Press Information Notice: IMF Concludes Article IV Consultation with Mauritius
IMF News, June 29, 1998
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- Published: June 29, 1998
Background and recent developments
- Period covered: 1996/97-1997/98 (July–June).
- Real GDP expanded by some 5 1/2 percent a year, driven by export processing zone manufactures, sugar exports, and tourism.
- Consumer price inflation:
- nearly 8 percent in 1996/97;
- decelerated to about 5 1/3 percent in 1997/98.
- Unemployment rose from about 3 1/3 percent in 1992 to some 6 percent in 1997, reflecting a skills mismatch, substitution of foreign for domestic labor, and substitution of capital for labor.
- Fiscal developments:
- Overall fiscal deficit (including grants, excluding exceptional factors such as privatization receipts) narrowed from 6 1/4 percent of GDP in 1995/96 to an estimated 3 2/3 percent in 1997/98.
- Buoyant tax revenues, restraint on current expenditure, and a decline in government capital outlays contributed to the narrowing.
- Monetary and credit developments:
- Expansion in broad money in 1997/98 estimated at 18 1/3 percent.
- Large overall increase in domestic bank credit estimated at 23 1/3 percent of beginning-of-period broad money.
- Required cash reserve ratio for commercial banks reduced in July 1997 from 8 percent to 6 percent.
- External sector:
- External current account surplus (including transfers, excluding acquisition of aircraft and ships) about 2 percent of GDP in 1996/97; envisaged at about 1 1/3 percent of GDP for 1997/98 due to lower sugar prices and higher imports, partly offset by higher tourism earnings.
- Net international reserves of the banking system estimated at some 5 3/4 months’ import cover for end-June 1998.
- External debt-service ratio about 6 2/3 percent of exports of goods and services in 1997/98.
- Exchange rate and market measures:
- Real effective appreciation of the Mauritian rupee by 2 1/2 percent in 1996/97 and a further 3 percent in the first half of 1997/98.
- Bank of Mauritius terminated surrender requirement for export proceeds of the Mauritius Sugar Syndicate effective July 1, 1997 (after reduction from 100 percent to 75 percent in July 1996).
Regulatory and prudential measures
- April 1997: domestic commercial banks subject to a daily-monitored 15 percent exposure limit on open foreign exchange positions in relation to relevant capital.
- January 1, 1998: minimum paid-up or assigned capital for domestic and offshore banks raised from Mau Rs 50 million to Mau Rs 75 million.
- January 1, 1999 (planned): further raise of minimum paid-up or assigned capital to Mau Rs 100 million.
Executive Board assessment — findings and risks
- Commendations:
- Authorities' generally prudent approach to economic management.
- Continued buoyant overall economic activity.
- Deceleration in the rate of inflation.
- Maintenance of a relatively comfortable external reserve position.
- Concerns and risks:
- Current budget surplus had not yet been achieved despite narrowing overall fiscal deficit.
- Unemployment continued to edge up.
- Rapid monetary expansion poses potential difficulties.
- Sharp depreciation of some Asian currencies posed potential external risks.
- Need for policy adjustments given Mauritius' open current and capital accounts.
Policy recommendations by Executive Directors
- Fiscal policy:
- Aim for further consolidation to reduce government's domestic borrowing, including reliance on bank financing.
- Fiscal reforms should center on effective implementation of a value-added tax (VAT), complemented by restraint on current expenditures.
- VAT rate and coverage should be sufficient to replace other indirect taxes; compensate for planned lowering of tariff rates; and raise the tax revenue-to-GDP ratio.
- Limit government expenditure by reforming and downsizing the civil service and eliminating consumer subsidies for flour and rice.
- Allocate some VAT revenue and privatization receipts to develop workers' skills through vocational training.
- Monetary policy and financial sector:
- Tightening of monetary policy needed; likely require introduction of full-fledged open-market operations by the Bank of Mauritius.
- Establish a mechanism for regular and continuous coordination between the Ministry of Finance and the Bank of Mauritius.
- Exchange rate and external policies:
- Remain prepared to tighten financial policies and allow the exchange rate of the Mauritian rupee to adjust to underlying market pressures following Asian currency depreciations.
- Proceed with rationalization of the tariff regime as soon as practicable after full and effective implementation of the VAT.
- Labor market and competitiveness:
- Remove rigidities in the wage determination process to reduce pressure on competitiveness and help address unemployment.
Selected economic indicators, 1993/94–1997/98 (fiscal year from July to June)
- Domestic economy (annual percentage change)
- Real GDP: 1993/94: 4.3; 1994/95: 3.5; 1995/96: 5.0; 1996/97: 5.3; 1997/98 Est.: 5.5
- Consumer prices (period averages): 1993/94: 9.4; 1994/95: 6.1; 1995/96: 5.8; 1996/97: 7.9; 1997/98: (figure in text: about 5 1/3 percent)
- External economy (In millions of SDRs) 2/
- Exports, f.o.b.: 1993/94: 952.8; 1994/95: 990.4; 1995/96: 1,119.8; 1996/97: 1,162.1; 1997/98: 1,187.8
- Imports, f.o.b.: 1993/94: -1,111.9; 1994/95: -1,253.5; 1995/96: -1,336.2; 1996/97: -1,344.0; 1997/98: -1,481.2
- Current account balance 3/: 1993/94: - 53.7; 1994/95: - 133.8; 1995/96: - 16.4; 1996/97: 23.3; 1997/98: - 50.8
- Current account balance (in percent of GDP) 3/: 1993/94: - 2.3; 1994/95: - 5.3; 1995/96: - 0.6; 1996/97: 0.8; 1997/98: - 1.7
- Capital and financial account balance: 1993/94: 22.4; 1994/95: 43.0; 1995/96: - 52.4; 1996/97: - 28.7; 1997/98: 50.8
- Net international reserves of the banking system (end of period): 1993/94: 606.5; 1994/95: 559.1; 1995/96: 740.5; 1996/97: 747.7; 1997/98: 728.7
- Net international reserves (in months of imports, c.i.f.) 4/: 1993/94: 5.2; 1994/95: 6.3; 1995/96: (value shown under notes); 1996/97: (value shown under notes)
- Debt service (in percent of exports of goods and nonfactor services): 1993/94: 7.3; 1994/95: 8.2; 1995/96: 9.0; 1996/97: 6.8; 1997/98: 6.7
- Change in real effective exchange rate (in percent) 5/: 1993/94: 0.1; 1994/95: 0.4; 1995/96: - 4.3; 1996/97: 2.5; 1997/98: 3.1
- Financial variables (In percent of GDP) 2/
- Total revenues and grants: 1993/94: 21.7; 1994/95: 19.9; 1995/96: 17.6; 1996/97: 20.2; 1997/98: 20.3
- Total expenditures and net lending: 1993/94: 24.2; 1994/95: 23.6; 1995/96: 24.3; 1996/97: 26.9; 1997/98: 24.0
- Current fiscal balance 6/: 1993/94: 1.7; 1994/95: - 0.3; 1995/96: - 2.7; 1996/97: - 1.0; 1997/98: - 1.1
- Overall fiscal balance 6/: 1993/94: - 4.1; 1994/95: - 7.0; 1995/96: - 6.7; 1996/97: - 3.9
- Change in broad money (in percent): 1993/94: 17.3; 1994/95: 11.8; 1995/96: 15.9; 1996/97: 8.8; 1997/98: 18.3
- Interest rate (in percent) 7/: 1993/94: 12.0; 1994/95: 11.0; 1995/96: 13.0; 1996/97: 12.5; 1997/98: 10.5
Press Information Notice: IMF Concludes Article IV Consultation with Mauritius, June 29, 1998.