Statement by Mr. Ngueto Tiraina Yambaye, Executive Director for Islamic Republic of Mauritania, and Mr. Mohamed Sidi Bouna, Senior Advisor to Executive Director, April 25, 2016

Context. The Mauritanian economy is facing a significant negative terms-of-trade shock that is more persistent than initially envisaged. Low iron ore prices have reduced economic growth, export receipts, and net international reserves; widened the fiscal deficit; and increased risks to financial stability. Lower oil prices have, on the contrary, provided some support to the external and fiscal positions. The exchange rate continued appreciating in real term in 2015, moving counter to the terms-of-trade shock. The impact of the shock is compounded by a narrow production base, structural weaknesses and limited policy space in the context of elevated public debt and pressures on external buffers. Outlook and Risks. The economic outlook envisages a recovery in economic activity to 4.1 percent in 2016, but risks to the outlook are tilted to the downside and the economy remains vulnerable to external shocks. Over the medium term, current policies will result in sustained pressures on reserves and elevated debt driven by public investment plans. Subdued economic activity could hinder the capacity of the financial sector to channel credit toward private sector activity hampering efforts to achieve more diversified and robust economic growth. In the short term, the economy is most vulnerable to higher oil prices, lower-than-envisaged iron ore prices, and a stronger US dollar under the current exchange rate policy.

Abstract

Context. The Mauritanian economy is facing a significant negative terms-of-trade shock that is more persistent than initially envisaged. Low iron ore prices have reduced economic growth, export receipts, and net international reserves; widened the fiscal deficit; and increased risks to financial stability. Lower oil prices have, on the contrary, provided some support to the external and fiscal positions. The exchange rate continued appreciating in real term in 2015, moving counter to the terms-of-trade shock. The impact of the shock is compounded by a narrow production base, structural weaknesses and limited policy space in the context of elevated public debt and pressures on external buffers. Outlook and Risks. The economic outlook envisages a recovery in economic activity to 4.1 percent in 2016, but risks to the outlook are tilted to the downside and the economy remains vulnerable to external shocks. Over the medium term, current policies will result in sustained pressures on reserves and elevated debt driven by public investment plans. Subdued economic activity could hinder the capacity of the financial sector to channel credit toward private sector activity hampering efforts to achieve more diversified and robust economic growth. In the short term, the economy is most vulnerable to higher oil prices, lower-than-envisaged iron ore prices, and a stronger US dollar under the current exchange rate policy.

1. Introduction

My Mauritanian authorities express their deep appreciation to staff for the candid discussions and the helpful policy advice provided during the Article IV Consultation.

The decline in international iron ore prices—Mauritania’s main export commodity—has had a severe impact on the country with strong negative spillover effects on the rest of the economy. The sizeable terms-of-trade shock slowed economic growth and contributed to an increase in debt levels. The current account deficit (although on a declining path) remains elevated. While lower international oil prices will help mitigate the impact of the shock on the external position, Mauritania’s overall performance and the country’s outlook have been adversely affected by the commodity shock.

The authorities have adjusted their policies to the new economic environment. They introduced more flexibility to the exchange rate and let the currency to depreciate gradually—a policy initiated as early as October 2014 and which is still ongoing—while pursuing their fiscal consolidation efforts. They feel that that their policy adjustment efforts are starting to have the intended effects on the economy.

The authorities share some of the concerns expressed in the report over debt levels and acknowledge that the current account deficit remains elevated which poses financing risks. While they recognize that 2015 has been a difficult year and that the period ahead remains challenging, due in part to the fact that iron ore prices will likely remain subdued for the foreseeable future, they are of the view that the impact of the shock has somehow stabilized from the “lows” reached in 2015.

Overall, my Mauritanian authorities feel that the tone of the report and the staff’s assessment of the economy and the country’s economic prospects are more pessimistic than their own assessment, especially with regard to the exchange rate policy and fiscal consolidation efforts. They also believe that the report could have been more balanced, emphasizing areas of difficulty (debt levels, current account deficit) but also giving more prominence to areas of relative resilience.

2. Recent economic developments show signs of resilience

Following the 2014 severe terms-of-trade shock, the policies implemented by the authorities have been effective in improving the resilience of the economy. This is shown by the growth performance. Economic growth is projected to rebound in 2016 to 4.1 percent up from 1.9 percent in 2015 and should stabilize at around 3.5-4 percent over the medium-term. Importantly, economic growth will be driven increasingly by non-extractive sectors. Inflation remains moderate at an estimated 3.8 percent in 2016 and is projected to stabilize at around 5 percent over the medium-term as growth resumes.

In assessing Mauritania’s economic performance, the report would have benefited from comparisons with LICs and Sub-Saharan Africa given that many economies in Africa and in developing countries more generally are being affected by similar shocks. Putting things into perspective, we would note that while Mauritania’s performance may have weakened in some areas compared to other LICs (debt/GDP is an example) in other areas, the performance has been relatively strong.

In the fiscal area, the fiscal revenue-to-GDP ratio of Mauritania at 28.1 percent in 2015 (as indicated in the DSA report) is not only high in absolute terms but has increased despite the drop in mining revenues. This compares favorably to the average for Sub-Saharan Africa which stands at 18.5 percent in 2015 (April 2016 WEO). Moreover, the primary fiscal deficit for Mauritania (excluding interest payment) is projected to improve from -2.8 percent of GDP in 2014 to -0.9 percent in 2016, which in the context of a high debt/GDP ratio such as for Mauritania, is crucial and indicative of the efforts being made.

As regards the external sector, the authorities have adopted a prudent and gradual depreciation of the exchange rate, to address the impact of the shock on the external position. The central bank also contracted a bilateral loan to strengthen foreign exchange reserves which is contributing to the stability of the foreign exchange market and further reassuring markets of the central bank’s ability to defend the currency.

The current account deficit narrowed significantly from 27 percent of GDP in 2014 to 13 percent projected in 2016—in just two years. Part of this improvement is the result of lower international oil prices but part is also due to the exchange rate adjustment, as other imports have dropped, affected by the depreciation of the currency (as shown, for example, by the decline in imports of capital goods.) International reserves buffers are estimated to have remained elevated at almost 6 months of imports in 2016, and are projected to remain above 3 months of imports until 2019.

The authorities disagree with the staff’s assessment in paragraph 12 of the main report that the currency is significantly overvalued. They see no evidence of imbalance in the official market, nor do they see any meaningful premium on the parallel market. The absence of premium on the parallel market can be explained in part by the size of the foreign exchange reserves, and in part by the ongoing policy of gradual depreciation of the currency. Furthermore, as a matter of consistency with previous IMF reports, the authorities believe that the present report should have addressed the significant divergence between the results of the methodology used to assess the exchange rate misalignment (concluding to an overvaluation of the currency) and the lack of meaningful premium on the parallel market (Annex V).[1]

On debt, the authorities share some of the concerns over the increase in debt levels. They would like to indicate, however, that part of the increase reflects the need to adjust to the severity of the terms-of-trade shock (including the need to build up foreign exchange reserves through a bilateral loan). The increase in debt levels also reflects the need to sustain efforts to close the country’s vast infrastructure gap, essential for raising Mauritania’s potential growth and fighting poverty.

They would also like to emphasize that the overall debt situation is more nuanced than it appears. First, the elevated debt levels referred to in the report (and in all IMF staff reports on Mauritania since the HIPC completion point) include a sizeable Kuwaiti debt which has been passive for many decades. If the Kuwaiti debt is excluded, the level of debt drops to 70 percent of GDP in 2016—which is still high but much lower than the level of 93% discussed in the report. Second, the additional recent borrowing is mostly on concessional terms (see the report on the DSA). Third, the ratio of “external debt service-to-GDP” remains low and manageable at 0.9 percent in 2015 and 2016.

3. Medium-term policies and outlook

The authorities have made difficult policy choices in the wake of the severe terms-of-trade shock to adapt to the new challenging environment. They are determined to pursue their policies and are confident that their policy choices will enable them to make progress towards macroeconomic stability and higher growth. They believe that given Mauritania’s economic circumstances, the gradual approach to exchange rate adjustment is the right approach to strengthen the country’s external position (as opposed to an abrupt depreciation which would do nothing to revive exports given the extremely narrow export base and which would instead exacerbate the already difficult economic situation by considerably slowing growth and significantly increasing inflation.)

According to the staff projections, the current account is forecast to remain elevated over the medium-term, posing financing risks. In response, the authorities will continue to introduce further flexibility of the exchange rate. They are confident that the continued gradual depreciation of the exchange rate (as long as the fundamentals require it) will help narrow the current account deficit and will also likely have a lesser impact on the foreign exchange reserves than currently assumed in the report. This is due in part to the fact that the import-to-GDP ratio would further adjust to a continued depreciation of the currency.

The authorities are also determined to continue their fiscal consolidation efforts. While the slowdown in economic activity and in the mining sector has had a severe impact on fiscal revenues, the authorities will continue to adjust to the decline in extractive industries’ revenues by reigning in expenditures while preserving essential social expenditures, with the objective to lower further the primary fiscal deficit to a level that would stabilize debt levels as a share of GDP. The authorities will also pursue important reforms which will support their fiscal consolidation efforts to reduce debt. In this regard, they intend to improve the code of tax procedures, the Organic Law of Finance (LOF) and the new customs code. Other important reforms will improve cash management through a second-generation single treasury account and strengthen the supervision of public enterprises.

Over the longer-term, the recent gas discoveries offshore Mauritania by the U.S. company Kosmos, could significantly improve the outlook beyond 2019. However, the authorities rely primarily on a dynamic and competitive private sector to diversify the economy and boost growth in the medium-term. As noted in the report, Mauritania was one of the top 10 reformers appearing in the 2016 Doing Business ranking. The authorities will pursue their efforts to improve the business environment by simplifying administrative procedures and taxation, modernize the judicial system, protect investors’ rights and implement the AML/CFT framework. These efforts will need to be supported by a sound financial system to support growth. In this regard, the authorities are committed to strengthen banking supervision and promote a more competitive financial system to improve financial intermediation and inclusion in support of their development agenda.

4. Conclusion

The recent terms of trade shocks have impacted negatively on Mauritania’s economy. However, the authorities are taking steps to address them, such that the economic outlook envisages a recovery in economic activity for 2016. The focus of their efforts will be to address the current account deficit and debt levels as they pursue their adjustment efforts. In doing so, they will continue to work closely with Fund staff and other development partners to put in place the appropriate policies that will help mitigate the impact of the shocks. With the help of the Fund and the donor community, they will also continue their efforts to further diversify the economy away from mineral commodities with the objective to raising growth to more sustainable and inclusive levels.

[1]

In the past, the IMF has always used the parallel market to assess potential imbalances on the official market and possible misalignment of the currency. For example, in the 2008 the Article IV Consultation report, staff note that the “results from the implementation of the CGER-type methodologies indicate that misalignment estimates lie within the range of statistical error. These results are confirmed by the absence of a significant premium on the parallel exchange rate market”. In the July 2013 report on the sixth revue of the ECF, they note that “the premium against the dollar and the euro on the parallel market remains small, indicating that there is no fundamental imbalance on the official market”.