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. Introduction
On behalf of my Mauritanian authorities, I would like to thank Management and Staff for their continuous support to Mauritania.
Over the past two years, Mauritania has been adversely affected by a series of major shocks which have contributed to deteriorating significantly the country’s economic outlook. The global economic crisis hit Mauritania hard through the trade channel i.e., the decline in external demand for the country’s main export commodities; a shock that was preceded in 2008 by both the rapid increase of the global food prices, and the suspension of financial aid from development partners following the 2008 political crisis.
With the stabilization of the political situation in July 2009, my authorities have launched an ambitious reform agenda to revive the economy and address the country’s long-term development challenges including the need to diversify the economy and increase the population’s living standards and welfare. There was an urgent need to stabilize the economy, strengthen public finances and create fiscal space for infrastructure and poverty reducing expenditure while accelerating the implementation of structural reforms to enhance the economy’s resilience to shocks.
To better anchor these policies, my authorities are requesting the support of the IMF under a three-year Extended Credit Facility. They would like to reiterate their firm commitment to the policies and objectives under the Fund-supported program, notably fiscal consolidation and a prudent monetary policy within a more flexible exchange rate regime. They are also committed to improving the country’s competitiveness and business climate while continuing to promote the development of the private sector.
II. Recent economic developments and policy measures
In 2009, non-oil real GDP contracted by 0.9 percent compared to +4.1 percent in 2008 while oil production continued to drop to approximately 10,000 barrels per day. The current account deficit remained high at almost 13 percent of GDP while the basic non-oil fiscal deficit dropped slightly to 5.3 percent of GDP in 2009 from 7.7 percent in 2008. Inflation remained relatively stable at approximately 5 percent in 2009. Foreign exchange reserves stood at the equivalent of 2.2 months of imports.
In the context of the economic slowdown, the authorities implemented supportive fiscal policy measures including significant tax rate reductions. The corporate income tax, for example, was lowered from 40 percent to 25 percent and the tax on wages reduced from 60 to 30 percent. Concomitantly, measures to enhance revenue performance were also taken to simplify the tax system, expand the tax base, and streamline public expenditure. In this regard, and consistent with previous IMF recommendations, the authorities set up both a large and a medium-sized enterprise units responsible for tax collection while tax centers for small enterprises were upgraded.
On the monetary policy front, the central bank lowered its lead rate from 12 to 9 percent in November 2009, as the economy stagnated and inflation declined. While continuing to address the effects of the economic slowdown, the authorities also pursued a number of important reforms including the adoption of a new charter giving greater independence to the central bank, and the establishment of the legal framework for new policy instruments (central bank bonds, CDs, and commercial paper).
In response to the deterioration of Mauritania’s external position in the midst of the global economic crisis, temporary exchange restriction measures were introduced by the central bank at end-2008 and the foreign exchange auction mechanism was interrupted. However, normal operation of the foreign exchange market was restored on December 14, 2009 and the exchange system is now free of restrictions.
III. Medium-term objectives under the program
The medium-term objectives under the program are: a return to a sustained growth rate of 5 percent; keep inflation low and stable at about 5 percent; accumulate reserves equivalent to 3 months of imports by end-2012; bring down the basic non-oil fiscal deficit to about 1 percent by 2012.
1. Fiscal policy
To lower the basic non-oil deficit to about 1 percent by 2012, the authorities have launched important measures both of the revenue side, and on the expenditure side and are committed to offset any shortfall in revenue by cuts in lower priority spending to achieve the fiscal deficit target. In view of the substantial needs of the country, they intend to step up their efforts to mobilize additional grants in support of high priority spending.
In the 2010 budget law, the basic non-oil deficit will be limited to 3.8 percent of non-oil GDP. Measures to expand the tax base and modernize and strengthen tax and customs administrations will be implemented. In view of harmonizing the VAT system with that of neighboring countries, in particular those of the WAEMU, the VAT on petroleum products and telecommunication will be increased from 14 to 18 percent.
On the expenditure side, the civil service reform under way with the assistance of the World Bank and other development partners comprises the completion of the census of civil servants, reconciliation of the payroll file with the civil service roster to eliminate unjustified paid salaries, and the computerization and automation of the payroll. This reform will contribute to a reduction of the wage bill by 1.7 percent of non-oil GDP between 2009 and 2012 and lowering the share of the wage bill to 8.8 percent of non-oil GDP in 2010 compared to 10.1 percent in 2009. An assessment of operational staffing needs by ministry will also be conducted. Furthermore, all benefits in kind granted to government employees will be terminated and replaced by cash allowances.
To lower transfers and subsidies to public enterprises which for the most part are in financial distress and rely heavily on budgetary transfers to continue operating, an assessment of the governance of public enterprises will be carried out with the assistance of development partners, and performance contracts will be signed with the ultimate view of restoring balanced financial positions and reducing subsidies.
Public investment efforts will be pursued consistent with the priorities of the PRSP, including access by the poor to basic services and promotion of employment. The emphasis will be put on building infrastructure that has a high impact on poverty reduction. In this regard, a large share of capital expenditure will be allocated for restructuring poor neighborhoods of large cities, improving living conditions including access to drinking water, and supporting employment initiatives. An agency tasked with project monitoring and research has just been set up, and the authorities intend to adopt a new government procurement code to improve the quality of public investment.
2. Monetary, exchange rate, and financial sector policies
The monetary authorities remain committed to a prudent monetary policy with the objective of keeping inflation in check in the context of greater exchange rate flexibility. Following the November loosening of monetary policy, the central bank stands ready to further tightening monetary policy if inflationary pressures emerge as credit to the private sector is projected to grow. Reforms under way to modernize and adapt monetary policy instruments while strengthening central bank operational independence will also be pursued.
Following the lifting of all restrictions introduced on current account transactions payments in 2008, the authorities remain committed to implementing a more flexible exchange rate regime to help absorb external shocks. Interventions by the central bank will be limited to smoothing excessive daily fluctuations.
As regards financial sector reform, various measures were introduced in line with recent FSAP recommendations, including new laws relating to the charter of the central bank, banking activity, and microfinance. Additional reforms will focus on strengthening the legal and regulatory framework, increasing transparency of accounting practices and the reliability of financial statements, building the capacity of the various financial institution supervisory authorities, and implementing AML/CFT regulations. The authorities will also study various options to eliminate the large stock of outstanding nonperforming loans held by the banks.
3. External sector and debt
The current account deficit is projected to decline to 11.9 percent of GDP in 2010 from 15.7 percent in 2008 subject to a favorable development in prices for Mauritania’s main export commodities and an improvement in the global economic outlook. The deficit will be financed mainly through an increase in FDI in the oil and mining sector and the mobilization of additional external funding.
As regards Mauritania’s external borrowing policy the government will work closely with its development partners to implement a debt management strategy that would ensure access to external financing while preserving external debt sustainability. They agree with the findings of the recent debt sustainability analysis conducted with the World Bank indicating that Mauritania remains at moderate risk of debt distress. Efforts will continue to be made to mobilize financing mainly on concessional terms. However, some strategic projects that could require financing on non-concessional terms will be brought to the attention of the IMF and the World Bank for review.
4. Structural reforms
The authorities will continue their efforts to improve the business climate and to remove obstacles to private sector development notably the limited availability and skills of the workforce and weak infrastructure services in electricity, transport, and telecommunications. Measures under consideration include setting-up a legal framework to facilitate the acquisition and enforcement of collateral on property, and strengthening the capacity of the judicial system. The authorities will also revise the investment code in 2010 drawing on experience of other countries so as to consolidate the safeguards granted to investors.
With the support of development partners Mauritania will finalize a master plan for the electricity sector which is in a very fragile state due to insufficient production capacity and significant operating losses. The plan will include a restructuring program for national electricity company and will clarify the relationship between the electricity company and the government.
With the support of UNICEF Mauritania has recently launched a study on social protection that will review the social safety nets currently in place, assess priority needs, and issue recommendations to guide the action of the government and its partners in preparing a national social welfare strategy for Mauritania for the 2010-12 period.
The government is also currently working on the adoption of a national anti-corruption strategy. An initial report and three-year action plan have just been prepared and have been forwarded to our development partners. During 2010, this policy will be submitted to all stakeholders for validation and implementation.
IV. Conclusion
My authorities are aware of the daunting challenges ahead but they are also firmly determined to move ahead with their ambitious reform agenda and achieving the objectives under the program. However, reaching these objectives is subject not only to the implementation of sound macroeconomic policies and the continuation of structural reforms but also to the resumption of financial and technical assistance from Mauritania’s development partners. They are confident that the IMF and other partners will continue to support the authorities’ efforts to reach their economic and social objectives.