Islamic Republic of Mauritania: Request for Disbursement under the Rapid Credit Facility—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.
Publication Date:
29 Apr 2020
eISBN:
9781513542485
Language:
English
Keywords:
ISCR; CR; financing; center; RCF fund; financing gap; grant financing; commodity export; emergency support; Credit; Fiscal stance; COVID-19; Global; exchange rate; broad money; private sector; limit financing pressure; central bank
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Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania

Context

1. Pre-pandemic, economic performance was strong; the authorities were implementing prudent policies and advancing with reforms, albeit with some delays. Growth accelerated to close to 6 percent in 2019, driven by buoyant activity in both extractive and non-extractive sectors and favorable terms of trade. Inflation remained low at 2.5 percent on an annual average in March. International reserves reached $1,136 million at end-December (about 5.3 months of non-extractive imports), up from $918 million a year earlier. The budget yielded a sizable primary surplus of 1.7 percent of non-extractive GDP (NEGDP, excluding grants) and as a result the external public debt-to-GDP ratio declined by 2 percentage points to 49 percent of GDP.1

2. Mauritania has an existing arrangement under the Extended Credit Facility (ECF) approved on December 6, 2017, with access of 90 percent of quota. The fourth ECF review was completed on December 11, 2019. The fifth review mission that concluded in early March— prior to the deterioration in the global outlook due to the pandemic and the containment measures taken by the authorities—found that the program was broadly on track. The program supported the use of fiscal space to increase priority social (education, health, and social protection) and infrastructure spending while maintaining prudent fiscal and borrowing policies to preserve debt sustainability.

3. Since then, however, the situation has changed dramatically and the authorities have requested financial assistance under the Rapid Credit Facility (RCF) to address urgent balance of payments and fiscal financing needs arising from the Covid-19 pandemic. Given the magnitude of the shock, immediate mitigation measures are critical and completion of the fifth ECF review is not feasible at this time. The authorities have reaffirmed their commitment to the reform policies of the ECF, and they see the RCF as a bridge until resumption of the ECF review.

Impact of the Pandemic, Outlook, and Risks

4. To prevent the spread of the coronavirus, the authorities have taken drastic measures to limit movement of people. As of April 14, seven Covid-19 cases were confirmed in Mauritania with one death and two recoveries; over 1,000 people were quarantined. In late February, the authorities started implementing—in consultation with the WHO and other development partners—their prevention and response plan, which includes health/security checks, preparation of hospitals, and securing medicines and healthcare equipment. In mid-March, the authorities suspended all commercial flights, closed border crossings (except for essential goods), imposed a strict nightly curfew, closed schools and universities, banned large gatherings, and closed non-essential businesses. At end-March, they closed all stores, banned inter-regional travel, and locked down a south-eastern city. Beyond preventive measures, additional efforts will be needed to contain the spread of a potential outbreak of the virus, which will require appropriate equipment, the mobilization of health personnel, and an extension of health services in remote regions—straining an already weak health system. The authorities also started engaging in sizable additional outlays for security and logistics to enforce the containment measures and secure borders, and to stockpile food and other essential goods; already 20,000 vulnerable household have benefitted from food distribution.

5. The pandemic has given rise to urgent balance of payments and budgetary needs:

  • The economy is expected to contract this year. The global economic outlook has deteriorated significantly, leading to a projected drop in extractive sector production while containment measures will bring many domestic economic activities and sectors to a virtual halt for several months, with knock-on effects on other sectors; these output losses, as well as a drop in FDI, could lead to a contraction in overall GDP to an estimated -2.0 percent at best in 2020—down from a pre-pandemic estimate of 6.3 percent growth.

  • The balance of payments will be severely affected through lower commodity and fish exports, despite the resilience of global iron ore prices thus far. Although lower activity, trade disruptions, and low global oil prices may reduce imports (including oil, equipment, and construction material), this will be compensated in part by imports of pharmaceuticals, health equipment, and foodstuff to prevent shortages. Extractive sector exports will be affected by equipment and personnel shortages, and work on the offshore gas field project will likely be delayed. Many of these effects are already being felt, and the resulting external financing need is projected at about $368 million (5.0 percent of GDP, about 1.7 month of non-extractive imports).

  • The budget will be severely impacted by additional health, medical supplies, social protection, SME support, foodstuff stocks, and security-related expenditures to address the pandemic (estimated at about $210 million, 3.2 percent of NEGDP in additional appropriations, with possible higher needs later on); and the loss of tax revenues in the order of 3 percent of NEGDP resulting from lower economic activity, a deterioration in compliance, restrictions on the work of revenue administrations and banks, and tax relief measures (see below). Following cuts of 1.2 percent of NEGDP in non-priority spending and projected increases in gains on the domestic fuel price differential of 0.8 percent of NEGDP,2 the fiscal position is expected to switch from a previously projected primary surplus of 0.8 percent of NEGDP (excluding grants) to a primary deficit of 3.2 percent, resulting in a budget financing gap of about 5.2 percent of NEGDP ($323 million, 4.4 percent of overall GDP).

6. Risks are tilted to the downside given the downside risks on the global and regional environment and its uncertain impact on Mauritania (Table 8). Risks include a prolonged global Covid-19 outbreak which could reduce global supply and demand, further lower commodity export prices, and disrupt critical imports. Domestically, an expansion of the epidemic would lead to intensification and prolongation of human suffering and economic and social disruptions; higher budgetary costs; and a greater impact on the economy and budget revenues than currently estimated. Expected fiscal gains from the domestic fuel price differential could fail to materialize and would widen the fiscal gap if petroleum consumption drops more than expected or if pressure to reduce domestic fuel prices succeeds. These risks would add to those associated with the already fragile security conditions in the Sahel. Development of the offshore gas field and other large investment projects could be further delayed (first gas is already assumed to be delayed by one year to 2023). To mitigate these risks, contingency plans include greater donor support and possible augmentation of the existing ECF arrangement (subject to applicable PRGT limits), in addition to acceleration of structural reforms and adjustment. In case of shortfalls in donor financing, additional expenditure reprioritization will need to be considered in areas that will least affect the prevention of the outbreak, such as further postponement of non-priority goods and services or capital expenditure, while protecting expenditure that benefit the poor.

Mauritania: Selected Economic Indicators, 2018–23

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Sources: Mauritanian authorities; and IMF staff estimates and projections.

Policy Discussions

7. There was broad agreement on policy priorities at the current juncture. Staff and the authorities discussed measures to (i) continue with essential containment measures and support for health systems; (ii) shield affected people and firms with adequate, timely, and targeted fiscal and financial sector measures; and (iii) reduce stress to the financial system. Furthermore, there was agreement on the need to plan for a recovery phase to minimize the potential scarring effects of the crisis on human and physical capital; this includes rapidly resuming work on critical social and infrastructure projects (such as the expansion of social safety nets to the whole territory, reforms to public education, and energy, irrigation, and road projects) and other structural reforms planned under the ECF-supported program.

8. Discussions focused on policies to address the human, economic, and social fallout from the pandemic. As noted above, the authorities have deployed a sanitary preparedness plan to prevent and response to the pandemic. To mitigate the economic and social impact, they have set up a special social assistance fund (open to private funding) to procure urgent medical supplies and support 30,000 vulnerable households (about $14 million in line with the existing cash transfer program supported by the World Bank), and waived taxes on some essential goods and SMEs (the government’s contribution to the fund represents about $67 million, 1 percent of NEGDP so far). Moreover, they have programmed additional budget outlays of about $143 million (2.2 percent of NEGDP) for health ($40 million), direct support for agricultural production ($53 million), direct support for SMEs ($18 million), and build-up of stocks of essential foodstuffs ($32 million) and stand ready to take further social action if the fluid situation deteriorates. The central bank (BCM) eased its monetary policy stance by reducing banks’ reserve requirements from 7 percent to 5 percent and its policy rate from 6.5 percent to 5 percent to ease tightening liquidity conditions following the drop in fishing receipts.

9. The authorities have appealed for financial support from the international community and have requested Fund assistance under the RCF. They have sought emergency financing from bilateral and multilateral donors including the World Bank, European Union, and African Development Bank. Staff encouraged the authorities to urgently seek donor financing (grants and concessional loans) to close the remaining balance of payments and fiscal gaps and help ease the adjustment burden.

10. Staff and the authorities agreed on the need to allocate sufficient resources for critical healthcare, emergency services and social protection, as well as for risk communication and community engagement, surveillance and case tracking, infection prevention and control, and testing, while reprioritizing non-essential spending. The authorities emphasized their intention to accelerate the rollout of the cash transfer scheme targeting vulnerable households to the whole territory, expand existing food distribution programs, and continue to seek contributions from the rich segments of the population as a solidarity measure. They were committed to full transparency in the use of resources deployed for the emergency response, to channel all spending through the budget (including the social assistance fund), and to track, account for, and report in a transparent manner. To help deter misappropriation of crisis-mitigation funds and assist fundraising from donors, the authorities will set up a supervisory committee for the social assistance fund and will ask the Court of Accounts to audit crisis-mitigation spending once the crisis abates and to publish the results. They will also publish information on the ministry of finance’s website regarding public procurement contracts related to crisis mitigation, the names of the awarded companies and their beneficial owners, and ex-post validation of delivery.

11. Staff saw accommodation of a wider fiscal deficit as inevitable, provided it remains temporary and enough financing is mobilized. Staff recommended maintaining countercyclical, well-designed public investment projects to support growth while reprioritizing non-essential capital projects as needed to increase health and social spending and limit financing pressures. Given limited fiscal space and a high risk of debt distress (see separate debt sustainability analysis, DSA), staff advised exclusively seeking grants and concessional loans for all budget and public investment financing needs. In case of financing shortfalls, non-essential budget appropriations would have to be reprioritized toward emergency and social needs. While staff saw some scope to use domestic financing buffers, it cautioned against depleting the limited resources of the national hydrocarbon revenue fund, or using the funds deposited at the BCM by Saudi Arabia in 2015 ($300 million, or one-quarter of gross official reserves) as it could lead to a severe depletion of reserves below adequate levels and risk jeopardizing external stability. The authorities noted that the high external public debt service, estimated at about $275 million this year (22 percent of government revenue) and climbing to $360 million next year (25 percent of revenue), represented a heavy burden on public finances. The authorities were committed to maintaining debt sustainability, and hence to unwinding the temporary measures and returning to a primary surplus once conditions normalize.

12. Staff and the authorities agreed on the need to conduct data-dependent monetary policy aimed at addressing liquidity strains while closely monitoring banking sector soundness and inflation developments. Staff recommended to stand ready to provide liquidity to the financial system, against appropriate collateral, while accelerating ongoing reforms of the collateral framework. It encouraged the BCM to consider options and costs of targeted support measures for households and SMEs facing loan servicing problems. It discouraged relaxation of prudential and loss accounting requirements, and called for using banks’ capital and liquidity buffers to absorb credit losses and the liquidity squeeze; but to stand ready, once banks’ buffers are exhausted, to show some flexibility on the timing of bringing capital and liquidity to the minimum required through gradual capital augmentation plans. Staff considered that allowing some exchange rate flexibility may help absorb the shock, although its potential inflationary impact and banks’ short net open foreign exchange positions limit the room for maneuver.

Mauritania: Financing, 2020

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Source: IMF staff projections

Fund Support and Capacity to Repay

13. The authorities have requested Fund support of SDR 95.680 million (about 74.3 percent of quota, or $130 million) under the exogenous shock window of the RCF.3 Staff assesses that Mauritania meets the qualification criteria for support under the RCF:

  • It faces an urgent balance of payments need, which, if not addressed, would result in immediate and severe economic disruption.

  • Disbursements under the ECF arrangement are expected to be delayed, given anticipated slippages in light of the Covid-19 pandemic. Moreover, the severity of the shock and uncertainty about the outlook make it difficult to quickly reach understandings on policies necessary to ensure that the program remains on track to meet its objectives. Because of the urgency of the balance of payments need, and the need for additional time to recalibrate/modify the program, the authorities are requesting an RCF in the meantime.

  • Despite a high risk of debt distress, public debt is sustainable and capacity to repay the Fund is adequate (Table 7, which also assumes prospective ECF disbursements), although capacity to repay would be affected by materialization of the risks described above (¶6). The updated DSA suggests that public debt is sustainable, despite remaining at high risk of external and overall debt distress (see separate report).

  • The authorities are committed to the reform policies under the ECF, and they see the RCF as a bridge until resumption of the ECF review as soon as possible. Staff is comforted by Mauritania’s solid track record of policy implementation and strong relations with the Fund, including under the current ECF-supported program.

14. The proposed access would cover about one-third of the estimated external financing gap. Remaining needs are expected to be filled by other donors (¶9), which would allow maintaining adequate official reserves above 5 months of non-extractive imports.4 The RCF is expected to help catalyze additional donor financing, including from Arab funds and bilateral donors from the Gulf. Absent prospective Fund and donor financing (including future ECF disbursements), reserves could drop to about 3½ months of imports, putting external stability at risk.

15. The authorities asked for the RCF funds to be disbursed to the central bank and on-lent to the treasury to cover the budgetary impact of the pandemic. Domestic savings are not expected to be sufficient to cover the fiscal financing gap. To allow the RCF disbursement to finance the budget, a memorandum of understanding has been signed between the Ministry of Finance and the BCM on their respective responsibilities for servicing financial obligations to the Fund. The authorities have committed to undergoing a safeguards assessment update to be completed before Board approval of any subsequent arrangement and to provide staff with the necessary audit reports and authorize the external auditors of the BCM to hold discussions with staff; the last safeguards assessment was completed in May 2018.

Revised National Accounts

The authorities revalued nominal GDP by 35 percent in 2018 as a result of a comprehensive revision of national accounts. The rebasing exercise, which started in 2017, upgraded national accounts to SNA 2008, updated the base year from 2004 to 2014, and expanded coverage of informal activities. The results were vetted by international experts, including from the Fund and the World Bank. This report incorporates preliminary estimates ahead of official publication scheduled for end-April/May.

Nominal GDP Revision

(in billion MRU)

Citation: IMF Staff Country Reports 2020, 140; 10.5089/9781513542485.002.A001

Sources: Mauritanian authorities.

Real GDP Growth

(in percent)

Citation: IMF Staff Country Reports 2020, 140; 10.5089/9781513542485.002.A001

Sources: Mauritanian authorities.

The main source of the increase in GDP estimates stemmed from the expansion of coverage of informal activities by use of new surveys conducted in 2017. This expansion accounted for 80 percent of the 22.7 percent revaluation of GDP in 2014; informal activities now account for over half of estimated value-added, against 39 percent previously. Revised estimates of deflators between 2015–17 led to a further GDP revaluation by 34.8 percent in 2018.

Contribution to Nominal GDP Revaluation, 2014

(in percent)

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Sources: Mauritanian authorities.

Staff Appraisal

16. The Covid-19 pandemic is having a dramatic human, economic, and social impact on Mauritania. The short-term economic outlook has deteriorated rapidly owing to the sharp deterioration in global economic conditions and the impact of domestic containment measures. Growth is expected to turn negative this year, with severe hardships for the population. Risks are tiled to the downside given the uncertainty around a more protracted global and domestic Covid-19 outbreak, a much steeper economic decline this year, and more gradual recovery thereafter.

17. Mauritania is facing urgent external and fiscal financing needs. Addressing the pandemic and the associated shocks has increased immediate external and fiscal financing needs. While subject to an unusual degree of uncertainty, staff’s revised macroeconomic outlook indicates external and fiscal financing gaps of 4½–5 percent of GDP.

18. Staff welcomes the authorities’ swift response to contain and mitigate the spread and impact of the virus. Health spending to prepare for a spread of the virus should be prioritized as well as spending for containment measures. To mitigate negative effects on the economy, targeted support to the most vulnerable households and those sectors most affected is appropriate. The temporary loosening of the fiscal and monetary stance is justified, and banking sector developments should be carefully monitored. If the crisis deepens, the government may need to scale up its response, ensuring that support measures remain timely, temporary, and targeted with a view to safeguarding fairness and public finances. Staff welcomes the authorities’ commitment to full transparency and reporting of the use of resources deployed for the emergency response, and to audit crisis-mitigation spending once the crisis abates and to publish the results—to help deter misappropriation of crisis-mitigation funds.

19. The authorities remain committed to medium-term fiscal and debt sustainability. The authorities are seeking grants and concessional resources from development partners to address the fiscal pressures from security-related costs, health spending and to safeguard debt sustainability. The updated DSA confirms that debt remains sustainable, despite remaining at high risk of external and overall debt distress, even under the new, more negative outlook. Staff welcomes the authorities’ commitment to returning to primary surpluses as conditions normalize.

20. Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility for a total amount of SDR 95.680 million (about 74.3 percent of quota). Staff’s support is based on the urgent balance of payments needs arising from the severe impact of the pandemic, the authorities’ existing and prospective policies to address this external shock, along with their strong track record which will mitigate risks for the Fund. Given the large fiscal financing gap, staff supports the request that the disbursement be made in the form of budget support. As the Fund alone will only cover about one-third of projected financing needs, staff encourages the authorities to seek additional donor financing. Staff welcomes the authorities’ commitment to resume discussions on the fifth review under the ECF as soon as feasible.

Table 1.

Mauritania: Macroeconomic Framework, 2016–25

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Sources: Mauritanian authorities; and IMF staff estimates and projections.

Including government debt to the central bank recognized in 2018.

Excluding passive debt to Kuwait under negotiation.

Excluding the hydrocarbon revenue fund.

Table 2.

Mauritania: Balance of Payments, 2016–25

(in millions of U.S. dollars, unless otherwise indicated)

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Sources: Mauritanian authorities; and IMF staff estimates and projections.
Table 3a.

Mauritania: Central Government Operations, 2016–25

(in billions of MRU, unless otherwise indicated)

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Sources: Mauritanian authorities; and IMF staff estimates and projections.

Including transfers to public entities outside the central government.

Adjusted for half of additional/shortfall in extractive revenue.

Overall balance excluding foreign-financed investment expenditure.