Executive Directors began their conclusion by welcoming the revived performance of the Mauritius economy, spurred by the important tax and business environment reforms adopted since 2006 that have contributed to reduced fiscal deficits and rising foreign direct investment.

Directors noted, however, that the large capital inflows have added to demand pressures, and inflation remains high, reflecting also rising international commodity prices and emerging supply constraints.

Against this background, Directors encouraged the authorities to proceed with their plans for further fiscal consolidation and deeper structural reforms in order to alleviate bottlenecks and ensure sustained noninflationary growth.

Directors underscored the importance of continued fiscal consolidation to underpin macroeconomic stability.

They noted that the recent tax reforms have made the tax system more progressive and easier to administer, while boosting fiscal receipts.

Additionally, Directors encouraged the authorities to build on these successes, and to extend the reform effort to the expenditure side of the budget and to the parastatal sector.

Improving the efficiency of social assistance programs by consolidating and targeting will be vital to further strengthening the fiscal position.

More generally, Directors considered that the introduction of program-based budgeting in the 2008/09 (July/June) budget will serve to strengthen spending efficiency over the medium term. They also welcomed the authorities' plans to introduce fiscal management laws on public debt management and public finance and audit.

Directors expressed concern, however, that the sizable public sector wage increase in the 2008/09 budget, in the context of strong private sector demand, would contribute to further inflationary pressures.

Further to this, Directors encouraged the authorities to continue their efforts to strengthen the monetary framework. While underlying inflation remains broadly under control and a significant component is imported, Directors advised the authorities to remain vigilant against inflation, in light of increasing demand pressures.

Communication by the Bank of Mauritius (BoM) of an inflation target range for monetary policy would help shape inflation expectations more actively.

Greater efforts to manage liquidity, in closer coordination with the fiscal authorities, will also pay dividends. Directors welcomed steps to strengthen further the BoM's capital base and governance structures.

Directors were of the view that Mauritius's managed floating exchange rate regime provides an appropriate framework for macroeconomic management. They noted the staff assessment that the real effective exchange rate of the rupee appears broadly in line with fundamentals.

The nominal appreciation of the rupee in 2007-08, from a depreciated level in 2005-06, reflected increased capital inflows and was helpful in dampening inflation. Directors noted that the staff's view that, should capital inflows rise as projected, further real exchange rate appreciation may be unavoidable, and should occur preferably through nominal appreciation.

This should be accompanied by additional fiscal consolidation as well as structural reforms aimed at improving economic efficiency and competitiveness.

In the area of structural reform, Directors supported a disengagement and divestment strategy for parastatals in the importation and distribution of basic goods.

Further steps are also needed to upgrade workforce skills and enhance labor market flexibility, liberalize domestic trade, reduce import duties, and phase out administered prices.

Finally, it was noted that improving the coverage and reliability of national statistics is a high priority, especially with regard to the financial account of the balance of payments and the international investment position, in line with previous recommendations.

It is expected that the next Article IV consultation with Mauritius will be held on the standard 12-month cycle.