Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Mauritius on a lapse-of-time basis.[2]
Mauritius has been gradually recovering from the pandemic. The authorities have successfully managed the health impact of the pandemic and vaccinated most of the population. Real GDP expanded by 4 percent in 2021 as many sectors recovered to pre-pandemic levels of economic activity while the tourism sector remained subdued. Against this backdrop, the current account deficit widened substantially. Fiscal performance is expected to improve in FY2021/22 helped by quasi-fiscal operations although the pandemic and new pressures on current spending burden the fiscal balance. Inflation increased substantially from 2.7 percent at end-2020 to 6.8 percent at end-2021 and further to 11 percent at end-April 2022. The financial sector, including the Global Business Companies (GBCs) segment was stable in 2021. Mauritius exited from the Financial Action Task Force (FATF) list of jurisdictions under increased monitoring in October 2021 and the analogous EU and UK lists soon after.
Staff projects real GDP growth of 6.1 percent in 2022. The economic rebound is expected to be driven primarily by the tourism sector with tourist arrivals expected at 60 percent of pre-pandemic levels. Unemployment is expected to decline as the economy recovers and to return to trend in the medium-term. Annual inflation is expected to rise to 11.4 percent in 2022 due to surging commodity prices, past depreciation of the rupee, and recovering domestic demand. The economy is expected to converge to its pre-pandemic trend growth of 3-3½ per- cent in the medium term.
The outlook for Mauritius is subject to downside risks, including due to the war in Ukraine. Rising global inflation reduces real disposable income and may weigh on global demand, including for tourism, and freight costs.
Executive Board Assessment
In concluding the Article IV consultation with Mauritius, Executive Directors endorsed the staff’s appraisal as follows:
The economy is recovering from the pandemic following a substantial contraction in 2020. The health impact of the pandemic was successfully managed, including by a remarkable vaccination campaign covering over 90 percent of the eligible population by May 2022. Economic growth has started to recover, with most sectors broadly back to pre-pandemic output levels, except tourism, where activity remains subdued.
The key macroeconomic challenge for Mauritius is to continue its economic recovery, while controlling inflation in a global environment with high fuel and food prices and slower recovery. The recovery in Mauritius is expected to continue, albeit at a slower pace than projected before the war in Ukraine, reflecting lower growth in trading partners, less optimistic prospects for tourist flows, and worsening terms of trade. Inflation has picked up substantially due to global supply bottlenecks, higher fuel and food prices, freight costs, and the past depreciation of the rupee.
The fiscal consolidation path needs to be carefully calibrated to balance recovery from the pandemic with long-term fiscal and debt sustainability. Adhering to fiscal rules remains critical to preserve fiscal sustainability and reduce debt vulnerabilities in the medium term. Public debt is elevated after increasing during the pandemic. Fiscal performance continues to be impacted by the pandemic and renewed pressures on current spending. Targeted transfers to the vulnerable may be needed in the face of sharp increases in food and fuel prices. If the economy continues to recover, revenue should increase and spending be reduced, including through pension system reform, to put debt on a declining path in the medium term.
The monetary policy normalization cycle needs to proceed to minimize potential second-round effects from supply-side shocks and to control inflation in the medium term. Supply-side pressures on inflation and inflation expectations have presented a challenge post pandemic. The war in Ukraine adds to these pressures and will require engineering tighter policy in an increasingly complicated environment.
The monetary policy framework needs to be modernized and credibility and independence of the central bank to be safeguarded. Staff recommends that the new monetary policy framework be rolled out soon to support policy effectiveness. Consistent with the inflation targeting framework, the Bank of Mauritius’ (BOM’s) FX intervention strategy should aim to smooth volatility while generally allowing for exchange rate flexibility, facilitating macroeconomic adjustment. The government needs to recapitalize the BOM per existing legislation for the BOM to accommodate the monetary policy costs. To strengthen the central bank’s operational independence and financial position, the reform of the BOM law should prohibit central bank’s transfers to the government and quasi-fiscal financing. Relinquishing the BOM ownership of the MIC would also help in this regard.
The external position of Mauritius at end-2021 was substantially weaker than is suggested by fundamentals and desirable policies, although official foreign reserves remained broadly adequate. The current account gap was large and negative, pointing to substantial overvaluation of the rupee compared to its level consistent with the long-term fundamentals. The external assessment remains highly uncertain due to the transitory supply shock to tourism. The financing of the current account will continue to depend on the financial and capital flows in the GBC sector. While the successful exit from the AML/CFT listings of FATF, EU, and the UK should support the flows, the indirect impact of sanctions on Russia may pose risks.
Mauritius should embrace structural transformation to continue along the path to sustainable and resilient long-term growth. Priorities should be on enhancing diversification and competitiveness, including greater digitalization of the economy and adaptation and mitigation policies to tackle climate change vulnerabilities.
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[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2]The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.