Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Mauritius
IMF News, January 3, 2006
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- Published: January 3, 2006
Background
- Growth slowed to 3.5 percent in 2004/05 and is expected to remain subdued during the next two fiscal years.
- External current account surplus recently turned into a deficit owing to a decline in exports and a price-related surge in petroleum product imports.
- The real effective exchange rate has depreciated and net foreign official reserves have dropped, although they remain at relatively comfortable levels.
- Fiscal position weakened: central government deficit about 5 percent of GDP during 2004/05; the State Trading Company (STC) incurred a rising deficit owing to lack of adjustment of retail petroleum prices since early 2005.
- Unless corrective action is taken, the overall fiscal position during 2005/06 is expected to deteriorate further owing to lower than originally projected revenue collections and a further increase of the STC's deficit as the gap between retail prices and import costs of petroleum products widens.
- Inflation picked up since mid-2004, reflecting ample liquidity and higher import prices for petroleum products; more recently, price developments have moderated largely because of slower monetary growth and because increases in international oil prices have not yet been passed on due to suspension of domestic oil price adjustments.
Executive Board Assessment — Main findings
- Directors commended Mauritius' impressive economic and social progress over the past two decades.
- Recent deterioration driven by a more difficult external environment, particularly for the sugar and textile sectors, leading to:
- slowdown of economic activity,
- increase in the external current account deficit,
- loss of international reserves.
- Key policy challenges identified: the challenging external environment, the high level of domestic public debt, and the risk of higher inflation.
- Authorities recognized the need for fundamental reforms to boost external competitiveness and ensure fiscal sustainability; Directors welcomed this recognition.
Executive Board Assessment — Structural and sectoral recommendations
- Urged development of a comprehensive economic strategy combining structural reform measures and policies geared toward macroeconomic stability to:
- reassure international and domestic investors,
- improve environment for private sector activity,
- lay the basis for a return to high growth rates and creation of employment opportunities.
- Structural reform recommendations:
- explore options for more active private sector involvement, including privatization;
- review the role of the public sector in commercial activities and the financial soundness of major public enterprises;
- create a more flexible labor market to facilitate transfer of workers from declining to dynamic sectors;
- accompany labor mobility efforts with training programs geared toward needs of growing segments of the economy;
- examine impact of centralized wage negotiations on labor costs and competitiveness.
- Textile and sugar sectors:
- welcomed authorities' restructuring plans to mitigate effects of loss of trade preferences;
- supported steps to increase enterprise efficiency and seek new export opportunities for textiles;
- cautioned against use of fiscal incentives for these sectors given the difficult fiscal situation.
- Financial sector:
- commended steady progress on financial sector reform, including implementation of key FSAP recommendations;
- welcomed plans to intensify financial sector monitoring and to harmonize tax treatment of domestic and offshore banks.
Executive Board Assessment — Fiscal and macroeconomic recommendations
- Urged steps to stem further deterioration of the fiscal position in 2005/06; recommended careful monitoring of financial situation of major state-owned enterprises.
- Supported recent adjustment of domestic petroleum prices and reinstatement of the automatic petroleum price adjustment mechanism to ensure full pass-through of import costs to domestic retail prices, while stressing that well-targeted safety nets will be needed to mitigate impact on the poor.
- Recommended devising support schemes for sugar and textile sectors that would not add to public outlays.
- Emphasized need for a strong and credible medium-term fiscal strategy to contain public debt and ensure fiscal sustainability.
- Noted scope for broadening the tax base and streamlining outlays through better targeting to groups in need.
- Encouraged authorities' plan to phase out all import tariffs to bolster competitiveness.
- Recommended improving debt management, including further diversification of debt instruments.
- Monetary and exchange rate policy guidance:
- exchange rate and monetary policies should secure external competitiveness in the short term while longer-term structural reforms are implemented;
- most Directors supported a cautious approach to tightening monetary conditions to contain inflationary pressures and encouraged more active liquidity management;
- supported the authorities' request for Fund technical assistance to develop a more diversified range of monetary policy instruments;
- cautioned against adopting a fully-fledged inflation targeting regime now given need to refine monetary instruments, uncertain external outlook, and need for fiscal consolidation;
- exchange rate should reflect movements in macroeconomic fundamentals; supported greater flexibility of the exchange rate and limiting foreign exchange interventions to smoothing short-term volatility to protect international reserves.
- Data and statistical recommendations:
- noted data availability and quality generally adequate for surveillance;
- encouraged reconciliation of differences between official and externally collected debt data;
- recommended moving fiscal accounts to an accrual basis as soon as feasible.
Key economic and financial indicators (2000/01–2004/05)
- Real GDP (annual percentage changes): 6.0; 2.5; 2.9; 4.2; 3.5
- Consumer Prices (period average): 4.4; 6.3; 5.1; 4.1; 5.6
- Unemployment rate (in percent): 9.1; 9.7; 10.2; 10.3; 11.0
- Exports, f.o.b. (in millions of U.S. dollars): 1639.0; 1586.0; 1834.8; 1934.5; 2015.7
- Imports, f.o.b. (in millions of U.S. dollars): -1891.9; -1790.4; -2132.7; -2309.2; -2707.7
- Current account balance (in millions of U.S. dollars): 154.3; 246.7; 122.5; 47.6; -184.6
- Current account balance (in percent of GDP): 3.4; 5.4; 2.4; 0.8; -3.0
- Capital and financial account balance (in millions of U.S. dollars): -95.7; -256.7; -219.2; -62.3; 116.9
- Net international reserves of the BoM (end of period, in millions of U.S. dollars): 786.0; 1010.3; 1366.8; 1550.5; 1473.3
- Net international reserves (in months of imports, c.i.f.): 4.7; 6.5; 7.3; 7.5; 6.1
- Change in real effective exchange rate (in percent): 2.8; -1.4; -1.7; -3.8; -6.0
- Total public debt (in percent of GDP): 63.9; 70.2; 80.2; 69.9; 71.8
- Total revenues and grants (in percent of GDP): 18.0; 18.4; 20.2; 20.3
- Total expenditure and net lending (in percent of GDP): 23.7; 24.4; 26.4; 25.7; 25.2
- Central government fiscal balance (in percent of GDP, after grants): -5.7; -6.2; -5.4; -5.0
- Central government primary fiscal balance (in percent of GDP, excluding interest payments): -1.3; -2.7; -1.9; -1.0
- Change in broad money (in percent): 11.7; 14.4; 8.5; 8.6; 8.4
- Interest rate (Yield on Treasury Bill, weighted average/primary auctions, in percent): 11.4; 10.5; 6.7; (2003/04 and 2004/05 entries not provided in the table)
Public Information Notice (PIN) No. 06/01 — IMF Executive Board Concludes the 2005 Article IV Consultation with Mauritius (January 3, 2006).