Mauritania successfully completed its previous poverty reduction growth facility arrangement in December 2002. The focus of this report is on the effectiveness of policies adopted in the last few years and the medium-term strategy. Macroeconomic stability under the IMF-supported program and the above structural reforms underpinned progress in reducing poverty and improving social indicators, and the development of the Poverty Reduction Strategy Paper (PRSP) was a major achievement. The banking system has remained highly concentrated with inadequate financial intermediation, and difficulties have persisted in the operations of the foreign exchange market.

Abstract

Mauritania successfully completed its previous poverty reduction growth facility arrangement in December 2002. The focus of this report is on the effectiveness of policies adopted in the last few years and the medium-term strategy. Macroeconomic stability under the IMF-supported program and the above structural reforms underpinned progress in reducing poverty and improving social indicators, and the development of the Poverty Reduction Strategy Paper (PRSP) was a major achievement. The banking system has remained highly concentrated with inadequate financial intermediation, and difficulties have persisted in the operations of the foreign exchange market.

The Mauritanian economy continues to perform well, despite unfavorable weather conditions and exogenous shocks. Strong ownership of reforms and the continued implementation of sound economic policies resulted in the improved performance and have enabled Mauritania to reach the completion point under the HIPC Initiative in June 2002, leading to a more sustainable debt level. Mauritania also completed successfully the PRGF-supported program. Growth has been robust, inflation low, and the reserve position has reached a comfortable level. Far-reaching structural reforms have also been implemented over the past few years, and these have significantly improved the performance of the economy.

My Mauritanian authorities are of the view that the Fund-supported adjustment programs of the past few years have been critical to this progress, and as was noted in the Board meeting of December 2002, they would like to continue the close collaboration with the Fund in the context of a successor PRGF Arrangement. This program will help to consolidate the progress made, address remaining structural weaknesses, build the needed capacity so that the authorities can carry out consistent macroeconomic policies and integrate the macroeconomic framework within the poverty reduction strategy and also prepare Mauritania to exit from Fund-supported programs.

My Mauritanian authorities would like to reiterate their full commitment to the program of adjustment that is being presented to the Board. They would like to reassure the Board that the recent coup attempt by a dismissed military officer was an isolated incident and had very little support from the population. This incidence will have little impact on program implementation, as the program has the full ownership of the authorities as well as of the country, as it is based on the PRSP which was prepared through a broad participatory process.

Recent Economic Developments

Economic and financial performance in 2002 remained satisfactory, although real GDP turned out to be lower than projected due to adverse climatic conditions, and lower fish and iron exports. Growth came mainly from activities in the construction, commerce, transportation and telecommunications sectors. Inflation increased in the last part of the year due to higher food prices, as a result of the adverse weather conditions, adjustment in oil and gas prices, and the depreciation of the ouguiya, but the average inflation rate for 2002 was 4 percent, compared to 4.7 percent in the previous year. Monetary policy remained tight in 2002 and helped to contain inflationary pressures.

In the fiscal sector, although government revenue was lower due to the weaker economic activity, and capital spending increased as a result of improvement in project execution, the overall fiscal position was in surplus on account of the payment from the E.U. related to the fisheries agreement. Fiscal measures taken, included, the continuation of the simplification of the tax system, the broadening of the tax base through the elimination of exemptions and the strengthening of tax administrations, and improving budget programming with the adoption of a new sectoral medium-term expenditure framework. Social and poverty-related expenditure also increased in 2002.

The external current account recorded a surplus at the end of the year, mainly on the basis of two payments (for 2001 and 2002) under the fisheries agreement with the E.U., and the level of international reserves increased to about 9 months of imports.

The Mauritanian authorities made significant progress on structural reforms in 2002, including the reform of the customs department, improving the functioning of the foreign exchange market and in the preparation of the studies for the rehabilitation of the National Social Security Fund. The second annual PRSP progress report, and the regionalization of the poverty reduction strategy were started. The authorities also adopted the standard mining convention, which has already led to a significant increase in the number of exploration permits delivered, as well as the number of operators. In the fisheries sector, the measures implementing the fisheries code have been adopted.

The authorities have also taken a number of important actions to develop the tourism industry, such as the preparation of a development strategy, the creation of an office for promoting the sector, and the development of related basic infrastructure. Measures were taken to improve the transport, energy and telecommunications sectors. The authorities have pursued their efforts to enhance the development of the private sector. These have consisted of reduction of taxes on businesses, the adoption of the texts implementing the investment code, the conduct of a study on economic regulation, and the strengthening of the government-private sector partnership through the Consultation Committee and organization of regional workshops to promote private investment in Mauritania.

New PRGF Program

As noted above, the Mauritanian authorities are requesting a new PRGF-supported program which covers the period April 2003 to March 2006. This program will help to consolidate the progress already achieved as well as help to address existing weaknesses. Working closely with the staff, the authorities have reviewed the previous programs, and drawn the appropriate lessons from them. The review has helped to revise some of the medium-term objectives to make them more consistent with the PRSP. It has also indicated the need, among others, to take steps to make the economy more resilient to exogenous shocks, improve financial intermediation so as to be better supportive of private sector development, develop capacities for managing the economy and executing public expenditure programs, and to intensify rural development and better target poverty reduction programs. The new PRGF, thus, includes measures to strengthen further the banking system and deepen financial intermediation, enhance the functioning of the exchange market, diversify the production and export base, increase social spending, and promote good governance. The program is closely aligned with the PRSP.

The medium-term macroeconomic framework targets a growth rate of 5-6 percent until 2005, increasing to 9 percent in 2006 as oil production comes into stream; the maintenance of inflation to below 4 percent; and the level of gross reserves to about 6 months of imports.

Program for 2003–04

Macroeconomic Policies

The authorities will maintain the current stance of fiscal policy with a special effort to ensure that the revenue target is achieved. The overall fiscal deficit for 2003 is projected at 2.1 percent of GDP. However, if there are indications of a revenue shortfall, the authorities have agreed with staff on a number of additional measures that could be taken. Improving the efficiency of the tax system and strengthening tax administration will remain important objectives of the program. In that context, the authorities have requested Fund technical assistance for a comprehensive review of the direct taxation system, with a view to the elimination of any distortion that may exist. Changes in the tax laws will be included in the 2004 budget. The authorities will also continue the strengthening of public expenditure management, and will introduce measures consistent with the recommendations of the fiscal ROSC. As regards the tracking of expenditure financed by debt relief, in the context of HIPC, progress is being made in this area, and it is the intention of the authorities to continue their efforts to include all the related expenditure in the quarterly reports.

Monetary policy will continue to be geared towards lowering inflation while also supporting the growth objective of the program. Consistent with this policy, private sector credit is projected to grow in 2003, while government deposits in the banking system are expected to increase. Moreover, in the context of improving the functioning of the monetary system, and enabling the central bank to better conduct monetary policy and enhance its management of liquidity, the authorities will start transferring government deposits from commercial banks, where they have traditionally been deposited, to the central bank. This will be done gradually and in an orderly way, according to an established plan with each commercial bank. The central bank will take every precaution to minimize the impact of this transfer on commercial banks’ liquidity position. These changes are also being undertaken in the context of improving the functioning of the banking system and to help with the deepening of financial intermediation. Banking supervision is being strengthened, banks’ balance sheets are being cleaned up by writing off non-performing loans that have no chance of being recovered, and other steps are being taken to increase competition in the banking sector. The authorities, thus, intend to strictly enforce the separation between banking and commercial activities. The banking law will be reviewed with Fund technical assistance and an information campaign will be started to attract foreign banks to operate in Mauritania.

The central bank will pursue its flexible exchange rate policy, and ensure external competitiveness. The authorities will also take additional measures as described in their Memorandum of Economic and Financial Policies to reduce the rigidities in the exchange market and enhance its operation. In this regard, a number of important measures are being implemented, and include, the requirement for banks to sell, at the end of the day, their excess foreign exchange to another bank or to the central bank, thus helping to develop an interbank market, as well as preventing the hoarding of foreign exchange for their own groups or clients. The authorities will also start an information campaign to explain the rights and obligations of banks and the public in the area of access to foreign exchange. It is the intention of the authorities to eliminate later in the year, the obligation to surrender foreign exchange receipts from fish export that was instituted in August 2002, will be eliminated.

Structural Reforms

Structural reforms will be focused on enhancing the functioning of the Mauritanian economy, including the strengthening of the climate for the development of a strong private sector. The program gives full attention to areas identified as major source of weaknesses. Measures to deepen financial intermediation and improving the operations of the banking system and the foreign exchange market are being taken, as described above.

As noted in their MEFP, the authorities view institutional development as vitally important in raising the level of development of Mauritania. The program therefore places much emphasis on capacity building. In this regard, the authorities will rely much on Fund and World Bank’s technical assistance, including training from AFRITAC. The assistance will be in the areas of planning, programming and projects preparation. It is the intention of the authorities to develop a pool of qualified personnel who will then be able to train other Mauritanians, thus reducing the need for external technical assistance, over time. The authorities also intend to modernize the civil service, and will update the professional code of ethics for all government officials. The reform of the judiciary system and the regulatory framework will also be accelerated. A broad program of good governance covering the central government, parliament, judiciary, local governments, civil society and human rights organizations has been prepared and is being implemented.

Other areas of reform include the restructuring of the national social security fund according to the plan established. The authorities will also implement the recommendations regarding the safeguards assessment. In addition, they will continue their wide-ranging reform program aimed at increasing output. The program of rural development, and that of improving fisheries resources management will be pursued. A number of actions are envisaged to further expand the production capacity of the iron ore company, SNIM, and improve its productivity. Development of the mining sector and oil and natural sector will be accelerated, as well as that of the tourism sector. A number of vital infrastructure projects in the transportation sector are being implemented. Electrification projects are also underway.

As regard the oil sector, which is expected to start production at end-2005, the authorities have taken a fully transparent approach. They have provided the staff with all information on ongoing investments, including the taxation of oil revenue, as well as the technical details relating to the production sharing contracts with oil companies. However, at this time, the authorities do not have all the information needed to put in place reliable systems and procedures for use of potential revenue which will only start to flow in 2006. As more data become available, the authorities will prepare such a plan which will be shared with the staff.

Poverty Reduction Strategy

Mauritania has submitted its second annual PRSP progress report prepared with a broad participatory process. While the report indicates that the second year implementation has been successful, it also draws important lessons from the experience gained, and makes recommendations for improvements and revisions of some the targets of the PRSP. The authorities are acting on these recommendations. The emphasis on rural development with better access to micro finance is being emphasized, as described in the PRSP report. Improving the living conditions of the poor is also being addressed through the intervention in housing, community activities and training schemes.

In the area of education, despite the decline in the retention rate, the authorities are continuing their efforts which have resulted in the gross enrollment rate reaching 88 percent. The issue of declining retention, however, does concern my authorities who intend to look into it. Efforts are being pursued to expand access to basic health care, but here again inadequate human resources, have caused the quality to be low. As more capacity is built, the authorities expect the quality to improve, but it may take some time. Furthermore, the authorities were able to lessen the adverse impact of the recent drought on the poor through the implementation of an Emergency Action Plan.

Overall, my authorities are broadly satisfied with the poverty reduction strategy, but as noted above, they will continue to improve its implementation with experience. They are of the view that the regional approach that they have adopted will enhance the implementation of the PRS. They will further strengthen the system of monitoring and analysis in order to better assess the impact of policies and poverty reduction programs

In conclusion, following the completion of the previous PRGF, Mauritania has made considerable progress towards macroeconomic stability, achieving high rates of growth, and improving social indicators. The new program, on which my authorities have embarked, aims at consolidating this progress, addresses remaining weaknesses, and prepares the country for an exit from Fund-supported program. The program draws important lessons from previous programs and addresses directly the issue of capacity-building. The authorities have shown a strong commitment to the reform program and are determined to achieve the medium term objectives. My Mauritanian authorities are thankful for the support that they have received up to now, but as they explained in their MEFP, major challenges remain, and they hope that the international community will continue to support their efforts, through both technical and financial assistance.