Mali: Joint IDA/IMF Debt Sustainability Analysis Under the Debt Sustainability Framework for Low-Income Countries

As a result of the Enhanced Highly Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), Mali’s stock of external debt has declined significantly. The central feature of Mali’s medium- and long-term macroeconomic outlook is the steady decline of annual gold production expected to be picked up only in part by other exports. Under baseline assumptions, all external debt and debt-service ratios remain below the policy-dependent thresholds throughout the projection period. Fiscal policy continues to be cautious.

Abstract

As a result of the Enhanced Highly Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), Mali’s stock of external debt has declined significantly. The central feature of Mali’s medium- and long-term macroeconomic outlook is the steady decline of annual gold production expected to be picked up only in part by other exports. Under baseline assumptions, all external debt and debt-service ratios remain below the policy-dependent thresholds throughout the projection period. Fiscal policy continues to be cautious.

I. Background

A. Recent Developments in Public External Debt

1. As a result of the enhanced Highly Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), Mali’s stock of external debt has declined significantly. Mali’s stock of public and publicly guaranteed external debt declined from 103 percent of GDP in 2000 to 19 percent in 2006 owing to enhanced HIPC debt relief in 2002 and MDRI debt relief in 2006 (Text Table 1). At end-2009, it had increased to 21 percent of GDP owing mainly to new loans by the International Development Association (IDA), the African Development Bank (ADB), the Islamic Development Bank (IsDB) and the IMF (mainly through an allocation of SDR 74 million). All of Mali’s external debt is public and the bulk is owed to multilateral creditors, mainly IDA, AfDB and IsDB.

Text Table 1:

Mali: External Debt Stock at Year-End, 2000-2009

(in billions of CFAF)

article image
Source: Malian authorities, staff estimates.

B. Recent Developments in Public Domestic Debt

2. Mali’s domestic public debt is small (3 percent of GDP in 2009, Text Table 2). It has increased since 2007 owing to the issuance of treasury bills and bonds on the regional market of the West African Economic and Monetary Union (WAEMU), and commercial bank loans to reimburse accumulated VAT credits to mining companies.

Text Table 2:

Mali: Public Domestic Debt Stock at Year-End, 2000-2009

(in billions of CFAF)

article image
Source: Malian authorities.

C. Debt Burden Thresholds Under the Debt Sustainability Framework

3. Mali is a medium policy performer for the purpose of debt burden thresholds under the Debt Sustainability Framework (DSF). Mali’s rating on the World Bank’s Country Policy and Institutional Assessment (CPIA) averaged 3.68 (on a scale of 1 to 6) during 2007-09. The corresponding debt burden thresholds are shown in Text Table 3.

Text Table 3:

External Public Debt Burden Thresholds for “Medium Policy Performers” under the Debt Sustainability Framework

article image

II. Baseline Scenario Underlying the Debt Sustainability Analysis

4. The central feature of Mali’s medium- and long-term macroeconomic outlook is the steady decline of annual gold production expected to be picked up only in part by other exports. The baseline scenario assumes a slight increase of trend growth as agriculture more than offsets the trend decline of gold production (Box 1). Inflation is expected to remain moderate on account of the continuation of the implementation of prudent fiscal policies with limited recourse to domestic financing. The current account deficit is expected to remain stable, as the decline in gold exports is compensated by an increase of other exports including food and other minerals and a decrease in imports.

Mali: Macroeconomic Assumptions Under the Baseline Scenario, 2010–30

  • Real GDP growth is projected to average 5.2 percent per year, slightly above the trend observed during the last 10 years (4.8 percent). Gold output is expected to decline by about 2 percent annually starting in 2013. Higher agricultural production is expected to outweigh this decline over time owing to cotton and other agricultural sector reforms. With population growth currently over 3.5 percent, the baseline scenario thus assumes limited per capita income growth (and therefore no decline in the grant element of lending).

  • Consumer price inflation is projected to remain below the WAEMU convergence criterion of 3 percent.

  • The basic fiscal deficit (domestic revenue (i.e. excluding grants) minus domestically financed expenditure) is expected to hover around 1 percent of GDP, and to be fully financed by external budgetary assistance. In 2009-12, the basic fiscal deficit departs slightly form that trend as a temporary fiscal stimulus is implemented with the proceeds of the privatization of the state telecom company SOTELMA. Including foreign-financed capital expenditure, the overall fiscal deficit (excluding grants) is projected to remain around 7 percent of GDP and to be financed by grants for 60 percent and loans for the balance. Public sector external debt is expected to carry an effective interest rate of less than 1 percent, slightly less than the historic average of 1.3 percent. No new domestic medium or long-term borrowing is assumed other than the rollover of treasury bills and bonds.

  • The current account deficit is projected to stay close to 8 percent of GDP over 2010–30. Gold exports volumes are expected to decline steadily over time and the share of gold in total exports should fall from 74 percent in 2010 to about 30 percent in 2030. This decline is projected to be compensated by a gradual increase of other exports (including food, cotton, and other minerals) and a reduction of imports.

III. Debt Sustainability Analysis

A. External Debt

5. Under baseline assumptions, all external debt and debt-service ratios remain below the policy-dependent thresholds throughout the projection period (Figure 1). The present value (PV) of external debt is expected to climb from 16 percent of GDP in 2010 to 19 percent in 2030 (Figure 1b, Table 1a). As production from existing gold mines declines and other exports’ growth only partly compensates for that decline, the PV of the external debt-to-exports ratio is projected to increase from 62 percent in 2010 to 113 percent in 2030, well below the threshold of 150 percent (Figure 1c, Table 1a). With projected increase in tax revenue collection by about 2.6 percent of GDP during the projection period, the PV of the external debt-to-revenue ratio is projected to hover around 90 percent of GDP, which is significantly below the threshold of 250 percent (Figure 1d, Table 1a).

Figure 1.
Figure 1.

Mali: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2011, 037; 10.5089/9781455216697.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a Terms shock
Table 1a.:

External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Includes central government gross debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

6. Mali’s external debt sustainability is most sensitive to an export shock or a hardening of financial terms. Under a bound test that reduces exports growth temporarily in 2011-12 with the effect of reducing exports levels permanently by 30 percent, the PV of the debt-to-exports ratio would exceed the threshold in the year 2017 and remain high until the end of the projection period (Figure 1c; Table 1b, Scenario B2). Under a hardening of financial terms, the PV of debt-to-exports ratio would also breach the threshold significantly in the second half of the projection period and for a protracted period of time (Table 1b, Scenario A2).

Table 1b.

Mali: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030

(In percent)

article image
article image
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an off setting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

B. Public Debt

7. The inclusion of domestic debt does not alter the assessment of Mali’s debt sustainability. Given the small size of Mali’s domestic debt and the continuation of limited recourse to domestic financing embedded in the base line scenario, the public debt sustainability analysis closely mirrors the external debt sustainability analysis (Figure 2 and Table 2a). The PV of debt-to-GDP ratio increases from 19 percent in 2010 to 20 percent in 2030.

Figure 2.
Figure 2.

Mali: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2011, 037; 10.5089/9781455216697.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020.2/ Revenues are defined inclusive of grants.
Table 2a.

Mali: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007-2030

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Includes central government gross debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

8. Mali’s total public debt sustainability is most sensitive to a growth shock. In particular, reducing trend growth by about ¾ of one percent would increase the PV of debt to GDP to 39 percent in 2030 (Figure 2; Table 2b, Scenario A3).

Table 2b.

Mali: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

C. Comparison with Previous Debt Sustainability Analysis

9. Mali’s debt vulnerabilities have increased compared to the 2009 DSA, as the volatility of gold exports has amplified. The present DSA begins with a higher initial external debt (up by about 2 percent of GDP in 2009, Text Table 1) than the previous DSA completed in December 2009 on the basis of end-2008 data.1 This increase stems mostly from multilateral creditors (IDA, IMF, African Development Bank, Islamic Development Bank). The baseline scenario remains broadly in line with the previous DSA. As in last year’s DSA, none of the debt indicators breach the external public debt burden thresholds throughout the projection period under the baseline scenario. But in contrast to the previous DSA, the PV of debt-to-exports ratio now permanently crosses the sustainability threshold under the export shock (¶6) owing to increased volatility of gold exports. This difference illustrates the sensitivity of Mali’s external debt sustainability to gold sector developments and the diversification of exports.

D. The Authorities’ Views

10. The authorities broadly concurred with the results of the DSA analysis but expressed more optimism about the medium-term export outlook. They acknowledged that the debt vulnerabilities have increased somewhat compared to the last DSA owing to the increased volatility of gold exports. But they expressed more optimism about the medium-term exports outlook owing to efforts underway to sustain gold production beyond the next five to seven years, and projects at various stages of development for mining diversification (cement, phosphate, uranium, bauxite, manganese, copper, nickel,…). They also underscored that the revival of the cotton industry could improve exports too.

IV. Debt Distress Classification and Conclusions

11. The updated DSA indicates that the risk of debt distress has shifted from low to moderate because exports volatility has increased compared to the 2009 DSA. As in last year’s DSA, none of the debt burden thresholds are breached over the 20-year projection period under the baseline scenario. But, contrary to last year’s DSA, debt sustainability has become sensitive to an export shock as the volatility of gold exports has increased. Given the expected decline in gold exports in the medium term and the uncertain prospects for export diversification, Mali’s debt sustainability needs to remain under close scrutiny, and the government should continue to limit its recourse to external financing to grants and concessional loans.

1

IMF Country Report No. 10/64, Mali - Third Review Under the Three-Year Arrangement Under the Extended Credit Facility - Staff Report; Joint IMF/IDA Debt Sustainability Analysis.