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AfricaMoney | August 22, 2017

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Government joint effort with Bank of Mauritius to address excess liquidity

Government joint effort with Bank of Mauritius to address excess liquidity

Excess liquidity has been pertaining in our banking system for some time now, where the Bank of Mauritius has already come forward with several measures. (Image: Business Mega)

As excess liquidity in the banking sector continues to plague the island economy, the Ministry of Finance and Economic Development and the Bank of Mauritius have put in place a series of measures to mitigate the adverse impact.

The measures which have been put forward are: the issue of Bank of Mauritius securities of maturities up to 15 years; issue of new Bank of Mauritius securities for an aggregate amount of Rs 17.4 billion during the period January 2013 to June 2014; increase in the Cash Reserve Ratio of banks, on two occasions, over the last 12 months, that is, from 7 per cent to 9 per cent; frontload the issuance of Rs 4 billion of Government securities; issue of five-year Government of Mauritius Savings Bonds to the public; and review of the debt management strategy to give preference to domestic borrowing.

Additionally, Government has taken the following actions to control the prevailing situation of excess liquidity.

Amongst those, the issue of a new three-year Government of Mauritius Savings Notes at a fixed coupon rate of 5.25 per cent per annum as from September 1, 2014 to individuals only.

An initial amount of Rs 2 billion of these Notes would be issued with a view to promoting the national savings culture and offering households, especially those who depend on interest income, a higher rate of interest.

Part of Government’s existing foreign currency balances would be used to prepay some Rs 1.5 billion of foreign loans that have a relatively high debt servicing cost.

Lastly, the Ministry of Finance and Economic Development would discuss with ministries, local authorities and public enterprises the possibility of raising finance from the banking sector for restructuring their existing loans portfolio and bringing forward implementation of new projects and schemes that would contribute significantly to unlock growth in priority areas.

Excess liquidity has been pertaining in our banking system for some time now, where the Bank of Mauritius has already come forward with several measures. Being very critical for the island economy, excess liquidity implies that there is too much capital looking out and too few investment avenues for it.

In other words, too much money chasing too few goods. This can lead to inflation and erode the purchasing power of consumers.

Furthermore, in its worst form, excess liquidity can turn into a liquidity glut where capital, for lack of worthwhile investments, becomes invested in bad projects. As ventures go defunct and fail to pay out promised returns, investors are left holding worthless assets.

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