Public Information Notice (PIN) No.
06/01
January 3, 2006
On December 2, 2005, the Executive Board of the International
Monetary Fund (IMF) concluded the Article IV consultation with
Mauritius.1
Background
Mauritius has been increasingly affected by the phasing out of
external trade preferences for its textile exports and, more
recently, by higher prices for petroleum product imports. Growth
has slowed to 3.5 percent in 2004/05 and is
expected to remain subdued during the next two fiscal years. The
surplus on the external current account has recently turned into a
deficit, owing to a decline in exports and a price-related surge in
petroleum product imports. The real effective exchange rate has
depreciated and net foreign official reserves have dropped,
although they remain at relatively comfortable levels.
The slowdown of economic activity and the suspension of periodic
adjustments of retail petroleum prices have negatively affected
Mauritius' fiscal position. While the central government deficit
was kept at about 5 percent of GDP during 2004/05,
the State Trading Company (STC) incurred a rising deficit owing to
the lack of adjustment of retail petroleum prices since early 2005.
Unless corrective action is taken, the overall fiscal position
during 2005/06 is expected to deteriorate further, owing to lower
than originally projected revenue collections associated with
lackluster activity and a further increase of the STC's deficit as
the gap between retail prices and import costs of petroleum
products widens.
Inflation has picked up since mid-2004, reflecting ample
liquidity and higher import prices for petroleum products. More
recently, price developments have moderated largely because of
slower monetary growth and because increases in international oil
prices have not yet been passed on due to the suspension of the
adjustment of domestic oil prices.
Executive Board Assessment
Executive Directors commended Mauritius' impressive economic and
social progress over the past two decades. However, they noted that
a deteriorating external economic environment, particularly for the
sugar and textile sectors, recently has led to a slowdown of
economic activity, an increase in the external current account
deficit, and a loss of international reserves. Directors
underscored that the challenging external environment, the high
level of domestic public debt, and the risk of higher inflation
pose considerable policy challenges in the short and medium term.
Against this background, Directors welcomed the authorities'
recognition of the need for fundamental reforms to boost external
competitiveness and ensure fiscal sustainability.
Directors urged the authorities to develop a comprehensive
economic strategy early on, that combines structural reform
measures and policies geared toward macroeconomic stability. Such
an agenda would reassure international and domestic investors,
improve the environment for private sector activity, and lay the
basis for a return to high growth rates and the creation of
employment opportunities.
In the structural area, Directors encouraged the authorities to
explore options for a more active involvement of the private
sector, including privatization, which would help foster investment
and growth. In this context, they stressed the need to review the
role of the public sector in commercial activities, including the
financial soundness of the major public enterprises. Directors also
underscored the importance of creating a more flexible labor market
to facilitate the transfer of workers from declining to more
dynamic sectors. However, they stressed that efforts to facilitate
inter-sectoral movement of labor will need to be accompanied by
training programs geared toward the needs of growing segments of
the economy. Also, the impact of centralized wage negotiations on
labor costs and competitiveness needs to be examined soon.
Regarding the textile and sugar sectors, Directors were
encouraged by the authorities' restructuring plans, aimed at
mitigating the effects of a loss of trade preferences. They
welcomed steps under way to increase the overall efficiency of
enterprise operations and seek new export opportunities for
textiles. However, they cautioned against the use of fiscal
incentives for the sectors, taking into account the difficult
fiscal situation.
Directors commended the authorities' steady progress on
financial sector reform, including implementation of several key
Financial Sector Assessment Program (FSAP) recommendations. This
has strengthened the banking system despite the adverse
developments in the textile and sugar sectors. Directors welcomed
the authorities' plans to intensify financial sector monitoring and
to harmonize the tax treatment of domestic and offshore banks.
Directors urged the authorities to take steps to stem a further
deterioration of the fiscal position in 2005/06. In this regard,
they recommended careful monitoring of the financial situation of
the major state-owned enterprises. They welcomed the recent
adjustment of domestic petroleum prices and supported reinstatement
of the automatic petroleum price adjustment mechanism to ensure
full pass-through of the cost of imported petroleum products to
domestic retail prices while cautioning that well-targeted safety
nets will be needed to mitigate the impact on the poor. Directors
also stressed the need to devise support schemes for the sugar and
textile sectors that would not add to public outlays.
Directors emphasized that a strong and credible medium-term
fiscal strategy will need to be formulated as quickly as possible
to contain the public debt and ensure fiscal sustainability.
They noted the scope for broadening the tax base
and streamlining outlays through better targeting to groups in need
of assistance. They encouraged the authorities to follow through
with their plan to phase out all import tariffs, which will support
efforts to bolster competitiveness. Directors also recommended that
debt management be improved, including through a further
diversification of debt instruments.
Directors emphasized that exchange rate and monetary policies
will play a key role in securing external competitiveness in the
short term while longer-term structural reforms are being
implemented. Most Directors supported a cautious approach to
tightening of monetary conditions in order to contain inflationary
pressures and encouraged the authorities to manage liquidity more
actively. In this regard, Directors supported the authorities'
request for Fund technical assistance to develop a more diversified
range of monetary policy instruments. Directors also cautioned
against adopting a fully-fledged inflation targeting regime in
light of the need to refine the instruments of monetary policy, the
uncertain external outlook, and the need for fiscal
consolidation.
Directors stressed that the exchange rate should reflect
movements in macroeconomic fundamentals. To this end, they
supported greater flexibility of the exchange rate, observing that
interventions in the foreign exchange market should be limited to
smoothing short-term volatility with a view to protecting
international reserves.
Directors noted that Mauritius' data availability and quality
are generally adequate for surveillance purposes. They encouraged
the authorities to reconcile differences between official and
externally collected debt data and to move the fiscal accounts to
an accrual basis as soon as feasible.
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| Mauritius: Selected Economic and Financial
Indicators 2000/01-2004/05 1/ |
| |
|
|
|
Prov. |
Est. |
| |
2000/01 |
2001/02 |
2002/03 |
2003/04 |
2004/05 |
|
| |
(Annual percentage changes, unless otherwise
indicated) |
|
Domestic economy |
|
|
|
|
|
|
Real GDP |
6.0 |
2.5 |
2.9 |
4.2 |
3.5 |
|
Consumer Prices (period average) |
4.4 |
6.3 |
5.1 |
4.1 |
5.6 |
|
Unemployment rate (in percent) |
9.1 |
9.7 |
10.2 |
10.3 |
11.0 |
| |
|
|
|
|
|
| |
(In millions of U.S. dollars, unless otherwise
indicated) |
|
External economy |
|
|
|
|
|
|
Exports, f.o.b. |
1639.0 |
1586.0 |
1834.8 |
1934.5 |
2015.7 |
|
Imports, f.o.b. 2/ |
-1891.9 |
-1790.4 |
-2132.7 |
-2309.2 |
-2707.7 |
|
Current account balance |
154.3 |
246.7 |
122.5 |
47.6 |
-184.6 |
|
(in percent of GDP) |
3.4 |
5.4 |
2.4 |
0.8 |
-3.0 |
|
Capital and financial account balance |
-95.7 |
-256.7 |
-219.2 |
-62.3 |
116.9 |
|
Net international reserves of the BoM (end of period)
(in months of imports, c.i.f.) 3/ |
786.0
4.7 |
1010.3
6.5 |
1366.8
7.3 |
1550.5
7.5 |
1473.3
6.1 |
|
Change in real effective exchange rate (in percent) 2/ |
2.8 |
-1.4 |
-1.7 |
-3.8 |
-6.0 |
| |
|
|
|
|
|
| |
(In percent of GDP, unless otherwise
indicated) |
|
Financial variables |
|
|
|
|
|
|
Total public debt |
63.9 |
70.2 |
80.2 |
69.9 |
71.8 |
|
Total revenues and grants |
18.0 |
18.4 |
20.2 |
20.3 |
20.2 |
|
Total expenditure and net lending |
23.7 |
24.4 |
26.4 |
25.7 |
25.2 |
|
Central government fiscal balance 4/ |
-5.7 |
-6.0 |
-6.2 |
-5.4 |
-5.0 |
|
Central government primary fiscal balance 4/ 5/ |
-1.3 |
-2.7 |
-1.9 |
-1.4 |
-1.0 |
|
Change in broad money (in percent) |
11.7 |
14.4 |
8.5 |
8.6 |
8.4 |
|
Interest rate (in percent) 6/ |
11.4 |
10.5 |
9.1 |
4.7 |
6.7 |
|
|
Sources: Bank of Mauritius; Central Statistics Office; Ministry
of Finance; and IMF Staff estimates and projections.
1/ Fiscal year from July to June.
2/ Trade-weighted period averages (a negative sign signifies a
depreciation).
3/ Excluding the acquisition of aircraft and ships.
4/ After grants.
5/ Overall central government fiscal balance, excluding interest
payments.
6/ Yield on Treasury Bill (weighted average/primary
auctions). |
1
Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board. At the conclusion of the discussion, the Managing
Director, as Chairman of the Board, summarizes the views of
Executive Directors, and this summary is transmitted to the
country's authorities.
