Islamic Republic of Mauritania: Third Review Under the Extended Credit Facility Arrangement—Debt Sustainability Analysis Update
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
31 May 2019
eISBN:
9781498317542
Language:
English
Keywords:
ISCR; CR; government; GDP; real GDP; price; long-term debt; shock result; shocks result in breach; growth shock; long-term debt service indicator; Stress testing; Debt sustainability
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Third Review Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania

Abstract

Third Review Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania

Public Debt Coverage

1. The coverage of public debt includes the central government, the central bank (BCM), and state-owned enterprises’ (SOEs) debt guaranteed by the government. Public and publicly guaranteed (PPG) debt now includes borrowing by the state-owned oil company SMHPM to finance Mauritania’s share in the Grand Tortue/Ahmeyim (GTA) offshore gas project.2 As in previous DSAs, it excludes non-guaranteed borrowing by the state-owned mining company SNIM, as the company is run on a commercial basis and has borrowed without government guarantee up to end-2016. SNIM’s non-guaranteed external debt is classified as private external debt.3 Other parts of the government and SOEs are unable to borrow from abroad or require a government guarantee.4 Public external debt also includes a passive debt in arrears owed to Kuwait.5 As noted in the previous DSA, the authorities have been in active discussions with Kuwait to resolve these longstanding arrears.

Mauritania: Coverage of Public Sector Debt

article image

Debt Developments

2. External PPG debt in percent of GDP declined in 2018 as a result of a slowdown in project loan disbursements for public investment. Excluding the passive debt to Kuwait, external public debt declined from 72.5 percent of GDP at end-2017 to 69.3 percent in 2018.6 External PPG debt is largely contracted on concessional or semi-concessional terms from official creditors. Much of the nominal increase in external debt in 2015 owed to a $300 million non-concessional deposit from Saudi Arabia to the support the BCM’s foreign exchange reserves. Most of the rest of external debt contracted in 2015–17 was by the central government to finance public investment projects. Domestic public debt increased in 2018 as the government formally recognized a debt toward the BCM equal to about 8.3 percent of GDP.

uA02fig01

External Debt by Debtor 2009–18

(In millions of USD)

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

Sources: Mauritanian authorities; and IMF staff estimates.
uA02fig02

PPG External Debt by Creditor, 2009–18

(In millions of USD)

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

Sources: Mauritanian authorities; and IMF staff estimates.
uA02fig03

PPG External Debt by Currency, 2018

(In percent of total)

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

Sources: Mauritanian authorities; and IMF staff estimates.

Mauritania: External Debt, 2013–18

article image
Source: Mauritanian authorities.

Including passive debt under negotiation.

Including deposit at the central bank.

Excluding SDR allocation.

Creditors include AfDB, KFW, France, IDB, EIB.

Macroeconomic Projections

3. The projections in the baseline scenario are derived from the macroeconomic framework presented in the Staff Report for the third ECF program review. Compared to the previous DSA in November 2018, the macroeconomic framework incorporates the first phase of the GTA offshore gas project, as well as Mauritania’s borrowing to finance its share in the project ($304.5 million over 2019–22).7 Key variables affected include project-related FDI inflows (mostly to finance corresponding imports), gas exports, and government revenues. As a result, while the debt profile is slightly higher, the medium-term outlook for growth, exports, and revenues has improved. In the framework, a preliminary assumption is made that half of the government revenues from the GTA project is saved in the existing hydrocarbon fund and half is used to increase public investment; at the same time the share of externally financed investment declines.8

Consequently, real GDP growth is projected to be higher on average than in the previous DSA during 2019–29, and marginally higher during 2029–39. For 2019, real GDP growth is projected at 6.7 percent of GDP, owing to sustained non-extractive sector growth supported by the authorities’ public investment program and planned structural reforms aimed at improving the business climate and diversifying the economy; gains are projected in agriculture, construction, telecom, and other services. During the GTA construction years, some local contracting of onshore project-related investments (such as a breakwater) are projected to raise growth somewhat. In the extractive sector, medium- and long-term growth is supported by past upgrades to iron ore and gold mines and the onset of GTA gas production in 2022. External borrowing is projected to be higher by about 1 percent of GDP per year than in the previous DSA in 2019–22 due to the financing of the GTA project. Inflation is projected to average 4 percent per year during 2019–29.

Mauritania: LIC DSA Macroeconomic Assumptions, 2018–39

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

For Previous (Nov. 2018): 2029–38.

Figure 1.
Figure 1.

Mauritania: Macroeconomic Projections, 2018–38

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

Source: Mauritanian authorities; and IMF staff estimates.1/ Excluding arrears to Kuwait for which debt relief under HIPC-MDRI is assumed.

4. The LIC-DSF realism tools suggest that projections underpinning this DSA are reasonable (Figures 4 and 5). The decomposition of the drivers of debt dynamics reveal a similar pattern to that in the November 2018 DSA. It highlights the adverse effects of the drop in commodity prices in 2014–16 which had a significant impact on the current account and growth owing to the undiversified structure of the economy. The large increase in borrowing in 2014–16 is not expected to recur in the context of the authorities’ ECF-supported program and their strong commitment to a prudent debt management policy consistent with debt sustainability and seeking to avoid non-concessional financing. Cross-country experience with fiscal adjustment under IMF programs for low-income countries suggests that the programmed three-year primary balance adjustment for Mauritania is well within the range of realistic outcomes. The projected baseline pickup in growth, which is larger than projected using fiscal multipliers, reflects the impact of a return to average weather conditions on agriculture and livestock following the drought and an increase in iron ore and gold production. The current DSA anticipates only a slight increase in the contribution of public investment to growth over the next five years (before the onset of large fiscal GTA-related revenues) compared with the last DSA. Instead, the higher projected growth is expected to be driven by higher productivity growth, structural reforms, and increased private investment, in part linked to the development of the GTA project.

Figure 2.
Figure 2.

Mauritania: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2019–29

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 3.
Figure 3.

Mauritania: Indicators of Public Debt Under Alternative Scenarios, 2019–29

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 4.
Figure 4.

Mauritania: Drivers of Debt Dynamics—Baseline Scenario External Debt

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 5.
Figure 5.

Mauritania: Realism Tools

Citation: IMF Staff Country Reports 2019, 145; 10.5089/9781498317542.002.A002

Country Classification and Stress Tests

5. Mauritania’s debt-carrying capacity continues to be assessed as medium. Based on the IMF’s April 2019 World Economic Outlook (WEO) data and the 2017 CPIA (the latest available), the Composite Indicator (CI) score is 2.90, indicating a medium debt-carrying capacity. This is higher than the CI score of 2.69 (based on the October 2018 WEO data) in the November 2018 DSA, which indicated a weak debt-carrying capacity. The improved CI reflects a higher projected import coverage of reserves, driven by higher projected commodity prices, increased mining production, and the inclusion of projected GTA gas exports. Mauritania’s debt carrying capacity continues to be assessed as medium. A change in debt-capacity requires two consecutive changes from the previous classification and the October 2018 WEO-based signal was the only weak result.

Mauritania: Calculation of the CI Index

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6. Default values were used for the standardized stress tests and the two applicable stress tests— contingent liabilities and commodity price shocks. The use of the default values for the combined contingent liability stress test and public-private partnerships (PPP) is unchanged relative to the previous DSA.9

Mauritania: Combined Contingent Liability Shock

article image

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be

Debt Sustainability Assessment

A. External Debt Sustainability

7. Baseline projections for two of the four debt indicators—the PV of debt-to-GDP and the debt service-to-revenue ratios—persistently breach their respective thresholds (Table 1 and Figure 2). The PV of debt-to-GDP indicator, albeit on a declining trend, remains above its 40 percent threshold until 2026. The debt service-to-revenue indicator breaches its relevant 18 percent threshold until 2024. Compared to the November 2018 DSA, the first indicator falls below its relevant threshold one year earlier due to a more favorable growth outlook related to the GTA gas project despite somewhat higher related debt. The breach in the second indicator, which mainly reflects the onset of repayments in 2021 on the Saudi deposit at the BCM, is more persistent than before due to more conservative short-term extractive revenue projections. The standardized stress tests show breaches of the thresholds by all the debt indicators (Table 2). The most extreme shocks are the combination shock (PV of debt-to-GDP ratio and debt service-to-revenue ratio) and the export growth shock (PV debt-to-exports ratio and debt service-to-exports ratio). The tailored commodity price shock results in a persistent breach of the threshold for all four debt indicators, and the contingent liability shock shows breaches of the PV of debt-to-GDP and debt service-to-revenue ratios.10

Table 1.

Mauritania: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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

Includes both public and private sector external debt.

Derived as [r – g – ρ(1+g) + εα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Assumes that PV of private sector debt is equivalent to its face value.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 2.

Mauritania: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29 (In percent)

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

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

B. Public Debt Sustainability

8. Baseline projections suggest a sustained breach of the 55 percent of GDP benchmark for the PV of public debt until 2022, unchanged from the previous DSA (Table 3 and Figure 3). The public debt dynamics are mostly driven by external debt given low domestic debt of only 12 percent of GDP at end-2018. The breach is slightly shorter than in the external DSA. The PV of debt-to-revenue and debt-service-to revenue indicators also show a steady decline from an initial high point in 2018–21. The standardized stress tests suggest that the largest negative impact (most extreme shock) on the three debt indicators would stem from a shock to non-debt flows (PV of debt-to-GDP and PV of debt-to-revenues ratios) and a real GDP growth shock (debt service-to-revenue ratio) (Table 4). The PV of debt-to-GDP ratio breaches its benchmark value under all the standardized stress shocks. With respect to the tailored stress tests, both contingent liability and commodity price shocks result in breaches of the benchmark value for the PV of debt-to-GDP ratio.

Table 3.

Mauritania: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

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

Coverage of debt: The central government, central bank, government-guaranteed debt. Definition of external debt is Residency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 4.

Mauritania: Sensitivity Analysis for Key Indicators of Public Debt, 2019–2029

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

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Risk Rating and Vulnerabilities

9. Despite a slowdown in external debt disbursements in 2018, the risk of external debt distress remains high. This is largely the legacy of the sharp increase in borrowing during 2014–16 to finance infrastructure, and the contraction in nominal GDP due to a large terms-of-trade shock and some exchange rate depreciation in 2016. The projected trajectory of the debt-to GDP and the PV of debt-to-GDP ratios is slightly lower than in the November 2018 DSA, reflecting stronger economic prospects across non-extractive and extractive sectors, including the GTA gas project. Moreover, under the current macroeconomic framework, these two debt burden indicators continue to show a clear downward trend. However, the DSA still projects an exit from a high risk of external debt distress only after 2025, and the trajectories of the two external debt service indicators remain above or close to their thresholds for several years, pointing to the need to monitor closely the consequences of any new borrowing on debt service. The stress tests illustrate the vulnerabilities of the debt indicators to negative shocks affecting exports, commodity prices, growth, and the fiscal stance. The DSA also suggests that the overall risk of debt distress is high because two external debt indictors breach their respective thresholds under the baseline and the PV of public debt-to-GDP breaches its benchmark value for a sustained period.

10. While the risk of external and overall debt distress is high, two longer-term mitigating factors could contribute to lowering risks and improving debt sustainability. First, the inclusion of dividends received by the SMHPM as part of consolidated public sector revenues would improve long-term debt service indicators. Second, the future assets potentially accumulated in the future by the hydrocarbons fund from its GTA-related revenues (assumed to represent half of annual GTA revenues, see paragraph 3) could be available to meet debt service payments or to retire external debt, which would help reduce long-term vulnerabilities. These options would depend on future macro-fiscal rules adopted on the use of GTA-related revenues and assets.

11. The DSA highlights the need to follow sound economic policies, including a prudent borrowing strategy that avoids non-concessional borrowing and relies instead on grants and concessional financing taken up at a moderate pace consistent with absorptive capacity. To avoid exacerbating short-term liquidity risks, new borrowing resulting in significant additional short-term debt service should be avoided. The authorities should also continue their best efforts to resolve the external debt in arrears with Kuwait. Reducing risks of debt distress also hinge on sustaining structural reforms to promote inclusive growth and economic diversification through private sector development, improving public financial management to raise the efficiency and growth dividends of public spending, and strengthening debt management capacity. The authorities have reflected these objectives in their growth and development strategy and have made progress in implementing the policies needed to achieve them under their IMF-supported program.

Authorities’ Views

12. The authorities acknowledge the need for prudent debt policies and stronger public investment management but question the rating of high risk of debt distress. They consider that the borrowing incurred for their investment in the GTA project is done on a commercial basis without a state guarantee, and therefore should not be counted as publicly guaranteed debt. Staff’s response is that this debt is incurred by a state-owned entity on behalf of the government. The authorities also considered the debt service burden to be manageable in the short-term, and subsequently more so with the onset of GTA fiscal and export revenues which in their view makes their largely concessional debt stock manageable. They also noted that the deferred repayment of the deposit made at the central bank by a development partner had helped reduce possible short-term liquidity risks regarding debt service payments. They look forward to the rebasing of their national accounts aimed at measuring economic activity more accurately, which they expect will raise GDP and therefore reduce debt ratios.

1

This DSA was prepared under the joint Fund-Bank Low-Income Country Debt Sustainability Framework and provides a streamlined update to the previous DSA prepared in November 2018 (IMF Country Report No. 18/365). Mauritania’s Composite Indicator (CI) score based on the April 2019 WEO and the CPIA is 2.90 and its debt-carrying capacity remains unchanged at medium.

2

This debt is not guaranteed by the government.

3

SNIM’s shareholders comprise the government (majority) and two other shareholders with significant holdings. The company has managerial independence including over pricing and employment policies. It operates on a commercial basis, is profitable and does not receive subsidies from, and pays dividends, to the government. It publishes annual reports and audited accounts. Nevertheless, SNIM debt represents a contingent liability for the central government as a majority shareholder and the DSA captures this through the contingent liability test

4

Externally-financed projects managed by SOEs and government agencies are funded through loans contracted by the government and are on-lent by the government to parastatals. This on-lending/investment is not recorded in the central government budget; however, debt service on these loans is paid by the central government and is included in the budget. The associated debt is included in the stock of central government external debt.

5

A passive pre-HIPC debt, estimated at 19 percent of GDP in 2018, is owed to the Kuwait Investment Authority (KIA) since the 1970s. Negotiations have been ongoing between the authorities and Kuwait to achieve debt relief on at least comparable terms to, or better than, the 2002 HIPC Initiative operation. In April 2019, a memorandum of understanding was signed on a framework to restructure these arrears; its terms will be incorporated in the DSA after final agreement and ratification by both countries. This DSA assumes full debt relief in 2020; in the previous DSA debt relief was assumed to be granted in 2019.

6

In Table 1 of the DSA, the figures for PPG external debt in percent of GDP are different from those reported in this paragraph and text table and in Tables 1 and 2 of the Staff Report for 3rd Review of the ECF Arrangement. The difference stems from different exchange rates (average or end-period) implicitly used to value foreign debt in local currency vs GDP in foreign currency; Table 1 of the DSA uses end-period exchange rates.

7

The framework does not incorporate two potential additional GTA project development phases, which would have further implications for the economic and debt outlooks, as no investment decision has been made yet.

8

At this time, the authorities have not decided on a plan for using the GTA revenues.

9

While a PPP law was adopted in 2017, World Bank data indicate no PPP capital stock, and a reported project has yet to be launched; hence the zero default value was retained. For SOEs, the default parameter of 2 percent of GDP is retained to capture a potential fiscal risk stemming from SNIM. SNIM’s external debt (not guaranteed by the government) was equivalent to 7 percent of GDP at end-2018.

10

Both the external and the public debt sustainability framework (Tables 1 and 3) show a sizeable residual in 2020, which reflects the assumed debt relief of the debt in arrears to Kuwait. Other residuals in the public debt sustainability framework are due to debt disbursements on loans on-lent by the government to SOEs that are not captured in the central government budget (but are in the external debt sustainability framework); debt service on these loans, however, is paid by the government and is included in the fiscal flows.

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Cover IMF Staff Country Reports
Islamic Republic of Mauritania: Third Review Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2019: Issue 145
Publisher:
International Monetary Fund
ISBN:
9781498317542
ISSN:
1934-7685
Pages:
103
DOI:
https://doi.org/10.5089/9781498317542.002
  • View in gallery

    External Debt by Debtor 2009–18

    (In millions of USD)

  • View in gallery

    PPG External Debt by Creditor, 2009–18

    (In millions of USD)

  • View in gallery

    PPG External Debt by Currency, 2018

    (In percent of total)

  • Figure 1.
    View in gallery
    Figure 1.

    Mauritania: Macroeconomic Projections, 2018–38

  • Figure 2.
    View in gallery
    Figure 2.

    Mauritania: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2019–29

  • Figure 3.
    View in gallery
    Figure 3.

    Mauritania: Indicators of Public Debt Under Alternative Scenarios, 2019–29

  • Figure 4.
    View in gallery
    Figure 4.

    Mauritania: Drivers of Debt Dynamics—Baseline Scenario External Debt

  • Figure 5.
    View in gallery
    Figure 5.

    Mauritania: Realism Tools

External Debt by Debtor 2009–18

(In millions of USD)

PPG External Debt by Creditor, 2009–18

(In millions of USD)

PPG External Debt by Currency, 2018

(In percent of total)
Figure 1.

Mauritania: Macroeconomic Projections, 2018–38
Figure 2.

Mauritania: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2019–29
Figure 3.

Mauritania: Indicators of Public Debt Under Alternative Scenarios, 2019–29
Figure 4.

Mauritania: Drivers of Debt Dynamics—Baseline Scenario External Debt
Figure 5.

Mauritania: Realism Tools