Interview published in TSE Reflect, January 2024
Under the egis of the TSE Sustainable Finance Center, TSE and the central bank of the Republic of Mauritius have recently started a three-year scientific partnership designed to accelerate and promote innovative research on emerging issues in the field of monetary economics and financial stability.
Mr Seegolam, Governor of the Bank of Mauritius, explains why sustainability and research is core to the Bank’s strategy, and shares his views on our recently launched partnership.
Before joining the Bank of Mauritius in 2020, Mr Seegolam served as the Chief Executive of the Financial Services Commission (FSC), the regulatory body overseeing the non-bank financial services sector and global business in Mauritius. In recent years, Mr Seegolam has played a pivotal role as a contributor and member of various technical committees at the level of the OECD. Notably, he has been a driving force for setting up of the FSC Regional Centre of Excellence – an initiative launched in collaboration with the OECD, aiming at capacity building and research in the areas of financial services, competition, and digital finance in Sub-Saharan Africa for regulatory bodies and law enforcement agencies.
What are the key priorities identified by the Bank of Mauritius in its strategic roadmap?
As a small Island State, Mauritius is particularly vulnerable to global crises that continue to create havoc across the global economic and financial systems. These include the dual health and economic crises triggered by the COVID-19 pandemic, the food and energy supply crises from the war in Ukraine, climate change and the fragmentation of established global trading blocs. While our economic recovery is well on track to reach pre-pandemic levels, we also find ourselves in the midst of two massive shifts that are currently revolutionizing societies and economies: digitalization and ESG, further emphasizing the critical need to develop strategic foresight in order to rise up to current and future challenges. Against this backdrop, the Bank of Mauritius (the “Bank”) has played a crucial role to preserve our economic resilience and financial stability by demonstrating agility and promptness in its decision-making.
Looking ahead, the Bank along with other key stakeholders in the banking industry has launched in September 2022, a report on the Future of Banking in Mauritius that provides a roadmap for a robust expansion of the banking sector across Mauritius over the medium to long term with the objective of contributing to the strategic vision of Mauritius as a leading International Financial Centre. To this end, the Bank has also embarked on a transformative journey to modernize its corporate culture and operations under a five-pronged strategic plan:
Strengthen monetary and financial stability by enhancing its monetary policy framework and updating its regulatory and supervisory tools to take into consideration evolving environmental and financial risks.
Promote innovation and digital inclusion by modernizing its digital payments infrastructure, including the issuance of a CBDC, the Digital Rupee, developing a state-of-the-art cybersecurity strategy across the Bank and the wider banking sector to protect investors and consumers.
Bolster international and institutional relations by enhancing cooperation and partnerships with international agencies like Network for Greening the Financial Sector (NGFS), other central banks and academic stakeholders.
Grow the Bank’s Climate Change Centre into a Centre of Excellence in the region by integrating climate-related risks into the Bank’s regulatory, supervisory and monetary policy frameworks, pushing forward the Bank’s net-zero agenda and developing a sustainable finance framework.
Progress on the Bank’s digital transformation of its internal operations and adhere to the highest standards in talent development to position the Bank as a central bank of reference in the region.
How can economists help to tackle these challenges and what do you value most about the relationship with international academic partners?
The challenges facing Central Banks require the formulation and enactment of policies that imply important intra-temporal and inter-temporal trade-offs. Economists are fond of concocting structured approaches that help balance these trade-offs and at identifying parametric restrictions that would ostensibly result in the materialization of a given result.
Let me illustrate with an example that is of relevance to central banks. A widely held mantra is that central bank independence should be upheld as a sacrosanct principle and forms the kernel of reform measures proposed to ensure success of inflation targeting frameworks. The advocacy for central bank independence traces its roots back to the good old days when Sargent and Wallace, two famous economists, and Kydland and Prescott, another pair with equal academic notoriety, separately concocted the inflation bias story as a constrained optimization solution within a game theoretic setting.
In more recent times, we have also seen that economic models with strong micro-foundations and underlying stochastic statistical processes, including Dynamic Stochastic General Equilibrium (DSGE), have been used by central banks as tools to inform long-term structural policy decisions. While DSGE models were stigmatized by practitioners in the aftermath of the Global Financial Crisis (GFC) of 2008 for failing to account for banking systems in their underlying structures, they have immediately seen a surge in their popularity in more recent times when the COVID-19 pandemic struck.
The difference between the pandemic and the GFC is one of perspective. The pandemic started with a negative real sector shock as initiator. The propagators, amplifiers and shock absorbers lied outside the real sector. Consequentially, as models dealing with effects of shocks, DSGE models did much better at rationalizing economic downturns. Another area of interest to central banks and that requires modelling expertise, both in scenario building and quantification of shocks, is climate change. Going forward, we shall see an upsurge in the use of structural economic models such as DSGE in climate change analysis. The gist of my argument here is that economic models should be used for the very purposes for which they were designed or else they lose their felicity.
I have provided a couple of applications of modelling approaches that economists commonly use to inform their policy decisions and to provide antidotes to economic conundrums. Ostensibly, economic modelling is a highly specialized area that combines knowledge of advanced economic analysis, statistics, mathematics, and econometrics. I highlighted the use of DSGE models earlier. At the Bank of Mauritius, we also make use of the Forecasting and Policy Analysis (FPAS) toolkit to inform our monetary policy decisions, albeit the time period of analysis is much shorter than for a DSGE model. Both, DSGE and FPAS frameworks require intensive program codification in Matlab. Thus, having sound operational knowledge of program coding is also a must.
The plethora of aptitudes and analytical dexterity that are tied to sound economic modelling and that are required of those who design, operationalize and maintain economic models, have a common interface with the academic world. Now, you will surely concur with me that we shall benefit enormously from the presence of international academic partners in that realm. We highly value the dialogue that we shall establish with our partners so as to keep abreast of latest developments and to ensure that we have a state-of-art modelling and analytical infrastructure.
What are your main expectations regarding the partnership with TSE?
As aforementioned, we look forward to deriving operational synergies and super-modularities with TSE in beefing up our analytical toolkits, in upgrading our modelling infrastructure, as well as in helping provide directional guidance to our research work so that we can step into the shoes of the best central bank research departments globally. We aim to be the premier research department in Sub-Saharan Africa (SSA) in terms of churning out high quality analytical research papers that inform our policy decisions and that would serve as useful interface to buttress our positions in our dialogue with our stakeholders.
We have a team of highly-trained, dedicated and fully-motivated staff members who have the ability to bridge the lacuna between the academic and practitioner worlds. Our staff members have benefited from numerous interactions with technical assistance experts from the IMF in areas as wide as: modelling, nowcasting, and forecasting. We also leave no stone unturned by sending out our staff members to attend dedicated workshops, both, domestically and abroad. The expertise of some of our staff members is often sought after in SSA and a few of them have served as makeshift consultants to regional trading blocs in themed research and project works.
What we currently lack is the Midas touch helping hand from reputable academics to turbocharge the process of migrating to the next stage in the quality ladder. We are confident that, by leveraging on the expertise of the TSE, we shall succeed in meeting our research ambitions with alacrity and panache.
How does the Bank of Mauritius collaborate with other central banks and international organisations to address these topics?
I firmly believe that the advancement of banking regulation and supervision is intimately linked to international cooperation, the more so with the amplification of globalisation. Since my appointment as Governor, the development of cooperative ties with both central banks and key stakeholders has been high on my agenda.
On the multilateral front, the Bank has closely engaged with the main international institutions promoting financial stability and economic development, such as the IMF and the OECD. These constitute unique platforms to understand international practices and showcase, on a global scale, the work that is being done by the Bank and its staff.
The Bank pursues its collaborative approach through Memorandum of Understanding, staff exchange, participation in training activities and knowledge-sharing exercises. We have extended our footprint through membership in international groups like the NGFS, the Global Financial Innovation Network, the Basel Consultative Group and the Groupe des Superviseurs Bancaires Francophones among others.
On a bilateral basis, we have entered into Memoranda of Understanding and collaborative frameworks with major central banks across the world such as the Banque de France and the Central Bank of UAE, amongst others.
These initiatives have enabled the Bank to keep abreast of the latest developments in several fields in addition to developing close contacts with major central banks.
One last word?
The pandemic brought down the world economy to its knees and was unfortunately a dark period in our history. Nevertheless, as an offshoot, it has created many opportunities. The Bank had to take bold measures to protect our population and salvage our financial system. The economic reconstruction is in full swing, and a business-as-usual scenario is no longer an option.
Digitalisation and climate change have emerged as top priorities. I will say that whatever policy being taken today will impact future generations. It is therefore imperative that we adopt the right policy mix so that our children are spared from the painful consequences of any wrongly-formulated reforms that could adversely impact their lives.
Against this backdrop, availing ourselves of the highest levels of intellect and empirical analysis is most critical. In that regard, we are fortunate that we have enduring partnerships with leading international organisations and academic institutions.