The local currency of Mauritius, the rupee, has experienced a significant depreciation of 5.5% over the course of this year. This concerning decline has unfolded within a span of just seven months, leaving financial experts and citizens alike grappling with its implications.
These statistics were unveiled by the Mauritius Exchange Rate Index (MERI), a vital economic indicator that tracks the rupee’s performance against major foreign currencies. The MERI, carefully calculated through a weighted average of bilateral exchange rates, captures the rupee’s fluctuations vis-à-vis its key trading partners’ currencies. The selection of these currencies mirrors Mauritius’ substantial trade interactions with the global market.
Diving deeper into the data, the MERI is segmented into two indices: MERI1 and MERI2. The former is influenced by the currency distribution of merchandise trade, while the latter takes into account both merchandise trade and tourism earnings. A surge in the index implies a devaluation of the rupee, while a decrease signals an appreciation.
Specifically, the MERI1 surged from 121.4 points in December 2022 to a staggering 127.97 points by the close of July 2023, marking a notable increase of 5.4%. Meanwhile, the broader MERI gauge, which encompassed both merchandise trade and tourism earnings, ascended from 119.89 points to 126.5 points within the same timeframe, reflecting a more pronounced depreciation of 5.5%.
Economists and financial analysts are closely scrutinizing the factors contributing to this substantial rupee devaluation. The implications of such a rapid and sizable depreciation are far-reaching, affecting import costs, inflation rates, and overall economic stability. The government and financial institutions are under increased pressure to implement measures that could potentially mitigate the adverse consequences of this currency decline.
Addressing concerns over the rupee’s depreciation, Finance Minister Renganaden Padayachy explained the factors influencing the currency’s decline during recent budget debates in Parliament. He shed light on the issue, by emphasizing that under a floating exchange rate regime, like the one in Mauritius, the value of the rupee against reference currencies reflects the fluctuations of supply and demand, influenced by various factors. He stated, “One of these factors is the significant decrease in foreign currency earnings we experienced due to the closure of borders in 2020 and 2021.” He further noted that the tourism sector, a significant contributor to foreign currency inflows, remained closed for over 18 months, resulting in a drastic decline of approximately $2 billion in foreign currency inflows between 2020 and 2021.
Additionally, he highlighted a deficit of roughly $400 million in goods exports and a shortfall of around $200 million in foreign direct investment (FDI) inflows. The scarcity of foreign currencies in the local market exerted significant pressure on the rupee, and the depreciation would have been much more substantial if the Bank of Mauritius had not intervened massively.
The Bank of Mauritius has sold approximately $4 billion on the local foreign exchange market since March 2020 to curb excessive exchange rate volatility.