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Mauritius

Author(s):
International Monetary Fund
Published Date:
February 2010
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I. Introduction

1. Mauritius has achieved remarkable success since its independence in 1968, with one of the highest per capita incomes in Africa. Underpinning this performance have been macroeconomic and political stability, robust institutions, an efficient administration, a favorable regulatory environment, and a well-developed financial system.1 In 2005, facing major external shocks (the phasing out of the Multi-Fiber Agreement and sharp reductions in EU sugar protocol prices), the government embarked on wide-ranging reforms that earned Mauritius the title of “best place to do business in Africa” from the World Bank in 2008 and 2009. Structural measures (Box 1) were accompanied by efforts to strengthen monetary and fiscal policy.2

2. The economy reacted favorably to the reforms initiated in 2005. Growth recovered to 6½ percent in 2007/08 (Figure 1) and foreign direct investment rose to unprecedented levels—complementing a major restructuring of the sugar and textile industries and rapid growth in the offshore financial sector, which was driven by the activities of the Global Business Companies (GBC). While the latter have focused primarily on investments to India, Mauritius has also begun to position itself as a platform for investment from China and India to East Africa.

Figure 1.Mauritius’ Recovery, 2002 -2008

Source: Mauritian authorities; and IMF staff calculations.

3. Like other emerging market economies (EMEs), Mauritius is now contending with the fallout of the global financial crisis—notably, the decline in demand for tourism and textile exports. The authorities have responded with a comprehensive policy package that includes fiscal stimulus, monetary easing, ensuring foreign exchange (FX) liquidity, strengthening the social safety net, and measures to facilitate workouts of private sector debt and to preserve jobs.3

Box 1.Reforms, 2006-09

Consolidating Fiscal Performance and Improving Public Sector Efficiency

  • Fiscal rules implemented (current expenditure rule and public debt legislation)
  • Performance-based budgeting, public management systems, and medium-term expenditure frameworks introduced
  • Tax system revamped (single flat tax on personal and corporate income)
  • New procurement legislation
  • Reforms in the parastatal sector launched

Enhancing Competitiveness

  • Tariff duties reduced
  • Regulations for export-processing zone (EPZ) and non-EPZ firms unified
  • Air access liberalized
  • Immigration restrictions eased
  • Broadband Internet costs reduced through regulatory reforms

Improving the Business Climate

  • Business registration and regulation procedures simplified
  • Restrictions on land acquisition by foreigners eased
  • New insolvency legislation
  • New labor market legislation

Widening the Circle of Opportunity through Participation, Social Inclusion and Sustainability

  • The National Empowerment Foundation for training redundant and re-allocated established
  • Education reform launched
  • Eradicating Absolute Poverty Plan launched
Source: World Bank

II. Recent Developments

4. Output growth has slowed sharply in the wake of the global financial crisis, but is expected to remain positive at about 2 percent in 2009. Growth slowed from 6.6 percent in 2008H1 to 1.5 percent in 2009H1 as tourism, textiles, and construction contracted—though financial services remain resilient. Contraction of these labor-intensive sectors has increased the unemployment rate by about 1 percentage point, to almost 8 percent in 2009Q2, with women (mainly in the textiles sector) particularly affected.

5. Inflation has subsided to the low single digits (Figure 2). Since reversal of last year’s global food and commodity price shock, and the slowdown of the domestic economy and portfolio inflows, inflationary pressures have eased despite monetary loosening.4

Figure 2.Monthly Inflation

(percent year-on-year)

6. The current account deficit has narrowed because external demand has been more than offset by reduced imports. Export volumes in the first half of 2009 contracted by 3.6 percent compared to the same period in 2008 and are forecast to fall by 11.6 percent in 2009, and import volumes are expected to fall by 12.8 percent. The current account deficit is therefore expected to narrow by 2.3 percent of GDP. While FDI continues to finance a substantial portion of the current account deficit, it has declined by about 9½ percent in the first half of 2009 compared to the same period in 2008, and net private capital flows are expected to fall from 9 percent of GDP in 2008 to about 7 percent in 2009.

7. The exchange rate has depreciated modestly and reserves coverage remains comfortable. Within the floating regime, the Bank of Mauritius (BoM) accumulated reserves opportunistically through mid-2008 then allowed them to decline as capital inflows eased late last summer (Figure 3). This trend continued when, in step with international developments, monetary policy was eased in November and again in early December. The BoM has since refrained from interventions, and the floating exchange has depreciated in nominal effective terms by about 4 percent since January 2009, while remaining relatively stable against the U.S. dollar.5

Figure 3.Exchange Rate Intervention, 2006-2009

Source: Bank of Mauritius

Response to the Global Financial Crisis

8. A fiscal stimulus package of about 5 percent of GDP (spread over 2009-10) was a key element of the policy response. Rough calculations suggest that, inclusive of this package, the fiscal impulse in FY2009/10 will be about 1.5 percent of GDP, commensurate with an estimated output gap of about 1 percent of GDP (Text Table 1).6 The targeted and temporary stimulus measures focus on advancing planned infrastructure spending, providing financial relief to the firms hit hardest by the global crisis, and protecting people either through job preservation interventions or direct assistance to the most vulnerable. At the same time, to ensure fiscal discipline and anchor expectations, the government also introduced partially offsetting measures that are expected to bring the primary budget into surplus by the end of 2011. The government has also been using special “rainy day” funds it had prudently put aside in previous financial years (to the tune of 3 percent of GDP), reducing current debt financing needs. In addition, a public debt management act was passed limiting public sector debt to 60 percent of GDP, with a goal of reducing it to 50 percent by 2013.

Text Table 1.Growth and Fiscal Performance, Fiscal Years 2006/07-10/11(in percent)
2006/072007/082008/09

Est.
2009/10

Proj.
2010/11

Proj.
Real GDP growth3.67.02.22.04.7
Output gap1/0.00.50.8-1.2-0.5
Fiscal balance2/
Overall balance-4.2-3.7-4.4-4.4-3.8
Primary balance-0.20.5-0.6-0.8-0.4
Fiscal impulse (- = stimulus)2,3/
Not incl. interest0.1-1.1-0.50.2
Incl. interest payments0.7-0.7-0.20.3
Central Government Debt52.850.250.050.249.7
Of which : Domestic46.645.643.841.239.0
External6.14.66.19.010.7

Based on HP filter and potential output estimates.

Percent of GDP.

Year-on-year change.

Based on HP filter and potential output estimates.

Percent of GDP.

Year-on-year change.

9. Monetary policy was loosened in tandem. With the economic slowdown and sharp decline in the growth of private sector credit, the BoM reduced its policy rate by 250 basis points to 5.75 percent a year and lowered reserve requirements (Figure 4). To ensure FX liquidity while conserving reserves, the BoM made FX credit available to banks facing rollover problems on FX liabilities, though in the event, only one needed to avail itself of this facility, and in a small amount

Figure 4.Policy and Banks Rates

(Quaterly, percent)

Chart.Mauritius: Macroeconomic Developments, 2006-09

Source: CSO, Bank of Mauritius and IMF Staff estimates.

10. To facilitate debt restructuring and avoid inefficient insolvencies, the government instituted the “Mauritius approach.”7 This provides temporary financial relief to firms facing liquidity problems due to the crisis, conditional on credible restructuring plans, with costs shared by the banks, the government, and the firm’s shareholders. Other initiatives to save jobs were a work-cum-training scheme that gave manufacturing and tourism firms an alternative to laying off workers by partially reimbursing wages while workers receive training. A few tax relief and deferrals were also provided to labor-intensive and vulnerable sectors. These timely and temporary measures (most sunset in December 2010) are judged to have had a significant impact in containing unemployment.

III. Outlook and Risks

11. The short-term risks and external vulnerabilities of Mauritius appear manageable. The exchange rate is estimated to be broadly in line with fundamentals, and external debt appears sustainable, 8 including in the face of the DSA templates’ standard shocks. Nevertheless, the current account deficit remains large—although the deficit is likely overestimated (see DSA appendix), and about one-half is financed by FDI (which has remained largely resilient even in the current crisis)—and accordingly poses some inherent financing risk. As of October 2009, official reserves stood at about 6 months of merchandise imports, 22 percent of GDP (twice the size of reported external debt), and about 10 percent of broad money—comfortable coverage for a country with a flexible exchange rate.9

12. Though exposed to the slowdown, banks remain well-capitalized and seem resilient to further shocks. They were not holding toxic assets and, especially the large banks that account for more than 70 percent of deposits, remain liquid and well-capitalized despite some increase in nonperforming loans. Because banks hold long FX positions, they would not be adversely affected by a further depreciation of the exchange rate (Box 2).

13. Over the longer term, Mauritius’ growth prospects depend heavily on the global economy. The medium-term growth forecast remains benign, but there is significant uncertainty. Economic growth is projected to increase to 5 percent per year by 2011, reflecting a reversal of the growth contraction in the EU, Mauritius’ main market for exports and tourism. But further deterioration of the external accounts cannot be ruled out if global demand remains sluggish and capital inflows dry up. And if world demand does begin to pick up too rapidly, there is a risk that a surge in oil prices could more than offset a rebound in demand for Mauritian exports, causing a deterioration of the trade deficit, larger financing requirements, and inflationary pressures.

14. To support the country’s transition from a low-skill sugar and apparel exporter to an innovative and skill-based services economy, the government needs to continue its ambitious reform agenda. In recent years, the government has revamped regulation, especially with regard to labor, solvency, public debt management, and procurement legislation (see Box 1). But although labor productivity has increased, transferring resources from low- to high-productivity sectors faster is necessary to speed enhancement of overall productivity. The human capital constraint needs to be addressed through a mix of long-run initiatives to improve educational performance and short-term measures to mitigate labor shortages in specific sectors and occupations.

15. New labor market legislation should facilitate the economic transformation underway. A new Employment Rights Bill that went into effect in 2009 contains workfare provisions and introduces a “flexi-security” scheme as part of the broader reform of the Industrial Relations Framework, which dated from 1973. The objective of flexi-security is to shift protection from jobs to workers by providing transitional support to those that lose their jobs.10 This should lower resistance to structural change and stabilize incomes for households, allowing for greater labor market efficiency and productivity-enhancing labor reallocation.

Box 2.Financial Sector Stability

Despite the slowdown, the Mauritian banking system has thus far withstood the impact of the global financial turmoil, for a number of reasons:

  • Banks were not holding toxic assets and fund operations mainly through domestic deposits (two-thirds of total liabilities) rather than large-scale interbank foreign borrowing.
  • A sizable share (one-third) of total deposits is held in liquid or near-liquid assets.
  • Banks have limited exposure to equities, either by way of their own investments or as loan collateral.
  • The “Mauritius Approach” has helped avoid costly insolvencies.
  • Their positive net foreign exchange FX position contains banks direct exchange rate risk, and limiting FX-denominated lending mainly to export-oriented enterprises contains credit risk.

The capital adequacy, liquidity, and profitability of the system are sound. Moreover, in line with the revised Guideline on Credit Concentration Risk, the ratio of large exposures to capital had declined from 394 at the end of 2008 to 215 by June 2009. Furthermore, bank assets have continued to improve since 2007, although nonperforming loans (NPLs) inched up from 2 percent in 2008 to 2.6 percent at the end of June 2009.

Stress tests show that banks would be generally resilient to a range of adverse shocks but are vulnerable to credit quality. On sensitivity to sector-specific credit shocks, a credit shock to sugar and textiles (with an immediate loss of 20 percent each) leads to a deterioration of the Capital Asset Ratio (CAR) from 16.2 percent to 12.3 percent and the NPLs (to total gross loans) from 2.3 percent to 5.8 percent. As in the 2007 Financial Sector Assessment Program (FSAP), the impact of a 50 percent loss on each bank’s third largest exposure was simulated; this leads to a deterioration of CAR from 16.3 percent to 14.7 percent and of NPLs from 2.3 percent to 6.2 percent.

Much progress has been made since the 2007 FSAP update, among them work on the recommendations of the 2007 Basel Core Principles (BCP) assessment, which has already triggered significant reinforcement of banking supervision. For instance, the position of head of the Supervision Division (SD), vacant for the past nine years, has been filled, and the SD has been reorganized to improve its efficiency (it now includes the following divisions: Off-site, On-site and Regulation, and Policy and Licensing). Remaining recommendations of the 2007 FSAP and the 2007 BCP assessment, which are mostly on completion or testing phases, are expected by early 2010; more specifically: (i) a model for risk based supervision has been developed and is being applied on a pilot basis to some banks; (ii) a draft Guideline on BOM intervention is in place; (iii) the final revision of Guideline on liquidity has been issued; (iv) the Guideline on Corporate Governance is being issued; (v) Draft Guideline on country risk has been issued. In addition, substantial progress has been made on the revision of Guidelines on Related Party Transactions and credit concentration and the revision of the guideline on Operational Risk. However, further steps are needed on the completion of the Supervision Manual.

IV. Policy Discussions

Discussions centered on the fiscal stance and ensuring sustainability of the public finances; monetary policy, and the monetary and exchange rate policy regime; maintaining the momentum of structural reforms; and improving the coverage of external statistics.

A. Fiscal Policy and Public Debt Sustainability

16. While agreeing with the accommodative fiscal stance, the mission recommended that some stimulus measures be held contingently in reserve and deployed only if the recovery seems to be faltering—given the uncertain outlook and the challenge of resuming fiscal consolidation without jeopardizing the recovery. Over short term, the government intends to continue its expansionary fiscal policy through the next full fiscal year (January-December 2010; Box 3). The authorities agreed, however, that if the recovery is stronger than expected, the need for further stimulus would be correspondingly lower. Indeed, with some early positive signs of recovery, the 2010 deficit is expected to be 4½ percent of GDP rather than of the originally slated 5 percent.11 The authorities explained that several of the stimulus measures (especially support to enterprises and work-cum-training schemes) are in the nature of automatic stabilizers. Moreover, a substantial part of the stimulus package consists of bringing forward public infrastructure investment projects; these can be delayed if the economy seems to be overheating and, in any case, the full program is unlikely to be implemented. The deficit is expected to fall to below 4 percent in 2011 and about 3 percent of GDP in 2012.

17. The mission welcomed the new public debt law, which should strengthen fiscal discipline and help ensure medium-term sustainability.12 Although immediate financing risks appear limited, reducing public debt will create fiscal space against contingencies13 and the eventual costs of an aging population. The mission and the authorities agreed, however, that the debt law as currently formulated may overly constrain the phasing of external financing that the government may obtain and also infrastructure investment undertaken by public enterprises, which is critically needed to enhance productivity. Specifically, the law makes no provision for netting uncommitted and freely usable government deposits in the banking system. In addition, nonguaranteed debt of public enterprises that are run on a commercial basis and are not likely to rely on the government budget could be excluded from public debt for the purposes of applying the debt limit. The guaranteed debt of such enterprises could also be discounted, though this is more complicated because it requires an explicit assessment of the likelihood that the guarantee could be called. The authorities further agreed that any modification of the debt law should be done in line with best practices, and not to undermine its critical value in maintaining fiscal discipline and achieving the necessary medium-term consolidation.14

18. The mission welcomed the government’s efforts to secure external financing, while underscoring that this financing should not widen the deficit, and that there are limits to the substitutability between domestic and external financing. In the uncertain external environment the government has prudently secured significant external financing of about 7 percent of GDP from such sources as the African Development Bank and the World Bank. The authorities recognize that the macroeconomic impact (either a significant increase in base money or a sharp appreciation of the exchange rate) limits the substitutability between domestic and external financing of the budget.15 They intend to adopt a pragmatic combination of using external financing to the extent it corresponds to capital imports for public investment, limiting the substitution of domestic borrowing to what the market can absorb, and treating part of the funds as precautionary—in effect, trying to reproduce a contingent credit line (which might have better served their purposes). The authorities are also considering creating a mini-sovereign wealth fund to park funds externally until they might be needed.

Box 3.Mauritius: Fiscal Stimulus Measures for 2010

In the first half of 2009, the authorities began to implement the targeted and temporary stimulus package announced in December 2008. The package accounts for about 5 percent of GDP, of which 3 to 3.5 percent of GDP will be carried out through dedicated funds that were set up at the end of the 2007/08 fiscal year as a contingency to deal with the crisis and were stocked up further in FY2008/09. The Minister of Finance and Economic Empowerment announced in his budget speech on November 18, 2009, that the following measures will be continued until December 2010:

  • Continue with direct support to SMEs and large enterprises facing temporary difficulties due to the crisis, so as to protect jobs and enterprises.
  • Continue with the work-cum-training program for retrenched workers and the unemployed.
  • Maintain the government’s commitment to upgrade public infrastructure in education, health, the environment, and sports and to frontload public infrastructure projects to boost construction and create jobs.
  • Accelerate private sector investment and improve competitiveness by modernizing machinery and equipment and upgrading skills.
  • Continue various tax suspensions to the tourism, construction and real estate sectors to stimulate growth and protect jobs.
  • On supporting development of Rodrigues island, (i) maintain additional infrastructure development, (ii) suspend the travel tax to Rodrigues, and (iii) maintain the incentive package for increasing tourism to Rodrigues.
  • Sustain a fiscal and monetary policy mix that is supportive of investment, growth, and job creation.
  • Step up efforts to protect to the population and strengthen the Eradication of Absolute Poverty Program.

B. Monetary Policy and Framework

19. With inflationary pressures subdued and the economic outlook still uncertain, the monetary policy stance appears appropriate. At its last two meetings of the Monetary Policy Committee (MPC), against some initial positive signs from the textile and tourism sectors, the MPC decided to leave the key Repo rate unchanged at 5.75 percent per year. The mission considered that, in the current environment, with banks flush with liquidity, it is unlikely that a further reduction in interest rates would significantly spur private lending and activity; but the mission also stressed that the MPC needs to be vigilant against any inflationary pressures. A more “data-driven” approach is therefore appropriate, with the MPC holding the repo rate at its current level pending clearer indications of the state of the economy.

20. The monetary and exchange rate framework, which may be described as hybrid inflation targeting, seems well-suited to the needs of the Mauritian economy. As a small and highly open economy, the scope for monetary policy to be truly independent of external factors is necessarily limited. In practice, policy interest rate decisions appear to place significant weight on the interest rate differential relative to major currencies (e.g., the US federal funds rate) while reacting to domestic inflation when it is above the tolerance level; FX intervention is limited to smoothing operations, and no intervention has been undertaken since November 2008 (Box 4). This allows the Mauritian monetary and exchange rate regime to combine the flexibility of a floating exchange rate with some of the discipline of a less flexible regime. The authorities agreed with this characterization of their monetary and exchange rate regime and noted that they do not envisage moving soon to a pure IT framework. The mission provided some background on common and best practices for the functioning of MPCs and central bank governance structures.

Box 4.Monetary Policy Reaction Function

The BoM’s real policy interest rate reaction function can be described by: Rt=β0+0.03ygap+1.1***D(πeπ¯)+0.4*USFedt; where R is the real policy (repo) rate, USFed is the US federal funds rate, D is a dummy variable equal to unity when expected inflation exceeds the threshold level, and the threshold (tolerance) level of inflation is estimated using maximum likelihood methods to be 4.7 percent a year. From the uncovered interest rate parity condition, a high coefficient on the Fed funds rate approximately sets the expected change of the exchange rate to zero (as in a pegged exchange rate regime), but unexpected shocks can be absorbed by exchange rate movements (as in a floating regime). Moreover, the high coefficient on expected inflation (when it exceeds the tolerance level) implies that the policy reaction function obeys the Taylor principle.

21. The currently low inflation rate may provide an opportunity for Mauritius to adopt a more ambitious tolerance level for inflation. The MPC has been operating with an implicit target (more precisely, tolerance level) for inflation of about 5 percent. Since inflation is now considerably lower, a more ambitious tolerance level (perhaps 3 percent) could be considered, with a view to anchoring inflationary expectations at this lower level.16 The authorities agreed that this may be an opportune time to anchor low inflationary expectations but also noted the need for further high-frequency indicators as well as econometric modeling to better understand inflation dynamics. They stated that they very much appreciate Fund technical assistance (TA), and the work of the mission, on incorporating available high-frequency data and developing econometric models, and requested that this assistance continue.

C. Financial Sector, Structural Reforms, and Data coverage

22. The mission welcomed the move towards greater risk-based financial sector supervision and encouraged the speedy implementation of the remaining recommendations of the 2007 FSAP. The authorities have made significant progress in implementing the 2007 FSAP recommendations, including periodic compliance-based analysis and steps to move toward more risk-based supervision; they agreed that remaining aspects (risk-based supervision, supervision manual, guide on BoM intervention, and off-site work) warrant speedy implementation. The government has requested Fund TA to help design a deposit insurance scheme, as mandated by the BoM 2004 Act and the Banking Act. This would give small, resident retail depositors more explicit assurance while clarifying that the government would not be responsible for large, offshore/non-resident deposits.

23. The mission welcomed efforts to improve service delivery and efficiency in the public sector, particularly with regard to the social protection system. To achieve a coherent approach in social policy, different agencies under the aegis of the Ministry of Finance and Economic Empowerment (MOFEE) were integrated into a single organization, the National Empowerment Foundation (NEF), set up in July 2008.17 The range of interventions includes training, placement, support for small and medium enterprises, direct financial assistance to most vulnerable groups, and housing. Despite the consolidation, social assistance in Mauritius needs further rationalization to target those that cannot escape poverty and to empower people to exploit new labor market opportunities. This is crucial for assuring that the 4.4 percent of GDP (2008/09 budget) spent on social assistance is used efficiently. Other initiatives to improve service delivery and efficiency in the public sector (such as PMS and parastatal reforms) are underway, including drawing on Fund and Bank TA.

24. The mission emphasized the need to resolve discrepancies in the balance of payments (BOP) and to improve external statistics to meet SDDS requirements. A joint committee comprising the BoM, Financial Services Commission (FSC) and MoFEE has been established to conduct a BOP survey of resident GBCs managed by 12 major management companies (MCs).18 The objective of the survey is to enhance coverage of the BOP statistics and the international investment position (IIP)—a critical requirement for subscription to the SDDS. The mission also urged the BoM to reissue the Foreign Assets and Liabilities Survey (FALS), which was first launched as an exploratory survey in November 2007 to collect data from resident companies on their cross-border financial flows and stocks. The authorities stated that they recognized the importance of improving the coverage of external statistics, including understanding the large positive errors and omissions in the BOP statistics, and are committed to doing so as soon as practicable; they expect to be ready to apply for subscription to the SDDS by mid-2010.

V. Staff Appraisal

25. The authorities’ prompt and comprehensive policy response has been instrumental in cushioning the economy from the fallout of the global financial crisis. Staff considers that the magnitude of the fiscal stimulus and extent of monetary easing to have been appropriate to the external shock from the global financial crisis. Together with more micro measures to restructure debts of illiquid enterprises and save private sector jobs, the policy response has been instrumental in cushioning the economy from the crisis impact.

26. The challenge now is how to begin withdrawing the stimulus and working toward further fiscal consolidation without jeopardizing the recovery. Despite shocks and the current crisis, public debt over the period 2006-2010 will be lower than in the previous five years, and stochastic simulations suggest a strong likelihood of further declines over the following five years. Nevertheless, public debt remains high and fiscal consolidation will be important to reduce the inherent risks. In addition, fiscal consolidation will also help reduce the large external current account deficit, which carries financing risks. Given uncertain conditions, the authorities have rightly decided on some contingent stimulus measures that will be deployed only if the recovery falters. Careful management of the mix of external and domestic financing of public debt is also required. In the longer term, the challenge will be to sustain reform efforts, enhance productivity, and improve the cost-effectiveness of public sector service delivery.

27. Mauritius remains vulnerable to global developments—but the private sector is dynamic, economic fundamentals are strong, institutions are robust, and the authorities have not only implemented far-reaching reforms in an environment of continued macroeconomic stability, they have also established a track record of strong policy responses to unexpected shocks. Some further reduction in public debt levels, monetary policy refinements, financial sector and structural reforms, and data improvements will both improve the economy’s resilience and better position Mauritius to compete with other EMEs, including as a financial center.

28. Staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

Table 1.Mauritius: Selected Economic and Financial Indicators, 2005–2013
2005200620072008200920102011

Projections
20122013
(Annual percent change, unless otherwise indicated)
National income, prices and employment
Real GDP
Market prices1.53.95.44.21.54.14.74.95.0
Factor costs2.45.25.55.22.74.14.75.15.2
Real GDP per capita0.73.24.73.30.73.34.04.24.3
GDP deflator4.07.28.38.14.05.05.05.05.0
Domestic demand at current prices 213.017.814.212.27.89.58.47.29.3
Consumer prices (period average)4.99.08.89.73.04.34.24.24.2
Consumer prices (end of period)3.911.88.76.84.03.04.94.54.1
Unemployment rate (percent)9.69.18.57.2
External sector
Exports of goods, f.o.b.7.38.9-4.77.3-23.57.23.13.62.9
Of which: tourism receipts2.215.629.011.5-24.45.15.07.19.1
Imports of goods, f.o.b.14.016.46.020.6-24.59.54.14.56.5
Nominal effective exchange rate (annual averages)-7.4-7.0-4.47.8-4.0
Real effective exchange rate (annual averages)-3.8-0.71.213.04.1
Terms of trade-8.4-5.8-1.0-1.11.6
(Annual change in percent of beginning of period M2, unless otherwise indicated)
Money and credit2
Net foreign assets6.948.813.18.13.713.76.97.07.1
Domestic credit14.710.211.722.58.914.612.913.613.3
Net claims on government1.60.5-0.30.6-1.34.90.3-0.40.2
Credit to private sector 313.09.712.021.910.39.612.614.013.2
Broad money (end of period, annual percentage change)11.19.515.314.712.513.39.39.69.6
Income velocity of broad money0.90.90.90.91.01.01.01.01.0
Interest rate (weighted average TBs, primary auctions)6.47.511.07.44.8
(Percent of GDP)
Central government budget
Overall balance (including grants)-5.3-4.6-4.0-3.4-4.5-4.5-3.9-3.0-2.2
Primary Balance (including grants)-1.8-0.20.50.7-1.1-1.1-0.70.20.7
Revenues and grants20.119.322.022.521.121.920.920.320.6
Expenditure and net lending25.823.625.726.125.625.924.723.122.7
Domestic debt of central government51.446.645.643.842.641.438.534.231.1
External debt of central government4.46.14.66.18.08.811.013.613.9
Investment and saving
Gross domestic investment21.424.325.124.626.326.224.624.624.8
Public7.56.96.45.06.17.66.57.07.4
Private14.017.318.719.620.218.518.117.617.4
Gross national savings17.417.121.216.714.214.316.818.821.5
Public-1.5-1.1-0.5-1.1-1.1-0.8-0.70.41.3
Private18.818.221.717.915.315.117.518.420.1
External sector
Balance of goods and services-6.0-11.3-10.3-14.7-11.1-11.4-11.1-10.4-10.3
Exports of goods and services, f.o.b.59.961.658.852.945.145.244.243.141.8
Imports of goods and services, f.o.b.-65.9-72.9-69.0-67.5-56.2-56.6-55.3-53.5-52.1
Current account balance-5.2-9.4-5.6-10.4-8.1-8.5-8.0-7.5-6.9
Overall balance-2.6-2.25.91.75.40.01.50.60.9
Total external debt 413.912.711.412.013.812.215.918.017.3
Net international reserves, BOM (millions of U.S. dollars)1,3611,2971,8141,7841,9892,0392,0882,1522,375
Net international reserves, BOM (months of imports of goods, c.i.f.)5.24.35.64.66.66.66.56.46.7
Memorandum item:
GDP at current market prices (millions of Mauritian rupees)185,349206,328235,519265,196280,264305,219334,500367,400408,760
GDP at current market prices (millions of U.S. dollars)6,2846,5077,5219,3218,527
Foreign currency long-term debt rating (Moody’s)Baa2Baa1Baa2Baa2

Excluding changes in stocks.

Percent of beginning of period M2. End-2009 data refer to June.

Includes credit to parastatals.

Reported debt only, excluding private sector short-term debt.

Excluding changes in stocks.

Percent of beginning of period M2. End-2009 data refer to June.

Includes credit to parastatals.

Reported debt only, excluding private sector short-term debt.

Table 2.Mauritius: Summary of Central Government Finances, 2006/07?2011 1
2006/072007/082008/092009 (Jul.-Dec.)20102011
BudgetAct.Prel.Proj.
(Percent of GDP)
Total revenue and grants19.322.021.922.921.121.920.9
Total revenue19.221.020.521.918.820.519.6
Tax revenue17.519.018.119.317.217.317.7
Taxes on net income and profits3.54.24.15.64.74.54.6
Of which: Individuals1.11.41.41.51.51.31.5
Corporate2.42.52.43.82.82.92.8
Taxes on property1.31.61.01.51.01.11.4
Taxes on goods and services11.512.111.110.810.310.110.4
Of which: VAT7.17.47.27.06.46.77.0
Taxes on international trade1.01.10.50.60.50.50.5
Other indirect taxes0.20.01.30.80.61.00.9
Nontax revenue1.72.02.42.61.73.31.9
Grants0.21.01.41.02.31.31.3
Total expenditure and net lending23.625.725.226.525.625.924.7
Current expenditure20.222.122.623.922.222.721.6
Expenditures on goods and services7.56.78.07.98.18.57.7
Wages and salaries5.65.06.16.06.06.25.7
Other goods and services1.91.71.91.92.12.32.0
Interest payments4.14.23.93.83.43.33.2
External interest0.10.10.10.10.30.20.3
Domestic interest3.94.13.83.73.13.12.9
Current transfers and subsidies8.611.110.112.210.710.210.2
Other expenditures: contingencyn.a.n.a.0.60.00.00.70.5
Capital expenditure and net lending3.43.62.62.63.53.23.1
Capital expenditure3.23.02.62.03.43.73.2
Lending minus repayment0.20.60.10.60.1-0.5-0.1
Overall balance after grants (including net lending)-4.2-3.7-3.3-3.6-4.5-4.0-3.8
Overall balance after grants (excluding net lending)-4.1-3.1-3.3-3.0-4.5-4.5-3.9
Primary balance (including net lending)-0.20.50.60.8-1.1-1.1-0.7
Financing, net4.23.73.33.64.54.03.8
External, net0.80.81.81.33.21.52.9
Disbursements1.31.22.12.03.61.83.2
Amortization-0.4-0.4-0.4-0.8-0.4-0.3-0.3
Domestic, net3.42.91.52.31.42.00.9
(Millions of Mauritian rupees)
Total revenue and grants42,32755,32761,58362,21631,36166,77069,800
Total expenditure and net lending51,60764,62670,87174,25638,08578,98782,594
Overall balance after grants-9,280-9,299-9,288-12,040-6,724-12,217-12,794
Memorandum items:
Government debt (percent of GDP)52.850.250.048.450.750.349.6
Public sector debt 2, 3 (percent of GDP)62.760.059.956.959.758.557.4
GDP at current market prices (millions of rupees)218,822251,502280,729271,503148,500305,219334,500

Fiscal years through 2008/09: July/June.

Includes central government, local government, and parastatals.

Starting in 2006/07, this includes central and local government and parastatals, after netting out investments of the Consolidated Sinking Fund (which accounts for 3 percent of GDP) in government securities.

Fiscal years through 2008/09: July/June.

Includes central government, local government, and parastatals.

Starting in 2006/07, this includes central and local government and parastatals, after netting out investments of the Consolidated Sinking Fund (which accounts for 3 percent of GDP) in government securities.

Table 3.Mauritius: Balance of Payments, 2005-20141
2005200620072008200920102011Projections

2012
20132014
(Millions of U.S. dollars, unless otherwise indicated)
Current account balance-324.4-611.8-423.1-971.2-694.4-791.7-792.6-803.2-799.4-873.3
Trade balance-797.2-1,089.1-1,403.2-1,989.2-1,477.0-1,659.2-1,745.1-1,841.4-2,035.5-2,166.7
Exports of goods, f.o.b.2,143.32,335.02,226.12,388.91,827.71,958.82,020.12,093.82,153.72,199.4
Imports of goods, f.o.b.-2,940.5-3,424.0-3,629.3-4,378.0-3,304.7-3,618.0-3,765.3-3,935.1-4,189.2-4,366.1
Services (net)420.0354.2631.9620.5527.7602.0644.6732.0849.21,018.8
Of which: tourism596.5678.9943.8997.2757.7762.6804.8871.9962.11,071.3
Income (net)-8.151.5224.3172.276.6113.5167.4181.7262.4150.2
Current transfers (net)60.971.6124.0225.2178.3152.0140.6124.5124.5124.5
Capital and financial accounts306.6182.6503.4903.1761.2792.5939.7867.4908.8902.1
Capital account-1.8-2.6-1.6-1.4-1.5-1.8-1.8-1.8-1.8-1.8
Financial account308.3185.2505.0904.5762.7794.3941.5869.2910.6903.9
Direct investment (net)-6.095.2281.0330.8222.1368.2379.5435.5531.0521.1
Abroad-47.5-10.1-58.0-52.2-33.5-36.8-40.5-44.5-49.0-53.9
In Mauritius41.6105.3339.1382.9255.6405.0420.0480.0580.0575.0
Portfolio investment (net)-16.3-27.763.5-171.1-49.2100.0100.0100.0100.0100.0
Other investment (net)164.9117.7160.5744.9589.8326.1461.9333.7279.6282.8
Of which: SDR allocation 2126.5
Of which: government (net)14.8-82.850.655.3156.8310.4237.5257.8195.7261.3
Errors and omissions 317.9285.0362.9230.6389.60.00.00.00.00.0
Overall balance-165.7-144.2443.3162.5456.40.8147.164.1109.428.8
Change in official reserves (- = increase)165.7144.2-443.3-162.5-456.4-0.8-147.1-64.1-109.4-28.8
Memorandum items:(Percent of GDP, unless otherwise indicated)
Balance of goods and services-6.0-11.3-10.3-14.7-11.1-11.4-11.1-10.4-10.3-9.2
Exports of goods and services, f.o.b.59.961.658.852.945.145.244.243.141.840.9
Imports of goods and services, f.o.b.-65.9-72.9-69.0-67.5-56.2-56.6-55.3-53.5-52.1-50.1
Foreign direct investment0.71.64.54.13.04.44.24.55.04.6
Current account balance-5.2-9.4-5.6-10.4-8.1-8.5-8.0-7.5-6.9-7.0
Overall balance-2.6-2.25.91.75.40.01.50.60.90.2
Errors and omissions 30.34.44.82.54.60.00.00.00.00.0
Net international reserves, BOM, (mill. of U.S. dollars)1,361.21,297.41,814.41,784.31,988.82,039.42,088.02,152.22,374.62,571.7
In months of imports of goods, c.i.f.5.24.35.64.66.66.66.56.46.76.9
GDP (millions of U.S. dollars)6,2846,5077,5219,3218,5279,2859,89410,65911,56612,456
Total external debt13.912.711.412.013.812.215.918.017.317.3
Total debt service ratio (percent of exports of goods and services6.16.13.63.44.54.03.93.43.12.8
Mauritian rupees per U.S. dollar (period average)29.531.731.328.532.9
Mauritian rupees per U.S. dollar (end of period)30.734.328.231.832.1

Fiscal year (July-June), analytical presentation.

Mauritius received an SDR allocation of SDR 75.3 million on August 28 and SDR 5.7 million on September 9 (total of US$126.5 million).

The 2006/07 budget announced the integration of EPZ and non-EPZ sectors.

Fiscal year (July-June), analytical presentation.

Mauritius received an SDR allocation of SDR 75.3 million on August 28 and SDR 5.7 million on September 9 (total of US$126.5 million).

The 2006/07 budget announced the integration of EPZ and non-EPZ sectors.

Table 4.Mauritius: Depository Corporations Survey, December 2006?June 2009
2006200720082009
Dec.Mar.Jun.Sept.Dec.Mar.Jun.Sept.Dec.Mar.Jun.
(Millions of rupees)
Net foreign assets239,095230,828243,085266,807266,304264,886295,283280,423285,787286,395304,631
Net domestic assets-31,574-19,614-27,677-43,704-26,985-22,972-43,108-20,422-11,307-7,234-20,853
Domestic credit218,007217,456226,550227,730242,190253,444277,278281,049296,098300,885299,757
Claims on government (net)46,18143,03842,24242,88245,52448,91053,17550,27646,96749,48849,791
Monetary authorities6,1161,332-1,417-179-270-278-4,362-7,083-3,797-6,398-10,175
Commercial banks40,06541,70643,66043,06145,79549,18857,53757,35850,76455,88659,965
Claims on private sector 1171,826174,418184,308184,848196,666204,535224,103230,774249,131251,398249,966
Other financial liabilities 2-167,431-158,223-172,353-191,350-188,761-194,836-229,974-212,487-207,939-207,021-216,148
Other items (net)-82,151-78,847-81,875-80,083-80,415-81,580-90,411-88,985-99,465-101,099-104,462
Broad money (M2)207,521211,214215,408223,103239,318241,914252,175260,001274,481279,161283,778
Money (M1)53,14853,18854,59958,34164,42961,67066,57666,53475,98777,47881,149
Quasi-money154,373158,025160,809164,762174,889180,244185,599193,467198,494201,683202,629
Reserve Money12,20813,26716,20617,56317,42417,61619,42129,29428,04730,14429,969
Memorandum Items:
(Annual change, millions of rupees)
Net foreign assets92,49366,67873,06068,40127,20834,05852,19813,61619,48421,5109,347
Domestic credit19,29915,79914,0329,89724,18335,98950,72853,31953,90847,44122,479
Claims on government931-2,421-6,505-4,577-6575,87210,9337,3941,443578-3,384
Claims on private sector 118,36918,22120,53714,47524,84030,11739,79545,92652,46546,86325,863
Broad money (M2)18,08116,08816,99621,02031,79730,70036,76836,89835,16237,24831,602
Money (M1)5,4646,6336,5329,06011,2818,48111,9778,19311,55815,80814,573
Quasi money12,6179,45510,46411,96120,51622,21924,79128,70523,60521,43917,030
(Annual percent change)
Domestic credit9.77.86.64.511.116.522.423.422.318.78.1
Claims on government2.1-5.3-13.3-9.6-1.413.625.917.23.21.2-6.4
Claims on private sector 112.011.712.58.514.517.321.624.826.722.911.5
Broad money (M2)9.58.28.610.415.314.517.116.514.715.412.5
Money (M1)11.514.213.618.421.215.921.914.017.925.621.9
Quasi-money8.96.47.07.813.314.115.417.413.511.99.2
Reserve Money-9.50.819.329.042.732.819.866.861.071.154.3
(Percentage change of beginning of year of broad money)
Net foreign assets48.832.135.233.013.114.221.85.78.17.83.7
Domestic credit10.27.66.84.811.715.021.222.322.517.38.9
Claims on government (net)0.5-1.2-3.1-2.2-0.32.54.63.10.60.2-1.3
Claims on private sector 19.78.89.97.012.012.616.619.221.917.110.3

Including claims on public enterprises.

The major component of other financial liabilities consists of restricted deposits, which largely include deposits of the offshore nonfinancial corporations (so-called Global License

Including claims on public enterprises.

The major component of other financial liabilities consists of restricted deposits, which largely include deposits of the offshore nonfinancial corporations (so-called Global License

Table 5.Mauritius: Financial Soundness Indicators for the Banking Sector, 2002-2009 1(End of period, in percent, unless otherwise indicated)
20022003200420052006200720082009

June
Capital adequacy
Regulatory capital to risk-weighted assets 212.314.215.015.415.813.315.316.3
Regulatory Tier I capital to risk-weighted asse13.013.713.713.513.711.513.714.1
Total (regulatory) capital to total assets7.28.07.87.87.36.07.37.9
Asset composition and quality
Share of loans (exposures) per risk-weight (RW) category
RW = 0%9.55.26.416.612.89.19.020.7
RW = 10%0.30.2
RW = 20%0.44.86.70.21.33.93.323.6
RW = 50%7.07.99.66.56.05.75.28.2
RW = 100%83.282.177.376.779.881.182.339.8
Total exposures/total assets51.647.845.953.640.144.854.940.1
Sectoral distribution of loans to total loans
Agriculture9.79.17.55.75.76.06.16.1
of which: sugar8.68.06.45.65.04.85.04.9
Manufacturing16.114.813.612.011.210.29.49.0
of which: EPZ9.47.56.15.44.84.74.03.7
Traders14.114.914.513.914.913.511.711.6
Personal and professional9.29.810.09.49.59.78.68.6
Construction13.914.216.215.215.416.418.719.0
of which: housing10.59.010.810.712.010.912.412.2
Tourism/hotels15.015.915.413.213.213.615.415.0
Other21.321.222.830.730.130.645.645.8
Foreign currency loans to total loans10.310.912.251.550.756.365.562.3
NPLs to gross loans - excluding accrued/unpa8.39.68.14.03.02.52.02.6
NPLs net of provisions to capital34.028.122.411.47.09.18.210.7
Large exposure to capital 3263.7220.9200.0250.3380.0493.2394.2215.7
Earnings and Profitability
ROA (Pre-tax net income/average assets)2.02.12.11.91.71.91.71.6
ROE (Pre-tax net income/average equity)18.119.219.221.122.426.424.321.1
Interest margin to gross income32.632.134.736.331.227.629.768.6
Noninterest expenses to gross income23.123.927.720.116.41517.238.8
Expenses/revenues10.510.610.28.17.76.88.5
Earnings/employee - in 000 of rupees1,8192,2122,4332,9042,8173,402
Liquidity
Liquid assets to total assets432.736.637.944.152.847.727.728.7
Liquid assets to total short-term liabilities465.371.071.788.6118.8104.231.934.4
Funding volatility ratio16.413.914.0-20.1-51.6-33.7-9.3
Demand deposits/total liabilities10.310.310.715.915.418.419.423.9
FX deposits to total deposits11.711.013.857.368.067.666.064.1
Sensitivity to market risk
Net open positions in FX to capital 47.520.81.94.26.43.23.86.7

Banking sector refers to former Category 1 banks up to December 2004 and to all banks thereafter.

Total of Tier I and Tier 2 less investments in subsidiaries and associates.

Prior to June 2006, data refer to Category 1 banks only.

Ratio has been revised according to manual as from 2008

Banking sector refers to former Category 1 banks up to December 2004 and to all banks thereafter.

Total of Tier I and Tier 2 less investments in subsidiaries and associates.

Prior to June 2006, data refer to Category 1 banks only.

Ratio has been revised according to manual as from 2008

Table 6.Mauritius: Indicators of Financial and External Vulnerability, 2005-2012 1/
20052006200720082009201020112012
Projections
Financial Indicators
Total central government debt (percent of GDP)#55.852.850.250.050.650.249.547.8
Total public sector debt (percent of GDP)68.862.760.059.959.758.557.455.9
Broad money (percent change; 12-month basis)4.29.515.314.712.5
Private sector credit (percent change; 12-month basis)5.712.014.526.711.5
Treasury Bill rate (weighted average of primary auctions)6.47.511.07.44.8
External indicators
Exports (percent change, in U.S. dollar terms)7.38.9-4.77.3-23.57.23.13.6
Imports (percent change, in U.S. dollar terms) 2/14.016.46.020.6-24.59.54.14.5
Terms of trade (percent change)-8.4-5.8-1.0-1.11.6
Current account balance (percent of GDP)-5.2-9.4-5.6-10.4-8.1-8.5-8.0-7.5
Capital and financial account balance (percent of GDP)4.95.00.87.93.67.98.97.6
Net international reserves of the Bank of Mauritius
Millions of U.S. dollars 3/1,3611,2971,8141,7841,9892,0452,0682,137
Months of imports, c.i.f. 2/5.24.35.64.66.66.66.56.4
Net international reserves of the banking system
Millions of U.S. dollars3,6604,5766,6197,9677,6578,0408,4428,864
Months of imports, c.i.f. 2/18.122.929.323.231.730.629.828.4
Total long and medium-term external debt (percent of GDP)13.912.711.412.013.812.215.918.0
Percent of exports of goods and services23.220.719.422.830.626.936.041.8
Total external debt service
Percent of exports of goods and nonfactor services6.16.13.63.44.54.03.93.4
Of which: interest payments0.80.70.70.60.70.91.01.4
Of which: principal repayments5.35.42.82.83.83.12.92.1
Exchange rate (Mauritian rupees per U.S. dollar; period average)29.531.731.328.532.932.933.834.5
Financial market indicators
Mauritius stock exchange index (SEMDEX; July 1989 = 100) 4/1194182011791412
Change in percent62.152.4-35.219.7
Foreign currency long-term debt rating by Moody’s 4/Baa2Baa1Baa2Baa2

Fiscal year (July-June).

Excluding the acquisition of aircraft and ships.

The reserves of the Bank of Mauritius are not pledged as collateral for short-term liabilities, nor are they sold forward.

Bonds rated “Baa2” by Moody’s are considered as medium-grade obligations.

Fiscal year (July-June).

Excluding the acquisition of aircraft and ships.

The reserves of the Bank of Mauritius are not pledged as collateral for short-term liabilities, nor are they sold forward.

Bonds rated “Baa2” by Moody’s are considered as medium-grade obligations.

Appendix. Debt Sustainability Analysis

Assumptions

The macroeconomic projection assumes that the government will resume fiscal consolidation as part of its post-crisis strategy and that growth will be higher, driven by rising foreign and domestic investment, and supported by ongoing structural reforms to improve competitiveness. Assuming no major negative shocks, GDP growth is expected to trend at 5 percent. The fiscal deficit will continue to decline as fiscal consolidation is resumed and financial discipline on public enterprises is better enforced. The primary balance, which was positive in 2007/08 and 2008/09, is projected to be negative in 2009 and 2010 but turn positive again in the medium term. Public investment is projected to rise to support higher growth.

Public Debt

In Mauritius the public finances are fundamentally sound and public debt is sustainable over the medium-term; the new Public Debt Management Act provides additional safeguards. With the launching of a wide-ranging reform strategy in 2005, the government has successfully implemented program-based budgeting within a medium-term expenditure framework, and the new debt law stipulates a reduction in public debt to 50 percent of GDP by 2013. Since fiscal consolidation began in 2005, public debt has been reduced from a peak of over 80 percent of GDP in 2003 to 54 percent in 2008. The forward-looking debt sustainability analysis (DSA) suggests that public debt will remain sustainable over the medium term (Table 1). It incorporates the fiscal stimulus measures, which are projected to push the deficit up to 4 percent of GDP in calendar 2009 and 4.5 percent in 2010 from about 3 percent in 2007 and 2008. Based on this scenario, public debt peaks at slightly below 60 percent of GDP in 2009 before falling to 52 percent in 2014, the end of the projection period. This adjustment is consistent with commitments under the Public Debt Management Act, which limits public sector debt to 60 percent of GDP and targets a medium-term reduction to 50 percent under “normal” circumstances. The results of standardized tests do not alter the general assessment because no scenario raises the debt ratio above levels observed as recently as 2004. Indeed, the only scenario in which debt exceeds the authorities’ own limit of 60 percent of GDP is when the primary deficit remains at its 2009 level over the full projection horizon (2009-14; Table 1); however, the authorities do not intend to maintain the deficit at its 2009 level, which was relatively large due to the economic downturn and stimulus. The medium-term scenario is also quite resilient to macroeconomic shocks: if growth were about 1 percent lower than projected, the debt-to-GDP ratio would increase to 56 percent of GDP (Figure 1).

Table 1.Mauritius: Public Sector Debt Sustainability Framework, 2004-2014(In percent of GDP, unless otherwise indicated)
ActualProjections
20042005200620072008200920102011201220132014Debt-stabilizing
primary
balance 9/
1Baseline: Public sector debt 1/70.569.668.862.753.759.658.157.456.254.352.3-0.9
o/w foreign-currency denominated14.213.312.311.48.111.513.215.017.317.317.3
2Change in public sector debt-10.8-0.8-0.9-6.1-9.05.9-1.5-0.7-1.2-1.9-2.0
3Identified debt-creating flows (4+7+12)-2.01.71.9-1.7-5.54.6-1.5-1.1-1.5-2.3-2.4
4Primary deficit1.51.31.80.2-0.53.20.10.50.2-0.5-1.1
5Revenue and grants20.320.020.119.320.920.221.820.820.220.620.6
6Primary (noninterest) expenditure21.821.422.019.520.323.421.921.320.320.119.6
7Automatic debt dynamics 2/-3.50.40.0-2.3-6.11.5-1.1-1.6-1.6-1.8-1.3
8Contribution from interest rate/growth differential 3/-3.1-0.3-0.6-2.6-6.21.5-1.1-1.6-1.6-1.8-1.3
9Of which contribution from real interest rate0.11.91.6-0.4-2.52.21.10.90.90.71.2
10Of which contribution from real GDP growth-3.2-2.2-2.2-2.2-3.7-0.8-2.2-2.5-2.6-2.5-2.5
11Contribution from exchange rate depreciation 4/-0.40.70.70.30.0
12Other identified debt-creating flows0.00.00.00.51.10.0-0.50.00.00.00.0
13Privatization receipts (negative)0.00.00.00.00.00.0-0.50.00.00.00.0
14Recognition of implicit or contingent liabilities0.00.00.00.51.10.00.00.00.00.00.0
15Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
16Residual, including asset changes (2-3) 5/-8.9-2.5-2.7-4.5-3.51.30.00.40.30.40.4
Public sector debt-to-revenue ratio 1348.0347.5341.4323.9257.2295.0266.5276.0278.4263.5253.4
Gross financing need 6/90.482.975.269.550.943.942.540.436.933.030.4
in billions of U.S. dollars5.55.24.84.74.73.74.04.03.93.83.8
Scenario with key variables at their historical averages 7/59.658.858.858.758.858.9-1.1
Scenario with no policy change (constant primary balance) in 2009-201459.658.759.560.160.761.6-1.7
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)4.33.43.53.67.11.54.14.74.95.05.0
Average nominal interest rate on public debt (in percent) 8/6.97.77.28.29.28.47.27.07.16.77.6
Average real interest rate (nominal rate minus change in GDP deflator, in percent)0.43.12.6-0.4-3.94.42.22.02.11.72.6
Nominal appreciation (increase in US dollar value of local currency, in percent)2.5-4.6-4.9-2.3-0.3
Inflation rate (GDP deflator, in percent)6.54.64.68.613.14.05.05.05.05.05.0
Growth of real primary spending (deflated by GDP deflator, in percent)2.61.56.2-7.911.613.82.6-0.5-3.25.42.8
Primary deficit1.51.31.80.2-0.53.20.10.50.2-0.5-1.1

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(rπ(1+g)g+αɛ(1+r)]/(1+g+π+gπ))

times previous period debt ratio, with r = interest rate; Π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - Π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as as(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(rπ(1+g)g+αɛ(1+r)]/(1+g+π+gπ))

times previous period debt ratio, with r = interest rate; Π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - Π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as as(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Appendix. Figure 1.Mauritius: Public Sector Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Stochastic simulation of public debt dynamics in Mauritius suggests that, on the baseline projection for the primary balance (which incorporates the stimulus package), there is a strong likelihood that the public debt ratio will at least stabilize, and may fall marginally, over the next five years (Box 1).

External Debt

External debt is sustainable. Excluding short-term private sector liabilities, it stood at 13.4 percent of GDP at the end of 2009, down from 19.6 percent in 2002. Official estimates of short-term private sector debt are only about 1 percent of GDP—almost surely it is under-reported. A preliminary survey suggests that total short-term external liabilities of the nonfinancial private sector are unlikely to be higher than 10 percent of GDP; an updated survey is planned for the end of 2009. Gross bank external liabilities were about 100 percent of GDP at the end of July 2009 and are not included in external debt as bank foreign assets are almost twice as large,1 and as in many international financial centers, it would be misleading to include gross bank liabilities in the external debt measure.2 Including banks’ position on a net basis in external debt shows that the net external debt position for the economy as a whole is generally balanced (Box 2). Projections suggest that external debt will rise over the next few years before stabilizing at about 19 percent of GDP, and debt dynamics remain stable in the face of DSA template shocks.3

Box 1.Stochastic Debt Sustainability Analysis

Monte Carlo simulations of public debt dynamics around the baseline projection (using shocks based on the estimated variance-covariance matrix of the primary balance, real GDP growth, and the real interest rate) yield a declining debt ratio after 2010, with the mean of the distribution at about 50 percent of GDP by 2014 (marginally lower than the baseline projection of 52 percent with the 90 percent confidence interval of [41, 61]; see Figure). Endogenizing the primary balance to allow it to react to the level of public debt yields a statistically significant regression coefficient of 0.1, implying that for each 10 percent of GDP that public debt increases, the primary balance in Mauritius has, historically, improved by 1 percent of GDP. This compares favorably to advanced economies (where the average coefficient is 0.02) and to other EMEs (where the average coefficient is 0.04).1 Incorporating this primary balance reaction function yields a somewhat lower mean debt ratio of 48 percent of GDP by 2014 with the 90 percent confidence interval of [41, 56], which suggests that the primary balance in the baseline projection is not implausible given Mauritius’ historical performance and its ongoing fiscal reform efforts.

Public Sector Debt (in percent of GDP) Stochastic Simulation around the Baseline

Public Sector Debt (in percent of GDP) Stochastic Simulation with Historical Primary Balance Reaction

1/ See Mendoza and Ostry (2008), “International Evidence on Fiscal Solvency: Is Fiscal Policy “Responsible”?, Journal of Monetary Economics, vol. 55, pp. 1081-93.

Box 2.Aggregate Balance Sheet of Mauritius Banks

As noted in the text, the DSA excludes bank foreign assets and foreign liabilities (following DSA policies for financial centers), but does such an “outsized” banking system nevertheless pose risks?

Structure of the banking system. The Mauritius banking system is dominated by two long-established domestic (MCB and SBM) and two international banking groups (Barclays and HSBC). Of the 18 commercial banks, four large banks serve both the domestic and foreign market, three large foreign banks serve almost exclusively nonresidents, five small and medium banks are focused on nonresidents, but pay increasing attention to the domestic market; the remainder largely serve the domestic market.

Foreign exchange (FX) versus foreign assets and liabilities. FX liabilities are about 121 percent of GDP and FX assets are 172 percent. Of the latter, 153 percent of GDP represent claims on nonresidents (of which 58 percent of GDP—equivalent to almost one-half of FX liabilities—are simply held as balances in banks abroad). FX lending to residents is only 19 percent of GDP (of which 6 percent of GDP is to the GBCs), and many residents have foreign currency earnings (e.g., the tourist sector). Foreign liabilities are much smaller than FX liabilities because the GBCs are considered residents in the monetary statistics. Liabilities to (the deposits of) the GBCs are funds that originate from foreign investors (who wish to invest, e.g., in India) and are temporarily parked in Mauritian banks before transfer abroad. These deposit floats, though flowing through Mauritian banks, are quite stable in aggregate, amounting to some 72 percent of GDP, virtually all in FX, and providing useful short-term FX liquidity to the banking system. FX liabilities to other residents (34 percent of GDP) likely reflect retail deposits of foreign currency earners (e.g., the tourist trade), and nonresident liabilities likely include regional depositors seeking to benefit from the country’s financial and political stability.

Risks. The large net foreign asset position (equal to 109 percent of GDP, or 44 percent of GDP if the GBCs are considered non-residents), the long FX position, the large proportion of FX assets held as highly liquid bank deposits abroad, and the limited FX lending to residents all give comfort that the risks should be manageable. Nevertheless, given the sheer magnitudes, close vigilance is warranted.1/

Mautius: Banks Balance Sheet, end-August 2009
Rupees (billion)Share (percent)1/Percent of GDP
TotalForeignDomesticTotalof whichTotalof which
currencycurrencyFC2/FC2/
Assets736.4480.9255.5100.065.3263.0171.7
Claim on residents307.852.4255.541.87.1109.918.7
GBCs17.617.50.12.42.46.36.2
Other residents290.334.9255.439.44.7103.712.5
Claim on non-residents428.5428.50.058.258.2153.0153.0
Liabilities736.4338.9397.5100.046.0263.0121.0
Liabilities on residents612.5297.2315.383.240.4218.8106.1
GBCs202.9202.80.127.627.572.572.4
Other residents409.794.4315.355.612.8146.333.7
Liabilities on non-residents3/123.841.782.116.85.744.214.9

Percent of total assets.

Foreign currency.

This includes non-resident liabilities and banks borrowings from banks abroad and from banks abroad for onlending outside Mauritius are assumed denominated in foreign currency.

Percent of total assets.

Foreign currency.

This includes non-resident liabilities and banks borrowings from banks abroad and from banks abroad for onlending outside Mauritius are assumed denominated in foreign currency.

1/ In reviewing developments over the past decade Patrick Imam and Rainer Kohler (“Balance Sheet Vulnerabilities of Mauritius During A Decade of Crises,” forthcoming) conclude that from a balance sheet analysis perspective, the macroeconomic vulnerabilities of Mauritius are manageable.
Table 2.Mauritius: External Debt Sustainability Framework, 2004-2014(In percent of GDP, unless otherwise indicated)
ActualProjection
20042005200620072008200920102011201220132014Debt-stabilizing
non-interest
current account 6/
1Baseline: External debt14.812.87.89.57.613.416.217.919.018.819.1-6.0
o/w estimated short-term0.20.00.01.51.11.92.12.63.33.43.4
2Change in external debt-2.1-1.9-5.01.6-1.95.92.81.81.0-0.20.4
3Identified external debt-creating flows (4+8+9)2.26.08.4-0.78.56.12.82.31.40.30.8
4Current account deficit, excluding interest payments1.34.79.05.210.17.88.17.56.96.36.3
5Deficit in balance of goods and services2.46.011.310.314.711.111.411.110.310.39.2
6Exports54.059.961.658.852.945.145.143.942.641.840.9
7Imports56.465.972.969.067.556.256.555.053.052.150.1
8Net non-debt creating capital inflows (negative)0.90.4-1.1-4.1-1.9-2.0-5.1-4.8-5.0-5.5-5.0
9Automatic debt dynamics 1/0.00.90.5-1.80.30.2-0.1-0.3-0.4-0.5-0.4
10Contribution from nominal interest rate0.50.50.40.40.30.30.40.40.40.40.4
11Contribution from real GDP growth-0.9-0.2-0.5-0.3-0.4-0.1-0.5-0.7-0.8-0.9-0.9
12Contribution from price and exchange rate changes 2/0.40.70.6-1.90.4
13Residual, incl. change in gross foreign assets (2-3) 3/-4.3-7.9-13.42.3-10.40.00.00.00.00.00.0
External debt-to-exports ratio (in percent)27.421.512.716.114.329.835.940.944.544.946.8
Gross external financing need (in billions of US dollars) 4/0.30.50.80.61.100.91.01.11.11.21.3
in percent of GDP4.78.412.76.913.210.511.410.810.710.610.7
Scenario with key variables at their historical averages 5/13.414.315.116.016.717.5-1.5
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)5.51.53.95.44.21.54.14.74.95.05.0
GDP deflator in US dollars (change in percent)-2.2-4.4-4.331.8-4.02.80.53.72.42.52.6
Nominal external interest rate (in percent)3.33.23.47.53.64.23.02.42.42.32.5
Growth of exports (US dollar terms, in percent)-1.17.62.332.5-10.1-11.04.65.74.35.55.3
Growth of imports (US dollar terms, in percent)5.713.410.131.5-2.1-13.15.05.73.55.83.6
Current account balance, excluding interest payments-1.3-4.7-9.0-5.2-10.1-7.8-8.1-7.5-6.9-6.3-6.3
Net non-debt creating capital inflows-0.9-0.41.14.11.92.05.14.85.05.55.0

Derived as [rgρ(1+g)+ɛα(1+r)]/(1+g+ρ+gρ)

times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [ρ(1+g)+ɛα(1+r)]/(1+g+ρ+gρ)

times previous period debt stock.

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year

Derived as [rgρ(1+g)+ɛα(1+r)]/(1+g+ρ+gρ)

times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [ρ(1+g)+ɛα(1+r)]/(1+g+ρ+gρ)

times previous period debt stock.

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year

Appendix I. Figure 2.Mauritius: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2009.

1

See Sacerdoti, El-Masry, Khandelwal, and Yao, Mauritius: Challenges of Sustained Growth (IMF, 2005).

2

Including a 15 percent flat tax rate, establishment of a central revenue authority, adoption of a fiscal consolidation strategy anchored in budgetary reforms (supported by Fund technical assistance), and a public debt law that stipulates reducing public debt to 50 percent of GDP by 2013 from its peak of 80 percent in 2003.

3

These steps are very much in line with staff policy advice to EMEs; see Coping with the Crisis: Policy Options for Emerging Market Economies (SPN/09/08).

4

Econometric decomposition of the change in inflation during the first two quarters of 2009 suggests that about 25 percent of the change is attributable to external factors (oil prices, global demand); 34 percent to monetary conditions (changes in the repo rate and money demand); and 14 percent due to domestic factors (GDP growth slowdown).

5

Mauritius’ exchange rate regime has been reclassified from a managed float to a free float in the Fund’s AREAR.

6

Cross-country evidence suggests fiscal multipliers of about 0.5 for small, open economies; see Fiscal Multipliers, SPN/09/11.

7

This “Mauritius Approach”—also known as the Mauritian Transitional Support to the Private Sector (MTSP)—is based on burden sharing amongst shareholders, management, creditors, and government. To date, 11 companies have received assistance under the MTSP, to which the government has contributed Rs140 million (36 percent of the total MTSP support for these companies; the rest has been provided by banks and share holder equity) in the form of debentures at 5 percent interest. During the MTSP support, the companies’ management may be subject to cuts in salary and benefits and no dividends are paid until the government has redeemed its investment. In regard to the fiscal cost of the program, the authorities estimate that the net present value (NPV) should be zero, and only if some assisted companies fail would the NPV may be negative. All firms assisted so far are doing well, with tight monitoring by the banks and authorities reducing risks to the government budget.

8

The three CGER-type methodologies yield estimated overvaluations of 1.9 percent for the macroeconomic balance approach (MB), 5.5 for the equilibrium real exchange rate (ERER) approach, and 5.7 for the external sustainability approach (ES)—insignificantly different from zero, given the standard errors of the analysis. For the MB approach, at end-2009 the CA norm is estimated—using CGER coefficients—at 4.7 percent. Using a variety of estimates, the underlying CA is below the CA norm by 1.0—3.4 percent of GDP (1.5 percent for the “baseline” underlying CA). Given the estimated elasticity of the current account response to the exchange rate, these estimates suggest a small exchange rate overvaluation of 1.2—4.0 percent (1.9 percent for the “baseline” underlying CA).

9

Including the general and special SDR allocations (SDR 75.3m, and SDR 5.7m) that the authorities intend to hold as reserves (Table 3).

10

The scheme provides for up to 12 months of transitional assistance to workers who opt to join the program. Workers receive a stipend of 90 percent of the basic wage for the first three months, 60 percent for the second three, and 30 percent for the six after that. In return workers must choose one of three programs offered by the government: (i) job placement; (ii) training and retooling; or (iii) assistance in starting a small business.

11

The borrowing requirement will be limited to 4 percent of GDP including through the sale of Mauritius Telecom shares. On taxes, the government will not increase the VAT and will maintain various tax suspensions in the tourism, construction, and real estate sectors until the end of 2010.

12

Although Mauritius’s public debt is high relative to most emerging market countries (close to 60 percent of GDP compared to an average of 50 percent of GDP for non-fuel exporting EMEs), its vulnerability is limited in part because it is nearly all held domestically by the National Pension Fund and commercial banks. Moreover, appetite for treasury bills remains strong; indeed, one concern of banks is that the government will reduce the domestic financing of its budget. Nonetheless, reducing public debt is important, for which grant support from development partners (including, e.g., continued support from the EC V-FLEX) would be particularly useful.

13

Sensitivity analysis suggests that fiscal risk factors (e.g., lower revenues) are in the order of 0.5 to 0.6 percent of GDP.

15

While the BoM could issue securities to mop up the increase in liquidity, this would be equivalent to domestic financing of the consolidated public sector in the first place—and would include a carry cost on the interest differential.

16

Such a move is also facilitated by the change from centralized wage determination to collective bargaining at the national level via the National Pay Council supplemented by flexibility in implementing recommendations at the firm level. The NPC formula of half inflation plus productivity to guide wage setting should favor a low inflation environment.

17

The NEF provides an overall coordinating framework for the Empowerment Program, the Trust Fund for the Social Integration of Vulnerable Groups, the Eradication of Absolute Poverty Program, the Decentralized Cooperation Program, the Program for Rodrigues and the Corporate Social Responsibility Program.

18

The first-round survey of GBCs is on track; the FSC sent the survey to the 12 MCs on September 25 with a submission deadline of March 31, 2010.

1

Bank investments of the GBC float—that is, money from foreign investors meant to be transferred to third countries but held for a short period by GBCs in bank deposits—are included. Excluding these GBC counterpart investments would still result in a positive bank net foreign asset position.

2

See Debt Sustainability Analysis for Market Access Countries Guidance Note (July 5, 2005), available at http://www-intranet.imf.org/departments/SPR/Debt/Pages/DSAMarketAccess.aspx.

3

Historically, there are large positive errors and omissions in the balance of payments. These likely reflect, inter alia, management fees earned by GBCs (which are not captured in the BOP statistics, which treat GBCs as nonresidents), as well as, possibly, capital inflows. For the purposes of DSA projections, the authorities’ estimate of likely management fees is included in the service receipts of the current account. Nevertheless, the projections likely overestimate the increase in external debt, as the unaccounted errors and omissions are unlikely to be all debt-creating.

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