Public Information Notice No. 12/99

Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with Mauritania

August 16, 2012

On July 2, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritania.¹

Background

Mauritania staged a solid recovery from the global crisis. The commodity price boom of the last two years, combined with prudent policies, helped Mauritania restore macroeconomic stability and build reserve and fiscal buffers. However, both poverty and unemployment remain high, highlighting the need to make growth more inclusive through greater employment creation and economic diversification.

The Mauritanian economy weathered well the Sahel drought and the economic slowdown in Europe. Real GDP grew 4 percent in 2011, less than the 5.1 percent recorded in the previous year but still one of the best performances in the sub-region. Buoyant activity in construction and services helped compensate for the drought-related downturn in agriculture and stalling mining production. Inflation was contained to 5.7 percent (year-on-year), reflecting low pass-through of international food and energy prices. The positive terms of trade shock associated with the run-up in metals prices in the first three quarters of 2011 narrowed the current account deficit to 7.4 percent of GDP and boosted foreign exchange reserves to a recent high of $501.6 million at the end of 2011.

Prudent policies contributed to maintaining macro-stability despite high international fuel and food prices. Fiscal consolidation continued for a third consecutive year, with higher mining revenues and strong tax collection more than offsetting the cost of the emergency program put in place in 2011 to alleviate the impact of higher food and energy prices on the most vulnerable. Monetary policy remained accommodative, although the excess liquidity in the banking system, associated with the unsterilized accumulation of net foreign assets, has not translated into high private-sector credit growth, which remained subdued at just over 10 percent (year-on-year). With a smaller fiscal financing requirement, T-Bill yields fell to unprecedented low of just below 3 percent.

Growth will pick up this year amid a rebound in the agricultural sector and several large-scale investment projects. The recovery in cereal production and major infrastructure projects are projected to offset the expected decline in demand from Europe, lifting growth above 5 percent. Inflation is estimated to remain well contained on the back of declining energy and food prices and prudent monetary and exchange rate policies. The external position is expected to significantly deteriorate in 2012 due to one-off effects linked to the emergency drought-relief program, major energy investments, and the construction of the new airport—before recovering in the medium term as new mineral production comes on line and nonmetals commodity prices fall.

Going forward, maintaining macroeconomic stability in an economy highly vulnerable to exogenous shocks is essential. To accommodate pressing social needs in the aftermath of the drought, the fiscal stance will temporarily loosen, but return to the pre-drought consolidation path as ill-targeted subsidies are phased-out while more effective social safety nets are introduced. Mauritania’s narrow export base keeps its economy highly exposed to falls in metals prices and shifts in global demand. Over the medium term, Mauritania’s overarching objective is to diversify the economy away from commodity exports to make growth more inclusive and reduce poverty.

Executive Board Assessment

Executive Directors commended the authorities for their strong program performance, noting that sound policies contributed to the accumulation of significant fiscal and external buffers, which helped the economy withstand a severe drought, a slowdown in external demand, and high international fuel and food prices. However, progress in tackling unemployment and poverty has been limited, and the economy remains vulnerable to external shocks due to its dependency on commodity exports.

Directors welcomed the authorities’ commitment to maintain macroeconomic stability in the short run. In this regard, they noted the intention to introduce a new short-term T-bill maturity to absorb excess liquidity in the banking sector. They also agreed that the modest loosening of the fiscal stance in 2012 to meet drought relief needs is appropriate, but advocated a quick phase-out once the drought emergency lapses.

Directors praised the authorities’ determination to consolidate the fiscal position over the medium term. In particular, they welcomed their intention to replace universal price subsidies with well-targeted social safety nets. They agreed that fiscal policy should be delinked from volatile commodity prices, notably through the creation of a well-managed mining fund, and urged a continuation of efforts to improve non-mining tax collection and seek new revenue from the natural resource sector while protecting Mauritania as a destination for foreign investors. To safeguard debt sustainability, Directors stressed the importance of avoiding non-concessional borrowing and new contingent liabilities, and encouraged the authorities to reach agreement on debt relief with remaining creditors on HIPC terms.

Directors noted that the banking system is relatively stable but emphasized that deeper financial intermediation would increase the effectiveness of monetary policy and promote more inclusive growth. In this context, Directors encouraged the strict application of recently overhauled regulations on connected lending and concentration risk. This, coupled with ongoing improvements in banking supervision, will help prevent the build-up of financial stability risks.

Directors welcomed the implementation of the new investment code and the one-stop shop as useful first steps toward improving the business climate. Structural reforms are needed to diversify the economy away from commodity exports and foster more inclusive growth, particularly in labor-intensive sectors like agriculture. They also urged the authorities to tackle remaining governance problems, notably through the systematic application of the procurement code.