Mauritania was hit by a severe drought in 2011 that tipped a quarter of the total population into food insecurity. As the authorities continue to alleviate the effects of the drought on the poor and the vulnerable, they reiterate their commitment to the prudent policies and reforms under the program, and thank staff for the candid discussions and helpful advice during the recent mission in Nouakchott.
The implementation of the ECF-supported program continues to be satisfactory. All quantitative performance criteria for end-December 2011 were met, including the target on poverty-related expenditures, and the target on international reserves, both with a wide margin. On the structural front, all but three of the eight structural benchmarks at end-December 2011 were met (further progress was since achieved on the remaining three unmet benchmarks). The criterion on non-concessional borrowing, for which my authorities request a waiver, was missed by only three weeks.
In spite of the severity of the recent drought and the difficult international environment—Europe being a key destination for Mauritania’s exports and an essential development partner—, the authorities are determined to pursue their efforts to stabilize the economy and improve the population’s living standards. However, as growth continues to be mostly driven by extractive industries—which are not inclusive by nature—, further reducing poverty and providing employment opportunities especially for the youth, remains a challenge. Continued support from the international community to assist my authorities in their efforts to diversify the economy, along with well-targeted social safety nets is therefore crucial.
II. Recent Economic Developments
Growth decelerated slightly in 2011 at 4 percent (compared to 5.1 percent in 2010) as the consequences of the drought severely affected agricultural production. Real GDP growth is however projected to reach 5.7 percent this year as agricultural production recovers thanks to a favorable rainy season, and led also by the dynamism of the construction sector. On the fiscal front, the overall deficit improved to 1.5 percent of non-oil GDP from 2 percent in 2010 driven by strong fiscal revenues from the booming mining sector. Inflation decelerated to 5.7 percent from 6.3 percent as a result mainly of the slower pace of the increase in credit to the private sector.
Relatively high international prices of the main commodities exported helped narrow the current account deficit to 7.4 percent of GDP from 8.6 in 2010. The deficit will however widen in 2012 driven by higher imports related to the emergency program and sizeable infrastructure projects underway (a new power plant; a new international airport), and also the projected decline in iron ore prices. Foreign exchange reserves increased substantially in 2011, nearly doubling to $501 million (compared to a year before), as the authorities continue to strengthen buffers to shield the economy from potential shocks.
III. Policies Under the ECF
A. Fiscal Policy
Drought-related emergency spending and the need to increase fuel subsidies have put pressure on this year’s budget. Thus, government expenditures rose by 1.1 percentage point of non-oil GDP compared to 2010. My authorities are grateful to the donor community for the sizeable pledges under the emergency program. However, given delays in disbursement and also higher than initially anticipated costs and subsidies, spending in favor of the affected poor was further revised upwards. On the revenue side, high international iron ore prices led to record profits at the national mining company which translated into higher dividend payouts to the government. Overall, fiscal revenues improved in 2011.
For 2012, the authorities remain firmly committed to their fiscal consolidation efforts, and insist that the increase in the fiscal deficit projected for this year is temporary, mainly driven by the need to address the effects of the drought. Efforts to rein in overall spending through the stabilizing of the wage bill (civil service reform) or the introduction of new fuel price formula to better align domestic fuel prices with international price and significantly reduce subsidies remain high on my authorities’ agenda. In this regard, they would also like to stress that the construction of the new international airport granted to a private consortium will have no impact on the budget (except for minor expenditures) as it is paid for by a transfer of land and no guarantee or tax incentives were given to the consortium by the government.
B. Monetary and Financial Sector Policies
Liquidity continues to be abundant in the banking sector resulting from high exports receipts from the mining sector (unsterilized) and also high fiscal revenues which have reduced the government’s need to issue T-bills.
In their efforts to ensure price stability and anchor inflation expectations, the monetary authorities target a moderate 13 percent growth of money supply this year. The central bank will continue to closely monitor inflationary pressures and if necessary will tighten the monetary policy stance through an increase of reserve requirements or T-bills emissions. In this regard, and in accordance with the recommendations of Fund TA a new T-bill maturity of one week will be introduced to sterilize excess liquidity (the cost will however be borne by the Ministry of Finance).
On reforming the financial system, the authorities are addressing a number of weaknesses identified by recent IMF and World Bank TA missions. In particular, the government will seek to develop long-term savings by further loosening the regulation on interest rates on savings accounts. Efforts are also underway to strengthen regulations and supervision of the banking system through the introduction of a new capital adequacy framework consistent with Basel II. The authorities are also making progress in the generalization of IFRS accounting, and an audit firm is currently assisting commercial banks in their transition to IFRS.
C. Poverty Reduction and Structural Reforms
Major steps have recently been taken to more effectively target social safety nets to the poor. With the assistance of UNICEF, the authorities have designed a social protection strategy aimed at better protecting the poor and vulnerable groups, and should be adopted by the government by end-June 2012. Furthermore, a poverty survey of vulnerable groups in the capital, Nouakchott, was recently completed with the help of the World Food Program. On the basis of this survey, a cash transfer scheme for 10,000 poor households was launched, and will be extended to the rest of the country as soon as the vulnerability survey for the reminder of the country is completed (scheduled before the end of this year).
The government has also developed a new fuel price structure with the goal of phasing out and eliminating poorly targeted fuel subsidies. In this regard, the full pass-through of international prices is expected to take place at the end of the year, but in meantime will be applied to all large consumers by July 2012.
My Mauritanian authorities have continued to make satisfactory progress under the ECF-supported program, and the overall economic performance remains strong. In light of their achievements, I would like to request the Board’s support for the favorable completion of the fourth review.