Statement by Mr. Kossi Assimaidou, Executive Director for Mali, June 10, 2013

The security and political crisis in Mali caused a sharp recession along with tax and external financing shortfalls. There has been a sharp expenditure cut and increased recourse to domestic financing, but the accumulation of arrears is prevalent. The first disbursement under the Rapid Credit Facility (RCF) of special drawing rights (SDR) 12 million in February has catalyzed about $508 million of budget support thus far. Resumption of donor support brightens the path to economic recovery, but there remain important financing gaps. Strengthening public financial management is essential for sustained macroeconomic and fiscal stability.

Abstract

The security and political crisis in Mali caused a sharp recession along with tax and external financing shortfalls. There has been a sharp expenditure cut and increased recourse to domestic financing, but the accumulation of arrears is prevalent. The first disbursement under the Rapid Credit Facility (RCF) of special drawing rights (SDR) 12 million in February has catalyzed about $508 million of budget support thus far. Resumption of donor support brightens the path to economic recovery, but there remain important financing gaps. Strengthening public financial management is essential for sustained macroeconomic and fiscal stability.

Introduction

On behalf of my Malian authorities, I would like to thank the Executive Board, Management and Staff for their continued engagement and support to Mali’s recovery efforts. My Malian authorities highly appreciate the valuable policy advice and the financial and technical assistance they have received from the Fund in the context of the RCF. The economic program supported by the RCF has helped Mali sustain its recovery efforts under very difficult security, economic and social challenges, and catalyze the assistance of the international community. This renewed confidence of the donors’ community in my authorities’ macroeconomic policies was confirmed during the international conference held in Brussels on May 15, 2013.

Performance under the RCF

Implementation of the RCF supported program remains satisfactory. All end-March 2013 program indicators have been met. In particular, despite the difficult economic situation, there was no accumulation of external arrears in 2013. The authorities have cleared part of the arrears during the first quarter of the year, and have not contracted any non-concessional loan in 2013. Likewise, all structural benchmarks have been met.

In order to consolidate the progress achieved, my authorities are requesting a second disbursement under the RCF which remains critical for sustaining their policies towards continued macroeconomic stability and sustainable growth and contribute to the restoration of peace and stability. The RCF support will help cover the financing gap in the balance of payment for 2013, strengthen donors’ confidence, and help the authorities to create the conditions necessary towards a Fund –supported program under the Extended Credit Facility (ECF).

Recent macroeconomic developments and performance under the RCF arrangement

Macroeconomic developments in 2012

In 2012, several shocks associated with poor harvest, challenging security and unstable political situation took a toll on the Malian economy, pulling it into a recession. While GDP growth was initially expected to reach 5.6 percent, it contracted by 1.2 percent as a result of the slowdown of activities in the secondary and tertiary sectors, a slowdown in construction industries and a decline in foreign aid and foreign direct investments. Inflation rose to 5.3 percent (compared to 3.5 percent 2011) due to rising food prices as a result of the bad harvest in 2011 and higher energy prices.

The political instability led to the suspension of almost all public development assistance, except emergency aid and aid directly targeting the population. As a result of a 30 percent decrease in government resources, the authorities moved quickly to control spending at a level consistent with revenue and reserves. The budget was amended accordingly to prioritize paying wages, pensions, student grants, expenses of the army and security forces, and to the extent possible, priority spending in the areas of education, health and social protection. Capital spending was drastically reduced. Revenue, however, improved thanks to the exceptional efforts of revenue collection agencies, increased taxation of petroleum products and reduced subsidies on the consumption of butane gas, as well as cuts in investment expenditures. As a result, the budget deficit (on a cash basis, including grants) was contained at to 1.2 percent of GDP.

Money supply grew by 15 percent as the government increasingly used its deposits to finance the budget deficit. Credit to the economy grew by only 5 percent due to the recession in the secondary and tertiary sectors, and the damages and losses suffered by banks in the north of the country, which caused the stability of the banking sector to deteriorate. This was accompanied by a decrease in the ratio of capital to risk-weighted assets and non-performing loans increased.

The current account deficit (including grants) fell slightly to 3.3 percent of GDP due to the strong increase of gold and cotton exports and remittances from migrant workers. However, this could not compensate for the deterioration of the capital and financial account due to the sharp decline in foreign aid and foreign direct investment. Thus, Mali had to draw on its reserves for US$ 87 million to finance the overall deficit of the balance of payments.

Economic and financial policies in 2013

Following the adoption of the road map in January 2013 to restore Mali’s territorial integrity and organize presidential and legislative elections, many donors, also comforted by the first disbursement under the RCF, have gradually resumed their aid to the country, including budget support. This willingness to assist the country was reaffirmed during the Brussels international conference of May 2013, in which donors have undertaken to donate Euro 3.25 billion to Mali in the next two years to support the Plan for the Sustainable Recovery of Mali (PRED).

My authorities are mindful that these resource commitments will depend on their perseverance to consolidate public finance reform. Therefore, the soundness and sustainability of fiscal policies will remain one important pillar of the authorities’ strategy for economic and financial reforms in 2013. The authorities will continue to implement a prudent fiscal policy aimed at containing expenditures in line with available resources. In this spirit, the 2013 budget was prepared based on resolute efforts to enhance domestic revenue mobilization and the authorities’ decision to freeze certain investment expenditures until the resources to finance them are confirmed. Following the resumption of foreign assistance, the authorities intend to continue with this practice and have prepared a supplementary budget (LFR) to account for additional resources. As aid flows are confirmed, they will unfreeze expenditures and allocate resources to the priorities of the roadmap, notably the organization of presidential elections, the reestablishment of public administration in the northern parts of the country and the revival of economic activities. Notwithstanding the progress made in recent years, the authorities are determined to continue to focus on improving the management of public finances. In this regard, they are committed to continue to implement the Action Plan for the improvement and modernization of public finances (PAGAM/GFP II) covering the period 2011-15 to address the persistent shortcomings in the areas of revenue collection, domestic debt management, public accounting and external control of public finances.

The authorities intend to prepare the ground for the gradual reduction of subsidy on electricity consumption and cooking gas, and for the automatic adjustment of domestic energy prices (petroleum products and electricity) to the evolution of international prices. In this regard, they intend to continue to present explicitly in the budget laws the budgetary implications of a non-adjustment of fuel and energy prices, a strategy initiated in the 2013 budget law. Since 2012, fuel prices have been increased by 6 percent but the authorities are in the process of preparing different options for the automatic adjustment of fuel prices to international prices, as well as the measures needed to minimize the social impacts of these adjustments. To this end, the authorities, with the assistance of the World Bank will prepare targeted transfers to the segments of the population who could be most affected in case of an increase in food and energy prices.

The authorities will also continue to reform fiscal policy by gradually reducing exemptions, reform the tax, customs and Government property administrations. In this regard, priority will continue to be given to the reforms aimed at sustainably improving the functioning and yield of the VAT, which accounts for about 40 percent of tax revenue. The authorities will also focus on developing their capacity to regulate mining companies and to analyze the introduction of a surcharge on profits generated by exceptionally high prices, as part of the tax provisions applicable to mining companies. In order to consolidate these reform efforts, the authorities will request technical assistance through the Fund’s topical Trust Funds.

The efforts towards improved expenditure management and transparency of public finance will be pursued in the framework of regional directives and regulations. Several draft laws have been prepared in this regard and have been approved by the Council of ministers. The authorities will continue to improve cash management, accounting and public finance statistics. In this regard, they intend to complete the actions undertaken to establish a single Treasury account at the regional central bank (BCEAO) and to monitor the net government position (NGP) in the banking system. Internal control structures will continue to be strengthened in compliance with the national internal control strategy and regional directives, notably the staffing of the Supreme Court accounting section which will be converted into a Court of Accounts.

In spite of the need to increase military spending to ensure the security of the country, the authorities will continue to give priority to spending in education, health and social protection in compliance with the strategic framework for growth and poverty reduction (CSCRP) for the period 2012-2017 and the PRED. Consequently, they are committed to maintain social spending above a floor set in the context of the RCF.

As regards external and domestic debt, the authorities will continue to improve debt management capacity in order to preserve debt sustainability. The important adjustment on the fiscal front in 2012 led to an increase in external and domestic arrears of 0.5 percent of GDP and 0.6 percent of GDP respectively. The authorities have contacted all the foreign creditors to whom they have accumulated arrears to reiterate their commitment to clear these arrears as soon as possible. Accordingly, in 2013, the authorities have made provisions in the supplementary budget to provide for the clearance of all external arrears in 2013. The government is committed to continue to implement a prudent debt policy and have recourse to grants and concessional financing. As regards domestic arrears accumulated in 2012, the authorities have commissioned an exhaustive audit by August 2013, as agreed in the context of the program, with the intention to also clear these domestic arrears and stimulate private sector activities.

Conclusion

My authorities are determined to preserve macroeconomic stability, improve public financial management and promote growth in the context of the revival of the country after the 2012 crisis, and renewed support from the international community. They are committed to sustain their efforts and are hopeful that they can receive, soon, Fund support under an ECF. In view of Mali’s overall good performance under the RCF arrangement and the commitment of my authorities to pursue sound macroeconomic policies, I would appreciate Directors’ favorable consideration of my authorities’ request for a disbursement under the RCF.

Mali: Request for Disbursement under the Rapid Credit Facility—Staff Report; Informational Annex; Staff Statement; Press Release on the Executive Board Approval; and Statement by the Executive Director for Mali
Author: International Monetary Fund. African Dept.