On behalf of my Mauritian authorities, I would like to express their appreciation to the staff for the constructive and engaging dialogue during the conduct of the 2014 Article IV Consultation. The staff report provides an insightful analysis of the economy and helpful advice, focused on policies to preserve macroeconomic stability and keep advancing towards higher and sustainable growth. My authorities would also like to express their gratitude to Management and staff for the high quality of technical assistance provided. This has been crucial in the development of the appropriate economic and financial policies and their implementation. The technical assistance provided, over the years, has been instrumental in the economic progress achieved.
The Mauritian economy continued to perform moderately well in 2013, with a broadly appropriate policy mix. Real GDP grew at 3.1 percent, as growth slowed down in the construction, tourism, and information technology sectors. Inflation remained low at about 3.5 percent, in spite of the public sector wage increases. The trade account improved but the current account deficit increased due to decline in service exports, mainly income from the Global Business Companies (GBC) transactions. The nominal exchange rate of the Mauritian rupee remained broadly stable and the central bank continued to build international reserves buffers.
Fiscal policy was slightly more expansionary than planned, due mainly to lower tax revenue and unexpected outlays related to the early 2013 floods. Capital expenditure was also higher than budgeted due to cost overruns. As a result the fiscal deficit and the public debt ratio increased.
Monetary policy was appropriately accommodative. Inflation declined compared to the previous year. However, an important concern of the authorities was the excess liquidity in the economy. The Bank of Mauritius increased reserve requirements twice last year in its efforts to remove excess liquidity. Presently, this excess liquidity is not putting pressure on prices as the output gap is negative and there is little demand for domestic credit. However, the situation does raise concerns as it is contributing to financial disintermediation and banks are not encouraging new deposits as they become more costly for them. The low interest rates and the excess liquidity are causing an increase in riskier lending, particularly in some segments of real estate. In this regard, the Bank of Mauritius issued guidelines to contain the expansion of loans toward the real estate sector and the increase in household debt. Notwithstanding these developments, the banking system remains strong and profitable. Banks are well capitalized, well above the Regulatory Tier I capital to risk-weighted assets of Basel II and Basel III, and non-performing loans remain low.
Structural reforms were pursued. Measures that were budgeted have been implemented. They are mostly in the transportation and water sectors with the aim to remove infrastructure bottlenecks and improve productivity.
Economic Outlook for 2014 and the Medium-Term
Policies going forward will continue to focus on raising economic growth with the objective of reaching high income status within a decade. Efforts will focus on reducing external imbalances through, among others, fiscal consolidation and reforms to remove infrastructure bottlenecks and improve productivity. Prudent investments in physical and human capital should help raise total factor productivity, in spite of a zero population growth. The authorities are of the view that their policies of encouraging economic diversification, supporting domestic demand, and attracting foreign investors will result in a higher growth rate than projected by staff. In this regard, they would note their successful efforts at diversifying their tourist markets towards Africa and Asia, and also diversifying the financial service sectors, especially the GBCs towards Africa. Together with the further development of the maritime sector (seafood, transshipment, ships registration, etc), and the expected recovery in their traditional export markets, the authorities expect real GDP growth to strengthen over the medium term.
The 2014 fiscal deficit is projected to be about the same as the previous year. New measures like excise on cars and tobacco should help raise revenue. Current expenditure is not expected to increase. However, total spending will increase as the authorities expand capital spending, mainly investment spending in public infrastructure, strengthen social safety nets, and foster the activities of the emerging sectors of the economy. More broadly, given the weak economic activity in the country’s main trading partners, the authorities are of the view that their policies, without being too expansionary, will help support economic growth and employment.
Over the medium term, the authorities intend to pursue policies aimed at fiscal consolidation in order to reduce external imbalances, and meet the debt target. However, in trying to reduce the fiscal deficit, the authorities prefer to focus their adjustment efforts on expenditure containment rather than revenue-increasing measures. They view the present tax system that has been put in place over a number of years as being simple and broadly efficient and one that attracts investors. However, they agree that the revenue system can be improved, and in that context are planning to harmonize the customs and excise taxes with Fund TA. They are also requesting Fund TA to develop and implement a system of real estate tax. They have taken good note of the recommendations of staff regarding better targeting of social assistance, and subsidies, and improving the financial performance of state-owned-enterprises (SOEs) and local governments. As regards the latter the authorities have greatly appreciated the presentation of staff during the Article IV Consultation. At the same time, the authorities view with appreciation the work done by staff on pension. Many of the recommendations of staff are under consideration and the technical work to prepare the ground work for future reforms has started.
The debt outlook remains positive. The results of the debt sustainability analysis indicate that public debt is sustainable over the medium term. The debt ratio has been on a declining trend since 2003, but the stimulus implemented to counter the adverse effects of the global financial crisis and the slowdown in economic growth have caused the debt ratio to increase slightly. The authorities remain fully committed to the objective of bringing the debt ratio down to 50 percent of GDP, and are confident that they will be able to reach this objective with further fiscal consolidation over the medium term. Moreover, a strengthening of real GDP going forward, based on both domestic measures, including public sector investment, and better growth in trade partners will also contribute to a lowering of the debt ratio.
The authorities are committed to reducing its involvement in State Owned Enterprises (SOEs). The Mauritian authorities share the view of staff that a strengthening of the financing of SOEs can both reduce government expenditure and ensure that the debt target is met. In this regard, they have already started work on strengthening the financial framework of the SOEs. A public sector governance office has been set up. It is responsible, among others, to review the performance of the SOEs and to propose restructuring plans, including privatization. In this regard, it is to be noted that the Development Bank of Mauritius (DBM) is already being privatized. A system of Key Performance Indicators (KPI) has been set up and is being monitored by the EU, under its budgetary support. The aim eventually is for the private sector to become majority share owners of these enterprises and for the government to use the proceeds from the sale to further reduce the public debt.
Monetary and Financial Sectors
The Bank of Mauritius will pursue its prudent monetary policy aimed at maintaining price stability and orderly and balanced economic development. It will continue to monitor external and domestic price developments closely and will tighten monetary conditions, if the situation warrants it. The current “hybrid inflation targeting” framework is serving Mauritius well and has helped to bring inflation down. It remains the intention of the authorities to move to a full inflation targeting framework in the future.
The authorities are giving their full attention to the excess liquidity issue in the economy. Over the past few weeks, representatives of the Bank of Mauritius and the Ministry of Finance have met regularly to discuss the best ways to address the issue and the modalities of a cost-sharing mechanism, as suggested by staff. In the meantime, both parties have come to an agreement as to what level of excess liquidity could adversely affect the economy. The Bank of Mauritius increased the reserve ratio for banks in March. The Ministry of Finance has for its part decided to frontload its borrowing requirement for this year, and to sell Treasury notes directly to the public and bear the associated costs. Moreover, it has cancelled a substantial contingency loan from the African Development Bank. The central bank is monitoring the situation carefully and future actions will be taken promptly, as necessary.
The banking system remains strong. It is well capitalized and, as staff note, it is resilient against a number of shocks according to stress tests. Nevertheless, additional macro-prudential measures have been introduced to address possible vulnerabilities in the banking sector. The central bank is continuing its work on a deposit insurance scheme (DIS). A draft DIS Bill has been prepared after consultation with stakeholders, but will be strengthened with further technical assistance from the Fund and World Bank before its presentation to parliament. Moreover, in view of recent weaknesses that have appeared in the regulatory framework of the non-bank financial sector, the Bank of Mauritius is strengthening its coordination with the non bank financial supervisory institution, the Financial Services Commission (FSC), to address those issues. Although there are important links between the global business and onshore sectors, through notably job creation and provisions of services, the contribution of the global business sector to the Mauritian economy is rather small and is not a risk to the economy. Nevertheless, as the sector expands, the risks associated with their activity could increase, and the authorities are taking steps to strengthen the statistical coverage of the Global Business Companies (GBCs) and the regulatory framework.
In conclusion, while the economy is performing rather well, the authorities are well aware of the challenges and risks to the outlook. They are in broad agreement with the staff’s assessment and with the policy recommendations. They will continue to monitor closely developments, both external and domestic, and will continue to implement reform measures aimed at achieving a higher level of inclusive growth in an environment of macroeconomic stability. In this regard, the authorities are working closely with the private sector to develop a “blueprint” for the next six years to accelerate economic growth and enable the country to reach high income status.