Islamic Republic of Mauritania
2012 Article IV Consultation and Fourth Review Under the Three-Year Extended Credit Facility Arrangement, and Requests for Waivers of Nonobservance and Modification of Performance Criteria-Staff Report and Supplement; 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:
01 Aug 2012
eISBN:
9781475506686
Language:
English
Keywords:
ISCR; CR; debt; government; SDR; real GDP; central bank; banking system; debt relief; current account; transfer program; Credit; Fiscal stance; Europe
Download PDF (2.5 MB)

The 2012 Article IV Consultation and Fourth Review under the three-year Extended Credit Facility (ECF) Arrangement discusses the macroeconomic conditions of the Islamic Republic of Mauritania. Mauritania’s economy has performed well in 2011, despite significant challenges. Economic activity is likely to pick up and inflation to remain low. However, Mauritania faces important short- and medium-term policy challenges, notably in the social area, where progress in reducing poverty has been slow and unemployment is still high. The performance under the ECF-supported program has remained strong.

Abstract

The 2012 Article IV Consultation and Fourth Review under the three-year Extended Credit Facility (ECF) Arrangement discusses the macroeconomic conditions of the Islamic Republic of Mauritania. Mauritania’s economy has performed well in 2011, despite significant challenges. Economic activity is likely to pick up and inflation to remain low. However, Mauritania faces important short- and medium-term policy challenges, notably in the social area, where progress in reducing poverty has been slow and unemployment is still high. The performance under the ECF-supported program has remained strong.

I. Background and Context

1. Mauritania staged a solid recovery from the global crisis, while confronting several exogenous shocks. The commodity price boom of the past two years, combined with prudent policies helped Mauritania restore macroeconomic stability and build reserve and fiscal buffers. Good progress on structural reforms also contributed to this performance, which materialized even though Mauritania faced a severe drought and high international fuel and food prices.

Drought: Impact and Emergency Response so Far

Mauritania is being hit hard by the Sahel drought. Wheat production is currently 55 percent below historical average, and the shrinking of available pastures caused important losses among cattle, which led to severe wealth and income loss for farmers. As a result, the number of people living in food insecurity has tripled to 800,000 (25 percent of the population) over the past year, with more than 40,000 children suffering from acute malnutrition.

Timely government response and better coordination with development partners has been crucial to reducing the impact of the drought. Early adoption of the emergency response in the 2012 budget and a revolving trade facility for the public food import company (SONIMEX) have helped rapidly scale up relief. So far, more than 100,000 tons of wheat and fodder have been distributed to the affected areas, but additional aid is needed to expand free food distribution, replenish food stocks in rural areas, and implement cash transfer programs. Following the government’s emergency call last November, the international community has generously mobilized (about $50 million), leaving a remaining gap of 35 percent of identified emergency needs not covered by the budget or donors. In view of the urgency of this situation and while awaiting new donor funds that will be directly channeled through aid agencies, the government has decided to further increase its contribution to the emergency program (see Section II below).

The response to the drought is further complicated by logistical issues and the massive inflow of refugees from Mali. Seaport congestion, a weak internal transport system, and insufficient storage capacity have complicated relief delivery, which has not always been able to keep pace with the large scale of the response. In addition, the unstable situation in Mali has increased the flow of refugees settling in the South-Eastern part of Mauritania to about 60,000. While development partners (aid is usually channeled through the HCR, UNICEF, and WFP) currently provide and finance all refugee relief operations, scaling up of the emergency program may be necessary to meet the needs of an ever-increasing refugee inflow.

2. Vast challenges, notably in the social area, loom ahead. Given that growth has been concentrated over the past two years in capital-intensive industries (such as mining and telecommunications), progress in reducing poverty has been slow and unemployment is still high. Poor infrastructure and constrained access to finance continue to undermine private-sector development.

A01ufig01

Poverty Headcount Ratio at National Poverty Line

(Percentage of Population)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: World Bank.
A01ufig02

Unemployment Rates

(2008; percent)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: International Labor Organization; national authorities; IMF, World Economic Outlook; and IMF staff estimates.

3. Political tensions have recently increased, as the opposition has become more vocal in the wake of the Arab Spring. New elections in 2009 led to a stable reform-minded government coalition. The government launched a process of inclusive dialogue with civil society and the opposition, which led to new constitutional amendments, revision of the electoral code and, a new independent electoral commission. However, lack of improvements in general living conditions and perceived governance issues have increased social discontent, which ultimately led to the largest demonstration in years last March. The postponement of the legislative elections, possibly to later this year, generates additional uncertainty and tension.

4. At the time of the 2009 Article IV discussions, the IMF Executive Board urged the authorities to pursue prudent fiscal and monetary policies, greater exchange rate flexibility and broad-based structural reforms to strengthen the financial sector and promote private-sector development. The authorities’ policy response and reform agenda were broadly in line with these recommendations. Continued implementation of these policies is needed to enhance the economy’s resilience to external shocks.

II. Recent Economic Developments

5. Mauritania’s macroeconomic performance has been robust, despite a severe drought, a slowdown in Europe, and high international food and fuel prices (Tables 1–8, Figures 1–5):

  • After a vibrant recovery driven by a strong rebound in external demand in 2010, real GDP growth in 2011 fell a full percentage point short of expectations (to 4 percent). This slower economic expansion is mostly explained by the drought, which resulted in a 35 percent drop in cereal production. To a lesser extent, a stalling mining production also contributed to this performance.

  • Headline inflation was contained to 5.7 percent (y-o-y), a full percentage point below expectations, mostly because of low pass-through of international food and energy prices. Notwithstanding this trend, core inflation (excluding food and energy) has picked up recently, but is not likely to reflect rising demand pressures as these are due to one-off adjustments in administered prices (transport) and excise duties.

  • The positive terms of trade shock associated with the run-up in metals prices (iron, gold, and copper) during the first three quarters of 2011 helped narrow the current account deficit, albeit by less than programmed, mostly because of the unexpected decline in metals prices in Q4 2011. Nonetheless, gross foreign reserves doubled in 2011 to a recent high of $501.6 million, about 3.6 months of imports.

  • Fiscal consolidation continued for a third year in a row, with the basic non-oil deficit (excluding grants, interest on external debt, and foreign financed investment) declining to 0.2 percent of non-oil GDP (about 1.5 percentage point better than programmed). Higher mining revenues and strong tax collection more than offset the cost of the emergency program put in place in 2011 to alleviate the impact of higher commodity prices on the most vulnerable. With a smaller financing requirement and excess liquidity in the banking system, T-bill yields fell to unprecedented lows of just below 3 percent.

  • Monetary policy was accommodative, although the excess liquidity in the banking system, associated with the unsterilized accumulation of net foreign assets, has not translated into high private sector credit growth, which remained subdued at just over 10 percent (y-o-y).

Figure 1.
Figure 1.
Figure 1.

Mauritania: Recent Economic Developments, 2007–11

(Percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Mauritanian authorities; and Fund staff estimates.
Figure 2.
Figure 2.

Mauritania: Real Sector Developments, 2007–11

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Mauritanian authorities; and Fund staff estimates.
Figure 3.
Figure 3.

Mauritania: Selected Monetary and Financial Sector Indicators, 2007–12

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Mauritanian authorities; and Fund staff estimates.
Figure 4.
Figure 4.

Mauritania: External Sector, 2007–12

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Mauritanian authorities; and Fund staff estimates.1/ Updated to first quarter of 2012.
Figure 5.
Figure 5.

Mauritania: Fiscal Sector Developments, 2007–11

(Percent of non-oil GDP, unless otherwise indicated

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Mauritanian authorities; and Fund staff estimates.
A01ufig03

GDP Growth

(y-o-y contributions; percent)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Mauritanian authorities; and IMF staff calculations.
A01ufig04

Inflation

(Percent)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Central Bank of Mauritania.
A01ufig05

Foreign Exchange Reserves

(Millions of U.S. dollars)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Central Bank of Mauritania; and IMF staff calculations.
A01ufig06

Private-sector Credit Growth

(y-o-y; percent)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Central Bank of Mauritania.
A01ufig07

Banking Sector Liquidity

(Billions of UM)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Central Bank of Mauritania.

III. Report on Policy Discussions

A. Outlook and Risks

6. Following a difficult year, a pick-up in economic activity—accompanied by moderately paced inflation and a wider current account deficit—is expected in the medium term. The rebound in cereal production and major construction projects will offset the expected decline in demand from Europe and delays in expanding gold production, thus lifting growth above 5 percent in 2012. Thereafter, expanded mining capacity and large investment projects already in the pipeline will sustain growth above 5 percent, while declining international energy and food prices will help contain inflation. After a temporary and significant widening of the current account deficit (to about 20 percent of non-oil GDP in 2012) because of one-off effects—such as the drought (2.6 percent), major energy investments, and the construction of the new airport (2 percent)—the external position will recover through rising mineral production and lower nonmetal commodity prices.

Mauritania: Medium-Term Macroeconomic Objectives, 2009–17

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

In months of following year's imports excluding extractive industries.

7. The authorities shared staff’s analysis on the outlook. They pointed out that the large current account deficit this year would amount to only 8 percent of GDP, after excluding FDI-financed mining imports. Repatriation of mining proceeds, new concessional loans and external credit lines (including those for the new airport) will help finance other import needs. As a result, gross foreign reserves are still expected to cover an unprecedented 4.8 months of imports by 2017.

8. The economic outlook in the short term is subject to the following risks:

  • A deteriorating external environment: Mauritania’s narrow export base (the mining sector represents nearly 75 percent of exports) keeps its economy highly vulnerable to a fall in metals prices and shifts in global demand, particularly from Europe (Box 2) and to a lesser extent China. The authorities recognized these risks but pointed out that the baseline scenario already incorporates a 25 percent fall in metals prices; the authorities expect the buffers accumulated over the past two years to make them more resilient to a sharp fall in demand (for the impact of a more severe downside risk scenario, see Box 2 of IMF Country Report No. 11/362).

  • Additional increases in international food and fuel prices will worsen the external position, and will place an additional burden on the budget, particularly if it requires new emergency mitigating measures. An inadequate social safety net would also negatively affect social stability.

  • A shortfall in donor assistance, particularly for food aid and refugee assistance (in case of sustained refugee inflows).

  • Persistence of the drought. Another rain deficit would further aggravate the near-term prospect for agriculture and livestock industries, further reducing the income of the rural poor.

  • Political context. A flare-up in domestic social unrest or yielding to spending pressures ahead of the legislative elections could jeopardize macroeconomic stability.

9. Lack of diversification of the economy and low job creation are key longstanding concerns. Staff’s baseline scenario is predicated on reforms that generate inclusive growth and diversify the economy. Implementation shortfalls will impede the authorities’ pro-poor growth agenda, particularly if actions to address internal bottlenecks, improve governance, and orient new investments towards developing a domestic industrial base slow down. On the upside, growth dividends of the ongoing public investment projects could be higher than assumed in the baseline scenario.

Mauritania: Spillovers from Europe1

As a small open economy, Mauritania remains highly vulnerable to developments in Europe through the trade channel. Mauritania’s exports to Europe, which are mostly metals, represent close to 30 percent of GDP, the highest among LICs. Contagion from Europe through remittances or financial sector links is limited, although Mauritania is still vulnerable to a shortfall in aid flows from the continent. That said, when combining all these indicators, Mauritania still appears more vulnerable to Europe than the typical LIC.

A01ufig08

Sources of Direct Exposure to Europe in 2010

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: IMF IMF-DOTS; OECD OECD-DAC; BIS; and World Bank.
A01ufig09

Index of Exposure to Shocks from Europe, (1990–2010)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: IMF Staff estimates. The index exposure to shocks from Europe has been computed as the aggregation (using the principal component analysis) of bilateral exports, aid, and migration data between each LIC and Europe.

The interconnectedness of Mauritania’s economy with Europe has increased in recent years. Staff’s analysis shows that co-movements with Europe rose markedly from 2000 onward as mining and fishing started to play a larger role in the economy. As a result, staff estimates that a 1 percent decrease in Europe’s real GDP growth lowers Mauritania’s exports by 3.2 percent (in volume terms).

A01ufig10

Coefficient of Business Cycle Synchronization Between Mauritania and Europe: Local Gaussian Ordinary Least Squares Estimates 1/

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: IMF staff calculations.1/ Bold line represents the time-varying coefficients of business cycles synchronization between Mauritania and Europe. Dashed lines denote the confidence interval at 95 percent.
1 See Selected Issues Paper.

B. Short-Term Challenge: Maintaining Macroeconomic Stability in the Face of the Drought and Large Infrastructure Projects

10. Food insecurity has emerged as a pressing issue. Both staff and the authorities agreed on the need of a realistic budget that takes into account drought-relief requirements. These were recently revised upwards to about 3 percent of non-oil GDP (from approximately 2 percent in the initial budget law),1 mostly to reflect increased costs of subsidized and free food distribution in rural areas, additional subsidies for livestock feeds, and slower pace of donor contributions than initially expected (text table). Staff welcomed the evaluation of the “subsidized food shops” programs introduced in 2011 and emphasized that the extension of these programs in 2012 should be approved in a revised budget law, remain linked to the current food crisis and not become a permanent entitlement. To strengthen the targeting, the existing monitoring system should regularly provide a report on beneficiaries of aid.

Drought Emergency Response, 2012

(In billions of ouguiyas; unless otherwise specified)

article image
Source: Fund staff estimate.

This includes donors' commitments that have not yet been disbursed.

11. Additional mining proceeds will limit the deterioration of the fiscal deficit in 2012. In a repeat of last year’s experience, higher mining revenues (including additional exceptional dividends from the state-owned mining company amounting to about 2 percent of non-oil GDP) and stronger tax collection will help pay for a more comprehensive emergency drought-relief response and higher subsidy payments to the energy sector (including large arrears repayment). They will also partly compensate the revenue loss arising from the delay in renewing the fishing agreement with the EU (LOI, ¶9–10). As a result, the basic fiscal deficit in 2012 will only worsen to 1 percent of non-oil GDP, 0.3 percent of non-oil GDP higher than programmed.

12. This modest loosening of the fiscal stance is appropriate to face the urgent social needs caused by the drought. However, staff cautioned against ballooning subsidy payments, which have increased for two years in a row as a result of various emergency programs—and amount to 8 percent of GDP in 2012 (as high as the wage bill). Staff urged the phasing out of these programs as soon as possible (see below). It also cautioned against financing additional expenditures through volatile mining revenues, which is not sustainable in the long term.

13. The authorities were adamant that the construction of the new international airport—a priority project listed in the last two PRSPs—does not entail new fiscal risks (Annex I and LOI, ¶12). Existing contracts showed that potential financial risks for the new airport will be borne by the private consortium constructing it. The authorities argued that the gradual transfer of land to the consortium in exchange of a new airport is a win-win situation since the government could not sell the land to other parties at a higher price (due to limitations in existing government regulations). They pointed out that no guarantees or tax incentives were granted to the private operator, thus preventing revenue loss and potential contingent liabilities. They disagreed with staff’s notion that it would have been better to use a bidding process to attribute this market as that is the procedure currently used by the government to sell land. In the absence of an independent cost-benefit analysis, staff has not been able to form a view as to whether the fair value of the land will be worth more or less than the new airport. That said, staff’s baseline macroeconomic scenario accounts for the largest cost estimate provided for the airport ($300 million, of which two thirds are imports—see Annex I).

14. Unwinding excess liquidity in the banking system will enhance the traction of monetary policy and reduce macroeconomic risks. Bank liquidity, measured by free reserves, persists at high levels, while T-bill yields are stuck at around 3 percent. Both staff and the authorities agreed that inflationary pressures could emerge if banks started to rely on their liquidity cushions to lend more aggressively. Meanwhile, the CBM’s ability to influence banks’ lending activities is limited (Box 3). To guard against upside inflation risks and enhance the traction of monetary policy, the authorities will introduce a new short-term monetary policy instrument that is under the sole control of the central bank—but paid for by the Treasury—to gradually absorb excess liquidity over the coming 12 months, as recommended by Fund TA (see Annex II and LOI, ¶14). The CBM also agreed to closely monitor inflationary effects from large construction projects (notably the new airport and electricity plant), exchange rate depreciation, and increases in administered energy prices. It stands ready to raise the required reserve ratio if the new instrument cannot be phased in quickly enough to remove the excess liquidity.

Monetary Policy (In)Effectiveness in Mauritania1

Three of the four traditional channels of monetary policy transmission—interest rates, asset prices, and the exchange rate—are unlikely to be very effective in Mauritania, as the institutional prerequisites of these channels are missing: (i) consumers and companies do not have significant savings that would allow them to adjust their consumption and investment patterns over time; (ii) asset markets with real-time price information do not exist; and (iii) the closed capital account prevents the exchange rate from adjusting to monetary policy changes.

This potentially leaves the banking sector as the fourth channel. Staff’s analysis of the behavior of six Mauritanian banks over the past six years finds that banks’ decision to lend more did not depend on exogenous increases in their available liquidity. This testifies to a weak monetary policy transmission mechanism—an experience shared by other low-income countries (see FO/Dis/12/66).

The bank lending channel would become more effective if liquidity were scarce. Although there are several binding constraints that undermine monetary policy effectiveness, absorbing excess liquidity would make the CBM’s policy rate more relevant and stimulate interbank transactions. The forthcoming new monetary policy instrument (7-day maturity T-bill) will therefore ultimately put the CBM in a better position to affect bank lending.

1 See Selected Issues Paper.

15. The CBM agreed that the exchange rate should continue to adjust freely to deal with exogenous shocks. Staff analysis suggests that the ouguiya is modestly overvalued, despite last year’s depreciation of the currency (Annex III). The CBM agreed with this analysis but expressed concern about upside inflation risks associated with exchange rate depreciation. It agreed with staff on the need to continue improving Mauritania’s shallow foreign exchange market by regularly selling mining proceeds repatriated through the CBM and avoiding off-market sales of foreign exchange. As a main seller of foreign exchange, the CBM will use its interventions to smooth excessive exchange rate fluctuations but not to lean against economic fundamentals. A sharper increase in prices of oil or food could undermine the authorities’ efforts to safeguard reserves, which are still projected below the optimal level (Annex III).

A01ufig11

Exchange Rate

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Central Bank of Mauritania.

C. Building Inclusive Growth

16. Mauritania faces a difficult challenge with respect to poverty reduction. Overall poverty has fallen to about 42 percent in 2008 (from about 46.5 percent in 2000), but worsened to about 59 percent in rural areas (Table 9). The slow progress in poverty reduction through 2008 is partly explained by insufficient and unbalanced economic growth. Indeed, staff calculations of a growth incidence curve suggest that growth has not been inclusive over the 2004–08 period (see Selected Issues Paper (SIP)).

A01ufig12

Growth Incidence Curve of the Real Consumption per Capita, 2004–08

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Fund Staff estimates based on 2004 and 2008 household surveys.

17. The structure of Mauritania’s economy is a key constraint for poverty reduction and employment creation. Mauritania’s productive sectors and export base have become increasingly concentrated, with growth over the past decade mainly driven by the good performance of the mining sector (particularly iron ore, copper, and gold), construction and telecommunications industries. However, these activities have low employment generation capacities, while agriculture, which remains the most important employment and poverty-reducing sector, continues to be constrained by the lack of a coherent government strategy, and by insufficient financing.

A01ufig13

Chart: Diversif ication of Export Products

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: UNCTAD statistics; and IMF staff calculations.

18. Against this background, both staff and the authorities agreed that Mauritania needs to diversify its economy away from commodity exports to reduce vulnerabilities to exogenous shocks and make growth more inclusive. Main strategies include maintaining macroeconomic stability, creating fiscal space for priority expenditures, strengthening social safety nets, deepening the financial sector, and pressing ahead with structural reforms.

Fiscal policy remains dependent on mining revenues and needs to be better anchored to remain sustainable and create space for priority spending

19. Maintaining public finances on a sound footing in the face of volatile mining revenues is a key objective. The authorities recognized that mining revenues that have been used to finance recurrent emergency spending are volatile and finite in time (gold and copper extraction will likely expire in 2030 and 2020, respectively). For this reason, they agreed to start using the nonmineral fiscal balance to anchor fiscal policy over the medium term. They aim to gradually reduce the nonmineral deficit to 4 percent of non-mining GDP in 2017, which will help reduce the debt-to-GDP ratio to 54.5 percent of GDP (a 25 percent of GDP debt reduction after excluding debt relief from Kuwait, see below). Such a strategy permits for scaling up social and investment spending while saving a fraction of windfall mining revenues. Fund TA for the creation of a stabilization mining fund later this year will help in this area.

A01ufig14

Production Profile of Gold and Copper

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Mauritanian authorities; First Quantum; and Kinross.

Mauritania: Main Fiscal Indicators

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

20. Subsidy reform and wage bill containment are the cornerstone of the adjustment strategy (LOI, ¶22–33), which would still allow for higher social and infrastructure spending. Fiscal consolidation through 2017 will mainly be achieved through:

  • Subsidy reform (Box 4). The increases in administered diesel prices during 2011 were not enough to eliminate ill-targeted subsidies by early 2012, as planned because international fuel prices turned out higher than envisaged. However, staff welcomed the authorities’ introduction of the new petroleum price structure and formula, which should facilitate the move toward international prices by end-2012 (thus leading to savings of about 0.4 percent of GDP) and help depoliticize the price setting process. The mission urged the authorities to put a cap on the monthly increase to ensure that large international price hikes do not lead to excessive retail price volatility that would undermine political support for the automatic fuel price formula. Additional reduction in subsidies will follow the planned increases in electricity tariffs (for large consumers) and gas prices (LOI, ¶21 and ¶34).

  • Social safety nets. The scaling up of cash transfer schemes (Box 4), in which the targeting is benefitting from new poverty and vulnerability studies, should help protect the poorest from the impact of subsidy removal. The mission also recommended the use of these new targeted schemes to gradually replace the “subsidized food shops,” which are not always located in the most vulnerable areas and do not reach the poor who have no disposable cash. It underscored that a successful subsidy reform strategy must be accompanied by a communication campaign that explains its benefits to the population.

  • Civil service reform. The authorities have recently reconciled the civil service census with the payroll file, and expect to use a unique payroll database as of June 2012. Going forward, the wage bill will be contained at the regional average (about 7 percent of non-oil GDP in 2017). A better human resources framework and a new organizational audit will also help, with some savings generated by the replacement of retirees by younger qualified personnel.

  • Social and investment spending. The authorities and staff agreed on the need to protect social and investment spending. Capital expenditures averaging about 10 percent of non-oil GDP over the period, which are increasingly domestically financed, allow for large infrastructure projects planned in the areas of energy, road infrastructure, water and agriculture. Staff estimates that this increase is realistic and in line with Mauritania’s implementation capacity, which has improved considerably: as 98 percent of total investment spending was executed in 2011.

  • Public financial management (LOI, ¶27–30). Greater spending should be accompanied by more transparency, accountability, and efficiency in the use of public resources. Recognizing this requirement, the authorities introduced a functional budget classification, created a Treasury Single Account, and committed to limiting the use of treasury advances. The government also made an inventory of domestic arrears, which will be repaid over a three-year period. This repayment plan complements the clearing of arrears in the energy sector, of which 1 percent of GDP is scheduled for 2012.

Mauritania’s Progress in Diesel Subsidy Reform

While gasoline products are not subsidized in Mauritania, the government remains committed to phasing out inefficient diesel subsidies, which benefit mostly the rich. However, the steady 1.5 percent monthly increase in diesel prices observed since January 2011 was not enough to completely eliminate subsidies in 2012, as the latest wave of international fuel price increases widened the price gap.

A01ufig15

Diesel: Retail Price and Price Gap (1)

(In Ouguiyas)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Fund staff estimates(1) the price gap corresponds to the difference between the full pass-through price and the retail price.
A01ufig16

Share of Benefit from Diesel Subsidy (Percent)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Fund staff estimates.

A simplified price formula for petroleum products will allow for a faster alignment of fuel retail prices with international levels. This new formula, in effect since May 2012, has been agreed with petroleum distribution companies, and will help reduce the current price gap by one third. Additional ad hoc price increases—about 10 percent—over the next six months should eliminate the remaining gap. Once that is closed, the automatic formula will start being applied on a biweekly basis.

A01ufig17

Structure of Retail Prices of Diesel (UM/Liter)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: National authorities; and Fund staff calculations.

Concurrently, the government is finalizing, with the assistance of the WFP, a cash transfer program. This program, which was rapidly put in place, targets 10,000 vulnerable households in Nouakchott identified through the recent poverty survey. Each household will receive UM 15,000 monthly (equivalent to half of the legal minimum wage) via a bank transfer. A positive side effect is that beneficiaries will also gain access to financial services. The program was extended in June to 15,000 households in four rural areas deemed of high food insecurity, with the targeting to be improved later in the year once the poverty survey for the rest of the country is completed.

21. Staff agreed with the authorities’ intention to consider options that will enhance revenues from the extractive industries. Progress made in recent years to augment non-mining revenues should be sustained, including revenue administration reforms (LOI, ¶25–26). However, about 60 percent of this year’s revenue increase will come from the mining sector, mostly the state-owned mining company, as the take from the private sector has so far been limited. Indeed, special tax regimes/exemptions granted to foreign investors in the early exploration phase when mining potential had yet to be confirmed weakened Mauritania’s mining taxation regime, which today mobilizes less revenue for the state than in other resource-rich countries.

A01ufig18

Average Tax Rate of Gold Mining Activities 1/

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: IMF staff calculations.1/ MC: mining code; TA: tax agreement; MDA: mining development agreement.

22. The government and staff agreed that new mining contracts should not grant new exemptions and instead be directly governed by the mining code. However, any intention to renegotiate existing contracts should be explored prudently, and only in a mutually agreed process with the foreign investor so as to protect Mauritania’s business climate. Staff recommended closing the existing loophole that allows the transfer of mining assets (to a nonresident) without any tax incidence (LOI, ¶23–24). In the meantime, Mauritania has become a fully compliant member under the Extractive Industries Transparency Initiative (EITI), which should help transparency.

23. The authorities shared staff’s debt sustainability concerns, and underscored their commitment to rely on concessional borrowing. After declining by over 70 percentage points following the 2006 MDRI initiative, and by another 8 percentage points following debt cancellation from Algeria and Libya in 2010, the PPG debt ratio is hovering around 83 percent of GDP at end-2011. Stress test scenarios indicate that Mauritania’s risk of debt distress is moderate. Continued fiscal prudence and debt relief from Kuwait are necessary to improve the medium-term debt outlook (see DSA). Development and adoption of a medium-term debt management strategy (MTDS) will guide the authorities in their future borrowing decisions.

Financial sector: Pushing for further deepening

24. The banking system remains relatively stable. Mauritanian banks have large liquidity cushions and are adequately capitalized. Their profitability, while weak, has not been significantly affected by the decline in T-bill yields last year. The main concern is weak asset quality, although risks are somewhat mitigated by high provisions, particularly for legacy loans, which account for the bulk of nonperforming loans.

Mauritania: Key Banking Sector Indicators, 2009–11

(In percent)

article image
Sources: Central Bank of Mauritania; and Fund staff estimates.

Liquid assets: cash, reserves, and treasury bills.

A subset of nonperforming loans which have not seen payments of due interest or principal for 360 days or more.

25. The authorities view the financial sector as a fundamental driver of growth. They recently finalized a comprehensive financial sector strategy, which includes a well-sequenced reform plan. In line with the plan’s strategic priorities, the authorities are continuing to focus on enhancing banking system stability (LOI, ¶16) by strengthening banking supervision, establishing higher bank capital requirements, and overhauling the regulatory framework. The mission also emphasized the need to closely monitor the risk profile of the banking sector, which may change significantly in response to the decline in T-bill yields and the possible entry of two new banks. It also encouraged the authorities to carefully monitor banks’ compliance with prudential standards. Special attention should be paid to banks’ FX positions, concentration risk, and related-party exposures—all risks that may rise markedly if local banks get involved in financing the new airport.

26. Deepening financial intermediation in Mauritania is necessary to enable private-sector growth and increase the traction of monetary policy. While calculations by the World Bank (see SIP) show that Mauritania’s private-sector credit as a share of GDP is above its structural benchmark, the level remains below the regional average. Moreover, high concentration risks in banks’ loan portfolios and widespread related-party lending imply that banks only finance a limited number of economic activities and actors. Such business strategies limit people’s access to banking services, a key ingredient for inclusive growth, and reduce the effectiveness of monetary policy (see SIP). To encourage banks to develop commercial relationships with a larger and more diversified customer base, the authorities agreed that the priorities are to:

  • boost the potential for credit-worthy demand through more formalization of economic activity (other factors such as growth in real economic activity would also need to be present to make this channel effective);

  • reinforce the supply of credit through more effective implementation of concentration and connected lending regulations; and

  • improve the institutional infrastructure, notably the interbank market and creditor rights.

A01ufig19

Mauritania: Regional Disparities in Pro-Poor Growth and Access to Financial Services

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: Fund estimates based on 2004 and 2008 household surveys.
A01ufig20

Private-sector Credit/GDP

(In percent; 2009)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Source: World Bank (FinStat 2012).
A01ufig21

Top 20 Loan Exposures/Total Loans

(In percent; 2010)

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

Sources: Standard & Poor's (2010), Central Bank of Mauritania; and IMF staff calculations.

Structural reforms: Improving the weak business environment to boost private-sector growth and diversify the economy

27. Structural impediments inhibit Mauritania’s growth over the medium term. Mauritania’s concentrated export sector and underdeveloped manufacturing base limit spillovers to more labor-intensive sectors. Moreover, businesses report that corruption, regulatory quality, access to finance, costs of cross-border trading, and weak infrastructure and logistic systems all hamper private-sector performance (Box 5). Businesses have also regularly complained about the inadequacy of labor skills and rigid employment regulations.

Business Environment and Governance

Mauritanian companies face severe bottlenecks when conducting business, particularly in accessing credit and dealing with customs administration. However, new streamlined procedures for obtaining operating licenses and recent reforms in tax administration and in construction regulations have helped lift Mauritania’s ranking over the past five years (though from a very low initial level). The Mauritanian press can operate relatively freely according to the 2011 Press Freedom Index compiled by Reporters Without Borders. While other governance indicators are in line with income levels, Mauritania is one of the few countries that have experienced a deterioration in the quality of governance; particularly in the enterprise survey indicator that measures perceived corruption, which has worsened over the 2000–09 period, although it improved slightly in 2009.

A01ufig22

Mauritania: Business Environment and Governance

Citation: IMF Staff Country Reports 2012, 246; 10.5089/9781475506686.002.A001

28. The authorities are taking a number of steps to enhance the investment climate. These involve the implementation of the new investment code and the establishment of a one-stop shop for business registration. Moreover, while the mission welcomed the tax administration’s collection efforts, it stressed the need to preserve taxpayers’ rights to ensure that firms’ ability to function is not hampered. To that end, the authorities agreed (LOI, ¶24–25) to modernize the appeal procedure, strengthen communications with the private sector, and repay regularly tax credits due (including VAT refunds for mining companies). The mission welcomed government steps to tackle corruption (LOI,¶38), but urged more action on the governance front, particularly in (i) quickly drawing up and implementing the action plan of their recently adopted anti-corruption strategy; and (ii) systematically applying the new procurement code procedures to all public projects.

29. Additional labor market policies are necessary to create a sufficient number of employment opportunities. Rapid population growth and a relatively weak education system make it difficult to absorb all new labor market entrants, thus keeping unemployment high (Annex IV). The authorities recognized the challenges in the labor market but underscored the importance of several initiatives underway: (i) a strategy that addresses the skill mismatch in the labor market; (ii) new professional programs for the young and unemployed; (iii) new investments and projects in the agricultural and fisheries sectors; and (iv) new microfinance programs. Staff emphasized that addressing high unemployment and poverty will require a more comprehensive reform strategy for the agricultural sector, given its potential as an employment generator in Mauritania. A more depreciated exchange rate could accompany agricultural reform to give greater incentives to domestic food processing businesses that substitute basic food imports.

IV. Program Implementation and Design

30. Program implementation has been strong. All relevant performance criteria for end-December 2011 were met by a relatively large margin except for one continuous performance criterion (LOI, Table 1). The continuous criterion on non concessional external debt was not observed because of a three-week delay in parliamentary approval of a nonconcessional loan that was programmed to take place in 2011. Staff supports the granting of a waiver as it considers the delay a minor deviation, which has no bearing on debt sustainability. Most of the authorities’ ambitious structural reform agenda is progressing well, although benchmarks up to March 2012 on public enterprise audits, external debt strategy, and International Financial Reporting Standards (IFRS) quantification were missed, partly because of delays in procurement and administrative procedures. (LOI, ¶2 and Tables 2a and 2b).

31. Program design and monitoring remain broadly unchanged. However, the authorities are proposing to revise downward the end-June performance criteria for NIR accumulation by $33.5 million and increase the target for NDA by UM17 billion to account for higher reserve buffer stocks in 2011, allow for lower metals prices in 2012, and accommodate the rebound in economic activity (LOI, ¶41 and Table 1). The end-June fiscal target will be revised upwards to account for higher mining revenues in Q2 2012. New quantitative targets for end-2012 are set in the attached LOI (Table 1). Structural benchmarks continue to focus on the following macro-critical areas: public financial management, subsidy reform, banking supervision, and CBM transparency and accountability (LOI, Table 2b).

32. Capacity to repay and safeguards assessment. Mauritania’s capacity to repay the Fund is adequate (Table 7). The move toward IFRS adoption has recently stalled but is expected to accelerate once the exercise of quantification of differences between the IFRS and Mauritanian standards in CBM’s 2011 financial statements has been completed. The CBM is making some progress in removing the qualifications expressed in the 2010 audit opinion regarding public-sector debt owed to the central bank. Meanwhile, the CBM’s accounts and program targets will continue to be audited by an international firm, a key recommendation of the 2010 safeguards assessment update.

33. Data provision. It is broadly adequate for surveillance purposes, but data gaps, linked to capacity constraints, still encompass many areas, including national accounts, balance of payments and social and labor markets indicators. A plethora of new surveys (including a replacement for the outdated CPI index and on employment), as well as additional Fund and World Bank technical assistance, will help strengthen data quality (LOI, ¶39).

V. Staff Appraisal

34. Mauritania’s macroeconomic performance has been robust, but the outlook is subject to significant external risks. Economic activity has been resilient, with the commodity price boom of the past two years and prudent policies more than offsetting a severe drought and high international food and fuel prices. The outlook for 2012 and beyond is encouraging, but remains highly vulnerable to shocks in external demand, metals prices, and donor support. Moreover, the persistence of high levels of poverty and unemployment is a clear warning sign that the country’s productive and export bases need to become broader.

35. Prudent monetary policy supported by a flexible exchange rate will be key to containing inflation. Staff welcomes the CBM’s intention to guard against inflationary pressures. The use of a new short-term monetary policy instrument will allow the CBM to absorb excess liquidity, thereby reducing macroeconomic risks. Staff estimates the exchange rate to be modestly overvalued, and the flexible exchange rate that has served Mauritania well should be maintained and used to resist any bias against depreciation.

36. The government’s fiscal consolidation strategy appropriately addresses longstanding vulnerabilities. In the near term, a modest loosening of the fiscal stance in 2012 is appropriate, although relief expenditures will need to be quickly phased out once the drought emergency lapses. Moreover, financing additional expenditures through volatile mining revenues is not sustainable, and fiscal policy over the medium term should be delinked from fluctuations in international commodity prices, notably through the envisaged creation of a new mining fund. The ongoing subsidy reform, accompanied by the expansion of well-targeted social safety nets, as well as greater revenue mobilization, will generate the needed fiscal space. Options to increase revenues from the resource-extractive industries should be explored, although any renegotiation of existing contracts should be balanced so as to protect Mauritania as a destination for foreign investors.

37. Concessional financing and debt relief are critical for preserving debt sustainability. Reaching agreement on outstanding debt relief is necessary to further reduce Mauritania’s vulnerability to external shocks. The drawing up of a medium-term debt strategy will guide the authorities’ future borrowing decisions. Care should be taken to guard against any potential contingent liabilities or macroeconomic risks that could emanate from large private infrastructure projects.

38. Mauritania’s banking system has been stable, but financial intermediation needs to deepen to make growth more inclusive. Staff is encouraged by the authorities’ ongoing efforts to strengthen bank supervision, which is crucial at a juncture where banks’ risk profile may evolve rapidly. Strictly applying recently improved regulations on connected lending and concentration risk, encouraging potential borrowers to move into the formal economy, and enhancing better creditor rights will help make growth more inclusive by giving people access to financial services. In addition, these reforms will contribute to strengthening the monetary policy transmission mechanism.

39. Structural reforms will be essential to raise private-sector growth, boost job creation, and diversify the economy. The implementation of the new investment code and the establishment of a one-stop shop are welcome. Bolder and deeper reforms are needed to preserve taxpayers’ rights, increase employment in the agricultural sector, and diversify the economy with the emergence of a domestic industrial base. The authorities’ full compliance with EITI is a welcome step in strengthening governance and transparency, but implementation of the anti-corruption strategy should be pursued vigorously and the new procurement code should be consistently applied to all public projects.

40. Based on the strong performance under the program, staff recommends completion of the fourth review under the ECF arrangement. It also recommends approval of the request for modification of the end-June 2012 performance criteria, a waiver for the nonobservance of the continuous performance criterion on nonconcessional external debt and the establishment of new performance criteria for end-December 2012.

41. It is proposed that the next Article IV consultation be held within 24 months, in accordance with the decision on consultation cycles, Decision No. 14747–(10/96) (9/28/2010).

Table 1.

Mauritania: Selected Economic and Financial Indicators, 2009–12

(Quota: SDR 64.4 million)

(Population: 3.46 million; 2010)

(Per capita GDP: $1,247; 2011)

(Poverty rate: 42 percent; 2008)

(Main exports: Iron ore, gold, fish; 2010)

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

Excluding the oil account.

HIPC debt relief from Kuwait was initially programmed in 2011 and is now expected to take place in 2012.

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

Table 2.

Mauritania: Balance of Payments, 2009–12

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

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

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

Table 3.

Mauritania: External Financing Requirements, 2009–13

(In millions of U.S. dollars)

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

Arrears to Kuwait are not included.

Table 4a.

Mauritania: Central Government Operations, 2008–17

(In billions of ouguiya, unless otherwise indicated)

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

Tax arrears from the public electricity company.

Including transfers to public entities outside the central government. For 2012, it also includes payments arrears to hydrocarbon companies and SOMELEC.

These include the development fund (FAID).

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

Table 4b.

Mauritania: Central Government Operations, 2008–17

(In percent of non-oil GDP, unless otherwise indicated)

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

Tax arrears from national electricity company.

Including transfers to public entities outside the central government.

These include the development fund (FAID).

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

In percent of GDP excluding extractive industries.