Statement by Laurean W. Rutayisire, Executive Director for Mauritius

The loss of trade preferences in textiles in 2005, the reform to the European Union’s sugar protocol for 2006–10, and higher international oil prices have brought about a permanent deterioration in Mauritius’s terms of trade. This 2007 Article IV Consultation highlights that the authorities have initiated broad-based reforms to address recent economic setbacks and to raise growth to levels of the previous two decades. Executive Directors have welcomed the authorities’ efforts to tighten monetary policy. This should help to reduce inflation and avoid entrenching inflation expectations.

Abstract

The loss of trade preferences in textiles in 2005, the reform to the European Union’s sugar protocol for 2006–10, and higher international oil prices have brought about a permanent deterioration in Mauritius’s terms of trade. This 2007 Article IV Consultation highlights that the authorities have initiated broad-based reforms to address recent economic setbacks and to raise growth to levels of the previous two decades. Executive Directors have welcomed the authorities’ efforts to tighten monetary policy. This should help to reduce inflation and avoid entrenching inflation expectations.

I - Introduction

On behalf of my Mauritian authorities, I would like to thank staff for the constructive policy dialogue held in the context of 2007 Article IV consultations. I would also like to thank the Board and Management for their continued policy advice to my Mauritian authorities in their current endeavors to restructure the economy and address the new economic and financial challenges following the phasing out of preferential trade agreements on textiles and sugar. My authorities are in broad agreement with staff’s analysis and policy recommendations. They look forward to continue benefiting from the Fund’s technical assistance in their efforts to strengthen the ongoing reform program.

The loss of preferential access to the European market for the textile and sugar which used to be the pillars of the Mauritian economy, combined with the high oil prices, have led to a slowdown of growth, high fiscal deficit and an unsustainable public debt. To reverse this situation and pave the way for a return to robust and durable high growth, the authorities initiated in 2006 broad-based reforms. Trade and air access were liberalized while inroads were made in restructuring the economy. The tax system was further simplified and the business environment liberalized. The authorities are cognizant that further sustained efforts are needed to reduce inflation, the fiscal deficit and public indebtedness as well as the deficit of the external current accounts. My Mauritian authorities remain fully committed in implementing policies and reforms to achieve these objectives.

II - Recent Macroeconomic Developments

Macroeconomic performance in 2005/2006 has shown some signs of recovery with the revamp of real GDP growth which is estimated at 3.7 percent against 3.0 percent in 2004/2005. While the contribution of sugar and EPZ sectors to this growth has declined, that of the service sector has increased thus enhancing the trend observed in the recent years. However, owing to the high oil prices and the elimination of some subsidies, headline inflation has increased. In response to the inflationary pressures, the Bank of Mauritius has gradually raised its repo rate set as a key policy rate. The weak export performance following the loss of trade preferences as well as the higher import price of petroleum products have resulted in a widening of the current account deficit. The fiscal deficit reached an estimated 5.3 percent of GDP, reflecting mainly higher interest payments. The public debt is still high, at 71.3 percent of GDP. As for the unemployment rate, it remains elevated mainly because of lack of new employment opportunities. While the government is working with social partners to further improve wage flexibility and implement labor market reforms focused on training and reskilling programs, it will take time for new jobs to be created and absorb the excess labor force. Timely aid-for-trade support from the international community could enable Mauritius to gain quick rebound from this situation.

Going forward, the authorities are committed to pursue the implementation of the economic program started with the 2006/07 budget while further increasing the public awareness and adjusting the sequencing of measures with a view to achieving the objectives set, while maintaining the political support needed to implement the reforms.

III - Macroeconomic Policies and Reforms for 2007

Fiscal Policy

The authorities will continue their efforts to achieve further fiscal consolidation. The medium-term budget deficit target has been set at 3 percent of GDP. However, the authorities would like to note that they need to give careful consideration to the social environment and the political trade-off between reorienting productive expenditure to improve the quality of the budget and further deficit reductions.

The authorities will continue to reduce fiscal vulnerability by improving the quality of expenditure and strengthening debt management. The three-year rolling Medium Term Expenditure Framework will be extended to all ministries in the 2007/08 budget together with improving the human capacities in terms of monitoring and macromodeling of the MTEF. The authorities will also reallocate fiscal resources to education and infrastructure as well as to well-targeted social programs owing to their positive impact in advancing the reform agenda. On the revenue side, it is the authorities’ intention to pursue efforts to tighten tax loopholes and broaden the tax base. They will also review the opportunities of a broader involvement of the private sector in improving the efficiency of public enterprises.

Monetary and Exchange Rate Policies

Policy objectives in this area aim at supporting macroeconomic stability, notably low and stable inflation, to further improve the external competitiveness of the economy. The authorities agree on the need to reduce the high headline inflation to the medium-term target of 4.5 - 5 percent. In their efforts to enhance the use of the repo as an effective policy rate, the authorities will develop the institutional framework with the view to improve on transmission mechanisms of monetary policy and communication with the public. The establishment of the Monetary Policy Committee has been completed. As for the exchange rate, the authorities agree that further adjustment may be required if the additional expected decline in the terms of trade materializes. However, central bank’s interventions will be limited to smoothing excess volatility to avoid postponing adjustment. The authorities believe that the ongoing economic reforms will promote stronger capital inflows.

Financial Sector Issues

The Mauritian financial sector remains in sound health. Efforts to improve financial intermediation will be accelerated with a view to lowering the borrowing costs and make more financing available to the private sector, notably small and medium-sized enterprises. The authorities welcome the recommendations of the recent FSAP mission while looking for more suitable actions to move forward the development of the financial sector given the challenges facing the country. They are hopeful that they will continue to benefit from Fund assistance in implementing these recommendations, including the regulation governing the foreign exchange bureaus.

Over the recent years, significant progress was made in the areas of unifying the banks’ licensing, establishing a Credit Bureau and developing a range of financing schemes under the Empowerment Program. The authorities are committed to further strengthening banking supervision and improving cooperation between the central bank and Financial Services Commission.

Structural Reforms

Given the important changes affecting the economy of Mauritius, the authorities are determined, with the assistance of the European Union and cooperation with all stakeholders, to undertake comprehensive restructuring plans for the sugar and textile sectors. Emphasis is also being placed on the tourism sector, which has done very well and is expected to make significant contribution on the employment front.

On the labor market, reforms will be implemented as planned, with the involvement of all stakeholders notably employers and unions. The aim is to enhance the framework for more flexibility in wages and regulations. Consensus building is of fundamental importance to sustain progress in this area.

As regards price controls, remarkable progress has been made towards price liberalization while taking into account the need to limit monopoly power and protect vulnerable groups as well as local production. The authorities will further strengthen the competition framework and the system of social transfers.

In the area of trade reform, it is worth noting that the authorities have made commendable progress to foster positive prospects for economic growth. In particular, tariffs in sensitive sectors have been reduced. The authorities agree that it would be relatively difficult to liberalize trade in all sectors without the necessary laws and policies, and also given the significant adverse financial impact of such general liberalization. In this respect, my authorities call on the international community for the urgent implementation of the “Aid for Trade” initiative. In their continued efforts to advocate for this initiative, they are of the view that tariff reductions should be undertaken while enhancing countries’ capacity to define, finance and implement accompanying measures. They also continue to promote the need to harmonize regional integration schemes and timetables developed by SADC and COMESA.

IV - Conclusion

My authorities are committed to pursue their reform agenda designed to boost economic growth and put it on a sustainable path, diversify the economy and reduce poverty while meeting the challenges facing the country over the period ahead. Mobilizing and strengthening public support will be essential in my authorities’ endeavors to speed up the implementation of needed reforms. At the same time, they will require external assistance and continue to work closely with the Fund and their other development partners.

Mauritius: 2007 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; Statement by the Staff Representatives; and Statement by the Executive Director for Mauritius
Author: International Monetary Fund