Economic Governance and Management Chapter 4 Chapter 4 construction and tourism registered double-digit growth. Following a contraction of nearly 40 per cent between 2002 and 2005, the textile sector recovered somewhat in 2006 and achieved growth of 8.5 per cent in 2007. The sugar sector, which was a mainstay of the economy, has been regressing for the past three years.28 The sustained growth of the Mauritian economy has, however, been accompanied by high inflation. Inflation was about 6.8 per cent in 2006 (GDP deflator) and 7.9 per cent in 2007, while the consumer price index (CPI) peaked at 8.9 per cent in 2006. The CPI remained at 8.8 per cent in 2007. 426. Exchange rate regime. The country has abolished exchange controls and liberalised interest rates in the early 1990s. As part of its monetary policy, the BoM limits its market interventions and allows the free play of market forces. The BoM intervenes on the domestic foreign exchange market only to smooth out irregular fluctuations of the rupee. In addition, Mauritius’s gross official international reserves rose from USD1.6 billion in December 2003 to USD1.8 billion at the end of December 2007. The Monetary Policy Committee (MPC), chaired by the governor of the BoM, defines the country’s monetary policy stance. 427. Balance of payments. Provisional estimates for 2007 indicated that the overall balance of payments registered a surplus of Rs13.9 billion. However, the current account recorded a smaller deficit of 5.6 per cent of GDP in 2007 compared with 9.4 per cent in 2006 and 5.2 per cent in 2005. The deficit on the merchandise account increased significantly to Rs45.0 billion in 2007 because of increasing imports and declining exports, but surpluses on the services account offset this. In the capital and financial account, direct investment in 2007 recorded a net inflow of Rs8.8 billion, compared with Rs3 million in 2006, while portfolio investment recorded a net inflow of Rs647 million in 2007. 428. Terms of trade. Mauritius’s ratio of export price index to import price index fell by 17 percentage points between 2003 and 2007. This indicates a decrease in the real purchasing power of local exports and a greater increase in import prices (about 54 per cent) compared with export prices (27 per cent). 15 per cent over three years, effective from the 2007/2008 year. Despite this decline, the overall budget deficit for the 2007/2008 fiscal year, which amounted to close to Rs9 billion and represented 3.3 per cent of GDP, was contained within the critical 5 per cent of GDP mark, down from 4.3 per cent in 2006/2007 and 5.3 per cent in 2005/2006. It introduced a new National Residential Property Tax (NRPT). It has maintained value-added tax (VAT), currently its largest source of tax revenue, at 15 per cent. The government has also introduced reforms in other systems of taxes and duties. It is worth noting, however, that revenue as a percentage of GDP has been declining. Savings and investment policy 430. Gross national savings plummeted from a high of 28.4 per cent of GDP in 2001 to 17 per cent in 2006. With the annual inflation rate at 8.9 per cent in 2006 and 8.8 per cent in 2007, the real after-tax interest rate on deposits has been negative for the past two years. This has prompted Mauritians to look for other savings instruments that earn higher returns, such as shares and mutual funds, rather than traditional saving accounts. 431. Investment in the local market. The Stock Exchange of Mauritius (SEM) lists 40 local companies from various sectors of the economy. Total market capital currently stands at Rs180 billion (USD6 billion).29 Foreign investments, which accounted for Rs11.5 billion in 2007, sustain the market. Low liquidity, low volumes of transactions and overconcentrated trading activities on some listed blue-chip companies characterise the local stock market. Total turnover, as a ratio to free-float on the official market, is around 30 per cent, while the top 10 listed stocks account for more than 75 per cent of the total value traded. Despite this, savings avenues are still limited. The average Mauritian consequently tends to invest in government securities. 432. BoM securities. The BoM, as an agent of government, auctions treasury bills or notes weekly or monthly, depending on their maturities. 433. The CSAR also presents, without analysis, interviewees’ responses to, or perceptions about, monetary and tax policy, savings and investments. It also makes recommendations for policy changes. ii. Findings of the CRM 434. The CRM concurs with the CSAR that Mauritius has made tremendous efforts to improve economic governance and management via a Tax policy 429. 176 The government has undertaken major fiscal reforms, including simplifying the income tax system. It reduced corporate and personal income tax rates from 30 per cent (top tax rates) to a single flat rate of 28 - Recent data for 2009 obtained after the CRM shows a resumption of growth in the sector estimated at 21.1 per cent. Economic Governance and Management 29 - Recent data for 2009 obtained after the CRM shows SEM market capitalisation at the end of December 2009 was at Rs 151.2 bn . 177