1. The following information has become available since the issuance of the staff report. The thrust of the staff appraisal remains broadly unchanged.
2. The proposed 2008-09 budget is more expansionary than anticipated. The large (37 percent) wage increase for public sector employees recommended by the independent Pay Review Board will be fully implemented from July 1, 2008 rather than phased-in over two years as assumed in the profile presented in the staff report. The wage bill and overall fiscal stance are correspondingly about 0.4 percent of GDP higher for 2008/09. As expected, import tariffs were further reduced, largely on food, household items, and clothing. Notwithstanding a looser than expected fiscal stance for 2008/09, the fiscal impulse remains contractionary. The budget includes a strong emphasis on public infrastructure investment and on education. The medium-term outlook remains broadly unchanged.
3. In the context of strong private sector demand staff expects greater inflationary pressures and higher imports in 2008/09 than described in the staff report. The Bank of Mauritius will need to remain vigilant in the period ahead as inflation crept up to 9.9 percent at end May and the nominal exchange rate reversed its strong appreciating trend against the US dollar. The unemployment rate dropped further to 8.2 percent in the first quarter of 2008.
4. The above indicates that the authorities will need to remain vigilant against inflationary pressures. The higher-than-expected wage bill in the 2008/09 budget will place a greater burden on monetary policy to contain demand pressures.