Mauritius Economic Update

PIN of 2007 Article IV Consultation with Mauritius is out;

The loss of trade preferences in textiles in 2005, the reform to the European Union's sugar protocol for 2006-10, and higher international oil prices have brought about a permanent deterioration in Mauritius's terms of trade. The authorities have initiated broad-based reforms to address recent economic setbacks and to raise growth to levels of the previous two decades.

Real GDP growth is expected to reach over 4 percent in 2006/07 (fiscal year ending in June), owing to a strong service sector outturn and slowing job losses in the textile sector. Unemployment, however, remains close to its historic high. Inflation, after peaking in December 2006-largely because of onetime budgetary measures and a weakening rupee-fell to 9.2 percent in February 2007 (year-on-year).

The fiscal deficit target for 2006/07 (4 percent of GDP) is within reach, with the adjustment relying partly on lower capital expenditure. The external current account deficit widened to 5.3 percent of GDP in 2005/06 because of weak textile and sugar exports and higher oil prices. An aircraft import will further widen the current account deficit in 2006/07. The Bank of Mauritius has continued to intervene in the interbank foreign exchange market and has gradually raised its signaling rate to contain inflation. Foreign reserves have continued to decline but have stayed at a comfortable level. The real effective exchange rate has depreciated by over 10 percent since 2004...

Directors noted that additional improvements in external competitiveness are needed to help restore external balance. Wage restraint, productivity gains, and labor market flexibility are key to achieve this. Directors considered that the flexible exchange rate regime has served Mauritius well, with rupee depreciation softening the negative effect of the terms of trade decline. They encouraged the authorities to limit foreign exchange intervention to smoothing excess volatility.

Directors welcomed the progress made toward fiscal consolidation and better public expenditure management, aimed at lowering public debt and improving the quality of the budget. They noted that fiscal pressure in the medium term would require more decisive fiscal consolidation and further improvements in expenditure management. They encouraged the authorities to identify options for budgetary savings and to continue strengthening debt management.

I would like to see Fazeer's take on the IMF's assessment.