## The Authorities’ Inclusive Growth Strategy for 2016–30 (cr17324) ## Source details **Canonical URL:** [The Authorities’ Inclusive Growth Strategy for 2016–30 (cr17324)](https://www.imf.org/-/media/files/publications/cr/2017/cr17324.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17324.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17324.pdf.json) --- ### Context and recent macroeconomic developments - Economy highly dependent on mining (iron ore, gold, copper) and fishing exports; terms of trade deteriorated by about 38 percent in 2014–15. - GDP growth and poverty: - High GDP growth of 5.3 percent on average annually during 2010–13; poverty reduced to 31 percent by 2014. - Prices, reserves, and exchange rate: - Iron ore prices: rebounded temporarily in November 2016 but dropped again in April 2017. - Inflation: 2.9 percent y-o-y as of May (food prices rose by 4.5 percent; non-food inflation at 1 percent). - International reserves: US$795 million (4.8 months of non-extractive imports) as of end-March 2017. - Nominal exchange rate depreciation exceeded 16 percent against the dollar since mid-2014; estimated real exchange rate overvaluation in the range of 14–21 percent (estimates uncertain). - Growth and financial indicators: - Growth rebounded to an estimated 1.7 percent in 2016; non-extractive growth subdued. - Negative output gap of about 1½ percent of non-extractive GDP (NEGDP); potential NEGDP growth slowed to about 4 percent (from 5 percent earlier). - Broad money grew by 7 percent in 2016; private sector credit rose by more than 8 percent in 2016 but credit growth slowed to 5 percent at end-March (year). - NPL ratio improved from 30 percent in 2015 to 21 percent in 2016 (partly due to an accounting transfer of fully provisioned NPLs). - Official capital adequacy ratios average 23.7 percent, but methodology has shortcomings; three banks’ NPL ratios exceed 40 percent; at least five banks recurrently unable to meet reserve requirements. - Public debt and financing: - External public debt rose during the past two years to 72 percent of GDP (headline amplified by nominal contraction); projected to decline to 71 percent of GDP in 2017. - 2015–16 external public debt rose by about $550 million (10 percent of 2014 GDP); $300 million (6.2 percent of GDP) Saudi Arabia deposit at BCM in 2015 noted. - Passive Kuwaiti debt estimated at 21 percent of GDP owed since the 1970s; staff tables show two debt stock figures (including and excluding it). - Debt sustainability: high risk of debt distress per DSA, though mitigated by concessional/semi-concessional terms and some reserve buffers. - Social and labor market: - Doing Business: 16-rank gain over two years to 160th out of 190 countries in 2017. - Pilot targeted cash transfer scheme launched in December 2016 with World Bank support. - Unemployment estimated about 13 percent on average in 2014; youth unemployment up to 35 percent in major cities. - Women’s labor participation rate at 27 percent; women’s unemployment rate at 19 percent. ### Main elements of the Inclusive Growth Strategy for 2016–30 - Strategic aims: - Raise growth (eventually to 12 percent annually) and employment. - Reduce inequalities, eliminate extreme poverty, and halve overall poverty by accelerating structural transformation and reforming social policies. - Three pillars: - Promoting higher, sustainable and more inclusive growth and job creation: - Encourage higher integration in the value chain in agriculture, pastoral activities, and fishing. - Improve public infrastructure. - Promote greater role for the private sector: improve business climate, develop PPPs, improve access to finance to SMEs, encourage FDI. - Developing human capital and improving access to basic social services: - Improve access and quality of education, vocational training, and health. - Strengthening governance: - New organic budget law to strengthen transparency and accountability. - Improve statistics to better support policymaking. - Strengthen the judicial system and fight corruption. - Launch a national strategy for gender equality. ### Policy implementation status and outstanding priorities - Implementation to date: - Many 2016 Article IV recommendations under implementation: fiscal and external imbalance adjustments, financial sector strengthening, business environment improvements. - Authorities finalizing the 2016–30 development strategy. - BCM finalized a new banking law and central bank statute to strengthen prudential and bank resolution frameworks and operational independence. - Outstanding staff recommendations: - Continue fiscal consolidation while managing public investment program: sustain primary deficit around 1½ percent of NEGDP in 2017 (staff projection). - Strengthen debt management, particularly debt recording and monitoring. - Reform the FX market and adopt a more active monetary policy to better manage liquidity and support private sector credit. - Maintain financial stability: reinforce bank supervision, address NPLs, establish clearer lender-of-last-resort arrangements, improve AML/CFT compliance. - Improve governance and public investment management to reduce risks from large-scale public investment program and public debt buildup. - Fund engagement: - Authorities requested Fund support; discussions on a possible arrangement under the Extended Credit Facility launched in February and progressing. - Issues under discussion: pace of fiscal consolidation, public investment program, foreign exchange reforms, and structural reforms. ### Risks and outlook highlights - Growth outlook: - Growth slowed in 2015–16 but showed some recovery in 2016; Q1 2017 indicators point to recovery in construction and fishing. - External and fiscal risks: - Current account deficit narrowed by 5 percent of GDP to 15 percent in 2016; excluding FDI-financed imports, deficit narrowed to 11 percent of GDP. - Large swing in errors and omissions close to 6 percent of GDP between 2015–16 clouds assessment. - Financial sector and debt risks: - Elevated financial stability risks from high NPLs, liquidity strains, loan concentration, and bank vulnerabilities. - High public external debt and amortization of Saudi deposit and other loans over 2018–22 increase debt distress risks. - Social and structural risks: - Persistent unemployment, low women’s labor participation, and remaining institutional and governance weaknesses could impede inclusive growth objectives. --- ### Near-term growth prospects and baseline projections - Non-extractive growth projected: - Pick up to 2.9 percent in 2017 and reach 6 percent by 2021. - Drivers: - Demand impact of scaled-up and more efficient public investment in infrastructure benefiting construction, manufacturing (cement), and services. - FDI-financed mining expansion (gold and iron ore) to boost extractive growth and support export revenues with spillovers to non-extractive sectors. - External pressures and projections: - Budget deficit: higher capital spending, especially foreign-financed, will widen the budget deficit to over 2 percent of GDP from 2018 onwards. - Public external debt: will rise to a peak of 75 percent of GDP by 2019. - Current account deficit (excluding FDI-financed extractive capital imports): projected to remain around 8–9 percent of GDP over the projection period. - Reserves: expected to remain under pressure and could drop below 3 months of non-extractive imports by 2020. - Temporary dips: - Extractive GDP dips in 2018 and 2021–22 due to planned shutdowns of oil production and a copper and gold mine, respectively. ### Upside potential and downside risks - Upside scenario: - Development of a recently discovered off-shore gas field (shared with Senegal and under development by a consortium led by British Petroleum) could be a game-changer starting in 2021; not included in staff projections as a final investment decision has yet to be made. - Downside risks: - Continued reliance on commodity exports and a narrow domestic productive base raise vulnerability to lower commodity prices and global growth. - A less benign international environment, deterioration of regional security, and weak policy implementation could reverse recent gains. --- ### Policy recommendations — exchange rate, monetary policy, and FX market - Rationale for reform: - Current exchange rate stabilization has been contractionary and led to some overvaluation; real exchange rate overvaluation signs in range 14–21 percent. - Unsterilized FX interventions and passive monetary policy contributed to tighter liquidity and higher real interest rates. - Specific recommendations: - Reform the FX market: introduce a competitive and transparent multiple-price auction system and gradually remove regulatory obstacles to develop an FX interbank market. - Move monetary anchor to monetary aggregates: staff suggested a flexible reserve money target as the operational objective to reduce daily interest rate volatility. - Rebuild FX buffers for negative shocks and exchange rate volatility. - Recapitalize the BCM: government should repay its debt to BCM following the schedule agreed in 2013; BCM should discontinue counting unpaid interest revenue on this debt as profits. - Enhance BCM analytical and forecasting capacities and reform central bank organization and decision-making. - Near-term monetary actions: - Room exists to reduce the BCM’s policy rate in 2017 given the negative output gap and relatively low inflation. - Contextual numeric values: - Policy rate fixed at 9 percent since 2009. - Large spread with T-bill rates: 9 percent versus 4.8 percent. - Banks’ required reserves fixed at 7 percent since 2007. - Liquidity measures under consideration: monthly averaging of reserve requirements, possible reduction of reserve requirements, reactivation of repo operations, resumption of weekly liquidity auctions (the latter two requiring an eligible collateral framework). BCM should proceed cautiously with planned extension of collateral to private debt and rely primarily on T-bills and FX as collateral. - Authorities’ views: - Agreed in principle on using the exchange rate as shock absorber but felt staff overstated degree of overvaluation and questioned exchange rate’s ability to correct external imbalances given limited non-extractive base and low elasticity of essential imports. - Emphasized gradual implementation, strict enforcement of existing FX repatriation regulations, capacity constraints, and need for adequate reserve cushion during transition. ### Fiscal policy, infrastructure, and debt sustainability - Trade-off: balance supporting growth and infrastructure with ensuring macroeconomic stability and debt sustainability. - Staff recommendation: - Moderate consolidation over next few years to return public debt to a downward trajectory while supporting recovery through quality reforms. - Fiscal scenario and numeric guidance: - Further adjustment in the primary balance (excluding grants) by about 1 percent of NEGDP over 2018–20, associated with a moderate pace of external borrowing for priority infrastructure and social investment, would put external public debt-to-GDP on a downward path. - Avoid non-concessional foreign financing that could jeopardize debt sustainability. - Determining a specific debt target is premature given large swings in nominal GDP. - Note: without sustained higher commodity prices, only significant economic transformation and diversification will durably address vulnerabilities; off-shore gas development unlikely to change this scenario in next 5–10 years. - Suggested priorities: - Growth-friendly domestic revenue mobilization and expenditure prioritization to create fiscal space. - Strengthen debt management and control parastatal sector borrowing. - Rely on concessional financing and promote PPPs. - Promote sustainable non-extractive revenue base, streamline current expenditure, and raise public investment efficiency. - Create fiscal buffers in case metal prices improve. ### Revenue mobilization - Ongoing measures and gaps: - Authorities working, with Fund support, to replace the profit tax with a modern corporate income tax (CIT). - With World Bank support, compilation of a tax exemption registry started; authorities committed to publishing estimates of tax expenditures and eliminating inefficient and distortionary tax exemptions over time. - Tax administration needs modernization; taxpayer compliance remains low; tax arrears have risen. - Pending reforms: adoption of a tax procedure code and a customs code; operationalization of a customs valuation office. - Many procedures remain manual; monitoring/forecasting tools limited. - Numeric and procedural details: - Tax exemptions estimated at 3–5 percent of GDP and granted through preferential regimes in the mining sector, the investment code, free zones, and VAT. - Agreed focus and priorities: - Broaden tax bases and strengthen tax administration; adopt new CIT and phase out costly untargeted exemptions; adopt tax procedure and customs codes; operationalize customs valuation office; modernize customs administration and strengthen taxpayer registration, filing, computerization and e-filing, controls and audits, arrears collection, and taxpayer services. - Over time, replace large oil taxation windfall with more efficient taxation and gradually phase in the fuel pricing formula adopted in 2012. ### Expenditure prioritization and public investment management - Recent and planned actions: - Public employment streamlining: identifying and removing ghost workers, piloting rationalized wage structures, integrating parastatal entities into central treasury. - Reforming subsidies through a new targeted cash transfer program. - Decree passed in September 2016 establishing a framework to select and monitor projects; steps to introduce a new information system with donor support to integrate project implementation phases. - Legal PPP framework adopted in October 2016; 2017 budget placed a ceiling on both domestic and foreign-financed investment for the first time. - Numeric and structural details: - Public investment doubled to 15 percent of NEGDP between 2010–15. - About 50 state-owned enterprises and over a hundred autonomous public agencies deliver important services, many financed through budget transfers. - Staff recommendations: - Further prioritize public investment projects to avoid crowding out social spending and account for capacity constraints and project management inefficiencies. - Strengthen project selection to focus on expected growth dividends. - Improve public investment efficiency and expand social spending by rationalizing and prioritizing current expenditure. --- ### Prioritizing public spending and public investment (institutional recommendations) - Project selection criteria to apply: - Financial viability. - Economic and social impact. - Relevance for development and sectoral strategies. - Impact on debt. - Additional considerations: - Future maintenance costs and budgetary impact, especially for infrastructure. - Parallel investment in human capital and social priorities. - Address inefficiencies from weak procurement and project monitoring. - Institutional reforms: - Swift adoption of new organic budget law to unify investment budgets and introduce multi-year budgeting. - Stronger oversight and reporting of the parastatal sector, with World Bank support. - Gradual operationalization of PPP framework, initially through a newly created unit and for small-scale projects. ### Strengthening debt management - Key measures underway: - Better coordination between Ministry of Economy and Finance and BCM, supported by integrated information systems, to improve contracting, recording, and monitoring of debt. - Formulation of a debt policy consistent with medium-term sustainability given high debt levels and vulnerability to adverse terms-of-trade developments. - Funding emphasis and cautions: - Avoid non-concessional borrowing; focus on grants and concessional loans for growth-enhancing projects at a pace consistent with debt sustainability. - Continue efforts to resolve debt in arrears with Kuwait. - Authorities’ position: - Questioned DSA’s high risk of debt distress rating and consider public debt sustainable and serviceable even in current low commodity price environment. - Agreed to seek concessional and grant financing for priority infrastructure projects but noted limited availability and that some favorable loans fall short of Fund concessionality threshold; semi-concessional financing may be needed. - Assured efforts to resolve Kuwait arrears seeking debt relief on terms comparable to 2002 HIPC Initiative completion point. ### Preserving financial stability and developing the banking system - Financial stability risks: - A few banks are precarious; a single bank failure could trigger loss of confidence. - Broad agreement to accelerate implementation of 2014 FSAP recommendations. - Supervision, regulation, legal framework: - Strengthen bank supervision, enforce regulations, accelerate adoption of new banking law and central bank statute. - BCM hopes that stronger licensing requirements and higher minimum capital will encourage mergers. - Liquidity management and market infrastructure: - Enhanced liquidity risk monitoring, regular reporting by banks, and stress testing needed. - BCM should introduce emergency liquidity assistance instrument and accelerate framework for eligible collateral, implementing cautiously. - Medium-term measures: deepen interbank market, reduce maturity mismatches, diversify and lengthen banks’ funding, reduce use of cash, develop liquidity framework for Islamic banks. - Ongoing: real-time settlement system and automated clearing house development with World Bank support; issuance of Islamic treasury bills. - NPLs and resolution: - BCM reinforcing inspections, urging transfer of fully provisioned NPLs off balance sheets. - Plan to upgrade capital adequacy ratio to Basel III and increase minimum capital requirement from UM6 to UM10 billion. - Authorities awaiting banking law submission to parliament to enhance resolution framework; recommendation to freeze granting of new bank licenses. - Credit registry reform: real-time access granted to banks; BCM planning to develop an NPL registry. - Remaining gaps: enforce concentration limits (including related parties), improve data quality/timeliness, modernize property rights legal framework, upgrade insolvency regulations. ### Improving the business climate and expanding social policies - Structural priorities: - Finalize and implement development strategy for 2016–30 through inclusive process; initiate long-lead reforms (education, justice, institutions). - Prioritize structural measures that yield both long- and short-term gains and are budget-neutral where possible. - Business climate recommendations: - Facilitate tax and social contribution payments, improve single window for enterprise creation and construction permits, strengthen legal framework for property rights. - Strengthen anti-corruption efforts and AML/CFT framework. - Social safety nets: - Finalize institutional setup of the social registry and identify resources to update and expand it. - Expand pilot social transfer program and secure permanent funding to replace donor funding in medium term. - Devote greater resources to priority social policies such as education and health. --- ### Article VIII, safeguards, and statistics - Article VIII and FX restriction: - Authorities remain committed to Article VIII obligations. - Since 2014, Mauritania maintained an exchange restriction arising from insufficient FX availability at BCM fixing sessions; approved by the Board in 2014 and again in April 2016 for one year. - Authorities request Fund approval to temporarily maintain the exchange restriction, necessary for balance of payments reasons and non-discriminatory among Fund members; commit to removing the restriction within one year following Board approval in context of program discussions and planned FX market reforms. - Safeguards and central bank governance: - Mixed progress implementing 2010 safeguards recommendations: BCM published audited financial statements for 2007–16 and improved internal audit practices, but has yet to provide 2015–16 external auditor’s management letters on internal controls to Fund staff. - Legal reforms to strengthen BCM autonomy and governance envisaged in amendments to central bank law not yet passed; BCM should improve financial reporting in line with international standards. - Statistics: - Data provision broadly adequate for surveillance but shortcomings remain in balance of payments, fiscal, debt, and financial sector statistics. - Improvements: new consumer price index with wider geographical coverage and updated consumption basket; steps to migrate national accounts to SNA 2008. - Authorities intend to further develop economic and social indicators and surveys; Fund will continue technical assistance and coordination with other organizations. --- ### Staff appraisal: key findings, projections, and recommended policy mix - Recent context and outcomes: - Steep decline in iron ore prices in 2014–15 halved exports, widened fiscal deficit, pressured reserves, and exposed bank vulnerabilities. - Authorities adjusted the 2016 budget (by 3 percent of GDP), allowed exchange rate depreciation, and mobilized foreign grants and loans. - Outcomes: reduced external imbalances and maintained macro stability, but growth slowed, external debt rose to 72 percent of GDP (high risk of debt distress), and financial stability risks heightened. - Main policy challenge: - Support inclusive growth recovery, diversify the economy, meet infrastructure needs while maintaining macro stability and strengthening external position and debt sustainability. - Recommended policy mix and priorities: - Greater exchange rate flexibility, active monetary policy, and gradual fiscal consolidation anchored on debt sustainability to support growth and rebuild buffers. - Accelerate domestic revenue mobilization, expenditure prioritization, and public investment management reforms to create fiscal space for higher social spending and public investment. - New borrowing to focus on growth-enhancing infrastructure on concessional terms and be phased consistent with capacity; strengthen public investment management through coordination and integrated information systems. - Encourage PPPs under the newly adopted framework. - Monetary and central bank actions: - Introduce monthly averaging of banks’ reserve requirements promptly. - If liquidity pressures persist, consider reducing reserve requirements and BCM’s policy rate, and activate other liquidity management instruments while monitoring inflation; proceed cautiously with planned extension of collateral to private debt. - Recapitalize the BCM to strengthen autonomy and monetary policy capacity. - Fiscal and tax measures: - Modernize tax and customs administration, introduce a new corporate income tax, and review and phase out tax exemptions. - Operationalize measures to strengthen public investment management, control public sector wage bill, and improve parastatal oversight. - Debt strategy: - Strengthen debt management through better coordination and integrated information systems for contracting, recording, and monitoring debt. - Avoid new non-concessional borrowing; prefer concessional loans and grants given already high debt. - Adopt an incremental borrowing strategy to periodically reassess investment needs, growth prospects, and debt sustainability with the objective to set the debt-to-GDP ratio on a downward trajectory over time. - Financial sector actions: - Accelerate implementation of 2014 FSAP recommendations, implement emergency liquidity assistance framework, address NPLs, and strengthen the resolution framework. - Social and structural priorities: - Expand social policies, increase spending on education and health, and expand social safety nets to reduce poverty and raise human capital. - Improve business climate and governance to support private sector growth, job creation, and diversification. - Exchange restriction recommendation: - Staff supports authorities’ request for approval of the existing exchange restriction as necessary for balance of payments reasons and non-discriminatory. - Staff recommends temporary approval of retention of this restriction until July 28, 2018 or the date of the conclusion of the next Article IV consultation, whichever is earlier. --- ### Reserve adequacy, vulnerabilities, and related recommendations - Reserve trajectory and vulnerabilities: - Under baseline, reserves projected to decline over medium term due to continued external imbalances, possibly dropping below 3 months of non-extractive imports by 2020. - Current account deficit (excluding FDI-financed extractive capital imports) projected to remain around 8–9 percent of GDP over projection period. - Policy adjustments recommended: - Greater exchange rate flexibility to decrease need for reserve buffers by allowing exchange rate to act as shock absorber. - Nevertheless, reserves should be increased gradually given high vulnerability to price shocks and inelasticity of non-extractive imports. - A more restrained fiscal position plus more flexible exchange rate would support current account adjustment and buffer rebuilding. - Reserve adequacy metrics and observations: - Fund’s LIC reserves template suggests adequate reserve level of 7.2 months of non-extractive sector imports (assuming fixed exchange rate and 6.2 percent marginal cost). - Actual reserves: 5.5 months at end-December 2016 and 4.8 months at end-March 2017 (including US$300 million Saudi deposit at BCM in 2015). - With a Fund arrangement, assessed adequate level would be lower; with 6.2 percent cost, 5.3 months of imports would be adequate—slightly more than current reserve level. - Greater exchange rate flexibility would reduce need for reserve buffers. --- ### Debt developments, DSA highlights, and policy implications - External public debt: - External public debt rose by $552 million (10 percent of 2014 GDP) between 2014–16. - External public debt ratio rose by 22 percentage points of GDP to 93.2 percent of GDP (end-2016) due to a 12 percent contraction in nominal dollar GDP. - Excluding passive Kuwaiti debt, external public debt reached 72.2 percent of GDP at end-2016. - Much of nominal increase included $300 million non-concessional Saudi deposit at BCM in 2015. - DSA projections and findings: - Baseline projections breach thresholds for three of five external debt indicators (one breach small); breaches less severe than 2016 DSA. - PV of debt-to-GDP projected on firm downward trajectory after 2019 and falls below threshold from 2030 onward. - PV of debt-to-exports breaches its threshold in 2022, peaks at 7 percent in 2031 before tapering. - Debt service-to-revenue ratio breaches threshold during 2018–21, largely due to amortization of $300 million Saudi deposit and AMF loans. - Standardized stress tests show breaches by all five debt indicators; vulnerabilities to export shocks and exchange rate depreciation. - Public debt assessment: - Public debt assessment more favorable because domestic debt is about 5 percent of GDP at end-2016 and most public debt is external. - PV of public debt-to-GDP projected to peak at 61 percent in 2019 and decline thereafter, crossing 56 percent benchmark in 2022. - Stress tests highlight importance of restrained fiscal policy. - Policy recommendations (debt-focused): - Follow sound economic policies and prudent borrowing strategy; take on new debt at moderate pace. - Avoid non-concessional borrowing; rely on grants and concessional financing. - Avoid new borrowing that results in significant additional short-term debt service. - Continue efforts to resolve external debt in arrears with Kuwait. - Strengthen public investment governance and monitoring to raise efficiency and growth dividends. - Strengthen debt management capacity and information systems. - If using PPPs, strengthen capacity to evaluate and monitor contingent liabilities; minimize direct financial participation and avoid explicit guarantees or implicit contingent budget liabilities. --- ### Annex I — Authorities’ response to 2016 Article IV recommendations (implementation status) - Monetary, exchange rate, and financial policies: - FX market reforms: ongoing; direct FX sales discontinued; repatriation of fishing proceeds enforced; FX market reforms under preparation but not implemented. - Monetary policy and liquidity management: limited progress; BCM developing forecasting capacity but remained passive and not recapitalized. - Bank supervision and resolution frameworks: partial progress; BCM reinforced supervision, finalized banking law and central bank statute, granted real-time credit registry access, prepared emergency liquidity assistance framework, adapting capital adequacy rules to Basel III; continued granting of new bank licenses and poor quality of financial data remain concerns. - Fiscal policy: - Fiscal consolidation ongoing; 2016 adjustment achieved; fiscal structural reforms initiated with Fund and Bank support; organic budget law not yet passed. - Structural reforms: - Ongoing: ambitious 2016–30 strategy designed but at initial stage; Doing Business rankings improved but additional reforms needed. --- ### Macro-structural reform priorities (Annex V) — prioritized reform menu - Main challenge: diversify economy to non-extractive sectors; binding constraints include macro vulnerabilities, micro risks, low productivity, low access to finance, and weak competitiveness. - Priority reform areas: - Accelerating banking and financial sector reforms: strengthen capital, NPL provisioning, central bank supervision, adopt new banking law for resolution framework. - Easing access to finance and financial inclusion: lower interest rates, greater availability of credit, broaden financing sources, consider developing a stock market. - Developing human capital: reform education, workforce skills, labor market functioning; increase investment in human capital relative to physical capital. - Improving efficiency of physical capital: prioritize projects, strengthen PIM, address procurement and implementation inefficiencies. - Reducing gender inequality: legal reforms, gender budgeting, remove discriminatory practices, promote equal education and employment access. - Fiscal structural reforms: broaden tax base, strengthen tax and customs administration, introduce CIT, eliminate inefficient tax exemptions, target subsidies, strengthen PFM and adopt new organic budget law. - Improving business environment: resolve insolvency, fair predictable taxation, ease access to credit, adopt revised tax and customs procedure codes. - Macro-fiscal framework for extractive revenues: build on oil fund experience to stabilize budget across cycle and save for future generations. --- ### Selected quantitative indicators and projections (selected series preserved exactly as presented) - Per capita GDP: US$ 1,335 (2014) - Poverty rate: 31 percent (2014) - Population: 4 million (2014) - Main exports: Iron ore, fish, gold, copper - Key export markets: China, Europe - Real GDP (2013–2022): 6.1, 5.6, 0.9, 1.7, 3.8, 3.0, 4.6, 5.2, 4.6, 4.0 - Real extractive GDP (2013–2022): 15.1, 4.2, -6.7, -1.4, 10.3, -3.5, 1.6, 2.8, -7.0, -14.1 - Real non-extractive GDP (2013–2022): 5.6, 5.8, 2.1, 2.2, 2.9, 4.0, 5.0, 5.5, 6.0, 6.0 - Iron ore production (million tons, 2013–2022): 12.5, 13.3, 11.6, 13.3, 14.5, 16.0, 17.0, 17.5, 18.0, 18.0 - Consumer prices (period average, 2013–2022): 4.1, 3.8, 0.5, 1.5, 2.1, 3.7, 5.0, 4.0, 4.0, 4.0 - Gross official reserves (end-period, 2013–2022, in millions of US$): 996.4, 639.1, 822.8, 824.5, 724.9, 622.8, 558.8, 481.4, 410.6, 345.9 - Reserves (months of prospective non-extractive imports, 2013–2022): 5.9, 5.0, 5.6, 5.5, 4.3, 3.7, 3.3, 2.8, 2.4, 1.9 - Current account balance (2013–2022, in millions of US$): -1,262.0, -1,470.7, -956.1, -706.8, -758.9, -561.3, -532.1, -536.1, -524.7, -543.1 - Central government: Total revenues and grants (2013–2022, in billions of UM): 422.7, 406.0, 460.2, 464.0, 484.3, 473.0, 500.7, 542.6, 580.0, 628.6, 697.7 - Nonextractive revenue (2013–2022, in billions of UM): 281.7, 293.9, 378.4, 407.7, 426.5, 413.3, 437.4, 470.5, 513.1, 569.4, 630.6 - Extractive revenue (2013–2022, in billions of UM): 129.7, 109.9, 53.5, 25.0, 26.9, 28.6, 28.9, 36.3, 43.1, 44.7, 47.5 - Overall balance (in percent of GDP, 2013–2022): -0.8, -4.5, -3.4, -0.3, -0.7, -0.6, -2.1, -2.1, -2.4, -2.3, -2.2 - Monetary survey highlights: - Broad money (M2, end-of-period, 2013–2019, in billions of UM): 469.7, 510.2, 512.1, 548.4, 588.7, 632.8, 694.8 - Credit to the private sector (end-of-period, 2013–2019, in billions of UM): 398.4, 443.0, 485.7, 524.4, 558.2, 599.7, 658.1 - Banking soundness indicators (selected): - Gross NPLs / gross loans (selected years): 45.3, 39.2, 25.7, 20.4, 23.0, 30.0, 21.0, 21.5 - Capital adequacy ratio (2008–2016): 33.0, 38.2, 34.0, 35.2, 29.2, 32.4, 28.1, 23.1, 23.7 - External financing (selected, 2015–2020, in millions of US$): - Total requirements (2015–2020): -1,220.5, -1,051.4, -1,088.1, -998.3, -961.8, -936.3 - Foreign direct investment and capital inflows (net, 2015–2020): 533.0, 279.6, 450.0, 212.0, 211.2, 239.0 - Official loan disbursements (2015–2020): 270.4, 321.5, 244.0, 391.0, 397.0, 330.0 - Deposit from Saudi Arabia at the Central Bank: 300.0 (2015 entry) --- ### Authorities’ views and concluding stance - Authorities consider public debt sustainable and serviceable even in current low commodity price environment; acknowledge need to strengthen public investment and debt management and to prioritize projects under public investment program. - Authorities note most borrowing benefits from favorable terms, even if some fall short of Fund concessionality thresholds; consider external borrowing necessary when alternative financing unavailable for critical cost-effective projects. - Authorities’ fiscal and monetary positions: - International reserves: 5.5 months of non-extractive imports. - Debt service: 1.3 percent of non-extractive GDP (as shown in Table 4). - Non-extractive sector revenues: 28 percent of non-extractive GDP in 2016. - Overall fiscal deficit: 0.4 percent of non-extractive GDP in 2016. - Authorities commit to gradual FX reform and to eliminating exchange restriction once reform finalized and implemented; cautious monetary easing preferred given external stability concerns. --- *IMF staff report excerpt titled "The Authorities’ Inclusive Growth Strategy for 2016–30" (cr17324).* ### 1. The Authorities’ Inclusive Growth Strategy for 2016–30 _______________________________________ 10 ### 1. The Authorities’ Inclusive Growth Strategy for 2016–30 _______________________________________ 10 ### Context and recent macroeconomic developments - Economy highly dependent on mining (iron ore, gold, copper) and fishing exports; terms of trade deteriorated by about 38 percent in 2014–15. - High GDP growth of 5.3 percent on average annually during 2010–13 accompanied by a reduction in poverty to 31 percent by 2014. - Iron ore prices: rebounded temporarily in November 2016 but dropped again in April 2017. - Authorities’ policy response in 2016: - Fiscal consolidation of 3 percent of GDP in 2016. - Central bank (BCM) allowed for gradual exchange rate depreciation against the dollar and stopped direct sales of foreign exchange (FX) outside the market. - Mobilized external resources to finance deficits, maintain reserves, and mitigate liquidity pressure. - Growth and financial stability: - Growth rebounded to an estimated 1.7 percent in 2016; non-extractive growth subdued. - Negative output gap of about 1½ percent of non-extractive GDP (NEGDP); potential NEGDP growth slowed to about 4 percent (from 5 percent earlier). - Inflation remained contained at 2.9 percent y-o-y as of May (food prices rose by 4.5 percent; non-food inflation at 1 percent). - International reserves at US$795 million (4.8 months of non-extractive imports) as of end-March 2017. - Nominal exchange rate depreciation exceeded 16 percent against the dollar since mid-2014; estimated real exchange rate overvaluation in the range of 14–21 percent (estimates uncertain). - Broad money grew by 7 percent in 2016; private sector credit rose by more than 8 percent in 2016 but credit growth slowed to 5 percent at end-March (year). - NPL ratio improved from 30 percent in 2015 to 21 percent in 2016 (partly due to an accounting transfer of fully provisioned NPLs). - Official capital adequacy ratios average 23.7 percent, but methodology has shortcomings; three banks’ NPL ratios exceed 40 percent; at least five banks recurrently unable to meet reserve requirements. - Public debt and financing: - External public debt rose during the past two years to 72 percent of GDP (headline amplified by nominal contraction); projected to decline to 71 percent of GDP in 2017. - 2015–16 external public debt rose by about $550 million (10 percent of 2014 GDP); $300 million (6.2 percent of GDP) Saudi Arabia deposit at BCM in 2015 noted. - Passive Kuwaiti debt estimated at 21 percent of GDP owed since the 1970s; staff tables show two debt stock figures (including and excluding it). - High risk of debt distress per debt sustainability analysis, though mitigated by concessional/semi-concessional terms and some reserve buffers. - Structural and social developments: - Doing Business: 16-rank gain over two years to 160th out of 190 countries in 2017. - Poverty rate reduced by about 11 points since 2008 to 31 percent in 2014. - Pilot targeted cash transfer scheme launched in December 2016 with World Bank support. - Unemployment estimated at about 13 percent on average in 2014; youth unemployment up to 35 percent in major cities. - Women’s labor participation rate at 27 percent; women’s unemployment rate at 19 percent. ### Main elements of the Inclusive Growth Strategy for 2016–30 (Box 1) - Strategic aims: - Raise growth (eventually to 12 percent annually) and employment. - Reduce inequalities, eliminate extreme poverty, and halve overall poverty by accelerating structural transformation and reforming social policies. - Three pillars: - Promoting higher, sustainable and more inclusive growth and job creation: - Encourage higher integration in the value chain in agriculture, pastoral activities, and fishing. - Improve public infrastructure. - Promote greater role for the private sector by improving the business climate, developing PPPs, improving access to finance to SMEs, and encouraging FDI. - Developing human capital and improving access to basic social services: - Focus on improving both access and quality of education, vocational training, and health. - Strengthening governance: - New organic budget law to strengthen transparency and accountability. - Improve statistics to better support policymaking. - Strengthen the judicial system and focus on fighting corruption. - Launch a national strategy for gender equality. ### Policy analysis, implementation status, and outstanding priorities - Implementation to date: - Many key recommendations of the 2016 Article IV consultation are under implementation (Annex I): policies to address fiscal and external imbalances, strengthen the financial sector, and improve the business environment. - Authorities finalizing the 2016–30 development strategy. - BCM finalized a new banking law and central bank statute to strengthen prudential and bank resolution frameworks and operational independence. - Outstanding policy challenges and recommendations emphasized by staff: - Continue fiscal consolidation while managing public investment program: sustain primary deficit around 1½ percent of NEGDP in 2017 (staff projection). - Strengthen debt management, particularly debt recording and monitoring. - Reform the FX market and adopt a more active monetary policy to better manage liquidity and support private sector credit. - Maintain financial stability: reinforce banking supervision, address NPLs, establish clearer lender-of-last-resort arrangements, and improve AML/CFT compliance. - Improve governance and public investment management to reduce risks from large-scale public investment program and public debt buildup. - Fund engagement: - Authorities requested Fund support; discussions on a possible arrangement under the Extended Credit Facility were launched in February and are progressing. - Issues under discussion include the pace of fiscal consolidation, the public investment program, foreign exchange reforms, and other structural reforms. ### Risks and outlook highlights - Growth outlook: - Growth slowed in 2015–16 but showed some recovery in 2016 and preliminary Q1 2017 indicators point to recovery in construction and fishing. - External and fiscal risks: - Current account deficit narrowed by 5 percent of GDP to 15 percent in 2016; excluding FDI-financed imports, deficit narrowed to 11 percent of GDP. - Large swing in errors and omissions close to 6 percent of GDP between 2015–16 clouds assessment. - Financial sector and debt risks: - Elevated financial stability risks due to high NPLs, liquidity strains, loan concentration, and bank vulnerabilities. - High public external debt and amortization of Saudi deposit and other loans over 2018–22 increase debt distress risks. - Social and structural risks: - Persistent unemployment, low women’s labor participation, and remaining institutional and governance weaknesses could impede inclusive growth objectives. *Source: IMF staff report excerpt titled "The Authorities’ Inclusive Growth Strategy for 2016–30" (cr17324).* ### 17. Near-term growth prospects are promising—supported by the authorities’ public ### 17. Near-term growth prospects are promising—supported by the authorities’ public ### Near-term outlook and baseline projections - Non-extractive growth is expected to pick up gradually to 2.9 percent in 2017 and reach 6 percent by 2021. - The near-term performance reflects the demand impact of scaled-up and more efficient public investment in infrastructure, benefiting construction, manufacturing (cement), and services. - FDI-financed mining expansion (gold and iron ore) will boost extractive growth and support export revenues, with spillovers to non-extractive sectors. - Despite these supports, external pressures are expected to persist under continued low commodity prices: - Budget deficit: higher capital spending, especially foreign-financed, will widen the budget deficit to over 2 percent of GDP from 2018 onwards. - Public external debt: will rise to a peak of 75 percent of GDP by 2019. - Current account deficit (excluding FDI-financed extractive capital imports): projected to remain around 8–9 percent of GDP over the projection period. - Reserves: expected to remain under pressure and could drop below 3 months of non-extractive imports by 2020. - Temporary dips in extractive GDP growth in 2018 and 2021–22 are due to planned shutdowns of oil production and a copper and gold mine, respectively. ### Upside potential and downside risks - Upside scenario: - Possible development of a recently discovered off-shore gas field (shared with Senegal and under development by a consortium led by British Petroleum) could be a game-changer starting in 2021; not included in staff projections as a final investment decision has yet to be made. - Downside risks: - Significant downside risks remain due to continued reliance on commodity exports and a narrow domestic productive base. - The economy is highly vulnerable to lower commodity prices and global growth, which would widen external and fiscal deficits, raise debt ratios, and strain buffers—creating attendant stability risks. - A less benign international environment, deterioration of regional security, and weak policy implementation could reverse recent economic and social gains. ### Policy recommendations — exchange rate, monetary policy, and FX market - Staff proposed greater exchange rate flexibility (through FX market reforms) and a more active and accommodative monetary policy to help address tight liquidity and support growth. - Rationale: - Current stance stabilizing the exchange rate has been effectively contractionary and led to some overvaluation; signs of real exchange rate overvaluation in the range of 14–21 percent. - Unsterilized FX interventions and passive monetary policy contributed to tighter liquidity and higher real interest rates. - Specific recommendations and reforms: - Reform the FX market by introducing a competitive and transparent multiple-price auction system and gradually remove regulatory obstacles to develop an FX interbank market. - Move to a new monetary policy anchor targeting monetary aggregates (nominal anchor instead of the exchange rate); staff suggested a flexible reserve money target as the operational objective to reduce daily interest rate volatility. - Rebuild FX buffers for negative shocks and exchange rate volatility. - Recapitalize the BCM: government should repay its debt to BCM following the schedule agreed in 2013; BCM should discontinue counting unpaid interest revenue on this debt as profits. - Enhance BCM analytical and forecasting capacities and reform central bank organization and decision-making. - Near-term monetary actions discussed: - Room exists to reduce the BCM’s policy rate in 2017 given the negative output gap and relatively low inflation. - Contextual numeric values: - Policy rate fixed at 9 percent since 2009. - Large spread with T-bill rates: 9 percent versus 4.8 percent. - Banks’ required reserves have remained fixed at 7 percent since 2007. - Liquidity measures under consideration: monthly averaging of reserve requirements, possible reduction of reserve requirements, reactivation of repo operations, resumption of weekly liquidity auctions (the latter two requiring an eligible collateral framework). BCM should proceed cautiously with planned extension of collateral to private debt and rely primarily on T-bills and FX as collateral. - Authorities’ views: - Authorities agreed in principle on using the exchange rate as a shock absorber but felt staff overstated the degree of overvaluation and questioned the exchange rate’s ability to correct external imbalances given the limited non-extractive production base and low elasticity of essential imports. - Authorities emphasized gradual implementation, strict enforcement of existing FX repatriation regulations, capacity constraints, and the need for an adequate reserve cushion during transition. ### Fiscal policy, infrastructure, and debt sustainability - Trade-off: fiscal policy must balance supporting growth and infrastructure development with ensuring macroeconomic stability and debt sustainability. - Staff recommended moderate consolidation over the next few years to return public debt to a downward trajectory while supporting recovery through quality reforms. - Fiscal scenario and numeric guidance: - A further adjustment in the primary balance (excluding grants) by about 1 percent of NEGDP over 2018–20, associated with a moderate pace of external borrowing for priority infrastructure and social investment, would put external public debt-to-GDP on a downward path. - Avoid non-concessional foreign financing that could jeopardize debt sustainability. - Objective: set the debt ratio on a downward trajectory over time to levels consistent with reduced risks of debt distress; determining a specific debt target is premature given large swings in nominal GDP. - Without sustained higher commodity export prices, only significant economic transformation and diversification will durably address vulnerabilities; successful off-shore gas development is unlikely to change this scenario in the next 5–10 years. - Staff suggested prioritizing growth-friendly domestic revenue mobilization and expenditure prioritization to create fiscal space, sustain consolidation, and enhance resilience: - Strengthen debt management and control parastatal sector borrowing. - Rely as much as possible on concessional financing and promote public-private partnerships (PPPs). - Promote a sustainable non-extractive revenue base, streamline current expenditure, and raise public investment efficiency. - Create fiscal buffers in case metal prices improve. ### Revenue mobilization - Ongoing measures and gaps: - Authorities are working, with Fund support, to replace the profit tax with a modern corporate income tax (CIT). - With World Bank support, compilation of a tax exemption registry has started; authorities committed to publishing estimates of tax expenditures and eliminating inefficient and distortionary tax exemptions over time. - Tax administration still needs modernization; taxpayer compliance remains low; tax arrears have risen. - Pending reforms: adoption of a tax procedure code and a customs code; operationalization of a customs valuation office. - Many procedures remain manual; monitoring/forecasting tools limited. - Numeric and procedural details: - Tax exemptions are estimated at 3–5 percent of GDP and are granted through preferential regimes in the mining sector, the investment code, free zones, and VAT. - Agreed focus: - Broaden tax bases and strengthen tax administration to increase efficiency, fairness, and predictability, and sustain the already high tax-to-GDP ratio. - Specific priorities: adopt the new CIT and phase out costly untargeted exemptions; adopt tax procedure and customs codes and operationalize the customs valuation office; modernize customs administration and strengthen taxpayer registration, filing, computerization and e-filing, controls and audits, arrears collection, and taxpayer services. - Over time, replace the large oil taxation windfall with more efficient taxation and gradually phase in the fuel pricing formula adopted in 2012. ### Expenditure prioritization and public investment management - Recent and planned actions: - Public employment streamlining: identifying and removing ghost workers, piloting rationalized wage structures, integrating parastatal entities into the central treasury system. - Reforming subsidies through a new targeted cash transfer program. - Measures to address shortcomings in public investment management: a decree passed in September 2016 establishing a framework to select and monitor projects; steps to introduce a new information system with donor support to better integrate all phases of project implementation. - Legal framework governing PPPs adopted in October 2016 to encourage private sector investment in infrastructure. - The 2017 budget placed a ceiling on both domestic and foreign-financed investment for the first time; awaiting adoption of the organic budget law to unify domestically and foreign-financed investment and introduce multi-year budgeting. - Numeric and structural details: - Public investment doubled to 15 percent of NEGDP between 2010–15. - About 50 state-owned enterprises and over a hundred autonomous public agencies deliver important economic and social services, some financed through own revenues but many by budget transfers. - Staff recommendations: - Further prioritize public investment projects to avoid crowding out needed social spending and account for capacity constraints and project management inefficiencies. - Strengthen project selection to focus on expected growth dividends. - Improve public investment efficiency and expand social spending by rationalizing and prioritizing current expenditure. *Source: IMF staff report excerpt (cr17324).* ### 33. There was broad agreement that rationalizing and prioritizing current spending and ### cr17324 - 33. There was broad agreement that rationalizing and prioritizing current spending and ### Prioritizing public spending and public investment - Consensus that rationalizing and prioritizing current spending and public investment should continue, including under ongoing employment and wage reforms and the new framework unifying public investment management. - Project selection criteria to be applied: - Financial viability. - Economic and social impact. - Relevance for development and sectoral strategies. - Impact on debt. - Additional considerations: - Future maintenance costs and their budgetary impact, especially for infrastructure projects. - Parallel investment in human capital and social priorities in line with the authorities’ development strategy. - Address inefficiencies from weak procurement processes and project monitoring. - Institutional and procedural reforms recommended: - Swift adoption of the new organic budget law to unify investment budgets and introduce multi-year budgeting. - Stronger oversight and reporting of the parastatal sector, with World Bank support, to strengthen control over spending and contracting debt. - Gradual operationalization of the new PPP framework, with World Bank support, initially through a newly created unit and for small-scale projects. ### Strengthening Debt Management - Authorities are strengthening the debt management framework. - Key measures: - Better coordination between the Ministry of Economy and Finance and the BCM, supported by integrated information systems being introduced, to improve contracting, recording, and monitoring of debt. - Formulation of a debt policy consistent with medium-term sustainability given high debt levels and vulnerability to adverse terms-of-trade developments. - Funding emphasis and cautions: - Staff emphasized avoiding non-concessional borrowing and focusing on grants and concessional loans for growth-enhancing projects at a pace consistent with debt sustainability. - Staff underscored continued best efforts to resolve the debt in arrears with Kuwait. - Authorities’ position: - Questioned the DSA’s high risk of debt distress rating and considered public debt sustainable and serviceable even in current low commodity price environment. - Agreed to seek concessional and grant financing for priority infrastructure projects but highlighted limited availability and noted some favorable loans fall short of the Fund’s concessionality threshold; semi-concessional financing may be needed in the context of their development strategy. - Assured efforts to resolve the debt in arrears with Kuwait by seeking debt relief on terms at least comparable to those granted under the 2002 HIPC Initiative completion point. ### Preserving financial stability and developing the banking system - Financial stability risks and banking sector vulnerabilities: - Situation of a few banks is precarious; a single bank failure could trigger loss of confidence across local banks. - Broad agreement to accelerate implementation of the 2014 FSAP recommendations. - Supervision, regulation, and legal framework: - Continue strengthening bank supervision, enforcing regulations, and accelerating adoption of the new banking law and central bank statute. - BCM hopes that strengthening licensing requirements and raising the minimum capital requirement will encourage mergers to limit the number of banks. - Liquidity management and market infrastructure: - Tight liquidity requires coordinated policy response: enhanced liquidity risk monitoring, regular reporting by banks, and stress testing. - BCM should introduce promptly the new instrument for emergency liquidity assistance (designed with Fund technical support) and accelerate framework for eligible collateral, implementing cautiously. - Medium-term structural measures: deepen interbank market, reduce maturity mismatches, diversify and lengthen banks’ funding maturities, reduce use of cash, and develop a liquidity management framework for Islamic banks. - Ongoing steps: development of a real-time settlement system and an automated clearing house with World Bank support, and recent issuance of Islamic treasury bills. - Nonperforming loans (NPLs) and resolution: - BCM reinforcing inspections to ensure adequate provisioning of NPLs and urging banks to transfer fully provisioned NPLs off balance sheets. - Plan to upgrade capital adequacy ratio to comply with Basel III and increase gradually the minimum capital requirement from UM6 to UM10 billion. - Authorities awaiting submission of new banking law to parliament which will enhance the resolution framework; recommendation to freeze granting of new bank licenses. - Credit registry reform progressed: real time access granted to banks; BCM planning to develop a registry for NPLs. - Remaining gaps: need to enforce concentration limits (including vis-à-vis related parties), improve data quality and timeliness for risk-based supervision, modernize legal framework for property rights, and upgrade insolvency regulations to lower risk premia and encourage private sector credit expansion. ### Improving the business climate and expanding social policies - Development strategy and reforms: - Staff welcomed the authorities’ new development strategy for 2016–30 focusing on diversified and inclusive growth. - Urged finalization of the strategy through an inclusive and consultative process and rapid initiation of long-lead reforms (education, justice, institutions). - Prioritize structural measures that yield both long-term and short-term gains and are budget-neutral where possible: raise productivity, reform public finances, improve business environment, and establish macro-fiscal framework to manage extractive revenues. - Business climate recommendations: - Address Doing Business shortcomings: facilitate tax and social contribution payments, improve single window for enterprise creation and construction permits, strengthen legal framework for property rights. - Strengthen anti-corruption efforts and the AML/CFT framework. - Social safety nets: - Finalize institutional setup of the social registry and identify resources to update and expand it. - Expand the pilot social transfer program and secure permanent funding to replace donor funding in the medium term. - Greater resources should be devoted to priority social policies such as education and health. ### Article VIII, safeguards, and statistics - Article VIII and FX restriction: - Authorities remain committed to meeting obligations under Article VIII. - Since 2014, Mauritania has maintained an exchange restriction arising from insufficient availability of FX at BCM fixing sessions; approved by the Board in 2014 and again in April 2016 for one year. - Authorities request Fund approval to temporarily maintain the exchange restriction, necessary for balance of payments reasons and non-discriminatory among Fund members; commit to removing the restriction within one year following Board approval in the context of ongoing program discussions and planned FX market reforms. - Safeguards and central bank governance: - Mixed progress implementing 2010 safeguards recommendations: BCM published audited financial statements for 2007–16 and improved internal audit practices, but has yet to provide 2015–16 external auditor’s management letters on internal controls to Fund staff. - Legal reforms to strengthen BCM autonomy and governance envisaged in amendments to the central bank law have not yet been passed; BCM should improve financial reporting in line with international standards. - Statistics: - Data provision broadly adequate for surveillance but shortcomings remain in balance of payments, fiscal, debt, and financial sector statistics. - Notable improvements: new consumer price index with wider geographical coverage and updated consumption basket; steps to migrate national accounts to SNA 2008. - Authorities intend to further develop economic and social indicators and surveys; Fund will continue technical assistance and coordination with other international organizations. ### Staff appraisal: findings, projections, and policy recommendations - Recent context and macroeconomic developments: - A steep decline in iron ore prices in 2014–15 halved exports, widened fiscal deficit, pressured reserves, and exposed bank vulnerabilities. - Authorities adjusted the budget in 2016 (by 3 percent of GDP), allowed the exchange rate to depreciate, and mobilized foreign grants and loans. - Outcomes: reduced external imbalances and maintained macroeconomic stability, but growth slowed, external debt rose to 72 percent of GDP (with a high risk of debt distress), and financial stability risks heightened. - Authorities preparing a national strategy for accelerated and inclusive growth for 2016–30 with structural reforms and a large-scale, foreign-financed infrastructure investment program. - Outlook and risks: - Growth prospects improved with planned public investment, structural reforms, and some recovery in metal prices; external position remains weak and upcoming debt repayments could pressure reserves. - Possible development of a recently discovered off-shore gas field could be a game-changer starting in 2021. - Main policy challenge: - Support inclusive growth recovery, diversify the economy, meet infrastructure needs while maintaining macroeconomic stability and strengthening external position and debt sustainability. - Reduce poverty and unemployment despite limited resources and already high debt. - Recommended policy mix and priorities: - Greater exchange rate flexibility, active monetary policy, and gradual fiscal consolidation anchored on debt sustainability to support growth and rebuild buffers. - Accelerate domestic revenue mobilization, expenditure prioritization, and public investment management reforms to create fiscal space for higher social spending and public investment. - New borrowing to focus on growth-enhancing infrastructure on concessional terms and be phased consistent with capacity; public investment management strengthened through better coordination and integrated information systems to prioritize projects. - Encourage public-private partnerships under the newly adopted framework. - Monetary policy and central bank measures: - Introduce monthly averaging of banks’ reserve requirements promptly. - If liquidity pressures persist, consider reducing reserve requirements and BCM’s policy rate, and activate other liquidity management instruments while monitoring inflation; proceed cautiously with planned extension of collateral to private debt. - Recapitalize the BCM to strengthen autonomy and monetary policy capacity. - Fiscal measures: - Further modernize tax and customs administration, introduce a new corporate income tax, and review and phase out tax exemptions. - Operationalize measures to strengthen public investment management, control public sector wage bill, and improve parastatal oversight. - Debt strategy: - Strengthen debt management through better coordination and integrated information systems for contracting, recording, and monitoring debt. - Avoid new non-concessional borrowing; prefer concessional loans and grants given already high debt. - Adopt an incremental borrowing strategy to periodically reassess investment needs, growth prospects, and debt sustainability with the objective to set the debt-to-GDP ratio on a downward trajectory over time. - Recognize that significant economic transformation and diversification, supported by sizable foreign aid on concessional terms, are required to durably address vulnerabilities and entrench debt sustainability. - Financial sector actions: - Accelerate implementation of 2014 FSAP recommendations, implement emergency liquidity assistance framework, address NPLs, and strengthen the resolution framework to reduce financial stability risks and boost credit. - Social and structural priorities: - Expand social policies, increase spending on education and health, and expand social safety nets to reduce poverty and raise human capital. - Improve business climate and governance to support private sector growth, job creation, and diversification. - Exchange restriction recommendation: - Staff supports authorities’ request for approval of the existing exchange restriction as necessary for balance of payments reasons and non-discriminatory. - Staff recommends temporary approval of retention of this restriction until July 28, 2018 or the date of the conclusion of the next Article IV consultation, whichever is earlier. *IMF staff summary based on the provided content of cr17324.* ### 56. It is proposed that the next Article IV consultation be held on the standard 12-month ### It is proposed that the next Article IV consultation be held on the standard 12-month consultation cycle. ### Real sector developments (high-level findings) - "The shock to the extractive sector in 2015 slowed growth accross the economy." - "...mainly through lower construction, services, and manufacturing." - "...opening a negative output gap in 2016." - "...while iron ore production improved in 2016." - "Inflation picked up due to higher food prices." ### External sector developments (high-level findings) - "The terms-of-trade shock abated along with a rebound in iron ore prices." - "The exchange rate depreciation against the dollar slowed recently..." - "...and continued to be mostly financed by public borrowing." - "...while reserves were supported by a one-off deposit in 2015." - "The current account deficit narrowed as exports rebounded..." - "...although mining exports remain far below previous peaks." ### Fiscal sector developments (high-level findings) - "Despite extractive revenue losses, significant fiscal consolidation efforts are ongoing..." - "...supported by non-extractive tax revenues," - "...and restraint in current expenditure...." - "...and public investment." - "Deficit financing has mostly relied on external resources as both banks and nonbanks reduced t-bill holdings." - "Public debt has continued to increase due to public infrastructure works." ### Monetary and financial sector indicators (high-level findings) - "Broad money and currency in circulation picked up in 2016...." - "...and credit growth remained sustained..." - "...despite a slowdown in credit to the central government." - "Household credit continues to represent a sizeable share of private sector credit." - "While banks' capital levels remain adequate, their profitability remains weak, ...." - "...and asset quality has been affected by the economic slowdown." ### Key country summary and indicators (Table 1 memoranda) - Per capita GDP: US$ 1,335 (2014) - Poverty rate: 31 percent (2014) - Population: 4 million (2014) - Main exports: Iron ore, fish, gold, copper - Key export markets: China, Europe ### Selected macroeconomic framework series (Real economy and prices, Table 1) - Real GDP (2013–2022): 6.1, 5.6, 0.9, 1.7, 3.8, 3.0, 4.6, 5.2, 4.6, 4.0 - Real extractive GDP (2013–2022): 15.1, 4.2, -6.7, -1.4, 10.3, -3.5, 1.6, 2.8, -7.0, -14.1 - Real non-extractive GDP (2013–2022): 5.6, 5.8, 2.1, 2.2, 2.9, 4.0, 5.0, 5.5, 6.0, 6.0 - Iron ore production (million tons, 2013–2022): 12.5, 13.3, 11.6, 13.3, 14.5, 16.0, 17.0, 17.5, 18.0, 18.0 - GDP deflator (2013–2022): 3.0, -9.2, -4.4, 4.1, 4.2, 2.6, 3.7, 3.2, 3.0, 4.5 - Consumer prices (period average, 2013–2022): 4.1, 3.8, 0.5, 1.5, 2.1, 3.7, 5.0, 4.0, 4.0, 4.0 - Nominal GDP (annual change in percent, 2013–2022): 9.5, -5.8, -10.2, -2.4, 4.9, 0.8, 3.3, 4.9, 5.4, 6.4 ### Savings, investment, and external reserves (Table 1) - Gross investment (2013–2022): 56.0, 52.2, 38.7, 39.6, 43.1, 38.2, 37.3, 35.9, 33.7, 32.5 - Gross national savings (2013–2022): 33.3, 25.0, 18.9, 24.7, 27.8, 26.9, 26.9, 26.0, 24.5, 23.5 - Saving - Investment Balance (2013–2022): -22.7, -27.2, -19.7, -14.9, -15.3, -11.2, -10.3, -9.9, -9.2, -8.9 - Gross official reserves (in millions of US$, end of period, 2013–2022): 996.4, 639.1, 822.8, 824.5, 724.9, 622.8, 558.8, 481.4, 410.6, 345.9 - Reserves (in months of prospective non-extractive imports, 2013–2022): 5.9, 5.0, 5.6, 5.5, 4.3, 3.7, 3.3, 2.8, 2.4, 1.9 ### External sector headline numbers (Table 2, selected) - Current account balance (2013–2022, in millions of US$): -1,262.0, -1,470.7, -956.1, -706.8, -758.9, -561.3, -532.1, -536.1, -524.7, -543.1 - Trade balance (2013–2022, in millions of US$): -392.9, -710.9, -559.4, -499.4, -442.1, -248.1, -226.8, -220.1, -260.4, -372.6 - Exports, f.o.b. (2013–2022): 2,651.4, 1,935.4, 1,388.6, 1,400.7, 1,592.9, 1,733.4, 1,769.1, 1,793.5, 1,761.4, 1,670.9 - Imports, f.o.b. (2013–2022): -3,044.4, -2,646.3, -1,948.0, -1,900.1, -2,034.9, -1,981.5, -1,995.9, -2,013.6, -2,021.9, -2,043.4 - Gross official reserves (in millions of US$; Table 2 memorandum): 996.4, 639.1, 822.8, 824.5, 724.9, 622.8, 558.8, 481.4, 410.6, 345.9 - SNIM contribution to BOP (in millions of US$): 613.0, 430.2, 135.4, 102.2, 204.1, 138.2, 130.4, 132.9, 141.6, 149.7 ### Central government operations (selected aggregates, Tables 3–4) - Total revenues and grants (2013–2022, in billions of UM): 422.7, 406.0, 460.2, 464.0, 484.3, 473.0, 500.7, 542.6, 580.0, 628.6, 697.7 (note: table columns include projection labels) - Nonextractive revenue (2013–2022, in billions of UM): 281.7, 293.9, 378.4, 407.7, 426.5, 413.3, 437.4, 470.5, 513.1, 569.4, 630.6 - Extractive revenue (2013–2022, in billions of UM): 129.7, 109.9, 53.5, 25.0, 26.9, 28.6, 28.9, 36.3, 43.1, 44.7, 47.5 - Expenditure and net lending (2013–2022, in billions of UM): 436.7, 479.1, 513.7, 469.8, 496.2, 484.3, 541.2, 586.8, 633.6, 683.4, 754.3 - Current expenditure (2013–2022, in billions of UM): 267.2, 287.6, 290.9, 276.4, 283.5, 283.9, 299.0, 320.4, 346.1, 377.2, 415.8 - Capital expenditure (2013–2022, in billions of UM): 169.6, 191.5, 219.9, 193.7, 209.7, 197.4, 239.3, 263.4, 284.5, 303.2, 335.4 - Overall balance (in percent of GDP, Table 4 memorandum for 2013–2022): -0.8, -4.5, -3.4, -0.3, -0.7, -0.6, -2.1, -2.1, -2.4, -2.3, -2.2 ### Monetary survey (selected, Table 5) - Broad money (M2, end-of-period, 2013–2019, in billions of UM): 469.7, 510.2, 512.1, 548.4, 588.7, 632.8, 694.8 - Credit to the private sector (end-of-period, 2013–2019, in billions of UM): 398.4, 443.0, 485.7, 524.4, 558.2, 599.7, 658.1 - Net foreign assets (Monetary survey, 2013–2019, in billions of UM): 196.7, 108.1, 78.5, 61.4, 32.9, 26.0, 35.0 - Broad money (M2) growth (annual change): 13.6, 8.6, 0.4, 7.1, 7.3, 7.5, 9.8 ### Banking soundness indicators (selected, Table 6) - Assets / GDP (2008–2016): 32.0, 35.3, 31.1, 30.9, 32.5, 35.2, 42.5, 43.2, 45.6 - Private-sector credit growth (y-o-y, 2008–2016): 23.6, 4.0, 16.0, 10.6, 15.1, 14.9, 21.3, 8.0, 8.3 - Gross NPLs / gross loans (selected years shown): 45.3, 39.2, 25.7, 20.4, 23.0, 30.0, 21.0, 21.5 (note: cells show ellipses for some years) - Capital adequacy ratio (2008–2016): 33.0, 38.2, 34.0, 35.2, 29.2, 32.4, 28.1, 23.1, 23.7 - Return on assets (2008–2015): 1.9, 1.4, 0.4, 1.2, 1.4, 1.2, 1.2, 0.7 - Liquid assets / total assets (2008–2016): 30.9, 29.8, 29.5, 29.7, 29.8, 24.0, 23.5, 21.4, 17.0 ### External financing requirements and sources (Table 7, selected) - Total requirements (2015–2020, in millions of US$): -1,220.5, -1,051.4, -1,088.1, -998.3, -961.8, -936.3 - Current account deficit, excl. grants (2015–2020, in millions of US$): -1,057.1, -876.6, -867.4, -674.8, -644.6, -618.1 - External public debt amortization (2015–2020, in millions of US$): -163.3, -174.8, -220.7, -323.4, -317.1, -318.2 - Total sources (2015–2020, in millions of US$): 1,220.5, 1,051.4, 1,088.1, 998.3, 961.8, 936.3 - Foreign direct investment and capital inflows (net, 2015–2020, in millions of US$): 533.0, 279.6, 450.0, 212.0, 211.2, 239.0 - Official loan disbursements (2015–2020, in millions of US$): 270.4, 321.5, 244.0, 391.0, 397.0, 330.0 - Deposit from Saudi Arabia at the Central Bank: 300.0 (2015 entry) *Sources: Mauritanian authorities; and IMF staff estimates and projections.* ### Annex I. Authorities’ Response to Key 2016 Article IV ### Annex I. Authorities’ Response to Key 2016 Article IV Recommendations ### Monetary, Exchange Rate, and Financial Policies - Support external stability through greater exchange rate flexibility supported by foreign exchange market reform - Ongoing. Direct foreign exchange sales were discontinued, and the central bank enforced the repatriation of fishing proceeds. Foreign exchange market reforms to support greater exchange rate flexibility are under preparation but have yet to be implemented. - Strengthen the monetary policy and liquidity management framework - Limited. The BCM is developing its capacity to forecast liquidity and inflation. However, monetary policy has remained passive and the BCM has yet to be recapitalized. - Strengthen bank supervision and the prudential and resolution frameworks - Partial. The BCM reinforced banking supervision, finalized preparation of a new banking law and central bank statute, and granted real-time access to the credit registry for banks. The BCM has prepared an emergency liquidity assistance framework and is adapting regulations on capital adequacy to Basel III. Yet, it continued to grant licenses to new banks, and the quality of financial data remains poor. ### Fiscal Policy - Support debt sustainability through fiscal adjustment and fiscal reforms - Ongoing. A sizable fiscal consolidation was achieved in 2016 through stronger revenue mobilization and expenditure restraint and external public debt is being stabilized. The authorities initiated fiscal structural reforms with Fund and Bank support and ongoing efforts are taking place to broaden the tax base, strengthen tax administration, and improve expenditure prioritization. However, the new organic budget law has yet to be passed. ### Structural Reforms - Renewed structural reform effort to support private sector development and job creation - Ongoing. The authorities have designed an ambitious reform strategy for 2016–30 aimed at stronger and more inclusive and diversified growth through human capital development, private sector development, and strengthened governance—although this strategy remains in its initial stage of implementation. They have implemented measures leading to improved rankings in the Doing Business survey, but additional reforms need to be pursued. ### Risk Assessment Matrix (selected global and domestic risks, staff views) - Notes on RAM methodology: - “Short term” indicates risk could materialize within 1 year and “medium term” within 3 years. - Relative likelihood categories: “low” = probability below 10 percent; “medium” = 10–30 percent; “high” = 30–50 percent. - Global Risks - Retreat from cross-border integration - Relative Likelihood: High - Time Horizon: Short to Medium Term - Expected Impact: Medium. Reduced prospects of attracting higher FDI in new sectors, impacting diversification, exports and growth potential. - Policy Response: Accelerate structural reforms to diversify the export base and export markets. Speed up business climate reforms and increase exchange rate flexibility to boost competitiveness and mitigate external shocks. Develop prudent borrowing plans based on concessional financing. - Significant further strengthening of the US dollar and/or higher rates - Relative Likelihood: High - Time Horizon: Short Term - Expected Impact: High. Exchange rate appreciation would affect competitiveness. Higher rates could increase funding costs for infrastructure investment. - Intensification of fragmentation/security dislocation in parts of the Middle East, Africa and Europe - Relative Likelihood: High - Time Horizon: Short to Medium Term - Expected Impact: High. Trade with neighbors would be adversely affected; migrants from neighboring countries would generate fiscal and security-related costs; negative investor sentiment would jeopardize diversification plans. - Policy Response: Create policy space by consolidating the budget and broadening the tax base; develop contingency plans in coordination with neighbors and the international community. - Significant China slowdown and slowdowns in other large EMs/frontier markets - Relative Likelihood: Low/Medium - Time Horizon: Short to Medium Term - Expected Impact: High. Lower commodity prices and trade flows would reduce exports and investment, negatively affecting external and fiscal positions. - Policy Response: In short term, greater exchange rate flexibility and use of external buffers for gradual adjustment. Over medium term, structural reforms to diversify the economy, exports, and export markets. - Structurally weak growth in key advanced and emerging economies - Relative Likelihood: High/Medium - Time Horizon: Medium Term - Expected Impact: Medium. Weaker partner growth would impact trade and the external position. - Climate change - Relative Likelihood: Medium - Time Horizon: Medium term - Expected Impact: High. Adverse climate changes would jeopardize agriculture and fishing, hampering diversification efforts. - Policy Response: Build long-term diversification, food security and climate resilience, and transition to targeted social safety nets. - Lower energy prices - Relative Likelihood: Low - Time Horizon: Short to Medium Term - Expected Impact: Medium positive. Improved fiscal and external positions, but risks for gas development. - Policy Response: Rebuild fiscal and external buffers. - Domestic Risks - Political and social unrest - Relative Likelihood: Medium - Time Horizon: Short to Medium Term - Expected Impact: High. Could lead to higher public spending, impair investor confidence, and slow growth. - Policy Response: Promote good governance, strengthen anti-corruption frameworks, and prioritize reforms to promote inclusiveness. - Slower-than-expected pace of reforms - Relative Likelihood: Medium - Time Horizon: Short to Medium Term - Expected Impact: High. Negative impact on investor confidence and growth prospects. - Policy Response: Build consensus on reforms; invest in human capital and institutions. ### External Sector Assessment (summary) - Terms-of-trade shock and exports - Mauritania has been affected by a severe terms-of-trade shock since 2014 driven by the sharp decline in the price of iron ore, resulting in a halving of exports. The extractive sector adjusted and imports of capital goods destined for that sector contracted. The concurrent fall in the price of oil partly mitigated the shock (Mauritania is a net oil importer). Iron ore prices rebounded briefly between November 2016 and April 2017, but are projected to remain well below pre-2014 levels. - 2016 external adjustment - External imbalances narrowed in 2016 due to lower private investment in extractive industries and a contraction in domestic demand supported by fiscal consolidation and exchange rate depreciation. - The current account deficit contracted by 5 percentage points to 15 percent of GDP (from 20 percent in 2015). - Excluding FDI-financed capital imports, the deficit narrowed to 11 percent of GDP (from 12 percent), financed mainly by official loans and mining companies. - A large swing in errors and omissions of close to 6 percent of GDP between 2015–16 complicates assessment of current account developments. - Medium-term outlook - External imbalances are expected to persist due to subdued prospects for commodity export prices and the authorities’ expansionary investment program complementary to diversification reforms. - The current account deficit, excluding FDI-financed extractive capital imports, is projected to decline from about 11 percent of GDP in 2016 to slightly under 8 percent of GDP over the projection period. - Expansion of gold mining, further gas exploration, and development of the fishing sector are expected to drive export growth, in addition to iron ore. Imports (excluding FDI-financed imports) would expand modestly. FDI, official borrowing, and revenues from the public mining company are expected to finance the bulk of external needs. - Exchange rate developments - The exchange rate depreciated significantly against the U.S. dollar from mid-2014 under a de facto crawl-like arrangement. The cumulative depreciation, managed by the central bank, exceeded 16.3 percent between mid-2014 and April 2017, although the pace slowed in the second half of 2016. - Despite depreciating by 2.6 percent against the euro in 2016, overall the exchange rate appreciated against the euro between mid-2014 and April 2017 because of the dollar’s appreciation in 2015. - Real effective exchange rate (REER) and valuation - The REER depreciated considerably in 2016, but assessment is uncertain due to the sharp appreciation of the U.S. dollar vis-à-vis the euro at end-2014. - Fund INS REER (based on 2010 trade weights) suggests a real depreciation of 6.7 percent over 2016 to April 2017; however, it still appreciated by 3.6 percent between mid-2014 and April 2017. - Using alternative weights based on currency shares in trade leads to an estimated real depreciation of 6.2 percent over 2016 to April 2017, and 4.9 percent between mid-2014 and April 2017. - Trade data from 2015–16 suggest that about 65 percent of trade occurs in U.S. dollar. - Overvaluation/undervaluation estimates - The real exchange rate is assessed as overvalued by the EBA-lite current account (CA) and external sustainability (ES) models. - The two estimates of real exchange rate overvaluation range between 14 and 21 percent. - By contrast, the equilibrium REER model suggests an undervaluation of 9 percent. - Estimates are subject to considerable uncertainty due to challenges in applying EBA-lite to resource-rich LICs, limited data, commodity price uncertainty, and sample issues. Staff places greater weight on the CA-model indication of overvaluation than on the REER-model indication of undervaluation. - Reserve adequacy - The Fund’s LIC reserves template suggests an adequate reserve level of 7.2 months of non-extractive sector imports, assuming a fixed exchange rate and a 6.2 percent marginal cost of holding reserves. - Mauritania’s actual reserves were 5.5 months at end-December 2016 and 4.8 months at end-March 2017 (including a US$300 million deposit at the central bank from Saudi Arabia in 2015 to maintain reserves). - With a Fund arrangement, the assessed adequate level would be lower; with a 6.2 percent cost of holding reserves, 5.3 months of imports would be adequate—slightly more than Mauritania’s current reserve level. - Greater exchange rate flexibility would reduce the need for reserve buffers. *Annex I. Authorities’ Response to Key 2016 Article IV (IMF).* ### 9. Policy adjustments are needed to strengthen reserve buffers to mitigate the impact of ### 9. Policy adjustments are needed to strengthen reserve buffers to mitigate the impact of possible future external shocks ### Reserve adequacy and vulnerabilities - Under the baseline scenario, reserves are projected to decline over the medium term due to continued external imbalances, increasing the gap between the reserve level and the adequacy metric. - A downward trajectory of reserves heightens vulnerability to: - a possible decline in iron ore prices; and - increases in global food and oil prices, which would lead to significant deterioration in trade balances. - International reserves are assessed to be below the adequacy metric for LICs, and are expected to remain under pressure—including due to sizable amortization payments—possibly dropping below 3 months of non-extractive imports by 2020. - The current account deficit (excluding FDI-financed extractive capital imports) is projected to remain around 8–9 percent of GDP over the projection period. - The methodology applied for Mauritania treats it as a resource-rich credit constrained economy; the cost of holding reserves used (6.2 percent) is the one proposed for Mauritania in the IMF Policy Paper referenced. ### Policy analysis and recommended adjustments - Greater exchange rate flexibility would decrease the need for reserve buffers by allowing the exchange rate to act as a shock absorber and support adjustment in the current account. - However, Mauritania’s high vulnerability to price shocks and the price inelasticity of non-extractive imports require that reserves be increased gradually despite potential gains from exchange rate flexibility. - A more restrained fiscal position and a more flexible exchange rate would: - support further adjustment in the current account; - strengthen buffers including reserves; and - put the economy in a better position to absorb shocks. ### Structural and governance issues affecting external resilience - Although indicators for governance, competitiveness, and doing business have improved significantly since 2014, further improvements are needed to converge with and surpass comparable peers. - Mauritania ranks lower than the average for low-income and lower middle-income countries (LICs and LMICs, respectively) in most categories of the competitiveness indicators, except: - infrastructure, health and education, and technological readiness relative to LICs; and - macroeconomic environment relative to LICs. - Governance indicators in political stability, regulatory quality and rule of law declined relative to LICs and LMICs compared to 2015. - Doing business: overall distance to frontier (DTF) score continued to improve in 2016 and exceeded the average for LICs but was still below that of LMICs. Relative strengths versus LMICs: starting a business, enforcing contracts, registering property, dealing with construction permits. Relative weaknesses versus LICs: getting credit, paying taxes, resolving insolvency. ### Authorities’ views - Authorities agree in principle that the exchange rate could be used as a shock absorber but consider that staff overstated: - the degree of overvaluation of the exchange rate; and - the ability of the exchange rate to correct external imbalances given the limited non-extractive production base and the low elasticity of essential imports, notably food. - Authorities prioritize structural reforms and infrastructure improvements to address external imbalances by promoting economic diversification and broad-based growth. ### Key policy recommendations (drawn from text and Annex IV) - Strengthen reserve buffers gradually to reduce vulnerability to commodity price shocks and global price changes. - Enhance exchange rate flexibility to allow external adjustment and reduce pressure on reserves, while recognizing limits due to import inelasticities. - Pursue a more restrained fiscal position to support current account adjustment and buffer rebuilding. - Continue structural reforms to improve the business environment and governance, including: - facilitating payments of taxes and social contributions; - improving the single window for enterprise creation and construction permits; and - strengthening the legal framework for property rights. ### Selected FSAP-related recommendations and implementation status (Annex IV) - Adopt the Banking Act giving more legal protection to decisions made as part of the exercise of the BCM's powers. Timeframe: Near term. Status: In preparation, envisaged under the draft banking law. - Adopt the Act concerning the BCM's charter, bolstering its independence, responsibilities and transparency. Timeframe: Near/Medium term. Status: In preparation, envisaged under the draft central bank statute. - Parliamentary approval of the 2013 agreement on BCM's claims on the government. Timeframe: Near term. Status: No progress. - Issue a timeline in which scheduled auction dates for Treasury bills are separate from those for Treasury bonds. Timeframe: Immediate. Status: No progress. - Quarterly updates of monetary programming tables, setting out medium-term monetary objectives. Timeframe: Medium term. Status: Partial progress, the BCM has a monetary program and is developing a forecasting model. - Ensure strict compliance with the new instruction issued in June 2014 concerning loan classification and provisioning. Timeframe: Immediate. Status: Done. - Eliminate direct sales of FX outside the official market. Timeframe: Near term. Status: Done. - Increase banks’ contributions to the Deposits Guarantee Fund, to reach at least UM6 billion in 3 years. Timeframe: Near term. Status: No progress. *Source: IMF staff report excerpt on Mauritania (content unit: cr17324).* ### Annex V. Macro-Structural Reform Priorities ### Annex V. Macro-Structural Reform Priorities ### A. Identifying Structural Policy Gaps - Main challenge: diversify the economy to non-extractive sectors. - Binding constraints to diversification, growth, and job creation: - Macroeconomic vulnerabilities. - High microeconomic risks. - Low productivity. - Low access to finance. - Weak competitiveness. - Authorities acknowledge challenges and seek to transform the economy to raise growth and diversify sources. ### B. Considering the Macroeconomic Context - Country classification and social context: - Mauritania is a low-income developing country, with high unemployment and poverty rates. - For LIDCs, research suggests highest-payoff reform areas include fiscal structural reforms, measures to improve provision and quality of infrastructure, banking sector reforms to improve access to finance, and measures to raise agricultural sector performance. - Cyclical position: - Negative output gap following a severe terms-of-trade shock that slowed growth for two consecutive years. - Recommended priority: structural reforms that both support demand in the short term and raise potential growth in the longer term (e.g., infrastructure investment or active labor market policies). - Policy space constraints: - Mauritania faced the recent terms-of-trade shock with limited buffers and responded with a mix of external financing and adjustment. - Lower extractive revenues and higher debt have limited fiscal space for expansionary policies. - This will likely constrain plans to raise public investment, using external financing, to stimulate demand in the short term and to reduce the infrastructure gap to increase potential growth in the long term. ### C. Prioritizing Structural Reforms - Overall guidance: - Given weak demand and limited policy space, prioritize structural measures that yield both long-term payoffs and short-term gains, and are budget-neutral as much as possible. - Menu of reforms that can produce positive short-term demand effects and long-term productivity and supply benefits. - Increasing productivity - Rationale: comprehensive reforms across banking/financial sector and factors of production (human and physical capital) are required. - Key reform areas and specific steps: a) Accelerating banking and financial sector reforms: - Strengthen banks' capital and establish provisions for nonperforming loans (NPLs). - Improve the quality of bank portfolios to reduce the share of NPLs. - Enhance the central bank’s capacity for more effective supervision. - Adoption of the new banking law will enhance the bank resolution framework, safeguard financial stability, and ensure the banking sector’s positive role in economic development. b) Easing access to finance and improving financial inclusion: - Lower interest rates, greater availability of credit, and access to financial services to boost credit to the private sector and support economic diversification and productivity growth. c) Diversifying sources of financing: - Banking sector mainly finances short-term trade activities or consumer credit; Caisse de Dépôts et de Développement (CDD) finances some longer-term and riskier credits. - Limited sources for medium- to long-term growth financing. - Developing a stock market would help increase the potential pool of investable funds. - Further deepening of the financial sector and strengthening the monetary policy framework with a liquidity management framework would be needed. d) Developing human capital: - Growth constrained by insufficient quality of labor. - Reforms in education, workforce skills, and labor market functioning are key. - Increase investment in human capital relative to physical capital to move from a factor-driven towards an efficiency-driven economy; essential for structural transformation and economic diversification. e) Improving the efficiency of physical capital: - Better prioritizing investment projects and strengthening public investment management (PIM) is key. - Since 2011, public investment has been scaled up to enhance roads, water, ports, airports, electricity, and support agriculture and fishing. - Need to ensure quality and efficiency of public investment to maximize growth benefits and support transformation to an efficiency-driven economy. - Areas for PIM improvement: - Fragmented management system for domestic and foreign-financed projects precludes clear assessment of the public investment program. - Inefficiencies in project implementation linked to the procurement process and insufficient capacity to monitor projects. - Projects could be further prioritized by focusing on financially viable projects based on economic and social impact, relevance for development and sectoral strategies, and low impact on debt. f) Reducing gender inequality: - Integrating women better into the economy can increase overall incomes and lift growth prospects via: - Increasing the number of women in the labor force expands the talent pool and potential entrepreneurs. - Women are more likely to invest a larger share of household income in children’s education, developing human capital. - Gender inequality is highly correlated with income inequality, which can penalize growth. - Policy options: - Reform the legal framework to address gender inequality, including amending laws relating to employment and entrepreneurship that differentiate between women and men. - Develop gender budgeting to direct public spending toward promoting gender equality, women development, and female labor force participation. - Remove gender discrimination practices. - Promote equal access to education and employment. - Fiscal structural reforms - Priorities to improve composition and quality of taxation and public spending with productivity, growth, and labor market impacts: - Broadening the tax base and reducing informality. - Strengthening tax and customs administration. - Simplifying taxation by introducing a corporate income tax. - Eliminating inefficient and distortionary tax exemptions. - Targeting subsidies and enhancing social safety nets. - Strengthening public financial management and adopting the new organic budget law. - Improving the business environment and developing the private sector - Continued improvements to facilitate private sector operations would support growth and diversification. - Further improvement areas: resolving insolvency, promoting fair and predictable taxation, easing access to credit. - Adopting revised tax and customs procedure codes would help. - Developing a macro-fiscal framework to manage extractive revenues - As a commodity exporter, Mauritania should strengthen governance and establish a macro-fiscal framework to manage extractive wealth during the current economic stability, low iron ore prices, and exploration phase for off-shore gas. - Benefits: - Address medium-term fiscal policy challenges from volatile resource revenues. - Avoid pro-cyclical fiscal policies. - Guide adoption of rules to anchor medium-term fiscal sustainability. - Use of existing experience: - The oil fund, which has operated transparently and with accountability, could serve as a starting point for designing a broader resource fund for extractive revenues to stabilize the budget across the cycle and serve as a savings fund for future generations. - Importance: - Especially important should greater income from mining and gas materialize in the next decade, providing a unique opportunity to improve living standards. *Source: Annex V. Macro-Structural Reform Priorities, Staff Report for the 2017 Article IV Consultation (July 13, 2017), International Monetary Fund.* ### 1. External debt rose during the past two years due to sizable borrowing, although the ### cr17324 - 1. External debt rose during the past two years due to sizable borrowing, although the ### External debt developments and headline drivers - External public debt rose by $552 million (10 percent of 2014 GDP) between 2014–16. - The external public debt ratio rose by 22 percentage points of GDP to 93.2 percent of GDP (end-2016) on the back of a 12 percent contraction in the nominal dollar GDP, driven by the terms-of-trade shock and the exchange rate depreciation. - Mauritania’s stock of external debt includes a passive debt in arrears owed to Kuwait, now estimated at 21 percent of GDP. - Excluding the passive debt to Kuwait, external public debt reached 72.2 percent of GDP at end-2016. - Much of the nominal increase included a $300 million non-concessional deposit from Saudi Arabia to support the central bank’s reserves in 2015; the remainder financed the budget and public investment projects. ### Composition, currency, and main creditors - Public and publicly guaranteed (PPG) debt represented about 85 percent of total external debt at end-2016. - PPG external debt includes debt contracted by the central government, the central bank, and state-owned enterprises (mainly SOMELEC); it excludes borrowing by SNIM (public mining company) up to end-2016. - External debt is mostly denominated in U.S. dollars and currencies pegged to or closely following it. - Selected creditor and instrument figures (2013–16 highlights): - PPG External Debt (in million USD): 2013: 3,770.1; 2014: 3,856.0; 2015: 4,291.8; 2016: 4,407.6. - PPG External Debt (in percent of GDP): 2013: 65.9; 2014: 71.5; 2015: 88.6; 2016: 93.2. - Bilateral Creditors (in million USD): 2016: 2,294.3 (48.5 percent of GDP). - Multilateral Creditors (in million USD): 2016: 2,113.2 (44.7 percent of GDP). - Passive debt to Kuwait Investment Authority (KIA) (memorandum): 2016: 993.1 million USD (21.0 percent of GDP). - Saudi deposit at BCM (memorandum): 2015: 300.0 million USD; recorded as 6.2–6.3 percent of GDP in 2015–16. ### Debt monitoring, recording, and Kuwait arrears - Reported debt stock figures for 2013–15 were revised upward by up to $300 million due to incomplete or delayed reporting from government agencies. - Authorities are introducing information systems to improve information exchange between the Ministry of Finance, central bank, and project/investment entities. - Authorities intend to reactivate the National Committee for Public Debt to involve it in investment selection, loan contracting, and monitoring debt sustainability. - The authorities continue to seek debt relief from Kuwait; no agreement has been reached on valuation, including interest in arrears. Under the 2002 Paris Club arrangement, Mauritania was expected to seek comparable treatment from non-Paris Club creditors. ### Macroeconomic assumptions and outlook (summary) - The outlook improved versus the previous DSA due to higher projected growth and lower projected disbursements in the medium term. - Real GDP growth (Current DSA, selected years): 2016: 1.7; 2017: 3.8; 2018: 3.0; 2019: 4.6; 2020: 5.2; 2021: 4.6; 2022: 4.0; 2023-29: 5.3; 2030-37: 4.8 (percent). - Nominal GDP (in millions of US$; Current DSA): 2016: 4,729.0; 2017: 4,960.6; 2018: 4,999.6; 2019: 5,164.0; 2020: 5,417.4; 2021: 5,710.2; 2022: 6,073.4; 2023-29: 8,132.8; 2030-37: 13,503.5. - Non-extractive growth projected to pick up gradually to 2.9 percent in 2017 and reach 6 percent by 2021 (text narrative). - Projected new debt disbursements average about 6½ percent of GDP over the medium term and converge gradually under 4 percent in the long term. - The average grant element of new disbursements is assumed to decline over time with expanding access to commercial borrowing. - Debt relief from KIA is assumed to take place in the first projection year (2017) in the DSA projections. ### External debt sustainability assessment (key findings) - Baseline projections breach thresholds for three of five external debt indicators (one breach is small); breaches are less severe than in the 2016 DSA. - The PV of debt-to-GDP ratio is projected on a firm downward trajectory after 2019 and falls below the threshold from 2030 onward. - The PV of debt-to-exports ratio breaches its threshold in 2022, remains above it by a relatively small margin, and peaks at 7 percent in 2031 before tapering. - The debt service-to-revenue ratio breaches the threshold during 2018–21, largely due to amortization of the $300 million Saudi deposit and budget support loans contracted from the Arab Monetary Fund (AMF). - Private external debt (mainly SNIM and banking sector liabilities) is relatively small and projected to decline over the projection period under conservative assumptions. - Standardized stress tests show breaches by all five debt indicators; vulnerabilities are highlighted to shocks to exports and exchange rate depreciation. - The standard historical stress scenario is judged unrealistic as it assumes that current account deficits due to FDI-financed mining expansion would be financed by debt. ### Public debt sustainability assessment (key findings) - Public debt assessment is somewhat more favorable than external debt assessment because domestic debt is only about 5 percent of GDP at end-2016 and most public debt is external. - Under the baseline, the PV of public debt-to-GDP ratio is projected to peak at 61 percent in 2019 and to decline thereafter, crossing the 56 percent benchmark in 2022. - Stress tests indicate the importance of a restrained fiscal policy: a fixed primary balance (small surplus) would reduce the high public debt-to-GDP ratio. - The bound test for a temporary growth shock (real growth 0.8 percent in 2018–2019 versus 3.8 percent baseline) raises the PV of public debt-to-GDP by about 5 percentage points initially and by about 20 percentage points by 2037; the debt burden indicator remains above the benchmark until 2037. - The most extreme shock (one-time depreciation) underscores vulnerability due to predominance of foreign currency-denominated debt. ### Conclusions and policy recommendations - Mauritania’s risk of debt distress remains high despite an improved CPIA rating and improvements in outlook; external debt increased over the past three years to finance infrastructure and external deficits amid a contraction in nominal GDP. - Baseline projections over the next twenty years indicate sizeable breaches in PV of debt-to-GDP and debt service-to-revenue ratios; the latter is mainly due to amortization profiles of short-term loans to the central bank and central government. - Policy recommendations: - Follow sound economic policies and a prudent borrowing strategy that takes on new debt at a moderate pace. - Avoid non-concessional borrowing and rely on grants and concessional financing. - Avoid new borrowing that results in significant additional short-term debt service to not exacerbate short-term liquidity risks. - Continue efforts to resolve external debt in arrears with Kuwait. - Sustain structural reforms to promote inclusive growth and economic diversification through private sector development. - Improve monitoring and governance to raise efficiency and growth dividends of the public investment program. - Strengthen debt management capacity and information systems. - If using public-private partnerships (PPP), strengthen capacity to evaluate and monitor PPP-related contingent liabilities; minimize direct financial participation in PPPs and avoid providing explicit guarantees or taking on implicit contingent budget liabilities related to PPP project performance. *Source: Mauritanian authorities; and Fund staff estimates and projections.* ### 12. The authorities acknowledge the need for prudent debt policies and stronger investment ### 12. The authorities acknowledge the need for prudent debt policies and stronger investment ### Authorities' assessment and policy stance - The authorities consider that public debt is sustainable and can be serviced, even in the current environment of low commodity prices. - They acknowledge the need to strengthen public investment and debt management by implementing the recently adopted framework to prioritize projects under the public investment program, and highlight progress made during the past year. - The authorities view their long-term public investment strategy as critical for Mauritania’s development and viable if it: - generates sustained strong economic growth, and - crowds-in sufficient FDI, which would serve as an alternative financing source for future development. - They note that most borrowing benefits from favorable terms, even if those terms fall slightly short of the Fund’s concessionality threshold. - They underscore high priority given to: - strengthening the governance and efficiency of public enterprises, - improving the business climate, - relying more on financing projects through PPPs involving only a small financial participation, if any, by the government. - In the absence of alternative financing options, they consider it necessary to use external borrowing to finance projects deemed critical and demonstrated to be cost-effective. ### Response to the DSA and external stability concerns - The DSA finding that the country remains in high risk of debt distress is questioned by the authorities on several grounds: - Mauritania’s nominal GDP has consistently declined since 2013, which helped increase substantially the debt ratio. - A major gas discovery off-shore Mauritania over the projected period could significantly alter assumptions on growth and other key indicators in the DSA. - Debt service stands at a manageable 1.3% of non-extractive GDP (as shown in Table 4). - Mauritania generated primary fiscal surpluses in 2016 and will generate them in 2017, which are expected to ease repayment of the country’s debt service. - Debt management capacities have improved, as illustrated by an improvement in the country’s most recent CPIA rating. - The authorities hope that the new DSA framework will address shortcomings in the present framework, including its inability to capture adequately the growth and investment nexus. - They will continue to strengthen their debt management framework while avoiding as much as possible non-concessional borrowing. ### Fiscal and public investment measures - Fiscal consolidation and revenue performance: - Significant fiscal consolidation achieved in recent years to preserve macroeconomic stability and debt sustainability. - Strong performance of fiscal revenues from the non-extractive sector rose to 28 percent of non-extractive GDP in 2016. - Overall fiscal deficit stood at 0.4 percent of non-extractive GDP in 2016. - Tax policy and administration reforms underway with IMF and World Bank support: - Modernize tax administration and broaden the tax base. - Replace the profit tax with corporate income tax. - Eliminate some tax exemptions. - Public expenditure management and investment controls: - Prioritize and rationalize current and capital spending. - Integrate parastatal entities into the central treasury system. - Issued a decree establishing a framework to select and monitor projects. - The 2017 budget places, for the first time, a ceiling on both domestic and foreign-financed investment. ### Monetary and financial sector policy - Monetary policy stance: - Authorities note staff’s call for a more active and accommodative monetary policy to address tight liquidity and support growth, given low inflation. - Concern that more accommodative policy could jeopardize efforts to stabilize the weak external position because increased liquidity would likely be channeled to the foreign exchange market. - Unless liquidity pressures persist, they choose to err on the side of caution to preserve macroeconomic stability; if pressures persist, the central bank will consider more active liquidity management. - In close consultation with staff, authorities are finalizing reform of the foreign exchange market and the monetary policy framework, aiming to gradually introduce greater exchange rate flexibility. - They reiterate commitment to meeting obligations under the Fund’s Article VIII; the current exchange restriction will be eliminated once the FX reform is finalized and implemented. - Financial sector reforms: - Economic slowdown affected the financial sector, though banking system health shows signs of improvement: credit to the private sector has begun to grow, and capital adequacy ratios remain strong; liquidity remains relatively tight and profitability has weakened. - The central bank will continue close monitoring, enhanced supervision, and further improve regulation. - Newly finalized banking law and central bank statute will contribute to strengthening prudential and bank resolution frameworks. ### Structural reforms and development strategy - Progress in investor protection and business creation; improvements reflected in World Bank doing business rankings. - Significant institutional weaknesses remain and weigh on private sector development. - A new development strategy for 2016-2030 is being finalized to: - accelerate economic diversification away from commodity reliance, - make growth more inclusive. ### Selected key statistics and projections (as reported in the chapter) - International reserves: 5.5 months of non-extractive imports. - Debt service: 1.3% of non-extractive GDP (as shown in Table 4). - Non-extractive sector revenues: 28 percent of non-extractive GDP in 2016. - Overall fiscal deficit: 0.4 percent of non-extractive GDP in 2016. *Source: cr17324 - 12. The authorities acknowledge the need for prudent debt policies and stronger investment (IMF staff report content provided).* ### Conclusion ### Conclusion ### Policy stance and objectives - The authorities will maintain prudent and gradual policies as they continue to make progress toward preserving macroeconomic stability and boosting growth. - In this endeavor, they will focus notably on safeguarding the stability of the financial system and debt sustainability. ### External engagement and support - The authorities are thankful to the Board and management for their support over the years. - They look forward to continued close engagement with the IMF along with other development partners, in support of their efforts to address the challenges facing the country and implement their development agenda. *Source: Conclusion* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17324.pdf_