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Mauritius

Author(s):
International Monetary Fund
Published Date:
July 2008
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I. Introduction

1. Mauritius’ economy suffered at the turn of the millennium as longstanding trade preferences, on which its growth strategy had relied, were phased out. In the 1990s, Mauritius achieved real annual GDP growth of over 5 percent, contributing to one of the highest levels of social welfare in Africa (Information Annex, Appendix V), but growth fell to about 3 percent in the early 2000s, reflecting the dismantling of the Multi-Fiber Agreement, lower guaranteed sugar prices from the European Union, and higher costs for imported commodities, especially petroleum, and, more recently, food (Text Figure 1). In 2005, the government launched a wide ranging reform strategy that has begun to bear fruit. Trade and investment were liberalized, some price controls were lifted, taxes were reduced, a fiscal consolidation strategy was initiated, and monetary policy was strengthened. According to the most recent Doing Business report (2008), Mauritius is now the lead country in Africa.

Text Figure 1:Mauritius: Changes in real GDP and Terms of Trade

Source: IMF Staff estimates.

2. While growth is recovering, the economy is facing rising labor, infrastructure, and other bottlenecks. The authorities are also facing strong head winds from international commodity price rises and inflation remains a concern. Strong foreign investment inflows are putting pressure on the nominal exchange rate.

II. Recent Economic Developments

3. Macroeconomic imbalances continue to be reduced as the fiscal consolidation effort progresses and growth accelerates (Tables 1 and 2). Fiscal policy has been put on a contractionary path in recent years and a significant primary surplus is expected in 2007/08 for the first time in more than a decade (Text Figure 2). Real GDP growth is projected to accelerate to 6½-7 percent in 2007/08—driven by foreign investment especially in tourism, banking, construction, and services, and structural reforms, including a major revamping of the tax system. Emerging sectors, notably the Global Business License (GBL) and the information, communication, and technology (ICT) sectors are growing strongly and have boosted demand for business, accounting, and investment services.1 The textile sector is reviving after years of restructuring.

Table 1.Mauritius: Selected Economic and Financial Indicators, 2005/06–2012/131
2005/062006/072007/082008/092009/102010/112011/122012/13
Baseline Projections
(Annual percent change, unless otherwise indicated)
National income, prices and employment
Real GDP3.64.26.66.25.15.15.15.1
Real GDP per capita2.83.45.75.44.34.44.44.4
GDP deflator4.47.98.47.56.85.55.05.0
Domestic demand at current prices 210.817.815.515.610.59.89.49.3
Consumer prices (period average)5.110.79.58.57.36.05.35.0
Consumer prices (end of period)7.610.09.08.06.55.55.05.0
Unemployment rate (percent)9.38.98.7
Unit labor cost3.84.35.6
External sector
Exports of goods, f.o.b. (U.S. dollars)12.13.29.43.83.85.65.35.3
Exports of services (U.S. dollars)3.220.224.216.714.112.311.411.2
Of which: tourism receipts (U.S. dollars)12.123.825.017.615.012.011.511.2
Imports of goods, f.o.b. (U.S. dollars)14.114.517.015.15.66.46.15.8
Nominal effective exchange rate 3-3.4-9.93.0
Real effective exchange rate 30.6-2.87.1
Terms of trade-7.7-3.4
Money and credit 4
Net foreign assets10.336.8-4.6
Domestic credit15.77.127.1
Net claims on government2.5-3.32.8
Credit to private sector 513.210.424.2
Broad money (end of period, annual percentage change)6.78.610.314.216.115.415.016.5
Income velocity of broad money1.01.01.11.11.01.00.90.9
Interest rate (weighted average TBs, primary auctions)7.511.9
(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)-1.5-0.21.71.10.30.30.30.5
Revenues and grants20.119.321.720.820.820.921.221.4
Expenditure and net lending25.523.624.723.623.623.223.122.9
Domestic debt of central government51.446.644.740.537.033.730.327.0
External debt of central government4.44.74.95.77.08.19.210.0
Investment and saving
Gross domestic investment22.526.429.130.832.433.835.035.3
Public7.16.66.87.27.67.98.38.7
Private13.719.022.323.624.825.926.726.6
Gross national savings17.218.424.724.627.129.430.931.9
Public-1.4-0.80.7-0.10.30.81.62.2
Private18.619.224.124.726.828.629.429.7
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.60.560.859.754.051.449.647.846.1
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-1.63.08.92.93.11.52.02.7
Total external debt 611.711.09.59.39.910.511.310.8
Net international reserves, BOM (millions of U.S. dollars)1,4081,6172,3432,6282,9783,1683,4533,895
Net international reserves, BOM (months of imports of goods, c.i.f.)5.25.26.46.26.76.76.87.3
Memorandum item:
GDP at current market prices (millions of Mauritian rupees)194,572218,784252,870288,702324,056359,426396,775438,006
GDP per capita (U.S. dollars)5,3575,6496,3257,3268,7039,77810,93712,236
Foreign currency long-term debt rating (Moody’s)Baa2Baa1Baa2
Sources: Bank of Mauritius; Central Statistics Office; Ministry of Finance; Moody’s, and IMF staff estimates and projections.

Fiscal year (July-June).

Excluding changes in stocks.

Period averages (a negative sign signifies a depreciation). 2007/08 figures show the change in average exchange rate since beginning of FY.

Percent of beginning of period M2.

Includes credit to parastatals.

Projections excluding external debt related to unidentified capital flows.

Sources: Bank of Mauritius; Central Statistics Office; Ministry of Finance; Moody’s, and IMF staff estimates and projections.

Fiscal year (July-June).

Excluding changes in stocks.

Period averages (a negative sign signifies a depreciation). 2007/08 figures show the change in average exchange rate since beginning of FY.

Percent of beginning of period M2.

Includes credit to parastatals.

Projections excluding external debt related to unidentified capital flows.

Table 2.Mauritius: GDP and Savings-Investment Balance, 2005/06-2012/13
2005/062006/072007/082008/092009/102010/112012/132012/13
Baseline Projections
(Annual percentage changes)
Real GDP3.64.26.66.25.15.15.15.1
Agriculture, forestry, hunting, and fishing-1.1-5.0-5.211.11.51.51.51.5
Sugarcane growing-6.8-7.1-13.619.30.00.00.00.0
Mining and quarrying-5.13.93.03.03.03.03.03.0
Manufacturing0.43.24.54.84.14.14.14.1
Export processing zone-6.08.07.05.05.05.05.05.0
Electricity, gas, and water5.12.56.05.05.05.05.05.0
Construction-1.216.911.08.05.05.05.05.0
Wholesale and retail trade10.0-1.68.95.15.15.15.15.1
Hotels and restaurants4.910.512.011.08.08.08.08.0
Transport, storage, and communications7.07.511.010.09.09.09.09.0
Financial intermediation6.29.38.57.67.67.67.67.6
Real estate, renting, and business activities6.66.59.07.67.67.67.67.6
Public administration, defense, and social security5.02.53.53.03.03.03.03.0
Education4.43.93.03.03.03.03.03.0
Health and social work5.02.55.05.05.05.05.05.0
Other services8.36.68.08.08.08.08.08.0
GDP at factor cost (GDP at basic prices)4.64.86.76.65.45.45.45.4
Net indirect taxes (taxes on products net of subsidies)-4.8-4.46.03.03.03.03.03.0
GDP deflator4.47.98.47.56.85.55.05.0
Nominal GDP8.212.415.614.212.210.910.410.4
(Percent of GDP)
External current account balance-5.3-8.0-4.3-6.2-5.3-4.5-4.0-3.3
Gross National Savings17.218.424.724.627.129.430.931.9
Private18.619.224.124.726.828.629.429.7
Public-1.4-0.80.7-0.10.30.81.62.2
Investment22.526.429.130.832.433.835.035.3
Private13.719.022.323.624.825.926.726.6
Public7.16.66.87.27.67.98.38.7
Consumption84.484.681.080.777.474.872.771.3
Private69.770.966.966.663.561.259.458.4
Public14.713.714.114.113.913.613.312.9
Sources: Mauritius Central Statistics Office; and IMF staff estimates.

Text figure 2:Fiscal Impulse and Primary Balance

Note: The fiscal impulse is the annual change in structural primary balance in percent of GDP, computed as the trend component of primary balance by applying an HP filter.

4. Inflation has eased somewhat in the past year but remains in the upper single digits. A significant portion (nearly 60 percent) of consumer price inflation is imported, especially with respect to food and energy (Text Figure 3). Large capital inflows have also added to demand pressures, compounded by supply-side constraints and inefficiencies, including from underinvestment in public infrastructure, lack of skilled workers in some sectors, and import and distribution monopolies run by parastatals. An appreciation of the exchange rate, especially in late 2007/early 2008, has dampened some of the inflationary pressures. The real effective exchange rate appreciated sharply—by 17 percent in the 12 months ending February 2008 from an overly depreciated level in 2005-06.

Text Figure 3.Mauritius: Evolution and Sources of Inflation

Source: World Economic Outlook and IMF Staff Estimates

5. The overall fiscal position has improved as revenues have risen strongly (by about 1 percent of GDP) in response to tax reforms and expenditure has been contained(Table 3). The overall deficit is projected to decline to about 3.0 percent of GDP in 2007/08, with a primary surplus of about 1.7 percent, and public sector debt falling to about 59 percent of GDP. Tax reform has made the tax regime more progressive, easier to administer, and broadened the base (Box 1). 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 – on program based budgeting (PBB), public sector debt management, and on public audit – which will contribute to better fiscal performance. The debt sustainability outlook has improved.2

Table 3.Mauritius: Summary of Central Government Finances, 2005/06-2012/13 1
2005/062006/072007/082008/092009/102010/112011/122012/13
BudgetProj.Baseline Projections
(Percent of GDP)
Total revenue and grants20.119.320.621.720.820.820.921.221.4
Total revenue19.919.219.420.719.920.120.320.721.0
Tax revenue18.217.517.418.418.118.318.518.919.2
Taxes on net income and profits3.83.53.64.04.14.44.64.74.9
Of which: Individuals1.41.11.21.21.21.31.41.41.4
Corporate2.42.42.22.42.42.52.52.52.6
Tax deduction at source0.30.40.50.60.70.8
Taxes on property1.01.31.31.51.61.71.81.91.9
Taxes on goods and services9.611.511.311.711.711.811.912.112.2
Of which: VAT7.07.17.07.27.17.17.27.37.4
Taxes on international trade3.71.00.91.10.60.30.10.10.1
Stamp Duties0.00.20.20.00.00.00.00.00.0
Nontax revenue1.61.72.02.31.81.81.81.81.8
Capital revenue0.10.00.00.00.00.00.00.00.0
Grants0.30.21.21.00.90.70.60.50.4
Total expenditure and net lending25.523.624.524.723.623.623.223.122.9
Current expenditure21.620.220.620.720.119.819.218.718.2
Expenditures on goods and services8.67.57.27.17.37.47.47.37.1
Wages and salaries6.35.65.45.35.45.35.25.14.9
Other goods and services2.31.91.71.81.92.12.22.22.2
Interest payments3.84.14.94.83.93.12.52.22.0
External interest0.10.10.20.10.20.30.30.40.4
Domestic interest3.73.94.84.63.72.82.21.81.6
Current transfers and subsidies9.28.68.58.98.99.39.39.29.1
Capital expenditure and net lending3.93.43.93.93.43.84.04.44.7
Capital expenditure3.63.33.93.03.43.84.14.44.7
Net lending minus repayment0.40.20.10.90.00.0-0.10.00.0
Overall balance after grants (cash basis)-5.4-4.2-3.9-3.0-2.8-2.8-2.3-1.9-1.5
Primary balance-1.6-0.21.01.71.10.30.30.30.5
Financing, net5.44.23.93.02.82.82.31.91.5
External, net-0.60.80.80.81.41.91.92.02.0
Disbursements0.11.31.21.21.82.22.22.22.2
Amortization-0.7-0.4-0.4-0.4-0.3-0.3-0.3-0.2-0.2
Domestic, net5.93.43.12.21.40.90.3-0.2-0.5
Banking system2.6-3.20.81.20.50.30.1-0.1-0.3
Nonbank3.67.72.31.00.40.60.2-0.1-0.3
Privatization receipts0.50.00.00.00.0
(Millions of Mauritian rupees)
Total revenue and grants39,20642,32750,50254,82160,08467,47475,28984,21793,723
Total expenditure and net lending49,62451,60760,05662,42768,13976,48883,40391,645100,276
Overall balance after grants-10,419-9,280-9,554-7,606-8,055-9,014-8,114-7,428-6,554
Memorandum items:
Government debt55.851.452.749.646.243.941.839.637.0
Public sector debt 2368.861.361.759.556.153.851.749.446.8
GDP at current market prices (millions of rupees)194,572218,784244,642252,870288,702324,056359,426396,775438,006
Sources: Ministry of Finance; Bank of Mauritius; and IMF staff estimates and projections.

Fiscal year: July/June.

Includes central government, local government, and parastatals.

Starting in 2006/07, this includes central and local government and parastatals, after netting out investments of the Consolidated Sinking Fund (which accounts for 3 percent of GDP) in government securities.

Sources: Ministry of Finance; Bank of Mauritius; and IMF staff estimates and projections.

Fiscal year: July/June.

Includes central government, local government, and parastatals.

Starting in 2006/07, this includes central and local government and parastatals, after netting out investments of the Consolidated Sinking Fund (which accounts for 3 percent of GDP) in government securities.

6. Mauritius began to experience significant capital inflows starting in 2006/07(Table 4). Financial account inflows comprise FDI, particularly into tourism, but also portfolio investment attracted by the high relative interest rates. The import bill has increased about 17 percent, driven by higher international petroleum and food prices, which was not compensated fully by rising service exports. The 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 are problematic and cloud the external sector analysis.3

Table 4.Mauritius: Balance of Payments, 2005/06-2012/131
2005/062006/072007/082008/092009/102010/112011/122012/13
Baseline Projections
(Millions of U.S.dollars, unless otherwises indicated)
Current account balance-335.9-553.2-355.4-616.3-600.9-575.7-586.4-549.2
Trade balance-833.3-1,205.7-1,584.6-2,111.0-2,278.7-2,448.1-2,620.0-2,789.3
Exports of goods, f.o.b.2,233.12,304.02,520.22,615.02,713.62,866.03,018.23,178.4
Of which: domestic exports1,561.21,757.51,920.22,049.52,108.52,246.02,368.22,498.4
EPZ 2983.01,160.81,335.41,464.91,546.31,633.41,728.61,829.0
Sugar344.4340.7298.9279.9240.6272.8271.8271.8
Imports of goods, f.o.b.-3,066.4-3,509.6-4,104.8-4,726.1-4,992.2-5,314.1-5,638.2-5,967.7
Of which: domestic imports-2,615.3-3,201.1-3,653.7-4,300.9-4,537.3-4,847.9-5,149.4-5,456.4
EPZ 2-538.0-632.6-761.2-797.4-833.4-871.1-918.3-966.7
Petroleum products-585.2-650.0-880.3-1,090.3-1,132.6-1,179.6-1,235.0-1,294.8
Aircraft and ships-10.6-226.2-87.50.0-109.20.00.00.0
IRS/New FDI0.00.0-80.6-190.6-255.0-300.6-340.6-380.6
Other-1,904.4-1,965.0-2,243.2-2,591.7-2,602.7-2,901.4-3,081.5-3,261.7
Services (net)400.6445.9756.3966.21,163.01,333.51,509.81,712.6
Of which: tourism652.3785.41,024.41,205.71,383.81,535.01,700.21,887.5
Income (net)43.5110.8280.0303.4328.7356.0385.3416.9
Current transfers (net)53.295.8192.9225.0186.1182.9138.5110.6
Capital and financial accounts37.0398.9930.7801.4901.3715.7821.2941.6
Capital account-3.2-1.6-1.8-1.8-1.8-1.8-1.8-1.8
Financial account40.2400.5932.5803.2903.1717.5823.0943.4
Direct investment (net)18.7224.3374.7642.2794.9899.8989.81,078.7
Abroad-32.0-24.3-75.3-82.8-91.1-100.2-110.2-121.3
In Mauritius50.7248.6450.0725.0886.01,000.01,100.01,200.0
Portfolio investment (net)-54.586.3-51.3-43.4-39.7-55.2-54.9-58.8
Other investment (net)75.989.9609.1204.4147.9-127.0-111.8-76.6
Of which: government debt (net)-26.750.052.2141.3214.9247.8295.3333.7
Errors and omissions 3201.0363.4150.0100.050.050.050.050.0
Overall balance-97.9209.1725.4285.1350.4190.0284.8442.4
Change in official reserves (- = increase)97.9-209.1-725.4-285.1-350.4-190.0-284.8-442.4
Memorandum items:(Percent of GDP, unless otherwise indicated)
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.60.560.859.754.051.449.647.846.1
Imports of goods and services, f.o.b.-67.4-71.8-69.8-65.4-61.2-58.2-55.5-52.7
Foreign direct investment0.83.65.57.37.87.77.67.3
Current account balance-5.3-8.0-4.3-6.2-5.3-4.5-4.0-3.3
Overall balance-1.63.08.92.93.11.52.02.7
Errors and omissions 33.25.21.81.00.40.40.30.3
Net international reserves, BOM, (millions of U.S. dollars)1,408.31,617.42,342.82,627.82,978.23,168.23,453.03,895.3
In months of imports of goods, c.i.f.5.25.26.46.26.76.76.87.3
GDP (millions of U.S. dollars)6,3116,9288,1919,97111,42012,92514,55916,400
Total external debt11.711.09.59.39.910.511.310.8
Total debt service ratio (percent of exports of goods and services)5.14.03.13.63.33.12.82.5
Mauritian rupees per U.S. dollar (period average)30.831.6
Mauritian rupees per U.S. dollar (end of period)30.432.5
Sources: Bank of Mauritius; Ministry of Finance; Mauritius Sugar Syndicate; and IMF staff estimates and projections.

Fiscal year (July-June), analytical presentation.

The 2006/07 budget announced the integration of EPZ and non-EPZ sectors.

Including unidentified capital flows.

Sources: Bank of Mauritius; Ministry of Finance; Mauritius Sugar Syndicate; and IMF staff estimates and projections.

Fiscal year (July-June), analytical presentation.

The 2006/07 budget announced the integration of EPZ and non-EPZ sectors.

Including unidentified capital flows.

Box 1:Tax Reform

Mauritius has implemented a major tax reform aimed at broadening the base and shifting tax incidence to higher income earners. A key measure of the reform was the introduction of a single flat tax rate on personal and corporate income. The introduction of a National Resident Property Tax (NPRT) on high-income earners has also improved progressivity (Text Table 1).

Text Table 1.Mauritius: Summary of Tax reform 2005/06 - 2007/08
BeforeAfter
Income Tax(i) four rates (10, 20, 25, 30 percent); (ii) lowest exemption threshold Rs 8,000(i) one flat rate (15 percent); (ii) lowest exemption threshold Rs 215,000
Company Income Taxtwo rates (25, and 15 percent incentive rate)one flat rate (15 percent) 1
Tax on residential propertynoneNRPT: (i) Rates: from 30 Rs per square feet, to a maximum of 5 percent of total income, (ii) low income below Rs 385,000 exempt
Witholding at sourcenoneTax deduction at source (TDS) on payments like interests, royalties, rent, and others (various rates: 15, 10, 5, 3, and 0.75 percent)2
VATThreshold: Rs 3 mnThreshold: Rs 2 mn2, the base was broadened by 22 percent during FY 2006/07
Taxes on imports8 tariffs: unweighted average tariff rate 29 percent4 tariffs: unweighted average tariff rate 13 percent
Tax Expendituresbudget estimate: 3 percent of GDPbudget estimate: 1.5 percent of GDP
Simplification and transparencyConsolidation of various reliefs, allowances, deductions and exemptions into income exemption thresholds (4 categories).
Revenue AdministrationMOF, and several other state agenciesSingle revenue authority for all taxpayers queries and payments.
Tax AmnestynoneVoluntary Disclosure Incentive Scheme (VDIS) and Tax Arrears Payment Incentive Scheme (TAPIS). These two schemes came into operation on July 1 2007 for a six-month period.
Source: Mauritian authorities, and staff estimates.

From income year 2007/08. During income year 2006/07 the flat rate was 22.5 percent.

From October 1, 2006

Operational since July, 2006

Source: Mauritian authorities, and staff estimates.

From income year 2007/08. During income year 2006/07 the flat rate was 22.5 percent.

From October 1, 2006

Operational since July, 2006

The tax reform has broadened the base, improved compliance, and eased administration. Income exemption thresholds were significantly raised removing many taxpayers from the tax rolls, freeing up resources to concentrate on the bigger taxpayers. Withholding and the VDIS scheme have improved collection from hard-to-tax groups.

Based on preliminary estimates, the impact of the reform on collections during the first year has been positive, with both income and corporate taxes rising as a share of GDP (Text Figure 4). However, some of the revenue increase may also reflect wider outpu recovery and the effects of two types of tax amnesty. Overall, the reform represents a fundamental regime shift toward more market-oriented policies, while improving compliance and collection.

Text Figure 4.‘Flat’ tax rates and better compliance improved income tax collection, despite a reduction in the single-tax rate from 22.5 to 15 percent.

1/ PIT also includes TDS, and the new NRPT

7. A monetary policy committee (MPC) was established in March 2007 to improve transparency and effectiveness, and the policy rate was switched from the Lombard to the repo rate. However, liquidity has grown rapidly and excess liquidity has persisted in the financial system since early 2007 (Table 5).4 Interest rates declined markedly, in part as the government borrowing requirement dropped. The BoM was of the view that stronger intervention to mop-up liquidity would be counterproductive in the face of significant portfolio inflows. As a result, no repo transactions took place under the new policy rules and rates in the interbank market remained outside the repo rate corridor, which undermined credibility of the new monetary policy framework (Text Figure 5). In April 2008 the BoM introduced new instruments, extended a special deposit facility, and widened the repo corridor to 125 basis points to strengthen liquidity management. The BoM conducted sterilized intervention in the foreign exchange market especially in late 2007 and early 2008.

Table 5.Mauritius: Deposit Corporate Survey, 2005-07
2004200520012007
Dec.MarchJuneSept.Dec.MarchJuneSept.Dec.MarchJuneSept.Dec.
(Millions of rupees)
Net foreign assets124,748126,947150,920134,178146,603164,150170,025198,406239,095230,828243,085266,819266,288
Net domestic assets54,32753,98634,95047,77342,83730,97528,3873,677-31,574-19,614-27,677-43,716-26,969
Domestic credit179,101178,792183,292190,026198,708201,656212,518217,833218,007217,456226,550227,730242,190
Claims on government (net)41,64342,38844,12144,37145,25145,45948,74747,45946,18143,03842,24242,88245,524
Monetary authorities-115-741381311,7414141,0112,9306,1161,332-1,417-179-270
Commercial banks41,75842,46143,98444,24043,51045,04547,73644,52940,06541,70643,66043,06145,795
Claims on private sector 1137,458136,405139,170145,655153,457156,197163,771170,373171,826174,418184,308184,848196,666
Other financial liabilities 2-63,148-62,879-86,058-77,821-89,715-101,866-114,769-136,085-167,431-158,223-172,353-191,350-188,761
Other items (net)-61,626-61,927-62,284-64,432-66,156-68,815-69,362-78,071-82,151-78,847-81,875-80,095-80,398
Broad money (M2)179,075180,933185,870181,952189,440195,125198,412202,083207,521211,214215,408223,103239,318
Money (M1)48,44848,68351,62644,80147,68446,55548,06749,28253,14853,18854,59958,34164,429
Quasi-money130,627132,250134,244137,150141,756148,571150,345152,801154,373158,025160,809164,762174,889
Reserve Money14,73414,73514,05113,83613,49113,16013,58113,61812,20813,26716,20617,56317,424
Memorandum Items:
(Annual change, millions of rupees)
Net foreign assets8,5422,19923,973-16,74212,42417,54719,10564,22892,49366,67873,06068,41327,192
Domestic credit903-3094,4996,7348,6822,94829,22627,80719,29915,79914,0329,89724,183
Claims on government1617451,7342508802094,6263,088931-2,421-6,505-4,577-657
Claims on private sector 1742-1,0532,7666,4847,8032,74024,60024,71818,36918,22120,53714,47524,840
Broad money (M2)2,1491,8584,937-3,9187,4885,68612,54220,13118,08116,08816,99621,02031,797
Money (M1)9662362,942-6,8242,883-1,129-3,5584,4815,4646,6336,5329,06011,281
Quasi money1,1841,6231,9942,9064,6066,8151,7752,4561,5723,6522,7833,95310,128
(Annual percent change)
Domestic credit1.0-0.45.03.84.81.615.914.69.77.86.64.511.1
Claims on government0.95.79.90.62.10.510.57.02.1-5.3-13.3-9.6-1.4
Claims on private sector 11.1-1.53.84.75.72.017.717.012.011.712.58.514.5
Broad money (M2)2.32.05.0-2.24.23.16.711.19.58.28.610.415.3
Money (M1)8.72.123.2-14.45.9-2.3-6.910.011.514.213.618.421.2
Quasi-money1.52.02.32.23.55.21.31.81.12.51.92.66.6
Reserve Money13.6-11.1-22.6-12.3-8.4-10.7-3.3-1.6-9.50.819.329.042.7
(Percentage change of beginning of year of broad money)
Net foreign assets4.81.213.4-9.36.99.310.133.948.832.135.233.013.1
Domestic credit0.5-0.22.53.84.81.615.414.710.27.66.84.811.7
Claims on government (net)0.10.41.00.10.50.12.41.60.5-1.2-3.1-2.2-0.3
Claims on private sector 10.4-0.61.53.64.41.413.013.09.78.89.97.012.0
Sources: Bank of Mauritius; and IMF staff estimates.

ncluding claims on public enterprises.

The major component of other financial liabilities consists of restricted deposits, which largely include deposits of the offshore nonfinancial corporations (so-called Global License Holders, GBLs). GBLs are resident corporations licensed to conduct business exclusively with nonresidents and only in foreign currencies.

Sources: Bank of Mauritius; and IMF staff estimates.

ncluding claims on public enterprises.

The major component of other financial liabilities consists of restricted deposits, which largely include deposits of the offshore nonfinancial corporations (so-called Global License Holders, GBLs). GBLs are resident corporations licensed to conduct business exclusively with nonresidents and only in foreign currencies.

Text Figure 5:Interbank Rate, Repo Rate and Corridor, 2006-2008

Source: Bank of Mauritius

8. The financial system remains sound, and vulnerability indicators have improved(Table 6 and 7). Financial soundness indicators point to a further improvement in the quality of assets. The banking system has two broad segments—the domestic market and the offshore/GBL sector, with the latter market dominated by the affiliates of large international banking groups.5 Starting in January 2008, Pillars I and II of Basel II are being implemented, and the BoM is planning to implement a risk-based supervision model in 2008/09. The stock exchange rose to record levels, supported by strong fundamentals. Aggregate profits of listed companies increased by about 35 percent. Valuations are consistent with international averages for emerging markets (an average P/E ratio of 14).

Table 6.Mauritius: Indicators of Financial and External Vulnerability, 2005/06-2012/13 1
2005/062006/072007/082008/092009/102010/112011/122012/13
Baseline Projections
Financial Indicators
Total central government debt (percent of GDP)55.851.449.646.243.941.839.637.0
Total public sector debt (percent of GDP)68.861.359.556.153.851.749.446.8
Broad money (percent change; 12-month basis)6.78.610.314.216.115.415.016.5
Private sector credit (percent change; 12-month basis)17.712.528.327.929.125.323.023.9
Treasury Bill rate (weighted average of primary auctions)7.511.9
External indicators
Exports (percent change, in U.S. dollar terms)12.13.29.43.83.85.65.35.3
Imports (percent change, in U.S. dollar terms)214.114.517.015.15.66.46.15.8
Terms of trade (percent change)-7.7-3.4
Current account balance (percent of GDP)-5.3-8.0-4.3-6.2-5.3-4.5-4.0-3.3
Capital and financial account balance (percent of GDP)2.12.711.48.07.95.55.65.7
Net international reserves of the Bank of Mauritius
Millions of U.S. dollars31,4081,6172,3432,6282,9783,1683,4533,895
Months of imports, c.i.f.25.25.26.46.26.76.76.87.3
Net international reserves of the banking system
Millions of U.S. dollars4,1795,8636,1566,4646,7877,1267,4837,857
Months of imports, c.i.f.220.424.122.420.119.819.018.518.3
Total external debt
Percent of exports of goods and nonfactor services19.318.115.917.219.321.123.523.5
Total external debt service
Percent of exports of goods and nonfactor services5.14.03.13.63.33.12.82.5
Of which: interest payments0.80.70.60.60.60.60.50.4
Of which: principal repayments4.33.32.53.02.62.52.32.0
Exchange rate (Mauritian rupees per U.S. dollar; period average)30.831.630.929.028.427.827.326.7
Financial market indicators
Mauritius stock exchange index (SEMDEX; July 1989 = 100) 58411425
Change in percent414.369.4
Foreign currency long-term debt rating by Moody’s5Baa2Baa1Baa2
Sources: Mauritian authorities; and IMF staff estimates and projections.

Fiscal year (July-June).

Excluding the acquisition of aircraft and ships.

The reserves of the Bank of Mauritius are not pledged as collateral for short-term liabilities, nor are they sold forward.

End of period.

Bonds rated “Baa2” by Moody’s are considered as medium-grade obligations.

Sources: Mauritian authorities; and IMF staff estimates and projections.

Fiscal year (July-June).

Excluding the acquisition of aircraft and ships.

The reserves of the Bank of Mauritius are not pledged as collateral for short-term liabilities, nor are they sold forward.

End of period.

Bonds rated “Baa2” by Moody’s are considered as medium-grade obligations.

Table 7.Mauritius: Financial Soundness Indicators for the Banking Sector, 2003-07 1(Percent, unless otherwise indicated)
20032004200520062007
(End-of-period)
Capital adequacy
Regulatory capital to risk-weighted assets 214.215.015.415.514.4
Regulatory Tier I capital to risk-weighted assets13.713.713.513.912.2
Total (regulatory) capital to total assets8.07.87.87.86.7
Asset composition and quality
Share of loans (exposures) per risk-weight (RW) category
RW = 0%5.26.416.614.29.7
RW = 20%4.86.70.28.315.5
RW = 50%7.99.66.56.85.6
RW = 100%82.177.376.770.768.9
Total exposures/total assets47.845.953.643.443.2
Sectoral distribution of loans to total loans
Agriculture9.17.55.75.84.8
Of which: sugar8.06.45.65.24.0
Manufacturing14.813.612.011.610.6
Of which: export enterprise certificate holders7.56.15.45.34.8
Traders14.914.513.913.813.9
Personal and professional9.810.09.49.110.1
Construction14.216.215.215.216.2
of which: housing9.010.810.711.112.4
Tourism/hotels15.915.413.212.012.6
Other21.222.830.731.631.8
Foreign currency loans to total loans10.912.251.546.157.2
NPLs to gross loans - excluding accrued/unpaid interest9.68.14.04.62.4
NPLs net of provisions to capital28.122.411.410.68.8
Large exposure to capital 3220.9200.0250.3410.2544.9
Earnings and Profitability
ROA (Pre-tax net income/average assets)2.12.11.91.81.8
ROE (Pre-tax net income/average equity)19.219.221.120.726.0
Interest margin to gross income32.134.736.334.729.3
Noninterest expenses to gross income23.927.720.119.615.5
Expenses/revenues10.610.29.99.27.2
Earnings/employee - in 000 of rupees2,2122,4332,9042,8893265.2
liquidity
Liquid assets to total assets36.637.944.148.946.2
Liquid assets to total short-term liabilities71.071.788.6106.595.9
Funding volatility ratio13.914.0-20.1-38.8-30.1
Demand deposits/total liabilities10.310.715.913.616.9
FX deposits to total deposits11.013.857.360.565.9
ensitivity to market risk
Net open positions in FX to capital20.81.94.23.82.4
Source: Mauritian authorities.

Data refer to former Category 1 (“domestic”) banks up to 2004, but include the former Category 2 (“offshore”) banks thereafter.

Total of Tier I and Tier 2 less investments in subsidiaries and associates.

Prior to 2006, data refer to Category 1 banks only.

Source: Mauritian authorities.

Data refer to former Category 1 (“domestic”) banks up to 2004, but include the former Category 2 (“offshore”) banks thereafter.

Total of Tier I and Tier 2 less investments in subsidiaries and associates.

Prior to 2006, data refer to Category 1 banks only.

9. An AML/CFT assessment, undertaken September/October 2007, found that Mauritius had taken a number of measures to strengthen its AML/CFT system; this is timely given the strong growth in its banking sector. The BoM supervision is relatively advanced and has undertaken onsite AML/CFT inspections of all institutions for which it has supervisory responsibility. The Financial Services Commission (FSC) is also developing its AML/CFT supervisory capabilities but is not as advanced as the BoM in this regard.

10. The authorities have continued efforts to liberalize international trade and secure market access. An economic partnership agreement with the EU, covering goods only, has been initialed. A free trade agreement with Pakistan was signed and an agreement with India is under discussion. However, several parastatals have preserved import and distribution monopolies on basic goods, and an administered price regime remains in place for many basic goods. The system may be having a deleterious effect on inflation.6

III. Medium-Term Outlook

11. Mauritius’s medium-term outlook has turned more favorable with the effects of the reform effort. Economic growth is projected to remain at 5 percent through the medium term, reflecting continued growth in tourism, services, and investment in large projects. This may be a cautious projection given the sizable investment inflows which are expected but implementation and absorptive capacity will be constraints. The outlook is clouded by large errors and omissions in the balance of payments, significant structural and policy changes in the economy, and uncertainties on the time frame and feasibility of a number of large public and private projects (Box 2). 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.

12. 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. The large foreign investment inflows, projected to rise to about US$1 billion per year (12 percent of 2007/08 GDP), risk overheating the economy, especially if the fiscal deficit is not reduced further and structural reforms are not pursued to improve the supply response. Fiscal policy should also aim to create fiscal space for education/retraining and much needed investment in infrastructure. Monetary policy needs to be strengthened further and focused on reducing inflation. Structural reforms aimed at improving efficiency take time to bear fruit, implying that challenges posed by large investment flows will need to be faced with fiscal and monetary policy tools.

Box 2:Impact of Large Projects on the External Current Account

A number of large public and private projects, totaling some US$12.4 billion (147.5 percent of 2007/08 GDP), have been launched or proposed over the medium-term (Text Table 2). These mega-projects, predominantly in the form of foreign investment, are primarily in the tourism sector (66 percent); but also industrial parks (47 percent); infrastructure (23 percent); and other industrial projects (11 percent).

Text Table 2:Large scale projects expected over the medium term
SectorProjectValue of

Projects (US$

billion)
Value of

Projects

(percent of

GDP)
InfrastructurePort, Airport, Waste Project, Freeport Project, Port Louis1.923.0
Bypass, Other Road Projects
Tourism Related InvestmentHotel, Integrated Resort Schemes5.666.4
Industrial ParksTianli, La Tour Koening, Highland4.047.2
Other Sector Specific Industrial ProjectsMedical Hub, Seafood Hub, Land Based Oceanic Industries,0.910.8
Milk Farm
Total Investment12.4147.5
Source: IMF staff and various Mauritian Ministries estimates and projectionsNote: Converted at an exchange rate of Rm 30/US$.

The impact of these projects on the external current account is not easily quantifiable for lack of data, but the magnitude will stretch the implementation and absorption capacity of the economy. Regression analysis suggests that a 1 percentage point increase in FDI leads to a 0.34 percent increase in imports. For every US$1 billion of investment the external current account would worsen by about 4.9 percent of GDP.

IV. Policy Discussions

13. Policy discussions centered on the macroeconomic and structural polices that were needed to sustain resurgent growth and enhance competitiveness. A window of opportunity now exists to build on the recent economic success to implement a second generation of reforms that are needed to sustain noninflationary growth.

A. Fiscal Consolidation and Refocusing

14. The mission recommended that, building on the success of the tax reform, a tighter fiscal policy stance be pursued over the medium term to further reduce public debt and counterbalance the strong demand impulse from the rising foreign investment. In particular, efforts should focus on raising expenditure efficiency and converting the system of indirect universal subsidies on basic goods into a well targeted social assistance program. The authorities indicated that they shared this assessment and were working to implement such a strategy, starting with the introduction of fiscal management laws on public debt management and public finance and audit, including the implementation of program-based budgeting (PBB). The mission broadly endorsed the authorities’ medium-term fiscal strategy, as reflected in the staff projections.

15. The mission encouraged the authorities to focus attention on:

  • Improving the efficiency of social assistance programs by consolidating and targeting. To reduce poverty more effectively, social assistance should be aimed at helping the working poor and the unemployed re-enter the job market. Targeting would also introduce a countercyclical component to fiscal policy which will be increasingly needed as Mauritius develops. The authorities indicated that work to create a social registry, which would form the basis for targeted assistance, is underway.
  • More generally, raising the efficiency of budgetary operations over the medium term through the PBB framework, supported by IMF technical assistance, starting with the 2008/09 budget. The mission welcomed the public debt management strategy which targeted a public debt reduction from 61.3 percent of GDP to 50 percent in the medium term. The staff noted that empirical evidence suggested that overall public debt levels in emerging markets should be on the order of 30-35 percent of GDP.7 Efforts to reinforce the debt management unit in the MOFED and coordination with the BoM should be pursued. The authorities explained that the proposed public debt ceiling was a first step in a longer-term debt sustainability strategy.
  • Accelerating the reforms of the parastatal sector. A disengagement and divestment strategy for parastatals in the import and distribution of basic goods would help improve economic efficiency and reduce the size of the public sector. While some reduction in central government employment has begun, this has been largely offset by a rise in parastatal employment, and overall public sector employment is up some 12 percent from early in the decade (Text Figure 6). Staff suggested the state trading firms be progressively withdrawn from commercial activities to allow these functions to be taken over by the private sector. Initial steps could include requirements for strict commercial cost recovery operations and the budgetization of subsidies. The authorities agreed that parastatal reform was needed, notwithstanding the difficulties involved. The World Bank is providing some technical support in this area. The appointment of a commissioner to implement the new competition law would facilitate this reform.
  • Areas requiring vigilance: A large upward adjustment of public sector wages will follow the Pay Review Commission (PRC) decision in late May 2008. This, along with a planned phasing out of remaining trade taxes will be a challenge to the fiscal balance. The duty-free island initiative is intended to make Mauritius a more attractive business destination and to encourage tourism spending. The timetable to duty free status was suspended in 2007, but the authorities indicated their intention to implement this initiative over the medium-term. Staff encouraged the authorities to announce a new timetable and in the interim to further simplify the tariff structure, and consider how the loss of import duty revenues (1.0 percent of GDP) would be offset.

Text Figure 6.Comparing Growth of Public Sector Employment with Central Government Employment

Source: Survey of Employment and Earnings in Large establishments (2007)

B. Strengthening Monetary Policy

16. While underlying inflation is broadly under control, staff expressed concern that the new monetary intervention policy was not being implemented as announced (Text Figure 7). Staff noted that while more needs to be done to reduce liquidity, rising capital mobility has made this more difficult without support from fiscal and structural policies. In this context, the recent appreciation of the nominal exchange rate has played a useful role. The authorities explained that the absence of repo operations reflected concerns not to encourage additional foreign portfolio inflows. They have attempted to address systemic liquidity by the special deposit facility, and efforts to make the repo rate operational by lowering the rate, in line with rate decreases abroad, and by broadening the intervention corridor. The BoM indicated that it would also rely on the effect of declining portfolio inflows and government steps to reduce its own liquidity injections to bring rates back into the corridor. The inflow of short term portfolio investment appears to have diminished in late 2007, following recent turmoil in international financial markets. The mission suggested that public pension and other funds be removed from the domestic banking system over the coming months. Staff urged reinforced coordination between the MOFED and BoM on liquidity management, which the authorities agreed was necessary.

Text Figure 7.Evolution of Headline and Core 2 Inflation, January 2005-April 2008

Source: Bank of Mauritius (2008)

CORE2 excludes Food, Beverages, Tobacco, mortgage interest, energy prices and administered prices from headline inflation. Effective July 2007, Core inflation data are compiled using the new basket of goods and services derived from the 2006-07 Household Budget Survey.

17. Staff recommended the BoM be more active in shaping public expectations of inflation through communication of an inflation target range for monetary policy (a soft inflation target) and actively work to achieve it. The monetary authorities indicated that this was in process through the forthcoming semi-annual inflation and financial stability reports.

18. Staff welcomed the initiative to raise BoM capitalization to provide the needed resources for an active monetary policy that could involve higher sterilization costs in the period ahead. The BoM has also initiated steps to reinforce its governance structures, including a revision to the central bank law to reform the membership of its board and of the MPC and to include regular reporting to a select committee of parliament. The responsiveness of monetary policy to rapidly changing conditions would be enhanced if the MPC met more often. The BoM is also in the process of bolstering its analytical framework, as recommended by the 2007 FSAP update, with IMF technical assistance.

19. Regulations to allow for the development of a swap market are needed to help manage inflows, develop capital markets, and support a reduction in spreads. The large inflows of foreign exchange are becoming difficult to manage. The authorities indicated that they were actively working with market participants on swap market regulations.

20. The mission’s assessment is that the current level of the rupee is broadly in line with fundamentals(Box 3). Different econometric estimates of exchange rate alignment suggest that the rupee was not far from equilibrium at end-2007. Should large capital inflows persist as projected, the REER would be expected to appreciate over the medium term, preferably through an appreciation of the nominal rate. The impact of appreciation could be offset by further fiscal consolidation and the implementation of structural reforms aimed at improving the supply response and reducing inflationary pressures. The authorities reaffirmed their policy to allow the nominal exchange rate to adjust to macroeconomic conditions and limit BoM intervention to smoothing operations.

21. The authorities should ensure that financial institutions not currently covered by the AML/CFT framework, such as cooperative credit unions, are brought within the regime, and further strengthen the FSC. While the financial intelligence unit in Mauritius has developed its operational capabilities, its overall effectiveness is hampered by the modest number of suspicious transactions reports filed by financial institutions.

Box 3:External Stability and Competitiveness

An assessment of external competitiveness suggests that the Mauritian rupee is broadly in line with economic fundamentals at end-2007. The full analysis is available in the accompanying selected issues paper.

  • Several price-based REER indices suggest that Mauritius’ competitiveness has been on an improving trend since 1980, with particularly large gains in the last few years.
  • The single-equation approach to estimating the equilibrium exchange rate reveals a negligible gap between the Mauritian rupee and its equilibrium value since 2003 (Text Figure 8). The macroeconomic balance approach suggests that th level of the real effective exch rate is broadly appropriate, as the projected underlying current account deficit over the medium-term is broadly in line with a current account norm obtained from panel regressions for a large sample of comparato countries. Finally, the capital enhanced equilibrium exchange rate approach, which adds uncovered interest rate parity to the analysis, suggests that since July 1995 the nominal exchange rate has been broadly in line with its equilibrium rate as indicated by inflation and interest rate differentials with the US.
  • An analysis of structural competitiveness indicators suggests that Mauritius ranks highly in Africa and fares well against other comparator countries. On the 2007 Global Competitiveness Index, Mauritius did better than other small-island economies, but was outperformed by highgrowth Asian economies. According to the 2008 World Bank Doing Business Report, Mauritiu mostly outranked comparator nations on the quality of the business environment, especially in areas such as commerce and entrepreneurship. However, progress is needed in improving broadband internet access and reducing telephone faults.

Text Figure 8.Single Equation Approach: Actual vs. Equilibrium REER

Note: The price measure is the GDP deflator.

Source: Staff estimates.

C. Structural Competitiveness

22. The mission encouraged the authorities to sustain their efforts on making the business environment conducive to private sector growth, by focusing on public infrastructure, human capital development and trade liberalization. Structural reforms will play a key role in the transition to a new economic structure and in ensuring sustained competitiveness. Greater efficiency in infrastructure, notably in transportation and communications, will be needed for Mauritius to realize its ambitions as a regional banking and services hub. Efforts to liberalize domestic trade, where several parastatals have import and distribution monopolies, need to be pursued along with scaling back the administered price regime.

23. Some labor market reforms have been initiated, but staff encouraged the authorities to take further steps to upgrade the skills of the work force and increase labor market flexibility. Every effort should be made to get the new labor laws implemented. The 2008 World Bank Doing Business Report flags the rigidity of the Mauritian labor market, especially how difficult it is to fire workers (see Text Table 3). Despite the improved growth environment, unemployment remains high, implying skills are mismatched to economic needs. Progress is needed in reducing the costs of broadband internet access, which are high by regional standards, by deregulating the telecommunication sector further.

Text Table 3:Selected Indicators of Labor Markets, 2007
Difficulty of Hiring Index 1/Rigidity of Hours Index 2/Difficulty of Firing Index 3/Rigidity of Employment Index 4/
Uganda00103
Nigeria00207
Botswana0204020
Namibia0402020
Kenya3303021
Mauritius0205023
Gambia0403023
Seychelles33205034
Ghana22405037
Cape Verde33406044
Senegal72605061
Tanzania89406063
Madagascar89604063
Source: World Bank “Doing Business Report 2008”

difficulty of hiring a new worker

restrictions on expanding or contracting the number of working hours

difficulty and expense of dismissing a redundant worker

an average of the three indices

Source: World Bank “Doing Business Report 2008”

difficulty of hiring a new worker

restrictions on expanding or contracting the number of working hours

difficulty and expense of dismissing a redundant worker

an average of the three indices

D. National Statistics

24. Staff welcomed the authorities' efforts to bring Mauritius into line with international best practice in statistics. Coverage lacunae in the financial account of the balance of payments and international investment position (IIP) are of particular concern as errors and omissions continue to rise (Box 4). Staff expressed concern at delays in conducting the surveys needed to improve the coverage of the balance of payments, especially as regards the GBLs, in line with the 2007 Data ROSC and STA technical assistance reports. Better data on the financial account, especially on GBL activity, will be needed to meet the Special Data Dissemination Standard. Mauritius has good first generation data for surveillance (national accounts, inflation), but efforts are needed on second generation data (asset prices such as housing, capital inflows) to better assess potential vulnerabilities of the economy. The authorities indicated that efforts on improving national statistics would move ahead.

Box 4:The Financial Account and Errors and Omissions in the Balance of Payments

Rapidly growing financial flows into and through Mauritius in recent years pose a challenge for statistical systems. Rising errors and omissions (5.2 percent of GDP in 2006/07) are largely linked to the activities of the GBL sector. The BOM collects partial GBL data, but these are excluded from the official balance of payments data. Official statistics capture only the foreign assets of the commercial banks, primarily sourced from the deposits made by the GBLs from funds raised abroad (in transition to investment destinations in third countries). To overcome this problem and obtain a more accurate picture of Mauritius' external position, the GBL's transactions in their assets and liabilities (with appropriate instrument detail) are needed. This can be achieved by conducting a quarterly survey on transactions data of the GBLs.

Similarly, the IIP omits the GBLs' assets and liabilities but includes the foreign assets of the commercial banks that are sourced from the GBLs. To address this problem, an annual survey of positions data is needed to improve the IIP statistics. As part of this exercise, the IIP should incorporate the results of the Coordinated Portfolio Investment Survey (CPIS), the overwhelming part of which is assets held by GBLs. As illustrated in Text Table 4, which draws on the CPIS, there has been a substantial run up in foreign assets since 2001. There is no similar increase in liabilities as they are presently not captured.

Text Table 4:Reported Portfolio Investment Assets and Liabilities for Mauritius of Nonresident Issuer: Total Portfolio Investment(in million of US dollar)
200120022003200420052006
Total Portfolio Investment (Assets)58417,12826,61239,03054,83481,550
of which Equity Securities44614,08722,79632,06648,83770,463
of which Debt Securities1383,0413,8166,9645,99711,087
Total Portfolio Investment (Liabilities)6456401,3912,1871,8953,942
of which Equity Securities3523033341,0001,3743,536
of which Debt Securities2743379511,143163404
Source: Coordinated Portfolio Investment Survey

V. Staff Appraisal

25. Staff commends the authorities for the reforms that have led to a revival in growth. Investors are responding to the important tax and business environment reforms instituted since 2006. Foreign investment is rising strongly and is projected to grow further. However, some supply constraints are already apparent, particularly for infrastructure, but also in the labor market, where skills shortages have emerged. The authorities need to proceed with further fiscal consolidation and structural reform to alleviate bottlenecks and ensure that the new growth is noninflationary and sustained. Staff welcomes the authorities’ intentions to further reduce the fiscal deficit over the medium term and the specific measures being implemented to that effect.

26. The recent tax reforms have made the system more progressive and easier to administer, broadened the base, and are leveraging other efforts to attract foreign investment and transform the economy. These efforts have also produced a boost in fiscal receipts which has lowered the deficit. Staff encourages the authorities to build on recent successes and extend the reform effort to the fiscal expenditure side and to the parastatal sector. Improving the efficiency of social assistance programs by consolidating and targeting are vital to this effort. Targeting would also introduce a beneficial countercyclical component to fiscal policy. The introduction of program based budgeting is an important component to raise spending efficiency over the medium term.

27. Efforts to strengthen the monetary framework should be continued. While underlying inflation is broadly under control and a significant component is imported, staff encourages the BoM to be more active in shaping public expectations of inflation through communication of an inflation target range for monetary policy. Greater efforts to manage liquidity, in closer coordination with the fiscal authorities, would pay dividends. Steps to strengthen further the BoM’s governance practices and capital base are important.

28. Mauritius’ managed floating exchange rate regime continues to provide an appropriate framework for macroeconomic management. The rate of the rupee appears to be broadly in line with fundamentals. The recent appreciation reflects the increased capital inflows into the productive sectors of the economy. While the appreciation has presented a challenge for the exportable good sectors, it has helped dampen imported inflation. Looking ahead, should capital inflows rise as projected, further nominal exchange rate appreciation may be unavoidable and should be accompanied by additional fiscal consolidation as well as structural reforms aimed at improving economic efficiency and competitiveness.

29. Staff underscores the important contribution that structural reform of the parastatal sector can bring to economic efficiency and competitiveness. A disengagement and divestment strategy for parastatals in the import and distribution of basic goods should be pursued as should further steps to liberalize domestic trade, reduce import duties, and phase out administered prices.

30. Staff urges the authorities to give high priority to improving the coverage and reliability of national statistics, especially as concerns the financial account of the balance of payments and the IIP, in line with the 2007 Data ROSC and STA technical assistance reports.

31. The staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

Figure 1.Mauritius: Selected Economic Indicators, 1994/95-2007/08

Sources: Central Statistics Office, Bank of Mauritius, Ministry of Finance, IMF staff estimates.

Figure 2.Mauritius: Recent Fiscal Developments 1994/95 - 2007/08

(Percent of GDP)

Sources: CSO, Ministry of Finance, Authorities, and IMF staff estimates.

Figure 3.Mauritius: Recent Developments in Trade and Competitiveness

Sources: CSO, Bank of Mauritius, World Economic Forum, IMF staff estimates.

Figure 4.Mauritius: Recent Financial Sector Developments

Sources: Bank of Mauritius, Bankscope, World Bank, and IMF staff estimates.

1 SBM: Standard Bank of Mauritius. MCB: Mauritius Commercial Bank. IOIB: Indian Ocean International Bank. SEAB: South East Asian Bank.

Table 1Mauritius: Selected Economic and Financial Indicators, 2005/06–2012/13 1
2005/062006/072007/082008/092009/102010/112011/122012/13
Baseline Projections
(Annual percent change, useless otherwise indicated)
National income, prices and employment

Real GDP3.64.26.66.25.15.15.15.1
Real GDP per capita2.83.45.75.44.34.44.44.4
GDP deflator4.47.98.47.56.85.55.05.0
Domestic demand at current prices 210.817.815.515.610.59.89.49.3
Consumer prices (period average)5.110.79.58.57.36.05.35.0
Consumer prices (end of period)7.610.09.08.06.55.55.05.0
Unemployment rate (percent)9.38.98.7
Unit labor cost3.84.35.6
External sector
Exports of goods, f.o.b. (U.S. dollars)12.13.29.43.83.85.65.35.3
Exports of services (U.S. dollars)3.220.224.216.714.112.311.411.2
Of which: tourism receipts (U.S. dollars)12.123.825.017.615.012.011.511.2
Imports of goods, f.o.b. (U.S. dollars)14.114.517.015.15.66.46.15.8
Nominal effective exchange rate 3-3.4-9.93.0
Real effective exchange rate 30.6-2.87.1
Terms of trade-7.7-3.4
Money and credit 4
Net foreign assets10.135.2-4.6
Domestic credit15.46.827.1
Net claims on government2.4-3.12.8
Credit to private sector 513.09.924.2
Broad money (end of period, annual percentage change)6.78.610.3
Income velocity of broad money1.01.01.1
Interest rate (weighted average TBs, primary auctions)7.511.9
(Percent of GDP)
Central government budget
Overall balance (including grants)-5.4-4.2-3.0-2.8-2.8-2.3-1.9-1.5
Primary Balance (including grants)-1.6-0.21.71.10.30.30.30.5
Revenues and grants20.119.321.720.820.820.921.221.4
Expenditure and net lending25.523.624.723.623.623.223.122.9
Domestic debt of central government51.446.644.740.537.033.730.327.0
External debt of central government4.44.74.95.77.08.19.210.0
Investment and saving
Gross domestic investment22.526.429.130.832.433.835.035.3
Public7.16.66.87.27.67.98.38.7
Private13.719.022.323.624.825.926.726.6
Gross national savings17.218.424.724.627.129.430.931.9
Public-1.4-0.80.7-0.10.30.81.62.2
Private18.619.224.124.726.828.629.429.7
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.60.560.859.754.051.449.647.846.1
Imports of goods and services, f.o.b.-67.4-71.8-69.8-65.4-61.2-58.2-55.5-52.7
Currentaccount balance-5.3-8.0-4.3-6.2-5.3-4.5-4.0-3.3
Overall balance-1.63.08.92.93.11.52.02.7
Total external debt 611.711.09.59.39.910.511.310.8
Net international reserves, BOM (millions of U.S. dollars)1,4081,6172,3432,6282,9783,1683,4533,895
Net international reserves, BOM (months of imports of goods, c.i.f.)5.25.26.46.26.76.76.87.3
Memorandum item:
GDP at current market prices (millions of Mauritian rupees)194,572218,784252,870288,702324,056359,426396,775438,006
GDP per capita (U.S. dollars)5,3575,6496,3257,3268,7039,77810,93712,236
Foreign currency long-term debt rating (Moody’s)Baa2Baa1Baa2
Sources: Bank of Mauritius; Central Statistics Office; Ministry of Finance; Moody’s, and IMF staff estimates and projections.

Fiscal year (July-June).

Excluding changes in stocks.

Period averages (a negative sign signifies a depreciation). 2007/08 figures show the change in average exchange rate since beginning of FY.

Percent of beginning of period M2.

Includes credit to parastatals.

Projections excluding external debt related to unidentified capital flows.

Sources: Bank of Mauritius; Central Statistics Office; Ministry of Finance; Moody’s, and IMF staff estimates and projections.

Fiscal year (July-June).

Excluding changes in stocks.

Period averages (a negative sign signifies a depreciation). 2007/08 figures show the change in average exchange rate since beginning of FY.

Percent of beginning of period M2.

Includes credit to parastatals.

Projections excluding external debt related to unidentified capital flows.

Appendix I. Debt Sustainability Analysis

Mauritius risk from external debt distress is low. While the level of public debt remains high, it has been declining steadily in recent years and the maturity structure has improved.

The macroeconomic projection assumes sustained fiscal consolidation, with higher growth, driven by rising foreign and domestic investment, supported by structural reforms to improve competitiveness. Assuming no major negative shocks, GDP growth is assumed on a long-term trend of 5.1 percent. Overall fiscal deficits will continue to decline, driven by a broadened tax base and a rationalization of current spending. The primary balance, which rose to a significant surplus in 2007/08 is projected to decline but remain positive. Public investment is projected to rise to support higher growth.

A. Public Sector Debt

Under fiscal consolidation begun in 2005, public debt levels have been reduced from their peak of over 80 percent in 2003 to 61 percent at end-2007 and to a projected 59 percent and end-June 2008. Public sector debt is projected to further decline to 47 percent of GDP by 2012/13 (Table 1). The main contributor to debt reduction is buoyant tax revenue driven by the major reform of 2006-07 and a rationalization of current spending. The revenue effort is projected to recover in the medium term from the expected elimination of most import duties in the next few year under the duty-free island initiative. Nominal interest rates have also declined significantly. Moderate primary surpluses, averaging 0.5 percent of GDP, are projected throughout the medium term. This fiscal profile aims at creating the fiscal space needed for higher outlays on public infrastructure and education/retraining. The medium-term scenario is quite resilient to stress-testing and macroeconomic shocks: if growth were 1 percent lower than projected, the debt-to-GDP ratio would increase to 54 percent of GDP (Figure 1). A two standard deviation negative shock to real growth, however, would cause public debt to increase to 78 percent of GDP by June 2013.

Table 1.Mauritius: Public Sector Debt Sustainability Framework: 2004/05-2012/13(Percent of GDP, unless otherwise indicated)
ActualProjections
2004/052005/062006/072007/082008/092009/102010/112011/122012/13>Debt-stabilizing
primary
balance 9
1Baseline: Public sector debt169.668.861.359.556.153.851.749.446.80.5
of which foreign-currency denominated13.312.310.09.67.98.39.19.910.6
2Change in public sector debt-0.8-0.8-7.5-1.8-3.4-2.3-2.1-2.2-2.6
3Identified debt-creating flows (4+7+12)0.41.0-0.5-4.1-4.8-3.1-2.8-2.7-2.9
4Primary deficit1.01.60.2-1.7-1.1-0.3-0.3-0.3-0.5
5Revenue and grants20.020.119.321.720.820.820.921.221.4
6Primary (noninterest) expenditure21.121.719.519.919.720.520.720.920.9
7Automatic debt dynamics 2-0.7-0.5-1.1-3.5-3.5-3.0-2.8-2.7-2.6
8Contribution from interest rate/growth differential3-1.3-1.5-3.6-3.5-3.5-3.0-2.8-2.7-2.6
9Of which: contribution from real interest rate0.70.9-1.00.0-0.3-0.5-0.3-0.3-0.3
10Of which: contribution from real GDP growth-2.0-2.3-2.6-3.5-3.2-2.6-2.5-2.4-2.3
11Contribution from exchange rate depreciation 40.70.92.4
12Other identified debt-creating flows0.00.00.51.2-0.20.30.30.30.3
13Privatization receipts (negative)0.00.00.00.0-0.50.00.00.00.0
14Recognition of implicit or contingent liabilities0.00.00.51.20.30.30.30.30.3
15Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.0
16Residual, including asset changes (2-3)5-1.2-1.9-7.10.40.70.60.20.1-0.1
Public sector debt-to-revenue ratio 1347.5341.4316.7274.3269.4258.4246.7232.9218.9
Gross financing need682.574.266.555.930.938.239.135.932.7
Billions of U.S. dollars0.00.00.00.00.00.00.00.00.0
Scenario with key variables at their historical averages 763.964.364.564.664.564.3-1.6
Scenario with no policy change (constant primary balance) in 2007/08-2012/1360.958.756.854.953.151.0-2.1
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (percent)3.13.64.26.66.25.15.15.15.1
Average nominal interest rate on public debt (percent)86.15.96.69.07.46.25.24.74.5
Average real interest rate (nominal rate minus change in GDP deflator, percent)1.21.5-1.30.5-0.1-0.6-0.3-0.3-0.5
Nominal appreciation (increase in US dollar value of local currency, percent)-3.7-5.5-13.8-12.1-5.5-2.4-3.6-3.5-3.3
Inflation rate (GDP deflator, percent)4.94.47.98.47.56.85.55.05.0
Growth of real primary spending (deflated by GDP deflator, percent)0.46.8-6.38.85.19.45.96.25.0
Primary deficit1.01.60.2-1.7-1.1-0.3-0.3-0.3-0.5

Includes central government, local governments, and parastatals (net of balances with the BOM).

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium- and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth, real interest rate, and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Includes central government, local governments, and parastatals (net of balances with the BOM).

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium- and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth, real interest rate, and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

The maturity structure of public debt in Mauritius has improved significantly since 2000/01 (Text Figure 1). The government has been extending the maturity structure so the share of medium and long-term debt has risen to over 50 percent of total debt. Total foreign debt is low and has been falling in recent years, as growth recovers and, especially is 2007/08, reflecting a significant exchange rate appreciation. External debt is largely concessional and predominantly on medium and long term maturities, and as such, is not very vulnerable to a reduction in global liquidity and investor risk appetite.

Text-Figure 1:Breakdown of Public Debt by Maturity 2007/08

Text-Figure 2:Evolution of Debt by maturity, 2000/01-2007/08

(in millions of Mauritian rupees, end of period)

Source: Ministry of Finance and staff estimates

B. External Debt

The medium-term projection assumes that Mauritius’ external debt, which is relatively low as a share of GDP, rises by about 1 percentage point by 2012/13 as the authorities intend to make greater use of available multilateral financing(Table 2). The external current account balance is expected to improve only moderately in the medium-term as large and rising foreign direct investment (FDI) inflows, notably into tourism and construction, draw in imports. The overall balance of payments is projected to remain in surplus and official reserves coverage is projected to rise steadily reflecting sustained capital investment inflows. Some of the worsening of the current account in recent years reflects large one-off items, such as purchases of aircraft (3.3 percent of GDP in 2006/07). Service exports, especially tourism, are expected to grow strongly, reflecting the investment profile. The textile sector has recently seen a moderate revival as it moves into higher added-value products. Non-traditional exports, notably seafood, financial services, and information, communication and technology have grown rapidly and are expected to continue on an upward trajectory. The external debt exposure therefore poses limited risk.

The most important risk to this picture stems from the current size of the external current account deficit should fiscal consolidation not materialize(Figure 2). Similarly, adverse external developments impinging on tourism arrivals, FDI and portfolio inflows, and service exports could materially worsen the external debt outlook, but from a low level.

Figure 1.Mauritius: Public Sector Debt Sustainability: Bound Tests: 2002/031 - 2012/131

(Public debt, percent of GDP)

Sources: International Monetary Fund, Mauritian authorities, and staff estimates.

1 Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2 Permanent one quarter standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3 One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2007/08, with real depreciation defined as nominal depreciation (measured by the percentage decline in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Table 2.Mauritius: External Debt Sustainability Framework, 2004/05-2012/13(Percent of GDP, unless otherwise indicated)
ActualProjections
2004/052005/062006/072007/082008/092009/102010/112011/122012/13Debt-stabilizing
non-interest
current account6
1Baseline: External debt13.811.711.09.59.39.910.511.310.8-3.1
2Change in external debt-1.4-2.1-0.7-1.5-0.20.60.60.8-0.4
3Identified external debt-creating flows (4+8+9)3.710.617.67.97.53.42.72.5-0.4
4Current account deficit, excluding interest payments3.04.97.54.05.84.94.23.83.1
5Deficit in balance of goods and services-118.8-127.9-132.5-129.5-119.4-112.6-107.8-103.3-98.8
6Exports57.260.560.859.754.051.449.647.846.1
7Imports-61.6-67.4-71.8-69.8-65.4-61.2-58.2-55.5-52.7
8Net non-debt creating capital inflows (negative)0.75.510.24.11.8-1.4-1.3-1.1-3.2
9Automatic debt dynamics10.00.2-0.1-0.2-0.2-0.1-0.2-0.2-0.3
10Contribution from nominal interest rate0.50.50.50.30.30.30.30.20.2
11Contribution from real GDP growth-0.5-0.5-0.5-0.6-0.5-0.4-0.4-0.5-0.5
12Contribution from price and exchange rate changes2-0.10.2-0.1
13Residual, incl. change in gross foreign assets (2-3)3-5.1-12.7-18.3-9.4-7.7-2.8-2.1-1.70.0
External debt-to-exports ratio (percent)24.119.318.115.917.219.321.123.523.5
Gross external financing need (billions of U.S. dollars)40.50.50.70.50.80.80.80.80.7
Percent of GDP7.28.410.46.28.16.96.05.44.5
Scenario with key variables at their historical averages 50.8-9.4-12.9-15.5-17.5-16.3-0.1
Key Macroeconomic Assumptions Underlying Baseline:For debt stabilization
Real GDP growth (percent)3.13.64.26.66.25.15.15.15.1
GDP deflator in US dollars (percent change)0.5-1.71.120.59.79.07.77.27.2
Nominal external interest rate (percent)3.43.44.14.04.24.03.22.62.1
Growth of exports (U.S. dollar terms, percent)6.87.75.726.15.39.19.28.78.6
Growth of imports (U.S. dollar terms, percent)15.911.512.125.09.27.07.77.37.0
Current account balance, excluding interest payments-3.0-4.9-7.5-4.0-5.8-4.9-4.2-3.8-3.1
Net non-debt creating capital inflows-0.7-5.5-10.2-4.1-1.81.41.31.13.2

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflatorin US dollar terms, g= real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debtin total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with anappreciating domestic currency (e ≥ 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflowsin percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflatorin US dollar terms, g= real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debtin total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with anappreciating domestic currency (e ≥ 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflowsin percent of GDP) remain at their levels of the last projection year.

Figure 2.Mauritius: External Debt Sustainability: Bound Tests 1/

(External debt, percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent one quarter standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2007/08.

1The GBLs are offshore investment vehicles resident in Mauritius. The GBLs were created to take advantage of double taxation avoidance treaties with a number of countries (notably India and South Africa) and Mauritius’ low tax environment. Flows through the GBLs have risen sharply to about US$80-100 billion per year and they hold large deposits in the domestic banking system.
2See the debt sustainability supplement to this report.
3A STA technical assistance report in 2007 found that the large and rising errors and omissions component of the balance of payments reflected incomplete surveys of GBLs activities.
4The excess liquidity in part reflects the impact of an average 7-10 day settlement float for transactions conducted through the GBL sector.
5While GBL deposits are large (78 percent of broad money at end 2007), they are predominantly on deposit with the “offshore” segment of the banking system. Domestic segment banks have little exposure to the GBLs.
6Staff analysis, as explained in the selected issues paper on inflation, suggest the administered price regime has raised the variance and skewness of the CPI and contributed to inflationary pressures.
7See WEO (2003) Chapter 3 “Public Debt in Emerging Markets: Is It Too High?” and Reinhart, Carmen M., Kenneth S. Rogoff and Miguel A. Savastano. “Debt Intolerance”, Brookings Papers on Economic Activity, 2003, pages 1-74.

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