## _cr1536

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### Context and Executive Summary
- Mauritania is a multi-metallic commodity exporter facing medium-term fiscal challenges from volatile resource revenues and prospects for significant mining expansion.
- Policy goal: avoid pro-cyclical fiscal policies and adopt rules guiding medium-term fiscal sustainability.
- Recommended fiscal-rule approaches:
  - Fiscal rule targeting a non-resource primary balance (NRPB) for long-term sustainability, designed to allow some frontloading of public spending on productive investment (appropriate under the assumption of a finite resource horizon).
  - Fiscal rule targeting a structural resource (primary) balance (appropriate if resources are long-lasting).

### Mauritania’s Resource Wealth — key facts and projections
- Sectoral importance and composition:
  - Minerals make up more than 75 percent of total exports and contributed 11 percent of non-extractive GDP in 2013.
  - Receipts from minerals and petroleum contribute 26 percent to Mauritania’s budget.
- Selected projects and statuses (excerpts):
  - SNIM (State 78.35%): In production. Currently producing at 13Mtpa, planning to ramp up production to 25Mtpa by 2021 and to 40Mtpa by 2025 with the development of the Tizerghaf project. (Also reported ramp up to 30Mtpa by 2025 in source text.)
  - MCM (100% MCM): In production. Guelb Moghrein mine; as of December 2013, estimated mine life was of eight years, including stockpiles.
  - TASIAST (Kinross Gold Corporation 100%): In production. Peak production rate of 272Koz gold in 2013, with total production of 1.14Moz between 2008 and 2013. Proven and probable reserves of 9.6Moz.
  - ASKAF (Glencore): Prospective. Production expected to begin in 2017 at 7.5Mtpa.
  - El Aouj Mining Company (SNIM 50% and Glencore 50%): Prospective. Phase I production projected to begin in 2019 at 9.5Mtpa, with a doubling in Phase II by 2023.
  - TAZADIT (SNIM 65%, Inmetals 35%): Prospective underground mine with US$250 million investment; delayed from original 2014/2017 plan.
  - TASIAST (expansion) (Kinross 100%): Expansion requiring US$1.6 billion to ramp processing to 38Ktpd; decision end 2015/beginning 2016; if materializes could produce at higher rate until 2027.
- Production and investment outlook:
  - Investment in the sector projected to keep growth of extractive GDP at 11 percent per year, on average, during 2015-20.
  - Iron ore production relative to 2013 levels expected to more than double in next five years and increase by five times in next 10 years if expansion plans materialize.
- Oil and gas prospects:
  - Current production below 5,000 barrels per day (Mbpd), well below original projections of 60Mbpd.
  - Banda Gas project (Chinguetti field) could produce up to BTU60 billion per day over 20 years (World Bank, 2014).
- Resource revenue projections (FARI framework):
  - Base-case (all planned mining projects executed): government revenue from mining over 2015–2034 could amount to US$10 billion or 2.6 times the country’s 2013 non-resource GDP.
  - Extended scenario (adds Banda Gas and hypothetical phosphate): nominal undiscounted revenue could amount to 4.5 times the country’s 2013 non-resource GDP.

### Fiscal framework considerations, vulnerabilities, and institutional issues
- Recent performance and buffers:
  - With ECF arrangement (2010-13) support, authorities adopted more prudent fiscal stance; by early 2014 fiscal and external buffers had been strengthened.
  - Oil fund established in 2006; despite decline in production, grew on account of higher oil prices.
- Vulnerabilities and indicators:
  - 2014 terms-of-trade shock weakened fiscal buffers.
  - External debt rose to 73½ percent of GDP.
  - Non-resource primary balance remained relatively high at 13 percent of non-resource GDP in 2014.
- Institutional/policy issues:
  - Contribution of natural resources to government revenue significantly smaller than share in exports due to generous fiscal concessions and negotiated terms differing from general legislation.
  - Mining Code history: 1999 Code (royalty iron ore 1.5 percent; gold/copper 3 percent; 30 percent corporate tax after three-year holiday; 16 percent dividend withholding); 2008 revisions increased iron ore royalty to 2 percent, reduced income tax to 25 percent and withholding to 10 percent; 2012 Code introduced progressive royalties linked to prices and 10 percent unpaid state participation. In practice negotiated terms vary.
- Objectives for strengthened fiscal framework:
  - Long-run fiscal sustainability: include resource revenues in inter-temporal budget constraint.
  - Manage resource revenue uncertainty and volatility: build precautionary financial savings if volatility is high and persistent.
  - Debt management: avoid borrowing against future revenues that reduces future fiscal flexibility.
  - Exhaustibility and intergenerational equity considerations.
  - Strengthen fiscal predictability and institutions to improve governance.

### Resource-horizon taxonomy and choice of fiscal anchor
- Two elements determine resource horizon length:
  - Only commercially exploitable reserves (meeting investors’ breakeven price) included in resource-wealth accounting.
  - Weight of resources in total government revenue and the fiscal regime determine timing and magnitude of flows.
- Rule of thumb: resource revenues representing more than 15-20 percent of total budget revenues over 30 years or more regarded as significant and sustained.
- Short resource horizon (baseline for Mauritania):
  - Resource revenues projected to average 5 percent of non-resource GDP over next decade and then gradually decline (characterized as less than 30 years).
  - Recommended anchor: Non-resource primary balance (NRPB) rule aligned with finite wealth sustainability.
- Long resource horizon (upside scenario):
  - Resource revenues could average 11 percent of non-resource GDP over next decade and be sustained.
  - Recommended anchor: Primary structural balance rule using cyclically-adjusted (“structural”) prices.

### Fiscal institutions and resource funds design
- Requirements:
  - Strengthened public financial management (PFM) systems, credible medium-term framework, improved public investment process, enhanced fiscal transparency.
- Resource funds:
  - Should be used primarily for smoothing and intergenerational equity; designed to mirror fiscal rule.
  - Resource funds and flows fully integrated into budget and PFM with no parallel spending program.
  - Surplus revenues from fiscal rule execution should flow into resource fund: first for stabilization buffer, any excess saved for future generations.

### Illustrative simulations anchored in the NRPB (PIH, MPIH, FSF) — preserved figures and outcomes
- Context: Mauritania characterized as capital-scarce with uncertain resource horizon; analysis period 36 years, 2015–2050.
- Key Box 1 assumptions (preserved exactly):
  - Analysis period: 36 years, from 2015 through 2050.
  - Real non-resource GDP growth: 6.4 percent (constant).
  - Nominal non-resource GDP growth: 11.8 percent (under the PIH and modified PIH rules).
  - Inflation: constant at 5.1 percent throughout the period.
  - Non-resource revenue (excluding grants): constant at 23 percent of non-resource GDP.
  - Annual resource revenue flows: derived from the FARI fiscal forecasting model; commodity prices come from the October 2014 WEO which assumes iron ore price converges to US$85 per metric ton in the long-term.
  - Mineral wealth (NPV of government revenues from minerals through 2050, end-2014, base case, discount rate 12.5 percent): MRO 1,336 billion at the beginning of 2015 (equivalent of 1.15 the non-resource GDP of 2013).
  - PIH baseline: NRPB deficit corresponding to PIH sustainability benchmark is 0.65 percent of non-resource GDP.
  - MPIH specifics:
    - Increase in public investment of MRO 1,081 billion between 2015 and 2019 (18 percent of 2013 non-resource GDP).
    - NRPB reaches maximum deficit of 2.9 percent of non-resource GDP during this period.
    - Fiscal consolidation over 2020–2029 with average adjustment of 0.34 percent of GDP; surpluses up to 0.9 percent; by 2031 returns to -0.65 percent.
  - FSF: generates long-run NRPB deficit of 0.25 percent of non-resource GDP.
- PIH results:
  - Fiscal space of 0.65 percent of non-resource GDP (sustainable perpetual NRPB deficit).
- MPIH results:
  - Allows temporary frontloading of capital spending; example: nominal public investment increase of 18 percent relative to baseline in next five years requires adjustment of 0.34 percent of GDP on average between 2020 and 2030.
  - During 2015-2019 NRPB reaches maximum deficit of 2.9 percent of non-resource GDP; later consolidation with surpluses up to 0.9 percent; by 2031 returns to PIH benchmark of -0.65 percent.
- FSF results:
  - Incorporates expectations of investment spillovers on growth; allows initial drawdown and later stabilizes NRPB at 0.25 percent of non-resource GDP.
  - Under FSF, primary expenditure can be stabilized at a higher level due to higher growth and non-resource revenues from spillovers.

### Managing volatility: price-based rules and calibration
- Three price-rule specifications modeled (applied to iron ore, copper, gold):
  - MA(5/0/0): five-year rolling average of historical average (Ghana’s budget oil price formula).
  - MA(5/1/5): moving average of past five years, current year, and projected prices for next five years (Trinidad and Tobago).
  - MA(12/1/3): average of past 12 years, current year, and three years of futures prices (Mongolia, 2013 copper budget price).
- Simulation result:
  - MA(5/1/5) reduces volatility relative to actual prices while responding better to changes in price trends.
- Trade-offs:
  - Short backward-looking horizon: tracks price changes better but may yield more volatile expenditure envelopes and procyclical policy.
  - Longer backward-looking horizon: smoother expenditures but may systematically under- or overshoot if price trends change.

### Fiscal-anchor level, expenditure caps, and savings accumulation (preserved figures)
- Simulations indicate targeting a structural surplus is advisable given risk factors and absorptive capacity constraints.
- Example calibration:
  - Structural balance rule targeting a surplus of 1 percent of non-resource GDP with price calculated as moving average over 11 years (5/1/5) could smooth public expenditure growth, stabilize overall primary balance, and allow accumulation of financial savings to reduce government debt.
- Additional real expenditure growth cap illustration:
  - Under 1 percent structural surplus + 5/1/5 price-smoothing rule:
    - Imposing cap on real expenditure growth of 7 percent increases financial savings from 37 percent to 42 percent of non-resource GDP by 2049.
  - Stabilization buffer: part of financial savings for buffers, excess saved for future generations.

### Institutional prerequisites and fiscal-rule design features
- Advance PFM reforms: formal adoption of new Organic Budget Law (OBL) (draft prepared 2012) to include fiscal principles, fiscal objectives, MTEF, improved documentation, and timetable for legislative scrutiny.
- Introduce binding MTEF encompassing public investment program (PIP).
- More sophisticated fiscal risk analysis for commodity price/production fluctuations.
- Fiscal rule design should include: fiscal objectives, fiscal anchor, interactions with resource fund, escape clauses; well-designed escape clauses critical.
- Oil fund experience could be starting point to expand to a comprehensive resource fund including mineral revenue.
- Resource fund flows fully integrated into budget; surplus revenues first fund stabilization buffer then savings for future generations.
- Transparency and communication: publish multi-year fiscal objectives and ex-post reporting to Parliament and public; include SOE and general government transactions and fiscal risks.

### DIGNAR model application — investment, debt, and consumption trade-offs (preserved calibration and outcomes)
- Model purpose: analyze benefits of higher public investment versus costs on debt and fiscal path; captures resource revenue management, public investment capacity constraints, and detailed fiscal financing choices.
- Key calibrations and parameters:
  - Sovereign wealth fund (SWF / oil fund) amounted to almost US$100 million, equivalent to 2 percent of GDP in 2014.
  - Consumption tax (VAT) initial level is 14 percent at end-2014.
  - Investment efficiency calibrated at 0.5 in non-natural resource sector, rising to 0.6 over next decade.
  - Absorptive capacity constraints bind when public investment rises above 75 percent from its initial value; average investment efficiency halves when public investment spikes to ~200 percent from initial value.
  - Extractive output assumed exogenous; iron ore represents entire extractive sector.
- Investment and price scenarios (2 x 2 matrix):
  - Investment paths:
    - Baseline investment path: staff projections; high public investments next three years; public investment as percent of GDP anchored at 2018 level (~10 percent of GDP) afterward.
    - Aggressive investment path: authorities continue investing at baseline peak (almost 15 percent of GDP) through 2018 before declining to ~10 percent of GDP by 2021.
  - Iron ore prices:
    - Baseline iron ore price: USD72 per ton (late-2014 market); assumes all planned mining projects execute and start within one year; production anchored at over 65 million tons per year by 2030.
    - Downside iron ore price: further 10 percent decline to about USD65 per ton; assumes cancellation/delay of projects; mining capacity increases to 44 million tons by 2026.
- Model simulation results — key findings:
  - Baseline investment + baseline price (USD72/ton):
    - Current investment plans sustainable but reduce private consumption.
    - Financing initially by additional debt and oil fund draws, later higher consumption taxes once oil fund depleted.
    - Private consumption decreases by about one percent below steady state in medium run.
    - Non-extractive output rises initially then returns to steady state; after 2019 consumption recovers to steady state by 2028; non-extractive output rises almost one percent above steady state.
    - Total public external debt peaks slightly over 70 percent of GDP in near term, then stabilizes and declines by 2019.
  - Baseline investment + downside price (USD65/ton):
    - Maintaining current investment plan becomes very costly: larger foregone private consumption, reduced non-extractive output, higher taxes and public external debt which decreases more slowly.
  - Aggressive investment + baseline price:
    - Non-extractive output more than 2.5 percent above steady state (almost three times baseline difference).
    - Consumption depressed by up to 3 percent below steady state in medium run due to higher consumption taxes.
    - Consumption eventually recovers but net consumption loss likely exceeds benefits.
  - Aggressive investment + downside price:
    - Particularly damaging: steep drop in private consumption next five years with long-run stagnation or decrease.
    - External public debt would rise above 80 percent of GDP by 2020 and only slowly decrease thereafter.
- Policy implications from DIGNAR:
  - Ambitious public investment increases output but creates substantial medium-run costs in foregone private consumption under current commodity prices.
  - Under downside price shocks, continuation of baseline investment plans would be very costly in terms of consumption and could reduce non-extractive output.
  - Aggressive investment under lower prices imposes very large consumption and debt costs; authorities should be prudent and flexible.
  - Strengthen investment management and absorptive capacity to raise investment efficiency (e.g., from 0.5 to 0.6) to increase returns and limit costs.

### Labor market, education, and human capital — problems and policy directions (preserved figures)
- Growth driven by extractive sector; two-speed economy with low productivity gains.
- Labor market statistics and dynamics:
  - Unemployment rate: 10 percent (2012 ENRE-SI, ILO methodology) and 31 percent (2012 EPCV 2008 survey methodology).
  - Urban unemployment average 16.6 percent; many cities >20 percent; rural unemployment 4.4 percent.
  - Two out of three unemployed are less than 35 years old.
  - Unemployment >20 percent for 20–29 urban workforce; 29 percent for 25–29 age group.
  - Female unemployment: 22.8 percent with secondary education and 37.5 percent with tertiary education.
  - Labor force participation: 4.4 out of 10 working-age people active.
  - Participation for ages 15–24 is 25 percent (34 percent for men, 17 percent for women).
  - Female labor force participation rate (FLFPR) 28.8 percent in 2012; increases from 12.5 percent (ages 15–19) to 43.7 percent (ages 45–49).
  - Informal sector employs 86.5 percent of total working population (more than two thirds in nonagricultural sector); 42.8 percent working in agriculture.
  - Formal sector dominated by public administration and public enterprises (95.7 percent); private firms employ 4.3 percent.
  - Only 4 percent of workers in nonagricultural private sector affiliated to social security.
  - 44 percent of workers are in seasonal or temporary jobs (53 percent for women).
  - Only 4 percent of workers in nonagricultural private sector affiliated to CNSS or social security.
- Education and skills:
  - 68 percent of working-age population had access to school; almost half did not complete primary education.
  - Only 7 percent of males and 3.3 percent of women reached tertiary education.
  - Private education: 11 percent of primary students; >26 percent of secondary students.
  - TVET covers only 6 percent of new labor-force entrants; public spending on TVET currently 0.02 percent of GDP.
  - ONS 2007: girl has 50 percent probability of becoming literate after six years; 17 percent succeed lower secondary certificate; 18 percent succeed baccalaureate.
  - Mauritania ranked 135 out of 144 in education quality (World Economic Forum Global Competitiveness Report 2014–15).
- Demographics and job-creation needs:
  - Working-age share reached 52 percent in 2013.
  - Working-age population expected to reach 60 percent in 2065 (medium-fertility scenario).
  - Using Drummond et al. (2014) estimation: 1 percentage point change in working-age share increases real GDP per capita by 0.5 percentage point; Mauritania’s GDP per capita could be 6 percent, 20 percent, and 40 percent higher in 2030, 2050, and 2080, respectively.
  - 15–64 age group will grow by 380,000 by 2020 and ~1,000,000 in 2030 relative to 2013.
  - Under constant participation, need to create 25,000 jobs per year during 2014–20 (3,000 more per year than 2000–13); additional demand reaches 30,000 in 2030.
  - If participation rates increase (e.g., female participation), economy needs to create 200,000 jobs during 2014–20.
  - Expected employment growth under baseline is 2 percent but ranges 1.4–2.4 percent depending on employment-output elasticity; working-age population expected to grow 2.7 percent on average.
- Policy recommendations — education and labor market:
  - Increase enrollment and attainment in primary school, target the poor and girls; consider conditional cash transfers where monitoring systems exist; expand adult literacy.
  - Improve quality of basic education and invest in secondary infrastructure (especially rural); participate in international assessments.
  - Shift toward supply-driven education and TVET aligned with employer needs; strengthen partnerships with employers; increase public spending on TVET (current 0.02 percent of GDP).
  - Reinforce Agence Nationale de Promotion de l’Emploi des Jeunes: current placement rates 61.5 percent overall, 31 percent for women, 64 percent for men, 65 percent urban, 28 percent rural.
  - Raise female participation via child care availability/subsidies, parental leave schemes, flexible work arrangements, rural infrastructure, and targeted programs; fewer than 10 percent of children have access to public child care/preschool in Mauritania. Labor code increased maternity leave to 14 weeks (eight after delivery).
  - Recognize informal actors in labor laws; set minimum social protection packages for informal workers; adapt labor code coverage; reduce barriers to formalization and align public wage policy with productivity.

### Structural reforms, productivity, and diversification priorities (preserved empirical highlights)
- Productivity and reform evidence:
  - Financial sector reforms (banking supervision) important for Q1 countries; selected regression coefficients preserved as reported (examples):
    - Banking system reforms: Q1 2.9396, Q2 6.3655, Q3 5.9330, Q4 0.4593, Full sample 3.272.
    - Banking supervision: Q1 4.0114, Q2 4.0794, Q3 4.926, Q4 0.628, Full sample 2.206.
    - Capital market development: Q1 2.5812, Q2 2.0776, Q3 6.43, Q4 0.862, Full sample 2.359.
  - Trade liberalization and reduction of non-tariff barriers can raise TFP for Q1 countries; Mauritania compares favorably on tariff barriers but less favorably on non-tariff barriers and ease of imports/exports.
  - Agricultural reforms are not significant for Q1 countries in the empirical exercise, but Mauritania has scaled up public investment in agriculture: arable land +80 percent; irrigated land rose from 9,000 to 16,000 hectares during 2010–14.
  - Public investment efficiency: Mauritania scores well in appraisal, selection, and evaluation, but implementation and management quality could improve.
- Diversification:
  - Export diversification linked to long-term growth gains: one standard deviation increase in LICs’ export diversification raises growth by ~0.8 percentage points.
  - Output diversification can yield larger gains: one standard deviation in output diversification raises average annual growth by ~1.4 percentage points.
  - Mauritania’s production base more diversified than other mining resource–rich countries but value added in key sectors remains low.
- High-priority reform agenda:
  - Strengthen banking supervision and prudential measures; bolster crisis prevention frameworks and macroprudential surveillance.
  - Deepen financial sector and strengthen monetary policy/liquidity management to prepare for capital markets.
  - Improve governance and business environment to attract FDI and private investment.
  - Reduce non-tariff and regulatory trade barriers.
  - Invest in human capital (education quality and quantity) and policies to increase female participation and protect informal workers.
  - Strengthen public investment efficiency and implementation; attract PPPs where appropriate.

### Conclusions and guidance on fiscal-anchor choice
- Fiscal policy must account for reliance on resource revenues, exposure to short-term price shocks, and significant mining expansion prospects; avoid procyclical fiscal policies.
- Choice of fiscal anchor depends on resource exhaustibility assumptions:
  - Finite resources: monitor NRPB linked to fiscal sustainability benchmark considering total resource wealth.
  - Long-term resource horizon: target a structural primary resource balance using price-smoothing (MA(5/1/5) indicated as balanced in simulations).
- Fiscal rule technical details require further discussion; strong institutions (OBL adoption, transparency, medium-term frameworks, good governance) are prerequisites for credible implementation.

*ISLAMIC REPUBLIC OF MAURITANIA, INTERNATIONAL MONETARY FUND, January 14, 2015.*

### References _______________________________________________________________________________ 18

### _cr1536 - References _______________________________________________________________________________ 18

### Context and Executive Summary
- Mauritania is a multi-metallic commodity exporter facing medium-term fiscal challenges from volatile resource revenues and prospects for significant mining expansion.
- Policy goal: avoid pro-cyclical fiscal policies and adopt rules guiding medium-term fiscal sustainability.
- Recommended fiscal-rule approaches in the paper:
  - A fiscal rule targeting a non-resource primary balance for long-term sustainability, designed to allow some frontloading of public spending on productive investment (appropriate under the assumption of a finite resource horizon).
  - A fiscal rule targeting a structural resource balance (appropriate in the scenario of long-lasting resources, possible under favorable global commodity market developments).

### Mauritania’s Resource Wealth — Key Facts and Projections
- Sectoral importance and current composition:
  - Minerals make up more than 75 percent of total exports and contributed 11 percent of non-extractive GDP in 2013.
  - Receipts from minerals and petroleum contribute 26 percent to Mauritania’s budget.
- Major mining companies and project status (selected excerpts from Table 1):
  - SNIM (State 78.35%): In production. Currently producing at 13Mtpa, planning to ramp up production to 25Mtpa by 2021 and to 40Mtpa by 2025 with the development of the Tizerghaf project.
  - MCM (100% MCM): In production. Guelb Moghrein mine; as of December 2013, estimated mine life was of eight years, including stockpiles.
  - TASIAST (Kinross Gold Corporation 100%): In production. Peak production rate of 272Koz gold in 2013, with total production of 1.14Moz between 2008 and 2013. Proven and probable reserves of 9.6Moz.
  - ASKAF (Glencore): Prospective. Production expected to begin in 2017 at 7.5Mtpa.
  - El Aouj Mining Company (SNIM 50% and Glencore 50%): Prospective. Phase I production projected to begin in 2019 at 9.5Mtpa, with a doubling in production in Phase II by 2023.
  - TAZADIT (SNIM 65%, Inmetals 35%): Prospective underground mine with US$250 million investment. Original plans to start development in 2014 and attain 2.5Mtpa peak production in 2017 are currently delayed.
  - TASIAST (expansion) (Kinross Gold Corporation 100%): Expansion strategy requiring US$1.6 billion in investment to ramp up processing capacity at 38Ktpd is to be decided at end 2015/beginning 2016. Should the expansion materialize, the project could produce at this higher rate until 2027.
- Production and investment outlook:
  - Investment in the sector has been growing at a remarkable rate and is projected to keep the growth of extractive GDP at 11 percent per year, on average, during 2015-20.
  - The production of iron ore alone is expected, relative to 2013 levels, to more than double in the next five years and increase by five times in the next 10 years if mining expansion plans materialize.
  - SNIM has announced plans to ramp up production to 25Mtpa by 2021 and to 30Mtpa by 2025 with the development of the Tizerghaf project. (Note: table entry reports ramp up to 40Mtpa by 2025; both formulations appear in the source.)
- Oil and gas prospects:
  - Mauritania is producing nowadays less than 5,000 barrels per day (Mbpd), well below original projections of 60Mbpd.
  - Frontier explorers active offshore include Premier Oil, Kosmos Energy, Chariot Oil and Gas, and Tullow Oil.
  - The Banda Gas project (Chinguetti field) could produce up to BTU60 billion per day over 20 years (World Bank, 2014).
- Resource revenue projections (FARI framework):
  - Base-case scenario (all currently planned mining projects executed): government revenue from mining alone over the next 20 years (2015–2034) could amount to US$10 billion or 2.6 times the country’s 2013 non-resource GDP.
  - Extended scenario (adds upstream Banda Gas receipts and hypothetical phosphate development): nominal undiscounted revenue could amount to 4.5 times the country’s 2013 non-resource GDP.
  - Revenues could be higher if global commodity prices recover and make development of new projects commercially viable.

### Fiscal Framework Considerations and Challenges
- Recent fiscal performance and buffers:
  - With ECF arrangement (2010-13) support, the authorities adopted a more prudent fiscal stance and improved policy space.
  - By early 2014, fiscal and external buffers had been strengthened thanks to progress in revenue mobilization, windfall donor assistance, and oil fund accumulations.
  - The oil fund was established in 2006 and, despite the decline in production, has grown in recent years on account of higher oil prices.
- Vulnerabilities and indicators:
  - The terms-of-trade shock in 2014 weakened fiscal buffers.
  - External debt maintained an upward trend, reaching an elevated 73½ percent of GDP.
  - The non-resource primary balance remained relatively high at 13 percent of non-resource GDP in 2014.
- Specific institutional and policy issues:
  - Contribution of natural resources to government revenue is significantly smaller than their share in exports partly due to a mining fiscal regime designed to attract investment (generous fiscal concessions).
  - Existing mines operate under negotiated terms with important variations from applicable general legislation.
  - Under the Mining Code of 1999 (and revisions retained in the Mining Code of 2012): royalties and tax parameters included a royalty payment of 1.5 percent on the sales value of iron ore and 3 percent on gold and copper; 30 percent corporate income tax after a three-year tax holiday; and 16 percent withholding on dividends. Revisions made in 2008 increased iron ore royalty to 2 percent while reducing income tax rate to 25 percent and withholding on dividends to 10 percent; the 2012 Code introduced progressive royalty rates linked to prices and implemented a 10 percent unpaid state participation. In practice, negotiated terms vary.
- Objectives a strengthened fiscal framework must address:
  - Long-run fiscal sustainability: include resource revenues in the inter-temporal budget constraint.
  - Manage resource revenue uncertainty and volatility: if volatility is high and persistent, build precautionary financial savings to smooth revenues and expenditures.
  - Debt management: natural resource wealth may increase capacity to borrow but borrowing against future revenue reduces fiscal flexibility later and can lower creditworthiness.
  - Exhaustibility and intergenerational equity: especially relevant if resource reserve horizons are limited.
  - Strengthening fiscal policy predictability and institutions to improve governance in managing mining wealth.

### Policy Implications and Recommended Directions
- Adopt a fiscal rule aligned with resource-horizon assumptions:
  - Non-resource primary balance rule appropriate under finite resource horizon and to allow some frontloaded productive public investment.
  - Structural resource balance rule appropriate if resources are long-lasting.
- Reinforce the fiscal framework urgently to:
  - Support continued responsible fiscal policy.
  - Enhance policy predictability.
  - Improve governance in managing mining wealth.
- Integrate resource revenue management with comprehensive debt management strategy to avoid excessive borrowing against future revenues.
- Build precautionary financial savings to smooth spending in the face of revenue volatility if required by persistent volatility.

*ISLAMIC REPUBLIC OF MAURITANIA, INTERNATIONAL MONETARY FUND, January 14, 2015.*

### 10.      With these multiple objectives, the appropriate fiscal anchor depends on whether the

### _cr1536 - 10.      With these multiple objectives, the appropriate fiscal anchor depends on whether the

### Resource-horizon taxonomy and fiscal-anchor choice
- The appropriate fiscal anchor depends on whether resource revenue is temporary or long-lasting, and whether the economy is scarce or abundant in capital.
- Two elements determine the length of the resource horizon:
  - Only commercially exploitable reserves (meeting investors’ breakeven price) can be included in resource-wealth accounting.
  - The weight of resources in total government revenue and the fiscal regime for extractive industries (timing and magnitude of flows into the budget).
- Rule of thumb cited: in mining producers, resource revenues representing more than 15-20 percent of total budget revenues over a period of 30 years or more could be regarded as significant and sustained.

### Short resource horizon: objectives and recommended anchor
- Context for Mauritania (baseline):
  - Resource revenues projected to average 5 percent of non-resource GDP over the next decade and then gradually decline.
  - This scenario is characterized as a short resource horizon (less than 30 years).
- Objectives when horizon is short:
  - Address sustainability and intergenerational equity.
  - Smooth government consumption over time.
- Fiscal anchor recommended:
  - Non-resource primary balance (NRPB) rule, with the non-resource primary deficit set in line with a long-run sustainability benchmark that accounts for finite resource wealth.

### Long resource horizon: objectives and recommended anchor
- Upside scenario for Mauritania:
  - Resource revenues could average 11 percent of non-resource GDP over the next decade and be sustained over a long period, increasing exposure to commodity-price volatility and fiscal space.
- Objectives when horizon is long:
  - Manage price uncertainty and invest in growth-supporting projects in the short to medium term.
  - Address absorptive capacity constraints and mitigate diversion to non-productive expenditure.
- Fiscal anchor recommended:
  - Primary structural balance rule where the resource component of budget revenue is calculated using cyclically-adjusted (“structural”) prices rather than actual commodity prices.

### Fiscal institutions and resource funds
- A solid fiscal framework requires:
  - Strengthened public financial management systems.
  - A credible medium-term framework for budget formulation.
  - Improved public investment process and enhanced fiscal transparency.
- Resource funds:
  - Should primarily be used for smoothing and intergenerational equity and be designed to mirror the fiscal rule.
  - Resource funds and flows should be integrated into the budget and public financial management framework, with no parallel spending program.

### Illustrative simulations for Mauritania: frameworks and outcomes
- Mauritania is characterized as capital-scarce with an uncertain resource horizon.
- Three sustainability frameworks anchored in the NRPB were simulated: Permanent Income Hypothesis (PIH), Modified PIH (MPIH), and Fiscal Sustainability Framework (FSF).

Findings from simulations (key figures preserved):
- PIH:
  - Fiscal space of 0.65 percent of non-resource GDP (sustainable perpetual NRPB deficit).
  - NPV of non-resource primary deficits equals NPV of future resource revenue flows.
- Modified PIH (MPIH):
  - Allows temporary frontloading of capital spending.
  - Simulation: nominal increase in public investment of 18 percent relative to the baseline in the next five years would require an adjustment of 0.34 percent of GDP on average between 2020 and 2030.
  - During front-loading (2015-2019) NRPB reaches a maximum deficit of 2.9 percent of non-resource GDP.
  - Fiscal consolidation assumed over 10 years starting in 2020 with surpluses of up to 0.9 percent; by 2031 returns to PIH benchmark of -0.65 percent of non-resource GDP.
  - Investment frontloading of MRO 1,081 billion over 2015–2019 equals 18 percent of 2013 non-resource GDP.
- Fiscal Sustainability Framework (FSF):
  - Incorporates ex-ante expectations of investment spillovers on growth.
  - Allows initial drawdown for investment and later stabilizes NRPB at a level inferior to PIH/MPIH.
  - FSF generates a fiscally sustainable path consistent with a long-run NRPB deficit of 0.25 percent of non-resource GDP.
  - Under FSF, primary expenditure can be stabilized at a higher level due to higher growth and non-resource revenues from spillovers.

### Box 1: Key simulation assumptions (preserved exactly)
- Analysis period: 36 years, from 2015 through 2050.
- Real non-resource GDP growth: 6.4 percent (constant).
- Nominal non-resource GDP growth: 11.8 percent (under the PIH and modified PIH rules).
- Inflation: constant at 5.1 percent throughout the period.
- Non-resource revenue (excluding grants): constant at 23 percent of non-resource GDP.
- Annual resource revenue flows: derived from the FARI fiscal forecasting model; commodity prices come from the October 2014 WEO which assumes iron ore price converges to US$85 per metric ton in the long-term.
- Mineral wealth:
  - Calculated as NPV of government revenues from minerals through 2050 (as of end of 2014) under base case (neither phosphate nor natural gas development).
  - Using discount rate of 12.5 percent, mineral wealth is MRO 1,336 billion at the beginning of 2015 (the equivalent of 1.15 the non-resource GDP of the country in 2013).
- PIH baseline: NRPB deficit corresponding to PIH sustainability benchmark is 0.65 percent of non-resource GDP.
- MPIH specifics:
  - Increase in public investment of MRO 1,081 billion between 2015 and 2019 (18 percent of 2013 non-resource GDP).
  - NRPB reaches maximum deficit of 2.9 percent of non-resource GDP during this period.
  - Fiscal consolidation over 2020–2029 with average adjustment of 0.34 percent of GDP; surpluses up to 0.9 percent; by 2031 returns to -0.65 percent.
- FSF:
  - Generates long-run NRPB deficit of 0.25 percent of non-resource GDP.

### Managing volatility: price-based rules and calibration
- For long resource horizons, the priority is managing volatility using price-based (structural) rules.
- Three price-rule specifications modeled for Mauritania (applied to iron ore, copper, and gold in the base case):
  - MA(5/0/0): five-year rolling average of historical average (Ghana’s budget oil price formula).
  - MA(5/1/5): moving average of past five years, current year, and projected prices for next five years (Trinidad and Tobago).
  - MA(12/1/3): average of past 12 years, current year, and three years of futures prices (Mongolia, 2013 copper budget price).
- Simulation result:
  - The MA(5/1/5) rule reduces volatility relative to actual prices while responding better to changes in price trends.
- Trade-offs in choosing price-rule horizon:
  - Short backward-looking horizon: tracks price changes better but may yield more volatile expenditure envelopes and procyclical policy.
  - Longer backward-looking horizon: smoother expenditures but may systematically under- or overshoot actual revenues if price trends change.

### Simulation policy options and practical design features
- When resource horizon is short: anchor fiscal policy to NRPB consistent with PIH/MPIH/FSF sustainability benchmarks; consider controlled front-loading if absorptive capacity and growth spillovers justify it, but plan later consolidation.
- When resource horizon is long: adopt primary structural balance rule with well-calibrated price-smoothing formula (MA(5/1/5) indicated as balanced in simulations) and maintain stabilization buffers to smooth cyclical price swings.
- Institutional requirements:
  - Integrate resource revenues and resource funds into the budget and public financial management framework.
  - Avoid parallel spending programs or off-budget treatment of resource funds.
  - Strengthen medium-term budget frameworks, public investment management, and fiscal transparency.

*ISLAMIC REPUBLIC OF MAURITANIA INTERNATIONAL MONETARY FUND*

### 21.      The level of the fiscal anchor must be determined in the context of the country’s debt

### 21.      The level of the fiscal anchor must be determined in the context of the country’s debt

### Fiscal anchor level and simulation results
- A structural surplus should be targeted because of risk factors (such as contingent liabilities) and Mauritania’s existing absorptive capacity constraints, at least in the medium term.
- Simulations indicate that a structural balance rule targeting a surplus of 1 percent of non-resource GDP and with the price calculated as the moving average over 11 years (5/1/5) could:
  - smooth public expenditure growth;
  - stabilize the overall primary balance; and
  - allow an accumulation of financial savings to reduce government debt (Figure 3, upper and middle row panels).

### Illustration: additional real expenditure growth cap
- An additional cap on real expenditure growth could further limit procyclicality and allow a higher accumulation of financial savings.
- Absorptive capacity considerations may call for a cap on overall expenditure growth; other countries (such as Mongolia) have used expenditure caps in combination with other fiscal anchors to smooth expenditure.
- Under the fiscal anchor of 1 percent structural resource surplus and a 5/1/5 price-smoothing rule:
  - imposing an additional cap on real expenditure growth of 7 percent brings the level of financial savings up from 37 percent to 42 percent of non-resource GDP by 2049 (Figure 3, bottom row panels).
  - Part of these financial savings could be set aside in stabilization buffers, with anything in excess saved for future generations.
- Generating more predictable changes in spending could be particularly important if the Banda Gas project comes on stream and phosphate resources are developed (according to the extended scenario).

### Strengthening institutions (policy recommendations and prerequisites)
- Advance public financial management (PFM) reforms initiated in recent years to strengthen fiscal institutions for transparent and efficient use of resource wealth.
- Key reform elements:
  - Formal adoption of the new Organic Budget Law (OBL), prepared in draft form in 2012, which will include fiscal principles, setting of fiscal objectives, a medium-term expenditure framework (MTEF), improved documentation, and a budgetary timetable with more time for legislative scrutiny (IMF 2013).
  - Introduction of a binding MTEF encompassing the public investment program (PIP) as a tool for monitoring fiscal policy and planning capital investment spending.
  - More sophisticated fiscal risks analysis to ensure the government’s fiscal strategy is robust to commodity price and production fluctuations.
- Design of a fiscal rule specifically addressing natural resource wealth:
  - Basic provisions should include fiscal objectives, the fiscal anchor, interactions with a natural resource fund, and escape clauses under which fiscal policy may deviate from the fiscal rule.
  - Well-designed escape clauses are critical to prevent exceptional and unforeseeable shocks from undermining the credibility of the fiscal rule.
  - The oil fund’s experience—operations that have generally set an example of transparency and accountability—could serve as a starting point for a more comprehensive resource fund to include mineral revenue.
  - Surplus revenues from the execution of the fiscal rule should flow into the resource fund, which would first play a budget stabilization function by providing a buffer to protect planned capital expenditure against resource revenue volatility; any additional surplus above this buffer would then be channeled into a savings portfolio for future generations.
  - The resource fund should be a complementary policy tool that mirrors the fiscal rule, with fund flows fully integrated into the budget process.
- Enhance transparency and communication to ensure sustained implementation:
  - Maintain a transparent budget formulation and execution reporting system, including multi-year fiscal objectives defined and published openly, with ex-post reporting to Parliament and the general public.
  - Fiscal performance reporting should preferably include all financial transactions involving state-owned enterprises, the central government, and the general government, with identification of fiscal risks.

### Conclusions and guidance on choosing a fiscal anchor
- Mauritania’s fiscal policy must account for reliance on resource revenues, exposure to price shocks in the short term, and significant mining expansion in the long term; avoid procyclical fiscal policies and adopt rules guiding medium-term policy and predictability.
- Fiscal frameworks linking the sustainable level of spending to future resource revenues could be particularly relevant; as a low income country scarce in capital, consideration could be given to frontloading public expenditure for productive investment, within debt management constraints.
- The choice of fiscal anchor depends on authorities’ view of resource exhaustibility:
  - Under the assumption of finite resources: monitor a non-resource primary balance linked to a fiscal sustainability benchmark that considers estimates of the total resource wealth.
  - Under the assumption of a long-term resource horizon: target a structural primary resource balance to isolate budget execution from commodity price fluctuations.
- Future discussions and analysis are needed to pin down technical details of a fiscal rule.
- Strong institutions are required: commitment to transparency, policy predictability and credibility, good governance structures, and enhanced institutional quality. Adoption of the new OBL would lay foundations for a modern PFM system and a fiscal framework tailored to managing resource wealth to support fiscal sustainability.

*IMF staff report excerpt: “The level of the fiscal anchor must be determined in the context of the country’s debt position.”*

### Box 1. Growth Accounting Exercise: Methodology and Data

### Box 1. Growth Accounting Exercise: Methodology and Data

### Methodology
- The exercise decomposes output growth into contributions of capital, labor, and a residual estimating changes in total factor productivity (TFP).
- Residual defined as growth in output with unchanged levels of factor inputs.
- Based on Hall and Jones (1999) methodology using a standard aggregate Cobb-Douglas production function with constant returns to scale, including physical capital (K), human capital (H), labor (L), human capital per person (h), and labor-augmenting technological progress (A).
- α denotes the capital share and (1-α) the labor share.
- Output growth = TFP growth + weighted sum of growth rates of physical capital and human capital.

### Data Sources and Limitations
- All data taken from the Penn database.
- Poor quality of some data, especially employment, leaves some uncertainty in the results.

### Sectoral Finding: Agriculture (paragraph 10)
- The low agricultural productivity could partly explain the aggregate productivity gap.
- Mauritania experienced relatively low TFP growth in the agriculture sector, unlike many low-income countries including some in the Sahel region.
- Recent efforts to extend irrigated land and other forms of financial support improved the attractiveness of the sector and increased its contribution to growth during 2011–13.

### Labor Market Dynamics (paragraphs 11–13)
- Unemployment rate:
  - 10 percent according to the 2012 national survey on employment and the informal sector (ENRE-SI) using ILO methodology.
  - 31 percent in 2012 using the EPCV 2008 survey methodology.
- Heterogeneity of unemployment across regions, age groups, and gender:
  - Urban unemployment averaging 16.6 percent; many cities record more than 20 percent.
  - Rural unemployment 4.4 percent.
  - Two out of three unemployed are less than 35 years old.
  - Unemployment exceeds 20 percent for the 20-29-year-old urban workforce, reaching 29 percent for the 25–29 age group.
  - Unemployment rate is higher among better educated people; for women: 22.8 percent with secondary education and 37.5 percent with tertiary education are unemployed.
- Labor force participation and gender:
  - Only 4.4 out of 10 working-age people are active (looking actively for a job).
  - Participation rate for people aged 15–24 years is 25 percent (34 percent for men and 17 percent for women).
  - Female labor force participation rate (FLFPR) stood at 28.8 percent in 2012.
  - FLFPR increases from 12.5 percent for ages 15–19 to 43.7 percent for ages 45–49.
- Informal sector and vulnerability:
  - Informal sector employs 86.5 percent of the total working population (more than two thirds of the working population in the nonagricultural sector).
  - 42.8 percent working in agriculture.
  - Formal sector dominated by public administration and public enterprises (95.7 percent); private firms employ 4.3 percent.
  - Formal jobs occupied mostly by the educated: 28.6 percent tertiary education and 43.1 percent secondary education.
  - Women entrepreneurship accounts for more than 50 percent in the informal sector.
  - 38 percent are unpaid, mostly in family businesses.
  - 44 percent of workers are in seasonal or temporary jobs (53 percent for women).
  - More than 98 percent of workers in the informal sector have no contract.
  - Only 4 percent of workers in the nonagricultural private sector are affiliated to the social security system.
  - 57 percent of respondents said creating an informal unit was voluntary.
  - Wage setting: employer discretion in 60 percent of cases; only 9 percent of informal employees have fixed wages.

### Socio-demographic Trends and Projections (paragraphs 14–16)
- Demographic transition and working-age share:
  - Fertility rate has been decreasing since the beginning of the 1980s; infant mortality declined, stabilizing population growth and age structure during 1980–2000.
  - Share of the working-age population reached 52 percent in 2013 (national population survey).
  - Working-age population expected to reach 60 percent in 2065 under the medium-fertility scenario.
- Potential demographic dividend:
  - Drummond and others (2014) estimate a 1 percentage point change in the share of the working-age population increases real GDP per capita by 0.5 percentage point.
  - Using that estimation, Mauritania’s GDP per capita could be 6 percent, 20 percent, and 40 percent higher in 2030, 2050, and 2080, respectively.
- Job-creation needs to absorb new entrants:
  - The 15–64 age group will grow by 380,000 by 2020 and by about 1,000,000 in 2030 compared to 2013.
  - Under constant participation rate, the economy needs to create 25,000 jobs per year on average during 2014–20 (3,000 more per year than in 2000–13).
  - Additional demand for jobs will reach 30,000 in 2030.
  - If participation rates increase (e.g., female participation), the economy will need to create 200,000 jobs during 2014–20.
  - Expected employment growth under the baseline scenario is 2 percent but ranges between 1.4 percent and 2.4 percent per year depending on employment-output elasticity.
  - Working-age population expected to grow by 2.7 percent on average during the same period.
- Urbanization pressures:
  - Urban population accounted for 42 percent of the total in 2013.
  - Urban population will increase by 2.9 percent on average during 2010–15, compared to 1.8 percent for rural population.
  - Nouakchott grew by 4.2 percent during 2000–13 and concentrates one third of the working-age population.
  - More than 40 percent of Nouadhibou’s population are natives of other regions.
  - High rural poverty and vulnerability likely to accelerate urbanization.

### Education, Skills, and Labor Quality (paragraph 17)
- Access and attainment:
  - 68 percent of the working-age population has had access to school.
  - Almost half did not complete primary education.
  - Only 7 percent of males and 3.3 percent of women have reached tertiary education.
- Education system performance:
  - Enrollment rates in primary and, to a lesser extent, secondary schools improved since 2000.
  - Completion rates remain low and transition to tertiary education is very limited.
  - ONS 2007 survey: a girl has only a 50 percent probability of becoming literate after six years of education.
  - 17 percent succeed in the lower secondary level certificate and 18 percent in the baccalaureate.
  - PNDSE reports efficiency rates of 70 percent for lower secondary and 88 percent for upper secondary.
  - Mauritania ranked 135 out of 144 countries in terms of education quality in the World Economic Forum’s Global Competitiveness Report 2014–15.
- Private education and vocational training:
  - Private education accounts for 11 percent of primary students and more than 26 percent of secondary students.
  - Technical and vocational training covers only 6 percent of new labor-force entrants; specialties often inappropriate for labor market needs.

### Lessons and Policy Directions (beginning of Section D)
- Structural reforms needed on demand side: diversification of the economy and promotion of the private sector.
- Supply-side focus also required:
  - More efficient utilization of existing resources.
  - Reduction of employment vulnerability in the short term.
  - Development of human capital and gradual reduction of labor market inefficiencies in the medium to long term.
- Identified three interconnected and complementary pillars relevant for Mauritania; first pillar: Education, training, and employability.

*Source: _cr1536 - Box 1. Growth Accounting Exercise: Methodology and Data (IMF).*

### 18. There is a consensus as to the impact of education on growth. The impact of education

### _cr1536 - 18. There is a consensus as to the impact of education on growth. The impact of education

### Impact of education on growth — key findings
- Early literature on human capital and endogenous growth credits education with positive impacts on labor productivity, innovation, and transmission of skills, and in some cases higher income and less inequality.
- Hanushek and Wößmann (2007) suggest that each year of schooling boosts long-run growth by 0.58 percentage points.
- Lustig and Lopez-Calva (2010) argue that education was key to reducing inequality in Brazil; Hailu and Soares (2009) estimate that one-third of the reduction in inequality is due to the effect of education.
- Conditional cash transfer programs show mixed results: Bolsa Familia (Brazil) relatively successful; Livelihood Empowerment Against Poverty (Ghana) ambiguous due to monitoring challenges.

### Access, enrollment, and policy emphasis
- Increasing access to education has been a high development priority, with successful reforms increasing enrollment rates (especially primary), reducing gender and geographic inequalities, expanding schools, and increasing education spending.
- Conditional cash transfers have been used to encourage schooling where monitoring systems exist.

### Education quality and returns
- Emerging evidence shows education quality matters in addition to quantity; cross-country differences in outcomes may reflect cognitive skills acquired, not just years of schooling.
- Case studies (Ghana, Kenya, Morocco, Pakistan, South Africa, Tanzania) suggest returns on quality may be larger in developing countries than in developed countries.

### Efficiency, spending, and reallocation
- Grigoli (2014) finds large potential gains in secondary enrollment from improving efficiency, especially in lower-income economies (for example, African economies).
- Where needed, reallocation from other public expenditures could be envisaged.
- Reallocating education expenditure to reduce student-to-teacher ratios (notably in rural regions) and improving institutional quality could improve spending efficiency.
- Current public spending on TVET is 0.02 percent of GDP.

### Labor market matching, TVET, and employability
- Tailor education programs to better fit employers’ needs to reduce skills mismatch that can lead to higher unemployment or underutilization of educated people.
- Technical and vocational training (TVET) should incorporate traditional apprenticeships and certification, involve social partners (employers and employees), and address informal economy needs (including agriculture-related training in rural areas).
- Experiments in Morocco, Benin, and Cameroon show value in associating social partners in TVET design and delivery.

### Recommendations — education
- Pursue efforts to increase enrollment and attainment in primary school, with attention to the poor and girls; use conditional cash transfers together with efficient monitoring systems and adult literacy programs.
- Improve quality of basic education and invest in secondary-level infrastructure (especially rural); participating in international assessment tests (PISA, etc.) could be useful.
- Move toward supply-driven education and TVET programs with more empirical content and focus on promising fields with high future labor demand; entail partnerships with employers; reinforce public spending on TVET (currently 0.02 percent of GDP).
- Reinforce Agence Nationale de Promotion de l’Emploi des Jeunes to smooth transition to work by supporting job seekers over a broader area and coordinating with the private sector; current placement rates: 61.5 percent overall, 31 percent for women, 64 percent for men, 65 percent in urban regions, 28 percent in rural.
- Better target public expenditures (subsidies and social transfers), introduce conditional cash transfers where services are available, set geographical priorities for education spending, link education to other development strategies with external financing, and involve the private sector in TVET reform.

---

### Female participation and gender equality — key findings
- Increasing female participation could contribute materially to higher and more inclusive growth and to realizing a demographic dividend.
- Studies: raising female labor force participation rate (FLFPR) to country-specific male levels estimated to increase GDP by 12 percent in the United Arab Emirates and 34 percent in Egypt (Aguirre and others, 2012).
- Tsani and others (2012) simulation for Tunisia: a 2.5 percentage point increase of the FLFPR during 2015–30 will reduce real wages by 4.25—percentage points and increase GDP growth by 1.75 percentage point.
- Low female participation is associated with social, legal, and economic obstacles including unequal access to education, high fertility, conservative norms, restrictive legislation, and a hostile environment in some countries.
- High FLFPR can coexist with underutilization and low pay; high poverty is often associated with high FLFP when work is a necessity.

### Policy instruments to raise female participation
- Fiscal measures to reconcile work and family life include: child care availability and subsidies, publicly financed parental leave schemes guaranteeing return to jobs, flexible work arrangements, and increased expenditure on rural infrastructure (clean water, transport).
- Linking child and family benefits to female labor force participation can be considered.
- Promote women’s entrepreneurship by improving access to education, land, and credit.

### Recommendations — gender
- Ensure equal opportunities in education at all levels and in all regions.
- Gender mainstream budgets and public policy formulation, leveraging projects like the Public Investment Management Support Project 2014–16.
- Adopt active labor market policies to reduce unemployment among women, including preferences for public hiring programs and vocational training.
- Help women reconcile work and family: provide affordable public child care and preschool (currently, fewer than 10 percent of children have access to such services in Mauritania); encourage maternity leave, flexible work, and part-time jobs. The labor code increased maternity leave to 14 weeks, eight of these for the period after the delivery, with some flexibility within the pregnancy and nursing period.
- Invest in health and infrastructure and improve access to land and financing for women; address high fertility among rural women via information and advocacy campaigns.

---

### Market segmentation, informality, and public sector attractiveness — findings
- Informality has macro and micro drawbacks (low productivity, low tax revenue, worker vulnerability) but is a significant source of job creation in developing countries.
- Short-term priority: recognize informal economy actors in labor laws and put minimum protection mechanisms in place; labor laws currently cover workers with clear employer-employee relationships, calling for extension or specific regulation for informal workers.
- Some countries design basic social protection packages (essentially health) for informal workers; unemployment benefits and public works have been used to mitigate shocks on informal workers.
- Long-term approach: encourage SMEs to gradually formalize by reducing costs of formality (labor market rigidities, high taxes, complex procedures) and increasing perceived benefits through better governance and transparency.
- A large and attractive public sector can distort labor market outcomes by offering greater job security and higher wages, inflating wage expectations, skewing education choices toward fields favored by public hiring, and reducing entrepreneurship (evidence from Leigh and Flores, 2012).

### Recommendations — informality and market segmentation
- Set minimum social protection packages for informal workers.
- Adapt the labor code to extend coverage to informal workers while accounting for their diversity and activity specificities (agriculture, domestic work, craft industry, street vendors); balance coercive actions with incentives and supporting measures; reinforce trade unions and associations.
- Promote awareness of benefits of formalization: according to ENRE-SI, only 18 percent of informal entrepreneurs know the CNSS but only 14 percent are against being affiliated; others have neutral or favorable views.
- Consider gradually increasing the maximum monthly earnings for contribution purposes, currently 70,000 ouguiya.
- Reduce regulatory and non-regulatory barriers to formalization (including excessively high minimum wages) while protecting workers’ rights.
- Reduce the gap between public and private sector wages via a productivity-oriented public wage policy and gradual alignment with private sector levels to increase public sector productivity and control the wage bill.

*International Monetary Fund — Islamic Republic of Mauritania (excerpt).*

### 31. In recent years, Mauritania’s growth performance has been mostly driven, directly and

### _cr1536 - 31. In recent years, Mauritania’s growth performance has been mostly driven, directly and

### Recent growth dynamics and labor market
- Growth has been mostly driven, directly and indirectly, by the extractive sector.
- The overall growth masks a two-speed economy with low productivity gains.
- Labor force underutilization is reflected in:
  - high youth unemployment rate (specific value not provided in the source text).
  - low female participation rate (specific value not provided in the source text).
- A large share of the workforce is highly vulnerable because informality dominates the economy.

### Medium-term outlook
- Over the medium term, Mauritania is expected to be one of the best performers in the region, thanks to a substantial improvement in its mining production.
- Pressures on the labor market are likely to increase due to:
  - a higher share of the population at working age, and
  - rural-urban migration.

### Human capital and inclusion priorities
- To better benefit from the demographic dividend, Mauritania needs more focus on human capital development, in particular by improving education, quantitatively and qualitatively.
- Inclusion priorities include:
  - promoting a more active role for women in the economy, and
  - increasing protection of informal workers.
- A more comprehensive approach is needed to reduce informality gradually over the medium term.

### Structural reforms and diversification: objectives and evidence
- Goal: boost and sustain growth and enhance inclusiveness through increases in total factor productivity (TFP) and economic diversification.
- Key reform areas identified:
  - banking sector reforms geared at financial stability,
  - investment in human capital,
  - improving the business climate,
  - strengthening the efficiency of public investment,
  - improving governance and institutions,
  - developing a well-targeted export promotion strategy.
- Empirical framework and data:
  - Uses results from Dabla‑Norris and others (2013) with a sample of 100 countries and 40 years of data (1970–2010).
  - Countries divided into four income quartiles (Q1 to Q4) by distance to the global technological frontier.
  - Mauritania falls in the first income quartile (Q1).

### Productivity performance and lessons
- Mauritania’s recent growth acceleration has not been fueled by productivity gains.
- Cross-country evidence highlights that structural transformation and diversification support higher growth and lower output volatility, especially in early development stages.

### Domestic financial reforms: banking and capital markets
- Banking sector reforms
  - Evidence: banking sector reforms increase productivity for countries in the first and second quartiles, more so for Q2.
  - For Q1 countries, the most productivity-enhancing banking sector reforms are those that strengthen banking supervision.
  - Implications for Mauritania:
    - Progress made in: (i) strengthening banks' capital and establishing provisions for nonperforming loans (NPLs); (ii) efforts to improve bank portfolio quality to reduce NPLs; and (iii) enhancing the central bank’s supervisory capacity.
    - Going forward: implementation of prudential, solvency, liquidity, and risk concentration measures expected to yield high productivity gains.
    - Continued strengthening of the supervisory role and tools of the CBM for both offsite and onsite inspections, and implementing a banking resolution framework, will safeguard financial stability and the banking sector’s role in economic development.
    - Note: The 2014 FSAP update identified that the crisis prevention framework should be bolstered with the introduction of macroprudential surveillance, and liquidity risk could be better managed with more qualitative requirements in the liquidity framework and focused onsite supervision.
- Capital market development
  - Evidence: capital market development is not significant in boosting productivity for Q1 countries, but is highly significant for countries in the upper quartiles.
  - Preconditions for effective capital market development include a well-developed banking sector, deep and liquid interbank markets for money and foreign exchange, and a certain level of private sector development.
  - Implications for Mauritania:
    - Need to diversify sources of financing because the banking sector mainly finances short-term trade activities or consumer credit; Caisse de Depots et de Développement (CDD) finances some longer-term and riskier credits.
    - Prerequisites for stock market development include further deepening of the financial sector, strengthening the monetary policy framework with a liquidity management framework, and strengthening investor confidence through better governance and improvements in the business environment.

### Real sector reforms: trade and FDI liberalization
- Trade liberalization
  - Evidence: reducing trade barriers is highly beneficial in raising TFP for Q1 countries.
  - Tariff and nontariff barriers prevent efficient resource allocation and technology transfer; removal of nontariff barriers that limit regional integration can prompt agricultural productivity growth.
  - Implications for Mauritania:
    - As authorities aim to increase the value-added chain in agriculture and farming to develop an exporting industry, steps should be taken to reduce nontariff and other regulatory trade barriers.
    - Compared to Q1 and Q2 countries, Mauritania compares favorably on tariff barriers but less favorably on nontariff barriers and ease of imports and exports (costs and time).
    - Reducing these barriers through an improved business environment could open new markets, facilitate export diversification, and improve sectoral efficiency.
- FDI liberalization
  - Evidence: liberalization of FDI is not significant at boosting productivity growth for Q1 countries, whereas it can foster productivity gains for Q2 and Q3 countries.
  - Implication for Mauritania:
    - Authorities envisage attracting FDI through public-private partnerships (PPPs) to finance large infrastructure projects in gas and power, and the Nouadhibou free trade zone.
    - Attracting FDI would help meet financing needs, but authorities face competition due to weaknesses in the institutional environment and infrastructure.
    - Continued macroeconomic and political stability and an improved business climate are needed to attract FDI.

### High-priority reform agenda (synthesis of implications)
- Strengthen banking supervision and implement prudential, solvency, liquidity, and risk-concentration measures.
- Bolster crisis prevention frameworks, including macroprudential surveillance and enhanced liquidity management (as noted in the 2014 FSAP update).
- Deepen the financial sector and strengthen the monetary policy and liquidity management frameworks to prepare for capital market development.
- Improve governance and the business environment to build investor confidence.
- Reduce nontariff and regulatory trade barriers to support export diversification and agricultural value chains.
- Pursue human capital investments (education quality and quantity) and policies to increase female labor force participation and protect informal workers to realize demographic dividends.
- Continue efforts to attract FDI through improved institutional environment, infrastructure, and political and macroeconomic stability.

*Source: IMF staff analysis and synthesis of the provided chapter content.*

### 14.      Agricultural reforms. Contrary to previous findings, the present empirical analysis suggests

### _cr1536 - 14.      Agricultural reforms. Contrary to previous findings, the present empirical analysis suggests

### Agricultural reforms
- Empirical analysis: agricultural reforms are not significant for Q1 countries, but are highly conducive to higher productivity growth for Q2 countries.
- Policy implication: efforts to boost sector productivity through appropriate land reforms and improvements in physical infrastructure could yield economy-wide productivity gains and facilitate structural transformation in economies with still-high shares of agricultural employment.
- Implications for Mauritania:
  - During 2010–14, the government scaled up public investment in agriculture, irrigation potential, improving roads and water infrastructure networks in agricultural areas.
  - Arable land has increased by about 80 percent.
  - Irrigated land area rose from 9,000 to 16,000 hectares.
  - These developments have helped achieve higher crop yields.
  - Authorities have started attracting FDI to develop large scale agricultural projects.
  - Going forward, government intervention could be scaled back to allow for more private initiative.

### Institutional reforms — Legal and property rights
- Empirical results: Q1 countries, even more than countries in higher quartiles, can bring the most benefits in productivity gain by strengthening the quality of their institutional frameworks that protect property rights, including intellectual property, and facilitate private contracting (Figure 9).
- Implications for Mauritania:
  - Mauritania scores low in many governance indicators such as property rights, protection of minority shareholders, strength of auditing and reporting, and government transparency (Figure 10).
  - Priority: ensure preconditions for market-based economic activity, notably property rights and the ability to enforce contracts, to promote private investment, FDI, entrepreneurship, and foster financial sector development.

### Institutional reforms — Business and labor market regulations
- Empirical results:
  - Heavy regulatory burdens can discourage international participation and limit benefits from knowledge transfers, economies of scale, and production-reallocation efficiencies.
  - For Q1 countries, reforms aimed at improving business regulations do not significantly raise aggregate productivity growth, but they are significant for Q2 countries’ productivity gains (Figure 11).
  - Removing excessive labor market rigidities is not positively associated with higher aggregate productivity for Q1 countries, though it is for Q2 countries.
  - Reducing informality can be an important avenue for enhancing productivity.
- Implications for Mauritania:
  - Mauritania scores low in most of the World Bank’s Doing Business indicators (Figures 12–13).
  - Authorities’ measures already taken:
    - Launch of the one-stop shop to reduce number of procedures and cost for creating a business.
    - Elimination of the minimum required capital to open a business.
    - Improvements in access to finance with a modernization of the centrale des risques at the CBM (including all financial transactions above UM 3,000).
    - Revamping of the code of commerce and revision of the procurement code.
  - Further recommended measures: reduce administrative burdens, simplify regulations, strengthen competition, improve dialogue with the private sector, and cut red-tape to boost productivity growth.

### Boosting productive capacity — Human capital development
- Evidence and role:
  - Education is a fundamental determinant of economic growth and long-term living standards.
  - Primary and secondary education matters more for a country’s ability to imitate frontier technology for lower-income and lower-middle-income countries; tertiary education has larger impact on innovation in advanced economies (Aghion and Howitt, 2009).
  - Lower-income countries need to improve quality and coverage of education to facilitate labor shift into higher-productivity industries and services.
- Implications for Mauritania:
  - Mauritania is a factor-driven economy (Figure 14).
  - Authorities have started tackling low retention rates in primary and secondary education and are increasing provision of specialized training in mining, public works, fishing, agriculture, and farming to enhance skills.

### Boosting productive capacity — Infrastructure and public investment efficiency
- Evidence and role:
  - Investment in infrastructure has a positive long-term impact on income.
  - Insufficient physical infrastructure is a major drag on productivity growth for EMs and LICs (Dabla-Norris and others, 2013).
  - Improved quality of public investment is important; inefficiencies in public investment management and weak governance can distort impact of public spending.
- Implications for Mauritania:
  - Comparatively favorable in quality of electricity supply, but improvements needed in air transportation, roads, railroads and port infrastructures to boost productivity (Figure 15a).
  - On public investment efficiency: Mauritania scores well in appraisal, selection, and evaluation of projects, but the quality of implementation and management of projects could be improved (Figure 15b).
  - Mauritania has scaled up public investment to enhance roads, water, port, airport, electricity, and support key sectors such as agriculture.
  - Recommendation: continue progress on infrastructure with better implementation and management; attract private investment through regulatory reform and promotion of PPPs.

### Boosting productive capacity — Fiscal policy efficiency
- Role:
  - Fiscal reforms can ensure public services in education, training, and infrastructure are more efficient and better targeted, fostering productivity growth.
  - Composition and quality of taxation and public spending can have significant productivity, growth, and labor market impacts.
- Implications for Mauritania:
  - Tax collection efforts have improved remarkably in recent years.
  - Policymakers should seek the right balance in mobilizing revenues with alternative revenue-raising measures and tax incentives (a common practice to attract FDI and promote research and development).
  - Tax policies (for example, corporate taxes) can affect productivity by creating disincentives for firms to engage in innovative activities.
  - Cutting back spending in nonproductive areas such as distortionary and poorly targeted energy subsidies, and improving efficiency of public spending in priority areas including strengthening public financial management, could yield important productivity gains.

### Diversification to sustain long-run growth — Export diversification
- Empirical results (IMF, 2014):
  - Export diversification has a decisive impact on growth for LICs once nonlinearities are introduced.
  - A one standard deviation increase in LICs’ export diversification raises their growth rate by about 0.8 percentage points in the long term.
  - Export diversification by expanding to new products could yield 0.4 to 0.8 percentage points in growth rates for LICs.
  - Growth determinants identified: initial GDP, government quality, investment, population growth, and government expenditure.
- Implications for Mauritania:
  - Mauritania’s export base is narrowly focused on raw mining and fishing products (Figure 16).
  - Export diversification quality has declined since the 70’s similarly to most LICs within the resource-rich group (Figure 17).
  - A more diversified export base will help reduce vulnerabilities to external shocks and growth volatility, promote more sustained growth, create jobs, and aid inclusive growth; diversification coupled with trade openness and competitiveness reforms will open access to new markets.

### Diversification to sustain long-run growth — Output diversification
- Empirical results:
  - Output diversification can yield larger benefits than export diversification for LICs.
  - With nonlinearities, one standard deviation in output diversification raises the average annual growth rate by about 1.4 percentage points.
  - Output diversification can help reduce output volatility and allow for sustained long-term growth.
- Implications for Mauritania:
  - Diversifying the production base and the export base could boost Mauritania’s average annual growth rate by 1.4 and 0.8 percentage point, respectively, payoffs similar to other LICs.
  - Mauritania’s production base is more diversified than those of other mining resource–rich countries (Figure 18), potentially bringing additional gains to growth potential.
  - However, value added of major economic sectors such as agriculture, farming, fishing, manufacturing, and services are low compared with other resource-rich and Q1 countries (Figure 19).
  - Authorities are developing exporting industries in red meat, poultry, dairy products and fishing, together with supporting infrastructure and PPPs.

### Conclusion and recommendations
- Meeting the challenge of boosting productivity, sustaining long-term growth and improving inclusiveness depends on implementing an ambitious structural reform agenda while strengthening institutional capacity.
- Priority reforms recommended (as presented):
  - Continue strengthening the macroeconomic policy framework;
  - Pursuing banking sector reforms to support financial stability using the roadmap of the recently concluded FSAP;
  - Invest in improving human capital development;
  - Continue improving the business climate to facilitate private sector development;
  - Strengthen the efficiency of public infrastructure investment, to ensure that quality infrastructure is put in place;
  - Improving governance and strengthening institutions to support policy predictability; and
  - Developing a solid export promotion strategy that encompasses all aspects of international trade (barriers to trade, competitive advantage, etc.).

*Source: IMF staff summary of chapter content in _cr1536.*

### 24.      Above all, countries’ experiences in successfully implementing productivity-enhancing

### 24.      Above all, countries’ experiences in successfully implementing productivity-enhancing reforms and structural transformation show that success is largely influenced by the authority of the executive power and broad ownership of reforms. Mauritanian policy makers will have to ensure that these elements of success are given due consideration.

### Governance and reform implementation
- Success in implementing productivity-enhancing reforms and structural transformation is largely influenced by the authority of the executive power and broad ownership of reforms.
- Mauritanian policy makers must ensure these elements are given due consideration.

### Empirical framework (Annex: The Model)
- Model: standard panel productivity growth equation with:
  - α: annual productivity growth rate.
  - one-year lag of productivity gap with the United States (captures convergence effects).
  - one-year lag of each reform indicator or institutional variable.
  - year dummies and country dummies (country fixed effects control for time-invariant country characteristics).
- Reforms and institutional factors considered (categories preserved exactly):
  - Financial sector reforms:
    - Banking system reforms: interest rate controls, credit controls, privatization, and banking supervision
    - Capital market development
  - Trade and FDI liberalization
  - Institutional reforms: legal system and property rights, sound money, freedom to trade internationally
  - Product market and regulatory reforms: agriculture, business regulation, and labor market regulations
  - Human and physical capital:
    - Human capital: years of secondary and tertiary education
    - Physical capital: electricity and roads
- Scope: IMF de jure reforms and liberalization in the real and financial sectors (domestic financial systems, trade, liberalization of agriculture, and FDI).

### Selected TFP regression highlights (results reproduced as reported)
- Financial sector reforms (banking system reforms and components) show positive coefficients in many quartiles and the full sample:
  - Banking system reforms (1/): Q1 2.9396, Q2 6.3655, Q3 5.9330, Q4 0.4593, Full sample 3.272
  - Interest rate controls: Q1 1.2401, Q2 1.5921, Q3 1.4290, Q4 0.3631, Full sample 1.033
  - Credit controls: Q1 0.8502, Q2 2.9061, Q3 1.0040, Q4 0.4881, Full sample 1.182
  - Privatization: Q1 1.0472, Q2 2.4753, Q3 3.059, Q4 -0.144, Full sample 1.402
  - Banking supervision: Q1 4.0114, Q2 4.0794, Q3 4.926, Q4 0.628, Full sample 2.206
  - Capital market development: Q1 2.5812, Q2 2.0776, Q3 6.43, Q4 0.862, Full sample 2.359
- Trade and FDI liberalization:
  - Freedom to trade internationally: Q1 0.3510, Q2 0.7020, Q3 0.3550, Q4 0.098, Full sample 0.287
  - Trade (tariff rates): Q1 4.1960, Q2 0.190, Q3 -0.670, Q4 -1.434, Full sample 0.497
  - FDI liberalization: Q1 1.5132, Q2 2.7991, Q3 1.6680, Q4 0.249, Full sample 1.472
- Institutional reforms:
  - Legal system and property rights: Q1 0.5970, Q2 0.3720, Q3 0.363, Q4 -0.061, Full sample 0.149
  - Sound money: Q1 0.4050, Q2 0.4770, Q3 0.097, Q4 -0.010, Full sample 0.185
- Product market and regulatory reforms:
  - Agriculture: Q1 0.3203, Q2 3.959, Q3 -0.0741, Q4 1.115, Full sample 1.982
  - Business regulation: Q1 0.0440, Q2 0.7040, Q3 0.9650, Q4 0.493, Full sample 0.491
  - Labor market regulation: Q1 -0.8720, Q2 0.7620, Q3 0.165, Q4 -0.149, Full sample -0.244
- Note: 1/ Includes interest controls; credit controls such as directed credit, reserves requirements; privatization; and supervision reforms. (Source: Dabla-Norris and others, 2013.)

### Public investment, natural resource and debt sustainability — context and objectives
- Mauritania is a low-income country with significant mining resources; extractive industries comprised on average about 83 percent of total exports in 2009–13.
- Iron ore accounts for over half of overall exports.
- SNIM (majority state-owned iron mining company) aims to triple mining output in the next 10 years; private sector expansion expected.
- Authorities increased public investments during 2012–14 using higher fiscal revenues from extractive industries and mostly concessional borrowing to address infrastructure gaps and support growth in non-extractive sectors.
- Objective: accelerate job creation and poverty reduction through infrastructure (transport, electricity), irrigation, and diversification.

### DIGNAR model: structure and calibration
- Purpose: analyze benefits of higher public investment versus costs on debt and fiscal path; framework captures natural resource revenue management, public investment capacity constraints, and detailed fiscal financing choices.
- Sovereign wealth fund (SWF) context: Mauritania’s oil fund amounted to almost US$100 million, equivalent to 2 percent of GDP in 2014.
- Fiscal choices:
  - Government finances consumption and investment with taxes, debt and SWF savings.
  - Path of external concessional debt given by DSA projections; government chooses non-concessional (commercial) external debt.
  - Consumption tax (VAT) initial level is 14 percent in place at the end of 2014.
- Investment efficiency and absorptive capacity:
  - Effective government investment is a fraction of government expenditure on investment.
  - Calibration: investment efficiency currently assumed at 0.5 in the non-natural resource sector, rising to 0.6 over the next decade.
  - Absorptive capacity constraints start binding when public investment rises above 75 percent from its initial value.
  - Calibration implies average investment efficiency approximately halves when public investment spikes to around 200 percent from its initial value.
- Households: rule-of-thumb (consume all disposable income) and optimizing (borrowing constraints, limited access to international bonds).
- Production: three sectors — traded non-extractive, non-traded non-extractive, extractive (iron ore). Extractive output assumed exogenous; iron ore represents entire extractive sector.

### Investment and revenue scenarios (2 x 2 matrix)
- Investment paths:
  - Baseline investment path: consistent with staff report projections; high public investments over next three years; public investment as percent of GDP remains anchored at the 2018 level (around 10 percent of GDP) afterward.
  - Aggressive investment path: authorities continue investing at the baseline peak level projected for 2015, at almost 15 percent of GDP, through 2018 before declining to about 10 percent of GDP by 2021.
- Iron ore price projections:
  - Baseline iron ore price: USD72 per ton (close to prevailing late-2014 market); assumes all planned mining projects execute and start within one year of schedule; production anchored at over 65 million tons per year by 2030.
  - Downside iron ore price: assumes a further 10 percent decline to about USD65 per ton; assumes cancellation of at least one substantial mining project and delays in others; overall mining capacity increases to 44 million tons by 2026.

### Model simulation results — key findings
- Baseline investment path + baseline iron price (USD72 per ton):
  - Authorities’ current investment plans are sustainable but reduce private consumption.
  - Financing mix initially: additional debt and drawings on oil fund, later replaced by increased consumption taxes once oil fund is depleted.
  - Private consumption decreases by about one percent below its steady state value in the medium run.
  - Non-extractive output: initial rise, then returns to steady state; once investments bear fruit in 2019, consumption starts increasing, returning to steady state by 2028, and non-extractive output rises almost one percent above steady state.
  - Total public external debt rises substantially in coming two years, peaking at slightly over 70 percent of GDP, then stabilizes and begins declining by 2019.
- Baseline investment path + downside iron price (USD65 per ton):
  - If iron prices fall and mining expansion is delayed, maintaining the current investment plan becomes very costly in terms of foregone private consumption and reduces non-extractive output.
  - Authorities must increase taxes and public external debt further, causing a sharp fall in private consumption and substantial decrease in non-extractive output in the medium run.
  - Public external debt increases further and then decreases more slowly than in baseline price scenario.
- Aggressive investment path + baseline iron price:
  - Higher output: non-extractive output more than 2.5 percent above steady state (almost three times the baseline difference).
  - Cost: substantially higher foregone private consumption, with consumption depressed by up to 3 percent below steady state in the medium run due to higher consumption taxes required to finance investments.
  - Consumption eventually recovers but the overall consumption loss in medium and long run likely exceeds benefits from higher non-extractive output.
- Aggressive investment path + downside iron price:
  - Particularly damaging: steep drop in private consumption over next five years with further stagnation or decrease in long run.
  - Non-extractive output initially increases then falls back due to reduced private consumption.
  - External public debt would rise above 80 percent of GDP by 2020 and only slowly decrease after that.
  - Overall costs in terms of consumption and debt dynamics of maintaining an aggressive investment plan under lower iron prices would be very large.

### Conclusions and policy implications (summary of implications reported)
- Ambitious public investment plans can increase output but create substantial medium-run costs in foregone private consumption under current commodity prices.
- Under downside commodity price shocks, continuation of baseline investment plans would be very costly in terms of private consumption and could reduce non-extractive output.
- A more aggressive investment path increases non-extractive output materially but at the expense of substantially larger consumption losses and higher external debt dynamics; these costs may outweigh benefits, especially under lower iron prices.
- Authorities should be prudent regarding investment plans, particularly in the event of further declines in iron ore prices, and should be ambitious in improving investment management capacity.
- Investment management and absorptive capacity improvements (reflected in raising investment efficiency from 0.5 to 0.6 in the calibration) are important to increase the returns to public investment and limit costs.

*Source: IMF staff report content provided in the supplied PDF chapter.*

### 8.      The DIGNAR application points to the potential costs in terms of foregone private

### _cr1536 - 8.      The DIGNAR application points to the potential costs in terms of foregone private

### Main findings
- The DIGNAR application points to the potential costs in terms of foregone private consumption of a scaled-up public investment plan in Mauritania, calling for flexibility in implementation should extractive revenues fall short of expectations.
- While higher levels of public investments will benefit the country in terms of non-extractive output and eventually private consumption, in the medium run their cost will be substantial.
- Financing the scaled-up investment plan will require higher debt and tax levels, the latter of which will depress private consumption even under the baseline investment plans and price projections.
- The model suggests that a higher-than-currently-envisaged investment path would have even larger costs.
- Even in the baseline investment path, the authorities will need to remain flexible in implementation in the face of volatile global commodity prices.
- Should prices decrease further and mining expansion projects be delayed or scaled back, too much of the planned investments would have to be financed through higher debt or taxes, potentially hurting private consumption even in the long run.

### Scenarios and model projections (figures and labels preserved)
- Time horizon shown: 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
- Non-extractive output (% deviation from SS) axis tick values shown: -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3
- Private consumption (% deviation from SS) axis tick values shown: -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5
- Consumption tax (%) axis tick values shown: 0 5 10 15 20 25
- Public external debt ((% of GDP)) axis tick values shown: 0 10 20 30 40 50 60 70 80 90
- Scenario labels preserved:
  - Baseline investment  / baseline prices
  - Baseline investment  / low prices
  - Aggressive investment  / baseline prices
  - Aggressive investment  / low prices

### Policy implications and recommendations
- Preserve implementation flexibility: Given volatile global commodity prices, implement investment plans flexibly so that planned investments can be scaled back if extractive revenues fall short.
- Avoid overreliance on higher debt or taxes: Financing shortfalls via higher debt or higher consumption taxes can depress private consumption both in the medium run and potentially in the long run.
- Strengthen investment efficiency to reduce costs: Further improvements in investment capacity would increase the benefits of public investments and ultimately reduce their costs.
- Prioritize improvements in project management and appraisal: The components of the PIMI index with particularly low values relative to peers—those capturing project management and appraisal—suggest starting points for efforts to further improve public investment efficiency in Mauritania.

### Model structure (key equations and parameters)
- The economy features three sectors: natural resource production, nontraded goods production and traded goods production.
- Natural resource production: "we assume that natural resource production follows an exogenous process described by" [equation in source], "where  is an auto-regressive coefficient and  is the natural resource production shock."
- International natural resource price: "the international natural resource price is taken as given and evolves according to" [equation in source], "where  is an auto-regressive coefficient and  is the resource price shock."
- Natural resource revenues: "The government collects natural resource revenues from its production" [equation in source], "where  is royalty tax rate that can be made time-varying, if necessary.  is the relative price of traded goods to the consumption basket. Assuming that the law of one price holds for traded goods implies that  also corresponds to the real exchange rate."
- Production technology: "Firms in both nontraded and traded sectors produce according to a Cobb-Douglas production function using labor, private capital and public capital" [equation in source], "where  is a total factor productivity scale parameter,  is the sectoral-specific private capital,  is the sectoral-specific labor,  is the public capital,  is the labor share of sectoral income and  is the output elasticity with respect to public capital,  represents nontraded or traded sector."
- Public investment inefficiency and dynamics:
  - "We explicitly model inefficiency in the public sector. Effective investment is given by" [equation in source], "where  is government public investment expenditure, and  governs the efficiency of public investment."
  - "The law of motion of public capital is given by" [equation in source], " captures the time-varying depreciation rate due to lack of maintenance on existing public capital."

*ISLAMIC REPUBLIC OF MAURITANIA — INTERNATIONAL MONETARY FUND (excerpts from the DIGNAR application and annex equations in the provided content)*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1536.pdf_