The recent statements issued by the IMF and Moody’s on Mauritius, dated 4 May 2026, should be interpreted with caution and realism. While both acknowledge progress, they send a clear message that the fiscal situation remains unsustainable and leaves no scope for complacency.

The IMF expects that economic growth will slip further down to 2.8% in 2026, largely because of the adverse effects of the Middle East conflict. This figure is lower than the baseline projection of Stats Mauritius at 3.0%, but higher than its worst-case scenario of 2.3%. Investments should be more actively incentivized, especially in new sectors, to improve growth prospects.

Inflation is on the rise. After averaging 3.7% in 2025, headline inflation has now climbed to 4.2%. This trend reinforces the need for prudent monetary management to prevent inflation from eroding purchasing power and undermining financial stability. Although completely overlooked by IMF and Moody’s, the growing scarcity of foreign exchange is exerting downward pressure on the rupee.

On fiscal policy, both IMF and Moody’s recognize significant but insufficient progress in addressing the large budget imbalance. IMF expects a notable reduction in the fiscal deficit from 9.3% in 24/25 to 6.8% of GDP in 25/26, but “at a slower pace than envisaged under the budget”. The budgeted deficit estimate for 25/26 is 4.9% of GDP, inclusive of the Chagos revenue of Rs10 bn, or 6.2% without this item.

Similarly, Moody’s observes that fiscal consolidation is pointing to a material deficit reduction, “showing early signs of progress, even though not fully on track with Government’s plans”, and notes Government’s expectation that the deficit in 25/26 will “remain high” at around 6.5% of GDP.

IMF also projects public sector debt to “remain elevated at around 88% of GDP” at June 2026 and urges continued efforts for fiscal sustainability through stronger revenue mobilization and containment of current spending, particularly on pensions, and including temporary measures to deal with the effects of the Iran war.

It would be a serious misreading of these assessments to conclude that the threat of a Moody’s downgrade has receded. On the contrary, Moody’s is explicit that “delays in fiscal consolidation that lead to persistently high deficits, causing debt to at best stabilize at high levels would be likely to result in a rating downgrade”. Government debt, excluding public enterprises, currently exceeds 80% of GDP, and is likely to remain higher than the level of 79.6% in June 2025.

Despite the progress made, Moody’s has not raised Mauritius’ outlook from negative to stable, a clear signal that current efforts fall short of what is required. Moody’s will surely review Mauritius again in the light of the detailed analysis of the upcoming IMF mission report, as well as the fiscal measures and targets proposed in the next budget. Any self-congratulatory comments would be misplaced if Moody’s maintains a negative outlook.

Government highlights that expenditure declined by 3.9% between the period from July 2025 and February 2026 and the corresponding eight months of the previous fiscal year. However, spending by the end of 25/26 will come under increased pressure with the effective payment of half of the PRB salary award due from January 26. It is therefore estimated that expenditure in 25/26 will be about unchanged over 24/25. Fiscal consolidation in 25/26 will likely depend almost entirely on higher revenues, representing a 10% increase over 24/25, whereas a more balanced revenue and expenditure approach should be favoured.

Credit downgrade concerns are amplified by heightened external risks, including uncertainty surrounding the Chagos revenue and the broader economic fallout from the Middle East conflict. While rating agencies may acknowledge these exceptional conditions, and make some allowance for added difficulties in pursuing fiscal adjustment, history shows that they do not hesitate to take rating actions during crises.

Moody’s and other rating agencies heavily downgraded several Asian countries during the 1997-98 financial crisis, particularly slashing ratings for Indonesia, Malaysia, South Korea, and Thailand. Several developing countries were similarly downgraded during the Covid pandemic, including South Africa which lost its investment grade status in March 2020. It would be reckless to contend that the risk of a Moody’s downgrade for Mauritius is no longer looming.

Additional vulnerabilities on public debt stem from contingent public liabilities, particularly those linked to the Mauritius Investment Corporation (MIC). IMF has once again urged the prompt return of undisbursed MIC funds to BoM, and a gradual phasing out of BoM from MIC. This IMF recommendation has been repeatedly ignored. MIC’s cash balances of Rs33 bn are still on deposit with BoM. MIC is seen as a source of sizeable hidden losses, which could further burden public debt.

Loss-making exposures in public enterprises reflecting contingent public liabilities would thus also influence Moody’s assessment. Budgetary loans and equity injections to deficit-laden public enterprises, estimated at around Rs6 bn for 26/27, are not counted as expenditures for deriving the fiscal deficit, but are fully reflected in public debt. Without due regard for cost efficiency, government financing for public utilities will continue to weigh on public indebtedness.

The overriding conclusion from the IMF and Moody’s assessments is unmistakable. Fiscal adjustment must not only be sustained but strengthened further. The 26/27 budget should target a deficit well below 5% of GDP, without banking on Chagos revenue, and put government debt on a clear downward trajectory towards 75% of GDP. Achieving this will require decisive reforms, including a strict targeting of pensions and subsidies, wide-ranging property taxation, and an extensive restructuring of the public sector.