Mauritius rates rift prompts top officials into talks

Tue Feb 18, 2014 6:50am EST

Related Topics

* Governor wants to raise rates, less govt borrowing

* Finance minister disagrees

* Mauritius trying to reduce reliance on tourism

By Jean Paul Arouff

PORT LOUIS, Feb 18 (Reuters) - Mauritius' top finance officials on Tuesday sought to end a monetary policy rift that could damage the Indian Ocean island's economy as it tries to broaden its base to offshore banking from tourism alone.

Finance Minister Xavier Duval and Central Bank Governor Rundheersing Bheenick disagree over whether to raise interest rates and over government borrowing. They met for the first time on Tuesday since their clash became public.

Officials said the meetings will be held monthly.

The debate is not unlike that being held in other emerging market economies where there is a desire to protect against investment flight while not damaging economic growth.

Mauritius's monetary policy committee held the main interest rate, the repo rate, at 4.65 percent earlier this month. However, its members were divided on the decision.

Bheenick has said hiking the rate would protect Mauritius from turbulence that has hit other emerging markets and would address the low level of savings in a nation that promotes itself as an offshore banking centre.

He has also blamed the government's foreign borrowing for pumping too much money into the banking system.

But the finance ministry blames the excess liquidity on sluggish demand for private sector credit, frequent purchases of foreign currencies by the central bank to build up its hard currency reserves and constant signalling by the central bank that it wants a tighter monetary policy stance.

Minutes of the MPC meeting released by the central bank showed that the central bank governor and his two deputy governors were in the minority when they voted for a rate hike of 50 basis points. There are a total of 8 members of the MPC.

The finance ministry said Tuesday's meeting and the ones to follow "will allow both parties to review the economic situation and discuss about current priorities and future prospects".

Analysts said they welcomed the fact that the two sides would be meeting to discuss how to run the economy.

"The financial crisis has demonstrated that policy makers need to collaborate because at the end of the day monetary and fiscal policies should be mutually reinforcing," Raj Makoond, director of the Joint Economic Council, a private sector umbrella group told Reuters.

"To have a shared understanding of the problem, it is fundamental that both parties share notes in the interest of the country."

In a bid to broaden its economy, which grew an estimated 3.2 percent in 2013, Mauritius has been trying to reduce its reliance on tourism, sugar and textiles and now has growing businesses in offshore banking, outsourcing, luxury real estate and medical tourism.

The central bank has said that it expected the economy to expand by 3.7 to 4.0 percent in 2014.

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