## 1mrtea2023002

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---

### Introduction and overarching conclusion
- A more flexible exchange rate would help absorb real shocks and dampen growth and financial volatility while preserving external buffers.
- Lower and more stable inflation can be achieved by an alternative monetary policy framework while fully reaping the benefits of a more flexible exchange rate.
- The reform has greater chance of success when initiated from a position of strength—external, fiscal, monetary, and financial.

### Motivations for greater exchange rate flexibility
- Mauritania is a small commodity-exporting economy exposed to terms-of-trade shocks and limited economic diversification.
- Major shocks since 2014:
  - 2014–15 drop in commodity prices (iron ore, gold, copper ore), which halved exports and widened the fiscal deficit.
  - COVID-19 shock, leading to the deepest economic contraction since 2007.
- Growth and current account:
  - Growth slowed to 1.3 percent in 2016 compared to 4.3 percent in 2014.
  - Non-extractive growth fell to 1.6 percent in 2016.
  - Over 2010–20 the current account deficit fluctuated between 3.8 percent of GDP in 2011 and 22.2 percent of GDP in 2014 with an average of 13 percent of GDP.
  - Excluding externally financed capital imports of extractive industries, the deficit stood at 3.8 percent of GDP in 2019, with a surplus of 2.2 percent of GDP achieved in 2020.
  - The current account deficit is expected to widen to 17.3 percent of GDP at end-2002 (text retained as presented).
- International reserves and FX market:
  - Adequacy threshold (2021 external sector assessment): 5.2 months of non-extractive sector imports, assuming a fixed exchange rate.
  - At end 2021, international reserves stood at 7.3 months of prospective non-extractive imports.
  - Until 2021 the official FX market had been structurally short in FX; the BCM was the main supplier of FX.
  - In 2022 the BCM increased FX interventions to cover current account transactions, reducing excess reserves from MRU11.3 billion at end-2021 to MRU2.2 billion in September 2022 (still above banks’ reserve requirements of MRU5.3 billion).
  - Premium between parallel and official market rates narrowed in 2022.

### Macro-financial transmission under a tightly managed exchange rate
- Transmission dynamics:
  - Positive external shocks → positive liquidity shocks → aggregate demand shock → overheating (if not offset by central bank operations).
  - Negative external shocks → economic contraction and negative liquidity shocks.
  - Volatile liquidity conditions without central bank offsets can cause credit boom-and-busts and encourage precautionary reserve buildup that hinders interbank market development.
- Historical BCM response:
  - During the 2014–15 commodity price shock the BCM engaged in unsterilized FX interventions, tightening liquidity, raising real interest rates, and causing a credit slowdown in 2016–17.
  - Non-performing loans (NPLs) rose significantly amid tighter liquidity.
  - Authorities implemented fiscal consolidation of 3 percent of GDP in 2016 while allowing a gradual exchange rate depreciation against the U.S. dollar and stopping direct FX sales outside the official market.

### Preconditions and critical elements for a successful transition
- Key elements:
  - An alternative nominal anchor and modern monetary policy framework.
  - Strengthened bank balance sheets and resilience to shocks.
  - Relatively developed domestic government securities and interbank money and FX markets to support monetary policy implementation and transmission and reduce reliance on external debt.
- Short-term priorities:
  - Gradually narrowing the interest rate corridor.
  - Managing liquidity more actively.
  - Addressing constraints on deepening the interbank money market.
  - Developing the government securities market.
  - Reforming the collateral framework.
  - Developing a Forecasting and Policy Analysis System (FPAS) and the central bank’s communication.
  - Accelerating reforms to create and gradually deepen the interbank FX market and support the move to greater flexibility.

### Recent institutional reforms undertaken by the authorities
- Reforms already launched:
  - 2017: BCM issued a new regulation introducing the monetary operations needed to operate an interest rate corridor system.
  - 2018: BCM initiated reform of its collateral framework and introduced a new emergency liquidity assistance (ELA) regulation.
  - July 2018: Reform of the central bank law and modernization of governance structures.
  - January 2019: New agreement between the central bank and the government on consolidation of legacy government debt ratified by parliament.
  - December 2019: BCM relaxed constraints on FX market activity by allowing the netting of bank client transactions.
  - November 2022: BCM phased out the surrender requirement of receipts from fishing exports of Mauritanian Corporation for Fish Marketing (SCMP) to accounts at the central bank.

### Costs, benefits, and trade-offs
- Benefits of greater exchange rate flexibility:
  - Reduces vulnerability to external shocks.
  - Preserves international reserves.
  - Supports competitiveness.
  - Dampens macroeconomic and financial volatility.
  - Reduces the need for sizeable fiscal adjustment.
  - Increases scope for more independent monetary policy.
- Trade-offs and risks:
  - Transition requires an alternative monetary anchor and stronger markets and financial sector resilience to avoid depreciations or destabilizing outcomes.
  - Positive FX reserve accumulation under a tight anchor would require sterilization; constrained BCM financial resources historically prevented needed liquidity-absorbing operations.
  - Rapid shifts without preparatory market and institutional development risk amplifying volatility.

### Exchange rate rigidity, reserves pressure, and passthrough to inflation
- Exchange rate rigidity:
  - A rigid exchange rate arrangement increases pressures on international reserves and can raise the risk of a disorderly exchange rate adjustment if a negative terms-of-trade shock is persistent.
  - The BCM limits exchange rate fluctuations within a narrow band (2 percent) to contain inflation pressures.
- Empirical passthrough to inflation:
  - Regression using monthly data 2014M1-2020M12 (based on Burstein and Gopinath, 2014).
  - Instantaneous passthrough is not statistically significant.
  - Long-run pass-through is 0.46.

### Monetary transmission: VAR and bank rate regressions
- VAR (2008Q1–2020Q2) key results:
  - No significant reaction of either inflation or the IPI to a policy rate shock.
  - Fourth-quarter variance decomposition of inflation:
    - 75 percent of inflation variance is explained by its own shock.
    - Shocks to economic activity can cause 19 percent of fluctuation in inflation.
    - Shocks to broad money growth explain 5.8 percent of inflation variance.
    - The policy rate plays almost no role in explaining inflation fluctuations.
  - Variance decomposition of economic activity suggests no role of broad money and a limited role of the policy rate.
- Passthrough from policy rate to bank retail rates (2014M1-2021M2 regressions):
  - Deposit-rate equation highlights (DDEPOSIT_RATE):
    - DPOLICY_RATE(-6) = -0.095683** (standard error 0.041511)
    - DPOLICY_RATE(-7) = -0.216962* (standard error 0.043135)
    - DBM_YOY = -0.014721** (standard error 0.005881)
    - DNEER(-3) = -0.045324** (standard error 0.014433)
    - DNEER(-4) = 0.046946* (standard error 0.015414)
    - DNEER(-5) = -0.047704* (standard error 0.014337)
    - DNEER(-6) = 0.030858** (standard error 0.014329)
    - DNEER(-10) = -0.058496* (standard error 0.014626)
    - DGOLDP(-4) = -0.000646*** (standard error 0.000329)
    - DIRONOREP(-4) = -0.005824* (standard error 0.002072)
    - DIRONOREP(-11) = -0.004011** (standard error 0.001941)
    - R-squared = 0.549730; Adjusted R-squared = 0.478259
  - Lending-rate equation highlights (DLENDING_RATE):
    - DPOLICY_RATE(-4) = 0.144375* (standard error 0.048164)
    - DNEER(-1) = -0.047343* (standard error 0.015422)
    - DNEER(-10) = 0.036112** (standard error 0.016357)
    - DOILP(-5) = 0.009494* (standard error 0.002691)
    - D(GOLDP) = 0.000817** (standard error 0.000374)
    - R-squared = 0.292115; Adjusted R-squared = 0.251664
  - Interpretation: Some transmission exists from the BCM’s policy rate to bank deposit and lending rates: β4 is statistically significant in the lending-rate equation and β6 and β7 are statistically significant in the deposit-rate equation.

### Balance sheet effects, liquidity, and structural changes
- FX and bank vulnerabilities:
  - Large depreciations can impact banks’ capital ratios and raise solvency concerns due to sizeable short FX NOPs that have been large since 2018 and widened since end-2019, with further widening due to increasing prices of imported food and energy.
  - Short FX NOPs widened to 53.2 percent of bank’s capital in March-2022 before narrowing to 38 percent in September 2022.
  - FX NOPs limits are 20 percent for all currencies and 10 percent per currency.
  - Short FX NOPs are mostly related to letters of credit, widened since 2019 following the drop in fishing exports, and increased further with higher global food and energy prices.
  - Recommendation: BCM should enforce better compliance with NOP limits.
- Structural liquidity events:
  - Mandatory use of bank accounts in 2018 and the currency redenomination at 1:10 in January 2018 coincided with a sharp rise in broad money growth and increase in the money multiplier in 2018.
  - Reserve money started growing faster than broad money during the second half of 2020, mainly due to gold purchases by the BCM.
  - CIC and bank reserves decreased in 2022 with the start of mobile banking activities and increasing FX interventions by the BCM.
- Liquidity distribution and constraints:
  - Banking system historically in surplus (positive structural liquidity position) but liquidity is unevenly distributed and constrained for some banks.
  - Banks hoard liquidity due to lack of available collateral (treasury bills) for interbank transactions and the constraint of maintaining excess reserves to access the official FX market.

### Monetary policy framework: limitations and policy directions
- Current limitations:
  - The BCM is not a conventional monetary targeter; monetary operations are not conducted with the objective of keeping bank reserves consistent with periodic targets that achieve stable inflation.
  - Monetary operations do not target steering a short-term interbank rate close to the policy rate.
  - Absence of active liquidity management and a narrow mid-corridor system constrains interbank market trading.
  - Shallow interbank market and limited High Quality Liquid Assets (HQLAs) in banks’ balance sheets limit implementation and transmission of an interest-rate based monetary policy.
  - Mauritania’s monetary policy framework is classified under “other” by the AREAER since 2010.
- Policy recommendations:
  - Use active liquidity management so banks can borrow (place) liquidity with the central bank in case of unexpected negative (positive) liquidity shock.
  - Develop a daily benchmark interbank rate to activate the first stage of transmission.
  - Strengthen the monetary policy framework—modern frameworks (adopting inflation targeting and having an independent and transparent central bank) can improve effectiveness.
  - Make more active use of the policy rate as an operational instrument.

### Operational and institutional prerequisites for transition
- Institutional building blocks:
  - Developing a deep and liquid FX market.
  - Formulating an intervention strategy consistent with the new exchange rate regime.
  - Establishing an alternative nominal anchor in the context of a new monetary policy framework and developing supportive markets.
  - Reviewing exchange rate exposures and building capacity of market participants and supervisory authorities to manage, regulate, and monitor exchange rate risks.
- Operational requirements:
  - Effective implementation of a narrower interest rate mid-corridor system using instruments introduced in 2017 (7-day main refinancing operations, BCM deposit auctions and bills, overnight standing lending and deposit facilities, fine-tuning and long-term operations, reserve requirements).
  - Address sterilization costs and lack of monetary policy collateral that limit active use of these tools.
  - Follow IMF guidance embodied in seven principles for LICs and developing countries with evolving frameworks.

### Sequencing, international experience, and BCM reforms to deepen FX markets
- International lessons:
  - Successful transitions often used currency baskets, crawling bands, or gradual widening of bands (examples: Chile, Poland, Morocco, Russia, Poland, Morocco).
  - FX spot markets typically develop first, followed by derivatives, and market deepening often begins after some exchange rate flexibility.
  - Central banks supported market development by widening bands, reducing market-making roles, removing trading obstacles, and upgrading infrastructure.
- BCM sequencing and remaining reforms:
  - Launched preparatory work to set up technical platform for interbank FX transactions.
  - December 2019: allowed netting of bank client transactions.
  - November 2022: phased out surrender requirement of SCMP fishing export receipts.
  - Remaining steps:
    - Allow interbank FX transactions by adopting new regulation and establishing related technical platform.
    - Deepen the interbank FX market by allowing fluctuations within a larger volatility band.
    - Move to fully competitive multiple price FX auctions.
    - Design an intervention rule and transition to a fully market-determined exchange rate.
    - Eliminate market-inhibiting regulations, improve market microstructure, increase flow of information, reduce central bank market maker role, and avoid excessive smoothing.

### Climate change impacts, vulnerabilities, and adaptation priorities
- Climate trends and hazards:
  - Annual temperatures increased by about 0.75° C on average over the past three decades.
  - Mauritania is one of the 10 in the MENA region that has more than 100 days of extreme heat per year.
  - Rain variability has been much higher than the average for emerging and developing economies in the last two decades.
  - Average frequency of droughts and floods has increased; 2017 drought affected 91 percent of the population; 2021 drought led to 20 percent of the population impacted by acute food insecurity.
  - From 2000-2020, on average, almost 10 percent of the population has been impacted by climate hazards.
  - Human climate-related losses: about 0.15 percent of the population have died due to climate hazards.
- Economic impacts:
  - If a drought intensifies by 10 percentage points, medium-term annual per capita growth can decline by almost 0.8 to 1 percentage points in Mauritania.
  - Intensification of floods by 10 percentage points takes one-fifth to one-fourth the toll on medium-term growth compared to droughts.
  - A temperature increase of one degree Celsius would lead to an immediate two percentage point drop in per capita economic growth.
- Adaptation and mitigation priorities:
  - Develop a national adaptation plan (NAP) with policy priorities.
  - Enhance domestic revenue mobilization and gradually reduce untargeted energy subsidies.
  - Establish a medium-term gender and climate responsive budget with a defined fiscal anchor linked to NAP priorities.
  - Improve access to finance, health, electricity, and telecommunication to offset medium-term growth losses.
- Climate financing needs and projects:
  - Authorities’ NDCs: adaptation needs could amount to up to US$10.6 billion over 2021–30, or an average annual investment of 12 percent of 2021 GDP.
  - World Bank estimate: NDC adaptation investments (if financed through public resources) would absorb an average of 69 percent of annual tax revenues between 2023-30 under a medium-growth scenario.
  - Historical external adaptation commitments (2010-2020): $500 million (majority grants, rest concessional loans); main donors: EU Institutions 21%, World Bank 20%, Germany 16%, Islamic Development Bank 9%, France 7%, Others 27%.
  - Green hydrogen AMAN project:
    - Target: build 30GW of hybrid generation capacity (18 GW wind and 12 GW solar).
    - Estimated generation at full capacity: 110 TWh per annum.
    - Potential hydrogen/ammonia output: 1.7 mtpa of green hydrogen or 10 mtpa of green ammonia.
    - Estimated capital investment: US$40 billion over the next 8 to 10 years, to be entirely funded by private foreign direct investment.

### Gender and climate vulnerabilities and policy responses
- Gender disparities:
  - Women have on average about two fewer years of schooling than men.
  - Literacy: 43 percent of women versus 64 percent of men.
  - Financial inclusion: 14 percent of women have an account at a financial institution versus 26 percent of men.
  - Gender gap in saving behavior: 37 percent for women versus 46 percent for men.
- Social impacts and programs:
  - Migration pressures: around 90.000 Malian refugees in the Hodh Chargui region.
  - Government cash transfer programs:
    - Elmaouna and Tekavoul choc reached a total of 69.000 households in 2022.
- Resilience gains from structural reforms:
  - Better access to electricity can halve the majority of the medium-term economic loss from a drought.
  - Access to finance contributes to halving a small proportion of the drought-related loss.
  - The bulk of medium-term growth loss from floods could be avoided with better health care, followed by access to finance and telecommunication.
- Policy recommendations:
  - Develop and implement an integrated NAP; refine adaptation priorities and link with macro-fiscal framework.
  - Enhance domestic revenue mobilization, consider carbon taxation.
  - Improve expenditure efficiency and adopt medium-term gender and climate responsive budgeting.
  - Target climate-resilient infrastructure investment (estimated need: 2 percent of GDP annually per 2020 Fiscal Monitor).
  - Expand renewable energy and develop enabling legislation for green hydrogen.
  - Mobilize concessional external financing and crowd-in private investment; pursue partnerships with climate funds.
  - Strengthen disaster preparedness, social safety nets, and develop climate insurance (improving weather data and meteorological services).

*Prepared by IMF staff; excerpted from the Selected Issues Paper and IMF country report material contained in the supplied PDF.*

### 1. Definitions of Monetary Policy Frameworks ______________________________________________ 19

### 1. Definitions of Monetary Policy Frameworks ______________________________________________ 19

### Introduction and overarching conclusion
- A more flexible exchange rate would help absorb real shocks and dampen growth and financial volatility while preserving external buffers.
- Lower and more stable inflation can be achieved by an alternative monetary policy framework while fully reaping the benefits of a more flexible exchange rate.
- The reform has greater chance of success when initiated from a position of strength—external, fiscal, monetary, and financial.

### Motivations for greater exchange rate flexibility
- Mauritania is a small commodity-exporting economy exposed to terms-of-trade shocks and limited economic diversification.
- Major shocks since 2014:
  - 2014–15 drop in commodity prices (iron ore, gold, copper ore), which halved exports and widened the fiscal deficit.
  - COVID-19 shock, leading to the deepest economic contraction since 2007.
- Growth outcomes and volatility:
  - Growth slowed to 1.3 percent in 2016 compared to 4.3 percent in 2014.
  - Non-extractive growth fell to 1.6 percent in 2016.
- Current account behavior:
  - Over 2010–20 the current account deficit fluctuated between 3.8 percent of GDP in 2011 and 22.2 percent of GDP in 2014 with an average of 13 percent of GDP.
  - When excluding externally financed capital imports of extractive industries, the deficit stood at 3.8 percent of GDP in 2019, with a surplus of 2.2 percent of GDP achieved in 2020.
  - The current account deficit is expected to widen to 17.3 percent of GDP at end-2002 (textual source year retained as presented).
- International reserves:
  - Adequacy threshold (2021 external sector assessment): 5.2 months of non-extractive sector imports, assuming a fixed exchange rate.
  - At end 2021, international reserves stood at 7.3 months of prospective non-extractive imports.
- Official FX market and rationing:
  - Until 2021 the official FX market had been structurally short in FX; the BCM was the main supplier of FX.
  - In 2022 the BCM increased FX interventions to cover current account transactions, reducing excess reserves from MRU11.3 billion at end-2021 to MRU2.2 billion in September 2022 (still above banks’ reserve requirements of MRU5.3 billion).
  - Premium between parallel and official market rates narrowed in 2022.

### Macro-financial transmission under a tightly managed exchange rate
- Tightly managed exchange rate effects:
  - Positive external shocks → positive liquidity shocks → aggregate demand shock → overheating (if not offset by central bank operations).
  - Negative external shocks → economic contraction and negative liquidity shocks.
  - Volatile liquidity conditions without central bank offsets can cause credit boom-and-busts and encourage precautionary reserve buildup that hinders interbank market development.
- Historical BCM response and outcomes:
  - During the 2014–15 commodity price shock the BCM engaged in unsterilized FX interventions, tightening liquidity, raising real interest rates, and causing a credit slowdown in 2016–17.
  - Non-performing loans (NPLs) rose significantly amid tighter liquidity.
  - Authorities implemented fiscal consolidation of 3 percent of GDP in 2016 while allowing a gradual exchange rate depreciation against the U.S. dollar and stopping direct FX sales outside the official market.

### Preconditions and critical elements for a successful transition
- Key elements for a successful transition to greater exchange rate flexibility:
  - An alternative nominal anchor and modern monetary policy framework.
  - Strengthened bank balance sheets and resilience to shocks.
  - Relatively developed domestic government securities and interbank money and FX markets to support monetary policy implementation and transmission and reduce reliance on external debt.
- Short-term focus and critical remaining steps include:
  - Gradually narrowing the interest rate corridor.
  - Managing liquidity more actively.
  - Addressing constraints on deepening the interbank money market.
  - Developing the government securities market.
  - Reforming the collateral framework.
  - Developing a Forecasting and Policy Analysis System (FPAS) and the central bank’s communication.
  - Accelerating reforms to create and gradually deepen the interbank FX market and support the move to greater flexibility.

### Recent institutional reforms undertaken by the authorities
- Reforms already launched:
  - 2017: BCM issued a new regulation introducing the monetary operations needed to operate an interest rate corridor system.
  - 2018: BCM initiated reform of its collateral framework and introduced a new emergency liquidity assistance (ELA) regulation.
  - July 2018: Reform of the central bank law and modernization of governance structures.
  - January 2019: New agreement between the central bank and the government on consolidation of legacy government debt ratified by parliament.
  - December 2019: BCM relaxed constraints on FX market activity by allowing the netting of bank client transactions.
  - November 2022: BCM phased out the surrender requirement of receipts from fishing exports of Mauritanian Corporation for Fish Marketing (SCMP) to accounts at the central bank.

### Costs, benefits, and trade-offs highlighted
- Benefits of greater exchange rate flexibility:
  - Reduces vulnerability to external shocks.
  - Preserves international reserves.
  - Supports competitiveness.
  - Dampens macroeconomic and financial volatility.
  - Reduces the need for sizeable fiscal adjustment.
  - Increases scope for more independent monetary policy.
- Trade-offs and risks:
  - Transition requires an alternative monetary anchor and stronger markets and financial sector resilience to avoid depreciations or destabilizing outcomes.
  - Positive FX reserve accumulation under a tight anchor would require sterilization; constrained BCM financial resources historically prevented needed liquidity-absorbing operations.
  - Rapid shifts without preparatory market and institutional development risk amplifying volatility.

*Prepared by Mariam El Hamiani Khatat. Extracted from the Selected Issues Paper: “Moving to Greater Exchange Rate Flexibility in Mauritania: Why, When, and How?”.*

### 16.      The rigid exchange rate arrangement exacerbated pressures on international

### 16.      The rigid exchange rate arrangement exacerbated pressures on international reserves

### Exchange rate rigidity and vulnerability
- A rigid exchange rate arrangement increases pressures on international reserves and can raise the risk of a disorderly exchange rate adjustment with adverse consequences on monetary and financial stability if a negative terms-of-trade shock is more persistent than expected.
- The premium between the official and parallel market exchange rate is usually low but may increase if the exchange rate is persistently misaligned.
- Exchange rate band: the BCM limits exchange rate fluctuations within a narrow band (2 percent) to contain inflation pressures.

### Benefits of more exchange rate flexibility
- A more flexible exchange rate would reduce the economy’s vulnerability to external shocks and preserve international reserves.
- Countries heavily reliant on a single commodity or a group of commodities need more exchange rate flexibility to respond to changes in world commodity prices (Husain, 2006).
- Allowing the exchange rate to absorb terms-of-trade shocks reduces the need for significant fiscal adjustments because exchange rate flexibility plays a counter-cyclical role: a negative external shock would depreciate the exchange rate, encouraging exports while constraining imports, thereby dampening the shock’s contractionary effect on banking system liquidity, credit, and absorption.
- Depreciation is not expected to lead to higher inflation if an effective alternative nominal anchor is in place.

### Exchange rate passthrough to inflation (empirical assessment)
- Data and methods:
  - Regression estimated using monthly data over the period 2014M1-2020M12, based on Burstein and Gopinath (2014).
  - Variables: log CPI (CPI_t), log ouguiya per U.S. dollar exchange rate (EX_t), control variables including broad money, and oil, iron ore, and gold prices.
  - 훽0 measures instantaneous passthrough; Β = sum_{k=0}^T 훽_k with T typically set at 2 years for long-term passthrough.
- Findings:
  - The instantaneous passthrough is not statistically significant.
  - The long-run pass-through is 0.46.

### Monetary transmission: VAR and impulse-response results
- VAR specification:
  - Period: 2008Q1–2020Q2.
  - Variables: Index of Industrial Production (IPI), Inflation (INFLATION), the BCM’s policy rate (POLICY_RATE), broad money (BM).
  - Oil, iron ore and gold prices included as exogenous variables.
  - Impulse responses generated with a Cholesky decomposition.
- Key empirical findings:
  - No significant reaction of either inflation or the IPI to a policy rate shock.
  - Variance decomposition of inflation in the short-run (fourth quarter):
    - (1) 75 percent of inflation variance is explained by its own shock.
    - (2) Shocks to economic activity can cause 19 percent of fluctuation in inflation.
    - (3) Shocks to broad money growth explain 5.8 percent of inflation variance.
    - (4) The policy rate plays almost no role in explaining inflation fluctuations.
  - Variance decomposition of economic activity suggests no role of broad money and a limited role of the policy rate in explaining fluctuations in economic activity.

### Passthrough from the policy rate to bank retail rates (regression results)
- Data and methods:
  - Regressions estimated over the period 2014M1-2021M2.
  - Dependent variables: change in average deposit rate and change in average lending rate.
  - Controls: broad money growth, NEER, and gold, iron ore, and oil prices.
- Findings from Tables:
  - Deposit rate regression (dependent variable: Change in average deposit rate, DDEPOSIT_RATE):
    - Change in the policy rate at t-6 (DPOLICY_RATE(-6)) = -0.095683** (standard error 0.041511)
    - Change in the policy rate at t-7 (DPOLICY_RATE(-7)) = -0.216962* (standard error 0.043135)
    - Change in broad money growth at t-1 (DBM_YOY) = -0.014721** (standard error 0.005881)
    - Change in NEER at t-3 (DNEER(-3)) = -0.045324** (standard error 0.014433)
    - Change in NEER at t-4 (DNEER(-4)) = 0.046946* (standard error 0.015414)
    - Change in NEER at t-5 (DNEER(-5)) = -0.047704* (standard error 0.014337)
    - Change in NEER at t-6 (DNEER(-6)) = 0.030858** (standard error 0.014329)
    - Change in NEER at t-6 (DNEER(-10)) = -0.058496* (standard error 0.014626)
    - Change in gold price at t-4 (DGOLDP(-4)) = -0.000646*** (standard error 0.000329)
    - Change in iron ore price at t-4 (DIRONOREP(-4)) = -0.005824* (standard error 0.002072)
    - Change in iron ore price at t-11 (DIRONOREP(-11)) = -0.004011** (standard error 0.001941)
    - R-squared = 0.549730; Adjusted R-squared = 0.478259
  - Lending rate regression (dependent variable: Change in average lending rate, DLENDING_RATE):
    - Change in the policy rate at t-4 (DPOLICY_RATE(-4)) = 0.144375* (standard error 0.048164)
    - Change in NEER at t-1 (DNEER(-1)) = -0.047343* (standard error 0.015422)
    - Change in NEER at t-10 (DNEER(-10)) = 0.036112** (standard error 0.016357)
    - Change in oil price at t-5 (DOILP(-5)) = 0.009494* (standard error 0.002691)
    - Change in gold price D(GOLDP) = 0.000817** (standard error 0.000374)
    - R-squared = 0.292115; Adjusted R-squared = 0.251664
- Interpretation:
  - Some transmission exists from the BCM’s policy rate to bank deposit and lending rates: 훽4 is statistically significant in the lending-rate equation and 훽6 and 훽7 are statistically significant in the deposit-rate equation.

### Balance sheet effects, liquidity, and structural changes
- Balance sheet effects:
  - Large depreciations can impact banks’ capital ratios and raise solvency concerns due to sizeable short FX NOPs (net open positions) that have been large since 2018 and widened since end-2019, with further widening due to increasing prices of imported food and energy.
  - In the absence of alternative investment options, banks’ most profitable activity is import financing through letters of credit.
  - Historically banks held government securities, but a significant drop in yields caused many banks to reduce or eliminate these holdings.
- Structural breaks in the money multiplier and related events:
  - Mandatory use of bank accounts in 2018 and the change in currency and its redenomination at a rate of 1:10 in January 2018 coincided with a sharp rise in broad money growth and increase in the money multiplier in 2018.
  - Structural breaks also occurred in 2020 and 2022:
    - Reserve money started growing faster than broad money during the second half of 2020, mainly due to gold purchases by the BCM.
    - CIC and bank reserves decreased in 2022 with the start of mobile banking activities and increasing FX interventions by the BCM.
  - The 2018 reduction in reserve money growth and simultaneous acceleration of broad money was driven by an influx of demand deposits owing to the mandatory use of bank accounts for exchanging large amounts of old currency into the new one.
- Liquidity distribution and constraints:
  - The overall banking system has been historically in surplus as assessed by the positive structural liquidity position, but liquidity is unevenly distributed and constrained for some banks.
  - Banks hoard liquidity due to lack of available collateral (treasury bills) for interbank transactions and the constraint of maintaining excess reserves to access the official FX market.
  - Structural liquidity position was volatile: contracted in early 2020 with the COVID-19 shock, eased in the second half of 2020 with accumulation of FX reserves, and contracted again in 2022 with increasing FX interventions.

### Monetary policy framework: limitations and recommended directions
- Current framework and limitations:
  - The BCM is not a conventional monetary targeter; monetary operations are not conducted with the objective of keeping bank reserves consistent with periodic targets that achieve stable inflation.
  - The BCM limits exchange rate fluctuations within a narrow band (2 percent) and recently used its policy rate as an additional instrument, increasing it by 200 basis points in August 2022.
  - Key ingredients for a price-based monetary policy are not fully in place:
    - Monetary operations do not target steering a short-term interbank rate close to the policy rate.
    - Absence of active liquidity management and a narrow mid-corridor system constrains interbank market trading.
    - Shallow interbank market and limited High Quality Liquid Assets (HQLAs) in banks’ balance sheets limit implementation and transmission of an interest-rate based monetary policy.
    - Modes of fiscal financing limit the availability of HQLAs and development of a sovereign bond market needed to support formation of a benchmark yield curve.
  - Mauritania’s monetary policy framework is classified under “other” by the AREAER since 2010, leaving the BCM without a clear nominal anchor and exposing the economy to the risk of unanchored inflation expectations in the event of a disorderly exchange rate adjustment.
- Policy directions to strengthen monetary transmission and anchor inflation expectations:
  - Use active liquidity management to provide comfort to banks that they can borrow (place) liquidity with the central bank in case of unexpected negative (positive) liquidity shock; this would reduce the incentive to hold excess reserves and encourage interbank trading.
  - Develop a daily benchmark interbank rate to activate the first stage of transmission from the policy rate to the interbank rate.
  - Strengthen the monetary policy framework—modern frameworks (adopting inflation targeting and having an independent and transparent central bank) matter for monetary transmission and can improve effectiveness, possibly more than financial development (Brandao-Marques and others, 2020).
  - Make more active use of the policy rate as an operational instrument, as evidence from Tunisia shows stronger interest rate transmission when the central bank uses its policy rate more actively (El Hamiani Khatat, End, and Kolsi, 2020).

*Source: Chapter 16, Islamic Republic of Mauritania — IMF staff analysis and calculations.*

### Box 1. Definitions of Monetary  Policy Frameworks

### Box 1. Definitions of Monetary Policy Frameworks

### Definitions of frameworks
- The IMF AREAER defines three monetary policy frameworks with a clearly identified nominal anchor: (1) Exchange Rate Anchor; (2) Monetary Aggregate Target; and (3) Inflation Targeting Framework (IMF, 2020). Countries that have no explicitly stated nominal anchor but rather monitor various indicators in conducting monetary policy are classified under “other” by the AREAER.
- Exchange Rate Anchor:
  - The monetary authority buys or sells FX to maintain the exchange rate at its predetermined level or within a range.
  - The exchange rate serves as the nominal anchor or intermediate target of monetary policy.
  - Associated arrangements: exchange rate arrangements with no separate legal tender, currency board arrangements, pegs (or stabilized arrangements) with or without bands, crawling pegs (or crawl-like arrangements), and other managed arrangements.
- Monetary Aggregate Target:
  - The monetary authority uses its instruments to achieve a target growth rate for a monetary aggregate (e.g., reserve money, M1, or M2).
  - The targeted aggregate becomes the nominal anchor or intermediate target of monetary policy.
- Inflation Targeting:
  - Involves the public announcement of numerical targets for inflation, with an institutional commitment by the monetary authority to achieve these targets, typically over a medium-term horizon.
  - Key features: increased communication with the public and markets about plans and objectives; increased accountability of the central bank for achieving its inflation objectives.
  - Monetary policy decisions are often guided by the deviation of forecasts of future inflation from the announced inflation target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.

### Monetary policy frameworks — building blocks and prerequisites for flexibility
- Macrofinancial conditions supporting greater exchange rate flexibility include:
  - Balanced current account.
  - Absence of significant exchange rate misalignment.
  - Monetary and fiscal discipline.
- Institutional building blocks include:
  - Developing a deep and liquid FX market.
  - Formulating an intervention strategy consistent with the new exchange rate regime.
  - Establishing an alternative nominal anchor in the context of a new monetary policy framework and developing supportive markets.
  - Reviewing exchange rate exposures and building capacity of market participants and supervisory authorities to manage, regulate, and monitor exchange rate risks (Ötker-Robe and others, 2007).
- Two important elements when transitioning to greater exchange rate flexibility:
  - (1) Macroeconomic conditions: flexibility reduces vulnerability to external shocks, preserves international reserves, supports competitiveness, and dampens macroeconomic and financial volatility; a flexible exchange rate doesn’t imply higher inflation when fiscal dominance is curtailed and the monetary policy framework is strong.
  - (2) Institutional capacity: requires strong track record, sound liquidity management, modeling and forecasting capabilities, and a stable financial system supporting monetary policy implementation and transmission.
- Countries may adopt pegs or tightly managed exchange rates even when macroeconomic criteria fail, to borrow credibility or when institutional capacity for flexibility is still developing (Levy-Yeyati and Struzenegger, 2010; and El Hamiani Khatat and Veyrune, 2019).

### Conditions for an orderly transition
- Supportive conditions:
  - Balanced current account.
  - Adequate FX reserve buffers.
  - Absence of significant exchange rate misalignment.
- FX market state reflects broader macro-financial conditions:
  - Central bank accumulation of FX reserves by buying FX on a well-functioning official FX market is reflective of lower depreciation pressures and supports introduction of fully competitive FX auctions.
  - Depleted international reserves, sizeable current account deficit, and excess demand for FX are not supportive to multiple price FX auctions as market participants may bid at a more depreciated exchange rate than the central bank is willing to accept.
- Fiscal policy role:
  - Prudent fiscal policy helps contain aggregate demand and imports, supporting a more balanced current account and smoother transition.
  - In Mauritania, confinement measures and economic slowdown resulted in a fiscal surplus in 2020 and 2021; fiscal discipline should be preserved to maintain fiscal space for social spending and evolve to a more flexible exchange rate.

### Operational and institutional requirements for transition
- Alternative nominal anchor and redesign of monetary policy framework are required for transition.
  - Credible monetary policy framework needed to stabilize expectations and maintain/regain credibility.
  - Many successful transitions favored inflation targeting over monetary targeting, but inflation targeting requires extensive preparation, capacity, and credibility building (Ötker-Robe and others 2007).
- Effective implementation of a narrower interest rate mid-corridor system is key:
  - The BCM introduced in 2017 instruments to operate a mid-corridor system (7-day main refinancing operations, BCM deposit auctions and bills, overnight standing lending and deposit facilities, fine-tuning and long-term operations, reserve requirements).
  - These tools are not actively used due to sterilization cost and lack of monetary policy collateral.
  - Banks’ short-term refinancing in Mauritania is constrained in both the interbank market and central bank refinancing, creating incentives for banks to accumulate excess liquidity (Blotevogel, 2013).
- IMF guidance:
  - Monetary policy design and implementation could be guided by the seven principles in IMF (2015b) for LICs and other developing countries with evolving frameworks.

### Box 2 — Principles for Evolving Monetary Policy Frameworks (summary)
- Principle I:
  - Central bank should have a clear mandate in law, operational independence, effective governance, and accountability; free from fiscal dominance and political pressures.
- Principle II:
  - Price stability should be the primary or overriding objective of monetary policy over the medium term.
- Principle III:
  - Central bank should have a medium-term inflation objective as the cornerstone for policy actions and communications; the numerical inflation objective should be distinct from near-term forecasts and modified only rarely.
- Principle IV:
  - Central bank should weigh implications of policy adjustments for macroeconomic activity and financial stability, considering output, unemployment, exchange rate, credit, and asset prices, without undermining the medium-term inflation objective.
- Principle V:
  - Central bank should have an effective operational framework, choose an operating target, and align market conditions with the announced policy stance to support money market functioning and predictable short-term funding.
- Principle VI:
  - Central bank should have a transparent forward-looking strategy reflecting assessments of transmission mechanism, an economic outlook, a policy path consistent with the inflation objective, and contingency plans; assess usefulness of intermediate targets.
- Principle VII:
  - Central bank communications should be transparent and timely, explaining past outcomes and actions necessary to align expected inflation with the policy objective, and explaining deviations and remedial actions.

### Financial sector vulnerabilities and required actions
- Banks’ FX NOPs:
  - Short FX NOPs widened to 53.2 percent of bank’s capital in March-2022 before narrowing to 38 percent in September 2022.
  - FX NOPs limits are 20 percent for all currencies and 10 percent per currency.
  - Short FX NOPs are mostly related to letters of credit, widened since 2019 following the drop in fishing exports, and increased further with higher global food and energy prices.
  - Short FX NOPs can pose risks to financial stability in the case of disorderly exchange rate adjustment.
  - Recommendation: BCM should enforce better compliance with NOP limits to mitigate risks and increase banks’ resilience to exchange rate shocks; strengthening banks’ balance sheets is crucial to foster market deepening and allow implementation of an alternative monetary policy anchor.

### Sequencing and international experience
- Experience varies: some countries pursued cautious and gradual approaches, building supportive elements; others exited under market pressure and external imbalances with little preparation.
- Countries cited that achieved gradual orderly transition: Chile and Poland — gradual increases in exchange rate flexibility helped FX market deepening and eventual exit to a free float with explicit inflation target (Ötker-Robe and others, 2007).
- Fiscal dominance often undermined capacity to operate under flexible exchange rates by generating excess liquidity, accelerating depreciation and FX reserve depletion, weakening monetary implementation and interest-rate based policy.
- Mauritania can successfully allow gradual exchange rate flexibility if well-planned and supported by:
  - An independent central bank with an alternative monetary policy framework.
  - A sound financial sector.
  - A well-planned gradual path toward flexibility.
  - Balanced macroeconomic conditions.
  - Supportive fiscal policy.
- Failures to achieve smooth transitions commonly involved: overvalued exchange rates, distorted FX markets, sizeable parallel market premia, lack of central bank independence and alternative framework, expansionary monetary and fiscal policies, fiscal dominance, and rapid unplanned transitions under unfavorable macro-financial conditions.

*Source: Excerpt from IMF country report material contained in the supplied content.*

### 44.      Countries that have achieved a successful transition have often implemented a

### 44.      Countries that have achieved a successful transition have often implemented a

### Exchange-rate transition experience and sequencing
- Successful transitions often implemented a currency basket (examples: Russia, Poland, Morocco).
- Transitional approaches observed:
  - Moving from a peg to a single currency to a basket in a first phase, then gradual widening of exchange rate bands in a second phase (El Hamiani Khatat, Buessing-Loercks, and Fleuriet 2020).
  - Crawling arrangements along the road (example: Poland).
  - Gradual widening of exchange rate bands (example: Morocco) (Figure 12).
- Early stages typically featured a shallow interbank FX market dominated by the central bank; the central bank’s fixing mechanism was gradually reduced (fixing formally ended in Poland in 1999).
- Market development often began only after some exchange rate flexibility:
  - Chile: after widening of the band to ±5 percent.
  - Poland: after adoption of a crawling band with a ±7.0 percent width.
- Market evolution pattern:
  - FX spot market developed first, followed by derivatives markets.
  - In Poland, FX market development occurred in conjunction with other financial markets and was supported by scope for greater exchange rate flexibility.

### Central bank roles in market development
- Central banks stimulated market development by:
  1. Widening trading bands.
  2. Reducing their market role by ceasing to be a single market maker and ending fixing interventions (Czech Republic, Poland) or discontinuing narrower inner bands or undeclared target levels (Poland, Uruguay).
  3. Removing obstacles to market activity and eliminating limits to market access (Chile); liberalizing the bank-client market (Czech Republic); encouraging interbank trading (Czech Republic, Uruguay).
- Central banks also upgraded infrastructure to support markets.
- Gradual increase in exchange rate flexibility raised awareness of FX risks and helped development of derivatives markets (Chile, Czech Republic, Poland) (Ötker-Robe and others, 2007).

### Reforms and sequencing proposed for Mauritania (BCM)
- BCM actions already taken:
  - Launched preparatory work to set up technical platform for interbank FX transactions.
  - December 2019: allowed netting of bank client transactions.
  - November 2022: phased out the surrender requirement of receipts from fishing exports of SCMP to accounts at the central bank.
- Remaining reforms to support transition to greater exchange rate flexibility:
  - Allow interbank FX transactions by adopting new regulation and establishing related technical platform.
  - Deepen the interbank FX market by allowing fluctuations of the exchange rate within a larger volatility band.
  - Move to fully competitive multiple price FX auctions.
  - Design an intervention rule.
  - Transition to a fully market-determined exchange rate.
- Reform focus to deepen FX markets:
  - Eliminate market-inhibiting regulations.
  - Improve market microstructure.
  - Increase flow of information in the market.
  - Reduce the central bank market maker role.
  - Avoid excessive smoothing so as not to inhibit nascent markets or useful market signals (Ötker-Robe and others 2007).
- When sufficient experience and interbank FX market emergence occur, BCM intervention strategy could evolve from stabilizing the exchange rate to managing volatility of the market-determined exchange rate using an intervention rule (Figure 13).

### Macroeconomic and institutional conclusions and recommendations
- Macroeconomic benefits of more flexible exchange rate for Mauritania:
  - Ensures consistency between exchange rate and fundamentals.
  - Helps absorb real shocks and dampen growth and financial volatility while preserving external buffers.
  - Enhances competitiveness and provides greater monetary policy autonomy and flexibility in responding to shocks.
- Key risks during transition:
  - Rising inflation volatility.
  - FX risks.
  - External debt.
- Mitigating measures:
  - Achieve lower and more stable inflation with an alternative monetary policy framework.
  - Mitigate public and financial sector FX risk exposures by deepening the domestic government securities’ market and tightening FX NOPs.
- Institutional prerequisites and preparation:
  - Adopt an alternative nominal anchor.
  - Effectively implement a corridor system.
  - Ensure a sound financial sector and well-functioning money and FX markets.
  - Short-term preparation: narrow the interest rate corridor and deepen interbank money, FX, and government securities’ markets to strengthen monetary policy implementation and transmission and allow switch to an alternative monetary policy anchor.
  - BCM should further develop macro-forecasting models and monetary policy communication.
- Sequencing and timing:
  - Gradual transition should be carefully sequenced.
  - Appropriate timing should consider supporting macrofinancial conditions and institutional requirements.
- Overall assessment:
  - Mauritania should be able to successfully transition to greater exchange rate flexibility if well-planned and supported by institutional and macro-financial building blocks.

### Climate change impacts, vulnerabilities, and adaptation priorities
- Climate trends and hazards in Mauritania:
  - Annual temperatures increased by about 0.75° C on average over the past three decades, faster than in emerging and developing economies.
  - Mauritania is one of the 10 in the MENA region that has more than 100 days of extreme heat per year (IMF, 2022).
  - Rain variability has been much higher in Mauritania than the average for emerging and developing economies in the last two decades.
  - Average frequency of droughts and floods has increased as well as the total number of disasters.
- Geographic and resource constraints:
  - Mauritania is essentially a desert country, with about 90 percent of its territory lying in the Sahara Desert, vast expanses of pastoral land and only 0.5 percent of arable land (Figure 1).
- Water stress and food insecurity:
  - Freshwater usage is in line with emerging and developing economies’ average, but water dependency approaches almost 100 percent originating outside country borders.
  - Mauritania has lower levels of water use efficiency than the average of emerging and developing economies.
  - Climate deterioration is eroding arable land size and fertility, surface and underground waters, contributing to water and food insecurity and likely exacerbating inflationary pressures.
- Human and social impacts:
  - Vulnerability to climate is high, reflecting high numbers of people affected and some very severe events.
  - 2017 drought affected 91 percent of the population.
  - 2021 drought led to 20 percent of the population impacted by acute food insecurity (Cadre Harmonise, March 2022).
  - From 2000-2020, on average, almost 10 percent of the population has been impacted by climate hazards, the highest share in the MENA region.
  - Human climate-related losses: about 0.15 percent of the population have died due to climate hazards (IMF, 2022).
  - Consequences are most pronounced for lower-income households and women.
- Economic impact and adaptation needs:
  - Climate disasters and higher temperatures are dampening growth; adaptation needs are significant.
  - Key measures to address climate challenges and offset medium-term growth losses:
    - Develop a national adaptation plan (NAP) with policy priorities.
    - Enhance domestic revenue mobilization and gradually reduce untargeted energy subsidies; combined with increased external financing could help finance adaptation needs (while also contributing to mitigation).
    - Establish a medium-term gender and climate responsive budget with a clearly defined fiscal anchor that integrates climate-related expenditures linked to NAP priorities.
    - Implement reforms to improve financial and social resilience.
  - Mauritania can offset a portion of its medium-term growth losses from climate disasters such as droughts and floods through improving access to finance, health, electricity, and telecommunication.

*Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mrtea2023002.pdf*

### Box 1. Gender and Climate Change in Mauritania

### Box 1. Gender and Climate Change in Mauritania

### Gender, access to resources, and climate vulnerability
- Women in Mauritania have on average about two fewer years of schooling than men.
- Literacy: 43 percent of women are literate compared to 64 percent of men.
- Financial inclusion:
  - 14 percent of Mauritanian women have an account at a financial institution compared to 26 percent of men.
  - The gender gap in those who have been able to save any money is 37 percent for women versus 46 percent for men (almost 10 percentage points).
- Gendered resource disaggregation affects capacity to respond to climate variability:
  - Women are disproportionally reliant on natural resources; climate variation increases the difficulty of this dependence.
  - During droughts, women and girls must venture more than an hour to collect a few liters of water, increasing exposure to risk of violence and sexual assault.
  - Female laborers more often rely on livestock breeds less adapted to climate challenges, while men have better access to networks, financial capital, and information to acquire and raise more durable breeds.

### Climatic trends, exposure, and migration pressures
- Mauritania faces higher frequency and severity of climate-related natural disasters, threatening health, infrastructure, social and economic stability, and growth.
- Migration pressures:
  - Conflicts in Mali, natural resource competition, and natural disasters are triggering migration into Mauritania.
  - Around 90.000 Malian refugees are currently in the Hodh Chargui region, increasing pressure on natural resources and stressing local communities vulnerable to water and food insecurity.
- Climate projections and impacts:
  - Multi-model projections indicate likely temperature rises and more irregular rainfalls, accelerating desertification and exacerbating extreme hazards (hotter/drier weather, warm spells, drought severity).

### Macroeconomic impacts of climate-related disasters
- Empirical assessment (model based on Pondi et al. 2022 and EM-DAT definitions) finds significant negative impacts of climate-related disasters on medium-term growth, with droughts and floods the main drivers.
- Key quantified impacts:
  - If a drought intensifies by 10 percentage points, medium-term annual per capita growth can decline by almost 0.8 to 1 percentage points in Mauritania.
  - An intensification of floods by 10 percentage points takes one-fifth to one-fourth the toll on medium-term growth compared to droughts.
  - The negative impact of droughts on Mauritania growth is up to 3 times that in emerging and developing economies.
  - Another study (IMF, 2022) shows that a temperature increase of one degree Celsius in Mauritania would lead to an immediate two percentage point drop in per capita economic growth, with agriculture and industry and construction sectors most severely impacted.
- Channels of macroeconomic vulnerability include lower growth, higher inflation, shifting GDP and employment shares, larger fiscal and external imbalances, erosion of financial institution soundness (deterioration of balance sheets, deposit withdrawals, nonperforming loans, reevaluation of stranded assets), and potential damage to payment system infrastructure.

### Resilience gains from structural reforms
- Structural areas analyzed for resilience-building: telecommunication, health, financial depth (access to finance), education, electricity, and agriculture modernization.
- Results indicate significant improvements in resilience from raising access to:
  - Telecommunication
  - Finance
  - Electricity
  - Health
  - Education
  - Mechanization
- Quantified resilience effects for Mauritania:
  - Better access to electricity can halve the majority of the medium-term economic loss from a drought.
  - Access to finance contributes to halving a small proportion of the drought-related loss (by enabling investments in weather-resilient infrastructure and providing post-disaster buffers).
  - The bulk of medium-term growth loss from floods could be avoided with better health care, followed by access to finance and telecommunication.
- Proxies used (WDI):
  - Electricity: Access to electricity, percent of population
  - Access to finance: Domestic credit to private sector, percent of GDP
  - Telecommunication: Mobile cellular subscriptions per 100 people
  - Health: Life expectancy at birth

### Mauritania’s mitigation and adaptation commitments and policies
- Contribution and commitments:
  - Mauritania contributes around 0.03 percent of global GHG emissions and has pledged to achieve net-zero emissions by 2050.
  - Updated NDC at COP26: new target to cut greenhouse emissions by 11 percent in 2030.
  - 92 percent of this 11 percent target is conditional on receiving substantial external support.
- Mitigation focus (selected measures):
  - Focus on energy, transport, livestock, forestry and waste.
  - Evaluate renewable energies and green hydrogen resources; update legislation to encourage clean energy production; promote energy efficiency; develop clean public transport; develop and implement a National Solid Waste Management Plan; step up reforestation to 30,000 ha by 2030; genetic improvement of breeds (create 20 artificial insemination farms).
- Adaptation focus (selected measures):
  - Water, agriculture, forestry, livestock, fisheries, health, infrastructure.
  - Strengthen access to clean water, develop desalination and sanitation in top five flood-risk cities (Nouakchott, NDB, Rosso, Atar and Kaédi).
  - Promote agroecological production practices (6,000 ha) and sustainable breeding; support sustainable fisheries management; set up insurance schemes for farmers, breeders and fishermen; adopt sustainable construction standards; develop a national land use plan resilient to climate change; implement the Great Green Wall Program: 2,000 ha / year; promote assisted regeneration of forests: 2,500 ha / year and aerial seeding: 10,000 ha / year; fight coastal erosion and protect coastal/marine ecosystems; develop health-risk knowledge and improve health capacity; conduct vulnerability risk assessments, early warning systems, and improve climate information systems; raise awareness and integrate environment and climate into educational programs.

### Low-carbon strategies and major green-hydrogen project (AMAN)
- Energy targets and challenges:
  - Plans to increase renewable energy to 50 percent of the energy mix by 2030 from 38 percent currently.
  - Plan to achieve universal energy access by 2030.
  - Resilience and climate risks are largely absent in sector planning; power system assets and hydropower availability are affected by climate change.
  - Energy tariffs are high; on-grid and off-grid markets are subsidized and do not allow the state to recover operating costs, contributing to the electricity utility’s high deficits.
  - Mauritania has recently revised its electricity code to promote consumption and production of renewable energy.
- AMAN green hydrogen project:
  - Aim: build 30GW of hybrid generation capacity (18 GW wind and 12 GW solar) to produce renewable energy for zero emissions power and green hydrogen and ammonia for domestic use and export.
  - At full 30 GW renewable capacity, estimated generation of 110 TWh of electricity per annum.
  - If directed fully to hydrogen production, expected output of 1.7 mtpa of green hydrogen or 10 mtpa of green ammonia for local industrial consumption and export.
  - Estimated capital investment: US$40 billion over the next 8 to 10 years, to be entirely funded by private foreign direct investment.
  - Investments required for installation of wind and solar infrastructure; construction of an industrial complex for hydrogen/ammonia synthesis, electricity storage and distribution, and ocean water desalination; and supporting transport, storage, communications, and residential infrastructure.
  - Project is expected to support government efforts to increase electricity and water supply, develop the manufacturing sector (green steel), boost growth and create jobs; potential provision of locally-produced green electricity and hydrogen to power SNIM’s iron ore production and pursue zero-emission steel production (e.g., hot-briquetted iron).

*Prepared by Lisa Kolovich and Sahar Priano. Source: IMF staff text in Box 1. Gender and Climate Change in Mauritania, from the referenced IMF document.*

### 17.      The Great  Green Wall movement, to which Mauritania belongs, is a reforestation

### 17.      The Great  Green Wall movement, to which Mauritania belongs, is a reforestation initiative that aims to grow an 8,000-kilometre-long barrier to combat environmental degradation and drought in the Sahel

### The Great Green Wall: scope and progress
- Initiative across 20 countries, including Mauritania, aims to grow an 8,000-kilometre-long barrier to combat environmental degradation and drought in the Sahel.
- Target to restore over 100 million hectares of degraded land.
- Restored land expected to sequester 250 million tons of carbon and create 10 million new green jobs.
- Project launched in 2007; only 4 percent of the goal was met as of 2021.
- A macro-economic study, commissioned by the international company, estimated the project could boost Mauritania’s GDP by 40 to 50 percent by 2030, and by 50 to 60 percent from 2035 onwards, including:
  - boost to employment in industry by 23 percent,
  - reduction in total national unemployment by almost a third by 2035.

### Adaptive social protection and crisis response
- Climate-related shocks substantially negatively impact household well-being in Mauritania; rainy season quality is a major driver of rural food insecurity variations.
- World Food Program estimate: 90 percent of agriculture production is subsistence based in Mauritania.
- Government cash transfer programs:
  - Elmaouna: implemented each lean season to support households affected by climate-related shocks (mainly drought; piloting response to rapid-onset shocks such as floods).
  - Tekavoul choc: responds to shocks by expanding vertically (temporary transfer increase) and horizontally (increase in number of beneficiaries selected from the Social Registry) in areas where Elmaouna does not operate.
  - These programs reached a total of 69.000 households in 2022 in response to the highest level of food insecurity ever recorded in Mauritania.
- Institutional developments:
  - Unified institutional framework established to manage prevention, preparation, coordination, implementation, monitoring, and capitalization of the national response plan to food insecurity and nutrition shocks.
  - Contingent fund established to help the Government secure and streamline sources of domestic and external funding.
  - Authorities in the process of defining rules to allocate necessary resources to respond to food security and nutrition shocks and boost household resilience before climate shocks.

### Climate adaptation financing: needs and sources
- Adaptation financing needs (authorities’ NDCs): could amount to up to US$10.6 billion over 2021–30, or an average annual investment of 12 percent of 2021 GDP.
- Under a medium-growth scenario for Mauritania, World Bank staff estimates that NDC adaptation investments (if financed through public resources) would absorb an average of 69 percent of annual tax revenues between 2023-30.
- Current funding plans rely heavily on international contributions: approximately 92 percent of the total amount.
- Action plan for financing expected to be finalized by end-2023.
- Historical external financing (2010-2020): international commitments for adaptation reached $500 million (majority grants, rest concessional loans).
  - Main donors and shares of total adaptation-related development finance in the last decade:
    - EU Institutions (excl. EIB): 21%
    - World Bank: 20%
    - Germany: 16%
    - Islamic Development Bank: 9%
    - France: 7%
    - Others: 27%
  - Top five donors covered around 72 percent of the total adaptation-related development finance received in the last decade.
- Climate funds and readiness:
  - Green Climate Fund developing a climate readiness assessment to develop bankable projects eligible for climate financing.
  - Direct access to climate funds would improve stakeholder engagement, project control, and implementation capacity.
  - Country examples to draw lessons from: Kenya (County Climate Change Funds), Chile (Acuerdo Verde), Madagascar, and Tanzania (execution and disbursement challenges).
- Climate insurance:
  - Could improve resilience of households, businesses, and government; would complement targeted social assistance.
  - Key obstacles: lack of data on weather and meteorological services and limited capacity to translate data into risk assessments.

### Domestic financing options and fiscal implications
- Potential domestic sources:
  - Redirect existing spending (for example, from fossil fuel subsidies) to cover climate adaptation costs for infrastructure resilience.
  - Mobilize domestic revenues by boosting tax collection efficiency and streamlining exemptions.
  - Consider carbon taxation; IMF (2022) suggests carbon taxation could help raise more than 4 percent of GDP in Mauritania (would require increased revenue administration capacity).
- Note on Figure 9: Climate adaptation costs cover floods and storms, do not capture investments needed to protect against droughts and heatwaves, and represent total financing from 2016-19. Data do not reflect subsequent subsidy reforms, including the 30 percent fuel price increase in MRT in 2022.

### Key empirical findings on climate impacts and resilience
- Climate disasters and higher temperatures are dampening growth with quantified medium-term per capita growth losses:
  - Losses of up to one percentage point of medium-term per capita growth if droughts intensify by ten percentage points.
  - One-fifth to one fourth of this impact if floods intensify by the same amount.
  - Two percentage points of medium-term per capita growth if temperatures increase by one Celsius in Mauritania.
- Mauritania can offset a portion of medium-term growth losses from climate disasters through improving access to finance, health, electricity and telecommunication.

### Concluding policy recommendations
- National Adaptation Plan (NAP):
  - Develop and implement an integrated, well-coordinated approach to climate change adaptation between donors and ministries.
  - Refine adaptation policy priorities, further refine funding needs, and link them with the macro-fiscal framework.
  - Embed priorities within a guiding framework tailored to Mauritania’s climate risks and capacity; use UNFCCC NAP process to integrate climate change into national decision-making and guide implementation and review.
- Fiscal measures:
  - Enhance domestic revenue mobilization; consider carbon taxation.
  - Improve expenditure efficiency, including gradually eliminating generalized energy subsidies and replacing them with targeted measures for the poorest households.
- Fiscal framework:
  - Adopt medium-term gender and climate responsive budgeting, a clearly defined fiscal anchor, and a medium-term expenditure framework consistent with public debt sustainability and integrating climate-related expenditures defined in the NAP.
  - Incorporate and label climate issues throughout budgeting, ensure transparent procurement and risk management.
- Climate-resilient infrastructure:
  - Targeted investments needed; 2020 Fiscal Monitor estimated Mauritania would need 2 percent of GDP annually to invest in infrastructure for climate resilience.
  - Improve public investment management (climate-aware planning, coordination, project appraisal and selection, budgeting and portfolio management, and risk management).
- Renewable energy:
  - Expand renewable energy production to reduce GHG emissions and pivot to greener energy sources.
  - Develop enabling environment and appropriate legislation to support green hydrogen development (potential to increase domestic revenues for adaptation needs and energy and water supply).
- Climate adaptation financing:
  - More external financing on concessional terms will be crucial to preserve debt sustainability.
  - Improve business environment, governance, and cohesive climate adaptation plan to crowd-in private investment and increase external finance.
  - Pursue partnerships with climate funds to unlock resources.
  - IMF can provide financial support through existing facilities and the proposed Resilience and Sustainability Trust (RST) to address risks to prospective BOP stability from long-term structural climate challenges.
- Financial and social resilience:
  - Strengthen disaster preparedness and coping capacities for droughts and floods.
  - Operationalize the recently adopted institutional framework to respond to food insecurity and nutrition shocks.
  - Continue reforms to enhance efficiency and effectiveness of social safety net programs; ensure social registry and existing social programs can respond to climate shocks.
  - Develop climate insurance schemes, requiring improved weather data, meteorological services, risk assessment capacity, and progress on financial inclusion.

### Annex I — Empirical methods and proxies (high level)
- Intensity proxy: dummy variable indicating whether total annual effect of disasters weighs over 0.01 percent of the population; constructed from fatalities and affected people relative to population (EM-DAT definitions used).
- Frequency proxy: considers total effects related to occurrence of disasters during the year using fatalities and affected people scaled by population; accounts for non-linear cumulative effects.
- Proxies focus on human capital destruction due to data availability (fatalities and affected people) rather than physical capital destruction.
- Estimation strategy: dynamic panel GMM methods to correct for correlation between unobserved effects and lagged regressors; endogenous variables include per-capita GDP and disaster proxies.
- Annex I. Table 2 (selected results for Mauritania: Intensity, Fixed effects):
  - Telecommunication: 0.009**
  - Access to finance: 0.026* (Droughts), 0.016** (Floods)
  - Health: 0.086**
  - Mechanization: -0.000** (Droughts), 0.000** (Floods)
  - Electricity: 0.114***

*Source: IMF staff summary of chapter content from the provided PDF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mrtea2023002.pdf_