I – Introduction
My Mauritian authorities would like to express their appreciation to the Staff and Management for the constructive discussion and policy dialogue held in Port Louis during December 2015 and in Washington last February under the 2015 Article IV Consultation. My authorities would also like to express their gratitude for the high quality of policy advice and technical assistance they are benefitting from the Fund in their efforts to make further progress in moving Mauritius from middle income to upper income economy status.
In a context of slackened global recovery, notably the subdued activity in its main trading partners, the Mauritian economy has continued to grow at a commendable pace in 2015 and financial stability has also been maintained. The authorities’ careful policies and continued reform efforts have enabled the economy to remain resilient to the recent increased volatility in emerging and frontier markets. The economy has also benefitted from the decline in oil and commodity prices and shipping costs reflected by the low inflation. International reserves have increased to US$ 4.2 billion (over 6 months of imports) by end-2015 and the current account deficit is estimated to have narrowed to about 5 percent of GDP. In addition, the primary fiscal deficit has remained below budget projection and has improved relative to 2014 due notably to the authorities’ more prudent policy implementation.
For the medium to longer term, the Mauritian authorities are putting in place a reform strategy aimed at moving the country to a higher income status. In this regard, they intend to implement policies aimed at addressing structural weaknesses, further increasing competitiveness, productivity and investment. In this regard, they envisage large public investments with complementary private investments to boost the country’s infrastructure. They will also pursue the implementation of their reform agenda to strengthen the resilience of the financial sector in line with the recent FSAP recommendations. They agree on the need to upgrade the macro-prudential policy framework with a view to addressing the complex inter-linkages between offshore and onshore activities including the evolving systemic risks. Furthermore, the authorities will implement policies to enhance the labor force including adequate steps to encourage female labor force participation.
II – Economic Outlook and Policies for 2016
The authorities concur that Mauritius’ economic outlook remains favorable with a growth boosted by continued low fuel prices and the execution of important public and private investment projects. In this context, policies geared at further strengthening economic diversification, attract foreign investments and address banking sector vulnerabilities will be pursued to achieve higher sustainable growth and enable the country to avoid “the middle income trap”.
The budget for 2015/16 is being steadfastly but prudently implemented and is expected to register a lower deficit than budgeted. However, public debt increased due to the intervention of the government in the financial sector to help recapitalize two ailing banks and the partial refund of policyholders in an insurance company. The costs were not excessively high, but they helped to preserve financial and economic stability. For the next budget, the authorities are studying additional measures to reduce the deficit and also place the debt ratio on a downward trend. On the revenue front, the authorities intend to further improve revenue mobilization and broaden the tax base and they are preparing a plan for divestiture of public assets to be used for debt reduction. Given the decline in import prices which could adversely affect revenue from value added tax, the authorities plan to seek technical advice from the Fund to help them compensate the loss on this front. With regard to expenditure, measures to rationalize spending on goods and services, and tighten control over civil servants’ compensation will be enhanced. In addition, the scope of private sector participation in upgrading public infrastructure will be increased thus helping to contain public borrowing. In order to continue making good progress in the fiscal sector, the authorities concur on the need to put in place a medium-term fiscal strategy to further strengthen the credibility of statutory fiscal objectives, including the debt target.
Monetary and Financial Sectors
The monetary policy pursued by Bank of Mauritius will remain cautiously accommodative to subdue inflation. In the same vein, efforts to gradually reduce excess domestic liquidity will be enhanced to improve the monetary policy transmission mechanism and without harming the overall money market conditions. The authorities welcome the analysis stating that the real effective exchange rate is broadly in line with fundamentals. Efforts to continue preserving this progress will be pursued with a careful monitoring of continued large inflows from the global business corporate (GBC) sector.
Although international reserve buffers are in line with indicators such as the coverage of imports, broad money and short-term debt, the authorities share the view that the complexity of the financial sector inter-linkages should also be taken into account in assessing the adequacy of reserves. This entails the need to build stronger buffers to external shocks. Further analysis in considering insurance mechanisms such as swap arrangements or credit lines with other central banks as well as a revision of reserves requirements for foreign currency deposits could be envisaged. The authorities will take all necessary steps to increase financial buffers deemed critical against balance of payments shocks.
My Mauritian authorities welcome the recent FSAP recommendations which will be implemented to further strengthen the resilience of the financial sector. In view of the systemic importance of mixed conglomerates of which several banks are part, the authorities plan to improve the supervisory framework, strengthen the Bank of Mauritius’s capacity to monitor cross border risks and upgrade the bank resolution framework. A deposit insurance scheme covering small domestic deposits is being introduced, with Fund technical assistance.
The authorities aim to raise Mauritius’s economic growth from 3 percent to 5 percent by next year and to 6 percent by 2018. To this end, they intend to implement major infrastructure projects to unleash potential growth in the oceanic sector, ports and trade with the African continent. The authorities remain committed to needed structural reforms in addressing the skills mismatch in the economy, increase labor force and fight unemployment among youth and women. Moreover, the business climate will be further improved with the expansion of the Fast Track Committee to expedite the implementation of major investment projects by abolishing a large number of obsolete requirements.
III – Conclusion
My Mauritian authorities are mindful of the daunting challenges they face in their efforts to move the country to a higher income status. In this vein, they will continue implementing prudent policies and sound reforms to achieve higher and sustainable growth and increase the economy’s resilience to shocks. They are grateful for the policy advice and technical assistance received from the Fund and look forward to continued strong cooperation with the Fund in achieving their economic objectives.