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

Mali’s risk of debt distress continues to be assessed as moderate—unchanged from the previous Debt Sustainability Analysis (DSA). Like in the previous assessment, debt sustainability remains mostly sensitive to an export shock, owing to the expected decline in gold exports in the medium term and the uncertain prospects for export diversification, and a hardening of financial terms. There is scope for borrowing of about 1 percent of GDP that may fall short of the 35 percent grant element under the IMF and the World Bank policy, tied to infrastructure investment projects with a high rate of return. Nonetheless, given the uncertainties about the medium term exports outlook, the government should continue to limit most of its recourse to external financing to grants and concessional loans.

Abstract

Mali’s risk of debt distress continues to be assessed as moderate—unchanged from the previous Debt Sustainability Analysis (DSA). Like in the previous assessment, debt sustainability remains mostly sensitive to an export shock, owing to the expected decline in gold exports in the medium term and the uncertain prospects for export diversification, and a hardening of financial terms. There is scope for borrowing of about 1 percent of GDP that may fall short of the 35 percent grant element under the IMF and the World Bank policy, tied to infrastructure investment projects with a high rate of return. Nonetheless, given the uncertainties about the medium term exports outlook, the government should continue to limit most of its recourse to external financing to grants and concessional loans.

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-2010, it had increased to 24.4 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 in 2009). 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, 2000–2010

(billions of CFAF)

article image
Source: Malian authorities, staff estimates.

Includes August 2009 SDR allocation.

B. Recent Developments in Public Domestic Debt

2. Mali’s domestic public debt is small (4.4 percent of GDP in 2010, Text Table 2). It is composed of treasury bills and bonds issued on the regional market of the West African Economic and Monetary Union (WAEMU), and commercial banks’ loans. Domestic debt has more than doubled in 2010 compared with 2009 mainly as a result of new issuances of treasury bills and bonds (CFAF 99 billion), but also owing to an inventory of all loans contracted or guaranteed by the government that the authorities have been conducting as part of their plan to strengthen debt management.

Text Table 2:

Mali: Public Domestic Debt Stock at Year-End, 2000–2010

(billions of CFAF)

article image
Source: Malian authorities, staff estimates.

C. Debt Burden Thresholds Under the Debt Sustainability Framework

3. Mali is a medium policy performer for the purpose of determining the debt burden thresholds under the Debt Sustainability Framework (DSF). Mali’s rating on the World Bank’s Country Policy and Institutional Assessment (CPIA) averaged 3.65 (on a scale of 1 to 6) during 2008–10, making it a medium policy performer. The corresponding external public 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 compensated only in part by other exports. The baseline scenario assumes a continuation of trend growth as agriculture offsets the steady decline of gold production (Box 1). Inflation is expected to remain moderate as prudent fiscal policies are implemented with no recourse to domestic borrowing. The current account deficit is expected to remain stable, as the decline in gold exports is compensated by an increase of other exports including agricultural products and other minerals and a decrease in imports.

Mali: Macroeconomic Assumptions Underlying the Baseline Scenario, 2011–31

  • Real GDP growth is projected to average 5.2 percent per year, slightly above the trend observed during the last 10 years (5.0 percent). Gold output is expected to decline by about 2 percent annually starting in 2014. Higher agricultural production is expected to outweigh this decline over time owing to cotton and other agricultural sector reforms. With population growth currently over 3.6 percent, the baseline scenario thus assumes low 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.

  • Fiscal policy. The basic fiscal balance (revenue plus budgetary grants minus domestically financed expenditure) is expected to be equal to or greater than zero in order to meet the WAEMU convergence criterion. Tax revenue and domestically financed expenditure are expected to increase in sync by about 6 percent of GDP during 2011–31. Therefore, there is no recourse to domestic borrowing to finance the budget, except for rolling over current stock of domestic debt at market rates. In 2009–13, the basic fiscal balance departs slightly from that underlying trend as a temporary fiscal stimulus of about 4 percent of GDP is being implemented with the proceeds of the privatization of the state telecom company SOTELMA. Starting in 2014, the overall fiscal deficit (excluding grants) is projected to remain around 5.2 percent of GDP, and to be financed by external loans for 50 percent and grants for the balance.

  • Non-concessional borrowing. Over the period 2012–14, about $100 million (1 percent of GDP), or about 10 percent of total external borrowing, is assumed to be borrowed on commercial terms (8 percent interest rate, 10 year maturity) in order to finance infrastructure investment projects with a high rate of return. These projects remain to be identified. Starting in 2015, about 0.3 percent of GDP or 10 percent of total borrowing is assumed to continue to be on commercial terms. Public sector external debt is expected to carry an effective interest rate slightly above the historical 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 non-interest current account deficit is projected to stay close to the historic average (4.2 percent of GDP) over 2011–31. Gold exports volumes are expected to decline steadily over time, and the share of gold in total exports is projected to fall from 75 percent in 2011 to about 33 percent in 2031. This decline is projected to be compensated by a gradual increase of other exports (including food, cotton, and other minerals such as cement, phosphate, uranium, bauxite, iron ore, copper, nickel, oil) and a reduction of imports.

III. Debt Sustainability Analysis

A. External Debt

5. Under the 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 2011 to 20 percent in 2031 (Figure 1b, Table 1a). As production from existing gold mines declines starting in 2014 and other exports’ growth only partly compensates for that decline, the PV of the external debt-to-exports ratio is projected to increase from 59 percent in 2011 to 116 percent in 2031, below the threshold of 150 percent (Figure 1c, Table 1a). With projected increase in tax revenue by 6 percent of GDP during the projection period, the PV of the external debt-to-revenue ratio is projected to hover around 87–99 percent of GDP, which is significantly below the threshold of 250 percent (Figure 1d, Table 1a).

Figure 1.
Figure 1.

Mali: Indicators of Public Debt Under Alternative Scenarios, 2011–2031 1/

Citation: IMF Staff Country Reports 2012, 003; 10.5089/9781463929251.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021. In figure b. it corresponds to a Terms shock; in c. to a Exports shock; in d. to a Terms shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Table 1a.:

External Debt Sustainability Framework, Baseline Scenario, 2008–2031 1/

(In percent of GDP, unless otherwise indicated)

article image
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 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 mostly sensitive to an export shock and a hardening of financial terms, limiting the scope for non-concessional borrowing. Under a bound test that reduces exports growth temporarily in 2012–13 with the effect of reducing exports levels permanently by 25 percent, the PV of the debt-to-exports ratio would exceed the threshold in the year 2020 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 breach the threshold by a large margin in the second half of the projection period and for a protracted period of time (Table 1b, Scenario A2). The sensitivity of Mali’s external debt sustainability to an export shock and a hardening of financial terms and the uncertainties about the medium term exports outlook indicate that the scope for nonconcessional borrowing is limited.

Table 1b.

Mali: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2011–2031

(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 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.

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 absence of recourse to domestic borrowing 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 hardly increases from 20 percent in 2011 to 21 percent in 2031.

Figure 2.
Figure 2.

Mali: Indicators of Public Debt Under Alternative Scenarios, 2011–2031 1/

Citation: IMF Staff Country Reports 2012, 003; 10.5089/9781463929251.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2021.2/ Revenues are defined inclusive of grants.
Table 2a.

Mali: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008–2031

(In percent of GDP, unless otherwise indicated)

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

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

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 fiscal shock. In particular, maintaining the fiscal impulse resulting from the spending of the SOTELMA privatization income in 2011 through the projection period would sharply increase the PV of debt-to-GDP ratio to 37 percent in 2031 (Figure 2; Table 2b, Scenario A2).

Table 2b.

Mali: Sensitivity Analysis for Key Indicators of Public Debt 2011–2031

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 the Previous Debt Sustainability Analysis

9. Mali’s debt vulnerabilities have remained broadly unchanged since the 2010 DSA. The baseline scenario remains broadly in line with the previous DSA.1 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, and Mali’s external debt sustainability remains mostly sensitive to an export shock and to a hardening of financial terms (¶6).

D. The Authorities’ Views

10. The authorities broadly concurred with the results of the DSA analysis, while emphasizing risks. They noted that the completion of projects that are at various stages of development for mining diversification (cement, phosphate, uranium, bauxite, iron ore, copper, nickel, oil …) could lead to higher non-gold exports over the medium-term. At the same time, they also expressed concern that grants could turn out less favorable over the medium-term in case of a protracted slowdown in the economies of their traditional development partners.

IV. Debt Distress Classification and Conclusions

11. The DSA indicates that Mali remains at moderate risk of debt distress based on the external debt burden indicators. As in last year’s DSA, none of the debt burden thresholds are breached over the 20-year projection period under the baseline scenario, and debt sustainability remains mostly sensitive to an export shock and to a hardening of financing terms. Given Mali’s low level of external debt after enhanced HIPC and MDRI debt relief, there is scope for non-concessional borrowing of about $100 million (1 percent of GDP) for a period of three years (2012–14) tied to investment in infrastructure projects with a high rate of return for which no concessional financing is available. But 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. Therefore, the government should continue to limit most of its external borrowing to grants and concessional loans.

1

IMF Country Report No. 11/37, Mali - Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility - Staff Report; Joint IMF/IDA Debt Sustainability Analysis.

Mali: Seventh Review Under the Extended Credit Facility and Request for a new Three-Year Arrangement Under the Extended Credit Facility: Staff Report; Joint IDA/IMF Debt Sustainability Analysis; Informational Annex; Statement by IMF Staff Representative; Statement by Alternate Executive Director for Mali; and Press Releases
Author: International Monetary Fund