Country Report Mauritius July 2008

Outlook for 2008-09

• Despite tension between the reformist and traditionalist wings of the Labour Party, the Alliance sociale coalition government will remain in power over the forecast period and maintain the liberalising thrust of economic policy.
• The Economist Intelligence Unit forecasts real GDP growth of 5.8% in 2008 and 6% in 2009, driven by the continuing recovery of textile manufacturing and further growth in the services and seafood sectors.
• We expect inflation to begin to decline over the next few months. However, average inflation is forecast to rise to 9.2% in 2008, before declining to 5.9% in 2009 as world energy and food price inflation falls.
• The Mauritius rupee is likely to hold on to much of its appreciation until late 2008, when the US dollar should start to rise on world markets. We forecast an average exchange rate of MRs27.4:US$1 in 2008 and MRs28.5:US$1 in 2009.
• The current-account deficit is forecast to rise to 6.7% of GDP in 2008, owing to a worsening trade deficit, before falling to 5.6% of GDP in 2009 as continuing growth in tourism leads to a wider surplus on the services account.

Monthly review

• The budget, presented by the minister of finance, Rama Sithanen, on June 6th, was an expansionary one, in contrast with his previous budgets, which had focused on economic reform and tight fiscal policy.
• The budget was broadly welcomed by both employers and trade unions, and the opposition found little to attack and had to resort to accusing Mr Sithanen of back-pedalling.
• Some progress has been made in consultations on electoral reform, but there are no signs of consensus, and further discussions have been postponed until after the budget is approved.
• A large pay rise for the civil service was one of the measures in a budget clearly designed to boost the Labour Party's electoral appeal.
• Higher than expected tax revenue allowed Mr Sithanen to announce a MRs4.5bn increase in infrastructure and social spending for the current year.
• Despite tax cuts and expenditure increases, the fiscal deficit is projected to fall to 3.3% of GDP in 2008/09. This is predicated on real GDP growth of 6.2% in 2008/09, which may be overoptimistic given global economic conditions.
• The performance of the economy is causing concern on several fronts: the latest figures show that inflation is rising and tourist growth faltering, and the trade deficit in the first quarter was at an all-time high.