## Mauritius—Assessment Letter for the World Bank

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**Canonical URL:** [Mauritius—Assessment Letter for the World Bank](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_121508.pdf)

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### Recent Economic Developments
- Program and reform outcomes
  - Wide-ranging reform program launched in 2005/06 after loss of trade preference in sugar and textiles.
  - Bold tax reform introduced: flat tax on corporate and personal income and a new revenue authority.
  - Program-based budgeting introduced with the 2008/09 budget.
  - New public debt management law introduced in 2008 aiming to reduce public sector debt to 50 percent of GDP by 2013.
- Growth and labor market
  - GDP growth progressively recovered from 2005/06 through mid-2008, averaging over 5 percent.
  - GDP growth in 2007/08 was 6.6 percent.
  - Unemployment expected to fall from 9.3 percent in 2005/06 to 8 percent in 2008, the lowest level in five years.
  - Main growth drivers: large FDI inflows into real estate development and tourism; offshore Global Business License (GBL) sector; rebound in sugar and textile production.
- Inflation and external prices
  - Inflation rose to about 12 percent in mid-2008 but eased to 9.7 percent in October 2008 as international food and fuel prices dropped.
- Fiscal outcomes
  - Overall deficit lowered to 3.4 percent of GDP in 2007/08 from 5.4 percent in 2005/06.
  - Public sector debt reduced to about 58 percent of GDP in June 2008 from close to 70 percent in June 2005.
  - Tax revenue effort boosted from 17.4 percent of GDP in 2006/07 to over 19 percent of GDP.
- Monetary policy and financial sector
  - Monetary authorities raised interest rates and increased the cash reserve ratio in mid-2008 to reduce credit growth and contain inflation.
  - Bank of Mauritius (BoM) issued its first inflation and financial stability reports.
  - BoM had difficulty keeping the repo rate within stated policy bounds for much of the year amid strong capital inflows.
  - As capital inflows eased in late summer, the BoM reversed external reserve accumulation and monetary policy was eased in November and again in early December.
  - Banking system appears well capitalized, underpinned by sound regulation, and has limited exposure to subprime products.
- External accounts and data issues
  - External current account deficit deteriorated to 9.0 percent of GDP in 2007/08 from 7.7 percent of GDP in 2006/07, largely because of the spike in food and fuel prices and counterpart imports to unprecedented FDI inflows.
  - Analysis is clouded by large errors and omission items due to difficulties in adequately surveying GBL operations.
- Structural reforms
  - Passage of the flexi-security law on social security.
  - Revised procedures to improve implementation of public capital investment.

### Outlook, Risks, and Policy Challenges
- Growth outlook
  - The healthy growth of recent years is expected to decelerate in 2008/09 as global demand slackens.
  - GDP growth in 2008/09 is now projected to be much lower than earlier expectations of more than 6 percent and down from 6.6 percent in 2007/08.
  - A growth deceleration to about 4 percent or lower is projected for 2008/09.
- Current account and inflation outlook
  - Current account deficit not expected to change greatly in 2008/09 as lower demand for tourism, textiles, and offshore investment services are offset by lower imports as FDI weakens and by lower commodity prices.
  - Inflation is expected to ease significantly with lower imported food and fuel prices and slackened demand.
- Main downside risks
  - Abrupt slowdown in global economic growth and sustained reduction in risk appetite could significantly impact key sectors: tourism, textiles, and real estate development.
  - Continued turmoil in global financial markets, reduced risk appetite, and outflows from emerging markets expected to reduce FDI inflows and activity in the offshore GBL sector.
  - Recent sharp depreciation of the rupee (against the U.S. dollar) will aid export competitiveness but may slow the reduction in inflation.
- Policy challenge priorities
  - Fiscal stimulus initiatives should be measured, targeted to need, and temporary to avoid jeopardizing fiscal sustainability.
  - Public debt remains high and calls for sustained fiscal prudence.
  - Pressures to relax fiscal discipline may rise in the run-up to the electoral campaign in the next fiscal year, but may be contained by stronger fiscal rules embedded in a medium-term fiscal framework.
  - Monetary easing was appropriate given global developments, but monetary authorities must remain vigilant against inflation.
  - BoM needs to resolve its internal conflict and reinforce the effectiveness of its stated intervention policy.
  - Sustained efforts needed to resolve statistical issues clouding external account analysis and to improve the framework for analyzing the monetary transmission mechanism.
  - Further structural reforms are needed to address supply bottlenecks and infrastructure constraints and to streamline the public sector.

### Policy Recommendations and Reform Priorities
- Fiscal policy
  - Ensure any fiscal stimulus is measured, targeted, and temporary.
  - Sustain fiscal prudence to continue reducing public debt toward 50 percent of GDP by 2013.
  - Introduce a beneficial countercyclical component into fiscal policy through careful targeting of social spending.
- Monetary and financial sector policy
  - Remain vigilant against inflation despite monetary easing.
  - Resolve Bank of Mauritius internal governance issues and strengthen intervention policy effectiveness.
  - Improve the framework for monetary transmission analysis.
- Data, surveillance, and governance
  - Resolve statistical issues that create large errors and omissions in the balance of payments, particularly regarding GBL operations.
- Structural reforms
  - Reform the parastatal sector to improve economic efficiency and competitiveness.
  - Pursue disengagement and divestment strategy for parastatals involved in import and distribution of basic goods.
  - Further liberalize domestic trade and phase out administered prices.
  - Replace indirect product subsidies with a targeted safety net.
  - Continue work to better target social spending, supported by key donors.

### Relations with the IMF
- The 2008 Article IV consultation was completed on July 2, 2008. The next consultation is expected in mid-2009.
- Technical assistance missions from the Fiscal Affairs Department (program-based budgeting) and the Monetary and Capital Markets Department (banking supervision and monetary modeling) will be in the field in the interim.

*IMF staff assessment, December 15, 2008.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_121508.pdf_