Islamic Republic of Mauritania and the IMF
News Brief: IMF Completes Fifth Review Under Mauritania's PRGF Arrangement, Approves In Principle US$8 Million Disbursement
Country's Policy Intentions Documents
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Mauritania—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Mr. Horst Köhler
The government of the Islamic Republic of Mauritania recently held discussions with International Monetary Fund (IMF) staff concerning both the fifth review of the program supported under the Poverty Reduction and Growth Facility (PRGF) and the Article IV consultations for 2002.
The government considers that program execution during 2001 was in line with the established objectives. The quantitative performance criteria for end-December would all have been met if not for the delay in payment of the 2001 tranche of the financial compensation under the fisheries agreement with the European Union. The government requests waivers for the nonobservance of three quantitative performance criteria and for the structural performance criterion on the privatization of SOMELEC, and requests the conclusion of the fifth review under the PRGF arrangement.
The government further notes the successful implementation of the Poverty Reduction Strategy Paper (PRSP) in 2001 and the progress made toward meeting the completion point conditions of the enhanced Initiative to reduce the debt of the heavily indebted poor countries (HIPC). The government hopes to reach the completion point at the same time as the completion of the fifth review under the PRGF arrangement.
The attached memorandum takes stock of program implementation during 2001 and sets objectives for 2002. These policies continue to reflect the objectives established in the Poverty Reduction Strategy Paper (PRSP) and the PRSP progress report.
The government believes that the policies set forth in the memorandum will make it possible to achieve the objectives established in the PRGF-supported program for 2002, but will take any further measures which might be necessary for this purpose. The government will continue to provide the Fund with all information required for better monitoring of implementation of the established economic policies.
It is understood that the government will remain in contact with Fund staff and will consult the IMF from time to time, on its own initiative or whenever the Managing Director so requests, regarding Mauritania's economic and financial policies.
On behalf of the government of the Islamic Republic 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 endeavors.
1. The government of Mauritania notes with satisfaction the continued progress under the PRGF-supported program and the successful implementation of the PRSP over the course of one year. In addition, Mauritania made significant progress toward meeting the conditions associated with reaching the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The government would like to reach the completion point before the end of the first half of 2002.
2. The government of Mauritania requests the conclusion of the fifth review under the PRGF arrangement. It regrets the nonobservance of three quantitative performance criteria owing to the late payment of the financial contribution for 2001 under the fishing agreement with the European Union (EU), which did not arrive until early 2002. Indeed, absent this delay, all these criteria would have been met. Also, the privatization of SOMELEC could not be completed on time due to technical factors and factors outside the control of the government. The quantitative benchmark on tax revenue was not met owing to a shortfall in the turnover tax (TCA) from the state mining company (SNIM), attributable for the most part to world economic conditions and their impact on the demand for iron ore (Tables 1 and 2).
3. Both structural performance criteria, the VAT refund system and the revision of the investment code were met. The structural benchmark concerning the preparation of the terms of reference for computerizing expenditure on goods and services, targeted for end-December 2001, was observed in January 2002. The structural benchmark on the remuneration of government deposits with commercial banks took effect as scheduled at the beginning of January 2002.
II. Poverty Profile
4. According to the latest household survey, the incidence of poverty and the social indicators both improved slightly. According to that survey, income poverty affected 46.3 percent of the population in 2000 as compared to 56.6 percent in 1990 and 50.5 percent in 1996. This slight decline in poverty was not uniform throughout the country. In addition, some progress was made regarding education and health indicators, and access to basic services improved somewhat during the period.
III. Recent Economic Developments
5. The delayed receipt of the financial compensation for 2001 under the fishing agreement with the EU explains almost all deviations from the program original targets. This delay, which was only a few days long, should have no impact on economic performance, which remains encouraging. This sizable delayed payment (€ 86 million, or US$77 million and about 8 percent of GDP) resulted in a fiscal deficit of 5.6 percent of GDP as well as a current account deficit (including official transfers) of 4.6 percent of GDP, as compared, respectively, to the program targets of a surplus of 1.9 percent of GDP and a deficit of 1.2 percent of GDP. The current account balance also reflects lower-than-projected imports. As a consequence, gross official reserves at the end of the year reached US$286 million (6.9 months of imports), against the program target of US$345 million.
6. Economic growth in 2001 was less robust than initially projected. The growth rate was revised downward from 5.2 percent in the program to 4.6 percent. This revision is explained principally by the global economic slowdown, which triggered a slackening of demand for iron ore in Europe. Similarly, agricultural production contracted, owing to the decline in the production of major commodities such as rice and maize, but this was offset by marked improvement in other sectors, in particular telecommunications and industrial fishing. The inflation rate remained low, at an average 4.7 percent for the year.
7. Given the magnitude of needs, expenditures related to poverty reduction accelerated in the second half of 2001. Improved project execution made it possible to make up for most of the delays registered in the first semester of the year. Excluding the financial contribution from the fishing agreement, the fiscal situation was by and large consistent with the program. The shortfall in the turnover tax (TCA) from the SNIM, attributable essentially to the drop in iron ore exports, was offset by a decline in public expenditure from the programmed level.
8. The central bank (BCM) reduced its discount rate by 2 percentage points (to 11 percent) in late October 2001, which was reflected in lower bank lending rates. There was a sharp drop in treasury bill rates, which fell to a low 3-4 percent in December before rising to 5 percent at the start of 2002, as well as faster-than-projected growth in money supply. However, the evolution of other monetary aggregates, including the expansion of credit to the private sector, was broadly in line with the program.
9. The current account deficit (including official transfers) principally reflects three factors: the late receipt of the financial compensation under the fishing agreement, a drop in mining exports of about US$15 million, and a lower-than-projected level of imports (by about US$35 million). As a result, official reserves reached US$286 million. Mauritania recently signed an agreement with the Arab Fund for Economic and Social Development (FADES) for a concessional loan of about US$52 million, which will contribute to financing construction of the road between Nouakchott and Nouadhibou.
10. Although the BCM provided the market with U.S. dollar banknotes and eliminated the ceiling on exchange bureau participation in the Expended Exchange Market (MCE), the spread between the transfer rate and the cash rate did not fall. It appears that the demand for foreign exchange increased in recent months because of several factors: the introduction of the euro, the prolonged effects of the traditional closing of the fishing season (September-October), the month of Ramadan, and departures for the Haj in early 2002. In addition, excess liquidity in the banking system following the fall in the treasury bill rates beginning October 2001 put pressure on the exchange rate (see below).
IV. The Program for 2002
A. Macroeconomic Objectives
11. The program for 2002 is aimed at achieving the government's objectives set forth in the PRSP, in particular reducing poverty in a stable macroeconomic environment. A growth rate of 5.1 percent would be achievable, with an average inflation rate of 4 percent. Given that the two annual payments (for 2001 and 2002) under the fishing agreement are being received in 2002, the current account balance will turn into a surplus of 3.8 percent of GDP, and official reserves are expected to rise to the equivalent of eight months of imports. It is noteworthy that these objectives are consistent with those of the medium-term economic framework as revised in the PRSP progress report. To achieve these objectives, the government intends to adopt the policies described below.
B. Macroeconomic Policy
12. Fiscal policy as reflected in the 2002 budget law remains appropriate. This policy is aimed at (i) sharply increasing investment expenditure and current expenditure in social sectors to over 11 percent of GDP; (ii) increasing expenditure on maintenance so as to preserve the quality of physical infrastructure; (iii) maintaining the tax collection effort over the entire year, particularly in the case of large taxpayers such as SNIM, in order to avoid undesirable fluctuations on the expenditure side; and (iv) continuing to strengthen tax and customs administrations. However, owing to the downturn in economic activity, tax receipts are expected to be slightly below the level projected in the budget law. An amended budget was adopted in early February reallocating 3 percent of current expenditure (other than wages and interest payments) to promote reading and make books available to the poor without affecting the fiscal balance.
13. A VAT refund system was recently introduced with the assistance of an expert from the IMF Fiscal Affairs Department. To facilitate the processing of refund requests and make it more efficient, a VAT refund request verification unit, as well as a control mechanism to classify enterprise risk, were created within the General Tax Directorate (DGI). A public awareness and information campaign will soon be launched, targeting economic agents; among other things, it will include meetings with representatives of the business community and providing them with a (technical) pamphlet on the refund procedure. The government would like to receive technical assistance from the IMF in the area of tax administration.
14. The government will begin preliminary consideration of the simplification of the income tax on wages and salaries (ITS), in particular by reducing the number of brackets. This review process should lead to a reform of the ITS, which could be adopted in the context of the discussions of the 2003 budget law. Should the need arise, the government will request technical assistance from the IMF to facilitate this work.
15. Following adoption of the new investment code in November, the government stopped granting tax concessions to those investors that were admitted under the old investment code in 2001. In addition, the government has prepared draft decrees implementing this code, which strengthens the effective monitoring of activities entering the free-export zones (points francs).
16. Following the joint (World Bank and IMF) technical assistance mission on monitoring expenditure related to poverty reduction, the government decided to take the following measures:
17. Despite the performance achieved with respect to project execution, implementation capacity remains below the desired level. The government has prepared a study identifying the major obstacles and proposing solutions. After adopting the procurement code in 2001, the government plans to finalize the implementing regulations (prior action). The resources of the Central Procurement Commission (CCM) and the departmental commissions will be augmented accordingly. Audit reports on project implementation will be systematically forwarded to the audit office for information purposes.
Monetary policy and financial sector reforms
18. The primary objective of monetary policy continues to be price stability and the development of the financial markets, including the interbank market. In a context of a low inflation, and in order to stimulate credit to the private sector, the BCM reduced its discount rate by 2 percentage points in late October; the treasury bill rate fell between October and November and reached 3.4 percent at the last auction of the year. This unintended sharp decline was triggered by a net reduction in the outstanding balance of treasury bills owing to problems with projecting banking system liquidity. The BCM decided to correct this excessive decline, and the treasury bill rate rebounded to over 5 percent at the auction of February 28, 2002.
19. In the weeks ahead, the BCM will continue to mop up the excess liquidity in the banking system, which is reflected inter alia in pressure on the exchange rate. To do this and to improve the conduct of monetary policy in general, the BCM intends to take the following measures:
20. To improve its effectiveness in carrying out its missions, the BCM has initiated a comprehensive internal restructuring. Accordingly, it has adopted two new organizational charts for two key departments, banking supervision and research. In the months ahead, the BCM will undertake the reorganization of other departments and will focus on redeploying existing staff as necessary, before preparing recruitment or severance plans. In any event, there will be no increase in central bank staffing.
21. The BCM agrees with the recent analysis and recommendations of the Fund's safeguards assessment. The BCM is committed to appoint external auditors for the 2001 financial year by end-June 2002 (structural performance criterion) and publish its completed audited financial statements and audit opinion for 2001 by end-September 2002 (structural performance criterion). The BCM will also establish before year-end a formal process for selecting external auditors and a policy of publishing financial statements within three months of year-end.
22. With the support of the IMF resident advisor, the bank supervision directorate conducted three inspection missions to commercial banks, and a fourth is now in progress. Given the shortage of auditors, these missions took far longer than planned, and consequently it was not possible to complete on schedule (end-2001) the study on the impact on the individual financial positions of banks of transferring government deposits to the central bank. The BCM is committed to completing this study before end-June 2002, once the fourth inspection mission has been completed, and then to put in place a program of prudent transfers, which takes into account the importance of these deposits both for banks and for financing requirements of the private sector.
23. Limited progress was made with respect to observing the credit concentration ratios as defined in the contract programmes signed with commercial banks. Five of seven banks complied with the concentration ratio for individual borrowers, while only three banks observed the concentration ratio for group borrowers. The other prudential ratios, specifically the liquidity ratio and capital adequacy ratio, were observed by all the banks.
24. After discussion with commercial banks, government deposits with commercial banks began to be remunerated at a rate of 3 percent in January 2002. To improve transparency, however, by end-February 2002, the BCM will issue a circular providing a detailed explanation of the reasons for, and modalities of, this remuneration.
Exchange rate and external policy
25. In view of the continuing gap between the official (cours de transfert) and the cash rate (cours manuel), the BCM intends to pursue the following policies:
26. In keeping with its obligations under Article VIII, Mauritania confirms that there are no restrictions on the making of foreign exchange payments and transfers for current international transactions.
27. The government will continue to follow a prudent external borrowing policy and will inform Fund staff on a regular basis of any new loans, even concessional, so as to ensure the viability of external debt indicators. There have been no new agreements reached in debt relief negotiations with non-Paris Club bilateral creditors; nor have any new debt relief commitments been received from multilateral organizations that have not already made such commitments.
V. Poverty Reduction Strategy Paper and
28. The Mauritanian government considers that its poverty reduction strategy was implemented successfully during its first year. This is well documented in the first PRSP progress report, which was prepared in a broad participatory process. The report takes stock of the progress achieved and lists the challenges that must still be met in order to effectively combat poverty, the significant reduction of which remains at the core of the government's concerns. Priority measures have been identified in the PRSP progress report and will be carried out in 2002.
29. The government expects to reach the completion point at the same time as the completion of the fifth review under the PRGF arrangement. Mauritania has made substantial progress in meeting the floating conditions for the completion point of the enhanced HIPC Initiative. Most of the macroeconomic and structural conditions have been met. As indicated in the government's memorandum for the fourth review, however, some conditions will not be met in 2002, either because they have proven unrealistic (principally in the social areas, particularly education) or because it has been determined, in consultation with Fund staff, that meeting some of these conditions (such as the credit concentration ratios for commercial banks) in 2002 may no longer be desirable.
30. The government intended to complete the privatization of SOMELEC by end-April 2002, a trigger for the completion point and a performance criterion under the PRGF-supported program. However, the process has been slower than envisaged due to delays, initially caused by the advisor (an investment bank) that the government hired to be in charge of these operations, that were compounded by difficulties in the global energy sector. Following the qualification of five international companies, three companies withdrew from the bidding process mainly as a result of the events in late 2001 and the Enron crisis, since companies were either directly affected by these events or became more careful in selecting their new investment projects. The two remaining companies visited Nouakchott in early April, but required more time to finalize the necessary technical work. At end-April, one company decided to withdraw, leaving only one company in the bidding process. In these circumstances, the government believes that the chances of successful implementation are reduced, and this could cause delays.
31. Regarding the social conditions for the completion point, in particular the targets set for income poverty, education, and health, the PRSP set more realistic objectives, compared to the targets set in the decision point document, on the basis of more in-depth analysis conducted in consultation with Mauritania's development partners in a participatory process. The government regards these objectives as the basis for the adjustment program and considers them to demonstrate clearly that the social objectives set in the decision point document were too ambitious. Be that as it may, the government reiterates its desire to do everything possible to fulfill all the other conditions as soon as possible.
VI. Other Structural Reforms
32. The government is determined to remedy the precarious financial condition of the social security fund (CNSS). However, a comprehensive solution can be identified only on the basis of the actuarial study conducted by the International Labor Organization (ILO), which has just been completed. In the meantime, a draft decree raising the ceiling on the contribution base from UM 35,000 to UM 50,000 was adopted in March 2002. This step has been taken in consultation with the representatives of labor unions and the business community, which are amenable to a comprehensive reform of the CNSS. The government also believes that an increase in the contribution rate is virtually inevitable. This rate has not changed in 28 years and is among the lowest in the region. An administrative modernization project is under way.
33. In the other structural areas:
VII. Request for Waivers and Program Monitoring
34. The authorities request waivers for the nonobservance of three quantitative performance criteria: net domestic assets of the central bank, net domestic financing of the budget, and net international reserves, as well as a waiver for the nonobservance of the structural performance criterion on the privatization of SOMELEC.
35. Prior actions. The government will adopt all the prior actions indicated in the annexed table before the fifth review under the PRGF arrangement is concluded by the IMF Executive Board.
36. Performance criteria. The quantitative performance criteria for end-June 2002 and quarterly benchmarks for 2002, are provided in Table 3. Structural performance criteria and structural benchmarks are provided in Table 4.
37. Program reviews and extension of the period of the PRGF. The existing PRGF arrangement expires on July 20, 2002. To permit conclusion of the sixth review under the PRGF arrangement, the government requests a five-month extension of the period of the PRGF.
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 BCM includes foreign currency debt contracted or guaranteed by the government or the BCM 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 the state mining company (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 ouguiya equivalent of US$10 million, and from the shortfall in fishing royalties to U.S. 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. 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.