The International Monetary Fund (IMF) has submitted its report after consultations with the Mauritian authorities in 2022. The report states that Mauritius is slowly recovering from the pandemic.
In concluding the Article IV consultation with Mauritius, Executive Directors endorsed the following staff assessment: The economy is recovering from the pandemic after a substantial contraction in 2020. The health impact of the pandemic has been successfully managed, including a remarkable vaccination campaign covering over 90 percent of the eligible population in May 2022. Economic growth has begun to recover, with most sectors generally returning to pre-pandemic levels of output, except for tourism, where activity remains subdued.
According to the IMF, “real GDP grew by 4 percent in 2021, with many sectors returning to their pre-pandemic levels of economic activity, while the tourism sector continued to lag. In this context, the current account deficit has widened considerably. Fiscal performance is expected to improve in FY 2021/22 due to quasi-fiscal operations, although the pandemic and new pressures on current spending are weighing on the fiscal balance.” The IMF notes that inflation has risen sharply from 2.7 percent at the end of 2020 to 6.8 percent at the end of 2021 and to 11 percent at the end of April 2022. Inflation has risen sharply due to global supply bottlenecks, rising fuel and food prices, transportation costs and the past depreciation of the rupee, the report said.
It is a fact that the financial sector, including the Global Business Companies (GBC) segment, remained stable in 2021. But it is noted that Mauritius left the Financial Action Task Force’s (FATF) list of jurisdictions under heightened scrutiny in October 2021 and the similar lists of the EU and the United Kingdom shortly after.
The IMF expects the government of Mauritius to achieve real GDP growth of 6.1 percent in 2022, with the economic rebound driven primarily by the tourism sector, with tourist arrivals expected to reach 60 percent of their pre-pandemic level. Unemployment is expected to decline as the economy recovers and return to trend in the medium term. Annual inflation is expected to reach 11.4 percent in 2022 due to soaring commodity prices, the past depreciation of the rupee, and the recovery in domestic demand. The economy is expected to converge to its pre-pandemic trend growth of 3-3½ percent over the medium term.
The outlook for Mauritius is subject to downside risks, particularly in light of the war in Ukraine. Rising global inflation reduces real disposable income and could weigh on global demand, especially for tourism, and freight costs.
The fiscal consolidation path must be carefully calibrated to balance post-pandemic recovery with long-term budget and debt sustainability. Public debt is high after increasing during the pandemic. Fiscal performance continues to be affected by the pandemic and renewed pressures on current spending. The IMF believes that targeted transfers to the vulnerable may be necessary in the face of sharp increases in food and fuel prices. If the economy continues to recover, revenues should increase and expenditures should be reduced, including through pension reform, to put the debt on a downward path over the medium term.
The reform of the BOM law should prohibit transfers from the central bank to the government
The monetary policy framework should be modernized and the credibility and independence of the central bank should be preserved. IMF staff recommends that the new monetary policy framework be put in place quickly to support policy effectiveness. Consistent with the inflation targeting framework, the Bank of Mauritius’ (BOM) foreign exchange intervention strategy should aim to mitigate volatility while generally allowing for exchange rate flexibility, thereby facilitating macroeconomic adjustment. The government should recapitalize the BOM in accordance with existing legislation so that the BOM can bear 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 transfers from the central bank to the government and quasi-fiscal financing. Relinquishing the BOM’s ownership of the MIC would also help in this regard.
The IMF believes that Mauritius needs to embark on a structural transformation in order to continue on a path of sustainable and resilient growth over the long term. Priorities should be strengthening diversification and competitiveness, including greater digitization of the economy and adaptation and mitigation policies to address climate change vulnerabilities.
