The 2007/2008 budget is a positive for the economy and the business community in particular as it continues to march along the path of reform and fiscal consolidation. In addition, the shift from inefficient subsidies to a more targeted policy approach will bode well for the most needy in the long term.

Recurrent revenues are expected to stand at 19.1 % of GDP in 2007/2008, a 0.5 % decrease over 2006/2007, a function of a lower tax regime albeit partly made up by stronger economic growth and a tighter tax net to capture a greater tax haul.

For 2007-2008, on account of the various budgetary initiatives and a very encouraging 22 % increase in capital spending, total expenditure is expected to stand at 24.2 % of GDP. The fiscal deficit is expected to drop to 3.8 % of GDP (from 4.3 % last fiscal year), a ratio that has been pushed down by an estimated Rs 2.9Bn in grants mostly coming from the EU. The inflow of these grants over the next few years is conditional on maintaining the cap on the reform process.

With this signal on grants, the Government finally appears to be committed to pursuing these necessary reforms which bodes well for the future of the economy. While some may argue that the budget did not sufficiently address inflationary concerns, bar any major oil supply shocks this year, a favorable base is expected to see inflation begin to head downwards towards the low to mid 6% range by next June.

Fiscal consolidation will also allow the Bank of Mauritius to follow a relatively less expansionary monetary policy in the coming years (to finance a lower fiscal deficit) and our forecasts indicate that for a second year in a row, the money supply is expected to grow below nominal GDP growth.

If this trend continues, excess liquidity in the economy will continue to fall which should lead to less inflation and lower interest rates (and lower finance costs for companies) in the longer term. This is important since although small and medium enterprises may find it easier to set up a business because of the reforms, they will need lower borrowing costs to expand in the future.

<B>Creation of a derivatives market</B>

The budget is also a positive for the stock market. With the support of the Government, the Stock Exchange of Mauritius will be able to encourage more cross listings of foreign firms and the creation of a derivatives market on underlying instruments traded in other markets.

One of the main problems facing the local stock market is the limited number of attractive and liquid stocks available for investors. The intention of the Government to list SICOM and Mauritius Telecom, if implemented, will not only raise revenue for the Government but will also offer investors with additional opportunities while encouraging these companies to raise both productivity and profitability in order to attract such investors.

On the whole the main index of the stock market is expected to see earnings growth in excess of 20% this year which, when added to a lower tax regime, will only serve to enhance shareholders? value further.

Overall, the 2007-2008 budget sends a good signal to the business community. However, the timely implementation of the proposed reforms is imperative to ensure that the Government achieves the targeted growth. This will create the necessary fiscal space to sustain future spending increases while reducing the debt burden.