Public Information Notice No. 07/58

Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Mauritius

May 29, 2007

On May 7, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius.¹

Background

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. The authorities have initiated broad-based reforms to address recent economic setbacks and to raise growth to levels of the previous two decades.

Real GDP growth is expected to reach over 4 percent in 2006/07 (fiscal year ending in June), owing to a strong service sector outturn and slowing job losses in the textile sector. Unemployment, however, remains close to its historic high. Inflation, after peaking in December 2006-largely because of onetime budgetary measures and a weakening rupee-fell to 9.2 percent in February 2007 (year-on-year).

The fiscal deficit target for 2006/07 (4 percent of GDP) is within reach, with the adjustment relying partly on lower capital expenditure. The external current account deficit widened to 5.3 percent of GDP in 2005/06 because of weak textile and sugar exports and higher oil prices. An aircraft import will further widen the current account deficit in 2006/07. The Bank of Mauritius has continued to intervene in the interbank foreign exchange market and has gradually raised its signaling rate to contain inflation. Foreign reserves have continued to decline but have stayed at a comfortable level. The real effective exchange rate has depreciated by over 10 percent since 2004.

Executive Board Assessment

Executive Directors commended the authorities for the reforms introduced with the 2006/07 budget to adjust to the loss of trade preferences and reduce the fiscal deficit. While inflation needs to be reduced, and the current account deficit and public debt remain large, Directors considered that the economy is on the right track, supported by reforms to improve the business environment, simplify the tax system, liberalize trade, open air access, and advance economic restructuring, including the development of new sectors. Directors noted that labor market reform will be needed to support economic restructuring. They encouraged the authorities to maintain the reform momentum.

Directors welcomed the authorities' efforts to tighten monetary policy. This should help to reduce inflation and avoid entrenching inflation expectations. Most Directors encouraged the Bank of Mauritius to consider raising the repo rate if inflation does not decline as expected. They welcomed improvements in the monetary framework, and called for further development of the institutional framework in order to strengthen the monetary policy transmission mechanisms.

Directors noted that additional improvements in external competitiveness are needed to help restore external balance. Wage restraint, productivity gains, and labor market flexibility are key to achieve this. Directors considered that the flexible exchange rate regime has served Mauritius well, with rupee depreciation softening the negative effect of the terms of trade decline. They encouraged the authorities to limit foreign exchange intervention to smoothing excess volatility.

Directors welcomed the progress made toward fiscal consolidation and better public expenditure management, aimed at lowering public debt and improving the quality of the budget. They noted that fiscal pressure in the medium term would require more decisive fiscal consolidation and further improvements in expenditure management. They encouraged the authorities to identify options for budgetary savings and to continue strengthening debt management.

Directors considered that efforts to boost growth and employment could be complemented by reforms that further liberalize trade, deepen the financial sector, and deregulate prices, while taking into account the need to protect vulnerable groups. They commended the steps to liberalize trade, and advocated a simple and transparent tariff framework. Addressing institutional constraints in the financial sector could help lower borrowing costs and make more financing available to small and medium-sized enterprises. A systematic review of price controls, including a review of the largest public enterprises, should guide further reform in this area.

Directors welcomed the 2007 Financial System Stability Assessment update and the reforms implemented since the 2002-2003 Financial Sector Assessment Program (FSAP). Mauritius's financial sector has shown resilience to the loss of trade preferences. Going forward, Directors called for further organizational and institutional strengthening in order to improve financial sector regulation, supervision, and infrastructure.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.