Public Information Notice No. 99/78

Public Information Notice: IMF Concludes Article IV Consultation with Mauritius

August 18, 1999

On August 3, 1999, the Executive Board concluded the Article IV consultation with Mauritius.¹

Background

During the period July 1998-June 1999, and in the wake of the turbulence in the global economy, overall economic activity in Mauritius remained buoyant, with real GDP growth estimated at 5 1/3 percent. The expansion continued to be broad based, with significant contributions recorded in manufacturing (especially in the export processing zone-EPZ), financial and business services (including offshore activities), trade (including tourism), and other services (particularly transport and communications).

However, the pace of inflation quickened to an estimated 8 percent from 5 1/3 percent in 1997/98. This pickup reflects the introduction of a value-added tax (VAT) in September 1998; the ongoing drought; the continued rapid expansion of bank credit to the private sector; and the lagged impact of the depreciation of the Mauritian rupee (10 percent vis-à-vis the U.S. dollar in nominal terms) in the aftermath of the Asian currency crises. Moreover, the rate of unemployment, although still relatively low (5 3/4 percent in 1997/98), is likely to have edged up further in an environment characterized by an increasing mismatch in labor skills and inadequate labor market flexibility.

With buoyant tax receipts (particularly from the recently implemented VAT) and nontax revenues, the overall fiscal deficit in 1998/99 (including grants and exceptional factors such as the proceeds from the sale of fixed assets) is estimated to have remained at some 4 percent of GDP, despite higher-than-expected off-budget outlays. However, the underlying fiscal deficit (including grants but excluding exceptional factors) is likely to have widened to about 5 1/3 percent of GDP. The government is likely to have met its financing needs entirely from domestic nonbank sources and, for the first time in the 1990s, to have made net repayments to the banking system. At the same time, however, commercial banks sharply expanded credit to the private sector, largely in the form of tax-free company debentures. In the area of prudential requirements, effective January 1, 1999, the Bank of Mauritius raised the minimum paid-up or assigned capital for both domestic and offshore banks from Mau Rs 75 million to Mau Rs 100 million.

In 1998/99, Mauritius is estimated to have recorded a smaller external current account deficit (including the acquisition of aircraft and ships) of just over 2 percent of GDP, compared with 3 percent in 1997/98, owing principally to a substantial rise in tourism-related earnings and lower petroleum import prices. Net international reserves of the banking system are estimated to have remained at a 5-month import cover at end-June 1999. Moreover, Mauritius continues to have a low external debt-service ratio; during 1998/99 this ratio is estimated to have increased slightly to 8 percent of exports of goods and services from 7 percent in 1997/98, largely reflecting an early repayment on a floating-rate note. The real effective exchange rate of the Mauritian rupee (on a period-average, bilateral-trade-weighted basis) appreciated by 3 1/2 percent in 1997/98 and remained unchanged over the July-December 1998 period.

Executive Board Assessment

Executive Directors welcomed the Mauritian authorities' success in maintaining buoyant economic activity in the wake of turbulence in the global economy. At the same time, however, Directors noted that the pace of inflation had quickened, unemployment had likely edged up further, and the near-term prospects had been weakened by a serious drought. Directors were therefore encouraged by the authorities' resolve to move forward with some key policy adjustments and reforms to meet the challenges in the period ahead, despite the difficult present circumstances.

Directors supported the authorities' intention to embark on a course of phased fiscal consolidation, taking into account the need to address the country's social needs. They noted that fiscal adjustment would rely primarily on higher revenues from the improved administration of the value-added tax and a downsizing of the civil service. In this connection, Directors also strongly encouraged the authorities to scale down the large number of tax exemptions and concessions. They stressed the need for the authorities to restructure government expenditure, so as to provide adequate resources for much-needed vocational training to address the increasing mismatch in labor skills.

Directors commended the authorities for placing importance on continued government net repayments to the banking system to achieve the required monetary restraint. They cautioned, however, that it would also be essential for the authorities to discontinue the tax-free status of company debentures; to develop, as intended, full-fledged open-market operations to gain greater monetary control through indirect instruments; and to ensure the coordination of domestic liquidity and treasury cash management needs.

Directors underscored the need for a further strengthening of prudential requirements and banking supervision, given the relatively high level of nonperforming loans and low loan provisioning by banks, as well as the high concentration ratios in the banking system. Directors urged the authorities to expedite passage of long-overdue revisions to the Bank of Mauritius and Banking Acts. In the present global environment, Directors welcomed the authorities' intention to continue their policy of allowing the exchange rate of the Mauritian rupee to adjust to underlying market pressures.

Directors took note of the steps that have been taken in the context of the 1999/2000 government budget to liberalize the tariff regime. However, they favored a more ambitious move to lower tariff rates, in concert with higher value-added tax revenue collections and consistent with regional commitments, so as to foster external competitiveness and the expansion of employment. To achieve these objectives, it would also be necessary for the authorities to press ahead with their efforts to replace the outmoded tripartite wage negotiation system, and to revise laws governing labor shedding to allow appropriate labor market flexibility. However, it was recognized that the potential social effects of such a transition should be taken into account. Directors also emphasized the need for the authorities to promote greater market competition, notably for petroleum products and cement.

Directors supported the authorities' policy of providing mainly legislative support for private sector initiatives in Mauritius and abroad. In this connection, they emphasized the need to adopt unambiguous and transparent guidelines in order to encourage investment in Mauritius.

While recognizing that Mauritius's economic and financial data were satisfactory for surveillance purposes, Directors encouraged the authorities to intensify efforts to provide the Fund with annual estimates and projections for the fiscal accounts and balance of payments.