20220714-IMF-Mauritius_Staff_Report_for_the_2022_Article_IV_Consultation-Press_Release_and_Staff_Report_64页_1mb

IMF Country Report No. 22/223: Mauritius 2022 Article IV Consultation Summary

Core Content

This document outlines the IMF's assessment of Mauritius' economic performance and policy framework during the 2022 Article IV consultation. The report covers the country's recovery from the pandemic, fiscal and monetary policy responses, the financial sector's stability, external economic conditions, and structural transformation priorities. It also includes the Executive Board's assessment and policy recommendations.

Main Economic Developments

• Pandemic Recovery:

  • Mauritius has gradually recovered from the pandemic, with real GDP growth of 4% in 2021 and projected growth of 6.1% in 2022.
  • The tourism sector remains subdued, contributing to the current account deficit and slower recovery.
  • The vaccination campaign reached over 90% of the eligible population by May 2022.

• Inflation:

  • Inflation surged from 2.7% in end-2020 to 11% in end-April 2022, driven by rising fuel and food prices, supply bottlenecks, and the depreciation of the rupee.
  • Staff projects inflation to reach 11.4% in 2022, with a convergence to pre-pandemic trend growth of 3–3.5% by 2025.

• Unemployment:

  • The unemployment rate dropped to 8.1% in 2021Q4 from 10.4% in 2020Q4.
  • It is expected to return to trend levels in the medium term.

• Financial Sector:

  • The financial sector, including the Global Business Companies (GBCs) segment, was stable in 2021.
  • The BOM-regulated moratorium on loans to SMEs, households, and individuals is expected to end by end-June 2022.
  • GBCs' dollar-denominated deposits increased significantly, and net financial flows were large and positive.

• Current Account:

  • The current account deficit widened in 2021, reaching 13.7% of GDP.
  • The deficit is attributed to subdued tourism and the depreciation of the rupee.
  • Net inflows from the GBC sector helped limit the deficit.

• Public Debt:

  • Public debt rose to 99.2% of GDP in FY2020/21 from 84.6% in FY2019/20.
  • The debt-to-GDP ratio is expected to remain elevated in the medium term.

• Foreign Exchange:

  • The rupee depreciated by about 10% in nominal terms and 9% in real effective terms in 2021.
  • The BOM continued substantial foreign exchange sales and borrowing to maintain reserves.
  • FX interventions were aimed at clearing the market, but more flexibility could be considered.

Key Policy Recommendations

A. Fiscal Policy

• Fiscal Consolidation:

  • Develop and implement a comprehensive fiscal consolidation plan to restore fiscal space and ensure debt sustainability.
  • Introduce and adhere to a fiscal rule to guide the path toward long-term fiscal sustainability.
  • Reform the pension system to reduce fiscal vulnerabilities.

• Reduction in Spending:

  • Phase out pandemic-related support measures, including wage subsidies and the COVID-19 Projects Development Fund.
  • Reduce current and capital expenditures, with a projected decline in total expenditure by 3.2% of GDP in FY2022/23.

• Revenue Measures:

  • Improve tax efficiency by scaling back VAT exemptions and zero-rates and strengthening VAT administration.
  • Increase revenue through social contributions (CSG) and the solidarity levy.

• Debt Sustainability:

  • The public debt sustainability analysis indicates elevated vulnerabilities.
  • A new medium-term debt anchor of up to 80% of GDP is proposed, with a ceiling of 3% of GDP for overall borrowing starting in FY2022/23.
  • A five-year transition period is suggested to allow for gradual adjustment.

B. Monetary Policy

• Normalization of Monetary Policy:

  • Proceed with the normalization of monetary policy to control inflation and address second-round effects from supply-side shocks.
  • Implement a modernized monetary policy framework aligned with international best practices.

• Exchange Rate Strategy:

  • The BOM's FX intervention strategy should aim to smooth volatility while allowing for exchange rate flexibility.
  • The new framework should support macroeconomic adjustment.

• Central Bank Independence:

  • The Bank of Mauritius (BOM) needs to be recapitalized under existing legislation.
  • The BOM's law should be reformed to prohibit transfers to the government and quasi-fiscal financing.
  • Relinquishing the BOM's ownership of the Mauritius Investment Corporation (MIC) would enhance independence.

Risks and Outlook

• Downside Risks:

  • The war in Ukraine has increased commodity price volatility, constrained real incomes, and affected tourism flows.
  • Global inflation and supply constraints may reduce real disposable income and global demand, including for tourism.
  • Limited flight availability continues to constrain tourism recovery.

• Fiscal and Monetary Balance:

  • Balancing recovery with inflation control and fiscal consolidation is a key challenge.
  • Tightening monetary policy and financial conditions may reduce fiscal space and slow recovery.

• Growth Potential:

  • Mauritius' growth potential is subject to climate change risks, which the country needs to adapt to.
  • The economy is expected to converge to pre-pandemic trend growth of 3–3.5% by 2025.

Structural Transformation

• Diversification and Competitiveness:
  • Structural transformation is necessary to achieve sustainable and resilient long-term growth.
  • Priorities include greater digitalization of the economy and climate change adaptation and mitigation measures.
  • The government should support diversification and competitiveness to reduce reliance on traditional sectors.

Key Indicators (2019–2023)

Conclusion

The IMF's staff report concludes that Mauritius is recovering from the pandemic but faces significant challenges in maintaining macroeconomic stability, controlling inflation, and ensuring fiscal and debt sustainability. The country needs to proceed with fiscal consolidation, monetary policy normalization, and structural transformation to support long-term growth and resilience. The Executive Board endorsed the staff's assessment and recommended a modernized monetary policy framework, improved fiscal rules, and enhanced central bank independence. The outlook is subject to various risks, including global inflation and the war in Ukraine, which may delay the recovery and increase economic volatility.