Economic Governance and Management Chapter 4 of the Mauritian people have improved dramatically. Mauritius has undoubtedly transformed itself from a poor and ‘desperate country’, according to some observers, to a vibrant one with a medium-level Human Development Index (HDI). 445. 446. In their joint efforts to prevent the complete collapse of the sugar and other affected sectors (textile, tourism and FDI), the government and the private sector have been creative, especially with the diversification strategy. The sugar industry, for example, is becoming the cane economy or industry. Its sugar becomes only one of its byproducts alongside energy, alcohol and others. 447. There are also some negative trends in the balance of payments, terms of trade and budget deficits. The recurrent budget deficit is one of the negative macro-economic effects of being a welfare state, while price increases in imported oil and food, among others, fuel inflation. 448. 182 There are nevertheless some weaknesses and the government is aware of them. The EU preferential policy toward Mauritius’s sugar and textile exports, with prices above market prices, tended to boost its growth artificially. However, Mauritius managed its resources well and that is why the country deserves its praise. The end of the preferential policy, together with the huge increases in oil prices, caused a structural crisis in the Mauritian economy before the world financial and economic crisis hit. Macroeconomic policies could neither prevent nor avoid the structural crisis. The government is revising them through monetary and tax policies in order to mitigate the negative effects on export-oriented enterprises (EOEs), particularly in the sugar and textile sectors. The CRM, however, commends the government for its approach to financing the budget deficit. Unlike what happens in several countries, where central banks create or issue money to finance budget deficits, thereby accelerating inflation, the government of Mauritius borrowed from the domestic market by issuing treasury bonds, bills and notes. The box below illustrates this as good practice. Chapter 4 Good practice 4.1: Economic Governance and Management Financing the budget deficit in Mauritius Mauritius is one of the few African countries that have succeeded, since 2004, in making budget deficit financing the instrument that regulates the money market. In fact, for over five years, the government has abandoned the money printing system to finance its cash flow requirements. It now covers its funding needs through the money market by issuing treasury bills and bonds and interest-bearing instruments. The BoM manages government securities to achieve its mission of administering monetary policy and advising government. The 2004 Banking Act strengthened the BoM’s role in order to ensure that the public debt strategy is implemented while considering its effect on developments in the money market on the one hand and macroeconomic indicators on the other. The MPC was established in March 2007 to ensure that the capital market was transparent and efficient and to develop monetary policy. The committee enables the BoM and the government to monitor market trends regularly, to intervene in the market in order to mobilise necessary resources for the government, to ensure that liquidity is properly managed, and to regulate interest rates. The committee meets at least once every quarter or whenever it is necessary. The committee publishes its decisions directly. As part of the definition of the budget policy, the government estimates its borrowing requirements to promote the issuance of government securities. However, it does not interfere in the market. Treasury bills issued in the market in 2005/2006 and 2006/2007 stimulated the mobilisation of domestic savings and an increase in foreign investments because of favourable interest rates. The average interest rate increased to 12.75 per cent from 6.79 per cent in June 2006 and then dropped to 11.1 per cent in June 2007. At the same time, the government is implementing a policy to consolidate short-term domestic debt into medium- and long-term debt. Medium- and long-term securities account for a significant percentage of domestic public debt (60 per cent at the end of 2006/2007 and 66.7 per cent in 2007/2008). Deficit financing came exclusively from the internal and external nonbanking sectors in 2006/2007. The rapid rise in interest rates, however, resulted in an increase in debt service payments. To avoid uncontrollable inflationary pressure, the BoM had to intervene in order to control interest rates. The MPC convened three meetings between January and June 2008 to reduce the base rate. This led to a drop in interest rates. Source: CRM. 449. On the human and sustainable development side, a growing per capita GDP, implying an improving HDI, demonstrates Mauritius’s performance. Figure 4.2 illustrates this. However, these average figures mask considerable inequalities that are increasing (see chapter 6 on pockets of absolute and relative poverty). In addition, the inflation rate remains somewhat high and seriously erodes the purchasing power of the average Mauritian. 183