Ministry of Finance and Economic Development Monetary Policy Committee Meeting 14 July 2014 Presented by Mr Patrick Yip Wang Wing, Ag. Deputy Financial Secretary

The Policy Context Government restated its resolve to embark on a Transformation Agenda underpinned by the 3 objectives of :– High Income Inclusiveness Sustainability

Specific Policy Announcements Reform of the public sector, in particular rationalisation of activities of parastatal bodies Reforms in business facilitation, with particular attention to SMEs Reactivation of the Financial Services Consultative Council to take the sector to a new threshold of development Better coordination of macroeconomic policies

The High Income Economy First announced in Government Programme Mauritius’ per capita GNI at US$9,300 in covered 72% of the road to High Income Country status (US$ 12,746) MOFED launched consultations with stakeholders on measures for accelerating this national effort, particularly on : well-focused structural policies to boost growth, productivity and competitiveness; fundamental reforms in key areas of the economy and society; and strong and effective macroeconomic policies.

Coordination of Macroeconomic Policies Memorandum of Understanding between MOFED and BOM: Effective management of excess liquidity and sharing of cost; Strengthening Bank of Mauritius’ capital; and Setting of an inflation target.

Explicit Inflation Target To better anchor inflation expectations and factor in other economic considerations such as growth and employment To also facilitate the work of the MPC Standing Committee on Inflation Target (MOFED and BOM) to pursue discussions on the inflation target and the modus operandi

Excess Liquidity IMF recommendation: Mopping up of excess liquidity to be accompanied by a technical downward adjustment in the Key Repo Rate This is necessary to speed up the convergence between the Policy Rate and the Interbank Rate, and allow for greater effectiveness of the monetary transmission mechanism

Excess Liquidity … cont’d IMF supports comprehensive approach of Joint Working Committee on Liquidity at MOFED Various measures and policy options subject of in-depth technical discussions and extensive consultations between MOFED, BOM and IMF Latest draft MoU, which MOFED has shared with the Bank, should provide a solid and sound foundation for continued institutional cooperation.

Excess Liquidity … cont’d Government borrowings of Rs 4 bn already frontloaded to mop up excess liquidity MOFED will shortly issue additional Rs 2 bn of 5-Year Bonds [fixed coupon rate of 6% p.a. and Inflation Index-linked] on a retail basis Opportunity for small savers to get higher return on their savings Provide full protection from inflation

Global Economy Momentum in global economic recovery less strong than expected earlier Disappointing first quarter: o Euro Area: 0.2% - France stagnating & Italy contracting o US: -2.9% Recovery remains tepid and uneven - not strong enough to reduce unemployment and debt. Significant downside risks - accommodative monetary policy stance for a prolonged period

Domestic Economy Growth in 2014 lower than initially forecast First quarter growth rate only 2.4% in Q (3.8% in Q1 2013) SM revised downwards growth projection for 2014 from 3.7% to 3.5% o Textile: 1.5% against 2% expected in March o Other Manufacturing: no growth against 2% o Construction sector: -4.8% against -3%. Tourism sector recovering: 3.5% against 3% but downside risks remain

Investment & Employment Sluggish private investment Private investment as % of GDP: drop from 16.2% in 2013 to 15.2% in a bigger drop than initially forecast Acute fall in “Residential and non-residential buildings” “Machinery and equipment” to grow by 8.7% “Other construction work” to recover (17.7%) due to public sector investment Unemployment Stabilised at 8% over past two years Forecast at 8% in 2014 But youth unemployment increasing to 24.7% in Q1 2014

Inflation Headline inflation in June stabilised at 4% for 4 th consecutive months Year-on-year inflation declining from 4.5%, 4.2%, 3.4% to reach 3.3% in June International prices to remain flat or decline Total wages and total consumption growing at much slower pace SM projections for 2014: inflation will be below the 4.5% initially forecast - closer to the lower bound of 4%. Expectations of lower inflation remain well anchored

Fiscal Policy Further progress towards fiscal consolidation Performance in 1 st semester shows lower budget deficit and Government borrowing requirements by about 0.3 to 0.5 GDP points. Significant improvement in the pace of implementation of capital budget and public sector infrastructure projects MOFED continue to address project preparation and execution constraints, including public procurement procedures and processes

Fiscal Policy … cont’d Mauritius Infrastructure Fund Ltd to be set up - innovative funding structures and instruments: Speedier implementation of large infrastructure projects (e.g MLRT) New possibilities for private investment in public infrastructure development Contributing to reduce excess liquidity Reduce dependence on budgetary resources Facilitate achievement of debt target of 50% of GDP by 2018

Global Trend in Policy Interest Rate Current monetary policy stance not indicating any rising pressure on price level Kept policy rate unchanged - US Federal Reserve, Bank of England, Reserve Bank of India, Bank of Japan, and South African Reserve Bank European Central Bank (ECB) cut benchmark rate from 0.25% to 0.15% in June. Kept same rate in July. Interest rates to remain at their present level for an “extended period of time in view of the current outlook for inflation”

Conclusion Situation warrants very careful approach to monetary policy: There is still uncertainty GDP growth forecast lowered Inflationary pressures very subdued Positive outcome of preceding monetary policy stance, and of structural and fiscal policies can be seen on unemployment rate MOFED view: monetary policy continue to be accommodative KRR be kept at its current level

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