Abstract
As a commodity exporter, Mauritania is vuinerabie to shifts in the terms of trade. Fiuctuations in the current account balance generate macroeconomic and financial voiatiiity that caii for exchange rate adjustments. A more flexible exchange rate would help absorb real shocks and dampen growth and financial volatility while preserving external buffers. This selected issue paper discusses the desirable institutional and macro-financial conditions and optimal path toward greater exchange rate flexibility. It also identifies the macro-financial risks that arise, and mitigation measures supporting a smooth transition and discusses reforms needed for a successful and smooth shift, including the need for an alternative nominal anchor and modern monetary policy framework, more developed financial markets, and resilient financial sector.
Mauritania: Gradual Transition to Greater Exchange Rate Flexibility1
As a commodity exporter, Mauritania is vuinerabie to shifts in the terms of trade. Fiuctuations in the current account balance generate macroeconomic and financial voiatiiity that caii for exchange rate adjustments. A more flexible exchange rate would help absorb real shocks and dampen growth and financial volatility while preserving external buffers. This selected issue paper discusses the desirable institutional and macro-financial conditions and optimal path toward greater exchange rate flexibility. It also identifies the macro-financial risks that arise, and mitigation measures supporting a smooth transition and discusses reforms needed for a successful and smooth shift, including the need for an alternative nominal anchor and modern monetary policy framework, more developed financial markets, and resilient financial sector.
A. Introduction
1. Mauritania would benefit from increasing exchange rate flexibility. A more flexible exchange rate can reduce the economy’s vulnerability to external shocks, preserve international reserves, support competitiveness, dampen macroeconomic and financial volatility, reduce the need for sizeable fiscal adjustment, and increase the scope for more independent monetary policy. One of the main benefits that Mauritania derived from a more stable exchange rate is a historically low inflation until the commodity price shock of 2021. However, lower and more stable inflation can be achieved by an alternative monetary policy framework while fully reaping the benefits of a more flexible exchange rate.
2. The reform of the exchange rate arrangement has greater chance of success when initiated from a position of strength—external, fiscal, monetary, and financial. In general, there are three main reasons triggering a move to greater exchange rate flexibility: (1) depleted foreign exchange (FX) reserves and overvalued exchange rate, (2) vulnerability to external shocks, or (3) the decision to modernize the monetary policy framework and evolve to an inflation targeting regime. In the first case, the objectives of the reform are often to address FX pressures, realign the exchange rate, and restore competitiveness. In the second case, the objective is rather to allow the exchange rate to serve as an additional instrument to help adjustment and strengthen resilience to future shocks, and the reform should normally not lead to a depreciation if the starting point is more or less balanced macrofinancial conditions supported by a sound monetary policy framework and fiscal discipline. At the same time, evolving the monetary policy framework toward a more forward-looking price-based monetary policy involves less reliance on the exchange rate and more reliance on the interest rate to stabilize inflation, as the BCM has been trying to achieve recently, which falls under the third case.
3. For Mauritania, key elements for a successful transition to greater exchange rate flexibility include: (1) an alternative nominal anchor and modern monetary policy framework, (2) strengthened banks’ balance sheets and resilience to shocks, and (3) relatively developed domestic government securities and interbank money and foreign exchange markets to support smoother monetary policy implementation and transmission and reduce reliance on external debt (Figure 1).
Flexible Exchange Rate—Cost/Benefit Analysis
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: the author.Flexible Exchange Rate—Cost/Benefit Analysis
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: the author.Flexible Exchange Rate—Cost/Benefit Analysis
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: the author.4. The Mauritanian authorities have already launched the preparatory work needed to strengthen the monetary policy framework to support greater exchange rate flexibility. In 2017, the central bank of Mauritania (BCM) issued a new regulation introducing the monetary operations needed to operate an interest rate corridor system. In 2018, the central bank initiated the reform of its collateral framework and introduced a new emergency liquidity assistance (ELA) regulation. The authorities also reformed the central bank law in July 2018 and modernized its governance structures. A new agreement between the central bank and the government on the consolidation of legacy government debtwas ratified by parliament in January 2019. In December 2019, the BCM relaxed some of the constraints on FX market activity by allowing the netting of bank client transactions, and in November 2022, it phased out the surrender requirement of receipts from fishing exports of Mauritanian Corporation for Fisch Marketing (SCMP) to accounts at the central bank.
5. Critical remaining steps include: the effective implementation of a narrower interest rate corridor system and deepening of key markets—i.e., the interbank money, FX and government securities’ markets—to strengthen monetary policy implementation and transmission, and allow the switch to an alternative monetary policy anchor. The short-term focus could be on (1) gradually narrowing the interest rate corridor, (2) managing liquidity more actively, (3) addressing the constraints on the deepening of the interbank money market, (4) developing the government securities’ market, (5) reforming the collateral framework, (6) developing a Forecasting and Policy Analysis System (FPAS) and the central bank’s communication, and (7) accelerating the reforms needed to create and gradually deepen the interbank FX market and support the move to greater flexibility.
B. Motivations for Greater Exchange Rate Flexibility
6. Mauritania is a small economy exposed to terms-of-trade shocks. External vulnerabilities are elevated due to limited economic diversification, and a dependence on a few exporting sectors. The economy was hit by two major shocks since 2014: (1) the 2014–15 drop in commodity prices, including Mauritania’s main export commodities—iron ore, gold, and copper ore, and (2) the COVID-19 shock. The 2014–15 terms-of-trade shock halved exports, widened the fiscal deficit, and put pressure on international reserves.Growth slowed to 1.3 percent in 2016 compared to 4.3 percent in 2014. The contraction in extractive sectors spilled over the whole economy as non-extractive growth also fell to 1.6 percent in 2016. After a short-lived recovery in 2017–18, the COVID-19 pandemic led to the deepest economic contraction since 2007 (Figure 2.1).
Real GDP Growth—Comparison to Peers
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Note: real GDP growth are estimates for all countries after 2020; S.D.= Standard Deviation.Sources: World Economic Outlook (WEO) database and author’s calculations.Real GDP Growth—Comparison to Peers
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Note: real GDP growth are estimates for all countries after 2020; S.D.= Standard Deviation.Sources: World Economic Outlook (WEO) database and author’s calculations.Real GDP Growth—Comparison to Peers
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Note: real GDP growth are estimates for all countries after 2020; S.D.= Standard Deviation.Sources: World Economic Outlook (WEO) database and author’s calculations.7. Exogenous shocks exacerbate macroeconomic and financial volatility. Under a tightly managed exchange rate, positive external shocks translate into positive liquidity shocks—in the absence of offsetting liquidity management by the central bank—and aggregate demand shock, leading to an overheating of the economy. Conversely negative external shocks generally induce an economic contraction. When not offset by the central bank monetary operations, volatile liquidity conditions lead to credit boom-and-busts and encourage the buildup of precautionary reserves that prevent the development of the interbank market and smooth implementation of an interest rate-based monetary policy.
8. In Mauritania, economic growth has been more volatile than other North African neighbors, including Morocco which maintained an exchange rate anchor according to the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER2020), and Algeria which is also highly dependent on hydrocarbon exports (Figures 3 and 4). Growth volatility makes investment decisions harder as sales are less predictable. It also generates larger swings in public revenues leading to fluctuations in the fiscal balance that required, at times, significant fiscal adjustments and flexibility. Domestic liquidity conditions have also fluctuated with external developments, thereby amplifying their impact on economic activity.
Exchange Rate Arrangement and Economic Volatility—Maghreb Countries
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Note: volatility is estimated bythe standard-deviation overthe period 1992–2020.Sources: AREAER 2020, and the author’s calculations.Exchange Rate Arrangement and Economic Volatility—Maghreb Countries
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Note: volatility is estimated bythe standard-deviation overthe period 1992–2020.Sources: AREAER 2020, and the author’s calculations.Exchange Rate Arrangement and Economic Volatility—Maghreb Countries
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Note: volatility is estimated bythe standard-deviation overthe period 1992–2020.Sources: AREAER 2020, and the author’s calculations.
Exchange Rate Regime and Economic Volatility—Selected AFR and MCD Countries
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: WEO database, International Financial Statistics (IFS), and author’s calculations.Exchange Rate Regime and Economic Volatility—Selected AFR and MCD Countries
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: WEO database, International Financial Statistics (IFS), and author’s calculations.Exchange Rate Regime and Economic Volatility—Selected AFR and MCD Countries
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: WEO database, International Financial Statistics (IFS), and author’s calculations.9. The policy aimed at stabilizing the exchange rate has been procyclical. During the 2014–15 commodity price shock, the BCM engaged in unsterilized FX interventions aimed at countering pressure on the exchange rate, which led to tighter liquidity conditions, higher real interest rates, and a credit slowdown in 2016–17. In addition, financial stability risks heightened as liquidity tightened and non-performing loans (NPLs) rose significantly. The authorities responded to the terms-of-trade shock with significant fiscal policy adjustment. They achieved a notable fiscal consolidation of 3 percent of GDP in 2016, while the BCM allowed a gradual exchange rate depreciation against the U.S. dollar and stopped direct FX sales outside the official market (IMF, 2017).
10. The tightly managed exchange rate amplifies the swings in international and bank reserves. Constraining the moves of the exchange rate usually results in positive liquidity shocks in times of FX reserve accumulation. This is precisely what happened in Mauritania during the 2010-11 positive terms-of-trade shock as well as more recently in 2021 with the buildup of FX reserves and artisanal gold purchases by the BCM. The rapid accumulation of net foreign assets (NFA) by the BCM would have called for large-scale sterilization operations in 2010–11. However, because its financial resources were constrained, the BCM was unable to cover the costs of the needed liquidity absorption operations and therefore refrained from undertaking them (Blotevogel, 2013).2 Conversely, adverse exogenous shocks result in negative liquidity shocks as experienced during the 2014–15 and the COVID-19 shocks.
11. The current account deficit is volatile and sometimes sizeable. Over the 2010–20 period, the current account deficit has fluctuated between 3.8 percent of GDP in 2011 and 22.2 percent of GDP in 2014 with an average of 13 percent of GDP. The current account deficit widened substantially after the Arab Uprisings and the 2014–15 commodity price shock. It recovered in 2017–19, helped byfiscal consolidation and controlled exchange rate depreciation (Figures 5.2). In 2019, the current account deficit narrowed on the back of favorable terms-of-trade. Yet, Mauritania’s current account deficit remains one of the largest in the middle east and central Asia region as it is inflated by externally financed imports of capital good of extractive industries.3 When excluding these imports, the deficit stood at 3.8 percent of GDP in 2019, with a surplus of 2.2 percent of GDP achieved in 2020 due to favorable commodity export markets for iron ore and gold, and lower public spending and oil import prices. The current account balance, however, deteriorated starting 2021 on the back of a resumption of public spending and deterioration of the terms-of-trade with the decrease in iron ore prices and increase in food and oil prices.
Current Account and Fiscal Balances (2010–21)
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Current Account and Fiscal Balances (2010–21)
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Current Account and Fiscal Balances (2010–21)
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.12. International reserves remained adequate until 2021 but are expected to fall around the adequacy threshold due to the negative external shock. According to the latest external sector assessment (2021), the adequate level of reserves was 5.2 months of non-extractive sector imports, assuming a fixed exchange rate. At end 2021, international reserves stood at 7.3 months of prospective non-extractive imports, still above the adequacy threshold. However, due to the surge in international food and oil prices and decrease in iron ore price, the current account deficit is expected to widen to 17.3 percent of GDP at end-2002, thus increasing downward pressures on reserves.
13. Despite adequate FX reserves, the official FX market has been structurally short in FX until 2021. Since the market’s establishment in 2007, unmet FX demand—mostly from importers— has been a persistent feature of the market, and the BCM the main supplier of FX. Historically, the BCM captured a large share of FX inflows outside the official market: an important share of export revenues, especially those of mining companies is drained through repatriations. In addition, before 2022, FX reserves accumulation by the BCM as result of the IMF-supported program and other FX borrowing was not fully channeled to the market. Despite the shortage of FX, the premium between the parallel and official market rate has been generally low (Figures 6).
Official and Parallel Market Daily Exchange Rates Against the US Dollar
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Official and Parallel Market Daily Exchange Rates Against the US Dollar
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Official and Parallel Market Daily Exchange Rates Against the US Dollar
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.14. In 2022, the BCM changed its rationing policy by increasing its FX interventions to cover current account transactions. This resulted in a decrease of excess reserves from MRU11.3 billion at end-2021 to MRU2.2 billion in September 2022, still above the level of banks’ reserve requirements (MRU5.3 billion). With the BCM new intervention strategy, the premium between the parallel and official market rate narrowed in 2022 (Figure 6).
15. Between 2010 and mid-2020, the exchange rate has been anchored on the U.S. dollar, on a broadly depreciating trend. The depreciation accelerated between mid-2014 and mid-2016 to about 18 percent and slowed in 2016–18 and 2021 where the exchange rate has been broadly stabilized. In July 2022, the depreciation accelerated somewhat. The bilateral exchange rate against the Euro has strictly followed the Eurodollar developments and has not been targeted by the central bank. At the onset of the 2014–15 commodity price shock, the nominal and real effective exchange rates (NEER and REER) significantly appreciated until early 2015, before reverting their appreciation trend in April 2015 and subsequently stabilizing. In 2016–17, the effective exchange rates depreciated but started appreciating again in 2018 due to the strengthening of the U.S. dollar. The REER stabilized in 2019, before slightly appreciating through mid-2020.
16. The rigid exchange rate arrangement exacerbated pressures on international reserves.4 If the negative terms-of-trade shock is more persistent than expected, the risk of a disorderly exchange rate adjustment with adverse consequences on the monetary and financial stability can also increase. Although the premium between the official and parallel market exchange rate is usually low, it may increase if the exchange rate is persistently misaligned.
17. A more flexible exchange rate would reduce the economy’s vulnerability to external shocks and preserve international reserves. Countries that are heavily reliant on a single commodity or a group of commodities need more exchange rate flexibility to respond to changes in world commodity prices and to mitigate their spillovers into other sectors (Husain, 2006). Diversified economies are less exposed to terms-of-trade shocks and thus less vulnerable to sizeable exchange rate movements usually needed to facilitate adjustment to these shocks (Eichengreen and others, 1998). Allowing the exchange rate to absorb terms-of-trade shocks reduces the need for significant fiscal adjustments as exchange rate flexibility plays a countercyclical role; a negative external shock would depreciate the exchange rate, encouraging exports while constraining imports, thereby dampening the initial impact of the shock and its contractionary effect on banking system liquidity, credit, and absorption. The depreciation is not expected to lead to higher inflation if an effective alternative nominal anchor is in place.
C. Exchange Rate Passthrough and Monetary Transmission
18. The exchange rate passthrough to inflation limits the scope for sizeable exchange rate fluctuations. To assess the magnitude of the exchange rate passthrough in Mauritania, we build on Burstein and Gopinath (2014) and estimate the following regression using monthly data over the period 2014M1–2020M12:
where cpit is the log of CPI, ert is the log of ouguiya per U.S. dollar exchange rate, and Xt a vector of control variables including broad money, and oil, iron ore, and gold prices. β0 measures the instantaneous passthrough, and
19. Muted monetary transmission could lead to inflationary pressures in case of significant exchange rate adjustment. Blotevogel (2013) found no evidence of a statistically significant impact of exogenous monetary policy shocks on bank lending. Banks’ concentrated loan portfolios and restricted BCM refinancing—due to the limited available collateral—were identified by the author as key constraints on effective monetary policy implementation and transmission. Banks only lend to a narrow range of customers (related parties, state-owned enterprises, and civil servants). In addition, since most banks cannot easily access the BCM standard liquidity injection operations to meet unexpected demand on their own liquidity, they tend to build liquidity buffers for precautionary reasons.
20. The empirical evidence shows no reaction of inflation to the BCM’s policy rate. To assess monetary transmission in Mauritania, we estimate a vector autoregression (VAR) model over 2008Q1–2020Q2, broadly following the methodology used by Christiano and others (2005) for the ordering of the variables. The variables included in the VAR are the Index of Industrial Production (IPI), Inflation (INFLATION), the BCM’s policy rate (POLICY_RATE), and broad money (BM). We use the IPI as a proxy of economic activity in the absence of a quarterly GDP. We also include oil, iron ore and gold prices as exogeneous variables. The generated impulse-response functions with a Cholesky decomposition are presented in Figure 7. We found no significant reaction of either inflation or the IPI to a policy rate shock. These results are consistent with those of Blotevogel (2013) who also found no evidence of monetary transmission in Mauritania. The variance decomposition of inflation shows that in the short-run (fourth quarter): (1) 75 percent of inflation variance is explained by its own shock, (2) shocks to economic activity can cause 19 percent of fluctuation in inflation, (3) shocks to broad money growth explain 5.8 percent of inflation variance, and (4) the policy rate plays almost no role in explaining inflation fluctuations (Figure 8). On the other hand, the variance decomposition of economic activity suggests no role of broad money and a limited role of the policy rate in explaining fluctuations in economic activity (Figure 9), an expected result considering the scarcity of policy rate adjustments and a lack of an active liquidity management.
VAR Impulse Responses
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.VAR Impulse Responses
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.VAR Impulse Responses
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.
Variance Decomposition of Inflation
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.Variance Decomposition of Inflation
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.Variance Decomposition of Inflation
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.
Variance Decomposition of Economic Activity
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.Variance Decomposition of Economic Activity
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.Variance Decomposition of Economic Activity
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and author’s calculations.21. Monetary transmission from the BCM’s policy rate to bank retail rates is however somewhat effective. To assess the passthrough from the policy rate to bank deposit and lending rates in Mauritania, we estimate the following regressions over the period 2014M1–2021M2:
Where Xt is a vector of control variables including broad money growth, the NEER, and gold, iron ore, and oil prices. We found that β4 is statistically significant in equation (3) where the change in the average lending rate is the dependent variable. In addition, in equation (2) where the dependent variable is the change in the average deposit rate, β6 and β7 are also statistically significant, suggesting some transmission from the BCM’s policy rate to bank retail rates (Table 1 and 2).
Mauritania: Passthrough from the Policy Rate to Bank Deposit Rate—Regression Results
Mauritania: Passthrough from the Policy Rate to Bank Deposit Rate—Regression Results
| Change in average deposit rate (DDEPOSIT_RATE) | |
|---|---|
| Change in the policy rate at t-6 (DPOLICY_RATE(-6)) | -0.095683** (0.041511) |
| Change in the policy rate at t-7 (DPOLICY_RATE(-7)) | -0.216962* (0.043135) |
| Change in broad money growth at t-1 (DBM_YOY) | -0.014721** (0.005881) |
| Change in NEER at t-3 (DNEER(-3)) | -0.045324** (0.014433) |
| Change in NEER at t-4 (DNEER(-4)) | 0.046946* (0.015414) |
| Change in NEER at t-5 (DNEER(-5)) | -0.047704* (0.014337) |
| Change in NEER at t-6 (DNEER(-6)) | 0.030858** (0.014329) |
| Change in NEER at t-6 (DNEER(-10)) | -0.058496* (0.014626) |
| Change in gold price at t-4 (DGOLDP(-4)) | -0.000646*** (0.000329) |
| Change in iron ore price at t-4 (DIRONOREP(-4)) | -0.005824* (0.002072) |
| Change in iron ore price at t-11 (DIRONOREP(-11)) | -0.004011** (0.001941) |
| R-squared | 0.549730 |
| Adjusted R-squared | 0.478259 |
Mauritania: Passthrough from the Policy Rate to Bank Deposit Rate—Regression Results
| Change in average deposit rate (DDEPOSIT_RATE) | |
|---|---|
| Change in the policy rate at t-6 (DPOLICY_RATE(-6)) | -0.095683** (0.041511) |
| Change in the policy rate at t-7 (DPOLICY_RATE(-7)) | -0.216962* (0.043135) |
| Change in broad money growth at t-1 (DBM_YOY) | -0.014721** (0.005881) |
| Change in NEER at t-3 (DNEER(-3)) | -0.045324** (0.014433) |
| Change in NEER at t-4 (DNEER(-4)) | 0.046946* (0.015414) |
| Change in NEER at t-5 (DNEER(-5)) | -0.047704* (0.014337) |
| Change in NEER at t-6 (DNEER(-6)) | 0.030858** (0.014329) |
| Change in NEER at t-6 (DNEER(-10)) | -0.058496* (0.014626) |
| Change in gold price at t-4 (DGOLDP(-4)) | -0.000646*** (0.000329) |
| Change in iron ore price at t-4 (DIRONOREP(-4)) | -0.005824* (0.002072) |
| Change in iron ore price at t-11 (DIRONOREP(-11)) | -0.004011** (0.001941) |
| R-squared | 0.549730 |
| Adjusted R-squared | 0.478259 |
Mauritania: Passthrough from the Policy Rate to Bank Lending Rate—Regression Results
Mauritania: Passthrough from the Policy Rate to Bank Lending Rate—Regression Results
| Change in average lending rate (DLENDING_RATE) | |
|---|---|
| Change in the policy rate at t-4 (DPOLICY_RATE(-4)) | 0.144375* (0.048164) |
| Change in NEER at t-1 (DNEER(-1)) | -0.047343* (0.015422) |
| Change in NEER at t-10 (DNEER(-10)) | 0.036112** (0.016357) |
| Change in oil price at t-5 (DOILP(-5)) | 0.009494* (0.002691) |
| Change in gold price D(GOLDP) | 0.000817** (0.000374) |
| R-squared | 0.292115 |
| Adjusted R-squared | 0.251664 |
Mauritania: Passthrough from the Policy Rate to Bank Lending Rate—Regression Results
| Change in average lending rate (DLENDING_RATE) | |
|---|---|
| Change in the policy rate at t-4 (DPOLICY_RATE(-4)) | 0.144375* (0.048164) |
| Change in NEER at t-1 (DNEER(-1)) | -0.047343* (0.015422) |
| Change in NEER at t-10 (DNEER(-10)) | 0.036112** (0.016357) |
| Change in oil price at t-5 (DOILP(-5)) | 0.009494* (0.002691) |
| Change in gold price D(GOLDP) | 0.000817** (0.000374) |
| R-squared | 0.292115 |
| Adjusted R-squared | 0.251664 |
22. The balance sheet effect limits the scope for large exchange rate movements. The balance sheet effect of a large depreciation can impact banks’ capital ratios and raise solvency concerns. In Mauritania, short FX NOPs have been large since 2018, and further widened since end-2019 and more recently with increasing prices of imported food and energy. In the absence of alternative investment options, banks’ most profitable activity in Mauritania is import financing through letters of credit. In the past, banks used to hold large amounts of government securities, but the significant drop in yields caused many banks to reduce, or even eliminate, their holdings.5 Sizeable short FX NOPs can pose risks to the stability of the financial sector in the case of significant exchange rate depreciation. Strengthening the Monetary Policy Framework to Mitigate Inflation Risks
23. The BCM is not a conventional monetary targeter. Under a conventional monetary targeting framework, monetary policy implementation relies on the central bank’s control over reserve money, with its evolution signaling when and why to intervene to attain reserve and broad money targets (Laurens and others, 2015). However, this is not exactly the way monetary policy operates in Mauritania; monetary operations are not conducted with the objective of keeping bank reserves consistent with periodic (i.e., quarterly, monthly) targets of reserve and broad moneythat achieve stable inflation (price stability objective). ;De facto the BCM limits exchange rate fluctuations within a narrowband (2 percent) to contain inflation pressures. In addition, it recently started using its policy rate as an additional instrument to tighten monetary policy, increasing it by 200 basis points in August 2022.
24. Mandatory use of bank accounts in 2018 and more recent gold purchases by the central bank and start of mobile banking led to structural breaks in the money multiplier. The 2018 reduction in reserve money growth and simultaneous acceleration of broad money, induced an increase in the money multiplier in 2018 (Figures 10). The shift in the money multiplier coincided with the change in the currency and its redenomination at a rate of 1:10 in January 2018. The sharp rise in broad money growth was due to influx of demand deposits into the banking system owing to the mandatory use of bank accounts for exchanging large amounts of old currency into the new one.6 The decrease of reserve money growth was mostly driven by the slowdown of the currency in circulation (CIC) in end-2017/early-2018. Other structural breaks in the money multiplier occurred in 2020 and 2022 as reserve money started growing faster than broad money during the second half of 2020, mainly due to gold purchases by the BCM, while CIC and bank reserves decreased in 2022 with the start of mobile banking activities and increasing FX interventions by the BCM.
Money Multiplier
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Money Multiplier
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Money Multiplier
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.25. The overall banking system has been historically in surplus, as assessed by the positive structural liquidity position.7 However, liquidity is unevenly distributed across banks and constrained for some of them. Banks do not reallocate excess reserves in local currency; most of them hoard liquidity due to the lack of available collateral (treasury bills) for interbank transactions and the constraint of maintaining excess reserves to access the official FX market. Although positive, the structural liquidity position is volatile; it contracted in early 2020 with the COVID-19 shock, eased in the second half of 2020 with the accumulation of FX reserves, and contracted again in 2022 with increasing FX interventions to accommodate current account transactions.
26. Constrained liquidity management prevented the smooth implementation of monetary policy. The relative stability of the money multiplier before 2018 suggests that a traditional monetary targeting framework could have been envisaged. However, sterilization cost concerns constrained the implementation of a reserve money contraction under a traditional monetary targeting regime. In addition, the dominant share of CIC in reserve money may also limit the magnitude of a reserve money contraction. At the same time, the implementation of a quantitative monetary expansion is constrained by limited government securities in banks’balance sheets and the tightly managed exchange rate.
27. The key ingredients for the conduct of a price-based monetary policy are not fully in place. Monetary operations do not target the objective of steering a short-term interbank rate close to the policy rate. The BCM conducted limited monetary operations to limit both its sterilization cost and liquidity injections that can increase the demand for FX. The policy rate was kept high until 2018 to discourage banks’ access to the central bank refinancing operations. The absence of an active liquidity management, and effective implementation of a narrower mid-corridor system is not conducive to interbank market trading. The shallow interbank market is a constraint on the implementation and smooth transmission of an interest-rate based monetary policy. At the same time, the modes of fiscal financing limit the availability of High Quality Liquid Assets (HQLAs) in banks’ balance sheets that can be used as collateral for monetary policy implementation and interbank transactions, as well as the development of the sovereign bond market needed to support the formation of a benchmark yield curve and monetary transmission.
28. In the absence of a clear monetary policy framework, inflation expectations may become unanchored. Article 48 of the BCM Law (amended in 2018) points to price stability as the main objective of the BCM.8 ln order to fulfill its price stability mandate, the BCM designs and implements monetary policy (Article 58 of BCM Law). However, the BCM is neither a monetary targeter nor an inflation targeter. Mauritania’s monetary policy framework is classified under “other” by the AREAER since 2010 (Box 1). This leaves the BCM’s monetary policy framework without a nominal anchor which exposes the Mauritanian economy to the risk of inflation especially in the event of a disorderly exchange rate adjustment.
29. Monetary transmission could strengthen with more active use of standard liquidity management instruments and strengthened monetary policy framework. Active liquidity management provides comfort to banks that they would be able to borrow liquidity from (place liquidity with) the central bank in case of unexpected negative (positive) liquidity shock, which would reduce the incentive of maintaining excess reserves and encourage interbank trading. An active interbank market would allow the existence of a daily benchmark interbank rate and the activation of the first stage of monetary transmission: from the policy rate to the interbank rate. Brandao-Marques and others (2020) found that having a modern monetary policy framework— adopting inflation targeting and having an independent and transparent central bank—matters for monetary transmission, possibly more than financial development.
30. Monetary transmission could also be more effective with more active use of the policy rate. El Hamiani Khatat, End, and Kolsi (2020) found evidence for stronger interest rate transmission in Tunisia when the central bank of Tunisia (BCT) started using its policy rate more actively. The transmission from the policy rate to bank retail rates is effective in Tunisia, as an important share of bank credit and deposit rates are indexed on the interbank rate. The level of financial development in Tunisia does not appear to be a constraint to the implementation of an interest rate based monetary policy, as monetary transmission works through the banking sector that is sufficiently developed although financial markets are still shallow. Nonetheless, a daily money market reference rate (the TMM) that the BCT uses as operational target already exists in Tunisia.
Definitions of Monetary Policy Frameworks
The IMFAREAER definesthree monetary policy frameworks with a clearly identified nominal anchor: (1) Exchange Rate Anchor; (2) Monetary Aggregate Target; and (3) Inflation Targeting Framework (IMF, 2020). Countries that have no explicitly stated nominal anchorbut rather monitor various indicatorsin conducting monetary policy are classified under “other” by the AREAER.
Under an Exchange Rate Anchor, the monetary authority buys or sells FX to maintain the exchange rate at its predetermined level or within a range. The exchange rate thus serves as the nominal anchor or intermediate target of monetary policy. These frameworks are associated with exchange rate arrangements with no separate legal tender, currency board arrangements, pegs (or stabilized arrangements) with or without bands, crawling pegs (or crawl-like arrangements), and other managed arrangements.
Definitions of Monetary Policy Frameworks (concluded)
Under a Monetary Aggregate Targeting regime, the monetary authority uses its instruments to achieve a target growth rate for a monetary aggregate, such as reserve money, M1, or M2; the targeted aggregate becomes the nominal anchoror intermediate target of monetary policy.
Inflation Targeting involves the public announcement of numerical targets for inflation, with an institutional commitment by the monetary authority to achieve these targets, typically over a medium-term horizon. Additional key features normally include increased communication with the public and the markets about the plans and objectives of monetary policymakers and increased accountability of the central bank for achieving its inflation objectives. Monetary policy decisions are often guided by the deviation of forecasts of future inflation from the announced inflation target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy (Box 1. figure 1).
Monetary Policy Frameworks—The Building Blocks
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: AREAER, and Adrian and others (2018).Monetary Policy Frameworks—The Building Blocks
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: AREAER, and Adrian and others (2018).Monetary Policy Frameworks—The Building Blocks
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: AREAER, and Adrian and others (2018).D. Supporting Macrofinancial Conditions
31. The literature identifies the macroeconomic, financial, and institutional conditions supporting the move to greater exchange rate flexibility. Key macroeconomic conditions include a balanced current account, absence of significant exchange rate misalignment, as well as monetary and fiscal discipline. From the institutional perspective, key monetary and financial building blocks include: (1) developing a deep and liquid FX market, (2) formulating an intervention strategy consistent with the new exchange rate regime, (3) establishing an alternative nominal anchor in the context of a new monetary policy framework and developing supportive markets, and (4) reviewing exchange rate exposures and building the capacity of market participants to manage exchange rate risks and of the supervisory authorities to regulate and monitor them (Otker-Robe and others, 2007).
Monetary Survey and BCM Analytical Balance Sheet
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Monetary Survey and BCM Analytical Balance Sheet
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.Monetary Survey and BCM Analytical Balance Sheet
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Sources: Mauritanian authorities and IMF staff calculations.32. There are two important elements to consider when initiating the transition to greater exchange rate flexibility: (1) the macroeconomic conditions, and (2) institutional capacity to operate under a flexible arrangement. From the macroeconomic perspective, Mauritania would be better off with a more flexible exchange rate as it will reduce the economy’s vulnerability to external shocks, preserve international reserves, support competitiveness, and dampen macroeconomic and financial volatility. Although Mauritania has a relatively closed capital account, it is prone to sizeable current account shocks with potentially destabilizing effects on its internal balance. In addition, low, and stable inflation can be achieved with an alternative monetary policy framework, and a flexible exchange rate arrangement doesn’t imply higher inflation when fiscal dominance is curtailed and the monetary policy framework strong.
33. Institutional capacity is still to develop to support the move to an alternative nominal anchor. Credibly committing to low inflation policies can be challenging in the absence of a strong institutional track record, sound liquidity management, modeling and forecasting capabilities, and
a stable financial system supporting monetary policy implementation and transmission. Therefore, Mauritania—like many other countries—may consider institutional rather than macroeconomic criteria in its choice of an exchange rate arrangement. Countries may adopt pegs or tightly managed exchange rates even when many of the macroeconomic criteria fail to apply, and when they choose to borrow the monetary policy credibility of another country or when the institutional capacity to implement flexible exchange rate regimes is still to develop (Levy-Yeyati and Struzenegger, 2010; and El Hamiani Khatat and Veyrune, 2019).
34. A balanced current account, adequate FX reserve buffers, and absence of significant exchange rate misalignment can help achieve an orderly transition. The state of the FX market usually reflects the broader macro-financial conditions, and conditions where the central bank accumulates FX reserves by buying FX from market participants on a well-functioning official FX market are reflective of lower depreciation pressures and thus more supportive to the introduction of fully competitive FX auctions. Conversely, depleted international reserves, a sizeable current account deficit, and excess demand for FX are usually not supportive to the introduction of a multiple price FX auction as market participants may bid at a more depreciated exchange rate than what the central bank is willing to accept.
35. Fiscal policy can help achieve a smooth transition to greater exchange rate flexibility. Prudent fiscal policy generally contains aggregate demand and imports thereby helping in achieving a more balanced current account. Supportive fiscal and broader macroeconomic policies are expected to reduce potential pressures in the FX market and allow for a smoother transition to greater exchange rate flexibility. In Mauritania, the confinement measures and economic slowdown resulted in a fiscal surplus in 2020 and 2021; fiscal discipline should be preserved considering the need for fiscal space to raise social spending and to evolve to a more flexible exchange rate.
36. The transition to a flexible exchange rate requires an alternative nominal anchor and redesign of the monetary policy framework. A credible monetary policy framework is essential in stabilizing market expectations and maintaining or regaining credibility during the transition to greater exchange rate flexibility. Many countries that have successfully achieved the transition to floating exchange rates (e.g., Chile and Poland) have favored inflation targeting frameworks over monetary targeting regimes. Inflation targeting, however, requires extensive preparation, with substantial amount of capacity and credibility building, and thus planning ahead for the transition is critical to achieving an orderly exit (Otker-Robe and others 2007).
37. The effective implementation of a narrower interest rate mid-corridor system is key in supporting a smooth transition.9The BCM has introduced in 2017 all the necessary instruments needed to operate a mid-corridor system—i.e., 7-day main refinancing operations and BCM deposit auctions and bills, overnight standing lending and deposit facilities, fine-tuning and long-term operations, as well as reserve requirements. However, as mentioned earlier, these tools are not actively used due to the sterilization cost and lack of monetary policy collateral. The two most common ways for banks’ short-term refinancing are the interbank market and central bank refinancing. In Mauritania, both are constrained which creates incentives for banks to accumulate excess liquidity (Blotevogel, 2013).
38. Monetary policy design and implementation could be guided by the principles laid down in IMF (2015b) during the transition. The IMF board paper sets seven principles that characterize effective monetary policy frameworks in Low Income Countries (LICs) and other developing countries with evolving monetary policy frameworks and scope for independent monetary policy.
Principles for Evolving Monetary Policy Frameworks
Principle I. The central bank should have a clear mandate in terms of its goals, and operational independence to pursue these goals, within the context of public accountability. The central bank’s monetary policy mandate should be set in the law. The central bank should have an effective governance and organizational structure. It should be free from fiscal dominance and political pressures to ensure a clear separation between fiscal and monetary policy, so that monetary policy has the operational space to attain its goals. Given a clear goal, operational independence, and appropriate transparency arrangements, the central bank should be accountable for fulfilling its objectives.
Principle II. Price stability should be the primary or overriding objective of monetary policy over the medium term. The consensus view is that (i) monetary policy is one policy instrument that cannot be expected to deliver on multiple inconsistent objectives, and (ii) monetary policy is ultimately limited in its ability to directly influence real variables in the long-term (such as output growth) and is instead most effective in providing a nominal anchor. Clarifying that price stability is the overriding objective of monetary policy over the medium-term provides a focal point for policy deliberations and helps ensure that policy decisions are consistent with this objective.
Principle III. Consistent with the primacy of price stability, the central bank should have a medium-term inflation objective that serves as the cornerstone for its monetary policy actions and communications. Establishing and maintaining an explicit numerical inflation objective operationalizes the price stability mandate. The numerical inflation objective should be distinct from the near-term inflation forecast. The inflation objective should only be modified rarely, and not due to short-term political pressures or conjunctural circumstances, but rather as part of a systematic and transparent review of the entire monetary policy framework. The central bank should clearly explain to the public how the inflation objective facilitates price stability, thereby bolstering the transparency and credibility of this objective. A transparent and credible inflation objective can in turn help anchor inflation expectations and provide a simple and transparent benchmark against which to measure performance. The focus on the medium-term recognizes that inflation in the short-run is beyond the direct control of the central bank. The inflation objective needs to be both achievable and, over time, achieved to be credible. Therefore, the medium-term horizon should be soon enough to shape current instrument setting and long enough so that inflation can be reasonably expected to converge to its objective under appropriate monetary policy.
Principle IV. In determining the magnitude and pace of monetary policy adjustments warranted by the inflation objective, the central bank should carefully take into account the implications for macroeconomic activity and financial stability. The level and volatility of output, unemployment, and the exchange rate may be important factors that the central bank should consider when determining the course of monetary policy. Consideration may also be given to financial stability issues, including the quantity of credit and asset prices. While it is important to take into account other economic and financial variables, this should not come at the expense of undermining the central role of the medium-term inflation objective for policy formulation. Any significant erosion of the central bank’s credibility can unhinge inflationary expectations, with related undesirable effects on real activity and financial stability.
Principle V. The central bank should have a clear and effective operational framework and it should align market conditions with its announced policy stance. It should choose an operating target, with the policy stance being set and announced in terms of a specific level for this target. The operating target should facilitate the communication of the policy stance, and its setting should be clearly linked to the attainment of the medium-term inflation objective. Central bank operations should align market conditions with this announced policy stance. An effectively implemented operational framework supports the functioning of money markets, allowing banks to predictably place surplus liquidity with, and obtain short-term funding from each other or the central bank at rates that are reasonably stable.
Principle VI. The central bank should have a transparent forward-looking monetary policy strategy that reflects timely and comprehensive assessments of the monetary transmission mechanism. Given the dynamic nature of monetary policy and the lags with which it affects the key economic variables (output, inflation, exchange rate), policy should be formulated in terms of a forward-looking strategy that encompasses: (i) a full assessment of the economic outlook; (ii) a path for policy that is consistentwith the inflation objective, while allowing for the macro and financial stability considerations noted above; and (iii) evaluation of future risks and contingency plans in the event of large shocks. The central bank should also assess the extent to which intermediate targets may be useful in formulating and communicating the monetary policy strategy. All available information and analytical tools should be used in devising the policy strategy, including an up-to-dateevaluation of the transmission mechanism.
Principle VII. The central bank’s communications should be transparent and timely, because clear communication enhances the effectiveness of monetary policy. The focus of communication should be on explaining past outcomes and actions necessary to align expected inflation outcomes with the policy objective, with emphasis on the variables that matter for private sector behavior. Effective communication helps reduce uncertainty, improves monetary policy transmission, and facilitates accountability, thereby building credibility. Clear communication can also help anchor inflation expectationswhen “words” are confirmed by actions and outcomes (“saywhatyoudo and do whatyou say”). It is also important to explain deviations from targets, and remedial actions.
Source: IMF (2015b).39. Banks’ FX NOPs need to be narrowed to avoid further deterioration of their balance sheets. In Mauritania, short FX NOPs widened to 53.2 percent of bank’s capital in March-2022 before narrowing to 38 percent in September 2022, while FX NOPs limits are 20 percent for all currencies and 10 percent per currency,. Short FX NOPs are mostly related to letters of credit but have widened since 2019 following the drop in fishing exports, and even further recently with the increase in global food and energy prices; short FX NOPs can pose risks to financial stability in the case of disorderly exchange rate adjustment. To mitigate the potential risks and increase banks’ resilience to exchange rate shocks, the BCM should enforce better compliance with NOP limits. More generally, strengthening banks’ balance sheets is crucial to foster market deepening and allow for the implementation of an alternative monetary policy anchor.
E. Sequencing the Move to Greater Exchange Rate Flexibility
40. The experiences of countries that have managed a transition to a flexible exchange rate vary greatly. Some countries that put significant emphasis on preparedness for further exchange rate flexibility chose a cautious and gradual approach while establishing the necessary supportive elements of a flexible exchange rate. In other countries, exits from pegs occurred under market pressure and sizeable external imbalances, and flexible exchange rates were adopted with little preparation. Countries that achieved a gradual and orderly transition to a floating exchange rate include Chile and Poland. Gradual increases in exchange rate flexibility helped the FX market to deepen, contributing to establish one of the key elements supporting greater flexibility. The countries ultimately exited to a free float with explicit inflation target (Otker-Robe and others, 2007).
41. The international experience revealed that fiscal dominance threatened countries’ capacity to operate under flexible exchange rate arrangements. Direct or indirect monetary financing often generates excess liquidity that put pressure on the exchange rate while at the same time weakening the central financial position and its ability to sterilize the excess at the appropriate level of interest rate. In many countries, fiscal dominance not only accelerated the pace of depreciation and FX reserves’ depletion but also weakened monetary policy implementation and transmission and the capacity of the central bank to operate an interest-rate based monetary policy.
42. Mauritania should be able to successfully allow gradual exchange rate flexibility if well-planned and supported by the institutional and macro-financial building blocks: an independent central bank with an alternative monetary policy framework in place, a sound financial sector, a well-planned gradual path toward flexibility, balanced macroeconomic conditions, and supportive fiscal policy.
43. Some emerging market economies and DCs did not achieve a smooth transition due to lack of preparation and supporting institutions and policies. Overvalued exchange rates, distorted FX markets, sizeable parallel market premia, lack of central bank independence and alternative monetary policy framework, expansionary monetary and fiscal policies, fiscal dominance, rapid and unplanned transition under unfavorable macro-financial conditions were often the reasons explaining disorderly transitions.
44. Countries that have achieved a successful transition have often implemented a currency basket. This is, for example, the case of Russia and Poland, but also Morocco that engaged in greater exchange rate flexibility starting from a peg to a currency basket. In addition, some countries have opted for a crawling arrangement along the road (e.g., Poland), while others have chosen a gradual widening of the exchange rate bands (e.g., Morocco) (Figure 12). When early transitioning from a peg to a more flexible exchange rate arrangement, transitional arrangements can include moving from a peg to a single currency to a basket in a first phase, and a gradual widening of the exchange rate bands in a second phase (El Hamiani Khatat, Buessing-Loercks, and Fleuriet 2020).
Stylized Transitional Exchange Rate Arrangements
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: El Hamiani Khatat, Buessing-Loercks, and Fleuriet (2020).Stylized Transitional Exchange Rate Arrangements
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: El Hamiani Khatat, Buessing-Loercks, and Fleuriet (2020).Stylized Transitional Exchange Rate Arrangements
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: El Hamiani Khatat, Buessing-Loercks, and Fleuriet (2020).45. At the early stage of the gradual transitions, the interbank FX market was shallow and dominated by the central bank. The central bank’s role through its fixing mechanism was gradually reduced as markets developed; fixing formally ended in Poland in 1999. In most cases, market development began only after some exchange rate flexibility was introduced: in Chile, after widening of the band to ±5 percent; and in Poland, following the adoption of a crawling band with a ±7.0 percent width. In most cases, the market mechanism began as a direct interbank market and in all cases the FX spot market was the first to develop, followed by derivatives’ markets. In Poland, the FX market was developed in conjunction with other financial markets and was supported by the scope for greater exchange rate flexibility.
46. Central banks played a significant role in market development by removing obstacles and creating the necessary infrastructure. They stimulated market development by (1) widening the trading bands; (2) reducing their market role by ceasing to be a single market maker and ending fixing interventions (Czech Republic, Poland) or by discontinuing narrower inner bands or undeclared target levels (Poland, Uruguay); and (3) removing obstacles to market activity and eliminating limits to market access (Chile), liberalizing the bank-client market (Czech Republic), and encouraging trading through the interbank market (Czech Republic, Uruguay). Central banks also contributed to market development by upgrading infrastructure. Gradually increasing the exchange rate flexibility led to a growing awareness of FX risks and helped the development of derivatives’ markets in Chile, the Czech Republic, and Poland (Otker-Robe and others, 2007).
47. The reform of the interbank FX market is critical to supporting the move to greater exchange rate flexibility. The BCM has already initiated the necessary work to strengthen the implementation of its monetary and exchange rate policy. The central bank launched the preparatory work needed to set up the technical platform for interbank FX transactions. Earlier in December 2019, the BCM allowed the netting of bank client transactions, and in November 2022, it phased out the surrender requirement of receipts from fishing exports of SCMP to accounts at the central bank. Remaining reforms to support the transition to greater exchange rate flexibility include allowing interbank FX transactions by adopting the new regulation and establishing the related technical platform, deepening the interbank FX market by allowing fluctuations of the exchange rate within a larger volatility band, moving to fully competitive multiple price FX auctions, designing an intervention rule, and transitioning to a fully market-determined exchange rate.
48. A flexible exchange rate requires sufficiently liquid FX market to support price formation. A well-functioning FX market allows the exchange rate to respond to market forces, helps minimize disruptive daily fluctuations in the exchange rate, and eases FX risk management. Deepening FX markets entails eliminating market-inhibiting regulations, improving market microstructure, and increasing the flow of information in the market, while reducing the central bank market maker role. Avoiding excessive smoothing is critical so as not to inhibit the nascent markets and useful market signals and to avoid sending confusing messages about policy intentions (Otker-Robe and others 2007).
49. An active interbank FX market will support the smooth transition to a fully market-determined exchange rate. Beyond the technical platform, reducing market segmentation, channeling FX inflows through the official market, and allowing the exchange rate to fluctuate in a wider volatility band are needed to support the deepening of the interbank FX market. Ultimately, when sufficient experience has been acquired and an interbank FX market has emerged, the BCM intervention strategy could evolve from stabilizing the exchange rate to managing the volatility of the market-determined exchange rate using an intervention rule (Figure 13).
Gradual Move to Further Exchange Rate Flexibility
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: The author.Gradual Move to Further Exchange Rate Flexibility
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: The author.Gradual Move to Further Exchange Rate Flexibility
Citation: IMF Staff Country Reports 2023, 074; 10.5089/9798400234323.002.A001
Source: The author.F. Conclusion
50. From the macroeconomic perspective, Mauritania would be better off with a more flexible exchange rate. A more flexible exchange rate would ensure the consistency between the exchange rate and the fundamentals. It would help absorb real shocks and dampen growth and financial volatility while preserving external buffers. A flexible exchange rate would also enhance competitiveness and provide greater monetary policy autonomy and flexibility in responding to shocks. Key risks involved with the transition to greater exchange rate flexibility include rising inflation volatility, FX risks, and external debt. Yet, lower and more stable inflation can be achieved by an alternative monetary policy framework. In addition, exposures to FX risk of the public and financial sectors can be mitigated through the deepening of the domestic government securities’ market and tighter FX NOPs.
51. From the institutional perspective, the international experience shows that transition to a more flexible exchange rate requires adequate preparation. An alternative nominal anchor, the effective implementation of a corridor system, sound financial sector, and well-functioning money and FX markets are key in supporting a smooth transition. In the short term, the preparation would involve a focus on narrowing the interest rate corridor and deepening of the interbank money, FX, and government securities’ markets to strengthen monetary policy implementation and transmission and allow the switch to an alternative monetary policy anchor. The BCM could further develop its macro-forecasting models and monetary policy communication.
52. As other countries, Mauritania should be able to successfully transition to greater exchange rate flexibility if well-planned and supported by the institutional and macro-financial building blocks. The gradual transition should, however, be carefully sequenced, and the appropriate timing of the reform should consider the supporting macrofinancial conditions as well as the institutional requirements.
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Prepared by Mariam El Hamiani Khatat. This Selected Issues Paperis extracted from aforthcoming Working Paper: “Moving to Greater Exchange Rate Flexibility in Mauritania: Why, When, and How?”.
One of the BCM’s biggest assets is a non-tradable claim on the government, carrying below-market interest rates. Since the claim generates little revenue and cannot be traded with banks, it cannot be used in liquidity-absorbing operations (Blotevogel 2013). The BCM law foresees coverage of central bank losses by tradable government securities.
Foreign company imports needed to expand their oil-related activities financed by foreign direct investment (FDI) increase the current account deficit but should not drive the exchange rate away from the level suggested by the fundamentals. Hence, the current account deficit used to assess the exchange rate misalignment is adjusted by externally financed capital imports of extractive industries.
According to the AREAER 2020, Mauritania’s exchange rate regime is a crawl-like arrangement, a category classified under “soft pegs” by the AREAER.
Islamic Republic of Mauritania—Financial System Stability Assessment—Stability Module, January 2015.
IMF (2018).
The structural liquidity position of the banking system is the sum of bank reserves in local currency at the central (reserve requirements and excess reserves), before any liquidity management operation has been undertaken by the central bank (El Hamiani Khatat, 2018). The structural liquidity position of the banking system has been positive in Mauritania as a result of the past monetary financing and accumulation of FX reserves and purchases of gold by the BCM in 2020–21.
In addition, without prejudice to the objective of price stability, the BCM pursues the stability of the financial system and contributes to the implementation of the general economic policies defined by the Government.
Corridors that are too narrow or too wide discourage interbank trading and tend to dampen market and yield curve development, weakening the interest rate channel. Atoo narrow corridor allows better control over interest rates but can hamper market development as banks have less incentive to engage in interbank transactions. On the other hand, if the cost of accessing the marginal lending facility is too high, banks are encouraged to increase the precautionary reserves in orderto avoid this cost, instead of trading (Russian Federation: Selected Issues, IMF Country Report No. 12/218, August 2012).
