## Mauritius—Assessment Letter for the World Bank and African Development Bank ## Source details **Canonical URL:** [Mauritius—Assessment Letter for the World Bank and African Development Bank](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_092909.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_092909.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_092909.pdf.json) --- ### Overview - Mauritius has a long and sustained track record of implementing strong policies. - Authorities responded to the global financial crisis by easing macroeconomic policies. - The crisis response has halted the decline in public debt; public finances are fundamentally sound and external debt is sustainable. - Flexible exchange rate and comfortable reserve position; banks have remained liquid and profitable. - With strong fundamentals and an effective institutional policy framework, Mauritius is well placed to weather current challenges. ### Recent Economic Developments and Short-Term Outlook - Direct financial spillovers have been limited due to conservative investment practices of Mauritian banks; banks had little direct exposure to subprime and other affected assets and have remained liquid, profitable, and well-capitalized. - The stock market has moved in tandem with global trends. - Main transmission of the global crisis: sharp drop in external demand for tourism and textiles, and a fall in capital inflows. - Growth and inflation projections and outcomes: - Economic growth is projected to slow to 2 percent in 2009—down from 5.3 percent in 2008. - Inflation dropped below 1 percent (year-on-year) in August and is expected to stay subdued for the remainder of the year. - Depressed imports likely to keep the current account deficit in single digits, as a share of GDP. ### Economic Policy Response - Fiscal policy - The government is implementing a fiscal stimulus package of about 5 percent of GDP spread over 2009-10. - Stimulus measures are targeted and temporary, focusing on advancing planned infrastructure spending and providing financial relief to firms hardest hit by the global crisis. - Stimulus-related expenditures will lead to a deterioration of the fiscal deficit during 2009-10. - Partially offsetting adjustment measures in the recent budget are intended to help bring the primary balance back to a small surplus by end-2011. - Public debt has declined sharply in recent years but still stands at around 60 percent of GDP. - Medium-term fiscal policy should aim at bringing public debt down further to reduce potential vulnerabilities. - Financing on favorable terms will be important to keep public finances and the debt ratio on a sustainable path. - Monetary policy - The Bank of Mauritius (BoM) shifted to an accommodative stance in the fall of 2008, cutting the repo rate by 250 basis points and reducing reserve requirements. - Since then, the policy rate has been left unchanged. - The central bank has preemptively established a foreign currency credit line—which has only been drawn thus far by one bank, to a very limited extent. - Exchange rate policy - The BoM has refrained from interventions in the foreign exchange market since December 2008. - Official reserves have remained at a comfortable level. - The rupee depreciated by 4 percent, in nominal effective terms, between end-December 2008 and end-August 2009. ### Box 1 — Fiscal Policy Stance and Measures - Based on the budget approved in May 2009 and the stimulus package, Mauritius is expected to record: - a deficit, including grants, for the six month budget (July-December) of 5 percent of GDP (about 4 percent for full calendar year 2009), - and in FY 2010 of again around 5 percent of GDP. - Revenue projections: revenues are projected to decline across the board due to: - Customs and excise revenues falling because of lower imports; - VAT declining because of lower domestic consumption, including significantly lower spending by tourists; - Real estate taxes falling due to depressed activity; - Corporate taxes declining because of a lower level of profits, reflecting depressed demand together with actions to preserve employment; - Dividends falling because of lower profitability of state owned enterprises. - Spending projections: spending is projected to increase as stimulus measures are implemented: - Authorities began implementing the stimulus package announced in December 2008 starting in the first half of 2009. - As programs get into full gear, spending is expected to accelerate over the next 18 months. - During this period, the stimulus package accounts for about 5 percent of GDP, of which 3 to 3.5 percent of GDP will be carried out through dedicated funds. - The dedicated funds were established at the end of the 2007/08 fiscal year as a contingency against an economic slowdown and were stocked up further in FY2008/09. ### External Sector Vulnerabilities - Economic vulnerabilities have been reduced in recent years; risks appear manageable. - Main risks: - Much lower demand for tourism, textiles, and real estate development. - Continued turmoil in global financial markets and reduced appetite for emerging market assets could diminish FDI inflows further and reduce activity of Global Business Companies. - External position: - External position remains sustainable and medium-term risks, including for external debt sustainability, are manageable. - International reserves (as of July) are about 6 months of imports, providing a cushion. - Orderly depreciation of the rupee is helping export competitiveness without having hindered a significant decline in inflation. ### Relations with the IMF - The 2008 Article IV consultation was completed on July 2, 2008. - The next consultation is expected in the fourth quarter of 2009. *Mauritius—Assessment Letter for the World Bank and African Development Bank, September 29, 2009.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_092909.pdf_