and bolts” of how to do SME finance more profitably, as the State Bank is not going to force the banks to undertake lending operations which are not profitable. The international speakers will share with us the best practices that have successfully worked elsewhere and we can explore ways of adapting them to our own situation. Let me also remind you that lending to SMEs, if developed and practiced on modern lines shall primarily remain a profitable options for banks and can guarantee earning for banks at a rate higher than the lending to corporate clients. There exists strong evidence that SMEs expansion boosts employment more than large firm growth because SMEs are more labour intensive. In Pakistan, the SME sector contributes 30 percent towards the country’s GDP, along with agriculture provides 90 percent of the jobs, accounts for 35 percent of the value added in the manufacturing industry and generates 25 percent of manufacturing sector export earnings ($ 2.5 billion). Given its huge potential for generating employment, the Government has identified the SME sector as one of the leading sectors along with agriculture and construction and housing which will spearhead its efforts towards generating employment to alleviate poverty in the country within the framework of the Pakistan Poverty Reduction Strategy Paper. While the sustained and long-term growth of the SME sector in Pakistan remains constrained by a number of factors that include skills shortage, scarcity of capital goods, poor management, lack of data on the sector, resistance to change and marketing difficulties especially for export-oriented SMEs; by far the biggest problem facing the sector is the unavailability of adequate financing facilities. The problem of limited access to credit for the SMEs is not exclusive to Pakistan as a recently conducted World Business Environment Survey covering 4000 firms in 54 countries found that SMEs cited inadequate access to finance as their primary constraint to growth. This sector is characterized by information asymmetries; the creditors’ search costs, information acquisition and processing costs exceed the returns. Hence, there is risk aversion by the banks towards extending credit to small and medium enterprises. It is relatively easy to lend to large corporates where the economies of scale, published financial information, collaterals and creditworthiness parameters favour such types of lending. As the small businesses cannot offer adequate collateral, the banks are unable to determine whether the borrower possesses technical, managerial and marketing skills that will allow him to generate adequate cash flows and repay the loan on time. The process of financial intermediation therefore breaks down for the SME borrowers. A sustainable solution requires that we take a more holistic view of this problem, instead of looking at the issue of financing to the SMEs in isolation. A large number of players have to be involved in contributing to the success of the SMEs. There are number of different stakeholders who have to work together in a coordinated and cohesive manner to ensure that these market failures in case of SME credit market are removed and the process of financial intermediation takes place. These include the government and the regulatory agencies such as the Small and Medium Enterprise Development Authority (SMEDA) and SBP, provincial and local governments, SME Bank and other commercial banks engaged in SME financing. First of all, the government and the regulatory agencies such as the State Bank of Pakistan need to provide a conducive and enabling environment for SMEs to operate. This requires that the macro economic policies are sound, the regulatory regime is supportive and the legal system is able to enforce contracts and property rights. There ought to be a level playing field for both the small and large entrepreneur and there is no preferential treatment for any particular class. In the past the SROs were being used to favour certain individuals or tariffs were raised to protect selective groups or banks loans were given to supporters of the ruling parties. In the past five years, however, these practices have been done away and a level playing field now exists for all businesses – small or large – in the economy. The second player in this process is the Provincial and the local Governments. They have to allocate and earmark land for setting up industrial estates and deliver the infrastructure facilities in these estates. The economies of agglomeration dictate that if clusters of same industries are relocated in the same vicinity the suppliers of raw materials and components, and providers of services and marketing of output also move to the same areas. The logistics management and reduction in transportation cost reduce the unit cost of production and distribution for a single enterprise and also improve the reliability and timeliness in the delivery of products. In many countries such zones and clusters have worked very well and helped small and medium enterprises to become more competitive. Thirdly, organizations such as SMEDA have to play a critical role in the business developments support, advisory services and managerial training of SMEs. For example, most small enterprises do not maintain proper accounting of their operation and do not have a trained accountant on their staff. This impedes their ability to access credit from commercial banks. SMEDA can organize training courses in accounting and assign these certified trainees to work on a part–time basis with a number of enterprises. Simple accounting software packages are now available for small businesses and these can be profitably used in a large number of SMEs. SMEDA can design simplified standardized book keeping, inventory management and ledger forms which can aid in the preparation of financials. The SME Bank, which was established in the public sector in 2002 to provide financing to the SME sector, is another important player in the sector. However, it alone cannot cater to the needs of the entire sector but it could develop a prototype of program lending, credit appraisal and delivery methodology, standardized documentation, monitoring mechanisms, which can be replicated and followed by other commercial banks. The SME Bank can produce experienced and skilled professionals who are specialists in the SME credit for the whole industry. The commercial banks, leasing industry, modarabas themselves have to develop dedicated groups for servicing the SMEs. They should establish their presence and branches at the clusters and places such as Daska, D.I.Khan, Wazirabad, Khairpur, Kotri, Gwadur which have large untapped potential. If the SME branches of the banks remain limited to a few big cities you will never be able to make a profitable business out of the SME sector. The balance sheet, cost of funding, the geographical spread do confer a big advantage to the big banks and if they do not make innovative use of technology, skills, systems and procedures to capitalize on this advantage they will soon be marginalized by the intrusion of more agile and nimble small private banks. The banking industry has to invest in people, processes and systems to minimize their risks and enhance their returns on the SME segment. Besides banks and DFIs, Leasing Companies and Modarabas are also the right vehicles for delivery of credit to the SME sector. Unfortunately with the exception of one or two leasing companies they have limited their activities so far to large urban areas and have not opened up their doors for business in those cities and towns where the clusters of SMEs do exist. As they face tough competition from banks in leasing business, it is expected that they would diversify both in product lines as well as in geographical coverage. Lastly, there is a widespread network of technical and vocational training institutes and polytechnics throughout the country. Those who graduate from these institutes are unable to find suitable remunerative jobs. On the other hand, the SMEs lack adequate technicians and trained manpower who have the requisite skills to help them in the production of their goods and services. Thus, there is a mismatch between the demand and supply of this type of manpower. The provincial governments who own these institutes should examine the contents and curriculum, pedagogical tools, evaluation and assessment procedure, incentive structure for the faculty members and bring about the necessary changes to align the supply of the graduates with the emerging needs of the SME sector. Synergies can be generated if some of the institutes are located in the clusters and apprenticeship and internship programmes are instituted to give practical hands-on training to the students. SME financing and SBP – achievements and strategies In recent years, the SBP has reviewed its own role to determine whether or not it was creating any hurdles in the way of lending to SMEs. We found out that the same prudential regulations which were applicable to corporate borrowers were also made applicable to consumer, SME and micro finance although the requirements were different for each market segment. We therefore decided to formulate a separate set of regulations for SMEs, which were developed after extensive consultations with the SME Associations, SMEDA, provincial departments and have been in force since January 2004. With the enforcement of these regulations a number of constraints in SME financing have been removed and the banks now in a better position to disburse loan to SMEs without fear of violating the prudential norms. The new prudential regulations for SMEs do not make it mandatory for banks to require collateral but allow them to take into consideration asset conversion cycle and cash flow generation as the basis for loan approval. We would be willing to further improve and strengthen these regulations if any practical difficulties arise in their implementation. The SBP has geared up its efforts towards providing policy advice to relevant stakeholders in the SME sector especially the banks/DFIs. For this purpose, a separate SME Department has been recently established in the SBP, which will organize itself internally to respond to the financing needs of SMEs by inducting skilled manpower and training of younger staff. The newly established department is tasked with creating a conducive macro-prudential environment for banks/DFIs to increase the flow of credit to SMEs; to promote a strategic focus on SMEs on the part of the banks/DFIs and to help banks/DFIs adopt best practices in the development of their SME business lines. Our short-to-medium term strategic plan also envisages Financial Sector Deepening and Broadening of Access to formal sources of finance by the SMEs as one of our top priorities for the next five years. For the SMEs, as an initial step, delivery of credit by banks will be monitored and intermediary/technical support organizations will be encouraged to assist the SMEs in preparing bankable proposals. In the medium term, the staff of the banks will be trained in program lending. SBP will also endeavor that a guarantee scheme is established by the Government of Pakistan (GoP) to share the credit risk of the financing banks. To pursue this strategy, close coordination will be established with the SMEDA. The SBP is also expanding the scope and coverage of its existing on-line Credit Information Bureau by including all loan amounts. This database will be a powerful tool for all the banks and financial institutions in mitigating risks in lending to SMEs. Under the framework of our strategic plan for 2005-2010 we will also explore the possibility of allowing the setting up of private sector credit bureaus that will incorporate a lot more information on credit history and behaviour of borrowers. The State Bank, with the help of ADB’s SME Sector Development Program, will also provide capacity building support to a select group of banks for SME lending including SME Bank. This project will revitalize the SME lending by the participating financial institutions and will be a prototype for other financial institutions who could see financing to SMEs as profitable business ventures. The SME Bank is being restructured under the SME Sector Development Program of ADB making it a viable Bank catering to the needs of SMEs in the country. SBP has also issued a commercial banking license to SME Bank. We hope that SME Bank would take a lead in developing innovative lending technologies and program lending tools where standardized credit scoring methodology may be used for each sub-sector rather than always relying on the current method of scrutiny and appraisal of each individual proposal. The present methods and documentation are onerous for small entrepreneurs and relatively costly for the banks. SME Bank has to experiment and come up with the standardized set of easy to fill but fully informational documentation, specification of risk parameters, credit appraisal and delivery techniques. Today, most big industrial establishments depend on SMEs for their value addition. It is on record in most emerging markets that the fastest growing export industries (cotton weaving, textiles, surgical instruments, carpets, leatherwear, etc) have been dominated by SMEs. Thus, SMEs have played very significant roles in reducing the poverty levels in many developing countries. Emphasis has been placed on pro-poor growth led by the private sector especially through SMEs. Sectors such as agriculture, services, manufacturing with heavy content of labor-intensive activities have received much support by the Governments because of their potential for reducing poverty. These countries have also successfully integrated their SMEs with the large corporate sector through sub contracting. Sub contracting by the large firms has proved to be an extremely useful and efficient way of integration across the size and scale. Automobile industry provides an excellent example of this business model whereby 60-70 percent of the components and parts in the manufacturing of cars and 90-95 percent in case of motorcycles are provided by small vending industry. A vast network of showrooms and service stations again owned by small entrepreneurs are the example of forward linkages between the large manufacturers and SMEs. This model can be replicated in case of other industries also. This will ensure that both the large manufacturing and SME sectors grow organically through the forces of interdependency. There is no substitute for economics of scales and the SMEs due to smallness of their size cannot excel in it and harvest its benefits. This makes their integration with the corporate sector more vital. I would urge upon the SMEDA and other government sector organizations involved in the SME policy formulation to take up this challenge of integrating SMEs with the corporate sector. Let me conclude by restating the fact that SMEs will continue to play a very important and vital role in our economy where the twin problems of unemployment and poverty constitute major development challenge. Well targeted government intervention in this sector remains indispensable provided such interventions do not displace the private sector. Given the quality of participants in the conference, I am convinced that useful policy recommendations will emerge at the end of the different sessions. I thank you Mr. President once gain for vision and leadership in the economic revival of this country and your personal support to the State Bank of Pakistan. I look forward to your guidance in creating an enabling environment for the promotion of SMEs in the country. | state bank of pakistan | 2,005 | 5 |
Welcome address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the inaugural ceremony of the 34th Annual Meeting of the Board of Directors of the Asian Clearing Union (ACU), Lahore, 16 May 2005. | Ishrat Husain: The Asian Clearing Union Welcome address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the inaugural ceremony of the 34th Annual Meeting of the Board of Directors of the Asian Clearing Union (ACU), Lahore, 16 May 2005. * * * It is a great honour for the State Bank of Pakistan to host the 34th Annual Meeting of the Board of Directors of the Asian Clearing Union. I welcome you all to Pakistan and wish you a pleasant and productive stay in our country. It is also indeed a pleasure for me to welcome the guests from Afghanistan and the Maldives Monetary Authority, who are attending this conference as Observers. We all are familiar with the purpose and background of the Asian Clearing Union. We have also reviewed each year the progress that was made and problems that our members had faced in international trade and payments and tried to modify the coverage, mechanism and procedure of the Asian Clearing Union. What I wish to emphasize today is that major changes have taken place in the international scene during the last one year which necessitates our taking a closer look at the record and relevance of the Asian Clearing Union in relation to fast changing global environment. In the rapidly changing environment, in which regional grouping is becoming a vehicle for trade promotion and economic co-operation, the Asian Clearing Union should revisit its charter, examine its relevance and find ways to expand the intra-regional trade and economic co-operation in a multilateral context. We have to be outward looking and our objective should be to bring about coherence and consistency in our macroeconomic policies that attract direct foreign investment. The Annual Report of ACU for the current year (2004) indicates that even though intra-regional trade is growing, the operations through the Asian Clearing Union are limited. Our efforts to expand its membership have not as yet succeeded. However, I may add here that the ACU has not experienced a default. Although there have been persistent debtors in the ACU system, their negative net balances have not been large. There has not been a "structural creditor problem" in the ACU. I would like the Governors to give some thought as to how we can make Asian Clearing Union an important vehicle for the expansion of intra-regional trade and further economic coordination, and how our banking and financial markets could be made complementary for the maximization of economic welfare of the member states. Asian Countries have demonstrated during the last several decades that it is possible to make great strides in uplifting the living standard of the majority of the people within a short span of time. I am extremely encouraged by the impressive progress that is being made by member countries of the Asian Clearing Union. Each and every country is working hard to bring about reduction in the incidence of poverty and improve the human development indicators. There is no doubt that the challenges ahead of us are quite formidable but giving the political will, national determinations and collective action I am sure we will be able to march ahead on the road to progress and prosperity. The last five years have been extremely critical for our own country, Pakistan. The strategy of economic revival that was initiated in December, 1999 has been successfully implemented and its main pillars were achieving macro-economic stability, improve the governance, introduce structural reforms and resume the path to accelerated growth. The results of the implementation of this strategy are quite well known and I will not get into the details as Pakistan delegation will dwell on them in their presentation. Let me briefly add here that the banking sector reforms undertaken by the State Bank during the last five years have helped us provide stability and strength to Pakistan’s financial sector. Independence of monetary policy has been a major factor in inculcating financial discipline in the public finances, while autonomy of the State Bank in regulating the financial system has been the main strength of reviving the financial institutions of the country. By contributing to financial discipline and financial stability, we have managed to turn a poorly managed financial system into a strong and sound one. The State Bank would be glad to share the details of the legal, structural, prudential and administrative changes that Pakistan has undertaken in the last five years to reach this stage of stability in the banking and the financial sector of the country. I would like to briefly mention here that country’s economy has been continuously growing for the past two years. The GDP for the current fiscal year is likely to be over 7½ per cent which will be the highest growth witnessed in the country during the past 13 years. Before concluding, I would once again like to welcome the participants and wish them a pleasant stay in Pakistan. | state bank of pakistan | 2,005 | 5 |
Speech by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Pakistan Development Forum, Islamabad, 25 April 2005. | Ishrat Husain: Financing human development in Pakistan Speech by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the Pakistan Development Forum, Islamabad, 25 April 2005. * * * Pakistan has committed to achieve its MDGs by 2015 through a variety of interventions e.g. Real per capita income growth, expansion of schooling particularly for the female population, increasing pupil-teacher ratio, improving sanitation access, increased immunization coverage, improving nutritional status of the children, providing electricity to the villages. Empirical studies assessing the progress made so far indicate that growth of real consumption expenditure per capita and large targeted intervention in child survival, malnutrition and schooling over and above the more general intervention could take Pakistan closer to achieving these goals. Failing this, it will be quite difficult to attain any of the MDGs. Financial assistance to poor families conditional on their making investment in their children’s human capital can bring about the desired results in improving child schooling, health and nutritional out comes. Conceptually, the economists think in terms of production function i.e. a set of inputs are deployed to produce one Unit of output. In case of MDGs the inputs such as teachers, doctors and para medical staff, generation transmission and distribution of water and collection of waste and garbage, supply of immunization shots etc. produce expansion of school, improved access to health, nutrition, water supply and sanitation, immunization coverage etc. Some of these inputs are additive while other interact with each other in a positive way making the output greater than the sum of all the inputs e.g. provision of inputs for potable water supply and sanitation interact with inputs for heath in a way that the outcomes of improved access to health, water and sanitation are positively correlated. Therefore instead of thinking independently of financing for education, financing for health, financing for water supply and sanitation we should think in terms of financing MDGs and include all expenditures on inputs that are deployed for achieving the outputs or outcomes embedded in the MDGs. Institutionally, federal government ministries, provincial departments, district government departments are all organized vertically and do not conform to the conceptual issue that I have outlined. Thus there is a disconnect between optimally efficient utilization of financing and the actual delivery of these programs. The other issue is that we have to design the correct measure to capture expenditures on human development. So far we have focused on a partial measure i.e. public expenditures - the amounts allocated out of the budgets of Federal or Provincial Governments. As a matter of fact there are three types of expenditures that are incurred. First is the public expenditure, second is the expenditures by private and nongovernmental sectors who provide schooling or health services and finally is the expenditures incurred by the households themselves in form of tuition fees, text books, purchase of medicines, vaccines etc. When all three types of expenditures are taken together we get a complete picture of the expenditures on inputs used for achieving MDGs. In addition to MDGs Pakistan has developed the Poverty Reduction Strategy (PRSP) and more recently an ambitious medium term development framework (MTDF) to catch up in the other areas of human development such as secondary, vocational and technical training, higher education, science and technology teacher training, curative health services etc. Too much preoccupation and the swing of pendulum towards an exclusive focus on primary education and basic health services create its own distortions and disequilibria. Teachers at the primary level exhibit poor quality and performance despite many attempts at teacher’s training because their graduate and postgraduate education has been sub-optimal. Universities are producing hundreds of thousands of graduates every year who are not all suited for ready absorption in labor market while economy is starving from a lack of technical skills. We have aspirations to become an active player in the globalized economy but capacity has to be developed in our science and technology institutions to generate the products, innovations and processes that will improve the productivity. The linkage between industry and universities is almost non-existent at present and has to be nurtured. The main argument of this paper is that while the donor emphasis and Pakistan’s commitment to achieve MDGs are well placed and should be fully implemented a more holistic approach towards human resource development that caters both to the economic and social objectives of the country has to be adopted. The internalization of externalities, spillovers and linkages within the whole human development initiative would create efficiency and result in cost savings and thus reduced overall financing needs. Second, “All hands on the deck” covering the Federal, Provincial and local governments, private sector, external donors, communities, not-forprofit institutions, civil society organizations, philanthropies and charities should be assigned roles in a more cohesive and integrated manner. The waste, duplication, overlapping can be avoided and optimal use of physical facilities and infrastructure by multiple players and pooling of resources across institutions rather than maintaining separate silos encouraged under the current arrangements of program delivery. Third, the excessive focus on public budgetary allocations on education and health has neglected the tremendous expenditures, being made by the households themselves in spending on schooling, health care, water and sanitation and also the efforts being made by other providers of these services in non-governmental sector. Attention should be shifted from the level of public expenditures or its share in GDP to the productivity of these expenditures. These stereotype and meaningless indicators with which the countries are flogged for lack of their commitment are not very helpful. Fourth, it is my contention that we should distinguish between financing and provisioning. While the Government should be responsible for financing primary and to a large extent secondary education and basic health services particularly preventive it should have, however, no exclusivity or monopoly in providing these services. For the poor quintiles the access to quality services can be improved if the Government provides scholarships, stipends, per capita grants and financial assistance to the non-governmental or quasi-governmental institutions in a transparent and targeted manner. The Government is already providing several incentives to these providers in the context of its Public-Private partnership program which needs further strengthening in operational terms. To illustrate this point education and health in Pakistan has been blessed recently with the entry or private sector, not-for-profit organizations, semi or quasi-governmental bodies (Annex I for a tentative list). The National Commission on Human Development, the National or Provincial Educational Foundations, Rural Support Programs, Fauji Foundation, Private foundations, charitable hospitals and clinics are taking an increasing burden of provisioning every day. There is no reason that the Government cannot use some of these quality institutions for financing the services targeted at the poor. So a competitive business model in which all service providers irrespective of their affiliation meeting the set criteria can provide the education, health or other services to the poor households needs to be implemented. If the above holistic framework encompassing the concept, measurement, financing, provisioning of Human Development is agreed upon and a consensus is reached then the issue of financing human resource development becomes less pressing. Table-I Financing human development 2005-2010 Public Private Total Basic and College education Health, Nutrition and Populate Water and Sanitation Skilled based literary, technology education Higher education, S&T Total Annual The total financing requirements for human development as identified in the MTDF and estimated on the basis of household expenditures amount to Rs.2160 billion over 2005-2010 period or Rs.430 billion annually. Of this, public expenditure is Rs.130 billion or slightly over or US$2 billion annually or less than one third of the total expenditure on human development, while private expenditure is Rs.300 billion or $ 5 billion annually. Private expenditure is dominated by household expenditure on water and sanitation, and health and to a lesser degree education. Non-household private expenditure would be about Rs.30-60 billion annually mainly provided by philanthropic, charitable institutions, individual and corporate donations and endowments. In the last year 2003-04 the total public expenditure on education and health alone was Rs.112 billion. Thus the proposed target of Rs.130 billion is not unrealistic and can be easily achieved if the domestic and donor assistance are available. Conclusion: Pakistan’s public expenditures on human development are low by international standards and are approximately 4 percent of GDP. But total public and private expenditures amount to more than 8 percent of GDP i.e. twice what the public sector spends. But this number is hardly recognized or mentioned in the popular discourse. Households themselves spend at least 4percent on health, education, water supply and sanitation. Donors have to agree on an integrated plan of human resource development that will meet the MDGs as well as the objectives set out in the MDTF. They should then channel their resources on the basis of certain criteria i.e. cost effectiveness, efficiency in the resource use, targeting the poor households, quality of service etc. Competition for these resources among the various providers of services will give them a better bang for the buck. For primary education and basic health services it is proposed that the 30 most deprived districts of Pakistan (Annex II) where the majority of the population live at the poverty or fringes of poverty and have the weakest social indicators should be chosen for grants in aid, scholarships, stipends, and other financial assistance. This will spur into action these providers of services who are at present reluctant to extend their outreach to these poor districts because of higher set up and operating costs. The assistance to them should be linked to the outcomes such as net enrolment ratios, drop out rates, immunization etc. In my view the approach outlined in the above paper has a much better chance of achieving both the MDGs as well as the objectives set out in the PRSP and the MDTF. Annex-I Major service providers in the non-governmental sector. 1. National Commission on Human Development 2. Beaconhouse School System 3. CARE 4. Bahria Foundation 5. Shaheen Foundation 6. The Citizens Foundation (TCF) 7. Fauji Foundation 8. Sindh Education Foundation (SEF) 9. Bunyad Foundation 10. Al-Sahiffa Hospital 11. Rural Support Programs (RSPs) 12. Punjab Education Foundation (PEF) 13. Agha Khan Education Service (AKES) 14. Agha Khan Health Service (SKHS) 15. Edhi Welfare Services 16. Shaukat Khanum Trust 17. National Education Foundation (NEF) 18. Overseas Pakistanis Foundation (OPF) 19. Lahore University of Management Sciences (LUMS) 20. Frontier Education Foundation (FEF) 21. Community Learning/Literacy Centers 22. Pakistan Centre for Philanthropy (PCP) 23. Marie – Adelaide Trust 24. Layton Rahamtullah Trust 25. Infaq Foundation 26. G.I.K. Institute 27. Agha Khan University 28. FAST 29. Shaikh Zaid Hospital, Lahore 30. Al-Shifa Trust Annex-II 30 most deprived districts in Pakistan (Based on overall Deprivation Index published by Haroon Jamal et al in Pakistan Development Review Summer 2003) Musakhel Kohistan Kharan Kohlu Awaran Zhob Jhal Magsi Panjgur Khuzdar Shangla Batagram Dera Bugti Barkhan Nasirabad Killa Saifullah Killal Abdullah Tharparkar Bolan Rajanpur Upper Dir Mastung Chagai Thatta Lasbela Badin Jafarabad Loralai Muzaffargadh D.G. Khan Kalat Provincial breakdown Balochistan 20/26 NWFP 4/24 Sindh 3/16 Punjab 3/34 | state bank of pakistan | 2,005 | 5 |
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