IMF Executive Board Concludes 2012 Article IV Consultation with Mauritius

On March 14, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius.

Background

The Mauritian economy continued its recovery in 2011, but growth momentum has slowed down in face of an adverse external environment. Real GDP growth is estimated to remain at around 4 percent, driven mostly by growth in textiles, ICT, financial services, and real estate. Inflationary pressures increased substantially in the first half of the year (the year-on-year inflation rate tripled to 6.6 percent in June) mainly on account of import prices and one-time increases in administered prices. There was a further jump to 7 percent in November 2011 due to one-time increases in alcohol and tobacco excises. By December, inflationary pressures moderated with year-on-year inflation falling to 4.9 percent as the base effects became absorbed. The fiscal stance was broadly unchanged compared to 2010, but less expansionary than expected. The overall deficit is estimated to have narrowed to 2.4 percent of GDP. The structural primary deficit excluding grants decreased from 0.3 percent of GDP in 2010 to 0.1 percent. A small shortfall in total revenues and grants was more than offset by the fact that capital expenditures were almost 1 percentage point of GDP lower than anticipated. While total expense remained close to projected levels, contrary to what was anticipated there was a net accumulation of resources in extra budgetary funds of almost 1 percent of GDP. Expense on goods and services and compensation of employees was lower than projected partly because of the postponing of local elections to 2012 and delays in filling vacancies in the civil service, whereas expense on grants and transfers was almost 2 percentage points of GDP higher than anticipated, because of larger capital grants and transfers to the special funds. Public sector debt declined to 56 percent of GDP.

Monetary policy was tightened with the key repo rate increased cumulatively by 65 basis points in response to inflationary developments. To address excess liquidity that built up in the system, the Bank of Mauritius (BOM) increased cash reserve requirements from 6 to 7 percent in February and issued Bank of Mauritius Bills and Notes with maturities of up to four years. It also increased the repo rate by 50 basis points in March and by 25 basis points in June, before lowering it by 10 basis points in December to address inflationary and economic developments. Private sector credit growth estimated at 13 percent for 2011 remained adequate, and similar to 2010. The authorities continued to intervene in the foreign exchange market to smooth excess volatility. Later in the year, the BOM also intervened to limit the appreciation of the rupee with most of the interventions sterilized. As a result of its liquidity management, the BOM's profitability was reduced in 2011.

The banking sector remains robust, and the system has proved resilient. Banks have remained liquid and well-capitalized, with 14.1 percent of Regulatory Tier I capital to risk-weighted assets in June. Non-performing loans (NPL) decreased from 2.8 percent of gross loans at end-2010 to 2.6 percent by June 2011. Banks have remained profitable with 21.5 percent return on equity, despite relatively low leverage ratios. In June 2011, the BOM started publishing CAMEL rating of domestic banks. This is a welcome development, as it is one of the first central banks in Sub-Saharan Africa (SSA) to do so. This should contribute to increase transparency about the state of the banking system. Despite strong export growth, a rebound in world commodity prices led to a widening of the current account deficit, but international reserves increased. Exports increased some 16 percent (in dollar terms), with strong growth registered across all major tradable industries. Tourism receipts grew some 12 percent as well, but a marked decrease in fourth quarter arrivals from key EU markets point to a difficult year ahead. On balance, the 17 percent increase in imports and a reduction in net transfers widened the current account deficit to some 10 percent of GDP. The deficit was more than covered with portfolio inflows and official loan disbursements. International reserves increased in nominal terms, but reserve cover in terms of imports of goods and services slipped to 4.4 months.

Over the past two decades, wide-ranging structural reforms, supported by prudent policies, have established Mauritius as a top regional performer. Mauritius’ national statistical capacity is being strengthened in line with its needs as an emerging economy. In line with these efforts, Mauritius subscribed to the Special Data Dissemination Standard (SDDS) in February 2012.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ skillful policy response to the global crisis, which has enabled a strong economic recovery and contained inflationary pressures. The growth outlook for 2012 is broadly positive, although external risks have increased. The key priorities going forward are to sustain fiscal consolidation, reduce external imbalances, enhance competitiveness and public sector service delivery, and foster inclusive growth.

Directors acknowledged the need for higher public investment to remove infrastructure bottlenecks. At the same time, most Directors saw merit in a slightly less expansionary fiscal stance than projected for 2012, in view of the need to build policy buffers. In case of a significant slowdown in growth, contingent measures in the budget can be used and automatic stabilizers should be allowed to operate.

Directors agreed that fiscal consolidation needs to be sustained to reduce debt vulnerabilities and achieve Mauritius’ debt reduction targets. They emphasized the need to reform the social protection system and public enterprises. They supported efforts to rationalize subsidies and better target social benefits, and to develop a financial monitoring framework to minimize transfers to state owned enterprises, implement full cost recovery, and enhance governance.

Directors welcomed the authorities’ efforts to ensure price stability, underpinned by an appropriate monetary policy stance. They supported continuing efforts to remove excess liquidity in the system. Directors welcomed future plans to adopt formal inflation targeting, which could help anchor inflation expectations, and supported ongoing initiatives to strengthen capacity within the central bank.

Directors noted the staff’s assessment that the real exchange rate is broadly in line with fundamentals. They agreed that the floating regime has served the economy well, and that exchange rate interventions should be limited to smoothing volatility. They noted that an adequate reserve cushion together with a stronger fiscal position and improved competitiveness are important to reduce external imbalances and safeguard against shocks.

Directors noted that the banking system is well capitalized and resilient to shocks. They welcomed efforts to increase transparency and plans to strengthen supervisory coordination, enhance the stress testing framework, and improve data availability in the financial sector.

Directors called for continued efforts to secure more inclusive and diversified growth. In addition to social protection and state owned enterprise reform, this will require investments in human and physical infrastructure, as well as further improvements in the business environment.

Directors commended Mauritius’ subscription to the Special Data Dissemination Standard (SDDS) in February 2012.

Mauritius: Selected Economic and Financial Indicators, 2009–2017
	2009	2010	2011		2012		2013	2014	2015	2016	2017
		Prel.	Last SR	Est.	Last SR	Proj.	Proj.	Proj.	Proj.	Proj.	Proj.
National income, prices and employment
Real GDP	3.0	4.1	4.1	4.1	4.2	3.7	4.1	4.2	4.2	4.2	4.2
Real GDP per capita	2.5	3.7	3.5	3.5	3.6	3.1	3.5	3.6	3.6	3.7	3.7
GDP per capita (in U.S. dollars)	6,919	7,582	7,990	8,385	8,471	8,403	8,789	9,158	9,649	10,184	10,807
GDP deflator	-0.2	1.8	5.0	4.3	4.4	3.9	5.9	4.4	4.4	4.4	4.4
Consumer prices (period average)	2.5	2.9	7.4	6.5	4.6	4.8	5.3	4.9	4.4	4.4	4.4
Consumer prices (end of period)	1.5	6.1	5.8	4.9	4.4	5.0	5.5	4.4	4.4	4.4	4.4
Unemployment rate (percent)	7.3	7.8	…	7.8	…	...	...	...	...	...	...
External sector
Exports of goods and services, f.o.b.	-15.6	18.9	12.5	15.5	6.6	3.0	6.1	6.0	6.2	6.5	6.7
Of which: tourism receipts	-23.5	15.9	10.4	13.5	11.2	2.9	10.3	9.2	9.0	9.1	9.1
Imports of goods and services, f.o.b.	-19.3	20.5	18.8	17.1	4.2	3.0	4.3	3.7	4.1	4.5	5.0
Nominal effective exchange rate (annual averages)	-5.8	3.2	...	3.1	...	...	...	...	...	...	...
Real effective exchange rate (annual averages)	-4.6	3.2	...	5.7	...	...	...	...	...	...	...
Terms of trade	7.8	-5.5	...	-4.9	...	...	...	...	...	...	...
	(Annual change in percent of beginning of period M2)
Money and credit
Net foreign assets	17.4	20.2	10.3	-7.7	...	16.9	...	...	...	...	...
Domestic credit	1.8	10.3	16.1	8.6	...	10.0	...	...	...	...	...
Net claims on government	1.1	1.0	2.5	-1.4	...	1.5	...	...	...	...	...
Credit to private sector1	0.4	10.1	13.6	10.7	...	8.2	...	...	...	...	...
Broad money (end of period, annual percentage change)	8.1	7.6	9.3	4.6	...	12.3	...	...	...	...	...
Income velocity of broad money	1.0	0.9	0.9	1.0	...	0.9	...	...	...	...	...
Interest rate (weighted average TBs, primary auctions)	4.4	3.9	...	4.6	...	...	...	...	...	...	...
	(Percent of GDP, unless otherwise indicated)
Central government finances
Overall consolidated balance (including grants) 2	-2.0	-3.0	-4.8	-2.4	-4.5	-3.7	-3.2	-2.7	-2.7	-2.2	-1.8
Primary balance (including grants)2	1.8	0.4	-1.3	0.6	-1.0	-0.5	-0.6	-0.1	-0.2	0.3	0.6
Revenues and grants	22.8	21.9	21.5	21.2	21.0	21.8	20.9	21.1	21.2	21.2	21.3
Expenditure, excl. net lending	24.8	24.9	26.2	23.7	25.5	25.5	24.1	23.8	23.9	23.3	23.1
Domestic debt of central government	44.7	43.1	42.5	41.2	41.6	40.5	38.1	36.8	37.0	37.0	34.0
External debt of central government	6.0	7.4	8.9	8.5	10.5	10.0	11.6	12.9	12.7	12.2	11.2
Investment and saving
Gross domestic investment	26.4	24.9	26.2	24.4	26.6	24.8	25.3	25.7	26.1	26.6	27.0
Public	6.6	6.1	7.6	6.4	7.7	7.4	7.7	7.8	8.3	8.2	7.6
Private	19.8	18.8	18.6	18.0	18.9	17.5	17.5	17.9	17.9	18.3	19.4
Gross national savings	13.8	15.6	14.2	14.7	15.7	14.8	16.4	18.1	19.8	21.4	23.0
Public	-0.8	-0.5	-0.7	-0.7	-0.5	0.2	0.5	1.1	1.3	1.4	1.5
Private	14.6	16.1	14.9	15.5	16.2	14.7	15.8	17.1	18.5	20.1	21.5
External sector
Balance of goods and services	-10.5	-12.1	-15.7	-13.5	-13.5	-13.8	-12.7	-11.4	-10.1	-8.9	-7.9
Exports of goods and services, f.o.b.	47.1	50.9	52.9	52.8	53.6	53.9	54.4	55.0	55.1	55.3	55.4
Imports of goods and services, f.o.b.	-57.6	-63.0	-68.6	-66.3	-67.1	-67.7	-67.2	-66.4	-65.2	-64.3	-63.2
Current account balance	-7.4	-8.2	-11.8	-9.9	-9.9	-10.2	-9.1	-7.8	-6.6	-5.4	-4.3
Overall balance	4.3	2.1	-0.9	1.3	0.1	-2.4	0.2	0.5	0.8	0.6	1.0
Total external debt 3	12.7	14.4	13.5	15.0	15.2	16.1	17.7	18.4	16.5	14.8	14.6
Net international reserves (millions of U.S. dollars)	2,150	2,448	2,253	2,636	2,265	2,420	2,512	2,660	2,852	3,035	3,289
Months of imports of goods and services, f.o.b.	5.1	4.8	3.8	4.4	3.7	3.9	3.9	4.0	4.1	4.2	4.3
Memorandum items:
GDP at current market prices (billions of Mauritian rupees)	282.0	299.1	327.4	324.8	356.6	350.0	385.9	419.6	456.3	496.5	540.2
GDP at current market prices (millions of U.S. dollars)	8,824	9,714	10,299	10,809	…	...	...	...	...	...	...
Public sector debt (percent of GDP)	59.6	57.3	58.8	56.1	59.7	57.0	55.7	54.8	55.5	54.2	49.8
Foreign currency long-term debt rating (Moody's)	Baa2	Baa2	…	Baa2	…	…	…	…	…	…	…
Sources: Mauritian authorities; and IMF staff estimates and projections. 1 Excludes credit to state-owned enterprises. 2 GFSM 2001 concept of net lending/net borrowing, includes special and other extrabudgetary funds. 3 Reported debt only, excluding private sector short-term debt.