The fiscal tightening underlying the 2025-26 Budget has drawn sharp public criticism, especially for raising the Basic Retirement Pension (BRP) entitlement age to 65 years. In response, Government is proposing to offer targeted income support to those most affected by this pension reform. In updating its Budget measures to cope with such implementation issues, Government should remain steadfast in exercising fiscal discipline.

The recent International Monetary Fund (IMF) Article IV Consultation Report 2025 also advocates strong fiscal consolidation. This article compares IMF to Government fiscal adjustment scenarios and highlights the need to address potential risks and reinforce the credibility of fiscal policy.

IMF and Budget outlook

The IMF and Government Budget scenarios are broadly wellaligned, with comparable estimates of sharply declining fiscal deficits and debt, with annual GDP growth at 4% and 3.4% respectively, and inflation at 3.5%. The IMF Report underlines the high overall risk of sovereign stress, calling attention to “Moody’s downgrading of the (investment grade) rating outlook to negative”. The Budget Speech also raises the urgency “to prevent a downgrading of our sovereign rating which could be catastrophic to our economy”.

The IMF Report does not refer to the 2025-26 Budget estimates, or account for expected Chagos revenue of around Rs10 bn, or 1.3% of GDP. Including Chagos revenue, the fiscal deficit projected by the IMF falls markedly by 5.4 % points of GDP in 2025- 26. Government’s budgeted deficit for 2025-26 also improves significantly by 4.9% points, from 9.8% of GDP in 2024-25 to 4.9% of GDP in 2025-26.

In comparison with Government Budget, the IMF projections over the next three years show a slightly stronger fiscal effort, with a greater focus on expenditure restraint. The IMF’s projected expenditure is about 2% of GDP lower than Government’s budgeted expenditure, and IMF projected revenue is about 1% of GDP lower than Government’s budgeted revenue. According to the IMF, further fiscal consolidation is expected to bring down public debt to 83% of GDP by June 2031. With annual Chagos revenue, the public debt ratio will adjust faster and reach closer to Government’s debt target of 75% of GDP by June 2031.

Fiscal risks

The IMF highlights potential public debt management issues due to contingent liability risks, arising from latent losses in the Mauritius Investment Corporation (MIC), held by the Bank of Mauritius (BoM), and to a lesser extent in Silver Bank. The IMF recommends the gradual winding down of the MIC and a prompt return of its undisbursed funds of over Rs25 bn to the BoM, to avert any further recourse to quasi-fiscal financing with printed money.

The biggest MIC loss will likely stem from a Rs25 bn investment in Airport Holdings, a Government-owned company. The BoM’s potential recapitalization needs will require fiscal support and further burden public debt. The IMF also notes that the BoM’s significant external borrowing of about USD1.5 bn also poses contingent liability risks to Government debt in the medium term.

Fiscal execution risks, as emphasized by Moody’s, arise when Government’s revenue and expenditure targets are not met. Tax revenue in 2025-26 is expected to increase sizeably by 18% and rise by 2.5% of GDP. Total revenue will stabilize around a high record level of 30% of GDP, up from 25% in 2024-25. Expenditure is forecast to progressively decline from 35% of GDP in 2024-25 to 31% in 2027-28. Government deficit would thus improve to a historic low of about 1% of GDP in 2027-28.

The attainment of these ambitious budgetary objectives is challenging. A planned reduction in social benefits, which, together with employee compensation, represents half of total Government’s expenditure, is crucial. But Government is also likely to encounter implementation setbacks, in the wake of negative public response to unpopular measures. Boosting revenue from income and corporate taxation is effective, but high marginal tax rates can prove counterproductive by stifling work effort, investment and innovation.

Fiscal measures

The potential contingent liability and budget execution risks should be addressed to enhance the credibility of fiscal adjustment, particularly in relation to Moody’s. Government should be willing to examine a broader range of revenue options and expenditure cuts. Changing demographics and critical financial constraints warrant deeper reforms to ensure a viable welfare state. The proposed Committee of experts on pension reform could suggest more wide-ranging measures, including multi-tiered income targeting, to achieve greater financial savings for pension sustainability.

A fundamental restructuring of the public sector will contribute to improving public financial management and reducing expenditure. Without a proper performance management system in the Civil Service to ensure individual accountability, the revived Program Based-Budgeting will again fail to enhance spending efficiency. The announced preparation of consolidated financial statements for the public sector, should be concluded without further delay to provide a comprehensive and accurate view of fiscal performance.

Revenue measures could include further VAT strengthening, the adoption of island-wide property taxation and a review of free transport to charge minimal user payments. The revision of public utility pricing to better reflect costs, with due regard for low-income consumers, will lessen the drain on Government financial resources. Equity investments and lending to cover operating costs of public bodies, such as CWA, WMA, Airports Holdings and Metro Express, average Rs5 bn annually, raising Government’s borrowing requirements by about 0.5% of GDP.

Messaging deficit

The urgent need for fiscal discipline is not widely understood and should be better explained. Consultations with trade unions and civil society on social measures are indispensable. Government must communicate more effectively that high deficit spending has reached its limits, with the country now under threat of an imminent crisis for two reasons.

Firstly, Mauritius is only one of two countries in Africa with a sovereign investment grade rating and may soon lose this status on account of high indebtedness, which will likely precipitate a financial crisis. Secondly, high Government deficit spending is feeding into the external current account deficit, weakening the rupee and putting pressure on external reserves, which will lead to a foreign exchange crisis.

The Budget speech does raise the danger of a sovereign downgrading but minimizes the risk of a forex crisis by claiming that “the Bank of Mauritius has also been able to stabilise the value of the rupee which reins in inflation”. Affirming that all is well on the monetary and external reserves situation, as with the previous Government, creates a serious dissonance. Foreign exchange scarcity remains chronic, the rupee continues to fall and year-on-year inflation is resuming an upward trend.

As an independent central bank, BoM is committed to restrictive monetary policy in combating inflation and to exchange rate flexibility in line with market conditions. BoM should therefore adopt a more independent and hawkish stance, with the explicit warning that higher interest rates and a weaker rupee are the inevitable consequences of unchecked Government spending. Monetary discipline facilitates and strengthens the process of fiscal adjustment.

Conclusion

The country is at a critical juncture and has no other alternative but to apply fiscal discipline. Relying on monetary expansion, rupee depreciation and inflation, to deflate public debt as in the recent past, is only possible if Government’s spending is controlled. A formal re-introduction of exchange control may stabilize the rupee without recourse to painful fiscal measures, but it would not save us from a junk credit rating.

Government must stay on track in its effort to improve public finances and lower public debt vulnerabilities in the medium term. Achieving a medium IMF sovereign stress risk rating calls for even more ambitious fiscal consolidation. Expanding fiscal space is also essential to deal with contingent liabilities, budget execution risks, and potential climatic shocks. Stringent fiscal adjustment is more an imperative than a choice.