Islamic Republic of Mauritania and the IMF
News Brief: IMF Completes Fourth Review Under Mauritania's PRGF Arrangement and Approves US$8 Million Disbursement
Free Email Notification
Mr. Horst Köhler
Dear Mr. Köhler,
1. The government of Mauritania recently conducted discussions with the International Monetary Fund (IMF) staff regarding the fourth review of the program supported under the Poverty Reduction and Growth Facility (PRGF) and the main parameters of the 2002 budget.
2. The government considers that program execution during the first half of 2001 was in line with the established objectives. The quantitative performance criteria for end-June and the structural criteria covering the period through September were all met. The government wishes to request completion of the fourth review under the PRGF arrangement and disbursement of Interim Assistance for 2002.
3. The attached memorandum reviews program implementation during the first half of 2001, and sets objectives for the rest of the year and indicators for 2002. These policies continue to reflect the objectives established in the Poverty Reduction Strategy Paper (PRSP). The government also establishes the main parameters of the budget for 2002, which is characterized by expansionary fiscal policy, financed by concessional external resources, which is aimed at increasing public expenditure in the social areas and in poverty reduction.
4. The government is convinced that the policies set forth in the attached memorandum will enable it to achieve the objectives established under the PRGF-supported program, but will take any further measures which might be necessary for this purpose. The government will continue to provide the Fund with all information to monitor fully the program.
5. It is understood that the government will remain in contact with Fund staff and will consult with the IMF from time to time, on its own initiative or whenever the Managing Director so requests, regarding Mauritania's economic and financial policies.
6. On behalf of the government of Mauritania, please be assured of our determination to take all necessary steps for the program to succeed. We hope to be able to count on continued IMF support for our efforts.
Sid El Moctar Ould Nagi
Governor, Central Bank of Mauritania
Memorandum of Economic and Financial Policies
of the Government of Mauritania for 2001-2002
1. The government of Mauritania has stepped up its efforts to improve program monitoring, resulting in macroeconomic and structural performance in line with program objectives. All structural and quantitative performance criteria for the fifth PRGF disbursement, and all structural benchmarks and quantitative indicators, except the one on tax revenue, have been met.
2. Progress was also made in implementing the poverty reduction strategy paper (PRSP). The authorities intend to maintain and develop the institutional and participatory process established at the time of the preparation of the PRSP to implement the strategy. The PRSP was reflected in a basic law (loi d'orientation) on poverty reduction adopted by parliament in July 2001. Similarly, Mauritania has made substantial progress with respect to the floating conditions for the completion point under the enhanced HIPC Initiative.
3. Continuation and intensification of the efforts undertaken so far should make it possible to reach the completion point during the first half of 2002. The government is prepared to take all necessary measures to avoid any delay in this respect.
II. Recent Economic Developments
4. Mauritania and the European Union recently ratified a new protocol setting the fishery capacity and the financial compensation provided in their agreement, for the five-year period from August 1, 2001 until July 31, 2006. Over this period, the financial compensation will amount to €430 million, as compared with €267 million under the previous agreement. Some of this compensation will be earmarked for development and modernization of the local fishery sector. The agreement also provides for enhanced control and surveillance of fishery activities in Mauritanian waters to protect the country's fishery resources.
5. Economic growth remains solid, particularly in the construction and public works, transport, and telecommunications sectors. However, the growth rate of GDP in real terms, which had been initially projected at 5.6 percent for 2001, was reduced to 5.2 percent, primarily as the result of lower-than-programmed expansion in mining activities. The average inflation rate (CPI) of 5.2 percent at end-July 2001 was higher than projected, primarily reflecting the delayed effect of the increase in petroleum product prices in 2000.
6. Fishery and mining exports were in line with the program, while imports remained well below projected levels. As a result, international reserves amounted to US$291 million at end-June 2001, US$14 million above the programmed level. The current account balance (including official transfers) is now estimated at 1.2 percent of GDP for 2001 and international reserves could reach US$345 million (equivalent to seven months of imports) at the end of the year.
7. The overall budget deficit during the first half of the year, estimated at approximately UM 1.5 billion, was narrower than projected, as the tax revenue shortfall was more than offset by a larger reduction in operating expenditures and the low rate of capital expenditure execution. The tax revenue shortfalls are largely attributable to the delay in receiving taxes from the state mining company (SNIM) and to lower-than-projected customs and petroleum tax revenue. As a result, the tax revenue indicator for end-June was not met.
8. Growth in monetary aggregates was generally in line with the program at end-June, including growth in credit to the private sector. Outstanding treasury bills (bons du Trésor) registered a substantial increase from July onward, financed largely through government deposits in commercial banks, while the required reserves on these deposits do not appear to have been collected. The BCM has implemented a series of measures, identified in the government's aide-mémoire for the third review under the PRGF, leading to improved functioning of the exchange market. The gap between the official rate (cours de transfert) and the cash rate (cours manuel) remained at approximately 5 percent, reflecting the relative shortage of US Bank notes and small margins for exchange bureaus. Between January and July, the ouguiya depreciated by 2 percent vis-à-vis the U.S. dollar, and the real effective exchange rate appreciated by approximately 4 percent.
9. Following the streamlining and reduction in the number of structural conditions, most of the measures that had not been implemented within the time frames set for them in the 2000 program, and that were eliminated from conditionality in the 2001 program, have since been completed. In addition, the remaining measures are expected to be completed by the end of the year.
III. Program for the remainder of 2001
A. Macroeconomic Objectives
10. In accordance with the government's medium-term objectives set forth in the PRSP, and in light of the developments during the first half of the year, the revised program objectives for 2001 are as follows:
Rather than requiring any major change in the economic policies pursued since the beginning of 2001, these revised objectives entail a refocusing of these policies in light of the performance recorded during the first half of the year. These policies are described below.
B. Macroeconomic Policy
11. Fiscal policy as reflected in the 2001 budget law is still generally appropriate. This policy is based on a relaxed budgetary stance to permit an appreciable increase in social and poverty reducing expenditures, in accordance with the priorities identified in the PRSP. However, in light of the sharp increase in revenue generated by the fishery agreement with the European Union, and in spite of the expected acceleration in expenditures during the remainder of the year, an overall budget surplus excluding grants of 1.9 percent of GDP is projected, instead of the deficit of 1.4 percent of GDP targeted previously under the program. In this context, the government intends to:
12. In line with the policy adopted by the central bank in 2000 of gradually reducing the discount rate (reference rate), and to signal its desire to stimulate private investment, the BCM will reduce the discount rate by 1-2 percent by end-October. The BCM remains prepared to revise this rate upward should inflationary pressures appear.
13. The BCM intends also to reduce the interest rate on treasury bills by reducing the outstanding stock of treasury bills issued. If this approach is inconsistent with the monetary policy objective, the BCM will resort to other monetary policy instruments, including the transfer of government deposits from commercial banks. This reduction in the stock of treasury bills should encourage commercial banks to increase credit to the private sector rather than simply investing in treasury bills. At the same time, the BCM intends to increase the gap between the discount rate and the rate on treasury bills (now around 2 percent) to 3-4 percent in order to promote development of the interbank market. In light of the envisaged decline in the discount rate, the rate on treasury bills should decline by at least 2-3 points.
14. In the area of monetary policy, some progress has been made in the use of indirect monetary instruments. However, the number of repos and reverse repos operations is still limited. To enhance performance in this area, the BCM intends to:
15. The BCM envisages taking the following steps to stimulate competition among commercial banks:
Exchange rate and external policy
16. In accordance with the objective established in the PRSP, exchange rate policy should preserve external competitiveness so as to promote economic diversification and reduce the economy's vulnerability to external shocks. The BCM will therefore ensure that the ouguiya does not appreciate in real terms on a sustained basis. In this context, the BCM will give more importance to the euro over the U.S. dollar in its exchange rate policy, since the bulk of foreign trade transactions take place with countries of the European Union.
17. The BCM intends to implement additional measures to improve operation of the Extended Foreign Exchange Market (MCE) and to reduce the gap between the official rate and the cash rate for the U.S. dollar, in particular, to:
18. The government will pursue a prudent external debt policy and will consult closely with IMF staff on any new external borrowing, even if on concessional terms, to ensure the sustainability of external debt indicators.
IV. Fiscal Policy for 2002
19. The key policy objectives for the 2002 draft budget are to modernize the tax system, increase capital expenditure and current outlays in the social and maintenance areas, and enhance project implementation and absorption capacity. The draft budget draws on the objectives set in the PRSP. Implementation of these policies will be facilitated by the increase in resources from the new fishery agreement with the European Union. The projected budget deficit is 1.6 percent of GDP. Since available external financing is likely to exceed budget requirements, there will be a further accumulation of government deposits in the banking system. The 2002 budget aims to:
20. The government will strengthen institutional and operational capacities at all levels with technical assistance from the World Bank. The government will take the following steps in the near future:
21. The government has decided to strengthen monitoring of public expenditure, and in this connection, it has received a joint mission of the World Bank and IMF in early October, which examined the system for tracking budget expenditures--particularly in the area of poverty reduction. The government will make every effort to implement the necessary measures identified by that mission. The government will also:
V. Poverty Reduction Strategy paper and Completion Point
22. The government is determined to press ahead with its poverty reduction strategy for the remainder of 2001 in order to reach the completion point under the enhanced HIPC Initiative in the first half of 2002. To that end, the government will complete its preliminary progress report on the PRSP by end-October, and will complete the final report and a revised PRSP by February 2002 (reflecting the findings of the latest household expenditures survey). The report will, in particular, examine the key obstacles encountered in implementing the strategy, pointing out problems related to administrative and project implementation capacity. The progress report will also be prepared in a participatory process, for which adequate budget allocations have been made.
23. Significant progress has been made in implementing the conditions for the floating completion point. The exchange regime and taxation reforms are well under way. However, it was deemed desirable, in consultation with IMF staff, to establish new calendars for reducing credit concentration ratios (floating condition) in the context of individual programs (contrats-programmes) with commercial banks. On this basis, it was clear that some banks would need a longer period (beyond 2002) to satisfy the required ratios as set in the conditions for the floating point. As for the privatization of the national power and water company (SOMELEC), the government expects it to be completed by end-April 2002.
24. With regard to the social floating conditions, the government and World Bank staff are afraid that some of these conditions cannot be met in the near future. According to the PRSP, the dates established for achieving a few of these objectives extend beyond 2004. In retrospect, the government, in consultation with World Bank staff, realizes that the quantitative social objectives established in the decision point document under the enhanced HIPC Initiative were too ambitious, as demonstrated in the PRSP.
25. In the context of the preparation of the PRSP first progress report, the government, with assistance from the World Bank, will analyze the social and poverty impact of the measures contained in the poverty reduction strategy. To ensure continuity of this analysis in the future, the government will assess regularly the impact of economic and sectoral policies on poverty and social conditions. However, this assessment will be conducted within specific time frames to avoid any delays in project implementation.
VI. Structural Reforms for 2001-2002
A. Monetary Reform
26. The BCM is convinced of the need to transfer government deposits with commercial banks to the central bank. In view of the size of these deposits and their importance to private sector credit, a gradual and prudent approach will be adopted. Accordingly, the BCM, with assistance from the IMF resident expert, will prepare, by the end of the year, a report on the impact of this transfer on the financial situation of banks. Based on this study, the BCM will agree with each commercial bank on specific schedule for the transfer, using objective and transparent criteria. These schedules will be adopted in consultation with the Fund staff in the context of the fifth review under the PRGF.
27. To encourage banks to begin adjusting to a more competitive environment--particularly once the government deposits have been transferred--government deposits will be remunerated initially at a low rate of 3 percent, effective from January 2002. This rate might be gradually raised to market rate as government deposits in these banks are phased out. However, to increase bank liquidity the BCM will reduce the reserve requirement ratio from 4.5 percent to 2 percent when the transfer of these deposits begins. The BCM will ensure that reserve requirements on government deposits are collected according to the circular of May 2001.
28. Given the difficulty of replacing government deposits with private sector deposits, even in the medium term, the BCM will examine the possibility of providing liquidity to commercial banks through credit auctions, and will identify the instruments that could be accepted as collateral. In the absence of sufficient treasury bills eligible for this use, other instruments (such as commercial paper) will need to be developed, and a financial records reporting center (centrale des bilans) will have to be created to rate borrowers' signatures on file.
B. Tax Reform
29. In line with its commitment, the government has decided to amend the investment code so as to eliminate all tax incentives provided under the code, and will consult with the staffs of the IMF and World Bank on the proposed amendments before their final approval. All measures intended to reduce the tax burden will be introduced into the common tax law. In this regard, the government has decided to implement the following measures under the 2002 Budget Law:
30. In view of the potentially considerable impact of the deteriorating financial situation of the social security fund (CNSS) on the budget in the medium term, and pending the conclusions of the actuarial study conducted by the International Labor Organization (ILO), scheduled to be completed in early 2002, a number of corrective measures will be taken. To that end, CNSS has undertaken to: (i) intensify its collection efforts; (ii) improve the information system; (iii) raise the ceiling on taxable wages and salaries for social security contributions (currently UM 35,000) by end-March 2002, in relation to the evolution in wages since 1992, and after consultations with social partners, and (iv) contain the wage bill, which accounts for approximately 80 percent of administrative costs. With regard to the latter, the CNSS will prepare a study on the rationalization of administrative costs, including by offering incentives for voluntary separation and pre-retirement, and identify the costs of these reforms. The CNSS will also make efforts to improve the various social support systems offered, as well as the quality of its services.
C. Other Structural Reforms
31. Concerning the other structural measures, the government intends to:
VII. Program Monitoring
33. Prior actions. The government will adopt the prior actions indicated in the attached table before the IMF Executive Board meeting for the fourth review.
34. Performance criteria. Quantitative performance criteria for end-December 2001, quantitative indicators for end-December 2001, and quarterly indicators for end-March and end-June 2002 are provided in Table 1. Structural performance criteria and structural benchmarks are provided in Table 2.
35. Program reviews. The IMF Executive Board will complete the fifth review of the PRGF by end-June 2002. The government expects to reach the completion point at that time. On this occasion, the government will present to the Executive Boards of the Fund and World Bank the first progress report on PRSP implementation, and a new version of the PRSP based on new data. The seventh disbursement under the arrangement will be conditioned on the observance of performance criteria for end-June 2002 and completion of the sixth review under the arrangement.
1. This memorandum sets out the definitions of the quantitative performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF). It also establishes the content and frequency of the data to be provided for monitoring the program. The government is defined to include only the central government and excludes the social security scheme.
I. performance criteria
2. Net official international reserves (NIR) of the Central Bank of Mauritania (BCM) is defined as the unencumbered (i.e., readily available) gross official reserves of the BCM less foreign liabilities of the BCM. For purposes of monitoring performance against the program target for NIR, valuation effects on the stock of gold holdings will be excluded, and gold holdings will be evaluated at the gold price in effect on December 31, 2000. Similarly, the U.S. dollar value of gross international reserves and foreign liabilities will be converted into ouguiya (UM) at the exchange rate of December 31, 2000. The exchange rates of the SDR and non-dollar currencies will be kept at their end-December 2000 levels. All required adjustments will be calculated at these program exchange rates.
3. Net domestic assets (NDA) of the BCM are defined as reserve money minus net foreign assets of the BCM, adjusted for valuation changes arising from the difference between the program and the actual exchange rates.
4. Net domestic financing of the budget (NDF) is defined as the sum of net bank and nonbank financing of the government. Net bank financing is the net credit to the government from the banking system (NCG), defined as claims on the government less deposits of the government with the banking system.
5. The contracting or guaranteeing of nonconcessional external debt by the government and the Central Bank of Mauritania includes foreign currency debt contracted or guaranteed by the government or the Central Bank of Mauritania with a grant element (NPV discount relative to face value) of less than 35 percent, based on the currency- and maturity-specific discount rates reported by the OECD (commercial interest reference rates). This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (August 24, 2000) as shown in the annex but also to commitments contracted or guaranteed for which value has not been received. Although this definition excludes borrowing by public enterprises (without government guarantee), such borrowing should be avoided except in exceptional circumstances (like in the case of SNIM), and after consultations with the Fund staff.
6. External payments arrears are defined as the stock of external arrears on debt contracted or guaranteed by the government or the central bank, excluding debts subject to rescheduling or debt forgiveness. This performance criterion applies on a continuous basis.
II. Quantitative benchmarks
7. Reserve money is defined as the sum of: (i) currency in circulation (currency outside banks and commercial banks' cash in vaults); and (ii) deposits of commercial banks at the central bank. Required adjustments of bank foreign currency deposits at the central bank will be evaluated at the program exchange rates.
8. Tax revenue is defined as the sum of all taxes on goods and services and income, and taxes on international trade.
III. Program adjusters
9. The NIR, NDA, and NDF targets are defined based on the assumption of projected cumulative amounts of external cash debt service payments, program related financing (loans and grants), the amount of the fixed part of the fishing royalties from the European Union (EU), and privatization proceeds to the budget.
10. In cases where total external cash debt service payments exceed (fall short of) the target, the floor for NIR will be adjusted downward (upward) and the ceiling on NDA will be adjusted upward (downward) by the amount of any excess over (shortfall from) the target.
11. In cases where program related financing or the fixed part of the fishing royalties from the EU exceeds (falls short of) their targets, the floor for NIR will be adjusted upward (downward) and the ceiling on NDA will be adjusted downward (upward) by the amount of any excess over (shortfall from) the targets. Any downward adjustment to NIR resulting from the shortfall in program related financing will be limited to US$10 million, and from the shortfall in fishing royalties to the U.S. dollar equivalent of €5 million. Any upward adjustment to NDA resulting from the shortfall in program related financing will be limited to ouguiya equivalent of US$10 million, and from the shortfall in fishing royalties to ouguiya equivalent of €5 million.
12. In cases where government external cash debt service payments exceed (fall short of) the target, the ceiling on NDF will be adjusted upward (downward) by the amount of excess over (shortfall from) the target. NDF will also be adjusted downward (upward) by the amount of any excess (shortfall) of either program related financing or the fixed part of fishing royalties from the EU over (from) their respective targets. Any upward adjustment to NDF resulting from the shortfall in program related financing will be limited to the UM equivalent of US$10 million, and from the shortfall in fishing royalties to US dollar equivalent of €5 million. In addition NDF will be adjusted downward (upward) by the amount of any excess (shortfall) of privatization proceeds over (from) the program target.
IV. Provision of Information to the Fund
13. To permit the monitoring of developments under the program, the Government will provide to Division D of the Middle Eastern Department the information summarized below:
14. The monthly and quarterly data listed above should be sent within a period of no more than five weeks after the end of the month or quarter reported, unless otherwise noted. Any revisions to previously reported data should be promptly communicated to the staff and adequately explained.
Definition of Debt Set Forth in No. 9 of the Guidelines
The definition of debt set forth in No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt reads as follows: (a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.