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Mauritius

Author(s):
International Monetary Fund
Published Date:
March 2012
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INTRODUCTION

1. To cushion the economy against the impact of the 2008/2009 global crisis, the Mauritian authorities responded with two comprehensive fiscal stimulus packages starting in 2009/2010. Monetary and exchange rate policies were also supportive for most of the period. The economy responded well to the policy packages and showed signs of recovery in 2010 and 2011.

2. The 2011 Article IV consultation concluded that the authorities’ prompt response to the crisis was appropriate, but that going forward a less expansionary fiscal stance was warranted to rebuild fiscal buffers and that the central bank should closely monitor inflationary pressures. The authorities broadly adhered to staff’s recommendations, with 2011 showing a decline in the fiscal deficit and monetary policies responding to inflation and economic growth developments. Going forward, policy recommendations stress continuing to build fiscal buffers and maintaining price stability in the context of a potentially deteriorating external environment.

RECENT DEVELOPMENTS

3. The Mauritian economy has continued its recovery despite a somewhat adverse external environment. Real GDP growth is estimated again at around 4 percent in 2011, driven mostly by growth in textiles, ICT, financial services, and real estate (Figure 1). Inflationary pressures increased in the first half of the year (year-on-year inflation rate rose to 6.6 percent in June) mainly due to higher 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 (and remaining at that level in January 2012), as the base effects became absorbed.

Figure 1.Mauritius: Macroeconomic Developments, 2004–11

Sources: Mauritian authorities; and IMF staff estimates.

4. The fiscal stance in 2011 improved compared to 2010, and was significantly less expansionary than planned. The overall deficit narrowed from 3.0 percent of GDP in 2010 to 2.4 percent of GDP.1 Also, the cyclically-adjusted primary deficit excluding grants decreased somewhat to essentially zero. A small shortfall in total revenues and grants was more than offset by savings on current expense and a net accumulation of resources in special funds. 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. However, transfers were higher than in 2011 particularly to the special funds (2 percent of GDP), although most were not spent in 2011. The deficit was over 2 percentage points of GDP lower than expected at the time of the last Article IV consultation mainly because of lower capital expenditures and net savings in the special funds. Public sector debt declined moderately to 56 percent of GDP at end 2011.

5. Monetary policy was tightened during the year 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. It also increased the repo rate by 50 basis points in March and by 25 basis points in June to address inflationary developments. The BOM lowered the repo rate by 10 basis points in December in response to the worsening growth outlook. Private sector credit growth—estimated at close to 13 percent for 2011—remained adequate, and similar to 2010. The authorities continued to intervene in the foreign exchange market to smooth excessive exchange rate volatility. In the second half of the year, the BOM also intervened to limit the real appreciation of the rupee with most of the interventions sterilized. As a result of its liquidity management, the BOM is expected to have recorded a loss for 2011.

6. The banking sector is 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 as of June 2011. 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 March 2011, the BOM started publishing overall CAMEL ratings for individual banks; one of the first central banks in Sub-Saharan Africa (SSA) to do so. This should contribute to increased transparency about the state of the banking system.

7. 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 across all major tradable industries. Tourism receipts grew strongly as well, but a marked decrease in fourth quarter arrivals from key EU markets points 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.

OUTLOOK AND RISKS

8. The outlook for 2012 is broadly positive but uncertainties have grown. Growth should moderate given the adverse external environment (Figure 2). Staff projects that real GDP growth in 2012 will decline moderately to 3¾ percent and will be driven mostly by growth in consumption and investment, which will accelerate relative to 2011. The main downside risks stem from a heavy dependency on the global economy, especially Europe. Potential spillovers to Mauritius from subdued partner country growth could materialize through reduced tourism, trade, and foreign direct investment (FDI) flows. Other international financial flows could become an additional source of vulnerability if large short-term capital flows linked in large part to the Global Business Corporations (GBCs) prove to be more volatile than in the past. In the event of adverse external shocks, staff’s view is that the main fiscal policy response should be to let automatic stabilizers work. Some limited fiscal stimulus measures could also be considered. With the appropriate policy response, the Mauritian economy would remain broadly resilient to a recession in advanced economies, even though the negative effects on the domestic economy would be significant. The authorities have already done a considerable amount of contingency planning for a possible downturn, and the 2012 budget provides contingency funds for such an event.

Figure 2.Mauritius: Macroeconomic Projections Through 2017

Sources: Mauritian authorities; and IMF staff estimates and projections.

9. Longer-term challenges include sustaining reform efforts, improving the targeting of social benefits, improving the cost-effectiveness of public sector delivery, and enhancing overall productivity through investments in physical and human capital. However, these challenges appear manageable in view of Mauritius’ well-established track record as an economic reformer, with a dynamic private sector, reasonable economic fundamentals, and robust institutions.

POLICY THEME 1. MACROECONOMIC POLICIES FOR 2012

Discussions centered on the fiscal stance for 2012 given the uncertainty of the external outlook and the need for consolidation to strengthen public debt dynamics. Also, the role of monetary policy and liquidity management in stabilizing inflation and supporting growth was discussed in conjunction with exchange rate policy and reserve management given the real appreciation of the rupee and ensuing concerns regarding the competitiveness of the export sector.

A. Fiscal Policy

10. The 2012 budget reflects the authorities’ objectives of increasing the economy’s resilience to shocks. On the revenue side, changes included the abolition of a tax on capital gains and certain property taxes, deemed to have negatively affected the real estate sector without generating significant revenue. These measures were partly compensated by an increase in excise duties (notably on alcohol and cigarettes), which should maintain the overall tax revenue broadly stable as a percentage of GDP. Current expense in 2012 is projected to decrease as a percent of GDP due to lower transfers and subsidies. The 2012 budget envisages a strong increase in public investment spending to 4 percent of GDP, which appears ambitious given the capacity constraints that limited capital budget execution in 2010 and 2011. There is also a plan to spend 1½ percent of GDP out of special funds, with a large share of these expenditures linked to investment projects or of a contingent nature. While staff agreed with the authorities’ revenue projections, it projected that capital projects and spending from special funds would be lower than budgeted. Thus, staff projects a more moderate fiscal expansion, with the overall budget deficit (including the special funds) increasing from 2.4 percent of GDP in 2011 to 3.7 percent of GDP in 2012 (compared to 5.3 percent of GDP under the budget). In fact, staff’s projections are in line with historical budget implementation as the fiscal outturns for the past two years have been less expansionary than initially envisaged under the relevant budget documents.

11. Staff recommended a less expansionary fiscal stance than projected for 2012. The cyclical component of Mauritius’ fiscal balance is projected to be small, reflecting small estimates of the output gap. Thus, the mission argued that there was little need for expansionary fiscal policy for cyclical considerations, particularly given the fact that fiscal multipliers are likely to be small in an open economy with a flexible exchange rate regime. As a consequence, the mission argued for a less expansionary fiscal stance than currently projected by staff in order to build policy buffers and ensure favorable debt dynamics, given that current debt levels are still relatively high for an emerging economy.

12. Authorities’ responded that infrastructure investments are needed to remove bottlenecks and that external shocks impose a constraint on fiscal consolidation. They explained that most of the planned expansion is related to capital spending to address infrastructure constraints on growth, which should yield benefits for future growth. They also noted that over the last two years, fiscal policy has been less expansionary than anticipated. Moreover, the 2012 budget includes contingent expenditures financed mostly by the special funds to support businesses through loan guarantees, factoring, and leasing schemes in the event of adverse shocks, which are likely to materialize at least partly in 2012.

13. Staff acknowledged that in the event of a deterioration in the external environment, a looser fiscal stance could become appropriate. The authorities have been proactive in considering policy options for a more significant downturn in the world economy and its impact on Mauritius. It was agreed that automatic stabilizers should be allowed to work. In addition, the measures applied during the 2008/09 crisis and further developed in the 2012 budget should be fully implemented. Finally, some fiscal stimulus to support social programs, protect employment, and accelerate capital spending could also be considered.

B. Monetary and Exchange Rate Policies

14. The monetary policy stance is broadly appropriate, but developments in inflation and excess liquidity need to be followed closely. The decline in year-on-year inflation in December and developments in core inflation measures point to a moderation in inflationary pressures for 2012. Private sector credit demand is likely to decelerate because of reduced risk appetite. The current repo rate of 5.4 percent is slightly positive in real terms given a year-on-year inflation projection of 4.9 percent (Figure 3). The current policy rate appears appropriate given the weak external environment, but the MPC needs to be vigilant against possible inflationary pressures and adjust its policy stance in light of future developments regarding inflation but also domestic growth. The BOM actively withdrew excess liquidity in the banking system during 2011, but there is room to further reduce the remaining excess liquidity—attributable in part to strong FDI inflows—to align the market-driven interbank rate with the BOM’s policy rate more closely. This will ensure a better working of the monetary transmission mechanism by ensuring that market rates move with policy rates.

Figure 3.Mauritius: Inflation and Interest Rates

Source: Bank of Mauritius

15. The authorities broadly agreed with the mission’s view on monetary policy. They believed that the recent track record for balancing price stability and economic development has been good. However, they explained that the cost of removing excess liquidity from the banking system was reducing the BOM’s profitability significantly, which was difficult to explain to the general public.

16. The current monetary policy framework of “hybrid inflation targeting” remains well-suited for the needs of the Mauritian economy and can be developed further. The MPC has been operating with an implicit inflation target of about 5 percent. Staff argued that a formal inflation target might help to anchor inflationary expectations. This would also be in line with the legal framework, which specifies that a target be announced in consultation with the Ministry of Finance. The adoption of a range around the target would still allow the BOM sufficient policy flexibility to fulfill its price stability and economic development mandate while increasing its accountability. Staff recommended that BOM’s macro-forecasting and analytical capability be strengthened further before shifting to a more formal inflation targeting framework. In particular, active use of structural models will allow the BOM to undertake scenario analysis of the macroeconomic effects of monetary and exchange rate policy. Also, there may be a need to strengthen price and external sector statistics further and to develop higher frequency real variables.

17. The authorities agreed on the desirability to move to inflation targeting over the medium-term, after improving the policy framework. Given Mauritius’ status as a small island economy, certain components of the CPI index (imported goods, administered prices) are quite volatile, thus requiring an appropriate measure of core inflation to underpin the formal target. They acknowledged the value of Fund technical assistance in enhancing the modeling capacity of the BOM, which they intend to strengthen further.

18. The real value of the Mauritian rupee has followed a U-shaped path over the last decade. The rupee depreciated steadily some 25 percent from peak (2001) to trough (end-2006). During the crisis years of 2008–09 the depreciation of the Euro and the British Pound has pushed up the value of the rupee. Mauritius rebounded relatively quickly from the world economic crisis, with increased financial flows translating into a steady nominal appreciation in 2010–11. During 2011, the real effective exchange rate (REER) is estimated to have appreciated by 5 percent despite some interventions by the BOM.

19. Staff estimates that the REER is broadly in line with fundamentals. The analysis indicates an overvaluation of the rupee, which is within the margin of error of the methodologies. It is estimated at 5 percent relative to medium-term fundamentals as the current account deficit is projected to gradually narrow over time (Figure 4 and Appendix I). These findings are based on the application of the three CGER-based approaches: macroeconomic balances, external sustainability, and equilibrium real exchange rate. This result is essentially the same as for the last Article IV assessment.

Figure 4.Actual and Equilibrium Exchange Rates, 2004–16

Source: IMF staff estimates.

20. Staff emphasized that the analysis suggested a need to reduce the current account deficit over time. This adjustment would be facilitated by medium-term fiscal consolidation, which is one of the authorities’ priorities and required by the public debt law. Staff noted that the flexible exchange rate system has served Mauritius well and that interventions in foreign exchange markets should be used primarily to limit exchange rate fluctuations in a relatively narrow market. Moreover, improved competitiveness through structural reforms would also help reduce the current account deficit. Current projections suggest that the current account would improve over time with an adequate policy-mix consisting of improvements in external competiveness and sustained fiscal adjustment.

21. The authorities are concerned about the impact of a real exchange rate appreciation on export competitiveness. The export sectors are a large engine of job creation, particularly tourism and textiles, which are also price sensitive and operating on low margins. The authorities also wondered whether their position vis-à-vis other competitors had deteriorated given the recent appreciation of the REER, the deterioration in Mauritius’ terms of trade, and lesser reserve accumulation (see section on reserve adequacy below). At the same time, the authorities recognized that sterilized interventions to moderate any real exchange rate overvaluation have quasi-fiscal costs given the important interest rate spread between reserve assets and sterilization instruments. In addition, such efforts might complicate inflation stabilization objectives. Moreover, they were not certain whether intervention would have much impact on the real exchange rate, which in their view is mostly determined by market fundamentals.

22. Staff highlighted that the estimate of overvaluation by itself is not significant enough to warrant considering active exchange rate management. The mission underscored that the exchange rate is only one mechanism for reducing external imbalances, and not necessarily the most obvious one in the case of a floating exchange rate regime. Staff recommended that the authorities monitor real exchange rate developments in relation with its fundamentals going forward. Further real appreciation not warranted by fundamentals might be resisted through sterilized interventions, but such policies should also be supported by fiscal adjustment and productivity increasing reforms to facilitate external adjustment.

C. Reserve Adequacy

23. Net international reserves appear fully adequate, but not excessive. Mauritius’ reserves are comfortable when measured against two traditional metrics (Appendix II). Import cover at four months is above the commonly-used benchmark of three months and short-term debt cover around 500 percent compares well against the benchmark of 100 percent. The authorities were interested in knowing whether they could manage “excess” reserves more actively. The mission established that a new multidimensional metric introduced in IMF (2011) is also met (Figure 5).2 At around 140 percent, reserves are at the upper margin of the suggested range of 100–150 percent, and firmly in the middle of the distribution among emerging markets. However, reserves have just kept up with financial deepening and are hovering only slightly above the 20 percent of M2, a benchmark intended to capture the risk of capital flight and the potential need for bank support in/after a crisis. Moreover, staff projects moderate declines in reserve adequacy over the medium term.

Figure 5.Mauritius: Reserves Adequacy as Measured by IMF Multidimensional Metric, 2000–11

Source: IMF staff estimates.

24. The mission argued that the current reserve cushion is warranted for several reasons. These include: (i) increased external risks stemming from Europe; (ii) likely under-reporting in external sector statistics of short-term debt and volatile exports, which would tend to over-estimate reserve adequacy; and (iii) Mauritius’ emerging status as international financial center. Risks are likely to decline over the medium term, which might justify lower reserves going forward. Moreover, there is likely some scope to increase the yield potential on a part of BOM’s reserves.

25. The authorities concurred with the analysis regarding reserve adequacy. They expressed interest in obtaining technical assistance to enhance reserve management capacity. They are looking forward to exploring these issues further with the forthcoming IMF technical assistance mission on asset/liability management and a medium-term debt strategy.

POLICY THEME 2. LONGER-TERM CHALLENGES

The discussions centered on the appropriate medium-term fiscal policies to control public debt including through improvements in the public enterprise sector; on inclusive growth and the strengthening of the social safety net; on the results of stress testing exercise for the banking system; and on productivity-enhancing structural reforms.

A. Medium-Term Debt Sustainability

26. Results of the Debt Sustainability Analysis indicate that the debt outlook for Mauritius is broadly positive, but more could be done to reduce vulnerabilities. Both total public debt and external debt are on sustainable trajectories and the results of stress tests indicate that debt dynamics are resilient to several shocks (see Appendix III). These conclusions are based on the current macroeconomic framework discussed with the authorities, which assumes that some fiscal consolidation will take place over the medium-term. Staff recommended that the authorities target slightly more ambitious fiscal adjustment objectives, which would reduce vulnerabilities more quickly and provide larger assurances of meeting the legally-mandated debt target of 50 percent of GDP by 2018. The bulk of fiscal consolidation efforts are likely to fall on current expense, especially transfers to state-owned enterprises (SOEs) and improvements in targeting of social benefits.

27. The role of taxes in fiscal adjustment is limited. Given the government’s focus on a stable tax regime with low rates, significant increases in the tax-to-GDP ratio over time are unlikely. The tax system is already relatively broad based and the main focus of tax reforms should be on administrative simplification and removing some of the few remaining exemptions (for example on motor vehicle excises). Mauritius is a pioneer in the development of green taxes, but more can be done (see Appendix IV), not least regarding reducing road congestion. Staff recommended progressively introducing congestion charges. The planned introduction of a subsidy for ethanol production, which reflects the positive externality of using ethanol, is a welcome initiative and more efficient than a quantitative requirement.

28. The macroeconomic impact of SOEs is large and there is scope for significant savings. In 2010 revenue for 15 large enterprises (for which data is available) amounted to 15 percent of GDP and investment expense was 8.5 percent of GDP. Transfers to SOEs from the budget amounted to 2.7 percent of GDP in 2010, which suggests that SOEs do not charge full cost-recovery prices for their services. Raising tariffs to full cost recovery would represent an important potential for savings and fiscal adjustment. The authorities are developing a financial monitoring framework aimed at promoting improvements in efficiency and minimizing the need for central government transfers. The indicators chosen by authorities are broadly appropriate (Appendix VI), but the system could increase the focus on variables measuring risks and contingent liabilities.

29. Staff recommended that Government financial support to public enterprises should be curtailed. The government’s program to strengthen the financial performance of SOEs is welcome. Staff also suggested reviewing the public policy purpose of each SOE and developing clear financial and service performance objectives. In particular, tariff structures and pricing policies will need to be revised to ensure long-term financial sustainability of these firms.

B. Inclusive Growth in Mauritius

30. The poor have benefitted from economic growth, but less than richer income groups. Mauritius has performed well in terms of securing relatively high growth rates without large adverse consequences for inequality over the last two decades and has a relatively low Gini-coefficient compared to emerging markets and advanced countries (Appendix V). However, during the period from 2001 to 2006/07, which is covered by the last available household survey, richer segments of the population have experienced faster growth rates in expenditure than the average, whereas poorer groups of the population had below average growth in expenditure (Figure 6). This points to a more uneven distribution of the benefits of economic growth, possibly linked to fundamental structural changes in the Mauritian economy, as some traditional sectors (agriculture, textile manufacturing) have declined and the service sector has played an increasing role as an engine of growth (particularly financial services). Differences in human capital accumulation, evidenced by disparities in educational outcomes, are also likely to be an important factor in explaining these trends.

Figure 6.Mauritius: Growth Incidence Curve, 2001–06/07

Growth in Real Household Expenditure per Capita

Source: HBS surveys and IMF staff estimates. Annual growth in real household expenditure per capita by expenditure percentile is depicted. The horizontal lines describe growth in average expenditure across surveys (growth in mean) and the average growth rate across percentiles (mean growth rate).

31. The authorities agreed with much of the analysis, but argued that some measures might have improved since 2007. Some social assistance programs were streamlined since, and the authorities have worked with the World Bank on better targeting. They also wondered whether the developments might be part of a global trend, which might require further comparative research.

32. The current social protection system is costly, but not well-targeted. In 2011, social insurance payments exceeded 4 percent of GDP, including over 1.3 percent of GDP for the basic retirement pension scheme (Appendix V). However, almost 40 percent of the basic retirement pension benefits go to the richest 20 percent of the population. Only about 24 percent of direct and indirect beneficiaries of social protection programs are poor. The poor receive only about 13 percent of total social protection payments. Estimates from the latest household survey indicate that the two richest quintiles of the population (top 40 percent) receive close to 58 percent of all social protection benefits and the richest 20 percent receive about 37 percent of all benefits. Thus, there is substantial scope for savings to be made.

33. Moreover, government-subsidized prices for rice, flour, cooking gas and transportation tend to be regressive. Subsidies administered by the State Trading Corporation (STC) on LPG, rice and wheat are significant (½ percent of GDP in 2011). The richest 20 percent of the population typically receive a multiple of the subsidies that go to the poorest 20 percent, particularly for LPG, where the subsidy also partly undoes the government’s environmental agenda.

34. The authorities have elaborated a strategy to reform the social protection system. A review of social protection programs undertaken by the authorities in 2010 concluded that social assistance programs are fragmented, leading to diseconomies of scale, and that these programs generally do not help beneficiaries transition from welfare to work. Monitoring and evaluation of these programs is also considered to be weak, which impairs the ability of policy makers to determine whether programs are cost effective.

35. Staff recommended that the authorities intensify their efforts to improve the targeting of social protection expenditures. Important steps include the completion of the Social Registry of Mauritius (an information system that would provide comprehensive data on existing and potential program clients) and replacing existing programs with a new absolute poverty benefit based on objective targeting criteria, as suggested by the Social Protection Review. The use of conditional cash-transfer schemes could also foster human capital accumulation and help to address skills mismatches in the labor market in the longer term. Staff believes that a reform of the pension system, albeit difficult from a political economy perspective, could also yield positive results in terms of income distribution and sustainability of the system. Savings from better targeting could be deployed more effectively in the pro-poor sectors of primary and secondary education and health, where they would also partially benefit the non-poor, and contribute to human capital accumulation.

36. The authorities agreed that targeting could be improved, but pointed out that political economy considerations were important. Some of the relatively inefficient programs (basic retirement pension and subsidies) have a long history in Mauritius and are backed by considerable societal consensus. They explained that it would take further communication efforts to prepare the ground for such reforms in order to avoid adverse reactions. They welcomed the involvement of the World Bank in designing appropriate targeting mechanisms.

37. The tax system appears to be moderately progressive overall. An analysis based on data from the 2006/07 household survey indicates that the VAT is not regressive in Mauritius, a concern often expressed with respect to consumption taxes. Furthermore, the evidence indicates that personal income taxes were progressive, as richer segments of the population bear a disproportionate share of the tax burden (Appendix V). Nevertheless, unlike countries such as New Zealand and the United States, the personal income tax (PIT) only has a limited impact as an instrument for redistribution given its small economic importance (tax revenue derived from PIT amounted to 1.5 percent of GDP in 2010).

C. Financial Sector Issues

38. Staff undertook a stress testing exercise for the Mauritian banking system based on bank-level data. The exercise used several toolkits, and focused on banking system vulnerabilities to credit risk, interest and exchange rate risk, liquidity risk and concentration risk (Appendix VII). It assessed the resilience of the banking system to extreme events by (i) assessing the drop in capital adequacy ratios following plausible shocks; and (ii) estimating breaking points–the size of the adverse shocks that would reduce the adequacy ratios below acceptable thresholds.

39. Stress-tests indicate that the Mauritian banking system is well-capitalized and resilient against many shocks. Banks’ profitability and comfortable capitalization provide important cushions against a range of shocks to their credit portfolios. Direct exchange rate, liquidity, and interest rate risks appear to be low, while concentration of lending remains an important source of risk. Medium and small banks are more vulnerable to shocks given their relatively higher exposure to the domestic economy in their loan book. Simulations suggest that the banking system would be resilient to a significant decrease in GDP growth following a slowdown Europe, with regulatory capital adequacy ratios remaining above 8 percent. Staff cautioned that there might be a residual risk to the banking system from the activities of the GBCs, which are significant. The direct link to the banking system through the deposit of the float of GBC activities appears to be low risk with maturities and currencies well matched. The domestic activities of GBCs are quite limited and their international investments appear mostly equity like with little risk of contagion. However, the availability of data on the other activities of GBCs could be improved in the future to provide greater transparency.

40. Authorities welcomed the stress testing exercise and pointed to possible areas for further refinement. They emphasized the complementarities between the analysis undertaken by Fund staff and exercises that are regularly performed by the BOM in the context of the semi-annual financial stability report, which focuses mostly on credit risk. Authorities also believe that it would be desirable to extend stress testing to the insurance and corporate sectors given the interconnectedness of banks, non-bank financial institutions and large private sector firms. These extensions will require considerable data collection efforts. They plan to improve the data availability for non-bank financial institutions, where the BOM cooperates with the Financial Services Commission (FSC).

41. Supervisory coordination between the BOM and the FSC should be enhanced further to ensure that there are neither supervisory loopholes nor supervisory overlaps. The decision on a possible merger of the two agencies needs further study to weigh potential benefits of supervisory unification against potential costs, particularly regarding integration, specialization, and institutional cultures. IMF technical assistance might be useful in this area. Loopholes have been identified with regard to AML/CFT supervision of non-financial businesses and professions, some of them essential to GBCs’ operations. Due to the importance of GBCs’ activities for the financial sector, this creates a risk, which is currently being addressed by the authorities with IMF technical assistance support

42. An important outstanding recommendation from the 2007 FSAP is the creation of a deposit insurance scheme (DIS). The BOM has already advanced in its preparations for the adoption of a DIS and Mauritius is now a member of the Committee of Deposit Insurance Schemes. Some important decisions still need to be made, including whether the DIS is intended to foster financial sector stability or to primarily protect small depositors. Fund technical assistance could be helpful in this respect.

D. Structural Reforms and Statistical Issues

43. Mauritius has a strong record of implementing structural reforms, but more can be done. The country has been consistently ranked as the top performer in terms of governance in sub-Saharan African. Nevertheless, Mauritius’ overall country ranking in the Doing Business indicators fell from 21st in 2011 to 23rd in 2012, a sign that it needs to continue to implement its reform strategy. Further improving the business environment and the facilitation of permits should help attract FDI and increase growth prospects. Insufficient skills, particularly for the less educated workers, are an important impediment to improvements in competitiveness. Reform of the basic educational system is required to address the unequal distribution of educational outcomes. Also, mechanisms need to be put in place to support the access of poorer segments of the population to tertiary education.

44. Important infrastructure bottlenecks should be addressed. Inefficiencies in water provision impose high costs on society and reflect years of mismanagement. The government’s efforts to work with Singapore to develop a water strategy are welcome. The strategy might usefully be reviewed by the World Bank, and should be implemented swiftly. There is an urgent need to increase water tariffs to full cost-recovery level including the cost of maintaining and expanding the distribution system. The reliability of the electricity supply may soon become an issue without further investment. Road congestion imposes costs on society and reduces the attractiveness of Mauritius as a place for investment. Although the capacity of the transportation system needs improvement, road congestion will continue, unless motorists are charged for their impact on adding to congestion.

45. Staff recommended reallocating spending and leveraging private sector involvement given the limited available fiscal space for additional public investment. Reduced transfers to SOEs and better targeting of social protection expenses could create substantial resources for additional investments. In addition, public-private-partnerships (PPPs) could generate further financial resources for infrastructure projects with positive impact on growth, provided that they are well managed. The authorities agreed on the usefulness of PPPs and intend to strengthen their implementation capacity in this respect. They stressed that the reallocating of spending would be a medium-term endeavor.

46. Authorities continue to pursue their efforts to strengthen Mauritius’ statistical capacity. The statistical framework has been reinforced to adhere to the Special Data Dissemination Standard (SDDS), and Mauritius subscribed to the SDDS in February 2012. The 2010 balance of payments statistics have been updated with results from the second survey of resident Global Business Companies (GBC1s), but important statistical and aggregation issues remain to be solved in subsequent rounds. The next survey may be extended to cover non-resident GBC2s.

STAFF APPRAISAL

47. The outlook for 2012 is broadly positive, but downside risks have increased. At around 3¾ percent, growth is expected to slow somewhat compared to 2011. Inflation is expected to be around 5 percent, similar to the level observed in 2011. However, as a small open economy, Mauritius is vulnerable to the external environment.

48. Staff recommended a somewhat less expansionary fiscal stance than projected by staff for 2012 to build policy buffers and accelerate debt reduction in the medium term. In the absence of further external shocks, staff projections point to a negligible output gap; consequently there is no need for expansionary fiscal policies for countercyclical reasons. Staff considers that both total public debt and external debt are on sustainable trajectories provided that the planned fiscal consolidation takes place over the medium-term. In addition, some further fiscal efforts should be undertaken to further reduce debt vulnerabilities and to ensure that legally-mandated debt targets are met comfortably.

49. Should economic growth slow significantly due to global developments, it would be appropriate to let automatic stabilizers work. The policy response would also include the instruments developed in response to the 2008/09 financial crisis and enhanced in the 2012 budget, which help firms restructure and workers find new employment. Strengthening the social safety net through better targeting would also be desirable. The contingency plans developed by the authorities for such eventualities are welcome.

50. The monetary policy stance is broadly appropriate and the financial sector appears sound. The current repo rate is slightly positive in real terms, which seems adequate given the weak external environment and limited domestic demand pressures. Staff believes that the BOM should continue to pursue its efforts to remove excess liquidity in the banking system even if it has a negative impact on the central bank’s profitability. The adoption of a formal inflation target could help to anchor inflationary expectations. Stress-tests indicate that the Mauritian banking system is well-capitalized and resilient against several types of shocks.

51. The floating exchange rate regime continues to serve the country well, particularly by allowing the exchange rate to be a shock absorber. In this context, exchange rate interventions should be used primarily to limit volatility. Staff estimates that the real exchange rate is broadly in line with medium-term fundamentals, but there is a need to reduce external imbalances over time. Further fiscal consolidation based on savings from the public enterprise and social protection sectors, and combined with structural reforms to enhance competitiveness should contribute towards external adjustment over the medium-term.

52. SOEs needs better pricing and governance policies. SOEs consume considerable fiscal resources that would be better used to build human and physical infrastructure. Full-cost recovery pricing and better service delivery standards should apply to all SOEs. This would help reduce bottlenecks to growth and improve the investment climate. Better SOE governance would also help improve performance.

53. Reform of the social protection system could contribute to secure more inclusive growth. Mauritius was able to achieve relatively high growth rates without large adverse consequences for inequality over the last two decades, but recent data point to a more uneven distribution of the benefits of growth. Following an extensive reform in the mid-2000s, the tax system appears to be moderately progressive and relatively efficient. Better targeting of the relatively large social protection expenses as well as a revision of subsidies to certain products could yield positive results both for income distribution and fiscal consolidation.

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

Table 1.Mauritius: Selected Economic and Financial Indicators, 2009–2017
200920102011201220132014201520162017
Prel.Last SREst.Last SRProj.Proj.Proj.Proj.Proj.Proj.
(Annual percent change, unless otherwise indicated)
National income, prices and employment
Real GDP3.04.14.14.14.23.74.14.24.24.24.2
Real GDP per capita2.53.73.53.53.63.13.53.63.63.73.7
GDP per capita (in U.S. dollars)6,9197,5827,9908,3858,4718,4038,7899,1589,64910,18410,807
GDP deflator-0.21.85.04.34.43.95.94.44.44.44.4
Consumer prices (period average)2.52.97.46.54.64.85.34.94.44.44.4
Consumer prices (end of period)1.56.15.84.94.45.05.54.44.44.44.4
Unemployment rate (percent)7.37.87.8
External sector
Exports of goods and services, f.o.b.-15.618.912.515.56.63.06.16.06.26.56.7
Of which: tourism receipts-23.515.910.413.511.22.910.39.29.09.19.1
Imports of goods and services, f.o.b.-19.320.518.817.14.23.04.33.74.14.55.0
Nominal effective exchange rate (annual averages)-5.83.23.1
Real effective exchange rate (annual averages)-4.63.25.7
Terms of trade7.8-5.5-4.9
(Annual change in percent of beginning of period M2)
Money and credit
Net foreign assets17.420.210.3-7.716.9
Domestic credit1.810.316.18.610.0
Net claims on government1.11.02.5-1.41.5
Credit to private sector10.410.113.610.78.2
Broad money (end of period, annual percentage change)8.17.69.34.612.3
Income velocity of broad money1.00.90.91.00.9
Interest rate (weighted average TBs, primary auctions)4.43.94.6
(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)21.80.4-1.30.6-1.0-0.5-0.6-0.1-0.20.30.6
Revenues and grants22.821.921.521.221.021.820.921.121.221.221.3
Expenditure, excl. net lending24.824.926.223.725.525.524.123.823.923.323.1
Domestic debt of central government44.743.142.541.241.640.538.136.837.037.034.0
External debt of central government6.07.48.98.510.510.011.612.912.712.211.2
Investment and saving
Gross domestic investment26.424.926.224.426.624.825.325.726.126.627.0
Public6.66.17.66.47.77.47.77.88.38.27.6
Private19.818.818.618.018.917.517.517.917.918.319.4
Gross national savings13.815.614.214.715.714.816.418.119.821.423.0
Public-0.8-0.5-0.7-0.7-0.50.20.51.11.31.41.5
Private14.616.114.915.516.214.715.817.118.520.121.5
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.47.150.952.952.853.653.954.455.055.155.355.4
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 balance4.32.1-0.91.30.1-2.40.20.50.80.61.0
Total external debt312.714.413.515.015.216.117.718.416.514.814.6
Net international reserves (millions of U.S. dollars)2,1502,4482,2532,6362,2652,4202,5122,6602,8523,0353,289
Months of imports of goods and services, f.o.b.5.14.83.84.43.73.93.94.04.14.24.3
Memorandum items:
GDP at current market prices (billions of Mauritian rupees)282.0299.1327.4324.8356.6350.0385.9419.6456.3496.5540.2
GDP at current market prices (millions of U.S. dollars)8,8249,71410,29910,809
Public sector debt (percent of GDP)59.657.358.856.159.757.055.754.855.554.249.8
Foreign currency long-term debt rating (Moody’s)Baa2Baa2Baa2
Sources: Mauritian authorities; and IMF staff estimates and projections.

Excludes credit to state-owned enterprises.

GFSM 2001 concept of net lending/net borrowing, includes special and other extrabudgetary funds.

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

Sources: Mauritian authorities; and IMF staff estimates and projections.

Excludes credit to state-owned enterprises.

GFSM 2001 concept of net lending/net borrowing, includes special and other extrabudgetary funds.

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

Table 2.Mauritius: Summary of Central Government Finances, 2009–20141(Percent of GDP; unless otherwise indicated)
200920102011201220132014
ActualActualLast SREst.Last SRBudgetProj.Proj.Proj.
Total revenue and grants (1)22.821.921.521.221.021.521.820.921.1
Domestic revenue21.221.220.620.620.020.520.820.220.2
Tax revenue19.118.518.218.216.518.118.318.118.0
Income tax - Individuals1.51.51.51.51.51.61.61.61.6
Income tax - Corporations3.72.82.52.62.52.52.52.52.5
Value added tax (VAT)6.97.17.07.06.96.97.07.07.0
Excise duties, incl. “Maurice Ile Durable” levy3.13.13.33.53.23.53.63.33.1
Customs0.60.50.50.50.40.40.40.40.4
Other taxes3.33.53.53.12.03.23.23.33.4
Social contributions0.30.30.30.30.30.30.30.30.3
Nontax revenue1.82.42.02.01.52.12.21.82.0
Grants1.60.70.90.71.11.01.00.60.9
Total expense (current spending) (2)23.622.422.222.021.621.321.620.420.1
Expense on goods and services8.89.09.48.28.68.69.08.98.9
Compensation of employees6.05.95.95.65.65.55.75.95.9
Use of goods and services2.83.13.52.63.03.03.33.03.1
Interest payments3.83.43.43.13.63.23.32.72.6
Domestic interest3.63.32.93.03.02.42.3
External interest0.10.10.20.20.20.20.3
Transfers and subsidies6.65.54.46.34.64.74.84.24.0
Subsidies0.30.30.40.40.30.40.40.30.3
Grants and transfers6.35.24.05.94.34.44.53.93.7
Social benefits4.54.54.44.44.34.44.54.54.6
Contingencies0.00.00.50.00.50.40.00.00.0
Gross operating balance ((3)=(1)-(2))-0.8-0.5-0.7-0.7-0.50.20.20.51.1
Net acquisition of non-financial assets (capital spending)2.72.73.52.62.74.03.03.13.2
Net lending / borrowing (central governm. budget balance)2-3.6-3.2-4.2-3.4-4.1-3.8-2.8-2.6-2.1
Net lending / borrowing (special funds)31.60.2-0.60.9-0.4-1.5-0.9-0.7-0.6
Inflows to special funds (contribution from government)2.01.02.00.50.50.10.0
Outflows from special funds (expense)-0.4-0.9-1.1-2.0-1.4-0.7-0.6
Net lending / borrowing (consolidated balance)-2.0-3.0-4.8-2.4-4.5-5.3-3.7-3.2-2.7
Transactions in financial assets/liabilities0.3-0.11.00.80.80.60.60.61.4
Net acquisition of financial assets0.30.01.20.91.00.80.80.81.7
Of which: net lending0.00.01.20.71.00.90.90.91.6
Adjustment for difference in cash and accrual (net)0.0-0.2-0.2-0.1-0.2-0.2-0.2-0.2-0.3
Borrowing requirements (financing)3.72.95.83.25.35.94.33.94.1
Domestic3.01.03.71.63.03.82.21.31.8
Banks1.01.0-0.52.51.50.70.9
Nonbanks2.00.12.11.30.80.70.9
Foreign1.81.92.11.72.32.02.12.52.2
Disbursements2.12.12.41.92.62.32.32.82.8
Amortization-0.3-0.3-0.3-0.2-0.3-0.3-0.3-0.3-0.5
Memorandum items:
Government debt50.750.551.449.852.150.549.749.8
Public sector debt59.657.358.856.159.757.055.754.8
GDP at current market prices (in billions of rupees)282.0299.1327.4324.8356.6357.7350.0385.9419.6
Expenditure, including special funds outflows26.826.025.727.326.024.223.8
Primary balance (incl. grants; excl. net lending)31.80.4-1.30.6-1.0-2.1-0.5-0.6-0.1
Primary balance (excl. grants; excl. net lending)30.2-0.3-2.2-0.1-2.0-3.1-1.5-1.2-1.0
Structural primary balance (excl. grants)0.2-0.3-2.2-0.1-1.9-1.4-1.2-1.0
Sources: Ministry of Finance and Development; Bank of Mauritius; and IMF staff estimates and projections.

GFSM 2001 presentation.

Corresponds to the authorities’ budget presentation.

Includes the following special and other extra-budgetary funds: Maurice Ile Durable Fund; Human Resource, Knowledge and Arts Development Fund; Food Security Fund; Local Infrastructure Fund; and Social Housing Development Fund; National Resillience Fund (named Business Growth Fund prior to 2012); and Road Decongestion Program Fund.

Sources: Ministry of Finance and Development; Bank of Mauritius; and IMF staff estimates and projections.

GFSM 2001 presentation.

Corresponds to the authorities’ budget presentation.

Includes the following special and other extra-budgetary funds: Maurice Ile Durable Fund; Human Resource, Knowledge and Arts Development Fund; Food Security Fund; Local Infrastructure Fund; and Social Housing Development Fund; National Resillience Fund (named Business Growth Fund prior to 2012); and Road Decongestion Program Fund.

Table 3.Mauritius: Central Government Integrated Balance Sheet(Percent of GDP)
20092010
Closing/opening balanceTransactionsOther economic flowsClosing balance
Net worth104.2-0.3-13.090.8
Nonfinancial assets161.72.7-10.8153.7
Of which: fixed assets42.52.6-4.041.1
Of which: land118.80.0-6.7112.1
Net financial worth-57.5-3.0-2.2-62.8
Financial assets13.0-0.8-1.111.2
Currency and deposits1.7-0.60.01.0
Equity and investment fund shares6.70.0-0.95.8
Loans (includes loans to parastatals)2.30.0-0.12.2
Other accounts receivable (arrears of revenue)2.4-0.20.02.2
Liabilities70.52.31.274.0
Domestic
Currency and deposits 13.1-0.60.02.4
Securities and loans 245.91.0-2.744.3
Insurance, pensions, and standardized guarantee schemes15.40.04.319.7
Foreign
Securities and loans 26.21.9-0.47.6
Memorandum items:
GDP at current market prices (billions of rupees)282.0299.1
Liabilities/assets ratio0.40.4
Liabilities/financial assets ratio5.46.6
Sources: Ministry of Finance and Development; and IMF staff estimates.

Includes special funds.

Includes interest payable on debt.

Sources: Ministry of Finance and Development; and IMF staff estimates.

Includes special funds.

Includes interest payable on debt.

Table 4.Mauritius: Balance of Payments, 2008–2014
2008200920102011201220132014
Prel.Last SREst.Last SRProj.Proj.Proj.
(Millions of U.S. dollars, unless otherwise indicated)
Current account balance-971-654-793-1,191-1,071-1,058-1,113-1,044-938
Trade balance-1,989-1,550-1,894-2,459-2,419-2,503-2,494-2,585-2,631
Exports of goods, f.o.b.2,3891,9292,2592,4592,6122,6212,6642,7822,906
Imports of goods, f.o.b.-4,378-3,479-4,154-4,918-5,032-5,124-5,158-5,367-5,537
Services (net)6216277148479631,0229941,1241,258
Of which: tourism9977638849371,0041,0761,0331,1391,244
Income (net)17253205316209336207235254
Current transfers (net)22521618310617787180182181
Capital and financial accounts9037528411,1031,1771,0698491,063996
Capital account-1-2-5-6-5-6-5-6-6
Financial account9057548451,1081,1821,0758551,0681002
Direct investment (net)331220301373235399237327369
Abroad-52-37-129-130-85-134-51-77-115
In Mauritius383257430503320534288403484
Portfolio investment (net)-171-57-186-63135-77-100-33
Other investment (net)745591730798812752628741665
Of which: SDR allocation127
Of which: government (net)49155177215171256187291269
Errors and omissions2312811520300000
Overall balance163379201-8813711-2641958
Change in official reserves (- = increase)-163-379-20188-137-11264-19-58
(Percent of GDP, unless otherwise indicated)
Memorandum items:
Balance of goods and services-14.2-10.5-12.1-15.7-13.5-13.5-13.8-12.7-11.4
Exports of goods and services, f.o.b.51.147.150.952.952.853.653.954.455.0
Imports of goods and services, f.o.b.-65.3-57.6-63.0-68.6-66.3-67.1-67.7-67.2-66.4
Foreign direct investment3.42.53.15.02.25.02.22.83.1
Current account balance-10.1-7.4-8.2-11.8-9.9-9.9-10.2-9.1-7.8
Overall balance1.74.32.1-0.91.30.1-2.40.20.5
Errors and omissions2.43.21.60.00.30.00.00.00.0
Net international reserves, BOM, (mill. of U.S. dollars)1,7602,1502,4482,2532,6362,2652,4202,5122,660
In months of imports of goods and services, f.o.b.3.45.14.83.84.43.73.93.94.0
As ratio to external short term debt15.97.78.832.78.530.08.47.58.2
Percent of broad money18.323.223.618.023.720.721.721.0
Gross reserves, BOM, (mil. of U.S. dollars)1,7852,3042,6012,4072,7902,4182,5732,6652,813
GDP (millions of U.S. dollars)9,6418,8249,71410,13510,80910,89811,46812,022
Total external debt13.412.714.413.515.015.216.117.718.4
Total debt service ratio (% of goods & services exports)3.53.14.43.24.02.83.83.54.0
Mauritian rupees per U.S. dollar (period average)28.532.030.830.0
Mauritian rupees per U.S. dollar (end of period)31.830.330.429.7
Sources: Mauritian authorities; and IMF staff estimates and projections.

The 2011 foreign asset and liability survey has resulted in significant upward revisions in the stock of short term debt, thus leading to a sharp reduction in the ratio compared to previous projections.

Sources: Mauritian authorities; and IMF staff estimates and projections.

The 2011 foreign asset and liability survey has resulted in significant upward revisions in the stock of short term debt, thus leading to a sharp reduction in the ratio compared to previous projections.

Table 5.Mauritius: Depository Corporations Survey, 2008–2012
20082009201020112012
Last SREst.Proj.
(Millions of rupees, end of period)
Net foreign assets285,016332,684392,515424,734367,800424,200
Net domestic assets-10,702-36,204-73,391-75,901-33,895-49,116
Domestic credit296,098301,170331,747366,952359,314392,585
Claims on government (net)46,96749,84952,73560,57848,18053,293
Monetary authorities-3,797-10,289-4,188-4,174-2,085-2,069
Commercial banks50,76460,13756,92364,75250,26555,362
Claims on local government and SOEs10,22211,3519,1367,0757,715
Claims on private sector238,909239,971269,875304,059331,576
Other financial liabilities 1-207,939-237,986-296,803-324,433-279,049-313,463
Other items (net)-98,861-99,388-108,335-118,420-114,160-128,238
Broad money (M2)274,314296,480319,124348,832333,905375,084
Money (M1)75,82088,15191,119103,55596,683108,667
Quasi-money198,494208,329228,005245,277237,222266,417
Reserve money30,64135,93446,91460,28651,37065,993
(Annual change, millions of rupees)
Net foreign assets19,41447,66859,83132,715-24,71556,400
Domestic credit53,9085,07230,57751,35927,56733,271
Claims on government1,4432,8822,8877,843-4,5555,113
Claims on local government and SOEs2,9461,128-2,21443,516-2,061640
Claims on private sector49,5191,06229,90443,51634,18327,518
Broad money (M2)34,99522,16722,64429,70814,78141,179
Money (M1)11,39012,3322,96812,4365,56411,984
Quasi money23,6059,83519,67617,2729,21729,195
Reserve money2,5615,29310,98013,3734,45714,623
(Annual percent change)
Net foreign assets7.316.718.0-6.315.3
Domestic credit22.31.710.216.38.39.3
Claims on government3.26.15.814.9-8.610.6
Claims on local government and SOEs40.511.0-19.516.6-22.69.1
Claims on private sector26.10.412.516.612.79.1
Broad money (M2)14.68.17.69.34.612.3
Money (M1)17.716.33.413.66.112.4
Quasi-money13.55.09.47.64.012.3
Reserve money9.117.330.628.59.528.5
(Percentage change of beginning of year of broad money)
Net foreign assets8.117.420.210.3-7.716.9
Domestic credit22.51.810.316.18.610.0
Claims on government (net)0.61.11.02.5-1.41.5
Claims on local government and SOEs1.20.4-0.713.6-0.60.2
Claims on private sector20.70.410.113.610.78.2
Memorandum Items:
Domestic credit (in percent of GDP)107.9106.8110.9112.1110.6112.2
Claims on private sector (in percent of GDP)84.882.887.993.693.694.7
Money multiplier9.08.36.85.86.55.7
Velocity1.01.00.90.91.00.9
Sources: Bank of Mauritius; and IMF staff estimates. SOEs is the acronym for State-Owned Enterprises.

The major component of other financial liabilities consists of restricted deposits, which largely include deposits of the offshore nonfinancial corporations (so-called Global Business Companies, GBCs). GBCs are resident corporations licensed to conduct business exclusively with nonresidents and only in foreign currencies.

Sources: Bank of Mauritius; and IMF staff estimates. SOEs is the acronym for State-Owned Enterprises.

The major component of other financial liabilities consists of restricted deposits, which largely include deposits of the offshore nonfinancial corporations (so-called Global Business Companies, GBCs). GBCs are resident corporations licensed to conduct business exclusively with nonresidents and only in foreign currencies.

Table 6.Mauritius: Financial Soundness Indicators for the Banking Sector, December 2006–June 2011(End of period, in percent, unless otherwise indicated)
20062007200820092010201020112011
Sep.Dec.Mar.Jun.
Capital adequacy
Regulatory capital to risk-weighted assets115.813.315.315.415.915.817.216.3
Regulatory Tier I capital to risk-weighted assets13.711.513.713.313.613.615.014.1
Total (regulatory) capital to total assets7.36.07.37.77.07.37.57.3
Asset composition and quality
Share of loans (exposures) per risk-weight (RW) category
RW = 0%12.89.19.020.618.621.616.417.2
RW = 20%1.33.93.324.923.819.521.621.7
RW = 35%3.23.13.03.33.2
RW = 50%6.05.75.28.48.18.811.210.7
RW = 75%3.73.63.63.63.7
RW = 100%79.881.182.338.341.842.542.842.3
RW = 150%0.91.01.01.11.2
Total exposures/total assets40.144.854.945.945.546.749.749.1
Sectoral distribution of loans to total loans
Agriculture5.76.06.16.36.66.36.05.8
of which: sugar5.04.85.05.25.75.55.24.9
Manufacturing11.210.29.48.77.57.87.47.6
of which: EPZ4.84.74.03.22.62.62.32.4
Traders14.913.511.710.110.710.510.510.6
Personal and professional9.59.78.69.09.08.89.08.9
Construction15.416.418.719.720.320.220.820.9
of which: housing12.010.912.411.612.114.314.614.5
Tourism/hotels13.213.615.416.217.417.617.417.7
Other30.130.645.630.028.528.828.928.5
Foreign currency loans to total loans50.756.365.559.161.061.560.661.6
NPLs to gross loans - excluding accrued/unpaid interest3.02.52.03.32.52.82.82.6
NPLs net of provisions to capital7.09.18.213.48.69.18.29.6
Large exposures to capital2380.0493.2394.2216.9217.0222.5197.4228.2
Earnings and Profitability
ROA (Pre-tax net income/average assets)1.71.91.71.61.21.41.41.6
ROE (Pre-tax net income/average equity)22.426.424.321.016.720.019.321.5
Interest margin to gross income31.227.629.768.970.567.170.065.4
Noninterest expenses to gross income16.41517.239.243.038.939.336.7
Liquidity
Liquid assets to total assets352.847.727.727.923.623.419.821.2
Liquid assets to total short-term liabilities3118.8104.231.934.431.231.928.129.9
Demand deposits/total liabilities15.418.419.423.927.425.626.925.3
FX deposits to total deposits68.067.666.064.164.364.062.265.1
Sensitivity to market risk
Net open positions in FX to capital36.43.23.85.34.67.02.62.0
Source: Mauritian authorities.

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

Large exposures refer to one or more credit exposures to the same individual or group that exceed 15 per cent of a bank’s capital base. The current aggregate large exposures ratio is well below the prudential limit of 800 per cent as set in the Bank of Mauritius Guideline on Credit Concentration Risk from December 2011.

Ratio has been revised according to the FSI manual from 2008.

Source: Mauritian authorities.

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

Large exposures refer to one or more credit exposures to the same individual or group that exceed 15 per cent of a bank’s capital base. The current aggregate large exposures ratio is well below the prudential limit of 800 per cent as set in the Bank of Mauritius Guideline on Credit Concentration Risk from December 2011.

Ratio has been revised according to the FSI manual from 2008.

APPENDIX I. EXCHANGE RATE AND EXTERNAL BALANCE ASSESSMENT

The real value of the Mauritian rupee has followed a U-shaped path over the last decade. The currency depreciated some 25 percent from peak (2001) to trough (end-2006). During the 2008/09 crisis, the depreciation of the Euro and the British Pound pushed up the rupee’s real value. With the relatively quick rebound from the world economic crisis, FDI and other investment flows returned to pre-crisis levels in 2010–11, which translated into a slight real appreciation over that period.

Figure I.1.Mauritius: Bilateral and Effective Exchange Rates, 2000–11

The rupee was broadly in line with fundamentals. The empirical strategy follows Vitek’s “Exchange Rate Assessment Toolkit” (2012), based on the application of three CGER approaches: macroeconomic balance (MB), external sustainability (ES) and equilibrium real exchange rate (ERER). All approaches point to a small overvaluation at end-2011, but the estimates taken together are still statistically indistinguishable from a zero misalignment and the misalignment declines over time.

The macroeconomic balance (MB) approach is a two-stage method. First, the equilibrium “current account norm” (CA norm) is estimated based on a Generalized Method of Moments (GMM) regression using a dataset covering 184 economies and spanning 1973–2010. The CA norm is compared to the “underlying CA”, which adjusts current account projections for one-off operations and real exchange movements. Second, using the country-specific elasticity of the current account with respect to the real exchange rate (0.88 estimated in IMF WP/08/212), the misalignment is computed as the real exchange rate adjustment required to close the external gap.

The MB approach shows that the underlying current account deficit has been greater than its equilibrium levelsince 2005 (Figure I.2). In 2011, the implied overvaluation decreased slightly from 2010 to below 8 percent. Zero deviation is within the 95 percent confidence interval, and thus the MB approach does not provide strong evidence of overvaluation in 2011. The balance of payments projections imply that the overvaluation is expected to continue shrinking in the medium term.

Figure I.2.MB Approach: Norm vs. Underlying Current Account and Implied Real Effective Exchange Rate Misalignment

The external sustainability (ES) approach also estimates the misalignment as the adjustment required to close the external gap. However, unlike the MB approach, ES defines the CA norm as the current account balance that would keep Mauritius’ net foreign assets constant as a share of GDP. Despite differences in methodology, results for the ES approach (Figure I.3) are similar to those derived from the MB approach: the exchange rate was overvalued by some 12 percent in 2011, but the misalignment is projected to diminish over the medium term.

Figure I.3.ES Approach: Norm vs. Underlying Current Account and Implied Real Effective Exchange Rate Misalignment

The ES approach misalignment estimates should be interpreted cautiously. As discussed in IMF WP/08/212 and WP/10/148, the liability side of Global Business Corporations’ (GBCs) activities is likely underestimated in external statistics, which biases upwards the NFA estimate for Mauritius.1 This results in overestimating the CA Norm and, consequently, the REER overvaluation. Confidence intervals cannot be estimated using the ES approach because it is based on an accounting identity.

The reduced-form equilibrium real exchange rate (ERER) approach uses fitted values from a panel regression to compute the equilibrium real exchange rate. The difference with the actual REER constitutes the misalignment. Results, presented in Figure I.4, broadly corroborate those obtained by the other two methods: the overvaluation, currently at 12 percent, is projected to decrease over the medium term. The overvaluation is statistically significant at the 5 percent level in 2011 in the ERER approach.

Figure I.4.Equilibrium Real Effective Rate (ERER) Approach and Implied Misalignment

Table I.1 summarizes the current and medium-term exchange rate misalignment computed under the three methodologies, while Figure I.5 compares the average equilibrium real exchange rate computed under the three methodologies with the REER forecasted under the random walk hypothesis. The results from the current analysis are essentially unchanged from last year’s Article IV consultation.

Table I.1.Real Effective Exchange Rate Misalignment Results
2010201020112016
(2011 A.IV)(revised)
MB12.38.37.8-0.8
EREER8.37.612.310.5
ES12.49.711.74.4
Average11.08.510.64.7

Figure I.5.Equilibrium Exchange Rate: Average for Three CGER Methodologies

The analysis does not provide support for active exchange rate management. There might be some scope to resist further appreciation that does not reflect fundamentals, although this might not be fully effective and would carry important sterilization costs. Moreover, the exchange rate is only one of the instruments available to close the external balance gap, and not necessarily the most obvious for a country with a floating exchange rate regime. Sustained fiscal adjustment can also contribute to reduction of external imbalances and reduce overall vulnerabilities (and is required by law). Reforms to increase productivity and reduce trade restrictions appreciate the equilibrium real exchange rate and thus reduce potential overvaluation.

APPENDIX II. RESERVE ADEQUACY ASSESSMENT1

Net international reserves held by the Bank of Mauritius appear fully adequate to face the current volatile global environment.

In nominal terms, net international reserves have nearly doubled since 2006, reaching USD 2.5 billion at end-2011 (Figure II.1). This rapid accumulation, plus the fact that at above 4 months of imports, reserves exceeded the 3 months threshold, has prompted policy discussions about the excessiveness of reserves and the merits of committing part of them to a sovereign wealth fund. This appendix analyzes international reserve adequacy for Mauritius using both traditional and new metrics.

Figure II.1.Mauritius: International Reserves in Nominal Terms and Compared to Standard Adequacy Metrics

While reserve accumulation may appear impressive in nominal terms, it has been broadly in line with the growth of the economy, the deepening of its financial sector and increased trade openness (Figure II.1). Over the last 6 years, reserves have been closely tracking another commonly-used benchmark—20 percent of M2, thus just keeping pace with rapid financial deepening. At some 500 percent of short term debt on a remaining maturity basis, reserves appeared particularly comfortable with respect to the Guidotti-Greenspan rule of 100 percent. It should be noted however that available statistics likely underestimate the stock of private short term debt.2

Mauritius has been accumulating reserves at a slower pace than comparator countries. As shown in Figure II.2, emerging markets have increased reserve import cover to an average of over 6 months of goods and services. Mauritius’ relative drop over time is not driven by outliers. As shown in the right column graphs of Figure II.2, the country’s percentile ranking among the 80 emerging markets included in the analysis has been on a decline across all three traditional metrics, albeit from high levels.

Figure II.2.Mauritius: International Reserves Against Various Adequacy Metrics, and Compared to 80 Emerging Markets.

Mauritius’ reserves are adequate when measured against the new multi-dimensional IMF (2011) metric.3 A main drawback of traditional metrics is that each of them only measures the country’s exposure to one type of risk: current account shocks (import cover); sudden stops (short-term debt cover); and capital flight (M2 cover). Moreover, the actual thresholds (e.g. 3 months of imports) are relatively arbitrary rules of thumb. The study of external market pressure episodes conducted as part of IMF’s recent research on reserve adequacy shows that these risks often materialize simultaneously. The event study also allowed constructing relative weights for each of these risks and the corresponding reserve cover needed to face them. In the case of countries with a floating regime, reserves should cover the sum of: 30 percent short term debt on remaining maturity basis, 10 percent of other portfolio liabilities, 5 percent of M2, and 5 percent of exports of goods and services. An adequacy index of 100 percent means that reserves exactly equal the sum of these four components. At end-2011, the metric for Mauritius constituted 143 percent, which is at the upper end of the suggested adequacy range (100 to 150 percent). Again, Mauritius has been slipping in relative terms among the 80 emerging markets for which the metric was computed, and is currently in the middle quintile (bottom graphs in Figure II.2).

Staff considers it appropriate for Mauritius to continue targeting the upper end of the suggested reserve adequacy range, as measured by the IMF metric. In addition to facing standard economic risks, the country is also exposed to the risk of costly cyclones and floods. Given the increasing role of Mauritius as an international financial center, M2 is an increasingly less representative measure of the size of the financial sector and associated risks. Finally, in the short run, an additional safety margin is needed to factor in increased uncertainty stemming from Mauritius’ high exposure to the European market. Staff therefore sees little scope in devoting any of BOM’s reserves to a potential sovereign wealth fund. However, staff welcomes BOM’s ongoing efforts to increase the yield potential on the upper tranches of reserves, including through diversifying the currencies in which reserve instruments are denominated.

APPENDIX III. MAURITIUS: DEBT SUSTAINABILITY ANALYSIS (DSA) USING THE DEBT SUSTAINABILITY FRAMEWORK FOR MARKET ACCESS COUNTRIES1

Recent Debt Developments

Public debt has stabilized over the last two years, albeit at a relatively high level of close to 60 percent of GDP, highlighting the need for fiscal consolidation over the medium term. After reaching a peak of close to 75 percent in 2003, the ratio of public debt to GDP had been on a declining trend mainly due to strong economic growth and sound fiscal policy. Nevertheless, a series of stimulus measures to counter the effects of the global financial crisis has pushed up public debt to close to 60 percent of GDP by the end of 2009, thus approaching the legally-mandated ceiling defined in the 2008 Public Debt Management Act (PDMA).2 Although the comprehensive policy packages are considered to have been broadly effective in facilitating economic recovery in 2010–11 and bringing the debt ratio to 56 percent of GDP by end-2011, the Mauritian authorities are cognizant of the need for fiscal consolidation over the medium-term.

The central government relies mostly on domestic debt for its borrowing needs, whereas in relative terms, state-owned firms have relied more heavily on external debt. As of end-December 2011, domestic debt represented some 80 percent of total central government debt, a small decline with respect to the average share for the period 2003–09 (90 percent), as the government pursued a strategy of seeking long-term financing from multilateral and bilateral creditors under favorable conditions (below market terms). Over 20 percent of domestic central government debt is classified as short-term (by original maturity). The debt of State-Owned Enterprises (SOEs) is estimated to account for 11 percent of total public debt as of end-2011. External debt amounted to over 40 percent of total SOE debt in 2011, a decline with respect to the historical average of over 50 percent for the period 2003–09.

The authorities are currently elaborating a new debt management strategy. The strategy attempts to meet the borrowing needs of the government in a manner that avoids market disruption; to minimize the cost of the debt portfolio within an acceptable level of risk; and to support the development of a well-functioning market for government securities. Among other objectives, the strategy envisages lengthening the maturity profile of government debt (partly by increasing the share of external debt in the total portfolio), increase the issuance of long-term domestic debt instruments, and increase liquidity in the domestic market for government securities by increasing the number of benchmark instruments.

Baseline Assumptions underlying the DSA

The results of this debt sustainability analysis are based on a number of important assumptions, notably regarding fiscal consolidation, sound monetary policy and sustained economic growth over the medium term. GDP growth is expected to increase gradually to 4.2 percent by 2014 driven by increased infrastructure investment and productivity improvements. Inflation should remain moderate due to credible implementation of monetary policy by the Bank of Mauritius. Furthermore, the macroeconomic framework used for this exercise assumes that the government will resume fiscal consolidation after 2012, with the primary deficit (including grants) declining by 1 percentage point of GDP between 2012 and 2017. A reduction in transfers and subsidies and better enforcement of financial discipline for public enterprises is expected to contribute to deficit reduction.

The current account deficit is expected to gradually narrow reaching close to 4 percent of GDP by 2017. The trade balance should improve over the projection period as import growth decelerates from current high levels (imports are estimated to have grown by 17 percent in dollar terms in 2011), while export growth continues to be robust at around 6 percent on average. After a marked slow-down in 2011 and 2012, financial flows including FDI are expected to recover contributing to an accumulation of international reserves over the medium-term.

The baseline macroeconomic framework is subject to downside risks. Given the strong links between Mauritius and advanced economies in Europe, the macroeconomic outlook remains vulnerable to the volatile external environment. FDI flows, tourism receipts and exports of manufactured goods to European trading partners are particularly important transmission channels for external shocks.

Public Debt Sustainability

The results of the debt sustainability analysis indicate that public debt is sustainable over the medium-term (Table III.1 and Figure III.1). Despite the small fiscal expansion expected in the context of the 2012 budget, public debt should gradually decline over the projection period, as fiscal consolidation takes place. Nevertheless, more ambitious consolidation efforts might be required to reach the 50 percent debt-to-GDP target mandated by the Public Debt Management Act (PDMA) before 2018. In fact, public debt is projected to peak at 57 percent of GDP in 2012 before falling to close to 50 percent by 2017, the end of the projection period.

Table III.1.Mauritius: Public Sector Debt Sustainability Framework, 2007-2017(In percent of GDP, unless otherwise indicated)
ActualProjections
20072008200920102011201220132014201520162017Debt-stabilizing primary balance 9/
Baseline: Public sector debt 1/56.251.959.657.356.157.055.754.855.554.249.8-1.5
o/w foreign-currency denominated9.313.412.714.415.016.117.718.416.514.814.6
Change in public sector debt-6.6-4.37.8-2.3-1.20.9-1.3-1.00.7-1.3-4.4
Identified debt-creating flows (4+7+12)-7.9-3.80.0-0.3-2.4-0.3-2.1-1.8-1.7-2.3-2.6
Primary deficit-1.4-2.6-1.8-0.4-0.60.50.60.10.2-0.3-0.6
Revenue and grants19.521.022.821.921.221.820.921.121.221.221.3
Primary (noninterest) expenditure18.218.521.021.520.622.321.521.321.420.920.7
Automatic debt dynamics 2/-6.5-1.31.80.1-1.8-0.8-2.6-1.9-1.9-2.1-2.0
Contribution from interest rate/growth differential 3/-3.9-2.32.40.0-1.5-0.8-2.6-1.9-1.9-2.1-2.0
Of which contribution from real interest rate-0.60.43.92.40.71.1-0.50.20.20.10.1
Of which contribution from real GDP growth-3.2-2.8-1.5-2.3-2.2-1.9-2.1-2.2-2.1-2.1-2.1
Contribution from exchange rate depreciation 4/-2.61.1-0.60.0-0.3
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes (2-3) 5/1.3-0.57.8-2.01.21.20.80.82.51.0-1.8
Public sector debt-to-revenue ratio 1/287.6246.5261.5261.7264.1261.7266.6259.2261.9256.0234.2
Gross financing need 6/27.820.213.618.314.815.814.310.39.68.67.4
in billions of U.S. dollars2.22.01.21.81.61.71.61.21.21.21.1
Scenario with key variables at their historical averages 7/57.056.255.556.455.952.6-1.0
Scenario with no policy change (constant primary balance) in 2012-201757.055.755.156.155.552.2-1.6
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)5.95.53.04.14.13.74.14.24.24.24.2
Average nominal interest rate on public debt (in percent) 8/7.37.87.56.15.86.35.15.04.94.84.9
Average real interest rate (nominal rate minus change in GDP deflator, in percent)-0.71.27.74.31.52.3-0.80.60.50.40.4
Nominal appreciation (increase in US dollar value of local currency, in percent)21.7-11.14.8-0.32.3
Inflation rate (GDP deflator, in percent)8.06.5-0.21.84.33.95.94.44.44.44.4
Growth of real primary spending (deflated by GDP deflator, in percent)-2.17.317.16.6-0.112.00.43.24.81.83.0
Primary deficit-1.4-2.6-1.8-0.4-0.60.50.60.10.2-0.3-0.6

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

Derived as [(r - π(1+g) - g + αε(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 αε(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 [(r - π(1+g) - g + αε(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 αε(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.

Figure III.1.Mauritius: Public Debt Sustainability: Bound Tests 1/2/

(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/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Public debt dynamics are resilient to several stress tests (Figure III.1). The results of standardized sensitivity tests do not fundamentally alter the broadly positive outlook for public debt previously discussed. In most cases, the public debt-to-GDP ratio does not approach 60 percent by the end of the projection period under the different shocks considered,3 except for the scenario including an increase in contingent liabilities, which would cause the debt-to-GDP ratio to exceed 65 percent in 2013 before falling back to 59 percent by 2017. The external debt outlook is somewhat vulnerable to a large devaluation, which would push up the debt-to-GDP ratio by 7 percentage points to 57 percent in 2017 (Figure III.1).

External Debt Sustainability

External debt dynamics are sustainable in the baseline scenario (Table III.2 and Figure III.2). Excluding short-term private sector liabilities, external debt is estimated at 15 percent of GDP at the end of 2011, down from 20 percent in 2002. Gross bank external liabilities surpassed 100 percent of GDP at the end of December 2011. They are not included in external debt figures, as bank foreign assets are almost twice as large,4 and as in many international financial centers, it would be misleading to include gross bank liabilities in the external debt measure.5 External debt is projected to increase over the medium term reaching 18 percent of GDP by 2013, as authorities take advantage of partially concessional long-term financing from multilateral and bilateral sources.

Table III.2.Mauritius: External Debt Sustainability Framework, 2007-2017(In percent of GDP, unless otherwise indicated)
ActualProjections
20072008200920102011201220132014201520162017Debt-stabilizing non-interest current account 6/
Baseline: External debt10.312.013.414.615.215.018.117.417.114.015.2-3.0
Change in external debt-5.21.61.41.20.6-0.23.1-0.8-0.3-3.11.2
Identified external debt-creating flows (4+8+9)-1.16.46.75.75.07.65.74.33.02.01.3
Current account deficit, excluding interest payments5.09.87.28.09.79.98.87.46.25.03.9
Deficit in balance of goods and services9.914.210.512.113.513.812.711.410.18.97.9
Exports56.751.147.150.952.853.954.455.055.155.355.4
Imports66.665.357.663.066.367.767.266.465.264.363.2
Net non-debt creating capital inflows (negative)-4.4-1.7-1.8-1.2-3.4-2.1-2.9-2.8-2.9-2.7-2.4
Automatic debt dynamics 1/-1.7-1.71.3-1.0-1.2-0.3-0.2-0.3-0.3-0.4-0.2
Contribution from nominal interest rate0.40.30.20.20.20.30.30.40.40.30.3
Contribution from real GDP growth-0.8-0.5-0.4-0.5-0.5-0.6-0.6-0.7-0.7-0.7-0.6
Contribution from price and exchange rate changes 2/-1.3-1.51.5-0.7-0.9
Residual, incl. change in gross foreign assets (2-3) 3/-4.1-4.8-5.3-4.5-4.4-7.7-2.5-5.0-3.3-5.2-0.1
External debt-to-exports ratio (in percent)18.223.428.428.728.727.833.331.631.125.327.4
Gross external financing need (in billions of US dollars) 4/0.71.31.11.31.61.61.51.51.41.31.2
in percent of GDP9.613.112.013.114.414.813.212.410.99.78.1
Scenario with key variables at their historical averages 5/15.015.112.912.811.113.9-2.1
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)5.95.53.04.14.13.74.14.24.24.24.2
GDP deflator in US dollars (change in percent)9.317.3-11.25.76.9-2.81.10.61.71.82.4
Nominal external interest rate (in percent)3.13.61.81.61.82.02.42.32.32.02.4
Growth of exports (US dollar terms, in percent)10.311.4-15.618.915.53.06.16.06.26.56.7
Growth of imports (US dollar terms, in percent)9.521.2-19.320.517.13.04.33.74.14.55.0
Current account balance, excluding interest payments-5.0-9.8-7.2-8.0-9.7-9.9-8.8-7.4-6.2-5.0-3.9
Net non-debt creating capital inflows4.41.71.81.23.42.12.92.82.92.72.4

Derived as [r - g - ρ(1+g) + εα(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, g = real GDP growth rate, 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) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

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 [r - g - ρ(1+g) + εα(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, g = real GDP growth rate, 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) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

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.

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

(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/For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/One-time real depreciation of 30 percent occurs in 2012.

Stress tests indicate that the external debt trajectory is particularly vulnerable to shocks to the non-interest current account and large exchange rate depreciations. Sensitivity analysis suggests that Mauritius’ external debt is resilient to interest rate and growth shocks, but a 30 percent real depreciation would push up the external debt-to-GDP ratio to around 23 percent in 2017. A current account deficit that is 3 percentage points of GDP larger than projected in the baseline would likely put the country on an unsustainable path, as the debt-to-GDP ratio would shoot up to 27 percent by 2017. Thus, moderating the non-interest part of the external current account balance is key to maintaining external debt sustainability.

Conclusion

Overall, the DSA results indicate that the debt outlook for Mauritius is broadly positive. Both total public debt and external debt are on sustainable trajectories in the baseline, and the results of stress tests indicate that debt dynamics are resilient to several shocks. Nevertheless, the external debt outlook is particularly vulnerable to a shock to the non-interest current account, which may lead to unsustainable trajectories. In addition, total public sector debt could be significantly affected by shocks to contingent liabilities. It is important to note that the simulated debt trajectories are based on the assumption that structural reforms will be implemented to sustain growth rates and that some fiscal consolidation will take place over the medium-term.

APPENDIX IV. GREEN TAXES AND ETHANOL POLICIES1

Mauritius is a pioneer in the development of green taxes. The authorities view taxes as the best policy instrument for reflecting environmental damages in the costs of energy and vehicle use and for promoting a variety of changes in household and firm behavior to reduce these damages. The excise on carbon-based fuels under the Maurice Ile Durable Initiative comes close to an ideal CO2 tax.

The amendment to the Excise Act in July 2011 to allow for the imposition of a CO2 levy or the granting of a rebate on the excise duty payable on motor cars has merit, but could be improved. The levy or rebate system depends on the CO2 emissions of the vehicle (new and second-hand motor cars) and was designed to be revenue neutral.2 Staff considers that levy/rebate scheme has merit, but it would be desirable to remove the graduated tax/subsidy rates, as the value of reducing CO2 by an additional ton should be the same across all possible uses. For example, currently the reward for incrementally reducing CO2 per km is much higher for high-tax vehicles than for other vehicles.

Designing Policies to Promote the Use of Ethanol

The appropriate subsidy per liter of ethanol should reflect the value of environmental benefits. To the extent that ethanol production from sugar cane (for blending with motor fuels) generates less carbon emissions and pollution than gasoline, it should be taxed at a lower rate, or equivalently, receive a tax refund or subsidy. The Mauritian authorities intend to follow this approach and currently, an ethanol subsidy (Rs 2 per liter or US $0.27 per gallon) is being proposed based on a careful assessment of lifecycle emissions from ethanol production compared with emissions from combusting gasoline. With pollution benefits appropriately rewarded, the market should supply the economically efficient amount of ethanol. If future sugar prices are high, or oil prices are low, ethanol supply will likely be minimal or zero, as production would not be commercially viable. However, ethanol could be economic to produce under several alternative future price scenarios that appear realistic at the moment.

There is no obvious economic rationale for supplementing the ethanol subsidy with a quantitative ethanol mandate. Even though mandates are common in other countries, a mandate could, in fact, be counterproductive, if it forces ethanol into the market when it would otherwise not be economic to produce (despite its environmental benefits, which should be addressed through the subsidy).

In principle, if there are additional market impediments, this may warrant more initial policy support, but this seems less plausible. Whether there are such impediments is not entirely clear (for example, one possible impediment, the inability of early ethanol producers to capture spillover benefits accruing from their ‘learning-by-doing’ to later producers should not be a large problem, given that the number of potential ethanol producers is very limited). Moreover, even if additional support might be justified, setting a higher initial subsidy would be better than forcing ethanol production through a mandate, regardless of whether future production makes economic sense.

APPENDIX V. INCLUSIVE GROWTH1

Poverty and inequality in Mauritius are relatively low. Extreme poverty, measured by the proportion of the population living below $1.25 a day in PPP terms was below 1 percent in 2006/07. By international standards, inequality in Mauritius with a Gini coefficient of 38.8 is not high. Egalitarian societies such as Sweden and Canada have Gini coefficients between 25 and 35, whereas most countries have coefficients around 40 (United States, China, and Russia). Between 1996 and 2007, Mauritius experienced strong per capita GDP growth, averaging 3.7 percent. Based on data from three household budget surveys (HBS), we review how inclusive growth in 1996-2007 has been and analyze the distributional incidence of social protection expenditures. We also discuss the redistributive impact of the tax structure.

Inclusive Growth Measured by Growth Incidence Curves

All income groups experienced positive real growth in household expenditure per capita between the three surveys, but the poor gained less more recently. Growth incidence curves examine the interaction between growth, poverty and inequality. As depicted in Figure V.1, for the whole period from 1996/1997 to 2006/2007, both the poorest percentiles and the richest percentiles grew well above the mean. However, from 2001/2002 to 2006/2007, richer groups’ expenditures grew faster, pointing to a more unequal distribution of the benefits of growth in recent years.

Figure V.1.Growth Incidence Curves for Per Capita Household Expenditures

Source: HBS Surveys; and IMF Staff estimates

Mauritius performed well compared to African countries analyzed in the latest AFR Regional Outlook. Even though mean growth in real expenditure per capita was stronger in some countries (not surprising given lower levels of development), in several instances poorer households saw slower growth or even negative growth in expenditure per capita.

Structural changes in the Mauritian economy might be an important factor in explaining recent trends in inequality. During the years of the last survey (2006 and 2007) unemployment rates were relatively high in Mauritius (around 9 percent). The loss of trade preferences in textile, the decline in some traditional sectors (agriculture, textile manufacturing) might have reduced demand for lower-skilled workers, whereas the expansion of the financial service and health sectors might have increased demand and wages for higher-skilled groups. This could reflect a global trend related to globalization and technological progress that are likely to have increased return on human capital and greater inequality between skilled and unskilled workers—something that might persist going forward. The educational system has been unable to accompany these structural changes and inequality in educational outcomes is still relatively high leading to significant problems of skill mismatches.2

Social Protection System

The Mauritian social protection system needs to improve to ensure that the poor benefit more from economic development. Social protection expenditures at close to 4.5 percent of GDP in 2010 are relatively high. Non-contributory and non-targeted pensions account for 1.3 percent of GDP. Only about 50 percent of direct and indirect beneficiaries of Social Aid (the main means-tested social assistance program) live below the poverty line. Old age pension benefits overwhelming go to non-poor households (only 22 percent of recipients of old age pensions are poor). Furthermore, 39 percent of the basic retirement pension benefits go to the richest 20 percent (Table V.1). The two richest quintiles of the population receive close to 58 percent of all social protection benefits, and the richest 20 percent alone receive 37 percent. Eliminating transfers to the richest 40 percent of the population could save significant sums, which could be deployed more effectively in the pro-poor sectors of primary and secondary education and health.

Table V.1.Distribution of Benefits(in percent by quintile)
Q1Q2Q3Q4Q5
All social protection13.712.715.921.236.5
All social insurance13.012.515.921.537.1
Old Age Pension12.111.615.821.838.7
Social Aid40.622.615.58.313.0
Sources: IMF staff estimates; and 2006/07 HBS survey. Benefits’ incidence is the transfer amount received by the group as a percent of total transfers received by the population. Aggregated transfer amounts are estimated using household size-weighted expansion factors.
Sources: IMF staff estimates; and 2006/07 HBS survey. Benefits’ incidence is the transfer amount received by the group as a percent of total transfers received by the population. Aggregated transfer amounts are estimated using household size-weighted expansion factors.

Structure of Tax Revenue and Incidence of Taxes

Major tax reforms after 2006 aimed at broadening the tax base and increasing tax progressivity. Measures included the introduction of a single 15 percent rate for VAT, corporate and personal income tax (the latter with an increase in the exemption threshold). Taxes on consumption are the most important sources of tax revenue (Table V.2) with VAT and excise duties accounting for more than half of total tax revenue. Corporate income taxes are some 15 percent on tax revenue, whereas personal income tax is about 8 percent of tax revenue.

Table V.2.Composition of Tax Revenues in Mauritius
2007200820092010
(in percent of total tax revenue)
Income Tax on Individuals6.77.58.08.1
Corporate Income Tax13.416.519.215.3
Property Taxes7.96.44.14.3
VAT39.637.536.238.2
Excise and Gambling Taxes21.219.919.521.0
Customs Duty5.64.12.92.8
Other5.68.210.110.3
(in percent of GDP)
Total17.618.219.118.5
of which: Income Tax on Individuals1.21.41.51.5
of which: Corporate Income Tax2.43.03.72.8
of which: VAT7.06.86.97.1
of which: Excise and Gambling3.73.63.73.9
of which: Customs Duty1.00.80.60.5
Source: Mauritian authorities and IMF staff estimates.
Source: Mauritian authorities and IMF staff estimates.

Personal income taxes are relatively progressive but their redistributive potential is limited. The concentration index3 for income tax payments is very high, indicating that richer segments of the population bear a disproportionate share of the tax burden (Table V.3). The Kakwani index—the difference between the Gini for pre-tax income and the concentration index for taxes—is the highest among the comparator countries considered, confirming that personal income taxes are relatively progressive. Nevertheless, the Kakwani index does not take into account the redistributive potential of the tax. The Reynolds-Smolensky (RS) index addresses this shortcoming by measuring the difference between the Gini coefficients for pre-tax and post-tax income.4 It suggests that income taxes have a negligible income distribution capacity in Mauritius, because of their relatively small share in total taxes. The RS index for Mauritius is close to zero, comparable to Costa Rica and Panama, whereas redistribution through taxation is much stronger in New Zealand and the United States.

Table V.3.Redistributive Impact of Income Taxes in Mauritius and Comparator Countries
Concentration IndexKakwani IndexGini for pre-Tax IncomeGini for post-Tax incomeRS Index
Mauritius (2006/07)89.242.846.445.90.5
Colombia (2003)89.435.753.751.32.4
Costa Rica (2000)48.13.045.144.80.3
New Zealand (2006/07)47.98.839.136.32.8
Panama (2003)73.920.153.853.40.4
US (Federal, 2004)75.531.743.839.84
Sources: Creedy et al. (2008) Equity and Efficiency Measures of Tax-Transfer Systems: Some Evidence for New Zealand” New Zealand Treasury WP/08/04; Cubero and Hollard (2010) “Equity and Fiscal Policy: The Income Distribution Effects of Taxation and Social Spending in Central America” IMF WP/10/112; and IMF staff estimates.
Sources: Creedy et al. (2008) Equity and Efficiency Measures of Tax-Transfer Systems: Some Evidence for New Zealand” New Zealand Treasury WP/08/04; Cubero and Hollard (2010) “Equity and Fiscal Policy: The Income Distribution Effects of Taxation and Social Spending in Central America” IMF WP/10/112; and IMF staff estimates.

VAT does not seem to be regressive in Mauritius. The early literature on the incidence of the VAT suggested that it was regressive, although some recent studies on VAT incidence in developing countries conclude that it might be less regressive than previously thought. A study by Statistics Mauritius based on the latest household survey estimates that the average share of VAT payments for poor households relative to total household expenditure was 5.8 percent compared to 8.7 percent for the richest households (7.2 percent for all households). Furthermore, the poor accounted for 2.8 percent of VAT payments, whereas the richest 10 percent accounted for 26.7 percent of all VAT payments.

Conclusions and Policy Implications

Mauritius achieved high economic growth with positive results for poverty, but better targeting of social benefits is needed. The extensive, but largely untargeted social protection system needs reforms to ensure that resources are spent in the most cost-effective way. The authorities should improve the targeting of social protection by completing the Social Registry of Mauritius (an information system that provides comprehensive data on existing and potential program clients). Conditional cash-transfer schemes could help foster human capital accumulation and address skills mismatches in the labor market. Redesigning the eligibility criteria for the basic retirement pension could have a positive redistributive impact over time. Reform of the basic educational system is required to address the unequal distribution of educational outcomes and mechanisms need to be put in place to support the access of poorer segments of the population to tertiary education.

The tax system does not appear to be regressive, but offers limited scope for redistribution. Personal income taxes are relatively progressive, although they are too small to have much of an impact. Preliminary evidence suggests that the VAT is not regressive, but more analysis would be useful given its economic importance. In general the tax system is relatively efficient, and expenditures offer better tools for addressing income inequality.

APPENDIX VI. STATE-OWNED ENTERPRISES: FINANCIAL MONITORING AND REFORM1

State-Owned Enterprises (SOEs) are of considerable macroeconomic importance in Mauritius. The revenue of 15 large SOEs (for which data was available) was 15 percent of GDP in 2010 (Figure VI.1). Investment expenditure for these firms was 8.5 percent of GDP, but considered insufficient and probably inefficient. This appendix discusses the options for integrating SOEs into the macrofiscal analysis and describes the authorities’ recent efforts at reforming the sector to improve service delivery and statistics.

Figure VI.1.The Macroeconomic Impact of SOEs in Mauritius

Source: Mauritian authorities; and IMF staff estimates.

Integrating SOEs into the fiscal statistics for the overall public sector would allow for a better evaluation of the macrofiscal stance. Six out of 15 large SOEs had an operational deficit in 2010, the highest number since 2006; and government transfers to SOEs are estimated to amount to 2.7 percent of GDP in 2010. This suggests that having consolidated public sector statistics (general government, central bank, and SOEs) would help assess the true macro-fiscal stance and provide a better view of the public sector’s net worth.2 Moreover, it would provide a better description of the public sector’s expenditure priorities.

Inadequate pricing policies negatively impact SOE financial sustainability and public sector investment. For example, despite recent increases in water tariffs, below full cost recovery pricing in water has led to years’ of underinvestment in public infrastructure and severe service delivery problems. The government has paired with Singapore to develop a strategy for the water sector, which might benefit from World Bank review. Other sectors might also be reviewed to ensure that all (i) SOEs fulfill a public service objective that cannot be provided by the private sector; (ii) pricing reflects full cost recovery (including externalities, if any); (iii) service delivery standards are well-specified and verifiable; and (iv) management is well-qualified and accountable. Following these objectives should allow to significantly decrease transfers to SOEs, while increasing investment.

The Mauritian authorities are enhancing the monitoring of SOEs to increase their operational efficiency and mitigate fiscal risks. The Parastatal Information Management System (PIMS) is currently being implemented on a pilot basis and contains financial and non-financial indicators. The PIMS collects information on assets management; corporate governance; financial management, human resource management, and strategic management. The indicators chosen seem broadly appropriate but the system would benefit from obtaining information on risks to which SOEs are exposed (including contingent liabilities, exposures to liquidity risk, roll-over risk, interest rate risk and currency mismatches). These indicators would permit to better assess the risk that a specific SOE poses to public finances.

The exclusion criteria to discount SOE debt with low risks from the public debt ceiling calculations are broadly appropriate. The assessment questionnaire covers (i) managerial independence, including pricing and employment policy; (ii) transparent and stable relations with government; (iii) governance structure; (iv) sustainable finances; and (v) other risks. Overall, this framework is compatible with the IMF Staff Guidance Note on Debt Limits in Fund-Supported Programs (2009). But coverage of information on off-balance sheet liabilities (foreign exchange hedging and other derivative contracts), on currency mismatches, on the cost of debt, and on pricing policies could be improved. It might also be desirable to increase the focus on risks to debt sustainability to the detriment of purely corporate governance issues.

APPENDIX VII. STRESS-TESTING THE BANKING SYSTEM1

Stress tests based on June 2011 data indicate that the level of capitalization appears sufficient to withstand sizeable macroeconomic shocks; the concentration of loans on single borrowers remains a major vulnerability; the direct exchange rate and interest rate risks on banks’ capitalization are likely to be limited; and liquidity conditions appear adequate. Exposure to Europe is limited and funding is diverse and stable. The activities of the GBCs appear to carry low risk for the banking system with maturities and currencies well-matched, but further research in this area would be useful when more data become available.

Since the 2007 FSAP update, the Mauritian banking system retained its key features. The number of banks operating in the market increased from 19 in 2007 to 20 at end-2011. The sector is fairly concentrated, with three largest banks accounting for 60 percent of domestic deposits and five largest banks controlling 70 percent of the system’s assets. Stress tests are conducted for 18 banks, since two smaller banks that are funded primarily through equity and including their results would skew the aggregate capital adequacy ratios (CAR).2 For the purposes of reporting stress test results, we sub-divided banks into four types: (1) three large banks serving both domestic and non-resident market; (2) three large banks serving primarily non-resident market; (3) five medium to small banks serving mostly non-residents; and (4) seven medium to small banks serving the domestic market.

Financial soundness indicators (FSIs) suggest that: (i) capitalization is adequate (CAR > regulatory minimum of 10 percent); (ii) credit quality appears to be good (low non-performing loan (NPL) ratio); (iii) profitability is comfortable with good return on equity (ROE); and (iv) liquidity is adequate and net open positions in foreign exchange are low (Figure VII.2).

Figure VII.1Mauritius: Structure of the Banking System

Source: BOM.

Figure VII.2Mauritius: FSIs

Source: BOM.

Cross-country comparisons shown in Figure VII.3 indicate that (i) regulatory capital as a percentage of risk-weighted assets (RWA) is in the intermediate range when compared to other countries; (ii) non-performing loans are relatively low, but comparable to and somewhat higher than in financial centers (Luxembourg, Switzerland, Hong Kong, Singapore); (iii) returns on equity are high when compared to advanced countries, but average compared to other SSA countries, some of which might feature both higher risks and less competition; and (iv) the implied leverage ratio is lower than in advanced countries and comparable to financial centers, but higher than average when compared to SSA and emerging markets.3

Figure VII.3Mauritius: FSIs – Cross-Country Comparison, end-2010 (or latest available)

Source: IMF Financial Soundness Indicators.

System-wide, capitalization is not very vulnerable to credit risk shocks. A fifty percent increase in NPLs, when allocated in proportion to existing loans, does not lead to major drops in CARs (Figure VII.4, Panel 1). The maximum decrease in the CARs is about 1 percentage point for a type 3 bank, but the median drop is well below 1 percent. Also, the median excess of the CARs over the Basel II requirement of 8 percent is comfortable between 15 and 5 percent, and even the minimum for all banks at around 3 percentage points seems reasonable.

Figure VII.4.Credit Risk Stress Test Results

Source: Staff estimates.

Concentration of exposures remains a risk for banks. A 50 percent default on the largest borrower would bring CARs below the domestic regulatory requirement for some type 2, 3, and 4 banks, but all would remain above the Basel II requirement (Figure VII.4, Panel 2). Here the median drop in CARs is around 3 percentage points and the maximum almost 10 percentage points, indicating that some banks have relatively concentrated loan portfolios, and could benefit from further diversification.

The banking system appears resilient to external growth shocks, but smaller banks are more vulnerable. Two alternative scenarios were considered: (1) a mild slowdown in Europe with a policy response, leading to a one percentage point drop in real GDP growth in Mauritius in 2012 compared to the baseline; (2) a larger slowdown in Europe without a policy response. The elasticity of the NPL ratio to GDP growth uses a rule of thumb value of -0.38 compared to -0.5 during the 2008/09 crisis. The shocks have a larger affect on smaller banks and those banks with larger exposure to domestic economy. Only one smaller bank falls marginally below the domestic CAR requirement in the mild slowdown scenario (Figure VII.4, Panel 3). In the severe downturn scenario, one smaller bank would see its CAR fall slightly below Basel II requirements (Figure VII.4, Panel 4). This indicates that the Mauritian banking system is relatively well prepared for external shocks although there is a need to monitor the exposure of some banks in the case of severe shocks.

Shocks on net foreign exchange positions and interest rate shocks suggest limited impact on bank capitalization. Most banks have small net-long foreign exchange exposures, which means that they gain from a rupee depreciation (Figure VII.5, Panel 1). The shock applied the most severe depreciation against major currencies over the last 10 years. In the worst and median case, there is essentially no impact on the CAR, but some banks gain moderately. A 300 basis point decrease in the policy interest rate has a limited impact on most banks’ capital positions because of moderate gaps between assets and liabilities with short-term maturity (Figure VII.5, Panel 2). One bank would gain significantly because short-term liabilities are greater than short-term assets (the bank would pay significantly less on deposits and loose only a moderate amount of interest on short-term assets).

Figure VII.5Market Risk Stress Test Results

Source: Staff estimates.

International exposure analysis: On a net basis, the banking system is intermediating funds from the domestic economy into Asia with a small net claim on Europe (Figure VII.1 and Table VII.1). Since Mauritius has a net claim on Europe, the impact from an economic slowdown in Europe might be limited. The largest net exposure is to Asia, which reflects intermediation of funds to India in particular.

Figure VII.6.Cross-border Net Exposures

Table VII.1.Breakdown of Bank’s Balance Sheet, June 2011(In billion rupees)
Liabilities toClaims onNet claims% GDP
Africa18.827.18.22.6
Asia27.5287.0259.583.2
Australia0.52.31.80.6
Europe123.3141.117.85.7
Mauritius670.6364.6-306.0-98.1
Middle East1.711.79.93.2
US/Canada13.414.10.70.2
Other14.127.113.04.2

GBCs and residents fund non-residents and foreign banks on a net basis. The largest sources of funds for the banks are GBCs and domestic residents, which contribute about 170 percent of GDP to banks (Figures VII.7-8 and Table VII.2). Banks use the funds mainly to finance non-residents, the domestic economy (residents), and foreign banks. The maturity profile of assets and liabilities is considered to be well matched, although some further study would be beneficial (see below).

Figure VII.7.Claims on Sectors of Economy

Figure VII.8.Liabilities to Sectors of Economy

Table VII.2.Mauritius: Breakdown of Banks’ Balance Sheet, June 2011(In billion rupees)
Liabilities toClaims onNet claims% GDP
Residents241.8208.1-33.7-10.8
SOEs28.08.0-20.0-6.4
Gov’t3.451.548.115.4
Dom banks3.83.80.00.0
GBCs288.222.1-266.1-85.3
Non-residents79.0297.2218.270.0
Foreign banks95.0199.7104.733.6
Interbank8.88.80.00.0

Areas of further investigation and analysis regarding stress testing should include (i) better understanding of the transmission of real, exchange rate, and interest rate shocks into NPLs; and (ii) monitoring of the cross-border and cross-sector exposures. In particular, better information on the international activities of GBCs would be useful in determining the potential risk to the banking system. GBCs intermediate foreign investments into other countries (mainly India) of a primarily equity type, which appears to be low risk. The float of funds that is held in Mauritius before being sent to their final destination is deposited with domestic banks. The banks mostly place these deposits with other banks abroad matching the maturity and currency profile of the funds involved, which should carry very limited risk. The authorities consider the risks from GBCs to be low and are working on improving the information available from GBCs to undertake better analysis of the potential risks.

APPENDIX VIII. TOURISM SECTOR COMPETITIVENESS1

At over 8 percent of GDP, tourism is Mauritius’ major export industry, as well as a potential channel through which external shocks affect the domestic economy. Staff is currently undertaking research concerning tourism competitiveness and vulnerabilities stemming from the sector. The study uses a new panel dataset of the universe of bilateral tourism flows for 1999–2009, covering over 180 countries (underlying data from UNWTO), and applies a gravity model used in empirical international trade research since the 1960s. This appendix summarizes selected preliminary results that the mission shared with the authorities.

Assessing competitiveness of tourism destinations is complicated by the fact that tourism flows to each destination is subject to multiple objective factors, known in the traditional international trade literature as trade frictions. Some of these cannot be influenced by policies (at least not in a useful time frame), such as common borders, distances to main markets, bilateral cultural and historical ties. Accounting for and eliminating these effects allows for constructing a ranking of countries’ tourism competitiveness.2 As shown in Figure VIII.1, Mauritius is doing on par with major destinations in the Caribbean (The Bahamas and Jamaica), but is slightly behind regional competitors – Maldives and Seychelles. Preliminary results also show that Mauritius is doing slightly worse than predicted by the model, which, if correct, would allow some scope for increasing tourism arrivals through appropriate policies (e.g. further market diversification) over time.

Figure VIII.1.Bilateral Tourism Arrivals: Percentage Difference vs. Mauritius

The tourism industry represents an important channel through which Mauritius is exposed to the risks emanating from Europe. To quantify the impact of this slowdown, one requires estimates of the elasticity of tourism—as measured by arrivals, visitor-nights and receipts—to GDP in tourist-originating countries. Using first differences regressions, staff estimates the elasticity of tourist-arrivals at around 0.54, and the elasticity of the average tourist stay at 0.45. Mauritius is therefore likely to see tourism demand drop one for one if GDP growth in main markets (France, UK) turns negative. Preliminary results also indicate that tourists are price sensitive, as each percent of real appreciation is associated with a 0.5 percent shorter stay.

1The numbers consolidate the operations of the earmarked special funds outside the budget. The central government budget deficit concept used by the authorities shows a small increase due to transfers from the budget to the special funds accounts.
2For floating regime countries, the measure sums 30 percent of short term debt on remaining maturity basis, 10 percent of other portfolio liabilities, 5 percent of M2 and 5 percent of exports of goods and services.
1GBCs offer investors tax planning vehicles based on double-taxation treaties between Mauritius and third countries.
1Prepared by Alexander Culiuc.
2The 2011 foreign asset and liability survey has already resulted in significant upward revisions in the stock of short term debt. However, future statistical surveys there are likely to uncover more short-term private liabilities.
3IMF (2011) “Assessing Reserve Adequacy”. http://www.imf.org/external/np/pp/eng/2011/021411b.pdf
1Prepared by Antonio David (AFR).
2The limits are 60 percent of GDP until 2017 and 50 percent of GDP after 2018. The 2011 Article IV consultation (SM/11/60) included discussions on the appropriateness of the debt ceiling rule contained in the PDMA in supporting fiscal sustainability.
3Sensitivity tests include shocks to the interest rate, to growth, to the primary balance, a combination of shocks, as well as shocks to contingent liabilities and a 30 percent exchange rate depreciation.
4Bank 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.
5See Debt Sustainability Analysis for Market Access Countries Guidance Note (July 5, 2005), available at http://wwwintranet.imf.org/departments/SPR/Debt/Pages/DSAMarketAccess.aspx.
1Prepared by Ian Parry (FAD).
2The motor vehicle buyer pays an additional amount as a CO2 levy (penalty) per gram of CO2 emission per km above a threshold. On the other hand, the buyer receives a rebate calculated on the basis of gram of CO2 emission per km if the CO2 emission standard of the motor car is below the CO2 threshold.
1Prepared by Antonio David (AFR).
2World Bank (2010) “Mauritius Enhancing and Sustaining Competitiveness” Report No: 53322-MU, World Bank, December, Washington, DC.
3The concentration index is the area below the concentration curve for a given tax. The concentration curve plots cumulative shares of tax payments with respect to the quantile distribution of pre-tax income.
4Note that the Gini coefficients in the Table differ from the overall Gini discussed at the beginning of the appendix because the welfare measure used for the analysis in the table is household income per adult equivalent, excluding government transfers. We define gross income as the sum of income from employment, income from self-employment, net rent income, and any other income from property. The measure of income net of income taxes simply subtracts from the gross income measure deductions related to PAYE and income tax on income from self-employment.
1Prepared by Antonio David (AFR).
2In 2010, total SOE debt was 7 percent of GDP or 12.5 percent of total public debt. After 2005, SOE debt fell as a share of GDP, and its composition has tilted towards domestic debt, which reached 55 percent in 2010.
1Prepared by Katsiaryna Svirydzenka.
2Stress tests apply Cihak (IMF WP/07/59) methodology, estimating the impact of credit, concentration, exchange rate, interest rate, and liquidity shocks. The stress tests assume uniform shocks. New NPLs stemming from shocks are assumed to be in proportion to existing loans, fully provisioned and reduce regulatory capital in due proportion, without considering the profit cushion, which would make the effect of shocks more benign.
3Data definitions follow, to the extent possible, the methodology of the Financial Soundness Indicators Compilation Guide. Due to differences in consolidation methods, national accounting, taxation, and supervisory regimes, data are not strictly comparable across countries. Also, the implied leverage ratio is not equal to the actual leverage ratio.
1Prepared by Alexander Culiuc.
2The computed competitiveness index is the value of the country dummy in a fixed effects regression with bilateral arrivals as explanatory variable and regressors including: GDPs of both countries, their population, areas, distances, price levels, geographical characteristics, common culture and history (language, colonial relationship, etc.).

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