Public Information Notice No. 01/52

Public Information Notice: IMF Concludes Article IV Consultation with Mauritius

May 22, 2001

On May 14, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius.¹

Background

Mauritius is enjoying a strong recovery, spurred by a rebound in agricultural production following the drought in 1999/2000 (July-June). Real GDP growth is now projected to grow at 7.8 percent in 2000/01, up from 3.6 percent in 1999/2000. Aided by the nominal appreciation of the rupee and restrained monetary conditions, consumer price inflation is on a downward trend, declining to 5.3 percent in 1999/2000 from 7.9 percent in 1998/99, and is likely to decrease further to about 4.5 percent in 2000/01. However, the trend rise in unemployment, evident since the early 1990s, has continued with the unemployment rate climbing to 7.2 percent in 1999/2000, and close to 8 percent in 2000/01. Real wage growth in excess of increases in productivity accounted in part for this development.

Despite a 4.4 percent decline in the terms of trade (resulting mainly from higher oil prices), and a real effective appreciation of the Mauritian rupee of 5.6 percent, the external current account balance shifted to a surplus of 0.5 percent of GDP in 1999/2000 from a deficit of 1.6 percent of GDP in 1998/99. A resilient tourism sector and buoyant exports to the United States, both reflecting the strength of the world economy, as well as significant sugar reinsurance receipts and strong productivity performance in the manufacturing sector, contributed to this strong external performance. As the effects of the currency appreciation are felt, and consistent with the global economic slowdown, the current account deficit is expected to revert to a deficit of about 1.2 percent of GDP in 2000/01. However, the overall balance of payments is likely to remain in surplus at about 2 percent of GDP, reflecting the receipts in November 2000 of about 5.7 percent of GDP from the partial privatization of Mauritius Telecom. Net international reserves of the banking system are likely to remain healthy, with the import cover at end-June 2001 projected at five months.

The stance of fiscal policies was relaxed in 1999/2000. The reduction in domestic petroleum prices in June 1999, in the wake of sharply escalating international prices through much of 1999 and 2000, led to the accumulation of large operating losses by the state oil company and electricity utility. As a result, the overall fiscal deficit (including parastatals) increased to 5.5 percent of GDP in 1999/2000 from 4.0 percent of GDP in 1998/99.

In July 2000, significant reductions in external tariffs, mainly on raw materials and intermediates, went into effect, together with certain income tax and indirect tax reductions. As a result, and notwithstanding the increases in domestic prices of petroleum products and electricity implemented by the new government in September 2000, the overall fiscal deficit in 2000/01 is likely to further widen to 7.6 percent of GDP. The public sector's net borrowing requirement in 2000/01, however, will be sharply reduced by privatization proceeds.

On monetary policy, the authorities lowered the Lombard rate to 13 percent in March 2000, and to 11.5 percent in June 2000 from 14 percent in December 1999. To head off inflationary pressures during the recovery in growth, the Lombard rate was raised to 12.0 percent and to 12.5 percent in late-September and November 2000, respectively.

The Mauritian rupee, which had been appreciating in real terms through much of 1999 and 2000, has been allowed to respond to market pressures since October 2000, and by January 2001 had depreciated in real effective terms by 7.5 percent, reversing much of the earlier decline in competitiveness. On a number of occasions in 2000, the Bank of Mauritius provided targeted subsidies to firms in the export processing zone that had sought relief from the effects of the appreciating rupee. In mid-2000, the Bank of Mauritius reintroduced a 50 percent surrender requirement on the export proceeds of the Mauritius Sugar Syndicate.

After long delays, the government's privatization program got off the ground in November 2000 when it sold 40 percent of its shares in Mauritius Telecom for US$261 million (or 5.7 percent of GDP) to France Telecom.

Executive Board Assessment

Executive Directors were encouraged by the current rebound in economic activity in Mauritius following the severe drought in 1999/2000 that affected the key sugar sector and noted that inflation was on a declining trend. Considering the fiscal deterioration in the previous years, Directors welcomed the recent steps by the new government, including the long-overdue adjustments of petroleum and electricity prices, but stressed that much more needed to be done. The new spending initiatives, while contributing to higher productivity growth in the future, were likely to add to the immediate fiscal pressures and give rise to an unsustainable debt burden that could further jeopardize growth prospects in the medium term. Nevertheless, Directors considered that Mauritius is well placed to face its challenges in the period ahead.

In this context, Directors encouraged the authorities to seize the opportunity afforded by the forthcoming 2001/02 budget to initiate the process of medium-term deficit reduction with up-front actions. Complementary institutional reforms, such as the establishment of a medium-term framework and greater transparency in the tax regime, would also be necessary.

Directors welcomed the recent tightening of monetary policy and noted the recent reversal of the real currency appreciation that had occurred during 1999 and much of 2000. They endorsed the proposed revisions to the Bank of Mauritius (BOM) Act, aimed at strengthening the central bank's institutional framework—including giving it greater independence, mandating that price stability be its primary objective, and allowing for a market-determined exchange rate—while increasing the BOM's transparency and accountability.

Directors viewed favorably the authorities' recent initiatives to strengthen and modernize Mauritius's financial sector, with technical assistance from the IMF properly prioritized. The proposed Financial Services Development Bill would rationalize the legal framework and strengthen the supervision of the nonbank sector. Directors noted that the banking sector remained essentially sound. These actions, along with the recent passage of the Economic Crime and Anti-Money Laundering Act, demonstrated the authorities' commitment to strengthen domestic institutions, while at the same time bringing these areas in line with international standards.

With remedial fiscal actions in place, Directors considered that the prospects for sustaining long-run growth at historic levels were encouraging. However, demographic developments were likely to reduce the available supply of labor, and changes in the external trade environment could threaten Mauritius's privileged market access for its exports, thereby limiting capital accumulation. Hence, appropriate actions needed to be taken to raise productivity growth. In this regard, Directors endorsed the government's proposals to enhance the economy's skill base by increasing markedly the compulsory education cycle, reinforcing the information technology base of the economy, and bolstering domestic institutions, particularly in the financial sector. Strengthening the regulatory framework in the services sector while allowing for greater competition—including through the privatization of state utilities—would also further boost productivity growth.

Directors emphasized that trade liberalization and the resulting exposure to foreign competition would be key to accelerating productivity growth. As export subsidization policies were constrained by WTO rules, there was a need for a preannounced medium-term liberalization of the import regime—including the elimination of state trading—to ensure neutrality between the import-competing and exporting sectors.

Directors recognized that the rising trend in unemployment posed a serious challenge. They supported the authorities' initiatives to address the growing mismatch between the demands of the workplace and the skills of the labor force while creating social safety nets for the unemployed, and encouraged the authorities to intensify their efforts to inject greater flexibility into the current centralized tripartite wage-negotiating system.

Directors noted that the quality and timeliness of Mauritius reporting to the IMF of core minimum and other economic and financial statistics were, in general, satisfactory for surveillance purposes and supported the authorities' request for technical assistance from the IMF to improve the quality and coverage of the overall public accounts.