IMF make motorists pay more to beat pollution and traffic congestion

The authorities agreed, the IMF says in its latest country report, that taxes are the appropriate instrument to reduce environmental damage while preserving revenue. The IMF recommends converting a tax on energy products into an explicit carbon tax to fully reflect the externalities associated with CO2 emissions.

There should also be a tax system on motor vehicles that raises the marginal costs of driving to reduce pollution and alleviate traffic congestion in the Port Louis area.

Going forward the IMF encourages the authorities to continue to review its tax system to make it more environmentally sustainable and growth-enhancing.

The IMF says that the government’s prompt policy response over 2008-10 helped to cushion the economy from the impact of the global crisis and supported an economic recovery in 2010.

The fiscal stimulus packages combined with monetary easing and various measures aimed at preserving private sector jobs contributed to the rekindling of growth to 4%.

The policy measures included in the 2011 Budget reflect the authorities’ intention to diversify exports, restructure and deleverage enterprises, accelerate public infrastructure investments, and improve the regulatory environment.

Going forward, the IMF recommended a less expansionary fiscal policy. With the output gap in 2011 estimated close to zero, the IMF recommends limiting the overall fiscal deficit to 4.25% of GDP.

This lower deficit target is still compatible with the need for higher capital spending to address infrastructure bottlenecks.

Though Mauritius is well placed to comply with the legally-mandated 50% of GDP debt ceiling by 2018, the IMF recommends a slightly more ambitious mediumterm fiscal consolidation path to further reduce debt vulnerabilities and suggests to target the structural primary fiscal balance to achieve a debt-to-GDP ratio of less than 40% over the longer term.

“The central bank should closely monitor inflationary pressures with a tightening bias to ensure that recent inflationary pressures do not become engrained. With the appropriate early monetary policy response and wage restraint, the second round effect of imported inflation should be limited,” the IMF says.

BOM’s measures to remove excess liquidity will likely reduce its profitability and should be well coordinated with the government’s financing strategy to ensure a smooth operation of the money and securities’ markets.

Estimates suggest that the rupee appreciated further during 2010 with respect to its estimated equilibrium rate, although it can still be considered to be broadly in line with fundamentals.

Mauritius has implemented important structural reforms in the past, but needs to continue with its farreaching reform strategy to increase its long-run growth potential.

The IMF estimates that growth rates above 4% require accelerated investment project implementation, labour market reforms to reduce unemployment, and education initiatives to enhance human capital.

Improvement in service delivery and efficiency in the public enterprise sector, particularly for water, is recommended. The authorities, says the IMF, should expand their policy of increasing the role of the private sector in managing State-owned enterprises.

The report also supports the authorities’ intention to diversify its export base, which at present relies heavily on Europe.