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The IMF Road Map
The IMF Staff Report on Mauritius, July 22, provides an updated assessment of the economic outlook, and offers a range of policy recommendations. This article reviews the main IMF policy proposals for fiscal and monetary actions, and takes a favourable view of the IMF road map for medium-term economic stabilization.
An easy path to recovery based on optimistic growth prospects offers an illusory hope. The IMF forecast of real GDP growth in 2022 is 6.1%, with 800,000 tourists, while headline inflation rises to 11%. Annual GDP growth is projected to settle at just over 3% in the medium term, instead of the official forecast of around 5%.
Fiscal policy
Public debt is estimated at 92% of GDP in June 22, a level considered as elevated by the IMF. Some fiscal deficit and debt reduction was achieved with funds from quasi-fiscal operations of the Bank of Mauritius (BoM) and the BoM-owned Mauritius Investment Corporation (MIC). The IMF points out that these operations reduce debt in the short term but can lead to inflationary pressures in the longer term.
The IMF underlines the need to address medium-term debt vulnerabilities. High inflation is also leading to renewed pressures on current spending. Revenue must be increased, and spending contained, including on pensions, to put public debt on a declining path. A credible fiscal consolidation plan should be implemented, and public finance should adhere to a fiscal rule.
Following the recent budget, total Govt expenditure relative to GDP is projected to decrease by 1.7 % points from 32.7% in 21/22 to 31% in 22/23. Total Govt revenue is expected to remain broadly stable at 23.8% and 23.6% of GDP, respectively. The budget deficit to GDP ratio is thus projected to fall from 8.9% in 21/22 to 7.4% in 22/23. The IMF notes that Govt is working on further fiscal consolidation to reduce debt levels in the medium term. The recent CSG and solidarity levy measures have increased revenue by about 10%. Higher petroleum prices have been passed on domestically.
The IMF recommends that the fiscal position should be further improved without reliance on quasi-fiscal operations of BoM/MIC. The budget deficit should be reduced by reining in current expenditures, mostly by phasing out pandemic related support, and also limiting capital spending. Pension reforms are also considered critical for fiscal correction, namely by extending the retirement age for eligibility to 65 years, freezing universal pensions at their current level, targeting benefits, and limiting CSG benefits to CSG contributors.
To mitigate high debt vulnerabilities and allow space for unanticipated shocks, a key IMF proposal is to introduce a medium-term public debt anchor of 80% of GDP, and an operational fiscal rule to limit Govt’s overall borrowing requirement (see Table) to a ceiling of 3% of GDP. The IMF focuses on the overall borrowing requirement, which is the same as the budget deficit in the absence of any net acquisition of financial assets by Govt, such as an equity sale net of any purchase, or a loan extension net of any reimbursement.
With some degree of fiscal adjustment, total expenditure would be scaled down from over 30% currently to 27% of GDP in 27/28, while total revenue would be maintained around 24% of GDP. The overall borrowing requirement would stay well above 3% of GDP. Without any fiscal rule, the debt ratio would be 85% in 24/25 and only decline below 80% in 27/28.
If the proposed fiscal rule is applied as from 22/23, i.e., with stronger immediate fiscal adjustment, the debt ratio would drop to 80% by 24/25. If the fiscal rule is applied over a transition period of 5 years, i.e., with stronger but more flexible fiscal adjustment, the debt ratio would decline to 80% earlier than in 27/28.
Monetary policy
The IMF calls for a normalization of monetary policy to control inflation in the medium term. Improving monetary policy effectiveness and safeguarding central bank independence are priorities. In this regard, a modernized monetary policy framework with an explicit inflation target, an upgraded central bank legislation, and improved governance are essential.
The proposed new BoM Act should, in line with best international practices, prohibit direct financing of non-banks, other quasi-fiscal activities, and transfers to Govt beyond regular profit transfers. The Monetary Policy Committee is not currently structured to provide independent advice. BoM should relinquish the MIC, and draft BoM legislation will be sent to the IMF for consultation, and introduced in the national assembly in 2022.
IMF considers the interest rate policy as still accommodative, and holds that interest tightening is due despite the increase in the key repo rate from 1.85% to 2%. It has since been raised further to 2.25%. Excess cash reserves should be mopped up by open market operations to make the monetary transmission mechanism effective. Sterilization costs could reach up to Rs2.5 bn a year, which may require a recapitalization of the central bank from fiscal resources.
In view of the high external current account deficit, there is scope to let the exchange rate adjust more flexibly, and allow for more effective monetary policy transmission. The rupee appears overvalued by 26-39 %, which may be seen more as a transitory misalignment that will improve as tourism recovers, and commodity markets stabilize. However, exchange rate flexibility should not be hindered by undue forex interventions.
The external position at end 2021 was substantially weaker than suggested by fundamentals and desirable policies, although official foreign reserves are considered broadly adequate. BoM forex reserves are boosted by BoM foreign borrowing and accumulated forex deposits of domestic banks. The IMF notes that Govt recognizes the need for monetary policy tightening and to review forex intervention strategy.
Other policy issues
The IMF draws special attention to the importance of strengthening public financial management and fiscal transparency, and safeguarding the independence of Statistics Mauritius. The IMF remarks may be prompted by recent concerns about the accuracy and reliability of official statistics. Lapses in financial reporting have in fact been growing lately. The publication of monthly data on Govt budgetary operations is subject to long delays and major errors, and the BoM failed to publish its financial statement for recent months.
The IMF Report corrects official data for deviations from accepted statistical standards. For instance, receipts from state owned entities (SOEs) of some Rs8 bn are treated by Govt as non-tax revenue in 21/22, but the IMF Report considers these transfers “as a financing item”, not as revenue. The IMF Report also notes that its “public debt figures are higher than those presented by the authorities”, and does not take into account a consolidation adjustment made to exclude govt securities held by SOEs, amounting to Rs 12 bn, or 2.4% of GDP, in June 22.
Comments
It can reasonably be acknowledged that the IMF recommendations constitute a sound basis for the formulation of a pragmatic and realistic economic plan for Mauritius. But, a few technical shortcomings of the IMF Report should also be pointed out. First, the absence of consolidation of budgetary central govt accounts with special funds (SF) weakens its fiscal analysis.
SF account for significant Govt capital spending and even current spending. Unspent budget transfers to SF accumulate as surplus balances there, and the budget balance thus overestimates the fiscal gap. In 21-22, this was not the case, as SF spending matched budget transfers. In the coming years, spending from SF is likely to exceed budget transfers to SF (in line with the electoral cycle), and the budget balance will then underestimate the fiscal gap.
The IMF Report rightly highlights the overall borrowing requirement rather than the budget balance for debt control. But, consolidation with special funds would provide a better measure of the fiscal deficit and a clearer analysis of current and capital expenditures.
Secondly, the importance of net acquisition of financial assets (NAFA) in future years in managing expenditure is underestimated in the IMF Report. NAFA together with the budget deficit add up to the overall borrowing requirement. High levels of NAFA are likely to persist as loans and equity investments are injected to cover operating deficits of SOEs, like WMA, and CWA, as well as for other contingent liabilities similar to BAI and Air Mtius bail-out expenses.
Recent equity investments in new prestige projects like Multisports Complex and Metro Express are likely to be loss-making, and will call for further Govt financial support in the coming years. The expectation of an equity sale in 22/23, as partially accepted by the IMF, is also doubtful. Due to increased NAFA, the overall borrowing requirement in future years is likely to be higher, requiring greater fiscal discipline to abide by the fiscal rule.
The IMF road map is far from offering a leisurely walk in the park. Major difficulties would lie in the implementation of politically painful measures, such as pension reforms and capital spending cuts. There is an obvious risk is that Govt takes only a minimum of needed tough actions, hoping for a free ride on the IMF’s goodwill.
Govt could continue to rely on inflation to boost revenue and reduce the debt ratio in the short term, while delaying and holding down on expenditure increases. Govt could also postpone fiscal consolidation by counting on more printed money, equity sales, and emergency grant assistance from friendly countries.
Restoring economic balance rests on tough fiscal and monetary measures, and Govt must resolve to change course on populist policies and ensure that the country lives within its means. The suggested creation of an independent Fiscal Council to monitor the application of the fiscal rule would enhance Govt’s fiscal commitment and credibility.
Conclusion
The IMF proposals relate mainly to (1) a medium-term debt anchor of 80% of GDP, with a flexible operational fiscal rule of an overall borrowing requirement of 3% of GDP to provide scope for gradual fiscal consolidation over 5 years, and (2) strengthened central bank independence and monetary policy effectiveness to support fiscal discipline and to counter inflation.
Mauritius should respond positively to the IMF road map for economic stabilization, which would immediately ward off any likelihood of a sovereign credit downgrading. The window of opportunity for addressing our internal and external imbalances in an unfavourable global environment is fast narrowing, and an early engagement with the IMF may be among the last remaining chances of averting a serious economic crisis ahead.
Table : Overall Borrowing Requirement and Public Debt
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Source: IMF Staff Report, July 22
* A net equity sale of Rs13 bn of Airport Holding to MIC in 21/22, and an assumed equity sale of Rs11 bn in 22/23.
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An easy path to recovery based on optimistic growth prospects offers an illusory hope….. Restoring economic balance rests on tough fiscal and monetary measures, and Govt must resolve to change course on populist policies and ensure that the country lives within its means. |
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