## 1. Terms of Trade Deterioration, 1999–2009

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### Overview and macroeconomic context
- Cumulative terms of trade shock of nearly 20 percent between 1999 and 2009.
- Specific external shocks:
  - Phasing-out of the Multi-Fiber Agreement (MFA) for textiles in December 2004.
  - EU sugar protocol price reductions (by 36 percent for 2006–09).
  - Rising import prices for petroleum and other commodities.
- Growth and crisis chronology:
  - Economic growth declined from an average of 5 percent in the 1990s to just 3 percent in the first half of the 2000s.
  - Growth recovered to 5½ percent in 2007, then was hit by the global financial crisis in 2008/09.
  - Mauritius maintained positive growth in 2009 despite the global crisis.

### Policy responses and structural reform highlights
- Reforms and measures since 2005:
  - Trade liberalization, lifting of price controls, simplification of business regulations.
  - Far-reaching tax reform featuring a 15 percent flat tax and establishment of a central revenue authority.
  - Fiscal consolidation anchored in a new public debt law targeting public debt reduced to 50 percent of GDP by 2013 (from a high of 80 percent in 2002).
  - Appointment of a Monetary Policy Committee in 2007.
- Crisis management in 2008/09:
  - Fiscal stimulus, monetary easing, ensured foreign exchange (FX) liquidity, strengthened social safety net, facilitated private sector debt workouts.
- Outcomes:
  - “Best place to do business in Africa” (World Bank) in 2008 and 2009.
  - FDI rose to unprecedented levels in 2007; rapid growth in offshore financial sector driven by global business companies (GBCs).

### Motivation for using the Balance Sheet Approach (BSA)
- Rationale:
  - Liquidity shocks can rapidly become solvency crises with spillovers across government, corporates, banks, and households.
  - Household debt increases and falling public debt motivate a broader sectoral balance-sheet analysis.
- BSA purpose:
  - Stock-based tool estimating intersectoral assets and liabilities, revealing hidden vulnerabilities (currency, maturity, capital structure risks).
  - Focus in this analysis: currency and maturity risks; capital structure risk where possible.

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### Typical vulnerabilities identified by the BSA (verbatim risk definitions)
- Currency risk: mismatch between liabilities in foreign currency and assets in domestic currency leading to exchange rate risk.
- Maturity risk: mismatch between short-term liabilities and long-term assets creating rollover and interest rate risk.
- Capital structure risk: financing via debt rather than equity increases vulnerability; financing current account deficits with debt rather than FDI heightens risk.

### Data availability and methodological caveats
- Data strengths:
  - Mauritius joined GDDS in September 2000; ROSC—Data Module finalized July 2008 found significant improvements since 2001.
  - Public sector and banking data are highly reliable; BoM monetary statistics sectorization fully consistent with the MFSM.
  - Comprehensive financial statistics for deposit-taking corporations using Standardized Report Forms (SRFs).
- Key limitations:
  - Nonfinancial sector not fully and regularly surveyed; a few large corporations dominate; incomplete coverage creates blind spots.
  - BoP and external debt statistics incomplete, primarily due to GBC activity growth; resulted in major errors, omissions, and inconsistencies between BoP and debt statistics.
  - BSA omits less liquid real assets, off-balance-sheet items, derivative positions, and heterogeneity within sectors; valuations often at book value for loans/deposits.

---

### Appendix II) — Data, BSA gaps, and amplification mechanisms

### SRFs, coverage, and sector definitions
- SRFs provide monthly detailed source data underpinning central bank, other depository corporations, and some other financial corporations sections of the BSA.
- Economy split used: central government; state and local governments; public nonfinancial corporations (parastatals); financial corporations; financial and nonfinancial private sector (enterprises); rest of the world (nonresidents).
- Nonfinancial sector gaps: nonfinancial sector not fully surveyed; leads to blind spots in detecting/quantifying risks.

### BSA methodological gaps (selected)
- BSA does not capture off-balance-sheet items (for example, government guarantees).
- Valuation: loans and deposits recorded at book value; financial assets/liabilities valuation mix of market prices and book values.
- Derivatives exposure is unavailable; example: costly hedging of oil prices by Air Mauritius and State Trading Corporation in 2008.
- BSA is a static snapshot (end-period) and masks heterogeneity and concentration risks (important given dependence on tourism, textile, sugar).

### How balance sheet imbalances amplify shocks
- Currency mismatches raise debt servicing costs after devaluation.
- Maturity mismatches increase rollover risk in liquidity shocks.
- Procyclical capital flows exacerbate imbalances: EMs borrow in good times and face reversals in bad times.
- Falling asset prices and rising liabilities reduce net worth, lower consumption, reduce collateral, raise borrowing costs, and increase NPLs, feeding back to bank capital and fiscal pressures.

### Monetary and fiscal policy effectiveness during balance sheet crises
- Monetary policy dilemmas in EMs:
  - Loosening → depreciation → raises foreign-currency debt burden; risk of runs if currency credibility weak.
  - Tightening → supports currency but hurts domestic demand and raises domestic interest burden.
  - Banking sector may blunt loosening if banks restrict credit to protect balance sheets.
- Fiscal policy constraints:
  - EMs have limited debt tolerance; capital markets can close to sovereigns during crises.
  - Automatic stabilizers and bailouts reduce government net worth.
  - Cutting spending/raising taxes can deepen recessions; fiscal and monetary impotence worsens crisis severity.

---

### Aggregate and sectoral balance-sheet findings (2003–09)

### National consolidated currency position
- Consolidated currency position for 2003–09:
  - Positive over the whole period 2003–09 and markedly improved since 2004.
  - Improvement reflects strong export performance and large FDI and portfolio inflows, and lower value of imports (notably oil and food price declines).
  - Conclusion: limited national risk from exchange rate depreciation.

### General Government — currency and maturity features (statistics and assessment)
- Fiscal reforms since 2005 included maximum personal income tax rate cut from 30 percent to a flat 15 percent.
- Public debt trajectory:
  - Public debt (including parastatals) fell below 60 percent of GDP in 2009 from a peak of 80 percent in 2002.
  - Public debt fell from over 80 percent in 2003 to 61 percent by 2007 and an estimated 59 percent at end-2009.
- Government foreign currency position:
  - Foreign currency liabilities fell from 13 percent of GDP in 2003 to about 8 percent in December 2008.
  - In 2009 foreign currency liabilities increased; government foreign borrowing in 2009 amounted to about 10 percent of GDP.
  - Government external loans: 53 percent multilateral (as of June 2009) and 47 percent official bilateral.
- Debt composition and rollover:
  - 90 percent of public debt is in domestic currency or owned by residents.
  - About a third of domestic debt is short-term; treasury bills targeted to be limited to 20 percent of portfolio by 2013 (currently about 34 percent).
  - National Pension Fund legally limited to 20 percent abroad; large holdings of government debt by pension fund and local banks mitigate rollover risks.
- Assessment and recommendation:
  - Public debt close to 60 percent of GDP is higher than many EMs (average 50 percent for nonfuel-exporting EMs) but sustainable over the medium term.
  - Exchange rate vulnerability contained due to domestic currency and resident holdings.
  - Policy recommendation: continue fiscal prudence and reduce domestic debt ratio to create fiscal space for contingencies and aging population costs.

### Central Bank (Bank of Mauritius) — balance-sheet metrics and risks
- BoM net foreign currency position:
  - Stable since June 2003 at 21–28 percent of GDP.
  - Improved through 2004 to 29 percent (about 8 percent in months of imports of goods), then declined to 24 percent by December 2009 (roughly 7 percent in months of goods imports).
  - BoM has negligible foreign currency liabilities.
  - One-off 2009 factors: SDR allocations totaling US$ 126.5 million (SDR 75.3 million general allocation effective August 28, 2009 and SDR 5.7 million special allocation effective September 9, 2009) and BoM purchase of two metric tons of gold from the IMF for the equivalent of US$71.7 million in November 2009.
  - Since April 2009 BoM moved toward a free float exchange rate policy.
- BoM net domestic currency position:
  - Net domestic currency liabilities fell from 11 percent of GDP in 2003 to about 1 percent in 2006 before rising to about 6 percent by end-2009.
- Overall conclusion:
  - BoM’s large net international reserves and negligible foreign liabilities imply little rollover or exchange rate depreciation risk; BoM net currency position highly positive.

### Financial sector structure and system-wide metrics
- Financial sector size and composition:
  - Financial sector contributes 12 percent of GDP.
  - Financial corporations include 18 banks, 13 nonbank deposit-taking institutions, Development Bank of Mauritius, money-changers, FX dealers, mutual funds, insurance and reinsurance companies, asset managers, venture capital fund.
  - Banking system dominated by Mauritius Commercial Bank, State Bank of Mauritius, Barclays, and HSBC.
- Banking-system expansion (June 2003–December 2009):
  - Commercial bank balance sheets expanded by 167 percent.
  - Net foreign assets grew by 480 percent.
  - Private sector credit growth was 104 percent.
  - Bank foreign liabilities grew by 150 percent.
  - Total deposits in commercial banks grew by 115 percent.
  - Foreign currency deposits to rupee deposits rose from about 15 percent to 20 percent.
- Financial soundness indicators:
  - High capital adequacy ratios, low NPLs, and sound liquidity positions noted; direct spillovers from the global crisis were few.
  - Plan to set up deposit insurance scheme per BoM 2004 Act and Banking Act.
- Supervisory capacity gaps:
  - Shortcomings in advanced risk-assessment methods and shortage of qualified staff in BoM and Financial Services Commission (per December 2007 FSAP update).

### Commercial banks — currency positions, funding, concentrations, and risks
- FX and GBC influence:
  - On a net FX basis, bank foreign currency liabilities exceeded foreign currency assets; growth of both FX assets and liabilities stagnated since global crisis onset.
  - GBC deposits account for roughly 65 percent of foreign currency deposits and 30 percent of total bank deposits.
  - GBC deposits with banks amounted to 85 percent of GDP in December 2009 (total private nonfinancial sector deposits with banks amounted to 96 percent of GDP).
- Funding model and liquidity:
  - Principal funding is deposits; system does not rely on short-term commercial paper.
  - No toxic assets reported.
  - Short-term liquidity risks remain due to maturity transformation (long-term assets financed by short-term liabilities).
- Credit concentration:
  - About 45 percent of aggregate loan portfolio exposed to tourism, textiles, and construction.
- MTSP (Mauritian Transitional Support to the Private Sector):
  - By end-2009, 11 companies received MTSP assistance.
  - Government contributed Rs140 million (36 percent of total MTSP support) as debentures at 5 percent interest.
  - MTSP design: share costs across banks, government, and shareholders; NPV expected to be zero unless assisted companies fail.
- Aggregate assessment:
  - Banking system aggregated net position positive; exchange rate risks mitigated by FX assets abroad and limited FX lending to residents (only 19 percent of GDP).
  - Risks include interest and liquidity shocks and potential spillovers from massive GBC outflows.
  - Lack of adequate GBC data warrants vigilance; ongoing surveys expected to improve coverage.

### GBCs, BoP/IIP coverage, and statistical issues
- GBC role and types:
  - GBCs function as conduits; GBC1 considered tax resident (maximum effective income tax rate is 3 percent); GBC2 nonresident for tax purposes and tax-exempt in Mauritius.
  - GBCs impact local economy via management companies (MCs), registration fees, and bank accounts; MC activities account for at least 3 percent of GDP.
- Statistical gaps and planned remedies:
  - BoP and IIP data currently exclude GBC activities; rising errors and omissions (2.7 percent of GDP in 2008) largely linked to GBCs.
  - Joint committee (BoM, FSC, Central Statistical Office, Ministry of Finance and Economic Development) to conduct a BoP survey of resident GBCs managed by 12 major management companies; initial survey scheduled for March/April 2010 to capture calendar year 2009.
  - Annual position survey and CPIS incorporation needed to improve IIP statistics.
- Bank-level GBC balance-sheet contributions (end-December 2009):
  - FX liabilities about 130 percent of GDP; FX assets 182 percent of GDP.
  - Of FX assets, 163 percent of GDP claims on nonresidents (58 percent of which held as balances in banks abroad).
  - FX lending to residents is 19 percent of GDP (of which 6 percent of GDP is to GBCs).
  - Deposit floats (liabilities of GBCs) amount to some 85 percent of GDP, virtually all in FX.
  - Large net foreign asset position equal to 116 percent of GDP, or 31 percent of GDP if GBCs are considered nonresidents.

### Nonfinancial private sector — transformation, currency positions, and vulnerabilities
- Structural shifts and new sectors:
  - ICT grew 40.8 percent between 2005 and 2007 and expanded 16.2 percent in 2009; ICT contributes 5.8 percent to GDP and employs 12,000 persons.
  - Jin Fei project: investment of US$780 million (about 9 percent of GDP) over eight years; projected to create some 40,000 jobs (directly and indirectly).
- Private sector balance-sheet features:
  - Private nonfinancial corporations nearly tripled their assets abroad between 2003 and 2009, especially hotel and banking groups.
  - Nonfinancial private foreign-currency borrowing has been almost nonexistent since 2003—private sector sources itself domestically in rupees.
  - Private nonfinancial sector net domestic currency position is negative (large domestic currency borrowing), but overall net currency position has been positive since beginning of 2005 due to accumulation of foreign currency in bank vaults.
- Caveats:
  - Sizable short-term private inflows and BoP errors and omissions suggest possible understatement of private-sector debt risks.
  - Lack of derivative and off-balance-sheet data and inadequate GBC coverage could alter positive assessment.
  - Concentration risk: shocks to textiles or tourism could spill over to households, banks, and government.

### Maturity mismatches and liquidity considerations
- Maturity mismatch findings:
  - Short-term bank lending minus short-term bank liabilities is negative, indicating vulnerability to rollover risk and interest rate increases.
  - Domestic currency liquidity (cash reserves above reserve requirements) comfortable during the global crisis.
  - Long-term assets and long-term liabilities are reasonably matched at the long end.
  - Total deposits outweigh assets by a substantial margin, implying exposure to interest rate and rollover risks.
- External debt and short-term foreign-currency liquidity:
  - Overall external debt stock estimated at about 13 percent of GDP in 2009.
  - Short-term foreign-currency liquidity position gradually improved despite late-2008/early-2009 dent; commercial bank liquid foreign currency assets improving as a share of official reserves.

---

### Sector-by-sector risk summary (selected key points)
- Public debt:
  - Net foreign currency position negative but small; mostly concessional.
  - Domestic debt large by EM standards; share of short-term domestic debt remains a liquidity/interest-rate exposure.
  - Risks appear sustainable given credible track record and improving debt profile.
- Central bank:
  - Net foreign currency position highly positive; overall net position positive.
- Financial sector:
  - Banking system aggregated net position positive and well capitalized.
  - Net foreign exchange position negative due to large GBC deposits.
  - Risks: interest and liquidity shocks from long-term assets funded by short-term liabilities; GBC outflow risk.
- Nonfinancial sector:
  - Large net foreign currency position from overseas investment boom; net domestic currency position negative from domestic borrowing.
  - Overall net position positive and rising; leverage limited.
  - Data gaps and concentration risks (textile, tourism) could hide vulnerabilities.

---

### Conclusions and policy recommendations
- Overall assessment:
  - Mauritius remains vulnerable to global developments but benefits from private sector dynamism, strong fundamentals, robust institutions, and prior policy responses.
  - BSA (with caveats on BoP gaps and missing derivatives/off-balance-sheet positions) suggests currency, currency-mismatch, and liquidity-mismatch risks are manageable.
  - Aggregate gross currency mismatch has fallen recently due to increased foreign currency assets, especially in the private sector.
- Policy recommendations and priorities:
  - Further reduction in public debt levels.
  - Monetary policy refinements.
  - Financial sector and structural reforms.
  - Data improvements, including compiling balance sheet information on GBCs to meet SDDS requirements.
  - Help build the domestic bond market to reduce incentives for private agents to borrow abroad and reduce private-sector currency mismatches.
  - Maintain close vigilance on GBC deposits within the banking system and complete the GBC survey by the FSC and BoM.
- Data caveats and next steps:
  - Achieving SDDS requirements and improving data on public and external debt, foreign currency, the IIP, and analytical accounts of the banking system will refine the BSA and produce more accurate policy implications.

*Source: IMF staff and Mauritian authorities (excerpt from chapter "1. Terms of Trade Deterioration, 1999–2009", _wp10148 — Appendix II and selected appendices).*

### 1. Terms of Trade Deterioration, 1999–2009 .............................................................................

### 1. Terms of Trade Deterioration, 1999–2009

### Introduction and context
- Mauritius achieved remarkable success since independence in 1968, with per capita GDP among the highest in Africa, diversifying from sugar into textiles, tourism, information and communication services, and financial services.
- Since 2000, Mauritius experienced a series of external shocks that produced a cumulative terms of trade shock of nearly 20 percent between 1999 and 2009.
- Specific shocks and impacts:
  - Phasing-out of the Multi-Fiber Agreement (MFA) for textiles in December 2004.
  - Drastic reductions in the European Union’s sugar protocol prices (by 36 percent for 2006–09).
  - Rising prices for imports of petroleum and other commodities.
- Macroeconomic trends:
  - Economic growth declined from an average of 5 percent in the 1990s to just 3 percent in the first half of the 2000s.
  - Growth recovered to 5½ percent in 2007 before being hit by the global financial crisis in 2008/09.
  - The global crisis hit tourism and textiles particularly hard.

### Policy response and structural reforms
- Government measures initiated in 2005 to absorb shocks and restore competitiveness:
  - Trade liberalization, lifting of various price controls, and simplification of business regulations.
  - Fiscal policy reforms including far-reaching tax reform featuring a 15 percent flat tax and establishment of a central revenue authority.
  - Fiscal consolidation strategy anchored in a new public debt law stipulating public debt is to be reduced to 50 percent of GDP by 2013, from a high of 80 percent in 2002.
  - Appointment of a Monetary Policy Committee in 2007.
- Outcomes:
  - Mauritius earned the title “best place to do business in Africa” from the World Bank in 2008 and 2009.
  - In 2007, foreign direct investment (FDI) rose to unprecedented levels, complementing restructuring of sugar and textile industries and rapid growth in the offshore financial sector driven by global business companies (GBCs).

### Immediate crisis management during 2008/09
- Comprehensive policy response to the global crisis included:
  - Fiscal stimulus.
  - Monetary easing.
  - Ensuring foreign exchange (FX) liquidity.
  - Strengthening the social safety net.
  - Facilitating workouts of private sector debt and preservation of jobs.
- Result: Mauritius was able to maintain positive growth in 2009 despite global conditions.

### Motivation for Balance Sheet Approach (BSA)
- Rationale:
  - The global credit crisis showed liquidity shocks can rapidly evolve into solvency crises with spillovers to governments, nonfinancial corporations, and households.
  - Reducing less visible risks to the balance sheets of government, private companies, banks, and households is necessary.
  - Household debt increases and falling public debt suggest analyzing sectors beyond the government is useful.
- Objective of the paper: explore intersectoral vulnerabilities in Mauritius using the Balance Sheet Approach (BSA).

### Introducing the Balance Sheet Approach (BSA)
- What is the BSA?
  - A stock-based tool closely related to the traditional flow-of-funds matrix that estimates intersectoral assets and liabilities (each sector’s position vis-à-vis other domestic sectors and nonresidents).
  - Provides information netted out in a consolidated country balance sheet and reveals vulnerabilities hidden between sectors.
  - Requires case-by-case application and substantial judgment; export openness, international reserve position, and the overall international investment position (IIP) should be factored in when assessing vulnerability.
- Key caution: BSA is largely based on financial statistics and is not intended to reflect the “true” position of an economy or sector, only its macroeconomic vulnerability. Real assets (for example, real estate) are not included because they are not liquid enough to be usable in a crisis.
- Focus of analysis in this paper: currency and maturity risks (more quantifiable), and capital structure risk where possible.

### Typical risks identified in BSA (verbatim descriptions)
- Currency risk: A mismatch between borrowers’ liabilities denominated in a foreign currency and assets denominated in the domestic currency creates exchange rate risk. If the exchange rate depreciates, repayment of foreign currency debt becomes more expensive.
- Maturity risk: A mismatch between short-term liabilities and long-term assets creates rollover and interest rate risk. If market conditions worsen, borrowers might find it difficult to acquire enough liquid assets to cover short-term (foreign currency) debt or might have to borrow at high interest rates.
- Capital structure risk: A mismatch could occur if a country finances investment projects mainly with debt, as opposed to equity. Because equity is state-contingent, it does not require payments in bad times, but debt instruments require payment regardless of market conditions. For instance, financing a current account deficit with debt rather than FDI is likely to heighten vulnerabilities.

### Sectoral breakdown and sources of vulnerability in BSA
- Public sector:
  - Potential vulnerabilities arise from high sovereign debt and weaknesses in the structure of government balance sheets.
  - A mismatch between short-term public liabilities and short-term public assets could create rollover and interest rate risks.
- Financial sector:
  - Balance sheets of the central bank, the Bank of Mauritius (BoM), and the financial sector are significant for assessing risks and resilience.
  - Maturity transformation exposes banks to rollover risks; commercial bank balance sheets are highly interconnected and can spill over to other sectors.
  - Banking is considered a contingent liability to the public sector.
- Nonfinancial corporate sector:
  - Corporate debt owed by corporations with inadequate capital, liquidity, profitability, or foreign exchange can be a vulnerability to the financial system.
- Note on presentation: Appendix III illustrates intersectoral asset and liability positions for Mauritius as of December 2009, with debtor positions on the horizontal axis and creditor positions on the vertical axis, presented by currency, maturity, and creditor.

### Data availability and limitations for Mauritius
- Data quality and participation:
  - Mauritius started participating in the IMF’s General Data Dissemination System (GDDS) in September 2000.
  - A Report on the Observance of Standards and Codes—Data Module was finalized in July 2008 to assess the quality of macroeconomic statistics; the report found quality had improved significantly since 2001.
- Strengths:
  - Data for the public sector (including the central bank) and the banking sector are highly reliable.
  - Sectorization in BoM monetary statistics is fully consistent with the IMF’s Monetary and Financial Statistics Manual 2000 (MFSM).
  - Mauritius has comprehensive financial statistics, especially for deposit-taking financial corporations, suitable for flow-of-funds analysis.
  - Source data for BSA matrices come from financial corporations compiled using Standardized Report Forms (SRFs).
- Limitations and caveats:
  - Nonfinancial sector data are compiled using the same categories as financial corporations; the National Pension Fund is an exception in sectorization.
  - BSA matrices are stock-based and omit less liquid real assets; therefore net financial position differs from net worth (implied capital).

*Source: IMF staff and Mauritian authorities (excerpt from chapter "1. Terms of Trade Deterioration, 1999–2009").*

### Appendix II).

### _wp10148 - Appendix II)

### Data sources, coverage, and limitations
- SRFs for Mauritius present monthly, up-to-date, and detailed data. They are source data used to complete the “central bank,” “other depository corporations” (that is, commercial banks), and to some extent the “other financial corporations” sections of the BSA.
- Currency and instrument breakdowns in SRFs help identify currency and capital structure (debt versus equity) mismatches with some indirect information on maturity structure.
- The economy is split into: central government; state and local governments (which include the island dependencies of Rodriguez, Agalega, and St. Brandon); public nonfinancial corporations (parastatals); financial corporations; the financial and nonfinancial private sector (enterprises); and the rest of the world (nonresidents).
- Lack of corporate data: the nonfinancial sector is not fully and regularly surveyed. A few large corporations dominate; incomplete coverage leads to blind spots and limits detection and quantification of some risks.
- Coverage of balance of payments (BoP) and external debt statistics is incomplete, related primarily to the growth of GBC activities; incompleteness has resulted in major errors, omissions, and inconsistencies between BoP and debt statistics.

### Gaps in the Balance Sheet Approach (BSA)
- The BSA methodology does not capture all risks to the balance sheet:
  - The BSA by definition does not look at off-balance-sheet items (for example, government guarantees), which could increase contingent liabilities.
  - Balance sheet positions are often recorded at book, not market value. In Mauritius: valuation of financial assets and liabilities is based on market prices or market-price equivalents (fair values); loans and deposits are recorded at book value (principal plus accrued interest) consistent with the MFSM.
  - The BSA does not account for derivative positions; derivative exposure of the various sectors is not known. Example: costly hedging of oil prices by Air Mauritius and State Trading Corporation in 2008.
  - The BSA is a static snapshot (end of period) and does not reflect ability to generate cash flows over time; aggregation by sector hides heterogeneity across individual entities.
  - The BSA subdivides the economy into four sectors (government, central bank, financial, non-financial private sector) and does not explicitly look at concentration risks within sectors. Concentration risks are important for Mauritius given dependence on key export sectors such as tourism, textile and sugar.
- Despite limitations, financial sector data in Mauritius are of reasonable quality; the BSA can still provide useful insights, though some risks remain undetectable.

### Why balance sheet imbalances can become destructive
- Vulnerabilities across sectoral balance sheets amplify macroeconomic shocks, threaten stability (especially financial sector), and reduce policy effectiveness. Examples include asset price deterioration (stocks, houses) or rising foreign-currency liabilities after a devaluation.
- Currency mismatch and maturity mismatch channels:
  - Currency mismatches raise debt servicing costs after devaluation.
  - Maturity mismatches (short-term borrowing) increase rollover risk during liquidity shocks.
- Procyclical access to international capital markets:
  - EMs can borrow in good times but face credit constraints and capital flow reversals in bad times.
  - External borrowing for consumption accentuates balance sheet imbalances.
  - Lenders often offer short-term loans in calm periods, producing maturity mismatches.
- Mechanisms of amplification:
  - Falling asset prices and rising liabilities reduce net worth, lower consumption, and reduce collateral for borrowing.
  - Lower asset values raise borrowing costs for companies and reduce investment.
  - Rising NPLs affect bank capital and dampen credit growth (“financial decelerator”).
  - Government tax revenues decline while spending rises, worsening public balance sheet and possibly transferring contingent liabilities to the government.

### Monetary policy ineffectiveness during a balance sheet crisis (high-level findings)
- In principle, monetary easing reduces debt burden and depreciation can stimulate exports; in practice for EMs:
  - EM monetary policy tends to be procyclical; capital inflows in good times lead to appreciation and constrain raising interest rates; outflows in bad times force rate hikes to defend the currency, harming growth.
  - During a balance sheet crisis, monetary policy choices create dilemmas:
    - Loosening policy → depreciation → increases foreign-currency debt burden and risk of runs if currency credibility is weak.
    - Tightening policy → supports currency but reduces domestic demand and raises domestic interest burden.
  - Banking sector behavior can blunt effects of looser policy if banks limit credit to protect balance sheets.
- Policy-makers must choose the option that does the least harm.

### Fiscal policy ineffectiveness during a balance sheet crisis (high-level findings)
- Fiscal expansion is desirable to offset aggregate demand shortfalls, but EMs often lack space:
  - EMs have limited tolerance to debt; capital markets can shut to sovereigns during crises.
  - Government net worth likely falls during crises due to automatic stabilizers (expenditure rises, tax revenue falls) and potential bailouts.
  - Cutting spending or raising taxes to preserve fiscal sustainability can worsen recessions.
- Fiscal and monetary impotence contributes to severity of balance sheet crises in EMs.

### Balance sheet mismatches in Mauritius — data scope and approach
- Analysis covers sectoral balance sheets since July 2003 (date when Mauritius began to compile data using the SRF).
- Data for December 2001 through June 2003 compiled from pre-SRF data are not included because they do not comply with MFSM methodology and are incomplete.
- The currency forward market between Mauritian rupees and other currencies is relatively illiquid and limited to no more than 12 months on demand; swap transactions infrequent; no options market. FX numbers are unlikely to be largely biased by derivative activities.
- Consolidated currency position (difference between assets and liabilities denominated in foreign currency) for the economy was positive over 2003–09 and improved since 2004.

### Aggregate mismatch — national level findings
- The consolidated currency position for 2003–09:
  - Positive over the whole period 2003–09 and markedly improved since 2004, thanks to strong export performance and large FDI and portfolio inflows.
  - Mauritius’s buildup of foreign currency has been stable despite the global financial crisis and downturn in global demand.
  - Improvement also reflects lower value of imports, notably commodities like oil and food whose prices have declined.
- Conclusion: Mauritius as a whole appears to have limited risk arising from exchange rate depreciation.

### Sectoral currency mismatches — General Government (findings and statistics)
- Reforms since 2005:
  - Major tax reform: maximum personal income tax rate cut from 30 percent to a flat 15 percent.
  - Fiscal consolidation strategy, program-based budgeting within a medium-term expenditure framework, and a public debt law stipulating reduction in public debt to 50 percent of GDP by 2013.
- Public debt trends:
  - Public debt (including parastatals) fell below 60 percent of GDP in 2009 compared to peak of 80 percent in 2002.
  - Public debt fell from peak of over 80 percent in 2003 to 61 percent by 2007 and an estimated 59 percent at the end of 2009.
- Government foreign currency position:
  - Foreign currency liabilities fell from 13 percent of GDP in 2003 to about 8 percent in December 2008.
  - During 2009, foreign currency liabilities increased; government’s foreign borrowing in 2009 amounted to about 10 percent of GDP.
  - Government external loans are concessionary: 53 percent from multilateral institutions as of June 2009 and 47 percent from official bilateral creditors.
  - As foreign debt is low by international standards, concessional and long-term, liquidity and rollover risks are low.
- Domestic currency debt and composition:
  - Large domestic currency–denominated debt reflects sophistication of domestic capital markets and investor confidence.
  - Of Mauritius’s public debt, 90 percent is in domestic currency or owned by residents.
  - About a third of domestic debt is still short-term, but composition has improved significantly.
  - Rollover risks are mitigated by large holdings of government debt by the National Pension Fund (by law the fund can invest only 20 percent of its portfolio abroad) and local banks.
  - Government’s new debt management strategy: limit treasury bills to 20 percent of the portfolio by 2013 (currently about 34 percent).
- Intersectoral relationships (central government vis-à-vis all sectors):
  - Borrowing directly from the central bank, the private nonfinancial sector, and households has been relatively insignificant over time.
  - Government borrows mainly in local currency from private financial corporations (selling short-term T-bills and other government securities to banks) and in foreign currency through direct loan agreements with nonresidents (multilateral institutions).
  - Banks’ appetite for treasury bills remains strong; major investors in long-term instruments are the National Pension Fund and some insurance companies.
  - After a decline to 4 percent of GDP in 2006 from about 6 percent in 2003, borrowings from nonresidents rose above 6 percent by end-2009 (reflecting external financing from the African Development Bank and the World Bank).
- Assessment:
  - Mauritius’s public debt at close to 60 percent of GDP is higher than many EMs (average is 50 percent for nonfuel-exporting EMs), but public finances appear sound and public debt is sustainable over the medium term.
  - Given large share of short-term domestic debt, public sector debt is potentially subject to liquidity and interest rate risks.
  - Exchange rate vulnerability appears contained because debt is nearly all held domestically and in local currency.
  - Policy recommendation: continue fiscal prudence and aim to bring down the domestic debt ratio to create fiscal space for contingencies and aging population costs.

### Sectoral currency mismatches — Central Bank (Bank of Mauritius) (findings and statistics)
- BoM balance sheet and policy response:
  - BoM has a solid balance sheet. It did not need unconventional monetary policy tools or quantitative easing during the credit crisis, though reserve requirements were reduced and policy rate was lowered.
- BoM net foreign currency position:
  - Stable since June 2003 at 21–28 percent of GDP.
  - Improved gradually through 2004 to 29 percent (about 8 percent in months of imports of goods), then declined to 24 percent by December 2009 (roughly 7 percent in months of goods imports).
  - BoM has only negligible foreign currency liabilities.
  - One-off factors in 2009: buildup of foreign currency deposits from special drawing rights with the IMF (SDRs) and the purchase of gold increased BoM foreign assets.
    - SDR allocations: a general allocation took effect on August 28, 2009 worth SDR 75.3 million and a special allocation on September 9, 2009 worth SDR 5.7 million (total of US$ 126.5 million).
    - In November 2009, the BoM bought two metric tons of gold from the IMF for the equivalent of US$71.7 million.
  - Since April 2009 BoM moved toward a free float exchange rate policy; FX intervention–related foreign assets have not changed and reflect valuation changes.
  - Because of its net asset position in foreign currency and negligible foreign liabilities, the BoM has no balance sheet risk from an exchange rate depreciation.
- BoM net domestic currency position:
  - Net domestic currency position is negative due to BoM role as issuer of currency and deposit-taker for government and commercial banks.
  - Net domestic currency liabilities fell from 11 percent of GDP in 2003 to about 1 percent in 2006 before rising since to about 6 percent.
  - Changes explained by reserve requirements, economic recovery, and shifts in bank behavior (more funds left at BoM when economy performed poorly; as activity picked up, lending expanded; since 2007 banks became more risk-averse and domestic liabilities rose).
- Overall BoM net currency position:
  - Highly positive because of large net international reserves throughout the observation period, few foreign currency obligations, and relatively small domestic liabilities as a share of GDP.
  - Conclusion: from a balance sheet perspective, the BoM faces little rollover and exchange rate risk; depreciation risk appears well capitalized.
- Intersectoral linkages (summary beginning):
  - Unlike 2006, when BoM granted advances to government on a fairly large scale, the government was not a net borrower in the early and late part of the observation period, and has kept high local currency deposits within the central bank.

*Source: _wp10148 - Appendix II).*

### 2009. The government’s restraint in 2009 reflects its efforts to secure external financing

### 2009. The government’s restraint in 2009 reflects its efforts to secure external financing

### Central Bank balance sheet and intersectoral positions
- Throughout 2003–09, banks in Mauritius have been very liquid and refinancing needs were low.
- Deposits with the central bank were low in relative terms but variable across time, reflecting changes in the reserve requirement and economic activity.
- The Bank of Mauritius (BoM) position toward the rest of the world has been strong and improving, reflecting primarily purchases of foreign currencies from the domestic FX market.
- The BoM’s net financial position vis-à-vis the private nonfinancial sector is insignificant because of little direct interaction.
- The BoM balance sheet appears sound and is neither subject to exchange rate depreciation nor liquidity risk.
- Intersectoral risks to the BoM’s balance sheet appear limited; exposure to the nonresident sector is largely in the form of hard currency, gold, and foreign (US) Treasury bills.
- Long-term risk noted: economic development and further exchange rate appreciation (for example, owing to the Balassa-Samuelson effect) might lead to the value of foreign assets falling in rupee terms, though this is characterized as a long term, not imminent, risk.

### Financial sector structure and systemic soundness
- Financial sector contribution and composition:
  - The financial sector contributes 12 percent of the country’s GDP.
  - Financial corporations comprise 18 banks, 13 nonbank deposit-taking institutions, the Development Bank of Mauritius (DBM), seven money-changers, and five FX dealers, in addition to mutual funds, investment companies, insurance and reinsurance companies, asset management companies, a venture capital fund, and other providers of financial services.
  - The Mauritian banking system is dominated by two long-established domestic groups (Mauritius Commercial Bank and the State Bank of Mauritius) and two international groups (Barclays and HSBC).
  - Of the 18 commercial banks: 4 serve both the domestic and foreign market; 3 large foreign banks serve almost exclusively nonresidents; 5 small and medium banks serve nonresidents but are paying increasing attention to the domestic market; the rest mainly serve residents.
- Financial soundness indicators and stability measures:
  - Direct spillovers from the global crisis onto the financial sector have been few.
  - Financial soundness indicators show high capital adequacy ratios, low NPLs, and sound liquidity positions (see IMF, 2009 referenced in source).
  - Ongoing plan to set up a deposit insurance scheme as mandated by the BoM 2004 Act and the Banking Act to reduce risks of bank runs and give small resident retail depositors more explicit assurance while clarifying that the government would not be responsible for large offshore nonresident deposits.
- Bank balance sheet expansion metrics (June 2003 to December 2009):
  - Commercial bank balance sheets expanded by 167 percent.
  - Net foreign assets grew by 480 percent.
  - Private sector credit growth was 104 percent.
  - Bank foreign liabilities grew by 150 percent.
  - Total deposits in commercial banks grew by 115 percent.
  - The proportion of foreign currency deposits to rupee deposits in banks expanded from about 15 percent to 20 percent.
- Systemic vulnerabilities and supervisory capacity:
  - No indication of solvency problems across the financial system.
  - Shortcomings noted in the use of advanced risk-assessment methods and a shortage of qualified and experienced staff in both the BoM (responsible for banks) and the Financial Services Commission (responsible for nonbanks) per the December 2007 FSAP update.

### Commercial banks: currency positions, funding, and risks
- Foreign currency positions and GBC influence:
  - On a net foreign currency basis, bank foreign currency liabilities exceeded foreign currency assets, though growth of both foreign currency assets and liabilities stagnated since the global crisis began.
  - GBCs park large amounts of foreign currency in the banking system for relatively short periods until funds are transferred abroad (mainly India).
  - GBC deposits account for roughly 65 percent of foreign currency deposits and 30 percent of total bank deposits.
  - GBC deposits held with banks amounted to 85 percent of GDP in December 2009 (compared to total private nonfinancial sector deposits with banks amounting to 96 percent of GDP).
- Commercial bank domestic currency position:
  - Net domestic currency position has been positive since 2003 because net positive claims (primarily loans and advances) outweigh deposits in local currency.
- Funding model and liquidity:
  - Principal source of funding is deposits; the system does not rely on short-term commercial paper.
  - No toxic assets on banks’ books; funding model helps mitigate rollover risks though short-term liquidity risk remains a generic concern.
- Credit concentration and credit-risk mitigation:
  - About 45 percent of the aggregate loan portfolio is exposed to tourism, textiles, and construction, creating credit risk from abrupt slowdowns in these sectors.
  - The “Mauritius approach” (Mauritian Transitional Support to the Private Sector, MTSP) provides temporary financial relief to firms hit by the crisis if they have credible restructuring plans; costs are shared by banks, the government, and firm shareholders.
    - By end-2009, 11 companies received MTSP assistance.
    - The government contributed Rs140 million (36 percent of total MTSP support) in the form of debentures at 5 percent interest.
    - Until MTSP loans are repaid, company management may be subject to cuts in salary and benefits, and no dividends are paid.
    - Authorities estimate the net present value (NPV) should be zero; only if some assisted companies fail would the NPV be negative. All firms assisted so far are reported as doing well.
  - Private companies’ leverage is relatively low by international standards; the top 50 companies have largely avoided foreign loans and companies generally prefer to finance themselves out of profits.
- Aggregate banking-system vulnerabilities and contingencies:
  - Overall net position of the banking system is positive, suggesting aggregated balance sheet risks appear limited.
  - Net negative foreign asset position implies exchange rate risks are present, mitigated by a large proportion of FX assets held as highly liquid bank deposits abroad and limited FX lending to residents (only 19 percent of GDP).
  - Banks remain at risk of interest and liquidity shocks given the predominance of long-term assets and short-term liabilities.
  - Massive outflows from GBCs could spill over to domestic banks and lead to liquidity problems.
  - Lack of adequate data on GBCs warrants vigilance; ongoing GBC survey is expected to improve coverage and help identify risks.

### GBCs, BoP and external statistics issues
- GBCs (Global Business Companies) are an important growth driver for the financial system and present data and statistical challenges:
  - Incomplete coverage of GBC activities has resulted in large errors and omissions and inconsistencies between BoP and debt statistics.
  - Authorities are undertaking steps to compile statistics that capture transactions of GBCs managed by 12 major management companies and expect a comprehensive survey in the near future.
- Systemic role of GBCs:
  - GBCs function largely as conduits between foreign investors and investments abroad; banks’ profits and losses are affected by GBC in- and out-flows and related “float,” but GBC gains or losses are ultimately borne by foreign investors.
  - Risks to financial stability from GBCs are considered limited on this basis, though sudden withdrawals and supervisory gaps pose potential short-run risks.
  - Dependency risk: the success of GBCs initially relied on the double-taxation avoidance treaty with India; an eventual end to that tax-treatment would negatively affect the financial sector, although GBCs have expanded investments to other countries in Africa and Asia.
  - Mauritius is explicitly excluded from the OECD list of “uncooperative tax havens,” supporting expectations for further GBC sector growth.

### Nonfinancial sector transformation and exposure
- Structural transformation and new sectors:
  - ICT grew by 40.8 percent between 2005 and 2007 and expanded by 16.2 percent in 2009; it contributes 5.8 percent to GDP and employs 12,000 persons.
  - Seafood sectors, real estate (especially related to the Integrated Resort Scheme, IRS), health and knowledge hubs are other growing industries.
  - The Chinese Jin Fei project: investment of US$780 million (about 9 percent of GDP) over eight years; projected to create some 40,000 jobs, directly and indirectly.
- Sectoral impacts from the global crisis:
  - Textiles and clothing stagnated in 2008 and output shrank by 4 percent in 2009.
  - Tourism, which was booming before the global crisis, showed negative developments (text cut off in source at this point).

*Source: IMF staff synthesis of Mauritian authorities’ data in the cited chapter.*

### 7.6 percent growth in 2009. The slowdown in real estate and IRS activities negatively

### _wp10148 - 7.6 percent growth in 2009. The slowdown in real estate and IRS activities negatively affected the construction industry, but public investment in infrastructure enabled it to maintain positive growth rate of 2.5 percent. The financial industry has come out relatively unscathed from the global turmoil and is projected to have grown by some 6 percent in 2009, though is bound to be affected by the ailing sectors with a lag.

### Macroeconomic and sectoral growth outcomes
- Economy-wide growth:
  - 7.6 percent growth in 2009.
- Construction:
  - Slowdown in real estate and IRS activities negatively affected the construction industry.
  - Public investment in infrastructure enabled construction to maintain positive growth rate of 2.5 percent.
- Financial industry:
  - Projected to have grown by some 6 percent in 2009.
  - Described as having come out relatively unscathed from the global turmoil but likely to be affected by ailing sectors with a lag.
- Private nonfinancial corporation behavior:
  - Between 2003 and 2009 private nonfinancial corporations nearly tripled their assets abroad, particularly hotel and banking groups operating in the Indian Ocean.
  - Depreciation of the rupee in 2009 increased the value of the net foreign currency position measured in rupees.

### Currency positions and mismatches (private nonfinancial sector)
- Foreign-currency borrowing and positions:
  - Nonfinancial private borrowing in foreign currency has been almost nonexistent since 2003.
  - The private sector does not borrow much in foreign currency and sources itself domestically in Mauritian rupees.
  - The risks to private sector balance sheets of exchange rate depreciation appear contained.
- Net currency positions:
  - The private nonfinancial sector’s net domestic currency position is negative because of large domestic currency–denominated borrowing requirements from the banking sector to finance expansion both domestically and overseas.
  - The overall net currency position of the nonfinancial sector (consolidating foreign and domestic assets and liabilities) has been positive since the beginning of 2005.
  - The sector has been able to steadily accumulate foreign currency in the vaults of commercial banks.
- Caveats and data limitations:
  - Short-term private inflows into the BoP have been sizable in recent years, as have BoP errors and omissions, which suggests that the report may be understating the risks of debt to private balance sheets.
  - More information on derivative positions and off-balance sheet items might affect the positive assessment.
  - The net financial position of the private nonfinancial sector is overwhelmingly influenced by the importance of GBCs.
  - GBCs mainly invest funds overseas provided by nonresidents, meaning gains and losses are borne by non-Mauritian entities; private nonfinancial sector profitability (for example, earning management fees) depends on flows into and out of GBCs and is not directly affected by gains and losses of GBC investments.
  - The analysis is overshadowed by the lack of adequate data on GBCs; a GBC survey by the FSC and BoM is needed.

### Balance sheet linkages and systemic exposures
- Intersectoral positions:
  - The nonfinancial sector shows a strong asset position vis-à-vis commercial banks and apparently does not borrow from other sources, including overseas, reflecting heavy reliance on the local banking system.
- Concentration and contagion risks:
  - The private sector is dynamic and overall net asset position is positive and rising, which limits credit risk.
  - Concentration risks are notable: any major shock to a key pillar of the economy, such as textile or tourism, could spill over into households and the banking system, and from there to the government’s balance sheet.
- GBC-related risks:
  - GBC sector provides important economic benefits but is vulnerable to changes in tax treaties (especially with India) and sudden changes in capital flows.
  - The risk of a sudden withdrawal of GBC funds from the banking system—and possible negative contagion to banking system liquidity—appears contained, given how GBCs operate, but close vigilance is warranted.

### Maturity mismatches and banking system liquidity
- General considerations:
  - Maturity mismatch risk arises when assets are long-term and liabilities are short-term, creating rollover and interest rate risks.
  - Banks are the primary channel for transmission of maturity mismatches because of maturity transformation (taking short-term deposits and lending long term).
- Short-term liquidity and rollover risk:
  - Domestic currency liquidity position (cash reserves above reserve requirements) of domestic banks in Mauritius is comfortable and has been throughout the current global crisis.
  - Short-term bank lending minus short-term bank liabilities (bank customers’ deposits) is negative, indicating vulnerability to rollover risk and interest rate increases.
  - The higher share of short-term deposits is related to the float of GBCs, which park investment funds in short-term deposits at short notice.
- Long-term maturity matching:
  - When comparing bank long-term assets and long-term liabilities, there is limited maturity mismatch—asset–liability are well matched at the long end.
- Aggregate positions:
  - Total deposits outweigh assets by a substantial margin, suggesting exposure to interest rate risks and rollover risks.
- External debt context:
  - Overall external debt stock is estimated at about 13 percent of GDP in 2009 and does not pose any immediate vulnerability risks.
- Short-term foreign-currency liquidity:
  - Mauritius’ short-term foreign-currency liquidity position (maturity mismatch) has continued to improve gradually despite a small global crisis–related “dent” in late 2008 and early 2009.
  - Commercial bank liquid foreign currency assets are improving steadily as a share of official reserves.

### Sector-by-sector risk summary
- Public debt:
  - Net foreign currency position is negative, though small as a share of GDP and mostly on concessional terms to multilateral organizations.
  - Domestic debt is large by EM standards and potentially subject to liquidity and interest rate risks given the still large share of short-term domestic debt.
  - Given a credible track record and improving debt profile, risks from public debt appear to be sustainable.
- Central bank:
  - Net foreign currency position is highly positive and not subject to major risks.
  - Net domestic currency position is negative because the BoM is a deposit-taker for both government and banks.
  - Overall net position is positive, with few interest rate risks; exchange rate depreciation does not pose a danger either.
- Financial sector (banking system):
  - Overall net position of the banking system is positive, suggesting it is well capitalized.
  - Net foreign exchange position is negative, reflecting large deposits from GBCs.
  - Banking system is at risk of interest and liquidity shocks given the balance sheet structure: predominance of long-term assets and short-term liabilities.
- Nonfinancial sector:
  - Large net foreign currency position due to overseas investment boom and predominance of domestic borrowing.
  - Net domestic currency position is negative because of large domestic borrowing.
  - Overall net position is positive and rising because of sector profitability; leverage appears limited and interest rate and liquidity risks are contained.
  - Lack of comprehensive private nonfinancial sector data suggests potential hidden risks; concentration risks (for example textiles or tourism) could spill over to the rest of the economy.

### Conclusions and policy implications
- Overall assessment:
  - Mauritius remains vulnerable to global developments but private sector dynamism, strong fundamentals, robust institutions, and a track record of strong policy responses have helped preserve resilience.
  - The BSA—subject to caveats about BoP data gaps and missing derivative and off-balance sheet positions—suggests balance sheet risks from currency exposure, currency mismatches, and liquidity mismatches appear manageable.
  - The aggregate gross currency mismatch in Mauritius has fallen in recent years, reflecting increased foreign currency assets, especially by the private sector.
- Policy recommendations and priorities:
  - Further reduction in public debt levels.
  - Monetary policy refinements.
  - Financial sector and structural reforms.
  - Data improvements, including compiling balance sheet information on GBCs to meet Special Data Dissemination Standard (SDDS) requirements.
  - Help build the domestic bond market to reduce incentives for private agents to borrow abroad and thereby reduce private sector currency mismatches.
  - Maintain close vigilance on GBC deposits within the banking system and complete the GBC survey by the FSC and BoM to close statistical gaps.
- Data caveats and next steps:
  - Achieving SDDS requirements and improving data on public and external debt, foreign currency, the international investment position, and analytical accounts of the banking system will refine the BSA and produce more accurate policy implications.

*Source: Mauritian authorities; extracted material from the supplied IMF content unit.*

### REFERENCES

### _wp10148 - REFERENCES

### Key References
- Allen, Mark; Christoph Rosenberg; Christian Keller; Brad Setser; and Nouriel Roubini, 2002, “A Balance Sheet Approach to Financial Crisis,” IMF Working Paper 02/210 (Washington: International Monetary Fund).
- Calvo, Guillermo A. and Carmen M. Reinhart, 2002, "Fear Of Floating," Quarterly Journal of Economics, Vol. 107, pp. 379-408.
- Eichengreen, Barry, and Ricardo Hausmann, 2003, “Original Sin: The Road to Redemption,” mimeography (Washington DC: Center for International Development).
- Hausmann, Ricardo; Ugo Panizza; and Ernesto Stein, 2000, “Why Do Countries Float the Way they Float?” IADB Working Paper 418 (Washington: Inter-American Development Bank).
- Imam, Patrick, and Camelia Minoiu, 2008, “Mauritius: A Competitiveness Assessment,” IMF Working Paper 212 (Washington: International Monetary Fund).
- IMF, 2000, Monetary and Financial Statistics Manual (Washington: International Monetary Fund). Available via the Internet: http://www.imf.org/external/pubs/ft/mfs/manual/index.htm
- IMF, 2007, Mauritius: Financial System Stability Assessment—Update, IMF Country Report 08/373 (Washington: International Monetary Fund).
- IMF, 2008, Report on the Observance of Standards and Codes (ROSC)—Data Module, IMF Country Report No. 08/277 (Washington: International Monetary Fund).
- IMF, 2009, Mauritius: 2009 Article IV Consultation, IMF Country Report No. 10/37 (Washington: International Monetary Fund).
- Mathieu, Paul, and Patrick Imam, 2008, “The Mauritian Growth Miracle,” in Regional Economic Outlook: Sub-Saharan Africa, October (Washington: International Monetary Fund).
- Mathisen, Johan, and Anthony J. Pellechio, 2007, “Using the Balance Sheet Approach in Surveillance: Framework and Data Sources and Availability,” (Washington: International Monetary Fund).
- Sacerdoti, Emilio; Gamal El-Masry; Padamja Khandelwal; and Yudong Yao, 2005, Mauritius: Challenges of Sustained Growth (Washington: International Monetary Fund).
- Talvi, Ernesto, and Carlos A. Vegh, 2002, “Tax Base Variability and Procyclical Fiscal Policy,” NBER Working Paper No. 7499 (Cambridge, MA: National Bureau of Economic Research).

### Appendix I — Definitions of Sectors
- Central bank: separate institution (central bank, reserve bank, national bank, or state bank) engaging in different activities.
- General government: institutional units producing principally nonmarket services, redistributing income and wealth.
- Other depository corporations: resident financial corporations (except the central bank) and quasi corporations engaged in financial intermediation and issuance of liabilities included in broad money (examples: commercial banks, merchant banks, savings banks, savings and loan associations, building societies and mortgage banks, credit unions and credit cooperatives, rural and agricultural banks, travelers’ check companies engaging mainly in financial corporation activities).
- Other financial corporations: remaining resident corporations or quasi corporations undertaking financial activities, including nonprofit institutions mainly engaged in the production of financial services (such as insurance) or financed by subscriptions from financial enterprises.
- Nonfinancial corporations: institutional units principally engaged in the production of market goods and nonfinancial services.
- Other resident sector: households (supply labor, final consumption, and production as entrepreneurs) and nonprofit institutions producing nonmarket services for households funded mainly by voluntary contributions.
- Nonresidents: institutional units outside the country that enter into transactions with resident units or have other economic links with resident units.

### Appendix II — Definitions of Financial Instruments
- Financial assets: subset of economic assets with enforceable ownership rights yielding economic benefits.
- Currency: notes and coins; monetary gold (if under effective control of the central bank) and SDRs can also be considered currency.
- Deposits: all claims represented by evidence of deposit on central bank, other depository corporations, government units, or other institutional units.
  - Transferable deposits: deposits exchangeable on demand at par and directly usable for payments (check, draft, giro order, direct debit/credit).
  - Other deposits: claims other than transferable deposits (e.g., savings and fixed-term deposits, foreign currency nontransferable deposits).
- Debt securities: negotiable instruments evidencing obligations to settle (e.g., treasury bills, government bonds, corporate bonds and debentures).
- Loans: financial assets created when a creditor lends directly to a debtor; shown by nonnegotiable documents (including leases).
- Shares and other equity: instruments acknowledging claims on the residual value of a corporation after creditors are paid.
- Insurance technical reserves: net equity of households in life insurance reserves and pension funds and prepayments of premiums.
- Financial derivatives contract: instrument linked to a specific financial instrument, indicator, or commodity, trading specific financial risks (interest rate risk; currency, equity and commodity price risk; or credit risk).
- Other accounts receivable/payable: trade credit and advances and similar accounts.
  - Trade credit and advances: trade credit extended directly to corporations, governments, nonprofit institutions, households, and the rest of the world; advances for work in progress and prepayments for goods and services.

### Appendix IV — Financial Accounts and Errors and Omissions in the Balance of Payments (BoP) — Key Points on Mauritius and GBCs
- Mauritius is an effective offshore jurisdiction with 34 double-taxation avoidance treaties (DTAs).
- Financial Services Act (July 2007) distinguishes Mauritian companies conducting business in Mauritius and those conducting business elsewhere; companies investing abroad may opt to be global business companies (GBCs), regulated by the Financial Services Commission (FSC).
- GBC types and features:
  - GBC1:
    - Considered a tax resident in Mauritius; enjoys benefits of the DTA network.
    - Used when overseas income is predominantly dividends, royalties, interest, capital gains needing DTA benefits.
    - Maximum effective income tax rate is 3 percent.
    - Business activities may include asset management, credit finance, factoring, leasing, and pension fund administration.
    - Must use services of management companies (MCs) in Mauritius, which must provide reports to authorities, including financial statements to the FSC.
  - GBC2:
    - Can carry out most business activities except financial services, holding/managing a collective investment fund or scheme, dealing with a collective investment fund professionally, and providing registered office facilities and other services for corporations.
    - Not a tax-resident in Mauritius and cannot benefit from the DTA network but is completely exempt from taxation in Mauritius.
    - Typically used for invoicing, marketing, and international trading.
    - Information available for GBC2s is currently much more limited than for GBC1s.
- Statistical challenges and BoP/IIP coverage:
  - For BoP and IIP purposes, both types of GBC are considered residents of Mauritius even though many have no physical presence.
  - Current BoP and IIP data exclude GBC activities (incoming and outgoing investment flows, mainly for investment in India and income).
  - Rising errors and omissions (2.7 percent of GDP in 2008) are mainly linked to GBC activities.
  - GBCs are largely pass-through enterprises but impact the local economy via MCs, registration fees, and accounts with local banks.
  - MC activities account for at least 3 percent of GDP.
- Data collection and improvement measures:
  - FSC information on GBCs is incomplete and currently not suitable for the central bank to compile BoP and IIP statistics.
  - Bank of Mauritius (BoM) collects only partial GBC data and excludes them from BoP payments data.
  - Official statistics capture only foreign assets of commercial banks primarily from deposits made by GBCs from funds raised abroad (the “float”).
  - A joint committee (BoM, FSC, Central Statistical Office, Ministry of Finance and Economic Development) established to conduct a BoP survey of resident GBCs managed by 12 major management companies.
  - Initial survey scheduled for March/April 2010 will be annual and will capture balance sheet information and transactions data for calendar year 2009.
  - To improve IIP statistics, an annual survey of positions data is needed; IIP should incorporate results of the Coordinated Portfolio Investment Survey (CPIS), the overwhelming part of which are assets held by GBCs.
- Operational implications:
  - Inclusion of GBCs in BoP and IIP would better reflect Mauritius as an international financial center.
  - Capturing GBC activity is necessary to reduce rising errors and omissions and to provide a more accurate external position.

### Appendix V — Contribution of Global Business Corporations to Banks' Aggregate Balance Sheet and Banking-System Features (end-December 2009)
- Structure of the banking system:
  - Dominated by two domestic banks (Mauritius Commercial Bank and State Bank of Mauritius) and two international banking groups (Barclays and HSBC).
  - Of 18 commercial banks:
    - 4 large banks serve both domestic and foreign market,
    - 3 large foreign banks serve almost exclusively nonresidents,
    - 5 small and medium banks focus on nonresidents but increasingly domestic market,
    - Remainder largely serve domestic market.
- FX (foreign exchange) positions and assets/liabilities:
  - FX liabilities are about 130 percent of GDP.
  - FX assets are 182 percent of GDP.
  - Of FX assets, 163 percent of GDP represent claims on nonresidents (of which 58 percent—equivalent to almost one-half of FX liabilities—are held as balances in banks abroad).
  - FX lending to residents is only 19 percent of GDP (of which 6 percent of GDP is to the GBCs).
  - Deposit floats (liabilities of GBCs) amount to some 85 percent of GDP, virtually all in FX.
  - FX liabilities to other residents are 29 percent of GDP.
- Risk assessment:
  - Large net foreign asset position equal to 116 percent of GDP, or 31 percent of GDP if GBCs are considered nonresidents.
  - Long FX position, large proportion of FX assets held as highly liquid bank deposits abroad, and limited FX lending to residents suggest manageable risks, but magnitudes warrant close vigilance.
- Banks' balance sheet (Mauritius: Banks' Balance Sheet, end-December 2009) — selected figures (Rupees (billion); Share (percent)1; Percent of GDP):
  - Assets total: 751.1 (Total); of which Foreign 489.0; Domestic 262.1; Currency 100.0; Foreign currency (FC) 65.1; FX 280.1; FX as percent 182.3.
  - Claim on residents: 313.8 (Total); of which Foreign 51.7; Domestic 262.1; Currency 41.8; FC 6.9; FX 117.0; FC share 19.3.
  - GBCs (claims on residents): 17.0 (Total); of which Foreign 16.8; Domestic 0.2; Currency 2.3; FC 2.2; FX 6.3; FC share 6.3.
  - Other residents (claims on residents): 296.8 (Total); of which Foreign 34.9; Domestic 261.9; Currency 39.5; FC 4.6; FX 110.7; FC share 13.0.
  - Claim on nonresidents: 437.3 (Total); of which Foreign 437.3; Domestic 0.0; Currency 58.2; FC 58.2; FX 163.1; FC share 163.1.
  - Liabilities total: 751.1 (Total); of which Foreign 352.1; Domestic 399.0; Currency 100.0; FC 46.9; FX 280.1; FX as percent 131.3.
  - Liabilities on residents: 624.6 (Total); of which Foreign 304.9; Domestic 319.7; Currency 83.2; FC 40.6; FX 232.9; FC share 113.7.
  - GBCs (liabilities on residents): 227.6 (Total); of which Foreign 227.5; Domestic 0.1; Currency 30.3; FC 30.3; FX 84.9; FC share 84.8.
  - Other residents (liabilities on residents): 397.0 (Total); of which Foreign 77.4; Domestic 319.6; Currency 52.9; FC 10.3; FX 148.1; FC share 28.9.
  - Liabilities on nonresidents: 126.5 (Total); of which Foreign 47.2; Domestic 79.3; Currency 16.8; FC 6.3; FX 47.2; FC share 17.6.
- Notes and sources:
  - Sources: Bank of Mauritius (Monthly Statistical Bulletin, January 2010).
  - 1 Percent of total assets.
  - 2 Foreign currency.

*Italic: Extracted from _wp10148 - REFERENCES (PDF) — content as provided.*

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