2022 article IV consultations: «BOM’s ownership of the MIC weighs on the BOM’s independence», says IMF staff

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The three-person IMF mission was headed by Cemile Sancak, who addressed the press on Tuesday

The three-person IMF mission was headed by Cemile Sancak, who addressed the press on Tuesday

An International Monetary Fund mission was in Mauritius over the last two weeks for discussions prior to the 2022 Article IV consultations. At a press conference held on Tuesday, it released the preliminary findings found below.

An International Monetary Fund (IMF) mission led by Cemile Sancak undertook a mission to Mauritius from April 27 to May 10 to conduct the discussions for the 2022 Article IV consultations. Based on the preliminary findings of this mission, IMF Staff teams notes that the economy is gradually recovering from the pandemic with sectors having returned to prepandemic levels of economic activity. The mission projects growth of 6,1 per cent and annual inflation of 11,5 per cent t in 2022. However, IMF teams views with concern BoM’s balance sheet and recommends it to relinquish ownership of the MIC and the latter to return undisbursed financing to the BoM and to avoid quasi-fiscal financing.

Below are the mission’s concluding remarks:

“Mauritius is gradually recovering from the pandemic. The public health impact of the pandemic was well managed, including a remarkable vaccination campaign covering over 90 percent of the eligible population by May 2022. Large and comprehensive support measures helped cushion the social and economic impact of the pandemic.”

“While most sectors have returned to pre-pandemic levels of economic activity and the tourism sector is gradually recovering, inflation has picked up substantially. Real GDP growth bounced back to 4 percent in 2021, from a contraction of around 15 percent in 2020. Tourist arrivals – at 13 percent of the 2019 level – were adversely impacted by the full reopening of the border only in October 2021, travel restrictions amid the Omicron variant, and limited flight availability for Mauritius. Year-onyear inflation accelerated due to higher fuel and food prices and freight costs, and the depreciation of the rupee. Inflation increased to 6.8 percent at end-December 2021 and further to 10.7 percent at endMarch 2022.”

“Staff projects growth of 6.1 percent in 2022, and a further rise in inflation. The war in Ukraine has weighed on growth projections due to lower growth in trading partners, less optimistic prospects for global tourist flows, and worsening terms of trade. Nevertheless, the recovery is expected to continue, driven essentially by the tourism sector. The mission expects tourist arrivals to reach about 60 percent of pre-pandemic levels in 2022 (i.e., slightly over 800,000 tourists). Air connectivity will need to be improved to effectively support the recovery of tourism flows to pre-pandemic levels. With every additional 100,000 tourists, growth could increase by 0.6 percent. Annual inflation is expected to further rise to 11½ percent in 2022, due to surging fuel and food prices, the past depreciation of the rupee, and recovering domestic demand.

“In the face of increasing fuel and food prices, the mission recommends protecting the vulnerable population with targeted transfers through social safety net programs while avoiding broad-based subsidies benefiting all income levels.”

“As the recovery solidifies, further fiscal consolidation is needed to restore fiscal space and ensure debt sustainability. Mauritius’ public debt, which rose notably amid the pandemic, is set to stay at elevated levels in the medium term. As the economy exits the pandemic, reinstating fiscal rules, including a medium-term debt anchor, would help preserve fiscal sustainability and reduce debt vulnerabilities, while allowing for flexibility to address shocks.

“Diversifying the economy will remain critical to support the recovery and Mauritius’ aspiration to become a high-income country.”

Reforming the pension system remains a critical step to support fiscal sustainability. Any medium-term fiscal consolidation plan will have to address the disparity between pension spending and pension revenue. The mission recommends fiscal consolidation through credible revenue and expenditure measures. The goal to reduce the stock of public debt should not justify deploying quasifiscal financing, for example, by the Mauritius Investment Corporation (MIC). While quasi-fiscal measures can help reduce debt in the short term, they can delay fundamental fiscal policy actions and lead to renewed pressures in the medium and long term.”

“Improving effectiveness of monetary policy and safeguarding the central bank independence need to remain priorities. The BoM exerted a welcome effort to modernize its policy framework, and the mission recommends the roll out of the new framework to take place as early as possible. Tightening the policy stance would be appropriate to control inflation and counter unanchoring of inflation expectations and second round effects.

Consistent with the BoM Act, the government needs to cover BoM’s losses which may materialize due to increasing policy implementation costs already in the near- to medium-term. Consistent with the new monetary policy framework, the exchange rate policy should allow for greater exchange rate flexibility. Improving the legal framework and addressing governance issues are important to allow for further safeguards to the central bank independence. The ongoing review of the banking and Central Bank legis- lations is welcome, and the mission advises expediting their submission to the Parliament.”

“To support policy credibility and remove unnecessary credit risk from the BoM’s balance sheet, the mission recommends the BoM to relinquish ownership of the MIC, the MIC to return undisbursed financing to the BoM, and avoid quasi-fiscal financing. BoM’s ownership of the MIC weigh on the BoM’s independence and blur the separation of monetary and fiscal policies. In addition, the MIC competes with the financial sector for some profi- table projects. The MIC can either be taken over by the government or folded into the Development Bank of Mauritius.”

“Exiting the Financial Action Task Force (FATF) list of jurisdictions under increased monitoring is commendable. Staff welcomes the authorities’ reform efforts to continue strengthening its AML/CFT regime, particularly as related to non-resident and cross-border activity.”

“Diversifying the economy will remain critical to support the reco- very and Mauritius’ aspiration to become a high-income country. To achieve this, the authorities need to consider policy options to reduce the shortage of suitably skilled workers. Greater digitalization should help further promote diversification and move up the value chain. Addressing climate change is another priority to help the economy build resilience against shocks. Diversification and improving the resilience of the economy need to be supported by a comprehensive reform agenda to identify priorities, address obstacles, and increase efficiency, including by finding complementarities between the public and private sectors. This agenda could be formulated in consultation with the private sector and civil society…”

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