IMF Concludes 2022 Article IV Consultation with Mauritius

Washington, DC: The Executive Board of the International Monetary Fund (IMF) Concludes Article IV Consultations[1]with Mauritius on a no-objection basis.[2]

Mauritius is gradually recovering from the pandemic. The authorities managed to manage the health impact of the pandemic and vaccinated most of the population. Real GDP grew by 4% in 2021 as many sectors returned to pre-pandemic levels of economic activity, while the tourism sector remained weak. In this context, the current account deficit widened significantly. Fiscal performance is expected to improve in FY 2021/22, driven by quasi-fiscal operations, although the pandemic and new pressures on current spending weigh on the fiscal balance. Inflation increased significantly from 2.7% at the end of 2020 to 6.8% at the end of 2021 and then to 11% at the end of April 2022. The financial sector, including the Global Business Companies (GBC) segment, remained stable in 2021. Mauritius exited the Financial Action Task Force (FATF) List of Enhanced Watch jurisdictions in October 2021 and the similar EU and UK lists shortly thereafter.

IMF staff forecast real GDP growth of 6.1% in 2022. The economic rebound is expected to be mainly driven by the tourism sector, with tourist arrivals expected at 60% of pre-pandemic levels. Unemployment is expected to decline as the economy recovers and return to its medium-term trend. Annual inflation is expected to reach 11.4% in 2022 due to the surge in commodity prices, the past depreciation of the rupee and the recovery of domestic demand. The economy is expected to converge to its pre-pandemic trend growth of 3-3½% over the medium term.

The outlook for Mauritius is subject to downside risks, particularly due to the war in Ukraine. Rising global inflation reduces real disposable income and can weigh on global demand, including for tourism, and transport costs.

Board assessment

In concluding the Article IV consultation with Mauritius, the Directors approved the staff assessment as follows:

The economy is recovering from the pandemic after a sharp contraction in 2020. The health impact of the pandemic has been successfully managed, including through a remarkable vaccination campaign covering more than 90% of the eligible population in May 2022. Growth economy has started to recover, with most sectors broadly back to pre-pandemic production levels, with the exception of tourism, where activity remains subdued.

The main macroeconomic challenge for Mauritius is to continue its economic recovery, while controlling inflation in a global environment characterized by high fuel and food prices and a slower recovery. The recovery in Mauritius is expected to continue, albeit at a slower pace than expected before the war in Ukraine, reflecting weaker growth among trading partners, less optimistic outlook for tourist flows and deteriorating terms of trade. exchange. Inflation has accelerated significantly due to global supply bottlenecks, rising fuel and food prices, transport costs and the past depreciation of the rupee.

The fiscal consolidation path needs to be carefully calibrated to balance post-pandemic recovery with long-term fiscal and debt sustainability. Adherence to fiscal rules remains essential to preserve fiscal sustainability and reduce medium-term debt vulnerabilities. Public debt is high after rising during the pandemic. Fiscal performance continues to be affected by the pandemic and renewed pressures on current spending. Targeted transfers to vulnerable people may be needed in the face of sharp increases in food and fuel prices. If the economy continues to recover, revenues should increase and spending be reduced, including through reform of the pension system, to put debt on a declining path over the medium term.

The monetary policy normalization cycle should continue in order to minimize the potential side effects of supply-side shocks and keep inflation under control over the medium term. Supply-side pressures on inflation and inflation expectations presented a challenge after the pandemic. The war in Ukraine is adding to these pressures and will require a tougher policy in an increasingly complicated environment.

The monetary policy framework must be modernized and the credibility and independence of the central bank must be preserved. IMF staff recommends that the new monetary policy framework be put in place soon to support policy effectiveness. In line with the inflation targeting framework, the Bank of Mauritius (BOM) foreign exchange intervention strategy should aim to smooth volatility while generally allowing flexibility in the exchange rate, facilitating macroeconomic adjustment. The government must recapitalize the BOM in accordance with existing legislation so that the BOM can take into account the costs of monetary policy. To strengthen the operational independence and financial position of the central bank, the reform of the BOM law should prohibit central bank transfers to the government and quasi-fiscal financing. Relinquishing BOM ownership of the MIC would also help in this regard.

Mauritius’ external position at the end of 2021 was significantly weaker than fundamentals and desirable policies would suggest, although official foreign exchange reserves remained broadly adequate. The current account gap was large and negative, indicating a substantial overvaluation of the rupiah from its level consistent with long-term fundamentals. The external assessment remains highly uncertain due to the transitory shock to tourism supply. Current account funding will continue to depend on financial and capital flows in the GBC sector. While the successful exit from the FATF, EU and UK AML/CFT lists should support flows, the indirect impact of sanctions on Russia may pose risks.

Mauritius should embrace structural transformation to continue on the path of long-term sustainable and resilient growth. Priorities should be to improve diversification and competitiveness, including greater digitalization of the economy and adaptation and mitigation policies to address vulnerabilities to climate change.