## 1. Real Sector Developments ## Source details **Canonical URL:** [1. Real Sector Developments](https://www.imf.org/-/media/files/publications/cr/2021/english/1musea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1musea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1musea2021001.pdf.json) --- ### Pre-pandemic context - Economy expanded steadily at around 3 percent a year. - Public debt was increasing and above the authorities’ 60 percent of GDP target. - Current account deficit expected to stabilize at about 5 percent of GDP. - International reserves had grown and were assessed to be adequate. - Credit to the private sector was healthy and the banking sector well-capitalized. - Fiscal stance was expansionary. ### The economic impact of the pandemic and policy responses - Health response - Strict nationwide lockdown from mid-March to end-May 2020; border closed to all travelers until early October. - Extensive testing, robust contact tracing, strict isolation, mask requirements; comprehensive testing of arrivals and strict quarantine as borders eased. - Vaccinations began in February 2021; authorities target vaccinating 60 percent of the population by July 2021. - Second domestic-transmission outbreak led to a shorter, more flexible lockdown in March 2021. - Macroeconomic shock and sectoral impact - Tourism (directly and indirectly) accounts for over a fifth of the economy and came to a sudden stop in March 2020. - Other exports, including textiles, declined amid restricted global demand. - Real GDP estimated to have contracted by 15 percent in 2020 (alternative entries state 14.9 percent or 15 percent in different excerpts). - Current account deficit: 12.6 percent of GDP in 2020 (from 5.4 percent in 2019). - Rupee depreciated in 2020 in real effective terms by 8.1 percent compared to its 2019 level. - Inflation at end-2020: 2.7 percent. - Unemployment increased to 10.4 percent at end-2020, up from 6.7 percent in 2019 (alternative table entries show unemployment series: 2019: 7.1; 2020: 6.9; projections thereafter). - Tumbling oil prices and modest export rebounds partly offset impacts. - Financial sector and GBCs - Banking sector and Global Business Companies (GBCs) remained stable. - Deposits in commercial banks remained steady; credit to the private sector grew at a significantly reduced pace. - GBCs’ US dollar-denominated deposits remained stable; GBCs’ net financial flows in the balance of payments were strongly positive. ### Fiscal support measures (estimates and composition) - Main announced support measures estimated at Rs121 billion (28 percent of 2020 GDP). - On-budget measures - Bank of Mauritius exceptional contribution to government budget (FY 2020/21): Rs60 billion (14 percent of 2020 GDP). - Wage Assistance and Self-Employed Assistance Schemes: Rs18 billion (4.2 percent of 2020 GDP). - Support to National Airline: Rs9 billion (2.1 percent of 2020 GDP). - Various initiatives to limit unemployment: Rs9 billion (2.1 percent of 2020 GDP). - Off-budget measures (including quasi-fiscal): Rs61 billion (14.2 percent of 2020 GDP). - Mauritius Investment Corporation: Rs41.8 billion (9.7 percent of 2020 GDP). - Development Bank Mauritius Concessional Credit Line: Rs10 billion (2.3 percent of 2020 GDP). - Bank of Mauritius Savings Bonds: Rs5 billion (1.2 percent of 2020 GDP). - State Investment Corporation Equity Participation Scheme: Rs4 billion (0.9 percent of 2020 GDP). - Development Bank Mauritius Revolving Credit Fund for SMEs: Rs0.2 billion (0.05 percent of 2020 GDP). - Other support (selected) - Bank of Mauritius Special Relief Program: Rs5 billion (1.2 percent of 2020 GDP). - Bank of Mauritius Special Foreign Currency (USD) Credit Line: US$ 500 mill / US$ 300 mill / US$ 71 mill referenced in different entries. - Bank of Mauritius Swap Arrangement to Support Import Oriented Businesses: US$ 200 mill / US$ 100 mill referenced. - COVID-19 Solidarity Fund: Rs0.5 billion (0.1 percent of 2020 GDP). ### Outlook and risks - 2021 growth forecast: about 5 percent (driven by strong base effect and non-tourism sector recovery). - Tourism arrivals assumed: 2021 about 15 percent of 2019 levels; 2022 about 60 percent of 2019 levels. - Inflation projection: year-on-year inflation projected to increase to 3½ percent by end-2021. - Medium-term growth: projected to converge to pre-pandemic rates of 3-3½ percent. - Key downside risks - Uncertainty in tourism flows depending on propensity to travel and international conditions. - Prolonged pandemic (e.g., new variants) could require costly containment and prompt behavioral changes hurting tourism. - Weakened fiscal position could lead to financial market anxieties. - AML/CFT listings, the Moody’s downgrade, or a sharp rise in global risk premia could exacerbate vulnerabilities. ### Staff appraisal — summary findings - Mauritius successfully contained COVID-19 with very small numbers of infections and fatalities due to strict health measures. - GDP estimated to have fallen by 15 percent in 2020. - Both fiscal and current account deficits have substantially widened. - Unemployment remains broadly contained (though higher), inflation low, and the banking system appears sound. - Growth expected to recover to 5 percent in 2021 and pick up in 2022, conditional on tourism resumption. --- ### Pension fiscal pressures and projections - Basic Retirement Pension (BRP) increased by 45 percent in late 2019, raising pension expenditure by about 2 percent of GDP. - Under current policies, a further 50 percent increase is scheduled in FY2023/24 for all Mauritians 65 and older. - Projected pension spending: - FY2018/19: 4½ percent of GDP. - By FY2023/24: more than 8 percent of GDP (also cited as 8½ percent in Annex). - Projected pension spending greatly exceeds pension revenue; medium-term consolidation must address the disparity. - CSG (Contribution Sociale Generalisee) introduced to collect additional payroll taxes (~1 percent of GDP) to the general account; CSG benefit Rs4,500 per month beginning FY2023/24. --- ### B. Monetary Policy ### Balance sheet actions and liquidity effects - BOM transferred Rs60 billion (14 percent of GDP) to the government and purchased Rs15 billion (3.5 percent of GDP) of government bonds in 2020. - BOM established the Mauritius Investment Corporation (MIC) and provided financial support—Rs34 billion (7.9 percent of GDP)—to systemically important firms. - Reserve money rose sharply: 58 percent at end-2020 compared to end-2019. - If unattended, these measures threaten excess liquidity and limit BOM’s ability to steer interest rates and inflation. ### Monetary stance and interest rates - BOM key policy rate cut from 3.35 percent in February 2020 to 1.85 percent in April 2020 and maintained since then. - Overnight money market interest rate declined from 2 percent in early 2020 to almost zero due to excess liquidity. - Inflation expectations (BOM survey, February 2021): more than 80 percent of respondents expected inflation 6- and 12-month ahead to be between 2.5 and 3.5 percent; average actual inflation over the last 10 years is 2.6 percent. ### Exchange rate interventions and reserves - REER depreciation: about 8 percent in 2020 compared to 2019. - Exchange rate remained around Rs40 to the dollar for the rest of 2020 after first-quarter depreciation. - BOM’s foreign exchange interventions totaled more than US$1 billion in 2020; FX disbursements and valuation changes kept reserves above US$7 billion. - Excess liquidity and a rigid intervention strategy pose risks to exchange rate flexibility and policy effectiveness. ### Mission recommendations for monetary framework - Support BOM’s review of the monetary policy framework and phase in mechanisms to bolster central bank credibility. - Specific recommendations: - Continue BOM recapitalization. - Remove MIC exposures from BOM’s balance sheet. - Implement a new FX interventions strategy. - Move towards an explicit inflation targeting strategy. - Short-term focus: regain control over the interest rate, increase exchange rate flexibility, and design a mechanism to preserve BOM’s capital. - Legal/institutional measures: - Return BOM law to pre-June 2019 status limiting transfers to government beyond regular profit transfers. - Legally prohibit BOM transfers, direct BOM financing of the non-banking sector, and other quasi-fiscal activities. - Government to satisfy financing needs by issuing domestic debt given ample liquidity. ### BOM balance sheet and recapitalization - BOM capital increased from Rs2 billion to Rs10 billion in July 2020. - Mission recommended further recapitalization within a reasonable timeframe. - Recapitalization options: - Up-front government recapitalization (e.g., transfer of marketable public debt instruments) — restores BOM capital but increases public debt. - Phase-in recapitalization over a few years starting when the economy recovers. - Staff recommended IMF TA to estimate required recapitalization amounts and parameters. - Mission recommended government cover ongoing sterilization costs to prevent further weakening (noting potential tensions with monetary independence). ### MIC ownership and quasi-fiscal operations - Staff recommended BOM relinquish ownership of the MIC. - Options: - Fold MIC into the Development Bank of Mauritius. - MIC taken over by the government with budgetary financing. - Financing MIC takeover: government could raise market liquidity to pay MIC obligations, remove credit risk from BOM balance sheet, and help mop up excess liquidity. Prefer credit intermediation via banks with targeted government credit guarantees. ### Exchange rate policy guidance - Move towards greater exchange rate flexibility. - Adopt FX intervention strategy focused on smoothing excessive volatility rather than fixing quantitative exchange rate targets. - Synchronize greater exchange rate flexibility with an interest-rate-based monetary policy and communicate the transition. ### Policy implementation and liquidity management - Reform implementation framework and foster interest-rate-based monetary policy. - Choose a liquidity management framework (corridor or floor system) and mop up excess liquidity to make the key policy rate effective. - Use fiscal, macroprudential, and other policies to manage large foreign capital inflows and reduce BOM liquidity management costs. - Continue developing forecasting and policy analysis systems; present macro forecasts and interest rate projections to MPC and improve communication. ### Authorities’ views on monetary actions - Authorities concurred that monetary stance is accommodative and should remain so until recovery strengthens. - Noted challenges of excess liquidity and are stepping up open market operations. - BOM highlighted the 91-day bill yield as current operating target and is reviewing its monetary policy framework. - Authorities defended Rs60 billion transfer and creation of the MIC as exceptional to stabilize the economy; MIC functions independently with an independent Board and Investment Committee. - As pandemic recedes, FX interventions strategy would lean against undue volatility and the new monetary policy framework would strengthen the nexus between exchange rate and interest rate policy. --- ### C. Financial Sector Policies and AML/CFT Listing ### Banking sector resilience and risks - Banks and non-bank deposit-taking institutions remained well capitalized by end-2020Q3. - Non-performing loans (NPLs): - Increased to 6.1 percent at end-2020Q3 from 4.9 percent at end-2019. - For banks alone, NPLs stood at 5.4 percent at end-2020Q4 compared to 4.3 percent a year ago. - Return on assets (ROA) in 2020Q3: 1.2 percent (down from 1.9 percent in 2019Q4). - Ratio NPLs less provisioning over capital for banks and non-banks deteriorated from 10.4 percent in 2019Q4 to 12.4 percent in 2020Q3. - Non-performing loans net of provisions to capital for banks improved to 9.7 percent by end-2020Q4. - If full provisioning of NPLs at 2020Q3 were implemented immediately, aggregate capital ratio would remain above adequacy level. ### Policy recommendations for the financial sector - Continue monitoring sector developments and maintain loan classification standards. - Ensure policies to assist distressed borrowers are transparent, temporary, and targeted. - Prepare legal and operational frameworks for debt restructuring and possible bankruptcies to ensure speedy resolution. - Engage banks to unwind COVID-19 support in a targeted and phased manner, balancing borrower support with bank solvency. ### AML/CFT listing and GBC sector implications - Mauritius placed on FATF increased monitoring list in February 2020; European Union followed in June 2020. - Effect has been mild so far: GBC activity remained stable; 2020 balance of payments show net GBC financial inflows; GBC FX deposits in banks (~100 percent of GDP) held steady. - Authorities committed to timeline to address AML/CFT deficiencies. - Remaining key tasks to demonstrate effectiveness: - Implement a risk-based supervision plan for GBCs. - Ensure timely access to accurate beneficial ownership information. - Ensure suspicious transactions are identified and reported. ### Authorities’ views on financial stability and reserves - BOM remains in close contact with banks to monitor loan portfolios and preempt systemic stress. - Phasing out support to banks should be aligned with economic recovery; support could be prolonged in a targeted manner. - Ending the debt amortization moratorium could increase NPLs, but banks are well capitalized to weather shocks. - Authorities view foreign reserves as ample, covering more than 13 months of imports (alternative metrics cited months-of-imports series: 2019: 9.5; 2020: 10.3; 2021: 16.9, etc.). - Authorities expect current account gap reduction once international travel resumes and tourism strategy consolidated. --- ### External Competitiveness, Structural Policies, and Reserve/External Sector Highlights ### External position and key metrics - Overall current account deficit widened to 12.6 percent of GDP in 2020 and is expected to widen to 15.6 percent in 2021 (alternative table entries show current account percent of GDP series across years). - REER depreciated by 8.1 percent year-on-year in 2020. - Current account gap: -13.3 percent. - Domestic currency appears overvalued by about 30–40 percent (Annex assessments: CA gap implies about 43 percent overvaluation; IREER assessment: overvalued by 31 percent). - Positive net international capital and financial flows declined by about 5.5 percentage points in 2020 compared to a year ago. - Net investment position (NIIP) at end-2019: 187 percent of GDP (down from 377 percent in 2018). - International reserves covered 103 percent of the Fund’s ARA metrics at end-2020; adequacy range 100–150 percent. - Total public and private external debt increased from 91 percent in 2019 to 116 percent of GDP in 2020. ### Structural policy recommendations and priorities - Near-term: value upgrading in traditional sectors; leverage African Continental FTA and trade agreements with China and India. - Tourism strategy: move to higher-value-added model (e.g., health-oriented, low-density eco-tourism targeting high-income foreigners). - Structural transformation: build innovation capacity, skill development, ICT infrastructure, R&D, promote competition in upstream sectors. - Facilitate new business formation via public reskilling and retraining programs, especially for women and youth. - Improve coordination between public and private sectors to overcome investment externalities. - Climate adaptation: implement government plans (e.g., new endemic forests, building codes, infrastructure to protect against cyclones and floods). ### Reserve adequacy and capital account background - Capital and financial account net flows declined from 11.8 percent in 2019 to 6.5 percent in 2020. - GBC sector recorded net inflows at 11.3 percent of GDP in 2020 (10.9 percent in 2019). - Adjusted reserve adequacy metrics (incorporating GBC deposit risks): - Reserves at end-2019 ≈ 109 percent of adjusted metric. - Reserves at end-2020 ≈ 103 percent of adjusted metric. - Alternative ARA with “High Risk” GBC deposits (13 percent share in June 2020 ≈ US$1.4 billion) yields reserve coverage: 117 percent (2019) and 113 percent (2020). - Policy implication: maintain stronger buffers against external shocks; opportunistic reserve accumulation when conditions permit; consider swap arrangements or credit lines. --- ### Debt Sustainability, Risk Assessment, and Policy Implications ### Public debt dynamics and projections - Public sector debt trajectory (selected fiscal-year percent of GDP): - Public sector debt: 2019/20: 64.3; 2020/21: 66.2; 2021/22: 84.6; 2022/23: 92.0; 2023/24: 92.6; 2024/25: 91.4; 2025/26: 92.9; 2026/27: 93.5; 2027/28: 93.5. - Central government debt (fiscal year): 2019/20: 57.8; 2020/21: 59.0; 2021/22: 76.2; 2022/23: 83.9. - Public gross financing needs (percent of GDP): 2018: 16.0; 2019: 18.4; 2020: 31.3; 2021: 40.0; 2022: 25.6; 2023: 23.1; 2024: 20.5; 2025: 21.5. - Primary deficit (percent of GDP) cumulative to 2025: 36.9; primary (noninterest) revenue and grants cumulative to 2025: 142.7; primary (noninterest) expenditure cumulative to 2025: 179.7. - Baseline outcome: public sector debt stabilizes at about 93½ percent of GDP over the medium term under staff baseline. - Identified debt-creating flows (percent of GDP): 2020: 21.0; 2021: 7.2; cumulative to 2025: 7.6. ### Stress tests and scenarios (selected outcomes) - Growth shock: one standard deviation lower growth for two years starting FY21/22 would push debt to 97.88 percent in FY21/22 (baseline 92.0); by FY2025/26 debt would be 104.6 percent (baseline 92.9). - Real interest rate shock: increase in sovereign risk premia by more than 200 basis points starting FY21/22 would push debt up to 97.5 percent by FY2025/26 (baseline 93.7). - Primary balance shock: cumulative deterioration ~4 percent of GDP over FY21/22–FY22/23 would push total debt to 102.1 percent by FY2025/26. - Combined macro-fiscal shock: public debt-to-GDP ratio could reach 120.3 percent by FY2025/26. - Contingent liability shock (10 percent of banking sector assets): debt could rise to 139.8 percent of GDP in FY2021/22 and gross financing needs spike to 58.7 percent of GDP in FY2021/22. ### Risk Assessment Matrix — key risks and likelihoods - Unexpected shifts in COVID-19 pandemic — Likelihood: Medium. - Sharp rise in global risk premia — Likelihood: Medium. - Oversupply/volatility in oil market — Likelihood: Medium. - Accelerating de-globalization — Likelihood: Medium. - Higher frequency/severity of climate disasters — Likelihood: Medium/Low. - Failure to exit AML/CFT lists — Likelihood: Medium/Low. ### Policy implications and recommendations - Public sector debt should be put on a downward path in the medium term. - Fiscal reforms to raise revenue and contain spending are necessary to build capacity to weather shocks and reduce debt. - Any central bank recapitalization (BOM currently with degraded net worth) would increase public sector debt — tradeoff between financial stability and debt sustainability. - Strengthen revenue mobilization and contain spending to stabilize debt at about 93½–94 percent of GDP beginning FY2024/25 (staff recommended implicit fiscal anchor). - Monitor GBC sector developments, banking sector exposures, and contingent liabilities closely. --- ### Data, Statistics, and Capacity Development Priorities - Data provision broadly adequate for surveillance; room for improvement. - Statistical priorities: - Improve national accounts (reduce statistical discrepancies; update supply and use tables). - Validate and improve timeliness of GBC annual survey data. - Expand fiscal accounts coverage to encompass general government. - Update PPI weights and expand PPI coverage to services. - Review RPPI methods; update import/export price index weights. - Capacity development priorities: - Strengthen AML/CFT framework. - Improve monetary policy framework. - Improve quality of national accounts data. - Strengthen public financial management. - Continue technical assistance and AFRITAC South support. --- *Source: IMF staff report excerpts compiled from content unit 1musea2021001.* ### 1. Real Sector Developments ____________________________________________________________________________ 19 ### 1. Real Sector Developments ### Pre-pandemic context - Economic performance was "solid" with the economy expanding steadily at around 3 percent a year. - Public debt was increasing and above the authorities’ 60 percent of GDP target. - The current account deficit was expected to widen in the near term before stabilizing at about 5 percent of GDP. - International reserves had grown and were assessed to be adequate. - Credit to the private sector was healthy and the banking sector well-capitalized. - Fiscal stance was expansionary. ### The economic impact of the pandemic and policy responses - Health response - Strict nationwide lockdown from mid-March to end-May 2020; border closed to all travelers until early October. - Extensive testing, robust contact tracing, strict isolation, mask requirements; comprehensive testing of arrivals and strict quarantine as borders eased. - Vaccinations began in February 2021; authorities target vaccinating 60 percent of the population by July 2021. - Second domestic-transmission outbreak led to a shorter, more flexible lockdown in March 2021. - Macroeconomic shock and sectoral impact - Tourism accounts, directly and indirectly, for over a fifth of the economy and came to a sudden stop in March 2020. - Other exports, including textiles, declined amid restricted global demand. - Real GDP is estimated to have contracted by 15 percent in 2020, compared to a pre-pandemic staff projection of 3½ percent growth. - Current account deficit: 12.6 percent of GDP in 2020 (from 5.4 percent in 2019). - Rupee depreciated in 2020 in real effective terms by 8.1 percent compared to its 2019 level. - Inflation remained low at 2.7 percent at end-2020. - Unemployment increased to 10.4 percent at end-2020, up from 6.7 percent in 2019. - Tumbling oil prices and modest rebound in textile and other exports late in the year partly offset impacts. - Financial sector and GBCs - Banking sector and Global Business Companies (GBCs) remained stable. - Deposits in commercial banks remained steady; credit to the private sector continued to grow but at a significantly reduced pace. - GBCs’ US dollar-denominated deposits remained stable; GBCs’ net financial flows in the balance of payments were strongly positive. ### Fiscal support measures (estimates and composition) - Main announced support measures estimated at Rs121 billion (28 percent of 2020 GDP). - On-budget measures - Bank of Mauritius exceptional contribution to government budget (FY 2020/21): Rs60 billion (14 percent of 2020 GDP). - Of which (FY 2020/21): - Wage Assistance and Self-Employed Assistance Schemes: Rs18 billion (4.2 percent of 2020 GDP) [FY2020/21]; prior amounts shown: 10.8 and 10.1 (FY2019/20 and FY2021/22 columns in source table). - Support to National Airline: Rs9 billion (2.1 percent of 2020 GDP). - Various initiatives to limit unemployment: Rs9 billion (2.1 percent of 2020 GDP). - Off-budget measures (including quasi-fiscal): Rs61 billion (14.2 percent of 2020 GDP). - Mauritius Investment Corporation: Rs41.8 billion (9.7 percent of 2020 GDP). - Development Bank Mauritius Concessional Credit Line: Rs10 billion (2.3 percent of 2020 GDP). - Bank of Mauritius Savings Bonds: Rs5 billion (1.2 percent of 2020 GDP). - State Investment Corporation Equity Participation Scheme: Rs4 billion (0.9 percent of 2020 GDP). - Development Bank Mauritius Revolving Credit Fund for SMEs: Rs0.2 billion (0.05 percent of 2020 GDP). - Other support (selected) - Bank of Mauritius Special Relief Program: Rs5 billion (1.2 percent of 2020 GDP). - Bank of Mauritius Special Foreign Currency (USD) Credit Line: US$ 500 mill / US$ 300 mill / US$ 71 mill referenced in different entries. - Bank of Mauritius Swap Arrangement to Support Import Oriented Businesses: US$ 200 mill / US$ 100 mill referenced. - COVID-19 Solidarity Fund: Rs0.5 billion (0.1 percent of 2020 GDP). ### Outlook and risks - 2021 growth forecast: about 5 percent (driven by strong base effect and non-tourism sector recovery). - Tourism arrivals assumed: - 2021: about 15 percent of 2019 levels. - 2022: about 60 percent of 2019 levels. - Inflation projection: year-on-year inflation projected to increase modestly to 3½ percent by end-2021. - Medium-term growth: projected to converge to pre-pandemic rates of 3-3½ percent. - Key downside risks: - Uncertainty in tourism flows depending on propensity to travel and international conditions (Annex V). - Prolonged pandemic (e.g., due to new variants) could require costly containment and prompt behavioral changes hurting tourism. - Weakened fiscal position could lead to financial market anxieties. - AML/CFT listings, the Moody’s downgrade, or a sharp rise in global risk premia could exacerbate vulnerabilities. ### Policy discussions — overarching guidance - Principal macroeconomic challenge: restore growth despite subdued tourism through at least 2022. - Recommended policy stance during reopening and recovery: - Continue accommodative fiscal policy with prioritized expenditures given reduced fiscal space. - Maintain accommodative monetary policy while strengthening the effective monetary policy lever. - Prioritize support measures to improve resilience and competitiveness and accelerate long-term structural transformation. - Fiscal stance will need to be tightened in the medium term to ensure debt sustainability given the substantial increase in debt. - Specific fiscal policy guidance - Fiscal deterioration in FY2020/21 partly financed with a transfer from the Bank of Mauritius (BOM). - Public spending rose from 23 percent of GDP in FY2018/19 to 30 percent in FY2019/20 and to a projected 32 percent in FY2020/21. - Domestic revenue declined by 6 percent in nominal terms in FY2019/20 and is projected to fall further in FY2020/21. - Transfers from BOM: Rs60 billion (14 percent of GDP) in third quarter of 2020; Rs18 billion (3½ percent of GDP) transferred in FY2019/20. - Public sector debt projected to reach 92 percent of GDP in the fiscal year referenced in the source (FY2020/21). - The accommodative fiscal policy was deemed necessary to support households and firms given the large output gap; emergency spending financed through domestic financial markets and foreign financing (AfDB, French Development Agency). - Need to calibrate timing of withdrawal of pandemic spending—use transparent triggers and benchmarks. - Prioritize expenditures that set stage for resilient growth (e.g., address pandemic-linked constraints, reskilling, targeted support rather than blanket firm support). - Recommendations to phase out wage assistance to tourism gradually as activity picks up; create incentives for reskilling and greater labor force participation (youth and women) and green projects. - Consider private-public partnerships (PPPs) with robust fiscal assessment and governance. - Medium-term debt dynamics and fiscal rules - Public sector debt forecasted to increase to 93 percent of GDP by FY2021/22 from 66 percent of GDP in FY2018/19. - Under assumptions of solid revenue performance and non-pension spending restraint, debt-to-GDP expected to decline modestly until FY2023/24; implementation of plans for further pension increases then pushes debt back up to 93 percent of GDP. - Staff recommended substantive measures to strengthen revenue mobilization and contain spending to stabilize debt at about 93½ percent of GDP beginning in FY2024/25. - Implicit fiscal anchor suggested: stabilize the debt-to-GDP ratio at around 94 percent of GDP by FY2024/25 when real GDP returns to its 2019 level. - While the repeal of the 60 percent debt limit was appropriate during the pandemic, authorities should explore a new fiscal rule in line with international best practices to foster debt sustainability and build buffers against shocks. *Source: IMF staff report — "1. Real Sector Developments" (extracted content).* ### 15. Pensions will be at the forefront of ### 15. Pensions will be at the forefront of ### Pension fiscal pressures and projections - Basic Retirement Pension (BRP) was increased by 45 percent in late 2019, increasing pension expenditure by about 2 percent of GDP. - Under current policies, there will be a further 50 percent increase in FY2023/24 for all Mauritians 65 and older. - Projected change in pension spending: - FY2018/19: 4½ of GDP - By FY2023/24: more than 8 percent of GDP - Projected pension spending will greatly exceed pension revenue. - Any medium-term fiscal consolidation plan will necessarily have to address this disparity. ### Authorities’ views on pension projections and reforms - Authorities agreed broadly with staff’s projections for future pension spending. - Authorities welcomed staff’s support for an accommodative fiscal stance in the near term and agreed that fiscal consolidation will be necessary to reduce public debt levels in the medium term. - Authorities noted that reform of the pension system is already underway with the introduction of Contribution Sociale Generalisee (CSG). --- ### B. Monetary Policy ### Balance sheet actions and liquidity effects - The Bank of Mauritius (BOM) transferred Rs60 billion (14 percent of GDP) to the government and purchased Rs15 billion (3.5 percent of GDP) of government bonds in 2020. - The BOM established the Mauritius Investment Corporation (MIC), a BOM owned and funded subsidiary, to provide financial support—Rs34 billion (7.9 percent of GDP)—to systemically important firms. - These policies contributed to a sharp increase in reserve money: 58 percent at end-2020 compared to end-2019. - If left unattended, these measures threaten to further spur excess liquidity, limiting the BOM’s ability to steer the interest rate and aggregate demand and to achieve low and stable inflation. ### Monetary stance and interest rates - BOM cut the announced key policy interest rate from 3.35 percent in February 2020 to 1.85 percent in April 2020 and has maintained the rate since then. - Overnight money market interest rate declined from 2 percent in early 2020 to almost zero, conditioned by excess liquidity. - Inflation expectations (BOM survey, February 2021): more than 80 percent of respondents expected inflation 6- and 12-month ahead to be between 2.5 and 3.5 percent; average actual inflation over the last 10 years is 2.6 percent. ### Exchange rate interventions and reserves - After initial depreciation, the rupee depreciated in real effective terms by about 8 percent in 2020 compared to 2019. - Exchange rate remained at around Rs40 to the dollar for the rest of 2020 after the first-quarter depreciation. - BOM’s foreign exchange interventions totaled more than US$1 billion in 2020; FX disbursements and valuation changes kept reserves above US$7 billion. - Excess liquidity and a rigid intervention strategy pose risks to exchange rate flexibility and policy effectiveness. ### Mission recommendations for monetary policy framework - Support BOM’s plan for a review of the monetary policy framework and recommend phasing in mechanisms to support central bank credibility as the economy recovers. - Specific recommendations include: - Continue with BOM recapitalization. - Remove exposures to the MIC from the BOM’s balance sheet. - Implement a new FX interventions strategy. - Move decisively towards an explicit inflation targeting strategy. - Short-term focus as the economy reopens: - Regain control over the interest rate. - Increase exchange rate flexibility. - Design a mechanism to preserve the BOM’s capital. - Legal and institutional measures: - Return the law governing the BOM to its status prior to June 2019 under which no transfers to the government were permitted beyond regular profit transfers. - Legally prohibit BOM transfers, direct BOM financing of the non-banking sector, and other quasi-fiscal activities involving BOM financing. - Government to satisfy financing needs by issuing debt in domestic markets given ample liquidity. ### Policy implementation and liquidity management - Reform the policy implementation framework and foster an interest-rate-based monetary policy. - Choose a liquidity management framework—the corridor or the floor system—and mop up excess liquidity sufficiently to make the key policy rate an effective lever. - Align and steer the policy and the overnight money market rates consistently with the price stability objective. - Identify causes and contemplate additional policies to limit persistent liquidity surpluses, including using fiscal, macroprudential, and other policies to manage large foreign capital inflows and reduce BOM’s liquidity management costs. - Continue developing and applying the forecasting and policy analysis system; regularly present macroeconomic forecasts and policy recommendations, including interest rate projections, to the MPC. - Improve communication of analysis, projections, and policy decisions to market participants and the public. ### BOM balance sheet and recapitalization - BOM increased its capital from Rs2 billion to Rs10 billion in July 2020. - Mission recommended further recapitalization of the BOM within a reasonable timeframe. - Preferred recapitalization strategies: - Government recapitalizes the central bank up-front (e.g., via transfer of marketable public debt instruments)—effectively restores BOM’s capital but requires a substantial one-off increase in public debt. - Alternatively, phase-in recapitalization over a few years, starting when the economy recovers. - Staff recommended requesting an IMF TA mission to estimate required recapitalization amounts and parameters. - To prevent further weakening, mission recommended an agreement where the government covers ongoing sterilization costs—recognizing potential tensions with monetary policy independence. ### MIC ownership and quasi-fiscal operations - Staff recommended the BOM relinquish ownership of the MIC. - Rationale: - BOM ownership threatens central bank independence and challenges financial sector intermediation. - Fiscal-nature spending should be undertaken by the government or government agencies for fiscal transparency. - Possible options for MIC: - Fold MIC into the Development Bank of Mauritius. - MIC taken over by the government, with financing provided through the budgetary process. - Financing the MIC takeover: - Government could raise liquidity from the market to pay for MIC obligations—removing credit risk from the BOM balance sheet and helping mop up excess liquidity. - Preferable to utilize financial sector intermediation with credit to firms flowing through banks, with the government providing targeted credit guaranties. ### Exchange rate policy guidance - Exchange rate policy should eventually allow for greater exchange rate flexibility. - BOM should adopt an FX intervention strategy targeted at smoothing excessive volatility rather than setting market-clearing objectives or quantitative exchange rate targets. - Recommendation to synchronize greater exchange rate flexibility with solidifying an interest-rate-based monetary policy. - Communicate with the market to transit smoothly to greater exchange rate flexibility. ### Authorities’ views on monetary actions - Authorities concurred that the monetary policy stance is accommodative and should remain so until economic recovery strengthens. - Recognized challenges posed by excess liquidity and noted stepping up open market operations to absorb excess. - BOM highlighted the 91-day bill yield as the current operating target and noted it has embarked on a review of its monetary policy framework. - Authorities viewed the Rs60 billion transfer to government as appropriate given exceptional circumstances to stabilize the economy and mitigate risks to financial and social stability. - Authorities defended creation of the MIC as a last resort to support systemically important and viable firms and to maintain financial stability; noted MIC functions independently with an independent Board and Investment Committee. - Authorities agreed that as pandemic recedes and the economy stabilizes, the FX interventions strategy would lean against undue volatility and that the new monetary policy framework would strengthen the nexus between exchange rate policy and interest rate policy. --- ### C. Financial Sector Policies and AML/CFT Listing ### Banking sector resilience and risks - By end-2020Q3 banks and non-bank deposit-taking institutions remained well capitalized. - Non-performing loans (NPLs): - Increased to 6.1 percent at end-2020Q3 relative to 4.9 percent at end-2019. - For banks alone, NPLs stood at 5.4 percent at end-2020Q4 compared to 4.3 percent a year ago. - Profitability compressed and provisioning of NPLs deteriorated, though provisioning for banks improved by end-2020Q4. - Return on assets (ROA) in 2020Q3 declined to 1.2 percent from 1.9 percent in 2019Q4. - The ratio of NPLs less provisioning over capital for banks and non-banks deteriorated from 10.4 percent in 2019Q4 to 12.4 percent in 2020Q3. - If the sector implemented the full provisioning of NPLs at the 2020Q3 level immediately, the aggregate capital ratio would remain above the adequacy level. - Non-performing loans net of provisions to capital for banks improved to 9.7 percent by end-2020Q4. ### Policy recommendations for the financial sector - Continue monitoring sector developments and maintain loan classification standards. - Ensure policies to assist distressed borrowers are transparent, temporary, and targeted. - Prepare legal and operational frameworks for debt restructuring and possible bankruptcies to ensure speedy resolutions. - Engage with banks to unwind COVID-19 support in a targeted and phased manner, balancing support for borrowers with bank solvency. ### AML/CFT listing and GBC sector implications - Mauritius was placed on the FATF list of jurisdictions under increased monitoring in February 2020; the European Union followed in June 2020. - Effect of the listing has been mild so far: GBC activity remained stable; balance of payments data for 2020 indicate net GBC financial inflows; GBC foreign exchange deposits in banks, equivalent to about 100 percent of GDP, have held steady. - Authorities committed publicly to a timeline to address AML/CFT deficiencies. - Mission encouraged continued efforts to exit FATF and EU AML/CFT lists. - Remaining key tasks to demonstrate effectiveness include: - Implementing a risk-based supervision plan for the GBCs. - Ensuring timely access to accurate beneficial ownership information. - Ensuring that suspicious transactions are identified and reported. *Source: IMF staff report excerpts provided in content unit 1musea2021001 - 15. Pensions will be at the forefront of* ### 10.1 percent a year ago. ### 10.1 percent a year ago. ### Authorities’ Views - Close monitoring to ensure financial stability and efforts to exit FATF and EU listings soon should continue. - The BOM remains in close contact with the banks to monitor loan portfolios and undertakes sufficient actions to preempt systemic financial stress. - Phasing out of support to banks should be aligned with economic recovery; support could be prolonged in a targeted manner to impacted sectors. - Ending the debt amortization moratorium could lead to an increase of non-performing loans, but banks are well capitalized to weather the corresponding shocks. - Authorities view foreign reserves as ample, covering more than 13 months of imports. - Authorities expect the current account gap would be reduced once the economy opens to international travel and by consolidating a sustainable tourism strategy. - Authorities are optimistic about effects of trade agreements with China and India on traditional sectors, including textiles and agriculture, and highlight potential of joint ventures with the private sector. ### External Competitiveness and Structural Policies for a Sustainable and Resilient Recovery - External position and key metrics: - Overall current account deficit widened to 12.6 percent of GDP in 2020 and is expected to widen to 15.6 percent in 2021. - The real effective exchange rate (REER) depreciated by 8.1 percent year-on-year in 2020. - The current account gap was -13.3 percent. - The domestic currency appears overvalued by about 30-40 percent. - Positive net international capital and financial flows declined by about 5.5 percentage points in 2020 compared to a year ago. - Net investment position (NIIP) stood at 187 percent of GDP in 2019, much lower than its 2018 level (377 percent). - International reserves covered 103 percent of the Fund’s ARA metrics at end-2020; adequacy range is 100-150 percent. - Total public and private external debt increased from 91 percent in 2019 to 116 percent of GDP in 2020. - Large external debt implies elevated exposures to unfavorable exchange rate movements and current account and rollover shocks. - Interpretation and risks: - External assessment and degree of overvaluation are subject to elevated uncertainty reflecting the adverse supply shock to the tourism sector and decline in income flows given Mauritius’ financial center position. - Staff views both developments as predominantly transitory; current account gap and misalignment expected to be substantially reduced once Mauritius reopens for travel and income flows recover. - Estimated current account gap and overvaluation may also point to long-term structural issues and need for further reforms to enhance competitiveness. - Structural policy recommendations and priorities: - Near-term strategy: focus on value upgrading in traditional sectors to spur productivity and transformation; take advantage of African Continental FTA and new trade agreements with China and India. - Tourism strategy: aim for more sustainability and move to higher-value-added business model (e.g., health-oriented, low-density eco-tourism targeting high-income foreigners). - Structural transformation: build innovation capacity through skill development; target resource allocation towards emerging activities or technological upgrading; improve ICT infrastructure and R&D; promote competition in critical upstream sectors. - Facilitate new business formation via public reskilling and retraining programs, especially benefiting women and youth. - Improve coordination between public and private sectors to overcome externalities and simultaneous investment needs across firms. - Climate and environmental vulnerabilities: - The 2018 World Risk Report ranked Mauritius as the 18th among countries most susceptible to climate change. - UN Environmental Program noted vulnerability due to climatic, biological, geological, and technological hazards, with increasing frequency and intensity of extreme weather events. - The 2020-2024 Government Programme highlights mitigation of climate change impacts; government plans include creating three new endemic forests and introducing building codes and infrastructure improvements to better protect against cyclones and floods. - Public financial management and procurement: - Mauritius performs well in doing business indicators, but continued efforts would further strengthen public financial management. - The February 2021 report of the National Audit Office found shortcomings in financial reporting, procurement management, and value for money; some previously identified issues in public sector procurement appear to have persisted and may have been exacerbated by rushed pandemic-related procurement. ### Other Issues - Data and statistical capacity: - Data provision is broadly adequate for surveillance, but there is room for improvement. - Ongoing efforts of Statistics Mauritius to improve national accounts data following TA recommendations are welcome. - Further progress is warranted to validate GBCs’ annual survey data quality and improve its timeliness. - Authorities should continue progress towards expanding fiscal accounts coverage to fully encompass the general government. - Capacity development priorities: - Strengthen the AML/CFT framework. - Improve the monetary policy framework. - Improve the quality of national accounts data. - Strengthen public financial management. - Capacity development—including through AFRITAC South—will help support the authorities’ policy objectives. ### Staff Appraisal — Key Findings, Projections, and Policy Recommendations - Pandemic containment and economic impact: - Mauritius successfully contained COVID-19 with very small numbers of infections and fatalities due to strict health measures. - GDP is estimated to have fallen by 15 percent in 2020. - Both fiscal and current account deficits have substantially widened. - Unemployment remains broadly contained, inflation low, and the banking system appears to be sound. - Growth outlook: - Staff projects a recovery as the pandemic recedes. - Growth should reach 5 percent in 2021 based on a resumption of tourism, with a further pick-up in 2022. - Pace of recovery in tourism is unclear, complicating timing of scaling back emergency measures. - Fiscal policy guidance: - Fiscal stance should remain accommodative in the near term, though consolidation will be necessary in the medium term. - Once past the crisis, revenue needs to be increased and spending reduced to put debt on a declining path. - Successful adjustment will require addressing the burgeoning divergence between pension spending and revenue. - Monetary and exchange rate policy guidance: - Maintain accommodative monetary policy in the near term while preparing for normalization of monetary and exchange rate policies. - BOM, with government support, should develop effective monetary instruments to guide the economy as it emerges from the crisis. - BOM law should be reformed, including to preempt further exceptional transfers to the government, in line with international best practices. - Staff recommended the central bank relinquish ownership of the MIC, with financing of the MIC provided through the budgetary process. - Exchange rate intervention strategy should be revised to support exchange rate flexibility, while smoothing extreme exchange rate volatility and ensuring market liquidity. - Structural and institutional priorities: - Sustain reforms to support structural transformation to a strong and resilient growth path. - Support authorities’ commitment to exit the FATF and EU AML/CFT lists. - Enhance diversification and strengthen competitiveness. - Improve public sector procurement practices. - Mitigate vulnerabilities to climate change. *Source: 1musea2021001 - 10.1 percent a year ago.* ### 51. Staff recommends that the next Article IV consultation take place on the standard ### 51. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Real sector developments - Pandemic led to a contraction in economic activity across the board; tourism-dependent economy was one of the hardest hit. - Tourism receipts collapsed with tourism coming to a standstill in 2020Q2. - Authorities implemented comprehensive stimulus measures including wage assistance and self-employed assistance schemes. - Impact on unemployment: - Unemployment rate (percent): 2019: 7.1; 2020: 6.9; 2021: 6.7; 2022: 9.2; 2023: 9.2; 2024: 9.2; 2025: 8.0; 2026: 7.3. - Inflation: - Consumer prices (period average): 2019: 3.7; 2020: 3.2; 2021: 0.5; 2022: 2.5; 2023: 2.3; 2024: 3.7; 2025: 3.5; 2026: 3.4; 2027: 3.3; 2028: 3.2 (table lists through 2026 but shows sequence). - Monthly inflation series shown with core and headline measures; inflation remained low in the pandemic period. - Real GDP and growth projections (annual percent change): - Real GDP: 2019: 3.8; 2020: 3.8; 2021: 3.0; 2022: -14.9; 2023: 5.0; 2024: 6.7; 2025: 4.0; 2026: 3.5; 2027: 3.3; 2028: 3.3. - Real GDP per capita follows same rates as Real GDP in table. - Tourism-specific figures (from Table 1): - Tourism receipts (percent change, included under “Of which: tourism receipts”): 2019: 11.3; 2020: 8.2; 2021: -5.9; 2022: -73.8; 2023: -41.5; 2024: 340.8; 2025: 25.4; 2026: 26.2; 2027: 2.1; 2028: 3.1. - Contribution to GDP by sectors shown in Figure 1 (supply-side contributions include Agriculture and mining, Manufacturing, Utilities, Construction, Services, Taxes, Statistical discrepancy). ### External sector developments - Current account deterioration driven by a drop in tourism and GBC sector income balances. - Gross financial flows declined while net inflows sustained. - Gross international reserves remained stable largely due to new borrowing and a positive valuation effect. - Current account balance (millions of U.S. dollars): 2017: -612; 2018: -555; 2019: -756; 2020: -1,374; 2021: -1,827; 2022: -882; 2023: -907; 2024: -574; 2025: -664; 2026: -685. - Current account balance (percent of GDP): 2019: -4.6; 2020: -3.9; 2021: -5.4; 2022: -12.6; 2023: -15.6; 2024: -6.8; 2025: -6.6; 2026: -4.0; 2027: -4.5; 2028: -4.5. - Trade balance (percent of GDP): 2019: -20.0; 2020: -21.3; 2021: -21.9; 2022: -19.6; 2023: -19.2; 2024: -18.1; 2025: -19.2; 2026: -19.4; 2027: -19.2; 2028: -18.8. - Exports of goods and services, f.o.b. (percent of GDP): 2019: 17.7; 2020: 16.7; 2021: 15.8; 2022: 16.4; 2023: 21.2; 2024: 18.8; 2025: 18.5; 2026: 18.6; 2027: 18.6; 2028: 18.6. - Gross international reserves (millions of U.S. dollars): 2019: 5,979; 2020: 6,321.6; 2021: 7,329; 2022: 7,242; 2023: 6,192; 2024: 5,942; 2025: 5,942; 2026: 5,942; 2027: 5,942; 2028: 5,942. - Months of imports of goods and services covered by reserves: 2019: 9.5; 2020: 10.3; 2021: 16.9; 2022: 13.9; 2023: 11.1; 2024: 9.7; 2025: 9.3; 2026: 8.9; 2027: 8.6; 2028: 8.3. - Balance of payments indicators (Table 3): Exports of goods (millions USD): 2019: 2,342; 2020: 2,366; 2021: 2,223; 2022: 1,791; 2023: 2,471; 2024: 2,441; projected increases through 2026. ### Fiscal sector developments - Pandemic generated substantial fiscal stimulus and revenue losses; resulting deficit financed with a transfer from the Bank of Mauritius. - Central government debt and public sector debt rose markedly. - Central government finances (Table 2a, millions of Rupees): - Total revenue and grants: FY2019/20: 106,831; FY2020/21: 110,665; FY2021/22: 103,890; FY2022/23: 96,236; FY2023/24: 110,520; FY2024/25: 123,088; FY2025/26: 133,096; FY2026/27: 143,765; FY2027/28: 156,263. - Total expense (current spending): FY2019/20: 106,582; FY2020/21: 113,214; FY2021/22: 134,917; FY2022/23: 142,264; FY2023/24: 133,975; FY2024/25: 137,592; FY2025/26: 154,506; FY2026/27: 160,326; FY2027/28: 169,234. - Social benefits (millions of Rupees): FY2019/20: 29,456; FY2020/21: 31,953; FY2021/22: 41,905; FY2022/23: 45,640; FY2023/24: 47,285; FY2024/25: 49,079; FY2025/26: 60,183; FY2026/27: 62,030; FY2027/28: 63,930. - BOM transfers to finance deficit: shown as Rs 18,000 (FY2020/21) and Rs 60,000 (FY2021/22) in monetary financing decomposition figures. - Fiscal balances and debt ratios (percent of GDP, Table 2b): - Total revenue and grants (percent of GDP): 2020/21: 22.7; 2021/22: 22.5; 2022/23: 22.7; 2023/24: 21.8; 2024/25: 23.2; 2025/26: 23.9; 2026/27: 24.2; 2027/28: 24.6; 2028/29: 25.3. - Total expense (current spending, percent of GDP): 2020/21: 22.7; 2021/22: 23.1; 2022/23: 29.5; 2023/24: 32.2; 2024/25: 28.1; 2025/26: 26.7; 2026/27: 28.1; 2027/28: 27.5; 2028/29: 27.4. - Overall borrowing requirement (percent of GDP): 2020/21: -4.1; 2021/22: -4.7; 2022/23: -13.1; 2023/24: -20.0; 2024/25: -8.4; 2025/26: -5.6; 2026/27: -6.7; 2027/28: -5.6; 2028/29: -4.9. - Central government debt (percent of GDP, fiscal year): 2019/20: 57.8; 2020/21: 59.0; 2021/22: 76.2; 2022/23: 83.9; 2023/24: 84.9; 2024/25: 84.2; 2025/26: 86.2; 2026/27: 87.2; 2027/28: 87.2; 2028/29: 87.6. - Public sector debt (percent of GDP): 2019/20: 64.3; 2020/21: 66.2; 2021/22: 84.6; 2022/23: 92.0; 2023/24: 92.6; 2024/25: 91.4; 2025/26: 92.9; 2026/27: 93.5; 2027/28: 93.5. - Spending pressures noted from growing pension costs and long-term demographic trends; dependency ratios (60+ and 65+) projected to rise over long term. ### Monetary sector developments - Central bank support totaled Rs 109 billion or 25.4 percent of GDP, comprising Rs60bn [14%], Rs15bn [3.5%], Rs34bn [7.9%] in specified components (BOM transfer; purchases of government bonds; MIC financing). - Monetary financing contributed to faster monetary expansion and excess liquidity, likely limiting monetary policy effectiveness as the output gap closes. - After substantial net FX purchases pre-pandemic, the BoM conducted large FX sales in 2020, limiting nominal exchange rate flexibility. - Net FX interventions by BOM (USD million) and change in reserves presented; net FX interventions by BoM (including STC) show large negative values in 2020. - Reserve money and M3 dynamics: - Annual change in broad (M3) and reserve money (percent): M2 growth series includes 2019: 8.7; 2020: 2.1; 2021: 6.2; 2022: 17.7; subsequent annual rates shown in Table 4. - Average exchange rate MUR/USD series shown with values around Jan-16 to Sep-20. - Monetary aggregates (Table 4, selected): - Money and quasi-money (M2, millions of rupees): 2019: 434,814; 2020: 443,913; 2021: 471,653; 2022: 554,951; 2023: 546,839; 2024: 560,657; 2025: 559,191; 2026: 603,979; 2027: 650,460; 2028: 699,835. - M3 (millions rupees): 2019: 522,083; 2020: 554,893; 2021: 601,973; 2022: 703,593; 2023: 695,704; 2024: 715,852; 2025: 716,661; 2026: 792,874; 2027: 853,440; 2028: 917,744. ### Financial sector soundness - Financial Soundness Indicators (banks and non-bank deposit-taking institutions, end-period percent): - Regulatory capital to risk-weighted assets: ranges around 18.0–20.5 across 2017–2020. - Non-performing loans to total loans: 2017: 7.0; 2018: 7.2; 2019: 6.9; 2020: 5.3; later quarterly values show 6.5, 6.3, 6.0, 5.8, 4.9, 5.3, 5.9, 6.1. - Return on assets: quarterly values mostly around 1.2–2.2. - Liquid assets to total assets: values around 21.0–27.2 across 2017–2020 quarters. - Net open position in foreign exchange to capital: values around 1.6–4.8. - Encouraged set: Capital to assets ~10.0–11.9; Residential real estate loans to total loans ~10.2–10.7; Commercial real estate loans to total loans ~3.9–4.6. - Banks’ deposit and credit dynamics shown in Table 4 with claims on private sector and credit to private sector series. ### Key summary indicators and projections (from Tables) - GDP at current market prices (millions of U.S. dollars): 2019: 13,259; 2020: 14,182; 2021: 14,046; 2022: 10,914; 2023: 11,676; 2024: 12,997; 2025: 13,676; 2026: 14,198; 2027: 14,733; 2028: 15,339. - Total external debt (percent of GDP): 2019: 77.1; 2020: 79.2; 2021: 91.4; 2022: 115.6; 2023: 109.8; 2024: 104.0; 2025: 101.9; 2026: 100.9; 2027: 99.5; 2028: 98.1. - Exports and imports percent changes (Table 1): Exports of G&S percent change: 2019: 3.7; 2020: 3.6; 2021: -7.4; 2022: -40.2; 2023: 14.3; 2024: 32.0; 2025: 10.7; 2026: 12.1; 2027: 3.3; 2028: 3.6. - Public sector debt (FY percent of GDP): 2019/20: 64.3; 2020/21: 66.2; 2021/22: 84.6; 2022/23: 92.0; 2023/24: 92.6; 2024/25: 91.4; 2025/26: 92.9; 2026/27: 93.5; 2027/28: 93.5. *Source: IMF staff compilation from the Mauritius Article IV consultation document (figures, tables, and notes as provided).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Conjunctural shocks and scenarios - Unexpected shifts in the COVID-19 pandemic — Likelihood: Medium - Asynchronous progress. Limited access to, and longer-than-expected deployment of, vaccines in some countries—combined with dwindling policy space—prompt a reassessment of their growth prospects (for some Emerging and Frontier Markets triggering capital outflows, depreciation and inflation pressures, and debt defaults). - Prolonged pandemic. The disease proves harder to eradicate (e.g., due to new virus strains, short effectiveness of vaccines, or widespread unwillingness to take them), requiring costly containment efforts and prompting persistent behavioral changes rendering many activities unviable. For countries with policy space, prolonged support—while needed to cushion the economy—exacerbates stretched asset valuations, fueling financial vulnerabilities. For those with limited space, especially EMs, policy support is insufficient. - Rebound to tourism flows could be delayed. - Faster containment. Pandemic is contained faster than expected due to the rapid production and distribution of vaccines, boosting confidence and economic activity. - Rebound of tourism flows could be accelerated. - Sharp rise in global risk premia exposes financial and fiscal vulnerabilities — Likelihood: Medium - A reassessment of market fundamentals (e.g., in response to adverse COVID-19 developments) triggers a widespread risk-off event. Risky asset prices fall sharply and volatility spikes, leading to significant losses in major non-bank financial institutions. Higher risk premia generate financing difficulties for leveraged firms (including those operating in unviable activities) and households, and a wave of bankruptcies erode banks’ capital buffers. Financing difficulties extend to sovereigns with excessive public debt, leading to cascading debt defaults. - Vulnerabilities to the Mauritian GBC sector could increase. - Oversupply and volatility in the oil market — Likelihood: Medium - Higher supply (due to, e.g., OPEC+ disagreements) and lower demand (including due to a slower global recovery from COVID-19) lead to renewed weakness in energy prices. Uncertainty about production cuts, prospects for the shale gas industry, and the pace of demand recovery lead to bouts of volatility. - Mauritius could benefit from lower oil prices, but also be subject to greater price volatility. ### Structural risks - Accelerating de-globalization — Likelihood: Medium - Despite renewed efforts to reach multilateral solutions to existing tensions, geopolitical competition leads to further fragmentation. Reshoring and less trade reduce potential growth. - Higher frequency and severity of natural disasters related to climate change — Likelihood: Medium/Low - Cause severe economic damage to smaller economies susceptible to disruptions and accelerate emigration from these economies (medium probability). A sequence of severe events in large economies reduces global GDP and prompts a recalculation of risk and growth prospects. Disasters hitting key infrastructure or disrupting trade raise commodity price levels and volatility (low probability). - Mauritius has elevated risk to climate change shocks. - Failure to exit the AML/CFT lists — Likelihood: Medium/Low - If Mauritius is unable to exit from the FATF and EU AML/CFT lists, the GBC sector could contract, particularly via the drying-up of new business. *The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon.* ### Annex II. Debt Sustainability Analysis Update — Key findings and scenarios - Overall assessment - Mauritius’ public debt remains sustainable under the baseline scenario, though risks have risen with higher gross financing needs and debt levels. - The baseline is particularly vulnerable to shocks affecting the financial sector, and the Central Bank balance sheet. - The debt-to-GDP ratio has risen notably in the wake of the pandemic and is set to rise further after announced increases in pensions take hold in FY2023/24. Thereafter, debt will stabilize, though at an elevated level. - Historical and projected public debt stock (Text Table 1) - FY2017/18 Total Public Debt: 64.3 - FY2018/19 Total Public Debt: 66.2 - FY2019/20 Total Public Debt: 84.6 - FY2020/21 Total Public Debt (projection): 92.0 - FY2017/18 Central Government: 57.8 - FY2018/19 Central Government: 59.0 - FY2019/20 Central Government: 76.2 - FY2020/21 Central Government (projection): 83.9 - FY2017/18 State-Owned Enterprises: 6.5 - FY2018/19 State-Owned Enterprises: 7.2 - FY2019/20 State-Owned Enterprises: 8.4 - FY2020/21 State-Owned Enterprises (projection): 8.1 - FY2017/18 Domestic: 51.9 - FY2018/19 Domestic: 55.4 - FY2019/20 Domestic: 70.5 - FY2020/21 Domestic (projection): 71.3 - FY2017/18 External: 12.5 - FY2018/19 External: 10.8 - FY2019/20 External: 14.1 - FY2020/21 External (projection): 20.7 - Note: The fiscal year runs from July to June. Debt stocks as of end June. Projections. - Drivers and background - Public-sector debt definition: central government (including extrabudgetary units) and state-owned enterprise (SOE) debt (including loan guarantees extended to SOEs by central government). - The increase in public sector debt reflects both nominal increases in debt and a sharp decline in GDP, which is estimated to have fallen by 13 percent in nominal terms during calendar year 2020. - Significant transfers from the BOM reduced public sector debt levels: BOM transferred Rs18 billion (3½ percent of GDP) in FY2019/20 and Rs60 billion (14 percent of GDP) in FY2020/21. These were not loans and thus did not increase public sector debt. - The public sector debt baseline assumes no recapitalization of the BOM to compensate for the transfers; a recapitalization would increase public sector debt. - Debt composition and financing - The majority of public debt is sourced from the highly liquid domestic market. - Short-term debt stood at 12 percent of total debt at end FY2019/20. - Medium- and long-term domestic debt comprise ¾ of the total. - In March 2021, an auction of 10-year bonds was oversubscribed by more than 200 percent at an interest rate of 2.2 percent. - External debt constituted less than one-fifth of total public debt (about 14 percent of GDP) in FY2019/20; central government external debt is concessional. - External debt expected to rise to 21 percent of GDP (driven mostly by fall in nominal GDP and rupee depreciation). - Total public and private external debt estimated to have increased from 91 percent in 2019 to 116 percent of GDP in 2020. - Realism of the baseline scenario (assumptions consistent with the 2021 Article IV Staff Report) - Growth: rebound of 5 percent in 2021 and converge to 3 to 3½ percent in the medium term. - Consumer prices: increase modestly in 2021 by 3½ percent. - Fiscal strategy: borrowing requirement will improve in FY2021/22 on the nascent recovery; planned pension increase in FY2023/24 will be compensated by higher revenue mobilization. - Current Account: deficit expected to return to historical levels of 4½ percent of GDP as tourism recovers. - Baseline scenario outcome - Public sector debt will stabilize at about 93½ percent of GDP over the medium term under the baseline. - There is little room to absorb additional shocks; the cyclically-adjusted primary balance adjustment envisaged is greater than the median of past adjustments in other MAC countries. - Stress tests and key scenario results - Growth shock: Lower real output growth by one standard deviation relative to the baseline for two years starting in FY21/22 would push debt up to 97.88 percent in FY21/22 (baseline 92.0). By FY2025/26, debt would be 104.6 percent (baseline 92.9). - Real interest rate shock: An increase in sovereign risk premia by more than 200 basis-points starting in FY21/22 would push debt up to 97.5 percent by FY2025/26 (baseline 93.7). - Primary balance shock: Cumulative deterioration in the primary balance of about 4 percent of GDP over FY21/22-FY22/23 would push total debt up to 102.1 percent of GDP by FY2025/26. - Combined macro-fiscal shock: Combining growth, interest rate, and primary balance shocks would imply public debt-to-GDP ratio reaching 120.3 percent by FY2025/26; public debt-to-revenue ratio and public gross financing needs would remain elevated. - Contingent liability shock: Realization of a contingent liability shock equal to 10 percent of banking sector assets would raise debt to 139.8 percent of GDP in FY2021/22 and spike gross financing needs in FY2021/22 to 58.7 percent of GDP. - Fan charts show tail risks (probabilities of more than 20 percent by the end of the projection period) of debt exceeding 100 percent of GDP by the end of the projection window. - Additional vulnerabilities and risks - Large financial sector relative to peers could pose potentially large contingent liability risks to GDP and debt. - Weak public investment management could jeopardize debt sustainability. - Population aging will put greater financial pressure on the pension system in the longer term. - The deteriorating balance sheet of the BOM: net worth substantially degraded by transfers to the government; potential further quasi fiscal operations could force sterilization, weakening BOM balance sheet; recapitalization with government securities would increase public sector debt (partially offset if recapitalization undertaken with cash). - Policy implication and recommendation - Public sector debt should be put on a downward path in the medium term. - As Mauritius emerges from the crisis, high debt levels leave the country highly susceptible to shocks. - Monitoring is required for risks from the GBC sector, competitive challenges to exports and tourism, ageing-related pension pressures, and potential contingent liabilities from the financial sector. *Source: IMF staff assessments as presented in Annex I. Risk Assessment Matrix and Annex II. Debt Sustainability Analysis Update.* ### 16. To build capacity to weather shocks by reducing debt, fiscal reforms to raise ### 16. To build capacity to weather shocks by reducing debt, fiscal reforms to raise revenue and contain spending will be necessary. Should efforts be undertaken to recapitalize the central bank, which currently has negative net worth, such efforts would engender a tradeoff in pushing public sector debt levels still higher. ### Public debt dynamics and baseline projections - Nominal gross public debt (percent of GDP): 2018: 59.5; 2019: 66.2; 2020: 84.6; 2021: 92.0; 2022: 92.6; 2023: 91.4; 2024: 92.9; 2025: 93.5. - Net public debt mirrors gross series: 2018: 59.5; 2019: 66.2; 2020: 84.6; 2021: 92.0; 2022: 92.6; 2023: 91.4; 2024: 92.9; 2025: 93.5. - Public gross financing needs (percent of GDP): 2018: 16.0; 2019: 18.4; 2020: 31.3; 2021: 40.0; 2022: 25.6; 2023: 23.1; 2024: 20.5; 2025: 21.5; projection note shows 20.0 and 5-year pattern. - Effective interest rate (percent): 2018: 5.1; 2019: 4.3; 2020: 4.1; 2021: 3.3; 2022: 3.1; 2023: 2.9; 2024: 3.0; 2025: 2.8; alternative tabulations show 3.3, 3.1, 3.3, 3.3, 3.1, 3.2 in scenarios. - Change in gross public sector debt (percent of GDP, cumulative): 2018: 1.6; 2019: 1.9; 2020: 18.4; 2021: 7.4; 2022: 0.6; 2023: -1.2; 2024: 1.5; 2025: 0.7; cumulative to 2025: 8.9. - Identified debt-creating flows (percent of GDP): 2018: 0.9; 2019: 3.8; 2020: 21.0; 2021: 7.2; 2022: 0.9; 2023: -1.5; 2024: 1.1; 2025: 0.3; cumulative to 2025: 7.6. - Primary deficit (percent of GDP): 2018: 1.0; 2019: 3.4; 2020: 12.4; 2021: 18.0; 2022: 6.0; 2023: 3.1; 2024: 4.2; 2025: 3.2; cumulative to 2025: 36.9. - Primary (noninterest) revenue and grants (percent of GDP): 2018: 20.8; 2019: 22.5; 2020: 22.7; 2021: 21.7; 2022: 23.2; 2023: 23.8; 2024: 24.2; 2025: 24.6; cumulative to 2025: 142.7. - Primary (noninterest) expenditure (percent of GDP): 2018: 21.8; 2019: 25.9; 2020: 35.0; 2021: 39.8; 2022: 29.2; 2023: 27.0; 2024: 28.4; 2025: 27.8; cumulative to 2025: 179.7. - Automatic debt dynamics contribution (percent of GDP): 2018: -0.1; 2019: 0.4; 2020: 8.6; 2021: 5.9; 2022: -4.0; 2023: -4.6; 2024: -3.1; 2025: -2.9; cumulative to 2025: -11.5. - Residual, including asset changes (percent of GDP): 2018: 0.8; 2019: -1.9; 2020: -2.6; 2021: 0.2; 2022: -0.3; 2023: 0.3; 2024: 0.4; 2025: 0.4; cumulative to 2025: 1.3. ### Macroeconomic assumptions underlying projections - Real GDP growth (percent): 2018: 3.8; 2019: 3.6; 2020: -7.7; 2021: -4.4 (baseline historical display shows -4.4 for 2020); baseline scenario projections for 2021–2025: 5.9 (2021), 5.3 (2022), 3.7 (2023), 3.4 (2024), 3.3 (2025). - Inflation (GDP deflator, percent): 2018: 1.8; 2019: 1.0; 2020: 0.9; projections: 2021: 0.9; 2022: 1.8; 2023: 2.9; 2024: 2.7; 2025: 2.6; alternative rows show slight variations depending on scenario. - Nominal GDP growth (percent): 2018: 5.6; 2019: 4.6; 2020: -6.8; 2021: -3.5; 2022: 7.8; 2023: 8.3; 2024: 6.6; 2025: 6.1. - Debt-stabilizing assumptions note: assumes key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. ### Scenario analysis and stress tests - Alternative scenarios presented: Baseline, Historical, Constant Primary Balance. - Constant Primary Balance Scenario: primary balance held at -18.0 (percent of GDP) from 2021 through 2025. - Stress tests modeled include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock. - Selected scenario outcomes (baseline vs shocks, 2020–2025): - Baseline Real GDP growth: -4.4 (2020), 5.9 (2021), 5.3 (2022), 3.7 (2023), 3.4 (2024), 3.3 (2025). - Primary Balance Shock path (percent of GDP): -18.0 (2020); primary balance moves to -12.0 (2021), -4.6 (2022), -4.2 (2023), -3.7 (2024), -2.8 (2025). - Real GDP Growth Shock path: real GDP growth -4.4 (2020), 2.3 (2021), 1.7 (2022), 3.7 (2023), 3.4 (2024), 3.3 (2025). - Real Interest Rate Shock effective interest rates: 3.3 (2020), 3.1 (2021), 3.5 (2022), 4.0 (2023), 4.1 (2024), 4.5 (2025). - Combined Shock and Contingent Liability Shock produce higher debt paths and higher effective interest rates (examples: effective interest rate under Contingent Liability Shock reaches 5.6 in 2022). - Stress-test charts show gross nominal public debt (percent of GDP) and public gross financing needs (percent of GDP) under baseline and shocks for 2020–2025; gross financing needs benchmark flagged at 15 percent of GDP for vulnerability assessment. ### Risk assessment and vulnerability indicators - Heat-map style indicators highlight: - Debt level and gross financing needs as key vulnerabilities. - Benchmarks used: bond spreads 200–600 basis points; external financing requirement 5–15 percent of GDP; change in share of short-term debt 0.5–1 percent; public debt held by non-residents 15–45 percent; share of foreign-currency denominated debt 20–60 percent. - Selected indicator values and flags (2019 baseline references and dynamics): - Bond spread: reported EMBIG (bp) not available; 5Y CDS (bp) not available. - Public debt held by non-residents and public debt in foreign currency presented in percentile charts; specific percent values not provided in table text but figures indicate monitoring across 2018–2025. ### External balance and reserve adequacy (Annex III) - Overall current account deficit: widened from 5.4 percent of GDP in 2019 to 12.6 percent of GDP at end-2020; expected to widen to 15.6 percent of GDP in 2021 and stabilize near 4.5 percent of GDP over the medium term as tourism and income flows recover. - External position assessment: EBA-lite suggests external position at end-2020 was substantially weaker than medium-term fundamentals and desirable policies. - CA gap: -13.3 percent of GDP (Adjusted CA -12.4; CA Norm 0.9). - REER misalignment implied by CA gap: about 43 percent (overvaluation). - REER model (IREER) assessment: overvalued by 31 percent. - Elasticity used in CA/REER reconciliation: -0.31. - External balance sheet (NIIP): end-2019 NIIP stood at 187 percent of GDP, down from 377 percent in 2018; decline driven by reduced international assets of the GBC sector, notably portfolio investment assets. - Gross non-FDI liabilities: 878 percent of GDP in 2019; mitigated by large non-FDI short-term external assets of about 1400 percent of GDP in 2019. - Reserve adequacy: international reserves at end-2020 remain within the advisable range when adjusting for financial sector vulnerabilities associated with GBC deposits. - Policy implications highlighted: authorities should carefully monitor global financial conditions, developments in the GBC sector, and exposures of banks to liquidity risk. ### Policy implications and recommendations - Fiscal reforms to raise revenue and contain spending are necessary to build capacity to weather shocks and reduce debt. - Recapitalization tradeoff: recapitalizing the central bank—currently with negative net worth—would increase public sector debt and create a tradeoff between financial stability objectives and public debt sustainability. - Monitoring and external-sector vigilance: - Carefully monitor GBC sector developments and exposures of the banking sector to liquidity risk given the large gross external positions. - Monitor global financial conditions and sources/destinations of GBC flows due to potential volatility in the external balance sheet. *Source: IMF staff, Mauritius: Public Sector Debt Sustainability Analysis and Annex III — External Balance and Reserve Adequacy (as of March 11, 2021).* ### 7. Background. Mauritius has an open capital and financial account. In total, net ### 1musea2021001 - 7. Background. Mauritius has an open capital and financial account. ### Capital and Financial Account: Background and Assessment - Findings: - Net international capital and financial flows declined from 11.8 percent in 2019 to 6.5 percent in 2020 (a decline of about 5 percentage points of GDP). - The decline was mostly driven by net outflows from the domestic economy at 4.8 percent of GDP in 2020 (compared to inflows of 0.8 percent of GDP in 2019). - The decline in the domestic sector was somewhat offset by net inflows in the GBC sector, in particular by net direct investment inflows. - The GBC sector financial and capital account recorded net inflows at 11.3 percent of GDP in 2020 compared to 10.9 percent in 2019. - Assessment: - The capital and financial account is likely to remain in surplus going forward provided the GBC sector maintains operations as during the years before the COVID-19 crisis. - Exiting the FATF and EU AML/CFT lists is identified as an important aspect to ensure orderly operations in the GBC sector and to attract new businesses. ### Reserve Adequacy: Background and Assessment - Background: - Exchange rate regime classified as floating in 2020. - Foreign exchange interventions in 2017–19 aimed at accumulating international reserves. - End-year international reserves: USD 4.9 billion at end-2016; USD 7.3 billion in 2019. - Reserves declined by 2 percent to USD 7.2 billion (63 percent of GDP) in 2020. - Reserves were adversely affected by substantial net sales (more than USD 1 billion); favorable price movements of some reserve assets (e.g., monetary gold) and additional FX borrowing helped offset sales. - Large FX interventions in 2020 occurred amid the COVID-19 crisis, deterioration of the current account, and limited nominal exchange rate flexibility. - Adjusted reserve adequacy metrics and findings: - The standard reserve adequacy metric is augmented with a portion of GBC deposits held in small and medium-sized banks to capture financial risks from potential disruptions to foreign currency funding of the GBC sector. - According to the adjusted metric: - Stock of international reserves at end-2019 ≈ 109 percent of the adjusted metric. - Stock of international reserves at end-2020 ≈ 103 percent of the adjusted metric. - These levels are within, but closer to, the lower bound of the advisable range. - Alternative ARA metric incorporating “High Risk” GBC deposits (share 13 percent in June 2020, equivalent to about USD 1.4 billion) yields: - Reserve coverage of 117 percent for 2019 and 113 percent for 2020. - Assessment and policy implications: - The large size and complex structure of the GBC sector and its linkages with the domestic economy warrant maintaining stronger buffers against external shocks. - Favorable price movements that offset reserve reductions in 2020 may reverse as the global recovery gathers pace; further opportunistic reserve accumulation may be desirable when conditions permit and when FX interventions do not interfere with the BOM’s price stability–oriented monetary policy. - Other insurance mechanisms to consider: swap arrangements or credit lines with other central banks; addressing structural bottlenecks to boost competitiveness. ### Universal Pensions (Annex IV): Background, Projections, and Fiscal Implications - Background and recent changes: - In 2019 authorities increased the Basic Retirement Pension (BRP) benefit by about 45 percent in nominal terms. - Authorities subsequently promised a further increase of 50 percent to most pensioners by FY2023/24. - If enacted, BRP spending would increase from about 4½ percent of GDP in FY2018/19 to 8½ percent of GDP by FY2023/24. - In FY2018/19, monthly pension was Rs5,810; post-2019 increase to Rs9,000; proposed further increase to Rs13,500 by end of next mandate. - With the pandemic, contributions to the National Pension Fund (NPF) have been halted. NPF net assets were Rs140 billion as of June 2020 (30 percent of GDP). NPF projected expenditures about Rs4 billion during FY2020/21. - A new system, the Contribution Social Generalize (CSG), was created to collect additional payroll taxes equivalent to about 1 percent of GDP to be paid directly into the general account of the Central Government. - Beginning in FY2023/24, the CSG would pay an additional Rs4,500 per month to all persons aged 65 and older, who represent about 70 percent of all persons 60 and older. - Projections and key numbers: - Combined expenditure of BRP and CSG projected to reach 8½ percent of GDP by FY2023/24 (from 4½ percent in FY2018/19). - CSG extra revenue forecast slightly more than 1½ percent of GDP, leaving a gap of about 3 percent of GDP relative to FY2018/19. - Staff estimate BRP spending will reach 8 percent of GDP in FY2020/21 (noting denominator effect of lower GDP in the pandemic year), then decline to 6½ of GDP by FY2025/26. - CSG revenue collections for FY2020/21 projected at 1.1 percent of GDP; staff baseline projects CSG revenue at 1.1 percent of GDP throughout the forecast window. - With CSG benefit payments beginning FY2023/24, total CSG spending projected to be about 1.7 percent of GDP. - Sum of BRP and CSG spending projected to increase to 8.6 percent of GDP by FY2023/24, then fall to 8.0 percent of GDP by FY2025/26. - Projection assumptions (announced policies): - BRP remains constant in nominal terms through FY2025/26 at Rs9,000 per month for those 60 and older; pensions for others (widows and the disabled) remain constant in nominal terms. - CSG benefit of Rs4,500 per month remains constant through FY2025/26, beginning payments in FY2023/24. - Existing assets of the NPF will be sufficient to fully meet its obligations to prior contributors through FY2025/26 without additional government financial assistance. - Fiscal sustainability considerations and recommendations: - Any medium-term fiscal consolidation plan must address disparity between pension expenditure and revenue. - Options include a combination of expenditure reductions and revenue increases. - Means testing could be considered, though operational difficulty and likely modest gains are noted because only a small share of the elderly are wealthy. - Consideration could be given to gradually increasing the BRP age threshold (currently 60), which is younger than in most other countries. ### Mauritius as a Tourism-Dependent Economy: Upside/Downside Scenarios (Annex V) - Baseline scenario: - Tourism arrivals and GDP grow gradually; regain 2019 levels only by 2024. - Downside scenario: - Lagging recovery of tourism hinders growth and leads to medium-term scarring; GDP fails to reach 2019 levels until much later. - Slow growth constrains fiscal revenues and puts further pressure on the external position. - Upside scenario: - Positive shocks driven by pent-up tourism demand could materialize quickly; GDP could approach 2019 levels by 2022. - Faster growth could boost fiscal revenue and improve the external position, though also stoking inflationary pressures. ### Status of 2019 Article IV Consultation Main Recommendations and Key FSAP Recommendations (Annex VI & VII) - Fiscal policy and debt sustainability: - Authorities’ debt target of 60 percent of GDP for FY2020/21 was unlikely to be met without significant policy adjustment. The FY2019/20 budget did not consolidate; pension increases and the pandemic made consolidation impossible; authorities repealed their debt target and pursued expansionary fiscal policy. - Monetary policy and FX interventions: - Prior to the pandemic authorities slowed FX interventions. Post-pandemic current account hit by cessation of tourism; authorities intervened in the FX market stabilizing the exchange rate. Reserves have fallen modestly, buoyed by external financing flows. - AML/CFT and international tax: - In February 2020 Mauritius was placed on the list of jurisdictions under increased monitoring by the FATF and subsequently on the EU’s AML/CFT list. - Authorities have made strong progress in addressing FATF and EU concerns. - OECD and EU have classified Mauritius as compliant with international tax-avoidance standards. - Banking supervision and financial sector oversight (selected implementation statuses): - Solvency and liquidity stress testing exercises are conducted quarterly; results published bi-annually in the BOM’s Financial Stability Report. - Establishment of a macroprudential body with a clear financial stability objective: Not implemented; Financial Stability Committee serves as forum; BOM and FSC coordinate via a joint committee. - Reforms to Global Business (2018): abolishment of GBC 2s and restyling of GBC 1s into GBCs; Economic Substance implemented and monitored; grandfathering provisions for GBC2s will end on June 30, 2021. Global Business sector being assessed for complete restructuring overhaul with consolidation implied; timeframe for execution by end of 2021. - Basel III Liquidity Coverage Ratio (LCR) implemented in 2017; reporting requirements enhanced; stress test scenarios assess vulnerability to adverse developments in the GBC sector. - Frameworks for conglomerate and consolidated supervision agreed between BOM and FSC; D-SIB framework fully operational; joint on-site examinations conducted. - Banking Act and BOM Act amended to improve conglomerate/consolidated supervision; Financial Services Act amended in 2020 to allow collection of statistics from competent authorities and other entities. - Resolution framework: legal framework drafted with IMF technical assistance but not yet enacted; Mauritius Deposit Insurance Scheme Act enacted in April 2019 but not yet proclaimed; BOM working on operationalization of Mauritius Deposit Insurance Company Limited. *Source: IMF staff report informational annex for the 2021 Article IV Consultation for Mauritius (selected excerpts).* ### Section 2, 3, and 4. The country maintains an exchange system free of multiple currency ### Mauritius — Sections 2, 3, and 4 ### Exchange system, Article IV, and resident representation - The country maintains an exchange system free of multiple currency practices, and of restrictions on the making of payments and transfers for current international transactions. - Mauritius maintains a liberal capital account. - The authorities continue to intervene in the foreign exchange market with an objective to smooth excess volatility. - Article IV Consultation: Mauritius is on the standard 12-month cycle. The last Article IV consultation was completed by the Executive Board on April 22, 2019 (Country Report No. 19/108, April 2019). - Resident Representative: None. ### Relations with other international organizations - As of June 1, 2021, Mauritius collaborates with: - World Bank Group - African Development Bank ### Assessment of data adequacy for surveillance (As of June 1, 2021) - General: Data provision is broadly adequate for surveillance, but there is room for improvement. Statistical discrepancies between the expenditure and production sides in the revised national accounts data need to be addressed. - National Accounts: - Statistical discrepancies between the expenditure and production measures of GDP remain substantial, both for the nominal and real estimates. - Statistics Mauritius has made notable progress in reducing these discrepancies and is updating supply and use tables, with capacity development support from STA and AFRITAC South. - Progress has been made in quantifying the Global Business Companies (GBCs) sector’s contribution to GDP. - Additional support will be provided in FY2022 through AFRITAC South to revise GDP estimates. - Price Statistics: - Statistics Mauritius compiles and disseminates a monthly CPI using weights based on expenditure data collected during 2018. - CPI compilation methods largely reflect international standards and best practice, but index coverage could be expanded to include owner occupied housing. - Producer price indexes are compiled and disseminated monthly for agriculture and manufacturing; weights derive from values of production in 2013 and should be updated. - Need to expand PPI coverage to include services. - Weights for quarterly import and export price indexes are derived from 2013 data and should be updated. - In April 2021, a quarterly residential property price index (RPPI) was disseminated; Statistics Mauritius would benefit from technical assistance to review RPPI methods. - External Sector Statistics (ESS): - Authorities should continue to strengthen tracking of the GBC sector, particularly in the context of the elimination of GBC2s and the introduction of the authorized company classification. - Fiscal Statistics: - Coverage of central government accounts is comprehensive, as is coverage of central government and state-owned enterprise debt, though timely publication of fiscal data has been delayed during the pandemic. - Authorities are taking steps to implement IPSAS. - Progress should be accelerated towards implementing general government accounting. - Monetary and Financial Statistics (MFS): - Progress by the BOM includes introduction of the Standardized Report Forms (SRFs) for the central bank and other depository corporations (ODCs) and publication of data aligned to the MFS Manual. - Authorities continue to broaden coverage of MFS, including compiling statistics for other financial corporations (OFCs) such as insurance companies, pension funds, GBCs, collective investment schemes, factoring companies, credit finance companies, leasing companies, Development Bank of Mauritius, National Savings Fund, insurance brokers, pension fund administrators, pension scheme managers, management companies, investment dealers, investment advisors, collective investment scheme managers, and registrar and transfer agents. - Mauritius reports data on several series and indicators of the Financial Access Survey (FAS), including commercial bank branches per 100,000 adults and ATMs per 100,000 adults. ### Data standards and quality - Mauritius participated in the GDDS since September 2000 and subscribed to the Special Data Dissemination Standard (SDDS) on February 28, 2012. - A data ROSC report was published in August 2008. ### Key data reporting dates and periodicity (selected items; June 1, 2021) - Exchange Rates: May 2021; received 5/2021; Frequency of data D; Frequency of reporting D; Frequency of publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: April 2021; received 5/2021; Frequency M. - Reserve/Base Money: April 2021; received 5/2021; Frequency M. - Broad Money: April 2021; received 5/2021; Frequency M. - Central Bank Balance Sheet: April 2021; received 5/2021; Frequency M. - Consolidated Balance Sheet of the Banking System: April 2021; received 5/2021; Frequency M. - Interest Rates: March 2021; received 4/2021; Frequency M. - Consumer Price Index: April 2021; received 5/2021; Frequency M. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: January 2021; received 5/2021; Frequency M. - Exports and Imports of Goods and Services: Q4/2020; received 3/2021; Frequency Q. - External Current Account Balance: Q4/2020; received 3/2021; Frequency Q. - GDP/GNP: Q4/2020; received 4/2021; Frequency Q. - Gross External Debt: Q1/2021; received 5/21; Frequency Q. - International Investment Position: December 2019; received 5/2020; Frequency A. (Note: the table also records assessments of methodological soundness and accuracy and reliability for many series as O, LO, LNO, NO as reflected in the data ROSC.) ### Supplementary information: FY2020/21 and FY2021/22 fiscal developments and projections - Context: On June 11, 2021, the government presented the FY2021/22 budget. The supplement summarizes differences between staff report and the draft budget; it does not alter the thrust of staff advice but highlights importance of medium-term consolidation after the pandemic. - FY2020/2021: - Authorities issued revised fiscal projections for FY2020/21. - Revenue is expected to be broadly in line with staff report projections, but spending through special funds and other capital transfers will be higher. - This results in an increase in the overall borrowing requirement of 2.7 percent of GDP relative to the staff report. - Public sector debt is expected to reach 96.4 percent of GDP in FY2020/21 compared to 92.0 percent in the staff report. - FY2021/2022 (authorities' budget projections): - Budget projects an overall borrowing requirement equivalent to 6.4 percent of GDP, compared with 8.4 percent of GDP in the staff report. - Net acquisition of non-financial assets and net lending/borrowing will be about 2½ percent of GDP higher, partly explained by strong public investment (energy, flood management, social housing, transportation). - Authorities project FY2021/22 domestic revenue to reach 28.9 percent of GDP, more than 6 percentage points of GDP higher than both the previous year and pre-crisis levels. - IMF staff revised projections (aligning spending with budget but maintaining staff revenue projections): - Staff envisages a higher FY2021/22 overall borrowing requirement and public sector debt compared with the staff report and the budget. - Staff projects an overall borrowing requirement of 11.8 percent of GDP and public sector debt of 100.0 percent of GDP by June 2022 (Text Table 1). - Staff policy advice: - Maintain an accommodative fiscal stance during the pandemic and pursue fiscal consolidation post-pandemic. - Given increased public debt and risk to debt sustainability, stabilizing the debt-to-GDP ratio in the medium term will require greater fiscal consolidation effort; the stabilized public debt level will likely exceed 100 percent of GDP. - Selected figures from Text Table 1 (in percent of GDP): - Total revenue and grants: 21.8; 21.6; 23.2; 28.9; 23.2 - Domestic revenue: 21.1; 21.2; 25.2; 28.0; 22.5 - Grants: 0.7; 0.4; 0.7; 0.9; 0.7 - Total expense (current spending): 32.2; 30.9; 28.1; 28.4; 28.1 - Net acquisition of non-financial assets (capital spending): 1.8; 1.8; 1.8; 2.9; 2.9 - Budget balance: -12.2; -11.1; -6.8; -2.4; -7.8 - Net lending/borrowing (special funds and other capital transfers): -4.3; -8.1; -1.3; -2.8; -2.8 - Consolidated balance: -16.6; -19.2; -8.1; -5.2; -10.6 - Transactions in financial assets/liabilities: 3.4; 3.5; 0.3; 1.2; 1.2 - Overall borrowing requirement: -20.0; -22.7; -8.4; -6.4; -11.8 - Public sector debt: 92.0; 96.4; 92.6; 87.7; 100.0 - (Columns correspond to Staff Report 2020/21, Staff Projection 2020/21, Staff Report 2021/22, Staff Projection 2021/22, Budget Projection 2021/22 as presented in Text Table 1.) ### Authorities' statement and Covid-19 response, recent developments, and outlook - Authorities appreciate IMF staff analysis and broadly agree with recommendations to restore sustainable growth, address pre-existing bottlenecks, bolster resilience and competitiveness, and continue structural transformation. - Authorities note that the crisis required a mix of conventional and unconventional policy measures to preserve economic and financial stability, preserve employment, limit corporate defaults and bankruptcies, and provide adequate liquidity. - Covid-19 response highlights: - Mauritius implemented strict nationwide lockdowns, restricted international travel, quarantine, contact tracing, case investigation and isolation of contacts, and mass testing. - The authorities accelerated their vaccination campaign, prioritizing frontline workers in the tourism industry. - Made solid progress towards achieving herd immunity of at least 60 percent of the population by July 2021. - International travel was expected to resume on July 15, 2021. - Economic impact: - Notwithstanding successful public health measures, the pandemic and containment measures have taken a severe toll on the economy. - An environmental disaster and the inclusion in the EU AML/CFT list of “high risk” countries also added pressure. - In line with staff, the authorities estimate real GDP to have dropped by (text cuts off in source). *Source: IMF staff report for the 2021 Article IV consultation — Supplementary information and Sections 2–4 (June 2021).* ### 14.9 percent in 2020, from an expansion of 3.0 percent in 2019, as the tourism industry ### 1musea2021001 - 14.9 percent in 2020, from an expansion of 3.0 percent in 2019, as the tourism industry ### Economic performance in 2020 - Real GDP contracted by 14.9 percent in 2020, from an expansion of 3.0 percent in 2019, as the tourism industry tumbled and exports fell due to disruptions in global demand. - Current account deficit widened to 12.6 percent of GDP in 2020 compared to 5.4 percent in 2019. - Foreign exchange reserves remained broadly stable at 13.9 months of imports, supported by new borrowing and a positive valuation effect. - Budget deficit increased to 8.4 percent in FY2019/20, from 2.2 percent in 2018/19, driven by extensive government support to households and firms together with lower tax receipts. - Public debt levels rose (level not restated beyond targets described below). - Inflation remained low and broadly under control at about 2.7 percent at end-2020. ### Outlook: 2021 and medium-term growth - Real GDP growth is expected to rebound to 5 percent in 2021 and firm up at around 3.0 to 3.5 percent in the medium-term, fueled by the construction sector and public investment, as well as a gradual recovery in the tourism industry. - Year-on-year inflation is expected to rise slightly to 3.5 percent by end-2021. - Key risks to the outlook: (i) a more protracted pandemic; (ii) uncertainty surrounding tourist arrivals; (iii) tightening of global financial conditions; and (iv) delayed exit from AML/CFT listings. ### Fiscal policy: response and medium-term strategy - Short-term priorities: protecting lives and livelihoods, maintaining production capacity, building resilience, and setting the stage for a quick recovery while preserving debt sustainability. - Government introduced a large fiscal stimulus package amounting to 32 percent of GDP, including wage assistance, self-employed assistance schemes, support to the national airline, tax deductions, credit lines and equity participations. - Authorities estimate that without such support job losses would have reached about 100,000. - As recovery takes hold, withdrawal of emergency measures should be gradual and fiscal consolidation will be needed to put debt on a downward trajectory. - Public debt reduction targets: - Bring public debt below 80 percent by end-June 2025. - Bring public debt to 70 percent by end-June 2030. - Fiscal consolidation will focus on additional revenue-enhancing and expenditures-controlling measures. - Authorities will consider alternative fiscal rules to replace the debt limit and strengthen the fiscal framework. - Pension reform: introduction of the contributory, participative and collective pension system, the Contribution Sociale Généralisée (CSG). ### Monetary and exchange rate policies - Bank of Mauritius (BOM) adopted an accommodative monetary policy and used all available tools to address pandemic challenges; current policy stance viewed as appropriate until recovery is well entrenched and inflationary pressures emerge. - Authorities implemented targeted fiscal, monetary and regulatory measures to protect employment, contain corporate defaults and bankruptcies, and ensure financial system liquidity. - One-off transfer to central government and creation of the Mauritius Investment Corporation (MIC) were viewed as necessary unconventional measures to stabilize the economy and mitigate systemic banking-sector risks. - MIC aimed to support systemically important and viable firms to avoid spillovers to the banking system; MIC functions independently of BOM with an independent Board and Investment Committee. - BOM embarked on a recapitalization plan evidenced by the increase of Rs8 billion of its capital in July 2020; Fund technical assistance considered helpful. - BOM initiated a comprehensive review of its monetary policy framework to strengthen the monetary policy lever and reinforce credibility; steps underway to enhance open market operations and normalize liquidity. - On exchange rate policy, BOM welcomes advice to recalibrate FX intervention strategy to contain excess volatility after the crisis while allowing greater exchange rate flexibility; revised monetary policy framework is being worked out. ### Financial sector policies and measures - BOM measures to prevent liquidity strains include: - Moratorium on loans granted to economic operators, SMEs, households and individuals. - Special relief program to alleviate short-term cash flow problems faced by economic operators. - Reduction of the Cash Reserve Ratio applicable to commercial banks. - Banking sector remains relatively well capitalized but asset quality has weakened with an increased stock of non-performing loans (NPLs). - As support measures are phased out, central bank will closely monitor financial sector developments and stands ready to act as required. - Authorities committed to strengthening the AML/CFT framework to comply with international best practices and norms and complete the FATF Action Plan for early exit from increased monitoring; measures include supervisory, regulatory and law enforcement actions. - Initiatives to sustain financial services industry resilience and development include: - Introduction of new Securities and Securitization Bills. - Enactment of new legislation for virtual assets. - Launch of one-year training programs on AML matters. - Roll-out, on a pilot basis, of the Central Bank Digital Currency – the Digital Rupee. - Authorities appreciate the Fund’s continued support on these initiatives. ### External competitiveness and structural policies - Authorities agree on the need to improve external competitiveness and enhance long-term growth; ongoing efforts include pursuing bilateral and multilateral trade agreements with India, China, the United Kingdom and the African Continental Free Trade Area. - Planned institutional and programmatic measures: - Establish a Trade Development and Intelligence Cell. - Introduce an Export Development Program to improve export readiness of enterprises. - Human capital, innovation, and green transition priorities: - Provide training and re-skilling opportunities to 10,000 individuals in the next financial year. - Launch initiatives to facilitate access to finance, particularly for SMEs. - Introduce tech-related courses. - Support gender equality and female workforce participation through the “Accompagnement des familles” program and initiatives to support women entrepreneurship and increase eligibility under the Back to Work Program. - Significant investments planned to address climate challenges and support transition to a greener, sustainable and climate resilient country. ### Conclusion - Authorities recognize the challenges posed by the Covid-19 pandemic and climate change and express appreciation to the IMF for continued support and advisory role. - Commitment reiterated to implement policy and reform agenda to restore growth, build resilience, improve external competitiveness and boost long-term inclusive growth while preserving macroeconomic stability. *Source: 1musea2021001 - 14.9 percent in 2020, from an expansion of 3.0 percent in 2019, as the tourism industry* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1musea2021001.pdf_