Public Information Notice No. 06/74

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Mauritania

July 7, 2006

On June 21, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritania.¹

Background

The Mauritanian transition authorities, in office since the regime change in August 2005, implemented an impressive policy shift toward transparency and good governance. They have decided to fully cooperate on the data issues that had plagued the relations with the Fund since early 2004 and revised most economic and financial data that had been provided to the Fund since 1992. The revised data show substantially looser macroeconomic fiscal and monetary policies, and lower official reserve accumulation than previously reported to the Fund. The long-lasting provision of erroneous data in the past led to misinformed policy advice, which proved costly for the country.²

The new authorities swiftly embarked on a course of macroeconomic stabilization and reforms. They banned the previous practices of off-budget spending and aligned the fiscal stance with the tight monetary stance adopted by the Central Bank of Mauritania (BCM) since mid-2004, founded on its no government deficit financing policy. As a result, inflation returned to single-digit levels in the last quarter of 2005 and Mauritania's external position—which has also benefited from improving terms of trade since 2005—started to strengthen.

In February 2006, Mauritania became an exporter of crude oil from an offshore field, with daily production averaging 54,000 barrels over the past three months. The oil investment-related activity helped maintain real growth in 2005 above 5 percent and, with the arrival of oil production, real growth is expected to attain nearly 20 percent in 2006. Non-oil real GDP growth (projected at 6½ percent) will be supported by new mining activity (copper and gold) and a substantial increase in public investment. Mauritania's improved external position would allow for a buildup of international reserves to nearly 1/ months of imports at end-2006.

The authorities have launched a staff-monitored program (SMP) covering the first half of 2006, to maintain the disinflation and fiscal consolidation momentum and implement key reforms in the areas of data transparency, oil revenue management, and public expenditure management. The SMP is firmly on track. Fiscal and monetary aggregates were well within the end-March 2006 targets and all structural indicators have been realized. Under the program, Mauritania proceeded with a timely closure of the 2005 supplementary budget, reduced domestic payment arrears, initiated a monthly reporting of the central government financial operations based on reconciled Treasury and BCM data, and adopted a functional classification of expenditure enabling the identification and tracking of poverty-reducing spending. The authorities also made steps toward establishing an efficient and transparent management of oil revenues, through adherence to the Extractive Industries Transparency Initiative and the creation of the National Hydrocarbon Revenue Fund (FNRH), which is now operational. Further steps are expected, including the publication of the production sharing contracts, quarterly reports on production and exports, and the certified FNRH statements, which shall be audited on a regular basis by a reputable international firm. Satisfactory implementation of the SMP is expected to pave the way for a new PRGF-supported program.

Mauritania has implemented all the remedial actions requested to qualify for the Multilateral Debt Relief Initiative (MDRI), including the resolution of the data issues, six months of satisfactory macroeconomic performance, and implementation of the remedial actions in budget formulation, execution, and reporting. Mauritania's debt relief from the IMF, the World Bank's International Development Association, and the African Development Fund of the African Development Bank, would amount to about US$400 million in net present value (NPV) terms, representing about 36.5 percent of the estimated NPV of public external debt at end-2006. The purpose of the MDRI is to accelerate eligible countries' progress towards the Millennium Development Goals by cancelling their debt to the above-mentioned creditors, and by ensuring that the corresponding resources are allocated to poverty reduction.

The authorities have decided to take advantage of the strong fiscal and external outlook for 2006 to further consolidate public finances and liberalize the foreign exchange system. The expected oil revenue and the maintenance of fiscal discipline are estimated to result in an overall fiscal surplus of some 10 percent of non-oil GDP, to be largely channeled toward the reduction of domestic government debt and payment arrears. The BCM is expected to remove the remaining restrictions under Article VIII of the Fund's Articles of Agreement and to allow for larger flexibility in exchange rate determination through the launching of an interbank currency auction market.

Executive Board Assessment

Executive Directors commended the substantial progress achieved in recent months by the Mauritanian authorities in improving macroeconomic policies, budget formulation, and governance and transparency, and in resolving the data issues that had undermined relations with the Fund. They viewed these steps, as well as Mauritania's full and timely repayment of the two noncomplying disbursements under the 1999-2002 PRGF arrangement, as essential building blocks for the close cooperation between Mauritania and the international community that will be needed to exploit fully Mauritania's improved growth and development prospects. In the period ahead, the authorities should focus on consolidating macroeconomic stability and strengthening the external position through prudent budgetary use of new oil revenue, while avoiding recourse to central bank budget financing.

Directors underscored that tight and well coordinated fiscal and monetary policies will need to be at the center of efforts to consolidate the macroeconomic stabilization and achieve the ambitious official reserves and disinflation objectives set for 2006. In this regard, they endorsed the authorities' plan to adhere to the original budgetary spending ceilings despite higher-than-budgeted oil revenue, while using the oil revenue for the reduction of domestic debt. Directors urged the authorities to provide a durable solution for the two parastatals in need of rehabilitation without jeopardizing the 2006 fiscal objectives.

Directors were encouraged by improvements in public expenditure management. They welcomed the timeliness and accuracy of public finance reporting based on the Treasury records and their regular reconciliation with the central bank data. Directors strongly endorsed the preparation of a medium-term expenditure framework ahead of the budget preparation cycle, and underscored the importance of sustaining the momentum of recent reforms by enhancing competition in the public procurement system and by further tightening expenditure controls, including through the planned computerization of the spending authorization circuit.

Directors welcomed the recent tightening of monetary policy, noting that the interest rate increases had strengthened the central bank's credibility in pursuing price stability. They recommended careful monitoring of international and domestic price pressures to control the risks to the authorities' disinflation objectives. Directors also recommended the development of alternative policy instruments to facilitate more active liquidity management.

Directors underscored that a well-prepared move toward a more flexible exchange rate policy would help contain inflationary pressures, particularly in light of the improved external outlook. They supported the authorities' planned steps toward the introduction of foreign exchange auctions, which will eliminate the foreign exchange rationing system and ensure free access to foreign exchange for current international transactions.

Directors noted the implementation of all remedial actions for Multilateral Debt Relief Initiative (MDRI) qualification, and agreed that Mauritania now qualifies for debt relief under the MDRI. They welcomed the authorities' plan to develop a medium-term debt management strategy. Directors urged the authorities to avoid accumulating new non-concessional external debt, and non-Paris Club creditors to conclude the remaining bilateral agreements. They noted that adequate monitoring mechanisms are in place to safeguard the use of MDRI resources, and that the introduction of the new functional classification of expenditure will enhance the targeting and tracking of poverty reducing outlays.

Directors encouraged the authorities to build on the progress achieved in ensuring sound and transparent management of oil revenues, including through the implementation of the Extractive Industries Transparency Initiative and the national hydrocarbon revenue fund. Directors stressed the importance of proper and timely reporting and auditing mechanisms, including through the appointment of independent and reputable auditors, and welcomed the planned publication of oil production, sales, and revenue data.

Directors emphasized that the medium-term framework should focus on preserving macroeconomic stability and on a prudent use of oil revenue, thereby allowing Mauritania to realize its growth and poverty reduction objectives. They endorsed the authorities' efforts to develop a sustainable poverty reduction strategy for 2006-10 centered on the market-based development of labor-intensive industries in which Mauritania enjoys comparative advantage. Directors noted that enhancing productivity in the non-oil sectors and safeguarding their competitiveness will require improvements in the business climate, efficient public investments, prudent wage policies, and an open trade policy. They also called on the authorities to strengthen the financial sector regulatory framework, and commended the authorities for the steps taken toward establishing a comprehensive AML/CFT framework.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.

² In addition, because of misreporting data to the Fund under the 1999-2002 PRGF arrangement, Mauritania repaid to the Fund on April 26 and June 12 two noncomplying disbursements which had been made in June and December 2002 (see press release No. 06/64).