Islamic Republic of Mauritania
2009 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility: Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Islamic Republic of Mauritania.
Author: International Monetary Fund
Publication Date:
11 Jun 2010
eISBN:
9781455202522
ISBN:
9781455202522
Language:
English
Keywords:
ISCR; CR; government; deficit; US$; procurement code; financing gap; oil GDP; GDP deflator; public finance; international community; Inflation; Global
Download PDF (1.4 MB)

This Article IV Consultation reports that the economic growth of Mauritania is robust, which reflected prudent economic management, sustained donor support, and the beginning of oil production. Executive Directors observed that the return of constitutional order to Mauritania has established a basis for the resumption of the reform agenda and of financial support from the international community. They commended the authorities’ commitment to protect poverty-related spending. They also highlighted the need to expand and strengthen safety nets and social protection.

Abstract

This Article IV Consultation reports that the economic growth of Mauritania is robust, which reflected prudent economic management, sustained donor support, and the beginning of oil production. Executive Directors observed that the return of constitutional order to Mauritania has established a basis for the resumption of the reform agenda and of financial support from the international community. They commended the authorities’ commitment to protect poverty-related spending. They also highlighted the need to expand and strengthen safety nets and social protection.

I. Background

1. The July 2009 presidential election, won by Mohamed Ould Abdel Aziz, enabled Mauritania’s return to constitutional order. The August 2008 military coup triggered a domestic political crisis and many bilateral and multilateral donors, including the World Bank, discontinued their assistance. The PRGF arrangement was interrupted in October 2008 after the third review was successfully completed in May 2008. The international community, including the Fund, has now resumed normal relations with Mauritania. The authorities have requested Fund reengagement through a new ECF arrangement.

2. The authorities’ ambitious reform agenda, supported by several Fund arrangements, had started to bear fruits. Economic growth was robust, reflecting prudent economic management, sustained donor support and the beginning of oil production. Inflation was low, and both external and fiscal positions strengthened (Figure 1). Additional debt relief under the Multilateral Debt Relief Initiative (MDR-I) in 20061 contributed to firm up the country’s debt sustainability, and create fiscal space for infrastructure and poverty reducing spending. Although, some progress has been made on the structural reform agenda, notably in the areas of public finance management, foreign exchange market liberalization, banking sector, and governance (Box 1), significant weaknesses remain. Private investment is still low, the economy remains vulnerable to commodity shocks, and limited infrastructure and an unfavorable business environment continue to hamper economic growth. The new program will help address these challenges.

Figure 1.
Figure 1.

Mauritania: Economic Developments, 1999-2009

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Mauritanian authorities and AFR REO.

3. Economic performance deteriorated sharply in 2008-09 on the back of both domestic and external shocks (Box 2). The global food and fuel price increases weakened the fiscal and external positions and pushed up inflation. The domestic political crisis led to a significant reduction in external assistance. The global economic slowdown contributed to further fiscal and balance of payments pressures mainly through the decline in the prices of and the demand for Mauritania’s main export commodity (iron, copper, and fish). Moreover, the anticipated shift to an oil economy did not materialize.

4. Though it has been reduced, poverty remains high. Poverty incidence has declined from 47.6 percent in 2004 to about 42 percent in 2008. Progress has been made in the social sectors, but the achievement of the Millennium Development Goals (MDGs) remains a key challenge. Mauritania ranked 154 out of 182 countries according to the Human Development Index in 2009. Recent domestic and external shocks have likely slowed progress on poverty reduction, highlighting the need to protect social spending and develop appropriate safety nets for the most vulnerable segments of the population.

Mauritania and the IMF

Mauritania has had a long-standing relationship with the Fund, with ten arrangements over the last twenty five years (three StandBy arrangements, one Enhanced Structural Adjustment Facility arrangement, and six Poverty Reduction and Growth Facility (PRGF) arrangements).

All but the last two Fund-supported programs have been completed. The 2003-05 PRGF arrangement was cancelled at the request of the authorities just after one year because of long standing practice of providing inaccurate data to the Fund. The revised data suggest that significant imbalances and low levels of foreign reserves persisted over many years. After the successful implementation of a six-month staff-monitored program (SMP) covering January-June 2006, a new PRGF arrangement (2006-09) was approved in December 2006. It was interrupted in October 2008 due to a military coup, and then cancelled, at the request of the authorities, in November 2009.

Key objectives of past arrangements. All Fund-supported programs aimed at maintaining macroeconomic stability; achieving high and sustainable growth; diversifying the economy and reducing vulnerability to shocks; and improving social indicators and reducing poverty.

Significant progress was made in several areas. On the macroeconomic side, these arrangements contributed to sustain non-oil GDP growth at an average of 4.5 percent, and keep inflation relatively low. On the structural side, the arrangements were instrumental in:

  • Establishing an auction system in the foreign exchange market and a more flexible exchange rate that reduced significantly the premium in the parallel market.

  • Increasing tax revenue thanks to tax policy and administration reform.

  • Liberalizing trade policy.

  • Strengthening the central bank operational, supervision, and regulatory capacity.

  • Improving some social indicators and making indent in the poverty incidence (which declined from about 51 percent in 2000 to 42 percent in 2008).

In contrast, weaknesses remain in several areas, as evidenced by:

  • External vulnerabilities: exports still heavily depend on the mining sector, and international reserves are below the targeted 3 months of imports.

  • Rigidities in some areas of public financial management.

  • Large transfers to state-owned enterprises.

  • Weak financial intermediation.

  • Unfriendly business environment.

  • Slow progress in improving several development goals and lack of coherent and comprehensive social protection and safety nets.

Performance under the two recent PRGF arrangements was largely affected by exogenous factors. This includes political instability with two military coups (2005, 2008), unfavorable weather conditions (particularly in 2002), and the sharp decline in oil production in 2006. But, it also highlights the need to build capacity, notably through appropriate and well designed technical assistance.

Weathering Multiple Exogenous Shocks in 2008-09

Mauritania was hard hit by the fuel and food crisis nearly two years ago and the subsequent financial crisis and global recession in 2008-09. The consequences of these external shocks have been exacerbated by a domestic political crisis triggered by the military coup of August 2008 and the unexpected significant drop in oil production. These shocks have taken a toll on the economy and its growth prospects.

Fuel and food crisis: The significant fuel and food price increases were exacerbated by a structurally precarious food situation affecting mainly poor people. In response, the government adopted a Special Intervention Program (SPI) amounting to about US$161 million (4.9 percent of non-oil GDP). The SPI contributed to a wider fiscal deficit but helped avoid social unrest. Reflecting measures to contain the prices of several goods, inflation was kept at 3.9 percent (y/y) through end-December 2008 compared to 7.4 percent in 2007.

Global economic slowdown: Direct contagion from the global financial crisis has been insignificant because the country’s financial sector is small and insulated from international markets. In contrast, the country has been affected through the trade channel. The decline in demand and prices for Mauritania’s main exports (iron ore, copper, and fish products) resulted in a sharp drop of exports. Remittances (although relatively low) have likely declined and some large investments projects delayed.

uA01fig01

Food and Oil Imports

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

uA01fig02

Evolution of Exports and Prices

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Mauritanian authorities; and IMF World Economic Outlook.

The oil economy: Production in the main oil field Chinguetti (declared commercially viable in 2004) started in 2006 and immediately ran into major technical difficulties which led output to fall from close to 75,000 barrels per day (bpd) in early 2006 to 30,000 barrels by end-2006 and steadily declining to reach only 10,000 bpd in 2009. Projected output for 2011 could be as low as 7,500 bpd. This drastic shift in production has led to a significant revision in the macroeconomic outlook of the country, the downsizing of the public investment program, and the need for more external aid which was curtailed at the onset of the oil economy.

The domestic political crisis: The August 2008 coup d’etat staged by a military junta, led many bilateral and multilateral donors to suspend their aid flows, complicating policy responses to the global economic slowdown. The drop in external assistance and delays in foreign-financed projects contributed to slower economic activity, mainly in construction and services, and reduced foreign exchange availability.

II. Recent Developments

5. The global economic downturn and the drop in donor financing have weakened economic activity, through slower activity in the mining, fishing, and the construction sectors. Non-oil real GDP growth is estimated at -0.9 percent in 2009, down from 4.1 percent in 2008. Oil output continued to decline in 2009 and total GDP would contract by about 1 percent (Table 1 and Figure 2).

Table 1.

Mauritania: Selected Economic and Financial Indicators, 2008–14

article image
Sources: Mauritanian authorities; and Fund staff estimates and projections.

Excluding the oil account.

Defined as government non-oil revenue (excluding grants) minus government expenditure (excluding foreign-financed investment expenditure and interest on external debt).

Figure 2.
Figure 2.

Real Sector Developments, 2004-09

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Source: Mauritanian authorities.

6. Fiscal position has deteriorated. The basic non-oil fiscal deficit increased to 7.7 percent of non-oil GDP in 2008, up from 2.2 percent in 2007 (Table 2 and Figure 3). Preliminary data suggest that spending adjustment efforts have not kept pace with declining revenue and the basic non-oil fiscal deficit, although lower, would still be high in 2009, reaching 5.3 percent of non-oil GDP. Faced with limited resources, the authorities have used the recent SDR allocation to help close the fiscal financing gap.

Table 2.

Mauritania: Central Government Operations, 2007-14

(In billions of ouguiya, unless otherwise indicated)

article image
article image
Sources: Mauritanian authorities; and Fund staff estimates and projections.

Including transfers to public entities outside the central government.

Defined as government non-oil revenue (excluding grants) minus government expenditure (excluding foreign-financed investment expenditure and interest on external debt).

Figure 3.
Figure 3.

Mauritania: Fiscal Developments, 2007-09

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Mauritanian authorities; and Fund staffestimates.

7. Lower food and fuel prices and the normalization of relations with the international community have helped cushion the impact of the global economic slowdown on the external position. The current account deficit is estimated at 12.7 percent in 2009, down from 15.7 percent in 2008 (Table 3). The decline in exports values is expected to be more than offset by a marked reduction in imports, reflecting the contraction in economic activity, lower world food and fuel prices, and the foreign exchange rationing. The resumption of donor financing after the July 2009 election and the disbursement of financial compensation under the European Union (EU) fishing convention helped maintain the level of gross international reserves at 2.2 months of imports2 at end-December 2009. The Central Bank of Mauritania (BCM) restored the foreign exchange auction system in mid-December 2009.

Table 3.

Mauritania: Balance of Payments 2007-14

(In millions of U.S. dollars; unless otherwise indicated)

article image
Sources: Mauritanian authorities; and Fund staff estimates and projections.1/ Excluding HIPC grants on debt service that have fallen subject to MDRI relief.

MDRI debt and assumed arrears relief (including passive debt owed to Kuweit and Libya) is treated as a one-time stock operation.

8. Inflation has remained in the low single digits (5 percent in 2009). Inflation fell rapidly to 0.9 percent (y/y) in September, reflecting lower international fuel and food prices and a somewhat prudent monetary policy stance. However, international fuel and food prices are rising again, pushing up inflation to 5 percent (y/y) at end-December (Figure 2). With slumping economic activity and a benign inflation outlook, the BCM lowered its policy rate from 12 to 9 percent in November 2009 but real interest rates remained positive. Broad money grew at 15.2 percent, reflecting the monetization of recent additional SDRs allocation, while private sector credit growth slowed down to about 4 percent in 2009 (Table 1 and Figure 4). The effective exchange rate depreciated by 3 percent in nominal terms and 2 percent in real terms.

Figure 4.
Figure 4.

Mauritania: Selected Financial Sector Indicators, 2006-09

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Source: Mauritanian authorities.

III. Macroeconomic Outlook and Risks

9. Medium-term growth prospects remain strong provided steady implementation of the reform agenda. While medium-term oil production perspectives have been substantially revised downward, staff and the authorities are of the view that the resumption of donor support, the projected partial recovery of iron ore and copper prices, and reforms underway would improve the macroeconomic outlook. Accordingly,

  • Overall real GDP is projected to grow by 5.2 percent on average over the next five years, supported by strong activity in the non-oil sector, including the launching of a major project (estimated at US$1.1 billion) by the national iron ore company.3

  • Inflation is expected to remain in the low single digits at around 5 percent.

  • The basic non-oil deficit would fall to about 1 percent on non-oil GDP, thus helping limit inflationary pressures, free resources for public and private investment, and ensure public debt sustainability.

  • The external position would strengthen gradually. On one hand, the country’s export outlook should gradually improve as the global economy recovers and domestic capacity expands. On the other hand, imports associated with major oil, mining, water, and infrastructure projects will decline as the projects are being phased out over the next 5 years. On balance, the current account deficit would peak in 2011, and thereafter decline gradually below10 percent by 2014.

uA01fig03

Mauritania: Oil Output Projections Profiles, 2006-14

(Daily production per barrel)

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Mauritania authorities; and Fund staff estimates and projections.

Mauritania: Medium-Term Macroeconomic Objectives, 2009-14

article image
Sources: Mauritanian authorities; and Fund staff estimates and projections.

10. There are several risks to the outlook. The risks to the 2010 outlook remain tilted to the downside given continued uncertainty in the global environment. Looking forward, other risks include (a) volatility in the commodity market, notably a large drop in iron ore and copper prices; and (b) a prolonged shortfall in power supply. On the upside, an acceleration of reforms and donor support could spur growth.

IV. Policy Discussions and Program Objectives

11. Mauritania’s immediate challenge is to limit the fallout from recent shocks, including the global economic slowdown and restore growth while ensuring macroeconomic stability. The peaceful completion of the presidential election has established a strong basis for resumption of the reform agenda and of the financial support from the international community. An appropriate macroeconomic policy mix will support the recovery while containing inflationary pressures.

12. Turning to the medium term, the key challenge is to achieve high and sustainable growth in order to boost employment and further reduce poverty. Meeting these challenges requires fiscal consolidation, prudent monetary policy, and accelerated structural reforms, particularly in public financial management (PFM) and in the financial sector. Another crucial objective is to lessen the economy’s vulnerability to external shocks. Improving the business climate and strengthening social policies are also important.

13. To address these challenges, the authorities have launched a comprehensive reform agenda in support of which they have requested an arrangement under the ECF. The arrangement (2010-12) would support Mauritania’s efforts to sustain high growth and reduce poverty while safeguarding macroeconomic stability. To achieve these goals, the program and policy discussions focus on (a) fiscal consolidation to reduce public debt while creating more fiscal space for social and infrastructure spending; (b) further enhancing the monetary policy framework to maintain low inflation and rebuild reserves to about 3 months of imports; (c) deepening financial intermediation and enhancing the business environment in support of a broad-based private sector led-growth; and (d) strengthening social protection and safety nets.

A. Furthering Economic Growth and Equity Through Fiscal Reform

Fiscal consolidation was brought to a halt in 2008 by lower revenues, and weak spending control. Furthermore, the rigid expenditure framework constrained fiscal adjustment (Box 3). With limited external financing, the deficit has been financed, inter alia, by a significant increase in domestic debt. Reforms to restrain expenditure and bolster revenues are needed to put public finances back on a sustainable path, while increasing poverty-related and infrastructure spending.

uA01fig04

Evolution of Revenues, Wages and the Fiscal Balance

(Percent of non-oil GDP)

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Mauritanian authorities; and IMF staff estimates.
uA01fig05

Central Government Debt, 2007-14

(As percentage of GDP)

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Source: Mauritanian authorities.

14. The authorities recognized that fiscal consolidation is necessary to put public finances on a sustainable footing, while also creating space for additional social and infrastructure spending. This hinges on further broadening the revenue base, strengthening tax and customs administration, closely managing the civil service wage bill, rolling back nonpriority spending, and improving the quality of public investment and of budget execution. Fiscal consolidation and the recourse to highly concessional loans would help ensuring debt sustainability and the return of the government debt-to-GDP ratio to a declining path.

Budget Composition and Fiscal Flexibility

Budget flexibility in Mauritania is constrained by the large share of non-discretionary spending which exceeds 60 percent of non-oil revenues. The main source of fiscal rigidity in Mauritania is the large wage bill. Short-term adjustment in the wage bill is generally difficult and limited either because of the large implied social costs or because of institutional constraints. The wage bill has led the increase in non-discretionary expenditures, rising significantly since 2006 and becoming one of the highest in the region by 2009. Subsidies and transfers to state-owned enterprises (SOEs), although relatively low, also hinder fiscal flexibility. Most SOEs are in financial distress and rely essentially on budgetary transfers to continue operating.

Mauritania: Fiscal Development, 2003-09

uA01fig06

Evolution Of The Budget Structure

(share of non-oil revenues)

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

uA01fig07

Share of the wage bill in GDP 1/

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Mauritanian authorities; and MF staff estimates and projection.
1/ For Mauritania, data represents 2009 projections. For other countries, the most recent available data is presented. Non-oil GDP was used when applicable.

The government’s program to lower the wage bill and transfers to SOEs will improve short-term fiscal flexibility and create space for social and development-related spending. In collaboration with the World Bank, the update of the census of civil servants and the ensuing reconciliation of the payroll file with the civil service roster will be completed. This would lead to significant savings in the wage bill in 2010 while creating room for recruitment of personnel in strategic development sectors. In the medium term, the government intends to address the size, effectiveness and remuneration system of the public service. Possible measures include decompressing the wage structure, shifting towards performance-based compensation, enhancing recruitment policies, and introducing additional PFM measures. Transfers to SOEs are to decline as well, by revising tariff structures and introducing better-targeted subsidies.

15. Efforts to strengthen revenues by broadening the tax base, curtailing the use of exemptions, and improving tax and customs administration (MEFP, ¶33) will ensure a sustainable fiscal consolidation. The medium-term direct tax policy reform, in line with the 2008 FAD technical assistance report, aims at simplifying the tax system, making it easier to administer, and lowering the burden on businesses. In this regard, it is important to conduct a new census of tax payers and complete the computerization of the tax revenue agencies. On customs administration, in addition to further reductions in discretionary exemptions, ongoing projects aim at strengthening valuation and inspection procedures.

16. The authorities intend to restrain the wage bill and other nonpriority spending while giving priority to pro-poor spending, and shifting gradually the balance from recurrent spending to capital spending. They are committed to speed up the civil service reform to contain the wage bill while improving the quality of public service (MEFP, ¶36). Efforts are also needed to eliminate inefficient spending, including untargeted subsidies.

17. The authorities program for 2010 targets a reduction of the basic fiscal non-oil deficit to 3.8 percent of non-oil GDP through revenue-enhancing measures and expenditure restraint. Non-oil revenue would increase on account of new revenue measures (MEFP, ¶24), improved economic situation, as well as the authorities’ determination to improve tax compliance. At the same time, current expenditure would be reduced by 3.4 percentage points, reflecting measures to contain nonpoverty-related current spending, the unwinding of one-time spending (presidential elections), and other savings. The completion of the census of civil servants and the subsequent reconciliation of the payroll file with the civil service roster (to eliminate double pay and ghost employees), and the computerization and automation of the payroll would free resources and lower the wage bill by 1 percent of GDP, while allowing new recruitment in the education, health, judiciary and security sectors (MEFP, ¶36). The authorities agreed on the need for contingency plans in case revenues are much lower than expected (MEFP, ¶26). Such measures would imply further cuts in nonpriority spending, in particular in common reserves, while minimizing economic distortions and adverse effects on the poor.

18. A durable reduction in the fiscal deficit will also require clarifying the relationship between the government and public enterprises. The authorities are aware that management of SOEs, in general, needs to be improved, given the drain on budget resources. In this respect, they intend to launch, in collaboration with the World Bank, a comprehensive study to review the financial status of all SOEs and propose a restructuring and recovery program that will ensure their long-term viability (MEFP, ¶14). The authorities are discussing with their multilateral and bilateral development partners to secure additional grants and concessional loans to fund these restructuring plans.

19. Efforts will be geared towards further improving the quality of public investment. The increase in capital expenditure is ambitious, putting pressure on the absorption and implementation capacities of the Mauritanian economy. However, the authorities stressed the importance of small projects (in the areas of water, health, habitat), easily implementable and with high impact on poverty reduction (MEFP, ¶25). They are aware of the need to further strengthen implementation capacity and indicated that the recently-established Agency for Project Monitoring will help improve the quality of investment spending, coordinate projects management, and increase transparency and value for money on public investment.

20. Public financial management (PFM) reforms would ensure greater transparency, accountability, and efficiency in the use of public resources. Streamlining and strengthening budget preparation, execution, and monitoring are important. One of the key measures is the creation of a treasury single account by 2011 (MEFP, ¶15), in line with the recent FAD/West AFRITAC technical assistance report. To improve medium-term budget planning and better inform discussions on expenditure priorities, the authorities intend to improve the medium-term expenditure framework, move to programmatic budgeting, and put in place a cash management plan with Fund and World Bank TA.

21. The authorities concurred with the conclusion of the debt sustainability analysis (DSA) carried out jointly with World Bank staff. This assessment is broadly unchanged from the 2008 DSA4. Mauritania remains at moderate risk of distress, although the country’s debt indicators have deteriorated, mainly reflecting both the new loan contracted by the national mining company to expand its productive capacity as well as lower projected oil output. Looking forward, the authorities are committed to develop an appropriate debt strategy and improve the country’s debt management capacity to preserve external debt sustainability. For that purpose, they intend to request World Bank support to assess debt management capacity and needs in the context of the management performance assessment (MPA) and medium-term debt strategy (MTDS) TA programs (MEFP, ¶30).

B. Greater Flexibility of Monetary and Exchange Rate Policy

The economic downturn and slowing down of private sector credit may warrant further monetary easing. But, there is some concern that inflationary pressures could reemerge rapidly given the recent increases in food prices—which have a large impact on domestic inflation—as well as the prospects for a strong economic recovery. Regarding exchange rate policy, in response to a weakening external position in late 2008, the central bank has begun rationing foreign currency. This increased the parallel market premium, undermined confidence, and led to a sharp drop in the amount of foreign exchange sold on the official market (excluding BCM intervention). Greater exchange rate flexibility is needed to increase the effectiveness of monetary policy and facilitate adjustment to external shocks.

uA01fig08

Mauritania: Inflation and Exchange Rate, 2006-09

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Source: Central Bank of Mauritania and Mauritanian National Office of Statistics.

22. Monetary policy will remain geared toward containing inflation in the context of a flexible exchange rate policy (MEFP, ¶27). Rising fuel and food prices are expected to pose some risks to the inflation outlook, but the authorities’ monetary program for 2010 will be sufficiently firm to keep inflation rate close to 5 percent. Broad money growth is to be limited to 13 percent, which, in view of the limited government financing requirement, would allow credit to the private sector to increase to 11.4 percent, up from 3.9 percent in 2009. Staff and BCM agreed that further cuts in interest rates should be gradual and based on a careful examination of the impact on external accounts. A reduction in the statutory reserve ratio could also be explored. In any case, the BCM stands ready to increase the policy rate as soon as signs of pressures on inflation or in the foreign exchange market emerge. The BCM will seek to strengthen its liquidity management efforts, notably through better coordination between monetary and fiscal policies.

23. The authorities concurred that greater exchange rate flexibility will help absorb the external shocks. In this respect, it was agreed that the foreign exchange auction system should be reestablished, although the authorities expressed some concern about the negative impact of such measure on foreign exchange reserves. However, they recognized that greater flexibility of the exchange rate, resumption of donor support, and fiscal consolidation would help respond to the anticipated strong demand associated with the lifting of foreign exchange restrictions and to minimize loss of foreign exchange reserves, while increasing official reserves to US$247 million (2.5 months of imports) at end-December 2010. On this basis, the BCM has restored the foreign exchange auction system in December 2009 MEFP, ¶28) and will confine its interventions to smooth fluctuations in the exchange rate. The BCM intends to request technical assistance for improving its intervention policy in the foreign exchange market. Staff and BCM agreed that the exchange rate is close to its equilibrium (Box 4), with a modest overvaluation in the range of 2 to 11 percent. Completing the structural reform agenda will then be critical to buttress competitiveness.

C. Enhancing Financial Intermediation and the Investment Environment

Excluding the oil and other extractive sectors, investment in Mauritania is relatively low, reflecting poor financial intermediation (limited access to and cost of bank financing), red tape, cumbersome tax regulations, lack of infrastructure, high costs of production factors, and energy shortages. The Global Competitiveness Index (GCI) and the World Bank Doing Business reports have ranked Mauritania in the bottom quartile (Panel 1). Market-oriented reforms centered on boosting financial intermediation and enhancing the investment environment will be critical to improve competitiveness, raise economic activity, and further reduce poverty.

Panel 1.
Panel 1.

Mauritania: Competitiveness and Governance, 2010

Out of 183 countries, Mauritania ranks 166 in the 2010 World Bank’s Doing Business Survey, losing five places relative to the previous year. Lack of competitiveness and poor governance constitute major constraints to the development of the manufacturing sector; while lack of progress in the judiciary reform and high NPLs reflect unfavorably on the banking indicators.

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Doing Business2010; Global Economic Index 2010; Human Development Report 2009; and Governance Indicators (World Bank), IMF.

The Real Effective Exchange Rate Assessment

There are no clear signs of exchange rate misalignment. Parallel market premiums and CGER analyses suggest that the Mauritanian real effective exchange rate (REER) is broadly in line with fundamentals.

Parallel market premiums are marginal. The rationing in the foreign exchange market introduced in late 2008 raised some concern over the availability of foreign exchange, and widened the premium in the parallel foreign exchange market, up to 11.5 percent in April 2009. The resumption of donor financing in the middle of 2009 boosted international reserves, lowering significantly the premiums to about 1 percent.

uA01fig09

Parallel Market Exchange Rate Premium (UM/US$) And Weekly Forex Sales

(Jan07-Dec09)

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Source: Mauritanian authorities.

The assessments, based on CGER approaches, indicate that the current level of the Mauritanian real effective exchange rate is in line with its equilibrium level.

uA01fig10

Misalignment as Percentage Deviation From Estimated Equililbrium

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Source: IMF staff estimates.

  • The macroeconomic balance (MB) approach calculates the real exchange rate adjustment needed to close the gap between the underlying current account and the estimated current account equilibrium. The results show that the exchange rate is overvalued by 2.5 percent.

  • The external sustainability (ES) approach calculates the current account that stabilizes the net foreign assets given the medium-term growth and inflation projections. The ES approach suggests that a real depreciation of 6.7 percent magnitude is needed to stabilize the ratio of net foreign assets to GDP.

  • The equilibrium real exchange rate (ERER) approach estimates directly the equilibrium real exchange rate based on a set of fundamental factors. The analysis points to a 10.6 percent overvaluation of the ouguiya.

24. The authorities intend to accelerate implementation of their multi-pronged banking sector reform strategy to strengthen regulation and supervision and consolidate the banks’ financial situation. The domestic banking sector has virtually no exposure to the source of the global financial crisis. However, the banking system remains fragile with nonperforming loans reaching almost 26.5 percent of total loans at end-October 2009. Moreover, the economic slowdown could further deteriorate credit quality. In this regard, the authorities indicated that they will maintain a vigilant watch on bank performance as the impact of the global slowdown plays out. They will accelerate the implementation of the 2007 FSAP. The BCM is committed to pursue the implementation of safeguards assessment mission recommendations (MEFP, ¶37). The authorities intend to request Fund technical assistance to further enhance banks’ supervision.

25. Improving the investment climate and private sector development remains a priority for the authorities. Efforts to firm up governance and transparency, increased public spending in infrastructure, education and health, measures in the financial sector and in the tax regime to support private sector activity, reforms in the legal, judicial, and regulatory areas, and the new investment code (MEFP, ¶39) are vital to help lower the cost of doing business and boost private investment. Further progress in reforming public enterprises, in particular in the energy sector, would also help improve the business environment. In this context, the authorities will finalize, in collaboration with the World Bank, an overall strategy in the energy sector to reduce costs and expand supply.

uA01fig11

Poverty-Related Spending in the Budget

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Source: Maturitanian authorities.

D. Social Protection and Safety Nets

Notwithstanding recent progress, poverty remains exceptionally high, particularly in rural areas. The recent household survey found that 59.4 percent of the population in rural area is below the poverty line in 2008 (Panel 2). In addition, Mauritania’s food situation remains structurally precarious, and a large segment of the population is subject to food insecurity.5 In the absence of safety nets, the government has been protecting vulnerable groups through a rise in poverty-related spending and a series of ad hoc measures. There is a need to develop comprehensive, well-targeted, and sustainable social protection and safety nets.

Panel 2.
Panel 2.

Mauritania: Fighting Poverty, 1990-2008

Citation: IMF Staff Country Reports 2010, 168; 10.5089/9781455202522.002.A001

Sources: Mauritanian authorities, World Development Indicators, and UNDP Human Development Indicators.

26. The authorities intend to develop sustainable and efficient safety nets over the medium term. The authorities’ response to the food and fuel crisis in 2008 mainly addressed short-term concerns, focusing on free food distribution via food stamps programs, and stabilization of gas, electricity, and water prices. Recent efforts to protect the poor led the authorities to provide well-targeted subsidy for cooking and heating oil to avoid severe environmental damages stemming from the use of wood by poor households who cannot afford high gas prices. The authorities recognized the need to make further efforts to strengthen and expand, well targeted and coherent subsidy schemes and social safety nets programs in coordination with the World Bank and other donors. In this respect, they will launch, in collaboration with the UNICEF, a comprehensive study on existing social protection and safety nets schemes (MEFP, ¶41). The results and recommendations will be included in an updated version of the PRSP.6 Looking forward, the authorities are also intensifying efforts to attract private investment in the agricultural sector to increase food output, reduce dependency on imports, develop income-generating activities for the poor, and improve food access.

E. Data Provision

27. Provision of data to the Fund is broadly adequate for surveillance purposes, with timeliness and regularity of basic macroeconomic data being priorities. Recently, efforts have been made to strengthen national accounts, balance of payments, and fiscal data, with the help of Fund technical assistance. Measures for improvement are underway.

V. ECF-Spported Program Modalities

28. Access level and phasing. ECF access is proposed at the norm of 120 percent of quota (SDR 77.28 million), to be disbursed in 7 installments over the three-year period covered by the arrangement (Table 6). The proposed access would be consistent with (a) the high balance of payment needs given that the country has been hit by multiple severe external shocks; (b) the need to build an adequate foreign exchange buffer in view of Mauritania’s vulnerability to external shocks; (c) the strength of the program; and (d) the relatively low outstanding Fund credit (16.01 percent of quota). It would also help to rebuild reserves to comfortable levels and facilitate the authorities’ adjustments efforts.

Table 4.

Mauritania: Monetary Situation, 2007–10

(In billions of ouguiya at end-of-period exchange rates, unless otherwise indicated)

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Sources: Mauritanian authorities; and Fund staff estimates and projections.
Table 5.

Millennium Development Goals, 1990-2015

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Sources: Mauritanian authorities, World Development Indicators, and UNDP Human Development Indicators (2004).

Estimates based on the population census data in 1988 and 2000.