## 1musea2022001 ## Source details **Canonical URL:** [1musea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1musea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1musea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1musea2022001.pdf.json) --- ### Recovery from the pandemic and policy responses - Public health and support measures - Vaccination campaign covering over 90 percent of the eligible population by May 2022. - On- and off-budget support measures amounting to 28 percent of GDP. - Wage subsidy to the tourism sector and self-employed workers completely phased out in April 2022. - BOM-regulated moratorium on loans expected to cease by end-June 2022. - Economic activity and labor market - Real GDP rebounded from a contraction of around 15 percent in 2020 to 4.0 percent in 2021. - Tourism: tourist arrivals at 13 percent of 2019 level in 2021. - Unemployment rate declined to 8.1 percent in 2021Q4 compared to 10.4 percent in 2020Q4. - Inflation and exchange rate - Inflation increased from 2.7 percent at end-2020 to 6.8 percent at end-2021 and further to 11 percent at end-April 2022. - The rupee depreciated by about 9 percent in real effective terms in 2021. - Financial sector - Banking system remained well capitalized; share of non-performing loans declined and return indicators improved. - Credit to the private sector marginally contracted. - GBCs’ dollar-denominated deposits substantially increased and their net financial flows were large positive. ### Outlook and key macro risks - Growth and inflation projections - Staff projects real GDP growth of 6.1 percent in 2022. - Tourist arrivals expected at about 800,000 in 2022, representing about 60 percent of pre-pandemic levels, and to regain pre-pandemic levels by 2024. - Economy expected to converge to pre-pandemic trend growth of 3-3½ percent by 2025. - Annual inflation expected to rise to 11.4 percent in 2022. - Downside risks - War in Ukraine: higher global inflation, worse terms of trade, constrained real incomes abroad and domestically, and weaker tourist flows. - Limited flight availability constraining travel; Statistics Mauritius estimates growth could increase by 0.6 percent for every additional 100,000 tourists. - Climate change risks: Mauritius is among the most vulnerable countries. ### Fiscal position, deterioration and medium-term outlook - FY2020/21 fiscal deterioration - Overall borrowing requirement increased to 23.1 percent of GDP in FY2020/21. - Expenditure increased by over 10 percent of GDP, mostly to address the pandemic. - A transfer amounting to 13 percent of GDP from the BOM to MOFED helped finance the high deficit. - Public debt rose to 99.2 percent of GDP from 84.6 percent in FY2019/20. - FY2021/22 and FY2022/23 projections and risks - Staff projects the overall borrowing requirement to improve to 7.6 percent of GDP in FY2021/22. - Improvement mostly due to sale of shares of Airport Holdings Ltd to MIC amounting to Rs13 billion (2.6 percent of GDP) in December 2021. - MOFED assumes disposals could reach Rs22 billion (4 percent of GDP) in FY2022/23; staff projects only half executed. - Absent one-off operations, overall borrowing requirement would be 5.9 percent of GDP in FY2022/23. - Tax revenue expected to remain at 20.4 percent of GDP in FY2022/23 as recovery proceeds. - Expenditure: new pay structure in November 2021 entails additional spending amounting to about 1 percent of GDP in FY2021/22. - Fuel subsidies under STC pricing mechanism could require 0.6 percent of GDP given global oil price increases; STC price stabilization account exhausted. - Pension outlook - New benefit payments in FY2023/24 set to increase pension spending to 8.1 percent of GDP. - Fiscal rules and anchors - Staff recommends reinstating fiscal rules; new medium-term debt anchor could be up to 80 percent of GDP. - Operational rule: ceiling for the overall borrowing requirement of 3 percent of GDP starting in FY2022/23 with a five-year transition to FY2027/28. ### Debt sustainability, DSA findings and stress tests - Baseline and levels - Public-sector debt-to-GDP ratio increased to 99.2 percent of GDP in FY2020/21 (from 66.2 percent in FY2018/19). - Staff forecasts decline to 92.4 percent in FY2021/22 and projects debt-to-GDP ratio will decline to 83.8 percent of GDP in FY2026/27. - DSA risk signals - Ten upper-bound early-warning thresholds are crossed; all upper-bound thresholds for debt level and gross financing needs are breached. - External debt rose: external debt reached 130 percent of GDP in 2021 (from 116 percent in 2020) in one section; elsewhere total external debt figures vary by table and projection. - Selected stress-test outcomes - Growth shock: debt up to 100.8 percent in FY2023/24 (vs 86.1 percent baseline) and 97.2 percent by FY2026/27 (vs 83.8 percent baseline). - Real interest rate shock: sovereign risk premia +200 basis-points raises debt to 89.1 percent by FY2026/27 (vs 83.8 baseline). - Primary balance shock: cumulative deterioration of 4 percent of GDP over FY2022/23–FY2023/24 pushes debt to 92.3 percent in FY2023/24 (vs 86.1 baseline). - Combined macro-fiscal shock: public debt-to-GDP ratio peaking at 112.7 percent by FY2023/24. - Contingent liability shock (10 percent of banking sector assets): debt rises to 135.8 percent of GDP in FY2023/24; gross financing needs spike to 56.2 percent of GDP in FY2022/23. ### Monetary policy, BOM operations, and governance - Monetary stance and liquidity - BOM maintained an accommodative stance in 2021; policy interest rate increased to 2 percent in March 2022 from 1.85 percent. - Excess rupee liquidity declined from its peak in 2020 but remained large, limiting monetary control. - FX operations and reserves - Rupee depreciated by about 10 percent in nominal terms and 9 percent in real effective terms in 2021; REER depreciated by 8.5 percent y-o-y in 2021. - BOM total FX sales to banks and the STC increased to US$1.5 billion in 2021 compared to about US$1 billion in 2020 in one section; elsewhere BOM sold US$1.6 billion net in 2021. - Gross official reserves increased to US$8.5 billion by end-2021 (almost 22 months of imports) compared to US$7.2 billion at end-2020; reserves declined to US$7.3 billion by end-April 2022 due to banks’ withdrawal of FX deposits. - Reserve coverage of augmented ARA metric: about 120 percent at end-2021; sensitivity variants showed 111 percent and 109 percent in some adjustments. - Staff recommendations on monetary policy and BOM governance - Roll out the modernized monetary policy framework promptly with explicit inflation target and fixed-rate full-allotment, mid-corridor system. - Actively tighten policy to bring inflation back to medium-term target; mop up excess domestic cash via BOM bills at rates aligning money market to policy rate; reduce BOM bills maturity from 3 months to 7 days. - Recapitalize the BOM per existing legislation: BOM capital relatively low at Rs10 billion (about 2 percent of both GDP and BOM liabilities). - Do not transfer the Rs5 billion (1 per-cent of GDP) in BOM’s accounts receivable to the government. - Reform BOM law to prohibit central bank transfers to the government and quasi-fiscal financing; expedite new BOM Act consistent with best international practices. - Relinquish BOM ownership of the Mauritius Investment Corporation (MIC); options: MIC taken over by government or folded into Development Bank of Mauritius. To finance takeover, government could raise liquidity and/or deploy Rs90 billion (about 20 percent of GDP) in government deposits at end-2021. ### Financial sector soundness and supervisory priorities - Systemic indicators and exposures - NPLs declined to 5.3 percent (from 6.2 percent at end-2020). - Moratorium on loans declined from Rs73 billion to about Rs34 billion; moratorium expected to end in June 2022. - Three quarters of public debt is held domestically; households’ loan-to-GDP ratio at 38 percent. - Large GBC deposits about 120 percent of GDP; domestic banks’ exposure to foreign liquidity and rollover risks substantial. - Staff recommendations - Continue monitoring systemic risks and quality of loans under moratorium; targeted, transparent, temporary support only. - Maintain loan classification standards; ensure legal/operational frameworks support timely resolution of impaired loans. - Expand stress testing to more complex scenarios. - Strengthen AML/CFT regime, especially related to non-resident and cross-border activity; FSC to strengthen risk-based AML/CFT supervision of GBCs and impose proportionate, dissuasive sanctions. - FSAP implementation updates - Regular solvency and liquidity stress testing conducted quarterly; LCR implemented in 2017. - Progress on consolidated supervision, D-SIB framework, and other supervisory enhancements; resolution framework drafted but not yet enacted; Mauritius Deposit Insurance Scheme Act enacted April 2019 but not yet proclaimed. ### External position, capital flows, and reserve adequacy - Current account and REER - Current account deficit expanded to 13.7 percent of GDP in 2021 from 9.2 percent in 2020; expected at 13.5 percent in 2022 in one section and projected to stabilize near 5 percent in medium-term under baseline. - EBA-lite current account gap estimated at -13 percent; REER misalignment assessments: overvaluation of about 39 percent (CA-model) and 26 percent (IREER-model). - Capital and financial flows - Net international capital and financial flows increased from 4.1 percent in 2020 to 26 percent in 2021. - Inflows through financial and capital account in the GBC sector: 26.5 percent of GDP in 2021 (vs 9 percent in 2020). - Assessment: capital account likely to remain in surplus provided GBC sector maintains operations; exit from FATF increased monitoring list expected to support flows. - Reserves and adequacy - End-year international reserves: US$4.9 billion (end-2016); US$7.3 billion (2019); US$7.2 billion (2020); US$8.5 billion (2021). - Augmented reserve coverage about 123 percent at end-2020 and 120 percent at end-2021; variants adjusting for year-end FX deposit spikes yield coverage closer to lower bound. - Staff: reserves broadly adequate but large, complex GBC sector warrants stronger buffers. ### Structural transformation, diversification, digitalization and climate - Diversification priorities - Diversify into sectors with advantage, including ITC and digital-related sectors; leverage AfCFTA and trade agreements with China and India. - Two thirds of tourist flows originate from only six countries—need to diversify tourist source markets and upgrade marketing. - Promote higher-value added tourism (low density, health- and eco-friendly tourism). - Digitalization - IMF Enhanced Digital Access Index (EDAI), 2019: Mauritius ranks high in digital infrastructure, affordability, and knowledge, but quality of digital connectivity ranks low. - Policy actions: increase broadband speed and international bandwidth. - BOM considering issuing central bank digital currency (CBDC). - Climate change financing - Mauritius averages four adverse events every 10 years. - Total climate change expenditure on average 2 percent of GDP per year, adaptation about 1.6 percent of GDP. - To achieve climate goals by 2030 authorities need to close a financing gap of around 1.6 percent of GDP per year on average; closing gap requires mix of external grants/concessional loans and improved project planning/appraisal/execution/reporting. ### Key policy recommendations (consolidated) - Fiscal - Develop and deploy a comprehensive fiscal consolidation plan to restore fiscal space and sustain public debt. - Introduce and adhere to a fiscal rule; consider medium-term debt anchor up to 80 percent of GDP and an operational ceiling for overall borrowing requirement of 3 percent of GDP by FY2027/28 with a five-year transition. - Reform pension system to address long-term sustainability; consider raising BRP eligibility age, targeting BRP, and reforming CSG contributory design. - Target transfers to the vulnerable rather than broad-based subsidies; continue to pass through global petroleum prices while protecting vulnerable households. - Avoid reliance on quasi-fiscal financing; prioritize credible revenue and expenditure measures over one-off/quasi-fiscal operations. - Monetary and central bank governance - Proceed with monetary policy normalization; roll out new monetary policy framework with explicit inflation target. - Mop up excess liquidity via BOM bills; shorten BOM bills maturity to improve operational effectiveness. - Recapitalize the BOM per legislation; do not transfer Rs5 billion (1 per-cent of GDP) accounts receivable to government. - Reform BOM Act to prohibit direct transfers to government and quasi-fiscal activities; expedite new legislation and improve governance (MPC composition, BOM representation in MIC). - Relinquish BOM ownership of the MIC; MIC to return undisbursed financing to BOM or be taken over by government/Development Bank of Mauritius. - Financial sector and AML/CFT - Maintain high capital adequacy and strong supervision; continue targeted support that is transparent and temporary. - Strengthen AML/CFT regime, enhance supervision of GBCs, and impose proportionate sanctions. - Expand stress testing to complex scenarios; operationalize resolution framework and deposit insurance. - External and structural policies - Allow exchange rate flexibility and adopt FX intervention strategy oriented toward smoothing volatility. - Improve competitiveness, address external imbalances, support diversification (ICT/digital), and implement climate adaptation/mitigation measures. - Strengthen public financial management, procurement, statistical capacity (national accounts, BOP), and access to climate finance. ### Selected key indicators (selected series and projections) - Real GDP (percentage change): 3.0 (2019), -14.9 (2020), 4.0 (2021), 6.1 (2022), 5.6 (2023) - Consumer prices (period average, percentage change): 0.5 (2019), 2.5 (2020), 4.0 (2021), 11.9 (2022), 5.8 (2023) - Unemployment rate (percent): 6.7 (2019), 9.2 (2020), 9.5 (2021), 7.8 (2022), 7.5 (2023) - Gross international reserves (millions of U.S. dollars): 7,329 (2019), 7,242 (2020), 8,513 (2021), 6,801 (2022), 6,371 (2023) - GDP at current market prices (billions of Mauritian rupees): 498.3 (2019), 429.7 (2020), 465.1 (2021), 520.1 (2022), 581.3 (2023) - Public sector debt, fiscal year (percent of GDP): 84.6 (2019), 99.2 (2020), 92.4 (2021), 88.1 (2022), 86.1 (2023) *STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (MAURITIUS). Source: IMF staff and country authorities.* ### 2021. Mauritius exited from the Financial Action Task Force (FATF) list of jurisdictions under ### 2021. Mauritius exited from the Financial Action Task Force (FATF) list of jurisdictions under increased monitoring in October 2021 and the analogous EU and UK lists soon after. ### Recovery from the pandemic and policy responses - Public health and support measures - Vaccination campaign covering over 90 percent of the eligible population by May 2022. - On- and off-budget support measures amounting to 28 percent of GDP. - Wage subsidy to the tourism sector and self-employed workers completely phased out in April 2022. - BOM-regulated moratorium on loans expected to cease by end-June 2022. - Economic activity and labor market - Real GDP rebounded from a contraction of around 15 percent in 2020 to 4.0 percent in 2021. - Most sectors broadly back to pre-pandemic output levels, except tourism (tourist arrivals at 13 percent of 2019 level in 2021). - Unemployment rate declined to 8.1 percent in 2021Q4 compared to 10.4 percent in 2020Q4. - Inflation and exchange rate - Inflation increased from 2.7 percent at end-2020 to 6.8 percent at end-2021 and further to 11 percent at end-April 2022. - The rupee depreciated by about 9 percent in real effective terms in 2021. - Financial sector - Banking system remained well capitalized; share of non-performing loans declined and return indicators improved. - Credit to the private sector marginally contracted. - GBCs’ dollar-denominated deposits substantially increased and their net financial flows were large positive. ### Outlook and risks - Growth and inflation projections - Staff projects real GDP growth of 6.1 percent in 2022. - Tourist arrivals expected at about 800,000 in 2022, representing about 60 percent of pre-pandemic levels, and to regain pre-pandemic levels by 2024. - Economy expected to converge to pre-pandemic trend growth of 3-3½ percent by 2025. - Annual inflation expected to rise to 11.4 percent in 2022 due to surging fuel and food prices, past depreciation of the rupee, and recovering domestic demand. - Downside risks - War in Ukraine: higher global inflation, worse terms of trade, constrained real incomes abroad and domestically, and weaker tourist flows. - Limited flight availability constraining travel; Statistics Mauritius estimates growth could increase by 0.6 percent for every additional 100,000 tourists. - Climate change risks given Mauritius is among the most vulnerable countries. ### Executive Board assessment and key macroeconomic challenges - Recovery vs. inflation: Continue economic recovery while controlling inflation in a global environment with high fuel and food prices and slower recovery. - Fiscal consolidation: Fiscal consolidation path needs careful calibration to balance recovery and long-term fiscal and debt sustainability. Adhering to fiscal rules is critical. - Monetary policy: Normalization cycle needs to proceed to minimize potential second-round effects and control inflation. New monetary policy framework should be rolled out soon. - Central bank governance and operations - Recapitalize the Bank of Mauritius (BOM) per existing legislation to accommodate monetary policy costs. - Reform BOM law to prohibit central bank transfers to the government and quasi-fiscal financing. - Relinquish BOM ownership of the Mauritius Investment Corporation (MIC). - BOM’s FX intervention strategy should smooth volatility while generally allowing exchange rate flexibility, consistent with inflation targeting. - External position: At end-2021 external position substantially weaker than fundamentals and desirable policies suggest; large negative current account gap pointing to substantial overvaluation of the rupee. Financing of the current account will continue to depend on financial and capital flows in the GBC sector. - Structural priorities: Embrace structural transformation to enhance diversification and competitiveness, including greater digitalization and climate change adaptation and mitigation. ### Key policy recommendations - Fiscal - Develop and deploy a comprehensive fiscal consolidation plan to restore fiscal space and sustain public debt. - Introduce and adhere to a fiscal rule and reform the pension system. - Target transfers to the vulnerable where needed to offset sharp increases in food and fuel prices. - Monetary and central bank reforms - Proceed with monetary policy normalization and roll out the new monetary policy framework. - Strengthen BOM independence and credibility via a new BOM Act consistent with best international practices, relinquish MIC ownership, and recapitalize the BOM. - Structural reforms - Support diversification and competitiveness, increase digitalization, and implement climate change adaptation and mitigation measures. ### Selected economic and financial indicators (2019–2023) - Real GDP (percentage change): 3.0 (2019), -14.9 (2020), 4.0 (2021), 6.1 (2022), 5.6 (2023) - Consumer prices (period average, percentage change): 0.5 (2019), 2.5 (2020), 4.0 (2021), 11.9 (2022), 5.8 (2023) - Unemployment rate (percent): 6.7 (2019), 9.2 (2020), 9.5 (2021), 7.8 (2022), 7.5 (2023) - Net foreign assets (percent change): 13.5 (2019), 16.4 (2020), 18.6 (2021), 2.0 (2022), -1.3 (2023) - Net claims on government (percent change): -3.8 (2019), 8.8 (2020), 34.8 (2021), 7.5 (2022), 9.5 (2023) - Credit to non-government sector (percent change): 17.1 (2019), 2.7 (2020), -0.4 (2021), 5.5 (2022), 8.2 (2023) - Broad money (percent change): 6.2 (2019), 17.7 (2020), 8.6 (2021), 1.9 (2022), 4.0 (2023) - Overall borrowing requirement (percent of GDP): -13.1 (2019), -23.1 (2020), -7.6 (2021), -3.9 (2022), -6.1 (2023) - Revenues, including grants (percent of GDP): 22.7 (2019), 22.7 (2020), 24.0 (2021), 23.9 (2022), 23.8 (2023) - Expenditure, excluding net lending (percent of GDP): 34.5 (2019), 42.3 (2020), 33.1 (2021), 29.5 (2022), 29.5 (2023) - Current account balance (percent of GDP): -5.1 (2019), -9.2 (2020), -13.7 (2021), -13.5 (2022), -8.1 (2023) - Gross international reserves (millions of U.S. dollars): 7,329 (2019), 7,242 (2020), 8,513 (2021), 6,801 (2022), 6,371 (2023) - GDP at current market prices (billions of Mauritian rupees): 498.3 (2019), 429.7 (2020), 465.1 (2021), 520.1 (2022), 581.3 (2023) - Public sector debt, fiscal year (percent of GDP): 84.6 (2019), 99.2 (2020), 92.4 (2021), 88.1 (2022), 86.1 (2023) *STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (MAURITIUS).* ### 6. The fiscal and debt position deteriorated significantly in FY2020/21 due to the ### 6. The fiscal and debt position deteriorated significantly in FY2020/21 due to the pandemic ### Fiscal deterioration in FY2020/21 - Overall borrowing requirement increased to 23.1 percent of GDP in FY2020/21. - Expenditure increased by over 10 percent of GDP, mostly to address the pandemic. - A transfer amounting to 13 percent of GDP from the BOM to the Ministry of Finance, Economic Planning and Development (MOFED) helped finance the high deficit. - Public debt rose to 99.2 percent of GDP from 84.6 percent in FY2019/20. ### FY2021/22—expected improvement and risks - Staff projects the overall borrowing requirement to improve to 7.6 percent of GDP in FY2021/22. - Improvement mostly due to the sale of shares of Airport Holdings Ltd to the BOM-owned Mauritius Investment Corporation (MIC), amounting to Rs13 billion (2.6 percent of GDP), in December 2021, which helped reduce the net acquisition of financial assets and hence the overall borrowing requirement. - Tax revenue is expected to be lower than the budget projection. - Key taxes, notably VAT and excises, stood below targets through March 2022 due to the prolonged closure of borders and entertainment venues as well as lower-than-expected tourist arrivals. - The authorities foresee greater financing from state-owned enterprises (SOEs), which will compensate for the shortfall (additional 1.3 percent of GDP). - Expenditures are slightly higher than initially expected. - A new pay structure rolled out in November 2021 entails additional spending on wages, transfers, and social benefits amounting to about 1 percent of GDP in FY2021/22. - Capital expenditure estimates revised down due to slower-than-expected execution of public projects; total expenditures marginally higher by 0.1 percent of GDP relative to the budget. - Fuel, rice, and flour are normally cross-subsidized off-budget by the State Trading Corporation (STC). - Staff estimates that the recent increase of global oil prices would require fuel subsidies amounting to 0.6 percent of GDP under the authorities’ quarterly price setting formula. - The balance on STC’s price stabilization account is exhausted; replenishing it could require transfers from the government. - Staff recommendation: - Use targeted transfers through social safety net programs, rather than broad-based subsidies, to protect the vulnerable. - Continue to pass through global prices to domestic petroleum products while protecting the vulnerable population. ### FY2022/23—staff recommendations and projections - Staff recommends that the budget aims for a further improvement of the fiscal position without reliance on quasi-fiscal operations. - Guiding principle: further reduce the budget deficit through a reduction in current and capital expenditures, mostly reflecting the phasing-out of pandemic-era support. - Overall borrowing requirement expected to decline to 3.9 percent of GDP in FY2022/23 partly due to authorities' plan to sell non-strategic assets. - MOFED assumes disposal of assets could reach Rs22 billion (4 percent of GDP); staff projects only half of these sales would be executed in FY22/23. - Absent one-off operations, the overall borrowing requirement would be higher at 5.9 percent of GDP in FY2022/23. - Tax revenue expected to remain at 20.4 percent of GDP in FY2022/23 as economic recovery proceeds. - Given that the tax ratio is below that in comparable small islands, there is room for new revenue measures. - Staff recommended measures to increase VAT efficiency by scaling back exemptions and zero-rates and strengthening VAT administration. - Expenditure recommendations: - Phase out pandemic-related support measures and scale back capital spending. - Wage subsidies to tourism sector workers and the self-employed were phased out in April 2022. - Remaining transfers to the COVID-19 Projects Development Fund (about 2.3 percent of GDP) should be phased out in FY2022/23 as the economy recovers. - Staff projects total expenditure to decline by 3.2 percent of GDP. - Reprioritize projects that suffer significant implementation delays. ### Pension system and fiscal sustainability - New benefit payments in FY2023/24 are set to increase pension spending to 8.1 percent of GDP. - To make the system sustainable, a combination of expenditure reductions and revenue increases would be required (Annex IV). ### Public debt vulnerabilities and fiscal rules - Public debt sustainability analysis (DSA) indicates that debt vulnerabilities remain elevated; baseline susceptible to shocks, particularly contingent liability shocks affecting the financial sector and the BOM’s balance sheet. - Debt-to-GDP ratio set to stay at elevated levels in the medium term (Annex II). - Reinstating fiscal rules recommended as the economy exits the pandemic. - New medium-term debt anchor could be up to 80 percent of GDP (compared to the anchor of 60 percent of GDP repealed early in the pandemic). - Operational rule: ceiling for the overall borrowing requirement of 3 percent of GDP starting in FY2022/23. - Allow a five-year transition period during which the borrowing requirement would gradually decline to 3 percent of GDP in FY2027/28, pushing the debt ratio to the anchor in FY2026/27. - Introduce well-designed escape clauses to allow temporary suspension of the anchor to address extraordinary shocks. ### Quasi-fiscal financing—risks and examples - Staff recommends fiscal consolidation through credible revenue and expenditure measures and warns against reliance on quasi-fiscal financing. - Example: injection by the MIC of Rs25 billion (around 5 percent of GDP) into Airport Holdings Ltd in December 2021 in exchange for shares from Air Mauritius Ltd helped reduce domestic debt by 6.7 percentage points of GDP from June to December 2021. - While quasi-fiscal measures can help reduce debt in the short term, they can lead to pressures in the medium and long term. ### Authorities’ fiscal views - Authorities have worked on a plan for further fiscal consolidation to increase resilience and reduce public debt levels in the medium term. - They have phased out almost all pandemic-related spending and plan to reduce public sector debt faster than staff’s baseline. - Authorities welcomed recalibrating the medium-term debt anchor to 80 percent of GDP. - Authorities highlighted revenue measures such as social contributions (CSG) and the solidarity levy have increased revenue by approximately 10 percent and will help reduce the budget deficit. ### Monetary policy stance and implementation (BOM) - BOM maintained an accommodative monetary policy stance in 2021. - Announced policy interest rate increased to 2 percent in March 2022 from 1.85 percent after remaining unchanged since April 2020. - Excess rupee liquidity declined from its peak in 2020 but still led to an exceptionally low short-term interest rate since early 2021. - Exchange rate and FX operations: - Rupee depreciated by about 10 percent in nominal terms and 9 percent in real effective terms in 2021. - BOM’s total FX sales to banks and the STC increased to US$1.5 billion in 2021 compared to about US$1 billion in 2020. - Gross official reserves increased to US$8.5 billion (almost 22 months of imports) by end-2021 compared to US$7.2 billion at end-2020. - Banks’ withdrawal of FX deposits contributed to a decline of official reserves to US$7.3 billion by end-April 2022. - Risks: - Increasing FX obligations to maintain reserves exposes the BOM to the risk of reversal of volatile FX domestic deposits. - Official reserve adequacy assessment is complicated (Annex III). ### Staff recommendations on monetary policy and BOM governance - Priorities: tackle legacies of pandemic-era policy choices, implement modernized monetary policy framework, introduce upgraded central bank legislation, and improve governance. - Roll out the modernized framework promptly. - New framework design features an explicit inflation target and policy implementation based on the fixed-rate full-allotment, mid-corridor system. - Actively tighten the policy stance to control inflation and counter un-anchoring of inflation expectations and second-round effects. - Use existing framework as needed; mop up excess domestic cash reserves in full through the issue of BOM bills at a rate that induces the money market rate to align with the announced policy rate. - Reduce BOM bills maturity from 3 months to 7 days to make operations more effective. - Pace of policy rate adjustment should depend on macroeconomic and inflation outlook and aim to bring inflation back to its medium-term target. - Recapitalization and balance sheet concerns: - BOM capital is relatively low at Rs10 billion (about 2 percent of both GDP and BOM liabilities). - In staff’s baseline projections, inflation normalizes by 2025 assuming policy is tightened appropriately. - A key risk is delayed or incomplete tightening if the government signals unwillingness to increase BOM’s capital and the BOM limits expenses on domestic liquidity sterilization. - Recapitalizing the BOM upfront is preferable but more demanding for the fiscal sector. - The Rs5 billion (1 per-cent of GDP) in the BOM’s accounts receivable should not be transferred to the government to limit further deficit monetization. - Exchange rate policy: - Allow more flexibility and adopt a new FX intervention strategy oriented toward smoothing excessive volatility rather than market clearing and intermediation. - Support the transition with communications to the market. - MIC and quasi-fiscal activities: - Staff recommends the BOM relinquish ownership of the MIC, the MIC return undisbursed financing to the BOM, and avoid quasi-fiscal financing. - Options for the MIC: be taken over by the government or folded into the Development Bank of Mauritius. - To finance takeover, the government could raise liquidity from the market and/or deploy resources in government deposits—Rs90 billion (about 20 percent of GDP) at end-2021. - Such a step would also alleviate excess domestic liquidity. - Legal and governance reforms: - Expedite the new BOM Act to match best international practices and prohibit direct financing of non-banks, other quasi-fiscal activities, and transfers to the government beyond regular profit transfers. - Reform governance: Monetary Policy Committee (MPC) composition and BOM representation in MIC create potential conflicts of interest. ### Authorities’ monetary views - Authorities concurred that inflationary pressures call for policy tightening; timing and pace will depend on assessment of inflation and growth outlook. - Upcoming MPC meetings will discuss appropriate policy moves. - Authorities confirmed the new policy framework would be rolled out this year. - Authorities view current level of BOM capital and income suffice to cover policy costs. - Authorities confirmed intention to submit the new banking legislation to the National Assembly at its last session for 2022 and to send the draft BOM Bill to the IMF in June for consultation. - Authorities considered creating the MIC to support systemically important and viable firms and safeguard financial sector stability during the pandemic; expected profits from MIC investments and viewed MIC as appropriate to support investment in strategic enterprises and projects. *Source: IMF staff and country authorities.* ### 26. The authorities agreed to review the FX intervention strategy. They viewed their ### 26. The authorities agreed to review the FX intervention strategy. They viewed their ### Exchange rate policy and FX intervention - Authorities viewed their approach to exchange rate policy during the pandemic as appropriate, including large FX sales intervention aimed at preventing disorderly market conditions. - The exchange rate remained flexible, and its evolution was consistent with market conditions. - Authorities expect FX market pressures to subside and the BOM’s interventions to decline as FX flows return. - Staff recommendation: the BOM’s FX intervention strategy should aim to smooth volatility while generally allowing for exchange rate flexibility, facilitating macroeconomic adjustment. ### Financial sector policies and systemic risks - Current assessment: level of systemic risks in the financial sector currently appears low. - Staff advice: BOM should continue monitoring systemic risks and the quality of loans under moratorium. - Capital adequacy: banking system’s capital adequacy ratios were substantially above benchmarks at end 2021Q3. - Non-performing loans (NPLs): share of NPLs declined to 5.3 percent compared to 6.2 percent at end-2020. - Moratorium on loan service: - Amount of loans under moratorium declined from Rs73 billion to about Rs34 billion. - Moratorium introduced in response to the pandemic has not been formally lifted; authorities expect it is likely to end in June 2022. - Staff note: banks and the BOM should continue assessing how ending the moratorium in June 2022 may affect the quality of the remaining loans and stability of banks. - Recommendations for continued support and resolution: - Any further support should be targeted, transparent, and temporary. - Loan classification standards should be maintained and, if some loans become impaired, legal and operational frameworks should support timely resolution. - Banks and the BOM will need to continue tracking systemic risks. - Financial sector exposures and liquidity: - Three quarters of public debt is held domestically implying substantial financial sector exposure to it. - Households’ loan-to-GDP ratio at 38 percent indicates substantial exposure to the household sector. - Banks will need to continue maintaining their short-term FX liquidity. - Authorities need to monitor the risk of disruptions to FX funding of the GBC sector and potential spillovers to the domestic economy, in the context of tightening in global financial conditions. - Stress testing: - Regular exercises in 2021 indicated that the banking system as a whole is resilient. - Staff recommends expanding stress testing to assess banks’ resilience in more complex and realistic scenarios. - AML/CFT and supervisory improvements: - Mauritius exited FATF list of jurisdictions under increased monitoring in October 2021; EU and the UK soon followed suit. - Staff urged continued strengthening of the AML/CFT regime, particularly related to non-resident and cross-border activity. - Financial Services Commission should strengthen a supervisory framework for risk-based AML/CFT supervision of GBCs, including imposition of proportionate and dissuasive sanctions. - Authorities’ views: - Authorities agreed close monitoring and stress testing of banks should continue. - They emphasized that the banking system is resilient and able to sustain a wide range of shocks. - The BOM deploys a comprehensive approach to monitor banks’ soundness and is proactive in preempting financial stress at macro- and micro-levels. - Targeted support to specific sectors could continue depending on the pace of economic recovery. ### External position, reserves, and external debt - Current account: - Current account deficit expanded to 13.7 percent of GDP in 2021 from 9.2 percent in 2020 and is expected to be at 13.5 percent in 2022. - The current account gap is at -13 percent. - Real effective exchange rate (REER): - REER depreciated by 8.5 percent year-on-year in 2021. - Domestic currency appears overvalued by 26-39 percent. - Reserve adequacy: - Reserves remain close to the middle of the 100-150 percent adequacy range of the Fund’s Assessing Reserve Adequacy (ARA) metric. - Accounting for financial sector vulnerabilities associated with the offshore GBC deposits, reserves covered 120 percent of the metric at end-2021 (Annex III). - External debt: - External debt reached 130 percent of GDP in 2021 (from 116 percent in 2020) and appears to be at an elevated level. - A large part of the debt is held by domestic banks (94 percent of GDP in 2021) and therefore the sector will need to continue to carefully manage foreign liquidity, exchange rate, and rollover risks. - Public external debt is low at 24 percent of GDP and is mostly concessional, long-term, and at a fixed interest rate. - Notes on measurement and uncertainty: - The 2020 BOP outturn has been substantially revised by the BOM; current account deficit revised to 9.2 percent of GDP from 12.5 percent reported previously. - The current account deficit may be overstated as exports by the GBC sector are not covered in the BOP statistics; BOM, Statistics Mauritius, and Financial Sector Commission are working on estimating such flows. - Staff views the external assessment as characterized by elevated uncertainty due to the adverse supply shock to tourism, which is seen as transitory. The current account imbalance and misalignment are expected to be significantly lower as tourism recovers and commodity markets stabilize. - Policy implication: improving competitiveness and addressing external imbalances would help sustain debt across all economic sectors. ### Structural transformation, diversification, and digitalization - Diversification priorities: - Diversifying the economy is critical to support Mauritius’ aspiration to become a high-income country. - AfCFTA and new trade agreements with China and India provide an important opportunity for diversification. - Mauritius should diversify into sectors where it has an advantage, including the ITC and digital-related sectors. - Authorities need to consider policy options to reduce the shortage of suitably skilled workers given the rapidly ageing population. - Economic diversification and resilience need to be supported by a comprehensive reform agenda formulated in consultation with the private sector and civil society. - Tourism sector diversification: - Two thirds of tourist flows originate from only six countries. - Diversifying the customer base and upgrading international marketing can increase resilience. - Embracing higher-value added tourism products (low density, health- and eco-friendly tourism) will be key as tourist preferences shift. - Digitalization: - Greater digitalization should promote diversification and moving up the value chain but requires policies to improve digital connectivity. - Authorities aim to diversify growth towards the ICT sector and become a regional hub for digital knowledge. - BOM is considering issuing central bank digital currency (CBDC) (selected issues paper). - IMF Enhanced Digital Access Index (EDAI), 2019 results indicate Mauritius ranks high in digital infrastructure, affordability, and knowledge, but quality of digital connectivity ranks low. - Policy actions to improve quality of digital connectivity include increasing broadband speed and international bandwidth. - Climate change and financing: - Mauritius is among the most vulnerable to climate shocks; climate shocks are frequent, with an average of four adverse events taking place every 10 years. - Mauritius’ total climate change expenditure is on average 2 percent of GDP per year, of which adaptation accounts for around 1.6 percent of GDP. - To achieve climate change goals by 2030, the authorities would need to close a financing gap of around 1.6 percent of GDP per year on average. - Closing the gap likely requires a mix of external grants or concessional loans and greater access to global climate funds; higher access will require improving planning, appraisal, execution, and reporting of climate-related projects. - Authorities’ views: - Authorities agreed building economic, social, and environmental resilience is key for long-term growth. - They are devising new policies and measures to unlock private investment and exports that will push medium-term growth above staff’s baseline projection. - They are working to improve the business environment by further consolidating public-private partnership. ### Other fiscal, statistical, and capacity development issues - Public financial management and transparency: - Continued efforts are necessary to further strengthen public financial management and fiscal transparency, and safeguard independence of Statistics Mauritius. - February 2022 National Audit Office report highlighted lapses in procurement and deficiencies in management of government projects, calling for value for money and strict observance of procurement rules and proper management of capital projects. - It is important to safeguard statistical independence of Statistics Mauritius in estimations of economic developments and outlook. - Capacity development (CD) priorities and technical assistance requested: - Modernizing the monetary policy framework. - Strengthening the fiscal framework and sustainability. - Enhancing public financial management. - Improving compilation of national accounts and BOP. - Requested technical assistance: review the Central Bank Act and Banking Bill, upgrade the central bank’s Forecasting and Policy Analysis System (FPAS), and review BOP statistics. - CD on real sector and price statistics, customs and tax administration, PFM, banking regulation and supervision, monetary policy operations, FX interventions, payment system and CBDC are planned or executed. ### Staff appraisal: macroeconomic outlook and policy priorities - Recovery and health outcomes: - Economy is recovering following a substantial contraction in 2020. - Vaccination campaign covered over 90 percent of the eligible population by May 2022. - Most sectors broadly back to pre-pandemic output levels, except tourism where activity remains subdued. - Macro challenges: - Key challenge: continue economic recovery while controlling inflation in a global environment with high fuel and food prices and slower recovery. - Recovery expected to continue but at a slower pace than projected before the war in Ukraine due to lower growth in trading partners, less optimistic prospects for tourist flows, and worsening terms of trade. - Inflation has picked up substantially due to global supply bottlenecks, higher fuel and food prices, freight costs, and past depreciation of the rupee. - Fiscal policy: - Fiscal consolidation needs careful calibration to balance recovery with long-term fiscal and debt sustainability. - Adhering to fiscal rules remains critical to preserve fiscal sustainability and reduce debt vulnerabilities in the medium term. - Public debt is elevated after increasing during the pandemic; fiscal performance continues to be impacted by the pandemic and renewed pressures on current spending. - Targeted transfers to the vulnerable may be needed in the face of sharp increases in food and fuel prices. - If the economy continues to recover, revenue should increase and spending be reduced, including through pension system reform, to put debt on a declining path in the medium term. - Monetary policy and central bank governance: - Monetary policy normalization cycle needs to proceed to minimize potential second-round effects from supply-side shocks and to control inflation in the medium term. - The war in Ukraine adds to pressures and will require engineering tighter policy in an increasingly complicated environment. - The monetary policy framework needs to be modernized and credibility and independence of the central bank safeguarded. - Staff recommends the new monetary policy framework be rolled out soon to support policy effectiveness. - Government needs to recapitalize the BOM per existing legislation for the BOM to accommodate the monetary policy costs. - Reform of the BOM law should prohibit central bank’s transfers to the government and quasi-fiscal financing. - Relinquishing the BOM ownership of the MIC would help strengthen the central bank’s operational independence and financial position. - External sector and structural priorities: - External position at end-2021 was substantially weaker than suggested by fundamentals and desirable policies, although official foreign reserves remained broadly adequate. - Financing of the current account will continue to depend on financial and capital flows in the GBC sector; exit from AML/CFT listings should support flows but indirect impact of sanctions on Russia may pose risks. - Mauritius should embrace structural transformation to continue along the path to sustainable and resilient long-term growth. - Priorities: enhancing diversification and competitiveness, greater digitalization of the economy, and adaptation and mitigation policies to tackle climate change vulnerabilities. *Content summarized from IMF country report chapter/section 1musea2022001.* ### 48. Staff recommends that the next Article IV consultation takes place on the standard 12- ### 1musea2022001 - 48. Staff recommends that the next Article IV consultation takes place on the standard 12- ### Real sector developments - Economy contracted across the board in 2020 and is recovering: Real GDP growth (annual percent change) — 2019: 3.8; 2020: 3.0; 2021: -14.9; 2022: 4.0; 2023: 6.1; 2024: 5.6; 2025: 4.1; 2026: 3.3; 2027: 3.3; projection beyond: 3.3. - Real GDP per capita (annual percent change) — 2019: 3.7; 2020: 2.9; 2021: -14.9; 2022: 4.1; 2023: 6.2; 2024: 5.6; 2025: 4.1; 2026: 3.3; 2027: 3.3; projection for 2027: 3.5. - GDP per capita (U.S. dollars) — 2019: 11,206; 2020: 11,088; 2021: 8,619; 2022: 8,807; 2023: 9,135; 2024: 10,008; 2025: 11,101; 2026: 12,001; 2027: 12,788; 2028: 13,503. - Output gap: gradually closing; charted output gap in percent of potential GDP through 2027 (shaded areas and asterisks are projections). - Tourism: Tourist arrivals and tourism earnings picking up but remain below pre-pandemic levels. Tourism receipts (annual percent change) — 2019: 8.2; 2020: -5.9; 2021: -73.8; 2022: -23.8; 2023: 199.4; 2024: 41.7; 2025: 34.0; 2026: 7.4; 2027: 5.8; 2028: 4.7. - Labor market: Unemployment rate (percent) — 2019: 6.9; 2020: 6.7; 2021: 9.2; 2022: 9.5; 2023: 7.8; 2024: 7.5; 2025: 7.3; 2026: 7.3; 2027: 7.3; 2028: 7.3. - Inflation: Consumer prices (period average) — 2019: 3.2; 2020: 0.5; 2021: 2.5; 2022: 4.0; 2023: 11.9; 2024: 5.8; 2025: 5.2; 2026: 4.2; 2027: 3.8; 2028: 3.5. End-of-period (YoY) — 2019: 1.8; 2020: 0.9; 2021: 2.7; 2022: 6.8; 2023: 11.4; 2024: 5.9; 2025: 4.6; 2026: 3.9; 2027: 3.6; 2028: 3.4. - Main COVID support measures (millions of rupees): wage assistance and self-employed assistance schemes and various other initiatives to limit unemployment; disbursements shown across FY2019/20–FY2021/22 with amounts disbursed and expected disbursements indicated. ### External sector developments - Current account balance deteriorated due to a drop in tourism and trade balance; Current account (percent of GDP) — 2019: -3.9; 2020: -5.1; 2021: -9.2; 2022: -13.7; 2023: -13.5; 2024: -8.1; 2025: -5.3; 2026: -5.3; 2027: -5.0; 2028: -5.3. - Trade balance (percent of GDP) — 2019: -20.0; 2020: -21.3; 2021: -21.9; 2022: -19.5; 2023: -24.1; 2024: -26.8; 2025: -22.6; 2026: -21.5; 2027: -21.0; 2028: -20.7. - Exports of goods and services, f.o.b. (percent change) — 2019: 3.7; 2020: 3.6; 2021: -5.9; 2022: -41.3; 2023: 3.5; 2024: 32.8; 2025: 15.6; 2026: 15.6; 2027: 5.2; 2028: 4.0; 2029: 3.0 (table extends through 2027). - Financial inflows: gross financial inflows sustained and net inflows increased in 2021; net financial inflows expected to moderate in 2022 after a spike in 2021 and remain in surplus afterwards. - Gross international reserves (millions of U.S. dollars) — 2019: 6,321.6; 2020: 7,329; 2021: 7,242; 2022: 8,513; 2023: 6,801; projections: 2024: 6,371; 2025: 6,371; 2026: 6,371; 2027: 6,371. - Months of imports coverage — 2019: 10.3; 2020: 16.9; 2021: 14.3; 2022: 14.7; 2023: 11.5; 2024: 10.1; 2025: 9.5; 2026: 9.0; 2027: 8.6; 2028: 8.1. - Changes in reserves decomposed: sales interventions by BOM, other factors including borrowing from non-residents and reinvesting banks' excess cash in FX, and change in reserves shown in USD amounts (chart). ### Fiscal sector developments - Fiscal performance expected to improve in the medium term, helped by quasi-fiscal and one-off operations. - Central government debt rose markedly in FY20/21 and is expected to decline gradually thereafter. - Central government debt (percent of fiscal year GDP) — FY2018/19: 50.8; FY2019/20: 66.7; FY2020/21: 70.6; FY2021/22: 60.2; FY2022/23: 56.8; FY2023/24: 57.2; FY2024/25: 58.1; FY2025/26: 59.8; FY2026/27: 61.8; FY2027/28: 64.0. - Public sector debt (fiscal year percent of GDP) — Table notes public sector debt for multiple years (e.g., 2019: 66.2; 2020: 84.6; 2021: 99.2; 2022: 92.4; 2023: 88.1; 2024: 86.1; 2025: 84.4; 2026: 83.8; 2027: 77.8). - Central government finances (millions of rupees): Total revenue and grants — 2019/20: 106,831; 2020/21: 110,665; 2021/22: 103,873; 2022/23: 98,711; 2023/24: 118,465; 2024/25: 131,563; projections to 2027/28 up to 182,927. - Tax revenue (millions of rupees) — 2019/20: 91,492; 2020/21: 98,898; 2021/22: 91,879; 2022/23: 86,028; 2023/24: 100,743; 2024/25: 112,482; projections to 2027/28 up to 158,515. - Total expense (current spending, millions of rupees) — 2019/20: 106,582; 2020/21: 113,214; 2021/22: 134,917; 2022/23: 138,792; 2023/24: 138,543; 2024/25: 147,498; projections to 2027/28 up to 192,979. - Budget balance and consolidated balance (millions of rupees): Budget balance — 2019/20: -7,849; 2020/21: -10,939; 2021/22: -38,580; 2022/23: -47,689; consolidated balance — 2019/20: -15,449; 2020/21: -15,882; 2021/22: -53,896; 2022/23: -85,624; projections through 2027/28 provided. - Overall borrowing requirement (millions of rupees) — 2019/20: -19,254; 2020/21: -23,127; 2021/22: -60,003; 2022/23: -100,776; projected to improve to -29,164 by 2027/28. - Interest rates on central government securities have increased recently (yield by maturity bars for December 2019, December 2020, March 2022 are charted). - Long-term demographic pressures: pension spending projections and dependency ratios (60+ and 65+ dependency ratios charted through 2059). - Sources of quasi-fiscal and one-off financing shown as percent of fiscal year GDP: MIC (FY21/22), Financing from SOEs (FY21/22), Sale of assets (FY22/23). ### Monetary sector developments - Monetary expansion slowed from the 2020 peak: Annual change in Broad (M3) and Reserve Money (in percent) — M3 annual change table: 2019: 6.2; 2020: 17.7; 2021: 8.6; 2022: 1.9; 2023: 4.0; 2024: 4.3; 2025: 10.4; 2026: 9.2; 2027: 8.8. - Credit to the private sector did not grow strongly in 2021; credit to private sector (billions of rupees) charted across 2017–2021. - Large excess liquidity remained in the system, limiting effective monetary policy control of the interest rate and increasing inflation expectations; decomposition of excess liquidity shows banks' rupee excess reserves and net FX interventions. - Key policy and market rates (percent): announced key repo rate, overnight interbank rate, 91-day BOM bill yield charted (Jan-17 to Sep-21). - Net FX interventions by BOM (including STC) — USD million charted across 2017–2021, with increased sales interventions in 2021. - Nominal exchange rate depreciated: Mauritian rupees per U.S. dollar (average) charted from Jan-2016 to Jul-2021 (MUR/USD values shown). - Monetary survey highlights (millions of U.S. dollars): - Net foreign assets (Monetary Survey) — 2018: 570,677; 2019: 647,472; 2020: 753,659; 2021: 894,161; 2022: 911,967; projections show 900,514 to 901,114 through 2027. - Reserve money (millions of rupees, end of period) — 2018: 100,772; 2019: 123,175; 2020: 194,716; 2021: 263,584; 2022: 175,929; projections 151,237 through 170,969. - Money and quasi-money (M2, millions of rupees) — 2018: 443,913; 2019: 471,653; 2020: 554,951; 2021: 602,831; 2022: 614,432; projections to 2027: 844,943. - M3 (millions of rupees) — 2018: 554,893; 2019: 601,973; 2020: 703,593; 2021: 765,847; 2022: 789,963; projections to 2027: 1,146,469. ### Selected economic and financial indicators (highlights and projections) - Real GDP growth (annual percent change) series (2019–2027): 3.8; 3.0; -14.9; 4.0; 6.1; 5.6; 4.1; 3.3; 3.3; 3.3. - Consumer prices (period average) series (2019–2027): 3.2; 0.5; 2.5; 4.0; 11.9; 5.8; 5.2; 4.2; 3.8; 3.5. - Unemployment rate (percent) series (2019–2027): 6.9; 6.7; 9.2; 9.5; 7.8; 7.5; 7.3; 7.3; 7.3; 7.3. - Exports of goods and services (percent change) — 2019: 3.7; 2020: 3.6; 2021: -5.9; 2022: -41.3; 2023: 3.5; 2024: 32.8; 2025: 15.6; 2026: 15.6; 2027: 5.2. - Imports of goods and services (percent change) — 2019: 11.0; 2020: 5.0; 2021: -2.2; 2022: -29.1; 2023: 16.5; 2024: 13.9; 2025: 2.2; 2026: 7.1; 2027: 5.7; 2028: 4.6; 2029: 4.0. - Total external debt (percent of GDP) — 2019: 77.1; 2020: 79.2; 2021: 91.4; 2022: 115.6; 2023: 129.6; projections decline to 104.8 by 2027. - Gross international reserves (millions of U.S. dollars) — 2019: 5,979; 2020: 6,322; 2021: 7,329; 2022: 7,242; 2023: 8,513; 2024: 6,801; 2025: 6,371; 2026: 6,371; 2027: 6,371. - Balance of payments (millions of U.S. dollars) — Current account balance: 2017: -612; 2018: -555; 2019: -718; 2020: -1,003; 2021: -1,527; 2022: -1,567; projected 2023: -1,031; 2024: -742; 2025: -798; 2026: -806; 2027: -903. *Sources: Country authorities; Statistics Mauritius; Bank of Mauritius; and IMF staff estimates and projections.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Conjunctural shocks and scenarios — Risks, Likelihood, Expected Impact, Policy Recommendations - Emergence of the new Covid-19 variants, which are harder to eradicate. Prolonged lockdowns, further disruptions to supply chains. - Likelihood: Medium - Expected Impact: Medium. Constrained tourism; delayed economic recovery. Prolonged policy support requires additional fiscal resources. Further monetization of public deficit and/or increase in public debt. - Policy Recommendation: - Provide targeted and temporary support to mitigate economic impact. - These could be financed by deploying government deposits in banks and issuing domestic debt, if needed. - Avoid BOM transfers to the government. - Rising and volatile food and energy prices. Global commodity prices increase and remain volatile due to supply disruptions, amidst the war in Ukraine and sanctions on oil and gas exports from Russia. - Likelihood: High - Expected Impact: High. Bouts of price, real sector volatility and decline in real income globally. Lower demand for tourism, increasing domestic inflation. - Policy Recommendation: - Allow for gradual pass through of commodity prices according to the STC pricing mechanism and provide targeted fiscal transfers to vulnerable households. - The pace of monetary tightening will need to balance slower recovery and higher inflation expectations. - De-anchoring of inflation expectations and sharper tightening of monetary policy in advanced economies. Recovery in demand amid lagging supply, rapid de-anchoring of inflation expectations, abrupt monetary tightening by central banks globally leads to spiking risk premia and tightening financial conditions. - Likelihood: Medium - Expected Impact: Medium. Asset market selloffs, rupee depreciation, additional pressure on inflation. - Policy Recommendation: - Tighten monetary policy consistent with the macroeconomic outlook and domestic inflation expectations. - Intervene in the FX market to smooth exchange rate volatility, but generally allowing for its flexibility and adjustment. - Delayed and incomplete tightening of monetary policy stance by the Bank of Mauritius (BOM). The BOM chooses not to tighten to avoid facing larger policy implementation costs. - Likelihood: Medium - Expected Impact: Medium. Inflation expectations un-anchor, inflation elevates. Larger policy tightening is required to re-anchor expectations down the road and triggers a recession. - Policy Recommendation: - The BOM should tighten monetary policy guided by the outlook. - Allow for greater exchange rate flexibility to foster policy transmission. - Government should recapitalize the BOM to finance monetary policy costs. - Slower fiscal consolidation. Further pandemic-related support, including the new wage requires higher-than-expected spending. Rising fuel and food prices call for higher subsidies. - Likelihood: Medium - Expected Impact: Medium. Fiscal deficit and financing stay higher than envisaged, keeping debt vulnerabilities more elevated. - Policy Recommendation: - Develop and communicate credible long-term consolidation strategy, prioritizing expenditure measures. - Allow for commodity price pass through deploying the STC pricing mechanism. ### Structural risks — Risks, Likelihood, Expected Impact, Policy Recommendations - Geopolitical tensions and de-globalization. Disorderly migration, decline in global trade, lower investor confidence, associated supply chain disruptions and commodity price shocks. - Likelihood: High - Expected Impact: High. Elevated inflationary pressures. Reduction in current and long-term potential growth. - Policy Recommendation: - Accelerate structural reforms for competitiveness and growth, prioritize fiscal expenditure accordingly. - BOM should stand ready to counter second-round effects. - Higher frequency and severity of natural disasters related to climate change. Economic damage to smaller economies susceptible to disruptions, accelerated emigration from these economies. Reduced global GDP, recalculation of risk and growth prospects. Damages to key infrastructure, disruption to trade, rise in commodity price levels and volatility. - Likelihood: Medium/Low - Expected Impact: Medium-Low. Damage to local infrastructure. Pressure on external demand, including for tourism services. Slower economic growth, elevated inflationary pressures. - Policy Recommendation: - Prioritize fiscal expenditure for climate change adaptation and mitigation measures. - Accelerate structural reforms supporting adaptation and growth in new conditions. *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 — Summary Findings and Risks - Overall assessment: - An updated public debt sustainability analysis (DSA) indicates that Mauritius’ public debt sustainability risks remain high. - The baseline is susceptible to a range of shocks and particularly vulnerable to contingent liability shocks affecting the financial sector. - The debt-to-GDP ratio, which rose notably amid the pandemic, is set to stay at elevated levels in the medium term. - The total external debt has increased substantially which elevates the exposure of the domestic economy to the exchange rate and current account shocks. - Background and key debt figures: - Public-sector debt definition: central government (including extrabudgetary units) and state-owned enterprise (SOE) debt (including loan guarantees extended to SOEs by central government). - Public sector debt-to-GDP ratio increased to 99.2 percent of GDP in FY2020/21 from 66.2 percent of GDP in FY2018/19. - Staff forecasts a decline to 92.4 percent in FY2021/22 and projects debt-to-GDP ratio will decline to 83.8 percent of GDP in FY2026/27. - Recent operations: - No new transfers have been made by the BOM following the Rs55 billion transfer (13 percent of GDP) in FY2020/21. - In December 2021 a government asset disposal to the BOM-owned MIC, in the amount of Rs25 billion (5 percent of GDP), allowed the government to use part of the proceeds to reduce the stock of public sector debt by 6.7 percent of GDP from July to December 2021. - This DSA baseline assumes the government does not recapitalize the BOM to compensate for earlier BOM transfers and does not cover the cost of sterilization going forward. Should such recapitalization take place, the level of public sector debt would increase. - Debt composition and market conditions: - The government mostly fulfills its borrowing requirement from the highly liquid domestic market. - Short-term debt stood at 8.8 percent of total debt in FY2020/21. - Medium- and long-term domestic debt comprise over 90 percent of the total. - Government bond auctions from February 2022 were oversubscribed by more than 150 percent, with the weighted interest rate ranging from 2.2 percent for 3-year treasury notes and 4.6 percent for 20-year bonds. - External debt constituted about one-quarter of total public debt, increasing in FY2020/21; external debt is expected to rise to around 30 percent of GDP in FY2021/22 and thereafter decline to around 23 percent of GDP in the medium-term. - Text Table 1: Mauritius: Public Debt-to-GDP Ratio, 2019-22 (debt stocks as of end June; fiscal year runs from July to June; FY2021/22 projections) - FY2019/20 Total Public Debt: 88.4 - FY2020/21 Total Public Debt: 99.7 - FY2021/22 Total Public Debt: 92.4 - FY2019/20 Central Government: 76.2; State-Owned Enterprises: 8.4; Domestic: 68.6; External: 19.8 - FY2020/21 Central Government: 90.1; State-Owned Enterprises: 9.1; Domestic: 74.0; External: 25.7 - FY2021/22 Central Government: 84.2; State-Owned Enterprises: 8.2; Domestic: 62.8; External: 29.6 - Public DSA Risk Assessment: - Ten upper-bound early-warning thresholds are crossed, compared to eleven in the previous DSA. - All upper-bound thresholds for the debt level and gross financing needs are breached. - The lower-bound threshold is breached for external financing requirements and public debt held by non-residents. - The lower-bound threshold for foreign currency debt is now breached. - Gross financing needs are susceptible to combined macro-fiscal and contingent liability shocks; these risks are mitigated somewhat by the preponderance of domestic debt at longer maturities. - Realism of the baseline: - Baseline assumptions align with the macroeconomic framework underlying the staff report for the 2022 Article IV consultation. - Recent forecast performance: - Growth: After falling dramatically in 2020, growth rebounded to 4 percent in 2021 (less than the projected 5 percent in the previous DSA). It is projected to further recover to 6.1 percent in 2022 and converge to slightly above 3 percent in the medium term. - Consumer prices: Projected to increase significantly in 2022 by around 11.9 percent due to higher oil and food prices and the recovery in demand. - GDP deflator: Projected to increase in 2022 and is higher than in the previous DSA. - Fiscal strategy: Overall borrowing requirement is projected to improve in FY2021/22 and FY2022/23 due to economic recovery and quasi-fiscal and one-off operations, despite a temporary uptick in FY2023/24 due to planned increase in pension spending. - Current account: Expected to decline to around 5 percent of GDP in the medium-term as the tourism sector recovers. - Baseline scenario: - Foresees a decline of public sector debt over the medium term to around 84 percent of GDP. - Room to absorb shocks is limited. - The adjustment to the cyclically-adjusted primary balance envisaged in the baseline is much greater than the median of past adjustments observed in other market-access countries (MAC). - Stress tests and scenario outcomes: - Growth shock: - Lower real output growth by one standard deviation for two years starting in FY2022/23 would push debt up to 100.8 percent in FY2023/24, compared to 86.1 percent in the baseline. - By FY2026/27, debt would be 97.2 percent, compared to 83.8 percent in the baseline. - Real interest rate shock: - An increase in sovereign risk premia by more than 200 basis-points starting in FY2022/23 would push debt up to 89.1 percent by FY2026/27, compared to 83.8 in the baseline. - Primary balance shock: - Fiscal slippage in the form of a cumulative deterioration in the primary balance of about 4 percent of GDP over FY2022/23-FY2023/24 would push total debt up to 92.3 percent of GDP in FY2023/24 compared to 86.1 percent in the baseline. - Combined macro-fiscal shock: - Combining the above three shocks would imply public debt-to-GDP ratio peaking at 112.7 percent by FY2023/24; public debt-to-revenue ratio and public gross financing needs would remain elevated over the medium-term. - Contingent liability shock: - A contingent liability shock equal to 10 percent of banking sector assets would raise debt to 135.8 percent of GDP in FY2023/24 and remain elevated throughout the forecast period. - Gross financing needs in FY2022/23 would spike to 56.2 percent of GDP, then fall rapidly in subsequent years. - Probability and distributional risks: - The probability of debt exceeding 100 percent of GDP in the medium term is around 20 percent by the end of the projection window, per the asymmetric fan chart. - Key risks and challenges to fiscal sustainability: - Short term: Delayed recovery in tourism could lead to lower growth and exchange rate depreciation, increasing the nominal stock of external public debt. - Short to medium term: Monetary policy normalization may require government recapitalization of the BOM to cover sterilization costs (estimated at 0.5 percent of GDP), which should be monitored. - The large financial sector increases potential contingent liability risks to GDP and debt. - Weak public investment management could jeopardize debt sustainability. - Longer term: Population aging will put greater financial pressure on the pension system, and climate change shocks may make long-term growth more vulnerable. - Conclusion and policy implication: - Mauritius’ public-sector debt is subject to notable vulnerabilities; under the baseline, public debt will remain elevated at around 84 percent of GDP in the medium term. - To mitigate risks, public sector debt should be put on a downward path in the medium term. - Risks are larger beyond the medium term due to aging population and climate change risks; recent financing has been aided by significant transfers from the BOM, but the high debt level, if unaddressed, will leave the country highly susceptible to shocks. *Annex I. Risk Assessment Matrix; Annex II. Debt Sustainability Analysis. Source: IMF staff report content provided in the PDF.* ### 15. To reduce debt, fiscal reforms to raise revenue and contain spending, while ### 1musea2022001 - 15. To reduce debt, fiscal reforms to raise revenue and contain spending, while ### Fiscal framework and policy guidance - Guiding principle: further reduce the borrowing requirement through higher revenue mobilization and moderation in spending growth as the economy recovers from the pandemic. - Reinstating fiscal rules through a recalibrated medium-term debt anchor is recommended to preserve fiscal and debt sustainability (selected issues paper). - Note on central bank recapitalization: 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 sector debt dynamics (Baseline DSA highlights) - Nominal gross public debt (in percent of GDP): - 2019: 60.5 - 2020: 84.6 - 2021: 99.2 - 2022: 92.4 - 2023: 88.1 - 2024: 86.1 - 2025: 85.2 - 2026: 84.4 - 2027 (projection end-series shown as 2026): 83.8 - Public gross financing needs (in percent of GDP): - 2019: 15.9 - 2020: 29.6 - 2021: 43.8 - 2022: 27.0 - 2023: 18.6 - 2024: 19.6 - 2025: 19.6 - 2026: 18.6 - 2027: 20.1 - Net public debt mirrors nominal gross public debt across these years. - Change in gross public sector debt (in percent of GDP): - 2019: 1.0 - 2020: 18.4 - 2021: 14.6 - 2022: -6.8 - 2023: -4.3 - 2024: -2.0 - 2025: -1.0 - 2026: -0.7 - cumulative (2019–2026): -15.4 - Identified debt-creating flows (in percent of GDP): - 2019: 1.2 - 2020: 19.3 - 2021: 13.1 - 2022: -8.8 - 2023: -4.8 - 2024: -1.4 - 2025: -0.6 - 2026: -0.6 - cumulative: -16.9 - Primary deficit (in percent of GDP): - 2019: 1.5 - 2020: 10.7 - 2021: 20.3 - 2022: 5.8 - 2023: 2.6 - 2024: 4.6 - 2025: 3.5 - 2026: 2.5 - cumulative: 21.1 - Primary (noninterest) revenue and grants (in percent of GDP): - 2019: 20.9 - 2020: 22.7 - 2021: 22.6 - 2022: 24.0 - 2023: 23.8 - 2024: 23.7 - 2025: 23.6 - 2026: 23.6 - cumulative: 142.3 - Primary (noninterest) expenditure (in percent of GDP): - 2019: 22.3 - 2020: 33.3 - 2021: 42.9 - 2022: 29.8 - 2023: 26.4 - 2024: 28.3 - 2025: 27.1 - 2026: 26.1 - cumulative: 163.4 - Automatic debt dynamics (cumulative contribution, in percent of GDP): -32.3 - Interest rate/growth differential (component of automatic dynamics): -32.3 - Real interest rate contributions (selected years, in percent): - 2019: 1.6 - 2020: 2.3 - 2021: 0.6 - 2022: -1.9 - 2023: -2.6 - 2024: -2.2 - 2025: -1.2 - 2026: -0.5 - cumulative: -8.5 - Real GDP growth contributions (selected years, in percent): - 2019: -2.1 - 2020: 5.5 - 2021: 6.5 - 2022: -7.0 - 2023: -4.8 - 2024: -3.8 - 2025: -2.9 - 2026: -2.6 - cumulative: -23.8 - Other identified debt-creating flows include a large negative entry in 2021: - 2021: -15.7 - 2022: -5.7 - cumulative other identified flows: -5.7 - Residual (including asset changes, in percent of GDP): - 2019: -0.2 - 2020: -0.9 - 2021: 1.5 - 2022: 2.0 - 2023: 0.5 - 2024: -0.6 - 2025: -0.4 - 2026: -0.1 - cumulative: 1.5 - Effective interest rate (defined as interest payments divided by debt stock at end of previous year): - 2019: 4.7 - 2020: 4.1 - 2021: 3.2 - 2022: 2.9 - 2023: 2.8 - 2024: 2.6 - 2025: 2.6 - 2026: 2.6 - 2027: 2.5 ### Macroeconomic assumptions underlying the DSA - Real GDP growth (in percent): - 2019: 3.7 - 2020: -7.7 - 2021: -7.3 - 2022: 8.0 - 2023: 5.9 - 2024: 4.8 - 2025: 3.6 - 2026: 3.3 - 2027: 3.3 - Inflation (GDP deflator, in percent): - 2019: 1.8 - 2020: 0.9 - 2021: 2.7 - 2022: 4.7 - 2023: 5.6 - 2024: 5.2 - 2025: 4.0 - 2026: 3.1 - 2027: 2.6 - Nominal GDP growth (in percent): - 2019: 5.6 - 2020: -6.8 - 2021: -4.8 - 2022: 13.1 - 2023: 11.8 - 2024: 10.2 - 2025: 7.7 - 2026: 6.4 - 2027: 5.9 - Ratings (as reported): - Moody’s: n.a. (2019), Baa2 (2020) - S&P’s: n.a. - Fitch: n.a. ### Alternative scenarios and stress tests (summary) - Alternative scenario assumptions shown include: - Baseline: Real GDP growth 8.0 (2021), 5.9 (2022), 4.8 (2023), 3.6 (2024), 3.3 (2025), 3.3 (2026); Primary balance -5.8 (2021), -2.6 (2022), -4.6 (2023), -3.5 (2024), -2.5 (2025), -2.0 (2026); Effective interest rate 2.9 (2021), 2.8 (2022), 2.6 thereafter. - Historical scenario (lower growth): Real GDP growth 8.0 (2021), 1.4 (2022–2026); Primary balance -5.8 (2021), -4.4 (2022–2026); Effective interest rate rising to 4.6 by 2026. - Constant Primary Balance scenario: Primary balance held at -5.8 for 2021–2026. - Stress tests reported (selected outcomes): - Primary Balance Shock: Primary balance reaches -7.8 in 2023; Real GDP growth follows baseline except a deeper primary balance in 2023. - Real GDP Growth Shock: Real GDP growth falls to 1.2 in 2022 and 0.1 in 2023; Primary balance reaches -8.1 in 2023. - Real Interest Rate Shock: Effective interest rate rises to 3.5 (2023), 4.0 (2024), 4.6 (2025), 5.0 (2026). - Real Exchange Rate Shock: Inflation spikes to 14.3 in 2022 in the scenario; effective rates and primary balance largely on baseline path. - Combined Shock: Real GDP growth 1.2 (2022), 0.1 (2023); Primary balance -8.1 (2023); effective interest rate up to 4.0–4.9 across 2023–2026. - Contingent Liability Shock: Primary balance shows -39.1 in 2022 in the scenario; effective interest rate impacts shown up to 5.8 in 2023 under some permutations. - Stress-test indicators (visuals summarized in text): - Gross nominal public debt and public gross financing needs are shown to increase substantially under severe shocks, with scenarios exceeding common benchmarks in some stress cases. ### Risk assessment highlights - Heat map and risk assessment emphasize: - Debt profile vulnerabilities and gross financing needs are key indicators assessed against benchmarks. - Benchmarks noted: gross financing needs benchmark of 15% of GDP; public debt burden benchmark of 70% of GDP; bond spreads benchmarks 200 and 600 basis points; external financing requirement benchmarks 5 and 15 percent of GDP; other thresholds for short-term debt share and foreign-currency debt share. - Selected indicator values and notes: - Bond spread: no data for typical sovereign bond spreads due to lack of foreign-currency denominated bonds (government has not issued such bonds for international comparison). - Public gross financing needs exceeded 15% in crisis years (see Public gross financing needs figures above). ### External sector assessment (Annex III) — key findings - Overall external position at end-2021 was substantially weaker than consistent with medium-term fundamentals and desirable policy settings. - Current account: - Overall current account deficit: 13.7 percent of GDP in 2021 (after a 9.2 percent deficit in 2020). - Projection: current account deficit expected at 13.5 percent of GDP in the reporting year, stabilizing at close to 5 percent of GDP in the medium-term. - Drivers: primarily the service balance weakness due to suspension of tourism; commodity price shocks (food and oil) related to the war in Ukraine also expected to contribute. - EBA-lite assessment: current account gap estimated at -13 percent of GDP; current account balance deviated from the norm of surplus equal to 1.9 percent of GDP. - Table 1 (EBA-lite exchange rate assessment for 2021, in percent of GDP): - CA-Actual: -13.7 - COVID-19 adjustor (+): 2.9 - Adjusted CA: -10.9 - CA Norm (from model): 1.9 - Adjusted CA Norm: 1.9 - CA Gap: -12.8 - o/w Relative policy gap: 6.1 - Elasticity: -0.33 - REER Gap (in percent): 38.9 and 26.1 (two model variants reported) - External balance sheet and NIIP: - NIIP equivalent to 151 percent of GDP in 2020 (decline from 193 percent in 2019); net asset position declined by 39 percent in USD equivalent according to available outturns for end-2020. - Gross liabilities were about 4,100 percent of GDP in 2021; gross assets about 4,200 percent of GDP in 2021. - GBC sector composition at end-2020: direct investment accounted for 59 percent of total gross assets and 72 percent of gross liabilities; portfolio investment about 28 percent of gross assets and 11 percent of liabilities. - Large GBC deposits: about 120 percent of GDP (domestic bank exposures/liquidity risk monitoring recommended). - Assessment and recommendations: - External balance sheet remains volatile due to a large offshore GBC sector; vulnerabilities from gross liabilities are expected to be mitigated by large external assets. - Authorities advised to continue monitoring exposures of domestic banks to liquidity risk, including due to large GBC deposits (about 120 percent of GDP). - Authorities should carefully monitor developments in the GBC sector and sensitivity of flows to changing financial conditions in foreign economies; assess potential direct and indirect exposure to flows impacted by sanctions on Russia introduced in response to the war in Ukraine. - Reserve adequacy assessment suggests international reserves at end-2021 remain within the advisable range. *Source: IMF staff (as presented in the provided content).* ### 5. Background. The real effective exchange rate (REER) depreciated by 8.5 percent year-on- ### 5. Background. The real effective exchange rate (REER) depreciated by 8.5 percent year-on- ### Exchange rate developments and competitiveness - Background findings: - The REER depreciated by 8.5 percent year-on-year (y-o-y) in 2021. - Nominal rupee weakening: 10.1 percent relative to the USD and 7.1 percent relative to the Euro in 2021. - The REER depreciated by 8.3 percent in 2020. - Cumulative appreciation of REER was 3.6 percent between 2015 and 2019. - Assessment of misalignment: - Current Account (CA) model and estimated current account elasticities imply an REER misalignment (overvaluation) of about 39 percent. - Index of Real Effective Exchange Rate (IREER)-model implies the exchange rate is overvalued by 26 percent relative to the level consistent with desired policies and fundamentals. - The IREER-model assessment is broadly consistent with the CA-model assessment but is subject to qualifications due to the supply-side shock in the tourism sector, which persisted in 2021. ### Capital and financial flows - Background findings: - Mauritius maintains an open capital account with minimal capital controls. - The Chinn-Ito index for Mauritius is 0.3. - Net international capital and financial flows increased from 4.1 percent in 2020 to 26 percent in 2021. - Gross drivers in 2021: - Inflows through financial and capital account in the GBC sector: 26.5 percent of GDP in 2021 (compared to inflows of 9 percent of GDP in 2020). - Domestic sector: net outflows at 0.6 percent of GDP in 2021 (compared to outflows of 4.9 percent in 2020). - The unusually large net inflow reflects that GBCs were not reinvesting resources brought to Mauritius as intensively as in previous years. - Estimates of capital and financial flows are preliminary and based on outturns for 3 quarters of 2021 and remain subject to heightened uncertainty due to particularly volatile non-GBC flows, complicating prediction for 2021Q4 and 2021 overall. - Assessment and outlook: - The capital and financial account is likely to remain in surplus in the following years provided the GBC sector maintains operations as before the COVID-19 pandemic. - Continued orderly operation and attraction of new businesses in the GBC sector will likely be supported by Mauritius’ successful exit from the FATF’s list of jurisdictions under increased monitoring and analogous EU and UK AML/CFT lists. - New risks may emerge due to sanctions imposed on Russia amidst the war in Ukraine. ### Reserve adequacy and central bank operations - Background findings: - The exchange rate regime of Mauritius was classified as crawl-like in December 2020. - BOM accumulated international reserves through foreign exchange interventions in 2017–19. - End-year international reserves: - US$4.9 billion at end-2016. - US$7.3 billion in 2019. - 2020: reserves declined by 2 percent to US$7.2 billion (63 percent of GDP). - 2021: reserves increased by 17 percent to US$8.5 billion. - BOM net FX sales and other operations in 2021: - BOM sold US$1.6 billion on a net basis in 2021 (compared to about US$1 billion in 2020). - BOM borrowing in FX from non-residents: US$0.8 billion. - Substantial increase in domestic banks’ excess cash FX balances at the central bank: US$1.4 billion (including US$0.75 billion in the last two days of December 2021), which the BOM invested in foreign assets. - BOM’s large FX interventions in 2020–21 occurred amidst deterioration of the current account during the COVID-19 pandemic and limited nominal exchange rate flexibility. - Assessment of adequacy: - Evaluation uses the standard metric augmented with a portion of GBC deposits held in non-systemic small and medium-sized banks to incorporate financial risks from disruptions to GBC foreign currency funding. - Reserve coverage of the augmented metric: - About 123 percent of the metric at end-2020. - About 120 percent of the metric at end-2021. - The coverage is within the advisable range, but the large and complex GBC sector and its linkages to the domestic economy warrant stronger buffers against external shocks. - Increasing BOM’s foreign reserves by deploying excess FX cash of domestic banks is not sustainable, as indicated by the reversal in January-April 2022. - Future options to enhance insurance mechanisms include opportunistic reserve accumulation consistent with the BOM’s price stabilization mandate, swap arrangements or credit lines with other central banks, and addressing structural bottlenecks to boost competitiveness. - Sensitivity/variants: - Cross-check adjusting reserves by removing USD 0.75 billion (increase in excess FX deposits in last two days of December 2021) and two variants of the metric yielded reserve coverage closer to the lower bound: - Variant (i): 111 percent. - Variant (ii): 109 percent. - Note: The adequacy assessment excludes GBCs’ other external liabilities; if such liabilities and domestic actors’ liabilities were fully included, reserve coverage would drop well below the advisable level of above 100 percent. ### Pension system sustainability (Annex IV) - Key structural features: - Mauritius’ pension system is not sustainable on current policies. - Two key schemes: - Basic retirement pension (BRP): non-contributory, pays benefits to all Mauritians aged 60 and older. - Contribution Social Generalize (CSG): contributory system introduced in FY2020/21, expected to pay benefits starting in FY2023/24 to all persons aged 65 and older, in addition to the BRP benefit. - BRP specifics: - BRP amount: Rs9,000 per month. - BRP currently accounts for more than 50 percent of pension spending. - BRP places Mauritius among countries with the highest paid universal benefits in the world relative to average wage (World Bank 2021). - Fiscal projections and gaps: - With enactment of CSG payments in FY2023/24, combined pension expenditure is projected to reach 8.4 percent of GDP. - Pension revenue projected to stand at 1.5 percent of GDP. - The gap is expected to increase as Mauritian society rapidly ages, worsening the old-age dependency ratio and increasing pension spending. - Sustainability concerns: - World Bank assessment: BRP is increasingly costly, poorly targeted, and creates adverse labor market incentives. - BRP is not pro-poor because per capita BRP does not decline with beneficiary pre-tax income. - BRP encourages early retirement and adversely affects labor force participation. - Lack of link between contributions and benefits may create incentives to minimize contributions to the CSG. - Policy options (noting political difficulty): - Gradually increase BRP eligibility age from 60 to 65, aligning with the age threshold for contributory CSG benefits. - Keep the BRP benefit fixed at the current Rs9,000 until it reaches 20 percent of average wage (benchmark for poverty alleviation for non-contributories), and thereafter make it wage-indexed. - Narrow BRP targeting by offering it only to a subset of the elderly who are most in need. - Reform the CSG contributory system so that it collects contributions from workers and provides benefits only to contributors. - These measures aim to gradually reduce fiscal cost while providing adequate pensions for poverty alleviation and wage replacement. ### Key policy developments and recommendations (Annex V highlights) - Fiscal policy and debt sustainability: - The fiscal stance should remain accommodative in the near term, with consolidation needed in the medium term. - FY2021/22 budget maintained an accommodative stance; headline deficit projected to decline to about 7.6 percent compared to 23 percent in FY2020/21. - Credible revenue and expenditure measures are needed to put debt on a declining path; the unsustainability of the pension system must be addressed. - Monetary policy: - Accommodative monetary policy maintained in 2021; short-term interest rates were kept at close-to-zero level. - BOM designed a new policy framework to be rolled over in 2022 and drafted a new BOM Act to be sent to IMF TA experts; authorities aim to submit the new BOM Act to the National Assembly in September 2022. - The MIC continues to operate and uses BOM resources; no clear plans for MIC takeover by the government. - BOM continued FX market interventions based on market clearing approach and is developing a new foreign exchange intervention (FXI) strategy and will receive TA on FXIs in 2022. - Financial sector: - Capital adequacy remained substantially above benchmarks in 2021; the share of NPLs declined; returns and provisioning improved. - Loans under moratorium declined; moratorium due to expire on June 30th, 2022. - AML/CFT: - Mauritius successfully exited the FATF list in October 2021; the EU and the UK soon followed suit removing the country from their listings. - Structural reforms and climate: - Need sustained reforms to support diversification, competitiveness, procurement, and climate resilience. - To achieve climate goals by 2030, authorities would need to close a financing gap of around 1.6 percent of GDP per year on average. *Source: IMF staff report content (Extracted section: 5. Background; Capital and Financial Flows; Reserve Adequacy; Annex IV; Annex V).* ### Annex VI. Status of Implementation of Key 2015 FSAP ### Annex VI. Status of Implementation of Key 2015 FSAP ### Banking Supervision and Regulation - Recommendation: Conduct regular macroprudential solvency and liquidity stress tests. - Updated status: Solvency and liquidity stress testing exercises are conducted quarterly; results are published bi-annually in the BOM’s Financial Stability Report. - Recommendation: Establish a macroprudential body with a clear financial stability objective, and adequate enabling framework. - Updated status: The BOM considers establishing the Financial Stability Committee within the Bank with the mandate of conducting macroprudential policy and maintaining financial stability in the banking sector. The existing Financial Stability Committee includes representatives of the BOM, FSC, and the Ministry of Finance and serves as a forum for discussing financial stability issues. - Recommendation: Improve monitoring and supervision of the GBC sector; seek significant consolidation of the management companies (MC) industry and raise its standards. - Updated status: Reforms to Global Business were brought in 2018, with the abolishment of GBC 2s and the restyling of GBC 1s into GBCs. These reforms included implementation of Economic Substance and its monitoring. Focus on consolidation of the industry was pushed forward, as requirements to comply with international standards (BEPS and OECD) were adjudged to be of utmost importance. - Updated status (timing): Grandfathering provisions for GBC2s will end on June 30, 2021. The GBC sector is being assessed for a complete structuring overhaul, implying a consolidation of the MC industry and supervision of the sector. The timeframe for the execution of new reforms is by the end of 2021. - Recommendation: Implement measures to ensure that banking system liquidity is not adversely affected by developments in the GBC sector and cross-border sectors. - Updated status: Basel III Liquidity Coverage Ratio (LCR) has been implemented in 2017. Reporting requirements have been enhanced. Stress tests scenarios assess banking sector vulnerability to adverse developments in the GBC sector. Risk assessment of GBC deposits conducted and published in the Financial Stability Report (December 2021). Oversight of liquidity risk was enhanced by adopting the risk-based supervision framework and coordinating with the FSC. The risk-based framework gathers information on funding risks, which largely meets the needs of the NSFR. ### Financial Sector Oversight - Recommendation: Establish a framework for conglomerate supervision, strengthen consolidated supervision, and develop a supervisory framework for D-SIBs. - Updated status: The framework for conglomerate and consolidated supervision has been agreed between the BOM and the FSC, and joint on-site examinations are conducted. D-SIB framework is fully operational. Terms of Reference for the Lead Regulator and the list of financial conglomerates (falling under the purview of the BOM and the FSC) have been approved by the BOM and the FSC. Joint Co-ordination Committee Working Group on Financial Stability fine-tunes data collection returns. - Recommendation: Improve bank rating systems and develop more comprehensive remedial action program. - Updated status: Enhancement of bank rating system is ongoing with the risk-based supervision framework. Comprehensive remedial action program is fully operational. - Recommendation: Amend the law to facilitate conglomerate supervision, improve consolidated supervision, and strengthen the corrective actions toolkit. - Updated status: Banking Act and BOM Act have been amended to improve conglomerate/consolidated supervision. As part of its corrective actions’ toolkit, the BOM has issued instructions and directives to ultimate and intermediate financial holding companies incorporated in Mauritius. Such companies have at least one subsidiary or joint venture or such other ownership structure as the central bank may determine within the group that is a bank or a non-bank deposit-taking institution. - Updated status: Financial Services Act was amended in 2020 to allow collection of statistics from competent authorities or any other entity (e.g., ultimate and intermediate holding companies incorporated in Mauritius, which have, within the group, at least one subsidiary or joint venture, or such ownership structure as the FSC may determine, which holds a license under the relevant Acts issued by the FSC). ### Financial Safety Net - Recommendation: Modify the Banking Act to make the resolution framework more efficient. - Updated status: The legal framework for resolution has been drafted with technical assistance from the IMF but not yet enacted. The updated draft will be sent to the IMF TA team for consultations. The new Banking Act is planned to be submitted to the National Assembly in September 2022. - Recommendation: Introduce an industry-funded deposit insurance scheme with powers to facilitate resolution. - Updated status: Mauritius Deposit Insurance Scheme Act enacted in April 2019, but not yet proclaimed, and provides for the establishment of the Mauritius Deposit Insurance Scheme. The BOM is working on the operationalization of the Mauritius Deposit Insurance Company Limited. - Recommendation: Introduce, through changes in the current legal and regulatory framework, a comprehensive framework for crisis prevention and management. - Updated status: Draft legislation for resolution, prepared with technical assistance from the IMF, is currently under review. A draft guideline on Recovery and Resolution Plan was issued to the industry for consultation. The draft is under review based on comments received, the draft legislation for resolution, and latest international standards and practices. ### Statistical Issues (Data adequacy and standards) - General assessment: 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 made notable progress updating supply and use tables, with capacity development support from STA and AFRITAC South. - Progress made in quantifying the Global Business Companies (GBCs) sector’s contribution to GDP; BOM, FSC, and Statistics Mauritius established a working group expected to address the issue in 2022. - Support provided through AFRITAC South to rebase the GDP estimates by June 2022 to the 2018 base year; additional support in FY2023. - Statistics Mauritius started dissemination of monthly index of industrial production in September 2021 and plans to start updating annual growth projections in every quarterly release of national accounts beginning in June 2022. - Price Statistics: - CPI: monthly CPI compiled using weights based on expenditure data collected during 2018; index coverage could be expanded to include owner occupied housing. - PPI: Producer price indexes compiled monthly for agriculture and manufacturing; weights derived from values of production in 2013 and should be updated; need to expand PPI coverage to include services. - Quarterly import and export price index weights derived from 2013 data and should be updated. - Residential Property Price Index (RPPI): quarterly RPPI disseminated in April 2021 covering Q3:2014 through Q2:2019; Statistics Mauritius continues to benefit from technical assistance to review RPPI methods. - External Sector Statistics (ESS): - Authorities should continue to strengthen tracking of the GBC sector, particularly in context of elimination of GBC2s and introduction of the authorized company classification. - BOM, with IMF TA and in collaboration with FSC and Statistics Mauritius, works towards producing estimates for exports of special purpose vehicles (incl. GBCs). - Fiscal Statistics: - Coverage of central government accounts is comprehensive; coverage of central government and state-owned enterprise debt is comprehensive, though timely publication of fiscal data delayed during the pandemic. - Authorities taking steps to implement IPSAS. Progress needed to implement general government accounting requiring compilation of statement of operations for the non-financial public sector entities. - Authorities currently net out from total public sector debt the stock of government securities held by SOEs. Refinement requires distinguishing between public corporations and state-owned entities that are part of government units. - Monetary and Financial Statistics (MFS): - BOM has made progress: introduction of Standardized Report Forms (SRFs) for the central bank and other depository corporations (ODCs) and publication of data aligned to the MFS Manual in International Financial Statistics and BOM publications. - Authorities continue to broaden coverage of MFS to include 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. ### Fiscal Supplement and Revised Projections (Supplementary information on FY2021/22 and FY2022/23) - FY2021/22 fiscal deficit: almost unchanged from the staff report. - Authorities released revised fiscal projections for FY2021/22 as part of the FY2022/23 budget. - Revenue, including grants, is 0.2 percent of GDP lower than in the staff report due to downward revision in non-tax revenue. - Total expenditure is lower by 0.3 percent of GDP. - Overall borrowing requirement declines by 0.1 percent of GDP relative to the staff report. - FY2022/23 fiscal deficit: expected to be higher than in the staff report by 1.9 percent of GDP. - Revenue: staff broadly maintained revenue projections but revised non-tax revenue down by 0.3 percent of GDP. - Expenditure: staff revised projections in line with the budget except for (i) compensation of employees (staff projection higher than the budget) and (ii) acquisition of non-financial assets (staff projection lower than the budget). - Budget envisages social spending measures that increase current expenditure by 1.4 percent of GDP relative to the staff report. - Key measures include increases in basic retirement and other pensions that increase pension spending by 0.8 percent of GDP relative to the staff report, as well as increases in other social aid benefits and unspecified expenditure to protect the vulnerable (by 1.2 percent of GDP relative to the staff report). - As a result, staff’s projection for the overall borrowing requirement increases from 3.9 percent of GDP in the staff report to 5.8 percent of GDP. - Note: The budget projects a lower overall borrowing requirement of 0.6 percent of GDP compared to the staff’s projection of 5.8 percent due to differences in assumptions (higher nominal GDP, more optimistic tax revenue, higher receipts from sales of government assets, and treatment of some SOE transfers). - Public sector debt projections: - Staff projects public sector debt to reach 90.6 percent of GDP by end-June 2022 compared to 88.1 percent in the staff report. - Staff expects public sector debt to reach 89.4 percent of GDP in FY2026/27 compared to 83.8 percent in the staff report. - Text Table 1 (selected entries, In percent of GDP): - Total revenue and grants: Staff Proj. 24.0; Staff Report 23.8; Budget Proj. 23.9; Updated Staff Report 26.0; Updated Budget 23.6. - Domestic revenue: 23.6; 23.3; 23.5; 25.6; 23.2. - Grants: 0.4; 0.4; 0.4; 0.4; 0.4. - Total expense (current spending) / Net acquisition of non-financial assets (capital spending): 28.1 / 2.0; 28.0 / 1.8; 26.8 / 1.7; 26.8 / 2.1; 28.2 / 1.7. - Budget balance: -6.1; -6.1; -4.6; -2.9; -6.3. - Net lending/borrowing (special funds and other capital transfers): -2.9; -2.9; -1.0; -1.1; -1.1. - Consolidated balance: -9.0; -9.0; -5.6; -4.0; -7.4. - Transactions in financial assets/liabilities: -1.4; -1.4; -1.7; -2.4; -1.6. - Overall borrowing requirement: -7.6; -7.5; -3.9; -0.6; -5.8. - Public sector debt: 92.4; 93.4; 88.1; 78.0; 90.6. - Policy recommendation reiterated by staff: - Increase the pace of fiscal consolidation in the post-pandemic period. - Stabilizing the debt-to-GDP ratio toward the proposed anchor of 80 percent will require a greater fiscal consolidation effort in the medium term. - Important to reduce debt through credible revenue and expenditure measures rather than through quasi-fiscal measures. *Source: Annex VI. Status of Implementation of Key 2015 FSAP — information provided by the authorities as presented in the IMF staff report and supplementary materials.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1musea2022001.pdf_