Public Information Notice: IMF Concludes Article IV Consultation with Mauritius
IMF News, August 18, 1999
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- Published: August 18, 1999
Background
- Period covered: July 1998–June 1999; Executive Board conclusion date: August 3, 1999.
- Real GDP growth: estimated at 5 1/3 percent for 1998/99.
- Expansion was broad based with significant contributions from:
- manufacturing (especially in the export processing zone-EPZ),
- financial and business services (including offshore activities),
- trade (including tourism),
- other services (particularly transport and communications).
- Inflation (consumer prices, period averages):
- quickened to an estimated 8 percent in 1998/99 from 5 1/3 percent in 1997/98.
- Factors cited: introduction of a value-added tax (VAT) in September 1998; ongoing drought; rapid expansion of bank credit to the private sector; lagged impact of a 10 percent nominal depreciation of the Mauritian rupee vis-à-vis the U.S. dollar following the Asian currency crises.
- Unemployment: 5 3/4 percent in 1997/98; likely edged up in 1998/99 due to skills mismatch and inadequate labor market flexibility.
- Fiscal position:
- Overall fiscal deficit in 1998/99 (including grants and exceptional factors such as proceeds from sale of fixed assets): estimated at some 4 percent of GDP.
- Underlying fiscal deficit (including grants but excluding exceptional factors): likely widened to about 5 1/3 percent of GDP.
- Government financing: likely met entirely from domestic nonbank sources and, for the first time in the 1990s, made net repayments to the banking system.
- Commercial banks sharply expanded credit to the private sector, largely in the form of tax-free company debentures.
- Prudential change: effective January 1, 1999, Bank of Mauritius raised minimum paid-up or assigned capital for both domestic and offshore banks from Mau Rs 75 million to Mau Rs 100 million.
- External sector:
- External current account deficit (including acquisition of aircraft and ships) in 1998/99: just over 2 percent of GDP (compared with 3 percent in 1997/98), driven by a substantial rise in tourism-related earnings and lower petroleum import prices.
- Net international reserves of the banking system at end-June 1999: estimated at a 5-month import cover.
- External debt-service ratio in 1998/99: estimated at 8 percent of exports of goods and services (up from 7 percent in 1997/98), reflecting an early repayment on a floating-rate note.
- Real effective exchange rate (period-average, bilateral-trade-weighted): appreciated by 3 1/2 percent in 1997/98 and remained unchanged over July–December 1998.
Executive Board Assessment
- Overall appraisal:
- Directors welcomed the authorities' success in maintaining buoyant economic activity amid global turbulence.
- Directors noted concerns: quickened inflation, likely higher unemployment, and weakened near-term prospects due to a serious drought.
- Directors were encouraged by the authorities' resolve to pursue key policy adjustments and reforms.
- Fiscal policy and public finances:
- Supported phased fiscal consolidation, taking social needs into account.
- Expected fiscal adjustment to rely primarily on higher VAT revenues from improved VAT administration and downsizing of the civil service.
- Strong encouragement to scale down the large number of tax exemptions and concessions.
- Stressed need to restructure government expenditure to provide resources for vocational training to address skills mismatch.
- Monetary and financial sector policy:
- Commended government net repayments to the banking system to achieve monetary restraint.
- Cautioned to discontinue tax-free status of company debentures.
- Urged development of full-fledged open-market operations to gain greater monetary control through indirect instruments.
- Emphasized need for coordination of domestic liquidity and treasury cash management.
- Banking supervision and prudential framework:
- Underscored need to strengthen prudential requirements and banking supervision due to relatively high nonperforming loans, low loan provisioning, and high banking concentration ratios.
- Urged authorities to expedite passage of long-overdue revisions to the Bank of Mauritius and Banking Acts.
- Exchange rate and external competitiveness:
- Welcomed authorities' intention to allow the exchange rate of the Mauritian rupee to adjust to underlying market pressures.
- Noted steps in the 1999/2000 budget to liberalize the tariff regime but favored a more ambitious reduction in tariff rates, in concert with higher VAT revenue collections and consistent with regional commitments, to foster external competitiveness and employment expansion.
- Labor market and competition policy:
- Recommended replacing the outmoded tripartite wage negotiation system and revising laws governing labor shedding to allow appropriate labor market flexibility, while taking potential social effects into account.
- Emphasized need to promote greater market competition, notably for petroleum products and cement.
- Private sector development:
- Supported providing mainly legislative support for private sector initiatives domestically and abroad.
- Emphasized need to adopt unambiguous and transparent guidelines to encourage investment.
- Data and surveillance:
- While data were satisfactory for surveillance purposes, Directors encouraged authorities to intensify efforts to provide the Fund with annual estimates and projections for the fiscal accounts and balance of payments.
Key Policy Recommendations and Priorities
- Implement phased fiscal consolidation focusing on:
- improved VAT administration to raise revenues,
- downsizing civil service,
- scaling down tax exemptions and concessions.
- Restructure government expenditure to finance vocational training to address skills mismatch.
- Strengthen monetary control by:
- discontinuing tax-free company debentures,
- developing open-market operations,
- coordinating domestic liquidity and treasury cash management.
- Reinforce prudential requirements and banking supervision; expedite revisions to Bank of Mauritius and Banking Acts.
- Maintain exchange rate flexibility to reflect market pressures.
- Liberalize tariff regime further and pursue policies to improve external competitiveness and employment.
- Reform labor institutions (wage negotiation system and laws governing labor shedding) with attention to social impacts.
- Promote market competition (petroleum, cement) and adopt transparent investment guidelines for private sector initiatives.
- Provide the IMF with annual fiscal and balance of payments estimates and projections.
Mauritius: Selected Economic Indicators (as presented)
- Domestic economy (Annual percentage change)
- Real GDP:
- 1994/95: 3.5
- 1995/96: 5.1
- 1996/97: 5.6
- 1997/98: 5.3
- 1998/99 Est.: 5 1/3
- Consumer prices (period averages):
- 1994/95: 6.1
- 1995/96: 5.8
- 1996/97: 7.9
- 1997/98: 5.4
- 1998/99 Est.: 8.0
- External economy (In millions of U.S. dollars)2
- Exports, f.o.b.:
- 1994/95: 1,452.2
- 1995/96: 1,563.7
- 1996/97: 1,622.7
- 1997/98: 1,603.4
- 1998/99 Est.: 1,583.8
- Imports, f.o.b.:
- 1994/95: -1,838.0
- 1995/96: -1,865.8
- 1996/97: -1,888.1
- 1997/98: -2,012.4
- 1998/99 Est.: -1,982.6
- Current account balance3:
- 1994/95: -196.2
- 1995/96: -22.9
- 1996/97: 17.1
- 1997/98: -114.9
- 1998/99 Est.: -87.6
- Current account balance (in percent of GDP)3:
- 1994/95: -5.3
- 1995/96: -0.6
- 1996/97: 0.4
- 1997/98: -2.9
- 1998/99 Est.: -2.2
- Capital and financial account balance:
- 1994/95: 63.0
- 1995/96: -73.1
- 1996/97: -40.0
- 1997/98: 75.3
- 1998/99 Est.: 87.6
- Net international reserves of the banking system (end of period):
- 1994/95: 852.5
- 1995/96: 953.6
- 1996/97: 1,020.4
- 1997/98: 873.0
- 1998/99 Est.: 901.7
- Net international reserves (in months of prospective imports, c.i.f.)4:
- 1994/95: 5.2
- 1995/96: 5.7
- 1996/97: 6.2
- 1997/98: 5.2
- 1998/99 Est.: 5.0 (noting table entry of 5.2, 5.7, 6.2, 5.2, 5.0 structure; end-June 1999 reported as a 5-month import cover in text)
- Debt service (in percent of exports of goods and nonfactor services):
- 1994/95: 8.2
- 1995/96: 9.0
- 1996/97: 6.8
- 1997/98: 7.0
- Change in real effective exchange rate (in percent)5:
- 1994/95: -4.2
- 1995/96: 2.7
- 1996/97: 3.6
- 1997/98: 0.0
- 1998/99 Est. (July–December 1998): figure reported as unchanged over July–December 1998 in text.
- Financial variables (In percent of GDP)2
- Total revenues and grants:
- 1994/95: 20.0
- 1995/96: 17.6
- 1996/97: 20.2
- 1997/98: 20.4
- 1998/99 Est.: 20.5
- Total expenditures and net lending:
- 1994/95: 23.7
- 1995/96: 25.0
- 1996/97: 27.8
- 1997/98: 24.4
- 1998/99 Est.: 24.6
- Overall fiscal balance6:
- 1994/95: -3.7
- 1995/96: -7.3
- 1996/97: -7.6
- 1997/98: -4.0
- 1998/99 Est.: -4.1
- Excluding exceptional factors6:
- 1995/96: ...
- 1996/97: -6.2
- 1997/98: -5.4
- 1998/99 Est.: -3.9
- Change in broad money (in percent):
- 1994/95: 11.8
- 1995/96: 15.9
- 1996/97: 8.8
- 1997/98: 17.4
- 1998/99 Est.: 13.4
- Interest rate (in percent)7 (maximum interest rate on fixed time deposits with maturities between six and twelve months):
- 1994/95: 11.0
- 1995/96: 13.0
- 1996/97: 12.5
- 1997/98: 10.0
- 1998/99 Est.: 11.5
Source: IMF Public Information Notice, August 18, 1999 (IMF Executive Board conclusion of Article IV consultation with Mauritius).