Abstract
This 2004 Article IV Consultation highlights that real GDP growth of Mauritius is expected to rebound to about 4½ percent in 2003/04. This largely reflects the recovery of tourism and sugar production, and continued strong construction and transportation activity. The current account is projected to remain in surplus with the recovery of the tourism sector offsetting a widening in the trade deficit. The capital and financial account is projected to register a small deficit of 0.8 percent of GDP in 2003/04 compared with a surplus in 2002/03.
1. I would like to express the appreciation of my Mauritian authorities to the staff for the constructive and comprehensive discussions they had during the 2004 Article IV consultation. My authorities are in broad agreement with the staff’s analysis as well as with their assessment regarding the main challenges facing the economy. In addressing these challenges, my authorities have benefited well from the staff’s advice as well as from excellent and timely technical assistance from the Fund, for which they are thankful. As the Staff Report and the excellent Selected Issues Paper indicate, the Mauritian authorities in close cooperation with the private sector have already started implementing wide ranging reforms to adapt the country to the new environment. These reforms are bearing fruits, but will require sustained efforts over the long term. My Mauritian authorities are committed to implement the necessary reforms to ensure that the economy maintains a strong and sustainable growth path, over the medium to long term.
Recent Developments
2. The Mauritian economy rebounded in 2003/04, with real GDP growth estimated at 4.5 percent, following growth of about 2.7 percent in 2002/03. Per capita GDP is now estimated at about US $4,000. This improved performance results from the recovery in the sugar and tourism sectors, as well as stronger activity in the construction and transportation sectors. However, the Export Processing Zone (EPZ), which consists mainly of textile and garments industries and which has been the locomotive of the economy for several decades, has experienced its second consecutive year of negative growth, reflecting higher production costs and increased competition.
3. In the fiscal sector, the deficit for 2003/04 is expected to be 5.6 percent of GDP compared to 6.2 percent in 2002/03. The lack of a more pronounced improvement in the deficit ratio is explained by shortfall in government revenue, and lower than projected growth. The overall balance of the nonfinancial public enterprises turned into a surplus, but the domestic public debt increased.
4. Monetary policy remained prudent, with the central bank pursuing successfully its informal inflation targeting framework. Inflation remained low and under control and fell to below 4 percent in 2003/04. The lower inflationary expectations as well as lower demand for private sector credit enabled a further decline in domestic interest rates. The Mauritian rupee strengthened against the U.S. dollar, and helped to mitigate somewhat the rising oil and commodity prices, and their impact on domestic inflation.
5. The external current account remained in surplus, and the level of international reserves remained comfortable and represents an import cover of about 8 months. The gross domestic savings and investment rates have remained high at about 25 and 23 percent of GDP, respectively.
6. On the labor market, the economy created more than 14,000 jobs in 2003/04, but the unemployment rate increased to 10.5 percent. The Mauritian stock market continued to register important gains, increasing by over 35 percent, in the year ending June 2004. Overall, the Mauritian economy performed well, with private sector confidence remaining strong.
Policies for 2004/05 and Medium-Term Prospects and Policies
7. Although the economy is faced with a number of challenges, the reforms underway and the policies envisaged should help to maintain real GDP growth at about 4 percent per annum. Inflation is expected to remain under control. The fiscal deficit is projected to decline, with the external current account balance remaining in surplus.
8. The authorities agree with the staff that the three immediate challenges are:
- reducing the fiscal deficit;
- adapting the economy to the impending loss of trade preferences in sugar and textiles; and
- carrying out structural reforms, including lessening labor market rigidities.
The authorities are cognizant of the constraints that an increasing public debt will have on policies, and intend to take steps to reduce it.
Fiscal Policy
9. It is my Mauritian authorities’ intention to reduce the fiscal deficit gradually over the medium term, and to reverse the trend in the debt-to-GDP ratio. The authorities agree with the staff that this is required to ensure fiscal sustainability and macroeconomic stability. For 2004/05, the deficit is projected at 5 percent of GDP, on the basis of additional revenue and expenditure measures, a prioritization of capital outlays, and the lengthening of the maturity structure of the domestic debt. As I noted last year, the high level of capital expenditure has been the main cause of the increase in the deficit. For 2004/05, the projected fiscal deficit will be almost equivalent to the level of capital expenditure, so that borrowing for the most part will be to finance capital expenditure and not to meet recurrent expenditure.
10. Over the medium term, as the government completes its program of capital spending in the area of education and information technology, which presently accounts for the largest block of capital spending, total outlays should come down, and thus contribute to a lowering of the deficit. Moreover, to strengthen budgetary management, the authorities are in the process of creating a Revenue Authority in line with FAD recommendations. They are also working closely with bilateral and multilateral partners to develop a Medium-Term Expenditure Framework. The new system has already been implemented in the areas of Education and Training. It will be gradually introduced in all ministries. The MTEF should allow the government to be more focused on objectives it wants to achieve, on results and performance. On the issue of reducing subsidies, the authorities agree with the staff that this would contribute to lower government expenditure, but it is an issue that is politically very sensitive, and will require continued consultation with all social partners. The authorities are of the view that this is one of the issues that will require a broad consensus. Broadening the tax base is another issue that is being considered, and the authorities have taken steps in this direction in the present Budget. These include the increase in the number of income tax brackets from two to four, changes in the corporate income tax, including the Alternative Minimum Tax, and the registration of professionals and other self-employed persons,.
Monetary and Financial Policies
11. The Bank of Mauritius (BOM) has been quite successful in the pursuit of its informal inflation targeting framework. As a result inflation has been brought down significantly over the past years, and has enabled a lowering of interest rates. However, as the Lombard rate, which the Bank of Mauritius has been using to signal the direction of monetary policy, has become less effective, it is planning to review its monetary framework, with a view to adopting short term interest rates as its operational target. In this regard, it is considering developing an active secondary market in government securities and Bank of Mauritius bills.
12. On the issue of excess liquidity in the banking system, the central bank does not think that, in the present circumstances, the excess liquidity poses any risk of a surge in inflation. Nevertheless, it is following developments carefully, and is attempting to absorb it through the issuance of BOM bills.
13. The financial system of Mauritius remains sound. The few areas of weaknesses, in particular in the offshore financial sector, that had been identified in last year’s FSAP report, are being addressed. The authorities agree with the staff that the financial market should be deepened with the development of an efficient corporate bond market which would contribute to the stability and soundness of the financial system. However, as the excellent study on “Developing a Corporate Bond Market in Mauritius” in the Selected Issues paper makes it clear, the development of such a market requires a number of preconditions to which the authorities are giving their attention.
Structural Reforms
14. As mentioned in previous Board discussions on Mauritius, the authorities have put in place a broad strategy to deal with the challenges facing the economy. Most of the measures needed are of a structural nature and will require fundamental changes in the way that the economy has operated up to now. My Mauritian authorities’ approach has been one of close cooperation with the private sector, and broad consultation with stakeholders. This approach has been helpful in developing the strategy and the broad consensus needed to implement the deep-seated changes that are needed and that are not only economic, but involve social and cultural changes as well.
15. As regards the sugar sector, a strategy has been put in place to restructure the industry and to improve its competitiveness, but these changes will require some time to be effective. Already the measures taken have resulted in the closure of several mills and the loss of almost 8,000 jobs in the sugar industry. The strategy also includes measures aimed at diversifying sugar-related activities, such as the production of electricity from the byproducts of sugar, as well as the production of ethanol and rum. The Government will start soon consultation with stakeholders on the Mid-Term Review of the Sugar Sector Strategic Plan to assess the progress made, and to decide on what further steps or changes are needed.
16. Steps are also being taken to encourage the development of the non-sugar agricultural sector, through, among others the leasing of agricultural land to small planters, and the improvement of the land irrigation system. Under the Non-Sugar Sector Strategic Plan, farmers are being encouraged and assisted to produce high-value added products with export potential. They are receiving assistance from the newly created National Biotechnology Institute in deciding what to produce. At the same time a Certification Body is being set up to help farmers meet the sanitary certification and standards required by importers, especially in the Euro area.
17. The authorities are also working closely with the textile and garments sector to help in its restructuring through technical advice and development finance. Already this sector has lost 10,000 jobs, and the relocation of many textile factories could cause the loss of an additional 20,000 jobs. Working closely with the private sector, the Government has set up a Textile Emergency Support Team (TEST) which is helping viable enterprises to restructure. This is being done through the provision of corporate diagnosis services as well as financial resources from the National Equity Fund and the Development Bank of Mauritius for capitalization and modernization of the enterprises. Improving productivity in the sector is an important objective of the restructuring process. Retraining of displaced workers is also being undertaken.
18. As regards the other sectors, the tourism sector remains buoyant, and the construction of a number of new upper-scale hotels by the private sector is envisaged for the next few years. Training facilities for workers in this industry is being expanded. In the Information and Communications Technology (ICT) sector, the infrastructure has been almost completed, and more than 50 companies, accounting for the creation of over 2,000 jobs have started operation. It is expected that over 4,000 new jobs will be created by the end of the year. Although the outlook for this sector appears less favorable than a year ago, the authorities remain confident that it will become an important pillar of the economy in the next few years.
19. In addition to the sectoral policies being implemented, as described above, the authorities are also focusing their attention on the labor market and further private sector development. On the labor market, the increase in the unemployment rate is due to several factors which include the ongoing restructuring and contraction of the two major sectors of sugar and textiles, the skills mismatch and the rigidities in the labor market.
20. The contraction of the sugar and textiles sectors which have been major generators of employment has been a strong factor in the high level of unemployment. It has not been easy for workers who have been for most of their life employed in one industry to be trained and to find employment in other sectors. Most of the time the new jobs do not exist. Nevertheless, the government is helping with different programs of retraining. As regards the mismatch of skills, the significant investment in education should help to address this issue over the medium term. But for the more immediate future and in order to meet the needs of the market, the authorities have launched a national program for training of 5,000 high school graduates in skills related to the needs of the ICT sector. Attention is also being given to the training of those who have not completed high school education and who are having the most difficult time finding a job. Special training programs in a number of crafts and professions are being provided. The program is starting with some 3,000 trainees this year.
21. Investment is also being made in developing a culture of entrepreneurship in Mauritius. This will include a program of support to entrepreneurs, as well as a Young Entrepreneur Scheme to help up to 100 qualified young entrepreneurs each year to start new business ventures.
22. The authorities view the unemployment problem as one that will require time to solve. They are confident that the measures they are taking will not only help to diversify the economy and create new employment opportunities, but they are also ensuring that these new sectors will be able to get the type of workers that they need, thus helping the economy to grow. The authorities also agree with the staff that these measures need to be complemented by a reform of the various labor market institutions. It is a process that will take time, but discussions with the trade unions have already started on ways to reduce rigidities in the market. The authorities view this cooperative approach as essential to maintain social peace, and are confident that progress will be made in this area.
23. In conclusion, I would like to say that my Mauritian authorities are fully cognizant of the challenges the economy faces, and are taking steps to address them. They are confident that their gradual approach and the strategies that they have put in place will help the country to maintain a high and sustainable growth path over the medium to long term.