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Nouakchott, December 21, 2000
Mr. Horst Köhler
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
Dear Mr. Köhler:
1. The government of Mauritania recently concluded discussions with the International Monetary Fund (IMF) staff on the second review of the program under the Poverty Reduction and Growth Facility (PRGF), approved by the Executive Board on July 21, 1999. This letter assesses the progress of program implementation and establishes preliminary objectives for the remainder of 2000 and 2001.
2. The government considers that, all in all, program execution is in line with the objectives set. The quantitative performance criteria for end-June were met, with the exception of the criterion on the government's overall balance, owing to minor slippages in program monitoring. As regards the structural reforms, all relevant structural performance criteria were observed, with the exception of the performance criterion on adjustments in petroleum product pricing and the performance criterion pertaining to the credit concentration ratios of commercial banks. On the former, there was a slight delay in the July 2000 price adjustment, and with respect to the latter, three banks did not meet the target ratio. The government requests a waiver for the failure to observe these criteria. Upon completion of the second program review, the government also requests the third disbursement called for under the arrangement, in the amount of SDR 6.07 million.
3. The attached memorandum of economic and financial policies supplements the letter of intent on the original program dated July 17, 1999, as amended by the letter of intent of May 25, 2000. The government considers that the objectives and performance criteria set for end-December at the time of the first review remain valid. The objectives set for 2001 (see Table 1) are indicative, and will serve as policy guidelines pending the determination of the final objectives for the year, which will be consistent with the objectives set forth in the poverty reduction strategy paper. That paper is expected to be finalized by year's end.
4. It is understood that the government will remain in contact with Fund staff and will consult the IMF from time to time, at its own initiative or whenever the Managing Director so requests, with regard to the economic and financial policies of Mauritania.
Mahfoud Ould Mohamed Ali
Governor, Central Bank of Mauritania
Unification of the two VAT rates (5 percent and 14 percent) at 14 percent will be adopted as part of the 2001 Budget Law. However, to protect the poorest segments of the population, the government has exempted from VAT staple goods, a minimum level of monthly electricity and water consumption (150 KWh and 8 cubic meters, respectively), as well as water consumption of the poor, who obtain their water from resellers, via standpipes (bornes-fontaines). In this connection, the government undertakes to discuss with the IMF staff the final list of products to be exempted, prior to its approval by the Council of Ministers.
The Ministry of Finance has restructured the General Tax Directorate in order to improve tax collections. Related measures will be carried out before end-December, in particular the revision of special incentives based on the amount of taxes effectively collected following audits.
Supplementary Memorandum of Economic and Financial Policies
of the Government of Mauritania
I. Recent Developments and Performance Under the Program
1. Macroeconomic performance remained solid in 2000, exceeding some program objectives. The growth rate is projected to be slightly higher than targeted (5.2 percent), while the average rate of inflation (CPI) remained low (less than 3 percent in September). The official exchange rate depreciated by about 10 percent vis-à-vis the U.S. dollar over the first nine months of the year, but remained within the maximum spread of 6 percent with respect to the parallel market rate targeted under the program.
2. Fiscal policy continued to be sound in 2000, although the overall budget balance target for end-June was exceeded slightly, by UM 90 million (0.04 percent of GDP), owing to minor problems with program monitoring. The growth of money supply was higher than projected, mostly on account of greater-than-anticipated growth in net foreign assets, while reserve money fell short of its indicative target for end-June. As a result, all other quantitative performance criteria for end-June 2000 were met. The balance of payments current account deficit (excluding official transfers) for the year is projected at 12.8 percent of GDP. Given the increase in foreign direct investment flows, in particular those associated with granting the first cellular telephone license, gross official reserves would rise to US$284 million, or the equivalent of 6.5 months of imports by year-end.
3. The government also made good progress in structural reforms. The percentage of export proceeds and the retention period for which they remain at the disposal of exporters, were increased to 80 percent and 12 months, respectively. Moreover, SNIM's surrender requirement of foreign exchange was lowered to 30 percent in June. Retail prices of petroleum products were adjusted in August, instead of July, to reflect changes in international prices. However, it should be noted that the increase in these prices has been considerable in Mauritania, roughly 45 percent since the start of the year.
4. To improve the focus of poverty reduction policies, the government is currently finalizing the PRSP, which is expected to be completed by the end of the year. In this regard, discussions have been initiated with a wide range of participants, including representatives of civil society, elected officials, nongovernmental organizations (NGOs), as well as donors and lenders. The government has also benefited from IMF and World Bank assistance in the formulation of the macroeconomic framework and sectoral policies, respectively. The policies set forth in the PRSP will guide the government actions in the next few years.
II. Macroeconomic and Structural Policies, 2000-2001
5. The government's poverty reduction strategy under the PRGF-supported program is based on an accelerated economic growth in a low inflation environment. Preliminary indicative targets for end-March and end-June 2001 were set, and will be revised in light of the policies identified in the final PRSP. The specific objectives of the program in 2001 and the performance criteria for end-June will be fixed during the Fund third review mission scheduled for early next year (February 2001).
6. The preliminary targets for 2001 are to increase the GDP growth rate to 5.5 percent and to keep inflation below 4 percent. The external current account deficit, excluding official transfers, is projected at 16.5 percent of GDP, which should make it possible to achieve a gross official reserves target equivalent to about 6 months of imports. To attain these objectives, the government intends to pursue the policies described below.
7. Fiscal policy will be eased in 2001 to allow for a significant increase in spending on social sectors and on poverty reduction programs, and in so doing, to stimulate the economy. This will cause the budget deficit to increase to 1.5 percent of GDP. While the government regards the easing of fiscal policy as desirable—especially in light of the interim HIPC assistance and the availability of concessional external financing—it remains vigilant about maintaining macroeconomic stability.
8. Budgetary revenue as a percentage of GDP is projected to decline by about 1 percent of GDP in 2001. Such decline is explained by conservative estimates of fisheries revenues, the transitional costs of the tax reform, and the decline in VAT and customs receipts following the completion in 2000 of most of the investment program in the telecommunications sector. However, ongoing tax reforms should help increase government revenue in the medium term.
9. Expenditure policy in 2001 aims essentially at improving infrastructures, developing social sectors and reducing poverty. Investment expenditure will increase to 8.5 percent of GDP, and a list of projects compatible with those identified in the PRSP is now being prepared. The government intends to improve considerably its project implementation capacity in 2001. In this regard, it will revise government procurement procedures and strengthen the project implementation monitoring system. The government further undertakes to improve the efficiency of public expenditure and to introduce a medium-term expenditure framework for the priority sectors, health and education, with assistance from the World Bank by June 2001. The 2001 budget includes sizable allocations for operations and maintenance, which are crucial for preserving infrastructure. In addition, allocations for operating expenditures and wages in the priority sectors of health and education will be increased significantly. Regarding wages and salaries, the government anticipates an increase in the wage bill of 0.1 percent in terms of GDP, which covers additional recruitment in the priority sectors as well as improvements in civil servants living conditions.
10. Tax policy for 2001 is aimed at eliminating VAT exemptions, unifying VAT rates, and strengthening tax administration:
- SNIM's activities unrelated to the production of iron ore will be subject to the common law VAT tax system beginning in 2001. Products strictly associated with SNIM's mining activities and which cannot be easily used by other producers will be identified in a list (with their customs nomenclature codes) and exempted from VAT. All other VAT exemptions will be eliminated. In addition, the system for the presumptive taxation of petroleum products imported by the electric power company, to be separated from SONELEC, will be eliminated when that enterprise is privatized. This provision will be stipulated in the documents prepared for its privatization.
11. To promote a transparent business environment, the government intends to revise the investment code and put an end to the special regimes now in effect (except in the case of SNIM) as part of the 2002 Budget Law. All tax incentives for investment will be incorporated into the common law and all exemptions will be eliminated. In this context, the government will examine the recommendations made by the Foreign Investment Advisory Services (FIAS) of the World Bank, with a view to further reduce the effective tax rate on businesses.
12. In 2001, the government will pursue a prudent monetary policy consistent with the inflation and foreign exchange reserve objectives, while ensuring adequate expansion of credit to the private sector. In this framework, money supply growth will be limited to approximately 10 percent while credit to the economy will grow by 16 percent. Following the recent decline in the discount rate and the Treasury bill rate, commercial banks' lending rates have declined by about 4 percentage points. However, these rates remain very high in real terms (the rate offered to best customers is in the range of 16-18 percent), and further reduction in these rates is constrained by the minimum 10 percent rate currently required by the Central Bank of Mauritania (BCM) on passbook savings. Given the noncompetitive nature of the banking system, the monetary authorities will take a gradual approach to eliminating the minimum rate on passbook savings, so as to avoid an erosion of private savings. In this connection, the BCM has reduced this rate to 8 percent as a first step at end-November. In addition, the BCM will further reduce the discount rate while ensuring that macroeconomic stability is maintained.
13. While some progress has been made toward reducing commercial banks' loan concentration ratios, three banks failed to meet the thresholds set under the program for end-June. However, one of these banks did meet the criterion in August following an increase in its capital. While the BCM expects that the application of penalties, introduced recently in cooperation with the MAE Department of the IMF, will prompt the banks to observe the targets set for December, the BCM is not in a position to guarantee this outcome. In general, the banking supervision function will continue to be strengthened, in particular as regards monitoring compliance with prudential ratios. To this end, the BCM is determined to strengthen its supervision unit, and will request technical assistance from the Fund in this area. In addition, by end-December, the BCM will issue implementing regulations for internal audit and control of banks, as called for under the program.
14. By March 2001, the central bank will introduce new indirect monetary policy instruments that will allow for more flexibility in liquidity management. In particular, the BCM will (i) introduce a repo system; (ii) replace the Treasury bill discount window by a short-term repo window; and (iii) introduce a special facility for reverse repos in government securities.
15. The government undertakes to continue broadening and deepening the foreign exchange market. Offering residents the possibility of opening foreign exchange accounts--a performance criterion for end-December under the program--should contribute to this objective. Given a comfortable level of reserves, the BCM should be soon in a position to intervene more often on the exchange market, both as seller and buyer, to prevent sharp short-term fluctuations in the exchange rate. However, the central bank will aim at maintaining the real effective exchange rate at a competitive level in the hope of diversifying the export base. In addition, the BCM undertakes not to carry out any longer exchange transactions outside the sessions of the expanded foreign exchange market, which should encourage greater participation on the part of banks. In any event, the BCM is resolved to keep the spread between the official exchange rate and the parallel market rate below 6 percent for the remainder of the year.
16. Concerning other structural reforms, the government plans are:
- To privatize Mauritel in early 2001 (a number of important potential investors have expressed interest in the firm). For the reorganization of SONELEC, the adoption of the legal and regulatory framework targeted for June 2000 is running behind schedule, but preliminary draft laws are already available. As a consequence, SONELEC's privatization will be delayed slightly, but is expected to be completed by end-April 2001.
- The study on land transportation has been completed. Its conclusions reveal that in the absence of a statistical base, it would not be possible to assess the granting of a budget subsidy to the isolated regions. The study on petroleum product pricing and safety standards has just started. The initial conclusions are expected by the end of the year.
- The study on the taxation of municipalities has been completed without identifying a viable revenue alternative to the municipal tax on international trade. The government is requesting postponement of this measure until the 2002 Budget Law, pending the identification of alternative resources.
- The introduction of a system for reconciling customs data with those of the import inspection company is running behind schedule. However, the government remains committed to introduce a program for the effective reconciliation of these data by end-December.
17. For purposes of program monitoring, the performance criteria already established for end-December at the time of the first program review remain appropriate (see Table 1). However, the end-December target for the overall budget balance is likely to be breached, due to the impact of Mauritel operation. The government intends, if necessary, to obtain a waiver for such nonobservance at the time of the third review. Regarding structural performance criteria, the preparation of a medium-term expenditure framework for priority sectors, health and education, will be a structural performance criterion for end-June 2001. In addition, the definition of the criterion on new nonconcessional external borrowing will be amended to bring it into line with the August 2000 decision of the Fund's Executive Board.
18. Before the second program review is presented to the Executive Board, the government undertakes to carry out the following prior actions:
- Elimination of tax exemptions granted to public enterprises, with the exception of those to SNIM which are directly associated with iron ore mining, and those granted to SONELEC until the privatization of the electricity branch emerging from that firm's restructuring, in the context of the adoption of the draft 2001 Budget Law by the Council of Ministers;
- Unification of the two VAT rates at 14 percent, in the context of the adoption of the draft 2001 Budget Law by the Council of Ministers.