Islamic Republic of Mauritania: Selected Issues Paper

Despite a relatively high GDP growth rate over the past decade (2000–10), economic growth in Mauritania has not been able to make a significant dent in poverty. Rapid and sustained poverty reduction requires inclusive growth that allows people to contribute to and benefit from expanding economic activity. Mauritania needs to make greater progress toward inclusive growth by enhancing the distributional impact of public spending and by improving the quality of pro-poor spending. The Executive Board recommends effective monetary policies to meet the challenges.


Despite a relatively high GDP growth rate over the past decade (2000–10), economic growth in Mauritania has not been able to make a significant dent in poverty. Rapid and sustained poverty reduction requires inclusive growth that allows people to contribute to and benefit from expanding economic activity. Mauritania needs to make greater progress toward inclusive growth by enhancing the distributional impact of public spending and by improving the quality of pro-poor spending. The Executive Board recommends effective monetary policies to meet the challenges.

II. Why Care About Shallow Credit Markets? The Case of Monetary Policy (In)Effectiveness in Mauritania1

As a small open resource-dependent economy, Mauritania’s monetary policy stance often shifts due to changes in the external environment. Yet exogenously driven policy changes do not seem to affect bank lending at the margin, which suggests ample scope to strengthen monetary policy effectiveness. A necessary pre-condition of more policy traction is a more inclusive financial sector. Strengthening the quality of credit demand, reinforcing supervision, and enhancing the institutional infrastructure seem fruitful avenues toward encouraging banks to finance a wider range of activities and customers.

A. The Puzzle: Liquid Banks but Little Lending

1. Mauritania experienced a large positive terms of trade shock in 2010/11, leading to involuntary surges in bank liquidity.

The recent run-up in commodity prices boosted Mauritania’s foreign exchange receipts, notably those from iron ore exports. To address longstanding external vulnerabilities, the authorities used this opportunity to build up foreign exchange reserve buffers. In the process, the size of the central bank’s balance sheet expanded, with a larger international asset position giving rise to a local currency counterpart in the form of banking sector liquidity.


Commodity Price Indices


Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

Source: International Financial Statistics.

2. Specifically, the export-related foreign exchange inflows found their way into the banking sector through two channels:

  • Repatriations of mining companies. Mining-related repatriations reached unprecedented highs last year, as the mining companies’ local currency expenditures tend to be proportional to their international sales, which were very strong. The modalities for the repatriations, and the impact on bank liquidity, differ between companies:

    • State-owned mining company (SNIM). SNIM keeps its local currency account at the central bank, which implies that its repatriations are sterilized until the time it draws on the account to spend. About 80 percent of its repatriations in 2011 created new liquidity.

    • Foreign-owned mining companies. The CBM issued a new regulation last summer that required foreign-owned mining companies to surrender their foreign exchange to the CBM. Because these mining companies have their bank accounts with commercial banks, the repatriations directly increase bank liquidity without the possibility to sterilize.

  • Change in the financing mix of the Treasury and reduced borrowing by state-owned enterprises. With sharp increases in mining-related revenue from SNIM, the Treasury had less appetite to roll over T-bills held by banks. The additional revenue also created fiscal space for clearing arrears and accelerating transfer payments to loss-making state-owned enterprises, thereby reducing their need to resort to bank credit. As a result, the composition of banks’ assets changed in favor of free reserves following the redemption of T-bills in the second half of last year.


Banks' Free Reserves and T-bills

(In MRO billions)

Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

Source: Central Bank of Mauritania.

3. Absent active sterilization efforts, positive terms of trade shocks result in looser monetary conditions. This scenario materialized in Mauritania last year. For the first time in years, financing needs of the Treasury were lower than the sterilization objective of the CBM. With a stronger budget position, the Treasury was hesitant to issue T-bills solely for monetary purposes, while the CBM did not have the financial resources to undertake large-scale sterilization operations on its own account. The only instruments left in the CBM’s liquidity management toolkit were reserve requirements and the sale of foreign exchange. The former was not used because of marked differences in liquidity positions across banks, and the authorities’ policy objective of accumulating international reserves limited the use of the latter. Illustrating the liquidity overhang, T-bill yields fell to historic lows of just below 3 percent.

4. Yet in spite of abundant liquidity, increased competition, and a generally favorable economic backdrop, credit expansion was modest. Private-sector credit rose 10.6 percent in 2011, in contrast to broad money that expanded almost twice as fast (19.9 percent). Adding to the puzzle of why bank lending was relatively subdued is that two new banks entered the Mauritanian market last year, a development which should normally foster competition and lending activity.

B. The Role of Reserves in the Bank Lending Channel

5. If monetary policy has an effect on the economy, it will likely be through the banking system. Mishra, Montiel, and Spilimbergo (2012) distinguish between four main channels of monetary transmission: (i) interest rates; (ii) asset prices; (iii) the exchange rate; and (iv) bank lending. In Mauritania, the first three channels are unlikely to be strongly developed because the necessary institutional prerequisites—significant savings and investments, equity and bond markets, and an open capital account—are absent. This leaves the bank lending channel.

6. Bank lending tends to react to changes in the supply of reserves. If reserves and credit are imperfect substitutes, profit-maximizing banks will target an optimal ratio between both assets. In this framework, exogenous shocks to either asset should be associated with movements in the same direction in the other so as to keep their ratio unchanged. As means of illustration, consider a bank that finds itself with one additional ouguiya in reserves. The bank will want to keep only a fraction of the ouguiya in (unremunerated) reserves, with the remainder available to be lent out in search of profits. This matters for the central bank because it controls the amount of reserves in the banking system through foreign exchange intervention, refinancing operations, and coordination with the Treasury on T-bill issuance.2

7. The optimal ratio of reserves to credit will vary across banks and change over time. Agénor, Aizenman and Hoffmaister (2004) and Saxegaard (2006) directly model banks’ demand for reserves. Applying this approach to Mauritania would suggest that optimal reserve holdings depend on the one hand on bank-specific determinants: (i) asset riskiness; (ii) risk aversion; (iii) volatility of funding base. But the following general economy-wide factors will play a role as well: (iv) institutional environment; (v) demand conditions; and (vi) competition among banks. For increases in (i) – (iii), banks will find it optimal to hold relatively more reserves, while the reverse will be true for improvements in (iv) – (vi).

C. An Empirical Analysis of the Link Between Reserves and Lending

8. Changes in banks’ optimal reserve levels are not observable and complicate estimations of monetary policy effectiveness. Merely examining the empirical co-movements of reserves and credit will not yield meaningful conclusions about the effectiveness of monetary policy. A successful empirical strategy would need to control for third factors that determine banks’ optimal reserve levels (see preceding paragraph), which could change simultaneously, confounding the influence of monetary policy on credit.

9. Fish exports can be used to identify exogenous changes in reserves. Fish is one of Mauritania’s main exports, accounting for 16 percent of total goods exports in the five years to 2011. Fish exports were subject to a repatriation requirement, which means that banks in charge of executing the repatriations tend to see their reserves increase in response. Such changes in reserves are primarily driven by the world price for Mauritanian fish varieties and fish captures—factors that are exogenous to banks’ lending activities and unlikely to be systematically related to unobserved third factors that affect reserves.


Bank Reserves by Fish Exports to the EU

(Lagged two months)

(2006–11; monthl)

Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

Source: Central Bank of Mauritania, EUROSTAT and IMF staff calculations.

10. Monetary policy, as measured by changes in reserves arising from repatriated fish export receipts, has no significant impact on banks’ lending activities. An empirical analysis of six Mauritanian banks with established business relationships with the fishing industry over the 2006–11 period shows no discernible link between changes in monetary policy and bank lending (see table). Specifications that use government credit and short-term trade finance as dependent variables also fail to uncover robust relationships between reserves and lending.

Private-sector Credit

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Source: IMF staff calculations.Note: Observations are three-month averages over the period 2006–11. Cluster-robust t statistics in parentheses. The table presents 2SLS estimators using fish exports to the EU lagged by one period as instrument. Columns (1)–(3) use reserve in levels as endogenous variable and include bank fixed effects and a linear time trend. Columns (4)–(6) use the first difference in reserves as endogenous variable. All specifications include a dummy for the Lehman bankruptcy.

11. Monetary policy ineffectiveness in low-income countries is not a surprising finding. Mishra et al. (2012) summarize empirical evidence that broadly suggests that the monetary transmission mechanism is fundamentally weaker, if not altogether ineffective, in low-income countries. Striking the same note, Khemraj (2010) presents a number of Caribbean and African countries where higher reserves did not lead, at the margin, to more private-sector credit. He shows that oligopolistic competition and risky borrowers can make banks indifferent between holding reserves and lending to the private sector—the opportunity costs of holding reserves are not sufficiently high to make banks rebalance their portfolios toward credit—though this is not to say that situations in which monetary policy does affect banks’ lending decisions can never occur. A sufficient condition for reserves to affect credit is a positive difference between the marginal profit of lending and the marginal profit of holding excess reserves. For example, if banks lowered their optimal reserve/credit ratio (which reduces the marginal profit of excess reserves) but did not have sufficient loanable funds, expanding the supply of reserves could well be effective as a means of relaxing banks’ funding constraint.

D. Factors Reducing the Traction of Monetary Policy

12. In general terms, credit markets in Mauritania are considered too shallow to effectively transmit impulses from monetary policy to the rest of the economy. However, constraints that typically impede the monetary transmission mechanism in other countries are less of a factor in Mauritania:

  • Structural size. Recognizing that financial sectors always develop against structural features in the economy that are fixed in the short run, Al-Hussainy et al. (2010) calculate for a large sample of countries expected levels of private-sector credit/GDP and deposits/GDP that are based solely on structural characteristics. In particular, they consider GDP per capita, demographics (dependency ratios), population size, and oil resources. On these measures, Mauritania performs rather well: its 2008 actual level of credit was higher than its predicted level, implying a positive “credit gap” of 5.1 percent of GDP. Note, though, that economies in other parts of the world at similar stages of development—such as Moldova and Mongolia—have already developed deeper credit markets. While also outperforming its structural benchmark in deposits/GDP, Mauritania still has scope to mobilize more bank funding in light of the widespread use of cash, which partly reflects its underdeveloped payment system. In addition, banks’ concentrated ownership structures conflict with their ability to attract long-term resources from outside investors.


Private-sector Credit/GDP Gap 1/

(In percent; 2009)

Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

Source: World Bank (FinStat 2012).

Bank Deposits/GDP Gap 1/

(In percent; 2009)

Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

Source: World Bank (FinStat 2012).1/ Private-sector credit/GDP and bank deposit/GDP gaps are defined as the difference between each country’s realization and structural benchmark. Structural ben chmarks are derived from cross-country regressions that explain credit and d eposits only as a function of structural factors, namely economic development, population, and d emographics.
  • Competition. There are 12 commercial banks, of which five are foreign-owned, one is a joint venture between the Libyan Foreign Bank and the Mauritanian government, and six belong to large domestic family-owned conglomerates. The domestic banks continue to dominate the market, but competition has been improving thanks to the entry of three foreign banks in the period 2006–10—a key recommendation of the 2006 FSAP. This helped reduce Mauritania’s three-bank concentration ratio to a level that is in line with those of comparator countries.

Source: World Bank (FinStat 2012 and World Development Indicators).

13. The banking sector’s limited reach is a key constraint. Only a limited number of economic actors have access to bank finance. Banks in Mauritania tend to focus on providing banking services to their parent group and affiliated parties. Other significant revenue sources are letters of credit, short-term consumer credit, and lending to government and state-owned enterprises—all forms of relatively low-risk credit. As a consequence, concentration risk is very high. The 20 largest loans of Mauritanian banks, either to state-owned companies or affiliated parties, represented 30 percent of all loans at the end of 2010. This is in line with the high levels of concentration risk seen in other countries in the Middle East and North Africa (MENA), the region where portfolio concentration is highest.


Total Credit Assets of Banks

(In MRO billions; October 2011)

Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

Source: Central Bank of Mauritania.

Top 20 Loan Exposures/Total Loans

(In percent; 2010)

Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

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

Top 20 Loan Exposures/Total Equity

(In percent; 6-year averages 2005–10)

Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A002

Source: Standard & Poor's (2010).

14. Weaknesses in the institutional framework can partly explain the prevalence of related-party lending and high single-party exposures:

  • Pervasive information asymmetries. Given widespread informality in the economy, few economic actors produce viable financial statements, and audited statements are often of low quality. This makes it difficult for lenders to obtain reliable information about borrowers. The launch of a credit bureau in 2005 has only offered partial remedy as the bureau still does not regularly communicate real-time information that is consistent with banks’ internal data.

  • Weak creditor rights. Collateral with predictable value is in short supply and enforcing collateral rights (especially the seizing of real estate) is fraught with difficulty. Official land registries and rights to other properties exist but are ill-functioning. Judicial procedures are lengthy and costly, and courts have voided financial contracts between banks and customers in the past. These problems are put into even starker relief because general payment discipline in the economy is reportedly low.

  • Interest rates floors and caps. Maximum lending rates are fixed at the policy rate—currently nine percent—plus eight percentage points. If banks’ required return for the marginal borrower is above this threshold, they will ration credit to non-affiliated borrowers. On their liability side, banks may not be willing to raise large amounts of term deposits due to interest rate floors on a particular type of savings account (“compte sur livret”). The authorities are now in the process of relaxing this minimum interest rate requirement.

15. These institutional constraints are one explanation for the high rates of nonperforming loans, which stood at 28.7 percent of gross loans at end-2011, covered to 91 percent by provisions. But shortcomings in Mauritanian banks’ internal credit risk management capacities—noted in the 2010 audit of commercial banks’ financial statements—also contribute to weak asset quality since they prevent banks from properly evaluating outside lending opportunities. Hauner (2009) suggests that banks can become complacent and lazy if they are guaranteed steady returns regardless of whether they finance outside projects. To address this problem, the authorities have recently adopted a new regulation that sets minimum standards for banks’ internal risk management systems.

16. Regulatory loopholes and limited intrusiveness of supervision also contributed to limiting the reach of the banking sector. Until March 2012, domestic regulation on related-party lending stipulated exposure limits on an individual company basis instead of applying the notion of groups. This allowed banks to build cumulative exposures to their own group in excess of 25 percent of capital while still respecting the legal framework. This loophole is now closed, as the authorities have recently aligned the regulations with international standards. Moreover, in cases when the supervision authority registered breaches of related-party and concentration risk limits, it did not always take swift corrective actions against the banks in question. Inspired by the approach of Barajas, Chami, and Yousefi (2012), simple cross-country regressions underscore the importance of pro-active banking supervision for the development of deeper financial markets. To classify supervisory regimes, the regressions use a proxy variable drawn from the latest available World Bank Survey on Bank Regulation that indicates whether supervisors have in the previous five years suspended banks’ decisions on remuneration or dividends. Defined in this way, supervisory intrusiveness is significantly related to cross-country variations in the private-sector “credit gap” (described in paragraph 12) and is economically large:

Source: IMF staff calculations.Note: Robust t statistics in parentheses. Please see Annex for definition of variables and alternative specifications.

Countries with more intrusive supervisory regimes had private-sector “credit gaps” that were six percent of GDP larger on average than those without (see Annex). However, these benefits arguably accrue more over the medium term as a tighter application of existing rules and regulations may rule out a number of lending operations that banks currently undertake.

17. The underdeveloped interbank market is another factor that hampers bank lending and monetary transmission. Banks are uncertain about their ability to cover unexpected liquidity needs at short notice because of weaknesses in the two existing short-term refinancing options: (i) the interbank market is shallow, and some of the largest and most liquid banks almost never lend to other banks, despite strict collateral requirements; and (ii) the CBM’s ability to fill its role as a lender of last resort is not firmly established. Banks are therefore reluctant to accept maturity mismatches that would result from using excess reserves to lend more to the private sector. And changes in the individual banks’ liquidity position do not tend to affect the rest of the system, often making the distribution of liquidity across the system inefficient.

E. Conclusions and Policy Recommendations

18. The Mauritanian banking sector finances a limited number of economic actors and activities, which limits the influence of monetary policy. Mauritanian banks are characterized by high single-party exposures and widespread related-party lending. Such business models tend to blunt the effectiveness of monetary policy because lending decisions are not, at the margin, driven by changes in the amounts of loanable funds. Consistent with this hypothesis, exogenous changes in bank reserves in Mauritania, similar to the ones seen in 2011, did not increase credit.

19. For monetary policy to be more effective, the banking system needs to broaden its reach. The main challenge is to make the banking sector more inclusive by encouraging banks to lend to a wider range of clients. The level of private-sector credit to GDP itself, on the other hand, does not raise immediate concerns. Reforms aimed at boosting the amount of credit-worthy demand and ensuring adequate supply, as well as improvements in the institutional infrastructure, could go a long way towards extending the reach of the banking sector.

20. Two actions are central to reinforce the supply of credit:

  • Make banking supervision more effective by applying the regulation on concentration risk and connected lending. In addition to making the banking system more resilient to shocks, reducing the incidence of high single-party exposures could encourage banks to actively search for lending opportunities elsewhere.

  • Ensure that banks reinforce their risk management capacities. A greater focus on internal risk management could make banks more comfortable about lending to new outside clients. The recently adopted instruction on banks’ internal risk management systems is a very good first step, with the focus now shifting to its swift implementation.

21. The institutional infrastructure could be improved along a number of dimensions:

  • Alleviate information asymmetries. A better resourced credit bureau could provide more reliable information about potential borrowers, and an enhanced legal framework for domestic auditors could strengthen the quality of audits.

  • Reduce judicial uncertainty. Creditor-debtor disputes could be dealt with in specialized commercial courts that are staffed with well-trained legal experts.

  • Strengthen collateral systems. The process of pledging real estate and cash flow collateral could be streamlined by increasing the number of land titles in circulation and enhancing administrative capacity in public registries.

  • Improve the liquidity management framework. Absorbing excess liquidity with a short-term T-bill instrument that is under the sole control of the central bank would increase the number of borrowers in the interbank market. As this market develops, liquidity changes of individual banks would filter through the rest of the system, strengthening the link between changes in reserves and credit to the private sector.

22. Taken together, the above measures will contribute toward making the banking sector more inclusive, reducing its vulnerabilities, and strengthening monetary policy effectiveness. But the demand side matters, too. While not the focal point of this paper, the limited amount of credit-worthy demand is also a key explanation for banks’ concentrated loan portfolios. Tax and other regulatory incentives could aim at bringing more businesses into the formal sector, helping them build up a pool of pledgeable assets and produce certified financial statements. In this context, setting up a system of quality control for the audit profession would also be beneficial.


  • Agénor, Pierre-Richard, Joshua Aizenman, and Alexander W. Hoffmaister, 2004, “The Credit Crunch in East Asia: What Can Bank Excess Liquid Assets Tell Us?Journal of International Money and Finance, Vol. 23, pp. 2749.

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  • Al Hussainy, Ed, and others, 2011, “FinStats 2011: A Ready-to-Use tool to Benchmark Financial Sector Access Across Countries Over Time,” (Washington: World Bank).

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  • Barajas, Adolfo, Ralph Chami, and Reza Yousefi, 2012, “Note on Financial Deepening and Aggregate Gaps in Deepening,” (Washington: International Monetary Fund).

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  • Hauner, David, 2009, “Public Debt and Financial Development,” Journal of Development Economics, Vol. 88, pp. 17183.

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  • Mishra, Prachi, Peter Montiel, and Antonio Spilimbergo, 2012, “Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications,” IMF Economic Review, forthcoming.

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  • Saxegaard, Magnus, 2006, “Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa,” IMF Working Paper 06/115 (Washington: International Monetary Fund).

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Gaps in Private-sector Credit

article image
Source: IMF staff calculations.Note: The dependent variable is the private-sector “credit gap” in percent of GDP of low-income and lower-middle income countries. Observations are yearly for the period 2007–08. Coefficients are based on pooled OLS regressions that include a constant and a year dummy. Cluster-robust t statistics are in parentheses. Supervisory intrusiveness is a dummy with 0 (no interference with directors’ decisions on dividends, bonuses, or remuneration in the past five years) and 1 (interference occurred), drawn from the World Bank Survey of Bank Regulation in 2008. The macroeconomic control variables are defined as follows. De facto FX regime ranges from 0 (hard peg) to 8 (freely floating), inflation (CPI) is measured in percent, stability (the composite risk indicator from ICRG) ranges from 0 (high risk) to 100 (low risk), trade openness measures imports + exports in percent of GDP, export concentration index (UNCTAD) ranges from 0 (very diversified) to 100 (very concentrated). The financial sector policy variables are all from the same source as supervisory intrusiveness. Banking sector concentration measures the asset share of the five largest banks in percent, restriction of entry of foreign banks ranges from 0 (no restrictions) to 4 (restrictions on acquisitions, subsidiaries, branches, and joint ventures), number of government banks as a share of all banks in percent, and ownership limits for single owner is a dummy with 0 (no limits) and 1 (limits exists). Specifications with fiscal variables did not improve on the results reported here, but are available on request.* p<0.1, ** p<0.05, *** p<0.01.

Prepared by Robert Blotevogel.


See Annex II in the staff report for a discussion of the liquidity management framework, including the limitations of the current toolkit.

Islamic Republic of Mauritania: Selected Issues Paper
Author: International Monetary Fund