IMF Executive Board Concludes 2015 Article IV Consultation with Mauritius

On March, 11, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius.

Mauritius has continued to grow at a moderate rate of 3.4 percent in 2015, as weak external demand, protracted decline in construction, and the collapse of a large financial conglomerate group more than offset the positive impact of favorable terms of trade. Inflation remains low (0.4 percent in January 2016), reflecting in part declining oil prices and shipping costs. Unemployment hovers around 8 percent, although it is higher among women and the youth. The external current account deficit narrowed to about 5 percent of GDP and international reserves increased to 6.5 months of imports, supported by continued capital inflows.

The monetary policy stance remains broadly appropriate against the backdrop of subdued inflation. The Bank of Mauritius reduced its key policy rate by 25 bps in November 2015, to 4.40 percent, in order to support the domestic economy, while making progress in mopping up excess domestic currency liquidity.

In the financial sector, credit growth is gradually recovering and overall, the banking system remains well capitalized. Nonetheless, domestic non-performing loans have been rising and provisioning has not kept pace with the decline in asset quality. In addition, the authorities face macro-financial challenges stemming from risk exposures and potential spillovers from the very large offshore sector and its sizeable inter-linkages with domestic banking activities.

The budgetary performance turned more prudent in 2015, reversing the deterioration of recent years. In 2015, both the overall consolidated deficit and the primary deficit remained below earlier budget projections, and improved relative to 2014. Nonetheless, public debt continued to increase (by more than 2 percentage points of GDP) due to the government’s interventions in the financial sector and the impact of the depreciating rupee on external debt.

The country’s statistical capacity continues to be strengthened as the authorities actively pursue efforts to improve the coverage of the offshore sector in official data, and to introduce a real estate price index.

Executive Board Assessment

Directors commended the authorities’ efforts to maintain a stable macroeconomic environment and foster a more diversified economy. While the country’s economic outlook is favorable, they noted the macro-financial risks from a potential slowdown in offshore activities and vulnerabilities in the banking sector. They encouraged the authorities to continue to strengthen macroeconomic and financial sector resilience and to pursue structural reforms to raise productivity and growth.

Directors urged the authorities to address potential spillover risks from the complex inter-linkages between large offshore activities, the banking system, and the domestic economy. They underscored the importance of upgrading the macro-prudential policy framework, and recommended creating a macro-prudential authority with a central role for the bank regulator to improve the assessment and mitigation of systemic risks. They also emphasized the urgency of addressing information gaps regarding offshore business companies and their role in conglomerate groups.

Directors stressed the need to improve consolidated supervision and oversight of mixed conglomerates, in line with the FSAP recommendations. They recommended reconsidering tax incentives that distort bank risk-taking toward cross-border and offshore activities; promoting better foreign currency liquidity management at domestic banks; strengthening the ability of the Bank of Mauritius to supervise bank holding companies and monitor cross-border risks; developing a comprehensive framework for crisis prevention and management; and upgrading the bank resolution framework prior to introducing deposit insurance. Directors also noted that the financial inter-linkages and potential spillover risks warrant a further bolstering of foreign currency buffers, and encouraged the authorities to seek appropriate financial insurance mechanisms. Directors supported the cautiously accommodative monetary stance in view of the subdued inflation environment.

Directors welcomed the authorities’ efforts to halt the fiscal deterioration in recent years and stressed the importance of putting in place a credible medium-term strategy to safeguard debt sustainability. With a view to creating space for growth-enhancing infrastructure investment, they recommended containing current spending while better targeting priority social expenditure, broadening the tax base, improving the efficiency of public entities, and targeting divestiture proceeds for debt reduction. They also underscored the need to introduce an operational framework for monitoring fiscal risks and contingent liabilities arising from public-private partnerships.

Directors welcomed the authorities’ commitment to raise growth and competitiveness by addressing infrastructure bottlenecks and skills mismatches, reducing the cost of doing business, and facilitating further diversification of the economy. In this context, they underscored that increased female labor force participation and immigration of skilled workers would help mitigate the impact on growth of the projected labor force decline.