Consultations on Article IV: IMF recommends Mauritius to replenish its foreign exchange reserves

The International Monetary Fund is generally optimistic about growth forecasts for Mauritius. It expects a performance of 4.9% of GDP for 2024. However, Bretton Woods recommends that the country rebuild its reserves and reduce its spending and debt.

Context

Mariana Colacelli led an International Monetary Fund (IMF) mission to Mauritius from January 9 to 18, 2024. There were consultations on Article IV. Discussions continued virtually upon the team's return to Washington, DC, until February 21.

Main conclusions and recommendations

• Strong rebound in the economy after the pandemic
The Mauritian economy rebounded strongly after the pandemic, observes the IMF. Growth reached 8.9% in 2022, thanks to the recovery of tourism and the manufacturing industry.

“Rapid growth continued in 2023 (estimated at 6.9%). Production has now exceeded its pre-pandemic level. The dynamism of tourism, the construction of social housing and the continued strong performance of transport and financial services have stimulated growth,” highlights Mariana Colacelli, IMF mission head.

He published a press release on the evening of Friday February 23. Another observation: inflationary pressures have eased in 2023, with average annual inflation of 7%.

• Recalibrate macroeconomic policies
The IMF is adamant that a recalibration of macroeconomic policies is needed to help rebuild reserves. These have been eroded by the pandemic and to maintain financial stability.

“The reconstitution of macroeconomic reserves, including foreign currency reserves (Editor's note: the level of foreign currency reserves recorded at the end of 2023 is 7.3 billion dollars), would contribute to improving the resilience of the economy in the face of shocks », Supports the IMF.

• Strengthen the effectiveness of monetary policy

The stance of monetary policy remained generally accommodative. Inflation has fallen and remains above the target range of the Bank of Mauritius, underlines the IMF. The Bank of Mauritius should raise the Key Rate if inflationary pressures re-emerge. It must also strengthen the effectiveness of the new monetary policy framework. It must improve its communication strategy.

• Reduce public debt

While the fiscal stance for the financial year 2023-24 is expected to be expansionary – with the primary fiscal deficit expected to widen to 2.9% of GDP, excluding grants. It is important to implement the medium-term fiscal consolidation plan to reduce public debt and rebuild fiscal buffers. We must mobilize additional tax revenues and reduce current spending, while protecting the most vulnerable.

• Continue close monitoring of risks linked to the financial sector

According to the IMF, strengthening financial sector resilience and managing macro-financial risks will support financial stability. Hence his recommendation that Mauritius continue to closely monitor the risks linked to the financial sector.


IMF forecasts

Growth: a rate of 4.9% in 2024

According to the IMF, growth prospects remain favorable, although risks are on the downside. “In 2024, growth is expected to rise to 4.9%, driven by the construction sector, with the acceleration of major social housing and public transport projects and the resumption of tourism to its previous levels. before the pandemic. »

Inflation: an average of 4.9% this year

While remaining above the Bank of Mauritius' target range of 2% to 5%, inflation declined during 2023. It was supported by falling international commodity prices. It fell from 10.8% in 2022 to 7% in 2023. In January 2024 alone, year-on-year inflation stood at 5.2% in January 2024. How will the situation evolve in 2024? Headline inflation is expected to decline to 4.9% on average in 2024, mainly reflecting the dynamics of international oil and food prices.

Excerpts

“A deterioration in global growth could depress tourism. And higher fuel and food prices could exacerbate inflation, worsen the external position and weaken the recovery. This is because of the fallout from Russia's invasion of Ukraine and the conflict in Gaza and Israel. Extreme weather events could weaken tourism and damage local infrastructure, which will influence growth. »


She said Mariana Colacelli, IMF mission chief for Mauritius:

“Advancing structural reforms is essential to supporting private sector investment and promoting economic diversification. The country must comply with anti-money laundering and anti-terrorism financing (AML/CFT) standards. It must improve governance and reduce the skills mismatch in the labor market. And it must promote digitalization and investments in climate-resilient infrastructure. »


Good to know

The IMF press release includes only the preliminary conclusions of the mission, after its visit to Mauritius. Based on these preliminary findings, a report will be prepared and presented to the IMF Executive Board for discussions and decision-making.

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