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Press Release: IMF Executive Board Approves US$45.7 Million PRGF Arrangement for Mali with Front-Loaded Disbursement to Address Higher Food and Fuel Prices
May 29, 2008
On May 28, 2008, the Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for Mali in an amount equivalent to SDR 27.99 million (about US$45.7 million) to support the government's economic program for 2008-11. To help Mali finance costs arising from higher food and oil import prices, the Executive Board supported a front-loaded disbursement schedule, making more than half of the total amount available during 2008. An initial disbursement of SDR 12.99 million (about US$21.2 million) will be available immediately.
At the conclusion of the Executive Board's discussion on Mali's request for a PRGF arrangement, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:
"The Malian authorities are to be commended for the implementation of sound macroeconomic policies and structural reforms under previous Fund-supported programs. These policies have boosted Mali's economic growth, raised average per capita income, and reduced inflation. Mali's attainment of the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative has led to a reduction in the country's debt burden and an increase in social spending. The external sector has improved, underpinned by the strong performance of the mining sector.
"In spite of the progress made, poverty remains widespread and the economy is still vulnerable to exogenous shocks. To address these issues and assist Mali in progressing toward the Millennium Development Goals, the new three-year PRGF- supported program seeks to bring the economy to a higher growth path, maintain macroeconomic stability, boost cereal production and continue to implement strong social policies. The program is fully aligned with the authorities' Growth and Poverty Reduction Strategy Paper.
"To create fiscal space to respond to shocks, the PRGF-supported program focuses on pursuing fiscal consolidation by increasing government revenue, through an improvement in tax administration and policy, and strengthening public expenditure management. For 2008, the budget will seek a balance between lightening taxation on energy and food to dampen price increases and the revenue needs underlying social spending plans, supported by a front-loading of Fund access under the new arrangement. Indeed, to implement its ambitious program, Mali will remain heavily dependent on foreign financial assistance. To avoid raising the debt burden, the authorities plan to rely on grants and concessional loans.
"The authorities' efforts to enhance the economy's competitiveness and improve the business climate are also welcome. Of particular importance are reform and privatization of key parastatal enterprises, including in the energy, telecommunications, and cotton sectors; the restructuring the Niger River Authority to improve irrigation services; and the strengthening of the financial system," Mr. Portugal said.
The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty and reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.
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Recent Economic Developments
Mali's economy has doubled in size since the democratic transition of the early 1990s. Sound macroeconomic management has produced growth averaging almost 5 percent and raised the tax ratio from less than 10 percent of GDP to around 16 percent. Together with external aid, including the HIPC debt relief initiative and the Multilateral Debt Relief Initiative (MDRI), the increase in resources has fueled rapid expansion of poverty-reducing spending and helped sustain economic growth. Nonetheless, the country remains poor and highly vulnerable to natural and external shocks. Agriculture, the mainstay of the economy, has been buffeted by recurrent droughts, floods, locust infestation, diseases, and depressed world prices for cotton-owing in part to domestic subsidies to cotton farmers in advanced countries.
Economic growth slowed from 5.3 percent in 2006 to less than 3 percent in 2007. Favorable weather and record gold production boosted growth in 2006, but late and heavy rainfall affected agriculture in 2007, especially cotton. Inflation remained subdued in 2007 at annual 2.3 percent but surged to 6 percent in February 2008 as cereal prices rose. The government tried to offset higher import costs by using the windfall from higher gold prices to provide tax breaks for food and fuel imports and announcing wage increases for civil servants. With almost half of tax revenue coming from international trade, however, these measures undermined the fiscal outturn, and the basic balance turned from a surplus of 0.3 percent of GDP in 2006 to a deficit of 1.1 percent in 2007. The overall fiscal deficit (excluding grants) also widened to 8 ½ percent of GDP, against 7 ½ percent in 2006.
Program summary
The PRGF-supported program aims to help Mali address the challenges posed by its economic vulnerability and raise its growth potential. The program is in line with the objectives set out in the 2007-11 Growth and Poverty Reduction Strategy Paper (GPRSP): a) increase the resources available for poverty reduction by mobilizing more domestic revenue and possibly securing scaled-up development assistance; b) improve external viability, mainly by strengthening the fiscal position; and c) raise growth potential by accelerating structural reforms.
The program calls for strengthening the fiscal position over time without constraining aid-financed outlays. The program aims to raise government revenue by broadening of the tax base. Although budget expenditure is set to increase in 2008 to respond to GPRSP priorities and the impact of salary increases, the authorities intends to contain total outlays below the amounts approved in the Finance Law (by about 2 percent of GDP) by saving on goods and services and lowering capital expenditure, and are preparing a Supplementary Finance Law to that effect. The expenditure cuts entail a strict containment of nonpriority outlays and the deferral of some investment projects.
The program gives renewed impetus to structural reforms. The focus is on measures to raise agricultural production and food security and thus help reduce the volatility of food prices; reform macrocritical state enterprises like the public utilities, cotton ginnery, and banks; and increase the contribution of the private sector to growth. Over the longer term, the challenge is to increase productivity, improve competitiveness and thus raise economic growth.
Assuming normal weather, growth is projected to recover to 5.4 percent in 2008, up from an estimated 2.8 percent in 2007. Inflation would remain low at some 2-3 percent. With the expected increase in government revenue, the overall fiscal deficit (excluding grants) would be at about the same level as in 2007. The external current account balance (excluding official transfers) is projected to improve, despite lower cotton exports and continued growth in imports, as the value of gold exports surges. Gross international reserves would remain at about 6 months of imports.
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