Public Information Notices
Mauritius and the IMF
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On June 1,1998, the IMF Executive Board concluded the Article IV consultation with Mauritius1.
During the period 1996/97-1997/98 (July-June), overall economic activity in Mauritius has remained buoyant. Real GDP has expanded by some 5 1/2 percent a year, with export processing zone manufactures, sugar exports, and tourism activity contributing to broadly based growth. Moreover, the rate of consumer price inflation, which had picked up to nearly 8 percent in 1996/97, owing in part to a rapid expansion in broad money in 1995/96 and to cost pressures arising from the indexation of wages to the previous year’s inflation, has decelerated to about 5 1/3 percent in 1997/98, as a result to some extent of moderation in the growth of domestic liquidity in 1996/97. In contrast, the unemployment rate has been rising—from about 3 1/3 percent in 1992 to some 6 percent in 1997—reflecting a mismatch in labor skills, the substitution of foreign for domestic labor, and the substitution of capital for labor.
The trend of rising overall fiscal deficits was reversed in 1996/97, and, with buoyant tax revenues, relative restraint on current expenditure, and a decline in government capital outlays in 1997/98 associated with temporary constraints on implementation capacity, the deficit (including grants, but excluding exceptional factors such as privatization receipts) has narrowed from 6 1/4 percent of GDP in 1995/96 to an estimated 3 2/3 percent in 1997/98. However, the expansion in broad money in 1997/98 is estimated at 18 1/3 percent, as the fiscal deficit is being financed almost entirely from the domestic banking system, and a large overall increase in domestic bank credit (estimated at 23 1/3 percent of beginning-of-period broad money) has been facilitated by a reduction in July 1997 in the required cash reserve ratio for commercial banks from 8 percent to 6 percent.
Since the conclusion of the last Article IV consultation in March 1997, the Bank of Mauritius has adopted two measures to tighten prudential requirements. First, with effect from April 1997, domestic commercial banks are subject to a daily-monitored 15 percent exposure limit on their open foreign exchange positions in relation to relevant capital. Second, the minimum paid-up or assigned capital for both domestic and offshore banks was raised from Mau Rs 50 million to Mau Rs 75 million effective January 1, 1998, and will be raised further to Mau Rs 100 million effective January 1, 1999.
Mauritius recorded a surplus in its external current account (including transfers, but excluding the acquisition of aircraft and ships) equivalent to some 2 percent of GDP in 1996/97, owing mainly to a narrowing of the trade deficit. A smaller surplus, on the order of 1 1/3 percent of GDP, is now envisaged for 1997/98, as world market sugar prices have declined and the pace of imports has picked up. The weakening in the trade balance, however, is being largely offset by a substantial rise in tourism-related earnings. Moreover, taking into account capital movements during 1996/97-1997/98, Mauritius’ external reserve position has remained relatively comfortable, and net international reserves of the banking system are now estimated at some 5 3/4 months’ import cover for end-June 1998.
Mauritius continues to have a low external debt-service ratio, which has remained on the order of some 6 2/3 percent of exports of goods and services in 1997/98. In real effective terms, the Mauritian rupee appreciated by 2 1/2 percent in 1996/97 and by a further 3 percent in the first half of 1997/98. In an effort to deepen the interbank foreign exchange market, the Bank of Mauritius terminated the surrender requirement for the export proceeds of the Mauritius Sugar Syndicate effective July 1, 1997. This move followed an initial reduction of the surrender requirement in July 1996 from 100 percent to 75 percent.
Executive Board Assessment
Executive Directors commended the Mauritian authorities for their generally prudent approach to economic management and welcomed the continued buoyant overall economic activity, the deceleration in the rate of inflation, and the maintenance of a relatively comfortable external reserve position. At the same time, they noted that, despite a narrowing of the overall fiscal deficit over the past two years, a current budget surplus had not yet been achieved; unemployment had continued to edge up; and rapid monetary expansion, as well as the sharp depreciation of some Asian currencies, posed potential difficulties for Mauritius in the period ahead.
Against this background, and given Mauritius' open current and capital accounts, Directors emphasized the need for the authorities to implement the policy adjustments and reforms required to sustain high economic growth, maintain moderate rates of inflation, and keep external reserves at prudent levels.
In the fiscal area, Directors urged the authorities to aim for further consolidation so as to reduce the government's domestic borrowing, including its reliance on bank financing. They noted that fiscal reforms would need to center on an effective implementation of a value-added tax (VAT), complemented by restraint on current expenditures. In that connection, the VAT rate and coverage should be sufficient to replace other indirect taxes; compensate for the planned lowering of tariff rates; and raise the tax revenue-to-GDP ratio. It would also be important to limit government expenditure by reforming and downsizing the civil service and eliminating consumer subsidies for flour and rice. In view of the need to invest in human capital, Directors supported the authorities' intention to allocate some of the revenue generated by the VAT, as well as privatization receipts, to develop workers' skills through vocational training.
Directors noted that a tightening of monetary policy was needed and would likely require the introduction of full-fledged open-market operations by the Bank of Mauritius. In this vein, they stressed that it would be particularly important to establish a mechanism to ensure the regular and continuous coordination of activities between the Ministry of Finance and the Bank of Mauritius.
Directors observed that, in the wake of the Asian currency depreciations, the authorities should remain prepared not only to tighten financial policies but also to allow the exchange rate of the Mauritian rupee to adjust to underlying market pressures. Directors encouraged the authorities to proceed with the rationalization of the tariff regime as soon as practicable after the full and effective implementation of the VAT. Directors underscored the immediate need for the authorities to remove the rigidities in the wage determination process, especially as they put pressure on competitiveness and contributed to higher unemployment.
|Mauritius: Selected Economic Indicators, 1993/94-1997/98 1/|
|(Annual percentage change)|
|Consumer prices (period averages)||9.4||6.1||5.8||7.9||5.3|
|(In millions of SDRs) 2/|
|Current account balance 3/||- 53.7||- 133.8||- 16.4||23.3||- 50.8|
|(in percent of GDP) 3/||- 2.3||- 5.3||- 0.6||0.8||- 1.7|
|Capital and financial account balance||22.4||43.0||- 52.4||- 28.7||50.8|
|Net international reserves of the banking system (end of period)||606.5||559.1||740.5||747.7||728.7|
|(in months of imports, c.i.f.) 4/||6.1||5.2||6.3||6.3||5.8|
|Debt service (in percent of exports of goods and nonfactor services)||7.3||8.2||9.0||6.8||6.7|
|Change in real effective exchange rate (in percent) 5/||0.1||0.4||- 4.3||2.5||3.1|
|(In percent of GDP) 2/|
|Total revenues and grants||21.7||19.9||17.6||20.2||20.3|
|Total expenditures and net lending||24.2||23.6||24.3||26.9||24.0|
|Current fiscal balance 6/||1.7||- 0.3||- 2.7||- 1.0||- 1.1|
|Overall fiscal balance 6/||- 2.7||- 4.1||- 7.0||- 6.7||- 3.9|
|Change in broad money (in percent)||17.3||11.8||15.9||8.8||18.3|
|Interest rate (in percent) 7/||12.0||11.0||13.0||12.5||10.5|
Sources: Mauritian authorities; and IMF staff estimates.
1/ Fiscal year from July to June.
2/ Unless otherwise indicated.
3/ Including the acquisition of aircraft and ships.
4/ Excluding the acquisition of aircraft and ships.
5/ Bilateral-trade-weighted period averages; figures for 1997/98 are for July to December 1997. A negative sign signifies a depreciation.
6/ Excluding grants.
7/ Maximum interest rate on fixed time
deposits with maturities between six and twelve months.
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT