One Rate for All: The Mauritius Foreign Exchange Question

The foreign exchange market in Mauritius was liberalised in 1994 under Article VIII of the IMF Articles of Agreement. From that point, commercial banks were permitted to set their own FX spreads above and below the interbank reference rate published by the Bank of Mauritius. The spread offered to any given client is a function of that client's transaction volume, relationship value and bargaining power. A conglomerate processing USD 500 million in annual FX transactions receives a spread that may be 0.5 to 1.5 percent better than the rate offered to a household converting Rs 50,000 for an overseas payment. The difference is commercially rational. The bank earns more per transaction from the retail client than from the corporate one, but the corporate volume compensates. Both parties transact. Both are satisfied with the arrangement. The household that cannot negotiate is not a party to the satisfaction. It simply pays.

The practice is legal in Mauritius and in every liberalised economy in the world. No Mauritian statute requires uniform FX pricing across client categories. The Bank of Mauritius Act empowers the central bank to set the reference rate and to regulate exchange dealers, but it does not mandate a uniform spread. The Banking Act requires fair treatment of customers but does not define fairness in terms of rate parity between corporate and retail clients. The Financial Services Commission oversees capital market conduct but FX spot transactions fall outside its primary mandate. The regulatory framework as it stands contains no instrument that would require a bank to offer the same FX rate to a garment factory worker converting rupees for a family remittance as it offers to the conglomerate importing that factory's raw materials.

Whether it should remain legal is a different question. The argument for the current arrangement is that differential pricing reflects differential cost of service: large transactions are cheaper to process per dollar than small ones, and the relationship infrastructure supporting a major corporate FX client is more expensive to maintain than a retail desk. The argument against is that the differential does not merely reflect cost of service. It reflects structural market power: the conglomerate can threaten to move its FX flow to a competing institution; the household cannot. The rate the household receives is therefore not the outcome of a negotiation. It is the outcome of an absence of negotiating capacity. In markets where one party has no alternative, the price is not determined by supply and demand. It is determined by the tolerance of the party with no choice.

Four policy instruments are available to the Mauritian government and the Bank of Mauritius. They are listed in ascending order of structural impact and descending order of political feasibility.

The most recent large-scale attempt to impose a unified FX rate in an otherwise liberalised emerging market economy was Nigeria's multiple exchange rate unification in 2023. The Central Bank of Nigeria collapsed its official, investor and exporter windows into a single rate in June of that year, ending a system in which different actors accessed different official rates. The immediate consequence was a sharp naira depreciation of approximately 40 percent as the artificially suppressed official rate converged toward the market rate. Inflation accelerated. The parallel market, which had operated throughout the multiple rate period, did not disappear -- it adjusted to the new differential between the unified official rate and the rate at which dollar holders would actually transact outside the official system. The unification corrected one distortion and produced several others. Nigeria is a larger and more complex economy than Mauritius, and the parallel applies imperfectly. But the directional lesson is clear: in any economy where FX is scarce and the incentive to arbitrage is structural, imposing a single rate does not eliminate the spread. It moves it underground.

The policy note does not end at the limit of the politically feasible. It ends at the limit of the structurally necessary and states clearly where the gap between those two limits lies. The uniform FX rate is not achievable without producing worse outcomes than it corrects. The FX spread cap and the STC essential goods rate are achievable and would produce meaningful household relief. The transparency requirement is immediately achievable and should be implemented without delay. The honest answer to the question of why none of these have been implemented is not technical. It is political.

The Bank of Mauritius has the regulatory authority to require FX spread transparency through a directive to all licensed exchange dealers. No parliamentary amendment is required. The directive could be issued in the next monetary policy cycle. It has not been issued because the banking sector's institutional relationship with the government -- as the primary underwriter of sovereign debt, the processor of state payroll and the dominant infrastructure of the financial system -- gives it leverage over any reform that reduces its non-interest income. MCB earned Rs 12.8 billion in non-interest income in FY2025. A meaningful portion of that income is FX spread revenue. The bank that funds the government's deficit is also the bank whose spread income the government would need to regulate. That is not a coincidence. It is the structural definition of the political obstacle.