On 2 July, 2008 the Executive Board of the International Monetary Fund (IMF)
concluded the Article IV consultation with Mauritius.
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.
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