Documentof The World Bank FOR OFFICIAL USE ONLY Report No. 37703-MU INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF MAURITIUS October 12,2006 Southern Africa Country Department Africa Region This documenthas a restricteddistributionand may be usedby recipients only inthe performance oftheir official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. REPUBLICOFMAURITIUS COUNTRYPARTNERSHIPSTR4TEGY CURRENCY EQUIVALENTS Currency Unit: Mauritius Rupee (MUR) US$1= MUR 32,5 (September 2006) WEIGHTS AND MEASURES Metric System FISCAL YEAR July 1 - June 30 ACRONYMS AND ABBREVIATIONS AAA Analytical and Advisory Activities IFAD InternationalFundfor Agricultural ABP Annual Business Plan Development AFD Agence Franqaise de DCveloppement IFC InternationalFinanceCorporation AfDB African DevelopmentBank IMF InternationalMonetary Fund AIMS Atlantic, IndianOcean, Mediterranean, IOC IndianOcean Commission and the South China Sea MDG MillenniumDevelopmentGoal AIMS SIDS AIMS Small IslandDevelopingStates MFA Multi-fiber Agreement BADEA Arab Bank for EconomicDevelopment MIC Middle IncomeCountry inAfrica MIGA Multilateral Investment Guarantee CAS Country Assistance Strategy Agency CAS CR CAS Completion Report MTEF Medium-TermExpenditureFramework CEM Country EconomicMemorandum NEA New EconomicAgenda COMESA CommonMarketfor Easternand NEAP NationalEnvironmentalAction Plan Southern Africa OPEC Organization o fPetroleumExporting CPE Certificateof PrimaryEducation Countries CPS Country Partnership Strategy PEFA PublicExpenditureand Financial DPL Development PolicyLoan Accountability EASSy East Africa Submarine System PER PublicExpenditureReview EIB European Investment Bank PERL PublicExpenditureReformLoan EPZ ExportProcessingZones PFM PublicFinancialManagement ESW Economic and Sector Work PIU Project ImplementationUnit EU European Union QAG Quality Assurance Group FIAS Foreign InvestmentAdvisory Service SACU SouthernAfrican Customs Union FSAP FinancialSector Assessment Program SADC Southern Africa Development FY FiscalYear Community GDP GrossDomesticProduct SME Small and MediumEnterprise GEF GlobalEnvironment Facility TCF Technical CooperationFacility IBRD InternationalBank for Reconstruction TDS Technology Diffusion Scheme and Development UNDP UnitedNationsDevelopmentProgram ICR ImplementationCompletion Report WBI World Bank Institute ICT Informationand Communication WMA Wastewater ManagementAuthority Technologies ZEP Zones d'Education Prioritaires IDF InstitutionalDevelopmentFund Country Director James Bond Task Team Leader Janet Dooley This CPS was producedby a core CPS team includingLiliaBurunciuc,Janet Dooley, RobertKeyfitz, Luis Alvaro Sanchez, and Harifera Raobelison,under the overall guidance of James Bond.Richard Newfarmer,Sascha Djumena, Ann Rennie, Alain Labeau, Marc Juhel, Ganesh Rasagam, John Donaldson,Maria-TeresaBenito Spinetto, IsabelNeto, and other members o f the Bank Group-wide Mauritius Country Team also made valuable contributionsthroughout the process.Helpful guidance and advice was providedby Tevfik Yaprak (OPCS). Fromthe EuropeanCommission, Hans Rhein and Vikramdityasing Bissoonauthsinggreatly contributedto the developmento f this CPS. TABLE CONTENTS OF Executive Summary ....................................................................................................................................... i I. CountryContextandOutlook ............................................................................................. ..............l WhatDrove the Success of Mauritius' Economy ..................................... 1 TheSituation Today.................................... ............................. 1 Millennium Development Goals .............. .................................... 3 Main Challenges.. ....................................................... ..................................... 3 Medium TermEconomic Outlook............................... ................................. 5 Government'sActions to Date.................................... ............................ 6 11. Government Development Program ............................................. .................................................... 7 Bank and EUAssessment ..................................................................................................................... 9 111. Lessons Learned from Past World Bank Experience .................................................................... 10 IV. Country Partnership Strategy ......................................................................................................... 11 Why should the WorldBank be involved in Mauritius? .................................. .................11 CPS Objective........................ OverallApproach.................. ..................................... CPSprogram............................................ .......................... TheStrategic Framework ..................................... Regional Cooperation Pro ..................................... Guidelinesfor Bank Involvement................................. .................................. 17 Monitoring and Evaluation ......................................... .................................. 17 CPS Consultation Proces V. Risk and Mitigation Measures ......................................................................................................... 18 Credinuorthiness................................................................................................................................. 19 VI. Concluding Remarks ........................................................................................................................ 19 Annexes Annex 1: Results Framework Annex 2: 2002 CAS Completion Report Annex 3: Country Financing Parameters Annex 4: Partner Institutions, Annex 5: Consultationswith Stakeholders CPS Annex A I: Mauritius at a Glance CPS Annex B2: Selected Indicators of Bank Portfolio Performance and Management CPS Annex B3: IBRDProgramSummary CPS Annex B3: IFC and MIGA Program Summary CPS Annex B4: Summary of NonLending Services CPS Annex B6: Key Economic Indicators CPS Annex B7: Key ExposureIndicators CPS Annex B8: OperationsPortfolio CPS Annex B8: Statement of IFC's Held and DisbursedPortfolio Tables Table 1: Long Term Growth Scenarios Table 2: Medium Term Outlook Table 3: Public Debt/GDP Ratiosunder Various Scenarios Table 4: Fiscal Projections Boxes Box 1 MainRecommendationfrom the CAS CompletionReport Box 2 DevelopmentPolicy Loans Foreword This Country Partnership Strategy has beenprepared together with the Government and with the European Commission's 2007-2013 Country Strategy Paper. Thisjoint work i s part o f the harmonizationagenda, following the presentation o f the reform program of the Government of Mauritius. It includes a shared diagnostic and results matrix. The European Commission and the World Bank have also agreedto undertake joint implementation by supporting common programs and carrying out joint evaluations and mid-termreview. EXECUTIVE SUMMARY (i) Since independence in 1968, Mauritius has achieved remarkable economic and social success, based on good governance, exceptional use o f preferentialtrade agreements for its sugar and textile exports, and the development of strong tourism and financial services industries. At independence, the country was poor, with a per capita income of about US$260.Today, per capita income is US$5,250, the second highest inthe Africa region after Seychelles, with good social indicators. (ii) However,whileeconomicperformanceremainsgoodbyinternationalstandards, Mauritius i s facing significant economic and social challenges as it i s forced to transition from dependence on trade preferences to open competition inthe global economy. Average growth has slowed from over 7.5 percent inthe second half o fthe 1980sto 3.5 percent during the past five years. The fiscal deficit i s estimated at 5.4 percent of GDP for FYOY06. And unemployment (currently at 8-10 percent) is on the rise due to a mismatch inlabor skills and labor market rigidities. The country's challenge is now to boost economic growth through higher productivity; develop human capital through education reform to raise skill levels; promote new emerging sectors and move Mauritius to a more knowledge based economy while preserving its long standing commitment to social we1fare, (iii) To address these challenges, the Government of Mauritius has laid out a planto get Mauritius back on a highgrowth path, and protect Mauritians who are being negatively affected by the transition. The reform program presentedinthe budget on June 9,2006 has four pillars: (i)Fiscal Consolidationand ImprovedPublic Sector Efficiency; (ii) Improving Trade Competitiveness; (iii) Improvingthe InvestmentClimate; and (iv) Democratizingthe Economy through participation, social inclusion and sustainability. The new reform program lays out an impressive roadmap inaddressing the challenges ahead by liberalizing the economy, improving the public sector, reforming the tax base, promoting investment,and establishing a new social program. The challenge is to now develop sector programs and implementreform. (iv) Giventhe magnitude ofthe country's economic and social challenges, the Government has asked for increased support from the World Bank, especially interms o f the provision of knowledge, and from the EuropeanUnion(EU), with whom the country has had longstanding trade ties and assistance through the European Development Fund. (v) This FY07-13 Country Partnership Strategy (CPS) is basedon three guiding principles: (i) alignment with the Government Program; (ii) flexibility; and (iii) harmonization. It has beendeveloped inclose collaboration with the Government of Mauritius and the European Union to ensure that it responds to the country's emerging needs, and reflects a coherent approach o f Mauritius' major development partners. This CPS buildson lessons learned from previous Bank experience inMauritius and on the flexible approaches developed elsewhere inthe Bank for Middle-Income Countries. It i s grounded inthe Bank's recognition that it needs to adapt its businessmodelto Mauritius' development agenda, and the Government's recognition that the Bank bringsmuch more than financial resources to the table. i (vi) The CPS takes as a startingpoint the four pillars o f the Government's strategy. Details o f the Bank Group program inMauritius will be set out each year inan Annual BusinessPlan(ABP). The ABP will be developed inparallel with the Government's annual planning and budget processes to ensure that the Bank i s fully instep with Mauritius' development agenda, and with other donors' support. (vii) The CPS objective is to help the Government deal with short-termtrade shocks and the transition to a more competitive and sophisticated economy, while minimizing negative social impacts. It i s built around a results framework outlining a broad list of potential outcomes agreed with the Government of Mauritius and the EU. However, because the CPS sets out a broadprogram, the elements of which will be determined every year through Annual Business Plans, it is not expected that the Bank will contribute to all of the pre-identifiedoutcomes, but only to those inwhich it will be involved. (viii) The Government has indicated its interest ina range of Bank instrumentsto help it implement its reformprogram and achieve its strategic objectives over the next seven years. First, the Governmenthas requested a series o f annual development policy loans (DPLs) to help implementkey facets o f the reformprogram, for an expected IBRDamount of US$30 million each, starting from FY07. This budget support program will be done jointly with other development partners, particularly the EU, France, and the African Development Bank. Second,the Government has requested infrastructure investment loans, for which cofinancing will also be sought, notably with the EIB. Third,the Government would like analytical and advisory work to continue and intensify. To support the Government's research needs, the Bank i s putting inplace a Rapid Response Facility and the EUa Technical CooperationFacility. The two institutions are exploring with Government the possibility of a Joint AAA funding arrangement to create a coherent EU/World Bank framework for technical assistance and analytical work for the Government's reform program. It is hoped that this arrangement will catalyze additional resources for analytical work, and be donejointly with Government. Finally, over the CPS period, the Government will be seeking increased partnerships with the other parts o f the Bank Group (IFC,and MIGA), to assist inthe mobilizationo f private investment. (ix) The strategy faces several key risks, the most important of which are as follows. First, there may be erosion o f support for the reform program inlight o f the difficult transition. The Bank will monitor the situationand adjust the program as necessary. Second,there is a risk that the Government may not borrow from the Bank. To better manage the work program and adjust ifthe Government does or does not borrow, the Bank and Government have agreed to plan and review the work program on an annual basis. Finally, there is a risk that the Bank may not be able to meetthe expectations o f the client, especially as far as the analytical and advisory work is concerned. The demand o f the Mauritian Government for the Bank's services currently exceeds what the Bank can reasonably finance out o f its operational budget. Therefore, this strategy proposes the creation of the joint donor-government AAA fund that can finance analytical work and technical assistanceto meet the government's research and capacity needs. *. 11 Executive Directors may wish to consider the following issues for discussion: 0 Does the CPS and its companion Annual Business Plans, appropriately respond to Mauritius' needs, balancing flexibility with accountability? 0 Predicting results for a MIC program where Bank support will only be determined on an annual basis is a challenge. I s the proposed framework, providing a menu of possible results dependingon what tasks the Bank carries out and doing itjointly with the EU, appropriate? Given the limited Bank resources for Mauritius, is the proposed approach to partner with other donor institutions and to catalyze additional resources, including from the Government, a sensible one? ... 111 Mauritius Country PartnershipStrategy 2007-2013 I. COUNTRYCONTEXTANDOUTLOOK What Drovethe Success of Mauritius' Economy 1. Mauritius is a small island economy inthe Indian Ocean with a population o f 1.2 millionpeople and an income per capita o f US$5,250. It has achieved spectacular economic success since independence in 1968, outperforming most other countries inthe region and middle-income and small island states as well. From 1968-2004, per capita GDP growth averaged 3.8 percent' compared to 2.3 percent for low- and middle-income countries overall, as successive waves o f diversification transformed the country from a monocrop sugar producer to an exporter o f sugar, textiles and clothing, tourism and financial services. Underpinning this success was a well-conceived and executed strategy to create growth and employment through labor-intensive, export-oriented manufacturing, while maintaining social harmony through an elaborate social welfare system. Inthis context, Mauritius has been successfully benefiting from preferential trade regimes in sugar and textiles. 2. Mauritius boasts a vibrant democracy along with well established traditions o f consensus building and maintenance o f social harmony.2 The system o f parliamentary democracy has helpedboost democratic values and political stability, an essential ingredient for steady economic growth. These were well reflected inthe July 2005 election o f a new government as, despite a keenly contested election, some policy continuity has been maintained. Indices for voice and accountability, government effectiveness, regulatory burden and rule o f law are sharply more favorable inMauritius, not only compared to other countries inAfrica3, but also to fast growing emerging Asian countries. The SituationToday 3. Today, Mauritius i s facing a sharp transition from dependence on trade preferences to open competition inthe global economy. Moreover, it i s doing so inan unusually difficult environment because o f a "triple trade shock" caused by the erosion o f trade preferences in sugar and textiles and the rise in oil prices. As a small island economy heavily dependent on sugar and textiles, Mauritius i s among the most vulnerable countries inthe world to current changes inthe world trade regime. The fact that the rest o fthe economy i s less sophisticated than the sectors subject to international competition (EPZ and tourism) does not help. I Average GDP growth for the same period was 6 percent. 2 Mauritius has been a parliamentarydemocracy based on the Westminster system of democracy model since independencein 1968. National and local electionsare held every five years under the supervisiono f an independent Electoral Commission.The political landscapeconsists of numerous politicalparties, both small and large. Mauritius has an independentjudiciary basedon acombinationo f English CommonLaw andthe Napoleonic Code. 3 Mauritius ranks 51 out o f 158 country rankingsinthe 2005 Transparency International Corruption PerceptionIndex, third inthe Africa region after Botswanaand SouthAfrica. 1 4. So far, trade preference erosion has mainly affected the clothing sector. Mauritius i s a relatively high-wage country, and with the end o f the Multi-fiberAgreement (MFA) in January 2005 it is no longer able to compete intraditional market segments. As a result, the export processing zones (EPZ) apparel sector has downsized by over a third inthe past several years. A similar fate likely awaits its sugar sector when the EUbegins implementingprice cuts in2006, leading to a sugar price reduction by 36 percent by 2009. Meanwhile,the rise inoil prices from $24/bblin2002 to more than $70/bbl inearly 2006 has addednearly 4 percent o f GDP to the annual oil import bill. From 2003 to 2005, its terms o f trade deteriorated by nearly 15 percent, equivalent to a massive 10 percent o f GDP. Inaddition, export growth has been depressedfurther by sluggish economic conditions and weak import demand from Europe, which i s Mauritius'main trading partner. 5. The combined effect of these developments has been a slowdown of growth from 5-6 percent inthe late 1990s to 3-4 percent over the last five years. Exports have stagnated inrealterms, and productivity growthhas slowed sharply. In2005, the growth rate slowed further tojust 2.5 percent, as apoor sugar harvest coincidedwith a sharp contractionofthe EPZ. The creation of newjobs has not beenfast enough to prevent an increase in unemployment. Domestic investment has fallen, the current account has deteriorated sharply and foreign exchange reserves have fallen. Fixedinvestment slumpedto an average ofjust 22 percent o f GDP in2001-2005 from as much as 30 percent inthe mid- 1990s; bothpublic and private investment shared inthe retrenchment, except for a brief spike inpublic investmentin2003 associatedwith the Government's New Economic Agenda and construction o f a Cyber Tower and business park including an ICT infrastructure platform. 6. Mauritius' economic success has translated into welfare improvements, but these achievements are under threat. The incidence of absolute poverty i s relatively low, although pockets still prevail in some suburban and coastal regions inMauritius and on the Islando f Rodrigues, and certain groups have remained marginalized. Some 12 percent o f the populationis estimated to bepoor, basedon apoverty benchmark calculated at 50 percent of the median monthly household expenditure. According to the Household Survey (2001-20024), 10.2 percent o f households were earning less than Rs 5000 (about US$154) a month. Significant gender and regional differences exist. The incidence o f poverty i s relatively higher among female-headed households (33.8 percent) than among male headed households (8 percent). On the island of Rodrigues, the poverty rate i s 30.2 percent. The incidence of poverty inrural areas i s more than three times that o f urban areas. 7. Unemployment has become a serious social problem, climbing steadily from below 3 percent in 1991 to nearly 10 percent today. There i s an important social dimensionto unemployment: nearly a third o f the unemployedlive inhouseholds inthe bottom quintile of income distribution, 15 percent live inhouseholds with no other sources o f income, and a high proportion o f unemployed are women (who account for two-thirds of the unemployed inthe EPZ sector). The unemployedalso are disproportionately young; in 2005, the 12-24 year age bracket comprised 16 percent of the active population but 43 percent of the unemployed, and the unemployment rate among youth (under 25 years old) was 26 percent compared to a moderate 6.5 percent for those 25 or older. Most of the unemployed have low educational attainment - 88 percent have not received a high school These are the latest data available; household surveys are carried out every five years. 2 certificate. Meanwhile, other social problems such as crime, domestic violence and HIV/AIDS are on the rise. These issues aside, the overall social picture is quite positive and encouraging, as demonstrated by good progress on the Millennium Development Goals (MDGs). MillenniumDevelopmentGoals 8. Mauritius is one o f the few countries inAfrica that have either met or are highly likely to meet all but one ofthe MillenniumDevelopment Goals (MDGs) by the year 2015. It has accomplished remarkable results over 15 years interms o fthe MDGindicato.rs, with four out o f the eight specific goals already achieved, largely due to the maintenance o f free health care and free primary and secondary education. The overwhelming majority o fthe population has access to safe drinkingwater. Primary education i s universal. The general state o f health o f the population i s good. Life expectancy has increased from 62 years at the time of independence in 1968 to 73 years (2005), and infectious diseases such as malaria, polio, diphtheria, typhoid and cholera have been virtually eradicated. 9. The only MDGthat Mauritiusis unlikely to meet is the reductionby two-thirds in child mortality. Mauritius' infant mortality rate currently stands at 14 deaths per 1,000 births. This is well lower than the rate inmost middle-income countries. Bringingthe rate down from 14 to 6 (below the level the USA has today) i s considered unlikely given Mauritius' level o f income, especially inthe various pockets o f poverty. On the whole, Mauritius' development challenges go well beyond the reaching o f the MDGs and focuses on successfully guiding Mauritius to the next level o f development. Main Challenges 10. Economic challenges.Considering the severity o f the external shocks, the economy's resilience to the removal o f textile preferences and increase inoil prices has so far been impressive. Nevertheless, with its traditional exports no longer globally competitive, Mauritius' most urgent challenge is economic. To stimulate the growth o f new, emerging sectors and facilitate the movement o fresources into them, a nexus o f problems must be addressed. 11. Thefirst task i s to move resources - land, labor and capital - out o f slow-growing, low-productivity sectors into dynamic, new activities where Mauritius has a potential competitive advantage internationally and may be able to achieve rapid productivity growth. This will require integrating the large and growing informal sector back into the formal economy. Inaddition, the present system o f overly complex industrial regulations, fiscal incentives and inflexible labor-market institutions will have to be reformed; they currently are biased toward stasis rather than innovation, toward production for protected domestic markets rather than exports, and toward capital-intensive technologies rather than labor. The problems are especially severe for small enterprises, which lack not only the necessary sophistication, but also access to legal, marketing and other support services. 12. A second element necessary to reignite growth is to upgrade services that are crucial inputs into internationally competitive sectors. Hightelecommunications costs often runtwo to four times higher than comparator countries, hobble the o f f shoring and ICT industries, and discourage essential internet access for businesses trying to sell Mauritianproducts inexport markets. Restrictions on air access keep passenger and 3 freight transportation costs high. Electricity costs, meanwhile, are higher than in comparator countries while the public provider i s accumulating losses. While there is a potential of alternative energy sources (biofuels, including ethanol and bagasse, and wind energy), a clear, sound energy policy i s needed, inparticular as concerns independent power producers. Transportation infrastructure i s also inadequate for a more advanced economy and congestion is becoming increasingly costly interms of direct costs on business, loss of time, use of fuel and impact on the environment. 13. Third, critical lapses in education and barriers to hiringforeign workers have created shortages of people with essential technical and managerial skills. Mauritius i s turning out too few workers and professionals with the world-class skills neededto compete effectively intourism and hotel management, off shoring and ICT businesses and other dynamic global industries. At the heart o f the problems ineducation is the fact that only two-thirds o f children reach secondary school, only 36 percent complete high school and only 14 percent obtain tertiary qualifications compared with about 40 to 60 percent for countries at similar PPP income per capita. 14. Fourth, bureaucratic procedures, redtape and corruption highlight the need for public sector reform. Greater efficiency i s neededat a time when there are exceptional demands for social spending, transitional support and investments ininfrastructure, but public sector debt of around 70 percent' of GDP i s constraining fiscal space. Poor fiscal discipline, misalignment o f budget allocations with national priorities, widespread and costly tax expenditures and poorly targeted subsidy programs all contribute to low overall public-sector efficiency. 15. Other challenges. Apart from the need for economic reform, the country also faces social challenges. Mauritius' developmental success is built on social cohesion. With the rise ofunemployment and educational inequalities the restructuringof the economy may risk increasing the poverty among certain segments of the population, unless appropriate and well targeted social safety nets are put inplace. 16. Inthe health sector, the overall indicators are good. But Mauritiushasthe second highest prevalence rate of diabetes inthe world, and HIV/AIDS incidence, though relatively low, has beenrising, particularly among drugusers. It i s estimated that there are some 18,000 injecting drug users inMauritius, and that some 13 percent o f these are infected with HIV/AIDS virus. Without sustained and determinedaction now HIVIAIDS could soar within a decade as has beenobserved inother countries with similar profiles. 17. Environmental challenges are also important. Tourism has provedto be a reliable pillar of growth, but the country's goals of nearly tripling arrivals to two millionover the next decade and constructing 18,000 new hotel rooms will call for careful environmental management. A strategy is neededfor waste management and protectiono f ocean resources. The environmental implications of withdrawing significant amounts o f land from sugar cultivation also needto be addressed. As a small island, Mauritius i s also exposed to climate change, cyclones, and rising sea levels, requiring disaster management and early warning systems. Mauritius also faces a risk of oil spills, which would threaten such environmental resources as coral reefs, sea grass beds and beaches, and thus affect tourism. SIncludingparastataldebt. 4 18. Gender issues have been brought to the fore by downsizing inthe textiles and clothing industries, where layoffs have predominantly affected women, whose unemployment rate far exceeds men's. MediumTerm EconomicOutlook 19. Mauritius' long term prospects are good. Over the past quarter century the country has beena star performer and the recent resilience inthe face o f a difficult structural transition and a sharp trade shock has also been impressive. Strong institutions and a pragmatic approach to economic management provide a solid platform for reforms which the Government is introducing. While this is a time o f considerable uncertainty, there is no reason to anticipate a radical break from past trends. Long term (20 year) scenarios prepared for the Country Economic Memorandum indicated that growth inthe range o f 4-6 percent annually should be feasible (Table 1). However, moving the outcome toward the top o f the range would entail a significant reform effort in a range o f areas. Table 1-LongTerm Growth Scenarios Low Medium High output 3.2 4.8 6.5 EmDlovment 0.6 1.2 2.1 Source: Mauritius CEM 20. Inthe mediumterm, the expectationis that growth will recover progressively from recent levels toward that range (Table 2). O f course, the speed o f the recovery depends on the quality and credibility o fthe Government's reform program and the assumption underlyingthe outlook i s that it will continue and have a significant impact. Table 2 anticipates an acceleration inGDP growth from 3.5 percent inFY 05/06 to an average o f 5.3 percent inFY 10/11-12/13, while inflation, though relatively highas a result o f exchange rate depreciation, remains stable. Both savings and investment rates trend higher, with private investment rising by two percentage points o f GDP. The current account deficit remains around 4 percent o f GDP. The outlook assumes the successful implementation and acceptance o f structural reforms, although it i s somewhat more pessimistic than the Government's own projections. Table 2: MediumTerm Outlook Avg lOil1- 05/06 06/07 07/08 08/09 09/10 12/13 Real GDP growth (%) 3.5 3.5 3.6 3.8 4.3 5.3 Inflation (%) 5.1 8.5 6 6 5.5 4.5 Gross DomesticInvestmentiGDP(%) 23.7 26.6 24.5 24.0 24.3 26.5 -Private(%) 15.0 15.8 16.1 16.4 16.5 18.2 Gross domestic savings (% GDP) 14.8 18.5 19.3 20.1 21.8 24.5 Current account balance (% GDP) -5.2 -7.0 -4.8 -3.8 -2.4 -2.2 Government deficit (% GDP) -5.4 -4.7 -4.2 -4.1 -3.5 -3.O Government debt (% GDP) `I 59.0 58.5 57.9 57.4 55.8 51.9 Source. World Bank Local Data Base, September 2006. I/ Excludesparastatals. 5 21. The issue of fiscal sustainability i s of critical importance. Consolidated central government debt is currently around 59 percent of GDP and total public sector debt (including parastatals) i s around 70 percent o f GDP, with the assumption that it will trend down. While that level of debt does not threaten an imminent melt-down, it does expose the economy to downside risks. The IMF6assesses mediumterm vulnerability by . estimating the impact o f various shocks on 2007/08 debt/GDP (Table 3). The initial conditions intheir scenarios are near to current values. The scenarios begin with a 2004105 debt o f 71.8 percent of GDP. Under the baseline assumption o f a moderate fiscal consolidation, the debt to GDP ratio falls to 63.9 percent while with no adjustment it rises slightly to 75.7 percent. But with adverse developments in growth and world interest rates, the no-adjustment situation quicltly gets out o f control and debt rises to 112.3 percent of GDP.' By contrast, with adjustment the outcome is a still manageable 75.7 percent o f GDP. Table 3 -PublicDebt/GDPRatiosUnder Various Scenarios Baseline --Low growth Low growth and high interest rates No adjustment - Low growth 86.6 112.3 Source: Sacerdoti et a12005. Note: initial debt level is 71.8%ofGDP in 2004/05 Government's Actions to Date 22. Since the publication o f the long-term prospective study, Vision 2020, inthe mid- 1990s,there has beena widespread acceptance that Mauritius' long term development depends on moving away from low-wage, labor-intensive commodities exports to more skilled, high value-added, knowledge-based services. The country has taken many steps towards realizingthis vision, including restructuring the sugar and textiles sectors; establishing an offshore financial sector utilizing a network o f double tax treaties; promoting informationtechnology and other priority sectors through various incentive schemes; designation o f a Cyber Park and constructiono f a publicly funded, Rs 1.5 billion, state of the art, Cyber Tower with fiber optic wiring; modernizingthe port and establishing a Freeport which provides a duty-free logistics, distribution and marketinghub; strengthening and deregulating telecommunications; and more. Many firms have upgraded their technology, some with assistance from the Government's technology diffusion scheme (TDS). Signs of a fledgling new economy taking hold offer encouraging support for the overall concept. But the new economy, comprising activities such as seafood, information technology and businessprocess outsourcing, remains small interms o f output, exports and employment. 6Sacerdoti, Emilio, Gama1El-Masry, PadamjaKhandelwal and Yudong Yao 2005, Mauritius: Challengesof sustained growth, (Washington, IMF) 7The shocks modeledare atwo standard deviationfall in growth and atwo standard deviation rise in interest rates for a two year period. 6 23. Today there is broad acceptance o f the need for deep structural reform and an awareness that speeding up transformation will require more thanjust tweaking incentives at the margina8 11. GOVERNMENT DEVELOPMENT PROGRAM 24. The Government's program entails a delicate balance o f economic and political factors for which it expects to harness broad support. But while the program lays out long termissues, details still needto be spelled out. (i) Fiscal Consolidation and Improved Public Sector Efficiency 25. Fiscal consolidation i s based on explicit rules intended to put deficits and debt on a downward path by: (i) limitinggovernment borrowing to the financing o fthe capital budget; and (ii) reducing the ratio o f net public debt to GDP. Projections from the Ministry of Finance anticipate revenue stabilizing at around 19percent o f GDP, accompanied by a decline inthe share o f expenditure from 25.4 and a narrowing o f the overall central government budget deficit. Table 4 :Fiscal Projections (as % o f GDP) Avg 10111- 05/06 06/07 07/08 08109 09110 12/13 Current revenues 19.9 20.1 19.3 19.1 19.3 19.4 Current expenditures 22.1 21.5 20.1 19.8 19.2 18.8 Capitalexpenditures and net lending 3.2 3.4 3.4 3.5 3.5 3.6 Budget balance -5.4 -4.7 -4.2 -4.1 -3.5 -3.0 Primary balance -0.6 -0.1 -0.2 -0.2 0.2 0.0 Government debt " 59.0 58.5 57.9 57.4 55.8 51.9 Source: WorldBank Local Data Base, September 2006. `I Excludesparastatals. 26. The Government's Medium-Term ExpenditureFramework (MTEF), supported by Sector Ministry Support Teams set up at the Ministry o f Finance and Economic Development, will underpin this consolidation, anchoring annual budgets within an aggregate multi-year framework and enabling the Government to set priorities and resolve budgetary trade-offs. Operationalization o f the Mauritius Revenue Authority and a reduction intax expenditures and discretionary ministerial powers to remit taxes and duties are expected to improve revenue collections. At the same time, proposed modifications to the structure o fdirect taxes will streamline incentives and increase equity. The expectation i s that the new tax structure will better reward effort, innovation and entrepreneurship, increase transparency, and encourage investment andjob creation, especially by small and mediumenterprises (SMEs). 8 A preliminarycommunications assessment found that there was an overwhelmingawareness of the economic challengesMauritiusis facing and agreementthat actionneeds to be taken; however, as with all complex reformtransitions, there is not a full agreement amongall stakeholders on how to minimizethe impact ofthe transitionon the population. 7 27. Onthe expenditure side, policy measures focus on eliminating waste and increasing efficiency. More careful monitoring of capital projects i s intendedto improve the quality o f public investments and discourage unjustified cost overruns. Closer scrutiny o f recurrent expenditures will reduce waste and improve efficiency. (ii) Improving trade competitiveness 28. The centerpiece o f the effort to improve trade competitiveness i s an overhaul of the incentive framework to reduce distortions and biases. A three-year programto liberalize tariffs and turn Mauritius into a duty-free island is aimed at leveling the playing field betweenproducing for the domestic and export markets. Inthe first year, the maximum tariff will be lowered from 65 percent to 30 percent, and the number o f bands reducedfrom 7 to three. Subsequently, revenues will be brought down to 0.1 percent o f GDP by 2008- 2009 from 1 percent before reforms. Inaddition, the incentive regimes for EPZ and non- EPZ firms will be unified; among other things, that will include setting all corporate taxes at a neutral 15 percent (also to be phasedinover three years). 29. A secondphase of the programwill tackle the high cost of services. The cost of International Private Leased Circuits will be reduced by 25 percent immediately, while increasing competition and strengthening the telecommunications regulator (ICTA) will promote more cost-effective supply inthe future. Other measures call for liberalizing air access, developing ports infrastructure, increasing training and promotional efforts for the hospitality and tourism sector, and strengthening financial institutions. 30. Restoring global competitiveness also requires modernizing and restructuring existing sectors (sugar and textiles and clothing) and, where a role for the public sector i s indicated, providing public support for the development o f new activities such as ICT, financial services, specialty tourism, seafood and land-based ocean activities. Achieving these objectives will entail adequateplanning and preparation o f long term development plans and sectoral strategies as well as enhancedaccess to financial services. (iii) Improving the Investment Climate 3 1, A range of reforms is proposed to make the regulatory environment more transparent and less burdensome. The plethora o f incentive schemes will be streamlined, development and building permits merged, and the system administered on the basis o f ex- post verification rather than ex-ante approval, with the goal o f reducing the time to start a businessto three days (from 46 in2005). Overhauling the current tripartite wage-setting machinery and easing restrictions on redeploying workers will increase labor market flexibility, while liberalizationo f the regime for issuing work permitswill enable employers to hireworkers with neededskills. Most importantly, the Board o f Investment will be converted from an administrator to a facilitator and promoter o f investment.The aimis to secure apositionfor Mauritius inthe top ten most investment-and business- friendly locations inthe world (according to the Doing Business survey). (iv) Democratizing the economy throughparticipation, social inclusion and sustainability 32. The Government announced an Empowerment Programto ease the burdenof unemployment, enhancejob prospects, reduce labor and skills mismatches and promote 8 smallandmediumenterprise (SME) development. A major plank ofthe programwill provide wage subsidies for on-the-job training or retraining for 20,000 unemployed and redeployed workers over the next five years. There also will be special programs for women who have beenparticularly affected by the downsizing o f the textile sector. Other components will make land available for small entrepreneurs, provide social housing and increase financial and technical support for SMEs. 33. Education and training will be key components of the Program, designed bothto broaden workers' access to jobs and increasethe skills base available to employers. Two priority areas for skills development and upgrading are the tourism sector and ICT. The Government also will support upgrading and training o f teachers and supervisory personnel, review the educational curriculum to encourage creativity and cognitive thinking, revitalize the Zones d'Education Prioritaires (ZEP) providing special support to pupils attending low performingprimary schools, and develop a national strategy for tertiary education to enhance competitiveness inthe global economy. 34. To ensure sustainability of social spending, social subsidy programs will be reconfigured to target income support to the needy, and the pension age will be progressively raised from 60 currently to 65 years. Another objective i s to ensure access to high quality health care for all, with special attention to vector borne disease (Chikungunya), HIV/AIDS which has beenon an upward trend among drug users, and diabetes, as Mauritius has one of the world's highest prevalence rates. Bank and EUAssessment 35. Despite the formidable nature of the challenges ahead, the government i s enacting its program with considerable and well known assets - a substantial tourism related infrastructure and attractive beaches, amulti-lingual and moderately well educatedwork force, a strong system o f governance, and a culture o f democracy. No less important is the credibility o f its policy framework, a credibility carefully constructed over several political administrations and recognized around the world. Puttingthese assets to work inways that will propel the country back to a higher growth rate requires tackling lingering policy problems with a decisive and coherent national strategy that enjoys broad support among senior policy makers and the society at large. A dialogue with all stakeholders is an important element for its success. 36. The authorities are fully aware of Mauritius's major economic challenges and their reformplan is entirely homegrown. Realizing that business-as-usual i s not an option given the immediate threats to macro-stability, the Government's boldbudget represents a break from the system that worked well inthe past but i s no longer viable. It seeks to move away from "an outdated socio-economic model ... a non-functional systemwhich i s very complicated, hardto understand and open to ab~se."~and accepts that a failure to adapt to globalization has slowed growth and contributed to a deterioration inmacroeconomic performance. It charts a new course toward more market-driven, transparent and rules- based economic management basedon clear rules and guidelines to replace the current regime o f special incentives and interventions. 9 Securing the Transition: From Trade Preferences to Global Competition, Government o f Mauritius, Budget Speech 2006-2007, June 2006. 9 37. While the World Bank, IMF, EUand other donors fully support the direction of this initiative, several structural reform measures outlined inthe 2006/07 budget mustbe morefully spelled out, includingcosting and prioritizing over the mediumand longterm. Notably, a more detailed program addressing needs ineducation, the financial sector, infrastructure, energy, institutional development, parastatal-sector reform, price liberalization, air access and telecommunications regulationneeds to be developed.lo 38. The 2006 budgetis the first step inan ambitious programthat entails significant political challenges. Its ability to move forward with the reform program over the medium and long term will depend on its ability to get buy-in both within Government as well as from the broader population. Additionally, the Government will have to address the challenges of implementationby overcoming capacity and organizationalconstraints within Government. 39. To fund the program, the Government is rightly seeking the additional internaland external resources by improving fiscal management, proactively seekingmore investment, getting the diaspora engaged, and seeking higher levels o f support from the international community, including greater coherence among development partner programs. The speed and scope of the reform efforts will dependto a certain extent on the Government's ability to mobilize necessary funding and prioritize and sequence investmentsover the medium- term. 111. LESSONS LEARNED PASTWORLDBANKEXPERIENCE FROM 40. Inpreparation ofthis Country Partnership Strategy, the Bank carriedout a Completion Report of the previous FY02-04CAS (Annex 2). Several important lessons from this analysis have been factored into the design of this Strategy. Interms o f overall approach, the alignment o f the Bank's assistance to the Government's programworked well as the Bank's activities were strategically relevant and ledto results. However, predetermining a multiyear program did not work well, as the Bank's work over the CAS period diverged from what was planned. Inparticular, the Government did not borrow two out of the three expected loans, andthe analytical work that was carried out differedfrom what had beenplanned. Box 1: Main Recommendationsfrom the CAS CompletionReport 1. The Bank should continueto align its programto the Government's. 2. It shoulduse a more flexible approach in its work with Mauritiusthrough ajoint Annual Business Planningprocess, 3. The Results Framework should be realistic and linked to areas where the Bank can have impact. 4. Additional resources for AAA work should be leveraged over and above the Bank's budget. 5. Greater emphasis should be given on disseminationo f findings of analytical work and collaborationwith other donors. 6. All arms o f the World Bank group shouldsupport an integratedprogram. 7. A one-person liaison office in Port Louis shouldbe establishedto maintain regular dialogue and outreach efforts. 10A more detailed assessment outliningthe main reform challenges will be provided inthe documentation 10 41. O n the lending program, an important lesson from the last CAS was that the Government found the transaction costs o f borrowing from the Bank too high.Since the planned lending did not transpire, the CAS Completion Report recommends allowing flexibility for adjustment or investment lending, and having a fall back position ifno lendingoccurs. Although the Bank did not carry out all the planned operations, the activities that the Bank did finance led to results, contributing to the conclusion that Mauritius i s a country where donor interventions can lead to development impact. 42. Over the CAS period, the Government expressed particular interest inthe Bank's analytical and advisory assistance (AAA) and access to worldwide experience. According to the various evaluations, Bank AAA for Mauritius was generally considered of high quality and informed Government policy making. However, the limited budget for Mauritius posed constraints in always meetingthe Government's needs ina timely manner. For example, greater emphasis could have been placed on dissemination and follow-up, which was constrained by the limited budget for Mauritius. Moreover, the AAA work diverged from the CAS program as the Bank tried to be responsive to the Government's needs. The assessment o f the last CAS therefore suggested that ajointly agreed list o f prioritized activities prepared on an annual basis with participation o f line ministries would increase clarity on Bank support to Mauritius. Inaddition, it i s recommendedto leverage Bank financing o f AAA - for example, through a cost sharing arrangement with the Government. Another possibility would be for the Government to use its own resources for project preparation incases o f lending, which would free up the budget for AAA. 43. On the monitoring o f program results, the last CAS policy matrix focused on higher order goals o f the Government's reform program, to which Bank assistance was aligned but over which the Bank's interventions would have only an indirect influence. Forecasting expected results o f the Bank's support remains a challenge, however, as its program will only be determined on an annual basis. 44. Finally, coordination with other donors was good inspecific sectors, but less effective at a strategic level. Inaddition, more could be done to leverage the limited IBRD program through the other arms o f the Bank Group - IFC, FIAS, MIGA, GEF and WBI. Partnerships and harmonization, therefore, could be enhanced, and form an important part o f the new strategy. 45. Based on these lessons and inline with recommendations from the Bank's Middle Income Country Task Force, this CPS sets out a new approach for the Bank's engagement inMauritius as describedbelow. IV. COUNTRY PARTNERSHIP STRATEGY Why should the World Bank be involvedin Mauritius? 46. Mauritius has demonstrated over the past decades a capacity to address challenges, profit from opportunities, and increase the welfare of its population even inan environment where institutions are imperfect. Today, as the country embarks on implementation o f its new boldprogram, the Government expects assistance from the for the Development Policy Loan series. 11 Bank to help design and implement reforms using experience and best expertise from around the world. 47. The Bank's involvement inMauritius is consistent with its comparative advantage as a knowledge institution in line with the Middle Income Country (MIC) approach. Additionally, involvement with middle income clients like Mauritius affords the Bank the opportunity to enrich its knowledge on how to help more advanced clients to continue improving the welfare o f their people and to adjust to new global world realities. CPS Objective 48. The objective o f this Country Partnership Strategy i s to help Government deal with short-term trade shocks and the transition to a more competitive and sophisticated economy, while minimizing negative social impacts. Overall Approach 49. The proposed approach is a flexible strategy with annual adjustments to the work program. It i s aligned with the EU assistance strategy. The three main principles o f the CPS approach are: (i)alignment with the Government program; (ii) flexibility; and (iii) harmonization with other donors. 50. Alignment with the Governmentprogram. The CPS builds on the Government program, which outlines a broad vision for the long term and includes well defined short- term actions. The government is still operationalizing its vision over the medium-to-longer term; it plans to take into account results on the ground and other relevant developments in this process. The CPS defines a strategic framework that is consistent withthe Government strategy, and lays out the broad outcomes the Bank and the EUintendto support. 5 1. Flexibility. The design o f the CPS allows for flexibility to assure responsiveness to the Government's demands and to take account o f evolving circumstances. The objective i s for the Bank to be able to provide the assistance that is needed when it is needed by the client. At the core o f the flexible approach are annual business plans preparedjointly with the government and synchronized with the Government's budget and decision-making processes. The annual discussions will include a review o f the effectiveness o f the Bank's program and whether it i s reaching the agreed results. The business plan discussions will take place at the beginning o f each calendar year (January-February), right before the start of the Government's and Bank's budget cycles. 52. Donor harmonization. Inline with the Government's request and consistent with the Paris Declaration on harmonization, the Bank assistance to Mauritius is aligned with that o f other donors to provide a package o f coordinated support around a common program. Specifically, this CPS includes a common EU-World Bank diagnostic o f the political, economic and social situation, a common assessment o f the government's program, and a common results matrix, thus providing a platform for joint work on CPS program implementation and monitoring o f results. The CPS is designed to facilitate maximum harmonization with other donors, such as Agence Franqaise de Developpement 12 (AFD), African Development Bank (AfDB) andUnitedNations Development Program' '. This includes efforts to designand implementjoint operations (budget support, investment) and setting a mechanism with donor and government contributions (possibly through a trust fund arrangement) to finance analytical and technical assistance work. CPS Program 53. The Government has signaled its strong interest inthe Bank's analytical and advisory services and policy advice on key strategic issues. The specific services designed to respond to Government's knowledge needs will be agreedupon as part o f the annual business-planning process. The Bank and the EUintendto set a mechanism for joint researchthrough a A A A fund to which the government may contribute its own resources. This fund will finance analytical and technical assistance work involving local research institutions and universities. This approach will allow for a greater alignment with the government needs and better transfer of knowledge. 54. The Government has indicated that it plans to borrow US$30 million a year for a series of development policy loans (DPLs). This will be provided as part o f a financing package supported by the EU, AFD, AfDB, and possibly other donors. The government also i s preparedto borrow for investment operations, but it would like these to be supplementedwith concessional or grant money from other donors. Hence, the Bank's investment loans are likely to be part of broader financing packages involving the European Investment Bank (EIB), AfDB and other financiers. The IFC is expected to be a player in supporting investments with particular focus on tourism, financial markets and ICT sectors. The IBRD annual lending volume for FY07-10 i s not expected to exceed US$60 million.12 The IBRD annual lending volume for the period FYI1-13 will be determined by the Bank during FY10. 55, Other instruments such as Global Environment Facility (GEF) and Institutional Development Facility grants and WBI training programs will be employed to deal with the environmental and capacity building challenges. Mauritius has requested to be includedon the WBI list of focus countries as part of its efforts to develop aregionalknowledge hubto serve the Indian Ocean Rim and the network o f Small and Vulnerable States, possibly with EU support. FIAS and MIGA will support the government's efforts to increase investments. Finally, Mauritius has signaled its strong interest inparticipating inregional programs. I1Abu DhabiFund, BADEA, IFAD andthe OPEC Fundhave indicated agreementto be part of the coordinatedexternal support and India andChina havealso beenrequestedby Government to fit their support into the same framework. 12For the purposeofthe Bank's internalrisk exposure analysis it is importantto note that ifthere is a demand for higher levels of finding, the loanpackage would include a creditworthiness review confirming that finding levels remain within prudent levels. 13 1Box 2: Development Policy Loans I The Bank's budget support consists of a series of Development Policy Loans (DPLs), startingwith a US30 million Trade and CompetitivenessDPL in FY07. The loans provide a framework among Government and major developmentpartners (EU,France, and African Development Bank) to supportthe Government's objective to boost growth and remaincompetitive while protectingthe vulnerable, by implementing structuralreforms inpublic sector management, industrial regulation, labor relationsand provision o f social safety nets. The first DPL will support a broad array of strategicallyimportant measures including: Fiscal consolidation including allocation of budgets accordingto preset ceilings, reducingtariff protectionas a first step toward makingMauritius a duty-free island, and reconfiguring subsidies on rice and flour to take the form o f increasedincome support to the needy; Improvingthe investmentclimateby streamliningbusiness regulations, including shifting from ex ante approvalto ex post verification of licenserequirementsfor startinga business; and Reformingthe labor market by rationalizingthe wage setting mechanismand easing restrictions on work and residencypermits. The Strategic Framework of BankEngagement 56. The Bank's assistance will be structured around the Government's four reform pillars: (i)fiscal consolidation and improvingpublic-sector efficiency; (ii) improving trade competitiveness; (iii) improving the investment climate; and (iv) democratizingthe economy through participation, social inclusion and sustainability. This assistance will be provided in an integrated manner by the different arms of the World Bank Group, and will be harmonized with other donors as discussedbelow. The results matrix inAnnex 1 outlines the Government's long-term objectives and the outcomes to which the Bank and EUmay contribute. The specific outcomes and impact of the Bank program will depend on the work program that is determinedannually. 57. Fiscal consolidationand improvingpublic sector efficiency. The Bank, inclose cooperation with the EU, AFD and other donors, will support the government's goal to reducepublic-sector debt over the long term as a key element of sound macroeconomic management. The assistance under this pillar will target improvements inthe quality and effectiveness o f public expenditures by making the MTEF operational and enhancing debt- management policies and capacity. The Bank also may support improvements of the tax system. Another potential area i s reform o f the state-owned enterprise sector to increase its efficiency and reduce the fiscal risks.Development Policy Loans will be a key tool for policy dialogue inthese areas. Inaddition, a series o f AAA products will provide the neededanalytical underpinning. A planned programmatic Public Expenditure Review (PER), possibly done jointly with the AFD, will play a key role inthis regard by focusing on sector strategies and their implications for public finance. Inaddition, the Government has requested a Public Expenditure and FinancialAccountability (PEFA) assessment for Mauritius to be financed by the EC. This assessment should contribute to defining areas for further public financial management reforms with the Government and contribute to the efforts to make public spending more effective. 58. Improving trade competitiveness.Assistance under this pillar will support the government's goal o f increasing the country's trade competitiveness by removing a series 14 o f constraints such as the anti-export bias o f the current institutional set-up, the limited use o f regional trade opportunities, the high cost o f logistics, and rigidities that prevent rapid adjustment to the external shocks. The reform efforts under this pillar will build on the Country Economic Memorandum (CEM) and Aid-for-Trade work carried out by Bank in FY06. The outcomes that the CPS seeks to influence include the creation o f a level playing field for all actors inthe economy, an increase inregional trade, and reduced costs o f supporting logistics -transportation and telecommunications. Government's efforts to restructure the sugar industry and to improve the viability o f the energy sector will continue receiving attention, especially from the EU side. A financial sector assessment (FSAP) to be conductedjointly by the Bank and the IMF will support the government's intention to deepen the financial sector and improve the effectiveness o f financial services as a key means of improving competitiveness and integrating small and medium enterprises into the formal economy. This will enable IFC to support second tier banks, thus contributing to deepening o f the financial sector, provided that IFC pricing i s attractive enough inthe context o f Mauritius' competitive financial market. 59. While the DPL series and AAA will bethe main instrumentsto support policy dialogue, possible investment projects will support infrastructure upgrades needed for a more advanced and competitive economy. For example, Mauritius has expressed interest in joining the East Africa Submarine System (EASSy), a regional telecommunications project which will finance a fiber optic cable connecting the east cost o f Africa to the rest of the world (See paragraph 64). Other potential infrastructure projects include airport and port expansion, and measures to reduce road congestion and travel time. IFC investments will complement the Bank's and other donors' work on infrastructure and energy; these investments may include support for setting up land markets through auctions and assistance infinding strategic partnerships and promoting Private Public Partnerships in the ports, airports and the communications sector, as well as help catalyzing foreign direct investment inkey industrial and financial sectors. 60. Improvingthe investmentclimate.The CPS will support the government's stated intention to join the ranks o f the most business-friendly countries inthe world. In particular, it will support policy changes initiated by the Government inits regulatory framework, which currently limits the mobility o f resources and attraction o f additional resources. Specific changes include measures to eliminate labor market rigidities and improve business and land regulations. As with the trade competitiveness pillar, the joint donor budget-support package and selective AAA will support the objectives o f this pillar. InFY2007 the Bank will finance an UrbanLand PolicyNote, and will continue providing advice on the investment climate through IFC and FIAS.Analytical work on the tourist sector under the programmatic PER will provide the underpinning for the tourist sector expansion with possible investment projects supported by IFC. MIGA will help improve investor confidence through the provision o f political risk guarantees as needed. MIGA also may help promote private sector investment inthe water and wastewater sectors at the sub-sovereign level. 61. Democratizingthe economy. Important objectives o fthe Mauritius government are to make the adjustment o f the economy to the triple trade shocks as painless as possible for its people, to make sure that the pain i s shared equally, and to offer everyone equal opportunities to participate inthe new, more competitive economy. Under this pillar, the Bank, the EU and other donors may help with improving the effectiveness o f social 15 assistance in reaching the needy; promoting the inclusion o f vulnerable groups o f the population; developing an education system that suppliesthe skills needed inthe new economy; and protecting the environment. Bank assistance will build on work undertaken under the previous CAS on education, social assistance and pensions. The programmatic PER (FY07-09) will look into education and retraining needs. A joint World Bank-UNDP effort, supported by an IDF grant, will seek to help the Government deal with the rising threat of HIVIAIDS. Inenvironment, the Bank i s likely to continue supporting improvements inwastewater management and other environmental programs, including through the GEF, to protect the environment as tourism and other economic activities expand. 62. The World Bank and AfDB will continue assisting the government's efforts to communicate effectively with the citizenry on the objectives and content o f the reform program. This may be the area where the greatest efforts are requiredto mitigate the implementation risks. Regional Cooperation Programs 63. With a view to achieving sustainable economic development and full participation inthe new international economy, Mauritiushas beenproactive inpromoting its interests at various bilateral, regional and multilateral levels. It also has championed a number of initiatives to support the cause of developing states, including Small Island Developing States (SIDS), and to strengthen regional cooperation and integration. The EUis actively supporting the regional agenda by providing funds at the regional level to promote economic integration, including the sustainable management o f natural resources. The EU further intendsto signEconomic Partnership agreementswith boththe Eastern and Southern Africa and Southern Africa Development Community (SADC) regions by 2008. 64. The Government of Mauritius is particularly interestedinparticipatinginregional initiatives. It would like to be linked to the East Africa Submarine System (EASSy) fiber optic submarine cable, inwhich the Bank Group has a coordinating role. This would lower telecommunications costs and increase interconnectivity with the rest o f the world -a particularly important goal ifMauritius is to become an ICT hub. The Bank also has been askedto oversee a study of the feasibility o f setting up a Center o f Excellence inMauritius to provide public sector training to African Government officials. 65. At the same time, the Bank is ramping up its engagement with the Indian Ocean Commission (IOC), and i s indiscussions on the possibility of a regionalwork programthat also would benefit Mauritius. Topics include regional waste and energy management, follow-up on the oil spill contingency plan project, follow-up o f regional network o f coral reefs, promotion o f the recommendations of the World Bank-Commonwealth Secretariat Task Force on Small States and the role o f the IOC inthe (i) Small States Forum 2006 - 2007 and (ii) project to promote sustainable development inthe Atlantic, IndianOcean, the Mediterranean, and the South China Sea (AIMS) Small IslandDeveloping States (AIMS SIDS). The Bank also is discussing technical assistanceto support the IOC ontourism, regional fisheries management, trade, ICT, regional maritime transport, hazard risk management and illegal trade control. 16 Guidelinesfor Bank Involvement 66. The flexible nature o f the CPS creates a needfor guidelines as to when and where the Bank should be engaged inMauritius. Basedon Mauritius' financial circumstances and its defensible development agenda, the first basis for any engagement must be demand by Mauritius, which will also ensure that activities undertakenare a country priority. However, on its side, the Bank must ensure that its work in Mauritius serves the institution's broader goals and meets institutional standards. For this purpose, management will regularly monitor both reforms and the environment into which Bank resources are placed. 67. The Bank will ensure that the environment into which Bank resources are placed is adequate interms o f policy direction and governance. This will require regular monitoring o f Mauritius' overall reform efforts, particularly progress in areas such as macroeconomic and fiscal management, and the various aspectsthat could contribute to greater competitiveness, as evidenced by actions inthese areas as outlined above. Outcomes inthe four pillars of the Government reform program will be monitored through the CPS results matrix and the DPL as outlined below. 68. Under the unlikelyscenario o f a major departure from sound macroeconomic policies, the Bank would respond by reducing lending volumes, and DPLs will not be available ina context where the macroeconomic framework is unsatisfactory, including, for example, were public debt to rise to a level approaching 80 percent of GDP. Any significant changes in the proposed strategy would be reflected inthe CPS Progress Report. Monitoring and Evaluation 69. The results matrix presentedinthis CPS is ajoint EU-World Bankmonitoring tool. It includes outcome indicators for both EUand World Bank programs. Becausethe CPS sets out a flexible, broad program, the elements o f which will be determined every year through Annual Business Plans, the CPS results framework includes a broad list of potential outcomes. It i s not expected that the Bank will contribute to all o f these outcomes, but only to those inwhich it will be involved. Inaddition, given that this is a joint EU-WorldBank matrix, it includes outcomes inareas o f EUinvolvement that may not be part of the Bank program. It also i s important to note that the Bank may contribute to outcomes that are not reflected inthe results matrix, if any are added to the program as a resultof the annual business planning exercise. Therefore the results matrix will be further refinedas the program i s developed as part of the Annual Business Planning exercise. 70. Inaddition to the results matrix, the CPS programwill bemonitoredand evaluated through two instruments,which have beenharmonized with other donors and the Government. First, the annual businessplan discussions will be usedto evaluate the results of the Bank's program and assess whether it i s meeting its broad development objectives under the four CPS pillars. The Annual Business Plans also will provide an opportunity to update and fine-tunethe results framework inline with the agreed assistance program for each particular year. This exercise will be carried out jointly with the EU. The changes will be reflectedinthe updated results matrix as part ofthe regular CPS progress reports (once in2-3 years). This approach to monitoring and evaluation differs from the traditional approach o f a pre-determinedprogram with pre-definedobjectives. It 17 i s an approach that fits best a flexible program designed to respond to the needs o f middle income countries. 71. Second,thejoint donor budget support program includes a common results framework which will be used to monitor the overall Government program. The Bank will be supporting the implementation of this program through the DPL series. This framework also will be usedto stimulate communication among the different players on results. 72. Should Bank assistance become limited to technical assistance and AAA if Mauritius determines that Bank lendingi s not sufficiently competitive with other sources o f finance available in the market or from other institutions, program monitoring would need to be tailored to the impact o f increasedknowledge and policy advice. The Bank should thenbe evaluated on its effectiveness inresponding quickly to requests for technical assistance which may occur. CPS ConsultationProcess 73. Consultations with Government and non-Government actors were held to better inform this CPS on the challenges Mauritius i s facing and their impact on the Mauritian people. As mentioned previously, the CPS was preparedjointly with the European Commission. Input for the CPS was gathered through meetings with stakeholders during Bank mission visits, an assessment on perceptions inthe country to the economic challenges done by an external communications group, a CPS website, an online survey, focused group discussions, and distribution o f informational materials to broadenthe understanding o f this Strategy and Government's economic reforms. The feedback received during the consultations was very useful inimproving the understanding o f the country's needs, and has contributed to an improved CPS design. A fuller account o f the consultation process can be found inAnnex 5. v. RISKAND MITIGATION MEASURES 74. The Strategy incorporates measures to deal with foreseeable country and Bank program risks. 75. Country risks.There is a risk o f erosion o fpolitical support for the bold reforms initiated by the Government. It i s difficult to predict the outcomes o f these reforms, and the results may be slow to come. The ethnic harmony is fragile and tensions could turn into violence unless the economic transition i s handled carefully. Hence, there could be a political backlash that may force the government to slow down. There also i s the risk that the Government may fail to communicate the reformprogram effectively to internal and external stakeholders, leading to lack o f buy-inand a slow down o f reform. The Government may muddle through or focus energies on less strategic efforts that may fail to produce substantive results. Inaddition, persistent fiscal deficits and excessive demands on domestic credit markets risk crowding out needed investment spending. Finally, external price shocks (particularly oil) may end up inperennial highprices with potentially negative implications. The Bank will monitor the situation and adjust the program as necessary. Thejoint budget support program with other donors will help the government maintain good macroeconomic management and sustain the pace o f reform. 18 76. Risksto the Bank program.There i s arisk that the Government may not borrow from the Bank as happened during the implementationof the previous Country Assistance Strategy. Duringthe preparation of this CPS, the Government has repeatedly indicated that it intends to borrow from the Bank over the mediumterm as it needs: (i)financing for its new reform program; and (ii) Bank's technical expertise and worldwide experience the to help see the country through the challenging time ahead and minimize the social impact o f transition. To address this risk, rather than pre-determining the work program over the next several years, the Bank and Government have agreedto plan and review their work program on an annual basis so that necessary adjustments can be made. There is also a riskthat the Bank may not be able to meetthe expectations ofthe client, especially as far as the analytical and advisory work i s concerned. The Bank's operational budget for Mauritius i s relatively small and inadequate to meet the client's expectations. Giventhe uncertainty concerning how much the government will borrow for either policy or investment loans duringthe CPS period, the operational budget may be even smaller inthe future. The strategy tries to addressthis risk throughthe creation of aproposedjoint donor-government AAA fund that can finance efforts to meet the Government's analytical and technical assistance needs. Creditworthiness 77. Mauritius' foreign currency issuer ratings are Baa2/P-2, and the rating for the government's rupee-denominated debt i s A2. These ratings reflect the country's modest external debt burden and its economic dynamism within a stable political framework. However, in December 2005, Moody's Investors Service lowered the outlook on Mauritius' debt ratings to negative from stable, ". .inlight o f the unfavorabledirection o f government . finances over recent years, including high levels o f government debt."13 Mauritius debt stands currently at around 70 percent o f GDP, but most o f this i s borrowed internally and poses little exchange risk, especially with foreign reserves at a comfortable level equal to around eight months o f imports, however the decline inEPZ export earnings and the higher import bill are placing increasing pressure on external liquidity. The situation i s not imminently unsustainable, but the country is vulnerable to macroeconomic risks arising from slower growth, further adverse movements inthe terms o f trade and risinginterest rates. Government bas recognized the needfor strong fiscal consolidation which was announced inthe 2006-2007 Budget Speech. The credit risks to the Bank are low but increasing. VI. CONCLUDINGREMARKS 78. This CPS i s designed to ensure strong Government ownership o f the Bank's program, to allow the Government and the Bank to adjust that program to changing Government priorities and country circumstances, and thereby to maximize the Bank's contributionto Mauritius' development. As is the case of any new relationship, the strategy will challenge boththe Bank and the Government, but ifit is successful, it will create a real partnership inservice to the people o f Mauritius. l3 Moody'sInvestors Service Press Release, 21 December 2005 19 .-m - d - Y r) 9ari 5 in P 0 Y B 3 E Y 38 E rw n . 5 s* 2 A Y v) Y 2B 3 I m 'I U U a, C E "YS 2 El: 3 - b 41 0 Annex 2 Page 1 of 16 Annex 2: 2002 CAS Completion Report Evaluation Summary (i) Overall, the Bank did well over the CAS period in substance and quality, which ledto results. It aligned itself to Government objectives, and showed flexibility in diverging from the program to respond to Government requests. However, the CAS did not evaluate risks properly as it did not foresee the risk that the country would not borrow, and it put all its eggs inone basket by centeringthe whole program on the PERLs and underpinningAAA. Because the Bank's program was to provide budget support, the CAS monitoring matrix was broad and too ambitious to track the Bank's results as opposed to the Government's own objectives and outcomes. Finally, the lack of a local presence also hindered Bank effectiveness. However, because the Bank program ledto satisfactory results and the Bank adjusted itself and responded effectively to meet the needs o f the client, the Bank assesses its work over the CAS period as satisfactory. (ii) In2001,the Government ofMauritius developed anambitious development program, the New Economic Agenda (NEA), with the objective to change the course o f the country's economy and turn it into a "high-tech, high-income service and knowledge economy." The key components o f this program were: (i) improvement inthe competitiveness o f Mauritius' private sector; (ii)investment inpeople and society; (iii) preservation o f Mauritius' fragile environment; and (iv) improvement ineconomic management. (iii) Inpreparing the NEA,the Government demonstrateda strong commitment to sound fiscal management and improved development prospects by taking important actions to stabilize the economy and introduce a much needed education reform. Inview of this commitment and the appropriateness o f the NEA to address Mauritius' development objectives, the 2002 Country Assistance Strategy was prepared to fully support the NEA. (iv) Designedaround program support and analytical and advisory services, the CAS represented a departure from traditional project financing. It foresaw up to three independentPublic Expenditure Reform Loan (PERL) program support operations over the three-year CAS period, depending on the government's external financing needs. Although program support under the PERLs would cover all budgetary expenditures, analytical and advisory services would give priority to human development, the environment, transportation and economic management. (4 This evaluation shows that the Bank was able to provide positive input and achieve results in all priority areas for Bank support. Inthe financial sector, a complete overhaul o f banking legislation led to an improved financial reputation and framework for accounting, auditing and corporate governance. With Bank support, Mauritius established a modern payments system and Financial Services Commission to regulate the non-bank financial services sector. Ineducation, reforms over the CAS period led to a more equitable system with the elimination o f star schools, and increased access, particularly in secondary education, with decentralization o f the secondary education system and creation o f 45 secondary schools. Exampass rates improved in secondary and higher secondary, although Annex 2 Page 2 of 16 primary exam rates slightly declined. At the tertiary level, the number o f students increased from 16,759 in 2000-2001 to 25,715 in 2004-2005. Inwastewater, cost recovery has been achieved, and tariffs have been put inplace at agreed sector policy levels. The Wastewater Management Authority registered an improvement inthe collection performance o f wastewater bills. As o f January 2005,56,153 houses had been connected to the WMA, and an additional 1,300 houses had been connected and were beingprocessed for billing network. Insewerage, all sector and institutional reforms were completed according to the agreed sector policy letter. Inaddition, standards for industrial discharge were implemented incompliance with environmental standards. Through its long standing dialogue on transport duringthe CAS period, the Bank assisted inmajor road network upgrading, and i s currently financing a Project Preparation Facility to examine options for reducing traffic congestion in Port Louis. The Bank also continued to provide technical assistance inport and maritime transport to help the authorities cope with higher-than- anticipated growth inport transshipment traffic. Finally, to improve budgeting, a Medium Term Expenditure Framework (MTEF) unit was established, and MTEFs were prepared in six pilot ministries. (vi) The overall approach the Bank took in Mauritius was sound at the time. Mauritius' borrowing was limited, but was highly interested inthe Bank's analytical and advisory services. Rather than undertaking multipleinvestments, this approach was planned to enable the Bank to closely support the country's new reform program and resolve the restrictions on the Bank's internal budget. However, the strategy and dialogue through the adjustment program unraveled after the first PERL. Only one project, the first PERL, was approved duringthe CAS period, and AAA diverged from what was planned. After the first PERL, the Government indicated that it did not need further borrowingfrom the Bank for budget support, as it found the transaction costs -such as the Bank's conditions and triggers to move from the first to second PERL - relatively high. In addition, its borrowing was likely spurred by continued demand for Bank services and access to international expertise and advice, rather than actual financial need. (vii) The Analytical and Advisory assistance (AAA) program rated highly on Strategic Relevance and Quality. The Bank was also flexible indiverging from the CAS to address emerging needs o f the Government. However, a lack o f human and financial resources for Mauritius created difficulties for the Bank to respond quickly and with high quality to ad hoc requests not included as part o f the normal business planning process. On one hand, work programs o f Bank sector staff are planned for the year ahead, and it proved difficult to mobilize top expertise for Mauritius on short notice. Inaddition, Government requests were sometimes put directly to sectors, with no prioritization. Aside from the process, other areas which could be improved include greater dissemination o f findings o f analytical work and follow up. (viii) Coordination with other donors was good in specific sectors, but less effective at a strategic level. Inaddition, more could be done to leverage the limited IBRDprogram through the other arms o f the Bank Group - IFC, MIGA, GEF and WBI. 6x1 Based on lessons learned, this report outlines actionable recommendations to be incorporated into the new Country Partnership Strategy to the extent possible: Annex 2 Page 3 of 16 The Bank should continue to align its program to the Government's. It should use a more flexible approach in its work with Mauritius through joint Annual Business Planning. The Output Matrix should be realistic and linked to areas where the Bank can have impact. The Bank should allow flexibility for adjustment or investment lending, and diversify the portfolio. Additional resources for AAA work should be leveraged over and above the Bank budget. Bank AAA should be more practical, and answer the "how" rather than "why" or "what." Greater emphasis should be given to dissemination o f findings o f analytical work and collaboration with other donors. The limited IBRDprogram should be leveraged through other arms o f the Bank Group - IFC, MIGA, and WBI. A one-person liaison office inPort Louis should be establishedto maintainregular dialogue and outreach efforts. I.COUNTRYCONTEXTANDLONG -TERMNATIONAL DEVELOPMENT GOALS 1. Mauritius, a middle income country with a population o f about 1.2 millionpeople, i s heralded as an example o f successful development worldwide. At independence in 1968, the country was poor, with a nominal per capita income o f about U S $260. Today that figure has risen to about US$5,250, and poverty has fallen to only about 10 percent o f the population. Real per capita GDP growth averaged 6 percent a year from 1968 to 2004, betterthan all but a handful o f countries and considerably above the average for all low- and middle-income countries. Now, Mauritius has the second highest per capita income in Africa after Seychelles, and ranks at the top i n C P I A ratings inthe Africa region. Transparency International ranks Mauritius 54thout o f 145 countries, makingthe country the second lowest after Seychelles among African countries inperceived corruption. Doing Business ranks Mauritius among the top 30 economies inthe world inease o f doing business. Mauritius has accomplished these gains through (i) political stability, (ii) generally sound fiscal management, (iii) aggressive export promotion, (iv) support for the private sector, and (v) a strong social welfare system. 2. A t independence, the Mauritian economy was almost completely dependent on sugar. Since then it has diversified impressively into manufacturing (EPZ textile and clothing exports) and services (tourism and, more recently, financial services). But continued growth and development will require making a transition to new, higher value- added, more skill-intensive activities. Over the past decade, Mauritius has beenpromoting diversification into knowledge-based sectors such as information and communications technology (ICT), financial services, ocean resources and a knowledge hub.Nevertheless, the economy remains dominated by the traditional pillars - sugar, apparel and tourism. Accelerating the transition is the main challenge facing the country today. Annex 2 Page 4 o f 16 Macroeconomic, Structural, and Political Developments since the Last CAS 3. Recently, a sense of urgency has been added because o f the phase-out of trade preferencesfor sugar and textiles apparel (whichtogether account for 80 percent o f Mauritius' merchandise exports). InJanuary 2005, MFA textile quotas ended. A 36 percent decrease in sugar prices under the EU sugar protocol beginning in2007 will cost Mauritius around 100 million per year. Anticipation of these developments has depressed private investment over the past several years, leading to a slowdown ingrowth. Up to 40,000 jobs already have been lost in sugar and apparel, and the eventual total i s likely to reach 50,000 or more - or 10percent o f the work force. Meanwhile, the new higher value-added, knowledge based economy has beenslow to take off. Productivity growth has stagnated and unemployment has risen to near 10percent. 4. Slower growth and major public initiatives on education and infrastructure have taken their toll on the public finances. Government deficits rose sharply beginning in2001, and have remained high incontrast to the government's medium-termfiscal strategy, which called for them to decline to 3 percent by FY 2004/05. Public sector debt stands at nearly 70 percent' of GDP. The current situation and near termprospects pose no urgent threat to solvency, but increasingly there i s a need for modest corrective action to reduce vulnerability to external risks (terms o f trade, weather and world interest rate shocks) and internal ones (lower growth). Notably, Moody's recently downgraded its outlook on Mauritiusfrom stable to negative. 5. Economic performance has beenrespectable, ifbelow long-term trends. Along with the structural challenges that Mauritius has beenfacing, weather poses a constant threat and output was depressedby Cyclone Dinain2002, especially inthe agricultural sector. Nevertheless, growth has remainedpositive. InFY04/05, GDP growth at factor costs was 4.0 percent, as disappointing results inagriculture and a 9.5 percent contraction inthe EPZ sector were offset by strong growth intourism, fueled by a 5.9 percent increase inarrivals to 761,063. A resoundingly pessimistic outlook - over 80 percent o f respondents polled about their expectations reported they were somewhat or very pessimistic about the economy at year-end 2005 -has depressedinvestmentand contributed to weak private demand. But all things considered, this is not a bad performance. 1997- 200 1 2002 2003 2004 2005 Realoutput growth( percent) - EPZ 5.8 1.8 3.8 4.5 2.9 5.9 -6.0 -6.0 -6.8 -13.0. Investmentrate - private 24.3 21.8 22.7 21.7 21.3 16.5 14.9 13.8 15.0 14.7 CPI inflation( percent) 6.0 6.4 3.9 4.7 4.9 CA balance ( percent GDP) -0.3 5.2 2.3 0.8 -3.3 Fiscal balance( percent GDP) 4.5 6.0 6.2 5.4 5.0 ' Includingparastataldebt Annex 2 Page 5 of 16 11. CAS OBJECTIVES AND OUTCOMES,BANKPERFORMANCEAND QUALITY OFSERVICES The FY02 CAS Framework and Objectives 6. The 2002 CAS underwent abroad consultation process with government, civil society, labor unions, vulnerable groups, and donors. The consultations provided input to the Strategy on the challenges facing the country. For example, one focus group was made up of unemployedmenand women intheir 40s and 50s. The majority inthis group were women divorced or abandoned by their husbandswho had beenpreviously employed at closed textiles factories, let go with few or no benefits and generally without other skills. Another group consisted o f labor unions to discuss inparticular, the proposed reforms in education. These issues surrounding the challenges of maintaining Mauritius' competitiveness and o f the top priority of education featured heavily inthe Strategy. 7. The 2002 CAS sought to cover awide ground with limitedresources. It set out to support the Government's ambitious reformprogram, the New Economic Agenda (NEA), the goals o f which were to maintainthe country's growth performance and improve the welfare of its citizens. The NEA's key components include: (i) improvement in competitiveness o f Mauritius' private sector; (ii)investments inpeople; (iii) preservingand protecting Mauritius' fragile environment; and (iv) improvement ineconomic management. 8. The Bank's CAS highlightedthe expansion of education and improvement in quality as the most important requirements for the success o f the NEA, and also pinpointed other development areas that deservedgreater focus, including social programs, environmental issues, mass transit, and public resource management. 9. More specific medium-term outcomes which the Bank set out to support duringthe CAS period were as follows (Annex 1 indicates the Bank instrumentsemployedto support outcomes inthese areas, as well as results achieved). Improving competitiveness a. Reformthe financial sector b. Encourage better corporate governance Investing inpeople and society c. Produce a better educated workforce that fully meets the requirementso f the public and private sectors. d. Improve social cohesion and seek a fairer distribution o fthe benefits of growth and greater inclusion for all population groups on the island. Environment and transport e. Ensurethe liquid waste, solid waste and transport sectors are financially, institutionally and legally sustainable, and that they operate infull compliance with environmental standards. Economic management f. Ensuremediumandlong-termfiscal sustainability. g. Better align expenditures with the country's strategic priorities. Annex 2 Page 6 o f 16 MonitoringResultsand Outcomes 10. Inassessing the Bank's contributions to Mauritius' development progress over the CAS period, the CAS Completion Report builds on multiple assessments, including the Quality Assurance Group (QAG) 2005 Country Analytical and Advisory Activity (AAA) Assessment, project Implementation Completion Reports, internal reviews, Country Partnership Strategy (CPS) consultations, and a stakeholder survey. 11, Ingeneral, these reviewsfound that the Bank continues to be relevant, and provides substantive input to Mauritianpolicy. Nonetheless, the task o f assessing Bank performance ina country with a minimal lendingprogram faces several challenges, which limit the precision with which the Bank's contributions can be described. Inparticular: Because the Bank has been largely involved in analytical work inMauritius, impacts and influence on policy decisions are difficult to identify. Having no presence inthe country limits the Bank's contacts and knowledge about how its contributions are perceived. 12. The CAS matrix was overly ambitious. It included over 100 outcomes, most of which were the Government's own indicators for its reform program, which the Bank intended to broadly support through budgetary assistance. Many benchmarks represented higher order goals to which Bank assistance was aligned but over which the Bank's interventions would have only an indirect influence, with the result that Bank performance could be assessed only interms o f Bank contributions to particular outcomes. Out o f these outcomes only ten can be considered to be linked with Bank activities, and even many o f these have no baseline nor target. Due to these shortcomings, this CAS C R does not reproduce the CAS'Soriginal program matrix stating the status at completion for each CAS benchmark. Instead, the CAS C R aims to identify the key results that the CAS achieved, the contributions that the Bank made, and the lessons learned. Moreover, given that the Bank's impact arises indirectly from its interventions and policy advice, this report presents a largely qualitative review o f Bank assistance over the past three years. FY02 CAS Outcomesin AchievingMauritius' Strategic Goals 13. Despite the small Bank program inMauritius, some good results were obtained in priority areas for Bank support -notably inthe education, financial, transport, environment, sewerage and sanitation sectors, as well as ineconomic management. The following section outlines outcomes ineach o f the Government's strategic objectives that are linked with Bank support. Improving Competitiveness:reforming thefinancial sector and improving corporate governance 14. The development o f the financial services industry has been one o f the success stories o f the Mauritian economy over the past 15 years. The sector is often referred to as the "Fourth Pillar" o f the economy. Its contribution to GDP, infact, now exceeds that o f Annex 2 Page 7 o f 16 sugar, the EPZ, and tourism. It has grown at a compound rate o f approximately 9 percent per year since the early 1990s, and, while growthhas slowed inthe past few years, it continues to outpace growth inthe economy as a whole (7.6 percent in2005). Moreover, if one excludes the one-off sale of Mauritius Telcom, it has also been the largest single source of foreign direct investment into Mauritius inrecent years. FDIinbanking alone (Le. excluding non-bank financial services), has accounted for 25 percent o f all FDIinMauritius since 1995 and 41 percent if the Mauritius Telcom sale i s excluded. 15. Over the CAS period, the Bank has been actively involved inthe successful reform and transformation o f the financial sector inMauritius and the quality of the Bank's input has beenhighly appreciated by the authorities. At the beginning of the CAS period, the Financial Stability Forum categorized the country's offshore financial center as a poorly regulatedjurisdiction. The strengthening o f the regulatory and supervisory framework, and the complete overhaul of financial sector legislationresultedinanimprovedfinancial reputation recognized by the international community and an improved framework for accounting, auditing and corporate governance. Inparticular, the Bank's two projects inthe financial sector, the Financial Sector Infrastructure Project ($4.75 million) and the Financial Sector Supervisory Authority Project ($1.8 1million) helpedMauritius establish a modern payments system and set up the Financial Services Commission as the regulator for the non-bank financial services sector. As follow up to the FSAP, the Bank worked with FIRST Initiative to provide technical assistanceto establish a code o f corporate governance, implement anti-money launderingmeasures, draft anew Securities Act and establish a Financial Reporting Council. The instruments the Bank used inthis sector were Economic and Sector Work (ESW), policy advice, technical assistance, and IBRDinvestment loans. ESW included a comprehensive financial Sector assessment (FSAP) in2002-03, pension reform work, and assessmentson Corporate Governance, Accounting and Auditing, and Corporate Insolvency. 16. The Government has translated highpriority recommendations from the Study on Corporate Governance into action, including regulationo f the auditing professionand development o f a voluntary corporate governance code. The Code o f Corporate Governance for Mauritius was institutionalizedby its publication in October 2003. Mauritian-listed companies, banks and non-bank financial institutions, large public companies, state-owned enterprises (including statutory corporations and parastatal bodies) and large private companies are now requiredto report according to the recommendations of this code. A National Committee on Corporate Governance, which acts as the national coordinating body responsible for all matters pertainingto corporate governance, and the Mauritius Institute o f Directors, which acts as the body responsible for promoting the highest standards o f corporate governance and of business and ethical conduct o f directors, were established inFebruary 2005. 17. The Bank has also helpedthe Government build its knowledge base concerning competitiveness and productivity by preparing an InvestmentClimate Assessment, a Labor Market Study and an Educationand Training Sector Note. Most recently, the Bank prepared a Country Economic Memorandum, "Managing Change ina Changing World", 2Accordingto the CentralStatistics Office, financial intermediationrepresented9.7 percent of GDP in 2005, as comparedto 4 percent for sugar, 8 percent for the EPZ, and 7.5 percent for tourism. Annex 2 Page 8 o f 16 May 2006 and ajust intime Aid for Trade TA and Report: From Preferences to Global Competitiveness, April 2006. These analyses on growth and competitiveness formed the basis for the Government's ambitious reformprogram laid out inthe June 2006 budget. The Bank also provided some complementary support by convening four international practitioners from Ireland, Chile, New Zealand, and Mexico to Mauritius inSeptember 2006 to share lessons learned on what worked well and what worked less well inreform programs. This was a practicalway to learn from experience as well as to communicate with the broader public around reform andtransition. Investing in people and society: Education and training,poverty alleviation andpensions 18. During the CAS period, the Government of Mauritius fully met its objective of launching its landmark education reform. Prior to the PERL preparation, the government had already extended mandatory education from six to 11years o f schooling. Subsequently, the government made good progress, as follows: (i) a new exam system, which has effectively eliminated national ranking for entrance into secondary schools infavor of a regional structure, was introduced inDecember 2002; (ii) the secondary education system was decentralized; (iii) both the primary and secondary school curricula have beenlargely revised; and (iv) a program has been formulated to address the problems o f low-performing schools (Zones Education Prioritaires ZEPs), which is being implementedin27 schools mostly located indeprived regions and reaching 11,000 pupils.The enrollment rate of the 12-16 age group is at around 80 percent in2004, up from 76 percent in2001. Access also has increased through the creation o f new secondary schools, from 34 in2000 to 70 in 2005. Despite the widespread reforms, however, the downward trend o f Certificate of Primary Education(CPE) pass rates has not yet beenreversed (63 percent in2004 from 66 percent in2000), althoughthe secondary and higher secondary pass rates have improved from 76 percent in2001 to 77.5 percent in2004 and from 72 percent in2001 to 76.2 percent in2004, respectively. At the tertiary level, the total number o f students has, increased from 16,759 in 2000/2001 to 25,715 in2004/2005. 19. The Bank's value added inthis reformhas beenin: (i) meeting the urgent and critical needto cost the entire education reform; (ii) offering advice on curricula development, and (iii) providing assistance indeveloping the Mauritius Qualifications Authority as a regulatory agency for vocational training. The Bank's Educationand Training Sector Note brings together policy, institutional management and reform management issues, and provides lessons from Mauritius' Asian competitors inthe education sector. Once Bank support through the preparation o f the second PERL ended and the Educationand Training Sector Note was finalized, the Bank has virtually stopped its sector support to education inMauritius, as no lending or AAA was requested, although the Bank has provided policy advice through the recent CEM on growth. Today, the new Government's reform program includes reversing some of the policy decisions taken by the previous Government, notably by reuniting the Form I-V and Form VI colleges, which has become the subject of a major nationwide debate. Environment and Transport 20. The Government of Mauritius has fully met its objective o f obtaining cost recovery inthe wastewater sector, and tariffs havebeenput inplace as per agreed sector policy Annex 2 Page 9 o f 16 levels. Prior to the PERL preparation, the government had enacted the Wastewater Management Authority (WMA) Act and publishedthe revised wastewater tariffs for 2002. Since then, the amendment to the WMA Act to provide for compulsory house connections (both domestic and non domestic) was approved by Government and enacted inAugust 2004. The W M A has been established as a financially sustainable, autonomous corporate body, and the progression and structure o f tariffs are inplace at agreed sector policy levels. A joint billing system was introduced inJanuary 2004. The W M A has registered an improvement inthe collection performance o f the wastewater bills, withthe rate of tariff collection averaging 85 percent during 2003-2004, and 82 percent during 2004-2005. As of January 2005, 56,153 houses have been connected to the WMA, and an additional 1,300 houseshave been connected and are being processedfor billing network. Insewerage, the Government also met its objective o f completing all sector and institutional reforms according to the agreed sector policy letter. This i s now being revisedfor the period 2005- 2010. Finally, standards for industrial discharge have beenimplemented incompliance with environmental standards. Notwithstandingthese achievements, progress inthe sector i s somewhat behind initial plans due to poor management at the agency. 21. The value added of the Bank inthe environment sector has been in:(i) supporting the development ofNational EnvironmentalAction Plans (NEAPS); (ii) providing advice on the financial sustainability o f the sewerage sector, which resultedinwater and sanitation reforms and investmentprogram and an introduction of ajoint billing system for clean water and sewerage; (iii) the institutional reform of the WMA; (iv) assisting inthe aiding implementation o f the household connection system; and (v) supporting biodiversity conservation through GEF. With Bank support a national Solid Waste Master Planand Strategy was put inplace. The Bank introduced the Prototype Carbon Fundfor the reduction of emissions, and supported participation of the private sector indeveloping solid aste management systems. Achievements inthe Environment, Sewerage, Solid Waste and Water Sectors are examples of successful processes and partnerships betweenthe Government and donors, which first developed sector strategies and priorities, and then addressedpriority areas throughprojects, with the donor community working together according to comparative advantage. Specifically, while the Bank helpedthe Government develop the NEAPs, the African Development Bank helpedMauritius develop aNational Sewerage Master Plan, which different donors supported through projects and regularly heldjoint Government donor meetings on sewerage. 22. The transport sector underwent a similar process where the Bank supported a National Strategy, followed by ESW, which i s now leading to lending, with a view to partnering with the private sector and donors. The Bank developed a Transport Action Plan in2003, which includeda financial tool for government to determinethe phasing and sequencing of all investments inthe transport sector. Through its longstanding dialogue on transport throughout the CAS period, the Bank assistedinmajor roadnetwork upgrading, and is currently financing a Project Preparation Facility to examine different options for reducing traffic congestion inPort Louis. Inthe wake of the successful implementationof the Port Development and Environment Protection Project, the Bank also continued to provide technical assistance inport and maritime transport, to help the Authorities cope with higher-than-anticipated growth inport transshipment traffic, which enhanced Port Louis' regional role and benefitedFreeport activities as well, but strained existing institutional and operational arrangements. An EnvironmentalTransport Investment project Annex 2 Page 10 of 16 is currently being prepared. With about 610 people per square kilometer, Mauritius i s one o f the most densely populated countries in the world. Traffic congestion around the capital is a major problem for the small island economy, and detrimental to its continued growth. Economic Management 23. The emergence o f sustained budget deficits since 2000 indicates underlying problems with fiscal management. Less evident but also a problem i s a failure to align budget resourceswith national priorities. To address these issues, the Bank supported the introduction of a Medium Term Expenditure Framework (MTEF).Significant progress has been achieved, with the establishment, staffing and training o f a central MTEF unit inthe Ministry of Finance and Economic Development; development o f a three-year framework o f revenues and spending which i s publishedas an annex inthe Budget Estimates; and preparation o f six pilot MTEFs incorporating results-based formats. More recently, in responseto some loss o f momentum, the Bank reviewed the implementation strategy, and recommended some changes to increase awareness and ownership o f both MTEF and the Government's fiscal framework. A fully operational MTEF i s well within Mauritius' grasp, and the recent Country Economic Memorandum has outlined steps to revitalize the implementation process. 24. The stock of knowledge has improved, andthe Bank has contributed to policy reform, particularly inthe areas o f public-sector management, education and development o f the private sector, including the investment climate and labor market. The Bank's ESW on Pension Reform contributed to national dialogue, which led to the introductionof means testing on the basic pension. This measure, however, was controversial, and has been reversedby the current Government. ESW on the labor market and unemployment ledthe Central Statistics Office to revise its procedures for compiling data on labor. MeasuringBankPerformance 25. Overall, the Bank did well during the CAS period inboth substance and quality, which ledto results. I t also aligned itselfto Government objectives, and showed flexibility indiverging from the program to respondto Government requests. However, the CAS did not evaluate risksproperly, as it did not foresee the risk that the country would not borrow, and it put all its eggs in one basket by centering the whole program on the PERLsand underpinning AAA. Because the Bank's lendingprogram was to be implementedthrough budget support, the CAS monitoring matrix was broad and too ambitious to track the Bank's results as distinct from the Government's own objectives and outcomes. Finally, the lack of a local presence hinderedBank effectiveness. 26. The Bank's lending and non lendingprogram described inthe last CAS aimed at supporting the New Economic Agenda, through a series of umbrella Public Expenditure Reform Loans (PERLs) and AAA. These adjustment operations were to be supported by a heavy program of ESW, designed and agreed upon with the Government and selected donors. While the principles underlyingthe last CAS, interms of aligning to the Government program and providing international expertise and advice remain valid, the actual work program diverged from what was envisaged. The first PERL was approved in 2002, but the two subsequent PERLs totaling US$SO million did not materialize. As only Annex 2 Page 11o f 16 one PERL transpired, the impact o f Bank assistance and the quality of overall policy reform monitoring and influence was less than envisaged inthe CAS. Through the ongoing portfolio and a strong AAA program o f technical assistance and ESW, however, the Bank continued to provide policy advice and keep informed o f sector developments. 27. A shortcoming ofthe 2002 CAS was inidentifying the risk that the country would not borrow, and the divergence from the planned AAA. As the tasks undertaken changed fromthe planned CAS to accommodate new Government priorities, the Bank considered preparing a progress report to revise the program. Since the CAS timeframe was only two years, however, the decision was taken to prepare a new CAS instead, and to focus the new Strategy on emerging good practices from other MiddleIncome Countries. This undertaking was started but delayed uponthe request of the Government due to elections. Inhindsight, despitethe problems that occurred from the deviationfrom the planned program, this worked out well, as the Government changed, and with the new Government came completely new ideas for Bank support. Quality of Services 28. Lending Services. The Bank's decision to phase out multiple investmentoperations and focus on single tranche PERLs reflectedboth its intentionto support Mauritius' ambitious reform program and its limited resources for activities inMauritius. PERLs were plannedto be timed to coincide with Mauritius' budgetary cycle so that proceeds of World Bank loans would be available at the beginning o f Mauritius' fiscal year. 29. Interms of objectives, the first PERL aimedto assist the government set the foundation for attaining its medium-termoutcomes. The ICR for the first PERL rated Bank and Borrower performance as satisfactory. The Bank was considered to have supported Mauritius adequately through the core advisory services that were rendered under supervision, and inhelping track the overall Government program. The second PERL would have been aimed at helping the Government implement its landmark education reform. The preparation process for the second PERL had a useful impact since it ledthe Bank to provide close technical assistance and advice as the government undertook its education reform. Results from this work and the education support providedthrough the AAA are documented inthe previous section. Once the second PERL was dropped andthe ESW finalized, the Bank stopped actively supporting the government on education reform. Country elections took place thereafter, and some o f the policy decisions under the previous Government have since beenreversed. 30. The Bank has received some mixed feedback as to the underlyingreasonsfor the discontinuation o f borrowing. On the one hand, the Government indicated that it did not need further borrowing from the Bank for budget support. Another reason given was that the transaction costs, such as the Bank's conditions and triggers to move from the first to second PERL, for Bank financing were found to be relatively high for what Government was getting inreturn. The borrowing was actually likely spurredby continued demand for Bank services, and access to international expertise and advice rather than actual financial need. Annex 2 Page 12 of 16 3 1. Analytical andAdvisory AssistanceServices: On the analytical and advisory services side, a Country Procurement AssessmentReport, a Public ExpenditureReview to assess financing for the NEA, a Transport Action Plan, and a CEM were undertaken. A Financial Sector Assessment Plan (FSAP) also was completed inFY03. Some o f the AAA tasks indicated inthe CAS, for example, Welfare Reform, Health Sector reform, Gender Assessment and ESW on the Informal Economy and Taxation, were not undertaken. On the other hand, several AAA activities not included inthe CAS were carried out upon the request of the Government; these includedi n ESW on Occupational Pension Funds, Insurance Industry, Anti-Money LaunderingiCFTAssessment, Real-time Gross Settlement, Membership in SACU and Corporate Governance. Aid for Trade TA and report has recently provided an important underpinningfor the new Government reform program. Also, as part of non-lending services, the Bank established an IDF grant (US$494,000) to help with capacity building for implementationof the MTEF. 32. For several pieces o f ESW, the Bank reacted quickly and efficiently to meetjust-in- time knowledge needs of the Government. The Strategic Relevance and Internal Quality of Bank AAA were rated highly. Most importantly, the client has greatly appreciated the Bank's technical and analytical work and continues to seek more than the Bank can provide within its limitedresource envelope. An internal Bank assessmentby the Quality Assurance Group (QAG) revealed areas for improvement inthe AAA program, which the Bank has already begun to take into account. Itprovedto be too ambitious to pre-programa three- year AAA program, as several activities were not undertaken and replaced by others. Financing an ambitious AAA program also proved to be difficult once the Government stopped borrowing from the Bank. 33. QAG found that the Bank should have moved more aggressively not only inthe development o f high quality analytical work, but inits dissemination and follow up. The level of dissemination and follow up were inpart due to limited resources for the Mauritius program inthe absence of borrowing, and insome cases dissemination was kept at a low level due to the preference of the Government. Some counterexamples include AAA involving pensions, FSAP and the Corporate Governance ROSC; these AAA provide good examples o f where results were presentedat well-attended national workshops and conferences. For both the FSAP and Corporate Governance ROSC, grant funding was obtained from FIRST Initiative (a multi-donor agency that i s partially funded by'theBank and provides grants for financial-sector work) to helpthe Mauritians implement some o f the recommendations. 34. Inthe absenceof a regular lendingprogram, the major constraint inthe Bank / Mauritius partnership is the limited human and financial resources allocated to the Mauritius program, as highlightedinthe QAG's AAA assessment. This, together with the absence of structuredjoint work planning sessions, hampered the effectiveness of Bank support and Bank responsiveness to new needs of the Government. 35. Mix of instruments. Eventhough borrowingwas less than expected, there was generally an appropriate mix o f instruments. QAG has suggested a greater use of technical assistance; andprogrammatic ESW is being integrated into the new Country Partnership Strategy. Annex 2 Page 13 o f 16 Portfolioand Other PerformanceIndicators 36. Portfolio indicators and ICRs for the projects carried out during the CAS period, the Public Expenditure Reform Loan and the Financial Sector Infrastructure and Supervisory Authority Projects, were systematically rated satisfactory on both Bank and Borrower performance. Throughout the CAS period, the Bank has had no problem projects, or projects at risk. This reflects Mauritius' high technical capacity and strong institutions. 37. OED rated four tasks within the timeframe ofthe CAS: (i)Port Development and Environmental Protection; (ii) Biodiversity Restoration; (iii) E E ; and (iv) Financial P Sector Infrastructure Project. The Port Development Project and the Financial Sector Infrastructure were rated Highly Satisfactory; the Biodiversity Restoration Satisfactory; and the PERL Moderately Satisfactory. All Projects were rated likely or highly likely for sustainability; substantial for impact; satisfactory for Bank performance, and satisfactory or highly satisfactory for Borrower performance. Conclusion 38. While Mauritius clearly has all the necessary ingredients for successful programs that have ledto good outcomes from Bank support, the problems inthe Mauritius-Bank partnership lie not inthe tasks themselves, which are carried out successfully, bringing to bear the Bank's global knowledge and resources, but rather inthe process o f identifying, prioritizing, and funding tasks. The traditional pre-determined three-year CAS i s not well suited for the Mauritian context. Rather, a more regular dialogue on the country program is needed. 111. ACTIONABLERECOMMENDATIONS 39. Recommendation 1:Continue to align the Bank's program to the Government's. Aligning the Bank's programto the Government worked well, andBank input was consistently highly rated inachieving strategic relevance. 40. Recommendation 2: The Bank should use a moreflexible approach in its work with Mauritius through ajoint Annual BusinessPlanningprocess with Government. The Bank's work program over the CAS period diverged from what was planned. While this showed responsiveness on the side o f the Bank, some difficulties emerged with staffing and financing tasks outside o f normal business planning. To avoid this problem, the Bank and the Government should agree upon a list of prioritized activities for which the Government would like the Bank's support. A jointly agreed, strategic approach that involves participation from line ministriespreparedon an annual basis would increase clarity on both sides about Bank support to Mauritius. A complementary approach would be to define just one or two flagship areas for in-depthassistance and to limitjust-in-time advice to a few products only. While the 2002 CAS made best use o f available instruments at the time, this new approach reflects emerging good practices inother Middle-Income Countries. Annex 2 Page 14 o f 16 41. Recommendation 3: The output matrix should be realistic and linked to areas where the Bank can have an impact. The last CAS policy focused on higher order goals of the Government's reformprogram, to which Bank assistance was aligned but over which the Bank's interventions would have only an indirect influence. The CAS matrix therefore was overly ambitious. 42. Recommendation 4: Allowflexibility for adjustment or investment lending by diversifying theportfolio, and have afall-back position if no lending occurs. The 2002 CAS planned to carry out umbrella adjustment operations rather than multiple investment operations due to both substantive and budgetary reasons. The Bank should not put all its eggs in one basket. Giventhat the Government chose not to continue borrowing, this approach was not meetingthe needs of the Government at the time. 43. Recommendation 5: Leverage additional resourcesfor AAA work over and above the Bank's budget. Giventhat financing an ambitious AAA programproved to be difficult once the Government stopped borrowing from the Bank, it will be important to leverage Bank financing of AAA, for example, through a cost sharing arrangement with the Government. Another possibility would be for the Government to use its own resources for project preparation incases o f lending, which would free up bank budget for AAA. 44. Recommendation 6: Answer the "how" rather than the "why" in AAA. While the quality of Bank work is appreciated, it i s important for this sophisticated client to focus more on how to implement reforms than the underlying analysis. 45. Recommendation 7: Give greater emphasisto dissemination offindings of analytical work and collaboration with other donors. Emphasis should continue to be put on dissemination of findings o f analytical work and collaboration with other donors. Given its lack of local presence, the Bank could cooperate more with other donors inknowledge dissemination and sharing. Coordination with other donors was good inspecific sectors, but, inline with the weaknesses injoint programmingwith the Government, has beenless effective at a strategic level. The Bank also should leverage its assistancemore against Government resources and those of other donors. 46. Recommendation 8: Leverage the'limitedIBRDprogram through greater involvement of the other arms of the Bank Group, IFC, MIGA, GEF and WBI,for example, inprivate sector development and the financial sector, and inpositioning Mauritius as a global knowledge hub. 47. Recommendation 9: Establish a one-person liaison office in Port Louis to enhance dissemination and follow-up o f analytical work as well as outreach efforts. sP : U Y Y a B 2 Y L .-c e . . e S 0 Annex 3 Page 1 of 4 Annex 3: MAURITIUS: COUNTRY FINANCING PARAMETERS Item Parameter Remarks/ Explanation Cost slzaring. Limit on the u p to 100% The government'spreferenceis for Bank investment loans proportion of individual to be supplemented with concessionalor grant financing. projects that the Bank may The Bank's lendingis likely to be part of broaderfinancing finance packages involving the EuropeanInvestmentBank (EIB), AfDB and other financiers, and the Bank's financing share in most instances is likely to be less than 100%. Recurrent cost financing. Any No country Bank financing of recurrent costs at the portfolio level is limits that would apply to the level limit on expected to remain within the recent modest ranges. At the overall amount of recurrent recurrent cost project-level, the Bank may finance recurrent costs after a expenditures that the Bank may financing careful consideration of the sustainability of project finance achievements and implied future budgetary outlays within the overall context o f Mauritius' aggregate fiscal position and prospects. Local cost financing. Are the Yes The Bank may finance local and foreign costs in any requirements for Bank proportionsas neededfor individual projects. financing of local expenditures met, namely that: (i)financing requireinents for the country's development program would exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing o f foreign expenditures alone would not enable the Bank to assist in the financing of individual projects Taxes and duties. Are there No Taxes and duties have beenjudged to be reasonable. At the any taxes and duties that the project level, the Bank would examine whether taxes and Bank would not finance. duties constitutean excessively high share o f projectcosts. Annex 3 Page 2 o f 4 MAURITIUS: COUNTRY FINANCING PARAMETERS Introduction. This Annex provides additional information on the country financing parameters for Mauritius established pursuant to OP/BP 6.00, Bank Financing. The Government has beenconsulted on the country financing parameters, and has indicatedthat it welcomes the increased flexibility in the World Bank's approach to financing o f investment projects, and believes that this should facilitate implementation and achievement o f results'. Public Fincrncinl Mcrnagement. Overall, the Mauritius PFM system is satisfactory. The budget adequately reflects policy priorities by the Government. An MTEF together with a results-based management framework was introduced in 2003 and MTEFs were prepared for 6 sector ministries in the last budget. The MTEF will require further deepening and the government is committed to this. Budget preparation is undertaken inclose consultation with the spending ministries, but while multi-year projections exist for most parts of the administration, the prioritization of public expenditure has made little progress. The budget classification system i s comprehensive and in line with international standards. N o significant funds are controlled outside the budget, although large losses in the parastatal sector, largely stemming from subsidized oil imports, are off balance sheet. Financial management and control system are comprehensive and effective; the Mauritius IFMIS is considered a "model" case and covers all relevant stages of the budget preparation and execution process. There i s no significant deviation between planned and actual budget. Payment arrears do not exist. Reconciliation between fiscal and central Bank accounts is made regularly and comprehensively (at least weekly). The Accountant General produces (high quality) budget execution reports on a regularly (monthly) basis which form the basis for discussions at the Cabinet level. Public accounts are prepared within a month after the fiscal year ends. The Government Audit Office (external independent auditor reporting to Parliament) reports within a few months. Recommendations o f the Audit Office are discussed with adequate actions taken by the Government. Cost Sharing. Government ownership o f projects is strong. The political leadership has shown a firm commitment to its vision and reform program, which i s entirely homegrown. As noted, the CPS is based on the four pillars of the Government's strategy, and the Bank Group's program will be set out each year in an Annual Business Plan (ABP), which will be developed inparallel with the Government's annual planning and budget processes to ensure that the Bank is fully in step with Mauritius' development agenda, and with other donors' support. The Government's new reform program i s currently estimated to cost as muchas Rs 150 billion (US$4.5 billion) over the next ten years, most o f it frontloaded in the first 3 to 5 years. O f this, the Government is anticipating Rs 80 billion (US$2.4 billion) from local private investment; Rs. 70 billion (US$2.1 billion) from foreign investment, and the remainder (US$300 million) from public sector investment and foreign aid. The Government i s further costing and refining the program. Bank financing of projects i s fully integrated into the budget. As noted in the CPS, portfolio performance has been satisfactory. Government has requested that the Bank finance up to 100 percent of the costs o f individual operations, particularly for sectors that the Government considers will trigger rapid growth inthe short to I Discussions with the Government took place in July 2006, and written comments were received in August 2006. Annex 3 Page 3 of 4 medium term. Based on the above considerations, the cost sharing limit i s being set at 100 percent. The government's preference i s for Bank investment loans to be supplemented with concessional or grant financing. The Bank's lending i s likely to be part o f broader financing packages involving the European Investment Bank (EIB), AfDB and other financiers, and the Bank's financing share in most instances is likely to be less than 100 percent. 79. Recurrent Cost Financing. Only a small proportion o f the Bank's current portfolio in Mauritius involves financing o f recurrent costs, and the Government has so far not expressed interest in World Bank financing o f substantial amounts o f recurrent costs. There are no PIUs in Mauritius, and therefore no PIU related operational running costs. As discussed in the CPS, the Government has made fiscal consolidation a pillar o f their reform strategy, based on explicit rules intended to put deficits and debt on a downward path. Projections from the Ministry o f Finance anticipate revenue stabilizing at around 19 percent o f GDP, accompanied b y a decline inthe share o f expenditure and a narrowing o f the overall central government budget deficit. Mauritius' debt situation i s not imminently unsustainable, but the country i s vulnerable to macroeconomic risks arising from slower growth, further adverse movements inthe terms o f trade and rising interest rates. Bank financing o f projects i s fully integrated into the budget and thus subject to Mauritius's overall fiscal targets and legal framework. The Government has been implementing a MTEF budgeting framework, which explicitly addresses the recurrent cost implications o f project spending. Bank recurrent cost financing will remain subject to consideration o f overall medium-term fiscal sustainability and i s expected to be small and not jeopardize overall fiscal or debt sustainability. O n a project by project basis, the Bank may finance recurrent costs after careful consideration o f the sustainability o f project achievements; and implied future budgetary outlays, within the overall context o f Mauritius' aggregate fiscal position and prospects. Local Cost Financing. The Government has an ambitious strategy 10 implement needed structural reform which exceed its own resources and expected domestic borrowing. The reform program will be implemented over the ten year period costing about US$4.5 billion, which will be partly sourced from the Government, the domestic private sector and FDI. There currently remains an unmet financing gap o f about US$1.6 billion over the next ten years. (The numbers are preliminary and would be further refined following sector analyses). On average, from FY99-04, local costs accounted for 23 percent o f the Bank's investment lending disbursements for Mauritius (68 percent in FY04). The local cost component o f envisaged investment lending i s expected to continue to be significant. The two requirements for Bank financing o f local costs are met, and the Bank may finance local and foreign costs inthe proportion required for individual projects. Taxes and Duties Financing. In 2006/07, the Government put inplace a new tax regime to remove distortions and create a level playiog field across sectors, business units and individuals.* The relinquishing o f the discretionary power o f the Minister o f Finance for granting exemptions has already reduced much o f distortion. Major taxes and duties are summarized below: 2 By 2008-09, the Governinent is expected to eliminate almost all o f its custom duties and consequently the associated duty draw-backs, relying on its V A T base to mobilize indirect tax revenues. The VAT base is expected to be at a single rate as will the corporate and personal income taxation. Annex 3 Page4 of 4 Item Tax rates (range) PersonalIncomeTax - For first Rs 500,000 of chargeableincome, the tax rate is 15 %. - For non-interest related chargeable income above Rs 500,000, the rate is 22.5% - 15% tax rate for chargeable income from interest Corporate IncomeTax -- Non-incentive15% rate 22.5% in 2006107 Incentive rate 1Value-addedtax Customstariffs 1-- 4Standardrate of 15% TariffBands-0 %, lo%, 15%, 30% I Currently, there are no excessive taxes or duties in Mauritius. Therefore, the Bank may finance all taxes and duties associated with project expenditures. At the project level, the Bank will examine whether taxes and duties constitute an excessively high share o f project costs. Changes intax and customs and/or related exemptions could trigger a review of this parameter. Annex 4 Page 1of 2 Annex 4: Partner Institutions Reflecting Mauritius' past success and improved access to capital markets, official donor assistance to the country declined over the past few years, and has become more selective. The few donors that are active inMauritius are cooperating on specific programs, notably in wastewater, and stepping up overall coordination at the strategic level. Though donors have played a relatively small role inMauritius inthe past few years, the Government i s stepping up its efforts to win financial, technical and moral support from the outside world. As describedearlier, improved donor coordination inline with the harmonization agenda is an underlyingprinciple o f this CPS. Donors to Mauritius includethe European Commission, the European Investment Bank, the World Bank, Agence Francaise de Developpement, the IndianGovernment, the Chinese Government, the Kuwait Fund, the African Development Bank, and the Arab Bank for Economic Development. Inaddition, the IMF is helping the Government with fiscal policy. The IMFhas no lending program inMauritius giventhe country's strong macroeconomic position, but it conducts routine macroeconomic surveillance. Collaboration with the IMF will continue; for example, the Bank is working with IMF on the Aid for Trade work, and going onjoint missions on the fiscal impactof transition. The EUis present inMauritius and has beenactive inthe areas of environment (particularly the wastewater sector) and poverty reductionfor the most vulnerable, marginalizedgroups who are not benefitingfrom Mauritius' development success. The European Commissioni s currently preparing its Country Strategy Paper for Mauritius inconjunction with the Bank's strategy and is programming the 1Oth EDF funds for Mauritius. Inaddition to EDF funds, Mauritiuswill benefitfrom the sugar accompanying measures which will be fully integrated inthe CSP. This includes6.5 million for sugar sector budget support in2006-2007, followed by nontargeted budget support together with the World Bank and the French government in2007-2008 and beyond. Like the Bank's RapidResponse TA Facility, the European Commission will set aside some resources ina technical cooperation facility (TCF) for Government requests as they arise. The Bank and EUwill coordinate on the analytical and advisory activities through these facilities to better fill knowledge gaps or other needed non lending support. The EC will also continue direct support to non-State actors. The European Investment Bank will continue to work inMauritius, particularly on infrastructure investments. The Agence Francaisede Developpementhas also confirmed its support to Mauritius' transition as the country moves toward greater integration inthe world economy, through better productivity and competitiveness. The AFD has proposed to support the investments in the clusters, with public entities and/or private sector, and to accompany the reformsprogram launched by the State within the initiative "Aid for Trade". AFD will look to intervene incoordinationwith other Development Partners, and can provide three types of support: (i) Budget Support, inpartnershipwith WB (DPL) and EC (10th European Development Fund and Funds for the Sugar Action Plan). Within the policy Annex 4 Page 2 of 2 dialogue between the Government and the Development Partners, a Budget Support would be conditioned to i)an alignment with the Mauritius Reform Strategy and the National Action Planfor Poverty Alleviation, ii)a process o f coordinationand harmonization with the main donors iii)a monitoring and evaluation o f the reforms implementedwithin a Performance Assessment Framework based on priority areas and sector identifiedby the Government and DevelopmentPartners (set of performance indicators); (ii) Project Financing,inthe clusters throughpublic bodies and/or private sector inorder to support government policy; and (iii) TechnicalAssistance, for the definition and/or implementation o f sectoral strategy (ICT, vocational training, etc). As a member o f the UNfamily, the Bank works with the local UNDP office. The Bank i s working with the UNDP to prepare an HIV/AIDS IDF grant proposal, and there is scope for collaboration on other issues related to the MDGs, including poverty and gender. The World Bank and African DevelopmentBank are working together inthe sewerage and sanitation sector. They also have contributed to the first budget support operation and the two institutions will continue to cooperate on Mauritius. India has economic, social, and cultural ties to Mauritius, and the Bank is exploring how to work jointly together. Annex 5 Page 1o f 3 Annex 5: Consultationswith Stakeholders 1. The World Bank held three sets of consultations to obtain feedback on the Bank's proposed program in Mauritius, inPort Louis and Rodrigues inFebruary and July 2006. The European Commission, with whom the Bank i sjointly preparing its strategy, joined in some of the consultations. The purpose of these discussions was to receive direct feedback from stakeholders on the country's main challenges and seek views on how the Bank might assist inthe country's transition. The Bank briefedthe participants onthe Country Partnership Strategy and explained how and inwhat areas the Bank can be involved inMauritius. The European Commission, who had already held consultations with civil society on its Strategy, also participated, emphasizing how the donors are working together to support the Government's program, that the Country Strategies are fully aligned with the Government's reform program, and how the EUwill be supporting Mauritius. Consultations in Port Louis 2. Participants welcomed the consultative approach and agreed with the broad thrusts of the Bank's assistanceto Mauritius. There was also a general consensus on and awareness of the economic problems the country is facing inlight of the erosion o f international trade preferences, inparticular all agreed on the four pillars of the Reform Program, which is also the pillars ofthe CPS. However, as with all complex reformtransitions, there are differing views among stakeholders about how to go about change and how to minimize the impact of the transition on the population. 3. At all the consultations, participants stressedthat communications was essential and that communication with Government on reform should be a two way street where the views of stakeholders are taken into account and the government communicates what it i s doing and why. 4. The consultations inPort Louis prior to the 2006 Budget Speechreflected a general feeling that the situationinMauritius today is worse than ten years back, that a fresh look should be taken at the role the State plays inthe economy to reduce and update outdated regulation, and increase clarity and transparency, to open up the economy and that growth must be private sector led. Problems with implementationwere stressed several times, and the sense that the public sector was not moving forward. There was a recognitionthat Mauritius i s not competitive: labor costs and unemployment were increasing; growth was being strangled by constraints ineducation and training and there i s a needfor skilled people. Other suggestions were to encourage clustering among sectors and small companies; diversify agriculture and find niche markets. Other issues were raised such as land, how to operationalize Mauritius as a knowledge hub, and a few participants stressed the importance of not squandering money, including for Aid for trade. 5. The Consultations a month following the announcement of the Government's program in its 2006-2007 Budget speech focused on the following issues: Annex 5 Page 2 of 3 0 Social impact o f economic transition. Participants stressed the need for involvement o f social partners in the economic reform program and expressed concern over the social impact that would be caused by the transition Mauritius i s facing. Governance and Educationwere raised as important issues. Energy was mentioned as a sector where assistance could be helpful.And Sugar was raised as an important sector for the economy, which has to become more competitive. As the sugar price cut will hit by 2009, reforms needto be completed by then. HIV/AIDS was noted as a growing threat inMauritius, whose rate o f increase could follow the case o f Botswana. It was suggested that support from donors for HIV/AIDS could be given partly to Government and partly to civil society. HIV/AIDS i s stigmatized and the Government will need community workers to gain people's trust. Capacity buildingfor civilsociety was mentioned as an area that should be supported. 6. On the Bank's support,the two sets o f consultations inPort Louis yielded mixed views among the stakeholders. It was felt that past collaboration had been successful, and that the Bank could usefully bring to bear its economic analyses such as the Investment Climate Assessment, and support implementation and policy decisions. Trade unions, however, expressed concern that the World Bank was too prescriptive inits advice to Government. The Bank answered that Mauritius i s a country which listens to advice and does what it thinks best. The Bank believes the Government i s doing the right thing by learning about worldwide experience intransition, which allows it to make more informed decisions based on the country's needs. It was noted that these consultations are only on the Bank's strategy and the Bank i s only one actor. While useful, it i s more important that stakeholders provide input to the government program. Consultations in Rodrigues 7. Participants appreciated the consultation and the Bank team noted the impressively vibrant and active civil society that exists in Rodrigues. The specificity o f Rodrigues was underscored, with its 36,000 people, specific economy mainly driven by fishing, agriculture, tourism are the main sectors o f the economy. Unemployment was raised as an important problem inRodrigues. 8. Issues raised included: (i) the need to develop tourism. Constraints identified included highcosts o f plane tickets, capacity, need to develop airport and port, visibility (Rodrigues i s not well known; need to brand), and lack o f entertainment. (ii) fisheriesandagro-industrydevelopment. (iii) Water was mentioned several times as a serious problem for Rodrigues, including for growth such as industry and irrigation. Annex 5 Page 3 o f 3 (iv) Energywas also mentionedas many subscribers are inarrears; people can not afford mandatory new security device to prevent electric shock (v) Lack of a good regulatory framework; slowness; creating an enterprise is not easy; should create a one stop shop. Should help SME development. Problems with training and market. (vi) Education.Children go irregularly to school. Can not read, illiteracy (vii) Social ills also exist including drug abuse, theft, violence, criminality. Lack o f security hinders investors. 9. On the Bank's support, participants mentioned the following suggestions and ideas: e Community Driven Developmentto empower local government to tackle issues o f importance for the community and improve capacity e Microcredit schemes: identify potential entrepreneur; provide seed money to start project; have peer system o f credit and create cohesion among entrepreneurs. e Airport infrastructure: Newproject for a new airline strip; add more length and width to runway. Findaircraft that can land with more people. Problem o f highcost o f oil. e Participants noted the importance o f making sure money being invested i s well used. IFADprogram is good example Rs 40 million going to things such as infrastructure and primary schools. 10. The World Bank confirmed that it can work inany o f these areas. It has an expansive network o f expertise inmost sectors o f the economy. Inorder for the Bank to be engaged in any o f these areas, either through project or analytical work, a request must be made by the Ministry o f Finance inMauritius. It was noted that the World Bank provides loans rather than grants as some other institutions or bilateral donors, so this has monetary implications for the Government o f Mauritius. The appropriate avenue i s that the needs o f Rodrigues are factored into the annual businessplandiscussions inJanuary/February each year so that they canbe considered for World Bank support. This should be done through the authorities o f Rodrigues to the Ministry o f Finance inMauritius. Ifthe World Bank knows o f Rodrigues' needs, it can also mention these areas to the Government for consideration for Bank support. Annex A1 Page 1 of3 Mauritius a t a glance 6/12/06 Sub- upper Key Development Indicators Saharan middle Mauritius Africa income Age distribution, 2005 (2005) Male Female Popuiation, mid-year (millions) 1.2 741 599 70-74 Surface area (thousand sq. km) 2.0 24,265 30,135 BO 64 Population growth (Oh) 1.I 2.1 0 4 Urban population (Ohof total population) 44 37 72 50-54 40 44 GNI (Atlas method, US$ billions) 6.5 552 3,366 30-34 GNi per capita (Atias method, US$) 5,250 745 5,625 20-24 GNi per capita (PPP, international $) 12,450 1,981 10,924 10-14 0-4 GDP growth (Oh) 4.6 5.3 5 5 15 10 5 o 5 i o GDP per capita growth (Oh) 3.3 3.1 5 0 percent (most recent estimate, 2000-2005) Poverty headcount ratio at $1 a day (PPP, %) 44 Poverty headcount ratio at $2 a day (PPP, Oh) 75 Jnder-5 mortality rate (per 1,000) Life expectancy at birth (years) 73 46 69 Infant mortality (per 1,000 live births) 14 100 23 200, Child mainutrition (% of children under 5) 15 29 7 150 Adult literacy, male (% of ages 15 and older) 66 95 Adult literacy, female (% of ages 15 and older) 81 92 100 Gross primary enrollment, male (% of age group) 102 99 106 Gross primary enrollment, female (Oh of age group) 102 87 106 50 Access to an improved water source (Ohof population) 100 56 94 0 Access to improved sanitation facilities (Ohof population) 94 37 84 1990 1995 2000 2004 0Mauritius OSub-SaharanAfrica N e t A i d Flows 1980 1990 2000 2005 * (US$ millions) Net ODA and official aid 33 89 20 38 Growth of GDP and GDP per capita (Oh) Aid (% of GNI) 2 9 3.6 0.5 0 6 Aid per capita (US$) 34 84 17 31 Long-Term Economic Trends Consumer prices (annual % change) 42 0 13.5 4.2 4 9 GDP implicit defiator (annual Oh change) 10 6 10.6 3.6 5 6 Exchange rate (annual average, local per US$) 7 1 15.4 25.5 28 9 Terms of trade index (2000 = 100) 90 95 00 05 104 100 92 +GDP - GDP par capita 1980-90 1990-2000 2000-05 (average annual gmwth %) Population, mid-year (millions) 1 0 1.I 1.2 1 2 0.9 1.2 1.o GDP (US$ millions) 1,153 2,363 4,465 6,290 6.0 5.2 3.9 (% of GDP) Agriculture 16 5 13.1 6.0 6 1 2.6 -0.5 1.9 Industry 26 3 33.1 31.2 28 2 9.2 5.5 1.9 Manufacturing 15 7 24.7 23.7 20 3 10.4 5.3 0.6 Services 57 2 53.6 62.8 65 7 5.1 6.4 5.7 Household final consumption expenditure 71 0 63.7 63.0 66 7 5.4 5.4 3.0 General gov't final consumption expenditure 14 4 12.6 13.1 14 4 3.3 4.6 4.5 Gross capital formation 25 4 30.7 25.9 23 3 10.3 4.7 4.6 Exports of goods and services 46 0 64.2 62.7 56 5 10.2 5.4 1.8 Imports of goods and services 57 6 71.4 64.7 60 9 10.3 5.2 1.4 Gross savings 14 0 26.3 25.3 19 7 11.1 5.7 3.1 Note: Figures in italics are for years other than those specified. 2005 data are preliminary estimates. .. indicates data are not available. Macro-data. balance of Payments and fiscal data refer to fiscal years, i.e., 2005 refers to FY starting o n Juiv 1, 2004 and ending on Ju a. Aid data are for 2004. Development Economics, Development Data Group (DECDG). Annex A 1 Page 2 of 3 Mauritius Balance of P a y m e n t s and T r a d e 2000 2005 IGovernance indicators, 2000 and 2004 (US$ m,l/,onsj Total merchandise exports (fob) 1,523 2,028 Total merchandise imports (af) 2,158 2,919 Voice and accountability Net trade in goods and services -130 -269 Politicalstability Workers' remittances and compensation of employees (receipts) 177 215 Regulatoryquality Current account balance -69 -216 Rule of law as a Q/~ of GDP -1 5 -3 4 Control of corruption Reserves including gold 688 1,487 0 25 50 75 100 Central G o v e r n m e n t Finance 1/ Q 2004 Country'spercentilerank (0-100) 02000 higher valuer rrnpfy bsfferralings (% of GDPj Revenue 20 5 19 6 Source Kaufmann.Kraay-MastNrli World Bank Tax revenue 18 1 179 Expense 20 5 20 9 Technology and Infrastructure 2000 2004 Cash surplus/deficit -3 8 -5 2 Paved roads (% of total) 97.0 700.0 Highest rnarginai tax rate (Oh) Fixed iina and mobile phone Individual 25 25 subscribers (per 1,000 people) 388 700 Corporate 25 25 High technology exports (Ohof manufactured exports) 1.o 4.5 External D e b t a n d Resource Flows E n v i r o n m e n t (US$ miliionsj Total debt outstanding and disbursed 1,720 2,294 Agricultural land (%of land area) 56 56 Total debt service 485 260 Forest area (% of land area, 2000 and 2005) 18.7 18.2 HlPC and MDRl debt relief (expected;flow) - - Nationally protected areas (% of land area) Total debt (% of GDP) 36 5 36.0 Freshwater resources per capita (cu. meters) 2,229 Total debt service (X of exports) 172 7 2 Freshwater withdrawal (% of internal resources) 22.2 Foreign direct investment (net inflows) 266 14 C02 emissions per capita (mt) 2.4 2.6 Portfolio equity (net inflows) -4 79 GDP per unit of energy use :omposition of total external debt, 2004 (2000 PPP $ per kg of oil equivalent) Energy use per capita (kg of oil equivalent) IDA 11 wo (US$ rndlionsj IBRD Total debt outstanding and disbursed 86 68 Sholt-term, 1353 Disbursements 4 2 Principal repayments 18 9 Interest payments 5 2 ISS millions IDA Total debt outstanding and disbursed 14 10 Disbursements 0 0 Private Sector D e v e l o p m e n t 2000 2005 Total debt service 1 1 Time required to start a business (days) - 46 IFC (fiscalyear) Cost to start a business (% of GNi per capita) 8.8 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 Portfolio sales, prepayments and (Ohof managers surveyed who agreed) repayments for iFC own account 3 0 n.a. n.a. MlGA Gross exposure Stock market capitalization (Ohof GDP) 29.8 41.5 New guarantees -- -- Bank branches (per 100,000 people) .. 11.9 Note Figures in italics are for years other than those specified. 2005 data are preliminary estimates. .. indicates data are not available. - indicates observation is not applicable. 9114/06 l / Revenues refer to current revenues excluding current grants: expenses refer to current expenditures: and, deficit refers to deficit after total grants. Development Economics, Development Data Group (DECDG). Annex A1 Page 3 of 3 Millennium Development Goals Mauritius W/thselected targets to achieve between 1990and 2015 (estimate closest to date shown, +/- 2 years) Goal 1: halve the rates for $1a day poverty and malnutrition 1990 1995 2000 2004 Poverty headcount ratio at $1 a day (PPP, Oh of population) Povertyheadcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitiie (Oh) Prevaience of malnutrition (% of children under 5) 15 Goal 2: ensure that children are able to complete primary schooling Pnmary school enrollment (net, Oh) 91 93 95 Primary cornpietionrate (% of relevant age group) 64 98 105 97 Secondary school enrollment (gross, %) 55 78 88 Youth iiteracy rate (% of people ages 15-24) 91 95 Goal 3: eliminate gender disparity in education and empower women Ratio of aids to bovs in Drimarv and secondarv education Ph) . , 102 98 100 Women employed in the nonagricultural sector I . L ( O hof nonagricultural employment) 37 36 39 35 Propoltion of seats held by women in national parliament (%) 7 8 8 6 Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 23 21 18 15 Infant mortalityrate (per 1,000 live births) 20 20 16 14 Measles immunization (proportion of one-year olds immunized, %) 76 89 84 98 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000live births) 24 Births attended by skilled health staff (% of total) 91 98 100 99 Goal 6: hait and begin to reverse the spread of HIV/AiDS and other major diseases Prevaience of HIV (% of popuiation ages 15-49) 0.6 Contraceptive prevalence (Ohof women ages 15-49) 75 26 76 incidence of tuberculosis (per 100,000people) 68 64 Tuberculosis cases detected under DOTS (Oh) 34 33 33 Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of popuiation) 100 100 Access to improved sanitation facilities (% of population) 94 Forest area (% of total land area) 19.2 18.7 18.2 Nationally protected areas (Ohof total land area) C02 emissions (metric tons per capita) 1.4 1.6 2.4 2.6 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) Goal 8: develop a global partnership for development Fixed iine and mobile Dhone subscnbers (Der 1 000 oeoole) 55 143 388 700 internet users (per 1,000people) I , 0 2 73 146 Personai computers (per 1,000people) 4 32 101 279 Youth unemployment(Ohof total labor force ages 15-24) I 1Education indicators (%) vleasies immunization (%of 1-yearolds) CT indicators (per 1,000 people) 800 e00 I 'L 400 200 50 1998 ' 20; ' 2 k ' 2004 ' 0 1990 1995 2000 2004 2000 2002 2004 -Primary net enrollment ratio +Ratio of girls to boys in pnmary 8 UFixed + mobile subscribers 0Mauritius 0Sub.Saharan Africa seconda education 0internet users Note: Figures in italics are for years other than those specified. .. indicates data are not avaiiable. 8/12/06 Development Economics, Development Data Group (DECDG). Annex B2 Page 1 o f 1 Annex B2 - Mauritius Selected Indicators* of Bank Portfolio Performance and Management As Of Date 07l2412006 Indicator 2004 2005 2006 Portfolio Assessment a Number of Projects Under Implementation 2 1 1 Average Implementation Period (years) 4.5 7.4 8.4 Percent of Problem Projects by Number a' 0.0 0.0 0.0 Percent of Problem Projects by Amount a' 0.0 0.0 0.0 Percent of Projects at Risk by Number a , d 0.0 0.0 0.0 Percent of Projects at Risk by Amount at 0.0 0.0 0.0 Disbursement Ratio (YO)e 6.4 19.3 24.0 Portfolio Management CPPR during the year (yes/no) No No No Supervision Resources (total US$) 135,000 117,000 101,000 Average Supervision (USWproject) 67,000 59,000 101,000 Memorandum Item Since FY 80 Last Five FYs Proj Eva1by OED by Number 31 2 Proj Eva1by OED by Amt (US$ millions) 346.2 3.5 % of OED Projects Rated U or HU by Number 16.1 0.0 % of OED Projects Rated U or HU by Amt 9.6 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the * beginning of the year: Investment projects only. All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. Annex B3 Page 1 of 1 Mauritius CAS Annex 83 IBRDllDA Program Summary - - As Of Date 08/21/2006 Proposed IBRDllDA Base-Case Lending Program a Fiscal year Proj ID US$(M) Strategic Rewards b Implementation b (H/M/L) Risks (H/WL) 2007 Env. UrbanTransp Inv Phase1 (FY07) 12.0 M M Development Policy DPLI (FY07) 30.0 H L Sub-total 42.0 2008 Development Policy DPL2 (FY08) 30.0 H L Infrastructure (to be determined) 20.0 M M Sub-total 50.0 2009 Development Policy DPL3 (FYO9) 30.0 H L Urban Infrastructure 20.0 M M Sub-total 50.0 Total 142.0 Annex B3 Page 1 of 1 CAS Annex B3 (IFC & MIGA) for Mauritius Mauritius IFC and MIGA Program,FY 2004-2007 - 2004 2005 2006 2007 IFC approvals (US$m) 0.00 0.00 0.00 Sector ("/o) Investmentinstrument(%) MIGA guarantees (US$m) 0.00 0.00 0.00 Annex B4 Page 1 of 1 Annex B4 Summary of Nonlending Services -Mauritius - As Of Date 07/24/2006 Product Completion FY Cost (US$OOO)Audiencea Objectiveb Recent completions Pension Reform FY02 76 Government Problem-solving CPAR FY03 76 Bank Knowledge CAS FY02 a5 Bank Strategy Transport Action Plan FY03 31 Government Problem-solving PER FY04 244 GovVBank Knowledge Investment Climate Assessment FY06 75 Government Problem-solving CEM FY06 462 GovVBank Knowledge Labor Market Study FY06 50 Government Problem-solving Communication Assessment FY06 86 Government Problem-solving Aid for Trade Report FY06 165 Government Problem-solving Cabinet Retreat and Meetings with Knowledge/Probl International Practitioners FY07 GovVPublic em-Solving Planned Communication FY07 100 Government Problem-solving LandIUrban Policy Note FY07 90 Government Problem-solving Public Expenditure Review FYO7-09 200 Government Problem solving HIV/AIDS IDF FY07 30 Government Problem solving a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. Annex B6 Page 1 o f 2 Mauritius Key Economic Indicators - _______ _____ ____________Estimated ______________________Projected ___ ____ _ _ _________.______.- ~ Avg 2010111- Indicator 200l102 2002104 2003104 2004105 2005/06 2006107 2007108 2008109 2009110 201212013 National accounts (as 'K o f CDP) Gross domestic product " 100.0 100 0 100 0 100 0 100 0 100 0 100.0 100.0 100 0 100.0 Agriculture 7.1 6 1 6 2 6 1 5 6 5 4 4.5 4.1 4 0 3.7 Industry 30.9 30 4 29 6 28 2 26 9 26 2 25.2 24.3 24 0 23.4 Services 62.0 63 5 64 3 65 7 67 6 68 4 70.3 71.6 72 0 72.9 Total Consumption 74.8 75 2 76 6 81 1 85 2 81 5 80.7 79.9 78 2 75.5 Gross domestic fixed investment 22 3 22 2 22 1 21 3 22 5 26 6 24.5 24 0 24 3 26.5 Governinent investinent 7 0 7 9 7 7 6 6 7 5 I O 8 8 5 7.7 7 8 8.3 Private investinent 15 3 I 4 3 14 5 14 8 15 0 15 8 16.1 16.4 16 5 18.2 Exports (GKFS)L 60 6 59 1 55 2 56 5 59 7 63 5 66.3 67 1 68 4 70.9 Iinporrs (Gh'FS) 56 8 56 9 55 9 60 9 68 6 71 6 71 6 71.0 70 8 72.9 Gross doinestic savings 25.2 24 8 23 4 18 9 14 8 18 5 19.3 20 1 21 8 24.5 cross national savingsd 26 5 26 3 23 8 I 9 7 I 6 4 I 9 6 19.8 20 3 21 9 24.3 Memorandum ilems Gross domestic product 4549 5248 6064 6290 6448 6598 6851 7103 7399 8508 (US$inillion at current prices) GNl per capita (US$,Atlas method) 3880 4010 4520 5250 5410 5380 5460 5570 5750 6357 Real annual growth rates (%, calculated froin 1992 prices) Gross domestic product at market prices 2.7 3 2 4 7 4 6 3 5 3 5 3.6 3.8 4 3 5.3 Gross Domestic Income I.7 4 4 2 7 0 5 0 1 9 1 4 3 4.8 5 2 6.5 Real annual per capita growth rates (%, calculated from 1992 prices) Gross domestic prodiict at market prices 1 6 2.3 .3 7 3 5 2 4 2 5 2.6 2.8 3 3 4.4 Total consumption 0 0 4.2 2 6 4 3 2 9 5 2 3.5 3.6 2 8 4.2 Private consumption -0 7 4.4 2 5 4 3 2 8 6 2 4.1 4.1 2 9 2.4 Balance of Payments (US$millions) Expotts (GNFS)c 2749 3065 3401 3592 3922 4190 4545 4769 5058 6042 Merchandise FOB 1569 1871 2014 2028 2254 2270 2382 2435 2528 2852 linpoits (GNFS)b 2577 3005 3357 3861 4330 4725 4903 5046 5241 6209 Merchandise FOB 1199 2162 2385 2733 3097 3411 3525 3609 3739 4385 Resource balance 172 60 45 -269 -408 -535 -358 -277 -183 -167 Net current transfers 71 81 60 58 39 47 41 46 62 67 Current account balance 248 139 68 -216 -333 -461 -326 -266 -177 -185 Net private foreign direct investment 48 57 35 -32 -10 45 55 55 55 55 Long-term loans (net) -15 -14 -64 -8 1 50 290 288 258 181 272 Official 14 8 -54 -43 -43 11 28 12 -8 .I1 Private -29 -22 -1 I -38 93 279 260 245 189 283 Other capital (net, tncl. en-ors & oininissions -38 137 19 220 195 -5 -5 -5 -5 -5 Change ti1 reserves' -243 -319 -118 109 98 131 -12 -4 1 -54 -137 ,Memorundurn items Resource balance (%of GDP) 3 8 1.1 0 7 -4 3 -6 3 -8 1 -5.2 -3 9 -2 5 -2.0 Real aiiniial groktli rates ( YR92 prices) Merchandise exports (FOB) -5 0 10.7 0 6 -2 0 8 8 -1 5 3.8 1.7 3 1 4.7 Priinaiy 9 9 -19.3 2 7 6 6 -6 1 -7 3 2.5 -12.4 -5 0 0.0 Manufactures -4 5 0.3 -1 8 -17 1 -11 0 0 9 0.2 0.0 0 0 0.0 Merchandise imports (CIF) -6 8 12.8 -1 9 0 0 8 7 5 0 3.3 3.4 4 3 8.9 Annex B6 Page 2 of 2 Mauritius Key Economic Indicators - (Continued) Indicator Public finance (as '% of GDP at market prices)' Current ieveiiiies 184 20.2 202 19.6 199 20.1 19.3 19.1 19 3 194 Current expenditures 20.3 21.0 21.0 20.9 22.1 21.5 20.1 19.8 19 2 I 8 8 Current account surplus (+) or deficit (-) -1.9 -0.8 -0.8 -1.3 -2.2 -1.4 -0.8 -0.7 0 0 0 6 Capital expenditure 4 1 5.3 4.6 3.9 3.2 3.4 3 4 3.5 3 5 3 6 ForeiF financing 0.8 0.1 -0.3 0.3 -0.5 0.1 -0.2 -0.4 -0 4 -0 4 Monetary indicators MZIGDP 80.5 82.3 84.9 87.7 90.5 90.0 90.0 89.8 89.6 89.2 Growth of M 2 (%) 13.0 11.7 14.4 13.1 11.2 10.2 9.8 9.8 9.8 9.8 Private sector credit growth 1 78.7 54.2 37 8 67.6 75.7 75.6 72.7 72.7 85.8 88.1 total credit growth (%) Price indices( YR92 =loo) ivlercliandise export price index 9 0 0 9 6 9 1037 1066 108.9 111.2 112.5 113.0 113 8 1175 Merchandise iinpon price index 95.5 1018 115.0 131.0 137.0 145.5 145.6 144.1 143 2 I42 6 Merchandise terms o f trade index 94.3 95.2 90.2 81.4 79.5 76.4 77 2 78 4 79 5 82 4 Real excliange rate (US%/LCL')' 104.5 103 7 100 6 95.0 93.0 91 1 89.3 87 5 85 7 85 7 Consumer price index (% change) 6 3 5.1 3.9 5.6 5.1 8.5 6.0 6.0 5.5 4.5 GDP deflator (Ohchange) 6 6 5 9 5.9 4.8 4 1 7.0 6.0 6.0 5.5 4.5 Source. Coiintiy Local Data Base, September, 2006. a. GDP at factor cost b. Excludes changes in stocks, which are projected at zero sstarting on 2006107. c "GNFS" denotes "goods and nonfactor services." d. Includes net tinrequited transfers excluding official capital grants. e. Includes iise o f IMF resources. e Consolidated central government f. "LCU" denotes "local currency units.'' An increase in US$/LCU denotes appreciation. Annex B7 Page 1of 1 Mauritius Key Exposure Indicators - Total debt outstandingand 2179 2422 2222 2314 2605 2894 3152 3334 3555 3910 disbursed (TDO) (USSiii)a Net disbursements (USSm)a -14 9 -14 0 -64 5 -8 I 50 290 288 258 181 272 Total debt service (TDS) 233 253 256 248 220 203 209 218 229 265 (US$in)a Debt and debt seivice indicators ("/I TDOIXGSb 66 2 6 1 2 58.3 53.8 59 1 60 9 63.4 63.3 62 8 56.6 TDOIGDP 41 5 39 9 35.3 35 9 39 5 42 2 44.4 45.1 45 0 42.8 TDSIXGS I1 7 0 6.7 5 8 5 0 4 3 4.2 4.1 4 0 3.8 ConcessioiialITDO 6 1 13 6 14.1 13 9 11 9 104 8.8 7.4 5 9 3.9 IBRD exposure indicators (%) IBRDDSIpublic DS 11 2 1 4 5.4 5.4 5 4 5 9 5.8 5.1 4 0 2.6 Preferredcreditor DSIpublic 23 1 23 5 20.3 20 4 21 8 26 9 28.2 26.5 22 2 16.4 DS (%o)c IBRD DS/XGS 0 6 0 4 0 3 0 3 0 2 0 2 0.2 0.2 0 2 0.1 IBRD TDO (US$ni)d 100 89 80 12 64 83 112 145 180 239 Share of IBRD ponfoiio (Oh) 0 1 0 1 0. I 0 1 0 1 0 1 0.1 0.I 0 2 0.2 IDA TDO (US$m)d 13 0 12 0 10.7 I O 7 10 1 9 5 8.9 8 3 7 7 6.4 IFC (USSni) Loans 0 0 0 0 0 0 0 0 0 0 Equity and quasi-equity IC 0 0 0 0 0 0 0 0 0 0 MIGA MIGA guarantees (US$ml 0 0 0 0 0 0 0 0 0 0 a Includes public and publicly guaranteeddebt, private nonguaranteed,use ofIMF credits and net short- term capital b "XGS" denotes exports o f goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d Includes presentvalue of guarantees. e Includes equity and quasi-equity types of both loan and equity instruments.