Mali: Request for a three-year Arrangement Under the Extended Credit Facility—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
05 Sep 2019
eISBN:
9781513513300
Language:
English
Keywords:
ISCR; CR; revenue administration reform; debt; government; company EDM; sustainability analysis; sustainability framework; debt carrying capacity; default shock; Stress testing; Debt sustainability
Download PDF (501.5 KB)

Request for Three-Year Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Mali

Abstract

Request for Three-Year Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Mali

Background

A. Public Debt Coverage

1. Mali’s public debt covers external and domestic obligations of the central government. Information on state-owned enterprises (SOEs) debt is generally not available, and only the liabilities of the national state-owned electricity company EDM (the main SOE), estimated at CFAF 319 billion (3.1 percent of GDP) at end-June 2018, are included in the baseline. Contingent liabilities estimated at CFAF 150 billion (1.5 percent of GDP) from EDM have already been assumed by the central government as a result of EDM’s financial difficulties. State and local government entities do not borrow directly on their own. While liabilities of other public sector entities, including SOEs and other guaranteed debts, are not included in the baseline due to data constraints, a contingent liability test is performed to capture potential fiscal risk posed by these entities (Text Table 1). Staff will continue discussions with the authorities to broaden the coverage of public debt to include guarantees and SOE debt. The component of the contingent liability shock related to SOEs that are not accounted for in the public sector coverage is calibrated at 2 percent of GDP (the default setting) (Text Table 1). Public Private Partnerships (PPPs) capital stock for Mali is estimated at 3.7 percent of GDP, implying a calibrated 1.3 percent of GDP (0.35*3.7) for the PPP component of the contingent liability stress test. External debt is defined on a currency-denominated basis.

Text Table 1.

Coverage of Public Debt and Size of 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 negligible, a country team may reduce this to 0%.

article image

B. Background on Debt

2. At end-2018, Mali’s stock of public debt amounted to CFAF 3,555 billion (37.3 percent of GDP), composed mostly of external debt on concessional terms (Text Figure 1 and Text Table 2). External debt amounted to CFAF 2,346 billion, of which CFAF 1,886 billion is due to multilateral creditors and CFAF 460 billion to bilateral creditors. However, domestic debt is rapidly building up, increasing from a low base of 6.3 percent of GDP in 2014 to 12.7 percent of GDP in 2018, mostly in treasury bills and bonds issued on the WAEMU regional market (Text Table 3).

Text Figure 1.
Text Figure 1.

Mali: Central Government Debt 2010–18

(in percent of GDP)

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.A002

Sources: Malian authorities; IMF Staff estimates.
Text Table 2.

Mali: External Debt Stock at Year-End, 2010–18

(billions of CFAF)

article image
Sources: Malian authorities; and IMF staff estimates.

Includes August 2009 SDR allocation.

Text Table 3.

Mali: Public Domestic Debt Stock at Year-End, 2014–18

(billions of CFAF)

article image
Sources: Malian authorities, IMF Staff estimates.

3. The authorities are planning to use a part of the IDA allocation in 2019 to reprofile domestic debt and reduce rollover risk. The government is planning a debt management operation that will entail borrowing a syndicated loan from international banks guaranteed by the World Bank using part of the 2019 IDA allocation. The authorities view this operation as a precursor for eventually accessing international financial markets and issuing a Eurobond. They intend to use part of the proceed of this operation (up to US$500 million under the Policy-Based Guarantee financial instrument, PBG) to support EDM, reducing its short-term exposure towards the banking sector, and to reduce rollover risk by replacing part of domestic and regional debt with external loans. However, as its timing and size are not yet confirmed, this operation has not been included in the baseline for the new program. Adjusters to performance criteria have been included should the operation materialize before end-2019.

Underlying Macroeconomic Assumptions and Country Classification

A. Background on Macroeconomic Forecasts

4. This DSA is consistent with the macroeconomic framework underlying the Staff Report prepared for the 2019 request for the ECF-Supported Program (Box 1).

5. Macroeconomic conditions have been updated since the previous 2018 DSA (Text Table 4). In the short term, the main changes in assumptions relate to fiscal balance, trade and external support (Text Table 5). In the medium and long terms, key macroeconomic assumptions are in line with the previous DSA.

Text Table 4.

Mali: Evolution of Selected Projected Macroeconomic Indicators

article image
Sources: Malian authorities; and IMF Staff estimates and projections.

Defined as the last 15 years of the projection period. For the current DSA, the long term covers the 2023–37 period. For the previous DSA, it covered 2022–36.

Defined as the sum of concessional grants and loans.

Text Table 5.

External Financing Assumptions, 2019–30

(in percent of GDP)

article image
Sources: Malian authorities and staff estimates.

Debt in which the grant element exceeds 35 percent.

Debt comprising a grant element that is positive but is less than 35 percent.

Baseline Macroeconomic Assumptions

  • Real GDP growth. The economic outlook, while presenting some encouraging elements, is subject to important downside risks. In 2019, real output growth is projected at 5.0 percent and remains near potential growth (4.8 percent) over the medium term (Text Table 4). Downside risks relate to the possible deterioration in security situation, potential terms of trade shocks (to the price of gold, cotton, and fuels), and adverse weather conditions. A specific risk arises from a continued shortfall in domestically-financed public investment because of a failure to mobilize sufficient domestic revenues. This outlook is broadly similar to the projected growth path in the previous DSA.

  • Fiscal policy. In 2018, fiscal revenue sharply declined by 4.2 percentage points of GDP, leading to a widening of the overall deficit to 4.7 percent of GDP (from 2.9 percent of GDP in 2017). This poor performance was explained by a combination of weakened compliance and enforcement in the run-up to presidential elections, worsened security conditions, and higher international fuel prices. The authorities partially offset the revenue shortfall by cutting domestically-financed capital spending (by 1.8 percent of GDP), as well as current spending (by 1.2 percent of GDP). Staff expect revenue to recover by 2020 with a frontloading of 75 percent of the recovery in 2019. This path would help the authorities achieve an overall fiscal balance of 3 percent of GDP already in 2019, in line with the WAEMU convergence criterion.

  • External sector. The current account deficit is projected at 5.6 percent of GDP in 2019 (6.5 in the previous DSA) from 3.8 percent of GDP in 2018, driven by imports for mining and infrastructure investment and a slowdown in gold exports. Thereafter, the current account deficit is projected to further widen to 7.1 percent of GDP in 2020 as terms of trade deteriorate, and then gradually narrow to stabilize at about 6.9 percent by 2023. This stabilization in the external position would be driven partly by supportive macroeconomic policies, gradual increase in exports (including food, cotton, and other minerals), and lower long-run oil prices. These factors should help to offset the expected steady decline in export earnings from gold.1 As in the previous DSA, the current account deficit continues to be financed mainly through FDI, public sector borrowing, and official grants.

  • Financing mix. External borrowing is expected to increase to 3.5 percent of GDP in 2019 from 2.2 percent of GDP in 2018, reflecting the large increase in the 2019 World Bank’s budget support (from US$60 million to US$250 million). The 2019 baseline also includes the disbursement of a near-concessional loan of US$250 million from Abu Dhabi for balance of payments purposes. The authorities initially intended to use the policy-based guarantee instrument of the World Bank to contract syndicated loans in the international market for about US$500 million on commercial terms. However, there remains considerable uncertainty about the timing and size of this operation and it has not been included in the baseline for the new program. Over the medium term, gross financing needs will continue to be financed by external multilateral sources and bonds issued in the regional bond market (UEMOA-Titres).

1 Gold export volumes are expected to decline steadily over time, with the share of gold in total exports projected to fall from 67 percent in 2015 to about 20 percent in 2036.

6. The realism tools show that projections are broadly in line with historical and peers’ experiences (Figure 6)

  • Forecast errors. Projections of the drivers of external debt are in line with past debt dynamics, when unexpected changes in debt were mainly driven by unexpected changes in the current account and FDI. On average, primary deficit was the main contributor of total public debt.

  • Fiscal adjustment. The fiscal adjustment path is in line with peer country experiences but with a lower impact on medium-term GDP growth than suggested by fiscal multipliers. The primary sector and gold production, which are weakly related to the fiscal stance, account for about 40 percent of real GDP growth. Moreover, the fiscal consolidation in 2020 is mainly driven by an increase in revenue (smaller fiscal multiplier) rather than a decrease in public expenditure (higher fiscal multiplier).2

  • Investment-growth. The contribution of government capital stock to growth is similar to that observed in the previous DSA.

Figure 1.
Figure 1.

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

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.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.
Figure 2.
Figure 2.

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

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.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 3.
Figure 3.

Mali: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.A002

1/ Difference betw een anticipated and actual contributions on debt ratios.2/ Distribution across LICs for w hich 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.Sources: Country authorities and staff estimates and projections.
Figure 4.
Figure 4.

Mali: Indicators of Public and Publicly Guaranteed External Debt Under Customized Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.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.
Figure 5.
Figure 5.

Mali: Indicators of Public Debt Under Customized Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.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 6.
Figure 6.

Mali: Realism Tools

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.A002

Sources: Country authorities and staff estimates and projections.

B. Country Classification and Determination of Scenario Stress Tests

7. Mali is assessed as having a medium debt carrying capacity. Based on the April 2019 WEO macroeconomic framework and updated World Bank’s CPIA measures, Mali’s composite indicator scorelies between 2.69 and 3.05, in line with the assessment of medium debt carrying capacity applied in the May 2018 DSA.

Applicable Thresholds

article image

Calculation of the CI Index

article image
Note: Until the April 2019 WEO vintage is released, the two previous vintages ago classification and corresponding score are based solely on the CPIA per the previous framework.

C. External DSA

8. The risk of external debt distress for Mali remains moderate with some space to absorb shocks. All debt indicators remain below their corresponding indicative thresholds under the baseline scenario and stress tests, indicating space to absorb shocks; however, in a customized alternative scenario in which the fiscal deficit is 2 percentage points of GDP per year higher than in the baseline during 2020–23, the debt service to export ratio breaches the threshold (Figure 4).

9. Mali’s external debt ratios remain low under the baseline scenario. Under the baseline scenario, the ratio for the PV of external public debt to GDP is projected to remain between 14 and 17 percent of GDP, well below the indicative threshold of 40 percent throughout the projection period (Figure 1, Table 1). The PV of the external debt-to-exports is also projected to remain broadly stable between 73.0 percent and 118.0 percent, comfortably below the 180 percent threshold. Debt service indicators are all below their corresponding thresholds. Including the PBG and reprofiling operation would not change the risk rating. The standardized stress tests show a negative impact on the trajectory of debt indicators, yet no threshold is breached.

Table 1.

Mali: 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.1/ Includes both public and private sector external debt.2/ Derived as [r – g – ρ(1+g)]/(1 +g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ 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.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ 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.

10. However, security challenges and large development needs justify considering a customized scenario with higher deficits which underscores the vulnerability of Mali’s external debt to external shocks (Figure 4). This scenario would reflect additional security-related expenditures that may be required if the conflict intensifies and the large investment spending projected in the authorities’ CREDD. The deficit would remain above the WAEMU’s convergence criterion of 3 percent of GDP by 2 percentage points of GDP for the next four years and financed on commercial terms.3 Debt ratios significantly would increase compared to the baseline, leading to a breach of the debt service-to-exports ratio under an export shock (the most extreme).

11. Mali’s external debt sustainability is highly sensitive to an export growth shock, a reduction in current transfers and FDI and exchange rate depreciations, along with changes in borrowing terms. Under a bound test with a temporary reduction in export growth4 in 2020–21, the debt service-to-exports ratio significantly increases under the baseline scenario and would breach its threshold under the customized scenario in 2026–27 (Figure 4). Similarly, a bound test with lower FDI and current transfers5 in 2020–21 would drive the PV of the debt-to-exports ratio toward the threshold.

12. Going forward, macroeconomic stability is crucial to maintaining external debt sustainability. In particular, it is essential that the authorities continue their efforts to mobilize domestic revenue and implement reforms to diversify the exports base. The full implementation of the 2015 peace agreement is also critical to macroeconomic stability and debt sustainability.

D. Public DSA

13. The inclusion of domestic debt does not alter the assessment of Mali’s debt sustainability. Given the small size of Mali’s domestic debt and the planned domestic debt reprofiling operation, the public debt sustainability analysis closely mirrors the external debt sustainability analysis under both the baseline and alternative scenarios (Figures 4 and 5). The PV of public sector debt-to-GDP ratio stays between 30.6 and 34.4 percent of GDP during the entire projection period under the baseline scenario but increases to 39.1 percent of GDP in 2023 under the alternative scenario of higher deficits financed at less favorable terms. That said, the recent rapid growth of domestic debt stock needs to be monitored closely to maintain debt sustainability and financial stability going forward.

E. Conclusion

14. Mali’s risk of external debt distress and overall risk of debt distress remain moderate. As in the previous DSA, while Mali’s public debt remains low, debt sustainability is sensitive to external shocks. All debt indicators remain below their corresponding indicative thresholds under the baseline scenario and stress tests. However, an export shock a customized scenario of higher deficits financed at unfavorable terms shows a breach of the debt service-to-exports threshold. The customized scenario reflects additional security-related expenditures that may be required if the conflict intensifies. Mali’s debt sustainability is also highly sensitive to a tightening of financing terms, to an exports shock given the export concentration in gold and cotton, and to a reduction in current transfers and FDI. In addition, non-resident holdings of securities issued in the regional securities market can pose additional risks that are not currently captured in the external DSA, although the scale of such holdings is unclear. Mali needs to maintain prudent macroeconomic policies, strengthen the effectiveness of public investment, debt management and continue to meet its external financing needs with grants and concessional loans, wherever possible. In addition, projects should deliver high returns; and structural reforms to improve the investment climate and export diversification should continue, in view of an expected decline in gold’s exports over the medium term.

F. Authorities’ Views

15. The authorities concurred with the results of the DSA. They agree on the need to tackle the country’s debt sustainability challenges. They commit to seeking grants and concessional financing, avoiding as much as possible non-concessional borrowing.

Table 2.

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

(In percent of G(In DpercPent, ofu GDnP, luenlesss sot hoerwtishe inedicratwed)ise indicated)

article image
Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central government . Definition of external debt is Currency-based.2/ 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.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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.5/ 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.6/ 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 3.

Mali: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029

(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.

Table 4.

Mali: 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.

Figure 7.
Figure 7.

Mali: Qualification of the Moderate Risk Category. 2019–2029 1/

Citation: IMF Staff Country Reports 2019, 289; 10.5089/9781513513300.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
1

This DSA was jointly prepared by IMF and World Bank staff under the new debt sustainability framework (DSF) for low-income countries (LICs), implemented since July 2018. The debt-carrying capacity is classified using the country-specific composite indicator (CI) composed of three macroeconomic indicators and the World Bank’s Country Policy and Institutional Assessment (CPIA). Mali’s capacity is assessed as “medium” using the CI based on the April 2019 WEO and the 2017 CPIA data.

2

See the Sub-Saharan Africa Fiscal Adjustment and Economic Diversification, Regional Economic Outlook, IMF, October 2017 for more details on fiscal multipliers in Sub-Saharan African countries.

3

The average grant element is 0.85 percent with an unified discount rate of 5 percent.

4

Nominal export growth (in USD) set to its historical average minus one standard deviation, or the baseline projection minus one standard deviation, whichever is lower, in the second and third years of the projection period.

5

Current transfers-to-GDP and FDI-to-GDP ratios set to their historical average minus one standard deviation, or baseline projection minus one standard deviation, whichever is lower, in the second and third years of the projection period.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Mali: Request for Three-Year Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Mali
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 289
Publisher: