OVERVIEW

Net foreign assets of the banking system fell marginally by Rs36 million or by 0.1 per cent, from Rs25,545 million at the end of December 1999 to Rs25,509 million at the end of January 2000. Net foreign assets of the Bank of Mauritius rose by Rs488 million or by 2.6 per cent, from Rs18,425 million to Rs18,913 million, whereas net foreign assets of commercial banks declined by Rs524 million or by 7.4 per cent, from Rs7,120 million to Rs6,596 million.

Domestic credit increased by Rs812 million or by 1.0 per cent, from Rs81,008 million at the end of December 1999 to Rs81,820 million at the end of January 2000. Growth of domestic credit was mainly driven by an increase in credit to the private sector, which was partly offset by a fall in net credit to Government.

Net credit to Government fell by Rs315 million or by 1.8 per cent, from Rs17,697 million at the end of December 1999 to Rs17,382 million at the end of January 2000. Net credit to Government from Bank of Mauritius went down by Rs264 million or by 11.6 per cent, from Rs2,281 million to Rs2,017 million. Net credit to Government from commercial banks dropped marginally by Rs51 million or by 0.3 per cent, from Rs15,416 million to Rs15,365 million.

Credit to the private sector from commercial banks expanded by Rs1,140 million or by 1.8 per cent, from Rs62,521 million at the end of December 1999 to Rs63,661 million at the end of January 2000. The additional credit extended in January 2000 was directed mainly to "Manufacturing" sector (Rs329 million), "Investments in Shares and Debentures" (Rs259 million), "Sugar Industry" (Rs152 million), "Hotels" (Rs125 million) and "Traders" (Rs116 million).

Money supply M2 rose by Rs560 million or by 0.6 per cent, from Rs86,899 million at the end of December 1999 to Rs87,459 million at the end of January 2000. Quasi money, one of the components of M2, increased by Rs1,474 million or by 2.0 per cent, from Rs74,895 million to Rs76,369 million. Narrow money supply M1, the other component of M2, went down by Rs914 million or by 7.6 per cent, from Rs12,004 million to Rs11,090 million.

Reserve money went up by Rs175 million or by 1.7 per cent, from Rs10,525 million at the end of December 1999 to Rs10,700 million at the end of January 2000.

On the international foreign exchange market, the US dollar, on an average basis, appreciated against all the major currencies during February 2000. On 2 February 2000, as widely expected, the Federal Reserve, at its FOMC meeting, raised the federal funds rate by 25 basis points to 5.75 per cent and the discount rate to 5.25 per cent from 5.00 per cent. In its accompanying statement, the Fed emphasised that the risks in the US economy pointed towards higher inflation, thereby reinforcing market expectations of further tightening in future. Expectations of higher US interest rates were further fuelled in the wake of the release of US January 2000 unemployment data, which showed unemployment at a 30-year low of 4.0 per cent, and Federal Reserve Chairman’s Humphrey-Hawkins testimony to Congress, in which he stated that US interest rates might have to rise substantially to prevent the booming US economy from overheating. Furthermore, towards the end of the month, the release of strong US fourth quarter 1999 GDP data showing that the economy has been expanding at an annualised rate of 6.9 per cent provided support for a further tightening of monetary policy. US assets markets, however, reacted calmly to the speculation of further US interest rates hikes such that market sentiment throughout February 2000 broadly favoured the dollar.

The yen lost ground against the dollar amid growing market pessimism about Japan’s ability to achieve a sustainable economic recovery. The Japanese currency was also undermined by news of a possible downgrade in Japan’s domestic debt rating under review by US ratings agency, Moody’s. The Euro, which started February 2000 at below parity level vis-à-vis the US dollar, managed to attain a month high of US$1.0060. The single currency derived support from the 25 basis points hike of the ECB’s refinancing rate to 3.25 per cent at its governing council meeting on 4 February 2000. This move was considered by the market as a means to shore up market confidence in the ECB’s commitment to tackle rising price pressures. However, confused policy pronouncements from ECB officials and the unwinding of Euro/Yen position by Japanese institutional investors contributed to a weakening of the Euro, which fell to a new low of US$0.9543.

The Bank of England, at its Monetary Policy Committee meeting on 10 February 2000, raised UK base rate for the second consecutive month by 25 basis points to 6.00 per cent. The Pound sterling, however, did not benefit from the hike as the market had already priced in the move. Subsequently, the Pound came under pressure after the Bank of England, in its inflation report, pointed out that higher sterling and higher interest rates were reducing inflationary pressures, which was interpreted by the markets as suggesting that despite strong economic data, UK interest rates might be kept on hold. The release of the February 2000 minutes of the Bank of England Monetary Policy Committee meeting showing that members discussed about intervention to weaken the Pound also weighed on the British currency.

Direct sales of foreign currencies by the Mauritius Sugar Syndicate (MSS) to the banking sector, mainly in Euros, amounted to an equivalent of US$3.6 million during February 2000.

Reflecting international trends and local market conditions, the rupee, on average, depreciated between January 2000 and February 2000 against the US dollar by 0.4 per cent but appreciated vis-à-vis the Japanese yen, Euro and Pound sterling by 3.6 per cent, 2.8 per cent and 1.9 per cent, respectively. The rupee edged down against the US dollar, trading at an average rate of Rs25.748 in February 2000 as against an average rate of Rs25.641 in January 2000. The rupee gained ground vis-à-vis the Japanese yen, to trade at an average rate of Rs23.611 per 100 Yen in February 2000 as against an average rate of Rs24.457 per 100 Yen in January 2000. The rupee strengthened against the Euro to trade at an average rate of Rs25.341 in February 2000 compared with an average rate of Rs26.056 in January 2000. The rupee recovered vis-à-vis the Pound sterling, trading at an average rate of Rs41.235 in February 2000 as against an average rate of Rs42.015 in the preceding month.

On an average basis, our competitors’ currencies appreciated sharply against the Euro between January 1999 and February 2000. The Philippines peso, Thailand baht, Singapore dollar, Hong Kong dollar, Korean won, Taiwan dollar and Indonesian rupiah appreciated against the Euro by 11.2 per cent, 14.0 per cent, 16.3 per cent, 17.2 per cent, 22.4 per cent, 23.5 per cent and 36.5 per cent, respectively, whereas the Mauritian rupee showed an appreciation of 14.4 per cent against the Euro.

The foreign exchange reserves of the Bank of Mauritius decreased by Rs358 million, from Rs18,913 million at the end of January 2000 to Rs18,555 million at the end of February 2000.

Net international reserves of the country, made up of the net foreign assets of the banking system, the foreign assets of the Government and the country’s Reserve Position in the International Monetary Fund (IMF), decreased marginally by Rs40 million, from Rs26,051 million at the end of December 1999 to Rs26,011 million at the end of January 2000. Based on the value of the import bill for fiscal year 1998-99, excluding the purchase of aircraft, the end-January 2000 level of net international reserves of the country represented 26.2 weeks of imports, down from 26.3 weeks at the end of December 1999.