## cr18142 ## Source details **Canonical URL:** [cr18142](https://www.imf.org/-/media/files/publications/cr/2018/cr18142.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18142.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18142.pdf.json) --- ### Sequence of Important Events — A Fragile State and the 2012 Crisis - Mali characterized as a fragile state with a highly undiversified economy. - Key socioeconomic and demographic facts: - Agriculture accounts for over 30 percent of GDP. - Cotton and gold account for over 80 percent of exports. - Total population is over 18 million inhabitants. - 10 percent of the population live in the northern regions. - Current annual population growth is over 3 percent. - Fecundity rate is 6.2 children. - Population projected to increase to over 45 million by 2050. - It is estimated that half of the population are below the age of 15 (World Bank 2016). - Mali ranked number 179 of 187 countries (UNDP 2017). - Mali ranked 175th out of 188 countries on the UN Human Development Index in 2016. - Consequences: - Vulnerability to adverse weather and commodity price fluctuations. - High population growth and drought have fueled poverty, food insecurity, and instability. - Delivery of services across a large, sparsely populated territory is challenging. - Northern regions exploited by terrorists and militant groups. - 2012 crisis context and aftermath: - 2012: Tuareg separatists returning from Libya, supported by jihadist groups, occupied large sections of northern Mali; unprecedented compared with prior rebellions (1963–1964, 1990–1996, 2006–2009). - March 2012: military coup d'état followed in part from military defeat and frustrations with political processes and corruption. - 2013: control of the northern region restored with French, African, and MINUSMA troops; elections enabled. - June 20, 2015: Agreement for Peace and Reconciliation (Algiers process) signed. - Ongoing challenges since 2013/2015: - Security worsened, especially central Mali; jihadist attacks increased in sophistication and frequency. - Slow implementation of the 2015 Peace Agreement; mounting tensions among government, population, and ex-rebel groups. - Reduced presence of government officials and civil servants in northern and central Mali. - Disarmament, demobilization, and reintegration processes have yet to begin. - Persistent insecurity stalls development projects in the North. - Proposed 2017 referendum to reform the 1992 Constitution failed. - Impact of the crisis: - Social/humanitarian: - Interruption/disruption of learning activities in northern Mali. - Slowed progress toward reducing poverty and Millennium Development Goals. - Fiscal/economic: - Security spending increased, reducing space for other priority spending. - 2012: donors pulled back; total revenue dropped sharply; authorities adjusted spending and narrowed deficit relative to 2011 program projections. - 2013: donors reengaged. - By 2016 total public spending (as a share of GDP) was about 0.8 percentage points higher than envisaged in the 2011 program projections and is projected to remain about 1.3 percentage points higher than projected in the 2011 fiscal program in the near term. - Total revenues (after 2016 GDP rebasing adjustment), as a share of GDP averaged 1 percentage point lower than pre-crisis projection. - Staff’s medium-term overall deficit projection widened to about 3 percent of GDP starting in 2019, compared with a projected deficit of about 2.3 percent of GDP in the 2011 projections. - Arrears and rebasing: - 2012: government accumulated arrears to external creditors of about 0.5 percent of GDP; arrears fully cleared by mid-2015. - 2016: nominal GDP rebased; new nominal GDP series from 2011 to 2016 about 10 percent higher than series used in 2011 program projections. ### Government Budgetary Adjustments and Peace-Related Financing - Fiscal decentralization and transfers: - Peace Agreement committed central government to transfer 30 percent of budget revenue to subnational governments by 2018. - Transfers to local government reached 24.4 percent of revenues in 2017 and are expected to rise to 25.3 percent in 2018. - Three-year strategy: increase transfers to national support fund for technical communities (FNACT) to support regional investment. - Sustainable development fund (FDD): - Established to help finance regional development projects and accompany decentralization. - Financed mainly through export taxes and other levies targeting specific sectors. - Execution and budgeted amounts: - CFAF 18 billion executed in 2016; - CFAF 24.6 billion executed in 2017; - CFAF 40 billion budgeted for 2018. ### Military and Security Spending — Increasing Share of Public Spending - Security spending trends: - One year before the crisis: 8.4 percent of public expenditure (2.1 percent of GDP). - By 2013: 11.4 percent of public expenditure (about 2.9 percent of GDP). - In 2017: 16.5 percent of public expenditure (3.8 percent of GDP). - Security needs are part of the security planning and civil protection act with HR management provisions for police and security staff. - Economic activity and sectoral impacts: - Staff projected output growth for 2012 at about 5.5 percent and 5.2 percent for the medium term (pre-2012 terrorist attack); growth in 2012 plunged to minus 0.8 percent. - Average growth over the medium-term revised to less than 5 percent. - Geographic impacts concentrated in the north; services (tourism, commerce) most adversely impacted. - Agriculture and mining located in south expanded in 2012 and partially offset negative impacts. - FDI impact likely small because most FDI focuses on gold mining in the south. - Financial sector and banking soundness: - 2012 bank losses estimated at 0.3 percent of GDP (theft of bank notes, looting, NPL increase). - End-2012: NPLs rose to 21.5 percent of total gross loans; only 64 percent of these had been provisioned. - 2017: NPLs remained high at 16 percent of total gross loans. - Authorities’ plan: merger of two banks, aggressive NPL reduction strategy, eventual partial privatization of the new bank. - Humanitarian and social impact (UN OCHA, 2012 and later): - Total population displacement: 412,401. - Refugees in neighboring countries: 208,558, including 108,953 in Mauritania; 64,206 in Niger; 35,335 in Burkina Faso. - Internally displaced persons: 203,843. - Internally displaced hosted by 150,000 households. - About 52 percent of the displaced are women; 31 percent are children. - Education impacts: - An estimated 800,000 school-aged children affected by the complex emergency, in addition to 1.2 million children who were out of school prior to the crisis. - As of end-2017, about 500 schools still closed in the north and center; more than half in Mopti. - Nearly 150,000 children out of school due to school closures. - Food insecurity and service disruptions: - 2011–2012 agricultural campaign caused a 41 percent drop in cereal production or 5,286,351 tons (all cereals combined) in 2011-2012; in northern regions deficit estimated at 138,690 tons and population affected more than 900,000 people. - Poverty: - Poverty incidence increased by a percentage point to 42.7 percent in 2012 from 41.7 percent in 2011. ### Tax Revenue Mobilization and Fiscal Context - External grants dropped from 3.5 percent of GDP in 2005 to 1.6 percent of GDP in 2017. - Tax revenue performance: - Tax revenue increased by 13 percent per year during 2012–16; nominal annual GDP growth was 7 percent. - Tax-to-GDP ratio increased from 11.9 percent in 2012 to 14.9 percent in 2016. - 2017: tax revenue increased by 0.3 percent of GDP (0.3 percentage point increase in income tax revenue; 0.1 percentage point increase in trade tax revenue; 0.1 percentage point decrease in goods and services tax revenue). - Collection shortfalls often due to optimistic projections; except in 2016 and 2017 revenue execution gaps led to scaling back planned investment programs. - Reforms driving tax increase (2014–16): - Elimination of oil price subsidies. - Adoption of a 3% synthetic tax. - Telecommunications (TARTOP) increased from 2% to 5%; Financial transactions (TAF) increased from 15% to 17%. - Excises on tobacco, alcohol and passenger vehicles. - Administrative measures: change in VAR threshold, increased audits, modernization of mining and petroleum codes, reorganization of medium and large taxpayer units, simplification of tax laws. - Comparative performance (2013-17 averages): - Mali’s tax-to-GDP ratio averaged 13.8 percent of GDP (WAEMU average 14.8 percent; SSA average 15.6 percent). - Income tax average: Mali 4.4 percent of GDP (WAEMU: 4.0 percent; SSA: 5.5 percent). - Goods and services tax revenue average: Mali 7.6 percent of GDP (WAEMU: 5.8 percent; SSA: 5.8 percent). - VAT contributed about 40 percent of total tax revenue in Mali (WAEMU: about 26 percent). - Identified gaps and reform priorities: - Estimated tax revenue gap: about 0.7 percent of GDP in 2010–15. - Trade taxes gap: about 2 ½-3 percentage points of GDP below tax capacity. - Weaknesses: under-taxation of agriculture and trade; challenges in tax administration (company identification, administration of tax exemptions). - Suggested reforms: - Consolidate 2017 law forbidding new discretionary exemptions. - Review tax and customs code to limit exemptions to economic policy and social considerations. - Develop property taxation and address under-taxation of agriculture and trade. - Tax administration: clean up taxpayer registration and accounting; upgrade IT system; strengthen compliance risk management; build capacity of tax agents; reinforce analysis and control capacities. ### Trade Tax Revenue — Underperformance and Potential - Trade tax revenue amounted to about 1.8 percent of GDP (WAEMU average 4.3 percent of GDP; SSA 2.8 percent of GDP). - Low trade taxes due to full trade liberalization within WAEMU and inefficiencies in customs administration. - Statutory rates: - CIT rate: 30 percent. - VAT rate: 18 percent. - Tax productivity lower than peers; administrative inefficiency, compliance issues, and exemptions cited. - Methods to estimate potential revenue: peer analysis (fixed-effect panel) and stochastic tax frontier (Aigner–Lovell–Schmidt style) over 1995–2015 sample of 38 SSA countries. - Empirical findings (2010–15 averages): - Estimated tax capacity: 13.2 percent of GDP. - Actual total tax collection: 12.6 percent of GDP. - Implied loss: up to 0.7 percentage point of GDP annually. - Large increase in tax revenue in 2015 reduced the gap to 0.2 percentage point assuming unchanged capacity. - Trade tax potential improvement: about 2½-3 percentage points of GDP. - Recommendations: - Review tax and customs codes to limit exemptions. - Consolidate elimination of discretionary exemptions. - Establish a property cadaster (start with cities) to expand revenue base. - Strengthen tax administration (registration, IT, compliance risk management, capacity building). - Timely technical assistance and donor support (IMF, France, EU). ### Multinational Enterprises (MNEs), Mining, and International Profit Shifting Exposure - MNEs in 2016: - Represented more than 50 percent of total turnover of companies subject to CIT. - Accounted for more than 80 percent of the CIT (excluding SMEs). - Five largest mining MNEs and two sole telecommunication operators each group account for one-third of the CIT. - Stock of FDI increased by more than 80 percent from 2011 to 2015. - MNE diversification into oil, construction, and financial services. - Mining sector and gold: - Reserves in 2017 estimated at 830 tons or 16 years of output at current production levels. - Mali has 0.5 percent of the World’s gold reserves. - Mali produced 50.6 tons of gold in 2017. - Share of mining in GDP declined from 10 percent in 2006 to 6 percent in 2016. - Gold’s share in exports: exceeded 50 percent since early 2000s; 62 percent in 2015; 67 percent in 2016. - Domestic tax framework highlights: - CIT on territorial basis; standard CIT rate 30 percent (reduced from 35 percent in 2012). - Minimum tax of 1 percent of turnover (Impôt Minimum Forfaitaire). - Loss carryforward: three years. - Withholding taxes: 10 percent on distributed dividends; 15 percent on interest and service fees paid to non-residents. - Article 41 of CGI refers to interests paid rather than accrued (implication for interest deductibility timing). - Mining Code (MC) and tax expenditures: - MC grants fiscal stability up to 30 years; 1991 MC granted 5-year CIT holiday; later MCs altered rates. - Overlap between MC and CGI creates complexity and inhibits effective CIT reforms. - Exemptions under mining and investment codes in 2016: - 24 percent of all VAT and customs tax expenditures; - about 21 percent of total tax expenditures. - CIT tax expenditure attributable to MC estimated at 1.2 percent of the CIT paid by MNEs in 2016. - MC CIT rates: - 1991 MC: 45 percent. - 1999 MC: 35 percent. - 2012 MC: CGI rate 30 percent; reduced rate 25 percent for first fifteen years of a mine’s operation. - Royalties: 6 percent under 1991 and 2012 codes (3 percent under 1999 code). - Telecoms: turnover tax 5 percent. - Indirect transfer taxation: - Mali does not tax indirect transfer of mining rights or transfers of shares of entities owning rights; recognized as potential base erosion source. - Transfer pricing regulations: - Recent enactment clarifies application of arm’s length principle; consistent with international standards but do not apply to intercompany transactions within Mali. - Documentation requirements based on OECD Master file/Local file and simplified declaration; country-by-country reporting for later. - Safe harbor: interest rate limitation at BCEAO rate plus 2 percentage points. - Recommendation: expand regulations to target important transactions (e.g., gold exports) and provide clear pricing methodologies. - Double tax treaties (as of October 2016): - Multilateral WAEMU treaty and bilateral treaties with France, Algeria, Russia, Morocco, Tunisia, Monaco. - Treaties generally follow UN model; some provide zero withholding on inter-company management and technical services, overriding CGI 15 percent rate—potentially significant for base erosion. - Recommendation: negotiate withholding tax rates in line with CGI to reduce treaty shopping and need for anti-abuse rules. - Exposure to profit shifting (FDI patterns and firm-level data): - Three most important origins of FDI into Mali (2011-2015): the UK, Barbados, and Australia. - End-2015: over 60 percent of inward FDI position with the UK and Barbados. - Over 2011-2015, about 84 percent of the increase in FDI (USD 1.38 billion) originated as debt from low-tax countries (UK dependencies and Barbados) — implies high interest deductions and thin capitalization risks. ### Export Destination, Gold Valuation, and Profitability Indicators - Export destinations: - About 75 percent of exports destined to South Africa and Switzerland. - Concentration may reflect gold refining importance (especially Switzerland) but raises valuation concerns for CIT and royalties. - Risk: non-refined gold harder to value using price indices; potential undervaluation of inter-company export prices. - Recommendations: identify nature of gold exports; examine exporter-importer relationships; analyze price structures. - Profitability and tax indicators for MNE affiliates: - Affiliates of MNEs resident in Mali represent 81 percent of total CIT; 10 largest affiliates contribute >67 percent of CIT. - Median CIT-to-turnover ratio for all MNEs: 1.1 percent (just above minimum tax of 1 percent). - 29.5 percent of MNEs reported negative taxable results in 2016. - 16 percent of all companies under normal CIT regime reported negative taxable results in 2016. - 42.7 percent of MNEs paid the minimum CIT in 2016. - More than 31.4 percent of MNEs paid the minimum CIT over 2014-2016. - Note: 2014-2016 coincides with decline in gold price; longer period analysis recommended. - Thin capitalization exposure: - About 35 percent of inward FDI by country of origin in 2015 had debt to equity ratio exceeding 500 percent. - UK ratio: 159 percent in 2015 (down from 263 percent in 2011). - About 84 percent of FDI into Mali is subject to thin capitalization risk (assuming debt-equity ratio of 1.5 long run). - Firm-level files show financial debt to social capital ratios disproportionate for mining companies; mining MNEs subscribe minimum required social capital and finance remaining investment by debt. - Consequences: excessive interest expenses create losses carried forward; tax deferral; policy response recommended: - Implement thin capitalization rules combining a debt-equity ratio and interest limitation rule. - Extend interest limitation to non-related party debt, including domestic debt. - Transfer pricing and valuation measures: - Valuation of gold exports: use Comparable Uncontrolled Price; compare exports to third parties vs related parties; determine arm’s-length allocation between quoted ex-mine prices and OTC prices. - Disallow methods based on margins or costs for taxes on profits given importance of economic rent. - Extend audits to quantities, strengthen ring-fencing rules, apply transfer pricing regulations to intercompany transactions within Mali. - Intercompany services: base service charges on cost incurred; use safe-harbors and caps on deductible management/technical services. - Royalty fees: consider royalty based on profits where third-party comparables lacking; audit royalties to related countries carefully. - International calls/telecommunications: monitor 2016 regulation implementation to access data on volumes and roaming agreements; use for intercompany pricing guidelines. - Capacity building: - Transfer pricing enforcement requires tax, legal, accounting, and economics expertise. - Recommendation: create a dedicated team sized to MNEs operating in Mali to centralize expertise; key competencies: MNE business models, comparability analysis, management accounting, transfer pricing audit management. ### Public Investment Efficiency (PIM), Infrastructure, and Way Forward - Fiscal challenges toward WAEMU convergence: - Short term: insurgencies increase spending needs for security and decentralization. - Medium term: meet developmental objectives while meeting regional fiscal consolidation. - Donor support diminishing; regional financing conditions tighter. - Core recommendation: improve efficiency of public spending to boost growth, social cohesion, and avoid unsustainable debt; optimize expenditure efficiency alongside revenue mobilization. - Institutional assessments: - 2017 PIMA mission and FAD Expenditure Assessment Tool informed analysis. - Current expenditure and outcomes: - Public expenditure to GDP below SSA average; current spending rose rapidly over past five years. - Health care spending ~5.5 percent of GDP; education expenditure 18 percent of total government expenditure. - Net enrollment ratio in primary schools: 60 percent (SSA average 80 percent). - Adult literacy about one-half of peers. - Capital expenditure patterns: - Public gross fixed capital formation share declined over 25 years; standard deviation year-on-year: 1.7 percent of GDP. - Average GDP growth during period: 4.6 percent. - 2012 crisis: dramatic dip in investment. - Share of national resources allocated to capital spending ~40 percent during 2004–2015 with pronounced decline in 2012. - Fixed capital stock: ~110 percent of GDP in 2000; <70 percent of GDP in 2015. - Fixed capital stock per capita declined by ~17 percent between 2000 and 2015 (constant USD PPP-adjusted). - Result: stock of fixed capital per capita much lower than other WAEMU countries. - Measuring public investment efficiency (PIE-X): - PIE-X score for Mali: 0.57 (scale 0 to 1). - Comparators: Sub-Saharan African average PIE-X: 0.64; Emerging countries average PIE-X: 0.73. - Efficiency components for Mali: - Quality component: 0.81 (emerging countries 0.78; SSA 0.80). - Physical (access) component: 0.32 (world average: 0.59; SSA average: 0.46). - Combined efficiency gap: 0.43 (other countries of the world: 0.27). - Conclusion: efficiency shortfall reflects insufficient volume and coverage of infrastructure rather than perceived quality. - PIM institutions and paradox: - PIMA assessment: institutional arrangements for PIM relatively robust and above LIC averages across 15 components. - Weaknesses: nascent PPP framework (late 2016) not yet implemented; oversight of public enterprises weak; project appraisal and selection need improvement; investment financing hampered by poor cash projections; fixed assets not properly accrued or maintained. - Mali PIM efficiency gap: about 43 percent of potential value of public investment lost to inefficiencies. - Causes of efficiency gap: - Corruption and fraud: deterioration in corruption indicators associated with lower growth (technical note: real GDP growth could have been ~0.7 percent higher per year over 2008-13 absent deterioration). - Cost overruns and time delays: 2017 special investment budget showed only 7 percent of projects "alive and well underway"; many projects with >10-year maturities. - Inadequate maintenance: maintenance costs not assessed systematically; few budget lines for recurring upkeep. - Supplier delivery and capacity constraints, high import costs for a landlocked country, climate and insecurity. - Way forward and priorities: - Increase efficiency via accountability, capacity building, oversight and anti-corruption safeguards. - Priorities: - Strengthen project selection, PPP and public enterprise risk management. - Improve accounting and classification of capital-related costs. - Plan and execute maintenance expenditures; involve civil society and local governments in oversight. - Short-run priorities (as of report): - Introduce performance contracts for investment projects (phased in with World Bank; apply to new World Bank projects from March 2018). - Update/issue manual to introduce PPP regulations in June 2018 and connect Planning and Statistics Units to SIGIP. - Seek technical assistance to adopt standard unit cost prices for construction of roads, buildings, irrigation and hydraulic structures. ### Financial Sector Overview — Banking, Microfinance, Mobile Banking, and Financial Stability - Banking sector structure (2016 aggregates): - Banks: 13 institutions; Total Assets 4,346.5 billion CFAF; Credits to private sector 2,202.3 CFAF billion; Private deposits 2,528.5 CFAF billion. - NBFIs (3): Total Assets 33.9 billion CFAF. - MFIs: 10 institutions (subject to Article 44): Total Assets 133.2 billion CFAF; Credits to private sector 93.7 CFAF billion; Private deposits 68.5 CFAF billion. - Total (all institutions): 26; Total Assets 4,503.3 billion CFAF; Credits to private sector 2,296 CFAF billion; Private deposits 2,597 CFAF billion. - Six banks out of 13 account for 77.5 percent of sector assets. - Seven international banks and five regional banks account for nearly 86 percent of total assets and deposits. - Banking sector balance sheets increased by 14.2 percent in 2016 to CFAF 4,336.2 billion at end-2016. - Banks’ net income amounted to CFAF 45.6 billion at end-2016. - Credits to the private sector increased by 16.7 percent in 2016 to CFAF 2,195 billion. - Customer deposits increased by 6.4 percent to CFAF 2,528 billion at end-2016. - Share of Malian banks’ total assets in WAEMU estimated at 13.3 percent. - Credit to the private sector: - Correlation between GDP and credit cycles with 1–2 year lag; Granger causality: GDP leads credit. - Credit spikes occur as GDP starts to decline; declining credit phase associated with increasing NPLs. - Credits per capita well below SSA average. - Only 3 percent of population contracted loan from a financial institution in 2014; nearly 33 percent borrowed from friends/family. - About 40 percent of population borrowed any money in 2014. - Firms with line of credit: 26.3 percent (regional average 22.6 percent); small firms: 13.8 percent (regional average). - Sectoral composition (June 2017): - Hotels, restaurants, wholesale and retail trade captured 43.2 percent of total credits (regional 31.4 percent). - Tertiary sector ~73 percent of total credits while contributing slightly more than 1/3 of GDP. - Agriculture accounts for ~43 percent of GDP but captures ~4 percent of total credits. - Interest rates and maturity: - Average bank lending rate in Mali: 8.3 percent in 2016 (regional average 7.0 percent). - Bank deposit rate: 4.8 percent (regional average 5.4 percent). - Short-term credits 76 percent of total credits (WAEMU average ~46 percent). - Transformation ratio reduced to 50 percent in 2015 from 75 percent. - Constraints on long-term lending include liquidity risk, weak creditor rights, incomplete public credit registry, shallow government bond market. - Sovereign-bank nexus and sovereign exposure: - Banking sector balance sheet increased 75 percent between 2012 and 2015. - Government bonds share of bank assets increased from 15.3 percent end-2012 to nearly 25 percent end-2015; Mali government securities account for ~26 percent of total assets in Malian banking sector in 2016. - About 85 percent of Mali government bonds issued via UMOA-Titres; half of these held by Malian banks. - Regulatory incentive: WAEMU regulation applies zero-risk weight for sovereign; new Basel II/III standards phased in 2018–2022 may change incentives. - Microfinance sector and crisis response: - Total number of MFIs: 101; operating MFIs: 33; 10 subject to Article 44. - Microfinance aggregates (Est. 2013–Est. 2017): - Number of accounts: 1,140,164 (2013); 1,213,121 (2014); 1,083,060 (2015); 1,007,104 (2016); 1,065,421 (Est. 2017). - Deposits (CFAF billion): 50.0 (2013); 58.2 (2014); 62.6 (2015); 68.5 (2016); 76.8 (Est. 2017). - Credits (CFAF billion): 60.5 (2013); 73.6 (2014); 81.8 (2015); 93.7 (2016); 100.3 (Est. 2017). - NPL percent in MFIs: 11.5% (2013); 8.0% (2014); 6.6% (2015); 6.1% (2016); 4.9% (Est. 2017). - Microfinance sector: close to 1 million microfinance clients and about 1.4 million beneficiaries. - National Emergency Plan for Microfinance (adopted March 2015) components: restructuring (depositor compensation), legal framework implementation, capacity building for supervisors, support for viable MFIs, infrastructure support, expansion of services. - Ministerial orders withdrawing licenses of MFIs audited and to be liquidated. - Leasing market: - Leasing market shallow: one leasing institution (Alios Leasing) and one lessor (Equibail). - Leases account for <1 percent of banks and NBFIs assets end-2016. - New leasing legislation not yet adopted; WAEMU regulation treats leasing as credit products; recovery procedures cumbersome. - Recommendation: enact leasing legislation to support SME financing and deepen capital markets. - Mobile banking and E-money (2014–2016): - Value of transactions (CFAF billions): 2014 = 811; 2015 = 1,641; 2016 = 2,193. - Value as percent of GDP: 2014 = 11.4; 2015 = 21.2; 2016 = 26.4. - Volume of transactions (million): 2014 = 54.5; 2015 = 100.3; 2016 = 139.7. - Number of E-money accounts (million): 2014 = 3.8; 2015 = 5.1; 2016 = 6.9. - Mali accounts for ~20 percent of WAEMU mobile banking market in 2016. - WAEMU totals: total value CFAF 11,500 billion; total volume 735 million. - Mali, Burkina Faso, Côte d’Ivoire account for ~83 percent of total value and 76.6 percent of total volume in WAEMU. - E-money accounts in Mali in 2016: 6.9 million; only 1/3 considered active (~2.2 million active). - About 25 percent of working population has active E-money account end-2016. - Mali mobile subscribers: 11.1 million (penetration ratio 60.5 percent; adult coverage 118.3 percent). - Mobile networks cover about 40 percent of the country. - Smartphone users: 26.5 percent of mobile subscribers (~2.9 million). - Cash-In/Cash-Out transactions: ~76 million (51.2 percent of total volume); estimated amount CFAF 1,625 billion in 2016 (74.1 percent of total value). - Net injection of E-money: ~112.2 billion in 2016. - Domestic P2P captured 9.2 percent of total volume or CFAF 415.3 billion in value. - P2B in 2016: 4.98 million transactions; value CFAF 100.8 billion. - Number of businesses registered to carry out mobile transactions: 921; active: 241. - Agents: 43,842 Cash-In/Cash-Out agents (highest in WAEMU); less than 2/3 active. - Financial stability indicators (selected, preserved exactly): - Mali – Dec. 2016: - Regulatory capital to weighted assets (percent): 14.2 - Non-performing loans to total loans (percent): 16.4 - Non-operating assets to capital (banks complying to total): 9/13 - Liquidity coverage ratio (percent): 86.9 - Return on assets (percent): 1.1 - Mali – Dec. 2017: - Regulatory capital to weighted assets (percent): 14.3 - Non-performing loans to total loans (percent): 16.7 - Non-operating assets to capital (banks complying to total): 7/13 - Liquidity coverage ratio (percent): 67.3 - Return on assets (percent): 1.4 - WAEMU regulatory benchmarks: - Regulatory capital to weighted assets (percent): >11.5 - Non-operating assets to capital: <15 percent of capital - Liquidity coverage ratio (percent): >75 - Asset quality and NPLs: - Net NPLs to net total loans ratio reached 8.2 percent in June 2017. - Gross NPLs and provisions at end-2017: 16.7 percent and 57.9 percent respectively. - Old claims estimated at least CFAF 50 billion (about 13 percent of NPLs end-2016); excluding these would lower NPL by about 4 percentage points. - Public credit registry incomplete and lagged; private credit bureau (BIC) intended to fill gaps but implementation lagging. - Regulatory reforms: - WAEMU adopted Basel II/III standards, consolidated supervision, tightened large exposure limit (transition 2018–2022). - By end-2022, WAEMU banks must meet minimum common equity Tier 1 of 7.5% and minimum total capital ratio of 11.5% (inclusive of 2.5% conservation buffer). - Financial inclusion and policy opportunities: - Mobile banking overtook banking and microfinance sectors in accounts due to microfinance crisis recovery lag. - Opportunities: expand bank-mobile operator partnerships for credit and term deposits; develop G2P payments to increase adoption; enact leasing legislation; strengthen agent network and liquidity management. *Source: IMF staff compilation and IMF Country Report cr18142.* ### 1. Sequence of Important Events ___________________________________________________ 8 ### 1. Sequence of Important Events ### A. A Fragile State - Mali is characterized as a fragile state with a highly undiversified economy. - Key socioeconomic and demographic facts: - Agriculture accounts for over 30 percent of GDP. - Cotton and gold account for over 80 percent of exports. - Total population is over 18 million inhabitants. - 10 percent of the population live in the northern regions. - Current annual population growth is over 3 percent. - Fecundity rate is 6.2 children. - Population is projected to increase to over 45 million by 2050. - It is estimated that half of the population are below the age of 15 (World Bank 2016). - Mali is ranked number 179 of 187 countries (UNDP 2017). - Mali ranked 175th out of 188 countries on the UN Human Development Index in 2016. - Consequences of these conditions: - Vulnerability to adverse weather and commodity price fluctuations. - High population growth and drought have fueled poverty, food insecurity, and instability. - Delivery of services across a large, sparsely populated territory is challenging, affecting geographic equity and social cohesion. - Northern regions are being exploited by terrorists and militant groups. ### B. The Context of the 2012 Crisis - Nature and sequence of the crisis: - In 2012, heavily armed Tuareg separatists returning from Libya, supported by jihadist groups, drove the Malian army out of major northern cities and occupied large sections of northern Mali for most of the year. - The 2012 uprising was unprecedented in scale compared with prior rebellions since independence in 1960 (prior rebellions in 1963–1964, 1990–1996, and 2006–2009). - The military defeat contributed to frustrations with political processes and corruption and led to a military coup d'état in March 2012. - Occupation of northern regions opened space for criminal activities, hostage-taking, and worsened the humanitarian situation with internal and cross-border displacement. - Post-2012 developments: - Control of the northern region was restored in 2013 with the help of French, African, and MINUSMA troops, enabling elections. - The Agreement for Peace and Reconciliation resulting from the Algiers process (the Peace Agreement) was signed on June 20, 2015. - Ongoing challenges since 2013 and after the 2015 Peace Agreement: - Security conditions worsened, especially in central Mali; attacks by terrorist groups not party to the peace agreement have become more sophisticated. - Jihadist groups, despite losing strongholds in 2013, increased the scale, scope, and frequency of attacks, posing a regional threat. - Progress on implementing the 2015 Peace Agreement has been very slow, causing popular frustration and mounting tensions among the government, population, and ex-rebel groups. - Presence of government officials and civil servants in northern and central Mali has decreased due to persistent insecurity. - Disarmament, demobilization, and reintegration processes have yet to begin. - Persistent insecurity prevents or stalls implementation of planned development projects in the North. - A proposed referendum in 2017 to reform the 1992 Constitution in response to the 2015 Peace Agreement failed. ### C. Impact of the Crisis - Social and humanitarian effects: - Significant economic, social, and humanitarian impacts concentrated in northern regions. - Interruption and/or disruption of learning activities in northern Mali, undermining Education For All efforts. - Security crisis slowed progress toward reducing poverty and achieving Millennium Development Goals. - Fiscal and economic effects: - Security spending increased, weighing on the budget and reducing space for other priority spending. - Persistent insecurity hindered investment and growth. - In 2012 donors initially pulled back support; total revenue dropped sharply. - Authorities adjusted spending; overall deficit narrowed sharply relative to 2011 program projections, with security spending rising and other budget categories cut. - In 2013 donors reengaged, providing more resources. - By 2016 total public spending (as a share of GDP) was about 0.8 percentage points higher than envisaged in the 2011 program projections and is projected to remain about 1.3 percentage points higher than projected in the 2011 fiscal program in the near term. - Drivers of higher spending include increased security needs, preparations for the presidential elections in 2018, spending on social programs, and implementation of the 2015 Peace Agreement. - Total revenues (even after an adjustment for the rebasing of GDP in 2016), as a share of GDP averaged 1 percentage point lower than its pre-crisis projection. - Lower revenues reflect a combination of lower average tax revenues; lower grant receipts; and lower non-tax revenues. - Staff’s medium-term overall deficit projection has widened to about 3 percent of GDP starting in 2019, compared with a projected deficit of about 2.3 percent of GDP in the 2011 projections. - Arrears and nominal GDP rebasing: - In 2012 the government accumulated arrears to external creditors of about 0.5 percent of GDP; these arrears were fully cleared by mid-2015. - Nominal GDP was rebased in 2016. The new nominal GDP series from 2011 to 2016 is about 10 percent higher than the GDP series used in the 2011 program projections; fiscal ratios were restated using the new nominal GDP for comparative analysis. ### D. Government Budgetary Adjustments and Peace-Related Financing - Fiscal decentralization and transfers: - The Peace Agreement includes a process of fiscal decentralization. The central government committed to transferring 30 percent of budget revenue to subnational governments by 2018. - Transfers to local government reached 24.4 percent of revenues in 2017 and are expected to rise to 25.3 percent in 2018. - Authorities prepared a three-year strategy to finance regional development projects by increasing transfers to the national support fund for technical communities (FNACT) to support investment in the regions. - Sustainable development fund (FDD): - A sustainable development fund (FDD) was established as a component of the peace process to help finance regional development projects, especially in the northern regions, and to accompany the decentralization process. - The FDD is financed mainly through export taxes and other levies targeting specific sectors. - Execution and budgeted amounts: CFAF 18 billion executed in 2016; CFAF 24.6 billion executed in 2017; CFAF 40 billion budgeted for 2018. *Source: IMF staff compilation from "The Cost of Insecurity" section, Mali country report.* ### 8. Military and security spending is consuming an increasing share of public spending ### 8. Military and security spending is consuming an increasing share of public spending ### Security spending trends - The share of security spending in Mali’s budgets has been increasing, constraining preservation of spending on social services and development investment. - Military spending one year before the crisis: - 8.4 percent of public expenditure (2.1 percent of GDP). - By 2013: - 11.4 percent of public expenditure (about 2.9 percent of GDP). - In 2017: - 16.5 percent of public expenditure (3.8 percent of GDP). - The security needs are part of the security planning and civil protection act, which provides for enhancing human resources management (recruitment, training and career path) for police and security staff. ### Economic activity and sectoral impacts - Output growth projections and outcomes: - Staff projected output growth for 2012 at about 5.5 percent and 5.2 percent for the medium term (pre-2012 terrorist attack). - Growth in 2012 plunged to minus 0.8 percent. - Average growth over the medium-term was revised to less than 5 percent. - Geographic and sectoral effects: - Economic activity mostly impacted in the northern region; businesses and aid agencies scaled back operations due to increased costs from insecurity. - Key sectors: - Services (especially tourism and commerce): among the most adversely impacted; travel to Mali and associated services fell sharply; ongoing terrorist attacks likely to restrict further tourism development. - Agriculture and mining: not directly impacted due to geographic location in southern Mali; expanded in 2012 and helped partially offset negative impacts from services and industry on overall output growth. - Foreign direct investment: - The impact on FDI is likely to have been small because most FDI focuses on gold mining operations in the south, which do not appear to have been adversely impacted. ### Financial sector and banking soundness - Banking sector losses and non-performing loans (NPLs): - Following the take-over in the north, banks suffered losses estimated at 0.3 percent of GDP through theft of bank notes, looting of buildings, and an increase in NPLs. - By end-2012: - NPLs had risen to 21.5 percent of total gross loans; only 64 percent of these had been provisioned. - In 2017: - NPLs remained high at 16 percent of total gross loans. - Authorities’ response: - A plan to resolve banking sector problems includes the merger of two banks, an aggressive strategy to reduce NPLs, and eventual partial privatization of the new bank. ### Humanitarian and social impact - Population displacement and refugees (UN OCHA, 2012): - Total population displacement: 412,401. - Refugees in neighboring countries: 208,558, including: - 108,953 in Mauritania - 64,206 in Niger - 35,335 in Burkina Faso - Internally displaced persons: 203,843. - Internally displaced people hosted by 150,000 households, increasing pressure on host family resources and basic social services. - Demographics of displaced: - About 52 percent of the displaced are women. - 31 percent are children. - Education impacts: - An estimated 800,000 school-aged children were affected by the complex emergency, in addition to 1.2 million children who were out of school prior to the crisis (Sarrough, 2013). - As of end-2017, about 500 schools are still closed in the north and center due to insecurity; more than half of these schools are in the region of Mopti alone. - Nearly 150,000 children are out of school due to school closures. - Food insecurity and service disruptions: - The 2011–2012 agricultural campaign caused a sharp (41 percent) drop in cereal production or 5,286,351 tons (all cereals combined) in 2011-2012; in northern regions the deficit was estimated at 138,690 tons and the population affected to more than 900,000 people. - Political and security crisis and massive displacements worsened food insecurity and living conditions. - Humanitarian concerns include: - Absence of public administrations (forced departure of civil servants). - Withdrawal of international NGOs (high risk of hostage taking). - Looting of banks, grain stores and state and WFP food security stocks. - Closing of health centers, pharmaceutical depots and schools. - Breaks in supply of electricity and drinking water and disruptions in market functioning. - Millennium Development Goals and poverty: - The crisis slowed progress toward achieving the Millennium development goals, mainly due to massive displacement and disruption of basic social service delivery. - The coup of March 2012 led to suspension of almost all public development assistance, except emergency and direct population aid. - According to the poverty reduction strategy paper – progress report (2014), poverty incidence increased by a percentage point to 42.7 percent in 2012 from 41.7 percent in 2011 due to disrupted agricultural output and trade and a fall in public investment. ### Tax revenue mobilization and fiscal context - Importance of revenue mobilization: - Mobilizing more revenue is critical to implement government priorities while preserving fiscal sustainability amid declining external support. - External grants dropped from 3.5 percent of GDP in 2005 to 1.6 percent of GDP in 2017. - Recent tax revenue performance: - Tax revenue increased by 13 percent per year during 2012–16, well above the nominal annual GDP growth of 7 percent. - Tax-to-GDP ratio increased from 11.9 percent in 2012 to 14.9 percent in 2016. - In 2017, tax revenue increased by 0.3 percent of GDP: - 0.3 percentage point increase in income tax revenue. - 0.1 percentage point increase in trade tax revenue. - 0.1 percentage point decrease in goods and services tax revenue. - Collection shortfalls and budget management: - Revenue collection often fell short of budget targets, driven predominantly by optimistic projections. - Except in 2016 and 2017, budget execution resulted in a gap in revenue, leading to scaling back planned investment programs to keep the budget deficit within target. - Reforms and measures driving tax increase: - Tax policy measures (2014–16) included: - Elimination of oil price subsidies. - Adoption of a 3% synthetic tax (applies to every enterprise, business not paying VAT). - Increase in other tax rates: Telecommunications (TARTOP) increased from 2% to 5%; Financial transactions (TAF) increased from 15% to 17%. - Excises on specific products (ISCP): excise taxes on tobacco, alcohol and passenger vehicles. - Administrative measures included: - Change in the VAR threshold. - Increasing audits of taxpayers. - Modernization of the mining and petroleum codes. - Reorganization of medium and large taxpayer units. - Simplification of tax laws. - Comparative performance and composition: - Over 2013-17, Mali’s tax-to-GDP ratio averaged 13.8 percent of GDP, below WAEMU average of 14.8 percent and SSA average of 15.6 percent. - Mali’s income tax (average 2013-17): 4.4 percent of GDP (WAEMU: 4.0 percent; SSA: 5.5 percent). - Mali’s goods and services (G&S) tax revenue (average 2013-17): 7.6 percent of GDP (WAEMU: 5.8 percent; SSA: 5.8 percent). - VAT contributed about 40 percent of total tax revenue in Mali, compared to about 26 percent in WAEMU. - Identified gaps and reform priorities: - Estimated tax revenue gap: about 0.7 percent of GDP in 2010–15 (stochastic frontier and peer analysis), indicating potential to raise revenue. - Trade taxes gap: about 2 ½-3 percentage points of GDP below tax capacity during the same period. - Weaknesses include under-taxation of agriculture and trade and challenges in tax administration (company identification, administration of tax exemptions). - Policy and administrative reforms suggested: - Tax policy: consolidate the 2017 law forbidding new discretionary exemptions; review tax and customs code provisions related to tax base, duties and taxes to limit exemptions to economic policy and social considerations; consider developing property taxation and address under-taxation of agriculture and trade. - Tax administration: clean up taxpayer registration and accounting; upgrade the IT system; strengthen compliance risk management; build capacity of tax agents via on-the-job training and modern management tools; reinforce analysis and control capacities, particularly in fast-growing areas of the economy. *Source: cr18142 - 8. Military and security spending is consuming an increasing share of public spending (IMF).* ### 9. Mali’s trade tax revenue is significantly out-of-lines with peers, notwithstanding ### 9. Mali’s trade tax revenue is significantly out-of-lines with peers, notwithstanding ### Trade tax performance and drivers - Trade tax revenue amounted to about 1.8 percent of GDP, well below the average of 4.3 percent of GDP for WAEMU countries, and below the 2.8 percent of GDP for SSA. - Low trade taxes are likely due to: - Full trade liberalization within the WAEMU region, with a growing share of Mali’s imports originating from WAEMU countries. - Inefficiencies in customs administration that weigh on collection. - Conclusion: there is potential to raise more trade-tax revenue while proceeding with the trade liberalization agenda. ### Tax rates and tax productivity - Mali’s statutory rates: - Corporate Income Tax (CIT) rate: 30 percent. - Value Added Tax (VAT) rate: 18 percent. - These rates are comparable to peers, but tax productivity is lower: - Tax productivity measured as revenue collected (percent of GDP) per percentage point of tax rate is lower in Mali than in peers. - Lower productivity may be linked to administrative inefficiency, compliance issues and policy gaps other than the rate (e.g., exemptions). ### Estimating potential tax revenue — methods - Two methods employed: - Peer analysis: standard fixed-effect panel analysis using determinants identified in the literature to predict tax revenue (tax capacity proxy). - Stochastic tax frontier analysis: regression-based frontier (Aigner–Lovell–Schmidt style) estimating maximum tax revenue given country characteristics; distance to frontier captures inefficiencies and policy choices. - Dataset and sample: - Period covered: 1995–2015. - Sample: 38 sub-Saharan African countries. - Reference groups: WAEMU and other sub-Saharan African countries. - Determinants included (as in the source): GDP per capita, consumption, gross fixed capital formation, inflation, trade openness (imports and exports as a share of GDP), share of agriculture in GDP, urban population share, natural resource rents, broad money as a share of GDP. ### Estimating potential tax revenue — key empirical findings - Peer analysis results: - GDP per capita coefficient positive and strongly significant: economic development associated with higher tax capacity. - Value added of agriculture negative and significant: reflects agricultural informality and exemptions. - Gross fixed capital formation positive (supports higher revenues). - Broad money (percent of GDP) positive and significant: higher monetization associated with higher tax potential. - Inflation negative and significant: higher inflation reduces tax-to-GDP ratio. - Other factors (demographics, trade openness, natural resource rent) not statistically significant in many specifications. - Quantitative capacity and gaps (2010–15 averages): - Estimated tax capacity (predicted total tax-to-GDP ratio): 13.2 percent of GDP. - Actual total tax collection: 12.6 percent of GDP. - Implied loss (tax administration inefficiencies, evasion, policy design): up to 0.7 percentage point of GDP annually. - The large increase in tax revenue in 2015 reduced the gap to 0.2 percentage point of GDP assuming unchanged tax capacity. - Trade tax specific findings: - Peer analysis indicates potential to improve collection of trade revenue by 2½-3% of GDP (text also references "about 2 ½-3 percentage points of GDP"). - Stochastic tax frontier results broadly similar: total tax revenue performs relatively well due to goods and services tax revenue, but trade tax revenue is less efficient relative to WAEMU and other SSA countries. ### Conclusions and main policy recommendations - Overall assessment: - Mali’s tax-to-GDP ratio is below WAEMU and SSA averages, with the most pronounced weakness in trade tax revenue. - Mali’s overall tax performance estimated about 0.7 percentage point of GDP below tax capacity in 2010-15, with pronounced trade tax underperformance of about 2 ½-3 percentage points of GDP. - Policy recommendations (tax policy and tax administration): - Review tax and customs codes to limit exemptions to economic policy (regulation, incentive) and social (income redistribution) considerations adapted to current context. - Consolidate elimination of discretionary exemptions implemented in 2017. - Expand revenue base by better leveraging property tax: - Establish a property cadaster starting with cities, then agricultural areas, then the rest of the national territory. - Tax administration reforms: - Clean up taxpayer registration and accounting. - Upgrade IT systems. - Strengthen compliance risk management. - Build capacity of tax agents through on-the-job training, modern management tools and procedures, and reinforcement of analysis and control capacities—particularly in areas experiencing marked economic growth. - Capacity building and external support: - Timely implementation of technical assistance advice will be key. - Mali participates in the IMF capacity building framework to develop a medium-term strategy to strengthen institutions including revenue mobilization. - Other donors such as France and the EU are also providing support. *Source: IMF staff estimations.* ### 1. Multination enterprises are major contributors to government revenue in Mali. In 2016, ### Multination enterprises are major contributors to government revenue in Mali. In 2016, ### Overview and role of MNEs - MNEs represented more than 50 percent of the total turnover of companies subject to the corporate income tax (CIT) in 2016. - MNEs accounted for more than 80 percent of the CIT (excluding small and medium-size companies) in 2016. - The five largest mining MNEs and the two sole telecommunication operators each group accounts for one-third of the CIT. - The stock of foreign direct investment increased by more than 80 percent from 2011 to 2015. - MNEs have been diversifying into oil, construction, and financial services. ### Mining sector and gold - Gold dominates Mali’s mining sector. - Reserves in 2017 were estimated at 830 tons or 16 years of output at current production levels. - Mali has 0.5 percent of the World’s gold reserves. - Mali produced 50.6 tons of gold in 2017, placing it among the five largest gold producers in Africa. - The share of the mining sector in GDP declined from a high of 10 percent in 2006 to 6 percent in 2016. - Gold’s share in total exports of goods has consistently exceeded 50 percent since the early 2000s, and was 62 percent in 2015 and 67 percent in 2016. - Direct employment effects of large-scale mining are limited; artisanal mining employment has increased in recent years. ### Purpose and organization of the paper - Objective: assess Mali’s exposure to erosion of its tax base through international profit shifting, with focus on the mining sector, and propose policy measures to mitigate such risks. - Organization: - Section II: main features of Mali’s international tax rules. - Section III: assessment of potential risks of international profit shifting to Mali’s tax revenues. - Section IV: assessment of key international tax issues arising from intra-group transactions in Mali. ### Mali’s international tax system — key elements - Two governing elements: 1. Domestic tax policy: General Tax Code (Code Général des Impôts, CGI), three mining codes (1991, 1999, and 2012), the Investment Code, and Mali’s recent transfer pricing regulations. 2. Bilateral tax treaties: includes treaties with WAEMU members and other partner countries. ### Domestic law and corporate income tax (CIT) - Mali applies CIT on a territorial basis: profits from sources in Mali are subject to tax in Mali; profits from sources outside Mali are exempt. - The standard CIT rate is 30 percent (reduced from 35 percent in 2012). - A minimum tax of 1 percent of turnover applies (Impôt Minimum Forfaitaire). - Losses may be carried forward for three years. - Withholding taxes: 10 percent on distributed dividends; 15 percent on interest and service fees paid to non-residents. - Article 41 of the CGI refers to interests paid rather than accrued, enabling MNEs to potentially deduct interest due to foreign affiliates without paying the interests immediately. ### Mining Code (MC), Investment Code (IC), and fiscal provisions - Mining companies governed by mining codes from 1991, 1999 and 2012. - MC defines taxes, duties, levies, royalties and grants fiscal stability of up to 30 years to eligible MNEs. - Overlap between MC and CGI creates complexity and inhibits effective CIT reforms. - Exemptions from VAT and customs duties under mining and investment codes: - In 2016, these exemptions amounted to 24 percent of all VAT and customs tax expenditures. - In 2016, these exemptions amounted to about 21 percent of total tax expenditures. - Temporary admissions and exemptions during exploration and first three years of production; exemptions from import duties for petroleum products during entire operation phase. - Customs exemptions can facilitate artificial price inflation of intercompany purchases, reducing CIT base. ### Specific MC provisions and tax expenditures - 1991 MC grants a CIT holiday of five years. - 1999 and 2012 MC removed the five-year exemption, but many projects still operate under 1991 MC due to stability clauses. - Several MNEs have continued benefiting from 1991 MC exemptions, including for mining extension projects. - The CIT tax expenditure estimate attributable to the MC is 1.2 percent of the CIT paid by MNEs in 2016. - CIT rates in MCs: - 1991 MC: 45 percent. - 1999 MC: 35 percent. - 2012 MC: applies CGI rate of 30 percent, but provides a reduced rate of 25 percent for the first fifteen years of a mine’s operation. - Royalties: - Mining companies subject to royalties of 6 percent under the 1991 and 2012 code (3 percent under the 1999 code). - Telecommunication companies subject to a turnover tax of 5 percent. ### Indirect transfer taxation - Mali does not currently tax indirect transfer of mining rights or other titles/rights to assets located in Mali (i.e., transfer of shares of the legal entity owning the rights). - This is recognized as a potential source of profit shifting, particularly given high levels of FDI transiting through tax havens. - Mali could consider extending taxation to gains on such indirect transfers. ### Transfer pricing regulations - Mali recently enacted transfer pricing regulations clarifying the application of the arm’s length principle (ALP). - Regulations are consistent with international standards but do not apply to intercompany transactions within Mali. - Documentation requirements introduced based on OECD Master file/Local file approach and a simplified declaration. - Country-by-country reporting can be introduced later, after capacity development. - Existing safe harbor: limitation on interest rate charged on related companies debt set at the BCEAO rate plus 2 percentage points. - Recommendation: regulations should be expanded to target important transactions, such as gold exports, and offer clear pricing methodologies. ### Double tax treaties - As of October 2016, Mali had: - A multilateral tax treaty with WAEMU partner States. - Bilateral treaties with France, Algeria, Russia, Morocco, Tunisia, and Monaco. - Treaties generally follow the UN model convention. - Some treaties provide zero withholding on inter-company management and technical services, overriding the 15 percent rate in the CGI; this can be significant for base erosion. - Recommendation: continue negotiating withholding tax rates in line with CGI and avoid significant variations across treaties to reduce treaty shopping and the need for complex anti-abuse rules. ### Exposure to tax avoidance and profit shifting - Analysis approach: patterns of FDI and firm-level tax-return data rather than high-level aggregate tax loss estimates. - Evidence of FDI transiting through low-tax countries (CDIS data, 2011-2015): - Three most important origins of FDI into Mali: the UK, Barbados, and Australia (2011-2015). - At end-2015, over 60 percent of Mali’s inward FDI position was with the UK and Barbados. - Some UK-attributed investments likely reflect British Overseas Territories and Crown Dependencies (e.g., Jersey, Cayman Islands). - Increase in inward FDI has been mainly in the form of debt: - Over 2011-2015, about 84 percent of the increase in FDI (USD 1.38 billion) originated as debt from low-tax countries (UK dependencies and Barbados). - This implies high levels of interest deductions taken against income generated in Mali, creating thin capitalization risks and tax base erosion over several years. *Source: cr18142 - 1. Multination enterprises are major contributors to government revenue in Mali. In 2016 (IMF).* ### 25. The destination of Mali’s exports may also indicate exposure to profit shifting through ### 25. The destination of Mali’s exports may also indicate exposure to profit shifting through ### Export destinations and valuation risks - About 75 percent of exports are destined to South Africa and Switzerland, and this ratio is relatively stable over recent years. - Concentration in these destinations may reflect the importance of gold refining in these two countries (especially Switzerland), but raises questions about whether such exports are valued appropriately for Mali’s CIT and royalties. - Non-refined gold may be harder to value using readily available price indices, increasing risk of undervaluation of inter-company export prices. - Further analysis recommended: - Identify the nature of gold exports. - Examine relationships between exporters (in Mali) and importers (in South Africa and Switzerland). - Analyze the structure of prices charged on such exports to shed light on base erosion through undervaluation. ### Profitability of MNEs in Mali - Affiliates of MNEs resident in Mali represent 81 percent of total CIT, but this share is unequally spread: the 10 largest affiliates contribute more than 67 percent of the CIT. - The median CIT-to-turnover ratio for all MNEs is 1.1 percent, which is just slightly above the minimum tax of 1 percent of turnover, suggesting very low tax profitability of affiliates of MNEs resident in Mali, possibly due to profit shifting. - Comparative indicators: - 29.5 percent of MNEs in Mali reported negative taxable results in 2016. - 16 percent of all companies under the normal CIT regime (excluding exempt companies) reported negative taxable results in 2016. - 42.7 percent of MNEs paid the minimum CIT in 2016. - More than 31.4 percent of MNEs paid the minimum CIT over 2014-2016. - Note: The period 2014-2016 coincides with a decline in the price of gold; analysis over a longer period is necessary. - Recommendation: Further sectoral analysis and benchmarking of revenue and cost structures; extend analysis to companies in other countries with similar economic structures. ### Thin capitalization and exposure - About 35 percent of inward FDI by country of origin in 2015 had debt to equity ratio exceeding 500 percent (Table 4). - Examples of country-specific ratios: - United Kingdom: ratio of 159 percent in 2015, declining from 263 percent in 2011. - FDI from Barbados indicate a large debt injection into Mali in 2015. - Overall indicators: - About 84 percent of FDI into Mali is subject to thin capitalization risk—assuming a debt-equity ratio of 1.5 over the long run is standard practice. - Firm-level tax files show ratios of financial debt to social capital of mining companies are disproportionate relative to total investment; all mining MNEs have subscribed the minimum required social capital (or slightly above), financing remaining investments by debt. - Consequences: - Excessive interest expenses in early stages create losses that can be carried forward against future earnings, deferring CIT and the 10 percent priority dividend to the Malian State. - Large early debt injections will eventually have to be repaid out of accumulated earnings, with no tax consequences. - Policy recommendation: - Implement more effective thin capitalization rules combining a debt-equity ratio (instead of minimum original equity contribution) with an interest limitation rule to capture both debt level and interest rate. - Extend interest limitation to non-related party debt, including domestic context. ### Strengthening transfer pricing rules (overview) - Aim: Simplified, clear, easy-to-apply methods to protect Mali against aggressive transfer pricing. - Short-term feasible objectives: issuance of administrative guidelines and development of relevant tax administration capacities over the next few years. - Focus areas (given importance of mining and telecommunications): - Undervaluation of gold exports. - Profit shifting within Mali, due to weak ring-fencing rules in mining. - Pricing and structuring of inter-company services and royalty fees. - Pricing of incoming international calls. ### Valuation of gold exports (specific measures) - Authorities control quantity and quality of gold export via MNEs’ own controls and refining reports; plans exist to develop laboratory resources (consider cost-benefit). - Authorities have less information about export prices, which MNEs may understate, affecting CIT and royalty revenues. - Current mining code (MC) splits royalties into two taxes: a tax based on turnover, and an ad-valorem tax based on mine gate prices, complicating valuation. - Suggested methodology: - Use Comparable Uncontrolled Price to ensure consistency across different taxes on turnover. - Conduct comparative analysis of exports to third parties vs. related parties to identify discrepancies and determine simple rules consistent with independent market practices. - Determine arm’s-length allocation of revenues arising from the difference between quoted ex-mine prices and over-the-counter prices. - Given importance of economic rent in mining, methods based on margins or costs should not be allowed, including for taxes on profits. ### Adapting tax audits to the investment lifecycle - Tax arbitrage varies over lifecycle, especially in capital-intensive sectors: - During CIT exemption periods, MNEs may inflate capital goods prices imported under customs exemption to claim higher amortization after exemption ends. - At end of mine life, MNEs have incentive to sell capital goods at low price to related parties to avoid realizing capital gains. - MNEs may increase stocks of intermediate and capital goods before end of exemption period to use them after the exemption, extending indirect tax exemptions. - Mining extension projects risk: - If extension within same legal entity, immediate deduction of extension charges may offset profits of existing activities, delaying CIT and priority dividends. - If extension in separate legal entity, allocation of expenses and revenues may transfer profits to new company benefiting from CIT exemption. - Recommendation: - Extend tax audits to quantities (not only prices). - Strengthen ring-fencing rules to limit transfer pricing risks across separate but related entities or across projects within same legal entity. - Apply transfer pricing regulations to intercompany transactions within Mali. - Ring-fencing should balance reducing base erosion and encouraging new projects and extensions. ### Intercompany services and royalty fees - Intercompany services: - Risk of overcharging technical and management services across mining, telecommunications, building, oil, and financial services. - Common abusive technique: charging services as a fixed percentage of recipient’s turnover without evidence services are rendered. - Domestic withholding tax of 15 percent is main protection, but tax treaties reduce this rate to zero, undermining protection. - Recommended approach: base service charges on cost incurred for services rendered (if justified), not on turnover. - Use safe-harbors to determine acceptable margin on service costs (as suggested by UN Practical Manual on Transfer Pricing for Developing Countries) and cap maximum deductible amounts for management and technical services (e.g., percentage of other expenses). - Royalty fees: - Main sectors not highly exposed to avoidance through royalty payments, but withholding tax of 30 percent is primary protection. - Mali’s tax treaties generally maintain protection but with reduced rates; treaties with France and Russia eliminate protection—royalties paid to residents of these countries should be audited carefully. - Given absence of relevant third-party comparable data, consider a royalty based on profits and develop a tax audit methodology to price inter-company royalties. ### International calls and telecommunications - Pricing of incoming international calls may be a revenue concern since Mali is generally a receiving country. - Decrease in turnover affects CIT and turnover tax on telecommunication companies. - Mali enacted a regulation establishing a communication right to access information on international calls such as volumes and roaming agreements (Finance law for 2016). - Recommendation: monitor effective implementation of the regulation; use gathered information to establish guidelines on intercompany pricing and rely on comparable transactions with third parties for audits. ### Developing effective transfer pricing capacity - Transfer pricing requires tax, legal, accounting, and economics expertise and specific methodologies. - Mali needs to develop human resources in key agencies (tax and customs administrations, Ministry of Mines) to enforce anti-avoidance rules. - Recommendation: - Create a dedicated team sized to number of MNEs operating in Mali to centralize expertise, manage important cases, and support tax auditors. - Key competencies: knowledge of MNE business models and structures, transfer pricing comparability analysis, management accounting, and transfer pricing audit management. *Source: cr18142 - MALI, International Monetary Fund.* ### 1. Mali faces fiscal challenges as it aims to reach the WAEMU fiscal convergence ### 1. Mali faces fiscal challenges as it aims to reach the WAEMU fiscal convergence objective ### Short-term and medium-term fiscal challenges - Short term: ongoing insurgencies create additional spending needs to improve security and support the decentralization process accompanying the peace agreement. - Medium term: challenge to achieve developmental objectives while meeting the fiscal consolidation required by regional stability objectives. - Context: donor support is diminishing and regional financing conditions are becoming tighter. ### Core policy recommendation (from source) - Improving the efficiency of public spending is essential to boost growth, achieve social cohesion, and avoid unsustainable debt levels. - Optimizing expenditure efficiency should complement domestic revenue mobilization to provide contingency if fiscal space assumptions do not materialize or external support declines. ### Institutional work informing the assessment - IMF and government of Mali undertook a 2017 assessment of infrastructure quality using the PIMA framework. - This paper builds on the FAD Expenditure Assessment Tool and the 2017 PIMA mission, and draws on a recent IMF technical assistance mission providing PFM recommendations. --- ### Current expenditure trends and implications - Overall public expenditure to GDP remains below the SSA average, but current spending has risen rapidly over the past five years. - Over the past decade, expenditures have grown faster than the SSA average, especially regarding current expenditures. - Meeting developmental needs of a growing population requires boosting the efficiency of public spending. Key statistics and observations: - Health care spending represents about 5.5 percent of GDP (in line with the SSA average and other LICs), but public spending has dropped and out-of-pocket expenses are much higher than in SSA. - Education expenditure: 18 percent of total government expenditure (a 2-percentage point higher than in other SSA countries), yet PPP$-adjusted per capita amount is significantly lower than SSA and LICDs averages. - Net enrollment ratio in primary schools: 60 percent in Mali versus 80 percent SSA average. - Adult literacy in Mali is about one-half of that in peer countries. --- ### Capital expenditure patterns and outcomes - Public investment (public gross fixed capital formation) shows a steady decline in the share of public investment in GDP over 25 years, with high volatility. - Standard deviation of public investment year on year: 1.7 percent of GDP. - Average GDP growth during the period considered: 4.6 percent. - During the 2012 crisis, investment experienced a dramatic dip as authorities discontinued investment to cover wages and other priority expenditures. - Share of national resources allocated to capital spending remained at approximately 40 percent during 2004–2015, with a pronounced decline in 2012. - External support has financed a substantial part of capital spending; disbursements have varied in the range of 20-50 percent of public investment. - Fixed capital stock trends: - Approximately 110 percent of GDP in 2000. - Less than 70 percent of GDP in 2015. - Fixed capital stock per capita declined by approximately 17 percent between 2000 and 2015 (in constant U.S. dollars, PPP-adjusted, per capita). - Result: stock of fixed capital per capita is much lower than in other WAEMU countries, reflecting erosion of public assets due to geopolitical, climate, and environmental conditions and insufficient maintenance/renewal. --- ### Measuring public investment efficiency (concepts and Mali's assessment) - The IMF's Public Investment Efficiency indicator (PIE-X) relates public capital stock and indicators of infrastructure access/quality; scores range from 0 to 1 where 1 is the efficiency frontier. - Three indicators used to construct the frontier: - Physical indicator: volume of economic infrastructure (length of road network, electricity production, access to water) and social infrastructure (number of secondary teachers and hospital beds). - Survey-based indicator: World Economic Forum business leaders’ impressions of infrastructure quality. - Hybrid indicator: combines physical and survey-based indicators. Mali’s measured efficiency: - PIE-X score for Mali: 0.57 (scale 0 to 1). - Comparators: - Sub-Saharan African average PIE-X: 0.64. - Emerging countries average PIE-X: 0.73. - Efficiency components for Mali: - Quality component: 0.81 (compared with an average of 0.78 in emerging countries and 0.80 in Sub-Saharan African countries). - Physical (access) component: 0.32 (world average: 0.59; Sub-Saharan African average: 0.46). - Combined efficiency gap: 0.43 (compared with 0.27 for other countries of the world). - Conclusion: Mali’s efficiency shortfall largely reflects insufficient volume and coverage of infrastructure rather than perceived quality. --- ### Sectoral outcomes and observations - Access to public infrastructures has improved over time, with the noteworthy exception of health infrastructures. - The perception of infrastructure quality (survey-based) declined since 2012, indicating fixed capital stock attrition is affecting infrastructure quality. - Despite improvements in some access indicators (teachers per thousand, roads per thousand, hospitals per thousand, access to drinking water), health outcomes remain poor relative to peers. --- ### Underlying causes and paradox - Mali presents a paradox: robust institutional arrangements for public investment management (as pictured by PIMA) but poor delivery of durable and quality infrastructure. - Causes identified in the text: - Volatile investment budgets and procyclical public investment behavior. - Lapses in governance and management and poor delivery on the investment supply side. - Heavy reliance on external financing, which fluctuates with donor support and project compliance. - Insufficient efforts to maintain and renew existing infrastructures. --- ### Policy implications and way forward (as emphasized by the source) - Closing the public investment efficiency gap is critical to substantially increase economic dividends from public investment. - A strategy should combine: - Continued domestic revenue mobilization. - Optimization of expenditure efficiency to avoid unsustainable debt and provide contingency. - Implementation of PFM and PIM reforms based on the 2017 PIMA mission and FAD Expenditure Assessment Tool findings. - Priorities implied by the assessment: - Improve governance and management of investment projects and the investment supply side. - Stabilize investment budgets to reduce procyclicality. - Strengthen maintenance and renewal of existing infrastructure to arrest the decline in capital stock per capita. *Source: IMF staff analysis based on: FAD Expenditure Assessment Tool, 2017 PIMA mission to Mali, IMF technical assistance findings, and related IMF assessments included in the provided content.* ### 21. Efficiency of public investment management (PIM) institutions is a driver for ### 21. Efficiency of public investment management (PIM) institutions is a driver for investment efficiency ### Role of PIM institutions and literature evidence - Legal, institutional, and procedural arrangements for public investment management influence the level, composition, and impact of public investment. - Empirical findings from the literature: - Weak institutions are associated with higher levels of investment, greater volatility in investment expenditure, and lower quality of infrastructure (Tanzi and Davoodi, 1997; Keefer and Knack, 2007; Grigoli and Mills, 2013). - Higher public investment efficiency is generally associated with stronger institutions and low dependency on natural resource revenues (Albino-War and others, 2014). - The Public Investment Management Index (PIMI) shows wide variations in PIM efficiency and effectiveness across middle- and low-income countries; limits arise from reliance on secondary-data sources and proxies. - Gupta and others (2014) using a PIMI-adjusted capital stock found the quality of PIM is an important determinant of public capital productivity. - PIM practices emphasize transparency and well-governed institutions at three stages of the investment cycle: - Planning: fiscal rules, integrated strategic planning, PPP institutional arrangements, oversight and governance of state-owned enterprises. - Allocation: medium-term budget frameworks, unification of current and capital budgets, consolidation of extrabudgetary funds, transparent and rigorous project appraisal and approval procedures. - Implementation: firm expenditure controls, efficient liquidity management, regular project execution reporting, strong project management, and regular reporting on the condition and value of resulting infrastructure assets (GFSM 2014). ### PIMA tool and assessment framework - The Fund’s Public Investment Management Assessment (PIMA) tool evaluates 15 key institutions for planning, allocation, and implementation of public investment. - The PIMA assesses the public investment decision-making process across three components: - Planning sustainable levels of investment across the public sector: - Evaluates: (i) fiscal principles or rules to preserve investment; (ii) national and sectoral plans; (iii) coordination between central and local administrations; (iv) transparent management of PPPs; (v) regulation of infrastructure enterprises to promote competition. - Allocating investment to the right sectors and projects: - Assesses: (i) multiyear budgeting with transparent and predictable appropriations for investment; (ii) comprehensive budget inclusion and Parliament authorization of all public investments; (iii) unified budget process; (iv) ex ante project assessments; (v) project selection system. - Implementing projects on time and on budget: - Determines whether: (i) there is an investment protection mechanism; (ii) funds are available; (iii) transparency in project execution exists; (iv) project implementation is managed; (v) public assets are monitored. ### Mali: PIM assessment results and paradox - Institutional institutions for public investment management in Mali are described as robust and relatively well implemented compared with peer countries. - Assessment of 15 PIM components shows generally good scores at or above average levels for LICs. - Noted weaknesses: - The nascent legal framework for PPPs (passed in late 2016) has yet to be implemented. - Oversight of public enterprises is less than effective. - Processes for appraisal and selection of projects need improvements. - Investment financing is hampered by poor cash projections. - Fixed assets are not properly accrued and are poorly maintained. - Despite the relatively strong PIM framework, Mali fails to deliver durable and quality fixed capital formation. - Mali PIM efficiency gap: on average, about 43 percent of the potential value of public investment in Mali is lost to inefficiencies in the investment process. ### Factors explaining the efficiency gap - Corruption and fraud: - Multiple indicators (Transparency International Corruption Perception Index; Ibrahim Index of African Governance (IIAG); World Bank Country Policy Institution Assessment) identify corruption as a major problem in Mali. - IMF staff analysis: a 2015 technical note (Stefan Klos and Milan Cuc’s) finds that real GDP growth could have been approximately 0.7 percent higher per year over 2008-13 if Mali had not experienced a deterioration in indicators of corruption during that period. - Cost overruns and time delays: - General pattern across LICs; media report numerous Mali infrastructure projects with costs exceeding budget and long completion times. - In 2017, the special investment budget showed many long-lasting projects: only 7 percent of the total number of projects were "alive and well underway," while 50 percent were in the near or past completion phases, some with more than 10-year maturities. - Inadequate infrastructure maintenance: - Maintenance costs are not assessed or only assessed for projects with large costs exceeding CFAF 1 billion. - Generally no budget lines specifically related to recurring expenditure (upkeep, maintenance, and renovation) for infrastructures as built. - Supplier difficulties to deliver quality infrastructure: - Construction sector challenges include costs of imported raw materials and equipment in landlocked Mali; poor human capacity; shallow financing access; operational difficulties including climate and insecurity. ### Way forward: priorities to fill the efficiency gap - Core orientation: increase efficiency by raising public investment managers’ accountability and stewardship through capacity building, strong oversight on results, and anti-corruption safeguards. - Three main priority areas for government reforms: - Strengthen the socio-economic impact of investment spending through enhanced processes for project selection, and better management of risks associated with PPPs and public enterprises. - Better reflect the investment effort by accurately accounting fiscal resources for public investment, and improving the classification of capital-related costs. - Maintain existing infrastructure in the long term with sound planning and execution of maintenance expenditures, and involve civil society and local governments in oversight of maintenance works. - Consistency with ongoing reforms: - Implementation of the West African Economic and Monetary Union’s harmonized framework involves investment-friendly reforms including fixed-asset management, program-based budget, cash management and accountability frameworks for managers. ### Short-run Malian authorities’ priorities (as of the report) - Introduce a stronger result-oriented culture in investment management: - Performance contracts for investment projects will be phased in, in conjunction with the World Bank, to create an incentive system for investment project performance. - This tool will be applied to new World Bank projects from March 2018. - Improve and streamline the process for project management: - Government plans to update and issue a manual to: (i) introduce regulatory developments related to PPPs in June 2018; and (ii) connect the Planning and Statistics Units to the Public Investment Management Database (SIGIP). - Streamline project costing: - Government will seek technical assistance to improve adoption of a cost price based on standard units for construction of road infrastructures, buildings, irrigation schemes and hydraulic structures. --- ### Financial sector profile and selected statistics (contextual) - Banking sector structure and 2016 aggregates: - Banks: 13 institutions; Total Assets 4,346.5 billion CFAF; Credits to the private sector 2,202.3 CFAF billion; Private deposits 2,528.5 CFAF billion. - Non-banks financial institutions (NBFIs) 1/: 3 institutions; Total Assets 33.9 billion CFAF; Credits to the private sector 0; Private deposits 0. - Microfinance institutions (MFIs) 2/: 10 institutions; Total Assets 133.2 billion CFAF; Credits to the private sector 93.7 CFAF billion; Private deposits 68.5 CFAF billion. - Total (all institutions): 26; Total Assets 4,503.3 billion CFAF; Credits to the private sector 2,296 CFAF billion; Private deposits 2,597 CFAF billion. - Source: BCEAO. - Notes: 1/ excluding insurance companies. 2/ excluding MFIs that are not subject to the Article 44 of the law 007-06-2010. - Market concentration and activity (2016): - Six banks out of 13 account for 77.5 percent of the sector in terms of total assets. - Seven international banks and five regional banks account for nearly 86 percent of both total assets and deposits. - Banking sector balance sheets increased by 14.2 percent in 2016 to reach CFAF 4,336.2 billion at end-2016. - Banks’ net income amounted to CFAF 45.6 billion at end-2016. - Credits to the private sector increased by 16.7 percent in 2016 to reach 2,195 CFAF billion. - Customer deposits increased by 6.4 percent to reach CFAF 2,528 billion at end-2016. - Balance sheets from other financial institutions increased by 26.5 percent in 2016, to reach CFAF 33.9 billion at end-2016. - The share of Malian banks’ total assets in the WAEMU is estimated at 13.3 percent. - Microfinance sector (end-2016 and related data): - There are 101 licensed MFIs, of which 33 are considered in operation. - Ten of the 33 operating MFIs are subject to Article 44 and account for about 3 percent of total assets in the financial sector. - Credits to the private sector from MFIs amounted to about CFAF 93.7 billion at end-2016, a 14.5 percent increase from end-2015. - Non-performing loans for MFIs are estimated at about 6.1 percent of total loans. - Nearly 50 percent of MFIs loans have been contracted for agricultural purposes. - Customer deposits increased to CFAF 68.5 billion, a 9.4 percent increase from end-2015. - Financial depth indicator: - Mali’s ratio of domestic credits to the private sector as a percentage of GDP is about 25 percent at end-2016. - WAEMU average: 29 percent of GDP. - Sub-Sahara Africa (SSA) average: 23.5 percent of GDP. *IMF Country Report content (selected excerpts).* ### 4. Credit to the private sector has ### 4. Credit to the private sector has ### Credit expansion and cycles - Credit to the private sector has expanded significantly along with strong economic performance and outlook (Figure 3). - Data from 2000 to 2017 show a correlation between the GDP and credit cycles with a lag of one to two years. - A Granger causality test indicates that the GDP cycle leads to credit cycle. - The credit cycle tends to spike as the GDP cycle has already started to decline. - A declining phase of the credit cycle is typically associated with increasing NPLs, which linger on banks’ balance sheet. ### Access to finance and financial inclusion - Credits to the private sector per capita remain well below SSA average (Figure 4). - Only 3 percent of Mali’s population contracted a loan from a financial institution in 2014 while nearly 33 percent borrowed from friends and family. - Overall, about 40 percent of Mali’s population borrowed any money in 2014. - The number of bank accounts per capita remains well below the SSA average. - The percentage of firms with a line of credit is estimated at 26.3 percent in 2016 (regional average: 22.6 percent). - The same indicator for small firms is about 13.8 percent in 2016 (in line with the regional average). ### Sectoral composition of bank credits - Banks’ credits to the economy are concentrated in trade and other services sectors (Figure 5). - In June 2017 the hotels, restaurants, wholesale and retail trade sector captures 43.2 percent of total credits compared to 31.4 percent at the regional level. - The tertiary sector accounts for nearly 73 percent of total credits while contributing to slightly more than a 1/3 of GDP. - The primary and secondary sectors capture around 27 percent of total credits while contributing to nearly 2/3 of GDP. - The agriculture sector accounts for about 43 percent of GDP but captures around 4 percent of total credits. - Farmers typically rely on cash transactions outside the formal banking system and do not have a bank account; their financial needs are usually addressed by other farms, family, and microfinance institutions. ### Interest rates, spreads, and cost of lending - The average bank lending rate in Mali is estimated at 8.3 percent in 2016 (regional average: 7.0 percent) (Figure 7). - The average interest rate has been overall declining since 2010. - Bank deposit rate is estimated at 4.8 percent (regional average: 5.4 percent). - The spread between lending and deposit rates in the Malian banking sector is among the highest in the WAEMU zone, reflecting relatively high credit risk and risk transformation. ### Maturity structure and transformation ratios - Short-term credits to the private sector account for about 76 percent of total credits (Figure 8). - The WAEMU average of short-term credits is estimated at about 46 percent of total credits as of end-2016. - The share of medium-term credits to total credits increased from 33 percent in 2014 to 35 percent in 2016. - The transformation ratio was reduced to 50 percent in 2015 from 75 percent, imposing a limit on long-term assets to long-term liabilities. - The reduction in the maximum transformation enabled a surge in credits with longer maturities financed with short-term resources, increasing the possibility of asset-liability mismatch. ### Constraints on long-term lending - Major constraints: liquidity risk tied to long-term projects, difficulties in enforcing contracts, information asymmetry, macroeconomic and political instability. - Malian banks often lack long-term resources and must comply with prudential liquidity ratios, reducing capacity to extend long-term financing. - In June 2017, 10 banks out of 13 complied with the liquidity ratio, and 11 banks out of 13 complied with the transformation ratio. - The long-term government bond market remains shallow and provides limited yield curve information, complicating pricing of long-term credits. - Legal uncertainty and judicial processes undermine creditors’ and investors’ rights and raise perceived risk; weak investor protection deters long-term lending. - The public credit registry at the BCEAO is incomplete and only focuses on delinquent loans; banks lack tools and knowledge to assess projects, increasing reliance on collateralization. - On the demand side, low-skilled entrepreneurs may be unable to design bankable projects and provide reliable financial information. ### Public investment and credit linkages - Credit to the private sector is correlated with public investment (Figure 9). - A Granger causality test indicates that public investments tend to lead credit growth. - Public projects create business opportunities to contractors; banks provide short-term loans to suppliers based on public sector invoices. - Official payment delays and arrears may have a significant impact on banks’ solvency. ### Bank asset composition and sovereign exposure - Short-term credits to the private sector accounted for 48.6 percent of total assets at end-2015, a reduction of about six percentage points compared to end-2012. - The share of government bonds increased from 15.3 percent of total assets at end-2012 to nearly 25 percent at end-2015. - The banking sector balance sheet increased by 75 percent between 2012 and 2015. - Mali’s public sector plays a sizeable role in the real economy; most large infrastructure projects are externally financed. - Government securities from Mali account for about 26 percent of total assets in Mali banking sector in 2016, compared to 7.5 percent in 2009. - About 85 percent of Mali government bonds are issued via the UMOA-Titres agency; the secondary market for bills and bonds remains underdeveloped. - Half of Malian government securities issued via the UMOA-Titres agency are held by Malian banks. - 53.4 percent of WAEMU’s government securities held by Malian banks were Mali’s government securities (Figures 13, 14). - Cross-country holdings: Côte d’Ivoire government bonds account for 16.1 percent of Malian banks’ government bond portfolio; banks from Côte d’Ivoire hold 11.1 percent of Mali’s government bonds; banks from Burkina Faso hold 14.1 percent of Mali’s government bonds while banks from Mali hold 3.2 percent of Burkina Faso’s government bonds. ### Maturity profile of domestic debt and implications - At end-2017, Mali’s domestic debt (mostly held by Malian banks) was composed of 9 percent of short-term securities and 91 percent of medium and long-term securities (Figure 15). - A higher ratio of medium and long-term bonds could put pressure on issuance of long-term loans to the private sector due to the transformation ratio requirement. - Commercial banks often find it safer and easier to hold long-term government bonds than long-term credits to the private sector: sovereign instruments benefit from more favorable regulatory rules, rarely become nonperforming, can be used as collateral, and do not require due diligence on project viability. ### Regulatory incentives and potential reforms - WAEMU regulation applies a zero-risk weight for sovereign, irrespective of their rating. - Under the Basel II standardized approach the “highly speculative” B category is assigned a risk weight of 100 percent, but supervisors can exercise discretion and set a lower risk weight for sovereigns denominated and funded in national currency. - Government bonds and bills from Mali are denominated only in national currency. - The new regulatory capital requirements are scheduled to be phased in from January 2018 and are expected to be fully applied by end-2022. - Government securities are currently exempted from exposure requirements; the BCEAO could specify a ceiling for sovereign exposure under new regulation, which could incentivize investor diversification and put pressure on the WAEMU-debt market. ### Microfinance sector conditions - Credit-to-deposit ratio is estimated at about 217 percent in rural areas compared to 119 percent for MFIs operating in urban areas at end-2016. - MFIs must comply with a coverage ratio of medium and long-term assets to medium and long-term liabilities of 100 percent; only 6 MFIs complied with this regulatory rule in Mali at end-2016. - Total amount of credits in the MFI sector is estimated at CFAF 93 billion (4.2 percent of the financial system) at end-2016, of which CFAF 27.9 billion in rural area (30 percent of loans in the MFI sector and 1.3 percent of the financial system). - Deposits accounted for CFAF 68.5 billion (2.7 percent of the financial system), of which CFAF 12.3 billion in rural area (0.5 percent of the financial system). - In urban area, value of credits per customer is CFAF 146 thousand and value of deposits per customer is CFAF 124 thousand. - In rural area, value of credits per customer is CFAF 107 thousand and value of deposits per customer is CFAF 47 thousand. - Most MFI loans are contracted for agricultural purposes. - Financial access to savings, credits, and insurance products is seriously affected by a confidence crisis in the microfinance sector stemming from the financial distress of major MFIs in 2009 and the aftermath of the 2012 coup d’état. *cr18142 - 4. Credit to the private sector has* ### 8.9 billion CFA francs. ### 8.9 billion CFA francs. ### Microfinance sector: scale, issues, and impact - Close to 1 million microfinance clients and about 1.4 million beneficiaries. - Many low-income depositors have lost their savings and lost faith in the integrity of the system. - Total assets and deposits growth are slowly recovering, helped in part by Microcred (started operations in 2014). - Refinancing by banks and other financial institutions remains challenging. - While the sector does not appear to pose a major risk to financial stability, its weakness: - Undermines confidence by the population in financial institutions. - May be a hurdle to raising financial inclusion and ultimately economic growth. ### National Emergency Plan for Microfinance: progress and components - Progress on implementing the National Emergency Plan for Microfinance is underway. - The Minister of Economy and Finance issued ministerial orders withdrawing the licenses of MFIs that have been audited and needed to be liquidated. - The National Emergency Plan for Microfinance was adopted by the council of Ministers in March 2015; it is aligned with the regional plan adopted by the WAEMU council in 2012. - The Emergency Plan is under the responsibility of the CCS/SFD and comprises: - i) restructuring of the sector (including depositor compensation mechanism), - ii) implementation of the legal framework, - iii) capacity building for supervisory body (CCS-/SFD) and promoting body (AP/SFD), - iv) support for viable MFIs, - v) improved support to develop the infrastructure of the sector, - vi) expansion of microfinance services. - The CCS/SFD supervision program and capacity are being strengthened. ### Supervision capacity and compliance - The WAMU Banking Commission supervises large MFIs; the Malian supervisory body (CCS/SFD) remains responsible for smaller MFIs. - The CCS/SFD provides regular supervision reports to the BCEAO; the Banking Commission participates in one or two missions per year. - Supervision involves on-site and off-site inspections but is constrained by: - Insufficient resources, - Too few inspections, - Limited follow-up or monitoring. - Historical activity: - The CCS carried out about 20 supervision missions per year between 2010 and 2014. - In 2013-2014, the Banking Commission carried out 2 on-site supervision missions for large MFIs. - Off-site supervision weaknesses: - Annual statistical and financial reports must be sent six months after the end of the financial year. - In 2014, only 22 institutions submitted their annual report on time and in compliance with the requirement. - Financial penalties were decided for MFIs not respecting submission deadlines, but the decision to apply them was not taken by the Ministry. ### Leasing market: status, legal gaps, and potential - Mali’s leasing market is shallow and underdeveloped. - There is one leasing institution (Alios Leasing) specialized in leasing truck and commercial transport vehicles, and one lessor (Equibail, a division of Bank of Africa). - Leases account for less than one percent of banks and non-bank financial institutions assets at end-2016. - The share of leases has been declining in relative and absolute terms. - Legislative gap: - New legislation on leasing has not yet been adopted in Mali. - Regional WAEMU financial regulation treats leasing products as credit products, resulting in an inefficient and inappropriate legal framework. - Procedures for recovery of leased property in the event of default are cumbersome: lessors are not treated as owners of the leased property and must go through the same recovery procedures as other creditors. - Development potential: - Leasing could bridge the financing gap experienced by SMEs by providing secured and cash-flow-based financing with lower internal processing costs. - Leasing can support SME business development through vendor programs and point-of-sale financing. - Developing leasing could help deepen Mali’s capital markets by booking medium term assets that diversify investment opportunities. ### Mobile banking: rapid growth, structure, and usage patterns - Since 2013, most large Malian banks provide mobile access; some are deploying E-money services. Two mobile operators (Malitel and Orange-Mali) offer demand deposit, mobile transfer and payment services through E-money. - Key mobile banking indicators (Text Table): - Value of transactions (billions of CFAF): 2014 = 811; 2015 = 1,641; 2016 = 2,193. - Value of transactions (percent of GDP): 2014 = 11.4; 2015 = 21.2; 2016 = 26.4. - Volume of transactions (million): 2014 = 54.5; 2015 = 100.3; 2016 = 139.7. - Number of E-money accounts (million): 2014 = 3.8; 2015 = 5.1; 2016 = 6.9. - Source: BCEAO. - Mali’s share in WAEMU mobile banking (2016): - Mali accounts for roughly 20 percent of the mobile banking market in the WAEMU. - In 2016, Mali ranked third in value (CFAF 2,193 billion) and volume (139.7 million) of transactions. - WAEMU totals: total value of transactions estimated at CFAF 11,500 billion; total volume of transactions estimated at CFAF 735 million. - Mali, Burkina Faso and Côte d’Ivoire account for around 83 percent of total value and 76.6 percent of total volume of transactions in WAEMU. - E-money account activity and penetration: - Number of E-money accounts in Mali in 2016: 6.9 million accounts; only 1/3 are considered active. - About 25 percent of the working population has an active E-money account at end-2016. - An E-money account is considered active if at least one financial transaction occurred within 90 days. - Mali: 11.1 million unique mobile subscribers (penetration ratio of 60.5 percent, compared to 40 percent in 2014). - When considering only the adult population (people older than 16 years old), coverage ratio is 118.3 percent. - Mobile networks cover about 40 percent of the country. - In Mali, 26.5 percent of mobile subscribers were smartphone users at end-2016 (about 2.9 million people). - In WAEMU, the number of unique subscribers is estimated at 55 million (coverage ratio about 47 percent). ### Mobile transaction composition and behavior (2016) - Cash-In/Cash-Out: - Around 76 million cash-in/cash-out transactions (51.2 percent of total volume). - Estimated amount: CFAF 1,625 billion in Mali (74.1 percent of total value). - CFAF 868.9 billion were injected as E-money and CFAF 756.7 billion were withdrew as CFAF cash. - Net injection of E-money estimated at about 112.2 billion in 2016. - Person-to-person (P2P) transactions: - Domestic P2P captured 9.2 percent of total volume or CFAF 415.3 billion in value. - P2P transfers between Mali and other WAEMU countries are marginal (0.2 percent of P2P volume) but correspond to 22.2 percent of total value of P2P transactions. - Person-to-business (P2B) transactions: - Volume increased from 0.7 million in 2013 to nearly 5 million in 2016. - Value increased from CFAF 12.7 billion in 2013 to CFAF 100.8 billion in 2016. - In 2016, 4.98 million P2B transactions corresponded to about 3.3 percent of total volume and CFAF 100.8 million (4.6 percent of total value). - There are 921 businesses registered to carry out mobile transactions, of which 241 are considered active. - Mobile recharge transactions: - Nearly 30 percent of the mobile transactions in 2016 were for mobile recharge, corresponding to 1.5 percent of total value (CFAF 32.9 billion). - Government-to-person (G2P) transactions: - G2P transactions do not exist in a systematic way in Mali and are at best marginal. ### Inclusion, challenges, and market structure - Depth and inclusiveness: - Mali had 6.9 million E-money accounts in 2016, corresponding to 18.9 percent of all E-money accounts in WAEMU while Mali’s population represents about 15 percent of the region. - Only 2.2 million E-money accounts are considered active. - Only a few hundred accounts opened for businesses. - Gender distribution uneven: only about 1/3 of users are women. - Agents and activity: - 43,842 Cash-In/Cash-Out agents deployed in Mali (the highest number in a WAEMU country); less than 2/3 are active. - By comparison, Burkina Faso has 12,675 agents and 93 percent are active. - Competition and market evolution: - Commercial banks are entering mobile banking via partnerships with mobile operators or their own applications. - Banks and mobile operators are increasingly competing for customers; mobile operators cannot under current regulation provide remunerated deposits or loans. - Partnerships between financial institutions and mobile operators to offer credit and term deposit services are lagging: one bank-mobile operator partnership in Mali at end-2016, compared to five partnerships in Burkina Faso or in Côte d’Ivoire. - Business acceptance and merchant uptake: - In Mali, no businesses accept mobile payments through electronic payment terminals at end-2016. - Only 241 active registered businesses carry out mobile transactions (out of 921 registered). - By comparison, Burkina Faso has 5,532 registered businesses able to carry out transactions, of which 1,529 are active. - Mobile banking vs. banking and microfinance: - With about 2.2 million active E-money accounts, mobile banking has overtaken both the banking and microfinance sectors in terms of accounts within the last five years. - There are about 1.3 accounts per person in the microfinance sector and 1.3 accounts per person in the banking sector. - The microfinance crisis’ slow recovery has likely promoted the fast rise of the mobile banking sector. ### Policy-relevant observations and opportunities - Mobile banking can increase financial inclusion but does not yet cover all financial needs (credit and term deposits) necessary to boost SME-led growth. - Expanding partnerships between banks and mobile operators could enable credit and term deposit offerings to E-money account holders within BCEAO regulations. - G2P payments could increase mobile banking adoption and financial inclusion, but require: - Appropriate government communication on timing and costs for beneficiaries. - A robust and developed agent network to avoid liquidity stress and negative feedback loops in mobile banking and the overall financial system. - Enacting specific leasing legislation would: - Provide a sound legal basis and appropriate fiscal and recovery regime for leasing. - Facilitate repossession and sale of leased equipment in case of default. - Support SME access to secured term financing and help deepen capital markets. ### Financial stability: banking sector soundness indicators (selected) - The average bank capital adequacy ratio remains above the WAEMU norm of 11.5 percent. All banks but one comply with the regulatory rule. - The stock of NPLs remains stable at a relatively high level of 17 percent on average. - The provisioning rate is on a declining trend: - Yearly average provisioning rate in 2017 was 56.9 percent of NPLs compared to 66.1 in 2016, resulting in a 21 percent increase of NPLs net of provision on average. - Non-operating assets to capital remains an issue: nearly half the banks do not comply with the WAEMU norm of 15 percent of capital. - Liquidity ratio deterioration: - Aggregate liquidity ratio fell from 86.9 percent in 2016 (above WAEMU norm of 75 percent) to 67.3 percent in 2017. - Text Table: Financial Stability Indicators, 2017 - Mali – Dec. 2016: - Regulatory capital to weighted assets (percent): 14.2 - Non-performing loans to total loans (percent): 16.4 - Non-operating assets to capital (banks complying to total): 9/13 - Liquidity coverage ratio (percent): 86.9 - Return on assets (percent): 1.1 - Mali – Dec. 2017: - Regulatory capital to weighted assets (percent): 14.3 - Non-performing loans to total loans (percent): 16.7 - Non-operating assets to capital (banks complying to total): 7/13 - Liquidity coverage ratio (percent): 67.3 - Return on assets (percent): 1.4 - Memo item: WAEMU regulatory benchmarks: - Regulatory capital to weighted assets (percent): >11.5 - Non-operating assets to capital: <15 percent of capital - Liquidity coverage ratio (percent): >75 - Source: BCEAO *International Monetary Fund (extracted content).* ### 40. Asset quality appears to be relatively weak in Mali compered to benchmarked ### 40. Asset quality appears to be relatively weak in Mali compered to benchmarked countries ### Asset quality and nonperforming loans - The net NPLs to net total loans ratio has deteriorated in recent years to reach 8.2 percent in June 2017 while it has remained broadly constant in the region. - Gross nonperforming loans (NPL) and provisions to gross nonperforming loans were respectively 16.7 percent and 57.9 percent at end-2017. - These ratios include a large volume of old claims that should no longer be included in banks’ balance sheets. - The gross amount that should no longer appear on banks’ balance sheets is estimated to be at least CFAF 50 billion, which corresponds to about 13 percent of nonperforming loans at end-2016. - Without these old claims, it is estimated that NPL would be about 4 percentage points less. - The high concentration of credits, whether sound or impaired, could lead to a high volatility in the ratios as the largest banks typically have the same large borrowers. ### Credit information and access to credit - The BCEAO maintains a public credit registry that contains uncomplete and lagged negative information and current outstanding to banks. - Not only negative but also positive information enable banks to better predict default probabilities for borrowers, thus reducing portfolio risk and improving access to credits. - The adoption of the uniform regional law on credit bureaus by four Member States, including Mali, has been passed and a new private credit information bureau (BIC) is intended to fill the current information gaps in credit reporting. - However, its complete implementation is lagging and banks remain reluctant to fully participate. ### Sovereign–bank nexus - The financial health of banks and sovereigns is intertwined in a “sovereign-bank nexus” that multiplies and accelerates vulnerabilities in each sector, exacerbating risks of adverse feedback loops. - Three interaction channels identified: - (i) the sovereign-exposure channel (banks hold large amounts of sovereign debt); - (ii) the safety net channel (banks are protected by government guarantees); - (iii) the macroeconomic channel (banks’ and governments’ health affect and are affected by economic activity). - Evidence suggests that all three channels are empirically relevant. - In Mali, the macroeconomic channel remains the main driver of the sovereign-bank nexus: - In Mali’s undiversified formal economy and in the context of severe security challenges and social tensions, any economic shock in the agriculture or mining sector would immediately weaken the sovereign fiscal position as well as banking activities. - Since the real sector in Mali is often directly or indirectly related to government expenditure and large public investment programs, large fiscal imbalances would trigger a reduction in public capital expenditure and an increase in accumulated arrears vis-à-vis their suppliers. - The soundness of the banking sector would then be negatively impacted, which in turn would slow credit growth and deteriorate assets quality. ### Regulatory and supervisory framework developments - A set of ambitious regulatory reforms was adopted by the regional Council of Ministers in June 2016, including: - Adoption of Basel II and III capital standards. - Introduction of consolidated supervision (including over WAEMU-based financial holding companies). - Tightening of the large exposure limit. - Transitional implementation arrangements span from 2018 until 2022. - Key features of the Basel II and III regulations: - By end-2022, WAEMU banks must meet a minimum common equity Tier 1 capital ratio of 7.5% and a minimum total capital ratio of 11.5%, both inclusive of a 2.5% capital conservation buffer. - Additional systemic and countercyclical capital buffers, yet to be defined, will also be required. - This implies a significant step-up from the 8% minimum total capital ratio under the existing Basel I-based approach. - The denominator in these ratios will also change, due to the move to Basel II risk-weighted assets; the direction and magnitude of change will depend on banks' risk exposures. - The overall impact of the new framework will be higher capital requirements in aggregate. - The single large exposure limit was reduced to 25% of banks’ Tier 1 capital. - Other measures include: - (i) the adoption of a new banking chart of accounts; - (ii) the reorganization of the Banking Commission to integrate the monitoring of crisis resolution processes and supervision of large microfinance institutions and other specialized institutions such as mobile money firms. ### Microfinance institutions and banking system structure (selected statistics) - Microfinance system (June 2017): - Total number of microfinance institutions: 101. - Active microfinance institutions: 33 (Mutual 15; Association 15; Limited liabilities companies 3). - Active microfinance institutions members (percent): Mutual 62.5; Association 36.4; Limited liabilities companies 1.1. - Microfinance system aggregates (Est. 2013–Est. 2017): - Number of accounts: 1,140,164 (2013); 1,213,121 (2014); 1,083,060 (2015); 1,007,104 (2016); 1,065,421 (Est. 2017). - Deposits (CFAF billion): 50.0 (2013); 58.2 (2014); 62.6 (2015); 68.5 (2016); 76.8 (Est. 2017). - Credits (CFAF billion): 60.5 (2013); 73.6 (2014); 81.8 (2015); 93.7 (2016); 100.3 (Est. 2017). - Of which non-performing loans (percent): 11.5% (2013); 8.0% (2014); 6.6% (2015); 6.1% (2016); 4.9% (Est. 2017). - Banking system structure, 2016 (selected entries, values preserved exactly as reported): - All banks (13): Capital (CFAF billion) 15.1; Assets (CFAF billion) 22.3; Assets (percent of total) 62.6; Number of accounts 175.5; 4,312.7; 100.0; 1,339,486. - BDM: 40.9; 10.7; 48.3; 25.0; 710.4; 16.5; 166,720. - BMS: 22.6; 75.1; 2.3; 34.6; 611.8; 14.2; 212,671. - ECOBANK: 0.0; 6.5; 93.5; 10.0; 601.0; 13.9; 202,275. - BOA-MALI: 0.0; 14.6; 85.4; 10.3; 514.0; 11.9; 226,370. - BIM: 10.5; 38.5; 51.0; 10.0; 412.6; 9.6; 253,439. - BNDA: 36.5; 0.0; 63.5; 23.5; 407.0; 9.4; 131,441. - Banque Atlantique: 0.0; 43.0; 57.0; 11.0; 278.0; 6.4; 53,955. - CORIS: 10.0; 0.0; 90.0; 11.0; 167.5; 3.9; 6,466. - BCI: 0.0; 0.0; 100.0; 9.8; 141.4; 3.3; 7,302. - BCS: 3.3; 0.0; 96.7; 14.3; 136.9; 3.2; 24,779. - BSIC-MALI: 0.0; 0.0; 100.0; 11.0; 136.5; 3.2; 22,640. - BICI-M: 0.0; 15.2; 84.8; 5.0; 132.0; 3.1; 14,823. - Orabank (branch): -; -; -; -; 63.5; 1.5; 16,605. - All non-bank financial institutions (3): 49.9; 42.4; 7.7; 6.8; 33.8; 100.0. - FGSP: 50.1; 42.9; 7.0; 5.6; 21.3; 62.9. - FGHM: 48.9; 40.0; 11.1; 1.2; 9.4; 27.8. - SAFCA-ALIOS FINANCE (branch): -; -; -; -; 3.1; 9.2. ### Financial inclusion (selected observations) - Access to an account at a financial institution has increased in most WAEMU countries, including Mali, but remains far below benchmark levels. - Penetration of credit and debit cards remains low. - The less educated parts of the population are less likely to have an account at a financial institution. - The percent of women borrowing from financial institution is lower than that for men in Mali. *Source: IMF staff report text as presented in the supplied content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18142.pdf_