Mali: First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criteria
Author: International Monetary Fund
Publication Date:
06 Apr 2005
eISBN:
9781451826401
Language:
English
Keywords:
ISCR; CR; PRGF arrangement; pump price; fuel excise; staff report estimate; consumer price inflation; authorities letter of intent; government disengagement; telecommunications company; state shareholding; cereal reserve; Budget planning and preparation
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This paper focuses on Mali’s First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance Performance Criteria. Program implementation in 2004 was mixed. The authorities stuck to their fiscal program, meeting all targets and indicators through end-September, despite some revenue and financing shortfalls. However, progress on structural reforms, particularly privatization, has been disappointing. The authorities request waivers for three structural performance criteria on the basis of corrective actions concerning privatization policies in the cotton, telecommunications, and banking sectors.

Abstract

This paper focuses on Mali’s First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance Performance Criteria. Program implementation in 2004 was mixed. The authorities stuck to their fiscal program, meeting all targets and indicators through end-September, despite some revenue and financing shortfalls. However, progress on structural reforms, particularly privatization, has been disappointing. The authorities request waivers for three structural performance criteria on the basis of corrective actions concerning privatization policies in the cotton, telecommunications, and banking sectors.

I. Recent Developments

Mali’s economic outlook deteriorated significantly since the approval of the PRGF arrangement in midyear, primarily as a result of external shocks (Figure 1, Tables 1-2).

Figure 1.
Figure 1.

Mali: Macroeconomic Indicators, 1999-2007

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2005, 129; 10.5089/9781451826401.002.A001

Sources: Malian authorities; and staff estimates and projections.1/ Central government, projected revenues in 2006-07 exclude grants not yet committed.
Table 1.

Mali: Selected Economic and Financial Indicators, 2002-07

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Sources: Malian authorities; and staff estimates and projections.

Data at end-October for 2004.

Data on a payment order basis.

Change in percent of broad money at the beginning of the period.

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.

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

Defined as footnote 5 above, but also excluding HIPC Initiative-related expenditure and exceptional expenditure financed by World Bank credit.

In percent of exports of goods and services.

Goods and services.

Table 2.

Mali: Selected National Accounts Indicators, 2002-07

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Sources: Malian authorities; and staff estimates and projections.

Including official transfers.

1. Below average rainfall and locust attacks have lowered projected agricultural production. Accordingly, the real GDP growth projection for 2004 has been revised downward to 2.2 percent from the original PRGF objective of 4.7 percent. In 2005, real GDP growth is projected to nearly reach the program rate of 6 percent, with a recovery in noncotton agricultural production and in the gold sector (resulting from investment in the largest mine).

2. External balances weakened in 2004 and are likely to continue to do so in 2005, rather than improving, as projected under the program (Figure 2, Tables 3-4). In 2004, the current account deficit excluding grants remained at nearly 7 percent of GDP on account of lower gold exports and higher oil imports. For 2005, the current account deficit is expected to weaken by a further 2½ percent, to 9 percent of GDP, primarily because of low cotton export prices.

Figure 2.
Figure 2.

Mali: Main External Indicators, 1999-2007

Citation: IMF Staff Country Reports 2005, 129; 10.5089/9781451826401.002.A001

Sources: Malian authorities; and staff estimates and projections.
Table 3.

Mali: Balance of payments, 2002-07 1/

(In billions of CFA francs, unless otherwise indicated)

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Sources: Malian authorities; and staff estimates and projections.

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

Includes short-term capital inflows.

Sum of the original and enhanced HIPC Initiative assistance.

In percent of exports of goods and services.

Table 4.

Mali: External Financing Requirements and Resources, 2002-07

(In billions of CFA francs, unless otherwise indicated)

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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.

uA01fig01

Cotton and Crude Oil Prices, 2004-05

Citation: IMF Staff Country Reports 2005, 129; 10.5089/9781451826401.002.A001

3. The terms of trade weakened substantially during 2004. Cotton prices for the 2004/05 season are expected to fall by 30 percent from the six-year high of 2003/04, in large part because world cotton production increased by 20 percent over the same period, reflecting both production subsidies in major cotton producing countries and rising yields from genetically modified cotton. Oil prices rose by 30 percent in 2004. These price developments result in a terms of trade deterioration of 10 percent in 2005 instead of the improvement expected in the 2004 program.

4. Monetary growth has slowed markedly from midyear, reflecting the weakening economy (Table 5). Following four years of double-digit broad money expansion, monetary growth is expected to slow to 7 percent in 2004. The principal source of monetary growth is the accumulation of official foreign assets early in the year, while credit to government and to the private sector has increased only marginally.

Table 5.

Mali: Monetary Survey, 2002-05

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Sources: BCEAO; and Fund staff estimates and projections.

5. The quality of banks’ lending portfolios deteriorated somewhat during the first half of 2004, and excess liquidity increased, though most banks met prudential ratios. The ratio of nonperforming loans to net credit to the economy rose from 8.4 to 10.5 percent between end-2003 and August 2004. The banking system continued to exhibit high liquidity, as attested by the level of excess reserves of commercial banks, in part reflecting the lack of bankable projects. Adherence to the main prudential ratios improved somewhat in 2004, with the notable exception of the risk-concentration ratio which no bank has yet observed because of exposure to the cotton sector.

Mali: Banks’ Compliance with Selected Prudential Norms, 2003–04

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Source: BCEAO.

6. Average consumer prices continued to decrease during 2004, and the real exchange rate depreciated slightly. As a result of the good 2003/04 harvest, food prices declined for most of 2004, although the weaker 2004/05 harvest pushed food prices up again by year-end. Nonfood prices have remained stable. The favorable inflation differential with trading partners has more than offset the nominal appreciation of the CFA franc against the U.S. dollar, with the average real effective exchange rate depreciating by 4.5 percent during January-October 2004.

uA01fig02

Consumer Price Indices, 2003-04

(Twelve-Month Percentage Changes)

Citation: IMF Staff Country Reports 2005, 129; 10.5089/9781451826401.002.A001

uA01fig03

Effective Exchange Rates, 2003-04

(January 2003 = 100)

Citation: IMF Staff Country Reports 2005, 129; 10.5089/9781451826401.002.A001

II. Policy Discussions

A. Macroeconomic Framework

7. The macroeconomic projections for 2004–05 have been revised to reflect the impact of shocks and unforeseen setbacks (¶7-8):1

  • Downward revisions to 2004 output growth were unavoidable. Weather conditions reduced agricultural production, while locusts also damaged crops (Box 1);

  • A return to GDP growth of 5-6 percent in 2005 would likely occur with a normal harvest (for 2005–06) and increased gold production projections. A return of the locust infestation is a risk for food crops while for cotton, whose domestic producer prices will likely fall significantly in 2005/06, production is expected to fall by some 10-15 percent. Staff and authorities agreed that the level of projected GDP would remain below PRGF projections over the medium-term, reflecting the impact of shocks in 2004, while medium-term growth objectives remain realistic, on the assumption of steadfast implementation of the structural reform agenda (¶9);

  • Although consumer price inflation in 2004 is substantially below expectations, a return to program projections of inflation at 2½ percent is likely in 2005. Temporary food price declines have already begun to reverse, and increasing fuel prices would affect transportation costs directly, leading to an upward tick in inflation by year-end;

  • The current account deficit before official transfers is expected to widen significantly through 2005. It is expected that cotton prices will languish at end-2004 levels (30 percent below PRGF assumptions), though much will depend on whether major producers maintain record planting levels in 2005 and on the impact on demand for cotton from clothing and textile liberalization in 2005. While oil prices remained volatile, understandings were reached that policies for 2005 should be calibrated for prices of US$40 a barrel. The current account deficit is expected to narrow after 2005, as oil prices moderate and gold exports expand through new mine development;

  • Both the staff and the authorities viewed the level of the exchange rate as broadly adequate, in historical perspective and in relation to regional partners. However, the authorities noted that external trade costs continued to be elevated as a result of blockages in Côte d’Ivoire, which hampered competitiveness. Further progress in structural reforms remains essential to boost labor productivity, reduce excessive factor costs, and maintain the country’s competitiveness in export markets;

  • The improvement in external debt indicators expected under the program in 2005 is expected to be offset by external shocks to exports, but to resume in the following years (debt sustainability is discussed in Appendix III).

Economic Impact of Locust Infestation

Swarms of desert locusts descended on West Africa in the second half of 2004–the most widespread infestation of these pests in more than fifteen years. The worst affected countries are Mauritania, Mali, Senegal, and Niger.

uA01fig04
Locust Swarms in West Africa, 11/30/04. Source: FAO

Preliminary findings of crop assessment missions to nine countries suggest that despite the large-scale desert locust infestation, regional cereal production in 2004/05 in the Sahel region will remain within the five-year average of around 11.6 million tons (compared to 14 million tons in 2003/04), in part resulting from concerted treatment efforts. FAO recommends investment at a regional level in early surveillance of locust breeding areas and targeted control campaigns to minimize risks to production in 2005.

Treatment and climatic factors prevented locust damage in the areas of intensive agricultural production in Mali, including cotton and rice growing areas. The overall decline of agricultural value added is estimated at 11 percent, against bumper harvests of the previous season, though largely a result of climatic factors as opposed to locust damage.

The locust infestation has significantly affected the north of Mali. Through September 2005, many communities would need food assistance expected to be covered by the authorities’ cereal reserves. However, the direct income reduction from crop damage and the number of inhabitants severely affected by the shock remain limited. Staff estimates, based on survey data, suggest that the impact on standard poverty indicators of the locust attack will be minor.

B. Fiscal Policy and Reforms

Fiscal outturns have exceeded program targets and indicators so far. But this over performance is unlikely to persist in coming months owing to oil tax reductions in 2004, and mounting losses in the state-controlled cotton sector (Figure 3). Against this background, the discussions focused on the budgetary implications of oil and cotton price shocks—including the cost of subsidizing fuel consumption and cotton production—and the impact upon poverty reducing spending. Progress continues to be made in public expenditure management. Fiscal decentralization reforms are proceeding slowly owing to a lack of institutional capacity.

Figure 3.
Figure 3.

Mali: Main Fiscal Indicators, 1992-2005 (in percent of GDP) 1/

Citation: IMF Staff Country Reports 2005, 129; 10.5089/9781451826401.002.A001

Source: Ministry of Economy and Finance, and staff estimates and projections.1/ Figures for 2004 are estimates, and figures for 2005 are projections.

8. The fiscal outturn for end-September 2004 was in line with the program, with revenue on track, and current and capital spending below budget, in part reflecting delayed external assistance. The overall deficit (payment-order basis, excluding grants) represented 5.9 percent of GDP, or 1 percent of GDP less than targeted under the program (¶11). Spending financed through the HIPC initiative, which was directed toward the education and health sectors to pay for the salary of contractual employees and transfers, was on track.

9. Fiscal objectives for end-2004 are also likely to be met with the overall deficit expected at 7 percent of GDP, some ½ percent above the program target (Table 6 and ¶12). To compensate for a temporary external financing shortfall, staff recommended to rollover to 2005 a treasury bill issue maturing in December 2004 (0.8 percent of GDP) within the programmed adjustor for shortfalls in external financing (¶13).

Table 6.

Mali: Central Government Consolidated Financial Operations, 2002-2005

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Sources: Minisry of Finance; and estimations and projections of staff.

Allocates unidentified budgetary assistance using the rule of 60 percent grants and 40 percent loans used in the debt sustainability analysis.

Excluding wages in autonomous public agencies (EPA).

10. The staff cautioned that the fiscal record could not be sustained in 2005 given external price shocks, weaker revenue policies, and slower economic growth. On current policies, and an improved outlook for oil and cotton prices, the draft 2005 budget submitted to the National Assembly would likely result in a overall deficit before grants of 10 percent of GDP and a financing gap equivalent to 2.2 percent of GDP. The authorities noted that spending in nominal terms excluding cotton sector support was consistent with the PRGF medium-term framework. They concurred, however, that the main contributory factors to the financing shortfall are:

  • cotton sector operating losses, estimated to amount 1.4 percent of GDP (CFAF 38 billion);

  • excise revenues, short of budget estimates by 0.6 percent of GDP (CFAF 16 billion), resulting from a reduction of excises on petroleum products in 2004;

  • lower gold sector dividend payments, reflecting lower-than-programmed profits in 2004 (0.2 percent of GDP or CFAF 6 billion).

11. The staff also discussed with the authorities other risks to implementing the 2005 budget. The primary concerns were potential unbudgeted water and electricity subsidies, revenue losses through tax exemptions, and delays in implementing tax measures:

  • The authorities took the view, on the basis of the independent regulator’s opinion, that a reduction of water and electricity tariffs in May 2004, as well as cuts in 2003, would not require compensatory payments in 2005 to the water and electricity concession holder. Nonetheless, the authorities were discussing revisions to the concession holder’s contract and have allocated CFAF 4.2 billion for contingencies arising from these discussions. The staff recommended that electricity prices be set to ensure that budget subsidies would not be needed. A tariff study would inform such a policy (¶20) and new structural benchmark).

  • The staff expressed concern about existing ad hoc tax exemptions and a new duty and VAT exemption on vehicle imports effective from October 2004. The authorities maintained that ad hoc exemptions had been reduced by 45 percent during Jan.-Sep. 2004 and that the vehicle exemption codified a previous ad hoc procedure. The authorities agreed to reduce ad hoc tax exemptions progressively in 2005 and to eliminate them over the medium-term. They have also submitted legislation in January 2005 to eliminate tax exemptions provided to an agricultural bank.

  • The staff urged that other tax measures envisaged in the draft budget be put in place prior to the new calendar year. These measures include removing tax exemptions on agricultural inputs and streamlining the presumptive tax regime to improve coverage of the informal sector.

12. To address the prospective financing gap, the authorities have taken measures amounting to 1.3 percent of GDP:

  • Submitted a budget amendment in December 2004 with spending cuts, mainly on transfers, of 0.6 percent of GDP. Poverty-reducing outlays are safeguarded (¶16).

  • Increased petroleum product excises back to Q1 2004 levels to boost revenue by 0.6 percent of GDP in 2005 (Box 2). The increase was largely in place by January 2005 and is expected to be fully implemented by end-March 2005 (¶15).

  • Measures to increase the yield and efficiency of nontax revenue collection (0.1 percent of GDP) informed by a study (new structural benchmark for 2005).

uA01fig05

Excise tax on petroleum products (CFAF per liter), January 2004-January 2005

Citation: IMF Staff Country Reports 2005, 129; 10.5089/9781451826401.002.A001

13. The authorities have also requested supplementary external financial assistance to close a residual financing gap after measures of 0.9 percent of GDP or CFAF 24.6 billion (¶17-18). The central reason for the financing gap is the projected losses of the cotton sector company CMDT (Compagnie Malienne pour le Développement des Textiles) that the government, as majority shareholder, covers. Total projected losses of 2.4 percent of GDP2 are expected to be covered by (i) measures in the cotton sector (0.6 percent of GDP), (ii) foreign shareholder (0.3 percent of GDP), and (iii) budget support (1.4 percent of GDP). The measures in the sector include cost savings, nonpayment of 2003/04 rebates to producers, and retained profits. The authorities will also reform the producer price mechanism to avoid a recurrence of losses.

14. The response of the international community has been positive, with indications that the financing gap of 0.9 percent of GDP can be covered through supplementary grant assistance. The European Union indicated that supplementary grants of 0.6 percent of GDP are available in the context of an overall sound budget and continuing progress on structural reforms, especially in the cotton sector. The remaining 0.3 percent of GDP would likely be covered by other bilateral donors—a number of whom are considering supplementary assistance to help offset external shocks—while the authorities have also committed to covering any residual financing gap by further budgetary adjustment in the context of the second review.

Mali: Fiscal Indicators, 2004–05 (in percent of GDP, unless otherwise indicated)

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15. The staff encouraged the authorities to reduce current spending, particularly wages. Both staff and authorities were concerned that financing substantial increases of education and health sector wages with HIPC Initiative resources might eventually prove unsustainable, because such assistance is front-loaded. In this regard, the staff urged the authorities to consider developing a long-term wage policy consistent with making steady progress toward attaining the Millennium Development Goals while respecting the financing constraints. The authorities observed that the 2005 budget wage has been set with a view to observing the WAEMU convergence criteria ceiling (35 percent of tax revenue), while the staff noted that wages in relation to GDP were rising strongly.

Economic Impact of Increases in Excises on Petroleum Products

The Government has adjusted petroleum product taxes to stabilize pump prices. The staff has recommended that average fuel excises in 2005 be increased to back to levels prevailing during Q1 2004. This would increase pump prices by 10 percent, and government revenue by 0.6 percent of GDP. The authorities are concerned that increases in the domestic price of petroleum products will adversely impact on growth, inflation, and poverty reduction.