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AfricaMoney | October 20, 2017

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Can Mauritius follow US in prioritizing growth over inflation?

Can Mauritius follow US in prioritizing growth over inflation?

The Bank of Mauritius stands at the crossroads of changing its policy to avoid prolonged economic downturns or continuing with the current policy of targeting inflation alone (Image: www.travelmauritius.info)

The tussle between stimulating economic growth while avoiding price rise is one that is keeping the Bank of Mauritius’s monetary policy committee awake at nights. As it stands at the crossroads of changing its policy to avoid prolonged economic downturns or continuing with the current policy of inflation targeting, the question that begs to be asked is: Can African policymakers afford to gloss over high inflation rates and follow US and EU central banks in adopting a GDP-based approach?

The minutes of the March meeting of the central bank’s monetary policy committee may not really make for exciting reading but one tiny line opens a new window into the latest debate on whether low gross domestic product (GDP) growth rates can be prioritized at the expense of inflation.

“The committee took note that nominal GDP targeting was a possible framework that was receiving increased attention among central bankers around the world,” read the minutes.

Currently, central banks in developed economies use inflation targeting as a basis for deciding on their monetary policies. Simply put, they use monetary tools – such as lowering or increasing the minimum interest rate at which banks lend to each other to either release or check the supply of money into the economy – designed to keep inflation under control.

But, this approach is unable to keep pace with on-the-ground realities in recession-hit developed economies. As growth in developed economies stagnates, or goes into the red, causing unemployment and poverty to shoot up in United States and Europe, it is increasing causing central banks around the globe to question a primarily inflation based approach.

Mauritius appears a ripe candidate for a GDP-based approach, given that the economic downturn has hit the small island nation, heavily reliant on textile exports and European tourists, especially hard. The International Monetary Fund predicts the Mauritian economy will grow at a mere 3.7% in 2013, below the African average of 5.1%.

As an alternative to only a price side approach, nominal GDP targeting attempts to base monetary policy decisions upon not just the one but two variables: the omnipresent inflation and real rate of GDP growth. And, including GDP targeting would mean that a central bank could easily intervene if the nominal GDP were to nosedive.

In Mauritius, any move away from pure inflation targeting would have to come through legislation. Xavier-Luc Duval, Mauritius’s vice prime minister and minister of finance, says the government is considering it.

He admits Mauritius would be pioneering other African nations if it were to make the change, but that it may be appropriate to try new ways to tackle the economic downturn.

On the other hand, Mauritian economists warn of possible implications of a policy shift.

Raj Makoond, director of the Joint Economic Council, an umbrella group for private sector bodies, warns that Mauritius should not get bogged down into orthodoxies or new orthodoxies but needs to be pragmatic and results orientated. Nevertheless, he says that time is ripe for a shift.

For Gilbert Gnany, Mauritius Commercial Bank’s chief strategy officer, the mandate must be clear and can even be counterproductive if the lines are blurred.

But he warns further that monetary policy alone cannot fix the structural issues of an economy. A better coordination between fiscal and monetary policy is the way out, feels Gnany.

Source: The Africa Report

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