IMF Executive Board Concludes 2011 Article IV Consultation with Mauritius

Public Information Notice (PIN) No. 11/49
May 3, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On April 14, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius, and considered and endorsed the staff appraisal without a meeting.1

Background

The Mauritian economy recovered in 2010 and the outlook for 2011 is positive. Real gross domestic product (GDP) growth is estimated to have accelerated to 4 percent (compared with 3 percent in 2009), driven by strong growth in fishing, information and communications technology (ICT), and financial industries. Taking account of the expected upturn in the world economy and the continuing effects of the fiscal stimulus, real GDP growth is projected at 4.1 percent in 2011. The average inflation rate was low at 2.9 percent in 2010, although it accelerated to 6.1 percent at end-year. Year-on-year inflation is expected to increase to 5¾ percent in 2011, on the back of further projected increases in commodity prices, increases in excise duties, and administered prices, resulting in average inflation of 7½ percent. Driven by a surge in imports, the 2010 current account deficit widened to 9½ percent of GDP, and is projected to widen further to 12 percent of GDP as strong export growth will be overshadowed by higher commodity import prices and large imports related to public infrastructure projects and foreign direct investment (FDI). Going forward, the largest risks to growth would come from shocks to external demand, particularly tourism and FDI.

Fiscal policy in 2010 was less expansionary than originally envisaged due to delays in implementing infrastructure projects. Total revenues decreased by ¾ percent of GDP on account of grants. With higher spending of ¾ percent of GDP the overall consolidated fiscal deficit (including special funds) widened from 2 percent of GDP in 2009 to 3.5 percent in 2010. This deficit is projected to increase to 4.8 percent of GDP in 2011, reflecting the authorities’ desire to increase growth through greener taxation and increased public investment. Total revenues are projected to decline marginally in 2011, reflecting lower nontax revenues and higher grants. The expenditure mix combines essentially unchanged current spending levels (more goods and services and less transfers) with greater public investment, much of it under the public-private partnership (PPP) framework.

Monetary policy was loosened in 2010 to support economic recovery. Average inflation was low at 2.9 percent, but increased at end-year mainly due to imported inflation. The real exchange rate appreciated by 3 percent during 2010.

The banking sector withstood the downturn well. Banks have remained liquid and well-capitalized, even above proposed Basel III requirements. The share of non-performing loans (NPL) decreased and banks were profitable with 16.7 percent return on equity despite low leverage ratios. Stress-tests conducted by the Bank of Mauritius (BOM) in June indicate that the domestic banks would be resilient to significant increases in NPLs and losses on large exposures. Mauritius became a member of the International Association of Deposit Insurers and is preparing the necessary steps to establish a deposit insurance scheme. The nonbank financial institutions (NBFI) in Mauritius intermediate a large part of international investment into Asia and Africa, and continue to receive substantial inflows.

Over the past two decades, wide-ranging structural reforms, supported by prudent policies, have established Mauritius as a top regional performer. Mauritius’ national statistical capacity is being strengthened in line with its needs as an emerging economy, and subscription to the SDDS is expected for end 2011.

Executive Board Assessment

In concluding the 2011 Article IV consultation with Mauritius, Executive Directors endorsed the staff’s appraisal, as follows:

The authorities’ prompt policy response over 2008–10 helped to cushion the economy from the impact of the global crisis and supported an economic recovery in 2010. The fiscal stimulus packages combined with monetary easing and various measures aimed at preserving private sector jobs contributed to the rekindling of growth to 4 percent in 2010. The policy measures included in the 2011 budget reflect the authorities’ intent to diversify exports, restructure and deleverage enterprises, accelerate public infrastructure investments, and improve the regulatory environment.

Going forward, staff recommended a less expansionary fiscal policy. With the output gap in 2011 estimated close to zero, staff recommends limiting the overall fiscal deficit to 4¼ percent of GDP. This lower deficit target is still compatible with the need for higher capital spending to address infrastructure bottlenecks. Though Mauritius is well placed to comply with the legally-mandated 50 percent of GDP debt ceiling by 2018, staff recommends a slightly more ambitious medium-term fiscal consolidation path to further reduce debt vulnerabilities and suggested to target the structural primary fiscal balance to achieve a debt-to-GDP ratio of less than 40 percent over the longer term.

The central bank should closely monitor inflationary pressures with a tightening bias to ensure that recent inflationary pressures do not become engrained. With the appropriate early monetary policy response and wage restraint, the second round effect of imported inflation should be limited. BOM’s measures to remove excess liquidity will likely reduce its profitability and should be well coordinated with the government’s financing strategy to ensure a smooth operation of the money and securities’ markets. Staff estimates suggest that the rupee appreciated further during 2010 with respect to its estimated equilibrium rate, although it can still be considered to be broadly in line with fundamentals.

Mauritius has implemented important structural reforms in the past, but needs to continue with its far-reaching reform strategy to increase its long-run growth potential. Staff estimates suggest growth rates above 4 percent require accelerated investment project implementation, labor market reforms to decrease unemployment rates, and education initiatives to enhance human capital, and structural reforms to increase total factor productivity. Staff recommends improving service delivery and efficiency in the public enterprise sector, particularly for water. It encouraged the authorities to expand their policy of increasing the role of the private sector in managing state-owned enterprises. Staff supports the authorities’ intention to diversify its export base, which relies heavily on Europe.

Mauritius is a pioneer of green taxation and should continue to spearhead new initiatives to support its sustainable development vision. The authorities agreed with staff that taxes are the appropriate instrument to reduce environmental damages while preserving revenue. Staff recommends converting a tax on energy products into an explicit carbon tax to fully reflect the externalities associated with CO2 emissions and a tax system on motor vehicles that raises the marginal costs of driving to reduce pollution and alleviate traffic congestion in the capital area. Going forward staff encourages the authorities to continue to review its tax system to make it more environmentally sustainable and growth enhancing.


Mauritius: Selected Economic and Financial Indicators, 2007–2011
 
  2007 2008 2009 2010 2011

 

      Prel. Proj.
 
  (Annual percent change, unless otherwise indicated)

National income, prices and employment

         

Real GDP

5.9 5.5 3.0 4.0 4.1

Real GDP per capita (in rupees)

4.9 5.2 2.5 3.6 3.5

GDP per capita (in U.S. dollars)

6,160 7,598 6,951 7,593 7,990

GDP deflator

8.0 6.5 0.2 1.6 5.0

Consumer prices (period average)

8.6 9.7 2.5 2.9 7.4

Consumer prices (end of period)

8.6 6.8 1.5 6.1 5.8

Unemployment rate (percent)

8.5 7.2 7.3 7.5

External sector

         

Exports of goods, f.o.b.

-4.7 7.3 -19.3 13.3 12.5

   Of which: tourism receipts

29.0 11.5 -22.9 15.2 10.4

Imports of goods, f.o.b.

6.0 20.6 -20.5 19.0 18.8

Nominal effective exchange rate (annual averages)

-4.7 7.5 -2.9 3.3 ...

Real effective exchange rate (annual averages)

0.5 12.6 -4.3 3.3 ...

Terms of trade

-1.0 -1.1 1.6 -3.5 ...
  (Annual change in percent of beginning of period M2)

Money and credit

         

Net foreign assets

13.2 8.1 17.4 20.0 10.3

Domestic credit

11.7 21.2 1.8 10.8 16.1

   Net claims on government

-0.3 0.6 1.1 1.0 2.5

   Credit to private sector1

5.4 20.6 0.4 9.9 13.6

Income velocity of broad money

1.0 1.0 1.0 0.9 0.9

Interest rate (weighted average TBs, primary auctions)

10.0 9.0 4.4 3.9 ...
  (Percent of GDP)

Central government finances

         

Overall consolidated balance (incl. grants) 2

-2.6 -1.5 -2.0 -3.5 -4.8

Primary Balance (including grants) 2

1.6 2.4 1.8 -0.1 -1.3

Revenues and grants

21.4 21.4 22.7 21.9 21.5

Expenditure, excl. net lending

24.0 22.9 24.7 25.4 26.2

Domestic debt of central government

45.6 43.9 44.5 43.0 42.5

External debt of central government

5.5 6.2 6.0 7.5 8.9

Investment and saving

         

Gross domestic investment

25.1 24.6 26.3 24.6 26.2

   Public

5.4 4.1 6.6 5.9 7.6

   Private

19.7 20.5 19.7 18.6 18.6

Gross national savings

22.1 18.3 15.3 16.2 14.2

   Public

2.7 2.3 0.8 -0.5 -0.7

   Private

19.3 15.9 14.4 16.7 14.9

External sector

         

Balance of goods and services

-9.9 -14.2 -10.4 -13.0 -15.7

   Exports of goods and services, f.o.b.

56.7 51.1 46.9 49.5 52.9

   Imports of goods and services, f.o.b.

-66.6 -65.3 -57.3 -62.5 -68.6

Current account balance

-5.5 -10.2 -7.5 -9.6 -11.8

Overall balance

5.7 1.7 4.3 3.3 -0.9

Total external debt 3

10.4 8.5 10.7 12.4 13.5

Net international reserves (millions of U.S. dollars)

1,789 1,760 2,150 2,448 2,253

   in months of imports of goods and services, f.o.b.

4.1 3.4 5.1 4.8 3.8

Memorandum items:

         

GDP at current market prices (billions of Mauritian rupees)

244.0 274.3 283.3 299.5 327.4

GDP at current market prices (millions of U.S. dollars)

7,792 9,641 8,865 9,729 10,299

Public sector debt (percent of GDP)

54.0 55.3 59.3 58.5 58.8

Foreign currency long-term debt rating (Moody's)

Baa2 Baa2 Baa2 Baa2
 

Sources: Mauritian authorities; and IMF staff estimates and projections.

1 Includes credit to parastatals.

2 GFSM 2001 concept of net lending/net borrowing, includes special and other extrabudgetary funds.

3 Reported debt only, excluding private sector short-term debt.


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.



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