III. Export Competitiveness and Exchange Rate Policy10
1. This chapter discusses several issues pertaining to Mauritania’s competitiveness and exchange rate policy. Section A outlines Mauritania’s trade patterns and exchange system. Section B provides an assessment of export competitiveness, based mainly on real effective exchange rate indicators and developments in market shares. Section C then offers some suggestions for exchange rate policy and daily management of the exchange rate.
A. Trade Patterns and Exchange System
2. Mauritania’s export base is heavily concentrated. Almost all of Mauritania’s exports (close to 99 percent) consist of two commodities: fish and iron ore, representing 45 percent and 54 percent of total exports in 2001, respectively.11 About 80 percent of exports go to industrial countries. EU countries are the sole recipients of iron ore, the major customers being France, Japan, Italy, and Spain, while fish exports are directed primarily at Asian countries, mainly Japan. Virtually no exports go to the United States.
3. Attempts at diversifying the export base have had limited success so far. In its 2000 Poverty Reduction Strategy Paper (PRSP), the government declared its intention to develop agricultural and livestock products, which will require foreign direct investment to develop distribution and packaging of fresh products. Another area of focus is tourism, which currently suffers from a shortage of basic infrastructure.12
4. Mauritania’s unfavorable climate, a low level of industrialization, and its narrow production base are reflected in its import composition. Petroleum products represent about 30 percent of total imports, food about 25 percent, machinery, transport, and equipment another 25 percent, with a further 15 percent being basic manufactures. The geographical distribution of imports is less skewed than that of exports, with about 60 percent coming from industrial countries. The bulk of imports come from the EU, with France (25–30 percent) having a share far in excess of any other country. About 6 percent of imports come from each of Africa and the Middle East, and about 10 percent from Asian developing countries. In contrast, Japan and the United States each account for only 3 percent of imports.
5. Mauritania trades very little with other African countries, with only 12 percent of exports and 6 percent of imports according to latest information. The vast majority of this trade is with two trading zones, UMA and ECOWAS.13 The main benefit of UMA membership is the access to mineral oil and related products. The main trading partners on the export side are Côte d’Ivoire, Liberia, Togo, and Benin, and on the import side Senegal and Côte d’Ivoire
6. Significant progress has been made in liberalizing Mauritania’s foreign trade regime. Until the mid-1990s, the trade regime was characterized by high protection rates, multiple tariff rates and bands, widespread exemptions, and significant nontariff barriers. Trade liberalization efforts intensified after the adoption of a medium-term strategy to reform the trade regime in late 1996. In particular: (i) the licensing system was eliminated; (ii) all import and export monopolies were abolished; (iii) the number of tariffs and quasi-tariffs was reduced from 33 to 4; and (iv) the combined maximum tariff rate was reduced from 180 percent to 20 percent by 2000. As a result, Mauritania’s average tariff rate was brought down from 19 percent to 9.2 percent in 2001, and its trade restrictiveness index has improved from 3 to 2 (on a scale of 1–10, with 10 being the most restrictive).14
7. The system of exchange controls has also been widely liberalized over the past decade. Since 1995, the major changes include the gradual removal of surrender requirements of export proceeds, the abolition of licenses to purchase imports, and the elimination of foreign exchange restrictions. Mauritania accepted the obligations under Article VIII of the Fund’s Articles of Agreements in July 1999.
8. Important steps have been taken toward a market-oriented determination of the exchange rate. A unified foreign exchange market has been gradually put in place, in particular with the introduction of the Expanded Exchange Market in April 2000, in which all banks and exchange houses participate. The central bank (Banque Centrale de Mauritanie) now determines the daily exchange rate on the basis of supply and demand trends in this market as well as other objectives, related to competitiveness, inflation, and reserve targets. Over the past two decades as well as in recent years, the Mauritanian currency has exhibited a depreciating trend against the major currencies (Figure 1).15
Figure III.1.Mauritania: Foreign Exchange Rate Market, November 1999-March 2002
Source: Mauritanian authorities.
1/ The EEM (Expanded Exchange Market) operations began around end of April, 2000.
B. Export Competitiveness and Exchange Rates
9. Assessing the competitiveness of Mauritania’s exports is difficult in view of data limitations, its narrow export base, and the institutional and trade arrangements in place that could affect exports for reasons not related to competitive factors. Traditionally, real effective exchange rate (REER) indicators along with the evolution of export market shares have been used to assess price competitiveness in several countries. Despite their limitations, these measures could provide some useful insights on Mauritania’s competitiveness.16
Evolution of the real effective exchange rate
10. Using the CPI-based REER as indicator, Mauritania’s competitiveness appears to have improved over the last fifteen years (Figure 2). In real terms, the ouguiya has depreciated by an average 5 percent a year since 1985. However, the rate of real depreciation of the Mauritanian currency has slowed down in recent years. Following a depreciation of the ouguiya over 1997—99—including a step devaluation of 11.6 percent in July 1998 after it became obvious that the exchange rate was misaligned—the REER has gradually stabilized. In 2001, the ouguiya did not depreciate in real terms, as the depreciation vis-à-vis the U.S. dollar was compensated by real appreciation with respect to Asian partners, while it stabilized vis-à-vis the euro.
Figure III.2.Mauritania: Monthly CPI-Based Real Effective Exchange Rate Index, 1980–2001
11. The evolution of the REER has been broadly the same vis-à-vis major trading blocks(Figure 3). Between 1985 and 2001, the REER for all partners fell by about 54 percent and by roughly the same amount, 56 percent, 49 percent and 51 percent, against the EU, Asia, and the United States. Fluctuations of these indicators at business cycle frequency tend to reflect exchange rate variations among the major currencies.
Figure III.3.Mauritania: CPI-Based Real Effective Exchange Rate Indices by Trading Partners, 1980–2001
Source: Information Notice System, IMF.
12. The real depreciation of the ouguiya over the past fifteen years may be explained by a steady nominal depreciation partly offset by a positive inflation differential. A positive inflation differential is true only if Brazil (a competitor with Mauritania in iron ore) is excluded from the sample. In this case, the real depreciation of the REER (of about 5 percent since 1985) is accounted for by a positive inflation gap (of over 3 percent) with a sharp 8.5 percent annual rate of depreciation. However, with Brazil part of the sample, Mauritania’s average rate of real depreciation is accounted for by an average nominal depreciation of 3.5 percent coupled with a negative inflation differential of over 1 percent.17Figures 4 and 5 illustrate the two cases as they decompose the REER into two components: the nominal effective exchange rate and the inflation gap vis-à-vis trading partners.
Figure III.4.Mauritania: Decomposition of Real Effective Exchange Rate Indices, 1980–2001 Figure III.5.Decomposition of Real Effective Exchange Rate Indices, 1980–2001
Source: Information Notice System, IMF.
13. Compared to a number of selected competitors, Mauritania’s REER has depreciated similarly or more rapidly over the last decade (Figures 6, 7, and 8). Among other major iron producers, Mauritania has gained competitiveness against China and to a lesser extent Australia and South Africa. Meanwhile, the continuous decline of Mauritania’s REER over the 1990s roughly matched the effects of the sharp step devaluation of the CFA franc in 1993, as evidenced by a comparison between Mauritania’s and Senegal’s REER. Competitiveness has also been gained by Mauritania against Morocco over the decade.
Figure III.6.Mauritania with Russia and China Figure III.7.Mauritania with Australia, Brazil, and South Africa Figure III.8.Mauritania with Morocco and Senegal
Source: Information Notice System, IMF.
14. Alternative REER measures are reported in Figure 9, based on GDP deflators, export deflators, and non-oil export deflators.18 The behaviors of the CPI and GDP deflator-based indicators closely parallel each other, while the two export deflator-based indicators show a different pattern—namely, a real appreciation by the mid-1990s followed by a stabilization. However, the latter two do not seem to measure competitiveness, as they appear to reflect, given their similarity, the terms of trade since the early 1990s (Figure 10). Rather, they may be seen as measuring the relative price of Mauritania’s products on world markets. This view is consistent with Mauritania being mostly a pricetaker.
Figure III.9.Mauritania: Real Effective Exchange Rate Indicators, 1980–2001 Figure III.10.Mauritania: Terms of Trade and REER Based on Export Deflator, 1980–2001
Source: Information Notice System, IMF.
15. Mauritania’s share of world iron ore production has remained small and broadly constant during the past decade, at just above 1 percent (Tables 1 and 2).19 This happened despite the collapse of the Russian market share after the fall of the Soviet Union in 199220 and despite the above-mentioned marked improvement in Mauritania’s exchange rate competitiveness against competitors in the iron ore market.
16. It appears that Mauritania’s share of world iron ore exports showed little sensitivity to aggregate exchange rate movements. This may be partially explained by the fact that Mauritania mainly exports low-grade ore, the demand for which is relatively stable. Besides, SNIM has been operating at levels close to full capacity during the last decade, and therefore Mauritania’s iron ore production could not have increased considerably, even in response to favorable changes in the aggregate real exchange rate.
17. Data on the state mining company’s (SNIM) costs in fact suggest that competitiveness of the mining sector has been stable since the mid-1990s (Table 3). When expressed in U.S. dollars, the unit cost of iron ore production has remained broadly unchanged since 1994. In ouguiyas, the unit cost increased markedly over the same period (by over 10 percent per year on average), much more than the CPI. This seems related to a number of factors, including the pass-through effects on input prices of the 1997–99 depreciation and a 15 percent increase in wages that are at the low end of the scale, in August 1998. However, a major expansion project is currently under way, including an upgrade in equipment, which should raise productivity and improve competitiveness in the medium term.
|Sales (in millions of metric tons)||10.3||11.5||11.1||11.7||11.4||11.0||11.1||10.1|
|Cost of goods sold (In billions of ouguiya)||11.2||11.8||13.4||14.2||15.5||16.5||21.5||23.3|
|Personnel expenses (In billions of ouguiyas)||3.4||3.5||3.6||3.9||4.4||4.3||4.3||4.9|
|Unit cost (In thousands of metric tons)||1.42||1.33||1.53||1.55||1.75||1.88||2.33||2.80|
|Unit cost (US$/metric ton)||11.5||10.3||11.1||10.2||9.3||9.0||9.8||11.0|
18. Evaluating the competitiveness offish exports is hindered by data limitations and by other nonprice factors. Mauritania’s share of world fish exports has been small, increasing from about 0.3 percent in the 1970s to 0.5–0.75 percent during the 1980s, but then falling back to about 0.3 percent by the late 1990s (Table 4).
19. While the movements in the exchange rate may have played a role, they cannot explain the large swings in the market shares. For example, the strong depreciation of the REER against Asian trading partners during the 1980s may have had an impact on fish exports and its market share. However, the decline in the market share in the mid-1990s was attributed to a great extent to the near collapse of the sector on account of overfishing that led to a substantial reduction in production. In addition, given that the bulk of cephalopods exports are to Asia (mainly Japan), the Asian crisis may have also reduced the demand for Mauritania’s fish. As for Mauritania’s competitiveness vis-à-vis its major African regional competitors in the fish market, it appears that it has been maintained during this period, as demonstrated by the relatively favorable evolution of the REER against significant producers such as Senegal or Morocco (Figure 8).21
20. Overall, it appears that Mauritania’s competitiveness has been maintained, although vigilance is required to prevent any reversal in the real effective exchange rate. Mauritania’s REER has remained broadly stable since 1999, including vis-à-vis European partners. Resisting real appreciation will be crucial in the future, especially in view of the narrow export base and the authorities’ intention to develop new nontraditional exports, as highlighted in Mauritania’s PRSP.
C. Exchange Rate Policy
21. As a general feature, given Mauritania’s exposure to idiosyncratic shocks, some nominal exchange rate flexibility seems desirable. The current account appears somewhat sensitive to terms of trade shocks originating in either changes in export prices (iron ore, fish) or variations in oil prices. In addition, Mauritania is exposed to significant real supply shocks, such as droughts or unexpected drops in fish catches (e.g., due to overfishing). Nominal exchange rate adjustments can help dampen the consequences of terms of trade or real shocks, as wage and price flexibility is likely to be low in the Mauritanian economy, and nominal exchange rate moves may significantly accelerate real exchange rate adjustments when needed. In addition, a degree of flexibility of the nominal exchange rate also helps to avoid unintended real exchange rate appreciation and more generally to maintain competitiveness of the tradable sector.
22. Meanwhile, the authorities are warranted in providing guidance to the foreign exchange market. The market remains thin and shallow. Exchange rate risks cannot be easily dealt with, as hedging instruments and forward contracts are underdeveloped. A policy of exchange rate neglect would open the door to larger swings in the value of the currency, a higher volatility of inflation, and increased transaction costs, which would hinder the development of foreign trade and investment. The need for both flexibility and guidance in exchange rate management thus supports the continuation of the managed float regime adopted by Mauritania, whereby the central bank fixes the official rate by pondering market trends and policy objectives.
23. In its daily operations, the central bank has tended to focus the exchange rate policy on the rate of exchange between the ouguiya and the U.S. dollar. It can indeed be shown that the dollar value of Mauritania’s currency has been empirically more stable than its value in euros or in yen. Over the past twenty years, though the ouguiya has exhibited a downward trend against all three major currencies, exchange rates variability around these trends has been somewhat lower in the case of the U.S. dollar (Table 5). This suggests that exchange rate policy is de facto formulated vis-à-vis the U.S. dollar. Such a feature clearly distinguishes Mauritania from its neighbors, the currencies of which, by contrast, are least variable against the euro (or, before 1999, against the French franc). Not surprisingly, the contrast is observed with members of the CFA zone such as Senegal or Mali, and a significant difference can also be found between the ouguiya and the Moroccan or Tunisian currencies, which are much more stable vis-à-vis the euro than the U.S. dollar.
|Relative variability to|
the U.S. dollar
|Relative variability to|
|Relative variability to|
|Mali and Senegal||36.5||39.7||23.8|
24. In the future, the authorities could consider giving more weight to the euro in their daily management of the exchange rate. Indeed, Europe currently accounts for the largest share of Mauritania’s trade—about two-thirds—with European countries being the sole recipients of iron ore exports and providing almost all Mauritanian imports except oil. Export proceeds are usually received in U.S. dollars, but a more predictable exchange rate between the ouguiya and the euro could help exporters tailor their contracts to European customers, e.g., by varying features other than the price.
25. Moreover, potential trade in agricultural, livestock, or fish processed products is likely to be developed mostly with the euro zone. In particular, the development of export processing zones, as recently adopted in the context of the recently amended Investment Code, will likely involve mainly trade with European countries. To a lesser extent, trade may also be developed with African neighbors, the currency of which is closely linked to the euro. Avoiding a real appreciation against the euro will therefore be key in maintaining the competitiveness of currently exporting sectors, particularly iron ore, and promoting a diversification of the export base.
26. Other factors than trade in goods also militate in favor of giving more weight to the euro:
- Services and transfers from and to abroad often involve transactions in euros. For instance, the agreement reached in July 2001 fixed the amount of fishing royalties in euros.
- Tourism, one of the activities in which domestic and foreign investors are interested in Mauritania, will be principally geared to European customers.
- Finally, as with potential trade, foreign direct investment should be mostly expected from countries belonging to the euro zone or loosely linked to it, rather than from “dollar zone countries”. The profitability of such investments will be more secure with a more predictable exchange rate of the ouguiya to the euro.
27. Overall, a number of arguments favor paying more attention to the euro value of the ouguiya. At the same time, this is a matter of degree rather than principle, as the U.S. dollar currently remains the main currency used for transaction purposes. Giving more weight to the euro would thus involve a closer monitoring of real effective exchange rate developments by the central bank.
28. This Appendix provides some background on the steps recently taken by Mauritania in liberalizing its exchange systems and heading toward a market-oriented determination of the exchange rate. Developments in the exchange market since 1995 are reviewed, along with a discussion of the most recent issues.
29. Until 1995, the Mauritanian foreign exchange market had remained highly centralized. The central bank (Banque Centrale de Mauritanie) was exercising heavy control over both the supply and use of foreign exchange. Most export proceeds had to be surrendered to BCM, while licenses were needed to purchase imports. In addition to the official market, a limited cash market was run by commercial banks, and a parallel cash market was tolerated, with the rates differing between the three markets.
30. A first round of reforms was introduced between 1995–98 but did not go far enough at unifying the foreign exchange market. The central bank established an interbank foreign exchange market in 1995, merging the two-tier exchange system in which the official market was led by the central bank and the cash market by commercial banks. Important reforms followed including: (i) marginally reducing surrender requirements on nonmineral export proceeds; (ii) introducing participation of foreign exchange bureaus in the cash market; and (iii) loosening controls on foreign exchange transactions by allowing commercial banks to sell foreign exchange for foreign transactions. However, these measures proved insufficient to prevent market segmentation, as banks withdrew completely from the cash market. A sharp decline in export proceeds in 1998 (by 12 percent) further complicated the situation, which led the central bank to limit the sale of foreign exchange and return to the application of nonmarket rates. The ouguiya became overvalued, and the spread between the official rate and the parallel market rate increased.
31. In response, new measures were introduced to increase the supply of foreign exchange by eliminating some market restrictions. These measures also aimed at improving the operation of the foreign exchange market and at gradually restoring market confidence in the ouguiya.23 They included:
- Gradually reducing surrender requirements on both mineral and nonmineral export proceeds to the central bank;
- Allowing residents to open foreign currency deposit accounts with commercial banks;
- Eliminating restrictions on foreign exchange sales for travel abroad;
- Adjusting the limits on commercial banks’ net open position in foreign exchange to international standards; and
- Eliminating the statistical visa and transferring the function of statistical monitoring of exports to customs.
The credibility of these measures was reinforced by the decision to eliminate foreign exchange restrictions on all current account transactions by accepting the obligations of Article VIII of the Fund’s Articles of Agreement in July 1999.
32. The introduction of the Manual Exchange Market (MEM) in the last quarter of 1999 ushered efforts to reconnect the interbank and the cash markets. The liberalization efforts introduced so far did not succeed in bringing commercial banks and the bureaus of exchange to operate in the same market: (i) banks continued to work directly with their clients and with the central bank in the official noncash market (with the BCM strongly influencing the market through the selling rate); and (ii) foreign exchange bureaus continued to operate separately in the cash market, where the cash market rate (and the parallel rate) of the ouguiya continued to depreciate. The increasing gap between the official rate and the parallel market rate prompted the authorities to establish the MEM at the central bank and use it as a channel to supply foreign exchange to the cash market at competitive rates. Whenever the spread increased to more than 10 percent, the central bank was to buy foreign currency in the noncash market and sell it to exchange bureaus in the manual cash market. As a result, the spread between the official and the cash rates declined to about 4 percent between October 1999 and March 2000 (Figure 1). However, the foreign exchange market remained segmented, and the arbitrator role of the central bank did not disappear.
33. To include banks in the daily sessions of the foreign exchange market at the central bank, the MEM was replaced by the Expanded Exchange Market (EEM) in April 2000 (Box 1). Initially, participation of banks in the EEM was limited to newly established smaller banks, while larger banks continued to rely mainly on their own clients for their needs in foreign exchange. Furthermore, all banks continued to buy foreign exchange at the central bank at the official rate—the rate of the previous session—for certain types of operations (in particular those in connection with authorized personal travel allocations). To deepen the market and increase competition in the EEM, the central bank introduced a sequence of new measures, including:
- Completely eliminating surrender requirements;
- Banning central bank sale of foreign exchange to banks outside the EEM;
- Raising the ceiling on exchange bureaus participation limits;
- Freeing movement of export proceeds deposited in domestic banks; and
- Reducing the BCM buying-selling margin to 1 percent.
In addition, the BCM encouraged the largest exporter in the country, the mining company SNIM, to participate in the EEM by meeting progressively its needs in ouguiya in this market through commercial banks. This action was meant not only to increase supply of foreign exchange in the EEM, but also to reduce the direct supply of foreign exchange from SNIM to banks, thus forcing them to come more often to the market.
The Functioning of the Expanded Exchange Market
The Expanded Exchange Market (EEM) was established in April 2000 in order to create a unified and deeper foreign exchange market. Both banks and exchange bureaus take part in the EEM. Permission to participate in the EEM is granted by the central bank and necessitates a deposit of 2.5 percent of the equivalent of US$20,000 in ouguiyas. Each participant in the EEM opens both an account in U.S. dollars and an account in local currency at the central bank.24 Transactions are then completed through transfers between these accounts.
Sessions of the EEM occur daily Monday through Thursday. At each session, exchange bureaus are allowed a maximum of one buying bid and one selling bid. The same restriction applies to banks with regard to their own operations, but additional orders may be placed on behalf of the banks’ customers. Buying and selling orders consist of a bid price and a required amount in multiples of US$1,000, with a minimum bid of US$5,000. Banks may not make orders of an amount exceeding 8 percent of their net equity capital while since November 2001, there has been no limit to the amount of foreign currency required by exchange bureaus.25 Usage of foreign currency traded in the EEM is free. However, cash withdrawals from accounts in U.S. dollars are subject to a 1 percent commission (0.75 percent for travelers checks).
The central bank acts as the system supervisor: it collects the bids, manages the transactions and disseminates the information to participants. In practice, the central bank and SNIM are the only suppliers of foreign currency. The central bank currently determines the daily rate on the basis of a number of considerations, including the evolution of supply and demand in the EEM, the prospects for inflation, the level of reserves, and the maintenance of competitiveness.