IMF Executive Board Concludes 2008 Article IV Consultation with Mauritius

Public Information Notice (PIN) No. 08/83
July 15, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 2, 2008 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius.1

Background

Economic growth is responding to structural reform efforts. Tax reform, together with improvements in the business environment and investment initiatives, has spurred foreign investment to unprecedented levels and accelerated growth. Growth, projected at 6½-7 percent in 2007/08 (fiscal year ending June 2008), is broad based but especially strong in tourism, banking, construction, and services. Rising fiscal receipts and expenditure containment have cut the deficit and public sector debt is continuing to decline. The external current account deficit has eased but remains high on investment-driven import growth. The exchange rate appreciated 17 percent in real effective terms in the 12 months ending February 2008 from an overly depreciated level in 2005-06. However, the economy is facing rising labor, infrastructure, and other bottlenecks, as well as strong head winds from international commodity price rises. Although an appreciation of the exchange rate has dampened some of the inflationary pressures, inflation remains a concern. The central bank (BoM) has accumulated reserves, which are projected to reach 6½ months of imports by end 2007/08. However, the large and rising errors and omissions items in the balance of payments cloud the external sector analysis.

The overall fiscal position has improved as revenues have risen strongly in response to tax reforms and expenditure has been contained. Tax reform has made the tax regime more progressive, easier to administer, and broadened the base. On the expenditure side, debt service has declined in line with falling interest rates, but capital expenditure is under-target owing to implementation difficulties. The authorities have introduced fiscal management laws which will contribute to better fiscal performance.

Monetary policy is being strengthened to improve transparency and effectiveness. However, liquidity has been growing rapidly and excess liquidity has persisted in the financial system since early 2007. Interest rates have declined markedly as the government borrowing requirement has dropped. In April 2008 the BoM introduced new instruments, extended a special deposit facility, and widened the repo corridor in an attempt to strengthen liquidity management. The BoM has conducted sterilized intervention in the foreign exchange market to limit the nominal appreciation of the rupee.

The banking sector and financial system remain relatively sound and vulnerability indicators have improved. Financial soundness indicators point to a further improvement in the quality of assets as evidenced by the decline in the nonperforming loans ratio. The banking system is well capitalized. The stock exchange outperformed most emerging markets in 2007, pushing the index to record levels, supported by strong fundamentals.

The authorities have continued efforts to liberalize international trade and secure market access. A partnership agreement with the EU has been initiated. A free trade agreement with Pakistan was signed and an agreement with India is under discussion. However, several parastatals maintain import and distribution monopolies on basic goods, and an administered price regime remains in place for many basic goods.

Mauritius' medium-term outlook has turned more favorable with the effects of the reform effort. Economic growth is projected to remain at about 5 percent through the medium-term, reflecting continued growth in tourism, services, and investment in large projects. Fiscal consolidation is expected to proceed with moderate primary surpluses and a declining overall deficit and public debt burden. The external current account deficit is expected to decline only moderately as large foreign investment inflows draw in imports. The key macroeconomic challenge is to manage the recent economic success through a broadening of structural reforms to spur economic efficiency and consolidate and refocus fiscal policy.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the revived performance of the Mauritius economy, spurred by the important tax and business environment reforms adopted since 2006 that have contributed to reduced fiscal deficits and rising foreign direct investment. Directors noted, however, that the large capital inflows have added to demand pressures, and inflation remains high, reflecting also rising international commodity prices and emerging supply constraints. Against this background, Directors encouraged the authorities to proceed with their plans for further fiscal consolidation and deeper structural reforms in order to alleviate bottlenecks and ensure sustained noninflationary growth.

Directors underscored the importance of continued fiscal consolidation to underpin macroeconomic stability. They noted that the recent tax reforms have made the tax system more progressive and easier to administer, while boosting fiscal receipts. Directors encouraged the authorities to build on these successes, and to extend the reform effort to the expenditure side of the budget and to the parastatal sector. Improving the efficiency of social assistance programs by consolidating and targeting will be vital to further strengthening the fiscal position. More generally, Directors considered that the introduction of program-based budgeting in the 2008/09 (July/June) budget will serve to strengthen spending efficiency over the medium term. They also welcomed the authorities' plans to introduce fiscal management laws on public debt management and public finance and audit. Directors expressed concern, however, that the sizable public sector wage increase in the 2008/09 budget, in the context of strong private sector demand, would contribute to further inflationary pressures.

Directors encouraged the authorities to continue their efforts to strengthen the monetary framework. While underlying inflation remains broadly under control and a significant component is imported, Directors advised the authorities to remain vigilant against inflation, in light of increasing demand pressures. Communication by the Bank of Mauritius (BoM) of an inflation target range for monetary policy would help shape inflation expectations more actively. Greater efforts to manage liquidity, in closer coordination with the fiscal authorities, will also pay dividends. Directors welcomed steps to strengthen further the BoM's capital base and governance structures.

Directors were of the view that Mauritius's managed floating exchange rate regime provides an appropriate framework for macroeconomic management. They noted the staff assessment that the real effective exchange rate of the rupee appears broadly in line with fundamentals. The nominal appreciation of the rupee in 2007-08, from a depreciated level in 2005-06, reflected increased capital inflows and was helpful in dampening inflation. Directors noted that the staff's view that, should capital inflows rise as projected, further real exchange rate appreciation may be unavoidable, and should occur preferably through nominal appreciation. This should be accompanied by additional fiscal consolidation as well as structural reforms aimed at improving economic efficiency and competitiveness.

In the area of structural reform, Directors supported a disengagement and divestment strategy for parastatals in the importation and distribution of basic goods. Further steps are also needed to upgrade workforce skills and enhance labor market flexibility, liberalize domestic trade, reduce import duties, and phase out administered prices.

Improving the coverage and reliability of national statistics is a high priority, especially with regard to the financial account of the balance of payments and the international investment position, in line with previous recommendations.

It is expected that the next Article IV consultation with Mauritius will be held on the standard 12-month cycle.


Table 1. Mauritius: Selected Economic and Financial Indicators, 2005/06-2012/13 1/
 
  2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
      Baseline Projections
 
  (Annual percent change, unless otherwise indicated)

National income, prices and employment

               

Real GDP

3.6 4.2 6.6 6.2 5.1 5.1 5.1 5.1

Real GDP per capita

2.8 3.4 5.7 5.4 4.3 4.4 4.4 4.4

GDP deflator

4.4 7.9 8.4 7.5 6.8 5.5 5.0 5.0

Domestic demand at current prices 2/

10.8 17.8 15.5 15.6 10.5 9.8 9.4 9.3

Consumer prices (period average)

5.1 10.7 9.5 8.5 7.3 6.0 5.3 5.0

Consumer prices (end of period)

7.6 10.0 9.0 8.0 6.5 5.5 5.0 5.0

Unemployment rate (percent)

9.3 8.9 8.7 ... ... ... ... ...

Unit labor cost

3.8 4.3 5.6 ... ... ... ... ...

External sector

               

Exports of good, f.o.b. (U.S. dollars)

12.1 3.2 9.4 3.8 3.8 5.6 5.3 5.3

Exports of services (U.S. dollars)

3.2 20.2 24.2 16.7 14.1 12.3 11.4 11.2

Of which: tourism receipts (U.S. dollars)

12.1 23.8 25.0 17.6 15.0 12.0 11.5 11.2

Imports of goods, f.o.b. (U.S. dollars)

14.1 14.5 17.0 15.1 5.6 6.4 6.1 5.8

Nominal effective exchange rate 3/

-3.4 -9.9 3.0 ... ... ... ... ...

Real effective exchange rate 3/

0.6 -2.8 7.1 ... ... ... ... ...

Terms of trade

-7.7 -3.4 ... ... ... ... ... ...

Money and credit 4/

               

Net foreign assets

10.3 36.8 -4.6 ... ... ... ... ...

Domesic credit

15.7 7.1 27.1 ... ... ... ...  

Net claims on government

2.5 -3.3 2.8 ... ... ... .... ...

Credit to private sector 5/

13.2 10.4 24.2 ... ... ... ... ...

Broad money (end of period, annual

percentage change)

6.7 8.6 10.3 14.2 16.1 15.4 15.0 16.5

Income velocity of broad money

1.0 1.0 1.1 1.1 1.0 1.0 0.9 0.9

Interest rate (weighted average TBs, primary

auctions)

7.5 11.9 ... ... ... ... ... ...
  (Percent of GDP)

Central government budget

               

Overall balance (including grants)

-5.3 -4.2 -3.0 -2.8 -2.8 -2.3 -1.9 -1.5

Primary balance (including grants)

-1.5 -0.2 1.7 1.1 0.3 0.3 0.3 0.5

Revenues and grants

20.1 19.3 21.7 20.8 20.8 20.9 21.2 21.4

Expenditure and net lending

25.5 23.6 24.7 23.6 23.6 23.2 23.1 22.9

Domestic debt of central government

51.4 46.6 44.7 40.5 37.0 33.7 30.3 27.0

External debt of central government

4.4 4.7 4.9 5.7 7.0 8.1 9.2 10.0

Investment and saving

               

Gross domestic investment

22.5 26.4 29.1 30.8 32.4 33.8 35.0 35.3

Public

7.1 6.6 6.8 7.2 7.6 7.9 8.3 8.7

Private

13.7 19.0 22.3 23.6 24.8 25.9 26.7 26.6

Gross national savings

17.2 18.4 24.7 24.6 27.1 29.4 30.9 31.9

Public

-1.4 -0.8 0.7 -0.1 0.3 0.8 1.6 2.2

Private

18.6 19.2 24.1 24.7 26.8 28.6 29.4 29.7

External sector

               

Trade balance

-13.2 -17.4 -19.3 -21.2 -20.0 -18.9 -18.0 -17.0

Exports of goods and services, f.o.b.

60.5 60.8 59.7 54.0 51.4 49.6 47.8 46.1

Imports of goods and services, f.o.b.

-67.4 -71.8 -69.8 -65.4 -61.2 -58.2 -55.5 -52.7

Current account balance

-5.3 -8.0 -4.3 -6.2 -5.3 -4.5 -4.0 -3.3

Overall balance

-1.6 3.0 8.9 2.9 3.1 1.5 2.0 2.7

Total external debt 6/

11.7 11.0 9.5 9.3 9.9 10.5 11.3 10.8

Net international reserves, BOM (millions of

U.S. dollars)

1,408 1,617 2,343 2,628 2.978 3,168 3,453 3,895

Net international reserves, BOM (months of

imports of goods, c.i.f.)

5.2 5.2 6.4 6.2 6.7 6.7 6.8 7.3

Memorandum item:

               

GDP at current market prices (millions of

Mauritian rupees)

194,572 218,784 252,870 288,702 324,056 359,426 396,775 438,006

GDP per capita (U.S. dollars)

5,357 5,649 6,325 7,326 8,703 9,778 10,937 12,236

Foreign currency long-term debt rating

(Moody's)

Baa2 Baa1 Baa2 ... ... ... ... ...
 

Sources: Bank of Mauritius; Central Statistics Office; Ministry of Finance; Moody's and IMF staff estimates and projections.
1/Fiscal year (July-June).
2/Excluding changes in stocks.
3/Period averages (a negative sign signifies a depreciation). 2007/08 figures show the change in average exchange rate since beginning of FY.
4/Percent of beginning of period M2.
5/Includes credit to parastatals.
6/Projections excluding external debt related to unidentified capital flows.


1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities.



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