The cotton sector in Mali is facing major challenges to overcome, with low export prices, technical hurdles, and a poorly performing state-owned cotton ginner. Some reforms, most notably with regard to the setting of the farmgate procurement price, have already been undertaken, but more is needed to put the sector on a sound financial footing. It is vital that the production process be modernized and the ginner profoundly reformed if cotton is to play a major role in poverty reduction in rural Mali.

Abstract

The cotton sector in Mali is facing major challenges to overcome, with low export prices, technical hurdles, and a poorly performing state-owned cotton ginner. Some reforms, most notably with regard to the setting of the farmgate procurement price, have already been undertaken, but more is needed to put the sector on a sound financial footing. It is vital that the production process be modernized and the ginner profoundly reformed if cotton is to play a major role in poverty reduction in rural Mali.

II. Macroeconomic Impact of the Mining Sector3

Gold mining in Mali has become a mainstay of the economy, contributing nearly three-fourth of exports. Despite weak linkages to the rest of the economy, mining has a potential for funding economic development and poverty reduction in coming decades. However, like other natural resources, the management of gold sector revenue presents both opportunities and challenges. For Mali, the key to success will be to balance an attractive investment regime to encourage new production with the capture of an appropriate share of the resource rents from mining. To do this well, it will be important to improve transparency and governance, and to reform the fiscal regime appropriately to reap the benefits.

A. Mali’s Gold Sector—Prospects and Potential

21. Gold has become the predominant export of Mali, surpassing cotton by far. Mali is the third largest gold producer in Africa, after South Africa and Ghana. Gold mining in Mali started in 1984. With the introduction of the Mining Code, commercial gold production increased from 4 metric tons in 1991 to 55 metric tons4 in 2007. By 2007, the share of gold mining in GDP had risen to 8 percent; the value of gold exports was more than 70 percent of total exports; and tax receipts from gold were 14 percent of total government revenue (Table 1).

Table 1.

Mali: Gold Sector Indicators, 2003–07

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Source: Malian authorities and staff calculations.

Based on the weighted average cost of all operating mines in Mali.

Figure 1.
Figure 1.

Mali: Gold production, 1990-2012

(In tons)

Citation: IMF Staff Country Reports 2008, 286; 10.5089/9781451826517.002.A002

Source: Malian authorities.

22. Gold mining is largely an enclave sector, with limited backward linkages to the rest of the economy. Backward linkages consist of the mining industry’s demand for locally produced intermediate inputs and capital goods, as well as the final demand for finished goods on the domestic market. Gold activity is financed mainly by capital inflows. After-tax profits are transferred abroad (reinvested earnings re-enter the country through the capital account). Any increase in gold mining implies higher imports (petroleum, capital goods, and services), transfers, and capital inflows, with limited domestic impact. Employment creation in the industrial mining sector has been modest because gold mining is capital intensive in nature. The mining sector employs less than 1 percent of the total labor force.

23. Forward linkages between gold mining and the rest of the economy are significant, and government revenue from gold increased sharply during 2003–07 (Table 2). Forward linkages give rise to improvements in foreign exchange reserves, tax revenues, and, more indirectly, employment. Industrial gold production contributes to government revenue through three main channels: royalties (3-6 percent of gold value, depending on the date of mine opening); corporate income taxes (generally at the standard rate of 35 percent, although all but one mine benefit from a five-year tax holiday granted under the 1991 Mining Code); and dividend payments on state shareholdings (which generally account for 10 percent of equity). From 2004 through 2007, total payments from gold companies to the government rose from 1.1 percent of GDP to 2.5 percent, and from 7 percent to 14 percent of total central government revenue.

Table 2.

Mali: Contribution of Mining Sector to Government Revenues, 2004–08

(CFAF billions)

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Source: Malian authorities.

24. Exploration, investment, and production have expanded in response to rising international gold prices. The surge in gold prices—from an average of US$445 per ounce in 2005 to US$920 in February 2008—more than doubled the profit margins for gold production in Mali. In turn, investment in the gold sector increased to about US$120 million per year during the 2000–07 period, mainly for exploration and the rehabilitation of old mining sites. Exploration has become more attractive and could give rise to significant additional government revenues, including through auctions of licenses. Higher gold price have translated into increased royalties, profits taxes, and dividend payments (see below). It is estimated that more than US$1 billion was invested in the mining sector during 1998–2004. The majority of the investment was in three major mine fields (Morila, Yatela, and Sadiola). There was also a general increase in capital spending over the period, owing to changes in the regulatory and fiscal environment in 1999.5

25. The longer-term prospects for the industry are uncertain. How long the current boom will last is unclear, and sustained productivity at the main producing mines is highly dependent on continued investment. For gold to keep playing an important role in the Malian economy, further exploration and investment will be essential.

B. Policies for a Pro-Development Mining Sector

Mining taxation

26. Taxation of the mineral sector represents the price for the right to extract a scarce resource. The tax objectives arise from the role of the state as owner of minerals, which requires the government to secure an appropriate share in the mineral rent. Maintaining the neutrality characteristic of mineral taxation is essential to fulfill this objective. Mineral extraction makes it possible to generate sizable economic rents, which may exceed the return thresholds necessary to constitute an incentive for the potential investor to carry out the project. Given these types of motivations for mineral taxation, the specific issues in the taxation of mineral resources are: (a) how much to tax, (b) whether a separate tax regime is needed for the mineral sector, and (c) how to combine different levies in a multi-levy system

27. In designing an appropriate mineral tax regime, Mali needs to assess the efficiency of various types of tax instruments and their effect on the incentives and behavior of mining companies. The primary concern should be to design an equitable mineral extraction policy that encourages new investment while ensuring that an appropriate share of resource rents accrue to the government. The choice among fiscal instruments depends on the timing of revenue, risk sharing, administrative convenience and political judgment. The key features of an effective taxation system in the mining sector are fiscal stability, taxation of the mineral rent, avoidance of excessive fiscal risks, and robustness of the tax system. Product-based royalties can ensure that the government receives at least a minimum payment for the exploitation of minerals, and which is less volatile than profit tax revenue. However, profit-based instruments reduce uncertainty in mineral contracts because they mean that the government shares in the returns from projects that could be more profitable than expected and do not unduly penalize investors when economic profits are low.

28. The Mining Code adopted by Mali in 1999 streamlined the permit issuance process and substantially altered the mineral tax regime by shifting the tax burden from inputs and production towards profits. Mining has been regulated by law since 1970, and the legislation was significantly reformed in 1991 and modified again in 1999 with support from the World Bank. Accordingly, royalty on gold production was reduced from 6 percent to 3 percent and customs duties were lowered, in line with the WAEMU common external tariff. The tax holidays on corporate income and import duties during the initial years of production were eliminated and a dividend withholding tax applied. Regulations concerning government participation in the capital of the mining enterprises (back-in-rights) were also modified. These policy changes were designed to foster the development of new gold deposits and increase government revenue from the sector.

29. Mali’s Mining Code focuses on profits, rather than output, and brings the Tax Code in line with international standards. Mineral producing nations have implemented mining tax regimes that include a wide range of varying features. Most of the countries prefer to have a hybrid tax regime in place (both royalty and profit tax) in order to minimize the risk for the state. However, many countries are moving away from royalty based taxes to profit based taxes (e.g. Mali). Recognizing that mining industry is capital intensive, Mali’s mining tax regime permits the mining enterprise to recover its capital costs before paying income tax. This capital cost recovery is achieved by allowing immediate 100 percent tax deductions for capital costs and infrastructure costs that are incurred during the pre-production period to be depreciated for tax purposes at a 100% rate. While the tax regimes in African countries are broadly comparable, there are some differences on profit taxes, especially with respects to depreciation allowances, reflecting the specificities of each tax regime. In fact, however, what matters for investors (as well as for the state) is the entire tax regime, which means that international comparisons require a comprehensive evaluation of these tax regimes by performing a financial simulation of their impact (Table 6).

Table 6.

International Comparisons of Mineral Tax Regimes for Selected Countries

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Source: Fiscal Affairs Department, IMF.

30. The tax system applied to the gold sector should provide enough incentives to investors while simultaneously yielding the state an adequate share of rents. Achieving such a balance is not easy. While Mali is retaining the structure of the 1999 Mining Code, the government should develop a better understanding of the taxes payable by mining companies and instill greater certainty with regard to the tax regime. Going forward, issues to consider when revising the Mining Code include sharing of revenue between the central and local governments, and the rights and obligations of minority (state) shareholders.

Macroeconomic policies and the management of mineral wealth

31. Mineral resources can contribute to poverty reduction and growth if exploited and managed carefully. Under appropriate conditions, mineral resources can spur the development of the country. In some developing countries, such as Botswana, revenues from mining companies have been an important engine for economic growth and social development. Natural resources generate substantial income, which can help finance social outlays, infrastructure, and productive capacity, thus adding to future output levels.

32. However, natural resources also pose serious macroeconomic management challenges. The “resource curse” is a complex phenomenon, in which three different processes come into play (Sachs and Warner, 2001). The first process is real currency appreciation arising from resource revenues and its negative effect on the competitive position of other industries (generally referred to as “Dutch disease”). The second process is financial instability, owing to fluctuations in commodity prices and the associated disruptive effects on the government budget. The third process is the effect on political conditions, which historically in some cases reached extreme proportions. Thus, the extraction of natural resources often sets in motion a chain of events that brings to the forefront specific sectors—i.e., the natural resource sector itself and certain activities in the nontradables sector, such as construction, to the detriment of other sectors. As a result, traditional exports become less profitable, causing widespread unemployment.

33. In this environment, it is important that macroeconomic policies are sufficiently prudent and supported by appropriate structural policies. With respect to macroeconomic policies, fiscal policy—especially in the fixed exchange rate environment of the CFA franc zone—should be run conservatively. Ideally, the authorities should aim to keep the basic fiscal balance in a range between zero and a surplus equivalent to mining revenue. This approach would help generate savings in good times and provide contingencies against an abrupt drop in mining sector revenue. With respect to structural policies, the focus should be on steps to improve the efficiency of the economy and enhance its international competitiveness to counteract any potential Dutch disease-type effects, and thus support employment generation.

Other policies

34. Weak institutions and the lack of accountability and transparency tend to have more deleterious consequences in the face of natural resource revenues. The relative abundance of money often fuels corruption, widens inequality, or even generates conflicts. Natural resource revenues can undermine governments, making them less likely to provide public goods such as health care and education. Large mining revenues may prompt governments to lower or eliminate other taxes and increase spending. In such cases, the population is less likely to demand accountability (Mehlum, 2002). However, the Extractive Industries Transparency Initiative (EITI)—which Mali is committed to implementing in 2008–09—can to improve transparency in mining revenue collection and related expenditure.6

35. Mining operations also entail environmental costs as a result of waste disposal, dust, and water pollution. If not managed properly, these problems could adversely affect the health and livelihood of the population living near mining operations. Key to mitigating environmental risks is setting and monitoring appropriate environmental standards and ensuring adequate environmental and social safeguards at all stages of a mining operation, ranging from exploration, construction, operation, to the closure of mines. In particular, it is important that sufficient funds be saved for clean-up operations. Other pressing issues relate to the rehabilitation of mines after closure (e.g., how to return a disturbed land to a predevelopment state or to make alternative use of the land). Mali has taken certain steps to mitigate environmental risks by using regulations as well as direct agreements with the mining companies, including for building up funds for future cleanup operations, and by establishing appropriate environmental performance standards.

C. Conclusions and Policy Implications

36. Natural resources are gifts that require proper management, and good governance is crucial to transform natural wealth into good economic performance. Mining, being an enclave activity, has weak linkages with the rest of the economy. Thus, transparency of gold revenues in terms of its collection and spending becomes very important. If properly managed, natural resources can yield rents that are an important source of development finance. If poorly managed, however, these resources become a curse.

37. Mali’s Mining Code is broadly well suited to ensure that the state gets a fair share of its resources while retaining sufficient incentives over the longer term to attract new exploration. The Mining Code is in line with the fiscal regimes in other sub-Saharan African countries, and it seems appropriate for the authorities to maintain the current mining tax regime, which apportions the risks between the state and the mining companies. However, there is scope to improve its effectiveness, e.g., by adhering to accounting best practices.

38. Transparency of revenue payments from mining companies to governments is an essential step toward greater accountability and an informed debate, and thus toward better governance. Revenue transparency is expected to improve with Mali’s adherence to EITI standards in 2009. In addition to ensuring that revenue flows are fully accounted for and disclosed in a transparent manner, the authorities should focus on using its resources for poverty reduction and development and addressing environmental in a timely manner.

References

  • Aryee, Benjamin (2000), “Ghana’s mining sector: its contribution to the national economy,” Resources Policy, 27, p 61-75.

  • Baunsgaard, Thomas (2001), “A Primer on Mineral Taxation,” IMF Working Paper, WP/01/139.

  • Bannon, Ian and Collier, Paul Eds. (2003), “Natural Resources and Violent Conflict: Actions and Options,” World Bank.

  • Collier, P. (2003), “Breaking the Conflict Trap: Civil War and Development Policy,” Oxford University Press.

  • Davis, J., R. Ossowski, J. Daniel, and S. Barnett (2001), “Stabilization and Savings Funds for Nonrenewable Resources,” IMF Occasional Paper No. 205, Washington D.C.

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  • Mehlum, H and R. Torvik (2002), “Institutions and the Resource Curse,” Department of Economics University of Oslo, No 29.

  • PricewaterhouseCoopers (2000), “Mineral Taxation Policies in Asia,” New York.

  • Sachs, J and Warner, A (2001), “The Curse of Natural Resources,” European Economic Review, 45 827-38.

  • Sarma, J.V.M and G. Naresh (2001), “Mineral Taxation around the World. Trends and Issues,” Asia-Pacific Tax Bulletin. January 2001.

Appendix I. Linkages Between Mining and Other Sectors

Input-output data provide indications on linkages between the mining sector and other sectors (Table A1). The input-output coefficients show low linkages of the mining sector to other sectors of the economy. Mining is strongly linked to the petroleum and chemicals sector and to the manufacturing sector, with coefficients of 20 percent and 8 percent, respectively. On the other hand, only 6 percent of the mining output is used domestically.

Table A1.

Mali: Input-Output Coefficient Matrix

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Source: Malian authorities and staff calculations.

The total requirement matrix shows the direct and indirect effects of the mining sector (Table A2). For every dollar worth of gold produced, the value added is 25 cents in the petroleum and chemicals sector and 9 cents in the manufacturing and services sector. On the other hand, the corresponding value for the cotton sector is 64 cents in the agriculture sector. The aggregate industry multiplier for mining is 1.50, while the multipliers for textiles and agriculture are 2.28 and 1.94, respectively. As expected, the intermediate input demand generated by the mining sector is less than that created by the textile and the agriculture sector (See Table A2).

Table A2.

Mali: Total Requirements Matrix1

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Leontief inverse matrix of data showed in Table A1.

3

Prepared by Saji Thomas.

4

A metric ton contains 32,151 troy ounces.

5

The first mining code of 1991 set forth the structure of the tax regime applicable to the mining companies, but also required that companies sign establishment conventions with the state (the owner of minerals and fossils). This convention is the legal text that brings together all the tax measures applicable to the companies. Mining permits may be transferred and may be managed by new owners under the same convention. New provisions under the 1999 code are discussed below.

6

Details on EITI are available at the “eitransparency.org” website.