1. A Fiction of Monetary Discipline

In 2020, the Bank of Mauritius created Rs 81 billion to capitalise the Mauritius Investment Corporation (MIC). These funds were not raised through taxation, exports, or foreign reserves. They were digitally created under an emergency provision of monetary policy, often described as “monetary creation ex nihilo.”

The stated intention was to support enterprises deemed strategically important to economic stability following the COVID-19 crisis. The mechanism involved the issuance of central bank liabilities to the MIC, which would deploy these funds into private sector support. Upon repayment, the funds would be returned to the central bank and removed from circulation—a process referred to as “sterilisation.”

This framework mirrors conventional liquidity operations, yet differs materially in one respect: the capital injection was not part of a short-term liquidity cycle but constituted a long-term fiscal instrument operating outside budgetary oversight. It was money creation with no corresponding increase in domestic production.

2. Counterfeit Capital

The deployment of these funds, and their asymmetric distribution, is best understood through the lens of the Cantillon Effect. Originally articulated in the 18th century by economist Richard Cantillon, the theory describes how newly created money enters an economy unevenly, benefiting those who receive it first—typically financial institutions and asset holders—before prices adjust across the broader population. In this context, entities with early access to MIC financing were positioned to consolidate assets, hedge against inflation, and multiply credit exposure, while the wider public, particularly wage earners and import-dependent consumers, faced the downstream consequences: currency devaluation, rising food and fuel costs, and stagnant incomes. That repaid funds will be “burned” to limit inflation presumes that the inflationary impact is both reversible and isolated. However, once base money enters the economy—particularly at scale and with minimal velocity constraints—it generates lasting distributive effects. Through commercial bank multiplication and secondary asset circulation, the real impact of the Rs 81 billion creation is unlikely to be neutralised by late-stage withdrawal.

This sequence reflects a textbook case of the Cantillon Effect, where those positioned closest to the source of new money benefit most, while the downstream effects are borne by wage earners, fixed-income households, and consumers exposed to imported inflation.

3. Governance and Institutional Exposure

The monetary dimension of the MIC is inseparable from the institutional question of central bank independence. The appointment of Dr. Rama Sithanen as Governor of the Bank of Mauritius has drawn scrutiny, given his prior role as Finance Minister and longstanding political affiliations.

His appointment coincided with ongoing questions regarding MIC’s governance, including documented irregularities in board proceedings. In one instance, board minutes were found to contain conflicting records of attendance, with amended versions submitted only after law enforcement inquiries were initiated.

These developments follow previous high-profile lapses in financial oversight, including the Silver Bank case. In such a context, the consolidation of monetary and quasi-fiscal functions within the same institutional framework increases exposure to operational and reputational risk.

The MIC’s model—funded by direct central bank issuance and operating outside the conventional budget process—blurs the line between monetary policy and discretionary fiscal intervention. It creates a precedent for off-balance-sheet liabilities that are politically managed but economically systemic.

4. The Real Sovereign Risk

In June 2025, Moody’s Investors Service revised Mauritius’ outlook to “Negative,” citing deteriorating public finances, subdued growth, and rising fiscal pressures. While headline concerns such as the 5.9% fiscal deficit and debt-to-GDP ratio exceeding 80% were highlighted, the rating agency’s underlying concern related less to the quantum of debt than to the institutional trajectory of the economy.

A closer examination of the 2025–2026 Annex Budget reveals that a significant portion of capital expenditure has been channelled toward transport, infrastructure, and metro expansion. While these projects are often presented as growth-enhancing, they remain heavily concentrated in sectors with high private contractor capture and limited productivity multipliers.

By contrast, allocations to health (Rs 2.9 billion) and education (Rs 749 million) remain modest. Within education, for example, the majority of funds are directed toward tertiary institutions and vocational training infrastructure, while early education, rural school facilities, and public remedial systems are underfunded.

In the health sector, over 60% of the Rs 25 billion allocation is directed toward physical infrastructure and equipment, with minimal investment in staffing, training, or mental health care delivery. This pattern suggests a capital-intensive strategy with constrained long-term social returns.

Social protection has seen a progressive shift from universalism to targeted minimalism. With the national retirement age increased to 65 and CSG payouts phased out, the broader model of social welfare is evolving toward digitalised screening and containment rather than expansion.

Meanwhile, fiscal buffers remain weak. Mauritius lacks a sovereign wealth fund or comparable capital cushion. Public debt has increased to Rs 679.6 billion, while interest payments alone consume Rs 26.1 billion annually. Tax revenue projections have improved, but this is largely attributable to indirect taxation—via VAT, customs duties, and levies on imported vehicles—rather than progressive tax reform.

Elite capture remains structurally embedded. Tax holidays for Smart Cities, low effective rates for property developers and offshore entities, and recurrent exemptions for REITs persist, even as informal labour remains widespread and youth unemployment high.

The result is a distributional imbalance: public borrowing finances visible infrastructure and politically salient projects, while long-term investments in resilience, equity, and productivity remain secondary. In this context, sovereign risk stems not only from fiscal metrics, but from the broader governance ecosystem in which fiscal and monetary decisions are embedded.

5. Inflation by Design

While inflation in Mauritius is often described as externally driven, a closer assessment suggests that imported inflation operates within a broader structural design. The country is heavily reliant on imports for essential goods—over 90% in food, fuel, and pharmaceuticals. This dependency is not accidental, but reflects longstanding underinvestment in domestic production capacity.

The inflationary pass-through is amplified by a taxation model that relies on indirect consumption taxes, including VAT and customs duties, both of which are levied on import values. As global commodity prices rise, these taxes compound retail prices for Mauritian consumers. Simultaneously, the regulatory framework enables a small number of firms to dominate import licenses and distribution chains, creating quasi-monopolistic conditions that reduce price competition.

Additionally, the rupee has depreciated steadily in recent years, a trend often attributed to global shocks or external deficits. However, the timing and scale of the depreciation—particularly between 2020 and 2024—suggest policy-level tolerance, if not tacit encouragement. A weaker rupee benefits exporters and foreign property investors, while increasing nominal rupee revenues for the state via customs and VAT. It also enhances the rupee equivalent returns for landowners selling to Smart Cities and offshore clients.

This structure produces a regressive outcome: real wages remain stagnant while the cost of living rises. The most affected groups are those dependent on rupee-denominated incomes with no hedge against currency or commodity risk. Inflation, in this sense, is not only imported but institutionally sustained.

6. The Burn as Ritual

This framework also invites examination through the Lucas Critique, which posits that economic agents—firms, banks, and consumers—adjust their expectations in response to policy regimes rather than stated intentions. Once monetary injections become politically routinised, as with the MIC model, the expectation of future interventions is priced in. This undermines the credibility of sterilisation, as market participants act in anticipation of repeat bailouts or continued monetary accommodation. In essence, policy loses effectiveness not due to volume but due to predictability.

In parallel, the MIC construct reflects characteristics of the Soft Budget Constraint, as defined by economist János Kornai. Organisations receiving capital support under opaque or discretionary criteria tend to internalise future bailouts as implicit guarantees. This weakens incentives for structural reform, fiscal discipline, and long-term innovation, reinforcing low-productivity equilibria within already protected sectors. The outcome is that wealth accumulation at the upper end is preserved, while the inflationary costs are borne by the wider population. The burn, in this case, is a ritual gesture that masks structural asymmetry. It offers narrative closure without economic redress.

7. Conclusion: The Captured Republic

The creation, deployment, and attempted erasure of Rs 81 billion through the MIC represents a unique case study in monetary governance within a small open economy. While presented as an emergency stabilisation measure, the structure of the intervention, its lack of transparency, and its downstream distributional effects suggest a broader institutional pattern.

This pattern is characterised by: central bank interventions bypassing fiscal scrutiny; state-backed capital flows into politically aligned sectors; reliance on regressive taxation to balance fiscal outcomes; and persistent inflationary pressures disproportionately affecting low- and middle-income households.

What distinguishes the Mauritian case is not merely the use of monetary tools, but the concentration of economic benefit and the absence of independent oversight. In effect, the monetary system has been repurposed—not to stimulate inclusive growth, but to stabilise an elite-led economic order.

As global attention shifts toward the fiscal and monetary integrity of emerging economies, Mauritius offers a cautionary example. Sovereign credibility cannot be measured solely in debt ratios or budget lines. It must also be assessed through the lens of governance, accountability, and the equitable distribution of public risk and reward.