Memorandum of Economic and Financial
Policies
of the Government of Mauritania for 2001-2002
I. Introduction
1. The government of Mauritania has stepped up its efforts
to improve program monitoring, resulting in macroeconomic and structural
performance in line with program objectives. All structural and quantitative
performance criteria for the fifth PRGF disbursement, and all structural
benchmarks and quantitative indicators, except the one on tax revenue,
have been met.
2. Progress was also made in implementing the poverty reduction
strategy paper (PRSP). The authorities intend to maintain and develop
the institutional and participatory process established at the time of
the preparation of the PRSP to implement the strategy. The PRSP was
reflected in a basic law (loi d'orientation) on poverty reduction
adopted by parliament in July 2001. Similarly, Mauritania has made
substantial progress with respect to the floating conditions for the completion
point under the enhanced HIPC Initiative.
3. Continuation and intensification of the efforts undertaken
so far should make it possible to reach the completion point during the
first half of 2002. The government is prepared to take all necessary measures
to avoid any delay in this respect.
II. Recent Economic Developments
4. Mauritania and the European Union recently ratified a new
protocol setting the fishery capacity and the financial compensation provided
in their agreement, for the five-year period from August 1, 2001 until
July 31, 2006. Over this period, the financial compensation will amount
to €430 million, as compared with €267 million under
the previous agreement. Some of this compensation will be earmarked for
development and modernization of the local fishery sector. The agreement
also provides for enhanced control and surveillance of fishery activities
in Mauritanian waters to protect the country's fishery resources.
5. Economic growth remains solid, particularly in the construction
and public works, transport, and telecommunications sectors. However,
the growth rate of GDP in real terms, which had been initially projected
at 5.6 percent for 2001, was reduced to 5.2 percent, primarily as the
result of lower-than-programmed expansion in mining activities. The average
inflation rate (CPI) of 5.2 percent at end-July 2001 was higher than projected,
primarily reflecting the delayed effect of the increase in petroleum
product prices in 2000.
6. Fishery and mining exports were in line with the program,
while imports remained well below projected levels. As a result, international
reserves amounted to US$291 million at end-June 2001, US$14 million
above the programmed level. The current account balance (including official
transfers) is now estimated at 1.2 percent of GDP for 2001 and international
reserves could reach US$345 million (equivalent to seven months of imports)
at the end of the year.
7. The overall budget deficit during the first half of the
year, estimated at approximately UM 1.5 billion, was narrower than projected,
as the tax revenue shortfall was more than offset by a larger reduction
in operating expenditures and the low rate of capital expenditure execution.
The tax revenue shortfalls are largely attributable to the delay in receiving
taxes from the state mining company (SNIM) and to lower-than-projected
customs and petroleum tax revenue. As a result, the tax revenue indicator
for end-June was not met.
8. Growth in monetary aggregates was generally in line with
the program at end-June, including growth in credit to the private sector.
Outstanding treasury bills (bons du Trésor) registered a
substantial increase from July onward, financed largely through government
deposits in commercial banks, while the required reserves on these deposits
do not appear to have been collected. The BCM has implemented a series
of measures, identified in the government's aide-mémoire for the
third review under the PRGF, leading to improved functioning of the exchange
market. The gap between the official rate (cours de transfert)
and the cash rate (cours manuel) remained at approximately 5 percent,
reflecting the relative shortage of US Bank notes and small margins for
exchange bureaus. Between January and July, the ouguiya depreciated by
2 percent vis-à-vis the U.S. dollar, and the real effective exchange
rate appreciated by approximately 4 percent.
9. Following the streamlining and reduction in the number
of structural conditions, most of the measures that had not been implemented
within the time frames set for them in the 2000 program, and that were
eliminated from conditionality in the 2001 program, have since been completed.
In addition, the remaining measures are expected to be completed by the
end of the year.
III. Program for the remainder of 2001
A. Macroeconomic Objectives
10. In accordance with the government's medium-term objectives
set forth in the PRSP, and in light of the developments during the first
half of the year, the revised program objectives for 2001 are as follows:
- A rate of real growth in GDP of 5.2 percent, based in part
on accelerated public expenditure and strengthened social spending directly
related to poverty reduction;
- An average inflation rate of 4 percent (consistent with an
end-of-period inflation rate of 2.5 percent). This inflation rate
is based on the assumption that prices will stabilize after having increased
during the early months of 2001;
- An international reserve level of US$345 million, covering
approximately seven months of imports. The upward revision of international
reserve figures is largely attributable to a lower level of imports
and the rise in the financial compensation in the new fishery agreement.
Rather than requiring any major change in the economic policies pursued
since the beginning of 2001, these revised objectives entail a refocusing
of these policies in light of the performance recorded during the first
half of the year. These policies are described below.
B. Macroeconomic Policy
Fiscal policy
11. Fiscal policy as reflected in the 2001 budget law is still
generally appropriate. This policy is based on a relaxed budgetary stance
to permit an appreciable increase in social and poverty reducing expenditures,
in accordance with the priorities identified in the PRSP. However, in
light of the sharp increase in revenue generated by the fishery agreement
with the European Union, and in spite of the expected acceleration in
expenditures during the remainder of the year, an overall budget surplus
excluding grants of 1.9 percent of GDP is projected, instead of the deficit
of 1.4 percent of GDP targeted previously under the program. In this
context, the government intends to:
- Accelerate execution of social and capital expenditures execution
to achieve at least the initial program target. Further, the government
intends to increase expenditure directly related to poverty reduction
and to the preparation of the first progress report on PRSP implementation,
which would increase expenditure by UM 750million for the entire
year.
- Intensify tax collection efforts during the latter months of
the year to offset tax revenue shortfalls registered during the first
half of the year. To that end, custom duties on the import by telecommunications
companies will be settled quickly according to the common tax law for
the period prior to their granting exemptions under the investment code.
The government's objective is to maintain a solid tax base, independently
of the availability of additional budget resources.
Monetary policy
12. In line with the policy adopted by the central bank in
2000 of gradually reducing the discount rate (reference rate), and to
signal its desire to stimulate private investment, the BCM will reduce
the discount rate by 1-2 percent by end-October. The BCM remains prepared
to revise this rate upward should inflationary pressures appear.
13. The BCM intends also to reduce the interest rate on treasury
bills by reducing the outstanding stock of treasury bills issued. If this
approach is inconsistent with the monetary policy objective, the BCM will
resort to other monetary policy instruments, including the transfer of
government deposits from commercial banks. This reduction in the stock
of treasury bills should encourage commercial banks to increase credit
to the private sector rather than simply investing in treasury bills.
At the same time, the BCM intends to increase the gap between the discount
rate and the rate on treasury bills (now around 2 percent) to 3-4 percent
in order to promote development of the interbank market. In light of the
envisaged decline in the discount rate, the rate on treasury bills should
decline by at least 2-3 points.
14. In the area of monetary policy, some progress has been
made in the use of indirect monetary instruments. However, the number
of repos and reverse repos operations is still limited. To enhance performance
in this area, the BCM intends to:
- Make more effort to further integrate the use of indirect monetary
instruments and liquidity projections into monetary policy formulation;
- Establish formal mechanisms of communication between the BCM
and the Ministry of Finance to ensure effective monitoring of government
cash flow trends;
- Improve the conduct of monetary policy and enhance monitoring
and coordination between the various units of the bank, through the
work of the recently established committee comprising representatives
of various units of the central bank.. The BCM will also produce quarterly
reports on the evolution of monetary and credit conditions in the economy.
15. The BCM envisages taking the following steps to stimulate
competition among commercial banks:
- Strengthen internal bank management and establish a transparent
information system on banks' activity;
- Encourage banks to open branches in the interior of the country
and to adopt a proactive customer policy;
- Facilitate establishment of foreign banks in Mauritania and
encourage partnerships between Mauritanian and foreign banks;
- Modernize the payment system. For that purpose, the central
bank is organizing a conference on automated payment systems in Nouakchott;
- Undertake a reform of the BCM to enable it to acquire the human
resources required to discharge its duties.
Exchange rate and external policy
16. In accordance with the objective established in the PRSP,
exchange rate policy should preserve external competitiveness so as to
promote economic diversification and reduce the economy's vulnerability
to external shocks. The BCM will therefore ensure that the ouguiya does
not appreciate in real terms on a sustained basis. In this context, the
BCM will give more importance to the euro over the U.S. dollar in its
exchange rate policy, since the bulk of foreign trade transactions take
place with countries of the European Union.
17. The BCM intends to implement additional measures to improve
operation of the Extended Foreign Exchange Market (MCE) and to reduce
the gap between the official rate and the cash rate for the U.S. dollar,
in particular, to:
- Reduce the BCM buy-sell margin from 1 percent to 0.75 percent;
- Eliminate the US$20,000 ceiling on exchange bureaus' participation
in the MCE session. This ceiling has not been binding during recent
months as most requests from exchange bureaus have been well below this
limit;
- Supply the market with large quantities of U.S. dollar notes
by end-December and encourage commercial banks to participate actively
in the cash market to create arbitrage with exchange bureaus;
- Encourage SNIM to increase and spread out its participation
in the MCE over time.
18. The government will pursue a prudent external debt policy
and will consult closely with IMF staff on any new external borrowing,
even if on concessional terms, to ensure the sustainability of external
debt indicators.
IV. Fiscal Policy for 2002
19. The key policy objectives for the 2002 draft budget are
to modernize the tax system, increase capital expenditure and current
outlays in the social and maintenance areas, and enhance project implementation
and absorption capacity. The draft budget draws on the objectives set
in the PRSP. Implementation of these policies will be facilitated by the
increase in resources from the new fishery agreement with the European
Union. The projected budget deficit is 1.6 percent of GDP. Since available
external financing is likely to exceed budget requirements, there will
be a further accumulation of government deposits in the banking system.
The 2002 budget aims to:
- Sharply increase capital expenditure in the priority sectors,
even beyond the objectives of the PRSP, as a result of the additional
revenue. Health and education expenditures will be largely in line with
the medium-term expenditure frameworks recently completed with assistance
from the World Bank;
- Ensure that increases in current expenditure go hand-in-hand
with increases in capital expenditure, particularly in the social sectors,
and make important allocations for operations and maintenance expenditures
as well as allocations for strengthening absorption capacity;
- Phase tax collection efforts, primarily from large taxpayers
such as SNIM, throughout the entire year. The government will ensure
that the turnover tax (TCA) and SNIM dividends are paid quarterly, with
the possibility of some regularization at the end of the year. The government
will, in any case, avoid random cuts in expenditures so as to ensure
that project execution and the functioning of administration are not
undermined;
- Continue to strengthen the tax and customs administrations
(including through the acquisition of ASYCUDA 3 by end-2001). Substantial
tax reforms to accompany the revision of the investment code are planned
in connection with the 2002 budget law (see paragraph 29).
20. The government will strengthen institutional and operational
capacities at all levels with technical assistance from the World Bank.
The government will take the following steps in the near future:
- Prepare, by end-October 2001, an assessment note identifying
main bottlenecks and proposing measures to be implemented in coordination
with development partners, particularly the World Bank;
- Strengthen administrative capacity through recruitment of experts
(foreign or Mauritanian nationals) in the finance and in procurement
areas, within the key ministries, and particularly the ministries of
education, health, and public works, to reduce the time required to
prepare the documents necessary at various stages of project execution,
and to help develop national expertise in these areas. In addition,
the improved business climate resulting from the tax reforms in progress
should encourage foreign companies to participate actively in project
execution (see below).
- Adopt the new public procurement code by end-October 2001.
This new code will simplify procedures for awarding contracts, particularly
by lowering the limits on expenditure subject to various types of procurement
procedures.
21. The government has decided to strengthen monitoring of
public expenditure, and in this connection, it has received a joint mission
of the World Bank and IMF in early October, which examined the system
for tracking budget expenditures--particularly in the area of poverty
reduction. The government will make every effort to implement the
necessary measures identified by that mission. The government will also:
- Further enhance the work of the committee responsible for monitoring
execution of projects financed with HIPC resources. In this connection,
the comments made by the IMF and World Bank on the committee's second
report will be studied, and those that have been accepted will be implemented.
In particular, all projects using public funds, and the administrations
responsible for their implementation, should be subject to physical
and financial audits to verify what proportion of the support allocated
to the various public services is actually received by the targeted
communities.
- Develop a medium-term expenditure framework, taking account
of absorption capacity, for the priority sectors (road infrastructures,
rural development, and urban development) by end-March 2002, and prepare
an overall medium-term expenditure framework for the economy by end-2002.
- Accelerate computerization of the entire expenditure chain,
to ensure good monitoring at different stages of the expenditure process.
Following establishment of the nomenclature for supporting documentation
in June 2001, computerization of the payroll will be completed by end-2001,
and preparation of the bidding documents for the computerization of
expenditures on goods and services by the end of the year. The authorities
intend to request technical assistance from the Fund for this purpose.
V. Poverty Reduction Strategy paper and
Completion Point
22. The government is determined to press ahead with its poverty
reduction strategy for the remainder of 2001 in order to reach the completion
point under the enhanced HIPC Initiative in the first half of 2002. To
that end, the government will complete its preliminary progress report
on the PRSP by end-October, and will complete the final report and a revised
PRSP by February 2002 (reflecting the findings of the latest household
expenditures survey). The report will, in particular, examine the
key obstacles encountered in implementing the strategy, pointing out problems
related to administrative and project implementation capacity. The progress report
will also be prepared in a participatory process, for which adequate budget
allocations have been made.
23. Significant progress has been made in implementing the
conditions for the floating completion point. The exchange regime and
taxation reforms are well under way. However, it was deemed desirable,
in consultation with IMF staff, to establish new calendars for reducing
credit concentration ratios (floating condition) in the context of individual
programs (contrats-programmes) with commercial banks. On this basis,
it was clear that some banks would need a longer period (beyond 2002)
to satisfy the required ratios as set in the conditions for the floating
point. As for the privatization of the national power and water company
(SOMELEC), the government expects it to be completed by end-April 2002.
24. With regard to the social floating conditions, the government
and World Bank staff are afraid that some of these conditions cannot be
met in the near future. According to the PRSP, the dates established for
achieving a few of these objectives extend beyond 2004. In retrospect,
the government, in consultation with World Bank staff, realizes that the
quantitative social objectives established in the decision point document
under the enhanced HIPC Initiative were too ambitious, as demonstrated
in the PRSP.
25. In the context of the preparation of the PRSP first progress
report, the government, with assistance from the World Bank, will analyze
the social and poverty impact of the measures contained in the poverty
reduction strategy. To ensure continuity of this analysis in the
future, the government will assess regularly the impact of economic and
sectoral policies on poverty and social conditions. However, this assessment
will be conducted within specific time frames to avoid any delays in project
implementation.
VI. Structural Reforms for 2001-2002
A. Monetary Reform
26. The BCM is convinced of the need to transfer government
deposits with commercial banks to the central bank. In view of the size
of these deposits and their importance to private sector credit, a gradual
and prudent approach will be adopted. Accordingly, the BCM, with assistance
from the IMF resident expert, will prepare, by the end of the year, a
report on the impact of this transfer on the financial situation of banks.
Based on this study, the BCM will agree with each commercial bank on specific
schedule for the transfer, using objective and transparent criteria. These
schedules will be adopted in consultation with the Fund staff in the context
of the fifth review under the PRGF.
27. To encourage banks to begin adjusting to a more competitive
environment--particularly once the government deposits have been transferred--government
deposits will be remunerated initially at a low rate of 3 percent, effective
from January 2002. This rate might be gradually raised to market rate
as government deposits in these banks are phased out. However, to increase
bank liquidity the BCM will reduce the reserve requirement ratio from
4.5 percent to 2 percent when the transfer of these deposits
begins. The BCM will ensure that reserve requirements on government deposits
are collected according to the circular of May 2001.
28. Given the difficulty of replacing government deposits
with private sector deposits, even in the medium term, the BCM will examine
the possibility of providing liquidity to commercial banks through credit
auctions, and will identify the instruments that could be accepted as
collateral. In the absence of sufficient treasury bills eligible for this
use, other instruments (such as commercial paper) will need to be developed,
and a financial records reporting center (centrale des bilans)
will have to be created to rate borrowers' signatures on file.
B. Tax Reform
29. In line with its commitment, the government has decided
to amend the investment code so as to eliminate all tax incentives provided
under the code, and will consult with the staffs of the IMF and World
Bank on the proposed amendments before their final approval. All measures
intended to reduce the tax burden will be introduced into the common tax
law. In this regard, the government has decided to implement the following
measures under the 2002 Budget Law:
- Reduce the corporate tax rate (impôt sur les bénéfices
industriels et commerciaux--BIC) from 35 percent to 25 percent.
The impact of this decrease on BIC revenue should be negligible
(estimated at UM 150 million in 2002) given its expected stimulative
effects on the tax base, and the intended improvement in tax collection
efforts;
- Adjust the deductibility of the minimum flat tax (impôt
minimum forfaitaire, IMF) to 100 percent, effective from January
2002;
- Put in place a VAT defered payment system on capital good imports
along with a refund system that will make it possible to refund excess
VAT for all enterprises and to reduce the cash-flow costs for exporters.
These measures will be completed by end-December 2001;
- Simplify registration fees by applying a single rate of 0.5
percent of capital for all enterprises, rather than a range of 0.5-2
percent. Similarly, taxes on income from property will be changed to
a single, uniform rate of 6 percent;
- Subject SOMELEC, following its privatization, to the common
tax law, regarding the taxation of petroleum products;
- Consult with IMF staff on any future adjustments to the tax
rate on investment income, and on business licensing fees (patente).
To simplify the structure of the tax on wages and salaries, the
government will request technical assistance from the IMF, so that any
changes in tax brackets or any corresponding modifications in rates
do not adversely affect revenue or penalize wage and salary earners.
30. In view of the potentially considerable impact of the
deteriorating financial situation of the social security fund (CNSS) on
the budget in the medium term, and pending the conclusions of the actuarial
study conducted by the International Labor Organization (ILO), scheduled
to be completed in early 2002, a number of corrective measures will be
taken. To that end, CNSS has undertaken to: (i) intensify its collection
efforts; (ii) improve the information system; (iii) raise the ceiling
on taxable wages and salaries for social security contributions (currently
UM 35,000) by end-March 2002, in relation to the evolution in wages since
1992, and after consultations with social partners, and (iv) contain
the wage bill, which accounts for approximately 80 percent of administrative
costs. With regard to the latter, the CNSS will prepare a study on the
rationalization of administrative costs, including by offering incentives
for voluntary separation and pre-retirement, and identify the costs of
these reforms. The CNSS will also make efforts to improve the various
social support systems offered, as well as the quality of its services.
C. Other Structural Reforms
31. Concerning the other structural measures, the government
intends to:
- Complete the process of pre-qualifying of bids for the privatization
of SOMELEC by end-November 2001, proceed with the provisional award
by end-February, and finalize the privatization by end-April 2002;
- Continue to adjust petroleum product prices using the automatic
formula to reflect development in international prices. This adjustment
will now be applied quarterly, instead of bi-monthly, or when the price
change exceeds 5 percent. These adjustments will be communicated
regularly to the Fund;
- Adopt the law organizing petroleum product distribution and
ensure unrestricted access to this sector by end-December 2001.
32. The government undertakes to prepare a new profile of poverty
in Mauritania, by end- 2001, based on the new household survey, the definitive
results of which should be available by end-September.
VII. Program Monitoring
33. Prior actions. The government will adopt the prior
actions indicated in the attached table before the IMF Executive Board
meeting for the fourth review.
34. Performance criteria. Quantitative performance
criteria for end-December 2001, quantitative indicators for end-December
2001, and quarterly indicators for end-March and end-June 2002 are provided
in Table 1. Structural performance criteria and structural benchmarks
are provided in Table 2.
35. Program reviews. The IMF Executive Board will complete
the fifth review of the PRGF by end-June 2002. The government expects
to reach the completion point at that time. On this occasion, the government
will present to the Executive Boards of the Fund and World Bank the first
progress report on PRSP implementation, and a new version of the PRSP
based on new data. The seventh disbursement under the arrangement will
be conditioned on the observance of performance criteria for end-June
2002 and completion of the sixth review under the arrangement.
1. This memorandum sets out the definitions of the quantitative performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF). It also establishes the content and frequency of the data to be provided for monitoring the program. The government is defined to include only the central government and excludes the social security scheme.
9. The NIR, NDA, and NDF targets are defined based on the assumption of projected cumulative amounts of external cash debt service payments, program related financing (loans and grants), the amount of the fixed part of the fishing royalties from the European Union (EU), and privatization proceeds to the budget.
13. To permit the monitoring of developments under the program, the Government will provide to Division D of the Middle Eastern Department the information summarized below:
14. The monthly and quarterly data listed above should be sent within a period of no more than five weeks after the end of the month or quarter reported, unless otherwise noted. Any revisions to previously reported data should be promptly communicated to the staff and adequately explained.
