Third Review Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania
On behalf of my Mauritanian authorities, I would like to thank staff for the constructive policy discussions held in Nouakchott in February-March 2019 in the context of the third review under the ECF-supported program.
The economic recovery has further strengthened since the completion of the second review. The fiscal balance is in surplus, external public debt has declined, and foreign exchange reserves have increased. Inflation is under control despite pressures from food price increases last year while the current account deficit has widened mainly due to strong domestic demand and higher oil prices.
Mauritania has continued to deliver on its commitments under the ECF-supported program. All performance criteria for end-December 2018 and end-March 2019 have been met. The structural benchmarks have all been completed albeit two with a slight delay.
Looking forward, Mauritania’s economic prospects are positive on account of favorable developments in both the extractive and non-extractive sectors as well as the continued implementation of sound policies. The authorities concur with the staff’s assessment that the outlook is subject to downside risks, but these are mostly external, stemming from an uncertain global environment and security challenges in the region. Against this backdrop, they highly value the Fund’s support and remain fully committed to prudent policies and reforms under the ECF-supported program with the view to reinforcing macroeconomic stability, enhancing economic resilience and promoting inclusiveness.
II. Recent Developments and Prospects
1. Recent Developments
Real GDP growth is estimated to have reached 3.6 percent in 2018 up from 3.1 percent in 2017 and 1.8 percent in 2016, driven by the non-extractive sectors, particularly fishing, construction, transport, and telecommunications. Excluding extractive industries, growth rose to a robust 6.3 percent in 2018 from 4.5 percent in 2017. Consumer prices increased slightly in 2018 but have remained in-check at 3.1 percent on average compared to 2.3 percent in 2017. The buoyant non-extractive growth has been accompanied by an increase in credit to the sectors that have driven growth, mainly construction, transport and telecommunications.
Continued fiscal consolidation efforts have led to a solid fiscal performance in 2018. The overall fiscal balance improved significantly in 2018, reaching a surplus of 3.3 percent of GDP from a balanced budget in 2017, thanks to increased tax revenues helped in part by the ongoing economic recovery as well as slower-than-expected execution of capital expenditures. The primary fiscal balance exceeded 4 percent of non-extractive GDP.
As the recovery took hold in 2018, imports grew at a faster pace than exports. Paired which with higher international oil prices, this has resulted in a widening of the current account deficit (excluding externally-financed extractive capital imports) from 7.4 percent of GDP in 2017 to 11.4 percent in 2018. Nonetheless, foreign exchange reserves stood at a comfortable 5 months of prospective non-extractive imports.
The authorities’ efforts to stabilize external debt and put it on a downward path have started to bear fruit. External public debt dropped in 2018 to 69.3 percent of GDP down from 72.5 percent in 2017 and is forecast to decline further over the medium-to long-term, owing in part to favorable prospects for offshore gas production. They reiterate their commitment to seeking non-concessional borrowing only in exceptional circumstances and for essential development projects and when concessional financing is unavailable.
On the issue of the passive debt owed to Kuwait, progress has been made in recent months as both countries have agreed to resolve the issue at a high-level meeting held in Kuwait in April 2019. In this regard, the details of the agreement are under discussion.
Medium- and long-term growth prospects remain favorable. Planned public and private investments in the non-extractive sector as well as steady progress in the implementation of structural reforms under the ECF-supported program and the Stratégie de Croissance Accélérée et de Prospérité Partagée 2016–30 (SCAPP) —Mauritania’s development strategy— should contribute to stimulating growth over the medium-term. In addition, the positive outlook for the commodities exported by Mauritania, especially iron ore and gold should help boost growth. Growth is expected to reach 6 percent on average in the medium-term. A gradual narrowing of the current account deficit as well as a further buildup of foreign exchange reserves are also projected.
From 2022 onwards, the launching of gas production and exports should significantly improve economic prospects. Taking into account the expected substantial revenues from gas exports, the authorities with the assistance of the IMF and other partners, will reinforce their fiscal policy framework. It is also worth noting that the staff’s projections currently only take into account the first phase of the GTA gas project. Therefore, given the substantial increases in gas production expected during phases two and three of the project, the authorities believe that the long-term outlook should further improve substantially.
III. Policy and Reform Priorities
1. Fiscal Policy
Fiscal consolidation efforts have continued in 2018, leading to a strong fiscal stance. In October 2018, the government submitted to parliament the 2019 budget which is consistent with program objectives. This budget approved by parliament in November 2018 foresees a fiscal balance for 2019 through measures to enhance the performance of the tax system and streamline current expenditures.
On the revenue side, reforms are underway to simplify and modernize the tax system. A new tax code has been approved by parliament in April 2019 which aims notably to improve tax fairness and reduce informality. In this context, a new corporate tax has been introduced which streamlines the tax structure while fostering the formalization of the economy. Measures have also been put in place to simplify tax returns and encourage timely payments, particularly by large and medium-sized enterprises subject to the VAT and income taxes. Performance targets have been introduced at the Directorate General of Taxation (DGI) to better monitor and assess the effectiveness of government actions on tax compliance by large and medium-sized enterprises. Regarding customs administration, controls after clearance of imports will be enhanced with the assistance of the IMF, including through the establishment of a supervisory committee.
On the expenditure side, the focus remains on rationalizing current expenditures, including by containing the wage bill and trimming public consumption spending through a reduction in subsidies allocated to certain public enterprises. To further improve the efficiency of investment spending, the authorities have requested technical assistance from the IMF to conduct a public investment management assessment (PIMA). Broader efforts are also underway to strengthen public expenditure management and financial accounting, as well as fiscal governance.
2. Monetary and Exchange Rate Policy
The central bank of Mauritania (BCM) lowered its key interest rate from 9 percent to 6.5 percent in December 2018. The policy easing intervenes in a context of stable inflation and relative tightening of liquidity conditions, as well as a solid fiscal position.
The implementation of the reforms aimed at promoting the development of the interbank market are moving forward and progress continues to be made in improving liquidity management. In this respect, following the introduction by BCM of new refinancing facilities in November 2018 and the adoption of a framework for eligible collaterals, BCM issued the newly created central bank bills for the first time in February 2019, to manage liquidity. It also established an interest rate corridor in November 2018 and will adjust its rates based on market needs. Two committees have been set up at the end of 2018 —a money market committee and a technical monetary policy committee— to guide the implementation of these new instruments.
Following the adoption last year of a central bank law to modernize the institutional structures of BCM and enhance its autonomy, another step towards reinforcing the central bank’s autonomy has been made in February 2019 with the ratification by parliament of the memorandum of understanding on the reimbursement of the government’s debt owed to the central bank.
The authorities remain committed to a full transition to International Financial Reporting Standards (IFRS) by 2020.
The central bank will pursue a gradual approach to reforming the foreign exchange market and introducing greater exchange rate flexibility with the assistance of the IMF. The objective remains to set up an interbank foreign exchange market in compliance with international standards by end-2019. An action plan to develop this market had been adopted in September 2018. The associated regulatory framework should be finalized by June 2019, and an appropriate technical platform operational by the end of 2019. It is expected that a one-way wholesale auction system will be introduced by the end of 2019.
3. Financial Sector Stability
Building on the progress achieved last year with the adoption of a new banking law that has contributed to the strengthening of prudential standards for banks and aligning them with Basel II and Basel III Principles, the BCM intends to further reinforce the stability of the financial sector and address its vulnerabilities, including the need to further reduce non-performing loans (NPLs) and concentration risks.
The new banking law has also led to strengthening banks’ solvency and capital requirements and, as a result, banks’ minimum capital has been raised. This has contributed to enhancing the overall capital adequacy ratio of the banking sector in 2018. To tackle vulnerabilities, the removal of NPLs from banks’ balance sheets will be facilitated. Furthermore, starting from
July 2019, banks will be required to apply prudential standards to limit concentration risks, including by further increasing their capital.
In addition, to help reduce banks’ credit risks while also encouraging access to credit, a new credit information bureau has been set up and made operational since February 2019.
The authorities are taking actions to address the weaknesses identified in the AML/CFT framework. In particular, they have adopted in January 2019 a new AML-CFT law consistent with the international norms of the Financial Action Task Force (FATF). They have also finalized the National Risk Assessment and prepared an action plan to address identified vulnerabilities. Continued progress in this area should help address correspondent banking relationship (CBR) pressures.
4. Structural Reforms and Poverty Reduction
Mauritania’s development agenda is underpinned by the SCAPP 2016–30 which pursues the three-fold objective of achieving a strong, sustainable and inclusive growth; developing human capital and better accessing basic social services; and improving governance. Ultimately, their goal is to increase per-capita GDP more rapidly and accelerate the poverty reduction within a more diversified, robust, and vibrant economy.
Structural reforms have lately focused on improving the business environment. While Mauritania has made rapid gains in the ranking of the World Bank’s Doing Business reports in recent years, the authorities recognize that much remains to be done to render the business climate fully attractive to investments. To make further inroads in this area, a High Council on the improvement of the business climate has been set up in February 2019, chaired by the Prime Minister and which also includes representatives of the private sector. The council will be responsible for coordinating the implementation of reforms and proposing an annual action plan. For 2019, the action plan takes into account the weaknesses underscored in the most recent Doing Business report, including regarding access to electricity and justice.
Given the favorable outlook in the gas sector, the progress accomplished by Mauritania on EITI compliance is noteworthy. At the meeting of the EITI Board in February 2019, all standards pertaining to Mauritania have either been considered as being “met” or having achieved “substantial progress”. The authorities are committed to implementing the remaining required actions by end-2019 with the assistance of development partners.
As regards the fight against corruption, the government will operationalize the monitoring committee in charge of implementing the national anti-corruption strategy adopted in 2010 by designating its members and providing the committee with the necessary resources to carry out its duties.
On poverty reduction, despite a steady and substantial increase in the resources allocated to social spending over the years, the program’s indicative target at end-December 2018 has not been observed due to capacity limitations. The authorities will take the necessary actions to ensure that this important target is met moving forward. They remain steadfast in their commitment to provide by June 2020 targeted social transfers to the estimated 200,000 most vulnerable households in the country. However, launching the next phases of the important social programs targeted towards the poorest segments of the population will require additional financial support from the international community. Talks with development partners will be initiated to ensure that these social programs are adequately financed.
The authorities are cognizant of the importance to make well-informed policy decision-making based on accurate statistics. In this regard, they have undertaken a revision and an update of their national accounts in accordance with the 2008 System of National Accounts (SNA) with support from various donors, including the IMF. The rebasing of the country’s national statistics should result in a 26 percent increase in nominal GDP.
My Mauritanian authorities would like to reiterate their firm commitment to the objectives of the program. They express their deep appreciation to the Executive Board, Management and staff for their continued support which has been instrumental in their efforts to preserving macroeconomic stability and fostering inclusive growth. In view of Mauritania’s satisfactory progress under the ECF-supported program, they request the Board’s support for the completion of the third review.