Statement by Mohamed-Lemine Raghani, Executive Director for Mauritius Thierry Paul Nguema-Affane, Senior Advisor to the Executive Director, and Kelvio Carvalho da Silveira, Advisor to the Executive Director Executive Board Meeting April 22, 2019

Staff Report for the 2019 Article IV Consultation


Staff Report for the 2019 Article IV Consultation

1. On behalf of the Mauritian authorities, we would like to thank Management and staff for the candid and constructive dialogue and invaluable technical assistance which have contributed to strengthen the authorities’ policy framework and preserve macroeconomic stability and steady growth over the years. The authorities welcome the staff report which provides a balanced assessment of the macroeconomic situation, including progress achieved to date as well as challenges and policy priorities. They also found the focus of the Selected Issues paper on savings, the financial conditions index, and structural transformation in Mauritius to be particularly relevant and informative.

2. Mauritius has embarked on an ambitious journey of structural transformation of the economy in the context of their Mauritius Vision 2030. The vision aims to boost long-term inclusive growth and ultimately reach the high-income status by 2030 by updating the country’s business model, which over the past decade focused on tourism and financial services and enabled to position Mauritius as a highly attractive and competitive touristic destination and financial hub. The new model seeks to strengthen the island’s global competitiveness and develop its innovation capacity, building on the country’s attractive traits including its political stability and strategic location between Africa and Asia.

3. The strategy underpinning this model revolves around three pillars: (i) economic diversification into high-value added services, (ii) public investment in urban and transport infrastructure, and (iii) promotion of private investment notably in new growth sectors such as ICT and the maritime or blue economy. This strategy should strengthen Mauritius’ destination for FDI, enhance its position as a financial center, and improve its position as regional logistics and transport hub. The authorities remain determined to pursue these objectives while maintaining macroeconomic stability. In implementing the strategy, the authorities will manage no efforts to address key structural bottlenecks, including the aging population, skills mismatch and declining productivity.

Recent Developments and Outlook

4. The Mauritian economy continues to perform well, with real GDP growth estimated at around 3.8 percent in 2017 and 2018, driven mainly by tourism, construction, Information Technology and financial services sectors. The expansion in these sectors has led the unemployment to reach its lowest rate in a decade at about 6.9 percent in 2018. Inflation has fallen to 3.2 percent in 2018. Although the current account deficit widened in 2018 due to higher oil prices but large capital inflows kept the overall balance of payment (BOP) in surplus. Foreign exchange reserves increased from 8.2 months of imports in 2017 to 9.3 months in 2018. Fiscal policy in 2018 has been prudent and the deficit continued to decline despite a shortfall in non-tax revenues and external grants. Public debt decreased to 63.7 percent of GDP, still above the statutory 60-percent target, but is sustainable as underscored in the Debt Sustainability Analysis (DSA). Credit to the private sector continued to grow in 2018 and the banking sector remains sound.

5. Mauritius’ economic outlook is positive. Real GDP growth is projected to remain strong at around 4.0 percent in the medium-term underpinned by a favorable performance in service sector. In the near-term, the materialization of key infrastructure projects will also support economic activity. Inflation is expected to decline further to 2.1 percent in 2019 and would remain relatively low in the medium term. As staff rightly noted, risks to the outlook could stem from domestic and external factors most notably (i) disruptions to the off-shore global business due to the expiration of tax treaty with India; (ii) tightening of global financial conditions; and (iii) rising protectionism. However, the Mauritian authorities are of the view that actions implemented to encourage greater female labor force participation, youth skill and small-scale entrepreneurs, could potentially surprise growth on the upside.

Policies Priorities for 2019 and the Medium-Term

Ensuring Fiscal Sustainability and Sound Fiscal Management

6. The authorities remain committed to fiscal and debt sustainability consistent with the country’s fiscal rule. They agree with staff that given the debt vulnerability to macro-fiscal shocks in the medium-term, putting debt on a downward path in the medium-term will be important to maintain macroeconomic stability and help the country absorb shocks. They acknowledge that, under the current expansionary fiscal stance in FY2018/19 driven by higher public investment, the statutory public debt target of 60 percent of GDP will not be met by FY2020/21 as initially envisaged. The authorities are determined to meet the debt target but are considering extending the deadline by two years to allow a smoother fiscal adjustment in the near-term while carrying out their infrastructure projects. It is worth stressing that with regards to the aircrafts, no decision has so far been taken. However, Air Mauritius’ favored option is leasing as it would not impact public sector debt.

7. Fiscal consolidation efforts will focus on both additional revenue-enhancing and expenditures-controlling measures but will need to be considered in view of the political cycle. In the Budget Circular issued in March 2019, it has been clearly stated that the 2019–2020 Budget would be formulated on the basis of the following four fundamental principles: (i) use the limited resources judiciously by right prioritizing of investment projects; (ii) eliminate wastage and unproductive expenditure in the public sector; (iii) ensure buoyancy in revenue collection; and (iv) adhere to the golden rule in public finance, that is, borrowing only to finance quality investment. Attention will also be paid to protecting the safety net for the most vulnerable.

8. Fiscal reforms are being implemented to enhance fiscal transparency and public investment management and help preserve fiscal and debt sustainability. In particular, the International Public Sector Accounting Standards (IPSAS) are currently being implemented, under the oversight of the newly created Ministry of Finance committee and several other project monitoring and coordinating commissions were created to support public investment efficiency. Steps are also underway to implement the remaining recommendations of the 2017 Public Investment Management Assessment (PIMA), including for public procurement process.

Maintaining Monetary Stability

9. The authorities concur that the current accommodative monetary policy stance continues to be appropriate considering subdued inflationary pressures. Bank of Mauritius (BOM) has made noteworthy efforts to improve the operational efficiency of its monetary policy. Through open market operations to address excess liquidity, the gap between the Key Repo Rate (KRR) and the money market rates narrowed. They will continue to monitor developments in both money market rates before formalizing the choice of the operational target. While efforts to mop up excess liquidity will continue, the high and increased cost associated with conducting monetary operations is a source of concern for BOM, as it has a serious bearing on the Bank’s already thin balance sheet. At times, this limits the Bank from further mopping up the excess liquidity. They request the support of the Fund in the drafting of a cost-sharing agreement with MOFED to lessen the financial burden on BOM. In addition, BOM has requested the IMF’s TA on asset and liability management, including reserve management to help support the high costs of absorbing liquidity.

10. The authorities are aware of the benefits that the establishment of a formal medium-term inflation target carry. Consideration will be given to this issue when the BOM finalizes its revised monetary policy framework.

Regaining External Competitiveness

11. The authorities share staff’s concerns on external competitiveness and are aware that there is significant room for improvement. In this connection, measures are being taken to boost trade and investments. For instance, new bilateral and multilateral free trade agreements are being negotiated and new paths of economic diplomacy with the African States are being developed under the Government’s Africa Strategy. The authorities also recognize the need to address the skill mismatch and promote innovation. Beside the focus on education and vocational systems, new tech-related courses are being introduced, the smart-city scheme is advancing and initiatives to facilitate access to finance, particularly for Small and Medium Enterprises (SMEs) were launched. Reflection is also ongoing on ways to further bolster female workforce participation. The authorities are confident that these measures, undertaken on several fronts, together with better coordination and monitoring will generate growth dividends in the coming years.

Strengthening Financial Stability and Integrity

12. Pursuing the strengthening of the AML/CFT framework ranks high in the authorities’ policy priorities. At the recent Eastern and Southern Africa Anti-Money Laundering Group (ESSAMLG) Task Force Plenary meeting, the Mauritius Follow-up report and application for technical compliance re-ratings were considered by the Review Group. It is to be noted that significant progress has been made to comply, and therefore, Mauritius has been upgraded by ESSAMLG on 12 recommendations. . Several AML laws and regulations have been amended, a dedicated unit for AML/CFT supervision was set up, and cooperation is actively ongoing with Financial Services Commission (FSC), Financial Intelligence Unit (FIU), Mauritius Revenue Authorities (MRA), Independent Commission Against Corruption (ICAC) and the Mauritius Police Force (MPF). Additionally, they have already conducted and are conducting more awareness and workshops on the subject across various target markets (The IMF AFRITAC is facilitating a week’s training at the FSC on risk-based approach to AML/CFT supervision). Given the importance attached to capacity building, a number of targeted courses offered by the Chartered Institute of Bankers of Scotland are being rolled out to raise the standards of professionalism and conduct in the banking and financial service sector in Mauritius. Going forward, the authorities reiterate their commitment to implement the recommendations of the ESAAMLG report as well as the National Risk Assessment to ensure that Mauritius continues to develop an effective AML/CFT framework aligned with the highest international standards.

13. Regarding financial supervision, the “Mauritius Deposit Insurance Scheme” (DIS) bill was recently approved by the National Assembly. The BOM has requested technical assistance from the Fund to implement the DIS project.

14. Mauritius also made great strides in the regulatory landscape for Fintech. Following the publication of the Guidance Note on the “Recognition of Digital Assets as an asset-class for investment” in September 2018, they also established a regulatory framework for the licensing of Custodian Services for digital asset. This framework makes Mauritius the first jurisdiction globally to offer a regulated landscape for the custody of digital assets. Further to this, a Guidance Note on “Securities Token Offering” was also issued in April 2019. Licensees will equally have to comply with the applicable framework for AML/CFT, in line with international best practices.

Compliance with International Tax Initiatives

15. Compliance with international tax initiatives has improved and will be further strengthened. The latest Organization for Economic Co-operation and Development (OECD) report indicated that Mauritius meets all the international requirements of the Base Erosion and Profit Shifting Project (BEPS) Action 5 and consequently has no harmful tax practices in its tax regime. Notwithstanding these positive developments, the European Union (EU) still considers that further changes are needed to their tax regimes to bring them into line with international standards. Although they expressed their unease over the lack of coordination between different anti-tax avoidance initiatives, the authorities will continue to work in this area to ensure that the country upholds its adherence to international best practices.

Data Provision

16. Efforts to strengthen statistics continue. A revision policy on external sector statistics (ESS) has been posted on the Bank’s website early April 2019 when revised 2017 ESS data were disseminated.


17. The Mauritian authorities recognize the challenges and are mindful of the need to ensure fiscal consolidation to put public debt on a downward trajectory, regain external competitiveness and maintain financial integrity and stability. They are committed to continue to implement their reforms policies to sustain macroeconomic stability and boost long-term inclusive growth. Lastly, the authorities would like to express their appreciation to the Fund for its policy advice and invaluable technical support and look forward to continued cooperation.