Growth to hit 4% only in 2016, says IMF mission

An International Monetary Fund (IMF) mission led by Mauro Mecagni visited Port Louis on December 2–16, 2015, to conduct discussions for the 2015 Article IV consultation. At the conclusion of the visit, country director Mr. Mecagni stated that the medium-term outlook for the country is favourable if sound policies continue to be implemented. The implementation of new public investment programs would catalyse private investment and help to raise GDP growth to close to 4% in 2016 and beyond, with rates of inflation below 3%. “Going forward, further reforms need to be implemented to take the next leap in development,” said the country director Mauco Mecagni. These include measures to stimulate female labour force participation, which would help mitigate the effect of the projected decline in Mauritius’ labour force in the next decades; investments in interconnectivity, transportation and communication; and strengthening the institutional framework to lower the cost of doing business and preserve Mauritius’ hard-earned macroeconomic and financial stability. “The Mauritian economy has remained resilient in 2015, despite some difficult domestic developments and the volatility affecting other emerging and frontier markets. The economy continued to grow at the respectable rate of over 3% in per capita terms, and inflation fell to an historical low (1 percent in November 2015). The fiscal deficit for the first half of the year was lower than projected, although public debt rose due to the injection of public capital in two banks, and the impact of the rupee depreciation on external debt. Excess domestic liquidity was significantly reduced; the external current account deficit has declined; and international reserves have risen to the equivalent of over 6 months of imports.” The main challenges for 2016 and beyond pertain to reducing public debt through a “growth-friendly and pro-poor medium-term” fiscal consolidation effort; further increasing the resilience of the financial sector by strengthening the macro-prudential oversight framework; and addressing the reforms needed to transition to high-income status, in particular with a view to improving productivity and competitiveness. Addressing infrastructure bottlenecks, skill mismatches and gender inequality in the labour market will also be important. Higher imports associated with the announced investment programs such as smart cities and port area development are likely to widen the current account deficit to some 6-6.5% of GDP. International reserves are nonetheless projected to strengthen gradually, supported by continued capital inflows as Mauritius seeks to leverage its financial sector as a hub to channel significant investments to Africa and Asia. “The 2015/16 fiscal stance accentuates the expansionary trend of recent years, and fiscal space needs to be created to implement the government’s ambitious investment program while reducing public debt in the medium term. Reduction of subsidies, better targeting of social assistance programs and improved efficiency in public enterprises could yield significant gains in tilting the composition of government expenditure toward infrastructure, human capital development spending and pro-poor programs. There is also scope to increase revenues, including by reducing tax exemptions and further broadening the tax base. The mission welcomes the authorities’ continued commitment to fiscal transparency, as evidenced by the decision to gradually eliminate special funds by 2018, and the ongoing preparation for divestiture of assets targeted at debt reduction,” stated the IMF mission. Given the low inflation environment, the current monetary policy stance is broadly appropriate according to the mission which welcomes the Bank of Mauritius’ successful efforts in mopping up excess domestic liquidity in the banking system, and concurs with the authorities that this process should continue at an appropriate pace in order to enhance the responsiveness of market interest rates to changes in the monetary policy rate.