On April 3, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius, and considered and endorsed the staff appraisal without a meeting.
Background
The Mauritian economy performed reasonably well in a difficult external environment in 2012. Growth decelerated to 3.3 percent, due to weak sugar and textile exports and a slowdown in the construction sector, though the information and communication technology and financial services sectors saw strong growth. The output gap is estimated to have been small (around ½ percent) and consumer price inflation moderated to 3.9 percent. Estimates of the unemployment rate suggest a marginal increase from 7.9 percent in 2011 to 8 percent in 2012. Credit growth to the private sector was robust. On the external front, the current account deficit narrowed, but remains relatively high at 10 percent of gross domestic product (GDP) in 2012. The Bank of Mauritius (BOM) managed to accumulate additional international reserves and the reserve cover of imports of goods and services rose to 4.4 months from 4.3 months at end-2011. In June 2012, Moody’s upgraded the country’s credit rating to Baa1.
The fiscal policy stance was broadly neutral and less expansionary than previously projected. The structural primary deficit was broadly unchanged relative to 2011. The overall deficit including extra-budgetary funds is estimated at 2.3 percent of GDP, a reduction of over 1 percentage point of GDP relative to previous projections and similar to the 2011 outcome. The positive fiscal outturn was partly due to a reduction in transfers and subsidies, which decreased by over 1 percent of GDP compared to 2011 (particularly transfers to state-owned enterprises). Expenditures on goods and services were lower, but extra-budgetary spending increased relative to 2011. On the revenue side, better than expected tax revenue performance (in particular for value added tax receipts) was offset by lower levels of non-tax revenue and grants so that total revenues remained stable as a percentage of GDP.
Monetary policy was supportive of the overall policy mix. In March 2012, the BOM reduced the policy rate by 50 basis points to 4.9 percent given the deceleration in global growth and prudent fiscal policies. The BOM maintained the policy rate at that level in light of continued uncertainty in the global outlook. Excess liquidity in the banking system remained elevated, and the yield on 3-month treasury bills fell by 120 basis points to 2.7 percent at end-2012. After June 2012, the authorities started intervening more actively in foreign exchange markets to build international reserves and moderate excessive fluctuations of the rupee exchange rate.
The banking system is well-capitalized. Regulatory Tier I capital to risk-weighted assets are well above Basel II and the proposed Basel III requirements. Non-performing loans (NPL) increased slightly in 2012, but banks remained profitable with a 20 percent return on equity, despite low leverage ratios. However, liquidity-to-assets ratios have worsened in recent years and are on the low side in international comparisons. As a first step towards gradual phase-in of the Basel III requirements, the BOM circulated a consultation paper to banks in October 2012. BOM continued to publish its bi-annual CAMEL (capital adequacy, asset quality, management, earnings & liquidity) ratings for all domestic banks.
Over the past decade wide-ranging structural reforms supported by prudent macroeconomic policies have established Mauritius as a top regional performer. Mauritius statistical capacity continues to be strengthened; the country subscribed to the IMF’s Special Data Dissemination Standard (SDDS) in February 2012, being the second Sub-Saharan African country to do so. The authorities aim at subscribing to SDDS Plus in the future.
Executive Board Assessment
In concluding the 2013 Article IV consultation with Mauritius, Executive Directors endorsed the staff’s appraisal, as follows:
The authorities have a good track record of prudent macroeconomic management and implementing structural reforms even though challenges remain. Macroeconomic management has delivered low inflation, declining debt-to-GDP ratios, and, given the difficult external environment, satisfactory growth. This outcome has been helped by consistent efforts to improve public financial management, the business climate, social assistance, and the sustainability of public finances. Recent efforts to improve the human and capital infrastructure (especially road congestion) should continue.
Going forward, staff recommended a neutral fiscal policy stance for 2013 in order to smooth medium-term fiscal consolidation and to facilitate external adjustment. A neutral stance is also likely to facilitate the rebuilding of policy buffers. Over the medium term staff suggested that fiscal consolidation should focus on reductions in transfers and subsidies and revenue raising measures. Increases in the revenue-to-GDP ratio would provide additional space for priority spending for building human and physical capital.
The current accommodative monetary policy stance remains appropriate, but the authorities should stand ready to tighten monetary conditions if inflation accelerates beyond current expectations. Inflationary pressures relate to wage increases and adjustments in administered prices, but expectations appear to be well-anchored. Excess liquidity should be reduced to better align the policy rate with market rates and help strengthen the monetary transmission mechanism. The Mauritian banking system is well-capitalized and profitable. Stress testing indicates the sector to be resilient against a range of shocks. Real estate developments should be monitored and cooperation between the BOM and the Financial Services Commission further improved.
Increasing national savings and fostering competitiveness would reduce the large external current account deficit. Medium-term fiscal consolidation should facilitate external adjustment. Efforts to improve competitiveness through structural reforms and investment in infrastructure and human capital are also crucial. The floating exchange rate regime continues to serve the country well, in particular by allowing the exchange rate to act as a shock absorber. Staff estimates that the real exchange rate is broadly in line with fundamentals.
The pension system could be used as a lever to increase national savings. Recent reforms have put the system on a much better footing, but further reforms would be helpful. An increase in mandatory contribution rates for the National Pension Fund (NPF) combined with an actuarially-sustainable increase in benefits is likely to lead to higher overall national savings. The inclusion of most public pensions systems within a strengthened NPF and mandatory inclusion of self-employed workers in the NPF might also be considered.
Labor market reform should primarily target the employability of the low-skilled youth and women, who comprise the majority of the unemployed. Measures to better align the education curriculum to the needs of industry and increase private sector involvement in vocational education could also contribute to reduce skills mismatches, particularly for the young. Wage setting mechanisms should be reviewed with the objective of aligning real wage increases closer with labor productivity improvements. In addition, an earned income tax credit could be introduced to encourage low-wage earners to take jobs on which they can acquire skills.
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