## _cr12249

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### I. INCLUSIVE GROWTH IN MAURITANIA — Key findings and diagnostics
- Context and overall assessment
  - Real GDP growth averaged 4.5 percent over the 2000–08 period.
  - Poverty rate (national poverty line) stood at 42 percent in 2008.
  - Multidimensional poverty measure: 62 percent in 2007.
  - Progress in reducing poverty improved by 5 percentage points over 2000–08.
  - Per capita real GDP growth over 2000–08: 1.9 percent (memorandum item).

- Poverty and welfare indicators
  - Share of household heads citing lack of means to satisfy nutritional needs: increased from 40 percent in 2000 to 60 percent in 2008.
  - Gini coefficient: decreased from 39 in 2000 to 38 in 2008.
  - Food subsidy capture: almost 80 percent of all energy subsidies are captured by the richest 40 percent of households.
  - Bank account ownership: 17 percent of adults in Mauritania hold a bank account (World Bank Global Financial Inclusion Database).

- Growth incidence and distribution
  - 2000–04: per capita real consumption of households below the poverty line increased at an annual rate of 2.3 percent while per capita real GDP growth was 1.1 percent.
  - 2004–08: middle class per capita real consumption increased by 3.4 percent annually; poorest 20 percent witnessed a 0.5 percent decline.
  - Indicators of pro-poor growth (exact figures):
    - Average of per capita growth of real consumption: 1.4 (2001–04), 1.7 (2005–08), 1.4 (2000–08).
    - Pro-poor growth at initial poverty rate: 2.3 (2001–04), 0.5 (2005–08), 1.4 (2000–08).
    - Per capita GDP growth: 1.1 (2001–04), 2.8 (2005–08), 1.9 (2000–08).

- Regional disparities and drivers of inclusiveness
  - Regional poverty incidence ranged from 15.5 percent in Nouakchott to 68 percent in Tagant (2008).
  - Strong correlations at regional level between pro-poor growth and access to potable water, electricity, health services, public transportation, food markets, presence of a secondary school, and presence of a bank in village/area.
  - Education and labor market:
    - Poverty rate among households whose head attained secondary or higher education: 16 percent.
    - Male wage workers with secondary schooling earn approximately 20 percent more than those with primary education (Rajadel, 2009).
  - Public sector composition and effects:
    - Poverty rate among civil servants: 22 percent.
    - Doubling of wages for all civil servants between 2004 and 2008 corresponded to an annual increase of 15 percent in real terms.
    - Almost half of civil servants are located in Nouakchott, representing 20 percent of its population.
  - Sectoral structure and diversification:
    - Exports dominated by mining products: 75 percent.
    - Manufacturing industry described as "in its infancy"; fertile lands and fisheries underexploited.
    - Youth unemployment rates among the highest in the region (Staff Report, Annex IV).

### I.C. Conclusions and policy recommendations (preserve phrasing)
- Enhance the distributional impact of public spending:
  - Promote a decentralized public administration: More accessible administration services (such as civil registry) will facilitate people’s integration into the economic environment, particularly in underserved regions.
  - Avoid increasing public wages as a measure to reduce poverty: Doing so widens the gap between poor and rich households and regions. Targeted measures to reach low-wage earners in the public sector would be more cost-effective and efficient.
  - Accelerate the transition to well-targeted subsidies: The subsidy reform underway should be implemented forcefully; at the same time, cash transfer programs should be scaled up.
  - Extend the access to health and education services: Mauritania is still far from its MDG targets in reducing child mortality and improving maternal health. Extending the geographical coverage of health units to poor regions will facilitate access to basic health services. Improving secondary school coverage will reduce the wide gap in secondary education vis-a-vis sub-Saharan countries and enhance employment opportunities for the labor force.
  - Build inclusive infrastructure: Construction of roads in remote areas will further encourage trade and economic activity.
  - Enhance access to financial services: Making the banking sector more accessible will improve people’s ability to save and invest, thereby reducing their consumption volatility and creating new employment opportunities.

- Improve the quality of pro-poor spending:
  - Improve the scope of pro-poor spending: Continue the practice of setting within a budget a floor for pro-poor spending, but improve relevance by excluding outlays that marginally benefit the poor (e.g., energy subsidies) and public wages. Consider a regional dimension to monitor the distributive impact of public spending.
  - Monitor the quality of public service delivery: Put more focus on quality of public service delivery; evidence points to a disconnect between public spending on education and health and outcomes because of lack of accountability and monitoring. Implementation of initiatives strengthening governance and accountability in the public sector (civil service reform, anti-corruption legislation) will help address these issues.

### II. WHY CARE ABOUT SHALLOW CREDIT MARKETS? — Overview and puzzle statement
- Context and motivation
  - Mauritania is characterized as a small open resource-dependent economy where monetary policy stance often shifts due to changes in the external environment.
  - Empirical observation: exogenously driven policy changes do not seem to affect bank lending at the margin, suggesting scope to strengthen monetary policy effectiveness.
  - A necessary pre-condition for more policy traction: a more inclusive financial sector.

- Core puzzle and diagnostic focus
  - “Liquid banks but little lending”: banks appear liquid yet extend little new lending.
  - Policy-relevant avenues highlighted: strengthening the quality of credit demand, reinforcing supervision, and enhancing institutional infrastructure to encourage banks to finance a wider range of activities and customers.

### Terms of trade shock (2010/11) and banking liquidity transmission
- Shock and transmission
  - The run-up in commodity prices boosted foreign exchange receipts, notably from iron ore exports, enabling the authorities to build foreign exchange reserve buffers and expand the central bank’s balance sheet.
  - The larger international asset position at the central bank gave rise to a local currency counterpart in the form of banking sector liquidity.
  - Two main channels for export-related foreign exchange inflows into the banking sector:
    - Repatriations of mining companies:
      - State-owned mining company (SNIM): keeps local currency account at the central bank; repatriations sterilized until spending. About 80 percent of its repatriations in 2011 created new liquidity.
      - Foreign-owned mining companies: new CBM regulation required surrender of foreign exchange to the CBM; because these companies hold accounts with commercial banks, repatriations directly increased bank liquidity without possibility to sterilize.
    - Change in financing mix of the Treasury and reduced borrowing by state-owned enterprises:
      - Sharp increases in mining-related revenue from SNIM reduced the Treasury’s appetite to roll over T-bills held by banks.
      - Additional revenue cleared arrears and accelerated transfer payments to loss-making state-owned enterprises, reducing their need for bank credit.
      - Result: the composition of banks’ assets shifted in favor of free reserves following redemption of T-bills in the second half of the year.
  - Monetary management responses and outcomes:
    - Absent active sterilization, positive terms of trade shocks produced looser monetary conditions.
    - For the first time in years, Treasury financing needs were lower than the CBM’s sterilization objective.
    - CBM liquidity management instruments available were reserve requirements and sale of foreign exchange; reserve requirements were not used because of marked differences in liquidity positions across banks, and foreign exchange sales were limited by the policy objective of accumulating international reserves.
    - T-bill yields fell to historic lows of just below 3 percent.

- Banking-sector response: liquidity versus lending
  - Private-sector credit rose 10.6 percent in 2011.
  - Broad money expanded 19.9 percent in 2011.
  - Two new banks entered the Mauritanian market in the year.

### The role of reserves in the bank lending channel and empirical evidence
- Transmission framework
  - Monetary transmission channels considered: (i) interest rates; (ii) asset prices; (iii) exchange rate; (iv) bank lending.
  - In Mauritania, the first three are unlikely to be strongly developed due to absence of significant savings and investments, equity and bond markets, and an open capital account; the bank lending channel remains central.
  - Banks’ optimal reserve/credit ratio affected by bank-specific factors (asset riskiness, risk aversion, volatility of funding base) and economy-wide factors (institutional environment, demand conditions, competition among banks).

- Empirical identification
  - Fish exports (16 percent of total goods exports in the five years to 2011) used as instrument for reserves in 2SLS estimations; fish exports to the EU, lagged one period, used as instrument.
  - Main finding: changes in reserves arising from repatriated fish export receipts show no significant impact on banks’ lending activities for six Mauritanian banks over 2006–11.
  - Regression table highlights (selected figures preserved):
    - Observations: 135, 129, 129, 129, 123, 123 (across columns).
    - R-squared: 0.55, 0.52, 0.53, -0.09, 0.00, -0.08 (across columns).
    - First-stage F statistic for excluded instruments: 25.68, 31.12, 20.04, 6.79, 17.90, 7.34 (across columns).
    - Regression coefficients on reserves/∆reserves not statistically significant in columns reported.

- Interpretation and context
  - Findings consistent with Mishra et al. (2012) and Khemraj (2010) that monetary transmission via reserves is weaker or ineffective in low-income countries.
  - Oligopolistic competition and risky borrowers can make banks indifferent between holding reserves and lending.
  - A sufficient condition for reserves to affect credit: positive difference between marginal profit of lending and marginal profit of holding excess reserves; if banks lower their optimal reserve/credit ratio but lack loanable funds, expanding reserves could relax funding constraints.

### Factors reducing traction of monetary policy in Mauritania
- Structural and market features
  - Structural size: Mauritania’s 2008 actual level of credit exceeded predicted level, implying a positive private-sector “credit gap” of 5.1 percent of GDP.
  - Deposits/GDP also outperform structural benchmark, but scope exists to mobilize more bank funding due to widespread cash usage and underdeveloped payment system.
  - Banking ownership: concentrated ownership structures impede attraction of long-term external resources.

- Competition and market structure
  - 12 commercial banks: five foreign-owned, one joint venture between Libyan Foreign Bank and the Mauritanian government, six belong to large domestic family-owned conglomerates.
  - Domestic banks dominate, but competition improved with entry of three foreign banks in 2006–10, lowering the three-bank concentration ratio to levels in line with comparator countries.

- Limited reach and concentration risk
  - Banks focus on parent group and affiliated parties; significant revenue sources include letters of credit, short-term consumer credit, and lending to government and state-owned enterprises.
  - The 20 largest loans (to state-owned companies or affiliated parties) represented 30 percent of all loans at end-2010.

- Institutional weaknesses
  - Pervasive information asymmetries: limited reliable audited financial statements; credit bureau launched in 2005 but still does not regularly communicate real-time information consistent with banks’ internal data.
  - Weak creditor rights: scarce collateral with predictable value; ill-functioning land registries; lengthy and costly judicial procedures; courts have voided financial contracts in the past.
  - Interest rate controls:
    - Maximum lending rates fixed at the policy rate—currently nine percent—plus eight percentage points.
    - Interest rate floors on a particular savings account type (“compte sur livret”) limit banks’ willingness to raise term deposits; authorities are in process of relaxing this minimum interest rate requirement.
  - Asset quality and risk management:
    - Nonperforming loans at 28.7 percent of gross loans at end-2011, covered to 91 percent by provisions.
    - Shortcomings in banks’ internal credit risk management capacities identified in the 2010 audit; authorities adopted a new regulation setting minimum standards for banks’ internal risk management systems.
  - Regulatory and supervisory gaps:
    - Until March 2012, related-party lending regulation limited exposure on individual company basis rather than groups, allowing cumulative group exposures in excess of 25 percent of capital; this loophole has been closed to align with international standards.
    - Supervision was sometimes not proactive in taking corrective actions when breaches occurred.
    - Cross-country regressions: countries with more intrusive supervisory regimes had private-sector “credit gaps” that were six percent of GDP larger on average than those without (regression R^2: 0.61; observations: 62).
  - Interbank market and lender-of-last-resort:
    - Interbank market is underdeveloped; some large liquid banks almost never lend to other banks despite strict collateral requirements.
    - CBM’s role as lender of last resort not firmly established.
    - Banks reluctant to accept maturity mismatches from converting excess reserves into loans; distribution of liquidity across system is often inefficient.

### Policy directions and recommendations (from chapter)
- Strengthen institutional framework to reduce information asymmetries (improve credit bureau functioning and financial reporting).
- Improve creditor rights and enforceability of collateral.
- Reform interest rate regulations (relax minimum interest rate requirements).
- Continue regulatory alignment to close related-party exposure loopholes and enforce limits at the group level.
- Enhance supervisory intrusiveness and pro-active enforcement to encourage deeper private-sector credit penetration.
- Develop interbank market liquidity and clarify CBM’s lender-of-last-resort role.
- Consider targeted measures to convert reserve accumulation into productive lending where banks face binding funding constraints and marginal profit of lending exceeds that of holding excess reserves.

### The Mauritanian banking sector finances a limited number of economic actors
- Constraints on monetary policy and banking-sector structure
  - High single-party exposures and widespread related-party lending blunt the effectiveness of monetary policy because lending decisions are not, at the margin, driven by changes in the amounts of loanable funds.
  - Exogenous changes in bank reserves in Mauritania, similar to the ones seen in 2011, did not increase credit.
  - Private-sector credit to GDP itself does not raise immediate concerns, but the narrow set of borrowers limits monetary transmission.

- Key statistics on financial linkages and funding
  - Domestic deposits fund 78 percent of bank liabilities.
  - Cross-border financing was 7 percent of GDP in 2011.
  - Liabilities of Mauritanian banks to external counterparts amounted to $124 million in 2011, of which 73 percent is from Europe (2 percent of GDP).
  - Foreign banks represent 24 percent of banking assets in Mauritania; of those, European banks represent 7 percent.
  - Flows of private capital to Mauritania reached close to 23 percent of GDP in 2011, led mostly by FDI and loans to the iron ore company.
  - Aid flows average 13 percent of GDP, mostly from multilateral institutions; about 80 percent of bilateral flows comes from Europe, representing about 5 percent of GDP in recent years.
  - Remittances averaged 2 percent of GDP over the past decade, with 54 percent coming directly from Europe.

- Supply-side reforms to broaden credit provision
  - Make banking supervision more effective by applying the regulation on concentration risk and connected lending.
  - Ensure that banks reinforce their risk management capacities: the recently adopted instruction on banks’ internal risk management systems is noted as a very good first step; focus should now shift to its swift implementation.

- Institutional infrastructure improvements
  - Alleviate information asymmetries: Better resourced credit bureau; enhanced legal framework for domestic auditors.
  - Reduce judicial uncertainty: Specialized commercial courts staffed with well-trained legal experts.
  - Strengthen collateral systems: Increase number of land titles in circulation and enhance administrative capacity in public registries.
  - Improve liquidity management framework:
    - Absorb excess liquidity with a short-term T-bill instrument that is under the sole control of the central bank to increase the number of borrowers in the interbank market.
    - As the interbank market develops, liquidity changes of individual banks would filter through the rest of the system, strengthening the link between changes in reserves and credit to the private sector.

- Demand-side measures to complement supply reforms
  - Tax and other regulatory incentives to bring more businesses into the formal sector.
  - Help businesses build up a pool of pledgeable assets and produce certified financial statements.
  - Establish a system of quality control for the audit profession to improve the reliability of financial statements and support credit extension.

- Expected outcomes
  - Make the banking sector more inclusive.
  - Reduce banking-sector vulnerabilities from concentrated exposures and related-party lending.
  - Strengthen the effectiveness of monetary policy by widening the base of credit demand and improving transmission from reserves to private-sector lending.

### 6. Business cycles between Mauritania and Europe are increasingly synchronized
- Trends in synchronization
  - Pre-2000 period: no co-movement with Europe; coefficients small and statistically insignificant.
  - Post-2000 period: spillovers are significant and rising.
    - A 1 percentage point decrease in Europe’s growth below its potential will on average decrease Mauritania’s growth by 1.5 percentage points below its potential.
  - Estimated time-varying semi-elasticity of demand: 3.2.
    - “This suggests that a decrease in GDP growth in Europe by 1 percentage point would lead to a drop in Mauritania’s exports to Europe by 3.2 percent.”

- Main channels and drivers of increased spillovers
  - Larger trade pattern: spillover effect mostly linked to high dependency of Mauritania’s main export receipts upon European markets.
  - Higher exports of demand-sensitive products:
    - Share of ores and metals exports to Europe: 71 percent in 2000 → 83 percent in 2011.
    - Share of fish exports to Europe: 27 percent in 2000 → 16 percent in 2011.
  - Different structure of the economy:
    - 1985–1999: output depended more on agriculture, often volatile (affected by droughts), resulting in higher aggregate output volatility and less exposure to trade channel.
    - Since 2000: dependency on metals exports increased, raising vulnerability to demand from Europe.

- Econometric evidence (selected)
  - Model: time-varying coefficients of synchronicity regressed on bilateral trade, controlling for aid and remittance flows; panel includes Mauritania, Tunisia, Morocco, Egypt and Djibouti.
  - Key standardized coefficient estimates (selected):
    - Trade intensity with Europe: 0.0598 (t-statistic (0.513))
    - Remittance-to-GDP ratio: 0.312** (2.432)
    - Aid dependency upon Europe: 0.0830*** (3.130)
    - Trade intensity * Mauritania dummy: 0.655** (2.001)
    - Remittance ratio * Mauritania dummy: -0.302** (-2.291)
    - Aid dependency * Mauritania dummy: -0.425* (-1.703)
    - Exposure index: 0.193*** (4.139)
    - Exposure index * Mauritania dummy: 1.353*** (9.647)
  - Regression diagnostics:
    - Observations: 83
    - R-squared: 0.94 (column [1]); 0.34 (column [2])
    - Significance notation: *** p<0.01, ** p<0.05, * p<0.1
  - Total effects in Mauritania (reported):
    - Total effect of trade in Mauritania: 0.71
    - Total effect of remittance flows in Mauritania: 0.01
    - Total effect of foreign aid in Mauritania: -0.34
    - Total effect of vulnerability in Mauritania: 1.546

- Policy implications and recommendations
  - Main policy challenges: increasing dependence on Europe via the trade channel increases exposure to external shocks.
  - Recommended policy responses:
    - Continue to increase diversification of export products and markets, including development of a domestic industrial base.
    - Implement countercyclical policies that build buffers in good times to cope with global shocks.

*Prepared by IMF staff (section prepared by Robert Blotevogel) based on IMF staff calculations and Central Bank of Mauritania data included in the chapter.*

### References .............................................................................................................

### _cr12249 - References .............................................................................................................

### I. INCLUSIVE GROWTH IN MAURITANIA — Key findings and diagnostics

- Context and overall assessment
  - Real GDP growth averaged 4.5 percent over the 2000–08 period.
  - Poverty rate (national poverty line) stood at 42 percent in 2008.
  - Multidimensional poverty measure: 62 percent in 2007.
  - Progress in reducing poverty improved by 5 percentage points over 2000–08.
  - Per capita real GDP growth over 2000–08: 1.9 percent (memorandum item).

- Poverty and welfare indicators (exact figures preserved)
  - Share of household heads citing lack of means to satisfy nutritional needs: increased from 40 percent in 2000 to 60 percent in 2008.
  - Gini coefficient: decreased from 39 in 2000 to 38 in 2008.
  - Food subsidy capture: almost 80 percent of all energy subsidies are captured by the richest 40 percent of households.
  - Bank account ownership: 17 percent of adults in Mauritania hold a bank account (World Bank Global Financial Inclusion Database).

- Growth incidence and distribution
  - 2000–04: per capita real consumption of households below the poverty line increased at an annual rate of 2.3 percent while per capita real GDP growth was 1.1 percent.
  - 2004–08: middle class per capita real consumption increased by 3.4 percent annually; poorest 20 percent witnessed a 0.5 percent decline.
  - Table of indicators of pro-poor growth:
    - Average of per capita growth of real consumption: 1.4 (2001–04), 1.7 (2005–08), 1.4 (2000–08).
    - Pro-poor growth at initial poverty rate: 2.3 (2001–04), 0.5 (2005–08), 1.4 (2000–08).
    - Per capita GDP growth: 1.1 (2001–04), 2.8 (2005–08), 1.9 (2000–08).

- Regional disparities and drivers of inclusiveness
  - Regional poverty incidence ranged from 15.5 percent in Nouakchott to 68 percent in Tagant (2008).
  - Strong correlations at regional level between pro-poor growth and:
    - Access to potable water, electricity, health services, public transportation, food markets, presence of a secondary school, and presence of a bank in village/area.
  - Education and labor market:
    - Poverty rate among households whose head attained secondary or higher education: 16 percent.
    - Male wage workers with secondary schooling earn approximately 20 percent more than those with primary education (Rajadel, 2009).
  - Public sector composition and effects:
    - Poverty rate among civil servants: 22 percent.
    - Doubling of wages for all civil servants between 2004 and 2008 corresponded to an annual increase of 15 percent in real terms.
    - Almost half of civil servants are located in Nouakchott, representing 20 percent of its population.
  - Sectoral structure and diversification:
    - Exports dominated by mining products: 75 percent.
    - Manufacturing industry described as "in its infancy"; fertile lands and fisheries underexploited.
    - Youth unemployment rates among the highest in the region (Staff Report, Annex IV).

### I.C. Conclusions and policy recommendations (preserve phrasing and bullets)

- Enhance the distributional impact of public spending:
  - Promote a decentralized public administration: More accessible administration services (such as civil registry) will facilitate people’s integration into the economic environment, particularly in underserved regions.
  - Avoid increasing public wages as a measure to reduce poverty: Doing so widens the gap between poor and rich households and regions. Targeted measures to reach low-wage earners in the public sector would be more cost-effective and efficient.
  - Accelerate the transition to well-targeted subsidies: The subsidy reform underway should be implemented forcefully; at the same time, cash transfer programs should be scaled up.
  - Extend the access to health and education services: Mauritania is still far from its MDG targets in reducing child mortality and improving maternal health. Extending the geographical coverage of health units to poor regions will facilitate access to basic health services. Improving secondary school coverage will reduce the wide gap in secondary education vis-a-vis sub-Saharan countries and enhance employment opportunities for the labor force.
  - Build inclusive infrastructure: Construction of roads in remote areas will further encourage trade and economic activity.
  - Enhance access to financial services: Making the banking sector more accessible will improve people’s ability to save and invest, thereby reducing their consumption volatility and creating new employment opportunities.

- Improve the quality of pro-poor spending:
  - Improve the scope of pro-poor spending: Continue the practice of setting within a budget a floor for pro-poor spending, but improve relevance by excluding outlays that marginally benefit the poor (e.g., energy subsidies) and public wages. Consider a regional dimension to monitor the distributive impact of public spending.
  - Monitor the quality of public service delivery: Put more focus on quality of public service delivery; evidence points to a disconnect between public spending on education and health and outcomes because of lack of accountability and monitoring. Implementation of initiatives strengthening governance and accountability in the public sector (civil service reform, anti-corruption legislation) will help address these issues.

### II. WHY CARE ABOUT SHALLOW CREDIT MARKETS? — Overview and puzzle statement

- Context and motivation
  - Mauritania is characterized as a small open resource-dependent economy where monetary policy stance often shifts due to changes in the external environment.
  - Empirical observation: exogenously driven policy changes do not seem to affect bank lending at the margin, suggesting scope to strengthen monetary policy effectiveness.
  - A necessary pre-condition for more policy traction: a more inclusive financial sector.

- Core puzzle and diagnostic focus
  - “Liquid banks but little lending”: banks appear liquid yet extend little new lending.
  - Policy-relevant avenues highlighted: strengthening the quality of credit demand, reinforcing supervision, and enhancing institutional infrastructure to encourage banks to finance a wider range of activities and customers.

*Source: _cr12249 - References .............................................................................................................*

### 1.      Mauritania experienced a large positive terms of trade shock in 2010/11, leading

### Mauritania experienced a large positive terms of trade shock in 2010/11, leading to involuntary surges in bank liquidity

### A. Terms of trade shock and transmission into banking liquidity
- The run-up in commodity prices boosted foreign exchange receipts, notably from iron ore exports, enabling the authorities to build foreign exchange reserve buffers and expand the central bank’s balance sheet.
- The larger international asset position at the central bank gave rise to a local currency counterpart in the form of banking sector liquidity.
- Two main channels for export-related foreign exchange inflows into the banking sector:
  - Repatriations of mining companies:
    - State-owned mining company (SNIM): keeps local currency account at the central bank; repatriations sterilized until spending. About 80 percent of its repatriations in 2011 created new liquidity.
    - Foreign-owned mining companies: new CBM regulation required surrender of foreign exchange to the CBM; because these companies hold accounts with commercial banks, repatriations directly increased bank liquidity without possibility to sterilize.
  - Change in financing mix of the Treasury and reduced borrowing by state-owned enterprises:
    - Sharp increases in mining-related revenue from SNIM reduced the Treasury’s appetite to roll over T-bills held by banks.
    - Additional revenue cleared arrears and accelerated transfer payments to loss-making state-owned enterprises, reducing their need for bank credit.
    - Result: the composition of banks’ assets shifted in favor of free reserves following redemption of T-bills in the second half of the year.
- Monetary management responses and outcomes:
  - Absent active sterilization, positive terms of trade shocks produced looser monetary conditions.
  - For the first time in years, Treasury financing needs were lower than the CBM’s sterilization objective.
  - CBM liquidity management instruments available were reserve requirements and sale of foreign exchange; reserve requirements were not used because of marked differences in liquidity positions across banks, and foreign exchange sales were limited by the policy objective of accumulating international reserves.
  - T-bill yields fell to historic lows of just below 3 percent.

### B. Banking-sector response: liquidity versus lending
- Despite abundant liquidity and improved competition, credit expansion remained modest:
  - Private-sector credit rose 10.6 percent in 2011.
  - Broad money expanded 19.9 percent in 2011.
- New market entrants:
  - Two new banks entered the Mauritanian market in the year, which would normally increase competition and lending activity.

### C. The role of reserves in the bank lending channel
- Monetary transmission channels considered: (i) interest rates; (ii) asset prices; (iii) exchange rate; (iv) bank lending.
  - In Mauritania, the first three are unlikely to be strongly developed due to absence of significant savings and investments, equity and bond markets, and an open capital account; the bank lending channel remains central.
- Banks’ optimal reserve/credit ratio:
  - If reserves and credit are imperfect substitutes, banks aim for an optimal ratio; an exogenous increase in reserves would typically lead banks to lend out the non-required fraction.
  - Central bank controls reserves via foreign exchange intervention, refinancing operations, and coordination with the Treasury on T-bill issuance.
- Determinants of banks’ optimal reserve holdings:
  - Bank-specific: (i) asset riskiness; (ii) risk aversion; (iii) volatility of funding base.
  - Economy-wide: (iv) institutional environment; (v) demand conditions; (vi) competition among banks.
  - Increases in (i)–(iii) raise optimal reserve holdings; improvements in (iv)–(vi) reduce them.

### D. Empirical analysis: fish exports as instrument for exogenous reserve changes
- Identification strategy:
  - Fish exports account for 16 percent of total goods exports in the five years to 2011 and were subject to repatriation requirements; fish price and captures are exogenous to banks’ lending.
  - Fish exports to the EU, lagged one period, used as instrument for reserves in 2SLS estimations.
- Main empirical finding:
  - Changes in reserves arising from repatriated fish export receipts show no significant impact on banks’ lending activities for six Mauritanian banks over 2006–11.
  - Specifications using government credit and short-term trade finance as dependent variables likewise fail to uncover robust relationships between reserves and lending.
- Table highlights (selected figures from regressions):
  - Observations: 135, 129, 129, 129, 123, 123 (across columns).
  - R-squared: 0.55, 0.52, 0.53, -0.09, 0.00, -0.08 (across columns).
  - First-stage F statistic for excluded instruments: 25.68, 31.12, 20.04, 6.79, 17.90, 7.34 (across columns).
  - Regression coefficients on reserves/∆reserves not statistically significant in columns reported.
- Interpretation in context of low-income countries:
  - Consistent with Mishra et al. (2012) and Khemraj (2010) that monetary transmission via reserves is weaker or ineffective in low-income countries.
  - Oligopolistic competition and risky borrowers can make banks indifferent between holding reserves and lending; the marginal profit of lending versus holding excess reserves matters.
  - A sufficient condition for reserves to affect credit: positive difference between marginal profit of lending and marginal profit of holding excess reserves; if banks lower their optimal reserve/credit ratio but lack loanable funds, expanding reserves could relax funding constraints.

### E. Factors reducing traction of monetary policy in Mauritania
- Structural and market features:
  - Structural size: Mauritania’s 2008 actual level of credit exceeded predicted level, implying a positive private-sector “credit gap” of 5.1 percent of GDP.
  - Deposits/GDP also outperform structural benchmark, but scope exists to mobilize more bank funding due to widespread cash usage and underdeveloped payment system.
  - Banking ownership: concentrated ownership structures impede attraction of long-term external resources.
- Competition and market structure:
  - 12 commercial banks: five foreign-owned, one joint venture between Libyan Foreign Bank and the Mauritanian government, six belong to large domestic family-owned conglomerates.
  - Domestic banks dominate, but competition improved with entry of three foreign banks in 2006–10, lowering the three-bank concentration ratio to levels in line with comparator countries.
- Limited reach and concentration risk:
  - Banks focus on parent group and affiliated parties; significant revenue sources include letters of credit, short-term consumer credit, and lending to government and state-owned enterprises.
  - The 20 largest loans (to state-owned companies or affiliated parties) represented 30 percent of all loans at end-2010.
- Institutional weaknesses:
  - Pervasive information asymmetries: limited reliable audited financial statements; credit bureau launched in 2005 but still does not regularly communicate real-time information consistent with banks’ internal data.
  - Weak creditor rights: scarce collateral with predictable value; ill-functioning land registries; lengthy and costly judicial procedures; courts have voided financial contracts in the past.
  - Interest rate controls:
    - Maximum lending rates fixed at the policy rate—currently nine percent—plus eight percentage points.
    - Interest rate floors on a particular savings account type (“compte sur livret”) limit banks’ willingness to raise term deposits; authorities are in process of relaxing this minimum interest rate requirement.
- Asset quality and risk management:
  - Nonperforming loans at 28.7 percent of gross loans at end-2011, covered to 91 percent by provisions.
  - Shortcomings in banks’ internal credit risk management capacities identified in the 2010 audit; authorities adopted a new regulation setting minimum standards for banks’ internal risk management systems.
- Regulatory and supervisory gaps:
  - Until March 2012, related-party lending regulation limited exposure on individual company basis rather than groups, allowing cumulative group exposures in excess of 25 percent of capital; this loophole has been closed to align with international standards.
  - Supervision was sometimes not proactive in taking corrective actions when breaches occurred.
  - Cross-country regressions indicate supervisory intrusiveness matters: countries with more intrusive supervisory regimes had private-sector “credit gaps” that were six percent of GDP larger on average than those without (regression R^2: 0.61; observations: 62).
- Interbank market and lender-of-last-resort:
  - Interbank market is underdeveloped; some large liquid banks almost never lend to other banks despite strict collateral requirements.
  - CBM’s role as lender of last resort not firmly established.
  - Banks reluctant to accept maturity mismatches from converting excess reserves into loans; distribution of liquidity across system is often inefficient.

### F. Conclusions and policy recommendations (summary of chapter’s direction)
- Empirical evidence for 2006–11 suggests that increases in reserves arising from export repatriations had no discernible effect on bank lending in Mauritania.
- Key impediments to monetary policy transmission via reserves include:
  - Shallow credit markets and limited banking sector reach.
  - High portfolio concentration and related-party lending.
  - Information asymmetries and weak creditor rights.
  - Regulatory constraints (interest rate floors/caps) and previously permissive related-party rules.
  - Underdeveloped interbank market and weak lender-of-last-resort backstop.
- Policy directions implied by the analysis (as presented in the chapter):
  - Strengthen institutional framework to reduce information asymmetries (improve credit bureau functioning and financial reporting).
  - Improve creditor rights and enforceability of collateral.
  - Reform interest rate regulations (relax minimum interest rate requirements).
  - Continue regulatory alignment to close related-party exposure loopholes and enforce limits at the group level.
  - Enhance supervisory intrusiveness and pro-active enforcement to encourage deeper private-sector credit penetration.
  - Develop interbank market liquidity and clarify CBM’s lender-of-last-resort role.
  - Consider targeted measures to convert reserve accumulation into productive lending where banks face binding funding constraints and marginal profit of lending exceeds that of holding excess reserves.

*Prepared by IMF staff (section prepared by Robert Blotevogel) based on IMF staff calculations and Central Bank of Mauritania data included in the chapter.*

### 18.      The Mauritanian banking sector finances a limited number of economic actors

### 18.      The Mauritanian banking sector finances a limited number of economic actors 

### Constraints on monetary policy and banking-sector structure
- Mauritanian banks are characterized by high single-party exposures and widespread related-party lending; such business models blunt the effectiveness of monetary policy because lending decisions are not, at the margin, driven by changes in the amounts of loanable funds.
- Consistent with this hypothesis, exogenous changes in bank reserves in Mauritania, similar to the ones seen in 2011, did not increase credit.
- Private-sector credit to GDP itself does not raise immediate concerns, but the narrow set of borrowers limits monetary transmission.

### Key statistics on financial linkages and funding (preserve source values)
- Domestic deposits fund 78 percent of bank liabilities.
- Cross-border financing was 7 percent of GDP in 2011.
- Liabilities of Mauritanian banks to external counterparts amounted to $124 million in 2011, of which 73 percent is from Europe (2 percent of GDP).
- Foreign banks represent 24 percent of banking assets in Mauritania; of those, European banks represent 7 percent.
- Flows of private capital to Mauritania reached close to 23 percent of GDP in 2011, led mostly by FDI and loans to the iron ore company.
- Aid flows average 13 percent of GDP, mostly from multilateral institutions; about 80 percent of bilateral flows comes from Europe, representing about 5 percent of GDP in recent years.
- Remittances averaged 2 percent of GDP over the past decade, with 54 percent coming directly from Europe.

### Supply-side reforms to broaden credit provision (central actions)
- Make banking supervision more effective by applying the regulation on concentration risk and connected lending.
  - Reducing the incidence of high single-party exposures would both make the banking system more resilient to shocks and encourage banks to actively search for lending opportunities elsewhere.
- Ensure that banks reinforce their risk management capacities.
  - The recently adopted instruction on banks’ internal risk management systems is noted as a very good first step; focus should now shift to its swift implementation.

### Institutional infrastructure improvements
- Alleviate information asymmetries:
  - Better resourced credit bureau to provide more reliable information about potential borrowers.
  - Enhanced legal framework for domestic auditors to strengthen the quality of audits.
- Reduce judicial uncertainty:
  - Creditor-debtor disputes could be handled in specialized commercial courts staffed with well-trained legal experts.
- Strengthen collateral systems:
  - Streamline the process of pledging real estate and cash flow collateral by increasing the number of land titles in circulation and enhancing administrative capacity in public registries.
- Improve the liquidity management framework:
  - Absorb excess liquidity with a short-term T-bill instrument that is under the sole control of the central bank to increase the number of borrowers in the interbank market.
  - As the interbank market develops, liquidity changes of individual banks would filter through the rest of the system, strengthening the link between changes in reserves and credit to the private sector.

### Demand-side measures to complement supply reforms
- Address limited credit-worthy demand, a key explanation for banks’ concentrated loan portfolios:
  - Tax and other regulatory incentives to bring more businesses into the formal sector.
  - Help businesses build up a pool of pledgeable assets and produce certified financial statements.
  - Establish a system of quality control for the audit profession to improve the reliability of financial statements and support credit extension.

### Expected outcomes
- Taken together, the above measures aim to:
  - Make the banking sector more inclusive.
  - Reduce banking-sector vulnerabilities from concentrated exposures and related-party lending.
  - Strengthen the effectiveness of monetary policy by widening the base of credit demand and improving transmission from reserves to private-sector lending.

*Source: IMF staff analysis in “The Mauritanian banking sector finances a limited number of economic actors” (content unit: _cr12249 - 18).*

### 6.      Business cycles between Mauritania and Europe are increasingly synchronized

### 6.      Business cycles between Mauritania and Europe are increasingly synchronized

### Trends in synchronization
- Pre-2000 period: no co-movement with Europe; coefficients small and statistically insignificant.
- Post-2000 period: spillovers are significant and rising.
  - A 1 percentage point decrease in Europe’s growth below its potential will on average decrease Mauritania’s growth by 1.5 percentage points below its potential.
- Estimated time-varying semi-elasticity of demand: 3.2.
  - “This suggests that a decrease in GDP growth in Europe by 1 percentage point would lead to a drop in Mauritania’s exports to Europe by 3.2 percent.”

### Main channels and drivers of increased spillovers
- Larger trade pattern:
  - Spillover effect is mostly linked to the high dependency of Mauritania’s main export receipts upon European markets.
  - Marginal effects of foreign aid and remittance inflows are disproportionately lower than for other countries.
- Higher exports of demand-sensitive products:
  - Share of ores and metals exports to Europe: 71 percent in 2000 → 83 percent in 2011.
  - Share of fish exports to Europe: 27 percent in 2000 → 16 percent in 2011.
  - Estimation indicates demand for Mauritania’s exports is highly sensitive to Europe’s income shocks (semi-elasticity 3.2).
- Different structure of the economy:
  - 1985–1999: output depended more on agriculture, often volatile (affected by droughts), resulting in higher aggregate output volatility and less exposure to trade channel.
  - Since 2000: dependency on metals exports increased, raising vulnerability to demand from Europe, especially during the global recession.

### Econometric evidence (ANNEX: Determinants of spillover effects)
- Model: time-varying coefficients of synchronicity regressed on bilateral trade, controlling for aid and remittance flows; panel includes Mauritania, Tunisia, Morocco, Egypt and Djibouti.
- Estimation method: weighted panel least squares (weight = inverse of standard deviation of Theta); observations weighted by country-specific average of the inverse of standard errors; explanatory variables lagged; country fixed effects included.
- Key standardized coefficient estimates (selected):
  - Trade intensity with Europe: 0.0598 (t-statistic (0.513))
  - Remittance-to-GDP ratio: 0.312** (2.432)
  - Aid dependency upon Europe: 0.0830*** (3.130)
  - Trade intensity * Mauritania dummy: 0.655** (2.001)
  - Remittance ratio * Mauritania dummy: -0.302** (-2.291)
  - Aid dependency * Mauritania dummy: -0.425* (-1.703)
  - Exposure index: 0.193*** (4.139)
  - Exposure index * Mauritania dummy: 1.353*** (9.647)
  - Intercept(s): 1.671** (2.363); 0.343*** (6.070)
- Regression diagnostics:
  - Observations: 83
  - R-squared: 0.94 (column [1]); 0.34 (column [2])
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1
- Total effects in Mauritania (reported):
  - Total effect of trade in Mauritania: 0.71
  - Total effect of remittance flows in Mauritania: 0.01
  - Total effect of foreign aid in Mauritania: -0.34
  - Total effect of vulnerability in Mauritania: 1.546

### Policy implications and recommendations
- Main policy challenges:
  - Increasing dependence on Europe via the trade channel increases exposure to external shocks.
- Recommended policy responses:
  - Continue to increase diversification of export products and markets, including development of a domestic industrial base.
  - Implement countercyclical policies that build buffers in good times to cope with global shocks.

*Source: IMF staff analysis from chapter “6. Business cycles between Mauritania and Europe are increasingly synchronized” (extracted from the provided content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12249.pdf_