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IMF Concludes Article IV Consultation With Mauritius

by Robert Lee,, London

31 May 2007

The International Monetary Fund (IMF) on Tuesday published the conclusions of its Article IV consultation with Mauritius, completed on May 7.

The IMF observed that loss of trade preferences in textiles in 2005, the reform to the European Union's sugar protocol for 2006-10, and higher international oil prices have brought about a permanent deterioration in Mauritius's terms of trade, but that the authorities have initiated broad-based reforms to address recent economic setbacks, and to raise growth to levels of the previous two decades.

Real GDP growth is expected to reach over 4% in 2006/07, owing to a strong service sector outturn and slowing job losses in the textile sector.

Commenting on the Mauritian economy this week, the IMF Executive Board announced that:

"Executive Directors commended the authorities for the reforms introduced with the 2006/07 budget to adjust to the loss of trade preferences and reduce the fiscal deficit. While inflation needs to be reduced, and the current account deficit and public debt remain large, Directors considered that the economy is on the right track, supported by reforms to improve the business environment, simplify the tax system, liberalize trade, open air access, and advance economic restructuring, including the development of new sectors. Directors noted that labor market reform will be needed to support economic restructuring. They encouraged the authorities to maintain the reform momentum."

"Directors welcomed the authorities' efforts to tighten monetary policy. This should help to reduce inflation and avoid entrenching inflation expectations. Most Directors encouraged the Bank of Mauritius to consider raising the repo rate if inflation does not decline as expected. They welcomed improvements in the monetary framework, and called for further development of the institutional framework in order to strengthen the monetary policy transmission mechanisms."

"Directors noted that additional improvements in external competitiveness are needed to help restore external balance. Wage restraint, productivity gains, and labor market flexibility are key to achieve this. Directors considered that the flexible exchange rate regime has served Mauritius well, with rupee depreciation softening the negative effect of the terms of trade decline. They encouraged the authorities to limit foreign exchange intervention to smoothing excess volatility."

They continued:

"Directors welcomed the progress made toward fiscal consolidation and better public expenditure management, aimed at lowering public debt and improving the quality of the budget. They noted that fiscal pressure in the medium term would require more decisive fiscal consolidation and further improvements in expenditure management. They encouraged the authorities to identify options for budgetary savings and to continue strengthening debt management."

"Directors considered that efforts to boost growth and employment could be complemented by reforms that further liberalize trade, deepen the financial sector, and deregulate prices, while taking into account the need to protect vulnerable groups. They commended the steps to liberalize trade, and advocated a simple and transparent tariff framework. Addressing institutional constraints in the financial sector could help lower borrowing costs and make more financing available to small and medium-sized enterprises. A systematic review of price controls, including a review of the largest public enterprises, should guide further reform in this area."

"Directors welcomed the 2007 Financial System Stability Assessment update and the reforms implemented since the 2002-2003 Financial Sector Assessment Program (FSAP). Mauritius's financial sector has shown resilience to the loss of trade preferences. Going forward, Directors called for further organizational and institutional strengthening in order to improve financial sector regulation, supervision, and infrastructure."

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