Public Information Notice No. 02/2

Public Information Notice: IMF Concludes 2001 Article IV Consultation with Mali

January 8, 2002

On December 17, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the 2001 Article IV consultation with Mali.¹

Background

Since the early 1990s, Mali has been implementing reforms supported by the Fund through successive Enhanced Structural Adjustment Facility (ESAF) and Poverty Reduction and Growth Facility (PRGF) arrangements.² The current PRGF arrangement with Mali was approved in August 1999 in support of a program covering the period 1999-2002. In September 2000, the IMF and World Bank Boards respectively decided that Mali had fulfilled the conditions for reaching the completion point under the original Heavily Indebted Poor Countries Initiative (HIPC) and the decision point under the enhanced HIPC Initiative, and that the interim poverty reduction strategy paper (I-PRSP) included an appropriate preliminary analysis of poverty in Mali and strategies to alleviate it.

Mali's macroeconomic performance has been satisfactory under the ESAF and PRGF-supported programs. In 1999, real GDP rose by 6.6 percent, while the consumer price index declined because of abundant food supplies. However, in 2000 the economy was buffeted by a number of exogenous shocks, including a severe drought, which depressed cereal production, the hike in oil prices, and adverse developments in the sub-region, which raised transport costs. In addition, cotton production was halved owing to a producers' boycott in protest of the low producer price paid by the Compagnie Malienne de Developeement des Textiles (CMDT), a state-owned cotton company. The cotton sector crisis was triggered by weaknesses in the management of the cotton monopsonist , and was compounded by the depressed world price for cotton fiber.

Real GDP growth slowed to about 4 percent in 2000 from 6½ percent in 1999, but inflation remained subdued. Fiscal revenue was lower than envisaged under the program (mainly owing to the downturn) and despite total outlays being kept in check, as programmed, the overall fiscal balance was below the program target. The current account deficit, excluding grants, widened by about 1 percentage point to 12 percent of GDP in 2000, largely reflecting the drop in export volume.

Program implementation during 2001 has been satisfactory to date, with all quantitative performance criteria and benchmarks observed through end-July 2001. Structural measures have been implemented in the cotton sector, the taxation of petroleum products, the pricing of public utilities, and the tracking of expenditures from HIPC Initiative resources. Fiscal developments through September 2001 have been in line with program projections. Nonetheless, reflecting the cumulative lagged impact of the above-mentioned shocks in 2000, real GDP is projected to stagnate in 2001. The current account deficit is expected to widen further in 2001 reflecting a drop in cotton export and a rise in profit transfer from mining companies. Furthermore, owing to the food shortages, inflation rose sharply to 6.3 percent (year-on-year) in July 2001, before decelerating due to improved prospects for cereal production stemming from the good rainfall.

Monetary policy, conducted at the regional level by the Central Bank for West African States, has remained prudent. While credit to the economy declined in 2000, reflecting the slowdown in economic activity, it has picked up in 2001 with the satisfactory implementation of a financial rescue plan in the cotton sector.

With a view to tackling the weaknesses in the management of the cotton sector, the government, with participatory input from cotton growers, has launched a reform program for the sector. The satisfactory implementation of the short-term aspects of the program (namely, the financial crisis resolution plan for the CMDT) to date has restored confidence among cotton growers, and cotton production is expected to fully recover in 2002. The CMDT is also taking steps to cut costs.

Executive Board Assessment

Executive Directors noted that, after several years of robust growth and improving poverty indicators, economic activity stagnated in 2001 as a result of drought and a fall in cotton prices. Directors commended the authorities for adhering to the program targets in the face of these adverse exogenous shocks, observing that this revealed a high degree of ownership of the program and a strong commitment to economic reform by the authorities. They welcomed the prospect that growth would resume in 2002, based on a recovery in cotton production and continued sound economic policies. Nevertheless, they underscored Mali's vulnerability to exogenous shocks and stressed the need to diversify the economic base, especially through the development of downstream activities in the cotton sector. Therefore, they encouraged the authorities to push ahead with structural reforms and with efforts to develop the human capital and physical infrastructure bases and to lower energy costs, and called on the international community to provide the necessary financial and technical support of the economic program.

Directors expressed satisfaction that Mali has largely maintained the gains in external competitiveness it achieved after the 1994 devaluation and that this improved competitiveness has provided the basis for the solid economic growth since then. However, they noted that the external sector remains fragile, in part because of the depressed prices of cotton and gold exports, and that this strengthens the case for export diversification and continued firm adherence to the economic program.

Directors considered that, given the cotton sector's crucial role in the economy, the reforms in this sector will be critical to Mali's medium-term economic prospects, as these constitute a key component of the structural reform. They therefore regretted the delay in undertaking key reforms in this sector, and urged the authorities to complete these reforms as quickly as possible in early 2002. In this regard, they were encouraged by the authorities' efforts to continue building consensus on the need to liberalize the cotton sector, especially since this would help ensure that the reform agenda is adopted by the post-election administration in 2002. Some Directors noted that price supports and cotton subsidies in developed countries have tended to amplify the decline in cotton prices. The view also was held that other factors such as the decline in global demand and the demand for cotton specifically as a result of technological change have contributed to the difficulties in the sector, further underscoring the need for Mali to diversify its economic base.

Directors considered the prudent fiscal stimulus incorporated into the 2002 budget to be appropriate in view of the need to address the problems in the cotton sector and to minimize the adverse social impact of the liberalization of the economy. Nonetheless, they encouraged the authorities to persevere in their efforts to broaden the tax base, to strengthen customs administration, and to observe a strict limit on current expenditures. Directors welcomed the initiative to reform the civil service, which would help control public sector wages and attain fiscal consolidation. They also strongly endorsed the efforts underway to improve governance, including the strengthening of democratic process, the establishment of a commercial court, the increase in the transparency of the public expenditure management system, and the establishment of a new coding system to better track poverty-related spending.

Directors commended the progress made in strengthening the banking sector, particularly the micro finance sector. They welcomed the authorities' intention to assist in the expansion of the micro finance sector, as this can play an important role in economic diversification and poverty alleviation, and stressed the role of donor financing in this area.

Directors commended the authorities emphasis on poverty reduction, and the progress that is being made in meeting the floating completion point conditions for debt relief under the enhanced HIPC Initiative. Continuing efforts are needed, however, to ensure that, remedial actions are also taken to meet the targets on health indicators set out in the I-PRSP. Directors welcomed the progress that is being made in the preparation of the PRSP using a participatory process and urged the authorities to allow sufficient time to produce a high-quality and inclusive document.

Directors were satisfied that Mali's statistical base is adequate for surveillance and program monitoring, but encouraged the authorities to continue to implement the recommendations of various technical assistance missions.