Documentof The WorldBank FOROFFICIAL USEONLY ReportNo. 46219 - MU INTERNATIONALBANK FORRECONSTRUCTION ANDDEVELOPMENT PROGRAMDOCUMENT FORA PROPOSEDLOAN INTHE AMOUNT OFUS$lOOMILLIONEQUIVALENT TO THE REPUBLICOFMAURITIUS FORA THIRD TRADE AND COMPETITIVENESSDEVELOPMENTPOLICYLOAN WITHDEFERREDDRAWDOWNOPTION March2,2009 PovertyReductionandEconomicManagement 1 Africa Region This document has a restricted distribution and may be used by recipients only inthe performance of their officialduties.Itscontents may not otherwise be disclosedwithout Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective as of February 12,2009) Currency Unit =MauritiusRupee US$l.OO = Rs 33.52 GOVERNMENT FISCAL YEAR July 1-June 30 WEIGHTSANDMEASURES Metric System Vice President: Obiageli KatrynEzekwesili Country Director: RuthKagia Sector Director Sudhir Shetty Sector Manager: John Panzer TeamLeader: Fabiano Bastos FOROFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Assistance AfDB African DevelopmentBank AFD Agence FranGaise de Dkveloppement AFT Aid for Trade B O M Bank of Mauritius BPO Business Process Outsourcing CEM Country Economic Memorandum CEB Central Electricity Board CHCL Cargo Handling Corporation Limited CPS Country Partnership Strategy CWA Central Water Authority DCP Document Cadre de Partenariat (Partnership Framework Document) DDO DeferredDrawdown Option DPL Development Policy Loan EC European Commission EPZ Export Processing Zone ESW Economic and Sector Work EU EuropeanUnion FAD Fiscal Affairs Department F D I ForeignDirect Investment FSAP Finance Sector Assessment Program GDP Gross Domestic Product IBRD InternationalBank for Reconstruction and Development ICA Investment Climate Assessment IT Information Technology ICT Information and Communications Technology ICTA Information and Communications Technology Authority IMF InternationalMonetary Fund MAAS Multi-AnnualAdaptation Strategy MDA Ministries, Departments and Agencies METAP Mauritius Economic Transition (Technical Assistance) Project MFA MultiFiberAgreement MOFEE Ministry of Finance and Economic Empowerment MPC Monetary Policy Committee MTEF MediumTermExpenditureFramework Rs. Mauritius Rupees NEA New Economic Agenda NEAP National Environmental Action Plan PBB Program basedBudget SMST Sector Ministry Support Team PMS Performance Management System PRB Pay ResearchBureau STLF Short term Liquidity Facility ZEP Zones d'Education Prioritaires (Priority Education Zones) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. TABLE OF CONTENTS LOANAND PROGRAMSUMMARY ............................................................................. vi I. INTRODUCTION....................................................................................................... 1 I1. COUNTRY CONTEXT.............................................................................................. 2 A. RECENTECONOMIC DEVELOPMENTS ........................................................................ 2 B. MACROECONOMIC OUTLOOKANDDEBTSUSTAINABILITY ...................................... 6 C. IMPACT REFORMS OFTHESTRUCTURAL .................................................................. 8 I11. THE GOVERNMENT PROGRAM............................................................................ 9 IV. BANK SUPPORTTO THE GOVERNMENT'S PROGRAM................................. 14 A. LINKToTHECOUNTRYPARTNERSHIP STRATEGY ................................................. 14 B. COLLABORATIONWITH IMFAND OTHERDONORS ............................................... 15 C. RELATION To OTHERBANKOPERATIONS.............................................................. 18 D. LESSONS LEARNED ................................................................................................. 18 E. ANALYTICAL UNDERPINNINGS ............................................................................... 19 V. THE PROPOSEDOPERATION.............................................................................. 23 A. OPERATIONDESCRIPTION ....................................................................................... 23 B. POLICY AREAS........................................................................................................ 28 VI. OPERATIONIMPLEMENTATION........................................................................ 45 A. POVERTYANDSOCIAL IWACT .............................................................................. 45 B. ENVIRONMENTAL ASPECTS .................................................................................... 47 C. IMPLEMENTATION, MONITORING EVALUATION AND .............................................. 48 D. FIDUCIARYASPECTS ............................................................................................... 49 E. RISKS ANDRISK MITIGATION ................................................................................ 49 Annex 1:DPLprogrammatrix......................................................................................... -52 Annex 2: Letter of DevelopmentPolicy............................................................................ 60 Annex 3: IMFAssessment Letter...................................................................................... 69 Annex 4: At A Glance....................................................................................................... 72 LISTOF TABLES Table 1:ExternalEnvironment............................................................................................ 3 Table 2: Balanceof Payments............................................................................................. 5 Table 3: Financingrequirements......................................................................................... 5 Table 4: Macroeconomicindicators.................................................................................... 6 Table 5: Fiscal framework................................................................................................... 8 Table 6: Pre- andpost-reformoutcomes ............................................................................. 8 Table7: DPLAnd CPS Outcomes Compared................................................................... 15 Table 8: Analyticalsupportfor the Government's reformprogram................................. 20 Table 9: Status of DPL3 PriorActions andDPL4IndicativeTriggers ............................. 23 Table 10:ProposedPMS implementationschedule.......................................................... 31 Table 11:Status of Implementationof PMS (December. 2008) ....................................... 32 Table 12: Fiscal Consolidation.......................................................................................... 33 Table 13: Public Sector Debt............................................................................................. 34 Table 14:Parastatalreform action plans: status of implementation. September2008......37 Table 15: Tariff Changes announcedin2008/09budget .................................................. 41 Table 16:Flexi-securityprogram...................................................................................... 43 Table 17:Job losses insugar and apparel (.000)............................................................... 45 LIST OF FIGURES Figure 1. capita GDP growth....................................................................................... Per 1 Figure 2: GDP growth ......................................................................................................... 3 Figure 3: Distribution of average per capita GDP growth, 1984-2004............................... 6 Figure4: Apparel exports.................................................................................................... 9 Figure 5: Government deficits anddebt ............................................................................ 32 Figure 6 :Industrialproduction......................................................................................... 40 Figure7:Mauritius-UnemploymentRate....................................................................... 46 LOANAND PROGRAMSUMMARY REPUBLICOF MAURITIUS THIRD TRADE AND COMPETITIVENESSDEVELOPMENTPOLICYLOAN WITHDEFERREDDRAWDOWNOPTION Borrower Implementing Agency FinancingData Operation Type Main Policy Areas Key Outcome Indicators OutcomeIndicator Base (05/06) Latest Target (09/10) A. Public sector debt/GDP 68.8 59.1 B. Unify EPZ,non-EPZregulations No Yes, exc. Labor Yes C. Doing Business ranking, 32 24 < 10 D. Workers trained by Empm't Program 4,000 lZ,OOO Program Development Objectives and Contribution to Country Partnership Strategy(CPS) The DPL: (i) prepared concurrently with the CPS and the two was substantially overlap in terms of diagnostics, objectives, and outcomes; (ii) has been the major vehicle for delivery of CPS outcomes. The European Commission, African Development Bank and Agence FranFaisede DCveloppement have participated injoint preparation and appraisal missions and adopted DPLtriggerdprior actions for their own budget support operations. Risks and Risk The country faces two risks.First,capacity constraints inimplementingthe Mitigation broad and ambitious reform program. Second, impact of deteriorating global conditions could further decelerate growth and fiscal revenues jeopardizing implementation of reforms and slowing down transition to a services-led economy. Operation ID P112369 PROGRAMDOCUMENT Date: March 2, 2009 Lending Instrument: Development Policy Lending - Country: Mauritius DeferredDrawdown Option (DPL-DDO) Operation: MauritiusThirdDevelopment Board Approval Date: March 31, 2009 Policy Loan Effectiveness Date: June 29, 2009 Operation ID:PI12369 Closing Date: December 31, 2011 Team Leader: Fabiano Bastos Sectors: Central government administration(60%); Sector Manager: John Panzer General industryand trade sector (25%); General Sector Director: Sudhir Shetty education sector (15%) Country Director: RuthKagia Themes: Export development and competitiveness (P); Public expenditure, financial management and procurement (S); Improving labor markets (S); Education for the knowledge economy (S) Environmental screening category: Special Development Policy Lending: [ ] Y e s [XINO Crisis or Post-Conflict Situation (exception to OP8.60): [] Yes [XI No Programmatic: [XI Yes [ ]No Deferred Drawdown Option: [XI Yes [I No Subnational Lending: [ I Yes [XINO Operation FinancingData [XI IBRDLoan [I IDA Credit [I Grant [IOther: Total Bank financing (US$m.): 100.0 equivalent Proposed terms: IBRDLoan: Development Policy Loan (DPL) with DeferredDrawdown Option (DDO). The DPL D D O will be available for three years and the closing date will be December 31, 2011.The proposed loan amount i s US$lOO million equivalent, and it i s an IBRDFlexible Loan inthree currencies (USD 30 million; EUR 22.7 million (USD 30 million equivalent); and GBP 28 million (USD 40 million equivalent) with variable spread, level repayment o f principal linked to commitment, and includes currency and interest rate conversionoptions. The loan term is 20 years including a grace period o f 5 years. The front-end fee will be financed from the loan proceeds. Tranche ReleaseInformation List bindingconditions as stated in the Legal Agreement. Tranche 1 Description Amount Expectedrelease date Single tranche US$lOO 06/29/2009 Condition 1 No tranche release conditions Triggers Alignment of the chart of accounts of the Treasury accounting system with the Government Finance Statistics Manual 2001 and upgrading o f the Borrower's financial management information system to enable budget implementationand reporting of financial and non-financial data, under the efforts o f the Ministry o f Finance and Economic Empowerment ("MOFEE"), in coordination with the department o f the Accountant General. Implementation of performance management pilots in the Borrower's civil service by individual line ministries and the Ministry of Civil Service and Administrative Reforms. Enactment and proclamation o f the Public Debt Management Act 2008, which limits the Borrower's public sector debt to a maximum o f 60-percent of gross domestic product and provides for public sector debt reduction to 50-percent by the end o f 2013. Begin implementation o f the respective parastatalreform action plans, by the CentralWater Authority, Wastewater ManagementAuthority, Central Electricity Board, and Sugar Planters MechanicalPool Corporation, to improve operational efficiency and service delivery by: (a) introducing a performance management system, promoting staff proficiency in multiple areas o f expertise, reducing overtime and eliminating unfilledposts; (b) increasing capacity utilization o f capital equipment (i.e., vehicles, tractors), and reducing fuel and lubricating oil costs; (c) outsourcing transport and security services, cutting delivery time and cost, and reducing pilferage; and (d) improving inventory management by reducing the number and volumes of items carried. Continue implementation of the Borrower's duty free islandpolicy by significantly reducing average tariff rate and number of top ratedtariff lines by the MOFEE. Introduction of a flexi-security scheme, as reflectedinthe workfare program provisions contained in section IX o f the Employment RightsAct 2008. Preparation and submission by the Ministry of Education, Culture and Human Resources to Cabinet o f a draft Education and HumanResources Strategy Plan that diagnoses education sector needs, identifies objectives and priorities, and outlines options, which will be costed and, together with human resources requirements, incorporated into a medium term action plan and a fully financed, program basedbudget submission. Does the operation depart from the CAS incontent or other significant respects? [ ]Yes [XINO Does the operation require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [XINO Operation development objective The operation supports reforms which respond to two major challenges: (i) the "triple trade shock" o f trade preference erosion and highoil prices and (ii) the transition from low wage, low skill sugar and apparel exporter to innovative, knowledge and skill based services economy. The operation also provides addedresources for the Government to weather the current global economic turbulence without jeopardizing successful reform implementation. I.INTRODUCTION massively in human capital and Figure 1- Per capita GDP growth infrastructure, make better use of advanced Percent technologies and reform the regulatory 1 environment to harness the creativity of the private sector. Yet, little was achieved in these areas during the decade which followed. Instead, trend growth slowed as new sectorsfailed to generatehoped for levels of output and employment while traditional ones lost ground to increasing competition in their export markets. The 1981 1986 1991 1996 2001 miracle years o f the 1980s receded into 1-per capitagrowth --r a n k history and Mauritius dropped back in the Source: World Development Indicators 2. InJuly 2005, Mauritians went to the polls. With the "triple trade shock" -eroding textiles and sugar preferences and rising energy prices - exacerbating the longer term decline, they were in an uncharacteristically pessimistic mood.' The outcome of the election was a new Government with a strong reformist platform that touched on virtually every facet of economic and social policy.2 Inthe economic sphere, the Finance Minister urged the need to halt the slide in performance by raising competitiveness, promoting higher value added exports, investing in infrastructure and education, and reforming industrial relations. These were well rehearsed themes, but it soon became apparent they did not portend business as usual. The new Government immediately set to work on an ambitious and comprehensive structural reform program intendedto raise the efficiency o f the private sector and modernize the public sector for a post-regulatory world (see Section 111). 3. As the Government worked out the details of its reform program, it called on the Bank and other Development Partners3 for both technical and financial assistance. The The MFA ended inJanuary2005 andthe EUannounced a 36 percentreductioninthe importpriceof sugar in2006-09. Governmentof Mauritius,"Government Programme2005-2010:Address by the Presidentof the Republic," httD://www.gov.mu/uortal/goc/assemblvsite/file/Presidentaddress.udf. The term, "Development Partners" is usedthroughoutthis documentto refer to Mauritius' mainexternal partners- the AfricanDevelopmentBank, AgenceFranGaisede DCveloppement(AFD),the European Commission(EC), UnitedNationsDevelopmentProgram(UNDP) andthe WorldBank (WB). series of Development Policy Loans (DPL), of which this i s the third, has played a central role in the resulting collaboration. Bank Technical Assistance undertaken during the identification phase helpedto clarify the context and logic of the reforms and establish a disciplined framework for monitoring implementation. Subsequent preparation and appraisals have served as a platform for dialog with Government and civil society, building awareness and consensus around the reforms. Joint missions carried out with other Development Partners have been instrumental inharmonizing the donor community around the Government's program. Finally, the DPL and parallel financing from other Development Partners have supplied around a quarter of the public sector borrowing requirement over the period. 4. The present operation features two elements which are new and noteworthy since DPL2. First, the Government has requested the operation be rolled over into a new series, which the Development Partners have welcomed. However, to keep in step with the electoral cycle it has been agreed to add a single year, DPL4, to the current series and begin a new series, DPL5-7, inFY2011.4 Accordingly, the DPL matrix has been amended to include indicative triggers for an additional year (DPL4). The intention i s for a new series (DPL5-7) to begin after the next election which will be held no later than July 2010. 5. Second, in light of the global financial crisis and uncertainty about the near term outlook, the Government has requested a US$70 million equivalent increase inthe current operation to a total of US$lOO million equivalent. This self-insurance in the face o f plausible risks will help to protect against disruption to the reform program and i s in line with the Bank's Middle Income Countries (MIC) Strategy as well as the growing engagement inMauritius. The lendinginstrument proposed for the operation i s a Deferred Drawdown Option (DDO), which allows the client greater flexibility in deciding when to withdraw the resources. Recently, the Government has communicated to the team its current intention to draw down the full amount at the earliest possible date after effectiveness. 11. COUNTRY CONTEXT A. RECENT ECONOMICDEVELOPMENTS 6. Since mid 2008, problems which originated in the financial sectors o f developed countries have escalated into a full-blown, global crisis. Near term prospects for the world economy have been revisedprogressively lower, with GDP growth now expected to reach The next election will be held by no later thanJuly 2010; anew series, DPU-6, launchedinearly 2010 would develop a programthat might not reflect the new Government's priorities. Note also that the Government intendsto shift the financial year aheadby six months to coincide with the calendar year, beginning in2010. Thus, the June 2009 budget will cover the six month period July -December 2009, to be followed by abudgetinand the next budget will bepresentedinDecember 2009 to cover the period January -December2010.DPLAwillremainonthesamecycleasthecurrentyear,disbursinginearly2010. Preparationof the new series has already begunand the first operation (DPLS) will be linkedto the 2010 budget, with disbursement expectedinmid2010, Q1of the Bank's FY2010/11. 2 only 0.9 percent in 2009 compared to 3.6 percent a year ago (Table l>.5 of The volume world trade i s expected to shrink by 2.1 percent in 2009, and growth for the Euro Area, which accounts for 70-80 percent of Mauritius' exports, is anticipated to fall by 0.6 percent in2009. 2006 2007 2008 2009 2010 World GDP growth 4.0 3.7 2.5 0.9 3.0 - Euro area 2.9 2.6 1.1 -0.6 1.6 - India 9.0 9.7 6.3 5.5 7.7 World trade volume 9.8 7.5 6.2 -2.1 6.0 I Oil price 64.3 71.1 101.2 74.5 75.8 Non-fuel commodity prices I 6.1 23.2 14.1 13.3 -6.2 Source: World Bank, Global Economic Prospects 2009 (December 2008) introduced since 2o06 Mauritius entered the Figure2: GDP growth global crisis with strong fundamentals. y-o-y percent change (last observation ;2008Q3) n strengthened the rupee and contributed to a 2001 2002 2003 2004 2005 2006 2007 2008 build up of reserves to more than 9 months ' -Trend --GDP growth] Source: Central Staristics office, Quarterly GDP 8. The momentum evident in Figure 2 carried into 2008. In the first three quarters, GDP gained a healthy 6.1 percent over a year earlier and exports were up 3.4 percent despite major trading partners sliding into recession.6 Services remained resilient, with tourist arrivals inthe year through September up 4.6 percent and receipts up 8.4 percent. In the domestic economy, investment remained strong as gross fixed capital formation added 9.5 percent in the first three quarters, primarily due to construction which gained 14.9 percent. Private household consumption was up 4.5 percent, offsetting a small, 0.4 percent decline in government consumption. The labor market strengthened, with Forecast from World Bank, Global Economic Prospects 2009 (December, 2008). The comparison is with the GEP 2008 forecast from a year earlier. InJanuary of 2009, the IMFhas also reduced its forecast for 2009 global growth to 0.5 percent growth from 2.2 percent inits last Economic Outlook (November 2008). Government of Mauritius (Central Statistics Office), Quarterly National Accounts, 3rdQuarter 2008, www.gov.mu/portal/goc/cso/ei743/qna%20.pdf, 3 employment up 2.2 percent in September y-0-y and the unemployment rate falling to 7.2 percent from 8.2 percent a year earlier. 9. However, despite positive momentum, growth eased progressively through 2008, from 7.7 percent y-0-y inQ1to 6.0 percent inQ2 and 4.5 percent inQ3 and a broad-based slowdown was apparent across most sectors and demand ~ategories.~Central Statistics Office recently lowered its provisional estimate of GDP growth for 2008 (calendar year) to 5.2 percent from 5.6 percent in September. Evidence that the economy has continued to slow down during the last quarter o f 2008 is confirmed by latest figures indicating that both tourist arrivals and earnings in November experienced negative growth when comparing 2008 to 2007. Textiles and apparel orders also slowed substantially in the run- up to the 2008 Christmas seasonand are down sharply for the first months of 2009. 10. Far from immunizing Mauritius from the global downturn, recent structural reforms that have increased the economy's wealth generation capacity have also increased its vulnerability to external shocks. As a result, a deeper and more prolonged slowdown in the world economy can reduce prospects for domestic growth substantially and produce significant negative fiscal implications. Under plausible risk scenarios, fiscal revenues could be affected to such an extent that the Government's ability to continue implementation of its reform program (or to avoid policy reversals in some areas such as trade liberalization) would be threatened. Inthis context, extra resources provided by the DDO component of this proposed operation would help smooth the adjustment and sustain the Government reform program, which the Bankhas been supportingover the last three years through the DPL series. As a mode o f illustration, if government spending for 2010 and 20llwould remain as projected in the current baseline scenario (Table 4), staff calculations indicate that a reduction of 1percent in GDP growth per year would require additional financing o f approximately 1percent o f GDP over a 2-year period. 11. The external account also poses important risks to the economy. Investment concentrated in cyclical sectors such as tourism, apparel, and real estate development, including hotels and luxury villas marketed to foreigners have played a key role in the recent economic upswing in Mauritius. Net foreign savings have financed a substantial share of the increase in investment, with a combination o f FDI and portfolio capital offsetting current account deficits of 7-8 percent of GDP (Table 2). Though both FDIand portfolio inflows are expected to remain important sources o f financing in the long term, they are highly vulnerable to cyclical downturns. As a result, the current account is expected to tighten over the next 12-18 months and drawing down of reserves to play an important role in financing. Lower oil prices will contribute to the narrowing, but some adjustment to domestic absorptionwill also be required. Financial intermediation was anotable exception onthe supply side, registering 11.O percent growth y-0-y inQ3. Onthe demandside, only exportsappearedto defy the trend in43, unexpectedly surging by 7.2 percent. However, other data belie this statistic: bothoutput and employment inexport-oriented firms declinedin4 3 and the export figure is likely to be reviseddown. 4 Table2: Balanceof Payments US$ millions 06107 07108 08109 09/10 CA net of grants -552 -651 -635 -468 Official grants 10 102 125 75 Official lending 70 70 70 70 FDI 223 374 200 100 Portfolio investment 299 -40 -75 -50 Change inreserves 206 614 -315 -273 Memo item: CA as % of GDP -8.1 -7.5 -5.3 -3.8 Source: Bankof Mauritius and staff calculations: Note: Columns do not add in06/07 and 07/08 because of errors and omissions. 12. Although FDI inflows represent long term strategic commitments and are less volatile (in addition to which any decline would be partly offset by lower imports) portfolio inflows are less benign. Indeed, cumulative net investment by foreigners in the Mauritian stock exchange was over US$200 million in 2008.8 So far there has not been any disorderly withdrawal, but the SEMDEX i s down around 50 percent from its peak in February 2008 and a further decline or adverse speculation about the rupee could trigger a rushfor the exit. A further vulnerability is a relatively large stock of short term foreign liabilities which needs to be rolled over (Table 3). Recent data indicate that around half the current account deficit has been financed by an accumulation of short term liabilities. While explicit acknowledgement of such risk factors i s important to provide a complete picture, it i s important to stress that the D D O component of the operation i s not intended for Balance of Payments support. Section IV o f the Project Document provides a discussion of the country relations with the IMF and possible access to financial instruments and associated resources incase of need. 2006107 2007108 2008109 2009110 Totalfinancingrequirement 3,237 4,541 4,597 4,615 - ST debt 2,804 3,719 3,896 4,048 - LT debt repayment 179 131 130 124 - Portfolio outflow -299 40 75 50 - Current accountdeficit 542 549 496 393 I Memofinancing (% item: Total GDP) 47.7 52.5 48.5 44.3 * Bank of Mauritius, Monthly Bulletin (Nov. 2008), Table 32b. Cumulative net inflows to the stock market since 1994total Rs.6.8 billionor around$220 million. The current value might be greater or less than this figure, thoughwould almostcertainly be less under conditions which triggered a mass liquidation of positions. 5 B. MACROECONOMIC ANDDEBTSUSTAINABILITY OUTLOOK 13. The near term outlook is both unfavorable and uncertain. The baseline forecast anticipates GDP growth averaging around 4.0 percent, a full 2 percentage points less than what was expected a year ago (Table 4). As the world economy continues to soften, the 4 percent forecast could be considered an upper-bound and significant downside risks are looming. If the global slowdown turns out to be more severe and long lasting than expected, a growth rate inthe 2 to 3 percent i s possible. Exports are expected to weaken in line with demand in trading partners, with aggressive price competition likely impacting further on revenues and profitability. As discussed above, retrenchment of the capital account i s expected to force a narrowing of the current account and depress domestic spending, especially fixed capital formation. The rupee's recent depreciation may be a harbinger of the adjustmentto come. 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10111 est, _ _ _ _ _ _ _ _ _ _ _ _ _ proj _ _ _ _ _ _ _ _ _ _ _ _ Real GDP growth (a) 3.2 4.7 4.6 3.6 4.7 5.3 4.1 3.9 4.8 Real GNFS exports growth(%) -8.0 -2.1 5.1 8.0 4.7 5.4 1.9 2.3 5.2 Gross nationalsavings(% GDP) 26.3 23.8 19.7 19.1 19.8 20.6 17.8 18.5 19.1 Gross domestic investment (% GDP) 22.7 24.0 23.3 24.6 26.8 25.1 23.1 22.3 22.4 CPI inflation (avg) (%) 5.1 3.9 5.6 5.1 10.7 9.5 9.0 7.2 6.0 Terms of trade (% change) 1.0 -5.3 -7.0 -7.7 -3.4 -6.4 -1.7 2.2 2.2 CA balance(% GDP) 2.6 1.1 -3.5 -5.6 -8.0 -7.5 -5.3 -3.8 -3.3 Realexchange rate (% change) -0.8 -3 -5.5 0.6 -2.8 7.1 -3.3 -3.5 -3.5 FX reserves (mo. of GNFS imports) 5.7 5.4 4.6 4.7 5.6 5.3 4.3 4.1 4.3 14. Growth i s expected to revert towards the country's potential of around 5-6 percent Figure3: Distribution of average per by 2010/11 provided that the global crisis capita GDP growth, 1984-2004 starts to ease. Mauritius enjoys strong Percent leadership, a high degree of social cohesion, 40 robust institutions and a tradition of 35 7 -30 pragmatic economic management, all of E 25 which augur well for a continuation o f the 20 ' superior performance of the past quarter century. The June 2008 budget and additional 10 stimulus measures in December signaled the 5 0 Government's resolve to press ahead with structural reforms. From the beginning of the reform cycle, actual out-turns have surpassed expectations and even with the depressed out- performance. 6 15. Raising long term, potential growth above 5-6 percent will require addressing widespread human capital and infrastructure constraints. Important initiatives, including several major infrastructure projects and a recently published draft education strategy are under consideration, but are still at the planning stage. Thus, it would be premature to anticipate a stronger result. Finally, Figure 3, reproduced from previous DPLs and the CEM, reminds that sustaining significantly higher long term growth would represent a remarkable achievement. The figure shows two distributions of average growth over the 20 year period, 1984-2004for all countries (141) with data available and a smaller number (14) whose per capita income in 1984 was near where Mauritius i s today. The mean o f both distributions i s around 1.5 percent. Low, middle and high indicate the outcomes of three scenarios prepared for the CEM. Even the low case, 3.2 percent average per capita growth, would be significantly above the unconditional mean of either distribution. Debtsustainability 16. During the 1990s and early 2000s, slower growth and eroding trade taxes fueled growing deficits and a progressive rise inpublic debt to around 70 percent o f GDP, most of it domestic and short term, contributing to significant interest rate and refinancing risks. However, since 2005/06 a concerted effort to restore fiscal discipline has succeeded in reversing the upward trend.g The establishment o f a Debt Management Unit in the Ministry of Finance, preparation of a debt management strategy and recent passage of a Debt Management Act 2008 all underscore the Government's firm intentions to continue reducing the debt burden. Infact, the law provides for a gradual reduction inpublic sector debt to around 50% of GDPby 2013. 17. The IMF staff's baseline scenario presented in the 2008 Article IV report anticipated debt would continue to trend down on the assumption of continuing reforms (see last row inTable 5). A slower growth scenario preparedby the Fund calculated that a permanent, one quarter standard deviation shock applied to: (i) the real interest rate; (ii) growth; (iii) primary balance; or (iv) a one-time real depreciation o f 30 percent, would the increase the debt-to-GDP trajectory to about 80 percent by 2011/2012. Notably, the new debt law provides explicitly for a relaxation of mandated debt ceilings in the case of an economic slowdown. Note that the 2007/08 budget also discontinued a ConsolidatedDebt Sinking Fund, reducing both the liability and asset sides of the balancesheetby aroundRs.6 billionor 2.5 percentof GDP.Earlier data in Table 5 havebeenadjusted accordingly. 7 Table 5: Fiscal framework Percent 04/05 05/06 06/07 07/08 08/09 09/10 10111 Total revenues and grants 19.8 20.0 19.2 20.3 20.8 20.3 20.1 Total revenues 19.6 19.8 19.1 19.1 19.3 19.6 19.5 Grants 0.3 0.2 0.1 1.2 1.5 0.7 0.6 Current expenditures 20.9 21.4 20.1 20.3 21.1 21.4 20.3 Interest 3.9 3.8 4.1 4.8 4.0 4.5 3.8 Capital exp. and net lending 3.9 3.9 3.4 3.9 3.3 3.2 3.3 Budget balance -5.0 -5.3 -4.3 -3.8 -3.6 -4.4 -3.4 Debt/GDP 69.6 68.8 63.0 61.00 58.7 59.9 56.6 I Memo item: IMFdebt/GDPprojection" I 69.6 68.8 61.3 59.5 56.1 53.8 51.7 I Source: MOFEE and World Bank staff calculations; Note I/- IMF 2008Article IV Staff Report, Table 1 p. 32 I, c. IMPACT OF THESTRUCTURAL REFORMS 18. It would be premature to attempt a definitive assessment of the reform program since it will take more time for a clear picture to emerge. At the macroeconomic level, the early indications are positive. Table 6 compares performance in the two years prior to beginning the reforms (June 2006) with the two years after. Output growth accelerated 2004-05 2007-08 from 3.5 percent to 6.2 percent, while private GDP growth 3.5 6.2 investment more than doubled from 8.0 - Private investment 8.0 17.7 percent to 17.7 percent and FDI surged from - Exports 5.1 3.8 around Rs 2 billlion in 2003 to more than Rs - Services 8.7 14.4 11billion in2008. Unemployment rate which FDI(% GDP) 1.3 4.2 had been on the rising trend for over a decade Employment 1.3 2.4 had constantly been reduced since 2006. - Male 1.7 1.6 Though exports overall slowed, services - Female 0.5 4.1 exports were very strong. Finally, TFP growth" -0.2 0.1 productivity growth improved marginally, though it remains very low, possibly because new investments have not yet been fully brought on line. 19. Interms of structure, results are harder to discern. Sustaining rapid growth inthe longer term will require diversifying into new emerging sectors such as seafood, knowledge hub, financial services, IT, call centers and Business Process Outsourcing (BPO), with the potential to create both highvalue added, knowledge based activities and significant amounts of low-to-moderate skilled employment." Growth acceleration so far ?For instance, the Board of Investment has spoken of as many as 25,000 ITjobs, mainly call centers and BPO by 2010. (See, 1'Express (August 15,2007), "Le BO1parle de 25 000 employes dans le secteur des Tics, d'ici 2010." The target is optimistic, but indicative of the sector's potential. Since 2005, BPO 8 i s largely attributable to the traditional economy, but signs of emerging new competitive strengths are clear. The severe downsizing o f textiles and apparel as a result o f the loss of trade preferences was accompanied b y diversification into new markets and migration to higher value added products. New manufacturing subsectors in the sugar cane cluster (ethanol, refined sugar) and seafood are also promising. In services, tourism - hotels and restaurants, travel and transport - remains by far the most important source of exports and employment growth, though financial services md ITES have also achieved significant growth. 20. In terms of promoting a more Figure4: Apparel exports innovative, entrepreneurial culture, it is Rs. billions likewise too early to draw conclusions. However, Figure 4 presents some ............................................. encouraging evidence, breaking apparel ................................. exports according to tariff lines into traditional (old product lines to old markets) and new (new products and/or new markets) ones. Traditional exports - defined as any tariff lines which were exported in 2000 - faced increasing competition in their 2000 2001 2002 2003 2004 2005 2006 2007 traditional markets and declined steadily. 10oldproducttooldmarket newproduct Eloldproductto newmarket 1 However, new products and new markets gained strongly, which more than offset the losses, particularly in2006-07. 21. In conclusion there is room for cautious optimism about the impact the Government's program i s having. However, more time will be needed to see whether the early gains will be sustained, and whether the impetus for reforms will be maintained in areas where progress has been difficult. These include the further structuring o f public enterprises, the implementation of the civil service reform and the improvement if the quality of sectoral strategies and their links to the budget. THE GOVERNMENTPROGRAM 22. The Government came to power with a clear vision of restoring growth through such measures as cutting red tape, improving the investment climate, empowering economic agents, supporting SMEs, liberalizing air access, while at the same time providing specific support to various existing and new sectors." After the election, a number of working groups were set up to review existing policies and look for ways to streamline and simplify the regulatory framework. As they probed systematically, policy makers recognized an array of interrelated problems to be addressed, chief among them: employment has been growing at over 25 percent annually. Meanwhile, doubling tourist arrivals by 2015 could generate similar job growth inthe hospitality sector. I'See" Setting the Stage for Robust Growth," (statement by Hon. Ramakrishna Sithanen, Deputy Prime Minister, Minister of Finance and Economic Development at the National Assembly on 30 August 2005). 9 e Distorted incentives and inefficient resource allocation: Inherent biases in the tax system as well as burdensome controls and regulations hindered efficient resource allocation (and reallocation), innovation andrisk taking. 0 Poor quality and costly services: Poor quality and expensive utilities and services such as transport and communications lowered productivity and undermined the competitiveness of both existing and new sectors. 0 Low educational attainment: Capacity constraints in the education system, high attrition rates and outmoded curricula were contributing factors to low basic languages, math and science proficiency and a shortage of workers and professionals with world-class skills. 0 Lax fiscal management: A failure to adjust to slower growth and declining trade taxes since the late 1990sput the public finances under increasing stress, with public debt on an unsustainable trajectory. 0 Public sector inefficiency: Complex and bureaucratic regulations, poorly designed and executed social programs, weak procurement practices and loss-making parastatals underminedefficiency and diverted resources from priority needs. 23. By the time the Finance Minister introduced his first budget in June 2006, the Government's views had evolved to the point of advocating, "wholesale change and adoption of a totally new paradigm.. .. It i s time for the nation to embrace radical change and build a new, open and competitive service platform that is fully integrated into the global economy.. ..,312 The budget speech announced forty major reforms structured around four mainpillars: A. Fiscal Consolidation andPublic Sector Efficiency B. ImprovingTrade Competitiveness C. Improvingthe Investment Climate D. Wideningthe circle of opportunity through participation, social inclusionand sustainability A. Fiscal Consolidation and Public Sector Efficiency 24. Macroeconomic stability i s a necessary cornerstone of integration into the global economy. "Hence the imperative of pursuing sound macroeconomic policies and putting public finance on a solid footing. Investors must have the confidence that the deficit and debt will be brought down to sustainable levels and that Government will become lean and trim."'3 Fiscal rules were adopted for the FY2006/07 budget: (i) golden rule that the Government should borrow only for investment and not for recurrent expenditure; and (ii) the sustainable investment rule that net public debt as a proportion of GDP should be on a downward track.14Sector Ministry Support Teams (SMSTs) were set up inthe Ministry o f l2 Government of Mauritius, 2006/07 budget speech, "Securing the transition: from trade preferences to ''lobalcompetition," (June 2006), par. 9, 13. Government of Mauritius 2005, "Setting the stage for robust growth," par. 158. l4 However, that classification of expenditure betweencapital and recurrent is to some extent arbitrary. For instance, all expenditure under the Empowerment Programmehas been charged to the capital budget. Roughly 90 percent of spending on health and education is classed as recurrent spending. 10 Finance and Economic Empowerment (MOFEE)" to work with sector Ministries on budget preparation, and audit committees and "cut waste" squads were put in place to monitor execution and look for cost savings, especially in the capital budget. Numerous recommendations to improve efficiency were put forward based on their investigations. 25. The 2006107 budget demonstrated a serious commitment to reversing the upward trend indeficits and debt. A sharp reduction inprimary spending by 2 percent of GDP far exceeded the target of 0.5 percent (a DPLl prior action), though infact only rule (ii) was achieved as total borrowing (4.3 percent of GDP) exceeded the capital budget (3.4 percent of GDP).16According to Bank staff projections, this will remain the case in the medium term. Nevertheless, the Government's MediumTerm Fiscal Framework has programmed a reduction in the debt to GDP ratio to below Europe's Maastricht criterion this year (Table 5) and the new DebtManagement Act should reinforce the downward trend. 26. Beyond restoring fiscal balance, the public sector agenda addressed a number of important issues, including reducing distortions and increasing equity in the tax code, relinquishing discretionary powers to grant tax and duty exemptions and operationalizing the Mauritius Revenue Authority. With technical support from UNDP and IMF, an important initiative to improve public sector efficiency and effectiveness has been to modernize the budget process through adoption o f a Medium Term Expenditure Framework (MTEF) and Program Based Budget (PBB). A key PBB requirement is the development of sector strategic plans, currently being prepared with assistance from the Development Partners. Rounding out the public sector agenda are an overhaul of procurement, parastatal reform, improved debt management and civil service reform. B.Improving Trade Competitiveness 27. Over the years, an accretion of interventions and regulations had impacted negatively on trade competitiveness and impeded the flow of resources to new, potential growth sectors. The structure of incentives was biased: Toward domestic production rather than exports. Trade protection skewed returns infavor of producing for the domestic market, reducing competition and overall efficiency to the detriment of exporters. Toward existing rather than new sectors. Rigid and inflexible regulations deterred businesses from innovating or changing the skills mix of their labor force, limited entry and reducedcompetition. Toward large rather than small firms. Smaller firms were unable to take advantage of complex incentive schemes, while high compliance costs drove many SMEs into the informal sector, curtailing their access to credit, training and other benefits.l7 l5The MOFED was renamedMOFEEinAugust 2008. l6Note that rule(i) not part of the new Debt Law. is l7See World Bank 2006, "From Preferences to Global Competitiveness:Report of the Aid for Trade Mission" (processed). 11 28. The reform program addressed these problems in two ways. First, revamping incentives, eliminating the distinction between Export Processing Zone (EPZ) and non- EPZ firms18and dismantling tariff barriers (while giving firms accustomed to highlevels of effective protection an opportunity to adjust"); eliminating a 25 percent investment tax credit to remove the anti-labor bias of the tax system; dramatically lightening regulatory burdens, including by simplifying the application process for permits and licenses and substituting ex-post verification of health and safety standards for ex-ante approvals to register a business. 29. Second, developing and implementing sector strategies to reduce costs and increase competitiveness inexisting and new sectors - sugar, textiles and apparel, tourism and financial services, Information Technology (IT) and BPO, fisheries, aquaculture, land-based ocean industry and a knowledge hub. These strategies would define the vision for the sector and provide a road map for Government policy, identifying needs for resource planning and capacity building. C. Improving theInvestment Climate 30. Weak investment spending over the years, especially FDI, had eroded competitiveness. Elements of the business environment such as labor regulations, land titling and business registration procedures needed to be overhauled and Government set the goal of moving Mauritius into the top ten of the World Bank's Doing Business survey. A key element, largely addressed in the 2006/07 budget, was eliminating bureaucratic obstacles to starting a business. The Registrar of Companies was designated as a one stop focal agency for business registration and the Board of Investment converted from being an administrator of programs to a facilitator and promoter. Whereas firms previously had to obtain ex-ante fire and health certificates before startingoperations, now they can begin operating subject to ex-post verification of adherence to published guidelines. Other measures include merging development and building permits and reducing the number of distinct activity clusters from ten to three. 31. A perennial obstacle to operating a business inMauritius hadbeen the shortage of human capital. Entry of foreign workers was eased to overcome skill shortages by combining residence and work permits into a single occupation permit to be issued within no more than three days for workers earning above preset thresholds. Provisions for spouses to work as professionals and for conversion o f tourist to business visas were also liberalized. An important aspect of opening the economy was amending the Law Practitioners' Act to allow entry o f international law firms. At the same time, measures were taken to encourage the returnof the Mauritian diaspora to work inMauritius. 32. Central to improving the investment climate was implementation of labor market reforms aimed at increasing flexibility, tying wages more closely to productivity by Except for less stringent labor regulations covering EPZproducers to be addressed inthe context o f more general labor reform. A decision to increase adjustment assistance and slow the pace o f tariff reductions required deferring an indicative trigger on tariff reform from DPL2 to DPL3.See paras 86-90. 12 replacing the tripartite wage setting mechanism with a National Pay Council, disbanding the current systemof Remuneration Orders and relaxing the need to seek approval for lay- offs. In addition, land administration and management needed to be modernized through the introduction of a cadastre system and establishment of transparent and predictable procedures for transfers of ownership and usage. 33. Finally, infrastructure investments were needed to alleviate road congestion and increase capacity in the port, airport, and power sector at the same time as enhancing regulatory capacity. D. Wideningthe circleof opportunitythroughparticipation, social inclusion,and sustainability 34. The President's speech to the National Assembly put forward a program that was equally committed to equity and social justice on the one hand and economic efficiency on the other. Widening the circle of opportunity implied, "reforms to the national economic structure that will open the doors of economic opportunities to the majority of the population. This will in turn contribute to mobilizing the overall competitive advantage of the whole population to create more wealth."20 Thus, the transition to higher value added services would require both optimizing the use o f available human resources and providing adequate social safety nets for the vulnerable; increasing access to education and (re)training, land and financing to start a business, but at the same time protecting the vulnerable by channelling social support to the truly needy and implementing a comprehensive strategy for poverty alleviation and ensuring environmental and pension sustainability. 35. Many initiatives in these areas were incorporated into an Empowerment Program with a budget of Mauritius Rupees (Rs.) 5 billion over five years. The program encompassed seven activities: (i) landfor social housing; (ii) for small entrepreneurs; land (iii)workfare programemphasizingtrainingandre-skilling; (iv)specialprograms for a unemployed women; (v) tourist villages; (vi) assistance for outsourcing; and (vii) support for development of new entrepreneurs and SMEs. 36. Beyond these measures, the goal would be to expand opportunities in education, improve teacher training and supervision, modernize the curriculum to feature more critical thinking and mathematics, science and language training, revitalize the Zones d'Education Prioritaires (ZEP) schools with provision of supportive services (food, health, and remedial teachers), active community participation, and expand tertiary education. DPL2 and DPL3 triggers have supported preparationof a national education strategy. 37. Government planned also to reform the administration of social safety nets to strengthen financial viability and focus support on the truly needy, replacing consumer price subsidies with conditional cash transfers to the most needy, improving access to high quality health care, and reforming the pension system to ensure long term sustainability. Conscious of environmental vulnerabilities, particularly in light of the projected rise in 2oGovernment programme,par. 42. 13 tourist arrivals to 2 million by 2015, a new National Environment Strategy would be developed and implemented to protect the nation's environmental assets. IV. BANK SUPPORTTO THE GOVERNMENT'S PROGRAM A. LINKTo THECOUNTRYPARTNERSHIP STRATEGY 38. The DPL and the latest Country Partnership Strategy (CPS) (2007-13) are closely linked to the Government's program. The two were prepared concurrently and presented to the Board within a few weeks of each other. The Government's reform program was itself coming into focus at the same time with Bank support. By design, all three share: 0 Common objectives of facilitating adjustment to external shocks and transitioning to a more skill and knowledge based economy while safeguarding the interests of vulnerable groups. 0 A common diagnostic pinpointing constraints to growth and diversification and identifyingreforms neededto rekindle economic progress. Consistent matrices structured around the four pillars of (i) sector reform, public (ii) competitiveness, (iii) investmentclimateand(iv)wideningthecircle trade the of opportunity. 39. Table 7 illustrates the close connection between DPL and CPS outcomes. The Bank and Government both envisage the DPL as a main instrument for olicy dialog, a role reaffirmed during the past two Annual Business Planning meetings.` The DPL has also played a useful role in harmonizing and coordinating external support in the donor community. 21The CPS calls for anannualbusinessplanningmeetingto agree onthe Bank'sprogramfor the coming year. 14 Table7: DPL And CPS Outcomes Compared Pillar *. I DPL outcomes CPS outcomes *Reduction inprimary spending as percent performance and of GDP, improve public sector efficiency, *Reduction of tax expenditure as percent of ,Reduction intax expenditures. GDP. ,Better allocation of budget according to presetceilings. *Revenue stabilization at not less than 19 percent o f GDP. *Improvement infinancial performance o f parastatals net o f subsidies. B. Improvetrade ,Tariff reductions being implemented. competitiveness *Elimination o f substantially all tariffs (95 percent of tariff lines zero rated). ,Unified incentives for EPZ, non-EPZ firms. ,Increased production of tradables; increasedfisheries exports; increased exports to Common Marketfor Eastern and SouthernAfrica, Southern African Develoument Communitv. C. Improve the *Improved ranking inDoing Business ,Reduction incost of doing business; one- investment climate survey. stop shop for business registration; *Increased investment inemerging sectors revision of investment legislation. *Reduction intime to start a business. *Increased registration of SMEs *Increased number of work andresidency ,System to facilitate entry o f foreign uermits. workers; increasedskills availability. D.Widen the circle *Increased registration of SMEs. ,Elimination of bias against S M E s as of opportunity measured by increased number of new through *Increased primary and secondary school SMEs registered. participation, completion rates. social inclusion *Increase inlow income families receiving ,Improvement in educational outcomes. andsustainability housing. ,Protection programs reach the needy. *Training provided to unemployed workers, ,Redeployment and training programs in unemployed women finding jobs; place for unemployed and retrenched completed tourist villages. workers with a special emphasis on women B. COLLABORATIONWITH IMFANDOTHER DONORS 40. A close collaborationhas developed with Mauritius' other DevelopmentPartners - the European Commission (EC), Agence Francaise de DCveloppement (AFD), African Development Bank (AfDB) and UNDP. The Bank and IMF also collaborate closely. The Government urged all external partners to harmonize their support and the DPL has been instrumental in accommodating this request through joint preparation and appraisal missions and coordination of Technical Assistance (TA) and other activities. However, it i s the Government which deserves the lions share of any credit for harmonization and 15 coordination which could not have been achieved except in the framework of a strongly owned, country-led program. 41. InternationalMonetary Fund: Mauritius has no formal program with the IMF, though relations are close. Over the years, the Fund has carried out work on sources of growth, labor markets, inflation, exchange rates, and monetary and fiscal policy. More recently, the Fiscal Affairs Department (FAD) has provided key support in the area of fiscal adjustment and budget reform. Bank and Fund staff work closely together and exchange views frequently. In 2007, they jointly prepared a Financial Sector Assessment Program (FSAP) update and are continuing together on a FSAP. Over the past three years, (annual) Article IV reports have given cautious, but positive appraisals of the Government's program and macro management as have assessment letters provided for the DPL series. Both the DPL series and the country dialog in general have benefited greatly from the IMF's analysis o f macroeconomic performance and debt sustainability. 42. Key potential IMF's instruments to provide financial support are: (i) traditional stand-by arrangements; and (ii)recently created Short-Term Liquidity Facility (STLF). The latter was announced in October 2008 and, upon IMF confirmation, Mauritius could access up to 500 percent of its quota in the institution.22This would amount to a total of approximately US$760 million dollars, which would have to be repaid in less than one year. 43. European Commission: The EC has been present in Mauritius for more than three decades. Under the ninth European Development Fund (EDF) which spanned the period 2002-07 the focal areas for E C intervention were environment, especially wastewater, and poverty reduction for the most vulnerable marginalized groups which are not benefiting from Mauritius' development success. Since 2006 the EC has also supported the restructuring of the sugar industry. Two sector budget supports (SBS) are nearing completion in2008, namely inthe wastewater sector for a total of 38 million and inthe sugar sector for 11million. These havefully disbursed. 44. In2007 the EC started its first general budget support program in support of the economic reform program of Mauritius. To date an amount of 83.5 million from the EDF and 128 million from the E C sugar accompanying measures have been earmarked for general budget support for the period 2007-2013, of which 52 Mhave been disbursed as at December 2008. 45. TheEC General Budget Support (GBS), beinggrant funded, differs however from the DPL approach in that it: (i) bases support on outcome-based indicators, rather than actions as specified by DPL triggers; (ii) has a different time horizon from the DPL; and (iii)maintains a special interest in sugar sector adjustment and social issues inthe adjustment process. The disbursement of E C funds i s based on fixed and variable ** To beeligible to the STLF, countries musthave a track record of sound policies, access to capital markets and sustainable debt burdens (the IMF's standarddebt sustainability analysis should indicate ahigh probability that bothpublic and private debt will remain sustainable). Policies should have been assessed very positively by the I M F s most recentcountry assessment. Financing is made available without the standardphasingor conditions of more traditional IMFarrangements. 16 tranches, the former being disbursed against general and specific conditions and the latter against the achievement of specific performance indicators. However, EC performance indicators are identified and formulated in such a way as to reinforce DPL triggers wherever possible. 46. Inaddition to budget support, in2007/08 the EC has funded a Public Expenditure and Financial Accountability (PEFA) Assessment, and funded technical assistance to assist the Government of Mauritius to prepare a long term energy policy and a long term education sector strategy. The latter was peer reviewed by both E C and WB (with co- financing from UNDP) education experts. The Bank and E C collaborated closely on a joint diagnostic and results matrix for the Bank's CPS and the European Union's (EU) tenth EDFCountry Strategy Paper and bothparticipated inthe Annual Business Planning exercise for the current year. The EC also participates inthe DPL missions to evaluate the progress inthe economic reform program. 47. Agence FranGaise de Dkveloppement:AFD has opened an office inMauritius in line with the Document Cadre de Partenariat (DCP) signed on April 2, 2007 between the Mauritian and French authorities. AFD has supported Mauritius in its transition to higher productivity and competitiveness and greater integration in the world economy through budget support and TA. A F D ' s focus is on clusters together with public entities and/or the private sector, as well as on financing infrastructure to enhance the attractiveness of the country to foreign investors. Sustainable development and the implementation of the "Maurice, Ile Durable" program i s a key underlyingconcern o f AFD inMauritius. AFD i s providing cofinancing for the reform program and i s particularly interested in the assessment of social and environmental impacts of the economic reforms and the capacity of the Government to mitigate them. 48. African Development Bank: The AfDB intends to increase its portfolio in Mauritius and expand its presence in the field to enhance its effectiveness. AfDB's assistance to Mauritius comprises three pillars: (i) Sustaining Infrastructure Development: Two projects were recently launched, the Northern Plains Irrigation Project (agriculture) and the Plain Wilhems Sewerage Project (water & sanitation); (ii) Promoting Private Sector Growth: Only indirect support to the private sector has been provided through reform support and involvement insome regional investment funds that selected Mauritius as a base; however, the AfDB intends to engage more aggressively with the private sector in Mauritius, and; (iii)Undertaking Economic and Sector Work: Several non-lending services were provided or launched, yet only one was finalized - the support to the development of the transport strategy. In coordination with the World Bank, two M I C (Middle-Income Country) grants will support the development of sector strategies in Health and Water and Sanitation (sewerage). 49. Current collaboration with the World Bank and other partners includes: the elaboration of the African Peer Review Mechanism (APRM), for which Mauritius i s one of the four pilot cases under New Partnership for Africa's Development and support to COMESA Fund which Mauritius currently chairs. A close working relationship has developed with the World Bank during preparation and the appraisal of the DPL series and further collaboration i s expected intransport and economic and sector work activities. 17 50. United Nations Development Program (UNDP): As a member of the United Nations (UN) family, the Bank liaises closely with the local UNDP office. Its current Country Program (2009-2011) totals US$ 16.5 million. The UNDP i s engaged in a number o f areas which directly support the DPL. Key areas are: (i) strategic plans at the ministry-department level, Performance-Based Budgeting and Performance Management System, and Social Register of Mauritius (ii) social inclusion through the Empowerment Programme with especial attention for the island o f Rodrigues, the ZEP educational programme and HIV/AIDS; (iii)environment protection, energy and management o f natural resources, human rights and governance. C. RELATIONTo OTHERBANKOPERATIONS 51. O n January 27, 2009, the World Bank Board approved the Mauritius Economic Transition (Technical Assistance) Project (METAP). This i s a US$18 million project with three components: business facilitation, public enterprise reform, and utility regulation & public and private partnerships. The objectives o f strengthening the investment climate and supporting public enterprise reform are well aligned with DPL efforts, as the technical assistance provided under METAP can play an important role in addressing reform implementation bottlenecks. An infrastructure project i s also beingprepared and due to be presented to the Board in FYO9. Two other projects focusing on: (i) SME development and (ii) eradication are under preparation for delivery in FY10. All four projects poverty have a significant policy content and present opportunities to broaden the coverage of future DPLs in policy areas such as poverty reduction and public enterprise reform. The DPL is expected to continue to underpin the strategic coherence of the Bank's program and coordinate the dialog with the Government andwithin the country team. D. LESSONS LEARNED 52. The DPL series affords important lessons with regard to: (i)ownership; (ii) teamwork and collaboration; (iii)flexibility; (iv) alignment with the Government's priorities; and (v) mutualunderstanding and respect. 53. Ownership:No doubt ownership has been the single most important factor inthe operation's success. From the outset, the Government has had a strong sense of direction about its reform program and even a strategy for availing of technical and financial resources from the Development Community. O f course, ownership cuts both ways. The Development Partners shared the Government's vision and thus were willing to accept its leadership. 54. Teamwork: A close collaboration developed as both sides worked together to diagnose the constraints to growth and articulate a strategy to overcome them. This subsequentlybecame the framework for the DPL program. Open and frank dialog created a strong program with buy-in and trust on all sides. As a result, the DPL has been able to adhere closely to its initial structure even as conditions have changed. 18 55. Alignment with the Government's priorities: The Government's agenda is broad and its priorities have inevitably evolved over time. Occasionally this has created tension when the DPL could not incorporate every current interest. Nevertheless, careful design of the operation and linkage to the core reform program have kept the DPL relevant and even provided a valuable counterweight to short termpolicy exigency. 56. Flexibility: B y its nature, a programmatic operation entails a high degree of precommitment. The DPLhas contributed a useful discipline, but also, where appropriate, trusted in the Government's judgment and good faith rather than insisting on an overly rigid interpretation of the triggers. The second year of the operation saw significant slippage in four of seven triggers - (i) tariff; (ii) parastatal reform; (iii) Information and Communications Technology Authority (ICTA) review; and (iv) the education strategy - but extended the benefit of the doubt and interpreted the outcome as political risk mitigation rather than a wavering o f commitment. In the third year, the reform program regained its momentum. Substituting trust for threats has fostered a more open and effective collaboration. 57. Mutual understandingand respect: Both sides have been able to respect each other's needs and objectives. Development Partners deferred to the Government's assessment of political economy costs and benefits in such areas as trade policy and parastatal reform. For its part, the Government accepted the Development Partners could not commit to areas where they had not done due diligence or where there were possible reputationalrisks or conflicts with other obligations of international organizations. E. ANALYTICALUNDERPINNINGS 58. Duringrecent years, the Bank has carried out extensive Analytical and Advisory Assistance (AAA) work, including a CEM, an Investment Climate Assessment (ICA), an Aid for Trade (AFT) TA mission, a labor market study, and an MTEFreview. Mauritius was included inthe Doing Business survey in2006 and 2007. The IMFhas been engaged inan extensive dialog on fiscal issues, including a recent FADmission to look at options for fiscal consolidation in the context of the Government's reform program. Note that the AAA described inthis section was either `on demand' or happened to be closely aligned with the reform plan. Other work by the Bank and other Development Partners which have been less immediately aTflicable may have an even greater eventual impact by planting the seeds of new ideas. 59. The various components o f the Government's reform strategy contained in the program matrix inAnnex 2 are shown inTable 8, with links to relevant AAA. While this underlines the quality and effectiveness of the dialog, the program remains very much the Government's own initiative, as evidenced by elements in the table which have not formed part of the recent dialog. The remainder of this section describes the main elements of AAA inmore detail and their relationship to the reform program. 23 Included in this category would be work by the Bank on social safety nets (2001), education (2004), and science and technology policy (2006). 19 Table 8: Analyticalsupportfor the Government'sreformprogram Recommendations AAA Year1 Year2 Year3 Consolidatefiscal performance CEM, FAD, AFT X X X Eliminatecustomsduties (duty free island) AFT X X X Unify Corporate IncomeTax at single rate FAD X X X ReformPersonalIncomeTax to increasefairness X Institute Nationalresidentialpropertytax scheme X Reducetax expenditures FAD X Abolish ministerialdiscretionto remit taxes and duties FAD X Replaceconsumersubsidies with cash transfers FAD X Reformparastatalsector X X 1 Passnew ProcurementAct X StrengthenIndependentCommissionAgainst Cormution CEM I X Cut telecommunications costs CEM, AFT X X X Liberalize air access AFT X Unify EPZ andnon-EPZregimes AFT X X Simplify businessregistrationprocedures ICA, AFT, CEM I Initiate largescale retrainingfor redundant workers X X X Improvelabor market flexibility by reducingseparation costs CEM,UM X Simplify wage setting mechanism. CEM. UM Decideon opening Cargo HandlingCorporationLimited (CHCL) to strategic partner X X Formulateand implement nationaleducation strategy CEM X Decontroladministeredprices FAD X Easeimmigrationrestrictionsandwork permits CEM X Simplify industrialincentives AFT, CEM X Pass insolvencybill X Developcadastre/landmanagement system Implementcivil servicereforms CEM Developandimplement sector strategies X X Improveport management andrestructureCHCL AFT Reformnationaleducationsystem CEM X Enhancesupport to SMEs AFT X Reformsocial safety nets CEM, AFT X Move forward with MTEFimplementation ICEM,MTEF,FAD I X x x Note: CEM- Country Economic Memorandum; FAD IMF Fiscal Affairs Department report; AFT Aidfor - - Trade report; UM- Unemployment in Mauritius; ICA - Investment ClimateAssessment; MTEF - Medium TermExpenditure Framework: a Mid-term review CountryEconomicMemorandum:ManagingChangein a ChangingWorld 60. The 2006 Country Economic Memorandum - Mauritius' first since 1995 - focused on the structural transition to a higher value added, knowledge based economy and recommended policy reforms inthree key areas: (i) sector reform; (ii) labor public the market and human capital formation; and (iii)science and technology policy for a knowledge based economy. It carried an important message to the new Government about budget modernization (MTEFPBB) and the need to redefine the role o f Government in a "post regulatory" world. The C E M also advocated deregulating the labor market and placing more emphasis on education as well as easing restrictions on work permits, all o f which are major themes in the reform program. In addition to its direct impact, draft versions of the C E M provided important inputs to other Bank M A work on the Investment Climate and AFT. Preliminary results were discussed with the Government in 20 February 2006 and the green cover version delivered inMay. The grey cover version was finalized inJanuary 2007. InvestmentClimate Assessment 61. An ICA was carried out jointly with the Board of Investment in early 2005. The survey of 285 firms in different sectors of the economy generated important insights with regard to firm's productivity, costs o f doing business, the regulatory environment, the labor market and more. Amongst the major business climate constraints perceived by f i r m s were delays and cost of business registration procedures associated with securing trade licenses, operating permits, development and building permits, and land titling as well as skill shortages. All these areas subsequently featured in the reform program. Preliminary findings were discussed with the Government in July 2005, after which an Investment Climate Committee was established, chaired by the Prime Minister. After consultations with Government and private sector counterparts, the ICA was finalized in April 2006. A second ICA is currently underway. Aid for Trade Report: FromPreferencesto GlobalCompetitiveness 62. At the Government's request, an "Aid for Trade" mission visited Mauritius in early 2006 to assess the country's trade competitiveness, facilitate the adjustment from protection to global competitiveness and link to the international community's AFT initiative. The project was demand driven and quickly built up an excellent and highly influential dialog at boththe technical and policy levels. Its work underpinnedmany of the ideas and even some of the language o f the reform program with regard to improving incentives, simplifying the regulatory environment and providing transitional support to workers and firms.24The report proposed measures to strengthen competitiveness; move resources out of declining and into dynamically growing sectors; improve the quality and cost of input services such as telecommunications, air transport, and cargo handling; and strengthen transitional support for displaced workers. Findings were presented to the Ministry of Finance in mid-April and subsequently disseminated more widely across the Government. A final report was submittedinMay 2006, prior to the 2006/07 budget. UnemploymentinMauritius 63. The study stemmed from a sharp rise in unemployment since the early 1990s. It deepened the understanding of the labor market in Mauritius by assessing the quality o f available data,25reviewing trends inlabor market indicators andprofiling the unemployed. Using household budget survey data, it assessed the impacts of distortions in the labor market and estimated returns to education. It showedthat despite risingunemployment the labor market had in many ways performed well, creating large numbers of jobs in services, particularly in small enterprises. By demonstrating widespread non-compliance 24 It bears repeatingthat this was not a matter of pushing the Bank's agenda, but rather supporting the Government as it moved inits chosendirection. 25 Recognition of methodological shortcomings inavailable data led to the conversion of the Continuous Multi PurposeHouseholdSurvey (CMPHS) to a dedicated, quarterly labor force sample survey inorder to improve the quality of labor market intelligence. 21 (particularly in the informal sector) with the cumbersome system o f minimum wage setting (Remuneration Orders), the study helped to prepare the ground for proposed labor reforms presented in the budget and supported the conclusion that labor market institutions needed to be more flexible and responsive to enable wages to adjust to productivity differences. Results were presentedto the Government inSeptember 2005. The Medium Term Expenditure Framework and Program Based Budgeting (MTEFPBB) 64. The World Bank has supported MTEF and Performance Management inMauritius since 2002 with a combination of Economic and Sector Work (ESW) and TA.26Since launching a MTEF in 2002, the Government has built core technical capacity in the MOFEE, but a "Mid-term Review'' in 2005 found that ownership and commitment were low and that many of the benefits of MTEF were not being realized. Nevertheless, this preparatory work helped to build understanding and familiarity with the underlying ideas and it was conveyed to the new Government at the first opportunity. The Government had already approached the IMF to assist with budget management and fiscal consolidation and this led naturally to the support of the MTEF and PBB as well. T w o IMF Fiscal Affairs Department TA missions have prepared detailed report and an action plan for MTEFPBB implementation. NationalEnvironmentalStrategy 65. Environmental policy has been a longstanding priority for policy makers in Mauritius. Decennial environmental strategies were prepared, with the first National Environmental Action Plan (NEAP) in 1988 and the Second National Environmental Strategy and ten year National Environmental Action Plan (NEAP2) in 1999. While NEAP2 covered the period 2000-10, there has been a recognition that environmental sustainability i s critical to the economic restructuring now underway. Accordingly, a third round of review i s currently under way. A White Paper on National Environment Policy was published in Jul 2006, outlining objectives and strategies and a framework for environmental p01icy.'~ Based on this, a new environmental strategy and action plan are now being prepared with expected completion in 2008. The white paper offers a comprehensive list of issues to be addressed, including the need to maintain biodiversity; manage land, water and coastal zone assets; control pollution; protect human health; and to pay particular regard to the special situation o f Rodrigues. 26See "Introduction of the MTEF inMauritius" (2001); "Draft report on the MTEFand results based management:M&Econsultants' mission" (2003); and"Implementing the MTEF inMauritius: A Mid-Term Review" (2005).In2003-06the Bank provideda $494,000IDFgrant (TF051274)to support capacity buildingfor MTEFimplementation. http://www.gov.mu/portal/goc/menv/files/nep-draft.pdf. 22 V. THE PROPOSEDOPERATION A. OPERATION DESCRIPTION 66. The DPL series has been structured around key elements of the Government's strategy, in particular reflecting areas where Development Partners were already engaged and/or the Government saw particular benefits to intensifying the dialog. All four pillars were intentionally incorporated into the design of the operation to underscore the breadth of the reformprogram. 67. The initial plan was to end the series with DPL3. However, acknowledging the central role which the DPL has played in supporting the reforms and coordinating the Development Partners, the Government has requested the operation be rolled over into a new series. Inlight of Mauritius' electoral cycle - the next election will take place no later than July 2010 - it was agreed to extend the current DPL series by a year with DPU, then initiate a new series (DPL5-7) to begin disbursing in January 2011. From a practical standpoint, this has required modifyingthe DPL program matrix to add indicative triggers for DPU. The DPLmatrix has also changed as DPL3 indicative triggers have been firmed up (and ina couple of cases, changed) into prior actions. It is worth emphasizingthat none of these changes have altered the thematic content of the DPL and are fully consistent with its development objectives. The full DPL program matrix i s presented below in Annex 1 and the DPL3 prior actions and DPL4 indicative triggers are highlighted in Table 9. Table ! Status of DPI iPrior Action! ative Triggers 'illar DPL3 indicative DPL3 Prior action Comments triggers triggers i. Consolidate Prepare sector Preparation of at Sector strategies have fiscal strategies for least four sector encountered delays. The performanceand 2008/09 budget. strategies for trigger has been slipped ayear improve public 2009/10 budget. to DPU. sector efficiency. Alignment of the RevisedDPL3 trigger to keep chart of accounts the DPL engagedon of the Treasury MTEFPBB andhighlight an accounting system aspect of progress which is with the being made on many fronts, Government even if sector strategic Finance Statistics planning i s behindschedule. Manual2001 and upgradingof the Borrower's financial management information systemto enable budget implementation and reportingof financial andnon- financial data, under the efforts of the Ministry of Finance and 23 Economic Empowerment ("MOFEE')), in coordinationwith the department of the Accountant General. Reduceprimary Enactmentand Reduce debt-to- DPL3 prior actionhasbeen spendingby 1.5 proclamationof GDPratio inline modifiedto be consistent with percentof GDP in the Public Debt with Public Debt Government's current 2008/09 compared ManagementAct ManagementAct approachto fiscal to FY 2005l06. 2008, which limits ceilings. management. the Borrower's public sector debt to amaximumof 60-percentof gross domestic productand providesfor public sector debt reductionto 50- percentby the end of 2013. Initiate civil Implementationof servicereform performance with performance managementpilots management inthe Borrower's pilots. civil serviceby individual line ministriesandthe Ministry of Civil Service and Administrative Reforms. Begin Begin implementationof implementationof parastatalreform the respective actionplans. parastatalreform actionplans,by the CentralWater Authority, Wastewater Management Authority, Central Electricity Board, and Sugar Planters MechanicalPool Corporation,to improve operational efficiency and servicedelivery by: (a) introducing aperformance management system, promoting staff proficiency inmultiple areas of expertise, reducingovertime andeliminating unfilled posts; (b) increasing 24 . capacity utilization of capitalequipment (i.e., vehicles, tractors), and reducingfuel and lubricating oil costs; (c) outsourcing transportand security services, cutting delivery time andcost, and reducing pilferage;and (d) improving inventory managementby reducingthe number and volumes of items carried. 3. Improvetrade Implementationof Continue competitiveness tariffreductions to implementationof be specified. the Borrower's duty free island policy by significantly reducingaverage tariff rateand number of top ratedtariff lines by the MOFEE. Reviewthe regulatory environment inthe ICT sector inline with international best practicesand changes resulting from technological convergencefor modem competitiveICT markets. z. Improvethe Introduceflexi- Introductionof a investment security inthe flexi-security climate labor market. scheme, as reflectedinthe workfare program provisions containedin section IX of the Employment RightsAct 2008. Get Cabinet approval for industryandSME strategy Get cabinet approval of insolvency legislation 25 , D. Widenthe circle Cabinet to approve Preparation and 3et Cabinet of opportunity education strategy submissionby the ipproval for a through andbegin Ministry of bullyfinanced participation, implementation. Education,Culture :ducation strategy social inclusion andHuman md actionplan, and Resourcesto .ncluding sustainability Cabinet of adraft provisionfor Educationand HumanResources HumanResources requirement. StrategyPlanthat diagnoses education sector needs, identifies objectives and priorities, and outlinesoptions, which will be costedand, together with humanresources requirements, incorporatedinto a mediumterm actionplananda fully financed, programbased budget submission. Beginpoverty mappingby CSO and introducean absolutepoverty line in order to develop a social safety net strategy for poverty reduction. 26 Box 1: Good Practice Principles on Conditionality Principle 1:Reinforce Ownership InJuly 2005, Mauritianselectedanew Government ona strongreformistplatformto revitalizethe economy, restore the public finances and broaden opportunity. The Government took office with a clear strategy for reform, much of which has subsequently been implemented inthe 2006/07, 2007/08 and 2008/09 budgets. While working out the details o f its program, the Government turned to the Bank for support which was provided inthe form o f targeted, high impact TA and ESW linked to preparation o f the DPL.The partnership which developed represents a best practice example o f how to provide external support for strong, locally-owned and championedreforms. Principle2: Agree upfront with thegovernmentand otherfinancialpartners on a coordinated accountabilityframework. The EC and World Bank collaborated closely on the preparation of the EC's Country Strategy Paper and the World Bank's Country Partnership Strategy in 2006. At the same time, the Government was refining its strategy in conjunction with preparation of the DPL.As a result, all these efforts feature common objectives and diagnostics. Subsequently, the EC, AFD,AfDB and World Bank participatedinjoint preparation and appraisal missions for DPLI-3 and, to the extent possible, all Development Partners have adopted common triggers and indicatorsfor their parallel operations. The DPL has been highly effective incoordinating and harmonizing development assistance inthe areas it covers. Principle3: Customize the accountabilityframework and modalitiesof Bank support to country circumstances. The DPL has focused on issues of strategic importance, but also on those where the Government saw a particularbenefit to availing the resources of the Development Partners, for instance in order to overcome resistance or surmount capacity limitations. The DPL has helpedto maintain consistency inthe dialog - a counterweight to the continual needto fight fires - and encouraged policymakersto stay focused on the core reform agenda. Principle4: Choose only actionscriticalfor achievingresults as conditionsfor disbursements. The Government's reformprogram is structured around four main pillars, all of which have been supported by the DPL. DPLl featured a relatively large set o f prior actions, consciously intended to signal to investors the breadtho f the program. DPL2 and DPL3 narrowed the focus to a smaller number o f prior actions. It was an easy task to select issues of genuine strategic importance, which is a testimonial to the ambitious scope o f the program. Principle5: Conducttransparentprogress reviews conducive topredictable andperformance- basedfinancial support. The annual budget has traditionally been the vehicle for announcing major economic policy reforms in Mauritius. Thus the programmatic DPL series has easily been aligned to the budget cycle, drawing prior actions from budget measures and providing financing for successive fiscal years. 27 B. POLICYAREAS A. ConsolidatingFiscal Performance and Improving Public Sector Efficiency DPL3prior action: Alignment of the chart of accounts of the Treasury accounting system with the Government Finance Statistics Manual 2001 and upgrading of the Borrower's financial management information system to enable budget implementation and reporting of financial and non-financial data, under the efforts of the Ministrv of Finance and Economic Empowerment ("MOFEE"), in coordination with the department of the Accountant General. 68. Description: For Pillar A, the DPL has focused on the twin components o f (i) tightening fiscal discipline; and (ii)improving efficiency and effectiveness. The Government's strategy on the latter has been built around adoption o f a MTEF and PBB, which together aim to increase predictability of resource envelopes for planningpurposes, clarify tradeoffs, and actively engage senior policy makers to align budgetary allocations with national priorities. Aside from its strategic importance, MTEFFBB was a natural choice for the DPL to support because o f the Bank's longstanding engagement. 69. Under DPL2, a MTEFFBB budget was prepared in 2007/08. Though highly effective inbuilding interest and awareness, the exercise was "indicative" only insofar as the traditional line item budget remained the official basis of financial management and reporting. Much more was left to be done as well, including:28 Defining coherent and consistent programs, activities, outcomes and performance indicators. Organizing sector ministries to accord with budget activities and strengthening performance management for results. Developing a new budget classification, Chart o f Accounts, Treasury Accounting System (TAS) and payroll systemto reflect the PBB activities. Providing training for budget, accounting and internal audit staff on PBB and preparing necessary guidelines, manuals and other documentation to ensure consistency across Government. 70. Meanwhile, as the Development Partners coordinated themselves around the reform program, the IMF's FAD and UNDP emerged as the Government's principal MTEFFBB advisors.29Thus, after the 2007/08 budget, it was decided to shift the DPL's support to other aspects o f the program. As the list above indicates, MTEFFBB entails a complex, multi-year sequence of institutional and process reforms and the Government requestedthe Development Partners to remain engaged to complement the IMF'srole. 28The list is drawnfromthe actionplaninIMF,"Introducing Program-BasedBudgetinginthe Contextof a Medium-TermExpenditureFramework," (Fiscal Affairs Department,June 2007). 29The IMFhas providedstrategic guidanceandthe UNDPoperationalsupport. 28 71. Preparation of sector strategies: Initially, DPL2 proposed an indicative trigger for DPL3 drawn from the first bullet point in the list above: preparation of sector strategies for the 2008/09 budget. The logic of this choice i s that effective budgeting demands a clear vision of sector objectives and a menu of strategically relevant, costed programs from which policymakers can choose as they make tradeoffs within and across sectors. The Government provided a list of priority sectors which the Development Partners divided up and supported in various ways, including funding and helping to prepare TORSfor consultancies, peer reviewing outputs and facilitating the work of Sector SMSTs as they linked sector strategies to PBB budget submission^.^^ The DPL was instrumental in orchestrating the response and helping to overcome capacity constraints, and considerable progress was achieved as a result. 72. O n the plus side, most Ministries now broadly understand and accept the importance of strategic planning and are at some stage inthe process. However inthe end the task proved too large to be achieved intime for the current year of the operation. From the standpoint of the longer term (5-10 year) objectives of MTEFPBB this i s a minor setback, but it necessitates a tactical adjustment to the DPL program. The DPL3 trigger calling for preparation of sector strategies has been slipped to DPL4 while DPL3 substitutes a different prior action from the list which recognizes an equally important, achievement. 73. A new prior action for DPL3: The prior action proposed for DPL3 focuses on revising the Chart of Accounts and Financial Management Information Systems. Moving beyond 2007/08's "indicative" MTEFPBB entailed revising the Chart o f Accounts (COA) in the Treasury Accounting System (TAS) to compile financial data according to the programs, objectives and outcomes o f the PBB. The new system was developed in time for the start of the 2008/09 financial year and i s now being used as the basis for processing and recording transactions and preparing annual financial statements and other reports. The changeover also allowed the new system to be updated to the 2001 revision o f the IMF's Government Financial Statistics Manual enabling more comprehensive and flexible financial management information and reporting. New software also allows for the recording of non-financial data (Le. PBB outcomes and indicators) to strengthen further the monitoring of budget effectiveness. 74. Government actions to date and future activities to address the challenge:The achievements in this area have been: (i) prepare a new Charts of Accounts consistent to with the 2001 Government Finance Statistics Manual, (ii) pass the Finance and Audit to (Amendment) Act 2008 and the Public Debt Management Act codifying the MTEFPBB; and (iii) upgrade the Financial Management Information System (FMIS) to enable to budget implementation and reporting on both financial data (Oracle Financial software developed and implemented by the Treasury) and non-financial data (Oracle Balance Scorecard software developed and implemented by the Budget Office). The Accountant General i s coordinating the activities of the FMIS and a newly-established Public 30The Bank has provided support to education, ICT, housing and lands, tourism and external communications, mainly under the Sector Strategic Planning TA Project (PI07215); the EC has supported tourism and education; AFD environment and industry; UNDPICT and social security; AFDB health. 29 Expenditure Management Systems Review Directorate (PEMSR) will issue each year an Interim Performance Report (IPR) for the first semester and an Annual Performance Report (APR) for the full financial year. 75. Expected results: The new classifications and treasury processes will improve the quality of financial reporting, hence budget planning and monitoring, while reinforcing andlocking inMTEFPBB as the official budgetmethodology. 76. Indicative trigger for DPL4: Prepare at least four sector strategies for 2009/10 PBB. Sector strategies are expected to play an important role for Program Based Budgetingto help channel public funds to effective government programs in a systematic way. Sector strategies should allow existing programs and planned activities to focus on costing and human resources requirements involved in implementation. This will contribute to efficiency in the public sector and strengthen the dialogue between line ministries and MOFEE DPL3prior action: Implementation of performance managementpilots in theBorrower's civil service by individual line ministries and the Ministry of Civil Service and Administrative Reforms. 77. Description: Performance Management Systems (PMSs) have become the norm for public sector human resource management throughout the OECD and much of the developing world. The idea i s to reinforce traditional public sector values with private sector-type incentives in order to stimulate an improvement in performance at both the individual and corporate levels. PMS i s complementary to MTEFPBB as PBB clarifies public sector objectives and translates them into programs while PMS provides an incentive to managers and their staffs to achieve results on the ground. June 2010 has been established as a target date for full implementation of PMS across the civil service. 78. Challenge: PMS entails a profound cultural and institutional shift androlling it out across a workforce of 50,000 by 2010 i s an ambitious undertaking. Primary responsibility rests with the Ministry of Civil Service and Administrative Reform (MCSAR), which has had to plan and build capacity accordingly. Its preparations and scaling-up are only now being tested operationally and the Ministry has other responsibilities to fulfill at the same time. Fillingout of forms and completing work agreements for individualworkers are the most labor intensive parts of the exercise and keeping to the schedule has proved to be a challenge. Moreover, the pace will need to be sustained or even accelerated over the next 18 months to achieve full implementation by mid 2010. For certain highly technical and skilled workers such as magistrates, there may be a need to avail o f outside e~pertise.~' 79. MCSAR' s strategy includes intensive communication to familiarize workers with PMS and assuage their concerns about impacts on careers and job security.32 In pilots carried out in 2006/07 this has had positive results. Nevertheless, some resistance will '' 31Note the need i s for specific, focused, short term TA rather than long term, resident advisory services on eneral PMS implementation. The DPL wholeheartedly supports this approach. For instance, workers are advised that if their performance i s found to be unsatisfactory, managers will seek to understand the reasons why and will provide training or other remedies. 30 inevitably be encountered in Ministries, Departments and Agencies (MDAs) where PMS i s being implemented and this may be problematic, especially where it emanates from the ranks o f senior management. MCSAR's painstaking implementation strategy has overcome such resistance in the past and as experience and understanding grows, this should be less and less of a problem. 80. Government actions to date and future activities to address the challenge: The Pay Research Bureau (PRB) reports of 2003 and 2008 have prepared the ground well, especially the latter which gives a compelling explanation of the rationale and objectives of PMS.33 More practically, MCSAR has developed and refined an implementation strategy and action plan, building on three pilots in 2006 carried out with assistance from a consultant (Central Statistics Office, Valuation Department and Meteorological Services). The 3-phase strategy calls for: (i)sensitization of staff; (ii)training of appraisers and appraisees to fill out forms and conduct assessments, and (iii) identification of Key Performance Indicators (KPIs) and signing of agreement forms by individual workers. At this point, the unit may be considered "PMS ready" though PMS i s not fully operational until it i s used to determine pay and promotion. This final step i s not anticipated until 2010. However, for the purpose of DPL3, "PMS ready" will be considered as completing the pilot. 81. MCSAR has set out an explicit schedule building up to full implementation by June 2010 (Table 10). For 2008 (and DPL3), MCSAR planned to work with 78 MDAs and complete implementation in 30-40 o f them by December 2008. This target has been broadly achieved (Table 11). The 78 organizations cover a total of 29,156 officers, o f which roughly two-thirds have been sensitized, half have been trained and a quarter have achieved PMS-ready status. Given that the final step i s the most labor intensive and time consuming, implementation is somewhat behind schedule, but the target for December 2008 and DPLprior action has been achieved. Table 10: ProposedPMS implementationschedule INo. I Actions I Date I 1 I Implementation of PMS in all Ministries I December 2009 I I2. I Use of revised forms for reuortine to PSC for Dromotion I2010 I 3. Last year o f reporting under Confidential Report 2011 4. Rolling out PMS to parastatal bodies and local authorities June 2010 5. Incrementhonus link to performance under PMS; grant of 2011or earlier for organizations additional incrementshmp sum for outstanding performance. that have already implemented PMS successfully. I 33 See, esp. Chapter 11, SynergisingPerformance Management and ProgrammeBased Budgeting and Making them Work, and Chapter 14, Performance RelatedReward (http://www. eov.mu/uortal/eoc/urb/file~euort%2OCon~itions%2Oof%2~Service.ud~. 31 Signing of agreement Total Sensitization perce Training perce forms perce Number completed nt completed nt completed nt Completed: - Organizations 78 62 79.5 48 61.5 36 46.2 - Officers 29,156 19,738 67.7 15,359 52.7 7,204 24.7 Source: MCSAR 82. Expected outcome: PMS should contribute to building a more meritocratic, results oriented public service which will contribute to more effective and efficient program delivery. 83. Indicative trigger for DPL4: None. PMS implementation has some distance to go, but key stakeholders are highly committed and the challenges which remain are largely operational. Thus, dialog under the DPL would add little value. DPL3 prior action: Enactment and proclamation of the Public Debt Management Act 2008, which limits the Borrower's public sector debt to a maximum of 60-percent of gross domestic product and provides for public sector debt reduction to 50-percent by the end of 2013. 84. Description: The Government began formulating its reform program at a time Figure 5: Government deficits and debt when debt and deficits had been rising percent of GDP 130- sharply. From 2001-05, central government _. ... - - - 6 5 deficits averaged above five percent of GDP 110 t -I and central Government debt climbed to 57.5 90 percent of GDP (Figure 5), or nearly 70 percent of GDP including publicly guaranteed debt of state owned corporations. Such high and rising debt levels undermined the public _ _ _ - 1 0 1 - . - 35 sector's ability to support the economic 1994 1995 1997 1999 2001 2003 2005 transition and increased vulnerability to i a Ixficit(L)-Central govemmcntdebt(R)i Source Cennal SransncsOflice negative external shocks.34 85. Beginning with the Government's first budget in 2006/07, the Finance Minister announced stringent fiscal rules intended to put deficits and debt on a downward path. Since the reform program was also premised on cutting taxes, the rules necessarily emphasized spending restraint through measures such as restrictions on hiring and overtime, holding salary increases below inflation, tightening oversight o f the capital budget, and setting up Audit Committees in key Ministries to reduce waste. Two inefficient public bodies, the Police Workshop and Development Works Corporation, 34Sacerdotiet al. 2005, Mauritius: Challengesof SustainedGrowth (Washington: IMF)calculatedthat without adjustment, developmentsinthe global economy (low growth and high interestrates) could raise public debt to anunsustainable112percentof GDP inthree years. 32 were closed. For the D P L series, the Government and Development Partners agreed on a series of fiscal consolidation triggers calling for progressive reductions in primary spending by 0.5 percent o f GDP each year relative to the 2005/06 baseline, to reach 1.5 percent o f GDP by 2008/09. Inthe first year, primary spending was cut by 2.1 percent of GDP, thus exceeding the commitment by a large margin. Another 0.2 percent of GDP followed in2007/08 (Table 12). Table 12: FiscalConsolidation 2005/06 2006/07 2007/08 2008/09 Total revenue and grants 20.0 19.2 20.3 20.8 Tax revenue 18.1 17.4 17.1 17.3 Non-tax revenue 1.6 1.7 2.0 2.0 Grants 0.3 0.1 1.2 1.5 I I I I Total exDenditure and net lending I 25.3 I 23.5 I 24.2 I 24.4 Current expenditure 21.4 20.1 20.3 21.1 Capital expenditure 3.6 3.2 3.8 3.3 Net lending 0.4 0.2 0.1 0.0 Interest Payments 3.8 4.1 4.8 4.0 Primary spending 21.6 19.5 19.3 20.4 Balance -5.3 -4.3 -3.8 -3.6 Primary balance -1.5 -0.2 1.o 0.3 86. Though the commitment to fiscal consolidation has not flagged, by the time of the 2008/09 budget the policy environment had changed materially. Generous EC grants and buoyant tax revenues (despite lower duties and corporate and personal income tax rates) had created fiscal space and debt had fallen sharply as a percentage o f GDP. At the same time, a rebound in growth was demanding more public sector inputs to support a higher growth trajectory, especially longer term investments in infrastructure. In response, the Government's fiscal strategy shifted from a sole focus on expenditure toward a more comprehensive view of fiscal sustainability that targeted deficits and debt rather than expenditure. A new Debt Law was passed calling for progressively lowering total debt to 50 percent of GDP by 2013. As well as representing a more encompassing approach, this confers the force of law, which was lacking with the earlier, informal fiscal 87. Government actions to date and future activities to address the challenge: The new approach to fiscal control i s codified in the Public Debt Management Bill (No. IX of 2008) passed in April 2008.36Section 7 of the bill establishes a ceiling for public sector 35Concern about the lack o f legal sanctions for violating the rules was raised by the IMF.See, IMF, "Mauritius: Fiscal Adjustment Strategy and Measures to Protect Low-Income Households,'' (FAD,May, 2006). Notably, the primary spending target of a reduction of 1.5 percent of GDPrelative to the 2005/06 baseline has not been met (see Table 12). 36See: httr,://www.pov.m~r,ortal/goc/mof/files/debtmanagementbillO8.r,df. 33 debt of 60 percent of GDP, declining to 50 percent of GDP by December 2013.37The macro and fiscal framework published with the 2008/09 budget anticipates debt levels which accord with the requirements of the bill (Table 13). Since the budget was introduced in June 2008, the growth outlook has deteriorated and in December the Government introduced a supplementary, "mini-budget." Nevertheless, the mini-budget i s expected to be financed by reallocating spending from lower priority areas and from other savings. The macroeconomic outlook anticipates that the MediumTerm Fiscal Framework from June will be achieved, with only a marginal increase inthe deficit, though 2010 may prove more problematic. Table 13: Public Sector Debt Rs. billions andpercent of GDP Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Dec-09 Dec-10 Rs.billions: - Total public debt 103.5 109.6 116.5 125.3 134.6 137.2 147.4 - Public corporations 22.4 25.1 21.7 20.7 21.7 22.3 23.4 - Total public sector debt 126.0 134.7 138.2 146.0 156.3 159.4 170.8 Percentof GDP: - Total public debt 57.2 56.0 53.1 50.7 48.0 45.9 43.6 - Public corporations 12.4 12.8 9.9 8.4 7.7 7.4 6.9 - Total public sector debt 69.6 68.8 63.0 59.1 55.7 53.3 50.5 88. Expected results: Until now, the Government's rules-based approach to fiscal management has lacked legal backing. Addressing this problem will strengthen the credibility of fiscal policy and reinforce the commitment to better macro management. 89. Indicative trigger for DPL4: "Reduce debt-to-GDP ratio in line with Debt Management Act ceilings." Initially a numerical target was proposed, but inthe near term global economic prospects pose severe challenges for fiscal management. Accordingly, the trigger has been recast to allow more latitude. Debt indicators have been movinginthe right direction and the Debt Law and recent establishment of a Debt Management Unit have strengthened the institutional framework for public debt management. Nevertheless, current debt levels are near the upper bound o f sustainability and the authorities must remain vigilant. The D D O also demands a higher level of oversight of macro performance, fiscal management inparticular. DPL3prior action: Begin implementation of the respectiveparastatal reform action plans, by the Central WaterAuthority, WastewaterManagement Authority, Central Electricity Board, and Sugar Planters Mechanical Pool Corporation,to improve operational efficiency and service delivery by: (a)introducing a performance management system, promoting staff proficiency in multiple areas of expertise, reducing overtime and eliminating unfilled posts: (b)increasing capacity utilization of capital equipment (i.e., vehicles, tractors), and reducing fuel and lubricating oil costs: (c) 37 The bill allows for three extenuatingcircumstances:natural disasters or other emergencies requiring exceptional expenditure; large investmentprojects deemedby Cabinet to be timely and prudent; or a general economicslow-down requiring fiscal stimulus. 34 outsourcing transport and security services, cutting delivery time and cost, and reducinx pilferage; and (d)improving inventory management bv reducing the number and volumes of items carried. 90. Description: Mauritius' parastatal sector comprises around 150 entities, many with poor operational andfinancial performance - insome cases because of mandates to pursue social objectives which are incompatible with financial viability and operational efficiency. Poor monitoring and oversight compound the problems. The result has been significant resource transfers and contingent liabilities on the budget, and parastatals occupying critical points in the production logistics chain have been a source o f inefficiency and a drain on competitivene~s.~~ The Government has recognized the sector must be restructured as part of the reforms, but that this will be one of the more challenging components of its program. 91. Challenge: Opposition from management and workers will make meaningful reform difficult to achieve. The sugar cess funded agricultural parastatals afford a sobering illustration. A reform strategy prepared by a management consultant proposed significant downsizing and restructuring of some relatively small, but highprofile entities. The proposal encountered such resistance that the report was shelved and the project appears to be on indefinite hold.39 Thus, Government's approach has been to start with relatively less controversial reforms in parastatals where both managements and parent Ministries are broadly supportive, though here the challenge i s to ensure that the reforms are meaningful. Moreover, the program has faced capacity constraints, both with respect to strategic planning within the reforming entities, and management and oversight by parent ministries. Finally, operational efficiency has so far been the primary focus, but reforms must eventually deal with more politically sensitive issues including privatization and systemic governance issues. 92. Government actions to date and future activities to address the challenge: In contrast to the "big bang" strategy in other areas, the Government i s taking a gradual approach. The 2006/07 budget signaled its intentions by closing with immediate effect the egregiously mismanaged Development Works Corporation and beyond that promising in general terms to, "reduce transfers to parastatals and provide the context for productivity gains inservice deli~ery."~' 93. To initiate more comprehensive reforms, four priority cases were selected on the basis of4' 38 In 2007/08, parastatalsreceived direct Government transfers of approximately Rs.10billion and inJuly 2008 their accumulated debt was Rs.20 billion, Rs.12.2 billion guaranteed by the Government. See World Bank, METAP ProjectAppraisal Document (September, 2008). 39 l'Express, e Rapport KPMG:La rCforme des institutions sucrikres en suspens n (10/8/07). 40par. 21. 41The project was initiated with assistance from the World Bank under the Public Enterprise ReformProject (PEW) which has now beenincorporatedas an element of the METAP.Five parastatals were selected, however one of them, the Agricultural Marketing Board (AMB),failed to complete its reform action plan on schedule (intime for DPL2). The AMB is to receive additional support from the METAP. 35 (i) Impact on public finances, inparticular the implicit and explicit budgetary burden; (ii) Impact on the economy, especially on the provision of essential services supporting business activity and on competition inthe market place; (iii)Social impact and the scope to improve quality and reduce cost of essential services to the public; (iv) Ownership of reformprocess by the parent Ministry. 94. The four parastatals selected were the Central Water Authority (CWA); Wastewater Management Authority (WMA); Central Electricity Board (CEB); and Sugar Planters' Mechanical Pool (SPMP).With assistance from the World Bank each developed a reform action plan, fulfilling the requirements of a DPL2 prior action. The action plans mainly focused on improving operational performance through more efficient use of human resources and equipment, better inventory management, training and multi-skilling of workforces and outsourcing o f services such as transportation and security. However, they also encompassed more ambitious measures such as Performance Management, tariff rationalization, development o f customer charters, closing down or outsourcing loss making operations, and in one case merging together two major entities, the CWA and WMA. 95. With the plans in hand, parastatal managements moved on to implementation in early 2008. Some of the major achievements over the past year are highlighted in Table 14. The SPMP achieved efficiency gains instaffing by reducing tractor crews from 3 to 2; the C W A eliminated 320 unfilledposts, andthe CEB reduced overtime by 36 percent. The Board of the WMA agreed to adopt Performance Management and launched a pilot scheme in the HR department. The SPMP outsourced the transportation of tractors between work sites, not only saving money, but increasing efficiency and saving US$20 million in the capital budget. The AMB, CEB, C W A and WMA found various ways to economize on electricity and fuel usage. The CWA lowered inventory costs by dropping 95 items for which there was little demand. The AMB shut down a loss-making dairy unit. Many of these suggest elements of on-going operations management rather than fundamental reform. However, they also represent the first fruits o f a more hard edged approach to management-by-obj ectives, intended to improve profitability and transform the sector over time. 36 .-M F 3 B Y e 1 u; c c) .3Ld 00 0 0 5s H Q) h .-x Y P 3 E 2 o Y Q) E 9 e, VI 1 e, 1 -a 6 - a a" Y eo ! s53 Y Q) H .I cw . . 0 Y 3eo . . . .. Y 0 . 0 0 0 0 0 . 0 0 . . VI 3 in 3 .I Y 0 eo E cw 8 Q) h .-6 3 3 0 Y eo a g.. Y eo Y pc u;; U 0 0 0 l+ 3H Q) 0 . 0 0 0 . 0 0 0 . 0 d. s -a M E .C > u3 0 . 0 0 0 0 . 0 . 0 c > 96. While the achievements overall represent significant progress, it i s important not to underestimate the task ahead. For instance, take the case of the CEB which was able to reduce overtime by Rs.30 million (36 percent) and insurance costs by Rs.25 million (46 percent). But, these are relatively small expenditures and the total cost savings of Rs.76 million achieved under the action plan represents only 0.7 percent of the operating budget. Since the bulk of costs are beyond the CEB's control, the key to profitability i s reform of a complex and rigid tariff structure which cross subsidizes industry and households at the expense of commercial users. Charges do not reflect costs, nor do they attempt to promote efficiency, for instance through time-of-day pricing. Moreover, tariff adjustments require Cabinet approval, thus bringing political considerations into what should be a technical, regulatory function. The CEB i s completing a consultant study to recommend tariff reform, but implementing the results will be challenging and politically sensitive. 97. Expected results: The reforms being undertakenare having a measurable impact on efficiency and budgetary transfers. However, the larger value of piloting reform with a few selected cases has been to provide a learning opportunity and create momentum for a more comprehensive approach. Recognizing the need for a more robust institutional structure, the Government has established a Public Enterprise Reform Unit (PERU) inthe Ministry of Finance to champion reform and carry out diagnostic work and training and develop management information systems. The World Bank's METAP will address capacity and technical issues by supporting the PERU with a full time advisor. The project anticipates a five year program which will build on these early results. 98. Indicative trigger for DPL4: None. The Government and the Development Partners are in agreement about the importance of parastatal reform, but more time i s needed to get the PERU up and running and develop a program to extend the initial pilots. Accordingly, parastatal reform will be taken outside the DPL. The Bank will continue to support the Government's efforts through the METAP. B. Improving Trade Competitiveness DPL3 prior action: Continue implementation of the Borrower's duty free island policy by significantly reducing average tariff rate and number of top rated tariff lines by the MOFEE. 99. Description: The strategy of becoming an open, globally connected, low tax, business friendly platform entails eliminating anti-export biased policy distortions, including tariffs.42 Cutting tariffs increases competition in domestic markets and raises export competitiveness by reducing the cost of labor and other domestically sourced inputs. The 2006/07 budget committed Mauritius to becoming a "duty free island" by eliminating substantially all tariffs (95 percent o f tariff lines) on a phased basis over three years. Reflecting the importance of this objective, all three years of tariff reductions were included as DPLprior actions/triggers. 42WorldBank 2006, Reportof the Aid for TradeMission. 39 opportunity to adapt and workers displaced by import competition may need help in Figure6 : Industrialproduction finding new jobs. Figure 6 underscores the y-0-y percent change point by contrasting the experience of 15 domestic (non-EPZ) manufacturers with export oriented EPZ firms. The latter were J not directly affected by the reduction in 9g ':, -5 ~ ~ duties as they had previously been eligible , `,`47 \Jl for duty drawbacks anyway. Following a 2 IP -15i severe retrenchment in 2001-05 which 1` ;I -20 - If culminated with the loss of MFA trade -25 preferences, the EPZ sector returned to 2004 2005 2006 2007 positive growth in2006-08. However, output 1-non-EPZ- EPZ 1 ~ declined sharply for domestic manufacturers ' Source CSO Industrial Production 101. The challenge for the Government is to provide adequate adjustment assistance while achieving credible progress toward the duty free island objective. Recognizing the need for adjustment assistance, the 2007/08 budget announced a one year respite in the move to a duty free island. A special allocation of Rs.40 million was provided to Enterprise Mauritius to finance adjustment measures such as consultancy services for marketing and innovation, capacity building in design and management, market intelligence and export promotion. Including cost sharing by firms, total spending was anticipated to reach Rs.60 million. The programs appearedwell conceived, though DPL2 expressed concern over the lack of a results framework and provisions for systematic m ~ n i t o r i n gIn~the event, however, Enterprise Mauritius was unable to spendany of the . ~ money and the opportunity afforded by the respite was squandered. 102. At that point, the Government faced a quandary. On the one hand, firms and workers needed adjustment assistance. But, on the other, resolute and determined progress was needed to signal unambiguously to economic agents that they had no alternative but to adjust, painful as that might be. Extending the one year respite might have seriously dented the overall credibility o f the duty free island.44After weighing the prospective costs and benefits, the Government resumed cutting tariffs in the 2008/09 budget, encouraged in part by World Bank TA which concluded that the incremental adjustment costs o f further tariff cuts would be fairly 103. Government actions to date and future activities to address the challenge: The 2006/07 budget made an important start on the program, reducing duty rates on some 659 tariff lines and setting another 345 lines to zero (a DPLl prior action). Tariff peaks, once as high as 65 percent, were cut to a maximum o f 30 percent and the dispersion in 43For a moredetaileddiscussion, see the DPL2programdocument,pp. 38-9. 44See DPL2ProgramDocument, par. 90. 45World Bank 2008, "Mauritius: Adjustingto Trade Reform" (powerpoint presentation) 40 the tariff structure nearly halved from a standard deviation of 15.5 percent to 8.4 percent. Under DPL3, the 2008/09 budget resumed the program, significantly reducing the average level and dispersion o f protection (Table 15).46 The unweighted average level of tariff protection was reduced by nearly half from 2.5 percent to 1.3 percent, while the number o f highest rated (30 percent) tariff lines was reduced by 365 (82.8 percent) and the number o f zero rated tariff lines rose by 477. Notably, the reductions left some sectors, such as furniture highly protected, while others such as food processing were - . - - significantly opened up. Table 15: Tariff Changesannouncedin2008/09 budget Before 2008 After 2008 Difference ( budget budget percent) Rs. billions Imports 114.6 115.4 0.7 Tariff revenue 2.5 1.3 -47.0 Number of tariff lines Average tariff rate 2.2 1.2 -47.3 0 4967 5444 9.6 10 67 40 -40.3 15 395 331 -16.2 30 441 76 -82.8 Specific '' 369 348 -5.7 Selected sectors: Average tariff rate (percent) Bakery products 28.2 0.0 -100.0 Soft drinks andmineralwaters 23.4 12.5 -46.6 Printing 12.5 6.8 -45.8 Wearing apparel 19.7 11.4 -41.8 Footwear 21.7 14.6 -32.7 Furniture 25.7 25.7 -0.2 Vehicles parts andaccessories 23.9 1.8 -92.5 Source: MOFEE and WBstaff calculations. Note: l/specific as opposed to ad valorem duties. 104. Expectedresults:Resumingtariff reformsends an important signal regardingthe Government's intentions. The second year o f cuts, now implemented, will keep up the momentum on industrial restructuring and contribute to improving overall competitiveness. 105. Apart from competitiveness, the net social impact of tariff cuts is ambiguous. Mauritian households in sectors losing protection are vulnerable, but low income consumers gain on average as they disproportionately consume commodities which were previously protected. According to World Bank estimates, completely removing all tariffs compared to the 200906 baseline would raise around 5 percent of low income workers out of poverty while displacing around 2 percent of the labor force. However, the tariff 46The figures include specific duties converted to ad valorem equivalents for the calculations. 21 specific duties were eliminated and the remaining 348 were lowered. 41 measures in the 2008/09 budget appear to have had minimal output and employment impacts because relatively little domestic industry sheltered behindthem.47 106. Indicative trigger for DPL4: None on tariff reform. Instead, the trade competitiveness pillar reverts to an earlier theme of ICT and telecommunications. International connectivity i s critical for a small, remote economy, especially one seeking to exploit communications-intensive activities such as call centers, BPO and financial services. DPLl and DPL2 focused on reducingthe cost of international connectivity and increasing capacity, and DPL2 also called for a review of telecommunications regulation. For DPL4, the Ministry of ICT has requested assistance with a broader review of the ICT regulatory framework, which i s inline with both the DPL and the National ICT Strategic Plan (NICTSP). Thus, a DPLA trigger has been included calling for the Government to, "Review the regulatory environment in the ICT sector in line with international best practices and changes resultingfrom technological convergence for modern competitive ICT markets." C.Improving the Investment Climate DPL3 prior action: Introduction of a flexi-security scheme, as reflected in the workfare program provisions contained in section IX of the Employment Rights Act 2008. 107. Description: Job creation and destruction are a normal aspect of market economies. Firms unable to fire workers are also reluctant to hire them, hence are less willing to take risks and innovate where this entails changing the skills mix of the labor force. The intent o f "flexi-security" i s to shift protection from jobs to workers in order to lower resistance to structural change and increase labor market efficiency. 108. Challenge: The Government chose to introduce flexi-security as a component of the broader reform of the Industrial Relations Framework, which dated from 1973 and had long been regarded as obsolete. Nevertheless, many aspects of industrial relations reform proved controversial and required extensive outreach to stakeholders, especially organized labor. With assistance from the ILO, the Government undertook a lengthy, consultative process while formulating its strategy and finalizing the legislation. As a result, flexi-security provisions were delayed. 109. Government actions to date and future activities to address the challenge: In practice, flexi-security refers to the workfare provisions contained in section IX o f the new Employment Rights Bill (2008). The bill was approved in August 2008 by the National Assembly and i s expected to be promulgated inearly 2009. 110. The workfare scheme provides for up to twelve months of transitional assistance to eligible workers who opt to join the program.48Workers receive a stipend o f ninety 47Theresultsarefrom the WorldBank's TRIST modelwhich mapsHS tariff codes to ISIC industriesand applies assumptions aboutdemandand supply elasticities to estimateemployment and output impactsat a disaggregatedlevel. 42 percent of the basic wage for the first three months, sixty percent for the second three months and thirty percent for the six months after that. Inreturn they must choose one of three alternatives inTable 16 upon which they are referred for assistance. Table 16: Flexi-security program Alternative Support providedby Job placement Employment Serviceof the Ministryof Labor Training andreskilling HumanResourceDevelopment Council (HRDC) Starting a small business Small Enterprises and Handicraft Development Authority (SEHDA) 111. Expected results: Flexi-security will provide workers who lose their jobs with transitional support, thereby improving labor market efficiency, lowering resistance to structural change and stabilizing incomes for households at risk of falling into poverty. 112. Indicative trigger for DPL4: None on the labor market. However, the investment climate pillar has two indicative triggers for DPL4. Both focus on private sector development which lies at the heart o f the Government's development strategy: "Get Cabinet approval for industry and SME strategy," and "Get Cabinet approval o f insolvency legislation." D. Widenthe circleof opportunitythroughparticipation, socialinclusionand sustainability DPL3 prior action: Preparation and submission by the Ministry of Education, Culture and Human Resources to Cabinet of a draft Education and Human Resources Strategy Plan that diagnoses education sector needs, identifies obiectives and m-iorities, and outlines options, which will be costed and, together with human resources requirements, incorporated into a medium term action plan and a fully financed, program based budget submission. 113. Description: The Government envisages educationplaying a dual role: on the one handproviding humancapital needed by skill and knowledge intensive emerging sectors and on the other by ensuring growth is inclusive and creates opportunities for all Mauritians. Yet, the system falls far short o f the mark on both dimensions. Its deficiencies are widely acknowledged - poor curriculum design, lack of science and technology offerings, high attrition rates, widespread private tutoring and inadequate local i n v ~ l v e m e n t .Rote learning i s emphasized over problem solving and critical ~ ~ thinking skills and outcomes fall short of current international best practice. Though education indicators have improved recently, they remain far below those o f comparators such as Finland, Singapore and Korea at the same stage o f their own development. 48Mostfull time, private sector workers with morethan 6 monthscontinuousemployment are eligibleupon termination. 49 SeeWorldBank 2007, Mauritius Country Economic Memorandum: Managing Change in a Changing World,Chapter 3. 43 114. Staff at the Ministry of Education Culture and HumanResources (MOECHR) are technically strong in individual components such as preprimary, primary, secondary, tertiary, special needs and TVET. But overall, vision has been lacking and efficiency i s low because o f high attrition and repeating in order to gain admission to an elite school. A comprehensive sector strategy is needed to ensure education serves the needs of all Mauritians and provides the inputsneeded for Mauritius' development strategy. 115. Government actions to date and future activities to address the challenge: DPL2 supported the drafting of an education strategy, which was undertaken with assistance from an EC consultant. While a draft was indeed prepared (December 2007), the MOEHR had reservations about both the substance and presentation and a small team within the Ministry was tasked with reworking it. A second draft was circulated inJuly and peer reviewed by the Bank and the EC. Comments were then incorporated and the draft strategy presented to Cabinet inNovember and posted on the Ministry's web site for comment. 116. Completing the draft strategy and publishing it for consultation are important milestones in reforming and modernizing the education system. While much work remains to be done - including costing and extracting a 3-year MTEFPBB program from the longer term strategy - bringing the strategy to its current state allow a consultative process to be launched inorder to build consensus for the major changes to come. 117. Expected results: Improved education system efficiency and service delivery. 118. DPL4 indicative trigger: "Get Cabinet approval for a fully financed education strategy and action plan, including provision for HumanResources requirement." Having completed the strategy, implementation requires costing and determination of HR requirements and extraction of rolling three-year MTEFPBB programs for the Ministry of Education. Aside from education, DPL4 returns to an earlier theme on reforming social safety nets with an indicative trigger calling for the Government to, "Begin poverty mapping b y CSO and introduce an absolute poverty line in order to develop a social safety net strategy for poverty reduction." 44 OPERATIONIMPLEMENTATION A. POVERTY AND SOCIAL IMPACT 119. Adapting to a world without trade preferences is essential to Mauritius, which i s the motivation for the Government's structural reform program being implemented since 2006/07. Moreover, inability to adapt means that "...those who will suffer most are the very people we want to protect: the poor, the vulnerable, the ~ n e m p l o y e d . "Indeed, in ~ ~ the run-up to the reforms, cumulative net job losses in apparel and sugar industry in 2001-06 reached around 9 percent of total employment in the economy (Table 17). Table 17: Job losses insugar and Women sufferedthe largest share o f the losses, apparel (,OOO) including over 80 percent inthe apparel sector. Total losses Moreover, retrenched workers, both men and - Sugar women, faced poor job prospects due to low educational attainment and narrow work experience, compoundedby weak labor marEet conditions. The households affected by the Source: Government of Mauritius. Notes: Sugar: actual structural shift were predominantly low job losses of 11,000 in 2001-06 plus projected 7,200 additional under MAAS; Apparel: actual losses in 2001- income where the loss of even a secondary 06. income can impact significantly on consumption, especially where primary incomes are precarious as 120. Structural reforms had a positive social impact as they contributed to the reversal of both growth slowdown and increasing unemployment o f recent years.52 Most significant has been the decline in female unemployment rate in the last 3 years (see Figure 7). This i s the result of strongjob creation inthe services sector, a key objective of the reform program. In addition, unemployment rate among males has also been declining with a reduction to 4.4 percent forecasted for 2008. Contributing to these positive labor market outcomes have been regulatory and corporate tax reforms, which neutralized pre-existing biases toward large firms and capital intensive production techniques, and support for SMEs, which boosted employment creation for younger workers. The argument that reforms would produce positive social impact via strong net 50Governmentof Mauritius, "Budget Speech, 2006-2007," par. 7., http://www.gov.mu/portaVsite/MOFSite/menuitem.5b1d751c6156d7f4eOaad11Oa7b521ca/?content_id=646 739f4fb4bbO1OVgnVCM1000000a04a8cORCRD. 51Association des FemmesEntrepreneursde Maurice 2004, "Etude sur l'impact des licenciements de la zone franchea1'Ile Maurice," htttx//un.intnet.m~2005/secUN%2OPublications/downloads/EPZ%20Report.pdf.A survey of workers laid off fromthe apparelsector found the great majority had started work at an early age and had not worked outsidethe sector or inmany cases even the firm. 52Theevidence is compelling that faster growth creates employment opportunities andraises the incomes of poor households.See, e.g., WDR 2000/2001,Attacking Poverty. 45 job creation permeates the Government Program and, after three years, data i s largely supportive. 18 00 . ............................. ....................................................................................................................... 16.00 - 7%. / *. / \ 14.00 - / b--- A / 2.00 0 - A 0 0.00 - 0 4 * - - k 8.00 - 6.00 - e*-.-.-.-.-.-.-*.-.-- -.-.-.-.~-.-.--~-.-.-.0. -.- ._, .... .. +AII -+. Male --r-Fernale 1 121. The Government working closely with the World Bank also anticipated that while reforms would be job-creating, they would however entail adjustment costs for workers as they needed to move to new activities. A major Government initiative to facilitate the adjustment process was the establishment of the Empowerment Programme in July of 2006 (DPL 1trigger) with a budget of Rs.5 billion over five years (around 0.4 percent of GDP). Objectives o f the program included: (i) providing training and re-skilling for the unemployed; (ii) supporting entrepreneurship and SME competitiveness through financial and technical assistance; and (iii) advancing social housing and development amongst poor families - with sub-programs targeting unemployed and retrenchedwomen. A high- level Steering Committee (to be converted into a Board o f Directors) involving the private sector and civil society defines strategies and budgets for the programs while existing institutions are entrusted with implementation. Targets and performance indicators were prepared under the PBB, and will form the basis o f the Empowerment Programme's future evaluations. The first review after the start-up phase (program design, setting up of structures and launch of pilot projects) was published in March of 2008, and it documents progress on different areas but it is too soon for a more complete assessment. Some of the figures are: about 4000 workers (mostly retrenched) out of a labor force of approximately 550,000 have been trained, 3000 have been placed in employment and 100 SMEs from various sectors received technical support. The Empowerment Programme has also provided entrepreneurs with access to finance, includingfishers from the poor island of Rodrigues. 46 122. The last budget speech has renewed the Government's commitment to its social policy. The Empowerment Programme has been strengthened and, in addition to it, the government has continued to pursue a number of active labor market policies and reforms. For example, introduction of the flexi-security scheme (DPL 3 prior action), as part of a broader change of the Mauritius' employment laws during 2008, allows laid off workers to benefit from transitional support if they to participate on training or job placement activities. 123. The Government is also committed to Eradicating Absolute Poverty (EAP). Absolute poverty (share of the population living below US$1per person daily) i s below one percent in Mauritius, which means that efficient targeting requires the improvement of measurement capacity and analytical skills. With technical assistance from UNDP, the Central Statistics Office of Mauritius (CSO) has launched a new survey - Survey o f Living Conditions (SLC) - to better measure the low-frequency event of absolute poverty inMauritius. Results willbereadywithina year or two. Inthe meantime, the government has conducted a lighter survey to identify pockets of extreme poverty and created an item of expenditure inthe budgetto be spent inthe 229 pockets identified. 124. Social protection in Mauritius i s complex, spread across many ministries with small programs and high administrative costs. Sixty one social programs (Empowerment Programme excluded) have been identified in Mauritius in 2007. The combined budget for these programs was about 5 percent o f GDP - possibly higher (8 percent) when subsidies are fully monetized. This i s a high figure by international standards as most countries spend in the order o f 1 to 2 percent. Parallel work by the Ministry o f Social Security (MSS), also with technical assistance from UNDP, i s seeking to produce a Social Register. This will be a large database o f potential and actual beneficiaries, providing the basis for program evaluation and social safety net design. B. ENVIRONMENTAL ASPECTS 125. Few if any o f the reforms supported by the DPL series have had significant environmental impacts and this true also of the current operation. The only DPL3 measure with any potential environmental impacts whatsoever i s tariff reform which could change the industrialstructure. Infact, inaddition to being small the direct impacts on industrial output (and hence on industrial pollution) are negative since the tariff cuts imply that more demand will be servedby imports. 126. Beyond the immediate focus of the DPL, other policies and development objectives such as doubling tourist arrivals by 2015, expanding the port and airport, relieving traffic congestion, making the business climate more investor friendly, and allowing expedited environmental assessments on a cost recovery basis may pose environmental risks. Ultimately, however, environmental standards in Mauritius will reflect the country's own priorities and institutional capacity. Historically, the record o f environmental management, though not perfect, has been relatively good.53 Stringent 53See EU,"Mauritius Country StrategyPaper 2008-2013," Annex 3, Executive Summary of the Country Environmental Profile. 47 environmental safeguards are provided for in the Environmental Protection Act and all projects must obtain a preliminaryenvironmental report or, inthe case o f heavy polluting activities or major investment projects, a full environmental impact a~sessment.~~ ~n environmental police force under the aegis o f the Ministry of Environment i s responsible for monitoring and enforcing environmental provisions. 127. Meanwhile, over the past two decades policy has continued to evolve inresponse to emerging threats and needs and i s currently under review again (see par. 65 above). The National Environmental Policy white paper of 2006 evidences a clear awareness of environmental risks and the importance of careful management of the fragile ecosystems of a Small IslandDeveloping State dependent on environmentally sensitive sectors such as tourism and fisheries. The white paper recognizes the, "need to properly manage wastes generated from new industries such as from ethanol distilleries, sea-food industriesand Information and Communication Technology....[and] integrate policies for sustainable consumption." (par. 2.6-2.7) More generally it stresses that, "Government i s fully conscious that the long-term socio-economic success of the country i s not possible without environmental sustainability and i s therefore putting environmental concerns highon its agenda." (par. 2.3). 128. All Development Partners recognize the strategic importance of environmental protection and AFD, UNDP and the EC are actively providing technical support. With EC assistance, a Strategic Environmental Assessment has been carried out for the Multi- Annual Adaptation Strategy (MAAS) and Government has expressed an interest in carrying out similar exercises for other environmentally sensitive sectors. AFD is providing support for the development of a sector strategic plan based on the white paper andpreparationof the Ministryof Environment's PBB. c. IMPLEMENTATION, MONITORINGEVALUATION AND 129. The Government, represented by the Financial Secretary, and the Bank, represented by the TTL, will meet to review progress of the DPL program, together with other Government and Bank representatives as appropriate. The Bank will also maintain a dialog with counterparts inthe Ministries of Industry, Information Technology, Labor, and other bodies critical to the success of the program. The Government will furnish data as required to monitor outcomes in the matrix. Supervision of the DDO loan requires Bank staff to periodically: (i)consult with the IMF on the adequacy of the macroeconomic framework; and (ii) the borrower's continuing adherence to the monitor overall program. As long as both drawdown conditions remain satisfied, such periodic monitoring normally takes place semiannually, although monitoring may be more frequent at the request of either the Bank or the borrower. If at any time during the drawdown period the Bank concludes that one or both drawdown conditions are not met, the Bank promptly advises the borrower of the need for a subsequent review to confirm that both conditions are satisfied before it would be able to grant a request for drawdown. 54See http://www.gov.mu/portal/goc/menv/fiiles/epa.pdf. 48 D. FIDUCIARYASPECTS Public Financial Management System 130. Financial controls at the B O M and in the Government appear to be entirely satisfactory. Audited accounts for the period 1998/99 - 2006/07 are published on the B O M web site.55 N o problems or errors have been reported by the external auditors during this period. This information was supplementedduring Preparation and Appraisal for the first DPL, by discussions with officials of the BOM, the Accountant General and others. N o evidence was found of any material weakness with the Public Financial Management system that would preclude general budget support. A Public Expenditure and Financial Accountability assessment undertaken with EU support in early 2007 had reached the same c o n c l ~ s i o nIt ~ . ~found that donor-provided project loans and budget support were "properly presented both in budget and outcomes, to a large extent using national procedures." (p.8) A thorough overhaul of procurement practices including new legislation prepared in consultation with the World Bank should further strengthen confidence. Funds Flow Arrangements 131. There has been no safeguard assessment o f the B O M by the IMF.Nevertheless, the country has a well respected capacity for project implementation and financial management. Information obtained for the first DPL is that the control environment for funds disbursed by Development Partnersis adequate. 132. The loan disbursement will follow Bank procedures for Development Policy Lending, with a deferred drawdown option. The Government may withdraw the single tranche loan invarious drawdowns. The loan proceeds from the Bank will be credited to a UnitedStates dollar, Euro, or Pounds Sterling denominated account in accordance with the loan currency tranche withdrawn. These accounts are part o f the country's official foreign exchange reserves. The Borrower also confirmed that the Rupee equivalent of the loan proceeds will be reflected in the budget to finance budgeted expenditures. The Government will provide a letter from its Accountant General confirming (i) that the accounts used to deposit the loan proceeds are part of the country's official foreign exchange reserves and (ii) the Rupee equivalent of the loan proceeds has been that reflected inthe budget and inthe State's accounts. E. RISKSAND RISK MITIGATION 133. For DPLl and to a lesser extent DPLZ, the main concern was whether Government would stay the course. Even the chief proponents of reform had argued less that the benefits were large, than that there was no alternative. Some measures were highly unpopular with the electorate and even in the Government there was widespread 55http://bom.intnet.mu/ 56SIPUInternational, "PEFA Public FinancialManagement Performance Assessment Report for Mauritius, " (project No. 2006/129349, final report dated 4 June 2007). 49 anxiety about if and when the reforms would succeed. However, the outcomes over the past two years have convinced many of the skeptics. Meanwhile, the 2008/09 budget used the headroom created by buoyant revenues to distribute some of the fruits of the harvest, including a generous pay increase for civil servants. A recent Cabinet shuffle consolidated the position of the Minister o f Finance (and now Vice Prime Minister) who i s the chief architect of the program. 134. Inthe near term, there are significant risks from the global economic slowdown, continuing commodity price and financial market volatility and perhaps even a new inflationary cycle with rising world interest rates. Firstly, as a small open economy, Mauritius i s vulnerable to shocks stemming from weaker export demands and a slowdown inFDIinflows: (i) Fiscal: Slower growth will depress tax revenues and increase pressure for fiscal stimulus inthe run-upto an election. At the same time, fiscal constraints may slow public investments ininfrastructure and education reform which are critical to sustaining the transition; and (ii) Balance of Payments: Large current account deficits have so far been financed by FDIandnet portfolio inflows, while the rupee has not come under any great pressure and foreign exchange reserves have runup to a comfortable level. However, a sharp reduction inE C grants (currently around 1.5 percent o f GDP) next year will present a challenge for fiscal and external management and a real devaluation of the rupee may be appropriate. The authorities need to be vigilant and contingency planning would be helpful to prepare a response to some of the potentially more destabilizing events. Increasing DPL3 to US$lOO million equivalent with a Deferred Drawdown Option will help mitigate the macroeconomic risks by providing an extra cushion to finance negative contingencies. 135. Second, loss of strategic focus: With the main core of reforms now inplace - tax reform, trade and labor market policy, fiscal consolidation- the remaining agenda i s less sharply delineated. Second generation measures will need to focus on modernizing the legal and institutional framework and building capacity, covering a broad range of issues which are important and substantive, but more diffuse and therefore difficult to manage. Diverting attention to regional issues also threatens to distract from the home agenda. The Development Partners can be instrumental inmitigating the risksby helping to maintain a disciplined approach. In particular, careful preparation of a new DPL series can be instrumental in defining and prioritizing the next generation of reforms, much as the current series did for the first generation. 136. Third, lack of capacity: Over the past 2-3 years, policy makinghas been highly controlled and centralized, dominated by the economic reform agenda. As the public sector reverts to a more `normal,' decentralized mode of operation, capacity shortages are likely to become more problematic. Civil service reform (PMS) should help to ameliorate the constraints by promoting a more meritocratic public service and experimental 50 initiatives such as the `Service to Mauritius' program may help at the margin. Government may also wish to consider more formally enhancing training opportunities for public servants. 51 m v, -r I 1 % 1, 9" 0 0 Ei d @ 0 2 0 o 0 m W w 5 ANNEX 2: LETTER OFDEVELOPMENTPOLICY 10December 2008 CF/92/2 Mm. RuthKagia Country Direator World Bank Group Pretoria, SouthAfrica Dear Mrs Ruth Letter of Development Policy IamenclosingasignedcopyoftheLetterofDevelopmentPolicy describing the implementation of the economic reform programme that will enable Mauritius to lay foundation of a new socio-economic model driven by global competitiveness and the creation opportunities for all. The Government of Mauritius wishes to have recourse to the Development Policy Loan to finance its budget and pro-growth reforms that will propel the economy on a higher growth trajectory, attaining full employment andimprovingthe qualityof life of its papulation. Iwishtotakethisopportunitytoexpresstheappreciationofthe Government of Mauritius for the continued close callahration between the Bank and our country. Yours sincerely Dr R, Sithanen Vice-Rime Minister Minister of Finance & Economic Empowerment 60 Letter ofDevelopmentPolicy TowardsanActfon Planto RegainCompetitiveness 1. The reform programme initiated in the FY 06-07 Budget was a turningpoint in the evolution of the Mauritius economy from preference dependence to global competitiveness. The four main axes upon which the development strategy rest are Fiscal Consolidation and Improving Public Sector Efficiency, Improving Trade Competitiveness, Improvingthe Investment Climate and Widening the Circle of Opportunities. The reforms were designed with a view to thrusting the economy on to a higher growth trajectory, making the economy more competitive, flexible and adaptable, attaining full employment, and improvingthe quality of life of the population. 2. We are in the third year of implementation of the reforms endorsed and supported financially by the World Bank (WB), the African Development Bank (ADB), the European Commission (EC) and the Agence Franqaise de Diveloppement (AFDJ. The UNDPhas been closely associated with the implementation of the programme by providing technical assistance to key programmes. Other donors, namely, IFAD, BADEA, Japan and IMF have also extended financial and/or technical assistance to support the reform agenda. Collectively, Mauritius has secured Development Policy Loans (DPL) from its partners amounting to US$140 million, representingtwo disbursements of a programmatic series. 3. We have successfully met the targets under DPL 1and DPL2. Over the past two years, we have been reviewing and revisiting policies and structures that are outdated or no longer attuned to global competitive environment. Inmany areas and sectors, we have implemented the required policy reforms or at least initiated them. These include simplifying the tax system, improvingthe investment climate, opening up the economy to the rest of the world and reforming the labour market. The macroeconomicfundamentals the reformprogramme havebeenkepton track. 4, We have indeed pushed through the first generation of reforms which has put the economy back on a higher growth path and enabled us to reap some early harvests. As a result, the economy has become more resilient than it was three years ago. There are welcome signs that the economy is continuing to sustain higher levels of employment and benefitingfrom a higher growth rate leadingto rapid increase in per capita incomeinspite of turbulences inthe external environment. The tourism, construction and seafood sectors are buoyant whilst manufacturing, after four consecutive years of contraction and stagnation, has managedto reverse the trend, Foreign direct investment and employment creation are on the upwardtrend. 5. Whilst we have made tremendous progress, clearly, we still have some distance to go to achieve the general widespread level of prosperity to which most people aspire. Raisingthe economy's growth potential and sustaining it over the longer term is Mauritius foremost policy challenge. Inthe context of future intervention, we plan to introduce new elements that are structured around excellent hard and soft infrastructure, sound 1 61 philosophy and economically and environmentally sustainable measures in addition to meetingspecific targets. 6. The progress achieved to date is significant and we are now thinking of the next generation of reforms that which shift the emphasis from policy proposals within the pillars to cross cutting themes covering sometimes more than one pillar and with a stronger focus on implementation, capacity and institutional building and strengthening ownership bystakeholders. 7. The 2008-2009 Budget has outlined the broad measures of this new wider programme and called it the Attractive, Modern, Inclusive, Green and Open economy (AMIGO plan). It indicates the broad and complex scope of what is required, sets out the agenda for action and outlines the main elements of what a strategy for economic development over the nextdecade andbeyondshouldencompass. 8. As we move forward, the Development Policies will be fully reflected in the PBB/MTEF, focusing on the implementation at a Ministry and Sector level. However, the four pillars of the reform programme will continue to underpin our strategy. The remainder of this letter outlines how current and prospectivereforms will consolidate and extend the gains ineach ofthe areas. FiscalConsolIdationandImprovingPublic Sector Efficiency 9. As part of ongoing efforts to restore fiscal dlscipline, we have strengthened fiscal performance and public efficiency by preparing a new Charts of Accounts consistent with the 2001 Government Finance Statistics Manual and passed the Finance and Audit [Amendment) Act 2008 and the h b i i c Debt Management Act codifying the MTEF/PBB, At the same time we have upgraded the FinancialManagement Information System (FMIS) to enable budget implementation and reporting on both financial data [Oracle Financial software developed and implemented by the Treasury) and non-financial data (Oracle Balance Score Card software developed and implemented by the Budget Strategy and Management Directorate). The Accountant General is coordinating the activities of the FMIS and a newly-established Public Expenditure Management Systems Review Directorate (PEMSR) will issue each year an Interim Performance Report [IPR) for the first semester and anAnnual Performance Report(APR) for the full financial year. 10. The Public Debt Management Act has adopted a new approach to control fiscal space. The macro and fiscal framework published with the 2008/09 Budget anticipates debt levels which accord with the requirements of the Ad. As announced last year, we are consolidating our fiscal accounts on the basis of the Government Finance Statistics Manual 2001. 11. Interms ofthe previous framework, the overalldeficit for 2007/08 was around Rs 8.3 billon representing 3.3 % of GDP compared to the initial estimate of 3.8 %. As for 2008/09, based on the newmethodology the overall budget deficit is expected to be at 3.3 2 62 %of GDP. Total governmentdebt as a percentage of CDPwill be reducedfurther to 48.0 % inthis financial year. 12. Tax reforms have taken 36,000 individual income earners out of the tax net, lowered the tax burdenof close to 25,000 persons, slashed corporate tax rates and reduced maximum personal income from 30 percent to a flat 15 percent and significantly improved the fairness and efficiency of the tax system. OnIy 7 per cent of employees pay tax andthe tax rate is one ofthe lowest in the world. 13. To become efficient and effective, we need quality human resources, processes and institutions in the public sector. For this purpose, we have introduced PBB embedded in MTEF with the support of UNDP, so that resources are channeled to where they give the best outcomes. This modernapproach to budgeting is about more judicious use of public money and about greater fiscal responsibility. Government has set up a Capaciv Building Programme (CBP) to support the reforms and development objectives by identifying internationai and domestic experts to help, design and/or implement the various sfxategies andprogrammes. 14. Government has also created a "SERVICE TO MAURITIUS PROGRAMME" to attract the brightest young people, both Mauritians and international, to serve in Government for periods of between 1monthand 2 years. Non-citizens coming to service the public sector for a maximum period of threeyears will be exempted from work and residence permits. 15. With the assistance of MCSAR and MOFEE, other Ministries will reorganize themselves as part of a move to a performance culture. In this respect, MCSAR has been able to target 30-40 Ministries, DepartmentsandAgencies (MDAs) for PMS. 16. Government has already embarked ona major public enterprise reform programme since March 2007 andhas worked closely with the Bank in its design and implementation. Government has createdwithin MOFEEa Public Enterprise Reform Unit (PERU) whichwill be the focal point responsibie for overseeing and coordinating the parastatal reform program. It will be responsible for managing and overseeing the reform process, and the creation of an effective information system onparastatal performance and reform. As at to- date, the Working Group for Public Utilities has already approved a phased action plan for reforms for each of Central Electricity Board [CEB), Central Water Authority (CWA) and Wastewater Management Authority (?VMA). The same has beendone bythe Agro-lndushy Sector Working Group for the AMB and SPMPC. Other parastatals includingthe lrrigation Authority (IA) and Mauritius Meat Authority [MMA) have also been integrated in this working group and their action plans for reform are being examined. The Commerce and Industry Working Group is actively discussing the action plan for reforms for its five parastatals namely Mauritius Standard Bureau (MSB), Mauritius Film Development Corporation (MFDC), Enterprise Mauritius (EM), Small Enterprises and Handicraft Development Authority (SEHDA) andthe State Trading Corporation (STC). 3 63 JmprovingTradeCompetitiveness 17, Improving trade competitiveness is still an important element of the Government's reform programme. In the 2008/09 Budget, we have stepped up our efforts to furlher reduce customs tariff, Customs duty has been abolished on almost all foodstuffs, flooring items and spare parts. Duty has been reduced by 15% on articles commonly used by households (detergents, soap, washjng powders), articles of toitetry and personal care and school and ofice supplies. The 2008 tariff cuts have brought the zero-rated tariff lines to 87% from 80%. Only 1%of the tariff lines attract the top tariff rate of 30 per cent compared to 7% prior to 2008/09 Budget. Further tariff cuts will be implemented in phaseswith a view to complete our tariflreform. 18. Trade competitiveness is also directly influenced by the availability and quality of appropriate infrastructure. Infrastructure is the second area where Bottlenecks in ports, airport, energy, roads, water and sanitation can be the biggest threats to continued improvements inlivingstandards. We must investmassively to modernize and increase the stock of public infrastructure to sustain highgrowth and provide'world class facilities. The supply side response to public infrastructure will need an investment estimated at Rs 125 billion over the next decade. Public resources alone will not be enough; we will also need substantial private investment, 19. To this end, we are reviving the Public Sector Investment Programme (FSIP). The Public Prfvate Partnership (PPP) Unit will be strengthened to prepare a 10-Year Infrastructure Development Plan. Itwill identify and cost the infrastructure needs of the country and chart the best and most emcient implementation path. For the coming financial year, some Rs 2.7 billion will be earmarked for programmes to improve infrastructure. Theproject value ofthese programmes amounts to Rs 42 billionof which Rs 2 1 billion will be Invested inthe next three years. We are injecting Rs 1billion of equity in Airports of Mauritius Ltd (AML] to support airport expansion. By end 2010, the air passenger terminal deveIopment phase two will be completed. This will begood for up to 4 million passengersperyear. 20. To realize the objective of developing the ICT as another pillar of the economy, we need to improve connectivity on the digital highway. Currently only about 70 percent of the island has access to high speed internet at 128 kbs compared to at least 512 kbs in Europe and evenhigher speeds inAsia, Our aim is to provide almost everyone with 512 kbs withinthe next fewyears. To achieve this, we are working with our partners inthe Indian Ocean Commission and COMESA to develop an inter-island high speed cable connection that would link up to other cable projects between Africa and Asia. Inaddition Mauritius Telecom will purchase additional capacity onSAFEand develop the local backbone at a cost of around Rs 2 billion over the next few years. 21. We have also set up a Manufacturing Adjustment and SME Development Fund to sharpen the competitiveness of Domestic Oriented Industriesand SMEs adversely affected by the reduction inimport tariffs as we move to a duty free island. The Fund amounting Rs 4 64 500 million will also support Export Industries to meet the challenges of global competition. 22. The issue of foodsecurity has emerged as a critical one in2008. Foodsecurity issue is not only about the price of food but also about access to food, especially for Net Food Importers like Mauritius. Becauseof limited landarea, Mauritius is seekingto partner with other countries inthe region to increase food production. The objective is to arrive at a series of bilateral agreements between the countries of the region to implement a Regional Food Security hitiative [RFSI) that is viable, sustainable and operators of the private sector ready to engage investments. The RFSI would thus deal with the predictability and security of investments which seem to be the main preoccupation of private operators when investing in the region. This Regional FoodSecurity Initiative is expected to result in a win-win situation for all countries in the region thereby consolidating regional Integration with each country being able to fully express its agricultural and economic potential. ImprovingtheInvestmentClimate 23. Conditions governing labour markets have an important impact on the investment climate. To respond effectively to the new exigencies of economic development and to better protect workers, the Employment Relations Act and the Employment Rights Act were enacted inAugust 2008. The new legislation has established a flexi-security system that will provide for the flexibility needed to create demand for labour together with the security needed to protect the worker as he or she switches between jobs. Flexi-security system will introduce a Workfare Programme which will support the worker through a transition unemployment benefit until he/she finds a job, joins a training and re-skilling programme or sets up a small business, They will also integrate the individual regulatory frameworks for different sectors of the economy into one regime with the same rules and procedures for all. 24. Building Modern Mauritius is a challenging task that must bring together dl the institutional capacity we can harness. Localgovernments can playa role in this endeavor if they access the required financial resources. We will therefore work toward giving them the means to raise their own finance through the issue of securities. As a first step, we are creating a Local lnfrastructure Fund to finance some key infrastructure projects of Local Authorities. Revenuefrom the NationalResidential Property Tax (NRPT) will be credited to that Fund.The Fundwill be allocated on the same performance-based principle applied to the nationalbudgeL 25. A modern Mauritius cannot be sustained if resources are not efficiently usedandthe environment is not sound. To ensure sustainable development, the National Energy Fund, under the aegis of the Ministry of Public Utilities, is being transformed to Maurice [Le Durable (MID) Fund. The MID Fund will support efforts to protect the environment through recycling, to encourage more efficient use of energy and to increase reliance on renewable energy. The Fund will mobilize resources from taxes, Government subsidies, 5 65 development partners, carbon credits, and the private sector including airlines offsetting their carbon footprints. 26. The vision for an Open Mauritius is about creating the space for investment and the opportunities for turning ideas and innovation into value added activities. It is about building an economy supported by eight to ten pillars instead of the present four. Mauritius will continue itspolicyto further open the economy to regional and international markets to attract foreign talents, know bow, ideas and technology. It will do so through more improvement in the ease of doing business, consolidation of productive sectors and constructing new pillars. We shall also focus on consolidating the dynamism in the boomingindustries, giving a spur to emerging activities and providingsupport to sectors that need to reengineer. 27. World Bank's Doing Business 2009 places Mauritius at the top in Africa and 24th world wide. Mauritius was ranked 29th inlast year's report. Some procedures have been further simplified and it is no longer necessary to obtain a clearance certificate from the Waste Water Authority or a tax clearance certificate for municipal taxes. Name verification for a new company is now done online. However, Mauritius must continue with the pursuit of gaining a place among the top ten economies in the world on ease of doing business. The Board of Investment, with the assistance of the World Bank will streamline and simplify the system of business licensing to make compliance easier, less time consumingand lesscostly Wideningthe Circle ofOpportualtles 28. Democratization andsocial inclusion are important to the success andsustainability of the reform programme. To sustain the highgrowth that our reforms have unlocked, it is critical that Mauritius shores up its capacity in Tertiary Education, in Science, Technology and Innovation (Srl] and in human resources generally. We are startinga comprehensive and effective action plan to increase enrolment ratio at tertiary level. These short term actions will be accompanied by a mediumterm strategy to significantly increase the share of each cohort of primary students going to HSC and to tertiary education so as to double the enrolment ratio by 2015. Inthis respect, the Government is providingRs 1billion for a HumanResource Development, KnowledgeandArts Fund under the Ministry of Education, Culture and Human Resources. A Second Chance Programmehas been introduced to focus on skills which could facilitate selection by the Circular Migration programmes we are setting upwith Canadaand France and pursuingwith other countries. 29. Government has established a five year Rs 5 billion Empowerment Programme. It has become today an important tool in our efforts to reskill those who have lost jobs in declining sectors, to reintegrate those who are left behind and to prevent those on the periphery from sliding into poverty. The Empowerment Programme has placed and trained more than 4,000 unemployed, given technical support to some 100 SMEs from various sectors, trained some 500 retrenched women, assisted 4,160 planters overcome damage caused by cyclone Gamede, helped 493 pigbreeders recover from devastation due 6 66 to the swine fever epidemic and given access to finance to more than 480 entrepreneurs through the booster and quasi equity loan schemes. It has also come up with a financing scheme to allow over 1,000 in-lagoon fishers in Rodrigues to move to alternative sustainable economic activities. The Empowerment Programme is also encouragingsmall farmers and former fishers in Rodrigues to expand production of goats and pigs. Following the swine fever epidemic in Mauritius, expanded pigsupply fromRodrigues is contributing to the rehabilitationofthesector inMauritius, 30. Those who are in extreme poverty have not been able to participate fully in the Empowerment Programme. Analysis of the reasons has revealed that multiple activities are in fact needed to bring them out of poverty. Accordingly this year, we are intensifying our efforts directed at socio- economic empowerment. Last year, for the first time in Mauritius social programs, such as training, empowerment, employment, education and circular migration were included in our housingpolicy. Poor families also have difficulties to meet their housing needs. Government is revamping, consolidating and strengthening its social housing schemes, Rs 500 million have been provided to finance a Social Housing Fund to be managed by the Ministry of Housing and Lands. This Fund will receive and manage the 1,000 arpents of land and improve financing for housing by developing and overseeing a new andambitious programme to buildnewmixed housingcommunities on a PPPbasis. 31. Government will combat poverty in at1 its forms and wherever it exists. There are 7,157 families living in extreme poverty in 229 deprived regions. The Eradication of Absolute Poverty (EAP) programme created as a special item of expenditure will be an integrateddevelopment project andwill focus on the 229 pockets ofabsolute poverty. The EAP Programme will be implemented in partnership with the private sector that has agreed to cover 30 percent of the cost as part of their CSR programme. UNDP will contribute to these aims in two areas through the Social Register of Mauritius (SRM) projects at the Ministry ofSocial Security. 32. Government will continue implementing the policy of inclusive growth with balanced, sustainable economic development, where benefits will be felt by generations to come. Building an inclusive Mauritius, entails in integrating the families who are at the margin of development by eradicating absolute poverty, by providing pre-primary education to kids, by further broadening the circle of opportunities, social inclusion in a knowledge society and addressing the food security issue. 33. The ultimate measure of success will, however, be the capacity to give full protection to vulnerable groups and to empower the population to operate in the new globally competitive environment Outcome, PastandProjected 34. We have gone through three years of socio-economic statecraft - reforming for prosperityand social upiiftmentfor all. Without reforms our economywould have suffered 7 67 the full blast of preference erosion and continued its decline to lower CDP growth, lower income, higher unemployment, and rising debt and deficit We would be today continuing to write all the indicatorswith redink Lastyear wehad an early harvest This year we are seeing a bumpercrop in spite of financial turmoil. The reform programme has also created fiscal space to do more to eradicate absolute poverty, to improve access to education and empower our men, women and youth, to provide higher quality health care, give more protection and support to the vulnerable and to the elderly, increase disposable incame, and broaden opportunities for small entrepreneurs. 35. We are also continuing our efforts to get Aid for Trade operationalised especially helpingto putinplace the form and structureAFT support shouId embrace. That shouldbe a major source of support to countries, which like Mauritius, have to face high adjustment costs of transformation. There is a need to press the international community to implement their commitmentfor &heEastern SouthernAfrica [ESA) region, Conclusion 36. Government is expanding on the success of the first generation of reforms initiated in2006/07. The overall objectives are to move the country to a higher growth path, raise the level of employment, reduce poverty and inequality and achieve a higher standard of Iiving. We, therefore, request our development partners to continue their support to the implementation of Governmenteconomic reform programme. Inaddition to the tradftional Development Policy Loans we are also specifically seeking technical expertise of the Bank informulatingstrategies and programmes andimplementingreforms innewareas Public - Enterprise Reform, Investment Climate and ease af doing business, social security, Eradication of Absolute Poverty, SME support programme, infrastructure planning and development, energy efficiency, food security and,regulatory reforms- in addition to tbe ongoingones. For GovernmentofMauritius DrRSithanen Vice-PrimeMinister Minlster of Plnanceand Economic Empowerment 8 68 ANNEX 3: IMFASSESSMENT LETTER Mauritius-Assessment Letterfor the WorldBank December15,2008 This note provides an IMF staff assessment of recent macroeconomic developments and prospects for Mauritius based on information available through November 2008. A comprehensive assessment of macroeconomic developments, undertaken as part of the 2008 Article N consultation, was published in July 2008 (Country Report No. 08/238, available at http://www.imfiorg). The next Article IV consultation is scheduledfor mid-2009. The authorities have made good headway in recent years in implementing reforms and easing fiscal pressures. Thefirst-round impact of recent global financial market turmoil on Mauritius has been modest, but the international downturnposes a greater challengefor key sectors of the economy. RecentEconomicDevelopments Mauritius has seen good results from the wide-ranging reform program it launched in 2005/06 following the loss of trade preference in sugar and textiles. The reforms have targeted reductions in the fiscal deficit, enhancing public financial management, restoring economic competitiveness, and improving the investment climate. A bold tax reform, incorporating a flat tax on corporate and personal income and a new revenue authority, has significantly improved tax revenues. Combined with reductions in the cost o f doing business and labor reforms, these policies have spurred foreign investment and growth. In the past three years, GDP growth has recovered and macroeconomic vulnerabilities have been reduced. Economicgrowthprogressivelyrecoveredfrom 200906 through mid-2008,averagingover 5 percent. This has lowered unemployment, which i s expected to fall from 9.3 percent in 2005/06 to 8 percent in 2008, the lowest level infive years, but it has also led to growing supply bottlenecks. The main drivers of growth have been large inflows of foreign direct investment (J3DI) into the real estate development and tourism sectors; the offshore Global Business License (GBL) sector, which services investments in major Asian markets; and a rebound in sugar and textile production. Mainly because of price increases for imported food and fuel, inflation rose to about 12 percent in mid-2008 but eased to 9.7 percent in October as international food and fuel prices have dropped. Because of the fiscal reforms, the overall deficit was lowered to 3.4 percent of GDP in 2007/08, from 5.4 percent in 2005/06, and public sector debt was reduced to about 58 percent of GDP in June 2008 from close to 70 percent in June 2005. The tax reform and better tax administration boosted the tax revenue effort from 17.4 percent o f GDP in2006/07 to over 19 percent of GDP, through greater compliance and a broadening of the base. A new public debt management law was introduced in 2008 with the aim of reducing public sector debt to 50 percent of GDP by 2013. Program-based budgeting was introduced with the 2008/09 budget to make government spending more effective. 69 Monetary policy through mid-2008 grappled with the need to contain the impact of strong capital inflows and rising import prices without putting too much pressure on growth. The monetary authorities raised interest rates and increased the cash reserve ratio in mid-2008 to reduce credit growth and contain inflation. Importantly, the Bank of Mauritius (BoM) issued its first inflation and financial stability reports. However, it had difficulty implementing its new monetary policy goal of keeping the rep0rate within stated policy bounds for much of the year in the face of strong capital inflows. Inflation remains a concern, though the recent plunge in food and fuel prices and slackened global demand have helped reduce inflationary pressures. As capital inflows eased in late summer, the B o M reversed its external reserve accumulation and monetary policy was eased inNovember and again in early December, in step with international developments. The banking system appears well capitalized, underpinned by sound regulation, and has limited exposure to subprime products. Despite continued recovery of the textile sector and high growth in tourism and services, the external current account deficit deteriorated in2007/08 to 9.0 percent of GDP (from 7.7 percent of GDP in 2006/07), largely because of on the spike in food and fuel prices and the counterpart imports to unprecedented FDI inflows. However, the analysis is clouded by continuing large errors and omission items caused by persistent difficulties in adequately surveying the operations of the GBLs. Structural reforms have advanced with the recent passage of the flexi-security law on social security, aimed at protecting the individual rather than the job, and revised procedures to improve the implementation of public capital investment. Outlook Risksand Policy Challenges The healthy growth of recent years is expected to decelerate in 2008/09 as global demand slackens. GDP growth in2008/09 is now projected to be much lower than earlier expectations of more than 6 percent and down from 6.6 percent in 2007/08. Uncertainties surrounding the outlook reflect the rapidly changing external environment, but a growth deceleration to about 4 percent or lower is projected. The current account deficit i s not expected to change greatly in 2008/09 as lower demand for tourism, textiles, and offshore investment services are offset by lower imports as FDI weakens and on lower commodity prices. Inflation i s expected to ease significantly with lower imported food and fuel prices and slackened demand. While economic vulnerabilities have been reduced in recent years, the downside risks to the Mauritius economy from the global recession will pose challenges for key export sectors. An abrupt slowdown inglobal economic growth and a sustained reduction inrisk appetite could significantly impact the Mauritian economy. The main risks are from much lower demand for tourism, textiles, and real estate development. Continued turmoil in global financial markets, reduced risk appetite, and outflows from emerging markets are expected to reduce FDI inflows into Mauritius and reduce activity in the offshore GBL sector. The recent sharp depreciation of the rupee (against the U S dollar) will be helpful to export competitiveness, although it may result ina slower reductionininflation. 70 I t is important that fiscal stimulus initiatives being considered be measured, targeted to need, and temporary so as not to jeopardize hard-won gains in fiscal sustainability.Public debt, while on a downward trend, is still highand calls for sustained fiscal prudence. Pressuresto relax fiscal discipline may rise inthe run-upto the electoral campaign inthe next fiscal year, but may be contained compared to previous cycles as a result of stronger fiscal rules embedded in a medium-term fiscal framework. The recentmonetary easing, consistent with globaldevelopments,was appropriate,but the monetary authorities must remain vigilant against inflation, which remains of concern. In particular, the B o M needs to resolve its internal conflict and reinforce the effectiveness of its stated intervention policy. Sustained efforts are needed to resolve statistical issues, which cloud the analysis of the external accounts, and to improve the framework for analyzing the monetary transmission mechanism. While Mauritius has made notable progress, further structural reforms are needed to streamline the public sector and otherwise address supply bottlenecks and infrastructure constraints.Reformof the parastatal sector would bringimportant benefits interms of economic efficiency and competitiveness. A disengagement and divestment strategy for parastatals in the import and distribution of basic goods should be pursued, as should further steps to liberalize domestic trade and phase out administered prices. To raise economic efficiency, indirect product subsidies should be replaced with a targeted safety net. Careful targeting of social spending, where work i s underway supported by key donors, would also introduce a beneficial countercyclical component into fiscal policy. Relationswith the IMF The 2008 Article IV consultation was completed on July 2, 2008. The next consultation i s expected in mid-2009. Technical assistance missions from the Fiscal Affairs Department, covering program-based budgeting, and the Monetary and Capital Markets Department, covering bankingsupervision andmonetary modeling, will be inthe field inthe interim. 71 ANNEX 4: AT A GLANCE Sub Upper Key Development Indicators Saharan middle MaUritius Africa i r c o m &e dskitution 2006 (m7) h4e Ferrate Population, m i d - w r (milions) 1.3 w ) O 823 7579 Surfacearea (thousand q.km) 2.0 24,242 41,497 Population growth (%) 0.7 2.4 0.6 WE4 Urban popuiation (Ohoftotal population) 42 36 75 GNI ( A h method, US$ billons) 7.O 762 5,750 GNI percapita(AUas method, US$) 5,570 952 6,987 GNIpercapita(PPP,intemationaI$) 11,390 1,870 11,868 GDPgrowth (Oh) 4.7 6.2 5.8 10 5 0 5 10 GDP per capita growth ( O h ) 3.9 3.7 5.1 Dermnt (mastrecert estimate,2W0-22w7) Poverty headcount ratio at $1.25a day (PPP, O h ) 50 Povertvheadcount ratioat $2.00a day (PPP,%/,) 72 Life expectancy at birth (years) 73 50 70 Infant mrtaity(per 1,000 lvebrths) 13 94 22 ax Child malnutrition ("/.of children under5) 180 15 27 160 140 Adultiiteracy, mle(%ofages15andokler) 88 69 94 1x1 Adult literacy, female ( O h of ages 15 and dder) 81 50 92 1w Grcss primary enrolment, mk (% of agegroup) 102 99 112 80 Gross primary enrolment, female(% of age group) W 102 68 109 40 20 Acces toan impm=dwaterswrce (Ohofpopulation) 100 58 95 0 Access to improved sanitation facilities (Ohof popuiatan) 94 31 53 Net Aid Flows 1980 1990 2000 20078 (US$m'llbns) Net ODA and official aid 33 88 20 19 Growth of GDP and GDP pec capita (%) Tw3donors (nm06): European CommGsion 1 8 3 15 :I- Japan 1 7 2 4 l8T France 13 32 9 3 Aid (%of GNI) 2.9 3.7 0.5 0.3 Aid per cap@ (US$) 31 84 17 15 Long-Term Economic Trends 0 1 ' ' ! " " ! ! ' 90 95 00 05 Consurrerprices(annual%change) 33.0 10.7 5.3 10.7 GDP implicit deflator (annual O hchange) 10.6 10.6 3.7 7.0 -GDP -GDP prcapita Exchange iate(annua1 average, local perUS$) 7.1 15.4 25.5 32.3 T e r m of trade index (2OOO =100) 1 M 100 79 1sa0-90 1990-2000 2 m 0 7 (averageannualgrowth %) Populaton, m i d - w r (milions) 1.o 1.1 1.2 1.3 0.9 1.2 0.9 GDP (US$ milions) 1,153 2,353 4,469 6,786 6.0 5.2 4.0 (77 of GDP) Agriculture 16.5 13.1 5.9 5.3 2.6 0 . 5 0.6 Induswy 26.3 33.1 31.2 27.6 9.2 5.5 1.4 Manuiacturing 15.7 24.7 23.7 19.9 10.4 5.3 0.2 services 57.2 53.8 62.9 66.9 5.1 6.4 6.0 Househdd mal conslmptionep?nditure 71.O 63.7 63.O 68.8 5.4 5.4 3.7 General gov'tfinal consumption expenditure 14.4 12.8 13.1 13.7 3.3 4.8 4.5 Grass capital fotmtion 25.4 30.7 25.9 26.8 10.3 4.7 5.1 Expatsofgocdsand sewices 46.8 64.2 62.7 61.8 10.2 5.4 2.7 lmpwts of goods and services 57.6 71.4 64.6 71.1 10.3 5.2 2.9 Grcss savings 14.0 26.3 25.3 19.8 Note: Fgures in itaics areforyears other than those specified. 2@37data are prelininary. .. ndicates data are rot avalabk a. Aid data are for 2006. Data is n fiscal pars, i.e.year2007 refers to FY 2006/07. Developmnt Econmics, Developmnt Data Group(DECffi). 72 Balance of Payments and Trade 2000 2007 IGovernance indicators,2000ard 2007 (US$m'llbns) Total merchandise exports (fob) 1,523 2,245 Total merchandise inwlts(ciD 2,158 3.647 Volceandacmmtabiliy Net trade in poods and services -1% -733 Pditlcd stabiliy Current account balance -69 -542 asa% ofGDP -1.5 -8.0 Regllatoy qudiy Workers' remittances and Rule of law conpensationof employees (receipts) 177 215 Cortrd of conuption Reserves, includnggold 688 2,272 0 25 50 75 IC0 Central Government FiMnCe a2007 muntvs peroentilermk(0-im) 32000 hgher v a l m unplybeferrafw ("7 of GDP) Current revenue (including grants) 20.2 19.2 Source Kaufmann-Kraay-Mastuzzi World Bank Tax revenue 18.1 17.4 Current e qendture 20.5 20.1 Technologyand Infrastructure 2000 2007 Overall surplus/defict -3.8 -4.3 PaLed roads ("A of total) 97.0 100.0 Highest mrgnal tax rate (%) Fked ineandmc4le phone Individual 25 15 subscribers (per100people) 39 90 Corporate 25 Hghtechnology exports (%of mnufactured exports) 1.o 24.1 External Debt and Resource Flows Environment (US$m'llbns) Total debt outstandinganddisbursed 1,779 2,734 Agricultural land (% of landarea) 56 56 Total debt service 308 164 Forestarea (??of land area) 18.7 18.2 Debt reief (HIPC,MDRI) - - Nationalk protected areas (% of hndarea) 3.3 Total debt (%of GDP) 39.8 40.3 Freshwaterresourcespercapita(cu. meters) 2,252 Total debt service (% of exports) 10.9 3.4 Freshwatervdthdrawal (%of internal resourax) 21.8 Foreign dired investment (net inflows) 13 223 C02emissbns percapita (mt) 2.3 2.6 Portfolioequity (net inflows) -23 80 GDP per unit of energyuse (2005 PPP$ per kg ofol equivalent) Composition d tdal external dett,2007 Energy useper capita(kg of o l equivalent) (US$millms) 1,411 iBRD Total debtoutstanding and disbursed 97 87 Disbursements 4 31 Principal repayments 20 9 Interestpayments 6 3 U S mlliom IDA Total debtoutstanding and disbursed 14 9 Disbursements 0 0 Private Sector Development 2000 2008 Total debt service 1 1 Time requiredto start a business(days) - 6 IFC (fiscalyear) Costtostarta business(%ofGNI percapita) - 5.0 Total disbursed and outstanding portfolio 6 0 Time requiredto register property(days) - 210 of which IFCown account 6 0 Disbursements for IFCom account 0 0 Rankedas a major constraint to business 2000 2007 Portfolio sales, prepaymentsand (%of managerssurveyedwho agreed) repaymentsfor IFC own accwnt 3 0 Access tdcost of financing .. 52.7 Busness licensingand permits .. 46.8 MlGA Gross exposure Stock market captaleatan (% of GDP) 29.8 83.5 New guarantees - - Bankcapital to assetratio (%) Note: FQuresin italics areforyeaw other than those specified. 2037 data are preliminary #REF! .. hdicates data arerotavalable. - indicatesobservation is not applicable. DevelopmentEmnomics, DevelopmentData Group (DECDG). 73 Millennium Development Goals wihselected targets toachievebetween 7993and 2075 (estimate closest to date shown, +/- 2years) Goal 1:halvethe rates foremmepovertyand malrutrition 1990 1995 2000 2007 Poverty headcountratioat$l 25 aday(PPP,% of populaton) Poverty headcount ratio at nationalpovertyline (%of population) Share of ircome or consumptionto the poorest quntile(%) Prevalence of malnutntion ("A of children under 5) 149 Goal 2 e m v e thatctilden are ableto complete primary schoding Primaryschwlenrolment (net,"A) 91 93 95 Primarycompletionrate ("A of relevantagegroup) 4 98 105 92 Secondaryschoolenrolhent (gross,%) 55 70 88 Youth literacy rate (%of people aQes15-24) 91 95 Goal 3: eliminategenderdisparityineducabm and empower women Ratioof girls to boys inpnmaryandsemndaryeducation (%) 102 98 100 Womenemployed inthe nonagnculturalsector (%of nonagriculturalemployment) 37 36 39 38 Proportion of seats heH by women in national parliament(%) 7 8 8 17 Goal 4 redce under4 mcitalitvbvtwo-ttirds Under5 mttaltyrate @er1,000) 23 21 18 15 lnfantmortalityrate(per 1,000 Iivebrths) 20 20 16 13 Measles rnmunization @mportionofone-parolds immuneed,%) 76 89 e4 98 Goal 5 redce maternal mcitalitybythreefourtk Maternalmrtalky ratio (modekdestinate, per 100,030 ive bitths) 24 Birthsattendedby skilledhealth staff (% of totao 91 98 100 59 Contraceptke prevalence(%of women ages 15-49) 75 76 Goa I 6: halt and begin to reversethe spread d HIWAIDSand other majordiseases Prevalence of HIV (%of populationages 1549) 0.3 1.7 incidenaeof tubemuloss(per 100,000people) E9 67 4 62 Tuberculosiscases detected under DOTS ("A) 34 33 32 Goal 7: halvethe prcportiar of pecple without sustainableaccessto basic needs Access to an improvedwater source(%of population) 100 100 1W 1W Access to inproved sanitationfacilties (%of population) 94 94 Forest area (% of total tad area) 19.2 18.7 18.2 Nationally protectedareas (% of total land area) 3.3 cO2 emissions(metrictons per capita) 1.4 1.6 2.3 2.6 GDP per unitofenerwuse (constant2005PPP$ per ka ofoleauivalent) Goal 8: develop aglobal partnership for development Telephone manines @er100 people) - 5.3 13.2 23.7 28.5 M b l e phonesubscnbers(per 100 people) 0.2 1.o 15.2 74.1 Internetusers(per 100people) 0.0 0.2 7.3 269 Personal aonputers(per 100people) 0.4 3.2 10.1 17.6 fleaslesimmmization (%of 1-year dds) llCT indicators (per 100 people) 1w 7 IO3- ~ 75 - 50 - 25 -, em 2002 mc4 m --9-Pdmry ret erroilrrentrafo -0-Wtioofgirlstoboysinprimcry& OMunttus semndry educdtiffl 1Sub-SaharanWnca Note:Fuuresinitalics areforvears other thanthose swified. .. indicatesdata are cot available DevelopmentEanomics, DevelopmentData Group (DECDG). 74 MAP SECTION IBRD 33446 MAURITIUS 57°30'E INDIAN Flat Rodrigues Island Island OCEAN 19°40'S Port Mathurin SELECTED CITIES AND TOWNS Grand Montagne DISTRICT CAPITALS La Femme Petit Gabriel NATIONAL CAPITAL Gunner's RIVERS Quoin 19°45'S 0 1 2 3 Kilometers Crab MAIN ROADS Island 0 1 2 3 Miles DISTRICT BOUNDARIES 63°20'E 63°25'E 63°30'E INTERNATIONAL BOUNDARIES 57°45'E 20°00'S Cannoniers 20°00'S Point Grand Grand This map was produced by the Map Design Unit of The World Bank. Gaube Baie The boundaries, colors, denominations and any other information Ile D'Ambre shown on this map do not imply, on the part of The World Bank Goodlands Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. Triolet R I V I É R E Poudre d'Or D U PAMPLEMOUSSES R E M PA R T Riviére du Riviére Pamplemousses Rempart I N D I A N Terre Riviére Rouge Citrons O C E A N Riviére Rempart PORT LOUIS La P O R T Nicoliére Nicoliére Bon Accueil L O U I S DéNcouuverte o Flacq Point Centre Petite Riviére velle du Poste du de Flacq Moka M O K A Riviére Pointe Quartier F L A C Q Quatre Cocos 20°15'S Rose Hill Militaire 20°15'S Bambous Piton de Milieu Quartier Bel Air Ile aux Cerfs Montagne Reservoir Blanche Phoenix Riviére du Vacoas Militaire East Tamarin Riviére Tamarin Rempart Curepipe Grand RiverSouth Bambou M t s B L A C K Pointe P L A I N E S du Diable R I V E R W I L H E M S G R A N D Vieux Grand Grand Riviére Vacoas Mare Nouvelle P O R T Port aux France Vacoas I N D I A N Mont Piton Noire Riviére Rose Belle La (828 m) Mahebourg O C E A N Ile aux Grand Bois Chaux Bénitiers Pointe Baie du Cap Rive rdes Mt. Cocotie (771m) Savane Grande Riverdu Sud P Ouest S AGValeA NChemin N E Mts ts Riviére des Riviére Grenier Anguilles Savanne oste L'Escalier 20°30'S Baie du Cap Surinam Souillac MAURITIUS 0 1 2 3 4 5 Kilometers 0 1 2 3 4 5 Miles 57°30'E DECEMBER 2004