## 1musea2019001 ## Source details **Canonical URL:** [1musea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1musea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1musea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1musea2019001.pdf.json) --- ### CONTEXT - Mauritius is a small open economy that has become an upper middle-income country through political stability and strong institutions. - Authorities pursue an ambitious strategy to upgrade physical infrastructure through public investments, promote economic diversification, and spur private investment to reach high-income status within the next decade. - Structural challenges identified: - Shortage of suitably skilled workers. - An aging population. - Declining cost competitiveness and productivity. - Elevated debt level and a growing external imbalance resulting from public investments to upgrade infrastructure. - Need for speedy compliance with international anti-tax avoidance initiatives and AML/CFT standards to remain an attractive investment destination. - Ongoing efforts: - Steps to boost skill development, improve the business climate, and build innovation capacity. - Significant progress in compliance with international anti-tax avoidance initiatives; OECD concluded Mauritius meets BEPS Action 5 requirements. - Identified AML/CFT weaknesses are being addressed; ESAAMLG actions underway and a National Risk Assessment to be finalized in 2019. ### RECENT MACRO-FINANCIAL DEVELOPMENTS - Growth and inflation - Real GDP growth estimated at 3.8 percent in 2017. - Headline inflation declined from 3.7 percent in 2017 to 3.2 percent in 2018. - Unemployment rate fell to 6.9 percent. - Staff estimates show output is close to potential; services sector remains the main contributor to growth and employment. - External sector and reserves - Current account deficit (CAD) rose from 4 percent of GDP in 2016 to 5.6 percent of GDP in 2017 and is estimated at 6.2 percent of GDP in 2018. - Large financial inflows, particularly FDI into offshore and real estate sectors, more than covered the CAD in 2017–18. - Official foreign exchange reserves increased by about US$1.4 billion between end-2016 and end-2018; end-year reserves about USD 6 billion in 2017 and USD 6.3 billion in 2018. - Exchange rate - Nominal effective exchange rate appreciated by about 3 percent since 2016; real effective exchange rate appreciated by about 5 percent since 2016. - Exchange Rate Support Scheme introduced in September 2017 was removed in March 2018. - Fiscal developments - Central government total revenue for FY2017/18 was lower than budgeted by about 2.5 percent of GDP. - Fiscal deficit smaller than budgeted by 0.3 percent of GDP in FY2017/18 due to restraint in current spending and under-execution of capital spending. - Public-sector debt grew 3 percent in nominal terms; public debt-to-GDP ratio declined to 63.7 percent by end-FY2017/18 from 65.0 percent at end-FY2016/17. - FY2018/19 overall fiscal deficit estimated to be 0.3 percent of GDP smaller than budgeted; public debt expected to rise to 64.9 percent of GDP by end-FY2018/19 due to increased external borrowing by SOEs. - Public-sector debt defined as debt of the central government and nonfinancial state-owned enterprises. - Monetary and financial sector - Key Repo Rate (KRR) at 3.5 percent since September 2017. - Private sector credit: grew about 4 percent in 2017 and estimated about 6 percent year-on-year at end-2018. - Bank capital well above regulatory minimum; banks meet Basel III liquidity requirements including the LCR in foreign currency. - NPL ratio declined from 7.8 percent at end-2016 to 6.4 percent at end-2018Q3. - BOM issued securities and sterilized FX intervention proceeds; targeted 91-day public sector bill rate moved within the KRR corridor. - Financial inclusion and global business sector - Pace of credit to SMEs accelerated in 2018, averaging over 6 percent year-on-year versus 4 percent in 2017, aided by government programs. - Activity in offshore global business sector broadly resilient ahead of expiry end-March 2019 of grandfathered tax benefit with India; FDI into Africa from Mauritius doubled during 2012–17. - Anti-tax avoidance reforms (Box summary) - All applicable DTAs (41 in total) placed under OECD’s Multilateral Instrument; ratification process expected to be completed by end-2019. - Deemed Foreign Tax Credit (DFTC) replaced with a partial exemption: qualifying foreign income of up to 80 percent exempt, subject to enhanced substance requirements. - GBC2 license phased out through mid-2021; new “Authorized Company” (AC) vehicle introduced with requirements on place of effective management. ### OUTLOOK AND RISKS - Growth and inflation projections - Real GDP growth projected at 3.9 percent in 2019–20 and about 4.0 percent thereafter. - Inflation projected to drop to 2.1 percent in 2019 and remain contained in the medium term. - External imbalance projections - CAD projected to increase to about 7 percent of GDP in 2019–20 due to weak merchandise exports, higher imports for infrastructure, and planned aircraft purchases by the state-owned airline. - CAD expected to decline to about 5 percent of GDP over the medium term and be fully financed by financial inflows. - Key risks (from RAM and text) - Tightening of global financial conditions; rising protectionism; weaker-than-expected global growth in major partners; large swings in energy prices. - Domestic risks: weakening of the offshore global business sector after expiry of India tax benefit; AML/CFT concerns affecting correspondent relationships; lack of fiscal credibility; natural disasters. - Relative likelihoods: Rising protectionism — High; Weaker global growth — Euro Area: High, U.S.: Medium, China: Medium; other shocks range Low to Medium. ### FISCAL STANCE, PROJECTIONS, AND ADJUSTMENT SCENARIOS - Baseline fiscal assumptions and projections - Staff baseline presumes a fiscal deficit in FY2019/20 similar to FY2018/19 (about 3 percent of GDP), with election-related spending likely to preclude consolidation. - Public-sector debt projected: 63.7 (FY2017/18), 64.9 (FY2018/19 projection), 67.5 (end-FY2019/20), 67.8 (end-FY2020/21), then declining gradually to about 63 percent of GDP by end-FY2024/25. - Baseline selected series (consolidated fiscal balance, primary balance excl. grants, public sector debt) presented for 2015/16 through 2023/24: - Consolidated fiscal balance: -3.7, -3.3, -2.9, -3.0, -3.0, -2.9, -2.9, -2.9, -2.8 - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.0, -1.8, -1.8, -1.6, -1.6, -1.6, -1.6 - Public sector debt: 65.0, 65.0, 63.7, 64.9, 67.5, 67.8, 66.7, 65.4, 64.4 - Authorities’ FY18/19 budget reported series (selected): - Consolidated fiscal balance: -3.7, -3.3, -3.3, -3.3, -3.1, -2.1 - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.5, -2.3, -1.1, 0.4 - Public sector debt: 65.0, 64.9, 63.0, 63.1, 62.8, 60.0 - Adjustment scenario 1 (meet public debt target by end-FY20/21; large near-term consolidation) - Required primary surplus averaging about 2.2 percent of GDP. - Selected series: - Consolidated fiscal balance: -3.7, -3.3, -2.9, -3.0, 1.0, 1.1, 1.2, 1.4, 1.6 - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.0, -1.8, 2.2, 2.2, 2.2, 2.2, 2.2 - Public sector debt: 65.0, 65.0, 63.7, 64.9, 63.5, 60.0, 55.3, 50.5, 46.0 - Adjustment scenario 2 (meet public debt target by end-FY22/23; gradual consolidation) - Primary balance adjustment of about 0.5 percent of GDP in FY2019/20 and 0.8 percent of GDP a year thereafter is judged feasible. - Selected series: - Consolidated fiscal balance: -3.7, -3.3, -2.9, -3.0, -2.5, -1.8, -1.0, 0.0, 0.0 - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.0, -1.8, -1.3, -0.5, 0.3, 1.1, 1.0 - Public sector debt: 65.0, 65.0, 63.7, 64.9, 67.0, 66.2, 63.2, 59.3, 55.8 - Policy options and recommendations to support consolidation - Revenue-side: higher excise taxes on alcohol, tobacco, and luxury items; toll taxes on repaired/new roads; increase the solidarity levy; introduce property taxes; streamline tax incentive framework; improve tax auditing efficiency. - Expenditure-side: better targeting of social spending and subsidies; allow subsidies supporting national minimum wage implementation to lapse as scheduled; rein in wage growth; reform national pension system. - Fiscal transparency and PIM: move towards general government reporting; implement IPSAS; improve public investment efficiency (project monitoring and coordination); strengthen transparency in public procurement and SPVs. - Authorities consider extending the deadline to meet the debt target to FY2022/23; committed to IPSAS implementation by FY2022/23 and created a steering committee at MOFED. ### DEBT SUSTAINABILITY (Annex II highlights) - Summary findings - Public debt remains sustainable under baseline but is vulnerable to macro-fiscal shocks. - Baseline projection: public debt rises to 67.8 percent of GDP by FY2020/21 then declines to 64.4 percent by FY2023/24. - Recent and projected public-sector debt (percent of GDP) - FY2015/16: 65.0 - FY2016/17: 65.0 (Central Government 59.5; SOEs 5.4; Domestic 49.4; External 15.6) - FY2017/18: 63.7 (Central Government 57.4; SOEs 5.5; Domestic 51.6; External 13.2) - FY2018/19 (projection): 64.9 (Central Government 57.7; SOEs 6.3; Domestic 52.0; External 12.8) - Stress-test outcomes (selected) - Growth shock: debt to 68.6 percent in FY20/21 versus 67.8 percent baseline. - Real interest rate shock (sovereign risk premia +200 basis-points): public-sector debt and GFN reach 70.3 percent and 11.1 percent respectively by FY23/24. - Primary balance shock (cumulative deterioration ~4 percent of GDP over FY19/20-FY20/21): total debt up to 72 percent in FY20/21. - Combined macro-fiscal shock: public debt-to-GDP about 75.2 percent by FY23/24. - Contingent liability shock equal to 10 percent of banking sector assets: debt to 96.7 percent of GDP in FY19/20; GFN spikes to 45 percent of GDP in FY19/20. - Public financing and composition - Short-term debt fell to 5.6 percent of GDP in FY17/18. - December 2018 auction of 10-year bonds oversubscribed at 5.2 percent interest rate. - External public debt about 12 percent of GDP in FY17/18; central government external debt concessional. - Interest payments about 11 percent of domestic revenues at end-FY2017/18. - Policy implication: prudent and credible medium-term fiscal stance required to contain downside risks; ensure SOE investment and PIM do not jeopardize debt sustainability. ### EXTERNAL SECTOR ASSESSMENT (Annex IV highlights) - Current account and REER - CA deficit: 4 percent of GDP in 2016; 5.6 percent in 2017; estimated 6.2 percent in 2018; expected 7.4 percent in 2019 and about 5 percent in the medium term. - EBA-lite CA norm (end-2017): 0.2 percent of GDP; CA gap -5.8 percent; REER overvaluation about 17 percent. - Excluding GBC flows, CA measured at -11.1 percent and REER gap at 33.6 percent. - Preliminary 2018 CA gap -7.4 percent, implying REER overvaluation about 22 percent. - External balance sheet and reserves - NIIP increased to about 204 percent of GDP in 2017 from about 142 percent in 2016. - Large gross non-FDI liabilities (1,119 percent of GDP in 2017) and non-FDI short-term external assets (about 1,900 percent of GDP in 2017). - Reserves per adjusted adequacy metric: about 121 percent at end-2017 and about 133 percent at end-2018 — within advisable range under adjusted metric. - If other offshore sector liabilities included in metric, reserves fall to 29 percent of the metric. - Policy implications - External position substantially weaker than consistent with fundamentals; CA gap estimated -5 to -7 percent of GDP and REER overvaluation 14–20 percent (estimates subject to uncertainty). - Primary responses: fiscal consolidation to help contain CA deterioration; structural reforms to boost productivity and diversify economy. - Reserve policy: continue opportunistic FX intervention to build buffers; consider swap arrangements or credit lines with other central banks. ### MONETARY POLICY AND LIQUIDITY MANAGEMENT - Monetary stance - Stance judged "broadly appropriate"; accommodative stance appropriate given subdued inflation but vigilance warranted given near-closed output gap and upside inflation risks. - Recommendation: modernize monetary policy framework toward a formal inflation-targeting framework with a medium-term inflation objective; steps include selecting target, strengthening forecasting capacity, and creating institutional transparency/accountability mechanisms. - Liquidity management - Continue efforts to contain excess liquidity; BOM focuses on 91-day bill yield as operating target while monitoring interbank rate. - Staff encouraged MOFED and BOM to agree on financing costs of securities issuance and other liquidity-absorbing interventions (BOM seeks cost-sharing arrangement). - Authorities’ views - Authorities broadly agree monetary policy should remain cautiously accommodative and respond to inflation developments. - BOM noted that much excess FX liquidity corresponds to LCR; domestic currency excess partly reflects precautionary holdings. - BOM requested IMF technical assistance on asset and liability management and support for cost-sharing arrangements. ### LABOR MARKET, PRODUCTIVITY, AND STRUCTURAL REFORMS - Labor market and wages - Real wages generally outpaced labor productivity in EOEs; EOE productivity growth averaged about 2 percent over 2000–17 versus 5 percent in the 1990s. - National minimum wage introduced in 2018—impact on SMEs and job creation should be monitored. - Wage-setting mechanism could be improved to better align wages with productivity. - Female labor force participation (FLFP) and skills - FLFP has improved but remains well below peers; boosting FLFP could help alleviate labor supply constraints. - Policy: better understand low FLFP across age/education cohorts and design targeted programs. - Structural transformation - Growth constrained by low returns due to limited infrastructure, human capital, and innovation capacity (Hausman, Rodrik, Velasco 2005 growth diagnostic). - Mauritius lags peers in economic complexity; policy implication: build innovation capacity (skills, R&D, ICT) and improve public–private coordination. - Near-term strategy: value upgrading in traditional sectors to spur productivity and transformation. - Savings and pensions - Private saving rate about 3 percent of GDP lower than potential; private saving averaged about 18 percent of GDP in recent years (peak 32 percent in early 2000s). - Recommendations: increase public awareness of savings, encourage private savings via old-age related schemes, and reform national pension system. ### FINANCIAL STABILITY, AML/CFT, SUPERVISION, AND FINTECH - Financial stability and supervision - Banks well capitalized; BOM stress tests indicate capital adequate under severe scenarios; liquidity and market risks manageable. - Non-bank financial institutions growing by double digits, driven by pension and insurance demand; monitored by FSC. - Outstanding supervisory reforms: implement risk-based and consolidated supervision; adopt remaining Basel III instruments; enact legal changes to upgrade financial safety net; consider establishing a macroprudential authority. - Loan-to-value ratio effectively suspended mid-2018; staff advised close monitoring of credit and property markets. - AML/CFT - ESAAMLG evaluation (2018) identified deficiencies; FATF placed Mauritius on one-year observation in October 2018. - 2018 amendments: enhanced CDD, obligations for PEPs, group-wide internal controls, beneficial ownership information provisions. - Further progress needed: complete NRA, strengthen AML/CFT supervision of banks and DNFBPs, improve availability/accessibility of beneficial ownership information in offshore sector. - Fintech and digital assets - Regulatory sandbox licensing (RSL) regime and National RSL Committee established; initial focus on digital assets. - Policy recommendations: adopt detailed fintech strategy (including mobile money/payments), ensure AML/CFT safeguards for fintech, assess AML/CFT risks for digital asset services, and ensure CDD/beneficial ownership safeguards via centralized KYC. - Mauritius introduced Guidance Note on Recognition of Digital Assets (September 2018) and regulatory framework for Custodian Services for digital assets (custodian licensing in force March 2019); Guidance Note on Securities Token Offering issued April 2019. - Mobile money penetration low: 6 percent mobile money accounts versus 21 percent for SSA, despite 90 percent adult bank account holders. ### DATA, CAPACITY DEVELOPMENT, AND IMPLEMENTATION - Data and statistics - Data provision broadly adequate but needs improvement: validate GBC1 annual survey data quality, improve timeliness, and set a revision policy. - Statistics Mauritius improving national accounts; revision policy on external sector statistics posted April 2019. - Capacity development priorities - Strengthen AML/CFT framework, improve national accounts data, and strengthen public financial management (including via AFRITAC South). ### STAFF APPRAISAL AND RECOMMENDATIONS - Macroeconomic outlook - Growth projected about 4 percent in the medium term, driven by construction and services; unemployment expected to decline; inflationary pressures likely contained. - CAD projected to widen in 2019–20 before stabilizing around 5 percent of GDP. - Fiscal policy - Fiscal adjustment necessary to enhance credibility, preserve debt sustainability, and reduce external imbalances. - Recommendation: commence gradual fiscal consolidation from FY2019/20 while protecting the social safety net to place public debt on a declining path. - Structural and financial reforms - Regain external competitiveness by boosting national savings, improving productivity, and expediting structural transformation. - Implement outstanding FSAP recommendations and fully address AML/CFT deficiencies per ESAAMLG/FATF standards. - Modernize monetary policy framework and consider including the Financial Conditions Index (FCI) in forecasting and macroprudential toolkits. - Institutional and governance measures - Improve fiscal transparency (move to general government reporting; implement IPSAS), strengthen public investment management and procurement transparency, and maintain strong independent institutions to improve investor confidence. *Source: IMF staff report excerpt (Content unit: 1musea2019001).* ### 2019. The staff team comprised Ms. Mahvash Qureshi (head), Messrs. ### MAURITIUS ### CONTEXT - Mauritius is described as a small open economy that has become an upper middle-income country through political stability and strong institutions. - An ambitious strategy is being pursued to upgrade physical infrastructure through public investments, promote economic diversification, and spur private investment to reach the high-income country milestone within the next decade. - Structural challenges identified: - Shortage of suitably skilled workers. - An aging population. - Declining cost competitiveness and productivity. - Elevated debt level and a growing external imbalance resulting from public investments to upgrade infrastructure. - Need for speedy compliance with international anti-tax avoidance initiatives and AML/CFT standards to remain an attractive investment destination. - Ongoing efforts: - Steps to boost skill development, improve the business climate, and build innovation capacity. - Significant progress in compliance with international anti-tax avoidance initiatives. - Identified areas for improvement in the AML/CFT framework are being addressed. ### RECENT MACRO-FINANCIAL DEVELOPMENTS - Growth and inflation - Real GDP growth is estimated at 3.8 percent in 2017. - Headline inflation declined from 3.7 percent in 2017 to 3.2 percent in 2018. - Unemployment rate has fallen to 6.9 percent (lowest level in a decade). - Staff estimates show output is close to potential. - The services sector remains the most important contributor to economic growth and employment. - External sector and reserves - Current account deficit (CAD) rose from 4 percent of GDP in 2016 to 5.6 percent of GDP in 2017. - CAD is estimated to have widened further to 6.2 percent of GDP in 2018. - Improvements noted in net exports of services and the income account. - Large financial inflows, particularly FDI into the offshore and real estate sectors, more than covered the CAD in 2017–18. - Overall balance of payments surplus and an increase in official foreign exchange reserves of about US$1.4 billion between end-2016 and end-2018. - Exchange rate - Nominal effective exchange rate appreciated by about 3 percent since 2016. - Real effective exchange rate appreciated by about 5 percent since 2016. - Pace of appreciation slowed in 2018 relative to 2017, partly due to sustained foreign exchange intervention. - The Exchange Rate Support Scheme introduced in September 2017 was removed in March 2018, ending a multiple currency practice. - Fiscal developments - Central government total revenue for FY2017/18 was lower than budgeted by about 2.5 percent of GDP due to lower nontax revenues and external grants. - The revenue shortfall was offset by restraint in current spending and under execution of capital spending, resulting in a fiscal deficit smaller than budgeted by 0.3 percent of GDP. - Public-sector debt grew by 3 percent in nominal terms, but public debt-to-GDP ratio declined to 63.7 percent by end-FY2017/18 from 65.0 percent at end-FY2016/17. - Based on first-half FY2018/19 outturns, overall fiscal deficit for FY2018/19 is estimated to be 0.3 percent of GDP smaller than budgeted. - Public debt is expected to rise to 64.9 percent of GDP by end-FY2018/19 owing to increased external borrowing by state-owned enterprises to finance investment spending. - Note: Public-sector debt is defined as debt of the central government and nonfinancial state-owned enterprises. - Monetary and financial sector - Key Repo Rate (KRR) has remained at 3.5 percent since September 2017. - Broad money growth has been fairly stable. - The Bank of Mauritius (BOM) has issued securities and sterilized proceeds from FX intervention to contain excess liquidity; the targeted 91-day public sector bill rate has moved within the KRR corridor. - Private sector credit: - Credit to the private sector grew about 4 percent in 2017 after negative growth in 2016. - Private sector credit growth estimated at about 6 percent year-on-year at end-2018. - Financial conditions index constructed by staff indicates an improvement in financial conditions in 2018 (Appendix I). - Financial stability and soundness - Bank capital is well above the regulatory minimum. - Banks meet enhanced liquidity requirements under Basel III, including the liquidity coverage ratio (LCR) in foreign currency. - Banks have increased exposure to the region; BOM has strengthened cross-border supervision and cooperation. - Non-performing loan (NPL) ratio declined from 7.8 percent at end-2016 to 6.4 percent at end-2018Q3. - Further NPL reduction expected with transfer of majority of state-owned Maubank’s NPLs to a special purpose vehicle and requirement for banks to accelerate write-offs. - BOM stress tests using severe scenarios suggest banks’ capital is adequate to absorb sizable shocks to NPLs; liquidity and market risks appear manageable. - Non-bank financial institutions have been growing by double digits, spurred by demand for pension and insurance services; monitored by the Financial Services Commission (FSC). - Financial inclusion and banking access - BOM opened the secondary market for government paper to small investors, launched financial literacy programs, and proposed measures for a more inclusive banking sector. - Pace of credit to SMEs accelerated in 2018, averaging over 6 percent year-on-year relative to 4 percent in 2017, aided by government programs subsidizing loan rates and granting grace periods. - Global business sector - Activity in the offshore global business sector broadly resilient ahead of expiry end-March 2019 of grandfathered tax benefit under the revised tax treaty with India. - FDI into Africa from Mauritius doubled during 2012–17. - Majority of new Global Business License (formerly Category 1 Global Business License, GBC1) applications in 2017 targeted Africa. - Anti-tax avoidance initiatives - Significant reforms related to the global business sector were introduced in 2018 to comply with OECD/EU anti-tax avoidance initiatives. - In November 2018, the OECD concluded Mauritius meets the requirements of BEPS Action 5 and does not have harmful features in its tax regimes. - Mauritius has placed all applicable tax treaties under the OECD’s Multilateral Instrument; ratification process expected to be completed by end-2019. - The EU has expressed some concerns about the new tax regime; authorities committed to address these by end-2019. ### OUTLOOK AND RISKS - Growth and inflation projections - Real GDP growth projected at 3.9 percent in 2019–20. - Real GDP growth projected at about 4.0 percent thereafter. - Inflation projected to drop to 2.1 percent in 2019 and remain contained in the medium term (with oil prices expected to decline in 2019). - External imbalance projections - Current account deficit (CAD) projected to increase to about 7 percent of GDP in 2019–20 owing to: - Lackluster merchandise export performance. - Higher imports associated with public infrastructure projects. - Planned aircraft purchases by the state-owned airline. - CAD expected to decline to about 5 percent of GDP over the medium term on the back of lower projected oil prices and capital imports. - CAD expected to be fully financed by financial inflows. ### BOX: Update on International Tax Transparency and Anti-Tax Avoidance Initiatives (summary of key measures) - Revision of DTAs: - All applicable DTAs (41 in total) placed under the coverage of the OECD’s Multilateral Instrument to enshrine BEPS minimum standards. - Ratification process for submitted DTAs expected to be completed by end-2019. - Additional BEPS-related substance requirements enshrined in the Income Tax Act. - Elimination of the Deemed Foreign Tax Credit (DFTC): - DFTC replaced with a new partial exemption system. - Qualifying foreign income of up to 80 percent of any firm (both global and domestic companies) will be exempt from domestic taxation, subject to enhanced substance requirements. - Elimination of the GBC2 license: - GBC2 license being phased out through mid-2021. - New vehicle “Authorized Company” (AC) introduced; ACs required to conduct business and have place of effective management outside Mauritius. - ACs not meeting these requirements would be subject to domestic taxation. *Source: IMF staff report excerpt (2019).* ### 16. The fiscal stance will remain expansionary, as several initiatives are undertaken to ### 16. The fiscal stance will remain expansionary, as several initiatives are undertaken to boost employment and growth ### Macroeconomic outlook and fiscal stance - Staff’s baseline scenario presumes a fiscal deficit in FY2019/20 of a similar magnitude as in FY2018/19 (about 3 percent of GDP), as election-related spending pressures are likely to preclude fiscal consolidation. - Increased borrowing for public capital spending is projected to push public debt to 67.5 percent of GDP by end-FY2019/20 and to 67.8 percent of GDP by end-FY2020/21. - Thereafter, public debt is projected to decline gradually to about 63 percent of GDP by end-FY2024/25 as public spending tails off. - The vibrant global business sector is entering a transition phase: expiration of the tax benefit granted by India may redirect some equity investment, but Mauritius could remain an important source of debt investment into India (tax benefit retained for such flows) and is becoming a gateway for investment flows into Africa. - Key external and domestic risks: - Tightening of global financial conditions reducing financial inflows and threatening macro-financial stability. - Growth slowdown in major partners affecting exports and financial flows. - Higher commodity prices exacerbating the external imbalance. - A slowdown in the global business sector posing a downside risk due to strong macro-financial linkages. - Upside surprise if initiatives supporting SMEs, youth skill development, and female labor force participation (FLFP) spur private investment and employment. ### Ensuring fiscal sustainability and sound fiscal management - On current policies, the public statutory debt target will be missed: - The expansionary fiscal stance in FY2018/19 deviates from the medium-term fiscal framework announced with the FY2017/18 budget, which projected consolidation through FY2020/21 to meet the statutory public debt target of 60 percent of GDP by the end of FY2020/21. - The FY2018/19 budget’s projected adjustment is based on public debt statistics that do not fully factor in borrowing outside of the central government; meeting the debt target on schedule requires a much larger consolidation than envisaged. - Authorities are considering extending the deadline to meet the debt target to FY2022/23: - Large adjustment required to meet the debt target by FY2020/21 equates to a primary surplus averaging about 2.2 percent of GDP (Text Table 1: Adjustment scenario 1). - Staff view: extension to FY2022/23 seems warranted in current circumstances, but fiscal consolidation while protecting the social safety net should be pursued from FY2019/20 to bolster credibility. - Gradual fiscal consolidation feasible to reach the revised debt target: - Baseline scenario presumes borrowing for aircraft purchases in the near term. - A primary balance adjustment of about 0.5 percent of GDP in FY2019/20 and 0.8 percent of GDP a year thereafter appears feasible to achieve the debt target of 60 percent of GDP by FY2022/23 (Text Table 1: Adjustment scenario 2). - If aircraft were leased, public debt would be lower by about 1-2 percent of GDP in the near term than in the baseline, allowing a modestly slower pace of adjustment. - Postponing aircraft purchases to FY2022/23 would imply lower near-term debt levels and financing needs but require a similar adjustment as in scenario 2 to reach the 60 percent target by FY2022/23. - Choice among options should be based on longer-term considerations (net present value). - Revenue and expenditure measures to support consolidation: - Revenue-side options: Mobilize domestic revenue through higher excise taxes on alcohol, tobacco, and luxury items; imposition of toll taxes on repaired/new roads; increase in the solidarity levy; introduction of property taxes; streamlining the tax incentive framework; and improvements in tax auditing efficiency. - Expenditure-side options: Rationalize spending by better targeting social spending and subsidies; allowing subsidies to support the national minimum wage implementation to lapse as scheduled; reining in wage growth; and reforming the national pension system. - Debt sustainability and vulnerabilities: - Debt Sustainability Analysis (DSA) under the baseline indicates Mauritius’ public debt level is sustainable, but outlook susceptible to macro-fiscal shocks (Annex II). - Maturity structure of public debt is favorable and most external debt contracted on concessional terms, but elevated debt level and notable short-term gross financing needs increase vulnerability to adverse growth, interest rate, and fiscal shocks. - Additional fiscal space exists reflecting institutional strength, deep domestic financial markets, and sustainable debt profile, but this space could be at risk under significant adverse scenarios. - Possible contingent liabilities (including those associated with a large financial sector) and costs associated with a rapidly aging population pose additional fiscal risks that require the debt level to be contained. - Fiscal transparency and public investment management: - Improvements recommended: move towards general government reporting, implement International Public Sector Accounting Standards (IPSAS), improve public investment efficiency (project monitoring and coordination ministerial committees), and strengthen transparency in public procurement (processes and outcomes, including special purpose entities). - Authorities’ views on fiscal issues: - Authorities agreed broadly with staff advice. - Extension of the timeline to FY2022/23 is under consideration; options to mobilize revenue and streamline expenditure are being explored. - Authorities committed to IPSAS implementation by FY2022/23; a steering committee at MOFED has been created to oversee implementation. ### Fiscal projections and adjustment scenarios (Text Table 1 highlights) - Baseline projections (selected series, as presented): - Consolidated fiscal balance: -3.7, -3.3, -2.9, -3.0, -3.0, -2.9, -2.9, -2.9, -2.8 (2015/16 through 2023/24) - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.0, -1.8, -1.8, -1.6, -1.6, -1.6, -1.6 - Public sector debt: 65.0, 65.0, 63.7, 64.9, 67.5, 67.8, 66.7, 65.4, 64.4 - Authorities' budget, FY18/19 (selected series reported by authorities): - Consolidated fiscal balance: -3.7, -3.3, -3.3, -3.3, -3.1, -2.1 - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.5, -2.3, -1.1, 0.4 - Public sector debt: 65.0, 64.9, 63.0, 63.1, 62.8, 60.0 - Adjustment scenario 1 (over FY19/20-FY20/21) (to meet public debt target by end-FY20/21): - Consolidated fiscal balance: -3.7, -3.3, -2.9, -3.0, 1.0, 1.1, 1.2, 1.4, 1.6 - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.0, -1.8, 2.2, 2.2, 2.2, 2.2, 2.2 - Public sector debt: 65.0, 65.0, 63.7, 64.9, 63.5, 60.0, 55.3, 50.5, 46.0 - Adjustment scenario 2 (over FY19/20-FY22/23) (to meet public debt target by end-FY22/23): - Consolidated fiscal balance: -3.7, -3.3, -2.9, -3.0, -2.5, -1.8, -1.0, 0.0, 0.0 - Primary fiscal balance (excl. grants): -1.4, -1.5, -1.0, -1.8, -1.3, -0.5, 0.3, 1.1, 1.0 - Public sector debt: 65.0, 65.0, 63.7, 64.9, 67.0, 66.2, 63.2, 59.3, 55.8 ### Maintaining monetary stability - Monetary policy stance: - Current monetary policy stance appears broadly appropriate against the backdrop of subdued inflation; accommodative stance remains appropriate but vigilance warranted given near-closed output gap and upside inflation risks. - Liquidity management: - Efforts to contain excess liquidity in the banking system are welcome and should continue. - Banks’ excess cash holdings in local currency during 2018 mostly stayed below the end-2017 level; gap between the KRR and the money market rates (91-day bill rate and overnight interbank rate) narrowed. - BOM has focused on the 91-day bill yield (at issuance) as its operating target rather than the interbank rate; BOM monitors both the 91-day bill and interbank rates before formalizing the operational target. - Staff encouraged MOFED and BOM to reach a tractable agreement on financing the costs of securities issuance and other liquidity-absorbing interventions. - Forward-looking framework: - Staff discussed benefits of moving toward a more formal inflation-targeting framework with a clearly defined medium-term inflation objective to enhance credibility and anchor expectations. - Required steps: determine appropriate medium-term inflation target (and band), strengthen BOM’s forecasting capacity, and set up institutional mechanisms for transparency and accountability. - Authorities’ views on monetary policy: - Authorities broadly agreed monetary policy should remain cautiously accommodative and respond to inflation developments. - BOM noted large part of excess liquidity in foreign currency corresponds to LCR; domestic currency excess partly reflects banks’ precautionary holdings. - BOM reiterated concerns about costs of open market operations and sterilized FX intervention and seeks a cost-sharing arrangement with MOFED; details remain to be worked out. - Authorities saw merit in modernizing the monetary policy framework but noted practical difficulties in determining the optimal inflation target. ### Regaining external competitiveness and advancing structural reforms - External position and reserves: - Staff’s external sector assessment suggests Mauritius’ external position at end-2017 was substantially weaker than implied by medium-term fundamentals and desirable policy settings. - The current account deficit (CAD) is estimated to have widened further in 2018. - International reserves have improved since 2016 and, at about 120 percent of the adjusted reserve adequacy metric, are in the middle of the advisable range. - Given the large offshore sector, FX intervention policy should continue to opportunistically build reserves to further strengthen resilience. - Structural weaknesses and reform priorities: - Mauritius has made progress on Doing Business and global competitiveness indicators and outperforms regional peers, but lags other international competitors in technological readiness, innovation, infrastructure, higher education and training, labor market efficiency, and institutional quality. - These gaps manifest in unfavorable productivity and diversification trends and a lower level of economic complexity than potential. - Reform measures and recommendations: - Improve synergies and coordination among initiatives and stakeholders to enhance reform effectiveness. - Conduct regular monitoring and evaluation of initiatives to track progress and prevent wastage of public resources. - Generate greater awareness about initiatives among targeted groups and make information easily available. - Address skill mismatch expeditiously: conduct regular establishment surveys to identify skill needs; strengthen partnerships with leading international academic and research institutions to foster skills and knowledge sharing. - Authorities’ reform actions: - Initiatives introduced: Business Facilitation Act 2017; Financial Sector Blueprint; creation of the National Economic Development Board; incentives to support SMEs, youth skill development, and FLFP. - Authorities focus on skill development as a priority. *Source: IMF staff report excerpt.* ### 35. Broader reforms in the labor market will help to improve cost competitiveness. Real ### 35. Broader reforms in the labor market will help to improve cost competitiveness. Real ### Labor market competitiveness and productivity - Real wages have generally outpaced labor productivity in the export-oriented sector (EOEs). - The current salary compensation mechanism—based on annual changes to the cost of living negotiated by the government, trade unions, and businesses—could be improved to better align productivity with real wages. - The national minimum wage introduced in 2018 is an important step toward safeguarding social objectives, but its impact on SME competitiveness and job creation should be monitored to strike the right balance. - EOE productivity growth averaged about 2 percent over 2000–17, compared to 5 percent in the 1990s. - Multifactor productivity growth and unit labor cost indicators point to weak productivity performance in the export sector. ### Female labor force participation (FLFP) and skills - FLFP has improved in recent years but remains well below peers. - Given the high education level among females, bolstering their workforce participation will help alleviate labor supply constraints and reduce the economy’s skill gap. - Efforts should be made to better understand the reasons for the limited FLFP across the different age groups/education levels to improve the targeting and design of programs aimed at boosting FLFP. ### Institutional quality, governance, and anticorruption - Mauritius has a track record of good governance and strong institutions, but recent years have seen a slight deterioration in some institutional quality indicators, including an increase in the perception of corruption. - Staff urged the authorities to maintain strong and independent institutions to remain an attractive investment and employment destination. - Improving fiscal transparency and strengthening the AML/CFT framework could help improve public perceptions regarding corruption. - The recent adoption of the Declaration of Assets Bill—extending the scope of assets to be declared and the categories of public officials obliged to declare—should be effectively implemented. ### Structural transformation and growth constraints (Box 2) - Real GDP growth has slowed, largely due to a decline in physical and human capital accumulation. - With negligible population growth and tepid private investment, robust productivity growth will be a key driver of economic growth going forward. - Applying the Hausman, Rodrik, and Velasco (2005) growth diagnostic, staff analysis suggests growth is constrained by low economic returns due to limited physical infrastructure, human capital, and innovation capacity. - Self-discovery externalities and coordination externalities appear to constrain private investment and structural transformation, manifesting as low economic diversification and sophistication. - Mauritius lags global peers in economic complexity, and its actual level is lower than predicted by its macro-structural characteristics. - Policy implication: improving sophistication requires building innovation capacity (skill development, R&D, ICT infrastructure) and better coordination between public and private sectors. - Near-term pragmatic strategy: focus on value upgrading in traditional sectors to spur productivity and transformation. ### Savings, investment, and external balance - The external imbalance over the last decade has been driven by a decline in national savings, including private savings. - Staff analysis shows the private saving rate is around 3 percent of GDP lower than potential, given Mauritius’ economic and structural characteristics. - Economic growth would help boost private savings, but a rapidly rising old-age dependency ratio requires a higher level of savings to alleviate fiscal pressures and avoid abrupt policy adjustments. - Recommended actions: increase public awareness of the importance of savings, encourage private savings (e.g., through old-age related saving schemes), and reform the national pension system in line with previous recommendations (IMF Country Report 14/107). ### Authorities’ views on reforms and policies - Authorities concurred on the importance of boosting productivity and accelerating structural transformation to improve competitiveness. - They cited ongoing efforts to create an innovation ecosystem (including Smart Cities), address skill gaps via training and new technology-related university courses, boost trade through bilateral and multilateral free trade agreements (including with China), and establish investment links via an Africa Strategy. - They emphasized the need for better coordination and monitoring of government initiatives and have created a ministerial committee to oversee implementation of budget-related measures. - Authorities attributed high youth unemployment and low FLFP to work preferences and cultural issues but agreed coordination/monitoring needs improvement. ### Strengthening financial stability and integrity (AML/CFT, supervision, fintech) - As a prominent international financial center, Mauritius’ financial sector is exposed to money laundering and terrorist financing threats. - The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) evaluation (2018) identified several deficiencies in Mauritius’ AML/CFT framework; FATF placed Mauritius on a one-year observation period in October 2018. - Steps taken in 2018 include amendments to the AML Law: customer due diligence (CDD) requirements for reporting entities, enhanced obligations for politically exposed persons and group-wide internal controls, and new provisions on gathering and maintenance of beneficial ownership information. - Mauritius has undertaken a National Risk Assessment (NRA) to be finalized in 2019 and initiated piloting a risk-based plan of AML/CFT supervision of banks; a centralized know-your-customer system is being developed. - Further progress needed: strengthen understanding of ML/TF risks among DNFBPs, improve AML/CFT implementation by reporting entities, and improve availability/accessibility of beneficial ownership information in the offshore sector. - Financial supervision: outstanding issues remain—implement risk-based and consolidated supervision, adopt remaining Basel III instruments, enact legal changes to upgrade the financial safety net, and consider establishing a macroprudential authority. - The loan-to-value ratio was effectively suspended in mid-2018; staff advised close monitoring of credit and property market developments to periodically evaluate the need for re-introduction. - Fintech: Mauritius aspires to be a regional fintech hub; a regulatory sandbox licensing (RSL) regime and National RSL Committee have been established, initially focusing on digital assets. - Policy implication for fintech: adopt detailed fintech strategy (including mobile money and payments) informed by an assessment of comparative strengths/limitations; ensure adequate AML/CFT safeguards for fintech activities, evaluate AML/CFT risks for digital asset services, and establish CDD/beneficial ownership safeguards facilitated by the centralized KYC work. ### Data, capacity development, and implementation - Data provision is broadly adequate for surveillance but needs improvement: Statistics Mauritius’ efforts to improve national accounts data are welcome; further progress needed to validate GBC1 annual survey data quality, improve timeliness, and set a revision policy. - Capacity development priorities (including through AFRITAC South) relate to strengthening the AML/CFT framework, improving national accounts data quality, and strengthening public financial management. ### Staff appraisal and policy recommendations - Macroeconomic outlook: growth is projected at about 4 percent in the medium term, driven by robust performance in construction and services; unemployment is expected to decline further; inflationary pressures likely to remain contained. - The current account deficit (CAD) is projected to widen in 2019–20, before stabilizing at around 5 percent of GDP. - Risks to the outlook are mostly tilted to the downside, from global and domestic shocks. - Fiscal policy: fiscal adjustment is necessary to enhance fiscal credibility, preserve debt sustainability, and reduce external imbalances. - With financing for public investments exerting upward pressure on public debt in the near term, the authorities’ debt target of 60 percent of GDP for FY2020/21 is unlikely to be met without significant policy adjustment. - Recommendation: commence gradual fiscal consolidation from the next budget FY2019/20 to enhance fiscal credibility and put public debt on a declining path. *Source: IMF staff report excerpt (Content unit: 1musea2019001).* ### 50. The monetary policy stance is broadly appropriate. Efforts to contain excess liquidity ### 50. The monetary policy stance is broadly appropriate. Efforts to contain excess liquidity ### Monetary policy stance and framework - The monetary policy stance is judged "broadly appropriate." - Efforts to contain excess liquidity in the banking system should continue. - Recommendation: modernize the monetary policy framework by building the necessary capacity and institutional arrangements to announce and track a medium-term inflation objective, to enhance policy credibility and improve resilience to shocks. ### External sector and reserves - Finding: "The widening external imbalance needs attention." - Staff analysis: the external position of Mauritius is "substantially weaker than implied by medium-term fundamentals and desirable policy settings." - International reserves "have improved significantly supported by financial inflows and are within the advisable range." - Recommendation: given the large size of the offshore sector, FX intervention policy should continue to opportunistically build reserves buffers to strengthen resilience to shocks. ### External competitiveness and structural policies - Concern: "External competitiveness concerns should be addressed by concerted efforts to boost national savings, improve productivity and expedite structural transformation." - Policy measures recommended: - Increase national savings, including through fiscal consolidation and pension reforms, to address the growing external imbalance. - Improve business climate, build innovation capacity, and support SMEs; however, note that existing steps "have yet to deliver tangible results." - Improve coordination among initiatives and stakeholders to enhance reform effectiveness. - Implement systematic monitoring and evaluation of initiatives to track progress and prevent resource wastage. - Undertake broader labor market reforms, including improvements to the wage-setting mechanism, to address declining cost competitiveness. - Maintain strong and independent institutions to remain an attractive investment and employment destination. ### Financial sector reform and supervision (FSAP) - Recommendation: "Outstanding FSAP recommendations should be implemented." - Specific FSAP items to follow through on: - Implementation of risk-based and consolidated supervision. - Adoption of the remaining Basel III instruments. - Establishment of a macroprudential authority. ### Tax and financial center reputation - Finding: "The steps taken to comply with the international anti-tax avoidance initiatives are welcome." - Progress: OECD concluded that "Mauritius does not have any harmful features in its tax regimes." - Recommendation: "The remaining requirements to meet international standards should also be swiftly implemented to strengthen Mauritius’ image as a globally competitive financial center." ### AML/CFT framework - Recommendation: "The ESAAMLG recommendations should be expeditiously implemented." - Progress: "Significant steps have been undertaken to address the identified deficiencies in the AML/CFT framework, but further progress is needed to meet all ESAAMLG recommendations." - Specific actions needed: - Complete the NRA exercise. - Further strengthen risk-based AML/CFT supervision of banks. - Enhance AML/CFT oversight of DNFBPs. - Improve availability and accessibility of beneficial ownership information in the offshore sector. - Put in place adequate AML/CFT safeguards for fintech-related activities. ### Article IV timetable - Staff recommendation: "the next Article IV consultation takes place in the standard 12-month cycle." *Source: 1musea2019001 - 50. The monetary policy stance is broadly appropriate. Efforts to contain excess liquidity* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Risk Matrix Overview - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. - Relative likelihood: "low" indicates a probability below 10 percent, "medium" between 10 and 30 percent, and "high" between 30 and 50 percent. - Time horizons: "Short term (ST)" indicates within 1 year; "Medium-term (MT)" indicates within 3 years. - Non-mutually exclusive risks may interact and materialize jointly. ### External Risks (Relative likelihood, Time Horizon, Impact, Policy Response) - Sharp tightening of global financial conditions - Relative Likelihood: Low/Medium - Time Horizon: ST - Impact: High: Capital flow reversal could affect the external and fiscal positions, requiring an abrupt and potentially disruptive adjustment. Spillovers to the financial system would be likely. - Policy Response: - Allow exchange rate flexibility and tighten monetary policy if inflationary pressures emerge. - Let automatic fiscal stabilizers operate. - Provide foreign exchange liquidity if dollar shortages appear. - Accelerate adoption of FSAP recommendations to mitigate risks to the banking sector. - Rising protectionism and retreat from multilateralism - Relative Likelihood: High - Time Horizon: ST, MT - Impact: High/Medium: Impact on the Balance of Payments and economic growth would depend on the extent to which trade and financial flows are disrupted. - Policy Response: - Adopt labor market reforms and improve the business climate to boost competitiveness. - Allow greater exchange rate flexibility and fiscal adjustment to reduce external imbalances and ensure medium-term debt stabilization, while protecting social spending. - Weaker-than-expected global growth (Euro Area; U.S.; China) - Relative Likelihoods: Euro Area: High; U.S.: Medium; China: Medium - Time Horizons: ST, MT for all - Impact: High/Medium: The US, EU, and China are Mauritius’ major trading and financial partners. Significant impact on the external sector is likely. - Policy Response: - Allow monetary easing if medium-term inflation expectations are contained and let automatic fiscal stabilizers operate. - Adopt labor market reforms and improve infrastructure to boost competitiveness. - Facilitate export diversification. - Allow exchange rate flexibility to absorb shocks. - Large swings in energy prices - Relative Likelihood: Medium - Time Horizon: ST, MT - Impact: High: Increase in oil prices would worsen the current account deficit and increase inflation. - Policy Response: - Tighten monetary policy if second-round effects start to build up. - Tighten fiscal policy and improve external competitiveness through structural reforms. ### Domestic Risks (Relative likelihood, Time Horizon, Impact, Policy Response) - Changes to the business model: Activity in the offshore global business sector is weakened following expiration of tax benefits granted by India. - Relative Likelihood: Medium - Time Horizon: ST, MT - Impact: High: Impact on financial stability, economic activity, fiscal revenues, and employment. - Policy Response: - Facilitate diversification to develop new growth drivers and improve the competitiveness of traditional sectors. - AML/CFT concerns: Loss of market confidence and correspondent banking relationships due to the identified deficiencies in the AML/CFT framework. - Relative Likelihood: Medium - Time Horizon: ST, MT - Impact: High: Impact on growth and employment. - Policy Response: - Strengthen the AML/CFT framework in line with the FATF standards. - Lack of fiscal credibility reduces market confidence - Relative Likelihood: Low - Time Horizon: ST, MT - Impact: High/Medium: Increase in interest rates, credit rating downgrade, capital outflows, and financial instability. - Policy Response: - Fiscal consolidation, while protecting the poor, to meet the debt target. - Improve public financial management and fiscal transparency. - Natural disasters - Relative Likelihood: Medium - Time Horizon: ST, MT - Impact: High: Lower growth because of disruption to agriculture, tourism, manufacturing, and damage to infrastructure. - Policy Response: - Build ex-ante resilience with fiscal buffers and better infrastructure. - Mobilize revenue to meet fiscal costs. - Loosen monetary policy if inflation is not a concern. *(Footnote: The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.)* --- ### Annex II. Debt Sustainability Analysis ### Summary Finding - An updated public debt sustainability analysis (DSA) indicates that Mauritius’ public debt remains sustainable under the baseline scenario. - Public debt-to-GDP ratio is expected to rise in the near term due to higher public-sector investments, then decline as capital projects wind down. - Shocks to real interest rates, the primary balance, a combined macro-fiscal shock, and a shock to contingent liabilities would cause a sustained divergence from the baseline. - Public debt will remain elevated through the medium-term and is unlikely to reach the authorities’ public debt target in the absence of significant policy adjustments. ### Background and Recent Debt Levels - Last DSA (December 2017) showed a moderately deteriorating but manageable debt outlook. - Public-sector debt definition: central government (including extrabudgetary units) and state-owned enterprise (SOE) debt (including loan guarantees extended to SOEs by central government). - Public-sector debt-to-GDP: - FY2015/16: Total Public Debt 65.0 - FY2016/17: Total Public Debt 65.0; Central Government 59.5; State-Owned Enterprises 5.4; Domestic 49.4; External 15.6 - FY2017/18: Total Public Debt 63.7; Central Government 57.4; State-Owned Enterprises 5.5; Domestic 51.6; External 13.2 - FY2018/19 (projection): Total Public Debt 64.9; Central Government 57.7; State-Owned Enterprises 6.3; Domestic 52.0; External 12.8 - Note: The authorities switched from calendar to fiscal year accounting in mid-2015 (the fiscal year ends in June). Considered in calendar year terms, figures are very similar with end-year public debt being 63.7 and 65.1 percent of GDP in 2017 and 2018, respectively. - In recent years, short-term debt fell and stood at 5.6 percent of GDP in FY17/18. - December 2018 auction of 10-year bonds was oversubscribed at an interest rate of 5.2 percent. - External debt constituted about 12 percent of GDP in FY17/18; the entirety of central government external debt was concessional. - Interest payments stood at about 11 percent of domestic revenues at end FY2017/18. ### Authorities’ Debt Target and Baseline Projection - Statutory public-sector debt target: 60 percent of GDP by FY20/21. - Baseline projection: public debt is set to rise to 67.8 percent of GDP by FY20/21 due to major public-sector investments (new light-rail system and aircraft purchases by the state-owned airline), then decline to 64.4 percent by FY23/24. - The authorities’ public debt target cannot be achieved without a significant and potentially economically disruptive fiscal adjustment in the near-term. ### Realism of the Baseline Scenario (Key Assumptions) - Growth: Real output growth expected to average about 4 percent over the medium-term. - GDP deflator and consumer prices: - Deflator expected to average about 2¾ percent over the medium-term. - Consumer prices likely to average about 3⅓ percent over the forecast horizon. - Fiscal strategy: Central government primary balance (including grants) expected to remain at about -½ percent of GDP in the near term, improving marginally in later years. - SOEs are expected to contract external debt of about 3 percent of GDP over FY19/20 and FY20/21, mostly for financing the light-rail project and aircraft purchases. - Current Account: Current account deficit expected to average about 5½ percent of GDP in the medium-term and will be largely financed by private financial flows. ### Baseline Scenario Details - Public financing needs follow the FY2018/19 budget. - New debt issuances assumed to principally consist of domestic debt. - Medium-to-long term debt will continue to form the largest share of the debt stock. - Debt will continue to be principally local-currency denominated, minimizing exchange rate risk. - After peaking in FY2020/21, reduction in public capital spending is expected to reduce upward pressures on debt; sustained real growth aids gradual decline. ### Stress Tests and Distribution of Risks (Standardized Scenarios) - Growth shock: - Lower real output growth by one standard deviation relative to the baseline for two years starting in FY19/20 would push debt to 68.6 percent in FY20/21, compared to 67.8 percent in the baseline. - By FY23/24, debt would be 0.6 percentage points higher than the baseline. - Real interest rate shock: - An increase in sovereign risk premia by more than 200 basis-point starting in FY19/20 would set public-sector debt and public gross financing needs on an upward path, reaching 70.3 percent and 11.1 percent, respectively, by FY23/24. - Primary balance shock: - A cumulative deterioration in the primary balance of about 4 percent of GDP over FY19/20-FY20/21 would push total debt up to 72 percent of GDP in FY20/21. - Combined macro-fiscal shock: - Combining the above three shocks would imply a sustained divergence of public debt dynamics from the baseline, with public debt-to-GDP reaching about 75.2 percent by FY23/24. Public debt-to-revenue ratio and public gross financing needs would remain elevated and increase toward the end of the projection period in this scenario. - Contingent liability shock: - Realization of a contingent liability shock equal to 10 percent of banking sector assets would raise debt to 96.7 percent of GDP in FY19/20 and keep it elevated. Gross financing needs in FY19/20 would spike to 45 percent of GDP, though would fall rapidly in subsequent years. ### Additional Vulnerabilities - Five upper-bound early warning thresholds are crossed, mainly related to gross financing needs (GFN) reflecting repayment of short-term debt in FY2018/19; GFN projected to fall markedly in the medium-term. - Increased exposure to non-resident liabilities due to borrowing for public infrastructure projects. - Large financial sector relative to peers could pose potentially large contingent liability risks. - Weak public investment management (particularly by SOEs) could jeopardize debt sustainability. - Longer-term challenge: population aging will put greater financial pressure on the pension system. ### Conclusion - Mauritius’ public-sector debt level appears sustainable despite an investment-driven near-term increase, but subject to notable vulnerabilities. - Under the baseline scenario, public debt will exceed the authorities’ target of 60 percent of GDP over the medium term. - The analysis reveals high vulnerability of public debt and public gross financing needs to a real interest rate shock and to a combined macro-fiscal shock. *Source: IMF staff Annex I. Risk Assessment Matrix and Annex II. Debt Sustainability Analysis from the provided IMF staff materials.* ### 13. While the projected path of public debt is sustainable, the baseline debt path ### 13. While the projected path of public debt is sustainable, the baseline debt path depends on the return of public-sector investment to historical levels. The main driver of the increase in public debt in the near term is the rise in public capital spending (notably, the new light-rail system and aircraft purchases by the state-owned airline), which is likely to taper off in the medium-term. A prudent and credible medium-term fiscal stance is essential to ensure that downside risks to the debt outlook are contained. ### Overview - Main near-term driver of higher public debt: rise in public capital spending (notably, the new light-rail system and aircraft purchases by the state-owned airline). - Medium-term expectation: public capital spending likely to taper off. - Policy imperative: a prudent and credible medium-term fiscal stance to contain downside risks to the debt outlook. ### Public debt baseline and key statistics (selected figures from DSA) - Nominal gross public debt: 56.5 (2016), 65.0 (2017), 63.7 (2018), 64.9 (2019), 67.5 (2020), 67.8 (2021), 66.7 (2022), 65.5 (2023), 64.4 (projection context). - Public gross financing needs (in percent of GDP): 16.4 (2016), 12.5 (2017), 12.5 (2018), 17.9 (2019), 15.7 (2020), 14.1 (2021), 9.2 (2022), 7.9 (2023), 8.4 (projection context). - Real GDP growth (in percent): 4.0 (2016), 3.8 (2017), 3.7 (2018), 4.4 (2019), 3.4 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 4.0 (projection context). - Inflation (GDP deflator, in percent): 2.5 (2016), 1.7 (2017), 1.8 (2018), 2.4 (2019), 2.8 (2020), 3.0 (2021), 2.9 (2022), 2.7 (2023), 2.4 (projection context). - Nominal GDP growth (in percent): 6.6 (2016), 5.6 (2017), 5.6 (2018), 6.9 (2019), 6.3 (2020), 7.1 (2021), 7.1 (2022), 6.8 (2023), 6.6 (projection context). - Effective interest rate (in percent): 5.8 (2016), 4.0 (2017), 3.9 (2018), 4.4 (2019), 3.9 (2020), 3.9 (2021), 3.9 (2022), 3.9 (2023), 3.9 (projection context). - Change in gross public sector debt (cumulative): 0.5 (2016), 0.1 (2017), -1.3 (2018), 1.1 (2019), 2.6 (2020), 0.3 (2021), -1.1 (2022), -1.2 (2023), -1.1 (projection cumulative), 0.7 (overall cumulative). - Primary deficit (percent of GDP): 0.3 (2016), 0.9 (2017), 1.0 (2018), 3.3 (2019), 4.0 (2020), 2.4 (2021), 0.9 (2022), 0.6 (2023), 0.5 (projection cumulative), 11.6 (cumulative). - Primary (noninterest) revenue and grants (percent of GDP): 20.1 (2016), 21.0 (2017), 21.4 (2018), 22.4 (2019), 22.0 (2020), 21.9 (2021), 21.6 (2022), 21.5 (2023), 21.4 (projection context), 130.9 (cumulative). - Primary (noninterest) expenditure (percent of GDP): 20.3 (2016), 21.9 (2017), 22.4 (2018), 25.6 (2019), 26.1 (2020), 24.3 (2021), 22.5 (2022), 22.1 (2023), 21.9 (projection context), 142.5 (cumulative). - Automatic debt dynamics contribution (cumulative): -0.2 (2016), -1.5 (2017), -1.6 (2018), -1.5 (2019), -1.5 (2020), -2.0 (2021), -2.0 (2022), -1.8 (2023), -1.6 (projection cumulative), -10.5 (overall cumulative). - Of which: real interest rate contributions: 1.7 (2016), 1.3 (2017), 1.3 (2018), 1.1 (2019), 0.6 (2020), 0.5 (2021), 0.5 (2022), 0.7 (2023), 0.8 (projection), 4.2 (cumulative). - Of which: real GDP growth contributions: -2.1 (2016), -2.3 (2017), -2.3 (2018), -2.6 (2019), -2.1 (2020), -2.5 (2021), -2.5 (2022), -2.5 (2023), -2.5 (projection), -14.7 (cumulative). ### DSA scenarios and assumption variants - Alternative scenarios shown: Baseline, Historical Scenario, Constant Primary Balance Scenario. - Baseline underlying assumptions (selected): - Real GDP growth: 4.4 (2018), 3.4 (2019), 4.0 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023). - Inflation: 2.4 (2018), 2.8 (2019), 3.0 (2020), 2.9 (2021), 2.7 (2022), 2.4 (2023). - Primary Balance (baseline): -3.3 (2018), -4.0 (2019), -2.4 (2020), -0.9 (2021), -0.6 (2022), -0.5 (2023). - Historical scenario (selected): - Real GDP growth: 4.4 (2018), 3.8 (2019), 3.8 (2020), 3.8 (2021), 3.8 (2022), 3.8 (2023). - Primary Balance (historical): -3.3 (2018), -0.5 (2019), -0.5 (2020), -0.5 (2021), -0.5 (2022), -0.5 (2023). - Constant Primary Balance scenario: primary balance held at -3.3 across 2018–2023 in scenario presentation. ### Stress tests and risk assessment (public and external) - Public DSA stress tests: - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock analyzed across 2018–2023. - Stress-test outcomes illustrated as impacts on Gross Nominal Public Debt (percent of GDP), Gross Nominal Public Debt (percent of Revenue), and Public Gross Financing Needs (percent of GDP). - External DSA key outcomes and sensitivities: - Total external debt stock declined from a peak of 103 percent of GDP at end-2014 to 78.5 percent of GDP at end-2018. - Total external debt stock (including banking sector liabilities): 11,536.8 USD Millions, 78.5 percent of GDP at end-2018. - External debt without banking sector liabilities: 2,220.8 USD Millions, 15.1 percent of GDP at end-2018. - Public external debt: 1,646.2 USD Millions, 11.2 percent of GDP at end-2018. - Of which: central government: 1,254.9 USD Millions, 8.5 percent of GDP. - Of which: multilateral: 818.0 USD Millions, 5.6 percent of GDP. - Of which: bilateral: 431.5 USD Millions, 2.9 percent of GDP. - Other lenders: 5.5 USD Millions, 0.0 percent of GDP. - Private external debt: 9,890.7 USD Millions, 67.3 percent of GDP at end-2018. - Baseline projection: external debt without banking sector liabilities projected to increase to 21.2 percent of GDP by 2020 and decline to 19.6 percent of GDP by 2024. - Stress test sensitivities: - A negative shock to the baseline non-interest current account of one-half standard deviation would increase the external debt ratio by 6 percentage points relative to the baseline by 2024. - A one-time 30 percent currency depreciation in 2019 would increase the external debt to GDP ratio by 9 percentage points relative to the baseline by 2024. - Shocks to interest rates and growth have minimal implications; a combined shock would imply a 3 percentage points increase in the external debt ratio in the medium-term. - External DSA numerical highlights (Table 2, selected): - Baseline external debt (percent of GDP): 19.5 (2014), 21.2 (2015), 19.3 (2016), 17.4 (2017), 15.6 (2018), 20.3 (2019), 21.2 (2020), 20.8 (2021), 20.2 (2022), 19.9 (2023), 19.6 (2024). - Change in external debt: -4.8 (2014), 1.6 (2015), -1.9 (2016), -1.9 (2017), -1.9 (2018), 4.8 (2019), 0.9 (2020), -0.5 (2021), -0.5 (2022), -0.3 (2023), -0.3 (2024). - Identified external debt-creating flows (4+8+9): 4.1 (2014), 6.6 (2015), 2.3 (2016), 4.7 (2017), 2.9 (2018), 4.9 (2019), 3.6 (2020), 2.6 (2021), 2.4 (2022), 2.2 (2023), 1.9 (2024). - Current account deficit, excluding interest payments (percent of GDP): 5.1 (2014), 3.3 (2015), 3.8 (2016), 5.4 (2017), 6.0 (2018), 7.2 (2019), 6.5 (2020), 5.5 (2021), 5.3 (2022), 5.1 (2023), 4.8 (2024). - External debt-to-exports ratio (percent): 41.6 (2014), 45.9 (2015), 45.3 (2016), 42.7 (2017), 38.8 (2018), 50.6 (2019), 53.6 (2020), 52.8 (2021), 51.9 (2022), 51.2 (2023), 50.4 (2024). - Gross external financing need (USD billions): 0.9 (2014), 0.6 (2015), 0.6 (2016), 1.0 (2017), 1.1 (2018), 1.3 (2019), 1.2 (2020), 1.1 (2021), 1.1 (2022), 1.2 (2023), 1.1 (2024). - Gross external financing need, including banks external debt (in percent of GDP): 30.1 (2014), 35.9 (2015), 33.9 (2016), 42.6 (2017), 44.5 (2018), 42.9 (2019), 41.2 (2020), 39.6 (2021), 38.7 (2022), 38.2 (2023), 37.5 (2024). ### Conclusions and policy implications - Public debt: projected path is sustainable conditional on public-sector investment returning to historical levels and on a prudent, credible medium-term fiscal stance. - External debt: sustainable in baseline but particularly susceptible to large exogenous shocks: - Non-interest current account shocks and real exchange rate depreciation pose the largest risks to external debt sustainability. - A combined shock has limited medium-term impact (3 percentage points increase in external debt ratio), while a 30 percent depreciation or a one-half standard deviation current account shock would have larger impacts (9 and 6 percentage points by 2024, respectively). - Policy priorities: - Ensure medium-term fiscal prudence and credibility to contain downside debt risks. - Implement reforms to bolster international competitiveness and address growing external imbalances to reduce vulnerability to real exchange rate and current account shocks. *Source: IMF staff.* ### Annex IV. External Sector Assessment ### Annex IV. External Sector Assessment ### A. External Balance Sheet — Background and Assessment - Net international investment position (NIIP): - Improved by 45 percent in absolute terms relative to 2016 (latest available official IIP data for end-2017). - NIIP increased to about 204 percent of GDP in 2017 from about 142 percent of GDP in 2016 (averaging about 147.6 over 2013–17). - Composition (end-2017): - Direct investment: about 55 percent of gross assets and 72 percent of gross liabilities. - Portfolio investment: about 30 percent of gross assets and about 8 percent of gross liabilities. - Coverage note: 2017 data have broader coverage of global business companies and are not strictly comparable to 2016 figures. - Vulnerabilities and mitigating factors: - Large gross non-FDI liabilities: 1,119 percent of GDP in 2017. - Large non-FDI short-term external assets: about 1,900 percent of GDP in 2017. - Official reserves increased by 7.8 percent of GDP to about 45 percent of GDP in 2017. - Projections: - Staff projects NIIP to average 146 percent of GDP over 2018–23. - Model-based illustrative results (External Balance Sheet model): - CA norm that would stabilize NIIP at target ~173 percent of GDP (average over 2012–16) is estimated at 0.1 percent of GDP. - Implied CA gap of -6.3 percent of GDP and REER overvaluation of about 19 percent. - Staff view: external balance sheet does not appear to be a major source of risk for Mauritius. ### B. Current Account — Background and Assessment - Recent/current levels and projections: - CA deficit widened from 4 percent of GDP in 2016 to 5.6 percent of GDP in 2017. - CA deficit expected to widen to 6.2 percent of GDP in 2018 due to higher oil prices. - CA expected around 7.4 percent of GDP in 2019 due to higher capital imports for large-scale public infrastructure projects. - CA projected to decline to about 5 percent of GDP in the medium term. - EBA-lite CA model results (end-2017): - CA norm estimated at 0.2 percent of GDP. - CA gap of -5.8 percent of GDP in 2017. - REER misalignment (overvaluation) of about 17 percent. - Current account (baseline) -5.6. - Current Account Norm 0.2. - Current Account Gap -5.8. - Current Account Elasticity -0.3. - Sensitivity to GBC flows (illustrative): - Current Account (excluding GBC flows) -11.1. - Current Account Gap (excluding GBC flows) -11.3. - Real Exchange Rate Gap (excluding GBC flows) 33.6. - Excluding offshore global business sector-related flows implies an even higher REER overvaluation and substantially weaker external position. - Uncertainty and ranges: - Standard deviation of the CA norm about 1 percent of GDP; CA gap and REER overvaluation in range -6.8 to -4.8 percent of GDP and 14.4 to 20.4 percent, respectively. - Preliminary data for 2018 indicate CA gap increased to -7.4 percent, implying an overvaluation of about 22 percent in 2018. - Staff conclusion: external position at end-2017 substantially weaker than medium-term fundamentals and desirable policy settings, subject to considerable uncertainty due to openness and global financial center status. ### C. Real Exchange Rate (REER) - Movements: - REER appreciated by 3.9 percent y-o-y in 2017 (driven by high inflation and a 2.5 percent y-o-y NEER appreciation). - Cumulative REER appreciation of 3.3 percent over 2014–16; NEER cumulative appreciation of 2.8 percent over 2014–16. - Preliminary 2018: REER appreciated by 1.4 percent y-o-y; NEER appreciated by 0.3 percent y-o-y. - IREER model (EBA-lite) assessment: - Estimated REER gap implies an overvaluation of about 25 percent (range 15 to 35 percent). - Preliminary 2018 data indicate a similar REER overvaluation in 2018. - Consistency: REER-model results broadly consistent with CA-model based assessment, but subject to considerable uncertainty. ### D. Capital and Financial Flows - Regime and flows: - Mauritius has a highly open financial account regime. - International capital flows remained resilient in 2017, driven largely by direct investment inflows pertaining to the offshore global business sector. - Net capital and financial account balance increased from about 8 percent of GDP in 2016 to about 11 percent of GDP at end-2017. - Assessment: - Capital and financial account likely to remain in surplus in the near and medium-term, resulting in an overall balance of payments surplus. ### E. Reserve Adequacy - Exchange rate regime and reserve accumulation: - Exchange rate regime classified as floating in 2017. - Foreign exchange intervention in 2017–18 aimed at accumulating international reserves. - End-year international reserves: about USD 5 billion in 2016; USD 6 billion in 2017; USD 6.3 billion in 2018. - Adjusted reserve adequacy metric: - Metric augmented with a portion of deposits of offshore global business companies (GBCs) held in small and medium-sized banks (net of liquid assets) to capture financial risks from offshore sector. - Per adjusted metric: - Staff estimates reserves at end-2017 to be about 121 percent of the adjusted metric (higher than 115 percent of the adjusted metric in end-2016). - Reserves at about 133 percent of the adjusted metric in end-2018 (assessment for 2018 is preliminary). - These levels are within the advisable range. - Caveats and recommendations: - Large size and complex structure of global business sector and strong linkage with real sector warrant stronger buffers against external shocks. - Further reserve accumulation may be desirable given substantial currency overvaluation. - Consider insurance mechanisms such as swap arrangements or credit lines with other central banks, alongside addressing structural bottlenecks to boost competitiveness. - Alternative inclusion note: - If external other liabilities of the offshore sector are included in the metric, reserves level drops to 29 percent of the metric, well below the advisable range of over 100 percent. ### F. Overall Assessment and Policy Implications - Aggregate staff assessment (2017): - External position substantially weaker than consistent with fundamentals and desirable policies. - CA gap estimated to be -5 to -7 percent of GDP. - REER overvaluation estimated at 14-20 percent. - Estimates subject to considerable uncertainty due to Mauritius’ openness and financial center position. - Preliminary data indicate 2018 assessment likely to be similar. - Policy implications and recommendations: - Primary responses: - Fiscal adjustment (fiscal consolidation) to help contain the deteriorating current account position. - Reforms to boost productivity and diversify the economy to improve competitiveness. - Reserve and financial preparedness: - Although reserves are within advisable range per adjusted metric, reserve buffers could be strengthened further given the large and complex GBC sector. - Bank of Mauritius could consider insurance mechanisms such as swap arrangements or credit lines with other central banks to deal with large adverse financial shocks. - Structural reforms: - Address structural bottlenecks to boost competitiveness, enhance productivity, and improve labor market efficiency and diversification (as discussed in the main text). *Source: Annex IV. External Sector Assessment (Mauritius), IMF staff report content provided.* ### Annex VII. Status of the 2017 Article IV Consultation Main ### Annex VII. Status of the 2017 Article IV Consultation Main ### Fiscal Policy and Debt Sustainability - Key recommendation: Adopt further revenue mobilization efforts to build fiscal space, support the fiscal anchor and preserve debt sustainability; improve tax efficiency; continue improvements in public investment management; identify pressure points in debt management. - Status findings: - Fiscal revenue in FY2017/18 fell short of the budget target by about ½ percent of GDP. - The consolidated balance target was met as the public investment budget was under executed. - The FY2018/19 budget remains expansionary. - Debt is projected to be sustainable, but the statutory debt target of 60 percent of GDP by FY2020/21 is unlikely to be met. - On debt management, the maturity structure of new issuances is more favorable. - Programs are underway to improve tax efficiency. - Some public financial management concerns remain around investments by SOEs. ### Monetary Policy - Key recommendation: Tighten monetary policy to address inflationary pressures; announce a medium-term inflation objective to better anchor inflation expectations; absorb excess liquidity through open market operations. - Status findings: - Amid a decline in inflation, an accommodative monetary policy stance has been maintained. - Banks’ excess liquidity has been contained owing to improved liquidity management. - The average overnight bank rate has moved into the policy rate corridor. - A medium-term inflation objective has not been announced. ### Exchange Rate Policy - Key recommendation: Foreign exchange intervention should be geared towards maintaining adequate reserve coverage, opportunistically building reserves and curbing excess volatility. - Status finding: - Reserves increased to about USD 6.3 billion by end-2018, falling in the middle of the range of the adjusted reserve adequacy metric. ### Financial Sector - Key recommendations: Shore up financial stability by lowering the high NPL stock through a more stringent approach to writing-off legacy exposures; safeguard longer-term forex funding needs from banks’ expansion abroad; consider establishing a formal macroprudential body. - Status findings: - The Bank of Mauritius (BOM) has asked banks to develop their own write-off policies; progress is ongoing. - In 2018, the BOM introduced a forex liquidity requirement for short-term positions prescribing a minimum liquidity buffer per currency; it does not cover longer-term forex funding above one year in residual maturity. - No formal plans are in train to establish a macroprudential body. ### International tax avoidance and AML/CFT - Key recommendations: Address concerns raised by the OECD and the EU about the tax regime; ensure compliance with FATF standards, particularly regarding AML/CFT supervision and entity transparency. - Status findings: - Reforms have been introduced and the OECD has concluded that Mauritius’ tax regime does not have harmful features. - Decision by the EU is pending. - Following the ESAAMLG mutual evaluation, reforms to address identified shortcomings in the AML/CFT framework are being pursued. ### Structural Reforms - Key recommendations: Pursue reforms to improve cost competitiveness; simplify the wage-setting mechanism; strengthen efforts to boost youth and female labor force participation. - Status findings: - Fiscal initiatives have been undertaken to boost female labor force participation and address youth unemployment. - Broader labor market reforms—including to the overall wage-setting mechanism—are pending. ### Appendix I — Financial Conditions Index (FCI) for Mauritius - Purpose and construction: - FCIs gauge the operational state of the financial sector and predict real economic activity; country-specific FCIs for Mauritius reflect external and domestic financial conditions. - Applying standard econometric methodologies, FCIs were developed for Mauritius (see Selected Issues Paper for details). - Key findings: - Constructed FCIs are leading indicators of economic activity and trends in private sector credit. - External factors (such as stock market indicators in major partner countries) are relatively more important than domestic factors in explaining financial conditions in Mauritius. - FCIs track GDP growth well; estimating real GDP growth with FCIs in a diffusion index model yields significantly lower root mean squared errors than excluding FCIs. - The FCI leads turning points in private sector credit growth by about four quarters, particularly during 2007–10; the Basel-recommended credit gap variable almost moves in tandem with credit growth. - The FCI appears to be a better predictor of a rise in the NPL ratio than the credit gap. - Policy implication: - The FCI could be included in the authorities’ forecasting toolkit and considered for macroprudential policy use (e.g., as an indicator to trigger the countercyclical capital buffer), possibly together with other external and domestic financial indicators including the credit gap and developments in credit standards and asset prices. ### Appendix II — Mauritius as a Financial Center: Current Standing and Prospects - Economy and IFC role: - The International Financial Center (IFC) comprises commercial banks and offshore global business companies (GBCs). - Assets under management exceed 50 times the country’s GDP. - The IFC’s contribution to domestic output reached about 12 percent during 2016–18. - The IFC and adjunct service providers account for about 3 percent of employment and generate tax revenue of about 6 percent of GDP. - Core activities and composition: - The IFC’s core specialization is cross-border investment and related fund administration, contributing about 60 percent to the IFC’s economic value added, 90 percent to its tax payments, and 70 percent to its employment. - Cross-border corporate banking accounts for about 30 percent of the IFC’s economic value added. - Competitive strengths and gaps: - The IFC benefits from a favorable tax regime, supportive regulatory framework, well-educated labor force, stable legal environment, business-friendly tax policy, and a network of bilateral double taxation and investment protection treaties. - Significant upgrading of human and physical capital, and ICT infrastructure is needed to move into higher value-added financial services (asset and treasury management, trade finance). - Mauritius ranks mid-range among comparator financial centers in financial sector depth (private sector credit relative to GDP); capital account openness is among the highest in the world, but absolute investment magnitudes are relatively small. - Mauritius lags advanced centers in tertiary education enrollment and ICT infrastructure. - Diversification and regional focus: - With the tax advantage vis-à-vis India being phased out at end-March 2019, the IFC increased focus on sub-Saharan Africa (SSA) under the authorities’ Africa Strategy. - The number of GBCs with an Africa focus is comparable to those investing in India, though total investment amounts are considerably lower. - During 2012–17, FDI from Mauritius into SSA doubled to USD25 billion, with nearly 25 percent of FDI into Kenya and 12 percent into Senegal and Côte d’Ivoire originating from Mauritius or passing through its IFC. - Challenges and strategic needs: - Risks include diversion of certain investment flows to other financial centers (e.g., Singapore captured some equity investment into India in 2018) and that SSA investment volumes may not offset the slowdown with India in the short run. - Addressing skill gaps and infrastructure needs swiftly is necessary to expand financial services and client base. - Fintech objectives and gaps: - Mauritius aspires to become a regional fintech hub; constraints include low venture capital investment, limited ties with other fintech hubs, and difficulties recruiting tech talent. - Mauritius lags significantly in innovation capacity (quality of research institutions, R&D spending, university-industry collaboration), ICT infrastructure (secure internet servers, mobile broadband subscriptions), and energy generation capacity required for certain crypto asset activities. - Mauritius introduced a regulatory sandbox licensing (RSL) regime in 2016 and has issued licenses for innovative products (peer-to-peer lending, robo-advisor). The framework is less stringent in risk identification and consumer protection compared with some peers. - Mobile money penetration is low: Mauritius has 90 percent adult bank account holders versus 43 percent for SSA, but only 6 percent mobile money accounts versus 21 percent for SSA. - A standardized open platform under the National Payment Switch aims to provide a level playing field for banks and non-bank operators. - Digital assets: digital assets were recognized as an asset class for investment in November 2018; a regulatory framework for licensing custodians of digital assets entered into force in March 2019. - AML/CFT and regulatory recommendations for fintech: - Amend FIAMLA and AML/CFT regulations to implement the new FATF standard on virtual asset service providers. - Thoroughly vet and monitor newly-licensed custodians of digital assets for AML/CFT compliance. - Monitor and assess concentration risk from dominant fintech providers by gathering appropriate data and metrics. - International cooperation: - Greater international cooperation in fintech is recommended; examples include cooperation agreements among fintech frontrunners (Australia, Singapore, U.K.) to share information, regulatory expertise, and sandbox access. *Annex VII. Status of the 2017 Article IV Consultation Main* ### Appendix III. Private Savings in Mauritius ### Appendix III. Private Savings in Mauritius ### Overview - The private saving rate in Mauritius has declined over the years, contributing to a lower national saving rate and a sizable current account deficit. - Using data over the last four decades, the analysis shows that the deposit rate and economic growth are the key drivers of private savings in Mauritius. - Given the economic and demographic characteristics, private saving rate is about 3 percent of GDP lower than potential in Mauritius. ### Current Account and National Saving - The current account balance of Mauritius has been in a persistent deficit since the mid-2000s, peaking at about 10 percent of GDP in 2010. - From a savings and investment perspective, Mauritius’ current account deficit can be largely attributed to a decline in national savings, as investment has remained tepid. - National savings fell sharply during the global financial crisis in 2008–09, recovered somewhat in 2011, and have averaged about 17 percent of GDP since then. - This ratio is one of the lowest among middle-income sub-Saharan African (SSA) countries. ### Private Saving Trends - Private saving is the main contributor to national saving and has averaged about 18 percent of GDP in recent years. - Private savings fell from a peak of 32 percent of GDP in the early 2000s to about 18 percent of GDP over the last decade. - Mauritius’ private saving rate is lower than the average private saving rate for other emerging market and developing countries (EMDEs) and lower than the average for Mauritius’ middle-income peers in the region. ### Determinants of Private Saving - Empirical analysis shows that: - The deposit rate is an important determinant of private saving in Mauritius. - Income (economic) growth is an important determinant of private saving in Mauritius. - There is no strong evidence that public saving or demographic trends are associated with private saving in the country (see Selected Issues Paper). ### Benchmarking and Policy Recommendations - Benchmarking based on panel data analysis for a large sample of EMDEs suggests: - Given its economic and demographic characteristics, Mauritius’ private saving rate is about 3 percent of GDP lower than potential. - Policy implications and recommendations highlighted: - Economic growth would boost private savings. - A rapidly rising old-age dependency ratio requires a higher level of savings to alleviate fiscal pressures and avoid abrupt policy adjustments in the future. - Efforts should focus on generating greater public awareness and encouraging private savings—e.g., through old-age related saving schemes. - Better targeting of social benefits and broader pension reforms could also help to boost savings. ### Key Statistics and Exact Figures (as presented) - Current account deficit peak: about 10 percent of GDP in 2010. - National savings averaged about 17 percent of GDP since 2011. - Private saving averaged about 18 percent of GDP in recent years. - Private saving peak: 32 percent of GDP in the early 2000s. - Decline in private saving to about 18 percent of GDP over the last decade. - Private saving is about 3 percent of GDP lower than potential. - Analysis period/data span: last four decades (no specific start year provided in text). *Source: Appendix III. Private Savings in Mauritius; IMF World Economic Outlook, and IMF staff calculations.* ### 2018. Fiscal policy in 2018 has been prudent and the deficit continued to decline despite a ### 1musea2019001 - 2018. Fiscal policy in 2018 has been prudent and the deficit continued to decline despite ### Economic outlook and macroeconomic context - Public debt decreased to 63.7 percent of GDP, still above the statutory 60-percent target, but is sustainable as underscored in the Debt Sustainability Analysis (DSA). - Credit to the private sector continued to grow in 2018 and the banking sector remains sound. - Real GDP growth is projected to remain strong at around 4.0 percent in the medium-term underpinned by a favorable performance in service sector. - Inflation is expected to decline further to 2.1 percent in 2019 and would remain relatively low in the medium term. - Near-term support to economic activity: materialization of key infrastructure projects. - Risks to the outlook identified: (i) disruptions to the off-shore global business due to the expiration of tax treaty with India; (ii) tightening of global financial conditions; and (iii) rising protectionism. - Possible upside to growth from actions to encourage greater female labor force participation, youth skill development and support for small-scale entrepreneurs. ### Fiscal sustainability and public financial management (Policy priorities for 2019 and the medium-term) - Authorities remain committed to fiscal and debt sustainability consistent with the country’s fiscal rule. - Acknowledged that under the current expansionary fiscal stance in FY2018/19 driven by higher public investment, the statutory public debt target of 60 percent of GDP will not be met by FY2020/21 as initially envisaged. - Authorities are considering extending the deadline by two years to allow a smoother fiscal adjustment in the near-term while carrying out infrastructure projects. - Specific note on aircrafts: no decision has so far been taken; Air Mauritius’ favored option is leasing as it would not impact public sector debt. - Fiscal consolidation approach will focus on additional revenue-enhancing and expenditures-controlling measures, to be considered in view of the political cycle. - Budget Circular (March 2019) fundamentals for the 2019-2020 Budget: - (i) use the limited resources judiciously by right prioritizing of investment projects; - (ii) eliminate wastage and unproductive expenditure in the public sector; - (iii) ensure buoyancy in revenue collection; and - (iv) adhere to the golden rule in public finance, that is, borrowing only to finance quality investment. - Protection of the safety net for the most vulnerable will be maintained. - Fiscal transparency and public investment management reforms underway: - Implementation of International Public Sector Accounting Standards (IPSAS) under a newly created Ministry of Finance committee. - Creation of several project monitoring and coordinating commissions to support public investment efficiency. - Steps underway to implement remaining recommendations of the 2017 Public Investment Management Assessment (PIMA), including for public procurement process. ### Monetary policy and Bank of Mauritius (BOM) operations - Current accommodative monetary policy stance considered appropriate given subdued inflationary pressures. - BOM efforts to improve operational efficiency: open market operations to address excess liquidity narrowed the gap between the Key Repo Rate (KRR) and the money market rates. - BOM will continue to monitor developments in money market rates before formalizing the choice of the operational target. - Concerns noted: the high and increased cost associated with conducting monetary operations has a serious bearing on the Bank’s already thin balance sheet and at times limits further mop-up of excess liquidity. - BOM requests IMF support in drafting a cost-sharing agreement with MOFED to lessen the financial burden on BOM. - BOM has requested IMF technical assistance on asset and liability management, including reserve management, to help support the high costs of absorbing liquidity. - Authorities will consider establishing a formal medium-term inflation target when BOM finalizes its revised monetary policy framework. ### External competitiveness and structural measures - Authorities share staff’s concerns on external competitiveness and acknowledge significant room for improvement. - Measures being taken to boost trade and investment include negotiating new bilateral and multilateral free trade agreements and developing economic diplomacy with African States under the Government’s Africa Strategy. - Efforts to address skill mismatch and promote innovation: - Focus on education and vocational systems and introduction of new tech-related courses. - Advancement of the smart-city scheme. - Initiatives to facilitate access to finance, particularly for Small and Medium Enterprises (SMEs). - Reflection on bolstering female workforce participation. - Authorities expect combined measures, with better coordination and monitoring, to generate growth dividends in coming years. ### Financial stability, AML/CFT, and fintech regulation - Strengthening the AML/CFT framework is a high policy priority. - At the recent Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) Task Force Plenary meeting, the Mauritius Follow-up report and application for technical compliance re-ratings were considered by the Review Group. - Significant progress has been made: Mauritius has been upgraded by ESSAMLG on 12 recommendations. - Actions taken: amendments to several AML laws and regulations; establishment of a dedicated unit for AML/CFT supervision; active cooperation among FSC, FIU, MRA, ICAC and MPF. - Capacity building: IMF AFRITAC facilitating a week’s training at the FSC on risk-based approach to AML/CFT supervision; targeted courses by the Chartered Institute of Bankers of Scotland being rolled out to raise professional standards. - Authorities committed to implement recommendations of the ESAAMLG report and the National Risk Assessment to align with highest international standards. - Financial supervision: “Mauritius Deposit Insurance Scheme” (DIS) bill recently approved by the National Assembly; BOM has requested technical assistance from the Fund to implement the DIS project. - Fintech regulatory advances: - Guidance Note on the “Recognition of Digital Assets as an asset-class for investment” published in September 2018. - Regulatory framework established for licensing of Custodian Services for digital assets—making Mauritius the first jurisdiction globally to offer a regulated landscape for the custody of digital assets. - Guidance Note on “Securities Token Offering” issued in April 2019. - Licensees must comply with applicable AML/CFT framework in line with international best practices. ### Compliance with international tax initiatives - Compliance with international tax initiatives has improved and will be further strengthened. - OECD report indicated that Mauritius meets all the international requirements of the Base Erosion and Profit Shifting Project (BEPS) Action 5 and consequently has no harmful tax practices in its tax regime. - The European Union (EU) still considers further changes are needed to bring tax regimes into line with international standards. - Authorities will continue work to ensure adherence to international best practices despite expressed concerns over lack of coordination between different anti-tax avoidance initiatives. ### Data provision and statistics - Efforts to strengthen statistics continue. - A revision policy on external sector statistics (ESS) was posted on the Bank’s website early April 2019 when revised 2017 ESS data were disseminated. ### Conclusion (authorities’ stance) - Authorities recognize the challenges and the need to ensure fiscal consolidation to put public debt on a downward trajectory, regain external competitiveness and maintain financial integrity and stability. - Authorities are committed to continuing implementation of reform policies to sustain macroeconomic stability and boost long-term inclusive growth. - Authorities expressed appreciation to the Fund for policy advice and technical support and look forward to continued cooperation. *1musea2019001 - 2018. Fiscal policy in 2018 has been prudent and the deficit continued to decline despite* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1musea2019001.pdf_