During a radio interview last week, a former senior official of the Ministry of Finance, Ali Mansoor, presented a contrasting perspective on the country’s economic situation, as follows: “Maurice ne traverse ni crise budgétaire ni crise fiscale, mais fait face à un déficit de production et d’exportation… ce qui entraîne un déficit commercial moyen de 1,4 milliard de dollars par an. Maurice n’a pas besoin d’un resserrement budgétaire, bien au contraire : il est essentiel de soutenir la consommation tout en mettant en œuvre des réformes structurelles pour renforcer les capacités de la population.”

In his view, Mauritius has the “marge de manœuvre” to avoid “un Budget d’austérité”, since foreign reserves have reached a record level of USD 8.8 bn, while the annual trade deficit stands at only USD 1.4 bn. He contends that fiscal spending can therefore continue unabated, as external reserves would not be fully depleted before another decade. The leader of the opposition also recently insisted on leaving social expenditures unscathed in the forthcoming budget.

Govt and many economic observers have instead been calling for fiscal consolidation to reduce the fiscal deficit and debt, especially to steer clear of the risk of a sovereign downgrading to below investment grade by credit rating agencies. Such a downgrade could trigger substantial capital outflows, destabilize the banking and financial sectors, and ultimately lead to a foreign exchange crisis. Averting the negative consequences of a credit downgrade should provide sufficient rebuttal to the notion that fiscal adjustment is unnecessary.

The belief that fiscal spending can be pursued without restraint is based on the mistaken inference that foreign exchange reserves are ample and offer scope for continued spending on imports. First, our trade deficit for 2024 is not USD 1.4 bn, but actually far higher at USD 4.4 bn – a surprising mistake from a seasoned economist. Secondly, gross external reserves of USD 8.7 bn at end-April 2025 are much lower, or close to USD 5 bn in net terms, excluding Bank of Mauritius (BoM) foreign short-term borrowings of USD 1.7 bn, forex deposits and cash balances of commercial banks with BoM of USD 1.6 bn, and gold swaps of USD 0.3 bn. The supposed flexibility between a USD 4.4 bn trade deficit and USD 5 bn in external reserves is minimal, offering little room for maneuver.

Reserves adequacy can be assessed in relation to imports, the trade deficit or the external current account deficit. A more rigorous measure of reserve adequacy, developed by the International Monetary Fund (IMF), is based on a broad set of risks reflecting potential drains on the overall balance of payments. In 2024, an IMF report on Mauritius estimated its gross official reserves at close to the lower bound of the recommended benchmark range for adequate reserve cover. The holdings of our external reserves for precautionary motives were considered just adequate. The IMF also urged the central bank to bolster foreign reserves buffers to guard against external shocks.

Ahead of the last general elections, the former Minister of Finance boasted of a booming economy and record-high external reserves. More recently, the political opposition again referred to the abundance of foreign reserves as evidence of a sound and performing economy. In countering these claims, the Bank of Mauritius should be more open and transparent about external reserves management, and consider disclosing data on both gross and net official reserves.

Despite alleged plentiful reserves and assertions of USD/ rupee stability, a chronic scarcity of foreign exchange still prevails. Monetary policy statements should more explicitly highlight the importance of tightening fiscal policy to stabilize forex market conditions. Unless the authorities choose to reimpose a formal exchange control regime, fiscal correction remains inevitable, even with a windfall on the Chagos deal. A windfall of, say Rs 10 bn, would contribute only a reduction of 1.4% of GDP to the fiscal deficit or public debt.

As shown in the table, the fiscal deficit for 2024-2025, excluding special funds, was initially budgeted at Rs 27 bn, then revised to Rs 48 bn in Dec 2024 in the State of the Economy Report, and is now estimated at Rs 65 bn, or around 9% of GDP. Excluding the new Govt’s Dec 2024 measures relating to the 14th-month bonus award and the petroleum price reduction, estimated at Rs 10 bn, the 2024-2025 deficit is projected to reach around Rs 55 bn, or twice the original budget estimate.

Public Sector Debt at June 25, without a consolidation adjustment, was originally budgeted at Rs 574 bn, later revised to Rs 613 bn in Dec 2024, and is now forecast at Rs 645 bn, or 90% of GDP. The IMF ranks Mauritius as the 6th most indebted country among 45 countries in Sub-Saharan Africa.

Potential contingent liabilities to Govt arising from the operations of state-owned companies and other public bodies, including from the Mauritius Investment Corporation (MIC), can further worsen the public debt burden. As reported in Govt’s audited accounts, financial guarantees to public corporations stood at close to Rs 40 bn in June 2024. In the light of MIC’s misvalued investment of Rs 25 bn in Airports Holdings, an independent financial audit of MIC is also recommended to gain a full measure of overall fiscal adjustment.

Advocating against fiscal discipline may resonate with populist logic, but the adverse outcomes of past fiscal laxity, as regards to rupee depreciation, inflation and lower growth, are all too obvious. Instead, the phased implementation over five years of a strict programme combining lower Govt spending, higher taxation, and targeted structural reforms is essential to thwart an impending economic crisis, and to foster productivitybased growth.