Joint IMF/IDA Debt Sustainability Analysis Update

The updated joint IMF-World Bank low-income country debt sustainability analysis (LICDSA) shows a moderate risk of debt distress for Mauritania.10 Under the baseline scenario, debt burden indicators do not exceed their policy-dependent indicative thresholds, although the present value (PV) of debt-to-GDP ratio briefly hits the relevant threshold. Public debt indicators remain on broadly declining paths. Stress tests suggest that Mauritania is particularly vulnerable to export shocks, thus highlighting the need to pursue prudent macroeconomic policies, maintain a cautious borrowing strategy, improve debt management, and diversify the economy.

Abstract

The updated joint IMF-World Bank low-income country debt sustainability analysis (LICDSA) shows a moderate risk of debt distress for Mauritania.10 Under the baseline scenario, debt burden indicators do not exceed their policy-dependent indicative thresholds, although the present value (PV) of debt-to-GDP ratio briefly hits the relevant threshold. Public debt indicators remain on broadly declining paths. Stress tests suggest that Mauritania is particularly vulnerable to export shocks, thus highlighting the need to pursue prudent macroeconomic policies, maintain a cautious borrowing strategy, improve debt management, and diversify the economy.

1. This DSA is consistent with the macroeconomic framework outlined in the IMF’s Second Review under the Extended Credit Facility. Compared to the previous DSA,11 prepared in February 2010 in connection with Mauritania’s request for an arrangement under the Extended Credit Facility, this analysis includes a much more favorable near-term evolution of the external sector and fiscal balance, reflecting higher prices for the country’s metal exports. By the end of the medium term, the outlook for the current account is broadly similar to that assumed in the previous DSA. In addition, whereas the previous DSA assumed that full cancellation of debt owed to remaining bilateral creditors occurred in 2010, only a portion of this debt was, in the event, cancelled. While agreements with Algeria and Libya were finalized in 2010, negotiations with the remaining creditor (Kuwait) are continuing, and the current DSA assumes that the remaining debt will be cancelled in 2011. The DSA’s macroeconomic assumptions are described in Annex I.

2.The DSA includes, as part of its baseline scenario, two $105 million external loans not yet signed but currently being considered by the authorities in connection with the expansion of Mauritania’s electricity generation and distribution system. The external borrowing for the project is structured as one nonconcessional and one concessional loan, each for $105 million.12 The DSA incorporates conservative assumptions regarding the financial terms of the loans, and the growth dividend from the expansion of the electrical network.13 Resort to concessional lending will continue to guide the authorities’ debt strategy in the near term—with nonconcessional lending remaining the exception. Over the longer run, new borrowing will gradually shift away from concessional financing.

3.External public and publicly guaranteed (PPG) debt burden indicators under the baseline scenario remain below their policy-dependent thresholds, with the exception of a marginal breach of the debt-GDP threshold over the medium term (Figure 1, Table 1).14 However, stress tests reveal that Mauritania’s external debt sustainability is very vulnerable to an export shock, with the standard shock (export growth in 2011-12 returning to its historical average minus one standard deviation) leading to sizable breaches of all thresholds (Figure 1, Table 2). This reflects the country’s reliance on mining exports (iron, copper, and gold), whose prices are highly volatile on global markets. This underscores the importance of policies aimed at diversifying the economy and a highly prudent approach to external borrowing.

4.Indicators of overall public debt (external plus domestic debt) and debt service follow a similar pattern as those for external public debt (Table 3). Public debt sustainability hinges on containing the fiscal deficit in the medium and long term, which will help reduce public debt to 34 percent of GDP by 2030. Like the external debt position, stress tests (Table 4 and Figure 2) reveal that public debt is vulnerable to external shocks, notably shocks to the exchange rate, and to lower GDP growth.

5. As was the case with the previous full DSA, this update concludes that Mauritania’s external debt burden is subject to a moderate risk of debt distress. The sustainability of Mauritania’s external PPG debt appears vulnerable to adverse shocks to the prices of its key commodity exports. This highlights the need for prudent debt management, including continuing to seek external resources on concessional terms wherever possible. Adding domestic debt, while raising the debt burden indicators, does not change the overall assessment of debt vulnerabilities but highlights the need for continued fiscal consolidation. In the absence of debt relief from remaining creditors, assumed to occur in 2011, Mauritania’s debt-to-GDP ratio would continue to breach the applicable threshold, leading to a more elevated risk of debt distress.

Annex I

Main Macroeconomic Assumptions and Preliminary DSA Results

Real GDP growth: Real GDP growth is projected to be sustained at 5.7 percent per year on average over 2011-15, supported by strong activity in the mining sector, which is primarily driven by significant investment programs boosting capacity of the national iron ore company, and private copper and gold production. Upon completion of these projects, we expect growth to converge to about 4½ percent per year by 2030. Near-term risks include volatility in the commodity market, notably a larger-than-expected drop in iron ore, gold, and copper prices from their current high levels, unfavorable climate conditions, a fall in the external demand, and a prolonged shortfall in power supply. On the upside, accelerated structural reforms to improve the business environment and higher return on ongoing investment could spur growth outside the traditional extractive industries sector.

Inflation: Continued prudent monetary and fiscal policies will lead to an inflation rate converging to about 5 percent in 2016 and thereafter.

Current account balance: After narrowing in 2011 amid high metal export prices and expanded production, the current account deficit is expected to widen over 2012-14 as a result of increased imports associated with the implementation of major mining and infrastructure projects, as well as a projected moderation of prices for key mining exports. The assumed longer-term current account deficit is broadly consistent with estimates of the norm (a deficit of about 7 percent of GDP) for Mauritania’s current account based on the methodology developed by the IMF’s Consultative Group on Exchange Rates (CGER).15

Government balances: The framework assumes the following: (a) non-oil revenue remains stable at about 23 percent of non-oil GDP throughout the period; and (b) grants are expected to stabilize at about ½ percent of GDP in the long run. The government’s non-oil deficit including grants is projected to improve gradually from 3.4 percent to about 0.3 percent of non-oil GDP between 2010 and 2030. The projected primary balance improves from a deficit of 1 percent of GDP in 2010 to a surplus of about 1½ percent of GDP in 2030.

External financing: The commitments made at the recent donors’ roundtable in Brussels have improved the country’s prospects for mobilizing external support. The baseline scenario assumes that, with the exception of the nonconcessional loan undertaken to finance the electricity generation plant discussed above, Mauritania will borrow essentially on concessional terms in the medium term. However, it is expected that new borrowing will gradually shift away from concessional financing over the longer run. As a result, the average grant element on new borrowing will decline to below 20 percent by 2030.

Domestic debt: mainly treasury bills held by the banking sector, stood at just under 9 percent of GDP at end- 2010. It is projected to stay around 7 percent at the horizon 2030.

Real interest rates: The real interest rate of the short-term domestic debt approaches 4 percent in 2016 and thereafter.

Figure 1.
Figure 1.

Mauritania: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010301/

Citation: IMF Staff Country Reports 2011, 189; 10.5089/9781462325412.002.A003

1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a Exports shock.
Table 1.

External Debt Sustainability Framework, Baseline Scenario, 2007-30 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external 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 p = 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).

Table 2.

Mauritania: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-30

(In percent)

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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 offsetting 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.

Table 3.

Mauritania: Public Sector Debt Sustainability Framework, Baseline Scenario, 200730

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Non-financial public sector 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.

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.

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.

Table 4.

Mauritania: Sensitivity Analysis for Key Indicators of Public Debt 201030

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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.