Public Information Notice No. 04/1

Public Information Notice: IMF Concludes 2003 Article IV Consultation with Mali

January 12, 2004

On December 15, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mali.¹

Background

Since the early 1990s, Mali has been implementing reforms supported by the Fund through successive Enhanced Structural Adjustment Facility (ESAF) and Poverty Reduction and Growth Facility (PRGF) arrangements.² The last PRGF arrangement with Mali was approved in August 1999 in support of a program covering the period 1999-2002. The arrangement, whichwas later extended by one year, expired on August 5, 2003. In early March 2003, the Executive Boards of the IMF and World Bank, respectively, decided that Mali had fulfilled the conditions for reaching the completion point under the enhanced Initiative for Heavily Indebted Poor Countries Initiative (HIPC), and that the poverty reduction strategy paper (PRSP) included an appropriate analysis of poverty in Mali as well as strategies to alleviate it. Paris Club creditors agreed to reduce Mali's debt stock on March 12, 2003. Total debt relief is estimated at US$417 million in net present value (NPV) terms, of which the Fund will provide US$45.2 million (SDR 34.7 million).

Mali's macroeconomic performance has been satisfactory in 2002 and 2003, in spite of the adverse impact of the crisis in Côte d'Ivoire and large fluctuations in agricultural output owing to uneven rainfalls. Real GDP growth slowed to 4.4 percent in 2002 from 13.3 percent in 2001 as declines in food production, trade, and transportation were partly offset by a record output in gold mining. Growth is expected to slow further to 3.2 percent in 2003, even though agricultural production is projected to rise by 10.9 percent on account of the very good rainfall recorded in the second half of the year. This outcome has contributed to reducing inflation to less than 1 percent in 2003 from 5.0 percent in 2002. The external current account, excluding official transfers, narrowed to 5.8 percent in 2002 by 6.7 percentage points of GDP, owing to a sharp increase in gold and cotton exports and a decline in imports (the latter in response to the completion of projects related to the African Soccer Cup). However, in 2003, the current account deficit is expected to widen anew by 3 percentage points largely because of the fall in the volume of gold and cotton exports. Since end-2001, the real effective exchange rate has appreciated by 4 percent, reflecting the depreciation of the U.S. dollar against the euro, to which the CFA franc is pegged.

Fiscal performance has been broadly satisfactory in 2002 and 2003, although revenue collection has weakened since the end of 2002, owing to the impact of the crisis in Côte d'Ivoire. The overall fiscal deficit, excluding grants, is projected to rise by 1 percentage point of GDP to 8.2 percent in 2003, with total government revenue and expenditure rising to 17.2 percent of GDP and 25.4 percent, respectively. The increase in expenditure--equivalent to 1.5 percentage points of GDP--is mostly due to higher capital outlays.

Monetary policy, conducted at the regional level by the Central Bank for West African States (BCEAO), has remained prudent. The BCEAO reduced the discount rate by 150 basis points to 5.0 percent between July and October 2003 as a response to the fall in inflation, the decline in interest rates in the euro area, and the high level of international reserves. However, the measure is unlikely to have a major impact on bank lending in the short run since commercial banks have maintained a high level of free reserves for some time.

There has been further progress in the implementation of structural reforms since 2002. Improvements in public expenditure management make it possible to monitor the budget spending that contributes to poverty reduction. At the same time, the authorities have strengthened medium-term budget programs and prepared medium-term expenditure frameworks for health and education. On the cotton sector, the authorities have streamlined the operations of the public enterprise (CMDT) and reached agreement with the World Bank and other bilateral and multilateral development partners on a timetable for splitting the CMDT into three or four private enterprises. As regards the privatization program, the authorities signed a concession contract with a private enterprise that will manage the railroad company, RFCM; a tender was launched for the management of Mali's airports; and the authorities are discussing the terms of the privatization of the cottonseed oil-producing company HUICOMA with the successful bidder.

The authorities agreed with the thrust of the staff's assessment of performance under past Fund-supported programs. The main conclusion is that important progress was made in restoring macroeconomic stability, laying the foundations for sustainable growth, and reducing poverty. Nevertheless, in spite of this progress, Mali, as a landlocked country in the Sahel region, faces many challenges and remains vulnerable to exogenous shocks, including inclement weather conditions, terms of trade fluctuations, and a difficult regional political environment. The authorities noted that, after more than 20 years of heavy government intervention in the economy, Fund-supported programs had helped to reduce external and internal imbalances and opened the economy to private sector initiatives. As the reform agenda is unfinished, they viewed a new formal agreement with the Fund as an essential element to help them move the process forward and mobilize foreign financial assistance.

Executive Board Assessment

Executive Directors welcomed the opportunity to review Mali's performance under Fund-supported programs since 1992. They agreed that during this period important progress was made by the authorities with respect to macroeconomic management and implementation of structural reforms, which has helped strengthen Mali's economic performance and lay the basis for sustained growth and poverty reduction. However, Directors considered that Mali continues to face serious challenges, including its vulnerability to exogenous shocks and the impact of the crisis in Côte d'Ivoire.

Directors welcomed the work done by the staff to identify key policies to address these challenges, based on its review of Mali's long-term performance under Fund-supported programs. The priorities include consolidating the fiscal position, bolstering competitiveness and diversifying the economy, and enhancing the business climate-including through privatization and improved governance-in order to spur growth and reduce poverty. Looking ahead, Directors noted the favorable prospects for 2004, especially if the regional security situation stabilizes, with stronger domestic demand expected to be underpinned by higher output and prices of agricultural commodities, notably cotton. They urged the authorities to use the opportunity provided by the favorable outlook to press ahead with the implementation of the above-mentioned policies.

Directors commended the authorities for their actions to strengthen fiscal performance, noting that fiscal objectives for 2003 appear likely to be met, despite domestic and external budgetary pressures. They called on the authorities to stay the course of fiscal consolidation and adopt measures to ensure that the 2004 fiscal targets are attained. These measures should center on strengthening revenue performance by reducing tax exemptions, reining in the growth of public sector wages as well as of expenditure not directly related to poverty reduction, and reforming the civil service retirement scheme. Directors expressed concern about the initial medium-term projections, which suggest a possible widening of the fiscal deficit and an increase in debt. To protect against these vulnerabilities, Directors called for continued efforts to reduce the fiscal deficit, monitor the debt burden closely, and increase reliance on external grants.

Directors welcomed the marked decline in inflation in Mali, and the recent lowering of interest rates by the Central Bank for West African States (BCEAO). Directors noted that Mali's financial institutions generally comply with prudential norms. They expressed concern, however, about the high level of nonperforming loans. Directors urged the authorities to continue to strengthen the legal and regulatory framework for the financial system and to promote financial deepening. In this context, they welcomed the authorities' plans to privatize the commercial banks, and urged the further development of microfinance institutions in rural areas. While welcoming Mali's recent efforts in the area of combating the financing of terrorism, some Directors also called for further strengthening of the effectiveness of the AML/CFT regime.

Directors emphasized the need for ongoing implementation of the wide-ranging agenda of structural reforms. In order to meet the objectives of promoting economic diversification and improving the environment for private investment, the authorities will need to give high priority to developing infrastructure, streamlining the regulatory framework, improving governance and the judicial system, and enhancing labor productivity. In this connection, Directors looked forward to the planned Investment Climate Assessment to be undertaken with the assistance of the World Bank.

Directors underlined the importance of reforms in the cotton sector. They welcomed the decision to split the cotton monopsony (CMDT) to help increase competition in the sector over the medium term. Given the importance of the cotton sector, Directors encouraged the authorities to proceed with the implementation of these plans in a careful and orderly manner. A few Directors noted the adverse effects on Mali of subsidies to the cotton sector in some industrialized countries, and cuts in this support were called for.

While Mali's economic data are generally satisfactory for surveillance purposes, Directors encouraged the authorities to continue to improve the quality and timeliness of national accounts data in line with the recommendations of the recent multi-sector mission from the Statistics Department of the Fund.

Looking ahead, Directors concurred that further financial support in the form of a low-access PRGF arrangement offers the best prospect for assisting the authorities to implement the remaining reform agenda and tackle the enormous challenges still facing Mali. However, a few Directors noted that the projected balance of payments surplus over the medium term and increased donor support raised questions about the need for further Fund financial assistance, and urged the consideration of other forms of Fund involvement.