Audit of Mauritius economic policy reform program, no. 642-0008

Compliance audit covers the period through 10/87 and is based on document review and interviews with REDSO/ESA, USAID/M, and Government of Mauritius (GOM) officials. The program achieved its purpose of providing foreign exchange and budgetary support and the GOM undertook substantial policy reforms. However, (1) the GOM did not adhere to reporting requirements on the use of the local currency (LC) equivalent of program funds; (2) nor were specific first tranche performance criteria negotiated as conditions precedent for releasing the program grant"s second tranche. (1) Although the Grant Agreement required the GOM to advise A.I.D. on specific allocations of LC within 30 days of receipt of the dollar grant, the GOM did not communicate this information until 12 months later, and indicated then that the funds were expended for tourism and water supply projects in FY 87 (and not, as was intended and as was in fact the case, in FY86). This occurred because REDSO/ESA did not adequately monitor reporting. During the audit a Program Implementation Letter (PIL) was issued setting out how REDSO/ESA intended to monitor the use of LC generated from the second tranche, and the audit recommendation regarding this is considered closed. (2) Specific criteria were not negotiated by REDSO/ESA as conditions precedent to release of the second grant tranche. Although the PAAD specified that the measures would be set out in a PIL and agreed to, the GOM never responded to the draft PIL drawn up by A.I.D. (apparently because the GOM experienced delays in related negotiations with the World Bank and the International Monetary Fund). As a result, REDSO/ESA had no criteria with which to measure the GOM"s economic reform achievements. REDSO/ESA had no choice but to release the second tranche of funds, as the GOM had undertaken substantial reforms in the areas of industrial incentives and lowering of tariffs. However, the GOM did not achieve REDSO/ESA"s objective of reducing disparities in rates of trade protection. To prevent similar situations in the future, it is recommended that conditions precedent in economic policy reform programs either contain specific benchmarks or require establishment of specific benchmarks as criteria for release of program funds. REDSO/ESA has agreed to issue a policy statement implementing the recommendation.