Ramesh Basant Roi : The Bank of Mauritius addresses challenges facing the financial sector

Ever since the dual licensing regime was done away with in the new Bank of Mauritius Act 2004, our financial sector has thrived impressively. To ensure its viability and sustained expansion, it is imperative to take a long-term strategic view for the financial sector.  It is universally agreed that the challenges are many, the risks and vulnerabilities are many, the uncertainties are many but the window of new opportunities is narrow – extremely narrow indeed. As a small and highly open economy opera-ting in a globalised world of finance, Mauritius faces various challenges. The two overriding challenges are how best to address the risks and vulnerabilities associated with the offshore business sector and how best to maintain the competitive advantage of the financial sector as a whole.

Important financial sector reforms were initiated to improve the efficacy of monetary policy, upgrade the regulatory and supervisory framework to keep up with fast-evolving standards in the global financial system, and modernise the domestic financial markets infrastructure.  An area on which much attention has been given to is the improvement of the functional and operational efficiency of the Bank of Mauritius. The Bank has been set on course to promote macroeconomic stability and ensure the soundness, safety and attractiveness of the banking sector.  

Robust and sound financial institutions are an essential pre-conditions for sustainable economic growth. Sluggishness in the growth performance of most economies across the world, at a time when the global financial system is already suffering from stresses and strains, has brought about a resurgence of problems other than economic and financial. The pre-conditions for sustainable growth worldwide are absent. The most life-threatening risks today are those having to do with financial institutions. No regulatory authority anywhere across the world can afford to be lax and lazy with regard to regulation and supervision of financial institutions. Over the last two years or so, the Bank of Mauritius initiated a number of key initiatives with a view to strengthening and consolidating our banking industry. The fresh initiatives are directed towards institution building that should eventually facilitated the sustaina-bility of monetary and financial stability.

Among the other key steps taken are legislative changes carried out in 2015 and 2016 to provide the Bank of Mauritius with greater powers to better safeguard financial stability.  Further legislative changes are under way, with a review of the Bank of Mauritius Act and the Banking Act which is centrally important for the promotion of our banking industry to higher levels of development. Given that our financial industry has expanded consequentially and assumed an ever-increasing importance to the economy, the Bank of Mauritius has to be appropriately equipped in order to resolve financial crises and prevent or minimize, as far as possible, negative impact on the economy. A crisis management and resolution framework is therefore being worked out, while a Deposit Insurance Scheme to better protect the interests of depositors of banks and non-bank deposit taking institutions is ready to be passed in the National Assembly.  Work on the Asset Management Company to tackle non-performing assets of banks is well on track.  The stress testing framework on credit and liquidity risks aims at assisting the Bank of Mauritius in designing appropriate policy responses for individual banks and for the banking sector as a whole.  The Bank of Mauritius is also beefing up its off-site surveillance of financial institutions, coupled with the forthcoming introduction of a robust risk-based supervision framework.

Payment systems have a key role to play in the financial system. But Mauritius does not have a comprehensive legal framework for its payment system. Several initiatives have been taken to ensure the payment infrastructures are modern, resilient and stable.  A full-fledged payment system legislation is in the pipeline: it will enable a comprehensive oversight of the national payment system.  The implementation of the National Payment Switch is yet another bold step forward that will foster a digital economy for Mauritius.  Technology-driven upgrade of financial market infrastructures will facilitate the use of electronic payments channels, already widely in use in advanced economies, and lower transactions cost for customers.

Mauritius has signed the agreement with the United States to implement the Foreign Accounts Tax Compliance Act (FATCA) and is committed to the early execution of the Common Reporting Standard (CRS) introduced by the OECD.  Furthermore, the country is ready to adopt the Base Erosion Profit Shifting (BEPS).  All these initiatives promote Mauritius as a transparent, collaborative international financial centre fully committed to the fight tax avoidance.

In 2016, challenges emerge from the potential fallouts of Brexit and from the revisions to the Double Taxation Avoidance Agreement (DTAA) with India.  It was speculated that there would result a flight of capital in the wake of the revision of the DTAA. The Bank of Mauritius however notes that there has been no such flight. Banks had started diversifying their deposit base and asset exposures and to tap new opportunities since the announcement of the General Anti-Avoidance Rule by India in 2012.

Finally, in a low inflation environment, the monetary policy stance has remained broadly accommodative and supportive of the economy. To enhance the transmission of monetary policy, the Bank of Mauritius has worked out a new monetary policy framework which will be rolled out at a suitable time. The exchange rate of the rupee is broadly in line with macroeconomic fundamentals, though lately its movements have reflected volatility in major international currencies. Inflation rate has remained low and stable. The current account deficit in our balance of payments is a pro-blem yet to be resolved. The economic and financial policies pursued by Mauritius have continued to attract capital inflows, contributing to raise the level of the foreign exchange reserves to nearly USD5 billion in February 2017 representing 9 months of import cover.