Context: The robust recovery from the 2008 balance of payments and debt crisis has resulted in improved economic and social outcomes. Continued policy discipline and reforms are needed for the microstate to mitigate its geographical and population constraints and maintain momentum in developing a diversified and resilient economy. Focus: With the fiscal stance anchored by the authorities’ debt reduction objective, macroeconomic discussions concentrated on the smooth functioning of monetary and exchange rate policies. On the structural agenda, the dialogue focused on policies to promote sustained and inclusive growth, particularly on the appropriate role for state-owned enterprises (SOEs). Review: The program is on track. The authorities met the end-December quantitative performance criteria except for narrowly exceeding the ceiling on reserve money. The structural agenda remains broadly on track despite some delays. Staff recommends completion of the second review under the Extended Arrangement and modification of the performance criteria for end-June and end-December 2015, and supports the authorities’ request for a waiver for the end-December 2014 performance criterion for reserve money. Outlook and risks: With the external position having stabilized since the last review, fundamentals are strengthening. However, the economy remains highly vulnerable to global developments, including weakness in the key European markets, while domestic risks center on the role of the SOEs. Recommendations: The authorities’ objective of reducing public debt below 50 percent of GDP by 2018 remains an appropriate and attainable anchor for fiscal policy. The monetary policy framework should be further enhanced by increasing its forward orientation in the context of a flexible exchange rate. Structural measures should focus on fostering inclusiveness and private sector-led growth, while improving economic governance and the focus of SOEs. Data: Data provision is broadly adequate for surveillance. Priority areas include improved GDP statistics, strengthening external sector statistics, and extending coverage of the international investment position.
1. Since the issuance of the staff report, the following information has become available. This information does not alter the thrust of the staff appraisal.
2. Macroeconomic outcomes have been somewhat stronger than projected. Tourism arrivals in the first four months of the year have been 13 percent higher than during the same period in 2014, driven by the buoyant growth of the Indian market and continued expansion of the traditional French and Italian markets. With monetary and fiscal policies in line with program targets, the recovery in tourism, and lower commodity import prices, the balance of payments has strengthened, with the exchange rate rising to 13.2 SCR/Dollar, a nominal appreciation of around 6 percent against the dollar since the start of the year. Inflation, which had reached 5.8 percent in March, fell to 4.0 percent in May, largely as a result of lower fuel prices feeding through to the electricity tariff.
3. Program performance appears to be on track to exceed targets. Preliminary data suggest that the Q1 fiscal primary surplus exceeded the target by around ¾ of a percent of GDP, supported by strong revenues. The authorities have taken advantage of the improved external environment to purchase foreign exchange and boost gross international reserves to $512 million on June 8 (implying NIR of $406 million comfortably above the end-June target of $367 million). Cumulative quarterly reserve money has stayed within the target corridor during the second quarter of 2015. Growth of credit to the private sector has begun to moderate, with annual growth decreasing from 25 percent in December 2014 to 23 percent in March 2015.
4. The authorities have also made progress on the structural agenda. On June 3 the Cabinet approved a strategy aiming to reduce restrictions and encourage competition in the provision of port services, meeting a structural benchmark with a small delay. Consultations on new legislation on International Business Companies for submission to the National Assembly (structural benchmark, end-June) are advancing more slowly than expected, and the legislation is expected to be submitted in the second half of the year.