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Mali: Staff Report for the 2005 Article IV Consultation, Second and Third Reviews Under the Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria

Author(s):
International Monetary Fund
Published Date:
March 2006
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I. Introduction

1. The 2005 Article IV consultation is taking place at an opportune time. First, the current program is at the half-way mark, offering the opportunity to take stock of what has been achieved. Second, the authorities are beginning preparations for their next poverty reduction strategy (PRS) beginning in 2007, against a backdrop of higher aid and debt reduction, and in this context are considering reform priorities ahead. Finally, there have been several exogenous shocks that the authorities have tackled, with varying degrees of success, that serve as a useful reminder that Mali’s economic performance remains vulnerable to sharp swings in the terms of trade and climatic factors.

2. Looking back to the 2003 Article IV consultation recommendations, the record of follow-through on policy recommendations has been mixed, as discussed further in this report (Box 1). The overall conduct of fiscal policy remains good, particularly public expenditure management compared to peer standards. Nonetheless, substantial issues remain particularly with respect to proliferating tax exemptions, and the potentially high liabilities of the pension systems. The privatization agenda, key to raising investment and productivity while reducing fiscal risks, has also experienced several setbacks.

Box 1.Checklist of Key 2003 Article IV Recommendations

AdviceStatus
  • Strengthen public expenditure management (PEM).
  • Rein in public sector wage growth.
  • Reduce the deficit of the civil service retirement scheme.
  • Reduce the fiscal deficit over the medium term and increase reliance on external grants
  • Refrain from granting tax exemptions or offering subsidies
  • Streamline the regulatory framework
  • Complete the privatization program, including in the cotton sector
  • PEM is good compared to peers, and public finance management continues to improve.
  • Increased employment in health and education has boosted the wage bill. Rising pressure for base salary increases after several years of restraint.
  • Reform of pension system parameters under discussion.
  • Domestic borrowing only for cash management purposes, and to cover shortfalls of external assistance. Rising share of grants.
  • Ad hoc exemptions continue, though subsidies have been generally held back.
  • Investors’ Council proposals under consideration, regional-level impetus is needed.
  • Delays in sale program for cotton company, banks, and telecommunications.

II. Recent Developments

3. Changes in agricultural output have been the primary determinant of output and inflation developments since 2002 (Tables 12). Due to changes in weather conditions the agricultural sector has not posted two successive years of positive growth since 1998–99. GDP growth fell to 2.3 percent in 2004, as inadequate rainfall and a locust infestation cut 2004/05 agricultural production by an estimated 10 percent (Table 2).1 Bolstered by good rains, agricultural output is expected to recover in 2005/06 raising GDP growth to 5.4 percent in 2005. In addition, increased gold output in 2005 also supports growth, as technical problems experienced in 2004 were overcome, though growth in the secondary and tertiary sectors has slowed reflecting weaker private consumption demand. The food production shortfall pushed 12-month inflation to a 10-year high of 11½ percent in September 2005, on account of food price inflation of 22½ percent. Nonfood inflation was 2 percent during the same period. In October 2005, prices moderated substantially as food supply improved.

Table 1.Mali: Selected Economic and Financial Indicators, 2002–06 1/
20022003200420052006
Prel.First ReviewRev.Proj.
(Annual percentage change)
National income and prices
Real GDP4.37.22.35.85.45.4
Nominal GDP (in billions of CFA francs)2,3302,5682,6102,7532,7612,905
GDP deflator1.02.8−0.60.00.3−0.2
Consumer price index (annual average)5.0−1.3−2.82.55.0−1.5
External sector
Exports, f.o.b.17.6−13.6−5.0−4.77.322.9
Imports, f.o.b−8.516.5−3.07.816.712.3
Export volume31.7−15.0−6.84.28.711.3
Of which: nonmining47.3−11.410.0−3.95.64.8
Import volume−10.413.5−2.76.33.74.0
Terms of trade−9.5−1.11.4−9.8−13.42.7
Nominal effective exchange rate (average)1.54.41.7
Real effective exchange rate (average)4.81.1−3.9
Central government finance
Total revenue19.213.77.812.67.110.0
Total expenditure and net lending 2/16.05.310.015.516.29.8
Current expenditure10.32.510.69.18.610.1
Capital expenditure and net lending 2/24.69.09.223.425.99.6
Money and credit
Credit to the government−1.8−7.61.9−3.91.3−2.9
Credit to the rest of economy21.617.37.114.24.07.3
Broad money (M2)28.425.5−2.45.96.56.2
Velocity (GDP/M2)3.73.33.43.23.43.3
Interest rate (in percent; end of period) 3/6.55.05.0
(In percent of GDP; unless otherwise indicated)
Investment and saving
Gross domestic investment 4/18.520.420.721.123.123.7
Government7.06.87.48.28.29.5
Nongovernment11.614.313.312.915.014.3
Gross domestic saving18.514.013.313.113.516.0
Government0.01.21.1−0.4−0.30.4
Nongovernment18.412.712.313.513.815.5
Central government finance
Total revenue15.916.417.418.317.618.4
Total expenditure and net lending 2/23.222.224.027.026.327.5
Overall balance (payment order basis, excluding grants−7.3−5.7−6.6−8.8−8.7−9.1
Basic fiscal balance 5/−1.3−0.2−0.7−2.1−2.0−0.9
Basic fiscal balance 6/0.11.10.4−0.9−0.90.1
External sector
Current external balance, including official transfers−3.0−6.1−7.7−5.9−9.1−8.1
Current external balance, excluding official transfers−4.3−8.7−9.5−9.0−11.1−9.5
Debt-service ratio 7/
Before debt relief10.010.310.810.410.99.2
After HIPC debt relief6.35.86.46.96.46.2
(In millions of U.S. dollars; unless otherwise indicated)
Overall balance of payments138.2198.5−169.7−29.381.619.2
Gross international reserves594.5952.5870.31,041.8937.81,004.3
(In months of next year’s imports)5.27.16.46.86.16.1
Exports (in percent of GDP)31.926.124.625.425.128.7
Imports (in percent of GDP)32.033.332.033.334.736.5
U.S. dollar exchange rate (end of period)625.5519.4481.6
Sources: Malian authorities; and staff estimates and projections.

Data for 2003 and 2004 reflect substantial downward revisions to the current account balance and net foreign assets following a revision by the BCEAO of the method of calculating foreign assets and the counterpart currency in circulation. As a result, the savings-investment balances for 2003 and 2004 are also revised downwards.

Data on a payment order basis.

End-of-period interest rate in the West African Monetary Union money market.

Excluding PESAP; series therefore is slightly different from national accounts series on investment.

Total revenue (excluding grants) minus total expenditures and net lending (excluding foreign-financed investment).

Footnote 5 also excluding HIPC Initiative-related expenditure and exceptional expenditure financed by World Bank.

In percent of exports of goods and services.

Sources: Malian authorities; and staff estimates and projections.

Data for 2003 and 2004 reflect substantial downward revisions to the current account balance and net foreign assets following a revision by the BCEAO of the method of calculating foreign assets and the counterpart currency in circulation. As a result, the savings-investment balances for 2003 and 2004 are also revised downwards.

Data on a payment order basis.

End-of-period interest rate in the West African Monetary Union money market.

Excluding PESAP; series therefore is slightly different from national accounts series on investment.

Total revenue (excluding grants) minus total expenditures and net lending (excluding foreign-financed investment).

Footnote 5 also excluding HIPC Initiative-related expenditure and exceptional expenditure financed by World Bank.

In percent of exports of goods and services.

Table 2.Mali: National Accounts, 2002–06 1/
Composition

of GDP in 2002

(In percent)
1994–200320022003200420052006
Prel.First

Revised
ReviewProj.
(Annual percentage changes, at constant prices)
Primary sector32.34.4−3.617.9−3.93.05.54.5
Agriculture17.46.0−7.931.8−10.12.57.95.0
Food crops, excluding rice10.74.63.232.0−11.65.010.05.0
Rice3.510.2−24.436.1−12.96.06.07.3
Industrial agriculture, excluding cotton0.92.52.87.7−11.46.04.04.0
Cotton2.416.7−23.033.10.8−13.03.42.0
Livestock9.82.91.61.07.33.81.64.0
Fishing and forestry5.13.12.62.62.63.83.83.8
Secondary sector25.47.118.4−8.61.87.77.49.8
Mining11.429.722.5−18.9−17.313.212.117.2
Industry7.60.722.7−5.518.62.95.66.2
Energy1.99.315.19.015.07.04.010.0
Construction and public works4.44.44.45.18.08.05.04.0
Tertiary sector34.54.31.17.67.55.94.13.3
GDP (at factor cost)92.14.73.56.71.75.35.45.3
Indirect taxes7.910.514.412.58.010.56.06.9
GDP (at market prices)100.05.04.37.22.35.85.45.4
Nonmining real GDP88.64.32.310.54.15.24.94.5
(In percent of GDP, unless otherwise indicated)
Gross national saving16.315.615.013.015.314.115.6
Of which: domestic saving12.818.514.013.313.213.516.0
Gross domestic investment23.318.621.120.721.223.123.7
Memorandum items:
External current account balance 2/−7.1−3.0−6.1−7.7−5.9−9.1−8.1
Nominal GDP (in billions of CFA francs)1,8272,3302,5682,6102,7532,7612,905
Sources: Malian authorities; and staff estimates and projections.

Data for 2003 and 2004 reflect substantial downward revisions to the current account balance and net foreign assets following a revision by the BCEAO, of the method of calculating foreign assets and the counterpart currency in circulation. As a result, the savings-investment balance for 2003 and 2004 is also revised downwards

Including official transfers.

Sources: Malian authorities; and staff estimates and projections.

Data for 2003 and 2004 reflect substantial downward revisions to the current account balance and net foreign assets following a revision by the BCEAO, of the method of calculating foreign assets and the counterpart currency in circulation. As a result, the savings-investment balance for 2003 and 2004 is also revised downwards

Including official transfers.

Food prices the key determinant of consumer price inflation

Shocks to agriculture keep output growth volatile

4. The external position has weakened since 2002, on account of both price and volume developments (Table 3). During 2003–04, the current account deficit (excluding grants) weakened by 4 percentage points to 9½ percent of GDP, principally due to a fall in gold export volumes. In 2005, a 13 percent projected decline in the terms of trade to a 25-year low, led to a further weakening of the current account deficit to 11 percent of GDP. The specific shocks to cotton and oil prices are discussed in the following section. External reserves, which had increased rapidly during 2000–03, fell modestly in 2004 and stabilized in 2005, at a level of six months import coverage.

Table 3.Mali: Balance of Payments, 2002–06 1/2/(In billions of CFA francs, unless otherwise indicated)
200220032004200520062007200820092010
Prel.RevisedProjections
Current account balance
Excluding official transfers−100−224−247−306−277−255−263−276−292
Including official transfers−69−157−201−250−237−250−258−271−285
Exports, f.o.b.625540513550676751792844906
Cotton fiber155141181150176182184195221
Gold400327270329417477503529549
Other697261718393106120136
Imports, f.o.b.−493−574−557−650−730−765−807−856−910
Petroleum products−87−103−120−177−223−229−205−214−223
Trade balance132−34−44−100−54−14−15−13−4
Services (net)−136−150−148−167−172−174−170−176−194
Credit118130130142159173185199215
Debit−254−280−278−309−331−347−355−375−409
Income (net)−167−93−96−93−106−125−140−153−162
Of which: interest due on public debt−17−16−16−18−20−21−22−24−25
Private transfers (net)715341535558626569
Official transfers (net)31674656405566
Of which: budgetary grants17524552360000
Capital and financial account196226118293247165185221269
Capital account (net)73667580869299107116
Of which: project grants69637075818794102111
Financial account123160432131617386114154
Private (net) 3/6284−31044714173455
Direct investment (net)1697631322026293233
Portfolio investment private (net)3788777777
Other private capital flows−1430−416520−19−18−415
Official (net)61764610911460698099
Disbursements10311383152159126138150163
Amortization due on public debt−42−37−37−43−46−66−69−70−64
Debt relief000000000
Errors and omissions−3047−7000000
Overall balance96115−904310−83−71−48−15
Financing−96−11590−43−1083714815
Foreign assets (net)−124−14561−74−35−25−25−25−25
Of which: IMF (net)−10−6−16−12−9−9−9−7−5
HIPC Initiative assistance 4/283029312527242322
Financing gap0000082725018
Memorandum items:
(Annual percentage change)
External trade
Export volume index31.7−15.0−6.88.711.36.81.93.45.8
Import volume index−10.413.5−2.73.74.04.15.35.35.5
Export unit value−10.71.61.9−1.310.44.13.53.01.5
Import price−1.32.80.514.07.50.20.10.90.9
Terms of trade−9.5−1.11.4−13.42.73.93.42.10.6
(In percent of GDP; unless otherwise indicated)
External current account balance
Excluding official transfers−4.3−8.7−9.5−11.1−9.5−8.0−7.6−7.3−7.2
Including official transfers−3.0−6.1−7.7−9.1−8.1−7.9−7.4−7.2−7.0
External public debt90.264.063.167.566.566.166.065.666.1
Debt-service ratio 5/
Before debt relief10.010.310.810.99.210.510.29.68.4
After HIPC Relief6.35.86.46.46.27.67.77.56.4
Commodity prices:
Petroleum (crude spot; US$/barrel)25.028.937.854.361.860.058.057.356.5
Gold (US$/ounce)310.0363.5408.2433.6452.5475.0495.0504.4513.9
Cotton (US cents/pound)42.453.563.550.055.556.355.662.563.7
Sources: Malian authorities; and staff estimates and projections.

Presented according to the Balance of Payments Manual (5th ed).

Data for 2003 and 2004 reflect substantial downward revisions to the current account balance and net foreign assets following a revision by the BCEAO of the method of calculating foreign assets and the counterpart currency in circulation.

Includes short-term capital inflows.

Sum of the original and enhanced HIPC Initiative assistance.

In percent of exports of goods and services.

Sources: Malian authorities; and staff estimates and projections.

Presented according to the Balance of Payments Manual (5th ed).

Data for 2003 and 2004 reflect substantial downward revisions to the current account balance and net foreign assets following a revision by the BCEAO of the method of calculating foreign assets and the counterpart currency in circulation.

Includes short-term capital inflows.

Sum of the original and enhanced HIPC Initiative assistance.

In percent of exports of goods and services.

Mali: Terms of Trade, 1980–2010

(2000=100)

Source: BCEAO.

5. As a result of the less favorable external environment, money growth slowed in 2004 and 2005, after robust growth in 2002 and 2003 (Table 4). Broad money fell 2 percent in 2004 and rose 6 percent in 2005.2 Private sector credit growth also slowed from near 20 percent during 2002–03 to just above 5 percent over 2004–05, partly reflecting banks’ efforts to improve credit portfolios. Liquidity remains high in the banking system as a whole, possibly reflecting undercapitalization, while compliance with prudential norms is only partial (Table 5). The government has decided to recapitalize the housing bank (Banque de l’Habitat du Mali) through a conversion of government deposits into equity (equivalent to 0.6 percent of GDP) while also strengthening its management and operations. A review of commercial bank loan portfolios is nearing completion and will provide the basis for a broader strengthening of bank soundness and adherence to prudential regulations.

Table 4.Mali: Monetary Survey, 2002–06 1/
20022003200420052006
Dec.Dec.Dec.Jun.Sep.Dec.Mar.Jun.Sep.Dec.
Prel.Prog.Prel.Prog.Proj.Proj.Proj.Proj.
(In billions of CFA francs)
Net foreign assets271.6423.2372.0405.7430.2451.9407.0417.0422.0425.0442.0
Central Bank of West African States (BCEAO)226.0384.7323.8373.2381.9418.7397.8407.8412.8415.8432.8
Commercial banks45.638.548.232.548.233.29.29.29.29.29.2
Net domestic assets341.4371.8395.2355.0372.0342.2410.0424.6423.6432.9425.7
Credit to the government (net)−27.5−74.9−59.7−50.1−18.8−40.6−49.4−32.9−5.2−0.2−72.9
BCEAO, net107.491.895.493.9100.5
Commercial banks−134.9−166.1−166.9−161.9−162.1
Other0.0−0.611.918.021.0
Credit to the economy411.5482.8517.2483.3469.0472.1537.7535.6507.1511.3576.8
Other items (net)−42.6−44.9−62.3−78.2−78.2−89.3−78.2−78.2−78.2−78.2−78.2
Money supply (M2)626.3786.2767.2760.7802.1794.1817.1841.6845.7857.9867.7
Currency outside banks247.4340.9275.4310.4327.3330.9293.3
Bank deposits378.9445.2491.8450.3474.8463.1523.8
Base Money (MO)359.3474.2402.7466.7471.9458.8480.7495.1488.6504.7510.5
(In percent of beginning-of-period broad money)
Contribution to the growth of broad money
Net foreign assets15.122.1−6.54.47.610.44.65.56.05.14.3
Net domestic assets10.63.44.1−5.2−3.0−6.91.95.0−0.21.51.9
Of which: credit to the central government−1.8−7.61.91.35.32.51.33.55.25.6−2.9
Money supply (M2)28.425.5−2.4−0.84.63.56.53.03.55.06.2
(Annual perecentage change, unless otherwise indicated)
Memorandum items:
Money supply (M2)28.425.5−2.4−6.04.5−1.96.510.55.86.66.2
Base Money (MO)46.632.0−15.111.117.214.019.423.021.425.46.2
Credit to the economy21.617.37.1−2.6−3.1−4.94.03.3−5.9−6.27.3
Velocity (GDP/M2)3.73.43.43.43.43.43.43.4
Money Multiplier (M2/M0)1.71.71.91.71.71.71.71.71.71.7
Currency outside banks / M2 (in percent)39.543.435.940.840.841.735.940.840.840.835.9
Sources: BCEAO; and staff estimates and projections.

Data for 2003 and 2004 reflect substantial downward revisions to the net foreign assets following a revision by the BCEAO of the method of calculating foreign assets and the counterpart currency in circulation.

Sources: BCEAO; and staff estimates and projections.

Data for 2003 and 2004 reflect substantial downward revisions to the net foreign assets following a revision by the BCEAO of the method of calculating foreign assets and the counterpart currency in circulation.

Table 5:Mali: Bank’s Compliance with Selected Prudential Norms, 2003–04
Prudential RatiosCompliance

Limits and

Ratios
Number of Banks Complying
Dec.Jun.Dec.Mar.Jun.
20032004200420052005
Effective capital> CFAF 1 billion12/1213/1311/1313/1412/14
Risk-weighted capital adequacy ratio> 8 percent11/1212/1311/1312/1411/14
Liquidity coefficient ratio (liquid assets to short term liabilities)> 75 percent3/97/118/1110/149/14
Total: 8 times
Division of risk (total and individual)Capital. Individual: 75 percent capital4/1212/1312/136/145/14
Transformation ratio (stable resources to fixed assets & medium & long-term loans.)> 75 percent5/1210/1311/1310/148/14
Participation in nonbank companies/effective capital< 15 percent
12/1213/1313/1314/1414/14
Nonoperational fixed assets/effective capital< 15 percent
10/1211/1311/1312/1412/14
Fixed assets/effective capital< 100 percent12/1213/1312/1314/1414/14
Credit to management /effective capital< 20 percent10/1210/137/1310/1410/14
Risk-concentration ratio< 60 percent0/120/130/130/140/14

6. Budget implementation in recent years has resulted in a steady increase of revenues and an upward trend in current spending, both from low levels. Revenue strengthening derives principally from improved tax administration of both direct and indirect tax bases. Increases in current spending have been broad based, reflecting higher levels of employment, as well as transfers. Changes in external grants and loans explain a considerable share of movements in fiscal balances since 2000. In 2005, fiscal policies weakened: spending increased principally due to net lending of 1 percent of GDP to cover losses at the state-owned cotton ginning company (CMDT) and higher foreign-financed investment, while revenues were stable. The overall fiscal deficit (on a commitment basis, excluding grants) is estimated to increase to 8½ percent of GDP (2 percent of GDP increase on 2004).

Mali: Fiscal Indicators, 2000–05(In percent of GDP)
200020012002200320042005
(proj)
Revenue and grants18.517.819.620.921.422.2
Of which: revenue13.814.115.916.417.417.6
Expenditure and net lending21.521.123.222.224.026.3
Of which: current expenditure10.512.613.212.313.413.8
capital spending9.87.78.78.59.310.2
Basic balance 1/−0.6−1.7−1.3−0.2−0.7−2.0
Overall balance, commitment basis, excl. grants−7.7−7.0−7.3−5.7−6.6−8.7
Overall balance, commitment basis, incl. grants−2.9−3.2−3.6−1.3−2.6−4.1

Excluding grants and foreign financed capital spending.

Excluding grants and foreign financed capital spending.

7. The progress of structural reforms was mixed in 2004–05, with both achievements and setbacks in private sector development. In the cotton sector, the government privatized a controlling stake in the cottonseed oil company, HUICOMA, with proceeds of 0.3 percent of GDP, although issues relating to the outstanding liabilities of the privatized company remain unresolved. The privatization of the cotton ginning company (CMDT) into regional operating units was pushed back from 2006 to 2008 to allow more time for preparatory work on the regulatory framework and to strengthen producer associations. Electricité du Mali returned to majority state ownership in October 2005, as a strategic foreign owner sold out over disputes concerning tariff setting and investment levels. The sale of government stakes in two banks was delayed by a legal challenge to one sale and difficulties in mobilizing other official shareholders to join in the sale of a controlling shareholding in the other.

8. Public sector institution-building progressed at a measured pace. The government continued implementation of a comprehensive plan to strengthen public finance management. Significant progress has already been achieved on expenditure management and control, especially the organizational changes in the Ministry of Economy and Finance, initiation of computerization and completion of the audits of the 2003 and 2004 budgets. Delays have developed on some aspects of financial controls, in particular the creation of a Supreme Court of Auditors. The authorities completed a study of the criteria for the allocation of social safety net resources (structural benchmark), albeit with some delay, that recommends ways to improve the targeting of assistance. A planned study on improving the efficiency and yield of property taxes (structural benchmark) has not yet been initiated, pending the availability of the required technical assistance from donors. Plans for decentralization and deconcentration of government functions, which is also proceeding, hold out promise of improvements in service delivery. Overall, Mali has satisfied 11 of the 16 Public Expenditure Management AAP indicators, an above average achievement for the region.

III. Policy Discussions

A. Coping with Exogenous Shocks

9. Adverse exogenous shocks have unambiguously framed Mali’s economic performance during 2004–05. The shocks have weakened household balance sheets, budget finances, and the performance of several significant state enterprises. These developments have also detracted from longer-term reform objectives. The Article IV consultation discussions focused on the authorities’ policy responses to a sharp drop in international cotton prices, rising oil prices, low rainfall and a locust infestation that cut agricultural production.

10. The state-controlled cotton company (CMDT) posted an operating loss of 1.7 percent of GDP in the 2004/05 season.3 The authorities recognize that a combination of declining international cotton prices and an ill-judged increase of producer prices contributed to this outcome. To cover the 2004/05 losses the government has lent the CMDT 1 percent of GDP (CFAF 28 billion) in 2005, and a further CFAF 14 billion is covered by CMDT and cotton producer resources. Residual financing needs will need to be covered in 2006 by shareholders (the government and/or a foreign shareholder) based on 2005 audited accounts. The staff and authorities agree that close surveillance of CMDT cashflow is warranted in order to clear payment arrears (Letter of Intent ¶31).

Mali: Cotton Sector Pricing and Profitability, 1999/00–2005/06

11. The staff support the authorities’ efforts to bring CMDT back to profit in 2006. Central to this strategy has been the implementation of a producer price protocol linking to world prices. Consistent with the price mechanism, producer prices were reduced by 24 percent for the 2005/06 season, while cotton producers have maintained planted areas, with the result that the CMDT is projected to at least break even in the current season. In the Doha Round, Mali and other African cotton producing countries are seeking the elimination by developed countries of trade-distorting cotton subsidies and have called for the establishment of a compensation fund for producers until such subsidies are eliminated. While supporting these efforts, the staff have also pressed for concrete progress toward the objective of privatizing CMDT in 2008 in order to bolster investment and productivity improvements, as yields have stagnated against a backdrop of improvements in other major cotton producing countries.

12. The staff and authorities discussed how best to respond to the continuing increase of international oil prices. A partial pass-through to domestic pump prices has given consumers time to adjust, and has significantly reduced fuel excise revenues. The staff recommends the adoption of a pricing formula for fuel products that would pass through international price increases fully but gradually, e.g., over three months, to balance consumer and revenue objectives. This recommendation is supported by conclusions of a study of the distributional effects of fuel price increases that over 40 percent of a fuel price increase is borne by the top quintile of consumers and less than 10 percent by the lowest quintile.4 The authorities have concerns about the social impact of higher fuel prices, particularly in light of sharply higher food prices in 2005, already high costs of transport, and the impact of rising kerosene prices on the poor. Staff agreed that studies of the impact of various pricing formulae, and the modalities of protecting low-income consumers would be desirable prior to the introduction of a pricing formula in 2006 (LoI, ¶18).

Mali: Pass-Through of World Oil Prices, January 2002 – August 2005

(Index 2002 = 100)

13. The cereal production shortfall in 2004/05 along with its inflationary effects have been a major issue for the Malian authorities in 2005. Cereal production declined by between 16 and 40 percent according to different methodologies used by the authorities. The combined efforts of the authorities and donor agencies appear to have been effective in limiting the human costs of drought and locusts through timely distribution or sale of food stocks. However, cereal prices increased by over 50 percent in the 12 months through September 2005, driving food price inflation up to 23 percent. Rising inflation has increased pressure for compensatory measures, including compensatory wage increases in the public sector.

14. The staff noted that as the price rises are temporary, only short-lived measures would be appropriate. The authorities concurred, though temporary measures including import VAT exemptions for rice and maize appear to have been largely ineffective (possibly owing to re-exports to neighboring food deficit countries). Proposals to introduce price controls for rice were proposed but not implemented. Moreover, the authorities agreed that all temporary measures would be removed as food prices revert to more normal levels in order not to penalize farmers (LoI, ¶12). The staff considers that high transport costs and regional trade restrictions have exacerbated food price variability and have supported high cross-country and regional differences in cereal prices. As trade cannot quickly cover food deficits, there is a close correlation between food deficits and inflation (Box 2). Accordingly, efforts in future should be directed to addressing these constraints to trade both within Mali and vis-à-vis trading partners. The authorities have stressed the importance of increasing food reserves, which donors are considering financing at least in part, and are creating a network of food banks that may help to reduce seasonal variability of prices, if well managed.

Box 2.Mali: Food Security and the Macroeconomy

Mali recently faced the challenge of rising food prices and food insecurity. Food constitutes 50 percent of the weight in the overall price index (Bamako), and cereals make up more than one-third of the food basket. Thus food price inflation is a major determinant of overall inflation.

Mali: Cereal deficit and average cereal prices, 1992–2005

Note: Cereal deficit is based on the FAO minimum dietary requirements of 198 kg per person

Rising food prices have an impact on the macroeconomy and the poor in particular. In Mali, the bottom quintile spent 84 percent of their expenditure on food; thus, high food price inflation has a significant impact on living standards and on economy-wide demand. Inflationary pressures can have a negative effect on growth and competitiveness and on the budget through tax exemptions and wage pressure.

The combined effects of inadequate rainfall and the locust invasion in 2004/05 increased the food deficit in Mali. The cereal deficit in 2004/05 is estimated at one third to one fifth of cereal production, depending on the assumption used for dietary requirements. The size of the cereal deficit is closely linked to the level of cereal prices (see chart).

Spatial Marketing Margins for Maize in Selected SSA Countries.

Source: IFPRI; For Mali, spatial margins are t he price spread between Bamako and Kayes region

There are several impediments to external and internal food trade as geography plays an important role in market integration. Food trade is primarily regional and conducted by small traders. On the external front, food export restrictions in other West African countries have contributed to high spatial and temporal price spreads in food markets. Mali’s internal markets are not integrated due to weak information and transport infrastructure. Private sector traders are characterized by limited capital, a low degree of specialization, little long-term investment. Market failures due to lack of access to credit, storage markets, and information have impeded the private trader operations.

Temporal price spread for Maize in Selected SSA Countries.

Source: IFPRI; For Mali, spatial margins are the avearge price spread between the minimum and maximum price.

B. Enabling Faster Growth and Poverty Reduction

Medium-Term Growth and Competitiveness Issues

15. The authorities’ aim at maintaining macroeconomic stability - by meeting economic and monetary union macroeconomic convergence criteria - while accelerating growth and poverty reduction through policies to increase diversification and productivity. Staff and authorities agreed that the impact of macroeconomic shocks had contributed to the nonobservance of convergence criteria for inflation and the basic fiscal balance in 2005, and that the unwinding of the shocks would very likely bring inflation under the 3 percent ceiling in 2006, and bring the basic balance back to surplus in 2007 (Table 7). The staff noted a potential tension between increases of aid-financed current spending and observing the basic balance criterion, an issue that is under review at the Union level.

Table 6.Mali: Central Government Consolidated Financial Operations, 2002–06
200220032004200520052006
Revised
1st ReviewprogramProgram
(In billions of CFAF, unless otherwise indicated)
Revenue and grants456.7536.5558.0648.3613.5698.2
Total revenue370.9421.8454.7502.7486.8535.6
Budgetary revenue 1/337.2384.4412.0462.7445.8493.1
Tax revenue306.0349.2393.3434.1430.0469.9
Direct taxes51.973.176.681.381.389.9
Indirect taxes254.1276.1316.7352.9348.8380.0
of which: VAT126.7139.4178.0177.5180.8216.2
Nontax revenue31.235.218.728.515.823.2
Special funds and annexed budgets33.737.442.640.041.042.5
Grants85.8114.8103.3145.6126.7162.6
Projects69.263.170.075.275.281.3
Sectoral45.5
General16.651.733.370.451.635.8
Total expenditure and net lending540.6569.0625.8744.4727.4798.9
Budgetary expenditure511.7535.5592.2670.9662.8762.0
Current expenditure308.7316.3350.0388.2380.1418.4
Wages and salaries 2/93.5106.2121.7140.2140.2149.0
Goods and Services109.0107.6136.5143.3140.2153.9
Transfers and subsidies87.883.874.585.180.097.3
Interest18.418.817.219.619.718.2
Capital expenditure203.1219.2242.2282.7282.70343.6
Externally financed140.3140.9152.8185.2185.2237.6
Domestically financed62.778.389.497.597.5106.0
Special funds and annexed budgets33.737.442.640.041.042.5
Net lending−4.9−3.9−9.033.523.5−5.6
of which: CMDT0.00.00.038.428.50.0
Overall fiscal balance, commitment basis
Excluding grants−169.7−147.2−171.2−241.7−240.5−263.3
Including grants−83.9−32.5−67.9−96.1−113.8−100.7
Adjustment to cash basis−1.310.87.90.0−11.10.0
Overall fiscal balance, cash basis
Excluding grants−171.0−136.4−163.3−241.7−251.6−263.3
Including grants−85.2−21.7−60.0−96.1−125.0−100.7
Financing85.221.760.096.1125.0100.7
External financing (net)88.5106.174.5141.5127.0138.2
Loans102.6112.782.8153.2138.7159.3
Project loans71.177.882.8110.0110.0110.8
Budgetary loans31.534.90.043.228.748.5
Amortization−41.6−36.8−37.0−42.9−42.9−45.7
Debt relief, HIPC Initiative27.530.128.731.231.224.6
Domestic financing (net)−3.4−84.4−14.6−45.4−2.0−37.5
Banking system−9.9−49.614.5−32.09.7−24.0
of which: IMF (net)−10.0−5.7−15.6−12.6−12.6−9.2
Privatization receipts29.41.01.24.511.514.1
Other financing−22.9−35.8−30.2−17.9−23.2−27.6
Unidentified budgetary assistance0.00.00.00.00.00.0
(In percent of GDP)
Revenue and grants19.620.921.423.522.224.0
Total revenue15.916.417.418.317.618.4
Budgetary revenue14.515.015.816.816.117.0
Special funds and annexed budgets1.41.51.61.51.51.5
Grants3.74.54.05.34.65.6
Total expenditure and net lending23.222.224.027.026.327.5
Current expenditure13.212.313.414.113.814.4
Wages and salaries4.04.14.75.15.15.1
Interest payments0.80.70.70.70.70.6
Capital expenditure8.78.59.310.310.211.8
Externally financed6.05.55.96.76.78.2
Domestically financed2.73.03.43.53.53.6
Net lending, special funds & annexed budgets1.21.31.32.72.31.3
Overall fiscal balance (commitment basis)
Including grants−3.6−1.3−2.6−3.5−4.1−3.5
Excluding grants−7.3−5.7−6.6−8.8−8.7−9.1
Overall fiscal balance (cash basis, incl. grants)−3.7−0.8−2.3−3.5−4.5−3.5
External financing3.84.12.95.14.64.8
Domestic financing−0.1−3.3−0.6−1.6−0.1−1.3
Financing gap0.00.00.00.00.00.0
Memorandum items
Budgetary assistance3.24.52.45.34.03.7
Public saving3.64.95.03.63.74.8
Wages and salaries/fiscal revenues (percent)30.630.430.932.332.631.7
Primary balance, excluding grants−6.5−5.0−5.9−8.1−8.0−8.4
Primary balance, including grants−2.8−0.5−1.9−2.8−3.4−2.8
Basic fiscal balance 3/−1.3−0.2−0.7−2.1−2.0−0.9
(In billions of CFA francs)
Primary balance, excluding grants−151.3−128.4−154.0−222.1−220.9−245.1
Primary balance, including grants−65.5−13.7−50.7−76.5−94.2−82.5
Basic fiscal balance 3/−29.4−6.3−18.4−56.5−55.3−25.7
Budgetary Assistance75.7116.662.0144.8111.4108.9
Public Saving83.9125.2129.799.0101.1139.9
Nominal GDP2,3302,5682,6102,7532,7612,905
Sources: Ministry of Economy and Finance; and staff estimates and projections

For 2006, VAT refunds and rebates of tax exemptions are reclassified from domestic financing to negative domestic revenue.

Excluding administrative public institutions.

Excluding grants and externally financed capital expenditures.

Sources: Ministry of Economy and Finance; and staff estimates and projections

For 2006, VAT refunds and rebates of tax exemptions are reclassified from domestic financing to negative domestic revenue.

Excluding administrative public institutions.

Excluding grants and externally financed capital expenditures.

Table 7.Mali: Compliance with WAEMU Convergence Criteria, 2004–07(Ratios in percent, unless otherwise indicated)
Ratio2004200520062007
Rev. proj.Projections
Primary criteria
Basic fiscal balance / GDP>=00.4−2.0−0.90.3
Inflation (annual average percentage change)<=3−2.85.0−1.52.5
Total nominal debt / GDP<=7063.167.566.566.1
Domestic arrears accumulation (in billions of CFA francs)<=00.00.00.00.0
External arrears accumulation (in billions of CFA francs)<=00.00.00.00.0
Secondary criteria
Wages / fiscal revenue<=3530.932.631.729.3
Domestically financed investment / fiscal revenue>=2022.722.717.318.0
Current account deficit, excl. current official transfers / GDP<=59.511.19.58.0
Fiscal revenue / GDP>=1715.115.616.216.4
Sources: Malian authorities; and staff estimates and projections.
Sources: Malian authorities; and staff estimates and projections.

16. An updated debt sustainability analysis (DSA) produced by Bank and Fund staffs (to be issued as a Supplement to this report) indicates that Mali broadly meets debt indicator thresholds (defined by country policy and institutions assessment rating) for debt stock and debt service in the baseline scenario but not for some alternative scenarios.5 A DSA scenario incorporating the multilateral debt relief initiative (MDRI) in 2006 brings debt indicators well below these thresholds through the medium-term, and would ensure that the WAEMU ceiling of nominal debt to GDP ratio would also be observed going forward.6 The authorities indicated that MDRI would not change their financing strategy of seeking a rising share of grant financing, and restricting loan financing to highly concessional terms. They indicated that a Fund-supported arrangement provided useful leverage in improving debt concessionality.

17. Projections of the medium-term balance of payments show a steady improvement in the current account balance (before grants) through 2010, based on a terms of trade improvement (easing of oil prices and increased cotton and gold prices). The overall balance of payments position would also strengthen, reflecting the improving current account, projected increases of official external financing and private investment inflows, including in the gold sector. The authorities stressed that ongoing efforts to decrease the volatility of donor assistance would lessen vulnerability to aid fluctuations. Mali’s contribution to monetary union international reserves would remain at six months import coverage (the current level for the West African Monetary Union).

Mali: Estimated External Debt Burden Indicators Prior to and Post MDRI, end-2006(In percent, unless otherwise indicated)
Post HIPCPost MDRIHIPC thresholdLow Income DSA
Threshold
NPV of debt to exports95.650.4150150
NPV of debt to revenues149.079.2250250
Debt service to exports6.84.42020
Nominal debt to GDP ratio66.526.7

18. The authorities’ medium-term GDP growth objectives are set at 6.7 percent in the current PRS (through 2006) and 7 percent in the framework document for the next PRS (2007–11).7 Staff and authorities agreed that shocks to agriculture had contributed to the recent growth slowdown. Over the medium term, growth potential would depend on policies to encourage diversification, the quality of the investment environment (including the strength of the financial system) and raising productivity. Staff expressed the opinion that the authorities’ forthcoming growth strategy would need to clearly articulate a rationale for raising growth above current PRGF projections, while taking into account the slow progress of structural reforms and evidence of a difficult investment environment, that may also act as a brake on growth. The staff medium-term macroeconomic outlook assumes average GDP growth of 5.6 percent through 2010, stable inflation at 2½ percent per year from 2007, and a significant improvement in the terms of trade, with the current account deficit improving from 11 percent to 7 percent of GDP between 2005 and 2010 (Tables 89).

Table 8.Mali: Medium–Term Outlook, 2004–10
1999–20032004200520062007200820092010
Est.Projections
(Annual percentage change)
Output supply and demand
Real GDP4.72.35.45.46.15.45.65.7
Primary sector4.6−3.95.54.54.74.85.25.2
Secondary sector5.21.87.49.88.66.06.26.4
Tertiary sector4.97.54.13.36.04.74.84.9
Aggregate demand (contribution to output growth)
Consumption3.52.64.52.14.43.94.54.8
Gross investment1.20.03.71.90.21.21.11.1
Of which: changes in inventories1.0−2.02.90.00.00.00.00.0
Net foreign balance0.0−0.4−2.81.51.50.30.0−0.1
Prices, period average
GDP deflator3.0−0.60.3−0.23.33.32.72.3
CPI inflation1.4−2.85.0−1.52.52.52.52.5
Terms of trade−1.31.4−13.42.73.93.42.10.6
(In percent of GDP; unless otherwise indicated)
Investment and saving
Gross domestic investment 1/20.820.723.123.722.422.422.322.1
Government7.37.48.29.58.48.48.48.4
Nongovernment13.813.315.014.314.214.214.013.8
Gross domestic saving13.513.313.516.016.717.317.417.3
Government0.41.1−0.30.41.31.42.02.5
Nongovernment13.112.313.815.515.415.915.314.8
Central government finance
Total revenue and grants19.321.422.224.021.521.821.922.0
Fiscal revenue12.715.115.616.216.416.716.917.1
Non-tax revenue and special accounts2.32.32.12.32.42.32.32.2
Grants 2/4.34.04.65.62.72.72.72.7
Total expenditure and net lending 3/22.124.026.327.526.026.325.825.4
Current expenditure11.913.413.814.414.314.614.213.8
Capital expenditure9.19.310.211.810.510.510.510.6
Overall balance (payment order basis, excl. grants)−7.1−6.6−8.7−9.1−7.3−7.2−6.6−6.1
Basic fiscal balance 4/−0.7−0.7−2.0−0.9−0.6−0.50.10.7
External sector
Current external balance, including official transfers−7.5−7.7−9.1−8.1−7.9−7.4−7.2−7.0
Current external balance, excluding official 2transfers−9.4−9.5−11.1−9.5−8.0−7.6−7.3−7.2
Exports of goods and nonfactor services26.924.625.128.729.028.227.727.6
Imports of goods and nonfactor services34.432.034.736.534.933.532.832.4
Debt service ratio after HIPC debt relief8.56.46.46.27.67.77.56.4
Gross international reserves
(In millions of US$)4558709381,0041,0531,1031,1511,199
(In months of next year’s imports)4.96.46.16.16.16.05.85.7
External public debt87.763.167.566.566.166.065.666.1
Sources: Malian authorities; and staff estimates and projections.

Data on a payment order basis.

Excludes general budgetary grants from 2007 onwards.

Excluding PESAP; series therefore is slightly different from national accounts series on investment.

Total revenue (excluding grants) minus total expenditures and net lending (excluding foreign-financed investment).

Sources: Malian authorities; and staff estimates and projections.

Data on a payment order basis.

Excludes general budgetary grants from 2007 onwards.

Excluding PESAP; series therefore is slightly different from national accounts series on investment.

Total revenue (excluding grants) minus total expenditures and net lending (excluding foreign-financed investment).

Table 9.Mali: External Financing Requirements and Resources, 2004–10(In billions of CFA francs, unless otherwise indicated)
2004200520062007200820092010
Est.Projections
Requirements231.2425.2359.8347.3358.1373.5383.6
Current account deficit,
excluding official transfers247.5306.0277.0255.1263.0276.3291.6
Debt amortization37.042.945.766.169.170.264.0
IMF repurchases16.714.811.39.88.66.74.9
Change in the net foreign assets (increase +) 1/−76.561.425.816.316.418.320.1
Adjustment 2/6.50.00.00.00.00.00.0
Resources231.2425.2359.8347.3358.1373.5383.6
Official transfers 3/46.555.840.34.95.35.86.3
Official project grants 3/70.075.281.386.794.4102.4110.7
Long-term public loan disbursement 3/82.8151.8159.3126.0137.6150.0163.2
Budgetary0.041.848.50.00.00.00.0
Project related82.8110.0110.8126.0137.6150.0163.2
Private capital (net) 4/2.1109.052.218.622.239.159.6
Debt relief, including HIPC Initiative assistance 5/28.731.224.626.924.522.822.1
Debt under negotiation/moratorium0.00.00.00.00.00.00.0
Use of IMF resources: ESAF and PRGF1.12.22.11.00.00.00.0
Unidentified budgetary assistance0.00.00.083.174.053.521.7
Memorandum item:
Exchange rate: CFA francs per SDR781.5….….….
Sources: Malian authorities; and Fund and World Bank staff estimates and projections.

Excluding the change in the net position vis-à-vis the Fund.

Errors and omissions.

Includes both existing and expected new commitments.

Includes private capital grants.

Sum of original and enhanced HIPC Initiative framework for the 2000 estimate and 2001 projection; original HIPC Initiative only for the program

Sources: Malian authorities; and Fund and World Bank staff estimates and projections.

Excluding the change in the net position vis-à-vis the Fund.

Errors and omissions.

Includes both existing and expected new commitments.

Includes private capital grants.

Sum of original and enhanced HIPC Initiative framework for the 2000 estimate and 2001 projection; original HIPC Initiative only for the program

19. The authorities recognize the importance of the policy framework for growth, while also stressing the supply side potential of the economy. Key bases for growth identified are: the development of rural infrastructure, particularly irrigation; agricultural diversification (fruits and vegetables); the development of agro-industry (sugar, meat, yarn); and expansion of transport, telecommunications and tourism service. The authorities emphasized that their diversification strategy would benefit from the elimination of agricultural subsidies in industrialized countries (by improving the terms of trade).

20. The gold sector is unlikely to be a major motor for future growth, but does lessen vulnerability. Given reasonably reliable production projections and the comparatively low volatility of gold prices, staff and authorities concurred that the outlook sector was for steady yet modest gold sector growth through 2010. While the contribution of gold to GDP and exports is significant (10 percent of GDP and over half of exports), links to the rest of the economy are limited: tax and dividend payments are 1–2 percent of GDP (after allowing for tax exemptions), most inputs are imported, and labor use is low.

Gold - Production and Exports, 2000–12

21. The staff noted that accelerating growth would require raising investment and productivity significantly above recent levels. Historical evidence in explaining growth pointed to a predominance of factor accumulation in explaining growth over increases in total factor productivity, although there are signs of some improvement in productivity since 2000.8 Moreover, the performance of several key sectors was not particularly encouraging: cotton yields had stagnated in recent years, indicating a lack of investment in new technology and the use of more marginal land, while worldwide yields have risen; and rice yields in the irrigated region of Office du Niger are stable.

Cotton Yields, 1980–2004

(in Kg per hectare)

22. The authorities have identified the main impediments to investment as the basis for developing a strategy to improve the investment environment. Key impediments that the authorities identified (in consultation with an Investors’ Council) include high operating costs (owing to poor infrastructure, excessive cost of energy and telecommunications), the proliferation of tax incentives in neighboring countries, and distance from ports in the region. The crisis in Côte d’Ivoire may also have deterred some investors. Private sector representatives also noted that the lack of a skilled workforce was a major impediment. They also stressed that governance was an issue, especially procurement procedures, the weak judicial system, and access to financing. An Investment Climate Assessment conducted by the World Bank confirms the significant impediments to private investment compared to peers. The staff underscored the importance of maintaining cost-recovery tariffs for utilities, while improving productivity through private management within an independent regulatory framework. The staff also cautioned against the use of broad investment incentives and urged that the application of Investment Code incentives be scrutinized carefully with a view to minimizing revenue losses. The staff agreed that transport costs are a major issue, and indicated that effective operation and funding of the newly-created Road Agency is key, and that reduced fuel taxes on specific import routes was an inefficient method of reducing costs.

23. Trade reforms, especially unilateral tariff reductions in the context of WAEMU, have advanced. The authorities indicated enhancing Mali’s contribution to and benefits from global trade would require (i) strengthening technical assistance with a view to better understand multilateral trade agreements, (ii) implementing swiftly the Integrated Framework so as to improve and diversify Mali’s exports, and (iii) a sound and equitable implementation of WTO agreements, notably a rapid elimination of subsidies and non justified technical obstacles to trade. Mali implemented WAEMU anti-competitive practices legislation in January 2003, complementing national legislation. Mali also implemented the principle of transactional value to determine the custom value of imported goods effective January 1, 2004. Mali is eligible for AGOA and was granted the visa for textile products in December 2003. As regards anti-dumping, pending adoption of the relevant WAEMU code, reference values under a 2003 decree apply for selected products.

Figure 1.Selected Doing Business Indicators, 2005

Mali has high business costs and low tax compared to the WAEMU and Sub-Saharan Africa

Source: World Bank Doing Business Indicators

24. The slowdown in growth in 2004 has also impacted on the banking sector after several years of rapid credit growth. Given less than full compliance with prudential ratios, and evidence of a degradation of the quality of credit portfolios, the authorities have strengthened surveillance of lending operations, in part spurred by the recommendations of supervision reports. In this regard, the Malian authorities’ actions to address liquidity and portfolio problems in the housing bank are commendable, although prompter action would have significantly reduced the budgetary costs of recapitalization. A process is under way to review necessary actions in other banks. The staff also requested additional information for financial sector surveillance to better gauge the strength of the system and identify priorities for improving intermediation and raising bank efficiency.

25. Staff and authorities agreed that exchange rate competitiveness indicators gave mixed signals (Box 3). The appreciation of the real exchange rate by 10–15 percent over the past five years (depending on the method of calculation), mainly on account of the depreciation of the US dollar against the CFA franc, has pressured cotton sector incomes while also lessening the price increase of dollar-denominated imports, particularly fuel. Export market shares, as a share of world exports and developing Africa exports, have weakened (principally on account of price developments in its two largest export sectors: Mali’s share of world gold production is increasing and share of cotton production is broadly stable). At the regional level, the exchange rate is consistent with comfortable reserve adequacy indicators, in relation to imports, broad money and short-term debt, and in relation to external shocks, indicating limited vulnerabilities. Nonetheless, the staff pointed toward analysis that the long-run equilibrium exchange rate in Mali has depreciated, in part due to a terms of trade decline, and that the adjustment of the actual real exchange rate to the equilibrium is relatively slow.9 This in turn, emphasizes the need for flexibility of factor prices to maintain a real exchange rate close to the equilibrium rate. Debt cancellation coupled with higher government spending would however likely lead to an appreciation of the equilibrium exchange rate, and equilibrium exchange rate estimates should be treated with caution.

Box 3.Exchange Rate Developments

Mali’s real effective exchange rate or REER (trade weighted, CPI based) has consistently been amongst the least appreciated in the West African Monetary Union, and tracks neighboring Sahel countries REER’s. Since 2000, REERs have appreciated modestly across the union on account of CFA appreciation against the dollar. The appreciation is slightly more marked if the REER is calculated using currency denomination of trade weights rather than origin and destination of trade weights.

Real Effective Exchange Rates. WAEMU Member States, 2000–05

(1990=100)

Over the longer term, Mali’s actual and equilibrium real exchange rate have depreciated. The depreciation of the theoretical equilibrium rate (consistent with macroeconomic balance) is particularly influenced by the declining terms of trade. Debt reduction would however support an appreciation of the equilibrium exchange rate, or equivalently increase the sustainable level of the current account deficit.

Actual and Long-Run Equilibrium Real Exchange Rates

(log, 1982–2004)

International Reserve Coverage, 2004
Ratio to:
Months ofImportBroadReserveShort-
importscoveragemoneymoneyterm
needed for 2debt
S.D. current
account
shock
WAEMU5.72.60.61.45.7
CEMAC 1/2.46.60.51.01.7
ECCU 2/4.31.80.21.02.0

Communauté Economique et Monétaire de l’Afrique Centrale.

East Caribbean Currency Union.

Communauté Economique et Monétaire de l’Afrique Centrale.

East Caribbean Currency Union.

Fiscal Space and Poverty Reduction

26. Poverty remains widespread in Mali notwithstanding prudent economic policies, and positive growth over the past decade. There are significant structural barriers to development, including high illiteracy, low health indicators, undeveloped infrastructure and distant markets and Mali’s progress toward achieving MDGs is mixed (Figure 2 and Table 10). Progress is more marked in access to health and education, and the spread of communications technology. Clearly, accelerating progress would require both faster growth and substantially higher spending on MDG-related objectives.

27. The discussion of medium-term fiscal issues focused on factors that could create fiscal space for pursuing poverty reduction objectives.10 The authorities agreed that the key factors that help to create fiscal space were GDP growth (leading to revenue increases with unchanged revenue yield), raising revenue yields, eliminating unproductive spending and more generally improving the efficiency of spending, while additional external grant assistance could also make a significant contribution if aligned to PRS spending priorities.

Table 10.Mali: Millennium Development Goals 1990–2003
19901994199720002003
Goal 1: Eradicate extreme poverty and hunger2015 target = halve 1990 $1 a day poverty and malnutrition rates
Percentage share of income or consumption held by poorest 20%..4.6......
Population below $1 a day (%)16.572.3......
Population below minimum level of dietary energy consumption (%)....32..29
Poverty gap ratio at $1 a day (incidence x depth of poverty)3.937.4......
Poverty headcount, national (% of population)....63.8....
Prevalence of underweight in children (under five years of age)....26.933.2..
Goal 2: Achieve universal primary education2015 target = net enrollment to 100
Net primary enrollment ratio (% of relevant age group)20.4..38.344.544.5
Primary completion rate, total (% of relevant age group)1215253540
Proportion of pupils starting grade 1 who reach grade 569.7..78.384.1..
Youth literacy rate (% ages 15–24)27.630.933.524.2..
Goal 3: Promote gender equality and empower women2015 target = education ratio to 100
Proportion of seats held by women in national parliament (%)....21210
Ratio of girls to boys in primary and secondary education (%)58.2..67.5..71.3
Ratio of young literate females to males (% ages 15–24)44.74850.552.3..
Share of women employed in the nonagricultural sector (%)35.6........
Goal 4: Reduce child mortality2015 target = reduce 1990 under 5 mortality by two-thirds
Immunization, measles (% of children ages 12–23 months)4346564968
Infant mortality rate (per 1,000 live births)140131..124122
Under 5 mortality rate (per 1,000)250233..224220
Goal 5: Improve maternal health2015 target = reduce 1990 maternal mortality by three-fourths
Births attended by skilled health staff (% of total)....23.740.6..
Maternal mortality ratio (modeled estimate, per 100,000 live births)......1200..
Goal 6: Combat HIV/AIDS, malaria, and other diseases2015 target = halt, and begin to reverse, AIDS and other major diseases
Contraceptive prevalence rate (% of women ages 15–49)....6.78.1..
Incidence of tuberculosis (per 100,000 people)297.2294.3292.2290.2288.1
Number of children orphaned by HIV/AIDS......5900075000
Prevalence of HIV, total (% of population aged 15–49)......1.71.9
Tuberculosis cases detected under DOTS (%)..13.917.514.518.2
Goal 7: Ensure environmental sustainability2015 target = various
Access to an improved water source (% of population)34......48
Access to improved sanitation (% of population)36......45
Access to secure tenure (% of population)..........
CO2 emissions (metric tons per capita)000.10.1..
Forest area (% of total land area)11.6....10.8..
GDP per unit of energy use (2000 PPP $ per kg oil equivalent)..........
Nationally protected areas (% of total land area)........3.7
Goal 8: Develop a global partnership for development2015 target = various
Aid per capita (current US$)56.946.942.533.245.3
Debt service (% of exports)..........
Fixed line and mobile phone subscribers (per 1,000 people)1.41.72.84.910.3
Internet users (per 1,000 people)....0.11.52.4
Personal computers (per 1,000 people)..0.30.71.31.4
Unemployment, youth female (% of female labor force ages 15–24)..........
Unemployment, youth male (% of male labor force ages 15–24)..........
Unemployment, youth total (% of total labor force ages 15–24)..........
Other
Fertility rate, total (births per woman)6.96.76.6..6.4
GNI per capita, Atlas method (current US$)270250260240290
GNI, Atlas method (current US$) (billions)2.32.42.62.63.4
Gross capital formation (% of GDP)2327.320.622.323.4
Life expectancy at birth, total (years)45..4442.640.6
Literacy rate, adult total (% of people ages 15 and above)18.821.423.519..
Population, total (millions)8.59.410.110.811.7
Trade (% of GDP)50.965.962.966.257.2
Source: World Bank, World Development Indicators (http://www.developmentgoals.org).

DOTS is the Directly Observed Therapy Short-course.

Source: World Bank, World Development Indicators (http://www.developmentgoals.org).

DOTS is the Directly Observed Therapy Short-course.

Figure 2.Selected Millennium Development Goals for 2015 1/

Mali is making progress on MDGs but continues to lag behind the WAEMU region and Sub-Saharan Africa

Source: World Bank, World Development Report.

1/When data were not available for the specific year, the charts use the data from the closest available year.

2/ The WAEMU comparator for poverty in 2003 is composed of only 2 countries -- Côte d’Ivoire and Burkina Faso.

28. The mission illustrated that the fiscal space created under the program medium-term framework by 2015 could amount to the equivalent of 20 percent of current GDP. Staff agreed that the projections of fiscal space were sensitive to the underlying assumptions: lower GDP growth (4 percent rather than 5½ percent per year) and weaker reform could cut fiscal space created by 2015 in half. Nonetheless across most scenarios, the most important factor, accounting for over half the projected fiscal space, is additional revenue resulting from expansion of the economy. The implementation of the multilateral debt reduction initiative (MDRI) frees up an additional 0.6 percent of GDP per year in constant 2005 prices (about 1 percent of current GDP over the medium-term), while a doubling of aid levels by 2010 (consistent with, for example, a number of recent bilateral donor commitments) would create fiscal space of 2 percent of GDP in constant 2005 prices (with the caveat that aid flows are volatile and often performance-based). The authorities agreed that maximizing internal sources of revenue was of paramount importance, while public finance management reforms were directed at producing revenue yield increases without increasing marginal tax rates, as assumed in the program. Moreover, eliminating fiscal risks such as cotton sector support, pension fund losses, and recapitalization of banks could also help create or preserve fiscal space. While the bulk of projected fiscal space is generated internally, staff noted that substantially increased net external resource flows could also affect inflation and competitiveness.

29. Linking fiscal space created to poverty reduction requires both discipline in the use of the space and an analysis of the impact of spending on poverty reduction objectives. Illustrative projections of the uses of fiscal space showed that only about half would be available for additional poverty reduction spending even under optimistic assumptions, specifically 10 percent of 2005 GDP by 2015 in the baseline scenario.11 The potential impact of such additional poverty spending could in principle be estimated by sector specialists in the context of the PRSP elaboration. For example, based on UN Commission for Macroeconomics and Health estimates, the cost of providing minimum essential health services in Mali would require additional expenditure of about 6.3 percent of 2005 GDP (three times the current level of public health expenditure).

Sources of Fiscal Space 2015

(At constant 2005 prices as a percent of 2005 GDP)

Uses of Fiscal Space 2015

(At constant 2005 prices as a percent of 2005 GDP)

30. The authorities found the analytical approach of fiscal space to be a useful concept for linking fiscal and poverty reduction policies, particularly in the context of developing the second generation of the Poverty Reduction Strategy (PSRP II). In the 2003–04 progress report on the Poverty Reduction Strategy, the authorities noted both considerable progress toward some poverty reduction goals and significant shortfalls in reaching key Millennium Development Goals. In this connection, the Joint Staff Advisory Note stresses the need for the PRSP II to include both a growth strategy and action plan and an analysis linking the creation of fiscal space with the costing and prioritization of targeting poverty reduction objectives. Constraints on absorption capacity, at the institutional and macroeconomic levels, also require attention and, if necessary, plans for mitigating actions.

IV. Program Issues

31. The attached Letter of Intent describes the authorities program implementation in 2005, specifies policy plans for 2005 and 2006, and requests completion of the second and third reviews under the arrangement.

32. The authorities met all quantitative performance criteria, indicative targets and financial performance indicators through September 2005 (Attachment I, Table 1).

33. The quantitative program for 2006 envisages a substantial strengthening of the fiscal position (defined by the regional convergence criterion on the basic balance), while net domestic financing is negative, reflecting the repayment of 2005 bridge financing. Budgetary revenue is projected to increase by about 1 percent of GDP, on account of policy and administrative measures (see ¶15 letter of intent), which is ambitious but achievable in light of the upward trend of recent years. Containing the increase in current expenditures is also feasible, given the track record of spending control, though pressure for public sector wage increases constitutes a significant risk ahead. Staff view the 2006 budget as fully financed on the assumption the envisaged external budgetary support is delivered. Such support has been volatile in past years, in part due to variable reform performance, and also poses a budgetary risk. Nonetheless, the program adjustor for shortfalls in budget support is adequate for addressing short-term aid volatility.

34. The structural reforms covered by the authorities’ program continue to advance, although with a number of delays (Attachment I, Annex II). The authorities have implemented three prior actions for completion of the second and third reviews concerning submission to the National Assembly of a fully financed 2006 budget, a revision of fuel excise taxation and the termination of food import VAT exemptions. Of the four structural performance criteria applicable for the review, one was met (adjusting cotton producer price), two were completed with delay (announcement of a cotton producer price consistent with agreed mechanism and beginning actuarial studies and audits of pension funds), and one has not been completed owing to a court challenge (closing date for acceptance of final bids for BIM). Accordingly, the authorities request waivers for nonobservance of three structural performance criteria. Staff supports the request for waivers on the basis that two measures are now completed after temporary delays, while the third measure (concerning privatization of BIM) has been delayed by a legal challenge beyond the authorities’ control and they remain committed to implementation as soon the legal impediment is lifted. None of the four structural benchmarks through end-September were met on schedule: a review of the social safety net program was completed with a delay, while the assessment of the impact of parametric reforms of the public sector pension fund has begun and is expected to be completed with a six-month delay. The study of electricity rates has been postponed to May 2006, following the withdrawal of a strategic foreign partner, while the tender for BIM was also delayed by the court case, and is now scheduled to be implemented by March 2006, nearly a year behind schedule.

35. The structural reform program for 2006 makes further progress in addressing the key challenges, particularly relating to privatization and addressing fiscal risks. Approval by the Council of Ministers of pension reforms aimed at progressively reducing the projected deficit of the civil service pension fund is a performance criterion for end-March 2006. A number of structural benchmarks are also set under the program for 2005–06: (i) submission of legislation authorizing parametric reforms to the civil service pension fund to the National Assembly together with an implementing draft decree; (ii) creation of commission for regular surveillance of cashflow to address short-term financing issues at the CMDT; (iii) approval of a privatization strategy for CMDT by 2008 by CMDT shareholders; (iv) approval by the Council of Ministers of a detailed operational plan for CMDT privatization; (v) launch of the privatization tender for BIM (provided no substantive legal obstacles remain); (vi) completion of the recapitalization of BHM, with a view to ensuring significant private sector involvement; and, (vii) in the electricity sector, completion of a management audit, a financial assessment and review of the electricity tariff-setting mechanism for Electricité du Mali.

36. The Multilateral Debt Relief Initiative (MDRI) is likely to occur in 2006. Staff is of the view that Mali meets the macroeconomic performance criterion to qualify given the completion of the first review under the PRGF arrangement in March, 2005, the impending consideration of the second and third reviews by the Board, and the recent track record of satisfactory macroeconomic performance. In addition, staff is of the view that Mali meets the criteria for poverty reduction policies and public expenditure management systems and recommends that the Board determine that Mali qualifies for MDRI debt relief, subject to continued satisfactory performance in implementation in those areas. The authorities intend to program the resources to support their poverty reduction efforts, through either submission of supplementary spending programs to the National Assembly or increasing provisions in the budget. Resources freed up by MDRI could also serve to cover possible external assistance shortfalls in 2006.

37. The proposed schedule of reviews and disbursements under the PRGF arrangement remains unchanged, with disbursements of SDR 1.33 million available on April 15, 2006 for the fourth review and October 15 for the fifth review (Table 11).

Table 11.Mali: Schedule of Disbursements Under the PRGF Arrangement, 2004–07
AmountAvailable dateDisbursement dateConditions necessary for disbursement 1/
SDR 1.333 millionJune 1, 2004July 2004Executive Board approval of the three-year PRGF arrangement.
SDR 1.333 millionOctober 15, 2004March 2005Observance of the performance criteria for September 30, 2004 and completion of the first review under the arrangement.
SDR 1.333 millionApril 15, 2005Observance of the performance criteria for March 31, 2005 and completion of the second review under the arrangement
SDR 1.333 millionOctober 15, 2005Observance of the performance criteria for September 30, 2005 and completion of the third review under the arrangement
SDR 1.333 millionApril 15, 2006Observance of the performance criteria for March 31, 2006 and completion of the fourth review under the arrangement
SDR 1.333 millionOctober 15, 2006Observance of the performance criteria for September 30, 2006 and completion of the fifth review under the arrangement
SDR 1.333 millionApril 15, 2007Observance of the performance criteria for March 31, 2006 and completion of the sixth review under the arrangement
Source: International Monetary Fund

In addition to the generally applicable conditions under the Poverty Reduction and Growth Facility arrangement.

Source: International Monetary Fund

In addition to the generally applicable conditions under the Poverty Reduction and Growth Facility arrangement.

V. Other Issues

38. Capacity Building. Staff and authorities concurred that capacity building is an important medium-term objective that will strengthen program implementation. The staff stressed the need for a contact point that would play a key role in identifying and matching technical assistance needs that are Fund core competences. The staff, including through West AFRITAC, will work with the authorities to identify assistance in priority areas identified by the authorities: (i) tax administration, including taxpayers’ declarations; (ii) computerization of Ministry of Finance departments; (iii) strengthening the land and property department in the context of the creation of a land cadastre; (iv) support for the large taxpayer unit (LTU) to improve service provision; (v) petroleum product pricing formula’s linking to world prices and design of measures to protect vulnerable groups from fuel price increases; and, (vi) wage policy. The authorities have also requested a Financial Sector Assessment (FSAP). The proposal is under consideration by Bank and Fund staffs either in the form of a country-focused development FSAP, or an assessment of the financial system in BCEAO members.

39. Mali’s statistical data is adequate for program monitoring and surveillance purposes. Although the quality of data could be improved the existing deficiencies have not significantly affected the staff’s analysis of key issues (Appendix III).

VI. Staff Appraisal

40. The Malian authorities have put in place broadly appropriate policies to address the terms of trade shocks that have contributed to weaker income growth and threatened budgetary objectives. Central to these efforts is the successful implementation of a flexible cotton producer price mechanism in full consultation with producers. The new mechanism protects farmer interests while also limiting risks of budget support to the cotton sector. The decision to set seed cotton prices at the floor of the price range for the 2005/06 season tackles a significant risk that was hanging over the 2006 budget. Further, the authorities have continued to pass through increases of international oil prices to pump prices to protect budgetary revenue, albeit partially and with some delay. To safeguard 2006 revenue objectives, the staff supports timely implementation of a pricing formula for fuel, once the necessary preparatory steps are complete.

41. Mali will remain vulnerable to further shocks, linked to weather conditions and deteriorating terms of trade, and needs to be prepared to strengthen adjustment efforts if necessary. While the policy response to food shortages was commendable, and contributed to a narrow avoidance of widespread food insecurity, the efficiency of food markets remains in doubt, with substantial spatial and temporal price differences. More attention should be focused on impediments to food trade, particularly at a regional level. Further increases in oil prices, and declines in cotton or gold prices, in the context of an undiversified economic base and a pegged exchange rate, are also major challenges to continued macroeconomic stability and growth. Stronger adjustment efforts may be needed, in particular maintaining a prudent fiscal position and allowing prices to adjust.

42. The continued support of development partners has contributed to a relatively smooth adjustment to the difficult external circumstances. While some donor budget support has been delayed into early 2006 for procedural reasons, other donors have increased their support in 2005. Nonetheless, the staff believes that continued increases in donor support are contingent on concrete steps to open up the cotton sector to private capital, financial management reform, and other operational reforms. The initial steps taken by the authorities to improve surveillance of the financial operations of the state-owned cotton company, CMDT, are welcome. To build on this success, a comprehensive business plan is required to chart the course to privatization, a clear strategy to disengage the government from the cotton sector while protecting farmers’ interests, and firm evidence that this strategy is being implemented.

43. The staff recommend closer surveillance of the financial sector in Mali, and in particular a significant reduction of forbearance as regards observance of prudential ratios, taking into account the unavoidably high levels of exposure to the cotton sector. Increased vigilance is called for on the part of the supervisory authorities, notwithstanding ample system-wide liquidity. Within the constraints of prudential norms, the authorities should examine ways of reinvigorating financial intermediation and private sector lending.

44. As a member of the West African Economic and Monetary Union, Mali does not independently determine its exchange rate policy. Nonetheless, the staff is of the view that the fixed peg of the CFA franc to the euro remains an important nominal anchor for inflation and remains credible in light of the levels of reserve coverage. Moreover, the Union has succeeded in substantially reforming the trade regime while economic convergence criteria are useful discipline on the conduct of fiscal policies. Competitiveness issues are best addressed through reforms that will reduce the costs of doing business and factor price flexibility.

45. Implementation of other structural reforms under the program has been generally disappointing and risks undermining both the program’s medium-term growth objective and poverty reduction objectives. Although the privatization of the cottonseed oil company is a move in the right direction, the broader picture appears to be a waning commitment to pursue private sector development characterized by continued delays in the disengagement from the banking and telecommunications sectors. Further, the deterioration of relations with companies in recently privatized sectors, notably electricity and water, does not augur well for attracting future investment. Implementation of the 2006 program of structural reforms regarding privatization and management of state enterprises would provide a clear signal of the authorities policy priorities.

46. The authorities need to complement their clear vision of the growth potential of various sectors, with determined implementation of reforms to improve the investment environment and boost productivity. Much of the diagnostic work is in place, and the next Poverty Reduction Strategy should, in the view of the staff, make explicit the link between a growth strategy and poverty reduction, as well as maintaining a realistic assessment of the growth potential. The discussions of exchange rate competitiveness in the context of a fixed peg underscore the importance of increasing the flexibility of other prices, notably wages and key product market prices (cotton, fuel) to send market signals to producers and consumers and improve the efficiency of resource allocation.

47. The concept of creating and using fiscal space is a useful term for analyzing the medium-term budgetary outlook and the scope for poverty reduction in Mali. while public finance management reforms continue to progress and are likely to support revenue growth over the medium term, the specifics of key budgetary policies relating to pensions, the efficiency of spending, and social safety net payments have not received the attention commensurate with their potential impact on fiscal space. The staff will continue to focus on policy advice in these areas in the remainder of the PRGF. Nonetheless, economic growth remains the key factor in creating fiscal space for poverty reducing spending over the medium term, even in the context of MDRI and higher than projected external assistance. This, in turn, underscores the importance of accelerating structural reforms, particularly relating to private sector and financial market development, while addressing the numerous impediments to doing business.

48. In light of the difficult circumstances and the authorities efforts to maintain macroeconomic stability, and continuing advances in institution building, the staff supports the requested waivers for nonobservance of three structural performance criteria and recommends completion of the second and third reviews under the PRGF arrangement. The staff recommends that the next Article IV consultation with Mali be held in accordance with the provisions of the decision on consultation cycles approved on July 15, 2002.

Appendix I. Mali: Relations with the Fund

(As of October 31, 2005)

I. Membership Status: Joined: September 27, 1963; Article VIII

II. General Resources Account:

SDR Millions%Quota
Quota93.30100.00
Fund holdings of currency84.1990.24
Reserve position9.129.77
Holdings Exchange Rate

III. SDR Department:

SDR Millions%Allocation
Net cumulative allocation15.91100.00
Holdings0.181.11

IV. Outstanding Purchases and Loans:

SDR Millions%Quota
PRGF arrangements79.5085.20

V. Latest Financial Arrangements:

ApprovalExpirationAmount ApprovedAmount Drawn
TypeDateDate(SDR Millions)(SDR Millions)
PRGFJun 23, 2004Jun 22, 20079.332.66
PRGFAug 06, 1999Aug 05, 200351.3251.32
PRGFApr 10, 1996Aug 05, 199962.0162.01

VI. Projected Payments to Fund (without HIPC Assistance) (SDR millions; based on existing use of resources and present holdings of SDRs):

Forthcoming
20052006200720082009
Principal3.1014.0713.5712.4911.43
Charges/interest0.310.810.730.670.61
Total3.4114.8814.3013.1612.04

Projected Payments to Fund; (with Board-approved HIPC Assistance) (SDR millions; based on existing use of resources and present holdings of SDRs):

Forthcoming
20052006200720082009
Principal1.938.829.589.8711.43
Charges/Interest0.310.810.730.670.61
Total2.259.6310.3110.5312.04

VII. Implementation of HIPC Initiative:

OriginalEnhanced
I. Commitment of HIPC assistanceFrameworkFrameworkTotal
Decision point dateSep 1998Sep 2000
Assistance committed by all creditors (US$ millions) 1/121.00417.00
Of which: IMF assistance (US$ millions)14.0045.21
(SDR equivalent in millions)10.8034.74
Completion point dateSep 2000Mar 2003
II. Disbursement of IMF assistance (SDR million)
Assistance disbursed to the member10.8034.7445.54
Interim assistance--9.089.08
Completion point balance10.8025.6636.46
Additional disbursement of interest income 2/--3.733.73
Total disbursements10.8038.4749.27

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

Decision point - point at which the IMF and the World Bank determine whether a country qualifies for assistance under the HIPC Initiative and decide on the amount of assistance to be committed.

Interim assistance - amount disbursed to a country during the period between decision and completion points, up to 20 percent annually and 60 percent in total of the assistance committed at the decision point (or 25 percent and 75 percent, respectively, in exceptional circumstances).

Completion point - point at which a country receives the remaining balance of its assistance committed at the decision point, together with an additional disbursement of interest income as defined in footnote 2 above. The timing of the completion point is linked to the implementation of preagreed key structural reforms (i.e., floating completion point).

VIII. Safeguards Assessments:

The Central Bank of West African States (BCEAO) is the common central bank of the countries of the West African Economic and Monetary Union. A new safeguards assessment of the BCEAO was completed on November 4, 2005. The assessment found that progress has been made in strengthening the BCEAO’s safeguards framework of the bank since 2002 when the last safeguards assessment took place.

The BCEAO now publishes a full set of audited financial statements, and improvements have been made to move financial reporting closer to International Financial Reporting Standards (IFRS). Furthermore, an internal audit charter has been put in place, mechanisms have been established to improve risk management and risk prevention, and follow-up on internal and external audit recommendations has been strengthened.

The new assessment identified a number of areas where further steps would help solidify the progress made. The main recommendations relate to improvements in the external audit process (including the adoption of a formal rotation policy), further enhancement of the transparency of the financial statements by fully adopting IFRS, and further strengthening of the effectiveness of the internal audit function.

IX. Exchange Rate Arrangements and Summary of Exchange Restrictions

Mali is a member of the West African Economic and Monetary Union (WAEMU). The exchange system, common to all members of the union, is free of restrictions on the making of payments and transfers for current international transactions. The union’s common currency, the CFA franc, was pegged to the French franc at the rate of CFAF 50 = F 1 from 1948 until early 1994. Effective January 12, 1994, the CFA franc was devalued, and the new parity set at CFAF 100 = F 1. Effective January 1, 1999, the CFA franc was pegged to the euro at a rate of CFAF 655.96 = EUR 1. On June 24, 2005, the rate of the CFA franc in terms of the SDR was SDR 1 = CFAF 794.35.

As of June 1, 1996, and in conjunction with its WAEMU partners, Mali accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement. Mali’s exchange system is free of restrictions on making payments or transfers for current international transactions. In addition Mali does not engage in multiple currency practices.

Mali shares a common trade policy with other members of WAEMU, shifting key trade policy-making to the sub-regional level. The common external tariff (CET) was adopted in January 2000. Mali is compliant with the tariff rate structure of the union and has effectively implemented the dismantling of internal tariffs. WAEMU tariff reform has reduced the simple average custom duty from 22.1 per cent in 1997 to 14.6 per cent in 2003 (latest available), with a maximum rate of 20 per cent. Imports to Mali are not subject to quantitative restrictions.

Mali is a signatory of the Cotonou Convention, and as such Malian exports to the European Union generally enjoy non-reciprocal preferential treatment in the form of exemption from import duties. Malian goods enjoy nonreciprocal preferential access to the markets of developed countries other than the European Union under the Generalized System of Preferences. Mali is also eligible for the benefits of the United States’ African Growth and Opportunity Act. At the WAEMU level, Mali does not officially experience legal or regulatory impediments to its exports.

X. Article IV Consultations

Mali’s Article IV consultation cycle is governed by the provisions of the July 2002 decision on consultation cycles. The 2003 Article IV consultation was completed by the Executive Board on December 15, 2003 (Country Report No. 04/11, 1/12/04).

XI. ROSC/AAP

Regarding the HIPC Assessment Action Plan, a May 2004 mission concluded that progress had been achieved, with the number of the more tightly defined benchmarks observed by Mali increasing from 8 out of 15 in 2001 to 11 out of 16, and that significant advances were made in the areas where the benchmarks are not yet met. The report put forward an action plan to strengthen Mali’s budget management capacity, with the view to helping Mali meet all 16 indicators in the medium term. One of the main priorities identified by the mission in many areas is to extend beyond the procedural monitoring of compliance with the rules to give greater emphasis to effectiveness and efficiency based on a sharper focus on risk management.

XII. Technical Assistance

DepartmentType of AssistanceTime of DeliveryPurpose
FADStaffJuly 2001Assisting in completion of the fiscal module of Report on the Observance of Standards and Codes (ROSC), and drafting an Assessment and Action Plan (AAP), as well as of the capacity of the public expenditure management system to track and report on the uses of HIPC Initiative assistance and all poverty-reducing expenditures.
FADFebruary – March 2002Assisting the authorities in improving the existing expenditure classifications.
STAExpertMay 2002Assessing government finance statistics under the General Data Dissemination System (GDDS) West Africa project.
STAExpertJune–July 2002Providing government finance statistics technical assistance under the GDDS West Africa project.
STAExpert (regional statistical officeAugust 2002Assessing real sector statistics assessment under the GDDS West Africa project.
(AFRISTAT)
STAExpertSeptember 2002Providing government finance statistics technical assistance under the GDDS West Africa project.
STAStaff and expertsApril 2003Undertaking a multisector statistics mission.
AFRITACDebt AdvisorNovember 2003

February 2004

April 2005
External and domestic debt management and assistance in government securities issuance
AFRITACMF AdvisorJune 2003

September 2004
Assisting the MOF to develop a MF supervision strategy
FADStaffJan 2004Assisting the authorities in improving revenue mobilization, especially as regards revenue from the mining sector.
AFRITACPEM AdvisorApril 2004Participation at the HIPC/AAP assessment Mission
AFRITACMultisector statistical advisorJune 2005GFS technical assistance
LEGExpertAugust 2005Assisting in drafting anti-money laundering law.
AFRITACPEM Advisor and expertAugust 2005Treasury Accounting
AFRITACMF AdvisorSeptember 2005Providing assistance to CAS/SFD in improving its capacity in terms of function, control and inspection.

XIII. Resident Representative

Mr. Wane, the current Resident Representative, took up this assignment in February 2005. The previous Resident Representative, Mr. Tazi, was stationed in Bamako for the period September 2002 through October 2004.

Appendix II. Mali: World Bank-IMF Relations

(As of December 6, 2005)

A. Partnership in Mali’s development strategy

1. Mali’s development strategy increasingly emphasizes growth and poverty reduction. Its PRSP (adopted by the government in May 2002) highlights growth as a precondition for poverty reduction, and outlines programs for (i) institutional development and improved governance, (ii) human development and access to basic social services, and (iii) infrastructure development and support for key productive sectors. Mali’s growth strategy aims to be private sector led and market oriented toward the West Africa region as well as the global market.

2. The IMF and World Bank staffs maintain a collaborative relationship in supporting the government’s macroeconomic and structural reforms, in line with the guidelines for enhanced Bank-Fund collaboration. This includes regular participation of Bank staff in the meetings with the government on the Fund’s program review missions, IMF staff participation in Bank development policy missions and Bank internal review meetings. The IMF takes the lead in macroeconomic stabilization and the World Bank in social and structural areas, with close collaboration on a few structural areas that have a particular impact on macroeconomic stability. The Fund’s dialogue and conditionality are consistent with the structural programs agreed with the Bank, and the Bank’s dialogue and conditionality have maintained consistency with the macroeconomic framework endorsed by the Fund.

B. World Bank Group strategy

3. The World Bank Group’s strategy, outlined in the Country Assistance Strategy (CAS) discussed by the Board of Directors on July 31, 2003, emphasizes three broad themes in line with the country’s PRSP: (i) promotion of economic growth; (ii) human resources development; and (iii) public finance management and governance. Mali also benefits under the Bank’s Regional Integration Assistance Strategy (2001), notably a program for connection to the West Africa Power Pool, harmonization of country policies and/or regulatory frameworks (telecommunications, agriculture, financial sectors), water resource development of the Niger and Senegal Rivers, strengthening of road transport corridors, and strengthening the regional payments system.

4. Support to Mali during fiscal years 2004–06 amounts to US$400 million in the base case, with about 30 percent in grants. Budget support of $25 million is provided annually through development policy credits (DPCs), subject to satisfactory macroeconomic management. This is complemented by selected investment operations (targeting education, support to growth, and infrastructure development) and a community-driven development operation. The Bank will prepare a new CAS in the course of FY07 in support of Mali’s next PRSP (under preparation in the first half of 2006). In that context, the Bank envisions aligning its annual budget support with Mali’s budget cycle during 2007, possibly in the form of programmatic lending along the lines of a PRSC.

5. The CAS also includes non-lending activities. Recently completed activities include a Country Financial Accountability Assessment, Macroeconomic Growth and Water Variability study, first phase Poverty Assessment, Country Procurement Assessment Review, and an Integrated Framework Trade Diagnostic Study. A Poverty and Social Impact Analysis of the cotton sector is nearing completion. The Bank has also assisted with development of medium-term expenditure frameworks (MTEF) for health, education, and transport, and MTEF support is envisioned for the agriculture-livestock-fisheries sector. Planned activities during FY06–07 include a Country Economic Memorandum on growth and a Public Expenditure Review.

C. IMF-World Bank collaboration

6. Areas in which the Fund leads. The Fund takes the lead in macroeconomic stabilization including macro-fiscal policy, monetary policy, exchange rate policy, and financial stability and risk management.

7. Areas in which the Bank leads. The Bank takes the lead in structural areas where both institutions have conditionality, including cotton sector reform, privatization and regulatory reform (telecommunications, banking, financial and energy sectors), and pension reform. The Bank also leads in other areas such as: agricultural competitiveness/diversification; rural development (irrigation, roads, support to producer organizations); private sector development (strengthening the investment climate, access to business services, support to small/medium enterprises); urban development (historic rehabilitation/ preservation, land/housing market development, water/road infrastructure); transportation policy/infrastructure; energy sector reforms; and social sectors (health, education and social protection, including HIV/AIDS). The Bank’s work in structural areas includes analytical work and dialogue on trade and growth policies, which form part of the overall economic policy dialogue. The Bank collaborates with other donors whenever possible (notably in health, education, agriculture and cotton sectors), and is pursuing a harmonized approach for donor support to health and education reforms as well as on budget support more broadly.

Areas of shared responsibility. Both Bank and Fund collaborate in assessing performance of HIPC resource use. Both also monitor progress on budgetary and public expenditure management, yet emphasize different aspects of the government’s reform program in the respective support operations. The Bank emphasis in this area is on strengthening all phases of the public expenditure system—budget preparation, budget execution, and budget controls—to support the government’s objectives of progressive shifts toward result-based budgeting and improved effectiveness of expenditures. Bank support is at the national level in the finance ministry (global MTEF, integrated information technology system, audit capabilities, budget reporting) and sector ministries (selected sector MTEFs, inter- and intra-sectoral allocations), as well as at de-concentrated levels (budget nomenclature, IT system, capacity building). The Fund’s emphasis is on fiscal management, expenditure management (including financing of transfers to parastatals), revenue enhancing measures, and audit capabilities. Table 1 summarizes the areas of Bank-Fund collaboration in Mali.

Table 1.Bank Fund Collaboration in Mali(ongoing or planned)
AreaSpecialized Advice from FundSpecialized Advice from BankKey Instruments
Economic Framework/ManagementFiscal/monetary policy, Economic statisticsEconomic growth analysis.IMF: PRGF performance criteria and benchmarks on fiscal and monetary targets; technical assistance.



Bank: Analytical studies
Budgetary and Public Expenditure ReformsOverall budget envelope, Expenditure management, Enhancement of tax and nontax revenue, Pension reformSector MTEFs (Transport and Rural Sectors), Integrated information system, Improved reporting on budget execution, CFAA, CPAR, Public expenditure tracking survey (education sector).IMF: PRGF performance criteria and benchmarks on overall fiscal balance and on pension system viability; technical assistance.



Bank: Policy framework actions in successive development policy operations; Support to capacity building (MTEFs), Financial sector development project.
Agriculture and Rural Development (incl. Cotton)Rural development strategy, Agricultural export promotion, Irrigation, Rural roads, Community driven development.



Cotton: privatization strategy, liberalization of critical functions, capacity building of producer organizations.
IMF: PRGF performance criteria on cotton pricing and benchmarks on preparations on privatization.



Bank: Policy framework actions for cotton and Office de Niger in successive development policy operations; Agricultural services and producer organizations project (for agriculture and rural sector development); Agriculture diversification and competitiveness project (for agriculture development and export promotion); National rural infrastructure project (for rural roads and irrigation).
Social Sector Reforms/Poverty MonitoringReforms in education and health, HIV/AIDS program, Poverty assessment, Cotton PSIA.Bank: Integrated health sector investment project (ongoing and next phase); Education sector expenditure program (ongoing and next phase); HIV/AIDS MAP project.
Privatization and Private Sector DevelopmentPrivatization strategy (telecommunications, banking, energy), Pricing policy, Revenue management (mining), Business development services (incl. to SMEs).IMF: PRGF benchmarks on bank and telecom privatization processes.



Bank: The policy framework under successive development policy operations (actions on the financial and cotton sectors); Financial sector development project (policy framework condition on State ownership of banks); Sources of growth project (telecom, mining, investment climate, SMEs); Household energy project, and advice on electricity utility.
Infrastructure and Other SectorsStrategy and investment program (transport, energy, water), Urban sector study.Bank: Transport corridor project, Rural infrastructure project, Household energy and universal access project.
Prepared by World Bank staff. Questions may be referred to Ms. Gaye (Acting Country Director, (229) 21 30 17 44), Ms. Wood (Sr. Economist, 473-5829), or Ms. Hader (Sr. Operations Officer, 458-8414).
Appendix III: Mali: Statistical Issues

(As of November 21, 2005)

1. Mali’s statistical database is adequate for program monitoring. However, there is considerable scope for improving the quality, timeliness, and availability of economic and financial data. Mali has been participating in the General Data Dissemination System (GDDS) since September 2001 and has advanced the implementation of its short- and medium-term plans for improvement. The metadata posted on the Dissemination Standards Bulletin Board (DSBB), last certified in June 2003, require updating.

Real sector

2. There are weaknesses in the accuracy, coverage, and timeliness of national accounts data. The main reason is the inadequacy of the real sector databases, owing to the inadequate funding and technical staffing of the National Directorate of Statistics and Data Processing (DSDP). Staff have discussed revisions to the calculation of GDP deflators, the treatment of agricultural stocks and expenditure estimates of GDP.

3. In collaboration with other West African Economic and Monetary Union (WAEMU) member countries, the DSDP has been compiling and publishing a harmonized consumer price index (CPI) for Bamako, on a monthly basis since early 1998. Index weights and, possibly, extension of coverage to additional cities is under review.

Government finance statistics

4. As part of the process of economic integration among the member countries of the WAEMU, Mali has made progress in bringing its fiscal data in line with the common framework that has been developed with technical assistance from the Fund (the harmonized table of government financial operations—TOFE). However, efforts need to be made to improve the timeliness of the TOFE. Work is progressing with the assistance of AFRISTAT to expand the coverage of the TOFE to public agencies and local governments. Staff have begun discussions with the Ministry of Finance on issues relating to the adoption of the revised 2001 GFS methodology.

5. Public debt statistics are prepared and monitored by separate agencies: external debt by the National Public Debt Directorate (NPDD) and domestic debt by the National Directorate of the Treasury and Government Accounting. The NPDD uses CS-DRMS accounting software. Debt data and projections are of generally good quality, although there is scope for improving the coverage of debt relief (multilateral and bilateral) and the presentation of passive debts. A procedure for regularly updating exchange rate projections is needed.

6. Fiscal data are posted on the BCEAO website, but not on a timely basis. The Ministry of Economy and Finance is preparing to launch a website in 2006.

Monetary data

7. Preliminary monetary data for Mali are prepared by the national agency of the Bank of Central African States (BCEAO) and released officially by the headquarters of the BCEAO. The dissemination of monthly monetary data from the BCEAO takes from four to six weeks consistent with GDDS recommendations. Data are posted on the BCEAO website with a considerably longer time lag.

8. In June 2005, the BCEAO made substantial revisions to the estimates of currency in circulation in member states. The revised method, based on updating sorting coefficients (“coefficients de tri”), has been applied retroactively from December 2003. The revised estimates increased the export of CFA franc banknotes from Mali to other member states, from 2003 resulting in a reduction of currency in circulation and a reduction of the counterpart net foreign assets in the BCEAO national balance sheet. Parallel revisions were also made to the balance of payments. Nonetheless, the national BCEAO balance sheets remain estimates based on the calculation of banknote movements and are therefore subject to error.

Balance of payments data

9. In December 1998, the responsibility for compiling and disseminating balance of payments statistics was formally assigned to the BCEAO by area-wide legislation adopted by the countries participating in the WAEMU. The BCEAO national agency disseminates balance of payments statistics with a lag which is longer than the recommendation of the GDDS guidelines. GDDS objectives to disseminate quarterly balance of payments have progressed but are not sufficiently robust for publication.

10. The foreign assets of the private non banking sector are not well covered in the financial accounts, especially the assets of WAEMU residents, obtained through partial surveys of residents’ foreign assets. The BCEAO has recently implemented a compilation system allowing commercial banks to report data on payments involving nonresidents; however, these data are not used to produce annual balance of payments statistics.

11. The multi sector statistics mission that visited Mali during April 22–May 6, 2003 found that the balance of payments compilation system is generally sound and encouraged the authorities to integrate banking settlement sources and disseminate the Mali balance of payments within the recommended timeliness, as set by the GDDS.

12. Annual statistics on balance of payments and international investment position are reported to STA on a regular basis.

Poverty Statistics

13. The PRS Annual Update identifies a key set of poverty indicators for monitoring of the PRS implementation.

Mali: Common Indicators Required for Surveillance(as of November 21, 2005)
Date of latest

observation
Date

received
Frequency

of

Data6
Frequency

of

Reporting 6
Frequency

of

Publication
Exchange RatesCurrentCurrentDMM
International Reserve Assets and Reserve Liabilities of the Monetary Authorities1
Reserve/Base MoneyAug 2005Nov 2005MMM
Broad MoneyAug 2005Nov 2005MMM
Central Bank Balance SheetAug 2005Nov 2005MMM
Consolidated Balance Sheet of the Banking SystemAug 2005Nov 2005MMM
Interest Rates2Oct 2005Nov 2005IWM
Consumer Price IndexMar 2005Jun 2005MMM
Revenue, Expenditure, Balance and Composition of Financing3 - General Government4
Revenue, Expenditure, Balance and Composition of Financing3- Central Government
Stocks of Central Government and Central Government-Guaranteed Debt5
External Current Account Balance2003Feb 2005AAA
Exports and Imports of Goods and Services2003Feb 2005AAA
GDP/GNP2004Jul 2005AASemi-A
Gross External Debt2002Feb 2004AAA

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Attachment I: Letter of Intent

Bamako, December 7, 2005

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. de Rato:

1. The Malian economy has experienced exogenous shocks that affected cotton and oil product prices over the past year, and the 2004/05 production of food crops was far from adequate, resulting in lower growth and higher inflation than envisioned under the program. With the assistance of our external partners, we have put in place decisive policies to adjust to these shocks and ensure macroeconomic stability and food security in the medium term.

2. The outlook for 2006 and for the medium term is encouraging. Agricultural production, particularly cereals, should rebound in 2005/06 following adequate rainfall, resulting in a reversal of recent inflation. The terms of trade have begun to improve, notably with respect to gold prices. We remain fully committed to completing the privatization of the Malian textile development company (CMDT) by 2008 and attach high priority to the financial sector reforms, to strengthening fiscal policies and increasing the role of the private sector in the economy.

Macroeconomic Framework

3. Recent macroeconomic developments remain broadly consistent with projections in the previous program review, although inflation has increased in 2005 because of the food supply reduction. We expect a recovery of GDP growth from 2 percent in 2004 to about 5.5 percent in 2005 on the basis of a normal 2005/06 harvest, rising gold production, and modestly increased cotton production levels. Owing to good rainfall the risks to growth are on the upside. Reduced cereal supply substantially increased food prices in 2005, leading to average consumer price inflation of 5 percent and projected year-end inflation of zero percent. In addition to the effects of the food shock, the upsurge in petroleum product prices has reduced the current account balance. The fiscal position, before grants, weakened temporarily, as we increased public spending to address losses in the cotton sector and at the same time cushion the impact of lower international cotton prices.

4. For 2006, we expect economic growth to remain at 5–6 percent, underpinned by improvements in the terms of trade, a narrowing of the current account deficit, low inflation, and increased levels of public investment.

5. Strict fiscal management has led to the maintenance, at end-2004 and end-September 2005, of an overall fiscal balance consistent with program projections. The overall fiscal deficit, before grants, in 2004 stood at 6.6 percent of GDP, or 1 percent of GDP less than estimated in the program, and is expected to rise to 8.8 percent GDP in 2005, financed by increases in concessional loans and budgetary grants. Revenue objectives were generally met, except shortfalls in nontax revenue (dividends and property taxes) and fuel excises. Expenditure increased in 2005, reflecting higher investment, wages including HIPC-financed wages, and lending to CMDT.

Mali: Economic Developments, 2003–06
2003200420052006
Revised
EstimateEstimate1st ReviewProjectionProgram
Real GDP (percent change)7.22.35.85.45.4
Nominal GDP (in billions of CFA francs)2,5682,6102,7532,7612,905
Average inflation rate−1.3−2.82.55.0−1.5
(In percent of GDP)
Total revenue and grants20.921.423.522.224.0
Total expenditure and net lending22.224.027.026.327.5
Overall fiscal balance (before grants)−5.7−6.6−8.8−8.7−9.1
Overall fiscal balance (including grants)−1.3−2.6−3.5−4.1−3.5
Current account balance 1/−6.1−7.7−5.9−9.1−8.1
Sources: Malian authorities and IMF estimates and projections.

Includes upwards revision of current account deficit in 2003 and 2004 on the basis of BCEAO data.

Sources: Malian authorities and IMF estimates and projections.

Includes upwards revision of current account deficit in 2003 and 2004 on the basis of BCEAO data.

6. Monetary growth has slowed as a result of the less favorable external environment. Following two years of rapid growth, the level of reserves declined in 2004, reflecting current account weakness. Meanwhile, growth of credit to the economy declined in 2004. This tendency could continue in 2005, partly reflecting efforts to strengthen the credit portfolio. Based on data available through the third quarter of 2005, broad money is expected to increase by about 6.5 percent in 2005 and 6.2 percent in 2006.

7. In the banking sector, system-wide liquidity remains high, even though there is only partial compliance with the prudential ratios. Credit is still concentrated in the cotton sector. Moreover, the quality of loan portfolios should be improved, particularly in the area of real-estate loans. Steps are under way to restructure the housing bank to protect its depositors, and the audit of the loan portfolios of other commercial banks is nearing completion.

8. To sustain GDP growth at an average of approximately 6 percent per annum over the medium term, we will focus our policies and reforms mainly on improving efficiency and competitiveness, particularly through structural reforms in the cotton and banking sectors and the strengthening of public finances and public institutions. The successful implementation of these reforms will rest on broad consultation with the stakeholders and on technical and financial support from our development partners. We expect the current account deficit to narrow after 2005 as the terms of trade gradually improve and gold exports increase as a result of the opening of new mines. With the recovery of exports and growth, our external debt sustainability indicators will continue to improve.

9. The second progress report on implementation of the Poverty Reduction Strategy Paper (PRSP), approved in August 2005 and drafted in consultation with external partners and other stakeholders, emphasizes the need to ensure coherence between the annual budget and the medium-term expenditure framework for poverty reduction spending under the PRSP. Preparation of our second PRSP, covering 2007–11, is under way, and will be submitted to the National Assembly. The PRSP will focus on matching identified budgetary space with the costs of those interventions that will enable us to make concrete progress toward achievement of the Millennium Development Goals (MDGs). Account will be taken in the 2007 Budget Law of the PRSP objectives.

Performance Under the Program

10. Financial program performance at end- September 2005. Program implementation at end-September was satisfactory. We met the quantitative performance criteria regarding net domestic financing, nonaccumulation of external payment arrears, and external borrowing terms and maturities at end-September. We also met the performance indicators with respect to the floor on tax revenues and the ceiling on the wage bill, and exceeded the basic balance, excluding HIPC-financed expenditure (Annex I).

11. Our structural reform program experienced a number of delays (Annex II), as follows:

  • We conducted an actuarial study of the civil service pension fund (CRM) in July 2005, with a six-month delay owing to bidding procedure issues. The draft study is now complete, and we will start a consultative process as soon as possible on the parametric reforms, with a view to placing the pertinent draft law before the National Assembly along with the 2007 Budget Law.
  • On May 2, 2005 we announced a base seed cotton purchaser price for 2005/06 of CFAF 160/kg, pursuant to the government-CMDT-producers memorandum of understanding on the cotton pricing mechanism, to minimize budgetary risks and taking into account world price projections. We maintained the base cotton price in August 2005 in accordance with the memorandum of understanding. In addition, steps are being taken to bring CMDT accounts into balance.
  • The plan to complete the sale of the government’s shares in the Banque Internationale du Mali (BIM) was delayed by circumstances beyond our control, in particular a court case contesting the validity of the government’s shareholding in the Bank. The privatization process will resume immediately after the Supreme Court ruling on the case, expected in November 2005. Our PRGF-supported structural reform program for 2006 is also attached to this letter.

12. On the basis of the policies described in this supplementary letter of intent and its annexes, we request the completion of the second and third reviews of the PRGF-supported program. The following prior actions were undertaken in anticipation of the review: (i) the revision of aspects of the taxation on petroleum products, in order to reduce the differentiation of excise taxes by route of importation, in accordance with regional policies (adopted by decree on July 11); (ii) submission of a fully financed draft 2006 Budget Law to the National Assembly, in accordance with the macroeconomic framework of the PRGF (submitted September 18); and (iii) elimination of the temporary VAT exemptions for rice and maize.

13. We request a waiver for nonobservance of the structural performance criterion related to beginning an actuarial study of the civil service pension fund (CRM), for the announcement of a base cotton producer price for 2005/06, and for the acceptance of financial bids for the sale of the government’s shares in the BIM. The fifth and sixth disbursements under PRGF will be subject to reviews expected to be completed on or after April 15, 2006 and October 15, 2006 respectively. We will continue to consult the Fund in advance of any change to our policies that could affect the implementation of our economic and financial program.

Program Policies for 2005–06

2005 Budget

14. We remain committed to fiscal discipline and to not seeking financing through the use of domestic credit and treasury bills, except where necessary to meet within-year requirements and unforeseen shortfalls in budgetary grants or loans.

15. The risks to the 2005 revenue outlook include weak nontax revenue mobilization, lower hydrocarbon taxes, delays in payment West African Economic and Monetary Union duty compensation, and delays in the implementation of fiscal measures. To cover budgeted spending, particularly for poverty reduction, we have:

  • Reduced the differentiation across petroleum product excise taxes with a view to improving revenue efficiency, in accordance with the regional legislation (prior action);
  • Strengthened administrative measures. The Tax Department’s action plan will be given high priority, and the on-site audit system was strengthened in the last quarter. We have requested but not yet identified technical assistance to strengthen the Land and Property Department (DNDC). The Customs Department has increased import inspection and fraud detection;
  • Eliminated the temporary VAT exemptions for rice and maize imports as products from the latest harvest arrive on the market; and
  • Made every effort to ensure the collection of dividends in respect of profitable state enterprises, notably the telecommunications company (SOTELMA).

16. On the expenditure side, we will submit to the National Assembly revisions to the 2005 budget that take account of net lending to the CMDT. The pertinent amount budgeted will be increased from CFAF 13.8 billion to CFAF 28.5 billion. This increase is less than estimated in the program, partly because the operating deficit for the 2004/05 season was narrower than anticipated. We also expect to realize savings of CFAF 8 billion relative to the estimates for a number of items (in particular, elections and electricity subsidies) in the 2005 budget.

17. To cover shortfalls in nontax revenues, hydrocarbon taxes, and higher spending needs, we have identified additional budgetary assistance of CFAF 9 billion for 2005, thereby closing the expected financing gap.

2006 Budget

18. We submitted a fully financed 2006 Budget to the National Assembly in September 2005. The principal measures underpinning the 2006 budget revenues are: (i) computerization of the Tax Department, leading to improved domestic VAT collections; (ii) full-year effects of measures implemented in late 2005, notably elimination of the VAT exemption on new vehicles effective November 1, 2005, introduction of a simplified tax regime for small and medium-sized businesses, and elimination of the agricultural bank tax exemptions; (iii) taxation of imports from WAEMU countries produced under economic or conditional relief arrangements; (iv) the introduction of regulations for prudent implementation of the revised investment code to limit tax losses. We will study, with technical assistance, different options to reform the petroleum product pricing mechanism and palliative measures to protect vulnerable groups of the population. On this basis, we will introduce a price mechanism before end-March 2006 linking pump prices to international prices, compatible with fuel excise estimates in the 2006 Budget (new structural benchmark). In the meantime, the fuel excise will be broadly compatible with 2006 budget projections.

19. Our spending is aimed at increasing investment financed by higher aid inflows. Nominal wage spending increases by 6.2 percent on account of HIPC-financed wages and wage adjustments, while spending on goods and services increased by 7.4 percent. The capital budget is intended to cover increased appropriations for [health, education, roads, and institutional capacity building. The budget also includes provisions totaling CFAF 8.2 billion that could be spent in the event realized fiscal revenue were to exceed the estimates. These provisions would be used to deal with unexpected exogenous shocks. Pursuant to the provisions of the Budget Law, the government will reduce spending if the rate of revenue realization is unsatisfactory.

20. Projected gross financing from external grants and loans will increase substantially in 2006. Largely on account of a shift toward sectoral budget support (1.6 percent of GDP), which will help increase assistance execution rates. Total aid support is projected to reach 11.1 percent of GDP, including the equivalent of 2.8 percent of GDP (CFAF 80 billion) in general budget support linked to implementation of the economic reform program, particularly in the cotton sector, and the maintenance of macroeconomic stability.

21. We welcome the proposals for multilateral debt cancellation from the IMF, the World Bank and the African Development Fund. Such cancellation and the potential increase in external assistance would help create additional budgetary space and progress toward the achievement of the MDGs. Cancellation would also reduce debt service by about 0.6 percent of GDP per year over the medium term. Should cancellation occur in 2006, we will either submit supplementary spending programs to the National Assembly or increase the unallocated provisions in the budget. Debt cancellation could also serve to cover possible external assistance shortfalls.

Fiscal structural measures

22. As we work with international partners to move from project support to sectoral and general budget support, we are reforming public finance management. The government has adopted an action plan for improving and modernizing public finance management. We will focus on strengthening the revenue collection agencies (taxes, customs), the audit function, procurement, extending the Treasury’s computer network, broadening the scope of the budget accounts to local governments and autonomous public agencies, and increasing accountability.

23. Concerning expenditure management, we began a study of the system of salary allowances and bonuses in October 2005 to assess incentives for the deconcentration of government services; we expect the study to be completed by year-end. With a slight delay, we completed a report in October 2005 on the review of the criteria used for allocating resources for the principal social safety net.

24. The provisional actuarial study of the civil service pension scheme (CRM) shows that without reform the operating deficit will rise to unsustainable levels from the 2005 budget level of 0.6 percent of GDP. We have begun consultations with the stakeholders on a range of parametric reform options that will restore the CRM to equilibrium. We have asked the consultant to provide a wide range of options, including simulations for reaching operational balance after 10 years, 15 years, and 20 years. In view of the importance of the parametric reforms to the CRM for the medium-term budgetary outlook, the government will identify a package of parametric reforms that will gradually reduce the projected deficit of the CRM from the present level over the medium term (new performance criteria for end-March 2006). In addition, the government will submit to the National Assembly, in the context of the 2007 Budget Law and by end-September 2006, a draft law authorizing the above mentioned package of parametric reforms (new structural benchmark).

Strengthening the financial system

We remain committed to our program of strengthening the financial system by increasing the role of the private sector in the banking system and improving presentation of the balance sheets of banks and nonbank institutions.

25. Preparations for the sale of government shares in the commercial banks have taken longer than expected:

  • Banque Internationale du Mali (BIM). We have received expressions of interest for the acquisition of the government’s 61.5 percent stake in this bank. The tender offer for a majority shareholding in this bank (end-April 2005 benchmark) has been delayed by a Supreme Court case contesting the validity of the government shareholding. Once the Court has ruled on the matter (expected in November 2005), and providing no legal impediments remain, we expect to launch a tender by end-March 2006 (reset structural benchmark).
  • Banque de Développement du Mali (BDM). Pending agreement on the parallel sale of the shares held by the Central Bank of West African States (BCEAO), the divestiture of the government’s 20 percent share in Mali’s largest bank is on hold. The BDM remains profitable and plays a pivotal role in the banking consortium for cotton export financing.

26. We are implementing, with World Bank support, a plan to restructure the housing bank, Banque de l’Habitat du Mali (BHM). The audit of the BHM portfolio by a firm of external auditors has been used as the basis for the measures in the restructuring plan. The plan centers on a recapitalization operation led by the government, to be completed by end-June 2006, with the objective of ensuring significant private sector involvement (new structural benchmark). To succeed, the above-mentioned recapitalization is preceded by measures aimed at strengthening the financial position of the bank. The recapitalization will take the form, in the short term, of a conversion of the government deposits into equity. The government will sell equity as new shareholders are identified and the financial position of the bank improves.

27. An audit of the nonperforming loan portfolio of commercial banks has begun to yield results. The proposals for the settlement of these claims, recommended in the final report, will be examined by the parties (government-banks-World Bank) during the first quarter of 2006, in a consultative framework.

28. As regards microfinance, the task of supervising microfinance institutions has been transferred to the Ministry of Economy and Finance in conformity with the WAEMU law governing microfinance institutions. In addition, the high level of nonperforming loans in the microfinance sector indicates there is a need to strengthen the supervisory capacity of the Ministry of Economy and Finance.

Cotton Sector Reforms and Privatization

29. A revised timetable for the cotton sector reform process, postponing privatization of the CMDT to 2008, was approved by the Council of Ministers in February 2005. This timetable announces the signing of a memorandum of understanding by the government-CMDT-producers on the producer price mechanism. It provides for a series of measures aimed at completing privatization of the CMDT in 2008.

30. A base price for cottonseed purchases from producers for the 2005/06 season has been set at CFAF 160/kg, in accordance with the memorandum of understanding on the pricing mechanism signed in January 2005, with a view to keeping to a minimum the risks related to budget support to the cotton sector for the 2005/06 season. This price is at the floor of the range for the base price and was reaffirmed in August 2005. In light of the program estimates regarding international cotton prices and exchange rates, we expect the CMDT operating balance to move from a loss of 1.8 percent of GDP (CFAF 50.3 billion) in 2004/05 to a gross profit equivalent to 0.6 percent of GDP (CFAF 16 billion) in 2005/06 (subject to a considerable margin of forecasting error).

31. The short-term financial situation of the CMDT remains difficult and poses a fiscal risk. These difficulties result from the partial recapitalization for 2004/05 losses (incurred in 2004) and receivables for cottonseed sales. Arrears with respect to external payments on medium- and long-term loans have been accumulating since April 2005. The finalization of the 2005 accounts by end-June 2006 will be key in resolving the financial problems. In the interim, the government, as the major shareholder, will set up a committee for the regular surveillance of cash flow operations (structural benchmark for end-December 2005) with a view to progressively reducing payment arrears. Such monitoring will be based on an audit and a payment plan for receivables, cost savings, and disposal of noncore assets, efforts to increase shareholder capital, and refinancing. In the interests of financial transparency, a plan will be submitted to the relevant stakeholders.

32. We continue to reflect on the best approach to privatization of the CMDT. The discussions center on whether to sell assets by zoning or equity in new subsidiary companies, creating a regulatory framework, and strengthening the role of cotton producers in downstream activities. In light of these discussions and delays in implementing the reforms planned in the revised privatization timetable, we recognize that a new political impetus is needed to move forward on the reforms, with the support of external partners. Accordingly, by end-December 2005 a definitive strategy for privatization will be adopted by CMDT shareholders (new structural benchmark). The strategy will be based on the agreed positions of shareholders concerning the management of the privatization procedure, notably the number of private companies to be created, shareholder interests, as well as the proposed management of privatization receipts and the clearance of CMDT liabilities. By end-September 2006, a detailed technical operational plan for privatization will be adopted by the Council of Ministers (new structural benchmark).

33. The privatization of other nonfinancial sector companies is proceeding, albeit with some technical delays: In June 2005, the sale of the bulk of the government’s shares in the cottonseed mill (HUICOMA) to a private operator was finalized against a payment equivalent to CFAF 9 billion or 0.3 percent of GDP. Preparations are continuing for the sale of 80 percent of the government’s shares in the national telecommunications company (SOTELMA), and we expect to conclude this transaction in the fourth quarter of 2006. A medium-term privatization plan for the period through 2008 will be devised by end-2006.

34. In the electricity sector, we agreed in October 2005 with the strategic partner to restructure ownership, with the government taking a controlling stake of 66 percent. By January 1, 2006 we will recruit specialized international experts to support the new management team. By end-May 2006, we will conduct a management audit, an assessment of the financial situation, and a review of the pricing mechanism, with a view to resolving the cash flow operating problems (new structural benchmark). We remain committed to private management of the company, based on the above-mentioned studies and reports.

Very truly yours,

/s/

Abou-Bakar Traoré

Minister of Economy and Finance

(In billions of CFA francs)

Mali: Quantitative Performance Criteria and Indicative Targets for December 2004–December 2005 1/
20042005
DecemberMarchJuneSeptemberDecember
IndicativePerformanceIndicativePerformanceIndicative
targetsActualcriteriaActualtargetsActualcriteriaActualtargetsActual
EBS/04/64EBS/04/64EBS/05/20EBS/05/20
Quantitative performance criteria and indicative targets
Net domestic financing of the government, program ceiling 2/−23.919.9−14.9−4.5−2.0
Net domestic financing, adjusted ceiling and actual 2/0.4−14.612.16.410.4−1.215.3−3.3....
Cumulative change in government external payments arrears 2/3/0.00.00.00.00.00.00.00.00.0..
Domestic0.00.00.00.00.00.00.00.00.0..
External0.00.00.00.00.00.00.00.00.0..
New external borrowing at terms of one year or more contracted or guaranteed by the government on nonconcessional terms 2/3/0.00.00.00.00.00.00.00.00.0..
New short-term external debt (less than one year) contracted or guaranteed by the government 2/3/4/0.00.00.00.00.00.00.00.00.0..
Financial performance indicators
Cumulative tax revenue 5/383.7393.394.4100.3198.1206.9318.4322.0430.0..
Cumulative wage bill 2/122.0121.733.931.970.164.7105.296.9140.2..
Overall basic fiscal balance 5/−2.610.45.920.0−8.423.1−18.014.1−28.6..
Memorandum items:
External budgetary assistance during the year 6/75.040.00.010.560.523.370.543.680.2..
FIPC Initiative debt relief29.628.76.67.015.614.623.421.931.2..
Expenditure financed with FflPC Initiative resources29.628.86.34.014.813.922.215.426.8..
Balance of FflPC Initiative resources0.0−0.10.22.90.80.61.26.44.3..

For definitions and explanations, please see Technical Memorandum of Understanding. All numbers are cumulative, starting at the beginning of each year.

Maximum.

These performance criteria will be monitored on a continuous basis.

Excluding debt relief obtained in the form of rescheduling or refinancing.

Minimum.

Excluding use of Fund resources.

For definitions and explanations, please see Technical Memorandum of Understanding. All numbers are cumulative, starting at the beginning of each year.

Maximum.

These performance criteria will be monitored on a continuous basis.

Excluding debt relief obtained in the form of rescheduling or refinancing.

Minimum.

Excluding use of Fund resources.

Mali: Quantitative Performance Criteria and Indicative Targets for 2006 1/(In billions of CFA francs)
2006
MarchJuneSeptemberDecember
PerformanceIndicativePerformanceIndicative
criteriaActualtargetsActualcriteriaActualtargetsActual
Quantitative performance criteria and indicative targets
Net domestic financing of the government, program ceiling 2/−23.0−29.7−47.5−37.5
Net domestic financing, adjusted ceiling and actual 2/................
Cumulative change in government external payments arrears 2/3/0.0..0.0..0.0..0.0..
Domestic0.0..0.0..0.0..0.0..
External0.0..0.0..0.0..0.0..
New external borrowing at terms of one year or more contracted or guaranteed by the government on nonconcessional terms 2/3/0.0..0.0..0.0..0.0..
New short-term external debt (less than one year) contracted or guaranteed by the government 2/3/4/0.0..0.0..0.0..0.0..
Financial performance indicators
Cumulative tax revenue 5/109.3..218.7..350.0..469.9..
Cumulative wage bill 2/29.8..67.1..104.3..149.0..
Overall basic fiscal balance 5/36.0..33.4..43.1..8.5..
Memorandum items:
External budgetary assistance during the year 6/18.4..43.1..63.4..84.3..
HIPC Initiative debt relief4.9..11.1..17.2..24.6..
Expenditure financed with HIPC Initiative resources7.2..15.8..24.3..34.2..
Balance of HIPC Initiative resources−2.3..−4.7..−7.1..−9.6..

For definitions and explanations, please see Technical Memorandum of Understanding. All numbers are cumulative, starting at the beginning of each year.

Maximum.

These performance criteria will be monitored on a continuous basis.

Excluding debt relief obtained in the form of rescheduling or refinancing.

Minimum.

Excluding use of Fund resources.

For definitions and explanations, please see Technical Memorandum of Understanding. All numbers are cumulative, starting at the beginning of each year.

Maximum.

These performance criteria will be monitored on a continuous basis.

Excluding debt relief obtained in the form of rescheduling or refinancing.

Minimum.

Excluding use of Fund resources.

Mali: Structural Measures, 2004–06
MeasuresDateStatus
Prior Actions for Second and Third Reviews
Revision of the structure of petroleum product prices with a view to reducing the differences in excise taxes levied on importsAdopted by decree on July 11, 2005. Met.
Submission of a fully financed 2006 Budget to the National AssemblyDraft submitted to the National Assembly September 18 for approval. Met.
Elimination of temporary VAT exemption for imported rice and maizeElimination put into place October 10. Met.
Performance Criteria for Second and Third Reviews
1. Beginning of actuarial studies on the CRM and audit of the files on INPS contributions and beneficiariesEnd-December 2004Completed, with delay, in July 2005. Not met.
2. Announcement of a base cotton producer price for 2005/06 that reduces to a minimum the risks for the budget within the framework of the memorandum of understanding on the pricing mechanismEnd-April 2005Completed with a slight delay, May 2, 2005. Not met.
3. Closing date for acceptance of final bids for sale of the government’s shares in the BIMEnd-June 2005Delayed by court case contesting the validity of government shareholding. Not met.
4. Lowering of the cotton producer price in the event that projected payments to producers are less than the base producer price as envisaged in the memorandum of understanding on the pricing mechanism (3rd Review Condition)End-August 2005The price was maintained. The CMDT is expected to make a modest profit on the basis of ICAC cotton price projections. Met.
Structural Benchmarks for 2005
1. Publication of a call for bids for the sale of the government’s shares in the BIMEnd-April 2005Delayed by court case contesting the validity of the government shareholding. Postponed to March 2006. Not met.
2. Review of the criteria for the allocation of resources for the principal social safety netEnd-June 2005Report completed in October 2005. Not met.
3. Completion of a study on electricity rates with a view to describing appropriate rate structures and proposing a mechanism targeted to support the most vulnerable segments of the populationEnd-September 2005Scope broadened. Postponed to May 2006. Not met.
4. Completion of a study to strengthen Ministry of Property and Land Affairs collection of nontax revenues with a view to improving overall efficiency and raising the yield of property taxesEnd-September 2005Required technical assistance from donors not available. Not met.
5. Assessment of the impact of parametric reforms on the financial position of the CRM over the medium termEnd-December 2005Work began October 2005 following completion of the draft actuarial study on the CRM.
6. Creation of a committee for regular surveillance of the cash flow operations of the CMDTEnd-December 2005
7. Approval by CMDT shareholders of a strategy for privatization of the CMDT in 2008 as defined in paragraph 32 of the letter of intentEnd-December 2005
Structural Performance Criterion for 2006
1. Identification by the government of a specific package of parametric reforms that will gradually reduce the projected deficit of the CRM from the present level over the medium term as described in paragraph 24 of the letter of intentEnd-March 2006
Structural Benchmarks for 2006
1. Introduction by decree of a petroleum product pricing mechanism linked to world prices, in accordance with the hydrocarbon excise tax estimates in the 2006 BudgetEnd-March 2006
2. Publication of a call for bids related to the sale of the government’s shares in the BIM, providing no legal impediments remainEnd-March 2006
3. Completion of a management audit of the power company, Energie du Mali, as well as an assessment of the financial situation and a review of the mechanism for setting the rates, with a view to resolving the cash management problemsEnd-May 2006
4. Completion of the recapitalization of the housing bank (BHM), with a view to ensuring significant private sector involvementEnd-June 2006
5. Approval by the Council of Ministers of an operational plan for privatization of the CMDT in 2008End-September 2006
6. Presentation to the National Assembly, with the 2007 Budget, of a draft law authorizing the parametric reforms and a draft decree that will gradually reduce the projected CRM deficit over the medium term.End-September 2006Reset from December 2005, so as to take account of the delays related to the preparatory activities.
International Monetary Fund Mali Technical Memorandum of Understanding (TMU) 12

December 7, 2005

1. This technical memorandum of understanding defines the performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF) arrangement. It also sets out the frequency and deadlines for data reporting to the staff of the International Monetary Fund (IMF) for program-monitoring purposes. This memorandum consolidates the TMU in Country Report No. 04/184 and its addendum in Country Report No. 05/129, from 2005 onwards. It also adds a data requirement relating to the CMDT treasury operations in the data provision summary table.

Definitions

2. Unless otherwise indicated, the government is defined as the central administration of the Republic of Mali and does not include local administrations, the central bank, or any other public entity with autonomous legal personality that is not included in the table of government financial operations (TOFE).

3. The definitions of “debt” and “concessional loans” for the purposes of this memorandum of understanding are as follows:

  • (a) Debt is defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (see Decision of the Executive Directors of the IMF No. 12274-00/85, August 24, 2000).
  • (b) A loan is considered concessional if, on the date the contract is signed, the ratio of the present value of the debt, based on the reference interest rates, to the nominal value of the debt is less than 65 percent (i.e., a grant element exceeding 35 percent). The reference interest rates used in this assessment are the commercial interest reference rates (CIRRs) established by the Organization for Economic Cooperation and Development (OECD). For debts with a maturity exceeding 15 years, the ten-year reference interest rate published by the OECD is used to calculate the grant element. For shorter maturities, the six-month market reference rate is used.

I. Quantitative Performance Criteria

A. Ceiling on Net Domestic Financing of the Government

4. The key quantitative performance criterion is net domestic financing of the government, defined as the sum of (i) net bank credit to government, as defined below, (ii) other government claims and debts vis-à-vis national banking institutions, and (iii) nonbank financing of the government.

5. Figures on net bank credit to government as calculated by the BCEAO, and on nonbank financing as calculated by the public treasury, are final in the context of the program.

6. Net bank credit to government is defined as the balance between government debts and government claims vis-à-vis the central bank and commercial banks. The scope of net bank credit to government is that used by the Central Bank of West African States (BCEAO) and is consistent with established Fund practice in this area. It implies a broader definition of government than that specified in paragraph 2 by also including local governments, and selected autonomous government agencies and projects. Government claims include the CFA franc cash balance, postal checking accounts, secured liabilities (obligations cautionnées), and all deposits with the BCEAO and commercial banks of public entities, with the exception of industrial or commercial public institutions (EPICs) and public enterprises, which are excluded from the calculation. Government debts to the banking system include all debts to these same financial institutions. Deposits of the cotton stabilization fund and government securities held outside the Malian banking system are not included in the calculation of net bank credit to government.

7. Nonbank financing of the government include, in particular, government bills and bonds held outside national banking institutions and proceeds from the sale of government assets. The receipts from sale of government assets are defined as the proceeds from the sale, effectively received by the government during the fiscal year, of all or part of the shares held by the government in privatized enterprises. In the event that payments in respect of these sale transactions are expected to extend beyond the fiscal year, the residual will be included in the calculation of nonbank financing of the government in each of the subsequent years, in accordance with the annual scheduling of the expected payments.

Adjustment factor

8. The ceiling on the change in net domestic financing of the government will be adjusted if external budgetary assistance exceeds or falls short of the program amount. Budgetary assistance is defined as grants, loans, and debt relief (excluding project loans and grants, IMF resources, and debt relief under the Initiative for Heavily Indebted Poor Countries). The adjustment factor is capped at CFAF 25 billion. These ceilings and program budgetary assistance are set in Annex I to the December Letter.

9. The ceiling on the change in net bank credit to government and net domestic financing will be adjusted by the difference between the amount of HIPC Initiative resources in the program and the amount actually spent. If the amount actually spent exceeds (or falls short of) the program amount, the ceiling will be reduced (increased) by the difference between the actual amount and the program amount.

B. Nonaccumulation of External Public Payments Arrears

10. External payments arrears are defined as the sum of external payments due and unpaid for external liabilities of the government and foreign debt held or guaranteed by the government. The definition of external debt provided in paragraph 3(a) applies here.

11. Under the program, the government will not accumulate external payments arrears, with the exception of arrears arising from debt under renegotiation or being rescheduled. The performance criterion on the nonaccumulation of external payments arrears will be applied on a continuous basis throughout the program period.

C. Ceiling on Nonconcessional External Debt with a Maturity of One Year or More Newly Contracted or Guaranteed by the Government and/or Public Enterprises

12. This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing (Executive Board Decision No. 6230-(79/140), amended by Executive Board Decision No. 12274-(00/85) (8/24/00)), but also to commitments contracted or guaranteed for which no value has yet been received.

13. The concept of government for the purposes of this performance criterion includes government as defined in paragraph 2, administrative public institutions (EPAs), scientific and/or technical public institutions, professional public institutions, industrial and/or commercial public institutions (EPICs), and local governments.

14. Starting with the program approval by the Executive Board of the IMF, a ceiling of zero is set for nonconcessional borrowing. This performance criterion is monitored on a continuous basis.

15. The government undertakes not to contract or guarantee external debt with a maturity of one year or more and a grant element of less than 35 percent (calculated using the reference interest rates corresponding to the borrowing currencies provided by the IMF). This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing, adopted by the Executive Board on August 24, 2000, but also to commitments contracted or guaranteed for which no value has yet been received. However, it does not apply to financing granted by the IMF and treasury bills and bonds issued in CFA francs on the West African Economic and Monetary Union (WAEMU) regional market.

D. Ceiling on Short-Term External Debt Newly Contracted or Guaranteed by the Government and/or Public Enterprises

16. The definition in paragraph 12 applies to this performance criterion.

17. Short-term external debt is debt with a contractual term of less than one year. Import-related credit, CMDT foreign borrowing secured by the proceeds of cotton exports, and debt-relief operations are excluded from this performance criterion. Treasury bills issued in CFA francs on the WAEMU regional market are also excluded.

18. In the context of the program, the government and public enterprises will not contract, or guarantee, short-term external debt.

19. This performance criterion is monitored on a continuous basis.

II. Quantitative Performance Indicators

20. The program also includes indicators on government tax revenues, the civil service wage bill, and the basic fiscal balance.

A. Floor for Tax Revenues

21. Government tax revenues are defined as those that figure in the Table on government financial operations (TOFE). The government shall report tax revenues to IMF staff each month in the context of the TOFE. Quantitative performance indicators for tax revenues are set in Annex I to the December Letter.

B. Ceiling on the Wage Bill

22. The wage bill includes all public expenditure on wages, bonuses, and other benefits or allowances granted civil servants employed by the government, the military, and other security forces, and includes expenditure with respect to special contracts and other permanent or temporary employment with the government. The government shall report the wage bill to IMF staff each month in the context of the TOFE. The quantitative performance indicators for the wage bill are set in Annex I to the December Letter.

C. Floor on the Basic Fiscal Balance, Excluding HIPC Initiative-Related Expenditure

23. The basic fiscal balance is defined as the difference between total revenues, excluding grants and privatization receipts, and total expenditure plus net lending, excluding capital expenditure financed by foreign donors and lenders and HIPC Initiative-related expenditures. The floors for the performance indicators for the basic fiscal balance, excluding HIPC Initiative-related expenditure, are set in Annex I to the December Letter.

III. Structural Measures

24. Annex II of the supplementary letter of intent describes the structural measures identified as prior actions, performance criteria, and structural benchmarks for 2004–06. This table provides information regarding the implementation dates for the structural reforms envisaged.

25. Data on the introduction of the structural benchmarks and performance criteria will be sent to Fund staff within two weeks of the date of their scheduled implementation.

IV. Additional Information for Program Monitoring

26. The government will provide IMF staff with information as set out in the following summary table in order to assist in the monitoring of the program.

Summary of Data to be Reported
Data TypeTablesFrequencyTime Frame
Real sectorNational accountsAnnualEnd of year + 9 months
Revisions of the national accountsVariable8 weeks following the revision
Disaggregated consumer price indexesMonthlyEnd of month + 2 weeks
Government financesNet government position (including the list of accounts of other public entities with the banking system) and breakdown of nonbank financingMonthlyEnd of month + 3 weeks (provisional); end of month + 6 weeks (final)
TOFE of the central government and consolidated TOFEMonthlyEnd of month + 3 weeks (provisional); end of month + 6 weeks (final)
Breakdown of fiscal revenue and expenditure in the context of the TOFEMonthlyEnd of month + 6 weeks (TOFE)
Separate report on outlays financed with HIPC resourcesMonthlyEnd of month + 6 weeks
Execution of capital budgetQuarterlyEnd of quarter + 8 weeks
Tax revenues in the context of the TOFEMonthlyEnd of month + 6 weeks
Wage bill in the context of the TOFEMonthlyEnd of month + 6 weeks
Basic fiscal balance in the context of the TOFEMonthlyEnd of month + 6 weeks
Formula for setting prices of petroleum products, tax revenues from petroleum products, and subsidies paidMonthlyEnd of month + 4 weeks
Treasury operations of the CMDTMonthlyEnd of month + 4 weeks
Monetary and financial dataSummary accounts of the BCEAO, summary accounts of banks, and accounts of the banking systemMonthlyEnd of month + 4 weeks (provisional); end of month + 8 weeks (final)
Foreign assets and liabilities of the BCEAOMonthlyEnd of month + 8 weeks
Lending and deposit interest rates, BCEAO intervention rates, and BCEAO reserve requirementsMonthlyEnd of month + 4 weeks
Bank prudential ratiosMonthlyEnd of month + 6 weeks
Balance of paymentsBalance of paymentsAnnualEnd of year + 12 months
Revisions of balance of paymentsVariable8 weeks following each revision
External debtBreakdown of all new external borrowing termsMonthlyEnd of month + 4 weeks
Debt service, indicating amortization, interest payments, and relief obtained under the HIPC InitiativeMonthlyEnd of month + 4 weeks
PRSPShare of poverty-reducing expenditureQuarterlyEnd of quarter + 4 weeks
Share of primary education in total outlays of the education sectorQuarterlyEnd of quarter + 4 weeks
Gross enrollment ratio in the primary education, with its breakdown between girls and boysannualBeginning of the next academic year +1 month (final)
Percentage of the population having access to health care facilities within a radius of 15 kilometersannualEnd of year + 2 months
Rate of assisted birthsannualEnd of year + 2 months
Data on immunization rate DTCP3 of child below 1 yearAnnualEnd of year + 2 months
1

The crop year runs from June to May. In the national accounts, production is registered in the year of planting (mostly as a change in inventories).

2

In June 2005, the monetary authorities introduced substantial revisions to monetary and related balance of payments statistics following a revision of methodology for estimating intra-monetary union banknote movements (see statistical issues, Appendix IV).

3

The cotton season runs from June to May.

4

The distributional impact of fuel price rises and possible palliative actions is discussed in an accompanying selected issues paper.

5

Four creditors accounting for 0.2 percent of Mali’s end-2004 external debt stock (before HIPC relief) have not yet agreed to provide HIPC relief. Also, one non-Paris Club bilateral creditor, accounting for 6.1 percent of 2004 debt outstanding, that is not participating in the HIPC Initiative, has been providing 100 percent relief on debt service falling due on a rolling basis.

6

After MDRI is approved and the final terms are known, it would be incorporated in the program baseline as discussed in section IV.

7

The 2004–07 PRGF, prepared after the PRS, projects GDP growth of 5.7 percent.

8

See selected issues paper: Economic Growth and Total Factor Productivity.

9

See selected issues paper “Estimation of the Equilibrium Exchange Rate for Mali”.

10

See selected issues paper “Mali: Creating Fiscal Space”. The term fiscal space refers to the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position.

11

This result is derived by assuming that underlying real spending increases at the same rate of population growth for an unchanged level of public services per capita, thus reducing the amount of fiscal space, and that of the remaining fiscal space 70 percent is allocated to poverty reducing spending, slightly higher than the share in the 2005 budget of 65 percent.

12

This memorandum consolidates the TMU in Country Report No. 04/184 and its addendum in Country Report No. 05/129. It adds a data requirement relating to the CMDT treasury operations in the data provision summary table.

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