Public Information Notice: IMF Concludes 2002 Article IV Consultation with Mauritius
IMF News, July 15, 2002
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- Published: July 15, 2002
Background: recent economic performance and risks
- Real GDP growth is expected to expand by about 5.3 percent in 2001/02 (July-June), only slightly below its trend rate of growth of the past 20 years.
- Sectoral developments:
- Tourism weakened in Q2 2001 but picked up in the second half of the year.
- Sugar output grew by 14 percent during the 2001/02 crop year, reaching 645,000 tons, its highest level since 1987.
- Financial services and other services (transport and communications) continued robust expansion.
- Output in the export processing zone (EPZ) is likely to increase by about 6 percent in 2001/02.
- Recent political upheavals in neighboring Madagascar disrupted production and trade and hurt profitability of Mauritius's EPZ firms due to sizable investments in, and vertical integration with, Madagascar's EPZ.
- Labor market and social indicators:
- Unemployment has risen steadily and is projected to reach about 9 percent in 2001/02.
- The trend suggests a mismatch between workplace requirements and job aspirations or skills, labor market rigidities, and broader problems in education and training.
- Fiscal position:
- Government finances are expected to deteriorate further in 2001/02 following a sharp deterioration in 2000/01.
- Main fiscal pressures: higher capital expenditure on education and environmental projects and an increase in net lending; partially offset by lower interest payments and wages.
- Government revenue is likely to be broadly stable.
- The primary deficit is expected to widen from 1.3 percent of GDP in 2000/01 to 3 percent of GDP in 2001/02.
- State-owned enterprises’ financial situation improved in 2000/01 and is expected to strengthen somewhat in 2001/02 but remains weak; utility and energy price adjustments remain infrequent and politically driven.
- Inflation and prices:
- Twelve-month average inflation fell to 4.4 percent in 2000/01 from 5.3 percent in the previous year, then rose to 5.6 percent in February 2002.
- Factors boosting inflation: depreciation of the rupee during 2001, rise in the VAT rate, increases in electricity and other administered prices, and the impact of a cyclone in late February on food prices.
- Financial sector and regulation:
- Financial Services Development Act took effect in December 2001 establishing the Financial Services Commission (FSC).
- FSC responsible for regulating and supervising the nonbank financial sector; Bank of Mauritius (BOM) retains regulation and supervision of banks.
- Planned transition of three to four years to merge FSC and BOM’s Banking Supervision Department into an integrated supervisory agency.
- External sector:
- Current account swung from a deficit of 1.6 percent of GDP in 1999/2000 to a surplus of 1.8 percent of GDP in 2000/01.
- Improvement in trade balance due to strong recovery in sugar exports and lower EPZ input imports.
- Capital and financial accounts: net FDI inflows of US$228 million more than offset final repayment on floating rate note of US$117 million.
- Real effective appreciation of the rupee during 1999 and much of 2000 was partly reversed during 2001.
- Current account expected to remain in modest surplus in 2001/02.
Executive Board assessment: strengths, concerns, and policy guidance
- Overall assessment:
- Directors noted sound macroeconomic policies and structural reforms over two decades that established Mauritius as a leading economic performer in Africa with robust growth, high real per capita incomes, improving social conditions, and a diversified economic base.
- Economy judged resilient to the recent global slowdown: growth near trend, subdued inflation pressures, and an external position in broad balance.
- Main concerns: large and growing fiscal deficit and steadily rising unemployment.
- Fiscal policy guidance and recommendations:
- Welcome government intention to lower the fiscal deficit over the medium term; substantial fiscal measures are required beginning with the 2002/03 budget.
- Failure to take corrective measures while pursuing ambitious capital spending could lead to substantial deficit increases and unsustainable debt dynamics.
- Broad support for:
- Increasing the VAT rate.
- Broadening the income and customs tax bases by reducing exemptions and concessions.
- Strengthening tax administration.
- On expenditures: review, prioritize, and check the pace of execution of planned capital projects to avoid excessive demand pressures.
- Implement an automatic and transparent mechanism for petroleum product pricing to reduce losses of the State Trading Corporation and potential need for budgetary support.
- Monetary and exchange rate policy:
- Stance of monetary policy viewed as appropriately tight.
- Directors viewed favorably BOM’s move to an informal inflation-targeting framework.
- Noted many conditions for formal inflation targeting (greater central bank independence and a price stability mandate) are not yet in place.
- Welcomed authorities’ intention to allow the exchange rate to be market determined, with limited intervention to reduce short-term volatility.
- Financial sector, AML/CFT, and supervision:
- Welcomed expeditious passage of legislation on anti-money laundering and combating the financing of terrorism and encouraged full implementation.
- Welcomed establishment of the Financial Services Commission and Mauritius’s request to participate in the Financial Sector Assessment Program starting later this year.
- Labor market and structural reforms:
- Considerable emphasis on labor market reforms to reverse rising unemployment and sustain high growth.
- Key actions: education and training to reduce skill mismatches; revision of labor laws and regulations to increase labor market flexibility.
- Directors look forward to a comprehensive World Bank–financed study on labor market reforms.
- A few Directors noted that prioritization and rescheduling of capital spending should not affect education spending.
- Trade policy:
- Commended measures to liberalize trade and encourage regional economic integration.
- Encouraged further trade liberalization and full alignment with World Trade Organization rules.
- Data and reporting:
- Noted quality and timeliness of Mauritius’s reporting of core minimum and other economic and financial statistics were in general satisfactory for surveillance purposes.
Key statistics and selected economic indicators
- Domestic economy (annual percentage change):
- Real GDP: 1997/98 = 6.0; 1998/99 = 5.3; 1999/00 = 2.6; 2000/01 = 7.2; Prov. 2001/02 = (text notes expected about 5.3 percent growth).
- Consumer prices (period averages): 1997/98 = 5.4; 1998/99 = 7.9; 1999/00 = 4.4.
- Unemployment: 1997/98 = 5.8; 1998/99 = 6.2; 1999/00 = 7.7; 2000/01 = 9.0; Prov. 2001/02 = 9.4.
- External economy (in millions of U.S. dollars, unless otherwise indicated):
- Exports, f.o.b: 1997/98 = 1,605.5; 1998/99 = 1,680.2; 1999/00 = 1,522.6; 2000/01 = 1,633.4; Prov. 2001/02 = 1,625.2.
- Imports, f.o.b.: 1997/98 = -2,016.0; 1998/99 = -2,045.7; 1999/00 = -2,006.5; 2000/01 = -1,912.5; Prov. 2001/02 = -1,916.7.
- Current account balance: 1997/98 = -115.8; 1998/99 = -65.3; 1999/00 = -68.5; 2000/01 = 80.2; Prov. 2001/02 = 66.4.
- Current account balance (in percent of GDP): 1997/98 = -2.8; 1998/99 = -1.5; 1999/00 = -1.6; 2000/01 = 1.8; Prov. 2001/02 = 1.5.
- Capital and financial account balance: 1997/98 = 73.8; 1998/99 = 11.7; 1999/00 = -102.6; 2000/01 = -49.3; Prov. 2001/02 = -66.3.
- Net international reserves of the banking system (end of period): 1997/98 = 879.6; 1998/99 = 893.8; 1999/00 = 966.0; 2000/01 = 1,082.7; Prov. 2001/02 = 1,215.4.
- Net international reserves (in months of prospective imports, c.i.f.) 2/: 1997/98 = 5.1; 1998/99 = 5.0; 1999/00 = 5.7; 2000/01 = 6.5; Prov. 2001/02 = 6.9.
- Debt service (in percent of exports of goods and nonfactor services): 1997/98 = 7.0; 1998/99 = 7.6; 1999/00 = 9.8.
- Change in real effective exchange rate (in percent) 3/: 1997/98 = 1.4; 1998/99 = -2.4; 1999/00 = 2.8; 2000/01 = -4.2.
- Financial variables (in percent of GDP, unless otherwise indicated) 2/:
- Total revenues and grants: 1997/98 = 19.6; 1998/99 = 20.1; 1999/00 = 20.9; 2000/01 = 18.2; Prov. 2001/02 = 18.3.
- Total expenditures and net lending: 1997/98 = 23.5; 1998/99 = 23.4; 1999/00 = 24.8; 2000/01 = 23.9; Prov. 2001/02 = 24.7.
- Central government fiscal balance 4/: 1997/98 = -3.8; 1998/99 = -3.3; 1999/00 = -5.7; 2000/01 = -6.4; Prov. 2001/02 = (primary balance and other figures reported below).
- Primary fiscal balance 4/ 5/: 1997/98 = -0.1; 1998/99 = 0.1; 1999/00 = -0.4; 2000/01 = -1.3; Prov. 2001/02 = -3.0.
- Change in broad money (in percent): 1997/98 = 17.4; 1998/99 = 13.2; 1999/00 = 10.9; 2000/01 = 9.9.
- Interest rate (in percent) 6/: 1997/98 = 10.0; 1998/99 = 12.0; 1999/00 = 10.8; 2000/01 = 11.4.
- Additional contextual figures and notes:
- Net inflows of foreign direct investment in 2000/01 = US$228 million.
- Final repayment on the floating rate note = US$117 million.
- Fiscal year convention: Fiscal year from July to June.
- Net international reserves excluding the acquisition of aircraft and ships.
- Real effective exchange rate figures are trade-weighted period averages; the figure for 2001/02 is for July to December 2001; a negative sign signifies a depreciation.
- Central government fiscal balances include grants.
- Primary fiscal balance is the overall central government fiscal balance, excluding interest payments.
- Interest rate shown is the maximum interest rate on fixed-time deposits with maturities between six and twelve months, end of period; the future for 2001/02 is for January 2002.
Public Information Notice: IMF Concludes 2002 Article IV Consultation with Mauritius, July 15, 2002.