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IMF Executive Board Concludes 2013 Article IV Consultation with Mauritius

Author(s):
International Monetary Fund. African Dept.
Published Date:
April 2013
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On April 3, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius, and considered and endorsed the staff appraisal without a meeting.1

Background

The Mauritian economy performed reasonably well in a difficult external environment in 2012. Growth decelerated to 3.3 percent, due to weak sugar and textile exports and a slowdown in the construction sector, though the information and communication technology and financial services sectors saw strong growth. The output gap is estimated to have been small (around ½ percent) and consumer price inflation moderated to 3.9 percent. Estimates of the unemployment rate suggest a marginal increase from 7.9 percent in 2011 to 8 percent in 2012. Credit growth to the private sector was robust. On the external front, the current account deficit narrowed, but remains relatively high at 10 percent of gross domestic product (GDP) in 2012. The Bank of Mauritius (BOM) managed to accumulate additional international reserves and the reserve cover of imports of goods and services rose to 4.4 months from 4.3 months at end-2011. In June 2012, Moody’s upgraded the country’s credit rating to Baa1.

The fiscal policy stance was broadly neutral and less expansionary than previously projected. The structural primary deficit was broadly unchanged relative to 2011. The overall deficit including extra-budgetary funds is estimated at 2.3 percent of GDP, a reduction of over 1 percentage point of GDP relative to previous projections and similar to the 2011 outcome. The positive fiscal outturn was partly due to a reduction in transfers and subsidies, which decreased by over 1 percent of GDP compared to 2011 (particularly transfers to state-owned enterprises). Expenditures on goods and services were lower, but extra-budgetary spending increased relative to 2011. On the revenue side, better than expected tax revenue performance (in particular for value added tax receipts) was offset by lower levels of non-tax revenue and grants so that total revenues remained stable as a percentage of GDP.

Monetary policy was supportive of the overall policy mix. In March 2012, the BOM reduced the policy rate by 50 basis points to 4.9 percent given the deceleration in global growth and prudent fiscal policies. The BOM maintained the policy rate at that level in light of continued uncertainty in the global outlook. Excess liquidity in the banking system remained elevated, and the yield on 3-month treasury bills fell by 120 basis points to 2.7 percent at end-2012. After June 2012, the authorities started intervening more actively in foreign exchange markets to build international reserves and moderate excessive fluctuations of the rupee exchange rate.

The banking system is well-capitalized. Regulatory Tier I capital to risk-weighted assets are well above Basel II and the proposed Basel III requirements. Non-performing loans (NPL) increased slightly in 2012, but banks remained profitable with a 20 percent return on equity, despite low leverage ratios. However, liquidity-to-assets ratios have worsened in recent years and are on the low side in international comparisons. As a first step towards gradual phase-in of the Basel III requirements, the BOM circulated a consultation paper to banks in October 2012. BOM continued to publish its bi-annual CAMEL (capital adequacy, asset quality, management, earnings & liquidity) ratings for all domestic banks.

Over the past decade wide-ranging structural reforms supported by prudent macroeconomic policies have established Mauritius as a top regional performer. Mauritius statistical capacity continues to be strengthened; the country subscribed to the IMF’s Special Data Dissemination Standard (SDDS) in February 2012, being the second Sub-Saharan African country to do so. The authorities aim at subscribing to SDDS Plus in the future.

Executive Board Assessment

In concluding the 2013 Article IV consultation with Mauritius, Executive Directors endorsed the staff’s appraisal, as follows:

The authorities have a good track record of prudent macroeconomic management and implementing structural reforms even though challenges remain. Macroeconomic management has delivered low inflation, declining debt-to-GDP ratios, and, given the difficult external environment, satisfactory growth. This outcome has been helped by consistent efforts to improve public financial management, the business climate, social assistance, and the sustainability of public finances. Recent efforts to improve the human and capital infrastructure (especially road congestion) should continue.

Going forward, staff recommended a neutral fiscal policy stance for 2013 in order to smooth medium-term fiscal consolidation and to facilitate external adjustment. A neutral stance is also likely to facilitate the rebuilding of policy buffers. Over the medium term staff suggested that fiscal consolidation should focus on reductions in transfers and subsidies and revenue raising measures. Increases in the revenue-to-GDP ratio would provide additional space for priority spending for building human and physical capital.

The current accommodative monetary policy stance remains appropriate, but the authorities should stand ready to tighten monetary conditions if inflation accelerates beyond current expectations. Inflationary pressures relate to wage increases and adjustments in administered prices, but expectations appear to be well-anchored. Excess liquidity should be reduced to better align the policy rate with market rates and help strengthen the monetary transmission mechanism. The Mauritian banking system is well-capitalized and profitable. Stress testing indicates the sector to be resilient against a range of shocks. Real estate developments should be monitored and cooperation between the BOM and the Financial Services Commission further improved.

Increasing national savings and fostering competitiveness would reduce the large external current account deficit. Medium-term fiscal consolidation should facilitate external adjustment. Efforts to improve competitiveness through structural reforms and investment in infrastructure and human capital are also crucial. The floating exchange rate regime continues to serve the country well, in particular by allowing the exchange rate to act as a shock absorber. Staff estimates that the real exchange rate is broadly in line with fundamentals.

The pension system could be used as a lever to increase national savings. Recent reforms have put the system on a much better footing, but further reforms would be helpful. An increase in mandatory contribution rates for the National Pension Fund (NPF) combined with an actuarially-sustainable increase in benefits is likely to lead to higher overall national savings. The inclusion of most public pensions systems within a strengthened NPF and mandatory inclusion of self-employed workers in the NPF might also be considered.

Labor market reform should primarily target the employability of the low-skilled youth and women, who comprise the majority of the unemployed. Measures to better align the education curriculum to the needs of industry and increase private sector involvement in vocational education could also contribute to reduce skills mismatches, particularly for the young. Wage setting mechanisms should be reviewed with the objective of aligning real wage increases closer with labor productivity improvements. In addition, an earned income tax credit could be introduced to encourage low-wage earners to take jobs on which they can acquire skills.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Table 1.Mauritius: Selected Economic and Financial Indicators, 2010–2018
201020112012201320142015201620172018
ActualActualLastLast
SREst.SRProj.Proj.Proj.Proj.Proj.Proj.
National income, prices and employment
Real GDP4.13.83.73.34.13.74.44.74.64.54.5
Real GDP per capita3.63.43.12.73.53.23.84.14.24.14.1
GDP per capita (in U.S. dollars)7,5628,7258,4038,8508,7899,3959,91210,48611,10111,80612,561
GDP deflator1.74.13.93.35.95.74.64.75.05.05.0
Consumer prices (period average)2.96.54.83.95.35.74.64.75.05.05.0
Consumer prices (end of period)6.14.95.03.25.56.05.15.05.05.05.0
Unemployment rate (percent)7.87.98.0
(Annual percent change, in US Dollars)
External sector
Exports of goods and services, f.o.b.18.919.63.04.86.16.76.36.76.87.17.3
Of which: tourism receipts15.923.02.91.710.34.35.55.45.85.85.9
Imports of goods and services, f.o.b.20.520.83.03.94.35.95.36.05.76.56.5
Nominal effective exchange rate (annual averages)3.23.30.5
Real effective exchange rate (annual averages)3.26.21.3
Terms of trade−5.5−5.30.5
(Annual change in percent of beginning of period M2)
Money and credit
Net foreign assets20.2−7.716.99.26.9
Domestic credit10.38.610.014.611.8
Net claims on government1.0−1.41.5−1.31.0
Credit to non-government sector19.910.28.218.210.7
Broad money (end of period, annual percentage change)7.64.612.38.69.7
Income velocity of broad money0.91.00.91.01.0
Interest rate (weighted average TBs, primary auctions)3.94.63.3
(Percent of GDP, unless otherwise indicated)
Central government finances
Overall consolidated balance (including grants)2−3.0−2.1−3.7−2.3−3.2−2.6−1.9−1.4−1.5−1.5−1.8
Primary balance (including grants)0.40.9−0.50.7−0.60.10.71.21.11.10.9
Structural primary balance (including grants)0.40.9−0.50.8−0.60.20.81.21.11.10.8
Structural primary balance (excluding grants)−0.30.2−1.40.1−1.2−0.40.30.90.80.70.5
Revenues and grants21.921.421.821.420.921.921.320.320.220.220.3
Expenditure, excl. net lending24.923.525.523.724.124.523.221.721.721.822.0
Domestic debt of central government43.142.640.541.538.139.737.637.436.034.533.2
External debt of central government7.58.410.08.711.610.312.412.612.611.710.9
Investment and saving
Gross domestic investment23.625.724.824.725.325.125.325.525.625.825.9
Public6.15.57.45.57.77.67.17.25.65.45.0
Private17.520.217.519.217.517.518.218.220.020.420.9
Gross national savings13.313.114.814.716.415.416.216.717.518.118.7
Public−0.5−0.50.21.00.51.31.10.90.70.70.4
Private13.813.614.713.715.814.115.215.816.717.418.2
External sector
Balance of goods and services−12.2−13.2−13.8−13.0−12.7−12.5−11.8−11.5−10.8−10.5−10.1
Exports of goods and services, f.o.b.50.952.653.954.054.454.054.154.354.654.855.0
Imports of goods and services, f.o.b.−63.1−65.8−67.7−67.0−67.2−66.5−66.0−65.8−65.4−65.2−65.1
Current account balance−10.3−12.6−10.2−10.0−9.1−9.7−9.1−8.8−8.1−7.7−7.2
Overall balance2.11.6−2.41.80.21.21.31.11.41.71.7
Total external debt322.323.716.123.717.725.126.726.525.924.923.8
Net international reserves (millions of U.S. dollars)2,4482,6312,4202,8342,5122,9773,1443,2983,4973,7664,044
Months of imports of goods and services, f.o.b.4.84.33.94.43.94.44.44.44.44.44.5
Memorandum items:
GDP at current market prices (billions of Mauritian rupees)298.8322.8350.0344.6385.9377.9412.5451.9496.2544.5597.5
GDP at current market prices (millions of U.S. dollars)9,70611,24411,466
Public sector debt (percent of GDP)457.457.457.056.255.755.855.054.252.650.047.6
Foreign and local currency long-term debt rating (Moody’s)Baa2Baa2Baa1
Sources: Mauritian authorities; and IMF staff estimates and projections.

Includes credit to parastatals.

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

Numbers were revised to include private external debt transactions as reported in the 2011 Foreign Assets and Liabilities Survey (FALS).

These figures do not discount certain types of State-owned enterprises’ debt. Such discounting is envisaged under the 2008 Public Debt Management Act for the purposes of calculating the public debt ceiling. In 2011, discounted SOE debt amounted to 3.3 percent of GDP.

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

Includes credit to parastatals.

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

Numbers were revised to include private external debt transactions as reported in the 2011 Foreign Assets and Liabilities Survey (FALS).

These figures do not discount certain types of State-owned enterprises’ debt. Such discounting is envisaged under the 2008 Public Debt Management Act for the purposes of calculating the public debt ceiling. In 2011, discounted SOE debt amounted to 3.3 percent of GDP.

1Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

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