Public Information Notice No. 00/45

Public Information Notice: IMF Concludes Article IV Consultation with Mauritania

June 27, 2000

On June 19, 2000, the International Monetary Fund's (IMF) Executive Board concluded the 2000 Article IV consultation with Mauritania.¹

Background

In July 1999, the Mauritanian authorities embarked on an ambitious economic program aimed at raising growth and reducing poverty. The program has been supported by the international community, including the IMF with a three-year arrangement under the Poverty Reduction and Growth Facility, the World Bank Group and other multilaterals, official bilateral debt relief under Cologne terms from Paris Club creditors, and assistance under the enhanced Heavily Indebted Poor Countries Initiative (HIPC).

Over the last year, Mauritania's economy has made substantial progress in consolidating macroeconomic stability and implementing wide-ranging structural reforms, while taking steps to develop a broad-based poverty reduction strategy. In line with expectations in 1999, real GDP grew by 4.3 percent, largely driven by an excellent agricultural season and a recovery in the fisheries sector. Average inflation was on target at 4 percent, down from 8 percent in 1998. The fiscal position strengthened, with the government's overall balance registering a surplus of 2.2 percent of GDP, despite non-tax revenue shortfalls, largely offset by higher tax revenue and rigorous expenditure management. Including official transfers, the external current account recorded a larger than expected surplus (4.3 percent of GDP against 0.9 percent projected) on account of substantially lower imports allowed by a drawdown of stocks. Gross international reserves at year-end covered 5.9 months of imports. In July 1999, Mauritania accepted the obligations under Article VIII.

Looking ahead, for the remainder of 2000 the policy mix underlying macroeconomic objectives relies on a prudent monetary policy consistent with stability of inflation, an easing of the fiscal stance allowing for increased social and poverty reduction expenditures, and a managed float of the exchange rate reflecting market forces and consistent with the targeted accumulation of international reserves. Real GDP growth is targeted at around 5 percent, following a recovery in iron ore production and an acceleration in construction and services. A modest fiscal deficit of 0.4 percent in 2000 is envisaged as increased social expenditures will be necessary to reduce poverty and improve access to basic services. However, this easing of the fiscal stance should not undermine fiscal consolidation, nor crowd out the private sector as Mauritania is expected to receive substantial concessional external financing, as well as assistance under the enhanced HIPC Initiative. Given the expected rebound of imports, the current account deficit (excluding official transfers) is expected to widen to around 11 percent of GDP, notwithstanding larger iron ore exports and some further recovery in fish exports. In light of Mauritania's vulnerability to external shocks, the authorities aim at maintaining foreign exchange reserves equivalent to about 6 months of imports.

The authorities' goals of achieving higher growth rates and reducing poverty are attainable by consolidating financial stabilization and continuing to implement comprehensive structural reforms. During the remainder of 2000, reforms in the fiscal area will focus on widening the tax base, reducing the tax burden on enterprises and improving the effectiveness of tax administration. A number of structural measures are envisaged in the banking sector in order to strengthen private sector confidence, boost long-term savings, enhance financial intermediation and promote lending outside a narrow base of preferred customers. The privatization agenda will focus on completing the sale of three large utility companies or some of their components (Air Mauritanie, OPT and SONELEC) to private interests. Finally, to integrate better macroeconomic policies with social and sectoral objectives, the authorities will need to pursue further reforms aimed at encouraging competition.

The main challenge to be addressed, given that a significant portion of the population still lives below the poverty line, is not only to register higher growth, but to achieve the kind of growth that will benefit most the poorest segments of the population. Therefore, alongside macroeconomic stabilization and structural reforms, the authorities have already taken important steps toward developing a broad-based, fully participatory poverty reduction strategy and are now in the process of gathering sufficient and reliable information to cost, prioritize and monitor key social and sectoral policies, infrastructure projects, institutional reforms and measures aimed at reducing poverty. The results of this process will form the core of the Poverty Reduction Strategy Paper that the authorities plan to finalize by end-2000.

Executive Board Assessment

Executive Directors commended the Mauritanian authorities for the encouraging economic performance under the first year of the program supported by the PRGF arrangement, which consolidates the progress made in the past few years in strengthening macroeconomic stability and moving forward a wide-ranging structural reform agenda. They noted, however, that the country still faces considerable challenges, with the economy dependent on a narrow productive base and highly vulnerable to weather-related and external shocks. Directors, therefore, welcomed the authorities' commitment to pursuing the program objectives aimed at fostering a more dynamic private sector that could provide the basis for increased economic diversification, stronger and sustainable growth, and poverty reduction.

While commending the significant progress made in fiscal consolidation over the last three years, Directors endorsed the easing of the fiscal stance reflected in the May 2000 supplementary budget. They noted that the provision of concessional external financing, including assistance under the enhanced HIPC Initiative, would permit a significant increase in much-needed social and poverty reduction expenditures, without jeopardizing macroeconomic stability. Directors also encouraged the authorities to put in place adequate monitoring mechanisms, noting that rigorous monitoring and increased accountability are essential to ensure the efficacy of poverty alleviation expenditure.

Directors stressed that, in a context of increasing social and poverty reduction outlays, enhanced revenue performance is essential. They encouraged the authorities to pursue firmly the envisaged reforms aimed at enlarging the tax base, removing tax exemptions, and increasing compliance.

Given the substantial decline in inflation over the last two years, Directors welcomed the recent reduction of key interest rates and supported the authorities' plan to adopt new and more effective instruments of monetary policy, allowing for enhanced monetary management and rendering interest rates more responsive to liquidity conditions. Directors encouraged the central bank to strengthen its supervisory capacity and to enforce strictly prudential regulations, in particular in light of the oligopolistic structure of the banking system.

Directors commended the authorities for the liberalization of the exchange system and the improved functioning of the foreign exchange market, in particular through the unification of the interbank and exchange bureaus markets. They also welcomed the removal of the remaining restrictions on payments.

Directors underscored the need to accelerate the pace of structural reform, which would ensure higher growth and generate much-needed employment. Looking at the privatization program, Directors stressed the importance of proceeding with the privatization of public utilities in line with the agreed calendar. Some Directors underscored that this is critical for the modernization of economic infrastructure and could help attract much-needed foreign investment and related technological innovation in key sectors of the economy. In this vein, Directors emphasized that the establishment of a fully transparent and competitive economic environment would be the best means to make the private sector the engine of growth in Mauritania. Continued provision of donor and Fund technical assistance would be essential to enhance capacity building, and facilitate timely implementation of the envisaged reform measures.

Directors commended the authorities for launching a broad-based participatory process, involving open consultation with civil society, for the preparation of a full-fledged Poverty Reduction Strategy. They urged the authorities to maintain transparency in the process and welcomed their plans to finalize it before the end of the year 2000.