July 2, 2008
I – Introduction
At the outset I would like to express my Mauritian authorities’ appreciation to the staff for the constructive discussions held during the Article IV consultation reflected in the staff report and for the comprehensive selected issues papers on external competitiveness and inflation. My authorities also appreciate the policy advice and technical assistance they continue to benefit from the Fund and the constant support received from Management and the Executive Board. They are in broad agreement with staff’ analysis and recommendations and remain determined to address the challenges facing the country including by further strengthening the implementation of structural reforms meant to sustain higher and durable economic growth.
In a context of loss of preferential access to the European market for the textile and sugar industries, Mauritius has embarked on broad-based reforms since 2006 with a view to diversify the economy and create a business environment conducive to private sector development. These reforms have led to the liberalization of trade and investment, reduction of taxes, lifting of some price controls and to the strengthening of the fiscal consolidation strategy as well as the monetary policy. My Mauritian authorities are cognizant of the need to pursue their efforts in order to further improve flexibility in the labor market, enhance reforms in the public enterprise sector, develop infrastructure and reduce inflationary pressures. The authorities’ commitment to address these challenges was reiterated by the Deputy Prime Minister during the discussions he had with Management and Staff during his visit to the Fund last May.
II – Recent Macroeconomic Developments
In 2007/08, macroeconomic performance has been impressive despite the increase in the world prices of oil and food. Economic growth has positively responded to improvements in the business climate and investment initiatives. Economic growth accelerated to 6.5-7.0 percent boosted by strong developments in the tourism, banking, construction sectors and services. Newly emerging service sectors in particular the Global Business License (GBL) information, communication and technology (ITC) sectors, as well as the newly restructured textile sector have also significantly contributed to this growth. In order to further accelerate the growth rate, the authorities are aware of the need to speed up their efforts to address the supply-side constraints and inefficiencies through the increase of investments in infrastructure and training of the labor force. The fiscal deficit and the public debt have declined while inflation although high due to the surge in world prices of food and energy is on the declining trend.
In response to reforms implemented in the tax area notably the strengthening of the tax administration, the broadening of the tax base and the introduction of a single flat tax rate on personal and corporate income, revenue has strongly increased. Public expenditure has been contained though capital spending could not meet the targets due to implementation difficulties. As a result, not only a primary surplus estimated at 1.7 percent was recorded but also the public sector debt fell significantly. The overall deficit is projected to decline to about 3.0 percent of GDP. In addition, the debt sustainability outlook for Mauritius has improved as well documented by staff in the debt sustainability paper.
Mauritius is attracting significant capital inflows notably foreign direct investments and portfolio investment. The authorities are mindful that these inflows may add pressures on the nominal exchange rate. In this regard, they are actively working with all concerned stakeholders to put in place appropriate regulations with a view to strengthen the development of the capital markets and the management of the large inflows of foreign exchange. The accumulation of international reserves by the Bank of Mauritius is projected to reach more than 6 months of imports by end-2007/08 despite the high increase of the import bill due to the sharp surge in the world petroleum products and food prices which was not fully compensated by the increase of services exports.
In their efforts to pursue the implementation of more market-oriented policies, my Mauritian authorities have established in March 2007 a monetary policy committee to improve transparency and effectiveness in the monetary area. As for the financial sector which remains sound and profitable, pillars I and II of Basle II principles have been also implemented. Furthermore, following the assessment of an AML/CFT in 2007, the authorities have taken a number of measures to further enhance the AML/CFT system.
Going forward, the authorities remain fully committed to fiscal consolidation and sound budgetary process. They will speed up their efforts in addressing the key macroeconomic challenges through broadening and deepening structural reforms in order to consolidate the recent economic success and, improve the supply response and further sustain higher economic growth.
III – Policies and Reforms for 2008/09
The Mauritian authorities intend to take full advantage of the great opportunity created by their recent economic success in order to continue their reform agenda and achieve a durable non inflationary growth. To this end, fiscal consolidation, strengthening monetary policy and improving competitiveness remain at the center of their efforts over the period ahead.
In this area, authorities’ strategy will continue to be focused on reducing public sector debt, raising expenditure efficiency and converting the system of indirect universal subsidies into a well-targeted social assistance program. Efficiency of budgetary operations will be raised through the implementation of the 2008/09 program-based budgeting with the support from the IMF. Efforts to reinforce the debt management unit will be pursued through an adoption of ceiling on public debt and an enhanced coordination between the ministry of finance and the central bank. The social assistance program aims at helping the working poor and the unemployed to meet the job market requirements. With regard to the parastatal sector, the authorities agreed on the need to reform the sector with the technical support from the World Bank. In order to identify potential difficulties and implement the newly adopted competition law, they have appointed a commissioner. In addition, it is important to note that the authorities intend to adjust the wages in the public sector following the decision of the Pay Review Commission.
Monetary Policy and Financial Sector Issues
The Bank of Mauritius will continue to strengthen its monetary policy framework with a view to address inflationary pressures while improving transparency and effectiveness. The authorities concur with staff that the current level of the rupee is in line with fundamentals. While the underlining inflation is broadly under control the authorities are cognizant that the liquidity management needs to be further enhanced in a close coordinated manner between the ministry of finance and the Bank of Mauritius. In this regard, they have introduced the special deposit facility and made the repo rate operational by lowering its rate and by broadening the intervention corridor. In addition they have raised the capitalization of the Bank of Mauritius to provide needed resources for an active monetary policy.
In order to reinforce the governance of the central bank, important steps have been initiated covering the membership of its board and the monetary policy committee and introducing a regular reporting to a selected committee of parliament. The bank’s communication strategy on its monetary policy will be improved by publishing semi-annual inflation and financial stability reports. With regard to the exchange rate, the authorities are committed to allow the nominal exchange rate to adjust to macroeconomic conditions and limit the Bank of Mauritius’ interventions to smoothing operations. The financial sector remains sound in spite of the macroeconomic shocks to the economy over the recent years. The authorities are determined to implement the 2007 FSAP update recommendations with the Fund technical assistance. They are also determined to develop the operational capabilities of the financial intelligence unit and the financial services commission in order to ensure that all financial institutions are covered by the AML/CFT framework given the importance of capital inflows directed to the country.
Structural Reforms and Competitiveness
In order to further improve the business environment conducive to private sector growth and realize Mauritius’ objectives as a regional banking and services hub, the authorities are committed to focus on public infrastructure development, human resources promotion and trade liberalization including the phase out of administrated prices. Structural reforms will be pursued through domestic trade liberalization, upgrading the skills of the labor force and increasing the flexibility of the labor market as well as deregulating further the telecommunication sector. Mauritius’ ranks in the 2007 Global Competitiveness Index and the 2008 World Bank Doing Business Report are encouraging. The authorities will enhance this achievement and speed up their efforts to further improve the economic efficiency and the quality of the business environment.
Debt Sustainability Analysis
My Mauritian authorities welcome the analysis and recommendations made by the staff under the DSA. It is worth noting that the risk from external debt distress is low and in recent years the level of public debt has declined and its maturity structure has also been improving. The authorities are committed to pursue their fiscal consolidation strategy and make greater use of available multilateral financing in order to further improve the external current account and preserve the debt sustainability. Efforts towards increasing non-traditional exports together with rising of foreign direct investments and the revival of textile exports will be pursued to help increase official reserves and maintain the overall balance of payments in surplus.
Efforts to bring Mauritius in line with international best practices in statistics will be pursued. The authorities welcome the 2007 Data ROSC and highly value the technical assistance provided by IMF Statistics Department. In this regard, IMF recommendations made by IMF technical assistance will be fully implemented with a view to improve national statistics including data and coverage related to balance of payments and also meet the Special Data Dissemination Standard.
IV – Conclusion
My Mauritian authorities highly appreciate the quality of their continued policy dialogue and cooperation with the Fund. They are determined to continue to work closely with the Fund and the international community in their ongoing efforts to deepen and broaden the implementation of their structural reforms in order to diversify the source of economic growth and alleviate poverty.