Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 42150-MU

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF US$30 MILLION

TO

THE REPUBLIC OF MAURITIUS

FOR A

SECOND TRADE AND COMPETITIVENESS DEVELOPMENT POLICY LOAN

January 25,2008

Poverty Reduction and Economic Management 1 Africa Region

This document has a restricted distr ibution and may be used b y recipients only in the performance o f their official duties. I t s contents may no t otherwise be disclosed without Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EOUIVALENTS (Exchange Rate Effective as o f August 3 1,2006

Currency Unit = Mauritius Rupee US$l.OO = MUR 32.508

GOVERNMENT FISCAL YEAR July 1 - June 30

WEIGHTS AND MEASURES Metric System

This DPL was jointly prepared and appraised by a team from the World Bank, the Agence FranGaise de DCveloppement, the European Commission and the African Development Bank. Team comprised Robert Keyfitz+TTL), Maria Teresa Benito-Spinetto, Laurent Besancon, Paul Brenton, Constantine Chikosi (WB), Michel Gauthey, Mustapha Kleiche, Cynthia Mela and Clarisse Liautaud (AFD), Ezzeddine Larbi (ADB) and Hans Rhein and Lalita Nosib (EC). Counsel for the Bank was Lisa Lui, the Finance Officer was Suzanne Morris and Financial Management Officer was Renaud Seligmann. Excellent administrative support was provided by Selvi Isaac and Sara Sundaram. Peer reviewers were Harry Broadman, Raj Nallari and Mathew Verghis. The work was done under the general guidance and supervision o f John Panzer (Sector Manager). Useful discussions and other contributions are gratefully acknowledged from L i l ia Burunciuc, Soamiely Andriamananjara, Yaw Ansu, Carine Clert, Emmanuel Cuvillier, Bernard Drum, Manuela Ferro, Emile Finateu, Norbert Funke, Malcolm Holmes, Paul Martin, Menachem Katz, Jeff Ramin, Sudhir Shetty, Jim Stephens, Michael Stevens, Arv i l Van Adams and Jan Walliser. The team i s greatly indebted to the many officers o f the Government o f Mauritius who graciously contributed their time and knowledge to explain the details o f the Government's reforms. Special thanks are due to Ali Mansoor, Vishnu Bassant, and Mohit Dhoorundhur o f the Ministry o f Finance and Economic Develoument.

Vice President: Obiageli Katryn Ezekwesili Country Director: Ritva Reinikka

Sector Manager: John Panzer Team Leader: Robert Keyfi tz

.. 11

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ............................................................................. iv I . INTRODUCTION ....................................................................................................... 2 I1 . COUNTRY CONTEXT .............................................................................................. 3

A . RECENT ECONOMIC DEVELOPMENTS: B . MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

I11 . THE GOVERNMENT PROGRAM .. IV . BANK SUPPORT TO THE GOVERNMENT'S PROGRAM .................................. 15

A . LINK TO THE COUNTRY PARTNERSHIP STRATEGY ............................................................... 15 B . COLLABORATION WITH IMF AND OTHER DONORS. C . RELATION TO OTHER BANK OPERATIONS .............................................. D . LESSONS LEARNED .............................................................................. E . ANALYTICAL UNDE NINGS ..................

V . THE PROPOSED OPERATION ............. A . OPERATION DESCRIPTION ............................................ B . POLICY AREAS ............ .......................................................................................................... 29

VI . OPERATION IMPLE TATION .......................................................................... 45 A . POVERTY AND SOCIAL IMPACT ........ ............................... B . ENVIRONMENTAL ASPECTS ............... ..................................................................................... 47 C . IMPLEMENTATION, MONITORING AND EVALUATION .......................................................... 48 D . FIDUCIARY ASPECTS ........... ........... ...................... ...... E . RISKS AND RISK MITIGATION ........................................................................

ANNEX 1 - LETTER OF DEVELOPMENT POLICY ................................................... 51 ANNEX 2 - OVERVIEW OF PRIORITY PARASTATALS .......................................... 61 ANNEX 3 - IMF ASSESSMENT LETTER ..................................................................... 62 ANNEX 4 - AT A GLANCE ............................................................................................ 67 MAP ................................................................................................................................... 70

LIST OF TABLES Table 1 . Macroeconomic indicators .............................................................................................. 5 Table 2 . Fiscal framework ............................................................................................................ 5 Table 3 . Contributions to growth ................................................................................................... 6 Table 4 . Fiscal projections ........................................................................................................... 11 Table 5 . Reforms introduced in the 2006/07 and 2007/08 budgets ............................................. 14 Table 6 . DPL and CPS outcomes compared ................................................................................ 16 Table 7 . Analytical support for the Government's reform program ............................................ 20 Table 8 . DPL prior actions and indicative triggers ...................................................................... 24 Table 9 . Action Plan for Implementing a PBB System ............................................................... 33 Table 10 . Fiscal consolidation ..................................................................................................... 36 Table 11 - Industrial Production growth from Q1 2006 to Q1 2007 ............................................ 40 Table 12 - Job losses in sugar and apparel (, 000) ......................................................................... 45

LIST OF FIGURES Figure 1 . GDP Growth Slowdown ................................................................................................ 4 Figure 2 - CPI inflation ................................................................................................................... 4 Figure 3 - Confidence index ........................................................................................................... 7 Figure 4 - Industrial production ...................................................................................................... 7 Figure 5 - Distribution of average per capita GDP growth, 1984-2004 .......................................... 8

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

LOAN AND PROGRAM SUMMARY

Tranching

Description

REPUBLIC OF MAURITIUS SECOND TRADE AND COMPETITIVENESS DEVELOPMENT POLICY LOAN

Single tranche operation

The loan i s the second o f three Development Policy Loans o f $30 mill ion each.

Borrower 1 Republic o f Mauritius

I

Implementing Agency 1 Ministry of Finance and Economic Development

Amount 1 US$30 mill ion

Terms Variable Spread Loan, fifteen years repayment including five year grace period.

Benefits

The objective i s to support a bold and comprehensive structural reform program which the Government i s implementing in response to two major challenges: (i) the “triple trade shock” o f trade preference erosion and high o i l prices and (ii) the transition from low wage, low skill sugar and apparel exporter to innovative, knowledge and skill based services economy.

Triggers have been drawn from the four pillars o f the Government’s reform program: (A) Consolidating fiscal performance and improving public sector efficiency; (B) Improving trade competitiveness; (C) Improving the investment climate; and (D) Democratizing the economy through participation, social inclusion and sustainability.

The loan wi l l help to finance the current year’s budget deficit and w i l l further diversify Mauritius’ debt portfolio, which i s heavily weighted toward domestic and short term borrowing.

Beyond that, the operation has deepened the policy dialog on key issues ranging from trade policy to labor market reform to transitional support measures. I t has also provided the vehicle for coordinating o f other principal donors which have participated in joint identification and appraisal missions and are expected to provide an additional US$40 mill ion in cofinancing. The EC i s also aligning i ts grant budget support with the DPL.

The operation symbolizes the cooperation and trust which have developed between the Government, the Bank and other Development Partners.

Risks The country faces two risks. First, capacity constraints in implementing the broad and ambitious reform program. Second, high inflation and current account and fiscal deficits highlight a delicate macroeconomic balance which could potentially unwind and destabilize the both the reform program and the country’s recovery prospects.

Operation ID Number I P106650

iv

ABBREVIATIOSS A 1 3 ACROXYMS

AAA

ADB AFD

AFT APRM B O M BPO C E M

CEB C H C L

CPS CPAR

CTB

C W A DCP DMU DPL

E C E C A EIA EPZ ES W

EU FAD FDI FY GBS GDP IBRD

I C A IT I C T

Analytical and Advisory Assistance

African Development Bank Agence FranGaise de DCveloppement Aid for Trade African Peer Review Mechanism Bank of Mauritius Business Process Outsourcing Country Economic Memorandum

Central Electricity Board Cargo Handling Corporation Limited Country Partnership Strategy Country Procurement Assessment Report Central Tender Board

Central Water Authority Document Cadre de Parteneriat Debt Management Unit Development Policy Loan

European Commission Economic Commission for Afr ica Environmental Impact Assessment Export Processing Zone Economic and Sector Work

European Union Fiscal Affairs Department Foreign Direct Investment Fiscal Year General Budget Support Gross Domestic Product International Bank for Reconstruction and Development Investment Climate Assessment Information Technology Information and Communications Technology

I C T A

I L O IMF

MAAS MDA MDG MFA MOFED

M P C MTEF

MUR NEA

NEPAD

NICTSP NPC PBB PEFA

PERL PERP PFM PIT SADC

S A F E SBS S M E SMST SPMP TA UN

UNDP WMA ZEP

Information and Communications Technology Authority International Labor Organization International Monetary Fund

Multi-Annual Adaptation Strategy Ministries, Departments and Agencies Millennium Development Goal Multi Fiber Agreement Ministry o f Finance and Economic Development Monetary Policy Committee Medium Term Expenditure Framework

Mauritius Rupees New Economic Agenda

New Partnership for Africa’s Development National I C T Strategic Plan National Pay Council Program based Budget Public Expenditure and Financial Accountability Public Expenditure Reform Loan Public Enterprise Reform Project Public Financial Management Personal Income Tax Southern African Development Community South Afr ica Far East Sector Budget Supports Small and Medium Enterprise Sector Ministry Support Team Sugar Planters’ Mechanical Pool Technical Assistance United Nations

United Nations Development Program Wastewater Management Authority Zone d’ Education Prioritaire

I. INTRODUCTION 1. In the early 1990s a new vision began to take shape in Mauritius o f a higher value added, more knowledge and skill intensive economy.' With labor shortages beginning to drive up real wages, there was a recognition that the end o f l o w wage, labor intensive development was being reached. Henceforth growth would depend increasingly on diversification into higher value added, more knowledge and skill based activities. Planners set their sights on financial and medical services, Information Technology (IT) and Business Process Outsourcing (BPO), and manufacturing activities such as jewelry, printing and publishing and light engineering where remote location and high transport costs would not be too much o f a handicap. Exploiting these opportunities would require upgrading transport and telecommunications infrastructure, strengthening education and training, and improving the regulatory environment. A combination o f Foreign Direct Investment (FDI) and domestic investment would be tapped for capital and entrepreneurial talent much as had happened with the Processing Zone (EPZ) in the 1970s and 1980s.

2. . This vision enjoys virtually universal popular support and has been the core development strategy o f every government since. I t gave r ise to two subsequent action plans and many steps have been undertaken to make it a reality. Today, a nascent new economy offers encouraging evidence that the vision i s on track. Sugar production has diversified into specialty sugars, ethanol and bagasse electricity cogeneration which now supplies nearly a fifth o f the country's power demand. Textiles and apparel have downsized, but stabilized around a core o f f i r m s which invested heavily in sophisticated design and fabrication capabilities and specialized, niche Small and Medium Enterprises (SMEs). Non-traditional exports (fish, precision instruments, jewelry and precious stones) have grown at double digit rates, albeit f rom a l o w base, reaching 15 percent o f EPZ exports in 2004. An IT sector has taken root, mostly call centers and BPO, but comprising disaster recovery centers and other high-end activities too. Upgrading and modernization o f the port quickly attracted enough extra business to overwhelm the new capacity. Since establishing the offshore financial sector, Mauritius has become the largest source o f inbound FDI into India.

3. The economy remains highly dependent on traditional sugar, clothing and tourism and as these have lost ground in increasingly competitive global markets, overall growth has slowed - from 6 to 7 percent in the late 1980s, to 5 to 6 percent in the late 1990s and 3 to 4 percent in the mid-2000s. More recently, trade preference erosion and high o i l prices - the triple trade shock - have added new urgency to speeding up this transition.

Yet, in the aggregate progress has been slow.

' Government o f Mauritius 1997, Vision 2020: The National Long-Term Perspective Study (Port Louis: Ministry o f Economic Development and Regional Cooperation).

4. The slow pace o f the transition has much to do with the approach o f successive Governments to economic management. Sugar and textile rents f rom trade protection allowed Mauritius to perpetuate 1970s’ style industrial policies o f picking winners and promoting them through special incentives and targeted public investments. Instead o f removing underlying structural constraints, ever more layers o f special programs and interventions were added to an increasingly complex and unwieldy framework. Expensive and poor quality utilities, telecommunications and transportation services, mainly government produced or regulated, undermined competitiveness, while inflexible labor market regulations deterred risk taking and innovation, and impeded the f low o f resources out o f declining sectors into dynamic, growing ones. L o w educational attainment and restrictive immigration practices made i t dif f icult for employers to hire needed skil ls. Finally, inefficient budgeting and public sector management caused a run up in public deficits and debt that began to threaten macroeconomic stability, undermining Mauritius’ attractiveness as a destination for FDI.

5. Elections in July 2005 brought to power a new government on a strong reformist platform o f enhancing competitiveness and broadening opportunities.2 As it worked out the details of i t s reform program and began implementation the Government turned to the World Bank and other Development Partners3 for both pol icy advice and financial support. The latter i s being delivered largely via a programmatic series o f three Development Policy Loans (DPLs), o f which this i s the second. The European Commission (EC), Agence FranCaise de Developpement (AFD) and the African Development Bank (ADB) participated in joint preparation and appraisal missions and are partners in financing the reforms. As wel l as meeting around a quarter o f the public sector borrowing requirement over the three-year period, the operation i s also coordinating dialog and external support by the Development Partners across the spectrum o f areas it covers.

11. COUNTRY CONTEXT A. RECENT ECONOMIC DEVELOPMENTS:

6. In step with the rest o f the world, Mauritius’ economy slowed sharply in 2001-02 (Figure 1). Indeed, with cyclone Dina superimposed over a range o f other global and regional factors Mauritius slowed more than most: growth declined f rom 9.7 percent in 2000 to 5.2 percent in 2001 and 1.8 percent in 2002. The downturn was particularly evident in the external sector which mirrored the growth slowdown in Mauritius’ main trading partner^.^ From 2002-05, export growth halved f rom a 12.6 percent average in 1997-2001 to 6.4 percent in 2002-05, the terms o f trade f e l l by 19 percent and the current

* See Government o f Mauritius, “Government Programme 2005-2010: Address by the President o f the Republic,” at httu://www.gov.mu/~ortal/eoc/assemblvsite/file/Presidentaddress.udf.

partners - the African Development Bank, Agence FranGaise de DCveloppement, the European Commission, and the World Bank.

World, Chapter 2.

The term, “Development Partners” i s used throughout this document to refer to Mauritius’ main external

See World Bank 2007, Mauritius Country Economic Memorandum: Managing Change in a Changing

2

account swung sharply into deficit. The EPZ sector, comprising mainly textiles and apparel, downsized by around a third in 2001-05 as the ending o f Multi-Fiber Agreement (MFA) approached. From there, the weakness spread to the domestic economy, where it was reflected in declining savings and investment rates and a deterioration in fiscal performance (Table 1).

7. Though 2002 marked the l ow point in the cycle, statistically smoothinjg away some o f the volatility in growth rates reveals an unmistakable downshift in performance (Figure 1). The slow pace o f adjustment to the external shocks which were largely global in nature i s notable: Mauritius was the fourth fastest growing country in sub-Saharan Africa in 1996-2001, but slipped to fourteenth place in 2002-05. No doubt this poor performance contributed to a growing sense o f anxiety and pessimism and i t lead to a dramatic change in policy direction.

1996 1998 2000 2002 2004 2006

1- - GDP -Trend

Soiircr CSO NmowI YCCOIMI

8. Since the introduction o f major reforms in mid 2006, the picture has brightened considerably. Real growth rebounded to 5 percent in 2006 and close to 6 percent in 2007 according to recent estimates by the Central Statistics Office.6 Private investment rose from an average o f 14.6 percent o f GDP in 2002-05 to 16.6 percent in 2006,7 while export growth picked up f rom 2.4 percent in 2002-05 to 17.3 percent in 2006.

9. Counterpoised to these positive developments, three largely negative indications o f macroeconomic stress can be noted - though as risks to the baseline expectation rather than predictors o f an impending meltdown. The first i s inflation which remains high, but has been trending down since peaking at double digit levels (Figure 2). In July 2007, the Bank o f Mauritius' (BoM) newly constituted Monetary Policy Committee (MPC), warning that "risks to inflation appear to be on the upside," raised the re o rate aggressively by 75 basis points! The

Figure 1 - GDP Growth Slowdown percent change

I"

g 1 . . . . . . . . . . . ,A. . . . . . . . . . . . . . . . . .

8 4 ................................. ' \ .......................................................... i 1' "'\ 7 7 ......................... ..... I ............................................

' J \I 2 ' J

1

Figure 2 - CPI inflation y-0-y percent change

10 -

J F M A M J J A S O N D J F M A M J J A S O N D 2006 2007

Source Cenrral Srarrsrrcs Office Nore structural break in July 2007

situation bears watching, but Mauritius has a history o f pragmatic economic management

Using a Hodrick-Prescott filter. Central Statistics Office estimate (December 2007). Total gross fixed capital formation increased more strongly, from an average o f 21.8 percent o f GDP in

2002-05 to 26.5 percent in 2006, but that reflects partly the purchase o f an aircraft by Air Mauritius. That furchase also obscures trends in imports and the current account.

See press release on July 2 at h t t ~ : / / b o m . i n t n e t . m ~ m ~ c / C o m m u n i ~ u e - M P S t

3

and execution has been strengthened by both the M P C and replacement o f the old Lombard rate with a more market oriented rep0 rate. Credit growth has not been excessive and the authorities appear to understand the r isks and be prepared to take further action should that become necessary.

Real GDP growth (%) Real GNFS exports growth (%) Gross national savings (% GDP) Gross domestic investment (% GDP)

CPI inflation (avg) (%) Productivity growth (**)

Terms o f trade (% change) TOT adjustment (% o f GDP) CA balance (% GDP) real exchange rate (% change) FX reserves (months o f imports of GNFS) FX reserves (months o f imports o f Goods)

Table 1 - Macroeconomic indicators

96197- OOIO1 01/02 02/03 03/04 04/05 05/06 06/07 99/00 (9

5.3 5.6 2.7 3.2 4.7 4.6 3.5 4.5 2.9 10.7 9.5 -8.0 -2.0 5.7 8.0 6.0 25.7 27.6 26.5 26.3 23.8 19.7 19.0 19.1 26.5 23.3 21.4 22.7 24.1 23.3 24.5 26.5

6.2 4.4 6.3 5.1 3.9 5.6 5.1 10.7 1.2 -0.3 -1.0 0.4 -1.5 -0.8 0.1

-1.2 -1.8 0.9 1.0 -5.3 -7.0 -0.5 -3.3 0.8 3.1 2.1 3.3 1.4 -2.6 -4.2 -6.1 -1.5 2.7 5.4 2.6 1.1 -3.5 -5.3 -7.2 1.5 2.8 -1.4 -0.8 -3 -5.5 -1.2 -2.0 3.1 3.5 4.7 5.7 5.4 4.6 3.9 3.2 4.2 5.0 6.8 8.0 7.6 6.5 5.4 4.5

10. Second i s the current account which swung into deficit in 2005 and has continued to deteriorate, perhaps reaching a deficit o f 8 percent o f GDP or more in the current year, although the final figure wil l be lower if export growth maintained i t s pace in the second hal f o f the year. So far the deficit has been more than offset by strong capital inflows, especially FDI which i s at the highest level in a decade, wi th the result that the exchange rate has been stable and foreign exchange reserves have actually risen. The Country Economic Memorandum (CEM) took a relatively sanguine view o f the current account deficit, attributing it largely to expenditure smoothing in response to a sustained, negative trade shock. Again, the authorities need to remain vigilant, but a sudden and disruptive correction does not appear l ikely at this time.g

Table

Total revenue and grants - Total revenue - Grants

Primary expenditure Interest expenditure Budget balance Debt/GDP Source: MOFED

1. - Fiscal framework 05/06 06/07 07/08 08/09 09/10

20.1 19.3 20.3 20.6 20.7 19.8 19.1 19.1 19.3 19.3 0.3 0.2 1.2 1.3 1.4

21.6 19.5 19.3 19.3 19.4 3.8 4.1 4.8 4.8 4.8

-5.3 -4.3 -3.8 -3.5 -3.5 54.9 50.3 49.2 48.4

See, W o r l d Bank 2007, Mauritius Country Economic Memorandum: Managing Change in a Changing World. Import data classified by end use could cast further light on the risks since investment goods

4

11. Finally, the government deficit also gives rise to concern. The 2006/07 budget reduced the deficit to 4.3 percent o f GDP from 5.3 percent the year before and put a stop to the upward trend in debt. The 2007/08 budget aims at a further reduction to 3.8 percent. Nevertheless, Moody’s recently put Mauritius’ sovereign debt rating under review because o f continuing high levels o f public borrowing in both domestic and foreign markets. lo The macroeconomic and fiscal framework presented in the 2007/08 budget anticipates that both revenue and expenditure w i l l stabilize at around current levels, but that significant grant financing from the European Union (EU) will continue to bring down the deficit (Table 2). Assuming these elements o f the macroeconomic and fiscal framework are borne out, the fiscal outlook i s satisfactory. However, i t bears mentioning that programming in the EU’s grant financing i s risky since some o f these transfers are conditional on politically sensitive pol icy actions, though the r isks have receded recently with agreement on key components o f the Mult i-Annual Adaptation Strategy for Sugar (MAAS).

12. H o w much does the rebound o f the past two years owe to the Government’s reform program? There i s little doubt that the reforms helped spawn the surge in confidence (Figure 3) which in turn translated into higher investment as evident in FDI and the booming construction sector.” At the same time, however, industrial production data suggest that the EPZ recovery may have begun earlier, while non-EPZ manufacturing i s struggling with the loss o f trade protection (Figure 4). Notably, the contributions to growth calculated in Table 3 attribute most o f the cyclical downturn and

Table 3 - Contributions to growth vercent

GDP at factor cost Agriculture

- sugar Industry

- manufacturing - EPZ - sugar

- construction

- restaurants and hotels - transport and communication

Services

Other Source: CSO

1997-01 2002-05 2005 2006 2007 5.7 3.2 2.3 5.0 5.6 0.2 -0.3 -0.4 0.0 -0.4 0.1 -0.2 -0.3 -0.1 -0.4 1.8 -0.1 -1.3 1.1 1.5 1.2 -0.4 -1.1 0.8 0.7 0.7 -0.8 -1.1 0.3 0.6 0.0 -0.1 -0.1 0.0 -0.1 0.4 0.2 -0.3 0.3 0.8 4.3 3.9 4.4 4.3 4.9 0.4 0.2 0.3 0.3 1.1 1.2 1.1 1.2 0.9 1 .o

-0.6 -0.3 -0.4 -0.4 -0.4

imports would imply greater future ability to service current net foreign borrowing. Unfortunately, the Central Statistics Office does not publish such a breakdown. lo Abstracting from concerns about fiscal sustainability, shifting the debt portfolio toward long term, foreign borrowing (Le. DPL financing) appears consistent with prudent debt management (see, World Bank 2006, “Should Mauritius borrow abroad?” (processed).) In particular, multilateral debt has trended down, falling from 6 percent of GNP in 2002 to 3.3 percent in 2006. Ne t flows on multilateral debt were negative over the period and the share of multilateral debt to total debt outstanding fel l from 15.3 percent to 10.7 percent.

in Figure 3 (p = 0.8). Quarterly national accounts investment data are highly correlated with the recovery in confidence shown

5

recovery to traditional sugar and EPZ manufacturing and construction and relatively l i t t le to new emerging sectors such as IT, and financial and business services.12 This should not be surprising (or discouraging) as substantial evidence indicates that the benefits o f major structural reforms begin to be realized in 2-3 years. Thus, the majority o f benefits l ikely l i e in the future. However, i t i s also worth bearing in mind the International Monetary Fund's (IMF) view that reaping these benefits wi l l depend on maintaining the momentum o f the reform process.

Figure 3 - Confidence index percent optimistic or very optimistic

minus percent pessimistic or very pessimistic 1 nn .I_ 80

60

40 - 20

a -20

E o

-40 -60

_. .................................... ............................................ .............................

................................................................ I

.......................................................................................................................

-100 ' ND JFMAMJ J A S O N D JFMAMJ JASOND J

2006 2007 2008 Source: Pluriconseil barometre

Figure 4 - Industrial production y-0-y percent change

1 4

........................... ................................................... I ....................................................................................................... v -15 4.

-20 1 1 I

-25 , Q1 Q2 Q3 Q4 Ql Q2 Q3 Q4 Q1 4 2 Q3 4 4 Q1 Q2

2004 2005 2006 2007

' - EPZ - - NO~-EPZ 1 Source: Central Sfarrsrrcs ODce

B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

13. The macroeconomic outlook prepared a year ago for the f i rs t DPL saw reason for optimism. Mauritius enjoys strong leadership, a high degree o f social cohesion, robust institutions and a tradition o f pragmatic economic management. These underlying factors augur well for a continuation o f the superior performance of the past quarter century, despite the radical structural changes now occurring in both Mauritius and the global economy.

14. In fact, over the past two years, the speed o f the recovery has surpassed expectations. Whereas the first DPL anticipated a steady recovery f rom 3.5 percent growth in 2005/06 to 4.3 percent by 2009/10, preliminary estimates show the actual outturn in 2006/07 was 4.5 percent, primarily due to unexpectedly strong export growth. With the 2007/08 budget, doubts about the Government's resolve to continue with the reforms have receded, further bolstering confidence about near term prospects. Nevertheless, i t would be prudent to remain cautious about the medium term:

W h i l e strongly supporting the reforms, the most recent Article IV staff report (February 2007) concluded that even 4-5 percent growth would be difficult to sustain without continuing the process.

l2 Average growth in 2002-05 slowed by 2.5 percent compared to 1997-2001, of which 0.5 percent was accounted for by agriculture and another 1.5 percent by EPZ manufacturing. In 2005-06 average growth increased by 2.0 percent, 0.2 percent due to agriculture, and 1.2 percent from EPZ manufacturing.

6

High o i l prices and recent turbulence in global financial markets highlight vulnerabilities in the external environment.

Finally, sustaining long term growth significantly above the current rate would represent a remarkable achievement by any standard. Figure 5 shows two distributions o f average growth over the 20 year period, 1984-2004 for al l countries with data available and a smaller number 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 o f three scenarios prepared for the CEM. Even the l o w case, 3.2 percent average per capita growth, would be significantly above the unconditional expectation.

Figure 5 - Distribution o f average per capita GDP growth, 1984-2004

percent 40 7

35 - - 30

- 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 0 1 2 3 4 5 6 7 8 average growth (%)

ID 141 countries 14 countries

15. Accordingly, the baseline projection brings forward the recovery anticipated last year, but maintains the expected convergence toward steady state growth in the 5 to 5.5 percent range. While, as noted above, significant concerns remain about inflation and the fiscal and current account deficits, a smooth transition to sustained growth near potential i s the most plausible scenario. Accordingly, the overall shape o f the projections i s very similar to a year ago.

Debt sustainability:

16. L o w growth and high fiscal deficits in recent years have fueled a r ise in Mauritius’s public sector debt, which stood at about 70 percent o f GDP in 2006/07. Public debt i s mostly domestic. Whi le progress has been made in improving the maturity profile, roughly hal f o f the domestic public debt i s short-term, contributing to significant interest rate and refinancing risks. Under the IMF staff‘s baseline scenario, presented in the 2007 Article IV report, which assumes that reforms already implemented are maintained but no additional reforms are undertaken, Mauritius’ public sector debt ratio remains roughly constant. In this modest growth scenario, where fiscal deficits rise in the medium term, a permanent, one quarter standard deviation shock applied to: (i) the real interest rate; (ii) growth; (iii) the primary balance; or (iv) a one-time real depreciation o f 30 percent, would increase the debt-to-GDP trajectory to about 80 percent by 201 1/2012.

17. Under the IMF staff‘s reform scenario, which assumes a gradual decline o f the fiscal deficit to 3 percent o f GDP - in l ine with the authorities’ intentions - and an increase in growth to just under 6 percent, public debt would decline to some 60 percent o f GDP within 5 years. Debt sustainability would improve substantially and in response to the standard shocks the debt to GDP ratio would generally remain below 70 percent in the medium term.

7

18. Mit igation o f interest rate risk wil l depend on sustained fiscal consolidation and enhanced debt management, including implementation o f a maturity-lengthening strategy. The government i s strengthening public debt management with a view to reducing fiscal vulnerabilities stemming f rom high interest payments and refinancing risks. A Debt Management Unit (DMU) was established in the Ministry o f Finance and Economic Development (MOFED) in 2002 as part o f a decision to reform public debt management. The current plan i s to transfer the DMU to the BoM, while at the same time putting in place other legal and institutional reforms which are currently being developed. An Advisory Committee has been established with sector-wide participation to support reforms and debt market development. A draft Debt Management Strategy has been circulated, which identifies risk exposure o f the public debt portfolio, including contingent liabilities, and suggests mitigating actions. Further articulation and formal adoption are anticipated shortly. Implementation o f the strategy, which wil l require building institutional capacity, wi l l be key to success. It w i l l also be important to reduce the financial r isks o f the largest public enterprises, improve their efficiency, and review the potential for more private sector involvement. This important plank o f the reform program i s featured as a DPL2 prior action.

111. THE GOVERNMENT PROGRAM 19. The Government’s program stems f rom a clear vision o f restoring growth through such measures as cutting red tape, improving the investment climate, empowering economic agents, supporting SMEs, liberalizing air access, and providing specific support tailored to the needs o f various existing and new sectors.13 After the election, a number o f working groups were set up and began to review existing policies, looking for ways to streamline and simplify the regulatory framework. As they probed systematically, pol icy makers recognized an array o f interrelated problems to be addressed, chief among them:

Distorted incentives and inefficient resource allocation: Inherent biases in the tax system as wel l as burdensome controls and regulations hindered efficient resource allocation (and reallocation), innovation and risk taking.

Poor quality and costly services: Poor quality and expensive ut i l i t ies and services such as transport and communications lowered productivity and undermined the competitiveness o f both existing and new sectors.

Low educational attainment: Capacity constraints, high attrition rates and outmoded curricula resulted in low basic languages, math and science proficiency and a shortage o f workers and professionals with world-class ski l ls .

Lmfiscal management: A failure to adjust to slower growth and declining trade taxes since the late 1990s was putting the public finances under increasing stress, sending public debt trending inexorably higher.

l3 See” Setting the Stage for Robust Growth,” (statement by Hon. Ramakrishna Sithanen, Deputy Pr ime Minister, Minister o f Finance and Economic Development at the National Assembly o n 30 August 2005).

8

Public sector inefliciency: Complex and bureaucratic regulations, poorly designed and executed social programs, weak procurement practices and loss making parastatals undermined efficiency and diverted resources f rom priority needs.

20. By the time the Finance Minister introduced his f i rs t budget in June 2006, the Government’s views had evolved to the point o f advocating, “wholesale change and adoption o f a totally new paradigm.. . . I t i s time for the nation to embrace radical change and build a new, open and competitive service platform that i s fully integrated into the global economy.. ..’,14 The budget speech announced forty major reforms structured around four main pillars, as described more fully below:

A. Fiscal Consolidation and Public Sector Efficiency B. Improving Trade Competitiveness C. Improving the Investment Climate D. Democratizing the Economy: Participation, Social Inclusion and Sustainability

A. Fiscal Consolidation and Public Sector Efficiency

21. Macroeconomic stability i s a necessary cornerstone o f integration into the global economy. “Hence the imperative o f pursuing sound macroeconomic policies and putting public finance on a solid footing. Investors must have the confidence that the deficit and debt wil l be brought down to sustainable levels and that Government wi l l become lean and trim.”15 Fiscal rules were adopted for the FY2006/07 budget: (i) the golden rule that Government should borrow only for investment and not for recurrent expenditure; and (ii) the sustainable investment rule that net public debt as a proportion o f GDP should be on a downward track.16 Sector Ministry Support Teams (SMSTs) were set up in the MOFED to work with sector Ministries o n 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.

22. The 2006/07 budget demonstrated a serious commitment to reversing the upward trend in deficits and debt. A sharp reduction in primary spending by 2 percent o f GDP far exceeded the target o f 0.5 percent (a DPLl prior action), though in fact only ru le (ii) was achieved as total borrowing (4.3 percent o f GDP) exceeded the capital budget (3.4 percent o f GDP). According to Bank staff projections, th i s wi l l remain the case in the medium term, in part because rising interest rates have increased the debt service burden. Nevertheless, the baseline projection anticipates the debt to GDP ratio declining to below Europe’s Maastricht criterion by the end o f the period (Table 4).

Government o f Mauritius, 2006/07 budget speech, “Securing the transition: from trade preferences to 14

global competition,” (June 2006), par. 9, 13. l5 Government o f Mauritius 2005, “Setting the stage for robust growth,” par. 158. l6 However, that classification o f expenditure between capital and recurrent i s to some extent arbitrary. For instance, all expenditure under the Empowerment Programme has been charged to the capital budget. Roughly 90 percent o f spending on health and education i s classed as recurrent spending.

9

Table 4 - Fiscal projections percent of GDP

I 05/06 06/07 07/08 08/09 09/10

- Total revenues Grants

Interest Current expenditures

Capital expenditures and net lending Budget balance I DebVGDP

Actual Estimated ____________Projected _ _ _ _ _ _ _ _ _ _ _ Total revenues and grants I 20.1 19.3 20.7 20.8 20.9

19.8 19.2 19.5 19.5 19.5 0.3 0.1 1.2 1.3 1.4

21.4 20.2 20.9 21.0 20.9 3.8 4.1 4.7 3.6 3.3 3.9 3.4 3.9 3.9 4.0

-5.3 -4.3 -4.1 -4.1 -4.1 68.9 63.1 61.3 60.1 59.4

23. Beyond restoring fiscal balance, the public sector agenda addresses a number o f 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. One o f the most important measures i s to implement a Medium Term Expenditure Framework (MTEF) and Program Based Budget (PBB) to improve efficiency and effectiveness by aligning spending better wi th national priorities. Complementary c iv i l service reform (performance management) wi l l also be launched. A key PBB requirement i s the development o f sector strategic plans for which the Government has requested help from the Development Partners. In addition, new procurement legislation, parastatal reform, improved debt management and c iv i l service reform (a pi lot performance-based management system in the MOFED are programmed.

B. Improving Trade Competitiveness

24. Over the years, an accretion o f interventions and regulations has impacted negatively on trade competitiveness and impeded the f low o f resources to new, potential growth sectors. Overall, incentives were biased: l7

25.

Toward domestic production rather than exports. Trade protection skewed returns in favor o f producing for the domestic market, reducing competition and overall efficiency to the detriment o f exporters.

Toward existing rather than new sectors. Rigid and inflexible regulations deterred businesses from innovating or changing the sk i l l s m i x o f their labor force, limited entry and reduced competition.

Toward large rather than small f i r m s . Smaller firms were unable to take advantage o f complex incentive schemes, while high compliance costs drove many SMEs into the informal sector, curtailing their access to credit, training and other benefits.

The reform program addresses these problems in two ways. First, revamping incentives, eliminating the distinction between EPZ and non-EPZ firms l8 and eliminating

See World Bank 2006, “From Preferences to Global Competitiveness: Report o f the Aid for Trade Mission” (processed).

10

substantially all tariffs over time (at such a pace as to allow f i r m s accustomed to high levels o f effective protection to adjust"); eliminating a 25 percent investment tax credit to remove the anti-labor bias o f the tax system; dramatically lightening regulatory burdens, including by simplifying applications for permits and licenses and substituting ex-post verification o f health and safety standards for ex-ante approvals in the process o f registering a business.

26. Second, implementing sectoral strategies and selective public investments to reduce costs and increase competitiveness in existing and new sectors - sugar, textiles and apparel, tourism and financial services, IT and BPO, fisheries, marine aquaculture, land-based ocean industry and a knowledge hub. Various initiatives are being aimed at removing bottlenecks and reducing high costs in the supply o f key inputs due to outmoded and uncompetitive business structures and capacity constraints. Air access i s being gradually opened up, telecommunications costs lowered and infrastructure investments in transport and energy are planned. Tourism and I C T training i s being increased and a draft national I C T strategic plan has been prepared.

C. Improving the Investment Climate

27. Weak investment spending over the years, especially FDI, has eroded competitiveness. Elements o f the business environment such as labor regulations, land titling and business registration procedures are being overhauled with a goal o f moving Mauritius into the top ten o f the World Bank's Doing Business survey. In 2007/08, Mauritius moved to 27" place from 32nd the year before. A key element, largely addressed in the 2006/07 budget, was eliminating bureaucratic obstacles to starting a business. The Registrar o f Companies was designated as a one stop focal agency for business registration and the Board o f Investment converted from being an administrator o f programs to a facilitator and promoter. Whereas f i r m s previously had to obtain ex-ante fire and health certificates before starting operations, now they can begin operating subject to ex-post verification o f adherence to published guidelines. Other measures include merging development and building permits and reducing the number o f distinct activity clusters f rom ten to three.

28. A perennial obstacle to operating a business in Mauritius has been the shortage o f human capital. Now, entry o f foreign workers has been 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 have also been liberalized. An important aspect o f opening the economy wil l be to amend the L a w Practitioners' A c t to allow entry o f international law f i rms. At the same time, measures are planned to encourage the return o f the Mauritian diaspora to work in Mauritius.

Except for less stringent labor regulations covering EPZ producers to be addressed in the context o f more eneral 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 below, paragraphs 86-90.

11

29. Central to improving the investment climate i s implementation o f labor market reforms aimed at increasing flexibility, tying wages more closely to productivity by replacing the tripartite wage setting mechanism with a National Pay Council (NPC), disbanding the current system o f Remuneration Orders and relaxing the need to seek approval for lay-offs. In addition, land administration and management i s being modernized with the introduction o f a cadastre system and establishment o f transparent and predictable procedures for transfers o f ownership and usage.

30. Finally, infrastructure investments are planned to alleviate road congestion and increase capacity in the port, airport, and power sector at the same time as enhancing regulatory capacity.

D. Democratizing the Economy: Participation, Social Inclusion, and Sustainability

3 1. The transition f rom sugar and textiles to higher value added services requires both making better use o f available human resources and providing adequate social safety nets for the vulnerable. O n the one hand, democratization entails increasing access to education and (re)training, land and financing to star t a business, but on the other protecting the vulnerable by channelling social support to the truly needy, implementing a comprehensive strategy for poverty alleviation and ensuring environmental and pension sustainability. Many initiatives in these areas have been incorporated into an Empowerment Programme with a budget o f MUR 5 bi l l ion over five years. The program encompasses seven activities: (i) land for social housing; (ii) land for small entrepreneurs; (iii) a workfare program emphasizing training and re-skilling; (iv) special programs for unemployed women; (v) tourist villages; (vi) assistance for outsourcing; and (vii) support for development o f new entrepreneurs and SMEs.

32. Beyond these measures, democratization wil l take the fo rm o f expanding opportunities in education, improving teacher training and supervision, modernizing the curriculum to feature more critical thinking and maths, science and language training, revitalizing the Zones d’Education Prioritaires (ZEP) schools with active community participation, and expanding tertiary education. Preparation o f a national education strategy i s a trigger for DPL2.

33. Government i s also reforming the administration o f 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 o f environmental vulnerabilities, particularly in light o f the projected r ise in tourist arrivals to 2 mi l l ion by 2015, Government intends to implement a new National Environment Strategy to protect the nation’s environmental assets.

Progress on the Government program

34. The 2006/07 and 2007/08 budgets have made significant and systematic progress on implementing the Government’s program. The main initiatives bearing o n the reform program are shown in Table 5.

12

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

A. LINK TO THE COUNTRY PARTNERSHIP STRATEGY

35. 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 o f each other. Both are closely linked to the Government’s reform program which was itself coming into focus at the same time with Bank support. As a result, al l three share:

Common objectives o f facilitating adjustment to external shocks and transitioning to a more skill and knowledge based economy while safeguarding the interests o f vulnerable groups.

A common diagnostic pinpointing constraints to growth and diversification and identifying reforms needed to rekindle economic progress.

Consistent matrices structured around the pillars o f public sector reform, trade competitiveness, the investment climate and democratizing the economy.

0

0

0

36. Table 6 illustrates the close connection between DPL and CPS outcomes. The Bank and Government both envisage the DPL as a main instrument for pol icy dialog, a role reaffirmed during the 2007 year’s Annual Business Planning discussion. The DPL has also played a useful role in harmonizing and coordinating external support in the donor community.

B. COLLABORATION WITH IMF AND OTHER DONORS

37. A close collaboration has developed with Mauritius’ other Development Partners - the EC, AFD and the ADB. The Government has urged al l external partners to harmonize their support and the DPL has been instrumental in this through jo int preparation and appraisal missions, and sharing o f Technical Assistance (TA) and other related activities. However, it i s the Government which clearly deserves the credit for any harmonization and coordination as this could only occur in the context o f a strongly owned country-led program.

The Bank and IMF also collaborate closely.

38. International Monetary Fund: Mauritius has no formal program with the IMF, though relations are close. Over the years, the Fund has carried out work o n sources o f growth, labor markets, inflation, and monetary and fiscal policy. More recently, the Fiscal Affairs Department (FAD) has provided key support in the area o f fiscal adjustment and budget reform. Bank and Fund staffs work closely together and exchange views frequently. During the past year, they joint ly prepared a Financial Sector Assessment Program update and are continuing together on a Financial Sector Act ion Plan. The last Art icle IV mission in February 2007 gave a cautious, but positive assessment o f the program as did assessment letters provided for DPLl and DPL2.

14

Preparation o f the DPL has benefited greatly f rom IMF analysis o f macroeconomic performance and debt sustainability.

Pillar A.

performance and improve public sector efficiency.

39. European Commission: The E C i s present in Mauritius and has been active in the areas o f environment, including wastewater, and poverty reduction for the most vulnerable marginalized groups which are not benefiting f rom Mauritius' development success. T w o sector budget supports (SBS) are currently operational, in wastewater for a

DPL outcomes CPS outcomes

percent o f GDP.

o f GDP.

*Reduction in primary spending as

*Reduction of tax expenditure as Percent *Reduction in tax expenditures

B. Improve trade competitiveness

*Improved composition o f expenditure *Better allocation o f budget according to outturn as compared to original approved budget. preset ceilings.

*Elimination o f substantially al l tariffs. *Common regulatory and tax regime

*Tariff reductions being implemented. *Unified incentives for EPZ, non-EPZ

*Revenue stabilization at not less than 19

*Improvement in financial performance o f percent o f GDP.

parastatals net o f subsidies.

C. Improvethe investment climate

D* Democratize the economy

across virtually al l sectors o f the economy. *Increased production o f tradables;

f i rms .

increased fisheries exports; increased exports to Common Market for Eastern and Southern Africa, Southern African Development Community.

stop shop for business registration;

*Increased export share o f GDP.

*Improved ranking in Doing Business *Reduction in cost o f doing business; one- survey.

*Increased investment in emerging sectors revision of investment legislation.

*Reduction in time to start a business. *Increased registration o f S M E s *Increased number o f work and residency

*Increased registration o f S M E s

*System to facilitate entry o f foreign workers; increased s k i l l s availability. permits.

*Elimination o f bias against S M E s as *Increased primary and secondary school measured by increased number of new completion rates. S M E s registered.

*Increase in low income families receiving housing.

*Training provided to unemployed workers, unemployed women finding jobs; completed tourist villages.

*Improvement in educational outcomes *Protection programs reach the needy *Redeployment and training programs in

place for unemployed and retrenched workers with a special emphasis on women.

15

total o f €38 mi l l ion and in the sugar sector for €11 mil l ion. The final tranches under these SBS for the FY 2007/8 are €4.2 mi l l ion and €4.5 mi l l ion respectively.

40. However, SBSs wi l l be phased out and the E C intends to move increasingly to general budget support in i t s assistance strategy, aligning this with the DPL as much as possible. The E C General Budget Support (GBS), being grant funds, differs however from the DPL approach in that it: (i) bases support on outcomes, rather than actions as specified by DPL triggers; (ii) has a different time horizon f rom the DPL; and (iii) maintains a special interest in sugar sector adjustment and social issues in the adjustment process. The disbursement o f E C funds i s based on fixed and variable tranches, the former being disbursed against general conditions and the latter against the achievement o f specific performance indicators. The GBS envelope for Mauritius for the period 2007- 20 10 totals approximately € 190 million, taking into consideration resources available f rom various instruments (including the Accompanying Measures for Sugar Protocol countries, residuals from the Ninth European Development Fund (EDF), the Tenth EDF allocations and other instruments).

41. For the 2007/2008 E C GBS program, three out o f f ive indicators are aligned with other Development Partners. The 2008/2009 E C performance indicators wi l l be identified and formulated in such a way as to reinforce the triggers for DPL3 wherever possible.

42. In addition to budget support, the E C has funded a Public Expenditure and Financial Accountability (PEFA), the preparation o f an energy study and preparation of an education strategy. The Bank and EU collaborated closely on a jo int diagnostic and support matrix for the Bank’s CPS and the EU’s Country Strategy Paper and both participated in the Annual Business Planning exercise for the current year. This jo int exercise of planning technical assistance wil l be continued next year, in l ine with the findings o f the various missions.

43. Agence Fransaise de Dhveloppement: AFD has opened an office in Mauritius t h i s year. In l ine with the Document Cadre de Partenariat (DCP) signed on April 2, 2007 between the Mauritian and French authorities, AFD proposes to support Mauritius in i t s transition to higher productivity and competitiveness and greater integration in the world economy. AFD intends to focus i t s funding on clusters together with public entities and/or the private sector, as wel l as to participate in financing infrastructure aimed at enhancing the attractiveness o f the country for foreign investors. Vocational training w i l l also be emphasized. AFD i s providing cofinancing for the reform program and i s particularly interested in the assessment o f social and environmental impacts o f the economic reforms and the capacity o f the Government to mitigate them. AFD also expects to participate with other interested donors on technical assistance provided to the government at a central and/or sectoral level.

44. African Development Bank: The ADB’s assistance to Mauritius combines lending and non-lending activities. Lending has focused o n infrastructure development in the agriculture and transport sectors and non-lending on Economic and Sector Work (ESW) in health, poverty reduction and debt management. Under the New Partnership for Africa’s Development (IWPAD) Program, ADB has been collaborating with the

16

United Nations Development Program (UNDP), AU and Economic Commission for Africa (ECA) on the African Peer Review Mechanism (APRM), for which Mauritius i s one o f the four pi lot cases. An ADB study on poverty, gender, and social exclusion i s also under preparation and i s being coordinated with the EU and the UNDP. Past collaboration with the World Bank (and other partners) includes water, sewerage, and sanitation (the Plaines Wilhems Sewerage Project) and transport (Southeastern Highway). A close working relationship has developed between the two institutions during the course o f preparation and appraisal o f the first and second DPLs.

45. United Nations Development Program: As a member o f the United Nations (UN) family, the Bank liaises closely with the local UNDP office. Elsewhere, the UNDP i s engaged in a number o f areas which directly support the DPL, including providing a long term MTEFRBB advisor in MOFED, funding the preparation o f a National Information and Communication Technology (ICT) Strategic Plan, assisting the Central Statistics Office wi th preparation o f tourism satellite accounts and a Social Accounting Matrix, supporting the ZEP schools program, and various other initiatives in Environment and Social Security. Thus, while not formally part o f the DPL team, the UNDP contributes significantly to achieving i t s objectives.

C. RELATION TO OTHER BANK OPERATIONS

46. There i s no other active lending to Mauritius at th i s time, though Project Preparation Facilities have been requested for two projects: (i) traffic decongestion; and (ii) parastatal reform. Should these go ahead, both would bear directly on the DPL since the former i s a milestone and the latter a trigger for the current operation. I t i s anticipated that the Public Enterprise Reform Project (PERP) in particular wil l support a key plank o f the DPL.

D. LESSONS LEARNED

47. Preparation o f DPL2 has benefited f rom lessons learnt f rom the Public Expenditure Reform Loan (PERL) approved in FY02 as well as the first DPL in FY07. The DPL and PERL had similar objectives, insofar as the PERL financed part o f the New Economic Agenda (NEA), an ambitious reform program introduced by the last Government aimed at maintaining the country’s growth performance and improving the welfare of i t s citizens. The PERL was intended to be the f i rs t o f a programmatic series o f three loans. While the principal performance ratings o f the operation were satisfactory (see the Implementation Completion Report, RN 25639), the second and third loans in the series were not taken up mainly because the Government did not need the money.

48. The first lesson concerns ownership. L i ke the PERL, the DPL series recognizes the importance o f supporting an agenda which i s Government owned and ideally which enjoys broad popular support. If there are politically sensitive or controversial areas, Government must take decisions o n how to allocate i t s political capital, then take the lead in communicating ownership clearly and building consensus. The DPL appropriately aims to play a supporting role, facilitating dialog where it can be effective, and adding

17

value by fine tuning, helping to organize and clarify thematic content, and bringing to bear international experience.

49. A second lesson concerns the Bank’s capacity to support the Government’s program. The Bank has been most effective where it could rely on a strong analytical base o f recent work on labor markets, MTEF, education, the investment climate, ports and telecommunications, and more. However, more recent demands have been in areas where the Bank’s knowledge i s less current and/or less extensive, especially for help wi th sectoral strategic planning. I t i s important to be realistic and not to mislead about what i s and i s not possible with the time and resources available. But, at the same time, the Bank and other Development Partners have learned to collaborate effectively in areas such as education, tourism and IT. For instance in education after a longstanding involvement by the Bank,20 the E C has taken over primary responsibility by funding a critically needed consultancy to prepare a strategic plan. In ICT, the UNDP supported the preparation o f the National I C T Strategic Plan (NICTSP) by the Ministry o f Information Technology and Telecommunications, while the Bank i s helping to facilitate dialog between MIT&T and MOFED on plan implementation. The Annual Business Planning exercise i s increasingly providing a forum for further deepening collaboration by Mauritius’ external partners.

E. ANALYTICAL UNDERPINNINGS

50. During recent 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 (UM), and an MTEF review (MTEF). Mauritius was included in the Doing Business survey in 2006 and 2007. The IMF has been engaged in an extensive dialog on fiscal issues, including a recent FAD mission to look at options for fiscal consolidation in the context o f the Government’s reform program. The various components o f the Government’s reform strategy contained in the program matrix in Annex 2 are shown in Table 7, with l i n k s to relevant AAA. Whi le this underlines the quality and effectiveness o f the dialog, the program remains very much the Government’s own initiative, for instance as evidenced by elements in the table which have not formed part o f the recent dialog. It should be noted that AAA has been most influential where it supported directions which the Government had already decided on. The remainder o f this section describes the main elements of AAA in more detail and their relationship to the reform program.

*’ Including, World Bank 2004 , “Education and training sector note: striving for higher standards,” report No. 29427-MU, World Bank 2007, “Country economic memorandum: managing change in a changing world.”

18

Country Economic Memorandurn: Managing Change in a Changing World

Recommendations

51. The 2006 Country Economic Memorandum - Mauritius’ first since 1995 - focused on the structural transition to a higher value added, knowledge based economy and recommended pol icy reforms in three key areas: (i) public sector reform; (ii) the labor market and human capital formation; and (iii) science and technology policy for a knowledge based economy. I t carried an important message to the new Government about budget modernization (MTEFDBB) 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. The Bank, joint ly with the United Nations Conference on Trade and Development, i s about to embark on a science, technology and innovation pol icy review which w i l l extend the treatment given

AAA I Year1 year2 y e a r 3

Eliminate customshuties (duty free island) Unify Corporate Income Tax at single rate Reform Personal Income Tax to increase fairness Institute National residential property tax scheme Reduce tax expenditures Abolish ministerial discretion to remit taxes and duties Replace consumer subsidies with cash transfers Reform parastatal sector Pass new Procurement Act Strengthen Independent Commission Against Corruption Cut telecommunications costs Liberalize air access Unify EPZ and non-EPZ regimes Simplify business registration procedures Initiate large scale retraining for redundant workers Improve labor market flexibility by reducing separation costs Simplify wage setting mechanism. Decide on opening Cargo Handling Corporation Limited (CHCL) to strategic partner Formulate and implement national education strategy Decontrol administered prices Ease immigration restrictions and work permits Simplify industrial incentives Pass insolvency bill Develop cadastre/land management system Implement civil service reforms Develop and implement sector strategies Improve port management and restructure CHCL Reform national education system Enhance support to SMEs Reform social safety nets Move forward with MTEF implementation Note: CEM - Country Economic Memorandum; FA

AFT FAD

FAD FAD FAD

CEM

CEM, AFT AFT AFT ICA, AFT, CEM

CEM, UM

CEM, UM

CEM FAD CEM AFT, CEM

CEM

AFT CEM AFT CEM, AFD CEM, FAD

1 - IMF Fiscal Affaii

X X X X X X X X X X X

X X X

X

X X X X

X X

X X X

X

X X

X X

X X

X

X X X X x x

Department report; AFT - Aid for Trade report; UM - Unemployment in Mauritius; ICA - Investment Climate Assessment

19

in the CEM. In addition to i t s direct impact, draft versions o f the C E M provided important inputs to other Bank AAA work on the Investment Climate and AFT. Preliminary results were discussed with the Government in February 2006 and the green cover version delivered in May. The grey cover version was finalized in January 2007.

Investment Climate Assessment

52. An I C A was carried out jo int ly wi th the Board o f Investment in early 2005. The survey o f 285 f i r m s in different sectors o f the economy generated important insights with regard to firm level 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 o f business registration procedures associated with securing trade licenses, operating permits, development and building permits and land titling as well as hiring needed ski l ls . 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. Consultations were held with Government and private sector counterparts and the I C A was finalized in April 2006.

Aid for Trade Report: From Preferences to Global Competitiveness

53. 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 f rom 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 both the technical and pol icy levels. I t s work underpinned many o f the ideas and even some o f the language o f the reform program with regard to improving incentives, simplifying the regulatory environment and providing transitional support to workers and firms.21 The report proposed measures to strengthen competitiveness; move resources out o f declining and into dynamically growing sectors; improve the quality and cost o f input services such as telecommunications, air transport, and cargo handling; and strengthen transitional support for displaced workers. Findings were presented to the Minister o f Finance in mid-Apr i l and subsequently disseminated more widely through the Government. A final report was submitted in May 2006, prior to the 2006/07 budget.

Unemployment in Mauritius

54. The study stemmed f rom a sharp rise in unemployment since the early 1990s. I t deepened the understanding o f the labor market in Mauritius by assessing the quality o f available data,22 reviewing trends in labor market indicators and profiling the unemployed. Using household budget survey data, it assessed the impacts o f distortions in the labor market and estimated returns to education. I t showed that despite rising

21 I t bears repeating that this was not a matter of pushing the Bank’s agenda, but rather supporting the Government as i t moved in i t s chosen direction. 22 Recognition o f methodological shortcomings in available data led to the conversion o f the Continuous Multi Purpose Household Survey (CMPHS) to a dedicated, quarterly labor force sample survey in order to improve the quality o f labor market intelligence.

20

unemployment the labor market had in many ways performed well, creating large numbers o f jobs in services, particularly in small enterprises. B y demonstrating widespread non-compliance (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 presented to the Government in September 2005.

The Medium Term Expenditure Framework and Program Based Budgeting (MTEF/PBB)

55. The World Bank has supported MTEF and Performance Management in Mauritius since 2002 with a combination o f ESW and TA.23 Since launching a MTEF in 2002, the Government has built core technical capacity in the MOFED, but the “Mid- term Review” in 2005 found that ownership and commitment were low and that many o f the benefits o f 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 support on MTEF and PBB as well. In early 2007 an IMF Fiscal Affairs Department TA mission prepared a detailed report which included an action plan for implementation o f MTEF and PBB.

National Environmental Strategy

56. Environmental policy has been a longstanding priori ty for pol icy makers in Mauritius. Decennial environmental strategies were prepared, with the first National Environmental Action Plan in 1988 and the Second National Environmental Strategy and ten year National Environmental Action Plan (NEAP2) in 1999. W h i l e 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 o f review i s currently under way. A Whi te Paper o n National Environment Policy was published in July 2006, outlining objectives and strategies and a framework for environmental policy.24 Based on this, a new environmental strategy and action plan are now being prepared with expected completion in early 2008. The white paper offers a comprehensive l i s t o f 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 Rodriques.

23 See “Introduction o f the MTEF in Mauritius“ (2001); “Draft report on the MTEF and results based management: M&E consultants’ mission” (2003); and “Implementing the Medium Term Expenditure Framework (MTEF) in Mauritius: A Mid-Term Review” (2005). In 2003-06 the Bank provided a $494,000 IDF grant (TF05 1274) to support capacity building for MTEF implementation. 24 http://www.gov.mu/portal/goc/menv/files/nep_draft.pdf.

21

V. THE PROPOSED OPERATION A. OPERATION DESCRIPTION

57. The DPL series i s closely linked to key strategic elements o f the Government’s reform program. In addition i t seeks to reinforce the comprehensive scope o f the program, selecting triggers f rom al l four pillars. Individual operations are timed to coincide with successive budget years and to support installments o f the reform program introduced in the budget speech. Thus, triggers for the current loan, the second in the series, draw mainly o n the 2007/08 budget. Table 8 presents the DPL2 triggers which Government has committed to achieving and Section B below describes them in greater detail. In addition to being o f strategic importance they focus specifically on areas where the Government has requested the external Development Partners to engage.

58. The table also shows the larger architecture o f the DPL program and the relationship o f triggers and prior actions for DPL2. The main themes o f the DPL are grouped according to the four pillars o f the reform program identified in column 1. Columns 2-5 shows sequentially:

0 DPLl prior actions 0

0 Actual DPL2 prior actions 0 Indicative DPL3 triggers

Indicative DPL2 triggers identified during preparation o f DPLl

The remaining columns o f the table comment in particular on any evolution f rom DPL2 triggers to prior actions, and also show progress on results indicators selected for DPLl.

22

m

Y

2 VI

> N 2 W

N ri

0 0 2 2 B a

d

1 : - I= O

N 01

Box: Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership

In July 2005, Mauritians elected a new Government on a strong reformist platform to revitalize the economy, restore the public finances and broaden opportunity. The Government took office wi th a clear strategy for reform, much o f which has subsequently been implemented in the 2006107 and 2007108 budgets. Whi le working out the details o f i ts program, the Government turned to the Bank for support which was provided in the form o f targeted, high impact TA and E S W linked to preparation o f the DPL. The partnership which developed serves as a best practice example o f how to provide external support for strongly, locally owned and championed reforms.

Principle 2: Agree up front with the government and otherfinancial partners on a coordinated accountability framework.

The E C and Wor ld Bank collaborated closely on the preparation o f the EC’s Country Strategy Paper and the Wor ld Bank’s Country Partnership Strategy in 2006. At the same time, the Government was refining i t s strategy in conjunction wi th preparation o f the DPL. As a result, a l l these efforts feature common objectives and diagnostics. Subsequently, the EC, AFD, ADB and Wor ld Bank participated in jo int preparation and appraisal missions for DPLl and DPL2 and, to the extent possible, a l l Development Partners have adopted common triggers and indicators for their parallel operations. The DPL has been highly effective in coordinating and harmonizing development assistance in i t s range o f coverage.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances.

The DPL has focused on issues o f strategic importance, but also o n those where the Government saw a particular benefit to availing the resources o f the Development Partners, for instance in order to overcome resistance or surmount capacity limitations. The DPL has helped to maintain consistency in the dialog - a counterweight to the continual need to fight fires which has encouraged policymakers to stay focused on the larger reform agenda.

Principle 4: Choose only actions critical for achieving results as conditions for disbursements.

The Government’s reform program i s structured around four main pillars, a l l o f which have been supported by the DPL. DPLl featured a relatively large set o f pr ior actions, consciously intended to signal to investors the breadth o f the program. DPL2 narrowed the focus to only seven pr ior actions. However, it i s a testimonial to the ambitious scope o f the program that in both cases it was easy to select issues o f genuine strategic importance.

Principle 5: Conduct transparent progress reviews conducive to predictable andperformance- based financial support.

The annual budget has traditionally been the vehicle for announcing major economic pol icy reforms in Mauritius. Thus the programmatic DPL series has easily been aligned to the budget cycle, drawing prior actions f rom budget measures and providing financing for successive fiscal Years.

28

B. POLICY AREAS

A. Consolidating Fiscal Performance and Improving Public Sector Efficiency

DPL2 prior action: Implementation of a MTEF budget and preparation of an indicative PBB for 2007/08 budget.

59. Description: The Government’s strategy for the public sector has twin objectives o f tightening fiscal discipline and improving the efficiency and effectiveness o f the public sector. At a time when debt already exceeds prudent levels and demands on the state have increased for economic restructuring, more disciplined and strategic resource allocation i s critical if the reform program i s to succeed.

60. The twin objectives o f discipline and efficiency are addressed by the MTEF and PBB. MTEF i s a technique for setting credible and enforceable medium t e r m (three year) fiscal targets and aligning the use o f public resources to the Government’s strategic priorities. Conceptually distinct, PBB recasts budget expenditures in terms o f outputs and outcomes rather than inputs as in traditional line-item budgeting. The result i s to achieve greater clarity regarding the nature o f policy decisions and increase pol icy makers’ accountability for spending, while delegating technical choices about implementation to staff in spending units.

61. MTEFPBB i s a complex institutional reform geared toward improving coordination throughout the Government, improving information flows and delineating responsibilities for achieving results. Different countries have taken different approaches to implementation - some bottom up wi th pi lot projects at the sector ministry level to demonstrate the shift in thinking f rom inputs to outcomes, others top down to strengthen budget discipline and create a demand for greater efficiency at the sector level. In every case, however, a lengthy period has been needed to achieve full effectiveness. For Mauritius, the ro l l out across the Government in the 2007/08 budget - fulfilling a commitment in the 2006/07 budget - has been the most significant achievement in six years o f the Bank’s involvement with the initiative.

62. The Government has requested the IMF lead the dialog with Government on MTEFPBB, together with UNDP which has provided a long term, resident advisor to the MOFED. A Fiscal Affairs Department TA mission in March 2007 prepared a detailed report including an action plan for implementation, and a fol low up mission i s expected in early 2008. However, this i s only the latest round in what has been a lengthy engagement. The Wor ld Bank has invested considerable resources in MTEF/PBB25 since 2001, as have other Development Partners (UNDP, EC, and ADB) which are currently providing financial and technical support, direct or indirect, to various aspects of the current initiative.

25 See “Introduction o f the MTEF in Mauritius“ (2001); “Draft report on the MTEF and results based management: M&E consultants’ mission” (2003); and “Implementing the Medium Term Expenditure Framework (MTEF) in Mauritius: A Mid-Term Review” (2005); the Bank provided a $494,000 IDF grant (TF05 1274) to support capacity building for MTEF implementation in 2003-06.

29

63. Challenge: Mainstreaming MTEFPBB wil l require revising the Chart o f Accounts, upgrading computer systems and providing adequate training. More difficult, the results framework o f the PBB needs to be matched to performance management in the civil service. In addition, sectoral strategic plans need to be drawn up in such areas as tourism, health, education, environment, transport, fisheries, and more in order to identify priorities, and cost and translate them into PBB inputs. Various initiatives are currently underway to address these needs with financial and technical support f rom external partners .

64. In the policy domain, while key players in the Government are strongly committed, it i s important to broaden ownership so that al l stakeholders in the Cabinet, National Assembly and l ine ministries understand and buy into the process and objectives o f MTEF and PBB. Moreover, the budget culture needs to change, including clarifying the roles and responsibilities o f the MOFED and sector ministries. Cabinet needs to be involved in decisions o n trade-offs at the aggregate level among competing needs and according to policy priorities. Spending ministries must take ownership o f their budget priorities and adhere to expenditure ceilings set in the budget framework.

65. Government actions to date and future activities to address the challenpe: The preparation o f the 2007/08 budget satisfies the pro-forma requirements o f the DPL prior action. A MTEF budget was prepared, including three year budget projections for most spending units, together wi th an indicative PBB which presented disaggregated programs, objectives and indicators.26 In most cases, albeit to varying degrees, the preparation of MTEFPBB budgets was achieved through a genuine collaborative effort by MOFED and sector Ministry staffs to develop and articulate pol icy priorities o f individual Ministries, Departments and Agencies.

66. There i s no single right approach to achieving the major changes needed in culture and operating procedures and wide experience shows there i s a need to respect country specific contexts and circumstances. In Mauritius’ case, MOFED’ s strategy for MTEF implementation reflects the priority o f fiscal consolidation, which the Bank and the IMF support as fully consistent with implementing a PBB within a MTEF. This entails MOFED maintaining tight control over the process. The IMF’s FAD TA mission prepared a detailed action plan for MTEFPBB implementation and Table 9 below indicates the current status. Over time the Government plans to review how to: (i) improve ownership by the Cabinet for approving the fiscal framework and budget allocations to support fiscal consolidation; and (ii) build on the merging o f the capital and recurrent budgets initiated in 2007/08 by providing more f lexibi l i ty for shifts between capital and recurrent spending to facilitate better planning and greater efficiency in resource utilization.

26 Available on the MOFED web site, see httu://www.crov.mu/uortal/site/MOFSite/menuitem.Sb 1 d75 lc6156d7f4eOaadl 1 Oa7bS2 1 ca/?content id=04a 45~7483033 1 IOVmVCM 1000000a04a8cORCRD. The term “indicative” signifies that actual budget execution wil l use pre-existing, line-item accounting categories from previous years, pending revision of the Chart o f Accounts.

30

67. Promise for future progress in the coming years i s reflected in the strong efforts o f Government to mobilize assistance f rom Development Partners to build ownership o f spending Min is t r ies for the PBB and for their own Strategic Plans within the MTEF. An IMF FAD mission early in 2008 w i l l assess progress and provide guidance tailored to the country context.

68. Expected results: MTEF and PBB w i l l allow pol icy makers in the Government to focus more clearly on strategic resource allocation decisions, aligning expenditure wi th policy priorities and thereby increasing the public sector’s overall impact and effectiveness. The process should also improve coordination and dialog within the government by clarifying responsibilities, with the MOFED setting and enforcing overall fiscal aggregates and sector ministries setting priorities and programs for optimal results. Finally, the MTEF’s rol l ing three year time horizon wil l facilitate better planning through more predictable funding to spending agencies.

69. initiation o f c iv i l service reform.

Indicative tr imers for DPL3: Preparation o f strategic plans for sector ministries;

31

c

Y

! 3 $ a 8E 2 s

m

m m

n E 9

d m

DPL2 prior action: Reduction of primary spendin2 by 1.0 percent of GDP in 2007/08 compared to 2005/06.

Primary Expenditure

- Cum. Change

- Cum. Change Current Primary Expenditure

Capital Expenditure & NL

70. Description: The Government has made a commitment to fiscal consolidation at the same time as moving Mauritius toward a low tax, internationally competitivz service platform. In keeping with this, the fiscal reform program mapped out in the FY 2006/07 budget aimed at approximate revenue neutrality while bringing down spending through various measures. The budget set a target o f reducing primary spending by 0.5 percent per year over the next three years. The first year o f the program was a DPL prior action and the outcome easily exceeded the target. According to the current year’s budget estimates, the ratio o f primary spending to GDP fel l f rom 21.6 percent in 200906 to 19.5 percent in 2006/07 and should fa l l again to 19.3 percent in 2007/08, by far exceeding the 1 percent trigger proposed for DPL2. Because o f strong reductions the year before, the incremental reduction in FY 2007/08 i s less than anticipated, however the overall reduction (2.3 percent o f GDP) i s wel l above the target (Table 10).

Target 05/06 06/07 07/08 07/08 08/09 21.6 19.5 19.3 20.6 19.9

-2.1 -2.3 -1.0 -1.5 17.7 16.0 15.5

-1.6 -2.2 3.9 3.5 3.9

71. Challenge: All Governments face demands for increased spending and in this case the pressures w i l l intensify with the preparation o f strategic plans for sectors such as tourism, ICT, education and health. I t i s also important to avoid spending cuts falling disproportionately on the capital budget.

--Cum. Change Budget Def ic i t

72. Government actions to date and future activities to address the challenge: Fiscal consolidation remains the top priority for public sector reform. The measures adopted in the FY 2006/07 budget included restrictions on overtime and hiring, salary increases less than inflation, tighter scrutiny o f the capital budget, a review o f some institutions and the setting up o f Audit Committees in key ministries to reduce unnecessary spending. T w o inefficient public departments, namely the Police Workshop and Development Works Corporation were closed. To ensure the program remains on track, the Ministry o f Finance intends to retain a firm grip on budget preparation and monitoring. Given the wide margin b y which the target has been exceeded to date and additional measures (supported by the DPL) to reform parastatals, the outcome i s expected to keep primary spending below the target over the medium term. MTEFFBB should further reinforce adherence to the fiscal framework.

-0.5 -0.1 -5.3 -4.3 -3.8 I Primary Balance I -1.5 -0.3 1.0 I

Source: Government of Mauritius, FY 2007/08 budget estimates

35

73. markets and increase headroom for priority spending needs or further tax reductions.

Expected results: Improved spending control wi l l reduce pressure on domestic credit

Indicative DPL3 trigger: Reduce primary spending by 1.5 percent o f GDP compared to FY 2005/06.

DPL2 prior action: Enactment and proclamation of the Public Procurement Act 2006, including the appointment of senior officials for the Procurement Policy Office, the Central Procurement Board and the Independent Review Panel, as prescribed under the Act.

74. Description: Public procurement translates plans and policies into results on the ground and hence i s central to improving public sector efficiency. Best practice public procurement entails competitive tendering, transparent selection procedures and effective dispute resolution. This i s particularly o f concern at a time when massive sums are about to be spent on infrastructure and economic modernization, not least to the Development Partners who are providing general budget support. A CPAR in 2002 commended Mauritius for, “a credible effort to provide a framework o f great transparency and accountabilit , yet noted, “some measures should s t i l l be adopted to improve the current system ....” 2y The CPAR recommended improvements such as standardization o f bidding and pre-qualification documents, more transparent practices for bid opening and announcing awards, and enhancing the regulatory functions o f the Central Tender Board (CTB). More recently, the CTB has come under increasing scrutiny for wastage and inefficiency and a lack o f transparency which fails to protect adequately against corruption.

75. The challenge o f bringing procurement up to international best practice standards has been addressed in new procurement legislation enacted in December 2006 which replaced the Public Procurement Transparency and Equity Act o f 2000. Subsequently, proclamation was held up pending appointment o f senior staff. The process calls for appointments to be made by the President on the recommendation o f the Prime Minister in consultation with the leader o f the opposition and i t proved unexpectedly difficult to identify appropriate appointees who satisfied high standards o f integrity and ethics and were willing to take the job. A shortlist o f suitable candidates was advised to the Prime Minister in June 2007 and after some delay the required appointments were made in December, 2007. Given that the accompanying detailed regulations had already been prepared, it was straightforward to proclaim the Act, which came into force on January 17,2008.

Challenge:

76. Beyond setting up the legal and institutional framework there i s a need to build capacity, in particular through training, and developing e-procurement procedures for posting procurement demands and accepting bids online. Training has been provided to 275 officials involved in procurement and the initiative i s ongoing, covering both more staff and specialized areas such as drugs.

77. Government actions to date and future activities to address the challenge: The Public Procurement Act 2006 enacted in December 2006 replaces the current system by setting up three bodies: (i) the Procurement Policy Office; (ii) the Central Procurement Board; and (iii) the

27 World Bank 2002, “Country Procurement Assessment Report,” p. 2.

36

Independent Review Panel was enacted in December 2006. Before presentation to the National Assembly, the Government requested a review by procurement specialists at the Wor ld Bank who made a few recommendations, but expressed the view that the Bill contained, “excellent measures” and represented, “international best practices in procurement legislation.” When proclaimed, the new system should significantly strengthen the procurement process.

78. expenditure.

Expected results: More efficient procurement and better value for money in public

79. Indicative triggers for DPL3: None.

DPL2 prior action: Submission of paper to cabinet establishing Parastatal Reform Steering Committee. Evaluation of state of health of selected parastatals (SPMP, Central Electricitv Board f CEB j, CWA, Wastewater Management Authoritv (WMA) and establishment of remedial action plans to address the problems.

80. Description: Mauritius’ parastatal sector comprises around 150 entities, many with poor operational and financial performance, in some cases because o f mandates to pursue social objectives that are not always compatible with financial viability and operational efficiency. In some cases, the financial burden has entailed significant resource transfers and contingent liabilities on the budget. Parastatals at critical points in the exports logistics chain are a source o f inefficiency and a drain on competitiveness.28 T o initiate reform o f the sector, 22 priority cases were identified on the basis o f (i) the impact o f the enterprises on public finances and in particular their implicit and explicit budgetary burden, (ii) their impact o n the economy, particularly on the provision o f essential services supporting business activity, and on the degree o f competition in the market place, and (iii) their social impact and the potential for improved quality and reduced costs o f essential services to the public. Taking into account importance, need to improve performance and ownership o f reform b y the parent Ministry, four key strategic parastatals were selected f rom the l i s t - CWA, WMA, CEB and SPMP (see Annex 2 for an overview).

81. Challenge: Powerful interests which support the status quo w i l l need to be overcome. These include some of the parastatals’ management teams, particularly those with trading monopolies, and other interest groups including labor unions. Actions to mitigate the associated r isks w i l l include delivering positive outcomes to the population, such as improved service and reduced costs o f essential outputs, as well as well targeted measures for affected groups and a public information campaign emphasizing the benefits o f the reforms.

82. However, to achieve early results for the first round parastatals were selected where there was strong support for the process. In the case o f public uti l i t ies and agro industry, the work started well and evidences a high degree o f ownership and buy in. Draft action plans have been prepared and key performance indicators identified. B y contrast, the commerce and industry

28 A recently report b y KPMG o n agricultural sector parastatals recommends halving employment in a number o f parastatals funded out o f the sugar cess. See << Rapport KPMG: L a rCforme des institutions sucrikres en suspens, >> (l’express, 10/8/07).

37

working group got o f f to a slower start and a decision was made to drop the State Trading Corporation f rom the first round.

83. Government actions to date and future activities to address the challenge: Working closely with the Wor ld Bank on design and implementation, the Government has initiated a PERP. An institutional framework has been set up for the Project, in which sectoral working groups comprised o f ministry officials, senior parastatal management and other stakeholders w i l l be responsible for preparing reform strategies. The Bank has been actively supporting the work o f these Groups and w i l l continue to do so through the PERP for the duration o f the reform program. Additional support f rom bilateral and other donors i s being sought by Government and i s l ikely to be forthcoming. Three o f the working groups have been meeting since March, covering:(i) public uti l i t ies; (ii) agriculture and agro industry; and (iii) commerce and industry. Two more have been proposed to cover (iv) public infrastructure and (v) social sectors. A cross- sectoral steering committee i s overseeing the project and the activities o f the working groups and w i l l monitor overall performance o f the parastatal sector. MOFED, through the steering committee wil l provide advisory services as wel l as manage two long-term consultants - one local and one international - who wil l work together on supporting the design and implementation o f the Project.

84. the treasury, improved competition in the economy and better quality, lower cost public services

Expected results: Implementation o f remedial action plans leading to reduced burden on

85. four enterprises selected.

Indicative triggers for DPL3: Satisfactory implementation o f the action programs for the

B. Improving Trade Competitiveness

Tariff reform and the duty free island2’

86. The strategy o f becoming an open, globally connected, l o w tax, business friendly platform entails eliminating anti-export biased pol icy distortions which include tariffs. The 2006/07 budget made a commitment to eliminating substantially a l l tariffs (95 percent o f tari f f lines) on a phased basis over three years. Reflecting the strategic importance o f th i s objective, all three years were proposed as DPL prior actiondtriggers. The first year target was met as duties were cut o n some 659 tariff lines and set to zero on another 345 lines. Tari f f peaks previously up to 65 percent were capped at a maximum o f 30 percent.

87. However, while a smaller, leaner EPZ sector i s successfully emerging from a painful adjustment to growing competition in world market, more recent setbacks to domestic manufacturing (see Figure 4, Table 11) highlight similar challenges being faced now by previously highly protected firms as the home market opens up.30 Suggesting that the situation was not fu l ly anticipated, the 2007/08 budget announced a one year respite in the move toward a duty free island, together with an additional MUR 40 mi l l ion for Enterprise Mauritius to

*’ Note that this section on tariff reform and the duty free island represents an indicative trigger which has been redefined as a milestone for DPL2, but i s expected to return as a prior action for DPL3. 30 Though other policies such as price controls may also have had an impact.

38

implement industrial support and restructuring programs.31 Including cost sharing by f i rms, total spending wil l reach MUR 60 million. The support being provided includes consultancy services for marketing and innovation, capacity building in design and management, market intelligence and export promotion. Some programs are sector-wide aimed at f i r m s in sectors such as textiles, furniture and jewelry. Others are demand driven, when individual firms approach Enterprise Mauritius for assistance. However, strict criteria are being applied to ensure that f i r m s are basically viable. In one strategic decision, Enterprise Mauritius has concluded the footwear sector i s unsustainable and w i l l not provide any support to footwear manufacturers.

Table 11 - Industrial Production growth f rom Q1 2006 to Q1 2007

percent

All Food products exc. Sugar Beverages and tobacco Textiles Wearing apparel Publishing and printing Chemicals and man-made fibers Non-metallic mineral products Optical instruments, watches & clocks Basic metals and metal products Other

EPZ 9.8

20.9

9.6 7.1

20.6

37.5

29.4

Non EPZ -4.5 -5.4 0.8

-17.5 4.0

-1 1.6 -15.4 -14.5

-34.7 10.6

Source: CSO, Quarterly Industrial Production

88. In general, the programs appear well conceived and administered, though o f relatively modest proportions. Officials at Enterprise Mauritius and the Ministry of Industry cite anecdotal evidence which indicates a measure o f success for their approach, especially in textiles and apparel where the initiative has been underway for some time. However, it i s notable that the programs have no results framework and there has not been any systematic monitoring o f their effectiveness. Accordingly, i t i s difficult to assess the prospective impacts on competitiveness. However, AFD i s planning to provide a grant for financing measures aimed at enhancing export capacity, part o f which i s expected to be channeled through Enterprise Mauritius’ Enterprise Development Fund and w i l l therefore provide an opportunity to assess the programs specifically aimed at manufacturing competitiveness. The assessment wi l l usefully inform the design o f subsequent industrial programs.

89. The Government emphasizes the philosophy o f becoming a duty free island i s unchanged and it intends to announce further tari f f reductions in the 2008/09 budget which w i l l reduce the level and/or dispersion o f tariffs and eliminate the most egregious distortions. Accordingly, while the DPL2 trigger concerned with the second year o f phased tariff reduction has been withdrawn it has been replaced by a milestone calling for the implementation o f industrial support measures in order to provide for continuity in support o f tari f f reform. At the same time, an indicative DPL3 trigger anticipates a resumption o f tariff reductions.

31 The program parallels the Textile Emergency Support Team (TEST) program in 2003/04 which, on a voluntary basis, assessed competitiveness and supported restructuring o f export oriented textile and apparel sector firms.

39

90. Despite the Government’s intentions, a risk o f temporary programs such as those o f Enterprise Mauritius i s that they persist beyond their originally envisaged horizons. This erodes credibility and creates uncertainty about the future pol icy environment, which gives firms an incentive to delay adjustment and further slows the reform process in a vicious cycle. Recognizing the risks, the Government has asked the Bank help it estimate the costs and benefits o f trade pol icy reform, and design a credible reform strategy to get the process back o n track. This assistance wil l form part o f the dialog for DPL3.

DPL2 prior action: ( i ) Acquisition of additional capacity on the SAFE cable by Mauritius Telecom; ( i i ) Issuing of decision by ICTA on Mauritius Telecom’s application for 20 percent price reduction on ADSL charges; ( i i i ) Initiation of regulatory review of ICTA.

9 1. Description: For a small, remote economy seeking to integrate into the global economy, high quality, competitively priced connectivity i s essential. The internet i s a vital tool in promoting existing activities such as tourism and financial services as wel l as diversifying into new areas such as call centers and BPO. In turn this depends on an adequate supply o f wel l managed, cost competitive infrastructure and competent, transparent regulatory oversight. These three elements - the price, quantity, and regulation of international telecommunications - are the focus of the DPL2 trigger.

92. With regard to cost, compared to other sub-Saharan African countries, Mauritius does not appear expensive. In 2003, a representative bundle o f internet services cost US$15 in Mauritius, US$33.30 in South Africa and US$45.70 in Kenya. But, costs in Africa are among the world’s highest and the same bundle cost US$11 in Singapore, US$8.40 in Malaysia and US$8.70 in India.32 Given the global nature o f competition in IT Enabled Services, further cost reductions would be a competitive advantage. I t i s worth noting that the Government has successfully engineered a sharp decrease in prices for wholesale international capacity over the last few years, wi th the 20 percent reduction referred to here being the latest installment.

93. Perhaps even more important than price, broadband access i s limited across the island and internet penetration i s l ow as visitors to Mauritius quickly discover. Since current demand i s also low, physical capacity has not been conspicuously a binding constraint. However, in light o f ambitious plans to grow communications intensive activities such as financial and IT services and tourism, there i s a need to plan for significant future increases.

94. Finally as to regulation, the international environment for telecommunications i s complex and opaque and of f the island, Mauritian authorities have limited capacity to intervene or even to compel cost disclosure. Nevertheless, vigorous efforts within the limits o f what i s feasible to improve service and lower costs wi l l both increase Mauritius’ competitiveness and send a highly visible signal to investors. Regulatory challenges have centered on balancing the interests o f the incumbent, Mauritius Telecom, wi th other competitors in the sector, especially MT’s exclusive control over the landing point for international communications and participation in the S A F E consortium. But, new challenges are also emerging, due to technological innovation,

32 Data sourced from World Bank, Knowledge Assessment Methodology database, http://web. worldbank.orr/WBSITE/EXTERNAL/WBI/WBIPROGRAMS/KFDLP/EXTUI~/O,.menuPK: 14 14 738-uagePK:64168427-piPK:64 168435-theSitePK: 141472 1,OO.html

40

management o f the country domain name and cyber security. Moreover, best practice thinking on regulation has evolved considerably since 2001 when the I C T A was established under the Telecommunications Act, shifting away f rom licensing entry to promoting efficient market outcomes. Questions have been raised about the ICTA’s performance due to delays in issuing findings and a perception among some private International Long Distance operators that more aggressive regulation i s needed to reduce the cost o f international bandwidth and inter-user connect charges.

95. Government actions to date and future activities to address the challenge: In April, 2007 Mauritius Telecom’s capacity on the SAFE cable rose by nearly two-thirds. New technologies since the S A F E fiber optic cable - Mauritius’ main link to the outside world - was laid, have approximately doubled the capacity o f the l ine and the increase has been distributed across consortium members. As a result, for a nominal investment Mauritius Telecom i s now able to access up to 4 mi l l ion MIU-km o f capacity compared to 1.2 mi l l ion MIU-km33 previously. In August 2007, MT’s latest application to the I C T A for a 20 percent cost reduction was given approval. As a result, the first two components o f the trigger have been satisfied.

96. Meanwhile, the Government has recognized that a regulatory review o f the ICTA’s technical and institutional capacity i s necessary to come to grips with a mult ipl ici ty o f issues which have surfaced. Such a regulatory review was anticipated in the MITT’S PBB (Programme 1, M a i n activity A4), and incorporated into the recently released NICTSP. T o establish I C T as a major pillar o f the economy, the NICTSP urges, “ ... a politico-legal superstructure that i s (a) aligned with needs o f the information economy, (b) i s harmonized with international norms, (c) takes into account emerging developments in technology, including that o f convergence, and (d) promotes increasing uptake of I C T in economy and society through high levels o f t rust and confidence.” The first step toward this is, “a comprehensive regulatory and competency review o f ICTA.. .that must cover issues including those related to functional competence including professional experience and educational requirements, consultative approach in decision-making, continuity in tenure at higher levels and other connected issues.”34

97. Since adoption of the NICTSP in December, the Government i s moving quickly to implementation. Terms o f Reference for the regulatory review have been finalized and a selection process has been launched for a competent international consultant to carry out the work.

98. Expected results: The recent experience with the increase in capacity on the SAFE cable (limited impact on market outcomes) indicates that the benefits o f adding new international capacity can be enhanced significantly if regulatory issues are addressed. Taken together, the increase in capacity and strengthening o f the regulator should have a significant impact on the cost and availability o f bandwidth.

33 Minimum Investment Units-kilometers, a measure o f capacity. 34 Government o f Mauritius 2007, “National ICT strategic plan: 2007-1 1,” p. 49.

41

99. Indicative DPL3 trigger: None.

C. Improving the Investment Climate

DPL2 prior action: Establishment and operationalization of new, National Pay Council durinR 2007 pay round.

100. Description: Detailed and inflexible labor market regulations and institutions have impeded efficient labor allocation and adjustment o f wages to reflect productivity. Remuneration Orders stipulating wages and working conditions for around 80 percent o f private sector workers have discouraged risk taking and i n n ~ v a t i o n . ~ ~ Government has been seeking to scrap the existing tripartite arrangement and substitute an alternative which would be less intrusive, promote collective bargaining and link wages more closely to productivity.

101. Challenge: Government has been committed to labor market reform, but has had to surmount a number o f obstacles, including design and staffing o f new institutions, getting buy in f rom stakeholders (especially organized labor) and concurrence from the International Labor Organization (ILO) for changes which require adequate consultation and are governed b y I L O conventions.

102. Government actions to date and future activities to address the challenge: The National Pay Council was set up on M a y 10,2007 by means o f an administrative arrangement, which i s to say a Cabinet decision. There was some urgency because o f a need for it to conclude i t s work and submit recommendations to Government b y the end o f M a y prior to the budget. The NPC was established with 15 members (5 government, 5 employers, and 5 workers) plus an independent chairman supported by the assistant director o f the CSO and a small support team (an economist, a productivity analyst, labor-management specialist, accountant and statistician). In the event, i t s recommendations were submitted within the required time frame, on May 24. The NPC’s TORS called for the establishment o f (a) a national minimum wage to be paid to every worker; and (b) a yearly minimum wage increase, taking into consideration: (i) the rise in the consumer price index, (ii) national ability to pay, (iii) national productivity and competitiveness; and (iv) employment and unemployment rates. By contrast, the previous arrangement took into account only consumer price inflation.

103. Government intends the NPC to remain as an administrative arrangement rather than codifying it in the labor law which i s currently under revision. Both organized labor and employers agree that this f lexibi l i ty i s desirable to allow further institutional evolution, albeit these groups have divergent views about what change i s needed - labor favors returning to the old system while employers want even greater scope for collective bargaining. I t i s understood that the I L O also recommended the NPC not be incorporated into the new labor law.

104. allocative efficiency and outcomes in l ine with productivity trends.

Expected results: More flexible and responsive wage bargaining resulting in greater

35 See Country Economic Memorandum, Mauritius: Managing Change in a Changing World.

42

105. Indicative DPL3 trigger: Introduce flexi-security.

D. Democratize the Economy through Participation, Social Inclusion and Sustainability

DPL2 prior action: Drafting of national education strategv to increase primary, secondary and tertiary output and raise quality, including through:

increasing enrollment at tertiary level: reducing the failure and marginal pass rate of the CPE, in particular in Zones d ’Education Prioritaires;

- offering a vocational stream to those who fail or barely pass the CPE:

- upgrading teacher training: - implementing a new curriculum with a greater emphasis on languages, science, math and

ICT.

- -

106. Description: From the outset o f i t s current mandate, the Government has argued for strengthening the educational system to, “enable young Mauritians to be employable in the new sectors [and] participate fully in a knowledge based economy in areas l ike tourism, agro- industry, electronics and Information T e ~ h n o l o g y . ” ~ ~ At the same time, education plays a key role in increasing participation and social equity. Government i s particularly interested in education reform because it addresses both wealth creation and social inclusion simultaneously. That is, it, “has a two-fold objective. I t intends to bring reforms to the national economic structure that w i l l open the doors o f economic opportunities to the majority o f the population. This w i l l in turn contribute to mobilizing the overall competitive advantage o f the whole population to create more wealth.”37 Education system reform i s complementary to the Empowerment Programme which was introduced in the 2006/07 budget and supported by DPLl . In that case, the focus was on (re)integrating workers into new emerging sectors through narrowly targeted employer-provided on the j ob training. By contrast, the DPL2 prior action focuses on the longer term goal o f ensuring adequate quantity and quality o f human capital available to the economy.

107. Challenge: The shortcomings o f the education system have been increasingly recognized over the past two decades: high failure rates and attrition throughout primary and secondary school, l ow enrollment in math, science, and language courses, ubiquitous private tutoring, inadequate teacher training, outdated and overly-academic curricula, lack o f choice, poor development o f problem solving and critical thinking skil ls, and inadequate tertiary capacity.38 Yet during that time, little has been achieved in the way of reform. Undoubtedly, Ministry o f Education and Human Resources (MOEHR) staff have been innovative and proactive in a range o f activities such as early childhood education, the knowledge channel and promoting the teaching o f science subjects. But, addressing the needs o f education systematically and in a cost

36 See Government Programme 2005-2010: Address by the President of the Republic of Mauritius, par. 147 ff (http://www.gov.mu/p~rtal/~oc/assemblysite/file~residentaddress,pdf). 37 Government Programme 2005-2010, par. 42. 38 See, World Bank 2004, “Mauritius education and training sector note: striving for higher standards,” Report No. 29427-MU (Washington, DC).

43

effective way demands moving beyond a piecemeal approach and especially engaging stakeholders in a genuinely consultative process to build a constituency for change.

tal losses

108. Government actions to date and future activities to address the challenge: In addition to the needs o f the education sector, the Ministry o f Finance i s a stakeholder in the education strategy because o f i t s budgetary implications and the need for inputs to the PBB for the annual budget exercise. Working together, the M O E H R sources and MOFED prepared TORS for the elaboration o f an Education Strategy Paper covering the period 2008 to 2020, with precise benchmarking and the delineation o f responsibilities. This strategic plan which resulted covered core priorities in the f ive main subsectors (pre-primary, primary, secondary, tertiary and TVET) and prepared costed implementation plans with specific objectives and well-documented, relevant and verifiable Key Program Indicators, taking account o f projected budget ceilings.

45.3

109. The E C agreed to fund an external consultancy to assist wi th preparing the strategy. Consultants were identified and began their assignment in mid October. A first draft Strategic Plan was delivered in November and finalized, together wi th the PBB indicators in December.39 That wi l l be followed by dissemination and consultation. The MOEHR i s strongly committed to the exercise.

emo item:

)tal employment (2000) 485.9

1 10. Expected results: Finalization and adoption o f strategy, including identification o f programs and performance indicators for the 2008/09 PBB. Overcoming the education system’s limitations wil l have a strong, positive impact on human capital formation and growth.

11 1. Indicative trigper for DPL3: Begin implementation o f strategic plan.

VI. OPERATION IMPLEMENTATION A. POVERTY AND SOCIAL IMPACT

112. Over the past several years, the loss o f trade preferences has resulted in major dislocations, wi th cumulative net j ob losses in apparel and sugar since 2001 around 9 percent o f total employment in the economy. Women have suffered the largest share o f the losses, including over 80 percent in the apparel sector. Both men and women have faced poor j ob prospects due to l ow educational attainment and narrow work experience, compounded by weak labor market condition^.^' The households affected by the structural shift have been

Sugar Annarel

39 See, Government o f Maurit ius 2007, “National strategic p lan for education and training: 2008-2020” (processed). 40 Association des Femmes Entrepreneurs de Maurice 2004, “Etude sur l’ impact des licenciements de l a zone franche a l ’ I le Maurice,” httt1://un.intnet.mu/UN2005/sec UN%20Publications/downloads/EPZ%2ORe~ort.r1df. A survey o f workers laid o f f f rom the apparel sector found the great majori ty had started work at an early age and had not worked outside the sector or in many cases even the firm.

44

predominantly l ow income where the loss o f even a secondary income can impact significantly on consumption, especially where primary incomes are precarious as well.

113. The Government has consistently emphasized that i t s reforms are intended to benefit l o w income, vulnerable households: “We simply cannot continue on the same path. I t i s the surest way to economic disaster and social upheaval. And those who wil l suffer most are the very people we want to protect: the poor, the vulnerable, the ~ n e m p l o y e d . ” ~ ~ O n balance the broadly market oriented reforms which the Government has been putting in place should be pro-poor, especially to the extent they reverse the growth slowdown o f recent years.42 Significant low-to- moderate skilled employment growth i s anticipated in construction, tourism, seafood, call centers and BP0.43 Regulatory and corporate tax reforms should further enhance employment gains b y neutralizing pre-existing biases toward large firms and capital intensive production techniques. Finally, labor market reforms linking wages to productivity, and support for SMEs should also tilt employment creation toward younger and less skilled workers.

114. Some reforms may produce losers as wel l as winners. For instance, tariff cuts raise real incomes o f some low income households b y reducing the cost o f wage goods, but also contribute to job losses in vulnerable sectors. The Aid for Trade report estimated that the price impacts o f completely eliminating tariffs would lift five percent o f poor workers out o f poverty, but also accelerate job losses - as many as 13,000 over a three to four year period, concentrated in a few sectors such as footwear and furniture, where workers with sector specific sk i l ls would disproportionately bear the burden o f re~tructur ing.~~ Minimizing the negative impacts and balancing these competing interests may be what has led the Government to slow the pace o f tariff reform.

115. The Government has also been careful to include in the program accompanying measures to mitigate some o f the social costs. Thus, a main pillar o f the reform program has been “economic democratization.. ..[comprising] reforms to the national economic structure that w i l l open the doors o f economic opportunities to the majority o f the p o p ~ l a t i o n . ” ~ ~ The main vehicle has been the Empowerment Programme, with training subsidies and support to the unemployed for starting SMEs, including special programs for women entrepreneurs. A number o f other smaller solidarity measures were incorporated in the 2007/08 budget, targeted at the most vulnerable groups. Finally, accompanying measures have mitigated some more egregious distributional impacts o f the reforms, in particular providing cash transfers to the most needy to compensate for eliminating consumer subsidies o n rice, flour, and exam fees.

2006107 budget speech, par. 7. 41

42The evidence i s compelling that faster growth creates employment opportunities and raises the incomes o f poor households. See, e.g., WDR 200012001, Attacking Poverty. 43For instance, the Board of Investment has spoken of as many as 25,000 IT jobs, mainly call centers and BPO by 2010. (See, 1’Express (August 15, 2007), “Le BO1 parle de 25 000 employes dans l e secteur des Tics, d’ici 2010.” The target i s optimistic, but indicative o f the sector’s potential. Since 2005, BPO employment has been growing at over 25% annually. Meanwhile, doubling tourist arrivals by 2015 could generate similar job growth in the hospitality sector.

Mission, April 26,2006) 45 Government of Mauritius, “Government Programme 2005-2010: Address by the President o f the Republic,” (July 2005), par. 42.

World Bank 2006, “Mauritius: From Preferences to Global Competitiveness” (Report o f the Aid for Trade 44

45

116. With respect to OP8.60, none o f the DPL2 measures appears to have a significant negative impact on poverty. Only one - operationalizing the National Pay Council for the 2007 pay round - has any direct bearing at al l and i t s impacts are l ikely positive. The NPC replaces a preexisting tripartite arrangement which rigidly mandated annual pay increases, taking no account o f productivity or market conditions facing firms or sectors. While this system may have benefited some low income, formal sector workers, others were unable to find work at all, or were driven into the informal sector where they not only earned less, but likely did not receive protection f rom safety and health regulations, or contribute to pensions. By contrast, the NPC allows substantially more flexibility in labor market outcomes. Survey results find excessive labor market regulation discourages employment creation while achieving relatively little overall for workers. 46

117. In l ine wi th i t s commitment to democratization, the Government has recognized the need for a more systematic assessment o f social protection. The Ministry o f Social Security i s currently compiling a Social Register, covering up to 200,000 actual or potential recipients o f social benefits, including basic pension, social housing, subsidized electricity, and social aid delivered under various programs. When completed in 2008, the Social Register w i l l help to ensure the adequacy o f social safety nets while rationalizing and streamlining various social support programs for greater cost efficiency. Other initiatives are being undertaken with support from various Development Partners to rationalize the social assistance system, including setting up a poverty observatory to improve tracking and monitoring o f poverty, carrying out a retrospective study on effectiveness o f social spending, and compiling a Social Accounting Matrix to facilitate analysis o f social and structural policies.

118. The Government has recognized that it needs to know more about the social costs and benefits o f the restructuring and has expressed an interest in a more comprehensive Poverty and Social Lmpact Assessment o f the transition which Mauritius i s undergoing. This wil l be discussed during the Annual Business Planning exercise in early 2008. The interest i s specifically in capacity building to enable the Government to perform such analysis itself. The Bank wil l also be providing TA to the Ministry o f Social Security as it prepares a strategic plan to support the MTEFPBB process. Such capacity building would complement the more sophisticated data and modeling tools which are under development.

B. ENVIRONMENTAL ASPECTS

119. Most DPL2 prior actions - those concerned with budget modernization, procurement, labor market reform, preparation o f an education sector strategic plan and telecommunications capacity and regulation - have no significant environmental impacts. However, two cases demand careful consideration:

Implementation o f industrial support measures to raise export competitiveness: which have the aim o f increasing output in sectors such as textiles, jewelry and furniture which may contribute to air, water, or noise pollution.

0

4b World Bank 2004, World Development Report 2005: A better investment climate for everyone, p. 148.

46

0 Establishment o f remedial action plans for selected parastatals: which in the cases o f the Wastewater Management Authority, CWA, and Central Electricity Board could entail weakening environmental safeguards.

120. Beyond the DPL’s coverage, other policies and development objectives such as doubling tourist arrivals b y 2015; expanding the port and airport; relieving traffic congestion; moving from ex ante approval to ex post verification for business licensing; and allowing expedited environmental assessments on a cost recovery basis may also pose environmental risks.

12 1. Ultimately, environmental standards in Mauritius wil l reflect the country’s own priorities and institutional capacity. Historically, the record o f environmental management, though not perfect, has been relatively good.47 Stringent environmental safeguards are provided for in the Environmental Protection Ac t and al l projects must obtain a preliminary environmental report or, in the case o f heavy polluting activities or major investment projects, a full environmental impact asse~smen t .~~ An environmental police force under the aegis o f the Ministry o f Environment i s responsible for monitoring and enforcing environmental provisions.

122. Meanwhile, over the past two decades pol icy has continued to evolve in response to emerging threats and needs and i s currently under review again (see par. 56 above). The National Environmental Policy white paper o f 2006 evidences a clear awareness o f environmental risks and the importance o f careful management o f the fragile ecosystems of a Small Island Developing 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 f rom ethanol distilleries, sea-food industries and Information and Communication Technology.. . .[and] integrate policies for sustainable consumption.” (par. 2.6- 2.7) More generally i t stresses that, “Government i s fully conscious that the long-term socio- economic success o f the country i s not possible without environmental sustainability and i s therefore putting environmental concerns high on i t s agenda.” (par. 2.3)

123. All Development Partners recognize the strategic importance o f environmental protection and AFD, UNDP and the E C are actively providing technical support. With E C assistance, a Strategic Environmental Assessment has been carried out for the M A A S and Government has expressed an interest in carrying out similar exercises for other environmentally sensitive sectors. AFD i s supporting the development o f a sector strategic plan based on the white paper which wil l lead to defining and costing programs, objectives, outputs and indicators for the 2008/09 PBB.

C. IMPLEMENTATION, MONITORING AND EVALUATION

124. The Government, represented by the Financial Secretary, and the Bank, represented by the TTL, wil l meet at least semiannually to review progress o f the DPL program, together with other Government and Bank representatives as appropriate. The Bank w i l l also maintain a dialog with counterparts in the Ministry o f Industry, Ministry o f Information Technology, Ministry o f

47 See EU, “Mauritius Country Strategy Paper 2008-2013,” Annex 3, Executive Summary o f the Country Environmental Profile. 48 See http://www.gov.mu/portal/goc/menv/files/epa.pdf.

47

Labor and other bodies critical to the success o f the program. The Government wi l l furnish data as required to monitor outcomes in the matrix.

D. FIDUCIARY ASPECTS

Public Financial Management System

125. Financial controls at the B o M and in the Government appear to be entirely satisfactory. Audited accounts for the period 1998/99 - 2005/06 are published on the B o M web site.49 N o problems or errors have been reported by the external auditors during th i s period. This information was supplemented during Preparation and Appraisal for the first DPL, by discussions with officials o f the BoM, the Accountant General and others. N o evidence was found o f 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 n . ~ ~ It 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)

Funds Flow Arrangements

126. 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 i s that the control environment for funds disbursed by Development Partners i s adequate.

127. The proposed operation wil l fo l low the Bank’s disbursement procedures for development policy lending. Disbursement (other than for the front end fee) wi l l occur in one tranche after effectiveness. The loan proceeds f rom the Bank wil l be credited to a United States dollar denominated account maintained by the B o M and forming part o f the official reserves o f Mauritius. Within two business days, the B o M wil l credit the Rupee equivalent o f the loan proceeds to the Single Treasury Account maintained on behalf o f the Government o f Mauritius. The Accountant General w i l l be notified accordingly. The B o M wil l not impose any charges or commissions on the Government for these transactions. The conversion f rom Unites States dollars to Rupees wil l be based on the prevailing exchange rate on the date that the funds are credited to the Single Treasury Account. The Government w i l l be required to provide confirmation to the Bank that an amount equivalent to the loan proceeds f rom the Bank has been credited to the Single Treasury Account, with an indication o f the exchange rate applied.

E. RISKS AND RISK MITIGATION

128. The risk section in the first DPL focused on the Government’s ability to maintain the momentum o f reforms. That risk has considerably receded with the 2007/08 budget which introduced the second installment o f the program much as envisaged. There has been no significant change in direction in the Government’s economic and social programs since they

49 http://bom.intnet.mu/

(project No. 2006A29349, final report dated 4 June 2007). SIPU International, “PEFA Public Financial Management Performance Assessment Report for Mauritius, ”

48

were first put forward in July 2005. Even in the case o f tariff reform where the pace o f implementation has slowed to give f i r m s more time to adjust, the Government maintains - credibly - that the medium term goal remains the duty free island.

129. Despite this impressive consistency in policymaking and implementation, i t i s widely reported that there are voices in the Government which are less supportive o f the reforms and from time to time dissent spills over into the public. One very effective mitigation strategy has been MTEFPBB, which as discussed above serves to increase dialog and the f low o f information within the Government, and to allow policymakers scope for setting pol icy goals and holds them accountable for getting results in their spheres o f responsibility. Government has attempted to mitigate the risk further by requesting the Development Partners including the World Bank to engage at a sectoral level to help develop strategic plans for ministries which are central to the reforms. The Development Partners have coordinated their support in this area to ensure an optimal coverage.

130. Another risk i s capacity constraints and a reluctance to prioritize o n the more strategically important elements o f the program. The need for sector strategies i s a case in point. An important effort to mitigate this risk include donor support for capacity building, especially for training and c iv i l service reform.

131. Finally, it i s important to remember the delicate macroeconomic balance which could prove difficult to maintain. Inf lat ion i s apparently trending lower, but it remains high and Monetary Policy Committee has warned o f upside risks. Meanwhile, financing the twin current account and fiscal deficits could present problems especially in light o f the recent volatility in global financial markets. The risk i s being mitigated by institutional reforms, namely the use of fiscal rules and MTEFPBBB in budget preparation and the establishment o f an independent Monetary Policy Committee and the introduction o f the more market oriented rep0 rate to strengthen monetary policy.

49

ANNEX 1 - LETTER OF DEVELOPMENT POLICY Letter of Development Policy

Office of the Deputy Prime Minister, Minister of Finance & Economic Development

14th January 2008 Ma Ritva Reinikka Country Director World Bank Group Pretoria, South Africa

CF/92/1 V2

Dear Ms Re in ikka

Letter of Development Policv

I am enclosing a signed copy o f the Letter o f Development Policy

describing the implementat ion o f the economic re fo rm programme

that will enable Maur i t i us to lay the foundat ion o f a n e w socio-

economic mode l dr iven by global competitiveness and the creation

opportunit ies fo r all.

The Government o f Maur i t ius wishes to have recourse to the

Development Policy Loan to finance i ts budget and pro-growth reforms

that wil l propel the economy on a higher g rowth trajectory, attaining

full employment and improving the quality o f l i fe o f i t s populat ion.

"

I w i s h to take th is opportuni ty t o express the appreciat ion of the

Government of Maur i t i us for the cont inued close col laboration

between the Bank and our country.

Yours sincerely

R. Sithanen Deputy Prime Minister, Minister o f

Finance 8s Economic Development

50

14 January 2008

Ms R i t v a Re in i kka Country Direc tor W o r l d Bank G r o u p Pretoria, South Af r i ca

Le t te r of DeveloDment Pol icy

1. The reform programme initiated in FY 06/07 was designed to lay the foundation o f a new socio-economic model driven by global competitiveness and the creation o f opportunities for all. This programme benefitted f rom direct Budget support f rom the Afr ican Development Bank (ADB), the European Commission (EC), the Agence Frangaise de Dtveloppement (AFD) and the Wor ld Bank (WB). The International Monetary Fund and the United Nations Development Programme (UNDP) are closely associated with the implementation o f the programme and have extended technical assistance. Collectively Maurit ius secured development pol icy loans amounting to U S $ 70 mill ion, representing the first disbursement o f a three- year support programme. All those providing budget support and other Development partners, namely BADEA, IFAD and Japan amongst others, have also provided financing for projects aligned to Government’s reform programme whi le bringing their expertise in areas o f interest to them.

2. The support o f external partners has helped Government to finance i ts budget whilst consolidating public finances and implement pro-growth reforms that wi l l propel the economy on to a higher growth trajectory, attain full employment, and improve the quality o f l i f e of i t s population. These reforms are sweeping away a non- functional system which is very complicated, hard to understand and open to abuse and wi th excessive discretion. W e are making things simple, transparent and rule based.

3. The early results and outcomes are encouraging. The signs o f economic renewal are vivid. Foreign Direct Investment is growing. The objective of reaching full employment and improving the purchasing power are within reach in spite o f adverse exogenous circumstances. W e have been able to share some o f the early gains, particularly with those who most need help. The early harvest also allows us to signal our determination to assure that a l l wi l l share in the accelerating recovery. However, to reach the destination we must stay on the path of reforms.

4. The FY 07/08 budget builds on the acquis o f the previous budget. I t puts in place further reforms with fine tuning wherever required and introduces a second generation o f reforms. These reforms are embodied in a Programme-Based Budgeting (PBB) framework embedded in three-year Med ium Term Expenditure Framework. Whilst the PBB i s only indicative in the 2007/08 Budget, with assistance from the IMF we are taking the steps to launch a P B B based budget in 2008/09. W e have made a big leap in promoting ownership by sector Ministries, coherence with the Government Reform Programme, internal consistency and ensuring programmes and projects are fully financed and consistent with the economic reform programme. A

1

51

credible and coherent medium term action plan has been prepared to move the MTEFIPBB agenda.

5. ?"ne strategic vision announced in the 2006/07 budget permeates the P B B and i s now internalized in the programmes o f each Ministry. However, a lot needs to be done to improve the quality o f various P B B indicators and to embed these in coherent strategic plans fo r each Ministry. Moreover, we need to ensure that strategic plans are (i) efficiency promoting, (ii) feasible in view o f human resource constraints, (iii) affordable by identifying h o w the proposed strategy can be paid for by expenditure rationalisation andor revenue measures including user charges; and (iv) fair, by ensuring that the bottom 10 percent continue to have access to free services whilst ensuring that the wealthiest 10 percent o f Mauritians contribute. To ensure ownership, each Min is t ry has formed a Working Group to develop the required strategic plan. However, w e will need the assistance o f the Development Partners to assist us with quality control o f the output o f the Working Groups and have accordingly made the request for a coordinated response, consistent with the Paris Declaration for Aid Effectiveness.

6. At the same time, the rapidity o f enactment o f the reform programme and the speed of response from the private sector, particularly FDI, have changed the areas o f emphasis for Government action supported b y the external partners. Instead o f charting the course for the country, our energies are n o w concentrated on how to get things done since the major reforms are now enacted. Indeed, we have significantly beefed up this side of Government's operations with the creation o f a dedicated Department for Pol icy Development, Implementation and Empowerment within the Ministry o f Finance and Economic Development (MOFED).

7. This new Department i s part of the now completed reorganisation o f the Ministry o f Finance wh ich was built around the strategic plan for MOFED as reflected in its PBB. Moreover, to support these changes, M O F E D will be the first Ministry to fully adopt Performance Management Systems under the supervision o f the Ministry o f C iv i l Service and Administrative Reform (MCSAR). The reforms in M O F E D set the stage for a jo in t effort by M C S A R and MOFED to assist other Ministries reorganise themselves as part o f a move to a performance culture.

8. A s we move forward, the Development Policies will be fully reflected in the PBB. The means o f implementing agreed programmes w i l l be assured thanks to the three year rol l ing Med ium Term Expenditure Framework that will b e formally adopted by Parliament as part o f the new budget document.

9. The Development Policies will, therefore, increasingly focus on implementation at a Min is t ry and Sector level. However, the four pillars o f the reform programme will continue to underpin our strategy as reflected below.

Fiscal Consolidation and Improving Public Sector Efficiency

10. Fiscal consolidation is intended to put deficits and debt on a downward path by: (i) limiting government borrowing to the financing o f the capital budget; and (ii) reducing the ratio of net public debt to GDP. Our projections indicate revenue stabilising at around 19 to 20 percent o f GDP, accompanied by a decline in the share

2

52

of total expenditure to 22 to 23 percent o f GDP, and a narrowing o f the overall central government budget deficit to about 3 to 3% percent o f GDP.

11. The Government's PBB wi l l underpin th is consolidation, anchoring annual budgets within an aggregate multi-year framework and enabling Government to set priorities and resolve budgetary trade-offs. PBB has been extended to the entire budget to address twin objectives o f tightening fiscal discipline and improving public sector allocative efficiency.

12. A coherent medium term action plan for training, computerisation and sector strategies has been prepared to fast track the programme. Key stakeholders own and champion the initiative, and have an acceptable blend o f best practice and country specific requirements.

13. In FY 06/07, personal and corporate income tax systems were reformed, overhauling most exemptions, consolidating the numerous deductions into new income tax exemption thresholds, reducing the number o f tax bands, and setting out to harmonise the tax rates and lower them significantly. Ministerial discretion over tax and duty exemptions was given up. As of July 2007, both corporate tax and personal income tax were reduced and unified at a single flat rate o f 15 %, two years ahead o f schedule.

14. On the expenditure side, policy measures focus on eliminating waste and increasing efficiency. Spending restraint includes measures aimed at reducing wastage such as restrictions on overtime and hiring, salary increases below the rate o f inflation, tighter scrutiny o f the capital budget, a review o f some institutions and the setting up of Audit Committees in key Ministries. These measures have resulted in significant savings, especially in the capital budget through a needs assessment o f capital projects, a review o f the effectiveness o f design, control o f variations and monitoring o f project implementation. Individual Ministries are also taking ownership of their projects. T h e Government i s also developing a Capital Budget Process Manual as a step-by-step guide for effective and timely management of projects. More careful monitoring of capital projects i s intended to improve the quality o f public investments and discourage unjustified cost overruns. Better targeting of subsidies and transfers wi l l better direct these expenditures to the neediest and restore fairness to spending so that the wealthiest 10 percent no longer benefit from a larger share o f public spending than the bottom 10 percent. Long term sustainability o f the pension system wil l be addressed, inter-alia, by raising the eligibility age to 65 over the next decade.

15. As a result o f the above measures, primary spending as percentage o f GDP was reduced fiom 21.6 % in 2005/06 to 19.5 % in 2006/07 and i s budgeted to decline m e r to 19.3 % in 2007/08. This reduction o f more than 2 percent of GDP during the two fiscal years compares favourably with the 1 percent reduction anticipated in the Government reform matrix over this period. This has allowed debt to follow a downward path for the first time in over a decade.

16. Currently there are more than 150 parastatals bodies that transact in billions o f rupees each year, and have significant weight in GDP. The Government intends to strengthen th is sector, align their management with the policy to eliminate waste in

3

53

Government, focus o n their output and outcomes, and bring them in l ine with our new economic strategy. The current year’s Budget Speech announced a programme to re- engineer the parastatal sector that includes, inter-ah, setting key performance indicators, increasing competition in output markets, outsourcing some activities, rationalising and reviewing business cases where government intervention is no longer needed. Three working groups were set up, one each for agriculture/agro- industry; public utilities and commerce and industry to init iate programmes in enterprises in these sectors, and six parastatals have been selected for the first phase o f the project - Small Planters Mechanical Pool (SPMP), Agricultural Marketing Board (AMB), Central Electricity Board (CEB), Central Water Author i ty (CWA) and Wastewater Management Authority (WMA) and State Trading Corporation (STC). The program wil l be implemented over the next f ive years.

Improv ing T rade Competitiveness

17. The centre piece o f improving trade competitiveness is an overhaul o f the incentive framework to reduce distortions and biases. Reducing the level o f tariffs, which in the past have contributed to the anti-export bias and hampered improved competitiveness o f the protected enterprises, i s an important element o f the Government’s programme. In the FY 06/07 budget, the first year o f a 3-year tariff reduction programme, duties were cut on several items and reduced to zero on many others. Tariff peaks were reduced and capped f rom 65% to 30%. However, in the FY 07/08 Budget, a one year respite in further tariff reductions was put in place. This postponement o f tariff reductions will enable Enterprise Maurit ius to assist firms to implement restructuring programmes and increase their global competitiveness in the face o f the loss o f protection. An amount o f Rs 40 m i l l i on that wou ld generate an additional Rs 20 mi l l ion by way o f cost-sharing by recipient enterprises would be spent o n the support programme during the year. Whilst this has a strong logic, i t may reduce the manovering room and reduce the benefits o f some positive measures in the coming budgets. At the same time, we also have a commitment to achieving a Duty Free Island and at latest with the 2009/10 budget by wh ich t ime we should have eliminated substantially a l l tar i f fs except for a small percentage. A useful approach might be to reduce remaining tariffs in two equal steps, say by reducing the maximum rate to 15% and then to zero, or cutting the weighted average ta r i f f rate by 50%.

18. Trade competitiveness is also directly influenced by the availability and quality o f appropriate infrastructure. A 20% increase in the public infrastructure budget has been provided to address problems o f land transport and traffic congestion, upgrading utilities, and modernizing port and airport infrastructure. The process for the establishment o f the Land Transport Authority (LTA) has been initiated The Government i s reviewing the strategy for the development o f the Port to enhance its attractiveness to the growing traffic in our region. A strategic partnership for the Cargo Handling Corporation Ltd (CHCL) i s in the of f ing so that necessary investment can be made to increase efficiency in port development and management. A Tourism Strategy to meet the target o f 2 mi l l ion tourists by 2015 i s being prepared. Accordingly, the pr ior i ty i s to modernize and expand the Passenger Terminal to underpin OUI po l i cy o f open air access. Th is i s estimated to cost Rs 4 b i l l i on and would be ready by end 2009.

4

54

.. .

19. Restoring global competitiveness requires modernizing and restructuring existing sectors (sugar and textiles and clothing) and, where a role for the public sector i s indicated, providing public support for the development o f new activities such as ICT, financial services, hospitality tourism, seafood and land based ocean activities. Achieving these objectives will entail adequate planning and preparation o f long term development plans and sectoral strategies, as i s being undertaken, as we l l as enhanced access to financial services.

20. T o realise the objective o f developing the I C T as another pillar o f development, require the provision o f adequate supply o f we l l managed infrastructure and components, and transparent regulatory oversight. Maurit ius Telecom’s monopoly over safe traffic has come to an end in April thus opening avenues for new entrants. The SAFE Consortium has recently upgraded the cable and distributed increases across its members. T h i s additional capacity has not been activated because o f l imited demand. Government i s exploring other options, including the EASSY cable and the Inter-Island Connector, for increasing capacity as we l l as providing redundancy, wh ich several international investors indicate as important for selecting Mauritius.

Improv ing the Investment C l imate

21. A second generation o f reforms i s proposed to make the regulatory environment more transparent and less burdensome. Government’s policies in this domain comprise facilitating issuance o f permits and simpl i fy ing appeals process, enhancing labour market f lexibi l i ty through new legislation and mechanism for wage setting, and attracting skil led workers and developing the knowledge hub in Mauritius. Facilitating the issuance o f permits for short-term and permanent residence is a step towards further opening o f the economy and attracting external technical expertise. Legislation i s also being amended to accelerate approval o f training and educational institutions to set up in Mauritius. The Government i s also amending the L a w Practitioner’s Ac t to al low the establishment o f corporations by both Mauritians and foreigners. These corporations will be able to employ foreign lawyers. We are also making it easier fo r appeals to the Privy Council by hosting i ts sittings in Mauritius.

22. Conditions governing labour markets have an important impact on investment climate. In the past, inflexible labour market regulations have divorced wage developments f rom productivity changes, and adversely affected r i sk taking and innovations in the productive sectors. The Government i s committed to labour market reform and market flexibility. T o that effect, Government i s introducing two new bills, namely the Employment Rights Bill and the Employment Relations B i l l s to replace the present Labour Ac t and the Industrial Relations Ac t respectively. The two bi l ls which have been circulated for public comments will not on ly modernize OUT

labour legislations in l ine with hternational Labour Organisation (ILO) Conventions, but w i l l also introduce ‘flexicurity’ that will protect workers rather than trying to protect jobs. Moreover, the Government has up set the National Pay Council (NPC) to replace the National Tripartite Committee to determine salary compensation for increase in the cost o f living. The N P C would determine the yearly minimum wage increase taking into consideration not only the increase in consumer index, but also

5

55

the national abil ity to pay, the national productivity and competitiveness and the employment and unemployment rates”.

23. The Land Administration, Valuation and Information Management System i s being implemented to provide us with a cadastral map o f a l l land and properties within the boundaries o f the island o f Mauritius. This wi l l substantially facilitate the use o f land for investment and other purposes whi le at the same time allow for optimal use o f land resources and provide a reliable tax base for the National Residential Property Tax (NRPT). A new mechanism has been proposed to accelerate the process o f approval for projects with complex Environmental Impact Assessments (EIA). Assistance f rom the Wor ld Bank has been requested and will be crucial to allow early implementation o f the proposals.

Democratizing the Economy by Widening the Circle o f Opportunities

24. The Government i s aware that the success and sustainability o f the reform programme depends upon its being owned by the people. All stakeholders must feel that they are participating in the formulation and implementation o f policies that affect them and that they are fa i r ly sharing the benefits f rom those policies. However, a prerequisite i s that everyone has access to health and education facilities for them to be able and equipped to participate effectively. The programme, accordingly, accords high priority to education and health care including a review o f the fairness o f current policies. The bottom 10 percent must have at least as good access as the top 10 percent and spending on the wealthiest Mauritians needs to be redirected to meet the needs o f those who most need assistance from the State. The emphasis on education is also justif ied by the needs o f making the transition to high value-added, skills and knowledge based economy, and competing effectively in the global economy. It wi l l be imperative to take steps to improve performance o f all, but particularly the poorest students, to ensure that they can succeed and move through graduation f rom University or appropriate Tertiary education facilities.

25. The Government is, therefore, preparing an overall strategy that wou ld address holistically the education issues. In the meantime, we have opened the country to international institutions o f learning that will broaden the opportunities for students to have access to tertiary education whilst also developing a new export market for services. W e are also increasing support t o l ow performing schools and addressing the problem o f high drop-out rates. The allocation for education has also been increased in the last and current years’ budgets, although much needs to be done to improve fairness and internal efficiency o f the system.

26. In the health sector also, budgetary allocation has been raised substantially in several areas, including for medical supplies for laboratories, purchase o f hi-tech equipment for hospitals, and upgrading government hospitals. The programme also addresses the needs o f the vulnerable groups, the youth and women. Here again, however, emphasis now i s required o n securing efficiency gains and adopting policies that are fair to all, particularly the neediest Mauritians. At the same time, w e need to ensure that the Health Care model i s sustainable for a population that i s rapidly aging and also getting wealthier.

6

56

27. Recognising that the implementation o f the programme would involve social transition costs, the Government instituted the Empowerment Programme, supported by an envelope o f Rs 5 billion over five years as a major instrument to address democratisation and social inclusion issues. I t aims at providing opportunities for the already unemployed and those likely to be made redundant as a result o f the restructuring and exposure to external competition, for women and for new entrants into the labour force through education technical training and re-skilling, and encouraging entrepreneurship and improving the capacity and competitiveness o f SMEs. Social costs o f the adjustment, including those for the Empowerment Programme, feature prominently and explicitly in the overall adjustment programme; of the total estimated financial requirements o f Euro 4 billion. Budgetary spending on the EP was Rs 700 million in the first (2005-06) fiscal year but i s expected to r i se to Rs 2 billion in the current fiscal year.

28. The Empowerment Programme (EP) has seen a degree o f consolidation over the past few months and an acceleration o f its activities, with the nomination o f a Project Coordinator. The modus operandi i s clearer now - the various sub- committees have instituted a (natural) division o f labor between themselves - while some sub-committees mobilize the unemployed to take advantage o f the EP, others are responsible for finding the training, placement and the job possibilities. The placement schemes have made significant progress - approximately 1,000 have been placed so far and the target i s 2,000 for the next financial year. In addition some 10,000 women retrenched from the textile sector have been enlisted for various employment programmes. So far 598 have undergone training in a new profession, while 408 have already found a job/placement, and others have established business networks in pastry and livestock. A major push in Rodrigues i s also planned.

29. For the SMEs, several projects are being implemented to improve sourcing and marketing skills, to build capacity in product development and design, to develop colonial style furniture, to manufacture tourist oriented souvenir products, to promote product and market development in the jewellery sector, and to develop export potential

30. In addition, however, the Government and the Development Partners have agreed that there should be a more integrated approach to the poverty issue. The IMF and the World Bank have been requested to work together to build on earlier assistance by the IMF. The Government also welcomes support from the Development partners for a full-fledged Poverty and Social Impact Assessment (PSIA) of the whole economic reform program at some stage. Government has also urged the Development Partners to provide the required TA and A A A to build capacity to undertake such work as part o f the PBB. Because Mauritius has been successful in unlocking growth with equity, absolute poverty i s low even by the standards of industrialized countries and relative poverty close to the best performers in the High Income OECD. This means that eradicating absolute poverty should be possible whilst reducing relative poverty to the levels in Scandinavia and Central Europe. The Government i s seeking assistance from the Development Partners to achieve this by a combination o f policies to unlock growth (as described above) together with a pro-active social policy aimed at helping those who need assistance to move out o f poverty.

57

31. The Government i s also committed to protect the environment, an urgent issue in a small island with a fragile eco-system. Growth wil l b e sustained only if it CO- exists with a focused effort to preserve the environment. The Government i s continuing i ts heavy investment in Waste Water treatment and mov ing to smart environmental controls. A s part o f i t s plans to facilitate business investment, the Government has moved away from ex-ante approval to ex-post verification. The challenge i s to extend this approach, under the Environment Protection Ac t which st i l l maintains a l is t o f activities wh ich require either a preliminary o r full environment impact assessment. For other activities, environment guidelines have been prepared to help businesses in addressing environmental issues whi le implementing their projects. The Government itself i s also taking steps to protect the country’s lagoons, rivers, and islands, and investing significantly in waste management. It i s also reviewing the National Environmental Strategy and Act ion Plan to take account o f the possible environmental demands o f future economic development, including specially tourism. T h i s i s another area where Government commitment needs to b e augmented by capacity building and technical assistance from the Development Partners. The Government has, therefore, requested the Wor ld Bank to coordinate a concerted effort by the Development Partners.

Outcome; Past and projected

32. There are clear signs that we are indeed mov ing in the right direction. A s a case in point, economic growth is once again on a r is ing path with most o f the productive sectors recovering f rom the sluggish performance o f the last few years; there is renewed dynamism in private sector investment, exports o f both the traditional sectors and the new sectors are rising by between 15-20 % on an annual basis; FDI is increasing at an unprecedented pace; jobs are being created at more than twice the rate pr ior to reforms and unemployment has stopped r is ing for the first time in almost a decade; foreign exchange reserves have reached a record level o f the equivalent o f about nine months o f imports; discipline in the public finances is also being restored and has resulted in a 1 % point o f GDP reduction in the overall deficit last year and a 0.5 % point reduction budgeted for the current year, whi lst also cleaning up various off-budget liabilities. The growth rate for the current year i s projected at 5.8 percent, thus maintaining the increasing trend observed last year.

Conclusion

33, Government intends to build on the success o f the f i r s t generation o f reforms initiated in 2006/07 through the measures indicated in the revised Government matrix as highlighted earlier. The overall objectives are to move the country to a higher growth path, raise the level o f employment and increase earnings o f workers, reduce poverty and inequality and achieve a higher standard o f living with an improved quality o f l i fe. The reform program is fully embedded in the regional integration process within COMESA and in the context o f the Economic Partnership Agreement with the EU. In this context, we are mobil ising the support o f the international community to help make regional FTAs fully effective as a first step towards integration with the rest o f the world. In particular, we aim at an FTA encompassing both COMESA and SADC in the next f ive years to act as a plat form for a free trade agreement with the EU in the context o f EPAs and eventually a FTA with the U S as a natural evolution o f AGOA.

8

58

34. W e therefore request our development partners to continue their support to the implementation o f Government economic reform programme. W e specifically rely o n the technical expertise o f the Bank to lead the way, in coordination with other development partners, in aligning our sector strategies and programmes to the reform agenda. With the major reforms enacted, the challenge i s to focus on implementation with the full support and active engagement o f our Development Partners.

For Government of Mauritius

Deputy Prime Minister

Minister o f Finance and Economic Development

9

59

ANNEX 2 - OVERVIEW OF PRIORITY PARASTATALS

Objectives/Services Sugar Planters Mechanical Pool Corporation (est. 1974, Min. of Agro-industry) Hiring of agricultural equipment to small sugar planters at subsidized rates Contingent liabilities: US$3.6 million? Staff 221 Central Electricity Board (est. 1952, Min. of Public Utilities) Electricity generation, transmission, distribution and sale Contingent liabilities: US$256 million? Staff 1.800

Central Water Authority (est. 1971, Min. of Public Utilities) Control, development and conservation of water resources Contingent liabilities: US$75 million? Staff 1,100

Wastewater Management Authority (est. 2001, Min. of Public Utilities) Collection, treatment and disposal o f wastewater Contingent liabilities: Staff: 297

Critical Issues Phasing out of sugar cess financing (80% of revenue): increasing dependence on grantslloans Cost recovery will further erode competitiveness of small planters: sustainability of this sector?

Risk of high debt burden No direct grants but import duty/tax remissions, loan guarantees Accumulated deficit of US$66 million (2005) Need for tariff rationalization and review 50% of total generation from IPPs; power purchase agreements to be reviewed?

Risk of high debt burden No direct grants but import duty/tax remissions, loan guarantees Accumulated deficit of US$18 million (2005) Very high rate of non revenue water (NRW): 46% Need for tariff rationalization and review Need to improve operational efficiency: fleet, project and stock management Domestic connections are not chargeable Debthumover: 30% Delays and cost overrun in project implementation Staffing difficulties: shortage of skills and managerial expertise

Current Actions b Cost reduction through

outsourcing of some activities

b Efficiency improvements through regroupinghlock management schemes

@ Awaiting KPMG study on cess -financed parastatals

@ Implementing cost reduction

@ Utility Regulatory Authority measures

Act passed but not promulgated

Energy Strategy (EU supported)

@ Request for 15% tariff increase followed by adoption of Automatic Pricing Mechanism

@ Implementing cost reduction measures

@ Seeking support from UNDP to hire a Norwegian consultant to follow up on F C Strategic Options recommendations: management contract leading to concession EIB concession loan for water loss reduction program Tariff structure review (DHV study?) User fee mechanism being reviewed Tariff review

@ Finalizing TOR for National

Possible Options Transfer functions to planters associations or cooperatives

lerge with Farmers Service Corporation or other entities: rationalization o f cess- financed institutions

Financial and operational audithestructuring plan including options for private participation Improved regulation through establishment of URA Tariff and PPA review

Management contract Merger of operations and maintenance with the Wastewater Management Authority

Management contract Merger o f operations/maintenance with the Wastewater Management Authority

60

ANNEX 3 - IMF ASSESSMENT LETTER

To:

From: The Secretary

Members o f the Executive Board November 7,2007

Subject: Mauritius -Assessment Letter for the World Bank

Attached for the information o f the Executive Directors i s the staff‘s assessment letter on Mauritius’s macroeconomic developments and prospects, as requested by the Wor ld Bank in regard to i t s lending program with Mauritius.

As staff assessments provided to the Wor ld Bank are generally published with those institutions’ documents, this assessment, with the authorities’ consent, could be published by the Wor ld Bank.

Questions about this assessment may be referred to Mr. Funke (ext. 38033) or Mr. Imam (ext. 39536) of AFR.

This document w i l l be posted shortly o n the extranet, a secure website for Executive Directors and member country authorities.

Att: (1)

Other Distribution: Department Heads

61

Mauritius-Assessment Letter for the World Bank

November 7,2007

This IMF staff note assesses macroeconomic developments and prospects for Mauritius based on information through October 2007. The most recent staff report on the 2007 Article N Consultation was discussed by the Fund’s Executive Board on May 7, 2007 (Country Report No. 07/192, available at http://www.im.org). The next Article IV Consultation visit is scheduled for the first quarter of 2008. Overall, macroeconomic developments and prospects remain favorable and the authorities have made good headway in implementing reforms and easing fiscal strains, but policies for medium-term budget consolidation remain to be spelled out and more flexible labor markets would support competitiveness.

Background

1. economy’s loss of trade preferences in textiles and sugar and to raise potential growth. The reform program aims to ease fiscal pressures, enhance public financial management, restore economic competitiveness, and improve the investment climate as a basis for higher growth.

The government in 2006 embarked on an ambitious reform program to adjust to the

Economic Conditions

2. an estimated 4.6 percent up f rom 3.6 percent in 2005/06, supported by rising foreign direct investment (FDI) and strong growth in the services sector. According to the latest indicators, tourist arrivals and FDI continue to be robust, though unemployment remains a high 9 percent.

Economic activity has strengthened in the past 18 months. Real GDP in 2006/07 grew

3. Annual inflation has retreated from its recent peak but i s still higher than in earlier periods. I t fe l l f rom 11.9 percent year over year in December 2006 to 8.4 percent in September, as the one-time effects o f higher excise duties and the removal o f subsidies in mid-2006 dropped

Core inflation i s also on the decline. T o contain inflationary pressure, the B o M increased the rep0 rate in July, by 75 basis points to 9.25 percent. Treasury bil l rates have started to fa l l in l ine wi th annual inflation.

4. Fiscal consolidation continues. The fiscal deficit shrank to 4.3 percent o f GDP in 2006/07 (compared with a budget target o f 4.0 percent o f GDP), f rom 5.3 percent o f GDP a year earlier. This reflected, among other factors, the removal o f subsidies, the phasing out o f tax expenditures, administrative measures to contain current spending, and a decline in capital expenditure (0.5 percent o f GDP). Public sector debt i s estimated to have been 63 percent o f GDP at end 2006/0752; close to one third o f it i s short-term. In July, Moody’s put Mauritius on i t s

51 The Central Statistics Office i s currently updating the CPI for a new base period (July 2006 to June 2007) with new weights, derived from the Household Budget Survey 2006/07. 52 After netting out investments in the Consolidated Sinking Fund, which was abolished with effect from July 1, 2007.

62

watchlist for a possible downgrade, mainly over concerns about the level and structure o f public debt in the context o f rising domestic interest rates earlier in the year.

5. reflecting weak textile and sugar exports, high o i l prices, the purchase o f an aircraft, and lower import tariffs. The real effective exchange rate, which had depreciated by 16.5 percent f rom early 2004 to December 2006, has since appreciated by some 10 percent, as capital inflows, including foreign direct investment, have picked up and the value o f the U.S. dollar has declined. The BoM, after buying in February-April about US$250 mi l l ion (4 percent o f GDP) o f international reserves, has refrained f rom intervening in the foreign exchange market. Foreign exchange reserves are at about five months o f imports.

The current account deficit widened to an estimated 7.2 percent of GDP in 2006/07,

6. move toward a program-based budget. T o strengthen the financial sector, the government recently introduced several legislative measures: a new Financial Services Bill, an Insurance (Amendment) Bill, and a Securities (Amendment) Bill. Business procedures have also been streamlined. In the World Bank's Doing Business 2008 report, Mauritius leads Africa and ranks 27th globally on ease o f doing business. In a first round o f labor market reforms, the tripartite committee has been abolished and replaced with a new National Pay Council. A new draft industrial relations framework (Employment Rights Bill and Employment Relations Bill) has been presented to the national assembly. Some delays have occurred in the restructuring o f the sugar sector, in part over conditions for sugar factory closures.

Structural reforms have advanced. On the fiscal front, the government has started to

Outlook and Policies

7. budget targets a deficit o f 3.9 percent o f GDP. Revenue i s expected to stabilize at about 19 percent o f GDP (excluding grants), as losses f rom the flat income tax rate (15 percent) introduced two years ahead o f schedule are offset by the national residential property tax, stronger efforts to collect tax arrears, a special levy o n profitable banks, and a special contribution o f the hotel sector. O n the expenditure side, the budget supports fiscal consolidation by establishing audit committees in ten ministries and curtailing cost overruns b y appointing project managers. I t also initiates a program to review and revitalize the parastatal sector and lays out steps to fully adopt program-based budgeting in 2008/09. Judging f rom preliminary data for the first quarter o f this fiscal year, fiscal consolidation i s l ikely to continue. Staff projects that the fiscal deficit may fal l just short o f i t s target, in part because staff's growth projections are more cautious than those o f the authorities. The primary balance i s expected to turn positive.

The 2007/08 budget continues the broad-based reforms initiated a year ago. The

8. With headline and core inflation on the decline, monetary growth moderate, and reserves stable, the current stance of monetary policy appears broadly appropriate. The Monetary Policy Committee, launched in April, has increased policy transparency and the credibility o f monetary policy, thereby helping to contain inflation expectations. There i s a risk that inflation declines might be reversed if food and o i l prices continue to soar and require a further r ise in the rep0 rate to counter spillover effects o n inflation expectations and core inflation.

63

9. To restore its external balance, Mauritius needs to further contain i ts wage growth, maintain a competitive exchange rate, and boost productivity. Wage restraint and greater labor flexibility are needed to build competitiveness. This wil l be particularly important if large capital inflows exert upward pressure on the equilibrium exchange rate. Foreign reserves should only be purchased to smooth volatility caused by temporary inflows.

Risks and Challenges

10. Key short-term risks are slowing global growth and other external shocks; and on the domestic front delays in implementing reforms. Marked slowing in Mauritius’s trading partners’ economic activity, rising o i l prices, or upward pressure on the rupee would widen the current account deficit53, dim growth prospects, and jeopardize the fiscal targets. A rise in o i l prices could also fan inflation and, through a renewed surge in interest rates, widen the fiscal deficit. Slow progress in implementing key reform measures, or reform “fatigue”, including differences in view within the governing coalition, could lead to delays or actual loss o f donor support, stalling reform progress and worsening debt sustainability.

11. The reform momentum needs to be sustained. The fiscal reforms involve some uncertainties in the medium term. Fiscal pressures-stemming from Mauritius’s aging population and scheduled wage adjustments-call for continued fiscal consolidation and enhanced public financial management. Additional budgetary savings wil l help put the medium- term budget deficit target (3 percent o f GDP) within reach and create more space for capital expenditure. Further structural reforms could help lift growth to the high levels seen in the 1980s and 1990s. Most importantly, measures to increase labor market flexibility would build competitiveness. Steps to improve productivity (e.g., further trade liberalization) and to extend access to finance would further enhance competitiveness. Some price controls could be liberalized quickly.

Fund Relations

12. Building on a Letter o f Assessment of the authorities’ reform strategy within the Aid for Trade initiative (September 2006), Article IV consultation discussions were held in Port Louis, February 19-28,2007. The staff report, together with the 2007 Financial Sector Stability Assessment update, was discussed by the Executive Board on M a y 7.

Mauritius has no financial arrangement with the Fund and i s not seeking one.

Over the past year, the Fund has provided Mauritius with technical assistance related to introducing program-based budgeting, the functioning of the foreign exchange market, balance-of-payment statistics, and the planned subscription to the Special Data Dissemination Standard. The next Article IV Consultation i s expected to take place in the first quarter o f 2008.

53 Staff estimates that the direct impact o f a US$ lO increase in o i l prices would widen the current account deficit by some 1.3 percent o f GDP and increase inflation by about 0.7 percentage points.

64

Table 1. Mauritius: Selected Economic and Financial Indicators, 2004/05-2007/08 I/

2004/05 2005/06 2006/07 2007108 Est Pro].

(Annual percent change, unless otherwise indicated)

Real GDP 3.1 3.6 4.6 4.8 Consumer prices (period average) 5.6 5.1 10.7 7.5 Unemployment rate (in percent) 9.0 9.3 9.1 ... Real effective exchange rate 2/ -5.2 0.6 -2.8 ... Terms of trade -7.0 -5.7 -3.3 ... Broad money 13.6 6.7 8.6 8.0 Overall fiscal balance (including grants) (in percent of GDP) -5.0 -5.3 -4.3 -4.1

Revenues and grants (in percent of GDP) 20.0 20.1 19.4 20.6 Expenditure and net lending (in percent of GDP) 25.1 25.5 23.7 24.8

Public sector debt (in percent of GDP) 3/ 69.6 68.6 63.0 61.6 Current account balance (in percent of GDP) -3.5 -5.3 -7.2 -6.5

Sources: Bank of Mauritius (BOM); Central Statistics Office; Ministry of Finance; and IMF staff estimates and projections

I/ Fiscal year (July-June). 2/ Trade-weighted period averages (a negative sign signifies a depreciation). 3/ Includes central and local government and parastatals, after netting out investments of the Consolidated Sinking Fund in

government securities.

65

ANNEX 4 - AT A GLANCE

Mauritius at a qlance 11/9/07

K e y Deve lopment I n d i c a t o r s

( 2 W

Population, mid-year (millions) Surface area (thousand sq. km) Population growth ( O h )

Urban pcpulation (%of total population)

GNI (Atlas method, US5 billions) GNI per capita (Atlas method, US$) GNi per capita (PPP. international 5)

GDP growth (%) GDP per capita growth (“4)

(most recent estimate, 2cXf3-2006)

Poverty headcount ratio at 51 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP, %) Life expectancy at birth (years) infant mortality (per 1,000 live births) Child malnutrition (%of children under 5)

Adult literacy, male (%of ages 15 and older) Adult literacy, female (%of ages 15 and older) Gross primary enrollment, male ( O h of age group) Gross primary enrollment, female (Oh of age group)

Access to an improved water source ( O h of population) Access to improved sanitation facilities (% of population)

Mauritius

1.2 2.0 -4.1 42

13,510

3.5 8.0

73 13 15

ea 81

102 102

100 94

Sub- Saharan

Africa

770 24,265

2.3 36

648 642

2,032

5.6 3.2

41 72 47 96 29

69 50 98 86

56 37

Upper middle income

81 0 41,460

0.7 75

4,790 5,913

10,817

5.6 4.9

70 26

94 92

106 104

93 81

N e t Aid Flows

(US$ millions) Net ODA and official aid Top 3 donors (in 2005):

Japan France Canada

Aid (%of GNI) Aid per capita ( U S )

Long-Term Economic Trends

Consumer prices (annual %change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population, mid-year (millions) GDP (US$ millions)

Agriculture Industry

Services

Household final consumption expenditure General gov’t final wnsumotion exoenditure Gross capital formation

Exports of goods and services Imports of goods and services Gross savings

Manufacturing

1980

33

1 13 0

2.9 34

33.0 10.6

7.1

1 .o 1,153

16.5 26.3 15.7 57.2

71 .O 14.4 25.4

46.8 57.6 14.0

1990 2000

ea 20

7 2 32 9 0 0

3.7 0.5 84 17

10.7 5.3 10.6 3.7

15.4 25.5 104 100

1 .I 1.2 2,383 4,469

(%of GDP) 13.1 5.9 33.1 31.2 24.7 23.7 53.8 62.9

63.7 63.0 12.8 13.1 30.7 25.9

64.2 62.7 71.4 64.6 26.3 25.3

2w6

32

17 4 2

0.5 26

5.1 4.1

30.9 88

1.2 6,347

5.6 26.9 19.1 67.6

68.1 14.5 24.5

60.0 67.1 19.0

Age distribution, 2006

Male Female

10 5 0 5 10

percent

Jnderd mortality rate (per 1,000)

2 W - 180. 180 - 140 - 120 - 1w- M - M. 40- 2 0 - 0-

1880 1995 zoo0 Em5

CMauritluS c Sub-Saharan Africa

7

;rowth of GDP and GDP per capita (%)

I

-4-GDP -GDP per capita

19W-90 199C-ZooO 2000-06 (average annual growth %)

0.9 1.2 0.1 6.0 5.2 4.0

2.8 -0.5 1 .I 9.2 5.5 1.4

10.4 5.3 0.2 5.1 6.4 5.9

5.4 5.4 3.4 3.3 4 8 4.6

10.3 4.7 4.6

10.2 5.4 2.3 10.3 5.2 2.2

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available a. Aid data are for 2005.

Development Economics, Development Data Group (DECDG).

66

Mauritius

Ba lance of P a y m e n t s a n d Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services

Current account baiance as a % of GDP

Workers' remittances and compensation of employees (receipts)

Reserves, including gold

C e n t r a l G o v e r n m e n t F inance

(99 of GDP) Current revenue (Including grants)

Current expenditure

Overail surpluddeficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

E x t e r n a l D e b t a n d Resource Flows

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRI)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net inflow) Portfolio equity (net inflow)

2000

1,523 2,158 -1 30

-69 -1.5

177

688

20.2 18.1 20.5

-3.8

25 25

1,784 336 -

39.9 12.0

13 -23

2006

2,263 3,329 -455

-356 -5.6

215

1,391

20.0 18.0 21.4

-5.3

30 25

2,157 295 -

34.0 6.9

19 -55

IComposition of total external debt, 2006

'%'I

Sholt.term 1353

US$ millions

P r i v a t e S e c t o r D e v e l o p m e n t 2000 2006

Time required to start a business (days) - 46

Time required to register property (days) - 210 Cost to start a business (% of GNI per capita) - 6.0

Ranked as a major constraint to business (% of managers SUNeyed who agreed)

Access tolcost of financing .. 52.7 Business licensing and pen i t s .. 46.8

Stock market capitalization (% of GDP) 29.6 56.7 Bank capital to asset ratio ("h)

IGovernance indicators, 2000 and 2006

Voice and accountability ~ - - -

Po .ca sa:: ty

Regulatory quality

Rule of law

Control Of COlNPflOtl

0 25 50 75 1w

?3 2006 3 2000

Country's percentile rank (0-100) n@er values imply berm ratings

Source Kaufmann-Kraay-MaStNzzl World Bank

T e c h n o l o g y and I n f r a s t r u c t u r e 2000 2005

Paved roads ("h of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(% of manufactured exports)

97.0 100.0

368 862

1.0 21.3

E n v i r o n m e n t

Agricultural land (%of land area) 56 56 Forest area (% of iand area) 18.7 18.2 Nationally protected areas (% of land area) .. 3.3

Freshwater resources per capita (cu. meters) .. 2,252 Freshwater withdrawal (% of internal resources)

C02 emissions per capita (mt)

GDP per unit of energy use

21.8

2.3 2.6

(2000 PPP 5 per kg of oil equivalent)

Energy use per capita (kg of oil equivalent)

orfd

(US$ millions)

IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

IDA Total debt outstanding and disbursed Disbursements Total debt service

97 73 4 0

20 9 6 1

14 11 0 0 1 1

IFC (fiscal year) Total disbursed and outstanding portfolio 6 0

of which IFC own account 6 0 Disbursements for iFC own account 0 0 Portfolio saies, prepayments and

repayments for IFC own account 3 0

MlGA Gross exDosure New guarantees - -

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. 11/9/07 .. indicates data are not available. -indicates Observation is not applicable.

Development Economics, Development Data Group (DECDG).

67

Millennium DeveloPment Goals Mauritius

With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, t/- 2 years)

Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2005 Poverty headcount ratio at $1 a day (PPP, %of population) Poverty headcount ratio at national poverty line (“A of population) Share of income or consumption to the poorest qunitile (“A) Prevalence of malnutrition (% of children under 5) 14.9 15.0

Goal 2 : ensure that children are able to complete primary schooling Primary school enrollment (net, %) 91 93 95 Primary completion rate (% of relevant age group) 64 98 105 97 Secondary school enrollment (gross, %) 55 78 88 Youth literacy rate (%of people ages 15-24)

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (“A) 101 96 98 Women employed in the nonagricultural sector (“6 of nonagricultural employment) 37 36 39 38 Proportion of seats held by women in national parliament (“A) 7 8 8 17

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortalitv rate [Der 1.000) 23 21 18 15 Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %)

20 20 16 13 76 89 84 98

Goal 5 : reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 24 Births attended by skilled health staff (x of total) 91 98 100 99

Goal 6 : halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 1549) Contraceptive prevalence (“A of women ages 15-49) Incidence of tuberculosis (per 100,000 people) Tuberculosis cases detected under DOTS (“A)

0.6 75 76 69 67 64 62

34 33 32

Goal 7 : halve the proportion of people withoul sustainable access to basic needs Access to an improved water source (“A of population) 100 100 Access to improved sanitation facilities (% of population) 94 Forest area (%of total land area) 19.2 18.7 18.2 Nationally protected areas (“A of total land area) 3.3 C02 emissions (metric tons per capita) 1.4 1.6 2.3 2.6 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent)

Goal 8 : develop a global partnership for development Fixed line and mobile phone subscribers (per 1,000 people) Internet users (per 1,000 people) Personal computers (per 1,000 people) Youth unemployment (“A of total labor force ages 15-24)

iducation indicators (%)

+Primary net enroliment ratio

+Ratio of gir(s to boys in primary & secondary education

Measles immunization (% of 1-year olds)

1990 1995 2000 2005

C Mauritius oSub-Saharan Africa

55 0 4

1 42 388 862 2 73 146

32 101 162 23.8 25.9

:T indicators (per 1,000 people)

i w o . 900 4 BOO 700 2

500. 600 4 300 i 100

0 4 2000 2002 2005

3 Fixed t mobiie subscribers B Internet users

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics, Development Data Group (DECDG).

1 1 19/07

68

R I V IR I V I ÉÉ R ER ED UD U

R E M PR E M PA RA R TT

F L A C QF L A C QM O K AM O K A

G R A N DG R A N DP O RP O R TT

B L A C KB L A C KR I V E RR I V E R

S AS AVVA N N EA N N E

P L A I N E SP L A I N E SW I L H E M SW I L H E M S

P O RP O R TTL O U I SL O U I S

PPAMPLEMOUSSESAMPLEMOUSSES

Mont PitonMont Piton(828 m)(828 m)

Mt. CocotieMt. Cocotie(771m) (771m)

SSaavvaanneeMM

ttss

GGrraannddee

SSaavvaannnnee

VVaaccoo

aass

QQuuaarr tt iieerr MM

ii ll ii tt aa ii rr ee

DDééccoouuvveerr ttee

NNoouuvveell llee

BBaammbboouu MM tt ss

RRiivviiéérree CCiittrroonnss

RRiivviiéérr

ee RReemmppaarrtt

RRiivviiéérr

eedduu PPoossttee

dduu FFllaaccqq

GGrraanndd RRiivveerr SSoouutthh EEaasstt

RRiivviiéérree LLaaCChhaa uuxx

RRiivveerr dduu PPoossttee

GGrraanndd

RRii vviiéérree

NNooiirree

BBaaiiee

dduu CCaapp

RRiivveerr ddeessGGaalleettss

RRiivviiéérr ee dduu RReemmppaarrtt

LaLaNicoliNicoliéérere

Piton de MilieuPiton de MilieuReserReservoirvoir

RRiivviiéérree TTaammaarriinn

MareMareauxauxVVacoasacoas

TTrioletriolet

BonBonAccueilAccueil

TTerreerreRougeRouge

GoodlandsGoodlands

GrandGrandGaubeGaubeGrandGrand

BaieBaie

RiviRiviéére dure duRemparRempartt

Bel AirBel Air

VVieuxieuxGrandGrandPorPortt

MontagneMontagneBlancheBlanche

PhoenixPhoenix

CurepipeCurepipe

VVacoasacoas

NouvelleNouvelleFranceFrance

Grand BoisGrand Bois

Baie du CapBaie du Cap

SurinamSurinam

L'EscalierL'Escalier

Rose BelleRose Belle

RiviRiviéére desre desAnguillesAnguilles

CheminCheminGrenierGrenier

BambousBambous

QuarQuartiertierMilitaireMilitaire

PamplemoussesPamplemousses

CentreCentrede Flacqde Flacq

SouillacSouillac

MokaMoka

Rose HillRose Hill

R I V I É R ED U

R E M PA R T

F L A C QM O K A

G R A N DP O R T

B L A C KR I V E R

S AVA N N E

P L A I N E SW I L H E M S

P O R TL O U I S

PAMPLEMOUSSES

Triolet

BonAccueil

TerreRouge

Goodlands

GrandGaubeGrand

Baie

Riviére duRempart

Bel Air

VieuxGrandPort

MontagneBlanche

Phoenix

Curepipe

Vacoas

NouvelleFrance

Grand Bois

Baie du Cap

Surinam

L'Escalier

Rose Belle

Riviére desAnguilles

CheminGrenier

Bambous

QuartierMilitaire

Poudre d'Or

Pamplemousses

Centrede Flacq

Mahebourg

Souillac

Moka

Rose Hill

Tamarin

PORT LOUIS

FlatIsland

Gunner'sQuoin

Ile D'Ambre

CannoniersPoint

PointeQuatre Cocos

PointPetite Riviére

PointeSud

Ouest

Pointedu Diable

Ile aux Cerfs

Ile auxBénitiers

Riviére Citrons

Riviér

e Rempart

Riviér

edu Poste

du Flacq

Grand River South East

Riviére LaCha ux

River du Poste

Grand

Ri viére

Noire

Baie

du Cap

River desGalets

Riviér e du Rempart

LaNicoliére

Piton de MilieuReservoir

Riviére Tamarin

MareauxVacoas

I N D I A NO C E A N

I N D I A NO C E A N

SavaneM

ts

Grande

Savanne

Vaco

as

Quar t ier M

i l i t a i r e

Découver te

Nouvel le

Bambou M t s

Mont Piton(828 m)

Mt. Cocotie(771m)

20°00'S 20°00'S

20°15'S20°15'S

20°30'S

57°30'E

57°30'E

57°45'E

63°20'E

19°40'S

19°45'S

63°25'E 63°30'E

Port Mathurin

La Femme

GrandMontagne

PetitGabriel

Rodrigues Island

CrabIsland

0 1 2 3 Kilometers

0 1 2 3 Miles

INDIANOCEAN

MAURITIUS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 1 2 3 4

0 1 2 3 4 5 Miles

5 Kilometers

IBRD 33446

DECEMBER 2004

MAURIT IUSSELECTED CITIES AND TOWNS

DISTRICT CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

DISTRICT BOUNDARIES

INTERNATIONAL BOUNDARIES