Statement by Damian Ondo Mañe, Executive Director for the Islamic Republic of Mauritania December 4, 2002

This paper focuses on the Islamic Republic of Mauritania’s Sixth Review Under the Poverty Reduction and Growth Facility (PRGF) and a Request for Waiver of Performance Criterion. Performance under the PRGF-supported program remained strong in 2002. All the quantitative and structural performance criteria and benchmarks were met except for the publication of the audit of the central bank accounts, which was delayed for technical reasons. The IMF staff commends the authorities for bringing to a successful conclusion the current PRGF Arrangement and for their impressive record on macroeconomic stability and structural reforms.

Abstract

This paper focuses on the Islamic Republic of Mauritania’s Sixth Review Under the Poverty Reduction and Growth Facility (PRGF) and a Request for Waiver of Performance Criterion. Performance under the PRGF-supported program remained strong in 2002. All the quantitative and structural performance criteria and benchmarks were met except for the publication of the audit of the central bank accounts, which was delayed for technical reasons. The IMF staff commends the authorities for bringing to a successful conclusion the current PRGF Arrangement and for their impressive record on macroeconomic stability and structural reforms.

My Mauritanian authorities would like to thank the Managing Director for his recent visit to their country, and for the strong interest that he has shown in their adjustment efforts. My authorities would like to reiterate their strong determination to move forward with the reform agenda, to continue the fight against poverty, and to maintain the close relationship with the Fund.

Mauritania has continued to make good progress in the implementation of sound economic policies, and has concluded successfully the three-year arrangement under the PRGF. Significant progress has also been made in the execution of the Poverty Reduction Strategy. Program implementation in 2002 was in line with the program targets, except for the performance criterion on the publication of the 2001 financial audits of the central bank. The audit was published later than programmed, due to delay in the submission of the report by the auditors. My authorities are requesting a waiver for the non-observance of this performance criterion.

Macroeconomic performance remains satisfactory, although real GDP for 2002 has been revised downward due to lower mining production, a decline in fish catch, and unusually cold rains that killed more than 100,000 heads of cattle. The fiscal account benefited from improved tax collections and the receipt of both the 2001 and 2002 fishing license payments by the European Union, and is expected to register a surplus of about 6.3 percent of GDP(excluding grants). The external current account, excluding transfers, is also expected to show a surplus of 1.2 percent of GDP in 2002, partly due to lower service payments. Although the ouguiya depreciated against the euro and the dollar, inflation remained subdued.

The authorities have continued with the implementation of the structural reform program, including the modernization of the customs department. Progress has also been made in the implementation of measures to reduce poverty. Significant improvement was achieved in those indicators that were not fully reached at completion point, namely, the child vaccination program, and school enrollment.

My authorities are convinced of the approach they are following, and are also fully committed to pursue steadfastly the adjustment process, which can help Mauritania overcome the challenges that it faces. In the pursuit of their efforts to improve social indicators and to strengthen macroeconomic performance, my authorities would like to continue to avail themselves of Fund’s assistance under a new PRGF program which will also help to consolidate and maintain financial discipline, in particular, in view of upcoming elections. Their interest in such a program is also motivated by the recent discovery of important oil reserves. The revenue from the oil resources can give an important boost to the ongoing efforts to improve infrastructure, build needed capacity, reduce poverty, and improve the quality of life of the Mauritanians My authorities are relying on the advice of the Fund to help them design the best way to manage these new resources which will come on stream in 2005.

In the context of such a program, the authorities have prepared the 2003 Budget, and developed a program of structural reform, after close consultation with the staff. The program will have three main objectives, namely improving growth prospects, reducing poverty, and maintaining macroeconomic stability. The policies envisaged which will include an increase in social and poverty-related spending, should help to achieve real growth of over 5 percent, an inflation rate under 4 percent, and a fiscal deficit, equivalent to 23 percent of GDP. The policies in place should also help improve the external position.

In the fiscal area, the authorities project for 2003 an overall deficit, excluding grants, of about 23 percent of GDP. Revenue is projected at over 29 percent of GDP. While total expenditure is budgeted at 31.6 percent of GDP, it should be noted that current outlays will absorb only about 19 percent of GDP with capital outlays absorbing almost 12 percent Social spending from HIPC resources will also see an increase to about 12 percent of GDP. The authorities have also proceeded with the simplification and streamlining of the payroll tax From 11 rates, it has been reduced to 2. The authorities expect the change to make an important contribution to poverty reduction. However, to compensate for the possibility of a loss in revenue in 2003, the authorities will raise some fees and the sale price of government land.

In the pursuit of their efforts to encourage the development of the private sector, the authorities have for the second consecutive year reduced the corporate tax. The tax rate is being lowered from 25 to 20 percent. It should be noted that following the reduction last year, the yield from this tax improved Moreover, the CNPM (employers’ union) have committed themselves to abide fully by their obligations. Therefore, while noting the views of the staff on this issue, the authorities do not think that this measure will have an adverse impact on the Budget. In any case, they stand ready to take compensatory measures, should there be a revenue shortfall. The efforts to improve public expenditure management will be pursued, and the authorities are giving a high priority to the preparation of the monthly government financial and economic accounts.

As regards monetary policy, the authorities have maintained a prudent stance that have helped to keep inflation low, despite the depreciation of the currency. The authorities will follow closely inflationary developments and will tighten policies, if needed. The authorities have also started to implement the safeguards assessment, but work on the restructuring of the central bank has been slowed, pending a decision from the World Bank on the approach to take. My authorities remain fully committed to this objective and will start implementing the measures as soon as an agreement is reached with the World Bank.

On debt relief under the enhanced HIPC Initiative, the authorities are making good progress in their negotiations with creditors to secure debt relief. To improve monitoring of external debt, a new unit has been created at the central bank. The authorities have also agreed to introduce the action plans as recommend by the staff to strengthen the unit.

On the national social security fund (CNSS), the authorities agree with the staff that it needs to be restructured. They have received the final report from the ILO experts and have set up a technical committee in charge of analyzing and drafting an action plan that will be submitted soon to the interministerial committee in charge of overseeing the reform of the CNSS. The authorities remain fully committed to the implementation of measures that will help to reverse the difficult financial situation of the CNSS.

On the exchange rate, the foreign exchange market does not seem to be functioning efficiently, and the spread between the official rate and the parallel rate increased earlier in the year. This increase is more a reflection of the behavior of commercial banks than any policy change of the central bank. There are traditional and close links between banks and traders, especially the importers, such that the banks have generally favored these importers in the supply of foreign exchange. In order to ensure the availability of foreign exchange on the market, the authorities took two measures. The first one set limits on the transportation of foreign bank notes and regulates its handling up to a certain level; the other measure was to request fish exporters to surrender their export proceeds to the central bank which would then sell 70 percent, and deposit the remaining 30 percent in foreign currency in the exporters’ bank accounts.

While the authorities understand the concerns of the staff regarding the latter measure, they would like to note that the objective was to alleviate the difficulties of economic agents to acquire foreign exchange, and to reduce the spread between the official and the parallel markets. In any case, the authorities view this measure as temporary and intend to review it. In the meantime, they have taken a number of additional measures aimed at increasing the transparency of the foreign exchange market. These include a publicity campaign to improve the public’s awareness of its rights and obligations regarding access to foreign exchange and to explain the working of the market, and the request to banks to inform the central banks regarding their customers’ requests for foreign exchange. It is to be noted that these measures were taken following a meeting with all interested parties, with Fund staff also present In response to these measures, and the more active participation of the central bank in the market, the rates have stabilized, with the spread returning to its more normal 4 to 5 percent. The central bank will continue to monitor the situation carefully, and will take additional steps, if necessary.

An important source of rigidity in the Mauritanian economy has been the lack of institutions, infrastructure and capacity. The authorities will increase their efforts to strengthen these areas, in the coming years, through a wide ranging program of capacity -building. In pursuit of these efforts, they would like to receive further technical assistance from the Fund, especially through AFRITAC. This assistance will also be helpful in improving, among others, the foreign exchange market, and in contributing to attract foreign direct assistance. The authorities are well aware of the vulnerability of some sources of government revenue, and would like, with Fund’s assistance, to continue the efforts to expand the taxable base, as well as creating the conditions for the development of a strong private sector, that will be the main source of employment.

In conclusion, my Mauritanian authorities would like to convey their appreciation to management and staff for the strong support they have received in the implementation of successive Fund programs, and which have enabled them to reach successfully the completion point under the enhanced HIPC Initiative, last May. As noted in the staff report and also in previous ones, significant progress has been achieved under Fund-supported program, and the Mauritanian economy is now in a better position to address the economic and financial challenges that it faces Both internal and external balances have been stabilized, and growth prospects have improved significantly Major structural reforms have already been undertaken or are underway. Nevertheless, further reforms are needed to put the economy on a solid growth path. In this context, my authorities would like to embark on a new medium-term program that place strong emphasis on the identification and development of sources of private sector-led growth, and on measures aimed at diversifying the economy. They also view such a successor program as helping them to set strong growth foundations, and to help them develop an exit strategy from the PRGF.

Islamic Republic of Mauritania: Sixth Review Under the Poverty Reduction and Growth Facility Arrangement and Request for Waiver of a Performance Criterion
Author: International Monetary Fund