Mauritania achieved substantial progress owing to its macroeconomic policies, budget formulation, governance, and transparency under the economic program. Executive Directors commended the program and emphasized the need for tight fiscal and monetary policies. Directors noted the implementation of all remedial actions and agreed that Mauritania qualifies for debt relief under the Multilateral Debt Relief Initiative (MDRI). They also called on the authorities to strengthen the financial sector regulatory framework, and commended the comprehensive Anti-Money Laundering and Combating the Financing of Terrorism framework.

Abstract

Mauritania achieved substantial progress owing to its macroeconomic policies, budget formulation, governance, and transparency under the economic program. Executive Directors commended the program and emphasized the need for tight fiscal and monetary policies. Directors noted the implementation of all remedial actions and agreed that Mauritania qualifies for debt relief under the Multilateral Debt Relief Initiative (MDRI). They also called on the authorities to strengthen the financial sector regulatory framework, and commended the comprehensive Anti-Money Laundering and Combating the Financing of Terrorism framework.

During the preliminary assessment of the first group of countries eligible for relief under the MDRI, in December 21, 2005, the Executive Board determined that Mauritania was not in a position to qualify immediately for debt relief because the country’s macroeconomic performance had deteriorated substantially since it was assessed at the completion point. Furthermore, serious data issues had plagued Mauritania’s relations with the Fund. The Board estimated that prior to assessing Mauritania’s qualification to the MDRI, the authorities would need to resolve pending data issues and take remedial actions in the area of public expenditure management. Sound macroeconomic policies over a period of six months would also be necessary. My authorities have addressed these issues within the current SMP framework covering the period January-June 2006.

Today, Mauritania has complied with all the recommendations of the Executive Board. The new government, in place since August 2005, has made transparency and good governance a priority in its reforms agenda. It has taken strong measures to solve the data issues, and has implemented sound policies with a high degree of ownership. The authorities have also repaid the two disbursements that were determined to be noncomplying by the Executive Board on March 27, 2006. The first installment of SDR 2 million was repaid within the month following the Board decision, and the second installment of SDR 10.14 million was repaid on June 12, 2006. I would like, on behalf of my authorities, to express my deep appreciation to staff and management for their close cooperation and active support to Mauritania and their valuable assistance in helping my authorities solve all pending issues and ensuring a prompt qualification of Mauritania to the MDRI.

My Mauritanian authorities are confident that the progress achieved so far in stabilizing the economy–and in such a short period–, will give assurances to the international community of my authorities’ sincerity and determination to put the issue of past data behind them, and move on to address the considerable challenges ahead. They welcome in this regard the resumption of the European Union (EU) assistance to Mauritania. My authorities are also hopeful that the steps they have taken will qualify them for debt relief under the MDRI.

I. Data Revision and Past Economic Performance

The authorities have prepared a report that reassesses past macroeconomic performance based on revised data over the 1992-2004 period. Major efforts are now under way, with the assistance of the IMF, to ensure that data reporting will remain reliable. In the same vein, the authorities have put an end to extra-budgetary spending and to the Central Bank financing of the fiscal deficit. The report, however, is still preliminary. Additional work is under way to explain some of the issues raised by staff in the report.

II. Stabilization of the Economy and Policies under the SMP

In 2005, real GDP growth rose to 5½ percent mainly due to a surge in investment associated with the imminence of oil production. The implementation of tight monetary and fiscal policies in the last part of the year, resulted in a declined in inflation. The slight deterioration of the fiscal deficit in 2005, was further contained by the interruption of extra-budgetary spending from September 2005. The parallel market premium disappeared by the end of the year, as a result of the improved confidence in the national currency resulting from the on-coming of oil production while the exchange rate appreciated moderately. The improvement in the external position has benefited from higher commodity prices worldwide, and an increase in FDIs attracted by the booming oil and mining sectors. Foreign exchange reserves, however, remained low in 2005, and are expected to rise slowly from 1.4 month of import cover at end-2006, to 3 months in 2008.

For the first quarter of 2006, tight budgetary and monetary policies under the SMP, have helped further stabilize the economy. Fiscal performance, in particular, was strong and spending was maintained within the SMP limits. Efforts were made to improve PEM, including through the preparation of a medium-term expenditure framework. In addition, the authorities have adopted a functional classification of the budget that will enable, notably, the tracking of poverty reducing expenditure.

For the remainder of the year, real GDP growth in the non-oil sector is expected to increase to 6.8 percent. Oil revenues and fiscal discipline will improve the fiscal stance significantly, while allowing for a substantial increase in poverty reducing expenditure. Government borrowing from the banking sector through the emission of treasury bills will help to keep monetary policy tight, until oil receipts reduce the government’s need for financing from the banking sector. To prevent a rapid spending of oil revenues, efforts are being made to promote a transparent and sound management of oil resources. In this regard, Mauritania has adhered to the EITI since September 2005, and the authorities have created a committee composed of representative of all relevant stakeholders to monitor the implementation of the initiative.

To further enable a sound management of oil resources, a single oil account has also been established at the Banque de France, where all government oil revenues will be deposited–the Hydrocarbon Revenue Fund. Oil resources will be channeled into this fund and will be used notably to smooth out public spending if prices were to fall. A law for the management of these resources is also under preparation. The additional revenues expected by the end of the month of June 2006, from the revision of the production sharing contract with the oil company Woodside, will also be deposited in the hydrocarbon fund and will be used to repay the government’s domestic debt, including its debt vis-à-vis the Central Bank. This will contribute to strengthen the Central Bank’s weak foreign exchange reserves. Looking forward, saving part of the oil resources would also help to alleviate a likely appreciation of the exchange rate that could adversely affect the competitiveness of the non-oil sector. Indeed, there are increasing signs that other factors are already affecting Mauritania’s competitiveness and hindering the development of important sectors of the economy, including the fishing sector. These include the limited capacity of the national electricity company and the enforcement of the international oil price pass-through mechanism. My authorities will continue to work closely with the IMF and the World Bank to discuss the best possible use of oil resources with the objective to promote growth and fight poverty.

On the structural front, the government, is preparing the introduction of a foreign exchange market, scheduled for end-2006. The authorities have defined a timetable for the introduction of the foreign exchange market that takes into account the projected improvement in foreign exchange reserves. My authorities believe that a minimum of 2 months of import cover would be necessary to launch this market on a sound and credible basis. Also essential for the start of the foreign exchange market are the current efforts by my authorities to repay private sector external arrears. Moreover, the requirement to surrender to the Central Bank part of the foreign exchange proceeds from fishery exports will also be phased out gradually, as foreign exchange reserves improve, and will be eliminated before the new foreign exchange market is operational. However, the Central Bank intends–at least in its early stages–, to monitor real exchange rate movements, notably to avoid a potentially rapid appreciation of the national currency resulting from large inflows of capital associated with oil- and, other mining-related activities that could adversely impact the competitiveness of the non-oil sector. A close monitoring of the exchange rate by the Central Bank will also be needed since demand of foreign currency by market participants will most likely exceed supply, for a certain period of time. This underscores the need to put in place appropriate liquidity management instruments at the Central Bank.

My authorities have been associated to the current negotiations between the EU and ECOWAS, on a new Economic Partnership Agreement (EPA). The discussions are set in the broader context of the revision of the trade regime between the EU and ACP countries within the 2000 Cotonou Agreement. Both parties, EU and ACP countries, are required to put in place a WTO-compatible alternative to these agreements, by 2008. My authorities are aware of the risks involved (reciprocity) but also note the advantages associated to the EPA (potential increase in EU assistance). They will monitor carefully the potential impact on Mauritania’s economy of the changes that would result from these negotiations.

III. Economic Prospects and Challenges

Mauritania’s economic prospects are encouraging. Notwithstanding a temporary slowdown in the volume of oil produced–compared to the initial target of 75,000 barrels per day–, international oil prices remain high and the recent revision of the production sharing contracts with Woodside will further increase substantially Mauritania’s oil revenues for 2006.

Debt relief under the MDRI–highly anticipated by the Mauritanian population–, will also provide needed resources to assist the authorities in their financial efforts to reduce poverty and accelerate progress towards achieving the MDGs.

The national iron ore company (SNIM) plans to increase substantially its investments in the medium-term, against the backdrop of rising iron ore prices. Copper and gold production have also started in 2006. However, prospects in the fishing sector remain uncertain, with the expiration of the fishing agreement with the EU on July 31, 2006. In case Mauritania does not reach an agreement with the EU by that date, my authorities have considered alternative solutions that they have shared with staff. They intend notably to launch international tenders of fishing licenses to compensate for the potential loss in EU revenues.

How to best manage the abundant resources expected in the coming years, is one of the most important challenges that my authorities will face. Capacity remains limited and the risks associated with the rapid rise in foreign exchange revenues on the competitiveness of the economy are high. My authorities are aware of these risks and will continue to work closely with the IMF and the World Bank to discuss possible ways to alleviate them. They agree that saving oil resources is essential to mitigate these risks. They are also committed to use part of these resources to accelerate poverty reduction and achieve more rapidly the MDGs. In this regard, they are completing their second PRSP–which is at an advanced stage–, covering the period 2006-10, through a broad-based participatory process. The new PRSP redefines Mauritania’s development objectives through 2015–target date of the MDGs–, and takes into account the substantial increase in projected foreign exchange inflows, and their use in the fight against poverty.

Other challenges include the need to diversify the economy away from its narrow dependence on a few exports commodities, and reduce its vulnerability to potential shocks, including the decline in world commodity prices that could severely affect the economy. Avoiding a new debt build-up, following MDRI debt relief, is also crucial. Accordingly, my authorities will develop a medium-term debt management strategy. While they acknowledge that the responsibility of a sound debt management policy is ultimately in their hands, advice and technical assistance from the Fund and other partners is essential. Also in this context, they will pursue their efforts to reach agreements with all bilateral creditors that would provide debt relief on terms comparable to the one provided by Mauritania’s Paris Club creditors HIPC debt relief. They have asked the IMF to assist them in solving the issues raised in the staff report.

Conclusion

It is my authorities’ hope that the satisfactory implementation of the SMP, by end-June 2006–to which they remain firmly committed–, and the rapid progress made in implementing key reforms, will pave the way soon, to a new PRGF-supported program. Such an arrangement would help consolidate the important achievements made so far under the SMP.

Mauritania’s resources prospects remain good and my authorities will continue to implement a prudent management of oil revenues. But the low level of foreign exchange reserves expected to endure a few more years, along with the fragile current transition towards good governance and transparency, and the country’s vulnerability to climatic and price commodity shocks, still deserves the financial support of the IMF and the international community.

In light of the authorities’ compliance with the Board’s recommendations, the remedial actions taken and the strong policy performance under the SMP, I would like to request the support of the Board for a declaration of Mauritania’s qualification for debt relief under the MDRI.

Finally, my authorities also request that the Executive Board grant them an extension of the current exchange restrictions under Article VIII, Section 2 (a), until October 31, 2006. The currently weak foreign exchange reserves make it difficult to eliminate foreign exchange rationing for the time being. Foreign exchange rationing will, however, be eliminated by end-October 2006 with the improvement of Mauritania’s foreign exchange reserves.