Economic Governance and Management 469. 470. Chapter 4 473. In order to strengthen the pillars of commercial competitiveness, the government reformed the business, legal, administrative and fiscal framework to render it more stringent, more flexible, more accessible and more equitable. 474. To stimulate the productivity of enterprises equitably, the government restructured the legal and regulatory framework. It eliminated the discrimination between free and nonfree zones, abolished additional tariffs substantially, reviewed tax credit on investments and simplified the regulatory procedures for granting authorisations and corporate authorisation permits. The budget helped to reverse the trend of increasing the budget deficit and debt, thanks to the 2 per cent cut in recurring expenditure. It exceeded the initial target of 0.5 per cent, thus testifying to the determination of the government to improve financial management (see table 4.4). Furthermore, debt contracted to 4.3 per cent of GDP and exceeded the level of capital expenditure (3.4 per cent of GDP). Box 4.1: 2005/ 2006 2006/ 2007 2007/ 2008 Total deficit (including grants), as a percentage of GDP -5.3 -4.2 -3.0 Public domestic debt, as a percentage of GDP 51.4 46.6 44.7 Public external debt, as a percentage of GDP 4.4 4.7 4.9 Outstanding public debt, as a percentage of GDP 57.9 55.7 48.6 Source: MOFEE. 472. 190 Economic Governance and Management The government decided to make budget policy the key instrument of the NEA. It therefore adopted, within the framework of the 2006/2007 budget, strict rules to guide the policy on indebtedness. The golden rules were: (i) to limit acquiring debt only to cover investments rather than running costs; and (ii) to be rigorous in choosing and managing sustainable public investment in order gradually to reduce the public debt to GDP ratio in net value. The government took specific measures to identify, in the different sectors, ways to reduce costs and capital expenditure while preparing and controlling the budget. In particular, it introduced reforms to improve management capacity and the efficiency of the budget. Table 4.4: Public finance indicators 32 471. Chapter 4 The CRM also noted the significant reforms undertaken to improve the efficiency of fiscal administration. The most notable are: (i) reducing distortions and increasing the transparency of the tax code; (ii) abolishing tax exemptions and similar discretionary powers; and (iii) creating the autonomous MRA to manage revenues. Other equally important reforms were introduced to consolidate the sound management of public finance and to promote the transparency and performance of all national economic policies. They were the reforms introduced in public procurement and for parastatal enterprises. 32 - The most recent budget deficit to GDP ratio obtained after the CRM as reported by the Bank of Mau-ritius is -5 per cent 2004/5, -5.3 per cent 2005/6, -4.3 per cent 2006/7, -3.3 per cent 2007/8, and -3.0 per cent for 2008/9. Global financial crisis and the Mauritian economy Mauritius is a small island economy. It depends largely on the global economy for its growth. The financial crisis therefore affected it severely, particularly the textile and tourism sectors. These sectors account for about 15 per cent of the country’s GDP and are facing falling export orders and tourist arrivals. The crisis also affected other export-oriented sectors and FDI. In the textile sector, the fall in orders has resulted in factories closing down and over 5,000 workers losing their jobs. The banking sector in Mauritius has weathered the financial crisis so far. All the banks operating in Mauritius have shown considerable resilience in terms of capital adequacy, balance sheet growth and profitability, and in loan delinquencies. Banks in Mauritius had an estimated average capital adequacy ratio of 15.8 per cent at the end of December 2008. This is above the regulatory minimum of 10 per cent. The system has not experienced a serious liquidity crunch either. This can partly be explained by the independence of the system on large-scale interbank borrowings to fund its operations and because it is less reliant on external sources for increasing domestic assets. According to the BoM, the foreign funds used for domestic deployment were as low as 2 per cent. This provides insulation from the liquidity crunch in global financial markets. In general, the banks were not exposed to toxic assets like mortgage-backed securities. The insurance and nonbanking sectors were not affected directly by the crisis. However, the financial crisis highlighted issues relevant to financial stability. The country may therefore consider developing new ways of strengthening its financial sector regulations to ensure stability. The CRM was also informed that the banking sector in the country has adopted an approach to implement Basel II. The country should also consider implementing Basel II fully. A number of other issues should take precedence with regard to economic governance and management in Mauritius. These are: (i) diversification; (ii) economic reform measures; (iii) redefining the driving sectors for sustainable growth; and (iv) necessary structural transformations. All of these are needed to cope with the global financial and economic crisis and, more importantly, to achieve sustainable development and economic democratisation. Source: MOFEE 191