Mauritius - Second Trade and Competitiveness Development Policy Loan Project

Documentof The WorldBank FOR OFFICIAL USEONLY ReportNo. 42150-MU INTERNATIONALBANKFORRECONSTRUCTION ANDDEVELOPMENT PROGRAMDOCUMENT FORA PROPOSEDLOAN INTHEAMOUNT OFUS$30MILLION TO THE REPUBLICOF MAURITIUS FORA SECONDTRADEAND COMPETITIVENESSDEVELOPMENTPOLICYLOAN January 25,2008 PovertyReductionandEconomicManagement1 Africa Region This document has a restricted distribution and may be used by recipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without Bank authorization.  CURRENCY EOUIVALENTS (Exchange Rate Effective as of August 31,2006 Currency Unit = Mauritius Rupee US$l.OO =MUR32.508 GOVERNMENT FISCALYEAR July 1- June 30 WEIGHTSANDMEASURES 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 of John Panzer (Sector Manager). Useful discussions and other contributions are gratefully acknowledged from Lilia 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, Arvil Van Adams and Jan Walliser. The team i s greatly indebted to the many officers of the Government o f Mauritius who graciously contributed their time and knowledge to explain the details of the Government's reforms. Special thanks are due to Ali Mansoor, Vishnu Bassant, and Mohit Dhoorundhur of the Ministryo f Finance and Economic Develoument. Vice President: Obiageli KatrynEzekwesili Country Director: RitvaReinikka Sector Manager: John Panzer Team Leader: Robert Keyfitz .. 11  FOROFFICIAL USE ONLY TABLE OF CONTENTS LOANAND PROGRAMSUMMARY............................................................................. iv I. INTRODUCTION....................................................................................................... 2 I1. COUNTRY CONTEXT.............................................................................................. 3 A. RECENTECONOMIC DEVELOPMENTS: B.MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY I11. THE GOVERNMENTPROGRAM.. IV. BANK SUPPORTTO THE GOVERNMENT'SPROGRAM.................................. 15 A LINKTO THE COUNTRY PARTNERSHIPSTRATEGY............................................................... . 15 B. COLLABORATIONWITHIMFAND OTHERDONORS. C RELATIONTO OTHERBANK OPERATIONS . .............................................. D. LESSONSLEARNED .............................................................................. E. ANALYTICAL UNDE NINGS.................. V.THEPROPOSEDOPERATION............. A.OPERATIONDESCRIPTION............................................ B. POLICY AREAS............ .......................................................................................................... 29 VI. OPERATIONIMPLE TATION.......................................................................... 45 A. POVERTY AND SOCIAL IMPACT........ ............................... B. ENVIRONMENTAL ASPECTS............... ..................................................................................... 47 C. IMPLEMENTATION, MONITORINGAND EVALUATION.......................................................... 48 D. FIDUCIARY ASPECTS ........... ........... ...................... ...... E RISKS AND RISKMITIGATION........................................................................ . ANNEX 1-LETTEROFDEVELOPMENTPOLICY................................................... 51 ANNEX 2 - OVERVIEW OFPRIORITYPARASTATALS.......................................... 61 ANNEX 3 - IMFASSESSMENT LETTER..................................................................... 62 ANNEX 4 -AT A GLANCE............................................................................................ 67 MAP................................................................................................................................... 70 LIST OF TABLES Table 1. indicators.............................................................................................. Macroeconomic 5 Table 2 . framework............................................................................................................ Fiscal 5 Table 3 . to growth................................................................................................... Contributions 6 Table 4 Fiscal projections........................................................................................................... . 11 Table 5 .Reforms introducedinthe 2006/07 and2007/08 budgets............................................. 14 Table 6 DPL andCPS outcomes compared................................................................................ . 16 Table 7 .Analytical support for the Government's reformprogram............................................ 20 Table 8 .DPL prior actions and indicativetriggers...................................................................... 24 Table 9 ActionPlanfor Implementinga PBB System............................................................... . 33 Table 10. consolidation..................................................................................................... Fiscal 36 Table 11-IndustrialProductiongrowthfrom Q12006 to Q12007 ............................................ 40 Table 12-Job losses insugar andapparel (,000) ......................................................................... 45 LISTOFFIGURES Figure 1. GrowthSlowdown................................................................................................ GDP 4 Figure2- CPIinflation................................................................................................................... 4 Figure3 -Confidenceindex ........................................................................................................... 7 Figure4 -Industrialproduction...................................................................................................... 7 Figure5 -Distributionof averageper capita GDP growth, 1984-2004.......................................... 8 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization.  LOANAND PROGRAMSUMMARY REPUBLICOF MAURITIUS SECOND TRADE AND COMPETITIVENESS DEVELOPMENT POLICY LOAN Borrower 1Republic of Mauritius ImplementingAgency 1Ministry of Finance and Economic Development Amount 1 US$30 million Terms Variable Spread Loan, fifteen years repayment includingfive year grace period. Tranching Single tranche operation Description The loan is the second of three Development Policy Loans of $30 million each. The objective is to support a bold and comprehensive structural reform program which the Government is implementing inresponseto two major challenges: (i)the "triple trade shock" of trade preference erosion and high oil prices and (ii) transition from low wage, low skill sugar and apparel the exporter to innovative, knowledge and skillbased services economy. Triggers have beendrawn from the four pillars of 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. Benefits The loan will help to finance the current year's budget deficit and will further diversify Mauritius' debt portfolio, which is heavily weighted toward domestic and short term borrowing. Beyond that, the operation has deepenedthe policy dialog on key issues ranging from trade policy to labor market reform to transitional support measures. It has also provided the vehicle for coordinating of other principaldonors which have participated injoint identification and appraisal missions and are expected to provide an additional US$40 million in cofinancing. The EC is also aligning its 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. I Risks The country faces two risks. First, capacity constraints inimplementing the broad and ambitious reformprogram. Second, highinflation and current account and fiscal deficits highlighta delicate macroeconomic balance which could potentially unwind and destabilize the both the reform program and the country's recovery prospects. Operation IDNumber IP106650 iv  ABBREVIATIOSS 1 3 ACROXYMS A AAA Analytical and Advisory Assistance ICTA Information and Communications Technology Authority ADB AfricanDevelopment Bank I L O International Labor Organization AFD Agence FranGaisede IMF International Monetary Fund DCveloppement AFT Aid for Trade MAAS Multi-AnnualAdaptation Strategy APRM African Peer Review Mechanism MDA Ministries, Departments and Agencies B O M Bank of Mauritius MDG MillenniumDevelopment Goal BPO Business Process Outsourcing MFA MultiFiberAgreement C E M Country Economic Memorandum MOFED Ministry o f Finance and Economic Development CEB Central Electricity Board MPC Monetary Policy Committee CHCL Cargo HandlingCorporation MTEF MediumTerm ExpenditureFramework Limited CPS Country Partnership Strategy MUR Mauritius Rupees CPAR Country Procurement Assessment NEA New Economic Agenda Report CTB CentralTender Board NEPAD New Partnership for Africa's Development C W A Central Water Authority NICTSP National ICT Strategic Plan DCP Document Cadre de Parteneriat NPC National Pay Council DMU DebtManagementUnit PBB Program based Budget DPL Development Policy Loan PEFA Public Expenditure and Financial Accountability E C European Commission PERL PublicExpenditure ReformLoan E C A Economic Commission for Africa PERP Public Enterprise ReformProject EIA Environmental Impact Assessment PFM Public Financial Management EPZ Export Processing Zone PIT Personal Income Tax ESW Economic and Sector Work SADC Southern AfricanDevelopment Community EU European Union SAFE South Africa Far East FAD Fiscal Affairs Department SBS Sector Budget Supports FDI Foreign Direct Investment SME Small and MediumEnterprise FY Fiscal Year SMST Sector Ministry Support Team GBS General Budget Support SPMP Sugar Planters' Mechanical Pool GDP Gross Domestic Product TA Technical Assistance IBRD International Bank for UN UnitedNations Reconstructionand Development I C A Investment Climate Assessment UNDP United Nations Development Program IT InformationTechnology WMA Wastewater Management Authority ICT Information and Communications ZEP Zone d'EducationPrioritaire Technology   I.INTRODUCTION 1. Inthe early 1990sanew visionbeganto take shape inMauritius of ahighervalue added, more knowledge and skill intensive economy.' With labor shortages beginning to drive up real wages, there was a recognition that the end of low 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. It gave rise 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 of the country's power demand. Textiles and apparel have downsized, but stabilized around a core o f firms 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 from a low base, reaching 15 percent of 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 of the port quickly attracted enough extra business to overwhelm the new capacity. Since establishing the offshore financial sector, Mauritius has become the largest source of inbound FDIinto India. 3. Yet, in the aggregate progress has been slow. 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 inthe late 1980s,to 5 to 6 percent inthe late 1990sand 3 to 4 percent inthe mid-2000s. More recently, trade preference erosion and high oil prices - the triple trade shock - have added new urgency to speeding up this transition. ' Government of Mauritius 1997, Vision 2020: The National Long-Term Perspective Study (Port Louis: Ministry of Economic Development and Regional Cooperation).  4. The slow pace of the transition has much to do with the approach o f successive Governments to economic management. Sugar and textile rents from trade protection allowed Mauritius to perpetuate 1970s' style industrial policies of picking winners and promoting them through special incentives and targeted public investments. Instead o f removing underlying structural constraints, ever more layers of 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, underminedcompetitiveness, while inflexible labor market regulations deterred risk taking and innovation, and impeded the flow of resources out of declining sectors into dynamic, growing ones. L o w educational attainment and restrictive immigration practices made it difficult for employers to hire needed skills. Finally, inefficient budgeting and public sector management caused a run up in public deficits and debt that began to threaten macroeconomic stability, underminingMauritius' attractiveness as a destinationfor FDI. 5. Elections in July 2005 brought to power a new government on a strong reformist platform of enhancing competitiveness and broadening opportunities.2 As it worked out the details of its reform program and beganimplementation the Government turned to the World Bank and other Development Partners3 for both policy advice and financial support. The latter is being delivered largely via a programmatic series of three Development Policy Loans (DPLs), of 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 well as meeting around a quarter of the public sector borrowing requirement over the three-year period, the operation is also coordinating dialog and external support by the Development Partners across the spectrum of areas it covers. 11.COUNTRYCONTEXT A. RECENTECONOMICDEVELOPMENTS: 6. Instep with the rest of the world, Mauritius' economy slowed sharply in2001-02 (Figure 1). Indeed, with cyclone Dina superimposed over a range of other global and regional factors Mauritius slowed more than most: growth declined from 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 from a 12.6 percent average in 1997-2001to 6.4 percent in2002-05, the terms of trade fell by 19 percent and the current * See Governmentof Mauritius, "Government Programme2005-2010: Address by the Presidentof the Republic," at httu://www.gov.mu/~ortal/eoc/assemblvsite/file/Presidentaddress.udf. The term, "Development Partners" is usedthroughoutthis document to refer to Mauritius' mainexternal partners-the AfricanDevelopmentBank, Agence FranGaisede DCveloppement,the European Commission,andthe World Bank. See WorldBank 2007, Mauritius Country Economic Memorandum: Managing Change in a Changing World,Chapter 2. 2  account swung sharply into deficit. The EPZ sector, comprising mainly textiles and apparel, downsized by around a third in2001-05 as the ending of Multi-FiberAgreement (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 low point Figure 1- GDP Growth Slowdown in the cycle, statistically smoothinjg away percent change some of the volatility in growth rates reveals 1 4 I" an unmistakable downshift in performance g . . . . . . . . . . . ,A.. . . . . . . . . . . . . . . . . ' i 8 ................................. \.......................................................... (Figure 1). The slow pace of adjustment to 7 ......................... 7 1'.....I "'\ ............................................ the external shocks which were largely global innature is notable: Mauritius was the fourth fastest growing country in sub-Saharan Africa in 1996-2001, but slipped to 2 ' J ' J fourteenth place in 2002-05. No doubt this 1 \I poor performance contributed to a growing 1996 1998 2000 2002 2004 2006 sense of anxiety and pessimismand it lead to 1- - GDP -Trend a dramatic change inpolicy direction. Soiircr CSO NmowI YCCOIMI 8. Since the introduction of major reforms in mid 2006, the picture has brightened considerably. Real growth reboundedto 5 percent in 2006 and close to 6 percent in2007 according to recent estimates by the Central Statistics Office.6 Private investment rose from an average o f 14.6 percent of GDP in2002-05 to 16.6 percent in2006,7while export growth pickedup from 2.4 percent in2002-05 to 17.3 percent in2006. 9. Counterpoised to these positive developments, three largely negative Figure2 - CPI inflation y-0-y percent change indications of macroeconomic stress can be noted - though as risks to the baseline expectation rather than predictors of an impending meltdown. The first i s inflation 10 - which remains high, but has been trending down since peaking at double digit levels (Figure 2). In July 2007, the Bank of Mauritius' (BoM) newly constituted Monetary Policy Committee (MPC), warning that "risks to inflation appear to be 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 on the upside," raised the re o rate Source Cenrral Srarrsrrcs Office Nore structural break in July 2007 aggressively by 75 basis points! The situation bears watching, but Mauritius has a history of 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 of 21.8 percent of GDP in 2002-05 to 26.5 percent in2006, but that reflects partly the purchase of an aircraft by Air Mauritius. That furchase also obscures trends inimports and the current account. See press releaseon 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 MPC and replacement of the old Lombard rate with a more market oriented rep0 rate. Credit growth has not been excessive and the authorities appear to understand the risks and be prepared to take further action should that become necessary. Table 1- Macroeconomic indicators 96197- OOIO1 01/02 02/03 03/04 04/05 05/06 06/07 99/00 (9 Real GDP growth (%) 5.3 5.6 2.7 3.2 4.7 4.6 3.5 4.5 Real GNFS exports growth (%) 2.9 10.7 9.5 -8.0 -2.0 5.7 8.0 6.0 Gross national savings (% GDP) 25.7 27.6 26.5 26.3 23.8 19.7 19.0 19.1 Gross domestic investment (% GDP) 26.5 23.3 21.4 22.7 24.1 23.3 24.5 26.5 Productivity growth (**) 1.2 -0.3 -1.0 0.4 -1.5 -0.8 0.1 CPI inflation (avg) (%) 6.2 4.4 6.3 5.1 3.9 5.6 5.1 10.7 Terms of trade (% change) -1.2 -1.8 0.9 1.0 -5.3 -7.0 -0.5 -3.3 TOT adjustment (% of GDP) 0.8 3.1 2.1 3.3 1.4 -2.6 -4.2 -6.1 CA balance (% GDP) -1.5 2.7 5.4 2.6 1.1 -3.5 -5.3 -7.2 real exchange rate (% change) 1.5 2.8 -1.4 -0.8 -3 -5.5 -1.2 -2.0 FXreserves (months of imports of GNFS) 3.1 3.5 4.7 5.7 5.4 4.6 3.9 3.2 FX reserves (months of imports of Goods) 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 of 8 percent of GDP or more in the current year, although the final figure will be lower if export growth maintained its pace in the second half of 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, with 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 of 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 disruptivecorrection does not appear likely at this time.g Table 1. -Fiscalframework 05/06 06/07 07/08 08/09 09/10 Total revenue andgrants 20.1 19.3 20.3 20.6 20.7 - Total revenue 19.8 19.1 19.1 19.3 19.3 - Grants 0.3 0.2 1.2 1.3 1.4 Primary expenditure 21.6 19.5 19.3 19.3 19.4 Interest expenditure 3.8 4.1 4.8 4.8 4.8 Budget balance -5.3 -4.3 -3.8 -3.5 -3.5 Debt/GDP 54.9 50.3 49.2 48.4 Source: MOFED See, World 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 of 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 of continuing high levels of public borrowing in both domestic and foreign markets.loThe macroeconomic and fiscal framework presented in the 2007/08 budget anticipates that both revenue and expenditure will stabilize at around current levels, but that significant grant financing from the EuropeanUnion (EU)will continue to bring down the deficit (Table 2). Assuming these elements of the macroeconomic and fiscal framework are borne out, the fiscal outlook i s satisfactory. However, it bears mentioning that programming in the EU's grant financing i s risky since some of these transfers are conditional on politically sensitive policy actions, though the risks have receded recently with agreement on key components of the Multi-Annual Adaptation Strategy for Sugar (MAAS). 12. How much does the rebound of 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 of trade protection (Figure 4). Notably, the contributions to growth calculated inTable 3 attribute most of the cyclical downturn and Table 3 - Contributions to growth vercent 1997-01 2002-05 2005 2006 2007 GDP at factor cost 5.7 3.2 2.3 5.0 5.6 Agriculture 0.2 -0.3 -0.4 0.0 -0.4 - sugar 0.1 -0.2 -0.3 -0.1 -0.4 Industry 1.8 -0.1 -1.3 1.1 1.5 - manufacturing 1.2 -0.4 -1.1 0.8 0.7 - EPZ 0.7 -0.8 -1.1 0.3 0.6 - sugar 0.0 -0.1 -0.1 0.0 -0.1 - construction 0.4 0.2 -0.3 0.3 0.8 Services 4.3 3.9 4.4 4.3 4.9 - restaurants and hotels 0.4 0.2 0.3 0.3 1.1 - transport and communication 1.2 1.1 1.2 0.9 1.o Other -0.6 -0.3 -0.4 -0.4 -0.4 Source: CSO imports would imply greater future ability to service current net foreign borrowing. Unfortunately, the Central Statistics Office does not publish such a breakdown. loAbstracting from concernsabout 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 Mauritiusborrow abroad?" (processed).) Inparticular, multilateral debt has trendeddown, falling from 6 percentof GNP in2002 to 3.3 percent in2006. Net flows on multilateral debt were negative over the period and the share of multilateral debt to total debt outstandingfell from 15.3percentto 10.7 percent. Quarterly national accounts investment data are highly correlated with the recovery inconfidence shown inFigure 3 (p =0.8). 5  recovery to traditional sugar and EPZ manufacturingand construction and relatively little 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 of major structural reforms begin to be realized in2-3 years. Thus, the majority of benefits likely lie in the future. However, it i s also worth bearing in mind the International Monetary Fund's (IMF) view that reaping these benefits will depend on maintaining the momentum of the reform process. Figure 3 - Confidence index Figure4 - Industrial production percent optimistic or very optimistic y-0-y percent change minuspercent pessimistic or very pessimistic 1nn .I_ 14 80 _..................................... ............................................ 60 ............................. - 40 20 E o v a -20 -40 ................................................................ -15 4. ........................... ................................................... I I -60 -20 ....................................................................................................... 1 1 ....................................................................................................................... ,I -25 -100 ' Q1 Q2 Q3 Q4 Ql Q3 Q4 Q1 4 2 Q3 4 4 Q1 Q2 Q2 ND JFMAMJ JASOND JFMAMJ JASOND J 2004 2005 2006 2007 2006 2007 2008 ' -EPZ - - NO~-EPZ1 Source: Pluriconseil barometre Source: Central SfarrsrrcsODce B.MACROECONOMICOUTLOOK ANDDEBTSUSTAINABILITY 13. The macroeconomic outlook prepared a year ago for the first DPL saw reason for optimism. Mauritius enjoys strong leadership, a high degree o f social cohesion, robust institutions and a tradition of pragmatic economic management. These underlying factors augur well for a continuation of 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 of the recovery has surpassed expectations. Whereas the first DPL anticipated a steady recovery from 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, it would be prudent to remain cautious about the mediumterm: While 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. l2Average growth in2002-05 slowed by 2.5 percentcomparedto 1997-2001,of which 0.5 percent was accounted for by agriculture and another 1.5 percentby EPZmanufacturing. In2005-06 average growth increasedby 2.0 percent, 0.2 percentdue to agriculture, and 1.2percentfrom EPZmanufacturing. 6  High oil prices and recent turbulence in global financial markets highlight vulnerabilities inthe external environment. Finally, sustaining long term growth significantly above the current rate would represent a remarkable achievement Figure 5 - Distribution of average per by any standard. Figure 5 shows two capita GDP growth, 1984-2004 distributions of average growth over percent the 20 year period, 1984-2004 for all 40 countries with data available and a 7 35 - smaller number whose per capita - 30 income in 1984 was near where Mauritius i s today. The mean of both distributions is around 1.5 percent. Low, middle and high indicate the outcomes of three scenarios prepared for the CEM. Even the low case, 3.2 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 0 1 2 3 4 5 6 7 8 percent average per capita growth, averagegrowth (%) would be significantly above the ID 141countries 14countries unconditional expectation. 15. Accordingly, the baseline projectionbrings 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 of the projections i s very similar to a year ago. Debtsustainability: 16. Low growth and high fiscal deficits in recent years have fueled a rise in Mauritius's public sector debt, which stood at about 70 percent of GDP in 2006/07. Public debt i s mostly domestic. While progress has been made inimproving the maturity profile, roughly half of 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. Inthis modest growth scenario, where fiscal deficits rise inthe medium term, a permanent, one quarter standard deviation shock applied to: (i) real the interest rate; (ii) growth; (iii) primary balance; or (iv) a one-time real depreciation of the 30 percent, would increase the debt-to-GDP trajectory to about 80 percent by 2011/2012. 17. Under the IMF staff`s reform scenario, which assumes a gradual decline of the fiscal deficit to 3 percent of GDP - in line 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 mediumterm. 7  18. Mitigation of interest rate risk will depend on sustained fiscal consolidation and enhanced debt management, including implementation of a maturity-lengthening strategy. The government i s strengthening public debt management with a view to reducing fiscal vulnerabilities stemming from high interest payments and refinancing risks. A Debt Management Unit (DMU) was established in the Ministry of Finance and Economic Development (MOFED) in 2002 as part of 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 of the public debt portfolio, including contingent liabilities, and suggests mitigating actions. Further articulation and formal adoption are anticipated shortly. Implementation of the strategy, which will require building institutional capacity, will be key to success. It will also be important to reduce the financial risks o f the largest public enterprises, improve their efficiency, and review the potential for more private sector involvement. This important plank of the reform program i s featured as a DPL2 prior action. 111. THE GOVERNMENTPROGRAM 19. The Government's program stems from a clear vision of 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 of various existing and new sectors.13 After the election, a number of 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, policy makers recognized an array of interrelated problems to be addressed, chief among them: Distorted incentives and inefficient resource allocation: Inherent biases in the tax system as well as burdensome controls and regulations hinderedefficient resource allocation (andreallocation), innovation and risk taking. Poor quality and costly services: Poor quality and expensive utilities and services such as transport and communications lowered productivity and undermined the competitiveness of 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 of workers andprofessionals with world-class skills. 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. l3See" Setting the Stage for Robust Growth," (statement by Hon. Ramakrishna Sithanen, Deputy Prime Minister, Minister o f Finance and Economic Development at the National Assembly on 30 August 2005). 8  Public sector inefliciency: Complex and bureaucratic regulations, poorly designed and executed social programs, weak procurement practices and loss making parastatals underminedefficiency and diverted resources from priority needs. 20. By the time the Finance Minister introduced his first budget in June 2006, the Government's views had evolved to the point of advocating, "wholesale change and adoption of a totally new paradigm.. .. It 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 describedmore fully below: A. FiscalConsolidation andPublic Sector Efficiency B. Improving Trade Competitiveness C. Improving the InvestmentClimate 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 of pursuing sound macroeconomic policies and putting public finance on a solid footing. Investors must have the confidence that the deficit and debt will be brought down to sustainable levels and that Government will become lean and trim."15 Fiscal rules were adopted for the FY2006/07 budget: (i) golden rule that the Government should borrow only for investment and not for recurrent expenditure; and (ii) sustainableinvestmentrulethatnetpublicdebtasaproportionofGDPshouldbe the on a downward track.16 Sector Ministry Support Teams (SMSTs) were set up in the MOFED to work with sector Ministries on budget preparation, and audit committees and "cut waste" squads were put in place to monitor execution and look for cost savings, especially inthe capital budget. Numerous recommendations to improve efficiency were put forward based on their investigations. 22. The 2006/07 budget demonstrated a serious commitment to reversingthe upward trend in deficits and debt. A sharp reduction inprimary spending by 2 percent of GDP far exceeded the target o f 0.5 percent (a DPLl prior action), though in fact only rule (ii) was achieved as total borrowing (4.3 percent of GDP) exceeded the capital budget (3.4 percent of GDP). According to Bank staff projections, this will remain the case in the medium term, inpart 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). 14Government of Mauritius, 2006/07 budget speech, "Securing the transition: from trade preferences to global competition," (June 2006), par. 9, 13. l5Government of Mauritius 2005, "Setting the stage for robust growth," par. 158. l6However, that classification o f expenditure between capital and recurrent i s to some extent arbitrary. For instance, all expenditure under the Empowerment Programmehas been charged to the capital budget. Roughly 90 percent o f spending on health and education is classed as recurrent spending. 9  Table 4 - Fiscal projections I percent of GDP 05/06 06/07 07/08 08/09 Actual Estimated ____________Projected _ _ _ _09/10_ _ _ _ _ _ _ Total revenues and grants - I 20.1 19.3 20.7 20.8 20.9 Total revenues 19.8 19.2 19.5 19.5 19.5 Grants 0.3 0.1 1.2 1.3 1.4 Current expenditures 21.4 20.2 20.9 21.0 20.9 Interest 3.8 4.1 4.7 3.6 3.3 Capital expenditures and net lending 3.9 3.4 3.9 3.9 4.0 IBudget balance -5.3 -4.3 -4.1 -4.1 -4.1 DebVGDP 68.9 63.1 61.3 60.1 59.4 23. Beyond restoring fiscal balance, the public sector agenda addresses a number of important issues, including reducing distortions and increasing equity in the tax code, relinquishingdiscretionary powers to grant tax and duty exemptions and operationalizing the Mauritius Revenue Authority. One of 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 with national priorities. Complementary civil service reform (performance management) will also be launched. A key PBB requirement is the development of 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 civil service reform (a pilot performance-based management system inthe MOFED are programmed. B. Improving Trade Competitiveness 24. Over the years, an accretion of interventions and regulations has impacted negatively on trade competitiveness and impeded the flow of resources to new, potential growth sectors. Overall, incentives were biased:l7 Toward domestic productionrather than exports. Trade protection skewed returns infavor of producing for the domestic market, reducing competition and overall efficiency to the detriment of exporters. Toward existing rather thannew sectors. Rigid and inflexible regulations deterred businesses from innovating or changingthe skills mix of their labor force, limited entry andreduced competition. Toward large rather than small firms. Smaller firms were unable to take advantage of complex incentive schemes, while high compliance costs drove many SMEs into the informal sector, curtailing their access to credit, training and other benefits. 25. The reform program addresses these problems in two ways. First, revamping incentives, eliminating the distinction between EPZ and non-EPZ firmsl8and eliminating See World Bank 2006, "From Preferences to Global Competitiveness: Report of the Aid for Trade Mission" (processed). 10  substantially all tariffs over time (at such a pace as to allow firms accustomed to high levels of effective protection to adjust"); eliminating a 25 percent investment tax credit to remove the anti-labor bias of the tax system; dramatically lightening regulatory burdens, including by simplifying applications for permits and licenses and substituting ex-post verification of 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 of 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 ICT training i s being increased and a draft national ICT strategic plan has been prepared. C. Improving theInvestment Climate 27. Weak investment spending over the years, especially FDI, has eroded competitiveness. Elements of the business environment such as labor regulations, land titling and business registration procedures are being overhauled with a goal of moving Mauritius into the top ten of 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 of Companies was designated as a one stop focal agency for business registration and the Board o f Investment converted from being an administrator of programs to a facilitator and promoter. Whereas firms previously had to obtain ex-ante fire and health certificates before starting operations, now they can begin operating subject to ex-post verification of adherence to published guidelines. Other measures include merging development and building permits and reducing the number o f distinct activity clusters from ten to three. 28. A perennial obstacle to operating a business inMauritius has beenthe shortage of humancapital. Now, entry of foreign workers has beeneasedto 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 of tourist to business visas have also been liberalized. An important aspect of opening the economy will be to amend the Law Practitioners' Act to allow entry o f international law firms. At the same time, measures are planned to encourage the return of the Mauritian diaspora to work in Mauritius. ''Except for less stringent labor regulations covering EPZproducers to be addressed inthe context o f more eneral labor reform. A decision to increase adjustment assistance and slow the pace of tariff reductions required deferring an indicative trigger on tariff reform from DPL2to DPL3. See below, paragraphs 86-90. 11  29. Central to improving the investment climate i s implementation of 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 of Remuneration Orders and relaxing the need to seek approval for lay-offs. In addition, land administration and management is being modernized with the introduction of a cadastre system and establishment of transparent andpredictable procedures for transfers of 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 theEconomy: Participation, Social Inclusion, and Sustainability 31. The transition from sugar and textiles to higher value added services requires both makingbetter use of available humanresources and providing adequate social safety nets for the vulnerable. On the one hand, democratization entails increasing access to education and (re)training, land and financing to start 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 of MUR 5 billion over five years. The program encompasses seven activities: (i) for social housing; (ii) for small entrepreneurs; land land (iii)workfareprogramemphasizing trainingandre-skilling; (iv) specialprogramsfor a unemployed women; (v) tourist villages; (vi) assistance for outsourcing; and (vii) support for development of new entrepreneurs and SMEs. 32. Beyond these measures, democratization will take the form 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 of a national education strategy i s a trigger for DPL2. 33. Government i s also reforming the administration of 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 of environmental vulnerabilities, particularly in light of the projected rise intourist arrivals to 2 millionby 2015, Government intendsto implementa new National Environment Strategy to protect the nation's environmental assets. Progressonthe Governmentprogram 34. The 2006/07 and 2007/08 budgets have made significant and systematic progress on implementing the Government's program. The main initiatives bearing on the reform program are shown inTable 5. 12   IV. BANK SUPPORT TO THE GOVERNMENT'S PROGRAM A. LINKTO THE COUNTRYPARTNERSHIPSTRATEGY 35. The DPL and the latest Country PartnershipStrategy (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 of 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, all three share: 0 Common objectives of facilitating adjustment to external shocks and transitioning to a more skill and knowledge based economy while safeguarding the interests of vulnerable groups. 0 A common diagnostic pinpointing constraints to growth and diversification and identifying reforms needed to rekindle economic progress. 0 Consistent matrices structured around the pillars of public sector reform, trade competitiveness, the investment climate and democratizing the economy. 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 policy 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. COLLABORATIONWITHIMFAND OTHERDONORS 37. A close collaborationhas developed with Mauritius' other Development Partners - the EC, AFD and the ADB. The Bank and IMF also collaborate closely. The Government has urged all external partners to harmonize their support and the DPL has been instrumental inthis through joint 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 inthe context of a strongly owned country-led program. 38. International Monetary Fund: Mauritius has no formal program with the IMF, though relations are close. Over the years, the Fundhas carried out work on 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 Fundstaffs work closely together and exchange views frequently. During the past year, they jointly prepared a Financial Sector Assessment Program update and are continuing together on a Financial Sector Action Plan. The last Article IV mission in February 2007 gave a cautious, but positive assessment of the program as did assessment letters provided for DPLl and DPL2. 14  Preparation of the DPL has benefited greatly from IMF analysis of macroeconomic performance and debt sustainability. 39. European Commission: The EC is present in Mauritius and has been active in the areas of environment, including wastewater, and poverty reduction for the most vulnerable marginalized groups which are not benefiting from Mauritius' development success. Two sector budget supports (SBS) are currently operational, inwastewater for a Pillar DPLoutcomes CPS outcomes A. *Reduction inprimary spending as performance and percent o f GDP. improve public sector efficiency. *Reduction of tax expenditure as Percent *Reduction intax expenditures o f GDP. *Improved composition o f expenditure outturn as compared to original approved *Better allocationof budget according to budget. preset ceilings. *Revenue stabilization at not less than 19 percent o f GDP. *Improvement infinancial performance o f parastatals net of subsidies. B. Improve trade *Elimination of substantially all tariffs. *Tariffreductions being implemented. competitiveness *Common regulatory and tax regime *Unified incentives for EPZ, non-EPZ across virtually all sectors of the firms. economy. *Increased production o f tradables; *Increased export share o f GDP. increasedfisheries exports; increased exports to CommonMarket for Eastern and SouthernAfrica, Southern African Development Community. C. Improvethe *Improved ranking inDoing Business *Reduction incost of doing business; one- investment climate survey. stop shop for business registration; *Increased investment inemerging sectors revision of investment legislation. *Reduction intime to start a business. *Increased registration o f SMEs *Increased number of work and residency *System to facilitate entry of foreign permits. workers; increased skills availability. D*Democratize the *Increased registration o f SMEs *Elimination of bias against SMEs as economy *Increased primary and secondary school measured by increased number of new completion rates. SMEs registered. *Increase inlow income families *Improvement ineducational outcomes receiving housing. *Protection programs reach the needy *Training provided to unemployed *Redeployment and training programs in workers, unemployed women finding place for unemployed and retrenched jobs; completed tourist villages. workers with a special emphasis on women. 15  total of 38 million and in the sugar sector for 11 million. The final tranches under these SBS for the FY 2007/8 are 4.2 million and4.5 million respectively. 40. However, SBSs will be phased out and the E C intends to move increasingly to general budget support in its assistance strategy, aligning this with the DPL as much as possible. The EC 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 from the DPL; and (iii) maintains a special interest in sugar sector adjustment and social issues inthe adjustment process. The disbursement o f EC funds i s based on fixed and variable tranches, the former being disbursed against general conditions and the latter against the achievement of specific performance indicators. The GBS envelope for Mauritius for the period 2007- 2010 totals approximately 190 million, taking into consideration resources available from 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 of five indicators are aligned with other Development Partners. The 2008/2009 EC performance indicators will be identified and formulated in such a way as to reinforce the triggers for DPL3 wherever possible. 42. In addition to budget support, the EC has funded a Public Expenditure and Financial Accountability (PEFA), the preparation of an energy study and preparation of an education strategy. The Bank and EU collaborated closely on a joint 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 joint exercise of planning technical assistance will be continued next year, in line with the findings of the various missions. 43. Agence Fransaise de Dhveloppement: AFD has opened an office in Mauritius this year. Inline with the Document Cadre de Partenariat (DCP) signed on April 2, 2007 between the Mauritian and French authorities, AFD proposes to support Mauritius in its transition to higher productivity and competitiveness and greater integration inthe world economy. AFD intends to focus its funding on clusters together with public entities and/or the private sector, as well as to participate in financing infrastructure aimed at enhancing the attractiveness o f the country for foreign investors. Vocational training will also be emphasized. AFD is providing cofinancing for the reform program and is particularly interested in the assessment of 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 lendingandnon-lending activities. Lendinghas focused on 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 of the four pilot cases. An ADB study on poverty, gender, and social exclusion i s also under preparation and is 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 of preparation and appraisal o f the first and second DPLs. 45. United Nations Development Program: As a member of the United Nations (UN)family, the Bank liaises closely with the local UNDPoffice. Elsewhere,the UNDP i s engaged in a number of areas which directly support the DPL, including providing a long term MTEFRBB advisor in MOFED, funding the preparation of a National Information and Communication Technology (ICT) Strategic Plan, assisting the Central Statistics Office with preparation of 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 of the DPL team, the UNDPcontributes significantly to achieving its objectives. C. RELATIONTO OTHERBANKOPERATIONS 46. There i s no other active lending to Mauritius at this 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 is a milestone andthe latter a trigger for the current operation. It is anticipated that the Public Enterprise ReformProject (PERP) inparticular will support a key plank of the DPL. D. LESSONSLEARNED 47. Preparation of DPL2 has benefited from lessons learnt from the Public Expenditure Reform Loan (PERL) approved in FY02 as well as the first DPL in FY07. The DPL and PERLhad similar objectives, insofar as the PERLfinanced part of 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 its citizens. The PERLwas intendedto be the first of a programmatic series of 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. Like the PERL, the DPL series recognizes the importance of supporting an agenda which is Government owned and ideally which enjoys broad popular support. If there are politically sensitive or controversial areas, Government must take decisions on how to allocate its 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 of 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 with sectoral strategic planning. It i s important to be realistic and not to mislead about what i s and is 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 ineducation after a longstanding involvement by the Bank,20 the EC 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 ICT Strategic Plan (NICTSP) by the Ministry of 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 collaborationby Mauritius' external partners. E. ANALYTICAL UNDERPINNINGS 50. Duringrecent 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 of the Government's reform program. The various components of the Government's reform strategy contained in the program matrix in Annex 2 are shown in Table 7, with links to relevant AAA. While this underlines the quality and effectiveness of the dialog, the program remains very much the Government's own initiative, for instance as evidenced by elements inthe table which have not formed part of 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 of 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: managingchange ina changing world." 18  Country Economic Memorandurn: Managing Change in a Changing World 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 policy 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. It carried an important message to the new Government about budget modernization (MTEFDBB) and the need to redefine the role of 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 of which are major themes in the reform program. The Bank, jointly with the UnitedNations Conference on Trade and Development, is about to embark on a science, technology and innovation policy review which will extend the treatment given Recommendations AAA I Year1 year2 y e a r 3 Eliminatecustomshuties(duty free island) AFT X X X Unify CorporateIncomeTax at single rate FAD X X X Reform PersonalIncomeTax to increasefairness X InstituteNationalresidentialpropertytax scheme X Reducetax expenditures FAD X Abolish ministerialdiscretionto remit taxes andduties FAD X Replaceconsumer subsidies with cash transfers FAD X Reformparastatal sector X X Passnew ProcurementAct X StrengthenIndependentCommissionAgainst Corruption CEM X Cut telecommunications costs CEM, AFT X X X Liberalizeair access AFT X Unify EPZ andnon-EPZregimes AFT X X Simplify businessregistrationprocedures ICA, AFT, CEM Initiate large scale retrainingfor redundant workers X X X Improvelabormarketflexibility by reducingseparation X costs CEM, UM Simplify wage setting mechanism. CEM, UM Decideon opening CargoHandlingCorporation X Limited (CHCL) to strategicpartner X Formulateand implement nationaleducation strategy CEM X Decontroladministeredprices FAD X Ease immigrationrestrictionsandwork permits CEM X Simplify industrialincentives AFT, CEM X Passinsolvencybill X Developcadastre/landmanagement system Implementcivil service reforms CEM Developand implement sector strategies Improveport managementandrestructureCHCL AFT Reformnationaleducation system CEM X Enhancesupport to SMEs AFT X Reformsocial safety nets CEM, AFD X Move forward with MTEF implementation CEM, FAD X x x Note: CEM- Country Economic Memorandum; FA 1-IMF Fiscal Affaii Department report; AFT -Aidfor Tradereport; UM-UnemploymentinMauritius; ICA-InvestmentClimateAssessment 19  in the CEM. In addition to its direct impact, draft versions of the CEM 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 inMay. The grey cover version was finalized inJanuary 2007. Investment ClimateAssessment 52. An ICA was carried out jointly with the Board of Investmentinearly 2005. The survey of 285 firms indifferent sectors of the economy generated important insightswith regardto firm level productivity, costs of doing business, the regulatory environment, the labor market and more. Amongst the major business climate constraints perceived by firms were delays and cost of business registration procedures associated with securing trade licenses, operating permits, development and building permits and land titling as well as hiringneeded skills. All these areas subsequently featured inthe 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 inApril 2006. Aidfor TradeReport: 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 from 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 policy levels. Its work underpinned many of the ideas and even some of the language of 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 of declining and into dynamically growing sectors; improve the quality and cost of input services such as telecommunications, air transport, and cargo handling; and strengthen transitional support for displaced workers. Findings were presented to the Minister of Finance inmid-April and subsequently disseminated more widely through the Government. A final report was submittedinMay 2006, prior to the 2006/07 budget. Unemploymentin Mauritius 54. The study stemmed from a sharp rise inunemployment since the early 1990s. It deepened the understanding of the labor market in Mauritius by assessing the quality of available data,22 reviewing trends in labor market indicators and profiling the unemployed. Using household budget survey data, it assessed the impacts of distortions in the labor market and estimated returns to education. It showed that despite rising 21 It bearsrepeatingthat this was not a matter of pushing the Bank's agenda, but rather supporting the Governmentas it moved inits chosen direction. 22 Recognition of methodological shortcomingsinavailable data led to the conversionof the Continuous MultiPurposeHousehold Survey (CMPHS) to a dedicated, quarterly labor force sample survey inorder to improve the quality of labor market intelligence. 20  unemployment the labor market had in many ways performed well, creating large numbers of jobs in services, particularly in small enterprises. B y demonstrating widespread non-compliance (particularly in the informal sector) with the cumbersome system of minimumwage setting (Remuneration Orders), the study helpedto prepare the ground for proposed labor reforms presented inthe 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 of ESWandTA.23Since 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 of 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. Inearly 2007 an IMFFiscal Affairs Department TA mission prepared a detailed report which included an action plan for implementationof MTEF and PBB. National Environmental Strategy 56. Environmental policy has been a longstanding priority for policy 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. While 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 is currently under way. A White Paper on 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 list o f issues to be addressed, including the need to maintain biodiversity; manage land, water and coastal zone assets; control pollution; protect humanhealth; and to pay particular regard to the special situation of Rodriques. 23See "Introduction of the MTEF inMauritius" (2001); "Draft report on the MTEFandresultsbased management:M&Econsultants' mission" (2003); and"Implementing the MediumTermExpenditure Framework (MTEF)inMauritius:A Mid-TermReview" (2005). In2003-06the Bankprovided a $494,000 IDFgrant (TF051274)to supportcapacitybuildingfor MTEFimplementation. 24http://www.gov.mu/portal/goc/menv/files/nep_draft.pdf. 21  V. THEPROPOSEDOPERATION A. OPERATIONDESCRIPTION 57. The DPL series i s closely linked to key strategic elements of the Government's reform program. In addition it seeks to reinforce the comprehensive scope of the program, selecting triggers from all four pillars. Individual operations are timed to coincide with successive budget years and to support installments of the reform program introduced in the budget speech. Thus, triggers for the current loan, the second in the series, draw mainly on 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. Inaddition 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 of the DPL program and the relationship of triggers and prior actions for DPL2. The main themes o f the DPL are grouped according to the four pillars of the reform program identified in column 1. Columns 2-5 shows sequentially: 0 DPLl prior actions 0 Indicative DPL2 triggers identified duringpreparationo f DPLl 0 Actual DPL2 prior actions 0 Indicative DPL3 triggers The remaining columns of the table comment inparticular on any evolution from DPL2 triggers to prior actions, and also show progress on results indicators selected for DPLl. 22  m Y   2 VI > N 2 W 0 0 N ri 22a B d  1 : - 01 N I= O   Box: Good Practice Principles on Conditionality Principle 1:Reinforce Ownership InJuly 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 with a clear strategy for reform, much of which has subsequently been implemented inthe 2006107 and 2007108 budgets. While working out the details of its program, the Government turned to the Bank for support which was provided in the form o f targeted, high impact TA and ESW linked to preparation of 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 upfront with thegovernmentand otherfinancialpartners on a coordinated accountabilityframework. The E C and World Bank collaborated closely on the preparation o f the EC's Country Strategy Paper and the World Bank's Country Partnership Strategy in 2006. At the same time, the Government was refining its strategy inconjunction with preparation of the DPL. As a result, all these efforts feature common objectives and diagnostics. Subsequently, the EC, AFD, ADB and World Bank participated injoint preparation and appraisal missions for DPLl and DPL2and, to the extent possible, all 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 its range o f coverage. Principle 3: Customizethe accountabilityframework and modalities of Bank support to country circumstances. The DPL has focused on issues of strategic importance, but also on 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 DPLhas helped to maintain consistency in the dialog - a counterweight to the continual need to fight fires which has encouraged policymakersto stay focused on the larger reform agenda. Principle 4: Chooseonly actions criticalfor achievingresultsas conditionsfor disbursements. The Government's reform program is structured around four main pillars, all o f which have been supported by the DPL. DPLl featured a relatively large set o f prior actions, consciously intended to signal to investors the breadth o f the program. DPL2 narrowed the focus to only seven prior actions. However, it is a testimonial to the ambitious scope o f the program that in both cases it was easy to select issues of genuine strategic importance. Principle 5: Conducttransparentprogress reviews conducive topredictable andperformance- basedfinancial support. The annual budget has traditionally been the vehicle for announcing major economic policy reforms inMauritius. Thus the programmatic DPL series has easily been aligned to the budget cycle, drawing prior actions from budget measures and providing financing for successive fiscal Years. 28  B. POLICYAREAS A. ConsolidatingFiscal Performance and Improving Public Sector Efficiency DPL2prior 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 of tightening fiscal discipline and improving the efficiency and effectiveness of 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. MTEFis a technique for setting credible and enforceable mediumterm (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 of outputs and outcomes rather than inputs as in traditional line-item budgeting. The result is to achieve greater clarity regarding the nature of policy decisions and increase policy makers' accountability for spending, while delegating technical choices about implementation to staff inspendingunits. 61. MTEFPBB is 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 with pilot projects at the sector ministry level to demonstrate the shift inthinking from inputs to outcomes, others top down to strengthen budget discipline and create a demandfor greater efficiency at the sector level. Inevery case, however, a lengthy period has been needed to achieve full effectiveness. For Mauritius, the roll 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 of 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 follow up mission i s expected in early 2008. However, this i s only the latest round in what has been a lengthy engagement. The World Bank has invested considerable resources inMTEF/PBB25since 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. 25See "Introduction of the MTEF inMauritius" (2001); "Draft report on the MTEFandresults based management:M&E consultants' mission" (2003); and"Implementing the MediumTermExpenditure Framework(MTEF) inMauritius:A Mid-TermReview" (2005);the Bankprovided a $494,000IDFgrant (TF051274)to support capacity buildingfor MTEF implementationin2003-06. 29  63. Challenge: Mainstreaming MTEFPBB will require revising the Chart of Accounts, upgrading computer systems and providing adequate training. More difficult, the results framework of the PBB needs to be matchedto performance management inthe civil service. In addition, sectoral strategic plans need to be drawn up in such areas as tourism, health, education, environment, transport, fisheries, and more inorder 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 from 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 all stakeholders in the Cabinet, National Assembly and line ministries understand and buy into the process and objectives of MTEF and PBB. Moreover, the budget culture needs to change, including clarifying the roles and responsibilities of the MOFED and sector ministries. Cabinet needs to be involved in decisions on 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 inthe budget framework. 65. Government actions to date and future activities to address the challenpe: The preparation of 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 spendingunits,together with an indicative PBB which presented disaggregated programs, objectives and indicators.26 In most cases, albeit to varying degrees, the preparation of MTEFPBBbudgetswas achieved through a genuine collaborative effort by MOFED and sector Ministry staffs to develop and articulate policy priorities of 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 of 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) on the mergingo f the capital and build recurrent budgets initiated in 2007/08 by providing more flexibility for shifts between capital and recurrent spending to facilitate better planning and greater efficiency in resource utilization. 26Available on the MOFED web site, see httu://www.crov.mu/uortal/site/MOFSite/menuitem.Sb1d75lc6156d7f4eOaadl1Oa7bS21ca/?content id=04a 45~74830331IOVmVCM1000000a04a8cORCRD.The term "indicative" signifies that actual budget execution will usepre-existing, line-itemaccountingcategoriesfrom previous years, pending revision of the Chart of Accounts. 30  67. Promise for future progress inthe coming years i s reflected inthe strong efforts of Government to mobilize assistance from Development Partners to build ownership of spendingMinistries for the PBB and for their own Strategic Plans within the MTEF. An IMFFADmission early in2008 will assess progress andprovide guidance tailored to the country context. 68. Expected results: MTEF and PBB will allow policy makers inthe Government to focus more clearly on strategic resource allocation decisions, aligning expenditure with 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 rolling three year time horizon will facilitate better planning through more predictable funding to spending agencies. 69. Indicative trimers for DPL3: Preparation o f strategic plans for sector ministries; initiation o f civil service reform. 31  c ! Y 3 28Es $ a  m m n E 9 m  m d  DPL2prior action: Reduction of primary spendin2 by 1.0percent of GDP in 2007/08 compared to 2005/06. 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 of reducing primary spending by 0.5 percent per year over the next three years. The first year of the program was a DPL prior action and the outcome easily exceeded the target. According to the current year's budget estimates, the ratio of primary spending to GDP fell from 21.6 percent in200906 to 19.5 percent in2006/07 and should fall 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 of GDP) i s well above the target (Table 10). 71. Challenge: All Governments face demands for increased spending and in this case the pressures will intensify with the preparation of strategic plans for sectors such as tourism, ICT, education and health. It i s also important to avoid spending cuts falling disproportionately on the capital budget. 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 inthe 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 of Audit Committees in key ministries to reduce unnecessary spending. Two 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 by 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. Target 05/06 06/07 07/08 07/08 08/09 Primary Expenditure 21.6 19.5 19.3 20.6 19.9 - Cum. Change -2.1 -2.3 -1.0 -1.5 CurrentPrimary Expenditure 17.7 16.0 15.5 - Cum. Change -1.6 -2.2 Capital Expenditure & NL 3.9 3.5 3.9 --Cum. Change -0.5 -0.1 IBudgetDeficit -5.3 -4.3 -3.8 Primary Balance I -1.5 -0.3 1.0 I Source: Government of Mauritius, FY 2007/08 budget estimates 35  73. Expected results: Improved spending control will reduce pressure on domestic credit markets and increase headroomfor priority spending needs or further tax reductions. Indicative DPL3 trigger: Reduce primary spending by 1.5 percent of GDP compared to FY 2005/06. DPL2prior action: Enactment and proclamation of the Public ProcurementAct 2006, including the appointment of senior officials for the Procurement Policy Office, the Central Procurement Board and the Independent Review Panel, as prescribed under theAct. 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 is particularly of 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 in2002 commended Mauritius for, "a credible effort to provide a framework of great transparency and accountabilit , yet noted, "some measures should still be adopted to improve the current system...." 2y The CPAR recommended improvements such as standardization of bidding and pre-qualification documents, more transparent practices for bid opening and announcing awards, and enhancing the regulatory functions of the Central Tender Board (CTB). More recently, the CTB has come under increasing scrutiny for wastage and inefficiency and a lack of transparency which fails to protect adequately against corruption. 75. Challenge: The challenge of 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 of 2000. Subsequently, proclamation was held up pending appointment of senior staff. The process calls for appointments to be made by the President on the recommendation of the Prime Minister in consultation with the leader of the opposition and it proved unexpectedly difficult to identify appropriate appointees who satisfied high standards of integrity and ethics and were willing to take the job. A shortlist of suitable candidates was advised to the Prime Minister in June 2007 and after some delay the required appointments were made inDecember, 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. 76. Beyond setting up the legal and institutional framework there i s a need to build capacity, inparticular through training, and developing e-procurement procedures for postingprocurement 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 inDecember 2006 replaces the current systemby setting up three bodies: (i) Procurement Policy Office; (ii)the Central Procurement Board; and (iii) the the 27WorldBank2002, "Country ProcurementAssessment Report," p. 2. 36  IndependentReview Panel was enacted inDecember 2006. Before presentationto the National Assembly, the Government requested a review by procurement specialists at the World 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. Expected results: More efficient procurement and better value for money in public expenditure. 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 fCEBj, 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 of 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 inthe exports logistics chain are a source o f inefficiency and a drain on competitiveness.28 To initiate reform of the sector, 22 priority cases were identified on the basis o f (i) impact of the enterprises on public finances and in the particular their implicit and explicit budgetary burden, (ii)their impact on the economy, particularly on the provision of essential services supporting business activity, and on the degree of competition in the market place, and (iii) social impact and the potential for improved their quality and reduced costs of essential services to the public. Taking into account importance, need to improve performance and ownership of reform b y the parent Ministry, four key strategic parastatals were selected from the list - CWA, WMA, CEB and SPMP (see Annex 2 for an overview). 81. Challenge: Powerful interests which support the status quo will 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 risks will include delivering positive outcomes to the population, such as improved service and reduced costs of essential outputs, as well as well targeted measures for affected groups and a public informationcampaign emphasizing the benefits of 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 utilities 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 reportby KPMGon agricultural sector parastatals recommends halving employment ina 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 off to a slower start and a decision was made to drop the State Trading Corporationfrom the first round. 83. Government actions to date and future activities to address the challenge: Working closely with the World 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 will be responsible for preparing reform strategies. The Bank has been actively supporting the work of these Groups and will continue to do so through the PERP for the duration of the reform program. Additional support from bilateral and other donors i s being sought by Government and i s likely to be forthcoming. Three of the working groups have been meeting since March, covering:(i) public utilities; (ii) agriculture and agro industry; and (iii) commerce and industry. Two more have been proposedto cover (iv) public infrastructure and (v) social sectors. A cross- sectoral steering committee i s overseeing the project and the activities of the working groups and will monitor overall performance of the parastatal sector. MOFED, through the steering committee will provide advisory services as well as manage two long-term consultants - one local and one international - who will work together on supporting the design and implementation o f the Project. 84. Expected results: Implementation of remedial action plans leading to reduced burden on the treasury, improved competition inthe economy and better quality, lower cost public services 85. Indicative triggers for DPL3: Satisfactory implementation o f the action programs for the four enterprises selected. B. Improving Trade Competitiveness Tariff reformandthe duty free island2' 86. The strategy o f becoming an open, globally connected, low tax, business friendly platform entails eliminating anti-export biased policy distortions which include tariffs. The 2006/07 budget made a commitment to eliminating substantially all tariffs (95 percent o f tariff lines) on a phased basis over three years. Reflecting the strategic importance o f this objective, all three years were proposed as DPL prior actiondtriggers. The first year target was met as duties were cut on some 659 tariff lines and set to zero on another 345 lines. Tariff peaks previously up to 65 percent were capped at a maximumo 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.30Suggesting that the situation was not fully anticipated, the 2007/08 budget announced a one year respite inthe move toward a duty free island, together with an additional MUR 40 million 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 is expected to return as a prior action for DPL3. 30 Though other policies such as price controls may also have had an impact. 38  implementindustrial support and restructuring programs.31 Including cost sharing by firms, total spendingwill reach MUR 60 million. The support beingprovided 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 firms 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 firms are basically viable. In one strategic decision, Enterprise Mauritius has concluded the footwear sector i s unsustainable and will not provide any support to footwear manufacturers. Table 11- Industrial Production growth from Q12006 to Q12007 percent EPZ NonEPZ All 9.8 -4.5 Food products exc. Sugar 20.9 -5.4 Beverages and tobacco 0.8 Textiles 9.6 -17.5 Wearing apparel 7.1 4.0 Publishing and printing -11.6 Chemicals and man-made fibers 20.6 -15.4 Non-metallic mineral products -14.5 Optical instruments, watches & clocks 37.5 Basic metals and metal products -34.7 Other 29.4 10.6 Source: CSO, Quarterly IndustrialProduction 88. In general, the programs appear well conceived and administered, though of relatively modest proportions. Officials at Enterprise Mauritius and the Ministry of Industrycite anecdotal evidence which indicates a measure of 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, it is 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 of which i s expected to be channeled through Enterprise Mauritius' Enterprise Development Fundand will therefore provide an opportunity to assess the programs specifically aimed at manufacturing competitiveness. The assessment will usefully inform the design o f subsequent industrial programs. 89. The Government emphasizes the philosophy of becoming a duty free island i s unchanged and it intends to announce further tariff reductions in the 2008/09 budget which will reduce the level and/or dispersion of tariffs and eliminate the most egregious distortions. Accordingly, while the DPL2 trigger concerned with the second year of phased tariff reduction has been withdrawn it has been replaced by a milestone calling for the implementation of industrial support measures inorder to provide for continuity insupport o f tariff reform. At the same time, an indicative DPL3 trigger anticipates a resumption of tariff reductions. 31The program parallels the Textile Emergency Support Team (TEST) program in 2003/04 which, on a voluntary basis, assessedcompetitiveness and supported restructuring of 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 policy 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 of trade policy reform, and design a credible reform strategy to get the process back on track. This assistancewill form part of the dialog for DPL3. DPL2prior action:(i)Acquisition of additional capacity on the SAFE cable by Mauritius Telecom; (ii)Issuing of decision by ICTA on Mauritius Telecom's application for 20 percent price reduction onADSL charges; (iii)Initiation of regulatory review of ICTA. 91. Description: For a small, remote economy seeking to integrate into the global economy, high quality, competitively priced connectivity is essential. The internet is a vital tool in promoting existing activities such as tourism and financial services as well as diversifying into new areas such as call centers and BPO. In turn this depends on an adequate supply o f well 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. In2003, 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. It i s worth noting that the Government has successfully engineered a sharp decrease inprices for wholesale international capacity over the last few years, with 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 penetrationis low 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 of ambitious plans to grow communications intensive activities such as financial and IT services and tourism, there is a need to planfor significant future increases. 94. Finally as to regulation, the international environment for telecommunications i s complex and opaque and off 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 will both increase Mauritius' competitiveness and send a highly visible signal to investors. Regulatory challenges have centered on balancing the interests of the incumbent, Mauritius Telecom, with other competitors in the sector, especially MT's exclusive control over the landing point for international communications and participation in the SAFE consortium. But, new challenges are also emerging, due to technological innovation, 32Data sourcedfromWorld Bank, Knowledge Assessment Methodology database, http://web.worldbank.orr/WBSITE/EXTERNAL/WBI/WBIPROGRAMS/KFDLP/EXTUI~/O,.menuPK:1414 738-uagePK:64168427-piPK:64168435-theSitePK:1414721,OO.html 40  management of the country domain name and cyber security. Moreover, best practice thinking on regulation has evolved considerably since 2001 when the ICTA was established under the Telecommunications Act, shifting away from 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 of international bandwidth and inter-user connect charges. 95. Government actions to date and future activities to address the challenge: InApril, 2007 Mauritius Telecom's capacity on the SAFE cable rose by nearly two-thirds. New technologies since the SAFE fiber optic cable - Mauritius' main link to the outside world - was laid, have approximately doubled the capacity of the line 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 million MIU-kmof capacity compared to 1.2 million MIU-km33 previously. In August 2007, MT's latest application to the ICTA for a 20 percent cost reduction was given approval. As a result, the first two components of the trigger have been satisfied. 96. Meanwhile, the Government has recognized that a regulatory review of the ICTA's technical and institutional capacity i s necessary to come to grips with a multiplicity of issues which have surfaced. Such a regulatory review was anticipated inthe MITT'SPBB (Programme 1,Mainactivity A4), and incorporated into the recently released NICTSP. To establish ICT as a major pillar of the economy, the NICTSP urges, ...a politico-legal superstructure that i s (a) " aligned with needs of the information economy, (b) i s harmonized with international norms, (c) takes into account emerging developments in technology, including that of convergence, and (d) promotes increasing uptake of ICT in economy and society through high levels o f trust and confidence." The first step toward this is, "a comprehensive regulatory and competency review of ICTA.. .that must cover issues including those related to functional competence including professional experience and educational requirements, consultative approach indecision-making, continuity intenure 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 of 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. Expectedresults: The recent experience with the increase incapacity on the SAFE cable (limited impact on market outcomes) indicates that the benefits of 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 of bandwidth. 33MinimumInvestment Units-kilometers, a measure of capacity. 34Government of Mauritius 2007, "National ICT strategic plan: 2007-11," p. 49. 41  99. Indicative DPL3 trigger: None. C. Improving the Investment Climate DPL2prior 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 of wages to reflect productivity. Remuneration Orders stipulating wages and working conditions for around 80 percent of 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 bargainingandlink wages more closely to productivity. 101. Challenge: Government has been committed to labor market reform, but has had to surmount a number of obstacles, including design and staffing of new institutions, getting buy in from 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 May 10,2007 by means of an administrative arrangement, which i s to say a Cabinet decision. There was some urgency because of a need for it to conclude its work and submit recommendations to Government by the end of May 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 of the CSO and a small support team (an economist, a productivity analyst, labor-management specialist, accountant and statistician). In the event, its recommendations were submitted within the requiredtime 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) rise in the 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 flexibility 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. It i s understood that the ILO also recommendedthe NPC not be incorporatedinto the new labor law. 104. Expected results: More flexible and responsive wage bargaining resulting in greater allocative efficiency and outcomes inline with productivity trends. 35See Country EconomicMemorandum,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 DPL2prior 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'EducationPrioritaires; - 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 of its 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 like tourism, agro- industry, electronics and Information Te~hnology."~~ the same time, education plays a key At 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. It intends to bring reforms to the national economic structure that will open the doors o f economic opportunities to the majority of the population. This will in turn contribute to mobilizing the overall competitive advantage of the whole population to create more wealth."37 Education system reform i s complementary to the Empowerment Programme which was introduced inthe 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 job training. By contrast, the DPL2 prior action focuses on the longer term goal of ensuring adequate quantity and quality o f human capital available to the economy. 107. Challenge: The shortcomings of the education system have been increasingly recognized over the past two decades: high failure rates and attrition throughout primary and secondary school, low enrollment in math, science, and language courses, ubiquitous private tutoring, inadequate teacher training, outdated and overly-academic curricula, lack of choice, poor development of problem solving and critical thinking skills, and inadequate tertiary capacity.38 Yet during that time, little has been achieved in the way of reform. Undoubtedly, Ministry of Education and Human Resources (MOEHR) staff have been innovative and proactive in a range of activities such as early childhood education, the knowledge channel and promoting the teaching of science subjects. But, addressingthe needs o f education systematically and in a cost 36 See GovernmentProgramme2005-2010: Address by the President of the Republic of Mauritius, par. 147ff (http://www.gov.mu/p~rtal/~oc/assemblysite/file~residentaddress,pdf). 37 GovernmentProgramme2005-2010, 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 ina genuinely consultative process to build a constituency for change. 108. Government actions to date and future activities to address the challenge: In addition to the needs of the education sector, the Ministry o f Finance i s a stakeholder in the education strategy because of its budgetary implications and the need for inputs to the PBB for the annual budget exercise. Working together, the MOEHR sources and MOFED prepared TORSfor the elaboration of an Education Strategy Paper covering the period 2008 to 2020, with precise benchmarking and the delineation of responsibilities. This strategic plan which resulted covered core priorities in the five 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 of projectedbudget ceilings. 109. The EC agreed to fund an external consultancy to assist with preparing the strategy. Consultants were identified and began their assignment in mid October. A first draft Strategic Plan was delivered inNovember and finalized, together with the PBB indicators inDecember.39 That will be followed by dissemination and consultation. The MOEHR i s strongly committed to the exercise. 110. 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 will have a strong, positive impact on human capital formation and growth. 111. Indicative trigper for DPL3: Beginimplementation of strategic plan. VI. OPERATIONIMPLEMENTATION A. POVERTY AND SOCIAL IMPACT 112. Over the past several years, the loss of trade preferences has resulted in major dislocations, with cumulative net job losses in apparel and sugar since 2001 around 9 percent tal losses 45.3 of total employment in the economy. Women Sugar have suffered the largest share o f the losses, Annarel including over 80 percent in the apparel sector. Both men and women have faced poor job emo item: prospects due to low educational attainment and )tal employment (2000) 485.9 narrow work experience, compounded by weak labor market condition^.^' The households affected by the structural shift have been 39See, Government o f Mauritius 2007, "National strategic plan for education and training: 2008-2020" (processed). 40Association des Femmes Entrepreneurs de Maurice 2004, "Etude sur l'impact des licenciements de la zone franche a l'Ile Maurice," httt1://un.intnet.mu/UN2005/secUN%20Publications/downloads/EPZ%2ORe~ort.r1df.A survey o f workers laid off from the apparel sector found the great majority had started work at an early age and had not worked outside the sector or inmany cases even the firm. 44  predominantly low income where the loss of even a secondary income can impact significantly on consumption, especially where primaryincomes are precarious as well. 113. The Government has consistently emphasized that its reforms are intendedto benefit low income, vulnerable households: "We simply cannot continue on the same path. It i s the surest way to economic disaster and social upheaval. And those who will suffer most are the very people we want to protect: the poor, the vulnerable, the ~nemployed."~~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 of recent years.42 Significant low-to- moderate skilled employment growth i s anticipated inconstruction, tourism, seafood, call centers and BP0.43Regulatory 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 creationtoward younger andless skilled workers. 114. Some reforms may produce losers as well as winners. For instance, tariff cuts raise real incomes of some low income households b y reducing the cost of wage goods, but also contribute to job losses in vulnerable sectors. The Aid for Trade report estimated that the price impacts of completely eliminating tariffs would lift five percent of poor workers out of 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 skills would disproportionately bear the burden o f re~tructuring.~~ Minimizing the negative impacts and balancing these competing interests may be what has led the Government to slow the pace of tariff reform. 115. The Government has also been careful to include inthe program accompanying measures to mitigate some of the social costs. Thus, a main pillar of the reform program has been "economic democratization.. ..[comprising] reforms to the national economic structure that will open the doors of 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 of the reforms, in particular providing cash transfers to the most needy to compensate for eliminating consumer subsidies on rice, flour, and exam fees. 41 2006107 budget speech, par. 7. 42Theevidenceis compelling that faster growthcreates employment opportunities andraisesthe incomesof poor households. See, e.g., WDR 200012001,Attacking Poverty. 43Forinstance,the Boardof Investmenthas spokenof as many as 25,000 ITjobs, mainly call centers and BPO by 2010. (See, 1'Express (August 15, 2007), "Le BO1parle de 25 000 employes dans le secteur des Tics, d'ici 2010." The target is optimistic, but indicative of the sector's potential. Since 2005, BPO employment has beengrowing at over 25% annually. Meanwhile, doubling tourist arrivals by 2015 could generate similarjob growth inthe hospitality sector. 44World Bank 2006, "Mauritius: FromPreferences to Global Competitiveness" (Report of the Aid for Trade Mission, April 26,2006) 45 Governmentof Mauritius, "Government Programme2005-2010: Address by the Presidentof the Republic," (July 2005), par. 42. 45  116. With respect to OP8.60, none of 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 all and its impacts are likely positive. The NPC replaces a preexisting tripartite arrangement which rigidly mandated annual pay increases, taking no account of 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 from 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. Inline with its commitment to democratization, the Government has recognizedthe need for a more systematic assessment of social protection. The Ministry of Social Security i s currently compiling a Social Register, covering up to 200,000 actual or potential recipients of social benefits, including basic pension, social housing, subsidized electricity, and social aid delivered under various programs. When completed in 2008, the Social Register will help to ensure the adequacy of 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 of poverty, carrying out a retrospective study on effectiveness of social spending, and compiling a Social Accounting Matrix to facilitate analysis of social and structural policies. 118. The Government has recognized that it needs to know more about the social costs and benefits of the restructuring and has expressed an interest in a more comprehensive Poverty and Social Lmpact Assessment of the transition which Mauritius i s undergoing. This will 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 will also be providing TA to the Ministry of 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. ENVIRONMENTALASPECTS 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: 0 Implementation of industrial support measures to raise export competitiveness: which have the aim of increasing output in sectors such as textiles, jewelry and furniture which may contribute to air, water, or noise pollution. 4bWorld Bank 2004, WorldDevelopment Report 2005: A better investmentclimatefor everyone,p. 148. 46  0 Establishment of remedial action plans for selected parastatals: which inthe cases of 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 by 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. 121. Ultimately, environmental standards inMauritius will reflect the country's own priorities and institutional capacity. Historically, the record of environmental management, though not perfect, has been relatively good.47 Stringent environmental safeguards are provided for in the Environmental ProtectionAct and all projects must obtain a preliminary environmental report or, inthe caseof heavypolluting activities or major investmentprojects, afull environmental impact asse~sment.~~ An environmental police force under the aegis of the Ministry of Environment is responsible for monitoring and enforcing environmental provisions. 122. Meanwhile, over the past two decades policy has continued to evolve in response to emerging threats and needs and is currently under review again (see par. 56 above). The National Environmental Policy white paper of 2006 evidences a clear awareness of 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 from ethanol distilleries, sea-food industries and Information and Communication Technology.. ..[and] integrate policies for sustainable consumption." (par. 2.6- 2.7) More generally it stresses that, "Government i s fully conscious that the long-term socio- economic success of the country i s not possible without environmental sustainability and i s therefore puttingenvironmental concerns high on its agenda." (par. 2.3) 123. All Development Partners recognize the strategic importance of environmental protection and AFD, UNDP and the EC are actively providing technical support. With EC assistance, a Strategic Environmental Assessment has been carried out for the M A A S and Government has expressed an interest incarrying out similar exercises for other environmentally sensitive sectors. AFD is supporting the development of a sector strategic plan based on the white paper which will lead to defining and costing programs, objectives, outputs and indicators for the 2008/09 PBB. C. IMPLEMENTATION,MONITORINGAND EVALUATION 124. The Government, represented by the Financial Secretary, and the Bank, represented by the TTL, will meet at least semiannually to review progress of the DPL program, together with other Government and Bank representatives as appropriate. The Bank will also maintain a dialog with counterparts in the Ministry of Industry, Ministry of Information Technology, Ministry of 47See EU,"Mauritius Country StrategyPaper 2008-2013," Annex 3, ExecutiveSummary of the Country EnvironmentalProfile. 48See http://www.gov.mu/portal/goc/menv/files/epa.pdf. 47  Labor and other bodies critical to the success of the program. The Government will furnishdata as requiredto monitor outcomes inthe matrix. D. FIDUCIARYASPECTS Public FinancialManagement 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 No problems or errors have been reported by the external auditors during this period. This information was supplemented during Preparation and Appraisal for the first DPL, by discussions with officials of the BoM, the Accountant General and others. N o evidence was found of 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 usingnational 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 will follow the Bank's disbursement procedures for development policy lending. Disbursement (other than for the front end fee) will occur in one tranche after effectiveness. The loan proceeds from the Bank will be credited to a United States dollar denominated account maintained by the B o M and forming part of the official reserves of Mauritius. Within two business days, the B o M will credit the Rupee equivalent of the loan proceeds to the Single Treasury Account maintained on behalf of the Government of Mauritius. The Accountant General will be notified accordingly. The B o M will not impose any charges or commissions on the Government for these transactions. The conversion from Unites States dollars to Rupees will be based on the prevailing exchange rate on the date that the funds are credited to the Single Treasury Account. The Government will be required to provide confirmation to the Bank that an amount equivalent to the loan proceeds from the Bank has been credited to the Single Treasury Account, with an indication of the exchange rate applied. E. RISKSANDRISKMITIGATION 128. The risk section in the first DPL focused on the Government's ability to maintain the momentum of reforms. That risk has considerably receded with the 2007/08 budget which introduced the second installment of the program much as envisaged. There has been no significant change in direction in the Government's economic and social programs since they 49http://bom.intnet.mu/ SIPUInternational,"PEFA PublicFinancialManagementPerformanceAssessment Reportfor Mauritius," (projectNo. 2006A29349, final report dated4 June 2007). 48  were first put forward in July 2005. Even in the case of tariff reform where the pace of implementation has slowed to give firms more time to adjust, the Government maintains - credibly - that the mediumterm goal remains the duty free island. 129. Despite this impressive consistency in policymaking and implementation, it i s widely reported that there are voices in the Government which are less supportive of 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 flow of information within the Government, and to allow policymakers scope for setting policy 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 inthis area to ensure an optimal coverage. 130. Another risk i s capacity constraints and a reluctance to prioritize on 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 civil service reform. 131. Finally, it is important to remember the delicate macroeconomic balance which could prove difficult to maintain. Inflation 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 of an independent Monetary Policy Committee and the introduction of the more market oriented rep0 rate to strengthen monetary policy. 49  ANNEX 1-LETTER OFDEVELOPMENTPOLICY Letter of Development Policy Office of the Deputy Prime Minister, Minister of Finance & Economic Development 14th January 2008 CF/92/1 V2 Ma Ritva Reinikka Country Director World Bank Group Pretoria, South Africa Dear Ms Reinikka Letter of Development Policv IamenclosingasignedcopyoftheLetterofDevelopmentPolicy describing the implementation of the economic reform programme that will enable Mauritius to lay the foundation of a new socio- economic model driven by global competitiveness and the creation opportunities for all. The Government of Mauritius wishes to have recourse to the Development Policy Loan to finance its budget and pro-growth reforms " that will propel the economy on a higher growth trajectory, attaining fullemployment andimproving the quality oflife of its population. Iwishtotakethisopportunitytoexpresstheappreciationofthe Government of Mauritius for the continued close collaboration between the Bank and our country. Yours sincerely R. Sithanen Deputy Prime Minister, Minister of Finance 8s Economic Development 50  14 January 2008 MsRitvaReinikka CountryDirector W o r l d Bank Group Pretoria, South Africa Letter of DeveloDment Policy 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 from direct Budget support from the African Development Bank(ADB), the European Commission (EC), the Agence Frangaise de Dtveloppement (AFD) and the World 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 Mauritius secured development policy loans amounting to U S $ 70 million, representing the first disbursement of 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 while bringing their expertise inareas o f interest to them. 2. The support o f external partners has helped Government to finance its budget whilst consolidating public finances and implement pro-growth reforms that will propel the economy on to a higher growth trajectory, attain full employment, and improve the quality o f life of its population. These reforms are sweeping away a non- functional system which is very complicated, hard to understand and open to abuse and with excessive discretion. We 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. We 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 all will 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. It puts in place further reforms with fine tuning wherever required and introduces a second generation of reforms. These reforms are embodied in a Programme-Based Budgeting (PBB) framework embedded in three-year Medium Term Expenditure Framework. Whilst the PBB i s only indicative inthe 2007/08 Budget, with assistance from the IMFwe are taking the steps to launch a PBB based budget in 2008/09. We have made a big leap inpromoting 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 MTEFIPBBagenda. 5. ?"ne strategic vision announced in the 2006/07 budget permeates the PBB 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 PBB indicators and to embed these in coherent strategic plans for each Ministry. Moreover, we need to ensure that strategic plans are (i)efficiencypromoting, (ii)feasible inview ofhuman resource constraints, (iii) affordable by identifying how 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 Ministry has formed a Working Group to develop the required strategic plan. However, we 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 Declarationfor 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 now 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 Policy Development, Implementation and Empowerment within the Ministry o f Finance and Economic Development (MOFED). 7. This new Department is part of the now completed reorganisation of the Ministry o f Finance which was built around the strategic plan for MOFED as reflected in its PBB. Moreover, to support these changes, MOFED will be the first Ministry to fully adopt Performance Management Systems under the supervision o f the Ministry o f Civil Service and Administrative Reform (MCSAR). The reforms in MOFED set the stage for a joint effort by MCSAR and MOFED to assist other Ministries reorganise themselves as partof a move to a performance culture. 8. As we move forward, the Development Policies will be fully reflected in the PBB. The means o f implementing agreed programmes will be assured thanks to the three year rolling Medium Term Expenditure Framework that will be formally adopted by Parliament as part o f the new budget document. 9. The Development Policies will, therefore, increasingly focus on implementation at a Ministry and Sector level. However, the four pillars o f the reform programme will continue to underpinour strategy as reflected below. Fiscal ConsolidationandImprovingPublicSectorEfficiency 10. Fiscal consolidation is intended to put deficits and debt on a downward path by: (i)limitinggovernment 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 inthe share 2 52  of total expenditureto 22 to 23 percent of GDP, and anarrowing of the overall central governmentbudgetdeficit to about 3 to 3% percent o f GDP. 11. The Government's PBB will underpin this 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 of tightening fiscal discipline and improvingpublic sector allocative efficiency. 12. A coherent medium term actionplan for training, computerisation and sector strategieshas beenpreparedto fast track the programme. Key stakeholdersown and champion the initiative, and have an acceptable blend of best practice and country specificrequirements. 13. In FY 06/07, personal and corporate income tax systems were reformed, overhauling most exemptions, consolidating the numerous deductions into new incometax exemptionthresholds, reducingthe numbero ftax bands, and settingout to harmonise the tax rates and lower them significantly. Ministerial discretion over tax andduty exemptionswas given up. As of July 2007, both corporatetax andpersonal incometax were reducedand unified at a single flat rate of 15 %, two years ahead of 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 rateof inflation, tighter scrutiny of the capital budget, a review o f some institutions and the setting up of Audit Committeesin key Ministries. These measures have resulted in significant savings, especially in the capital budget through a needs assessment of capital projects, a review of the effectiveness of design, control of variations and monitoring of project implementation. Individual Ministries are also taking ownership of their projects. The 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 of public investments and discourage unjustified cost overruns. Better targetingof subsidies and transfers will betterdirect these expendituresto the neediest and restore fairness to spending so that the wealthiest 10 percent no longer benefit from a larger share of public spending than the bottom 10 percent. Long term sustainability of the pension system will be addressed, inter-alia, by raising the eligibility age to 65 over the next decade. 15. As a result of the above measures, primary spending as percentage of GDP was reducedfiom 21.6 % in2005/06 to 19.5 % in 2006/07 and is budgetedto 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 downwardpathfor the first time inover a decade. 16. Currently there are more than 150parastatalsbodiesthat transact in billions of rupees each year, and have significant weight in GDP. The Government intends to strengthen this sector, align their management with the policy to eliminate waste in 3 53  Government, focus on their output and outcomes, andbring them inline 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 initiate 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 Authority (CWA) and Wastewater Management Authority (WMA) and State Trading Corporation (STC). The program will be implementedover the next five years. Improving Trade 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 from 65% to 30%. However, inthe 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 Mauritius 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 million that would generate an additional Rs 20 million by way o f cost-sharing by recipient enterprises would be spent on the support programme during the year. Whilst this has a strong logic, it may reduce the manovering room and reduce the benefits o f some positive measures inthe coming budgets. At the same time, we also have a commitment to achieving a DutyFree Islandand at latest with the 2009/10 budget bywhich time we shouldhave eliminated substantially all tariffs except for a small percentage. A useful approach mightbeto reduce remainingtariffs intwo equal steps, say by reducingthe maximum rate to 15% and then to zero, or cutting the weighted average tariff 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 andtraffic 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 is 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 HandlingCorporation Ltd(CHCL) is inthe offing so that necessary investment can be made to increase efficiency inport development and management. A Tourism Strategy to meet the target o f 2 million tourists by 2015 is being prepared. Accordingly, the priority is to modernize and expand the Passenger Terminal to underpin OUI policy o f open air access. This i s estimated to cost Rs 4 billion 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 is 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 is being undertaken, as well as enhanced access to financial services. 20. To 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 well managed infrastructure and components, and transparent regulatory oversight. Mauritius Telecom's monopoly over safe traffic has come to an end inApril thus opening avenues for new entrants. The SAFE Consortium has recently upgraded the cable and distributed increases across its members. This additional capacity has not been activated because o f limited demand. Government is exploring other options, including the EASSY cable and the Inter-Island Connector, for increasing capacity as well as providing redundancy, which several international investors indicate as important for selecting Mauritius. Improving the Investment Climate 21. A second generation o f reforms is proposed to make the regulatory environment more transparent and less burdensome. Government's policies in this domain comprise facilitating issuance o f permits and simplifying appeals process, enhancing labour market flexibility through new legislation and mechanism for wage setting, and attracting skilled 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 is also amending the Law Practitioner's Act to allow 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 for appeals to the Privy Council by hosting its 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 from productivity changes, and adversely affected risk taking and innovations inthe productive sectors. The Government is committed to labour market reform and market flexibility. To that effect, Government is introducing two new bills, namely the Employment Rights Bill and the Employment Relations Bills to replace the present Labour Act and the Industrial Relations Act respectively. The two bills which have been circulated for public comments will not only modernize OUT labour legislations in line with hternational Labour Organisation (ILO) Conventions, but will 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 NPC would determine the yearly minimum wage increase taking into consideration not only the increase in consumer index, but also 5 55  the national ability to pay, the national productivity and competitiveness and the employment and unemployment rates". 23. The Land Administration, Valuation and Information Management System is being implemented to provide us with a cadastral map o f all land and properties within the boundaries o f the island o f Mauritius. This will substantially facilitate the use o f land for investment and other purposes while at the same time allow for optimal use o f land resources and provide a reliable tax base for the National ResidentialPropertyTax (NRPT). A new mechanism has been proposed to accelerate the process o f approval for projects with complex Environmental Impact Assessments (EIA). Assistance from the World Bank has been requested and will be crucial to allow early implementationo fthe proposals. Democratizingthe Economyby Wideningthe Circle of Opportunities 24. The Government is 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 fairly sharing the benefits from those policies. However, a prerequisite is that everyone has access to health and education facilities for them to be able and equipped to participate effectively. The programme, accordingly, accords highpriority to education andhealth care including a review ofthe 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 justified by the needs o f making the transition to high value-added, skills and knowledge based economy, and competing effectively inthe global economy. It will 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 from University or appropriate Tertiary education facilities. 25. The Government is, therefore, preparingan overall strategy that would 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. We are also increasing support to low performing schools and addressing the problem o f high drop-out rates. The allocation for education has also been increased inthe 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 on securing efficiency gains and adopting policies that are fair to all, particularly the neediest Mauritians. At the same time, we need to ensure that the Health Care model is sustainable for a population that is rapidly aging and also getting wealthier. 6 56  27. Recognisingthat the implementation of the programme would involve social transition costs, the Government instituted the EmpowermentProgramme, supported by an envelope o f Rs 5 billion over five years as a major instrument to address democratisationand social inclusion issues. It 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 of SMEs. Social costs of the adjustment, including those for the Empowerment Programme, feature prominently and explicitly in the overall adjustmentprogramme; of the total estimatedfinancial requirements of Euro 4 billion. Budgetary spendingon the EP was Rs 700 million inthe first (2005-06) fiscal year but is expected to rise to Rs2 billioninthe current fiscal year. 28. The EmpowermentProgramme (EP) has seen a degree o f consolidation over the past few months and an acceleration of its activities, with the nomination of a Project Coordinator. The modus operandi is clearer now - the various sub- committeeshave instituted a (natural) division of labor between themselves - while some sub-committeesmobilize the unemployed to take advantage of 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 is 2,000 for the next financial year. In addition some 10,000 women retrenched from the textile sector have been enlisted for various employmentprogrammes. So far 598 have undergone training in a new profession, while 408 have already found a job/placement, and others have establishedbusiness networks inpastry and livestock. A major pushinRodriguesis also planned. 29. For the SMEs, several projects are being implemented to improve sourcing andmarketing skills, to buildcapacity inproductdevelopmentand design, to develop colonial style furniture, to manufacturetourist 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 agreedthat there shouldbe a more integratedapproachto 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 AAA 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 standardsof industrialized countries and relative poverty close to the best performers inthe High Income OECD. This means that eradicatingabsolutepoverty 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 of policies to unlock growth (as described above) together with apro-active socialpolicy aimed at helping those who need assistanceto moveout ofpoverty. 57  31. The Government i s also committed to protect the environment, an urgent issue ina small islandwith a fragile eco-system. Growthwill be sustained only ifit CO- exists with a focused effort to preserve the environment. The Government is continuing its heavy investment in Waste Water treatment and moving to smart environmental controls. As part o f its plans to facilitate business investment, the Government has moved away from ex-ante approval to ex-post verification. The challenge is to extend this approach, under the Environment Protection Act which still maintains a list o f activities which require either a preliminary or full environment impact assessment. For other activities, environment guidelines have been preparedto help businesses in addressing environmental issues while implementing their projects. The Government itself is also taking steps to protect the country's lagoons, rivers, and islands, and investing significantly in waste management. It is also reviewing the National Environmental Strategy and Action Plan to take account o f the possible environmental demands o f future economic development, including specially tourism. This is another area where Government commitment needs to be augmented by capacity building and technical assistance from the Development Partners. The Government has, therefore, requested the World Bank to coordinate a concerted effort bythe DevelopmentPartners. Outcome;Past andprojected 32. There are clear signs that we are indeed moving in the right direction. As a case in point, economic growth is once again on a rising path with most o f the productive sectors recovering from 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 prior to reforms and unemployment has stopped rising 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 ina 1% point o f GDPreduction inthe overall deficit last year and a 0.5 % point reduction budgeted for the current year, whilst also cleaning up various off-budget liabilities. The growth rate for the current year i s projected at 5.8 percent, thus maintainingthe increasingtrend observed last year. Conclusion 33, Government intends to build on the success o f the first generation of 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 life. 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 mobilising 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. Inparticular, we aim at an FTA encompassing both COMESA and SADC inthe next five years to act as a platform for a free trade agreement with the EUin the context o f EPAs and eventually a FTA with the U S as a natural evolution o fAGOA. 8 58  34. W e therefore request our development partners to continue their support to the implementation of Government economic reform programme. We specifically rely on the technical expertise of the Bank to lead the way, in coordination with other development partners, inaligning our sector strategies and programmes to the reform agenda. With the major reforms enacted, the challenge is to focus on implementation with the full support and active engagement o f our DevelopmentPartners. For Governmentof Mauritius DeputyPrimeMinister Minister ofFinanceand EconomicDevelopment 9 59  ANNEX 2 -OVERVIEW OFPRIORITYPARASTATALS Objectives/Services Critical Issues Current Actions Possible Options Sugar Planters Phasingout of sugar cess b Cost reductionthrough Transfer functions to planters MechanicalPool financing (80% of revenue): outsourcing of some associations or cooperatives Corporation(est. 1974, increasingdependence on activities lerge with FarmersService Min.ofAgro-industry) grantslloans b Efficiency improvements Corporationor other entities: Hiring of agricultural Cost recovery will further throughregroupinghlock rationalizationof cess- equipment to small sugar erode competitivenessof management schemes financedinstitutions plantersat subsidizedrates smallplanters: sustainability Awaiting KPMG study on @ Contingentliabilities: of this sector? cess -financedparastatals US$3.6 million? Staff 221 Central ElectricityBoard Risk of high debt burden Financialandoperational @ Implementingcost reduction (est. 1952, Min.of Public No directgrantsbut import measures audithestructuringplan Utilities) duty/taxremissions, loan including options for private @ Utility RegulatoryAuthority Electricity generation, guarantees Act passedbut not participation transmission, distribution Accumulated deficit of promulgated Improvedregulationthrough and sale US$66million (2005) establishmentof URA @ Finalizing TOR for National Contingentliabilities: Needfor tariff rationalization Energy Strategy(EU Tariff andPPA review US$256million? andreview supported) Staff 1.800 50% of total generation from Requestfor 15%tariff @ IPPs;power purchase increase followed by agreementsto be reviewed? adoptionof Automatic PricingMechanism Central Water Authority Risk of high debt burden @ Implementingcost reduction Managementcontract (est. 1971,Min.of Public No direct grantsbut import measures Merger of operations and Utilities) duty/taxremissions, loan Seekingsupport from UNDP maintenancewith the @ Control, developmentand guarantees to hireaNorwegian Wastewater Management conservationof water Accumulated deficit of consultantto follow up on Authority resources US$18million (2005) F C Strategic Options Contingentliabilities: Very high rateof non recommendations: US$75million? revenuewater (NRW): 46% managementcontractleading Staff 1,100 Needfor tariff rationalization to concession andreview EIB concessionloanfor Needto improveoperational water loss reductionprogram efficiency:fleet, projectand Tariff structure review (DHV stock management study?) WastewaterManagement Domestic connections are User fee mechanismbeing Managementcontract Authority (est. 2001, Min. not chargeable reviewed Merger of of PublicUtilities) Debthumover:30% Tariff review operations/maintenancewith Collection, treatment and Delays and cost overrunin the Wastewater Management disposalof wastewater projectimplementation Authority Contingentliabilities: Staffingdifficulties: shortage Staff: 297 of skills andmanagerial expertise 60  ANNEX 3 -IMFASSESSMENT LETTER To: Members o f the Executive Board November 7,2007 From: The Secretary Subject: Mauritius-Assessment Letter for the World Bank Attached for the information of the Executive Directors i s the staff`s assessment letter on Mauritius's macroeconomic developments and prospects, as requestedby the World Bank in regardto its lendingprogram with Mauritius. As staff assessmentsprovided to the World Bank are generally publishedwith those institutions' documents, this assessment, with the authorities' consent, could be publishedby the World Bank. Questions about this assessment may be referredto Mr.Funke (ext. 38033) or Mr.Imam(ext. 39536) of AFR. This document will bepostedshortly on the extranet, a secure website for Executive Directors and member country authorities. Att: (1) Other Distribution: Department Heads 61  Mauritius-Assessment Letterfor the WorldBank November7,2007 This IMF staff note assesses macroeconomic developmentsand prospectsfor Mauritius based on information through October 2007. Themost recent staff report on the 2007 Article N Consultation was discussedby the Fund's Executive Board on May 7, 2007 (Country Report No. 07/192, available at http://www.im.org). Thenext Article IV Consultation visit is scheduledfor thefirst quarter of 2008. Overall, macroeconomic developmentsand prospects remainfavorable and the authorities have made good headway in implementing reforms and easingfiscal strains, but policies for medium-term budget consolidation remain to be spelled out and moreflexible labor markets would support competitiveness. Background 1. The governmentin2006 embarkedon an ambitiousreformprogramto adjustto the economy's loss of trade preferencesintextilesandsugar andto raisepotentialgrowth.The reformprogram aims to ease fiscal pressures, enhance public financial management, restore economic competitiveness, and improve the investment climate as a basis for higher growth. EconomicConditions 2. Economicactivity hasstrengthenedinthe past 18 months.Real GDPin2006/07 grew an estimated 4.6 percent up from 3.6 percent in2005/06, supported by risingforeign direct investment(FDI)and strong growth inthe services sector. According to the latest indicators, tourist arrivals andFDIcontinue to be robust, though unemployment remains a high9 percent. 3. Annual inflationhasretreatedfromitsrecentpeak butis stillhigherthaninearlier periods.Itfell from 11.9 percent year over year inDecember 2006 to 8.4 percent inSeptember, as the one-time effects of higher excise duties and the removal of subsidies inmid-2006 dropped Core inflation is also on the decline. To contain inflationary pressure, the B o M increased the rep0rate inJuly, by 75 basis points to 9.25 percent. Treasury billrates have startedto fall in line with annual inflation. 4. Fiscalconsolidationcontinues.The fiscal deficit shrank to 4.3 percent of GDP in 2006/07 (compared with a budgettarget of 4.0 percent o f GDP), from 5.3 percent of GDP a year earlier. This reflected, among other factors, the removal of subsidies, the phasing out of tax expenditures, administrative measures to contain current spending, and a decline incapital expenditure (0.5 percent of GDP). Public sector debt i s estimated to have been 63 percent of GDP at end2006/0752;close to one third of it is short-term. InJuly, Moody's put Mauritius on its 51The Central StatisticsOffice i s currently updating the CPI for a new baseperiod (July 2006 to June 2007) with new weights, derived from the HouseholdBudget Survey 2006/07. 52After netting out investments inthe ConsolidatedSinking Fund, which was abolished with effect from July 1, 2007. 62  watchlist for a possible downgrade, mainly over concerns about the level and structure of public debt inthe context of rising domestic interest rates earlier inthe year. 5. The current accountdeficitwidenedto an estimated7.2 percentof GDPin2006/07, reflecting weak textile and sugar exports, highoil prices, the purchase of an aircraft, and lower import tariffs. The real effective exchange rate, which had depreciated by 16.5 percent from 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 of the U.S. dollar has declined. The BoM, after buying inFebruary-April about US$250 million (4 percent of GDP) of international reserves, has refrained from intervening inthe foreign exchange market. Foreign exchange reserves are at about five months of imports. 6. Structuralreformshaveadvanced. Onthe fiscal front, the governmenthas started to move toward a program-based budget.To 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. Inthe World Bank's Doing Business 2008 report, Mauritiusleads Africa and ranks 27thglobally on ease of doing business. Ina first round o f labor marketreforms, the tripartite committee has been abolished and replaced with a new National Pay Council. A new draft industrialrelations framework (Employment RightsBill and Employment Relations Bill) has beenpresented to the national assembly. Some delays have occurred inthe restructuring o f the sugar sector, inpart over conditions for sugar factory closures. Outlook andPolicies 7. The 2007/08 budgetcontinuesthe broad-basedreformsinitiateda year ago. The budget targets a deficit of 3.9 percent of GDP. Revenue i s expected to stabilize at about 19 percent o f GDP (excluding grants), as losses from the flat income tax rate (15 percent) introducedtwo years ahead o f schedule are offset by the national residential property tax, stronger efforts to collect tax arrears, a special levy on profitable banks, and a special contribution of the hotel sector. O n the expenditure side, the budget supports fiscal consolidation by establishing audit committees inten ministries and curtailing cost overruns by appointing project managers. It also initiates a program to review and revitalize the parastatal sector and lays out steps to fully adopt program-based budgeting in2008/09. Judging from preliminary data for the first quarter of this fiscal year, fiscal consolidation i s likely to continue. Staff projects that the fiscal deficit may fall just short of its target, inpart because staff's growth projections are more cautious than those of the authorities. The primary balance i s expected to turnpositive. 8. With headlineand core inflationon the decline,monetarygrowthmoderate,and reserves stable,the currentstance of monetarypolicyappearsbroadlyappropriate.The Monetary Policy Committee, launched inApril, has increased policy transparency and the credibility of monetary policy, thereby helpingto contain inflation expectations. There i s a risk that inflation declines might be reversed if food and oil prices continue to soar and require a further rise inthe rep0rate to counter spillover effects on inflation expectations and core inflation. 63  9. To restore its external balance, Mauritiusneedsto further contain its wage growth, maintain a competitive exchange rate, and boost productivity. Wage restraint and greater labor flexibility are neededto build competitiveness. This will be particularly important if large capital inflows exert upwardpressure on the equilibriumexchange rate. Foreign reserves should only be purchased to smooth volatility caused by temporary inflows. Risksand Challenges 10. Key short-term risksare slowing global growth and other external shocks; and on the domesticfront delays inimplementing reforms. Marked slowing inMauritius's trading partners' economic activity, risingoil prices, or upward pressure on the rupee would widen the current account deficit53,dim growth prospects, andjeopardize the fiscal targets. A rise inoil prices could also fan inflation and, through a renewed surge ininterest rates, widen the fiscal deficit. Slow progress inimplementingkey reform measures, or reform "fatigue", including differences inview within the governing coalition, could lead to delays or actual loss of donor support, stalling reform progress and worsening debt sustainability. 11. The reformmomentum needsto be sustained.The fiscal reforms involve some uncertainties inthe mediumterm. Fiscal pressures-stemming from Mauritius's aging population and scheduledwage adjustments-call for continued fiscal consolidation and enhanced public financial management.Additional budgetary savings will help put the medium- term budget deficit target (3 percent of GDP) within reach and create more space for capital expenditure. Further structural reforms could help lift growth to the highlevels seen inthe 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. FundRelations 12. Mauritius has no financial arrangement with the Fundand is not seeking one. Buildingon a Letter of Assessment of the authorities' reform strategy within the Aid for Trade initiative (September 2006), Article IV consultation discussions were held inPort Louis, February 19-28,2007. The staff report, together with the 2007 Financial Sector Stability Assessment update, was discussed by the Executive Board on May 7. Over the past year, the Fundhas provided Mauritius with technical assistancerelated 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 is expected to take place inthe first quarter of 2008. 53Staff estimates that the direct impact of a US$lO increase inoil prices would widen the current account deficit by some 1.3 percent of 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]. (Annualpercentchange, unless otherwiseindicated) Real GDP 3.1 3.6 4.6 4.8 Consumer prices (period average) 5.6 5.1 10.7 7.5 Unemploymentrate (in percent) 9.0 9.3 9.1 ... Real effectiveexchange 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 Overallfiscal balance (includinggrants) (in percentof GDP) -5.0 -5.3 -4.3 -4.1 Revenues and grants (in percent of GDP) 20.0 20.1 19.4 20.6 Expenditureand net lending (in percent of GDP) 25.1 25.5 23.7 24.8 Public sector debt (in percentof GDP) 3/ 69.6 68.6 63.0 61.6 Current account balance (in percentof GDP) -3.5 -5.3 -7.2 -6.5 Sources: Bank of Mauritius(BOM); Central Statistics Office; Ministryof Finance;and IMF staff estimates and projections I/Fiscalyear(July-June). 2/ Trade-weightedperiod averages (a negativesign signifies a depreciation). 3/ Includes central and local government and parastatals, after netting out investments of the ConsolidatedSinking Fund in government securities. 65  ANNEX 4 -AT A GLANCE Mauritius at a qlance 11/9/07 Sub- Upper Key Development Indicators Saharan middle Mauritius Africa income Age distribution, 2006 ( 2 W Male Female Population,mid-year(millions) 1.2 770 810 Surfacearea (thousandsq. km) 2.0 24,265 41,460 Populationgrowth( O h ) -4.1 2.3 0.7 Urbanpcpulation(%of total population) 42 36 75 GNI(Atlas method, US5 billions) 648 4,790 GNIper capita(Atlasmethod, US$) 642 5,913 GNi per capita(PPP. international5) 13,510 2,032 10,817 GDP growth(%) 3.5 5.6 5.6 10 5 0 5 10 GDP per capitagrowth ("4) 8.0 3.2 4.9 percent (mostrecent estimate,2cXf3-2006) Povertyheadcountratioat 51 a day (PPP, %) 41 Povertyheadcountratioat $2 a day (PPP,%) 72 Jnderd mortality rate (per 1,000) Lifeexpectancyat birth(years) 73 47 70 infantmortality(per 1,000 live births) 13 96 26 2W- Child malnutrition(%of children under 5) 15 29 180. 180 - 140 - Adult literacy,male (%of ages 15 and older) ea 69 94 120 - Adult literacy,female(%of ages 15 and older) 81 50 92 1w- Gross primaryenrollment, male ( M - O hof age group) 102 98 106 M. Gross primaryenrollment, female (Oh of age group) 102 86 104 40- 20- Accessto an improvedwater source ( O hof population) 100 56 93 0- 7 Accessto improvedsanitation facilities(% of population) 94 37 81 1880 1995 zoo0 Em5 CMauritluS c Sub-Saharan Africa Net Aid Flows 1980 1990 2000 2w6 (US$ millions) NetODA and officialaid 33 ea 20 32 ;rowth of GDPandGDP per capita(%) Top3 donors (in2005): Japan 1 7 2 17 France 13 32 9 4 Canada 0 0 0 2 I Aid (%ofGNI) 2.9 3.7 0.5 0.5 Aid percapita(US) 34 84 17 26 Long-Term Economic Trends Consumerprices (annual %change) 33.0 10.7 5.3 5.1 GDPimplicitdeflator (annual % change) 10.6 10.6 3.7 4.1 -4-GDP -GDP per capita Exchangerate(annualaverage, localper US$) 7.1 15.4 25.5 30.9 Termsof trade index (2000 = 100) 104 100 88 19W-90 199C-ZooO 2000-06 (averageannualgrowth %) Population,mid-year(millions) 1.o 1.I 1.2 1.2 0.9 1.2 0.1 GDP (US$millions) 1,153 2,383 4,469 6,347 6.0 5.2 4.0 (%of GDP) Agriculture 16.5 13.1 5.9 5.6 2.8 -0.5 1.I Industry 26.3 33.1 31.2 26.9 9.2 5.5 1.4 Manufacturing 15.7 24.7 23.7 19.1 10.4 5.3 0.2 Services 57.2 53.8 62.9 67.6 5.1 6.4 5.9 Householdfinal consumptionexpenditure 71.O 63.7 63.0 68.1 5.4 5.4 3.4 Generalgov'tfinal wnsumotion exoenditure 14.4 12.8 13.1 14.5 3.3 4 8 4.6 Grosscapitalformation 25.4 30.7 25.9 24.5 10.3 4.7 4.6 Exportsof goodsand services 46.8 64.2 62.7 60.0 10.2 5.4 2.3 Importsof goodsandservices 57.6 71.4 64.6 67.1 10.3 5.2 2.2 Grosssavings 14.0 26.3 25.3 19.0 Note: Figuresin italicsare for years other than those specified. 2006 data are preliminary. .. indicatesdata are not available a. Aid data are for 2005. DevelopmentEconomics,Development DataGroup (DECDG). 66  Mauritius Balance of Payments a n d Trade 2000 2006 IGovernance indicators, 2000 and 2006 (US$ millions) Total merchandise exports (fob) 1,523 2,263 Total merchandise imports (cif) 2,158 3,329 Voice and accountability Net trade in goods and services -130 -455 - - - ~ Po .ca sa:: ty Current account baiance -69 -356 as a % of GDP -1.5 -5.6 Regulatoryquality Workers' remittances and Ruleof law compensation of employees (receipts) 177 215 ControlOf COlNPflOtl Reserves, including gold 688 1,391 0 25 50 75 1w ?32006 Central Government Finance Country'spercentile rank(0-100) 32000 n@er values implyberm ratings (99 of GDP) Current revenue (Including grants) 20.2 20.0 Source Kaufmann-Kraay-MaStNzzl World Bank Tax revenue 18.1 18.0 Current expenditure 20.5 21.4 Technology and Infrastructure 2000 2005 Overail surpluddeficit -3.8 -5.3 Paved roads ("hof total) 97.0 100.0 Highest marginal tax rate (%) Fixed line and mobile phone Individual 25 30 subscribers (per 1,000 people) 368 862 Corporate 25 25 High technology exports (% of manufactured exports) 1.0 21.3 External D e b t a n d Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 1,784 2,157 Agricultural land (%of land area) 56 56 Total debt service 336 295 Forest area (% of iand area) 18.7 18.2 Debt relief (HIPC, MDRI) - - Nationally protected areas (% of land area) .. 3.3 Total debt (% of GDP) 39.9 34.0 Freshwater resources per capita (cu. meters) .. 2,252 Total debt service (% of exports) 12.0 6.9 Freshwater withdrawal (% of internal resources) 21.8 Foreign direct investment (net inflow) 13 19 C02 emissions per capita (mt) 2.3 2.6 Portfolio equity (net inflow) -23 -55 GDP per unit of energy use IComposition of total external debt, 2006 (2000 PPP 5 per kg of oil equivalent) '%'I Energy use per capita (kg of oil equivalent) orfd (US$ millions) IBRD Total debt outstanding and disbursed 97 73 Sholt.term 1353 Disbursements 4 0 Principal repayments 20 9 Interest payments 6 1 US$ millions IDA Total debt outstanding and disbursed 14 11 Disbursements 0 0 Private Sector Development 2000 2006 Total debt service 1 1 Time required to start a business (days) - 46 IFC (fiscalyear) Cost to start a business (% of GNI per capita) - 6.0 Total disbursed and outstanding portfolio 6 0 Time required to register property (days) - 210 of which IFC own account 6 0 Disbursements for iFC own account 0 0 Ranked as a major constraint to business Portfoliosaies, prepayments and (% of managers SUNeyedwho agreed) repayments for IFC own account 3 0 Access tolcost of financing 52.7 Business licensing and penits .... 46.8 MlGA Gross exDosure Stock market capitalization (% of GDP) 29.6 56.7 New guarantees - - Bank capital to asset ratio ("h) 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 Withselected targets to achieve between 1990and 2015 (estimate closest to date shown, t/-2years) Goal 1:halve the ratesfor $1 a day poverty and malnutrition 1990 1995 2000 2005 Povertyheadcount ratio at $1 a day (PPP, %of population) Poverty headcountratio at nationalpoverty line ("A of population) Share of income or consumptionto the poorestqunitile ("A) Prevalenceof malnutrition(%of childrenunder5) 14.9 15.0 Goal 2: ensure that children are able to complete primary schooling Primary school enrollment(net,%) 91 93 95 Primary completion rate (%of relevantage group) 64 98 105 97 Secondary school enrollment(gross,%) 55 78 88 Youth literacy rate (%of peopleages 15-24) Goal 3: eliminate gender disparity ineducation and empower women Ratioof girls to boys in primaryand secondary education("A) 101 96 98 Womenemployed in the nonagriculturalsector ("6 of nonagriculturalemployment) 37 36 39 38 Proportion of seats held by women in nationalparliament("A) 7 8 8 17 Goal 4: reduce under-5 mortality by two-thirds Under-5mortalitv rate [Der 1.000) 23 21 18 15 Infant mortality rate (per 1,000 live births) 20 20 16 13 Measles immunization(proportionof one-yearolds immunized,%) 76 89 84 98 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio(modeledestimate, per 100,000 live births) 24 Birthsattended by skilled healthstaff (x of total) 91 98 100 99 Goal 6: halt and beginto reversethe spread of HIV/AIDS and other major diseases Prevalence of HIV (%of populationages 1549) 0.6 Contraceptive prevalence("Aof women ages 15-49) 75 76 Incidenceof tuberculosis(per 100,000 people) 69 67 64 62 Tuberculosiscases detected under DOTS ("A) 34 33 32 Goal 7: halve the proportion of people withoul sustainable access to basic needs Access to an improvedwater source ("A of population) 100 100 Access to improvedsanitationfacilities(% of population) 94 Forest area (%of total land area) 19.2 18.7 18.2 Nationally protectedareas ("A of total landarea) 3.3 C02 emissions (metrictons per capita) 1.4 1.6 2.3 2.6 GDP per unit of energy use (constant2000 PPP$ per kg of oil equivalent) Goal 8: develop a global partnership for development Fixedlineand mobile phone subscribers(per 1,000 people) 55 142 388 862 Internet users (per 1,000 people) 0 2 73 146 Personal computers(per 1,000 people) 4 32 101 162 Youth unemployment ("A of total labor force ages 15-24) 23.8 25.9 iducation indicators (%) Measles immunization (% of 1-year olds) :T indicators (per 1,000 people) iwo. 9004 BOO 7002 6004 500. 300i 100 0 4 1990 1995 2000 2005 2000 2002 2005 +Primary netenroliment ratio +Ratio of gir(sto boys in primary& C Mauritius oSub-SaharanAfrica 3 Fixedt mobiie subscribers secondaryeducation BInternetusers Note: Figures in italicsare for years other than those specified. .. indicatesdata are not available. 1119/07 Development Economics,DevelopmentData Group (DECDG). 68  IBRD 33446 MAURITIUS 57