IMF Executive Board Concludes 2017 Article IV Consultation with Mauritius
IMF News, December 8, 2017
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- Published: December 8, 2017
Overview
- Date: December 8, 2017.
- Mauritius aims to become a high-income economy within the next 10 years.
- Past 30 years: political stability, sound macroeconomic environment, and strong reform track record enabled transformation from a monocrop economy into a diversified services-based middle income country with low levels of poverty.
- Government strategy: ambitious growth strategy anchored on significant public investments in infrastructure and improvements in the business environment.
- Growth in 2017 is projected at 3.9 percent in 2017, and about 4.0 percent over the medium term.
- International reserve buffers have improved substantially.
- Key concerns: limited fiscal space, increasing fiscal risks, emerging inflationary pressures, pressure on the Global Business Sector from international anti-tax avoidance initiatives.
Executive Board assessment — Macroeconomic outlook and risks
- Macroeconomic outlook is broadly positive, but vulnerabilities are emerging.
- Economic activity expected to remain robust, driven by the government’s ambitious Public Investment Program, continued dynamism in tourism, and financial intermediation activities.
- Headline inflation is expected to recede in the second half of 2017 but likely to finish the year around 4.0 percent under current policies.
- Main risks: further slowing of manufacturing exports and delays in implementation of the PIP.
- Evidence of a business cycle shift: output gap closing, core inflation increasing, and rising credit demand.
- Accommodative fiscal and monetary policies have weakened the external position and increased real exchange rate overvaluation.
- A countercyclical policy mix is recommended to safeguard external stability.
Fiscal policy recommendations
- Further revenue mobilization is required to build fiscal space, support the fiscal anchor, and preserve debt sustainability.
- Under current policies, indications are that the revised debt anchor would be missed; a tighter fiscal stance would then be required.
- Higher tax efficiency could yield additional revenues of about 0.8 percent of GDP.
- Continued improvements in public investment management and identifying pressure points in debt management should be elements of the fiscal strategy.
- A tighter fiscal policy would help safeguard external stability and curb real appreciation.
- Staff encourages the authorities to phase-out the Exchange Rate Support Scheme (ERSS) and expedite other measures to support the export-oriented sector.
- Staff recommends approval for the temporary retention of the Multiple Currency Practice (MCP) on the basis that the ERSS is temporary, does not materially impede the member’s balance of payments adjustment, does not harm the interests of other members, and does not discriminate among members.
Monetary policy and central bank framework
- A tightening of monetary policy is warranted to address growing underlying inflationary pressures.
- Expected increases in international oil and controlled prices and the anticipated introduction of the minimum wage policy in 2018 are likely to have second-round effects and increase inflation expectations.
- A tighter monetary policy stance should be implemented by mopping-up excess liquidity to bring interbank rates in line with the policy rate and regain control of money market conditions.
- Clarifying the monetary policy framework will help increase policy coherence; there appears to be no consensus on the definition of price stability and the role of the nominal exchange rate.
- Announcing a medium-term inflation objective will be instrumental; an inflation objective of about 3 percent could serve as the foundation for the BOM’s policy actions and communication.
- Strengthening the operational independence of the central bank will improve its capacity to deliver on the price stability mandate; allowing more exchange rate flexibility will help address emerging inflationary pressures and improve resilience to shocks.
Financial sector and external sector recommendations
- Authorities are well-advanced in modernizing financial sector regulation and should address salient banking sector issues.
- Additional steps include lowering the still-high stock of NPLs through a more stringent approach to writing-off legacy exposures, and safeguarding longer-term FX funding needs from banks’ expansion abroad.
- Consider establishing a formal macroprudential body.
- Efforts to address OECD and EU concerns about the tax regime should be prioritized.
- The GBC sector needs to adjust its business model, ensure compliance with FATF standards (particularly on AML/CFT supervision and entity transparency), and manage a possible significant decline in GBC activity to avoid risks to external and financial stability.
Structural reforms and competitiveness
- Further reforms necessary to meet emerging cost competitiveness challenges.
- Recent reform efforts likely to bolster Mauritius’ position in the Doing Business rankings.
- Broader structural reforms are needed in labor market, higher education, innovation, governance, and anti-corruption (e.g., effective use of AML tools and strengthened asset declaration system).
- Simplifying the wage-setting mechanism will improve competitiveness.
- Strengthening efforts to boost labor supply of youth and women will help close gender gaps and reduce inequality.
- Formation of the National Economic Development Board and drafting of the Financial Services Sector Blueprint are positive steps toward harmonizing policy direction and implementation.
Selected economic and financial indicators (as presented)
- Real GDP: 3.6; 3.5; 3.9
- Real GDP per capita: 3.4; 3.8
- GDP per capita (in U.S. dollars): 10,001; 9,115; 9,613; 9,672
- GDP deflator: 1.7; 0.9; 3.0; 1.0
- Consumer prices (period average): 3.2; 1.3; 4.2
- Consumer prices (end of period): 0.2; 2.3; 5.0
- Unemployment rate (percent): 7.8; 7.9; 7.2; 6.9
- Exports of goods and services, f.o.b. (Annual percent change, in US Dollars): 11.4; -12.1; -5.4
- Of which: tourism receipts: 9.5; -1.0; 9.8; 5.9
- Imports of goods and services, f.o.b.: 7.0; -13.9; -4.4; 8.3
- Nominal effective exchange rate (annual average): 2.0; 1.8; ...
- Real effective exchange rate (annual average): -1.1
- Terms of trade: 2.2; 10.9; -3.4
- Net foreign assets (Annual change in percent): 15.5; 15.6
- Domestic credit (Annual change in percent): -0.3; 6.7; 5.5
- Net claims on government (Annual change in percent): 28.8; -6.2; 29.1; 13.2
- Credit to non-government sector 1 (Annual change in percent): -2.2; 8.7; -0.6; 4.8
- Broad money (Annual change in percent): 8.2; 4.9
- Income velocity of broad money (M2): 1.1
- Interest rate (weighted average TBs, primary auctions): 2.1
- Overall consolidated balance (including grants) 2 (Percent of GDP): -4.3; -3.6; -3.3
- Primary balance (excluding grants): -1.7; -1.3; -1.6; -2.3
- Revenues (incl. grants): 20.6; 21.1; 21.2; 23.9
- Expenditure, excl. net lending: 24.9; 24.7; 24.6; 27.2
- Domestic debt of central government: 44.2; 47.4; 49.6; 47.8
- External debt of central government: 13.3; 12.8; 10.4; 10.1
- Gross domestic investment: 23.0; 20.4; 20.5
- Public investment: 5.7; 5.8
- Private investment 3: 18.1; 16.4; 14.7
- Gross national savings: 17.0; 16.3; 16.0
- Private savings: -0.8; -2.1; 17.8; 18.5; 15.3
- Balance of goods and services: -12.5; -10.8; -10.3; -13.0
- Current account balance: -5.7; -4.9; -5.8
- Capital and financial account: 10.8; 9.3; 11.6; 9.1
- Total external debt: 108.9; 94.3; 89.2; 99.4
- Net international reserves (millions of U.S. dollars): 3,868; 4,222; 4,934; 5,331
- GDP at current market prices (billions of Mauritian rupees): 386.2; 403.5; 431.8; 453.2
- GDP at current market prices (millions of U.S. dollars): 12,613; 11,511; 12,150; 12,273
- Public sector debt (percent of GDP): 62.9; 68.0; 65.6; 64.7
- Foreign and local currency long-term debt rating (Moody's): Baa1; …
Executive Board conclusion: Executive Directors endorsed staff’s appraisal and considered it without a meeting under the lapse-of-time procedure.
