20220714-IMF-Mauritius_Selected_Issues_34页_685kb

Summary of Selected Issues Paper on Mauritius

Core Content

This document presents a comprehensive analysis of two key issues facing Mauritius: reinstating fiscal rules in the post-pandemic context and addressing climate change through financing and reform options. It also touches on the impact of digital rupees on liquidity management and monetary policy transmission.

Reinstating Fiscal Rules in Post-Pandemic Mauritius

Main Points

• Fiscal Stimulus and Pandemic Impact: The pandemic led to significant fiscal stimulus, revenue losses, and GDP contraction, pushing public debt to 100% of GDP in FY2020/21. The debt ceiling was repealed in 2020 due to this surge.
• Debt Limit Estimation: The paper estimates the debt limit using three methods:
  • Fiscal Fatigue: Based on historical data, the debt limit is estimated at 101.4% of GDP (less conservative) or 74.6% of GDP (more conservative).
  • Debt-Servicing Capacity: The debt limit is estimated at 100.1% of GDP (less conservative) or 89.8% of GDP (more conservative).
  • Maximum Growth: The debt limit is estimated at 88.5% of GDP.
• Debt Anchor: Considering a 15% buffer, the debt anchor is set at 86.7% of GDP (less conservative) or 74.3% of GDP (more conservative). The paper recommends an anchor of 80% of GDP, which is significantly higher than the previously repealed 60%.
• Short-Term Operational Rule: A short-term operational rule is proposed, setting a 3% overall deficit ceiling of GDP. This would help bring the debt ratio down to the anchor by FY2026/27.
• Transition Period: To minimize the negative impact on growth, a transition period is suggested, allowing the deficit to gradually decline from 7.6% in FY2021/22 to 3% in FY2026/27.
• Debt Sustainability: Regardless of whether the debt anchor is met, debt sustainability risks should continue to be assessed using the IMF's Debt Sustainability Assessment (DSA) tools.

Policy Options

• Introduce a short-term operational rule based on the overall balance and expenditure-to-GDP ratio.
• Establish an independent fiscal council to monitor fiscal rules and improve compliance.
• Strengthen escape clauses to allow for flexibility in case of shocks, while ensuring they are well-defined and limited in scope.
• Consider a transition period to ease the fiscal adjustment process and protect growth.

Addressing Climate Change in Mauritius

Main Points

• Climate Vulnerability: Mauritius is highly vulnerable to climate change, with frequent natural disaster shocks and limited adaptive capacity. The country has experienced 22 extreme weather events between 1960 and 2022, averaging USD 160-245 million in socio-economic damage per event.
• Climate Financing Gap: The total financing gap to meet the 2030 climate targets is 1.6% of GDP per year, with a higher share allocated to adaptation than mitigation.
• Current Funding Sources: External grants and concessional loans are essential to finance climate-related projects. However, donor financing has been limited and skewed toward mitigation, despite adaptation being more critical.
• Government Objectives:
  • Mitigation: Reduce GHG emissions by 40% by 2030, increase green energy to 60%, phase out coal, and improve energy efficiency by 10%.
  • Adaptation: Expand knowledge on climate risks, improve governance, and enhance disaster preparedness and response, especially for infrastructure.
• Reform Options:
  • Improve the track record of planning, appraisal, execution, and reporting of climate-related projects.
  • Increase access to climate funds and green bonds, which are increasingly sought after by small island states.
  • Strengthen the climate adaptation framework to align with national and international goals.

Impact of Digital Rupee on Liquidity Management and Monetary Policy Transmission

Main Points

• Background: The paper explores the potential impact of issuing digital rupees (rDR and wDR) on Mauritius' monetary policy and liquidity management.
• Three Dimensions of DR Issuance:
  1. Liquidity Management: The introduction of digital rupees could affect the central bank's ability to manage liquidity in the financial system.
  2. Monetary Policy Transmission: Digital rupees may influence how monetary policy is transmitted through the financial system, potentially improving efficiency.
  3. Debt Sustainability: The paper revisits assumptions on how digital rupees might affect excess liquidity and the debt-to-GDP ratio.
• Impact Scenarios:
  • rDR (Retail Digital Rupee): May reduce excess liquidity and support monetary policy goals.
  • wDR (Wholesale Digital Rupee): Could affect the interbank market and the central bank's role in liquidity provision.
  • Excess Liquidity: If excess liquidity remains in the system, the impact of digital rupees could be more significant in terms of debt sustainability.
• Conclusion: The paper suggests that digital rupees could play a role in improving liquidity management and monetary policy transmission, but their exact impact depends on the design and implementation framework.

Key Figures and Tables

• Figure 1: Shows the borrowing requirement and public sector debt in Mauritius.
• Figure 2: Depicts the debt-to-GDP ratio and real GDP growth under different fiscal rules.
• Figure 3: Illustrates the overall balance and debt-to-GDP ratio under alternative adjustment paths.
• Table 1: Provides estimates of the debt limit and underlying indicators under different scenarios.
• Table 2: Summarizes the assessment of fiscal rules, including their pros and cons.

References

• Batini, N., L. Eyraud, L. Forni, and A. Weber (2014): "Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections".
• Checherita-Westphal, C., A. H. Hallett, and P. Rother (2014): "Fiscal Sustainability Using Growth-maximizing Debt Targets".
• David, A., L. Eyraud, and A. Sode (forthcoming): "A simple approach to anchor fiscal policy in sub-Saharan African countries after the COVID crisis".
• Escolano, J., L. Jaramillo, C. Mulas-Granados, and G. Terrier (2014): "How Much Is a Lot? Historical Evidence on the Size of Fiscal Adjustments".
• IMF (2018a): "How to Calibrate Fiscal Rules. A Primer".
• IMF (2018b): "How to Select Fiscal Rules. A Primer".
• IMF (2020): "Fiscal Rules, Escape Clauses, and Large Shocks".
• IMF (2021): "Selected Issues: West African Economic and Monetary Union".

Conclusion

• Reinstating a medium-term debt anchor of 80% of GDP is feasible and necessary to ensure debt sustainability and fiscal discipline.
• A transition period and operational rules are recommended to gradually reduce the fiscal deficit.
• Climate change poses a significant challenge, with a financing gap of 1.6% of GDP annually. Adaptation requires more attention and resources.
• Digital rupees could help improve liquidity management and monetary policy transmission, but their impact depends on the design and implementation.