Abstract
This paper discusses key findings of the Second Review Under the Staff Monitored Program (SMP) for Mauritania. Mauritania’s performance since the beginning of 2006 has been fully satisfactory. All quantitative targets and structural benchmarks under the SMP that covered the first six months of 2006 were observed. Sound macroeconomic policies reined in inflation and contributed to the elimination of the parallel foreign exchange market premium. The proposed Poverty Reduction and Growth Facility (PRGF)-supported program will consolidate the progress achieved during the SMP toward macroeconomic stabilization.
I. Introduction
December 18, 2006
On behalf of my Mauritanian authorities I would like to thank Executive Directors and Management for their continued support to Mauritania. I would also like to thank to staff for their valuable advice to Mauritania over the years. My authorities look forward to a continued dialogue with the Fund in the period ahead, and remain confident that the IMF and all major development partners will continue to assist them in their efforts to promote a sound reforms agenda.
Mauritania has gone a long way since the political changes that took place in August 2005. The transition authorities have put good governance and transparency at the center of their political and economic agendas while pursuing economic stabilization and promoting structural reforms. This has helped restore confidence in their relations with the international community. As a result of their efforts, the recent SMP has been successfully implemented with all quantitative targets and structural indicators met, enabling Mauritania to benefit from debt relief under the MDRI. They thank the Board for granting them debt relief last June, and would like to reiterate their commitment to a prudent borrowing policy consistent with debt sustainability. They look forward to remaining creditors providing their promised HIPC debt relief.
On behalf of my authorities, I request the support of the Board for a new PRGF arrangement that would enable them to consolidate the rapid and substantial achievements they have made so far, and to promote a sound and transparent management of the nascent oil sector.
Poverty remains pervasive in Mauritania and to address this other major challenge, my authorities have prepared a new PRSP, covering the period 2006-10. Consistent with the objectives of the PRSP, they believe that a new PRGF arrangement program represents an adequate framework to assist them in their efforts to achieve sustained and higher growth rates that would enable them to reach their ambitious poverty reduction objectives. In addition, a PRGF arrangement would help mobilize external resources to finance their investment program intended to diversify the country’s production base and develop, notably, tourism and agriculture, in order to generate a broader-based growth that would help achieve the MDGs. Recent technical difficulties in the oil sector and the revision of oil production prospects over the medium term are a reminder of the Mauritania’s fragile situation, and the need for a sustained support from the international community.
II. Recent Economic Developments
Prudent macroeconomic policies since August 2005 have helped improve the economic situation significantly. Despite lower than expected oil production levels and energy supply bottlenecks, real GDP is expected to reach 14 percent, approximately, in 2006, while non-oil real GDP growth should attain 6.1 percent, also in 2006, from 5.4 percent in 2005. Sound fiscal management has helped contain the fiscal deficit and reduce government arrears, and tight monetary policy has brought back inflation to single-digit levels. Higher iron ore prices and the start of oil production have contributed to strengthen the balance of payments while the parallel foreign exchange market premium has narrowed significantly. Thanks to these favorable external developments, the central bank’s foreign exchange reserves have risen from one month of imports of goods and services cover in 2005, to a projected 2.3 months at end-2006.
Strong revenue performance and tight expenditures control, helped contain the budget deficit during the first half of 2006 at 4.6 percent of non-oil GDP. By mid-year, the fiscal stance improved further with the inflow of new foreign exchange receipts that had not been anticipated when the 2006 budget was adopted. These include a $100 million bonus payment from the oil operator Woodside, the proceeds of the sale of the third cellular telephone license for $103 million, and the signing of a fishing agreement with the European Union that provides for an annual compensation of 86 million euros over the period 2006-12.
Taking into account these unexpected but substantial new revenues, the government adopted in July 2006 a supplementary budget ordinance, which provides for additional domestically financed spending notably on investment and on transfers to the water and electricity companies that continue to experience financial difficulties.
III. Medium-Term Prospects
In the medium term, the pace of real GDP growth will be strongly determined by the oil production outlook. The PRSP foresees a significant increase in poverty reducing expenditures during the 2007-10 periods. It targets a reduction of poverty from 47 percent in 2004 to less than 35 percent in 2010. Consistent with these objectives, the authorities’ economic program for 2006-09 aims at raising average annual non-oil GDP growth to 5.5 percent, bringing inflation under 5 percent, building up official reserves to ensure an imports cover equivalent to about three months from 2007 onward. However, the authorities’ recent downward revision of oil production projections over the medium term, to take into account the unexpected technical difficulties encountered by the oil operator Woodside in the single oil field currently under production, has also led to a downward revision of growth prospects in their medium term macroeconomic framework, compared to PRSP growth projections. Production prospects for the other extractive industries are expected to remain strong.
A. Fiscal and Public Sector Policies
In the tax area, important reforms will be implemented. These include the entering into effect in January 2007 of a new customs tariff largely in line with the tariffs applied in the neighboring WAEMU countries. A broadening of the tax base, including through the elimination of VAT exemptions on a number of food products, will be implemented, and an excise tax on sugar will be introduced. VAT administration will also be further strengthened. With regard to rice production, the present tariff rate of 20 percent will be revised in the 2008 budget law, at the latest.
As for current expenditures, the 2007 budget provides for the second phase of wage increases initiated in 2006. My authorities consider this measure as key to combating corruption in the civil service. However, in order to contain the overall wage bill, my authorities will, with World Bank support, pursue civil service reform, including through the elimination of the significant overstaffing in the civil service to adjust it to government’s functional needs. Other measures to combat corruption include the adoption by end-2006 a code of ethics for civil servants, designed to reinforce moral and professional values of civil servants. The code of ethics will be published on the government’s website. Also, to further enhance governance and transparency, the authorities will strengthen the state control institutions, notably the Inspection Générate des Finances and the Cour des Comptes.
Subsidies to public enterprises will be reduced. In this regard, the authorities intend to strengthen public enterprises’ management and financial situation, and reduce the government’s role in administrating prices. Petroleum products prices will be adjusted every two months to reflect international market prices. This measure should help eliminate distribution companies’ revenue losses by end-august 2007. Performance contracts with the national electricity company, the water company and the hydrocarbon company will be signed by end-June 2007. Furthermore, the launching in January 2007 of the activities of the Caisse Nationale d’Assurance Maladie will not result in additional costs for the government as the broadening of the coverage of health benefits would be covered by a new user contribution.
B. Oil Sector
The authorities are committed to a transparent management of oil resources and will continue to seek Fund and World Bank assistance to further strengthen the measures already taken in this regard. The authorities have created the National Hydrocarbon Revenue Fund (FNRH), managed by the Ministry of Finance and the central bank. The FNRH has been operating since June 2006 and all government revenues from the hydrocarbon sector are now transferred to this fund. The authorities have also included in the budget law, a ceiling on the authorized transfer of these resources to the Treasury. Nonetheless, as a result of less favorable oil revenue projections, the oil fund contribution to the financing of the budget is expected to decline over the period 2006-09. A draft law on the optimal management of oil resources will be prepared during the first quarter of 2007 -with IMF technical assistance-, and submitted by end-August 2007 to the future legislature, for adoption. In addition to adhering to the EITI, the authorities have also set up an EITI Committee and have launched the procedure for recruiting an international consulting firm to monitor the implementation of this initiative.
C. Monetary and Exchange Rate Policies
The authorities will maintain a prudent monetary policy stance while promoting greater exchange rate flexibility. Monetary policy implementation will take into account the expected increase in foreign currency inflows and the reduction in government debt to the banking sector. The authorities intend to limit broad money growth to a pace equivalent to that of nominal non-oil GDP. To meet this objective, the central bank will keep its policy interest rates at a positive real level. It will also encourage the development of a secondary market for securities and securitize a portion of the government debt to the central bank. Furthermore, the central bank will introduce a new liquidity management instrument, the central bank certificates of deposit, which will contribute to disconnecting liquidity management from the pace of Treasury bills issuances.
The authorities plan to develop a more flexible exchange rate policy, which will help them better manage the consequences of a possible real exchange rate appreciation and oil-related external shocks. On October 2006, the remaining restrictions on payments for current external transactions were eliminated consistent with the Fund’s Article VIII of Agreement. The new foreign exchange market which will open by end-December 2006 will be limited to an auction system managed at the central bank, and then expanded to an interbank market. Once this market is operational, the main objective of the intervention policy will be to smooth daily fluctuations.
D. Financial Sector
Consistent with the FSAP recommendations, the authorities intend to implement reforms aimed at strengthening the financial sector while improving access to financial services in a competitive environment. These reforms include: a) strengthening the financial sector’s legislative and regulatory environment; b) enhancing the transparency of financial sector accounting practices and the reliability of financial statements; c) strengthening the capacity of the different institutions in charge of the supervision of financial institutions; d) improving the legal framework for collateral and the implementation of regulations on combating money-laundering and the financing of terrorism; and e) gradually developing financial markets, with the deepening of the money market.
My authorities remain committed to implementing the recommendations of the Fund safeguards assessment reports, including those that will be issued in the updated 2004 safeguards assessment. It is the central bank (BCM)’s intention to continue enhancing its management and accounting procedures, in particular by applying international accounting and reporting standards, and strengthening internal audit procedures. The annual audits of its financial statements that the BCM will perform will be published within six months following the closing of accounts.
IV. Conclusion
Over the last year and a half, my authorities have demonstrated strong commitment to program implementation under the SMP, and clear determination to pursue sound policies under an ambitious reform agenda characterized by strong ownership, as outlined in the new PRSP.
Despite the considerable and rapid progress made to this date, my authorities acknowledge the daunting challenges ahead and the vulnerability of Mauritania’s economy to a number of major risks. Uncertainties related to the evolution of oil production and commodities exports prices, along with weather-related shocks and natural hazards, notably drought and locusts invasions, continue to hamper the development of the country.
To address these challenges and to consolidate the progress made thus far, I call upon the Board to support my authorities’ request of a new PRGF arrangement, and on the international community to continue to provide financial and technical assistance to Mauritania.