Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Mauritius

IMF News, May 29, 2007

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Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Mauritius

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• Published: May 29, 2007

Background

• The loss of trade preferences in textiles in 2005, the reform to the European Union's sugar protocol for 2006-10, and higher international oil prices brought about a permanent deterioration in Mauritius's terms of trade. The authorities initiated broad-based reforms to address recent economic setbacks and to raise growth to levels of the previous two decades. (Public Information Notice, May 7, 2007)
• Real GDP growth expectations and labor market:
  • Real GDP growth is expected to reach over 4 percent in 2006/07 (fiscal year ending in June), owing to a strong service sector outturn and slowing job losses in the textile sector.
  • Unemployment remains close to its historic high.
• Inflation and exchange rate:
  • Inflation, after peaking in December 2006—largely because of onetime budgetary measures and a weakening rupee—fell to 9.2 percent in February 2007 (year-on-year).
  • The real effective exchange rate has depreciated by over 10 percent since 2004.
• Fiscal and external positions:
  • The fiscal deficit target for 2006/07 (4 percent of GDP) is within reach, with the adjustment relying partly on lower capital expenditure.
  • The external current account deficit widened to 5.3 percent of GDP in 2005/06 because of weak textile and sugar exports and higher oil prices.
  • An aircraft import will further widen the current account deficit in 2006/07.
• Monetary and reserve developments:
  • The Bank of Mauritius has continued to intervene in the interbank foreign exchange market and has gradually raised its signaling rate to contain inflation.
  • Foreign reserves have continued to decline but have stayed at a comfortable level.

Executive Board Assessment — Findings

• Directors commended the authorities for reforms introduced with the 2006/07 budget to adjust to the loss of trade preferences and reduce the fiscal deficit.
• Macro and policy assessments:
  • While inflation needs to be reduced, and the current account deficit and public debt remain large, Directors considered that the economy is on the right track, supported by reforms to improve the business environment, simplify the tax system, liberalize trade, open air access, and advance economic restructuring, including the development of new sectors.
  • Directors noted that labor market reform will be needed to support economic restructuring and encouraged the authorities to maintain the reform momentum.
• Monetary policy and framework:
  • Directors welcomed the authorities' efforts to tighten monetary policy. This should help to reduce inflation and avoid entrenching inflation expectations.
  • Most Directors encouraged the Bank of Mauritius to consider raising the repo rate if inflation does not decline as expected.
  • Directors welcomed improvements in the monetary framework, and called for further development of the institutional framework to strengthen monetary policy transmission mechanisms.
• External competitiveness:
  • Directors noted that additional improvements in external competitiveness are needed to help restore external balance.
  • Wage restraint, productivity gains, and labor market flexibility are key to achieve this.
  • Directors considered that the flexible exchange rate regime has served Mauritius well, with rupee depreciation softening the negative effect of the terms of trade decline.
  • Directors encouraged the authorities to limit foreign exchange intervention to smoothing excess volatility.
• Fiscal consolidation and public expenditure management:
  • Directors welcomed the progress toward fiscal consolidation and better public expenditure management, aimed at lowering public debt and improving the quality of the budget.
  • Directors noted that fiscal pressure in the medium term would require more decisive fiscal consolidation and further improvements in expenditure management.
  • Directors encouraged the authorities to identify options for budgetary savings and to continue strengthening debt management.
• Structural reforms to boost growth and employment:
  • Efforts to boost growth and employment could be complemented by reforms that further liberalize trade, deepen the financial sector, and deregulate prices, while taking into account the need to protect vulnerable groups.
  • Directors commended steps to liberalize trade and advocated a simple and transparent tariff framework.
  • Addressing institutional constraints in the financial sector could help lower borrowing costs and make more financing available to small and medium-sized enterprises.
  • A systematic review of price controls, including a review of the largest public enterprises, should guide further reform in this area.
• Financial sector stability:
  • Directors welcomed the 2007 Financial System Stability Assessment update and the reforms implemented since the 2002-2003 Financial Sector Assessment Program (FSAP).
  • Mauritius's financial sector has shown resilience to the loss of trade preferences.
  • Going forward, Directors called for further organizational and institutional strengthening to improve financial sector regulation, supervision, and infrastructure.

Key Statistics and Projections (fiscal year July-June; annual percent change unless otherwise indicated)

• National income, prices and employment:
  • Real GDP: 2004/05 = 3.0; 2005/06 = 3.7; 2006/07 (Projection) = 4.1; 2007/08 (Projection) = 4.4
  • Real GDP per capita: 2004/05 = 2.2; 2005/06 = 2.9; 2006/07 (Projection) = 3.3; 2007/08 (Projection) = 3.6
  • Consumer prices (end of period): 2004/05 = 5.4; 2005/06 = 7.6; 2006/07 (Projection) = 8.7; 2007/08 (Projection) = 6.0
  • Unemployment rate (percent): 2004/05 = 9.0; 2005/06 = 9.5; 2006/07 = ...; 2007/08 = ...
• External sector (U.S. dollars, annual percent change):
  • Exports of goods, f.o.b.: 2004/05 = 3.7; 2005/06 = 12.8; 2006/07 (Projection) = 4.5; 2007/08 (Projection) = 2.0
  • Imports of goods, f.o.b.: 2004/05 = 17.3; 2005/06 = 14.9; 2006/07 (Projection) = 10.7; 2007/08 (Projection) = 0.9
  • Real effective exchange rate2: 2004/05 = -5.5; 2005/06 = -1.2; 2006/07 = ...; 2007/08 = ...
• Money and credit:
  • Broad money (end of period, annual percentage growth): 2004/05 = 13.1; 2005/06 = 11.2; 2006/07 (Projection) = 10.5; 2007/08 (Projection) = 12.3
• Central government budget (Percent of GDP at market prices):
  • Overall balance (including grants): 2004/05 = -5.0; 2005/06 = -5.3; 2006/07 (Projection) = -4.1; 2007/08 (Projection) = -4.7
  • Revenues and grants: 2004/05 = 20.1; 2005/06 = 20.1; 2006/07 (Projection) = 19.6; 2007/08 (Projection) = 20.0
  • Expenditure and net lending: 2004/05 = 25.1; 2005/06 = 25.5; 2006/07 (Projection) = 23.8; 2007/08 (Projection) = 24.7
  • Domestic debt of central government: 2004/05 = 53.9; 2005/06 = 53.8; 2006/07 (Projection) = 51.4; 2007/08 (Projection) = 48.3
  • External debt of central government: 2004/05 = 5.1; 2005/06 = 4.4; 2006/07 (Projection) = 5.0; 2007/08 (Projection) = 5.5
• External sector (percent of GDP at market prices):
  • Current account balance: 2004/05 = -3.5; 2005/06 = -5.3; 2006/07 (Projection) = -7.4; 2007/08 (Projection) = -4.9
  • Overall balance of payments: 2004/05 = -1.7; 2005/06 = -1.5; 2006/07 (Projection) = -1.9; 2007/08 (Projection) = -1.3
  • Net international reserves, BOM (millions of U.S. dollars): 2004/05 = 1,442; 2005/06 = 1,377; 2006/07 (Projection) = 1,243; 2007/08 (Projection) = 1,143
  • Net international reserves, BOM (months of imports of goods, c.i.f.): 2004/05 = 5.9; 2005/06 = 5.0; 2006/07 (Projection) = 4.0; 2007/08 (Projection) = 3.7