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May 19, 2008

On behalf of my Mauritanian authorities, I would like to thank the Board, Management, and Staff for their support to Mauritania. Performance under the PRGF-supported program continues to be satisfactory. All quantitative and structural performance criteria at end-2007 were met. All quantitative indicative targets –including the poverty reduction expenditure benchmark– were also met.

Despite Mauritania’s satisfactory performance under the program, the authorities continue to face significant challenges ahead, both immediate and longer-term. One of the government’s most important challenge in the short-term, is to rapidly and effectively address the social impact of the current food crisis that led to violent riots late last year. This crisis, if sustained, could jeopardize the steady progress made in recent years to reduce poverty and achieve the MDGs. The authorities have accordingly adopted an emergency plan and price measures (food and fuel prices represent more than two thirds of the consumer price index) to mitigate the impact of high international food prices on the local population, especially the poorest segments. The main objectives of the plan is to ease the distribution of staples in the most vulnerable areas nationwide, especially rural populations, and promote agriculture while fostering activities that would provide incomes for the poor in urban areas. Measures have also been adopted to limit increases in rice and bread prices and to prevent rises in gas, electricity, and water prices in 2008.

In the longer term the authorities face the daunting challenge of raising the population’s living standards while promoting job creating activities needed to provide employment opportunities for a young and rapidly growing population. They are aware that structural reforms need to be accelerated to further diversify and enhance the competitiveness of the economy. In this regard, a strategy to promote a private sector-led growth is currently being undertaken with the assistance of the World Bank and other development partners, especially in sectors where Mauritania has a comparative advantage (livestock, fishing, mining). The authorities also acknowledge that improving the business climate is key to accelerating growth, and are adopting measures to make the tax regime more favorable to investment and strengthen governance and the effectiveness of the judicial system. Also key in this regard will be to move ahead rapidly with financial sector reforms with a view to facilitating access to credit, including by enforcing prudential norms, dealing with weak banks through the restructuring of nonperforming loans, and the licensing of new banks in order to promote competition in the financial sector.

Improving the business climate will also contribute to enhancing foreign investors’ confidence, as private foreign investors have signaled important investments in key sectors of the economy, including the banking sector, tourism, mining, and transport. Efforts are underway to restructure state-owned enterprises especially in the energy, water, and transport sectors by improving the management and control of these enterprises and adopting performance contracts. The authorities are also grateful to the international community’s financial pledges made recently in Paris during the December 2007 consultative group meeting where more than USD 2 billion were promised to support of the government’s development plans.

1. Recent Economic Developments

Mauritania’s macroeconomic performance in 2007 was broadly satisfactory despite the continuous decline in oil production to 15,000 barrels per day in 2007, down from an average of 36,000 barrels in 2006. Non-oil GDP growth reached 5.9 percent driven mainly by agriculture and mining. Inflation fell slightly at end-2007 to 7.4 percent compared to 8.9 percent at end-2006. The basic non-oil budget deficit declined to 2.5 percent of GDP. However, high international oil and food prices along with the decline in oil production further widened the current account deficit from 1.3 percent of GDP in 2006 to 11.4 percent of GDP in 2007. Foreign exchange reserves at the central bank also dropped to 1.9 month of imports cover from 2.6 months in 2006.

The recently adopted emergency plan aims mainly at increasing agricultural production and protect the livestock threatened by drought while facilitating the distribution of foodstuffs in the most vulnerable and most remote regions, and to develop income-generating activities in peri-urban areas. To facilitate imports of food products, the authorities have also announced the increase of financial resources of the public import company including through additional lines of credit guaranteed by the central bank for food importers. Furthermore, to alleviate the impact of food price rises on the population, a 10 percent wage increase will be implemented at mid-year to limit the decline of wages in real terms, thereby complementing the measures already taken to limit the effects of food and oil price increases.

A steering committee has been set up to monitor the emergency plan. It will prepare a report on the implementation and the outcomes of these measures that will be submitted quarterly by the government to the National Assembly.

2. Medium-Term Outlook

The growth outlook remains favorable in 2008 (except for oil production) thanks to positive developments in the mining sector and high international prices for the commodities exported by Mauritania including iron ore, copper, and gold. Beyond 2008, the growth outlook will further benefit from the large investments expected especially in basic infrastructures for which financing had been pledged by donors during the consultative group meeting in Paris in December 2007.

In 2008 real non-oil GDP growth is projected to reach 5.7 percent slightly lower than the 5.9 reached in 2007. Although inflation should rise to 12 percent in 2008, from 7.4 percent in 2007, due to the increases in international prices of oil and food products, the adoption of price support measures for a number of staples should help moderate the effects of increases in oil and food products. Foreign exchange reserves are projected to strengthen to 2.8 months of import cover at end-2008 from 1.9 in 2007.

In the fiscal area, the authorities will add to the 2008 budget a supplementary budget law detailing the financing of the emergency plan. Higher tax and nontax revenues, including from the mining sector, will contribute to finance the expected increase in the basic non-oil fiscal deficit for 2008 resulting from the implementation of the emergency plan.

Also in the fiscal area, an important progress in the current civil service reforms is expected by end-June 2008, when the authorities would have completed the comprehensive census of civil servants. The completed census will be followed by an assessment of functional staffing needs in some pilot ministries by end-September 2008.

As regards monetary policy, the central bank will continue to implement a prudent policy consistent with its objective of containing inflationary pressures. Accordingly, money supply growth will remain below nominal GDP growth. Also in the monetary area, the central bank will expedite the implementation of the recommendations of the safeguards assessment mission, in particular those related to improving accounting procedures, ensuring their consistency with IFRS standards. Furthermore, based on the FSSAP recommendations, the central bank has adopted a strategic plan to develop financial markets and system. With technical assistance from Banque de France, the implementation of Banking Law will be reinforced by the adoption of instructions on bank licensing conditions, capital, and the creation of a deposit guarantee fund. These measures, in addition to the increased presence of foreign banks that contribute to reinforce competition, should further strengthen the financial sector.

The authorities remain committed to the country’s flexible exchange rate regime that will help them enhance the competitiveness of the economy while also mitigating the adverse effects of the fluctuations of the terms of trade on the economy. The authorities welcome the staff’s findings that Mauritania’s exchange rate is in line with fundamentals.

On the structural front, the authorities will continue to improve the business climate including by overhauling the tax regime to make it more favorable to investment, facilitate access to banking credit, and strengthening the effectiveness of the judicial system. More specifically, the planned reform of the tax regime will benefit businesses and private investment by reducing the tax rate on investments and on corporate profits. Furthermore, an investment code will be adopted by end-2008 that will substantially simplify investment procedures, in particular by introducing a one-stop window. The new investment code will also contain provisions under which investments deemed as strategic will be exempted from the ordinary tax system.

The authorities have initiated the restructuring of their portfolio of public enterprises to improve the quality of their services, ensure their financial sustainability, and introduce more competition. In this respect, Air Mauritanie was liquidated on January 2008. Operational audits will be conducted for electricity company SOMELEC, and the national water company SNDE, to conclude performance contracts with these enterprises by end-2008. In consultation with the World Bank, the authorities will also adopt by end-June 2008 a strategy for restructuring SOMELEC, notably with the aim of reducing its costs.

The authorities note the conclusions of the Debt Sustainability Analysis which indicate that the risk of debt distress remains moderate, and reiterate their commitment to prudent borrowing on concessional terms only.

3. Conclusion

The authorities remain committed to prudent macroeconomic policies¹, consistent with the objectives of the PRGF-supported program –notwithstanding the need to temporarily loosen fiscal policy in response to the food crisis. They are confident that they will continue to benefit from the support of the Fund and the international community as they implement their poverty reduction agenda.