French version

Nouakchott, May 25, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The government of Mauritania recently held discussions with the staff of the International Monetary Fund (IMF) on the 2000 Article IV consultations and the first review of the program supported by the Poverty Reduction and Growth Facility (PRGF) arrangement, which was approved by the Executive Board on July 21, 1999. The attached Memorandum of Economic and Financial policies reviews progress in implementing the program and sets out the broad objectives and policies to be pursued during the year 2000.

Following consideration by the Executive Boards of the World Bank and the IMF of the decision point document that determined Mauritania’s eligibility for relief under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC), the Mauritanian government thanks the international community for the assistance entailed, in the form of debt relief amounting to US$622 million (in end-1998 NPV). This relief would render the external debt burden sustainable and would allow the attainment of a viable external position.

The Government of Mauritania considers that, overall, the 1999 macroeconomic objectives were achieved and the end-December 1999 quantitative performance criteria were met, except for the criterion pertaining to the overall general government balance, which was missed by a very small margin, in spite of a remarkable budgetary management. On the structural reform front, the privatization of Air Mauritanie, a performance criterion for end-December 1999, was subject to technical delays. The government wishes to request waivers for the nonobservance of these criteria. Upon the completion of the first program review by the Executive Board, the government also requests the second disbursement under the arrangement, amounting to SDR 6.07 million.

The government believes that the policies and measures described in the attached memorandum will enable it to meet the program objectives for the year 2000, which were set out in the letter of intent of July 17, 1999 and revised in consultation with IMF staff during the first review mission, in light of available additional data and updated information on economic developments. If necessary, it will take any further measures that may be required for this purpose, in consultation with the IMF and in accordance with policies of the Fund on such consultations. Moreover, while Mauritania has outstanding financial obligations to the Fund arising from loans under the arrangement, the government will consult with the Fund from time to time, at the initiative of the government or whenever the Managing Director requests consultation on Mauritania’s economic and financial policies.

Sincerely yours

Attachment: Memorandum of Economic and Financial Policies for 2000.

1.  A firm financial stance, efforts at fiscal consolidation, and structural reforms contributed to a satisfactory economic performance in 1999, resulting in higher growth, lower inflation, and a strengthened external position. An exceptional agricultural season combined with a recovery in the fisheries sector after the 1997-98 crisis helped to offset the decline in mining sector production and raised real GDP growth to around 4.3 percent in 1999, compared with the 4.1 percent program projection. Appropriate macroeconomic management, low agricultural prices and abundant stocks of basic foodstuffs contributed to a marked fall in the 12-month inflation rate, from 8.2 percent in end-December 1998 to 1.9 percent by end-December 1999, so that the program target of 4 percent average inflation in 1999 was met, well below the 8 percent recorded in 1998.

2.  In 1999, the fiscal position remained fundamentally sound despite some exogenous shocks at the end of the year. The government’s overall balance recorded a surplus of UM 4.3 billion (2.2 percent of GDP), against a targeted UM 4.4 billion (2.2 percent of GDP). Consequently, the overall balance of the government deviated only marginally from the end-December performance criterion. Some difficulties were encountered in reaching public finance targets. Nontax revenues were considerably lower than expected due to a larger-than-forecast decline in the ouguiya value of the European Union fishing royalty (a loss of 0.3 percent of GDP), following the appreciation of the ouguiya vis-à-vis the euro, and also by a shortfall in revenue of the Fonds de Soutien (of about 0.2 percent of GDP), resulting from a rise in international oil prices, not entirely compensated by higher retail prices. These revenue shortfalls were partially offset by intensified tax collection efforts, so that tax revenue (15.7 percent of GDP) exceeded the target (15.4 percent of GDP), and by expenditure restraint. Firm expenditure management limited current spending on goods and services, while maintaining priority spending on health, education, and targeted poverty reduction actions. Capital and restructuring expenditure reached 7.5 percent of GDP (8.3 percent of GDP in the program), owing to delays in restructuring the food security agency (CSA) and thus in European Union disbursements of the related counterpart funds.

3.  The evolution of monetary aggregates remained close to projections, and the end-December targets for net domestic assets and net foreign assets of the BCM were met, taking adjusters into account. In line with the program, reserve money in relation to beginning-of-period broad money increased by 1.4 percent, while broad money increased by 2.1 percent (lower than the projected 3.5 percent). This trend reflected an acceleration to 7.1 in velocity, partly justified by the sharp increase in nonmonetized agricultural GDP, but also explained by a structural lack of confidence in the banking sector. Net credit to government declined markedly on account of the accumulation of funds for the EU fishing royalty payment, while credit to the economy rose by 17.5 percent, slightly higher than projected. The BCM pursued a restrictive interest rate policy, maintaining the discount rate at 18 percent. However, due to increased competition in the market, the Treasury bond rate declined from 17 percent in January to 14 percent in December 1999. By contrast, the spread between lending rates (between 18 percent and 28 percent) and deposit rates (10 percent on passbook accounts) remained high, reflecting inadequate financial intermediation and the oligopolistic nature of the banking sector.

4.  Despite the improvement in 1999, Mauritania’s external position remains vulnerable. In 1999, external sector developments were dominated by a large fall in imports (14.9 percent in U.S. dollar terms relative to 1998)—owing to the depreciation of the ouguiya vis-à-vis the U.S. dollar and the drawdown of stocks—and a lesser drop in exports (-7.4 percent), since the decline in iron ore exports was not offset by the recovery in fish exports. Overall, the trade surplus reached US$28 million in 1999. The current account deficit (excluding official transfers) narrowed from US$124 million in 1998 (12.3 percent of GDP) to US$89 million in 1999 (9.2 percent of GDP). Due to external financing shortfalls and the clearing of private sector arrears, the overall balance of payments deficit amounted to US$19 million. With the accumulation of new arrears on bilateral debt, gross international reserves rose to US$225 million (equivalent to 5.8 months of imports). The ouguiya depreciated vis-à-vis the U.S. dollar by 8.5 percent in 1999 but appreciated by 6.7 percent in relation to the euro. Mauritania accepted the obligations of Article VIII, sections 2, 3 and 4, in July 1999.

5.  In 1999, Mauritania remained current on its external debt service obligations to multilateral creditors. Following the end-July 1998 expiration of the consolidation period of the rescheduling obtained from the Paris Club in 1995, new arrears emerged in debt service on precut-off debt to the Paris Club. The delays in the discussion of the decision point document in the context of the enhanced HIPC Initiative led to an accumulation of new arrears of US$40 million in 1999. Negotiations to reach agreement with non-Paris Club bilateral creditors made little progress and new arrears to these creditors accumulated, amounting to US$18 million in 1999. Regarding private sector debt, about US$6.6 million in arrears were cleared in 1999.

6.  All the programmed structural performance criteria for the period July—December 1999 were observed, except for the criterion pertaining to the privatization of Air Mauritania. However, important steps were implemented within the agreed timeframe.

7.  Regarding structural benchmarks, the import-export card was eliminated on December 31, 1999, and the fourth phase of the tariff reform took effect on January 1, 2000. Both the quota system and subsidies for the production and commercialization of rice were abolished, while the rice market information system was put in place in January 2000. Acceleration was recorded in the liberalization of the exchange market, and the spread between the official exchange rate and the parallel market rate was reduced to less than 6 percent. The amount and the period of retention of non-mineral export proceeds remaining at the disposal of exporters were increased to 70 percent and 9 months, respectively; the surrender requirement for export receipts repatriated by the SNIM was lowered to 40 percent. Reforms of monetary policy instruments helped to improve the management of required reserves. A plan to restructure the BAMIS was put in place and central bank advances were repaid as planned.

8.  In the area of public sector reform, the study on the reorganization of the water and Electricity Company (SONELEC) was launched with some delay and the legal and regulatory framework, originally programmed for November 1999, should be ready in June 2000. The decree establishing the new post and telecommunications enterprises was signed. The government practically completed the sale of four public enterprises to private investors and also transferred to the private sector a percentage of its equity investments in SONIMEX, in addition to most of the capital and management of MPN. However, some technical difficulties delayed the sale of SAN (Nouakchott Abattoir Company) and legal problems blocked the liquidation of SAMIN.

9.  The ultimate objective of the Mauritanian authorities is to reduce poverty and improve the living conditions of the population. The poverty reduction strategy is based on three mutually reinforcing factors: faster growth, long-term development of human resources and the execution of programs aimed at the poorest. Faster growth requires a stable macroeconomic environment, the revitalization of private investment, stronger economic competitiveness, and the entrenchment of such growth at all levels of the population. Long-term human resources development must be pursued in the areas of education, health, and access to other basic services. More effective public spending, systematic recourse to a participatory approach and decentralization are the major factors for success in implementing this strategy. Since the success of such a strategy is measured by its impact on the living conditions of the population, monitoring and analyzing levels and trends of poverty over time will thus become crucial. This strategy will be described in the Poverty Reduction Strategy Paper (PRSP) which Mauritania began to prepare in December 1999 with the aim of finalizing it by December 2000. Pending the incorporation of these elements in the overall framework, the medium-term macroeconomic objectives remain unchanged.

10.  This strategy requires some easing in the fiscal stance, made possible by the additional external financing obtained under the enhanced HIPC Initiative. With a flexible exchange rate policy, a relatively strict monetary policy will be needed to maintain macroeconomic stability. In 2000, real GDP growth is projected at 5 percent led by the sectors currently undergoing reform, such as transport and communications, trade and tourism, construction and public works, as well as a recovery in mining production. The external current account deficit (excluding official transfers) is expected to increase to 10.6 percent of GDP, and official reserves are expected to reach 5.9 months imports of goods and services by end-2000, while the average annual inflation rate would be limited to 3.5 percent, despite the increase in petroleum prices.

11.  The original 2000 budget and the May 2000 supplementary budget were formulated in the spirit of the new PRGF. With a decline in revenue relative to GDP, increased spending on social and basic infrastructure is allowed by the cutbacks in nonpriority spending, the additional funds made available by external debt relief under the enhanced HIPC Initiative, and a shift from a surplus in the overall balance to a small deficit. The government believes that, since the projected budget deficit of UM 1 billion (0.5 percent of GDP) is accompanied by substantial external financing, it remains compatible with macroeconomic stability. Such a relaxation of the fiscal stance will allow the execution of additional high-quality spending aimed at fostering growth and reducing poverty. This fiscal policy supports the macro-economic stabilization and exchange rate policies, while permitting an increase in social and investment spending.

12.  In light of the 1999 outcome, it is expected that revenue will decline from 27.9 percent of GDP in 1999 to 26.4 percent of GDP in 2000. This development is explained by the loss of customs revenue resulting from the tariff reform, the fact that SNIM will not pay an exceptional dividend in 2000, lower revenue from the FSD, and the expected increase in the deduction to be applied to the minimum flat-rate tax on corporate profits, which will be raised to 50 percent under the direct taxation reform program begun in 1999. All revenue from privatization operations will be incorporated as financing in the government budget.

13.  Total spending is projected to increase by 16 percent with respect to 1999, implying an increase of 1.1 percentage points in GDP terms. In line with the recommendations on the use of HIPC debt relief for growth enhancing and poverty reduction programs, and consistent with PRGF objectives, the revised 2000 budget provides for a remarkable rise in the share of resources allocated to well-targeted poverty reduction programs and includes substantial increases in spending on health and education. Additional recruitment, limited to the social sectors, and a rise in nominal wages, which had not increased since 1998, will lead to a slight increase in the wage bill. Investment spending will increase by about 1.5 percentage points in terms of GDP, owing to the additional projects financed by the interim relief awarded to Mauritania, following its eligibility under the enhanced HIPC Initiative, and some improvement in the rate of execution of the Public Investment Program (PIP). The PIP will continue to accord priority to projects aimed at rehabilitating the existing infrastructure and improving the living conditions of the most disadvantaged sectors of the population. The government has increased the share of domestic counterpart funds dedicated to public investment and the rate of execution of investment projects financed by external loans or grants is expected to reach 65 percent. The institutional framework for implementing the PIP will be strengthened, particularly at the level of project identification and coordination by the executing agencies. Review of the procurement code and the applicable procedures will be completed in December 2000 with assistance from the World Bank. In the medium term, the budgetary process, too, will be improved by the consolidation, in the budget presented to the Parliament, of counterpart funds and externally financed capital expenditure.

14.  Following the consideration of the enhanced HIPC Initiative decision point document and the Paris Club rescheduling agreement, the additional funds available in 2000 have been allocated to priority spending aimed at promoting growth and social development, while remaining compatible with macroeconomic stability and the absorptive capacity. The additional expenditures have been incorporated in the supplementary budget adopted by the Council of Ministers on May 17, 2000 and presented to Parliament in the current session. Beginning in 2001, the additional spending which could be financed by debt relief will be re-examined in the context of the PRSP. The government will institute an appropriate monitoring system to ensure that these amounts are spent as agreed and will be ready to provide the IMF and the World Bank all the details required for this assessment. Should the absorptive capacity for these additional expenses prove inadequate, the government will take the necessary corrective measures in consultation with the IMF and the World Bank.

15.  Following the tightening of monetary policy in 1999, the 2000 monetary policy objective will be to continue to maintain rigorous discipline to support the exchange rate policy and keep inflation at a level close to that of partner countries, even if large increases in the international prices of oil and other raw materials occur. To this end, central bank net foreign assets are projected at US$ -10.3 million in June 2000 and US$45.6 million in December 2000, while net domestic assets of the central bank should be limited to UM 11,411 million in June 2000 and UM -684 million in December 2000. This policy is justified by the need to grant sufficient credits to the rest of the economy while keeping the growth of money supply to 11.3 percent in 2000, at the same rate as nominal GDP, given the projected stabilization of velocity.

16.  The central bank will rely more heavily on indirect monetary policy instruments to manage liquidity. First steps towards the introduction of new instruments of monetary policy have been taken in May 2000 with technical assistance from the IMF’s Monetary and Exchange Affairs Department (MAE); an analysis of the existing system and its limits has been completed, an implementation calendar agreed, and a system for the daily monitoring of liquidity put in place. With IMF assistance, the new system will become operational by end September 2000. In view of the uneven distribution of liquidity in the banking system, the new instruments will allow the monetary authorities to react more rapidly to liquidity conditions and to make the central bank discount rate—which remained unchanged at 18 percent from April 1998 to April 2000—more flexible.

17.  Given the progress observed in reducing inflation and taking into account the high level of real interest rates, the monetary authorities intend to proceed with a gradual lowering of interest rates. Therefore, the BCM’s discount rate was lowered to 16 percent in April. The authorities believe that they can reduce further the maximum interest rate accepted on treasury bill submissions, while ensuring that this policy remains consistent with the established exchange rate and inflation objectives. Beginning in December 2000, the BCM intends to issue small-denomination bearer treasury bills, with four-week maturities at an interest rate to be agreed with IMF technical assistance. This would help not only to increase competition for deposits, but also to mobilize savings. Furthermore, with the aim of increasing confidence in the banking system, on March 15, 2000, the BCM issued a circular stipulating that information on depositors can no longer be requested from commercial banks except as provided for in the regulations.

18.  Imports are expected to increase by 11.8 percent in 2000 as a result of the rise in oil prices, a faster investment pace, and the replenishment of stocks. In contrast, exports should grow by 5.7 percent despite an upturn in iron ore exports and taking into account the stagnation of fish exports in terms of both volume and value. The trade balance is expected to deteriorate markedly, to a surplus of about US$11 million. The external current account deficit (excluding official transfers) should reach US$104 million (11 percent of GDP) while the capital account deficit would decline markedly to US$24 million, primarily due to higher program financing and direct investment. Debt relief under the enhanced HIPC Initiative of US$53 million and program assistance by the Fund of US$9 million (net of obligations) would finance a deficit in the overall balance of US$31 million and an increase in net foreign reserves of US$22 million, maintaining import cover at about 5.9 months, which is desirable because of the risks associated with oil prices, fluctuations in export receipts, and the risk of a decline in bilateral aid.

19.  The authorities are firmly committed to maintaining their policy of managed floating of the exchange rate to achieve their external reserves objectives and protect export competitiveness, and they are prepared to allow any adjustment to the nominal rate that might be necessary, in consultation with IMF staff, to respond to developments involving the main macroeconomic aggregates, particularly in light of inflation and international prices.

20.  In 1999, the exchange market was strengthened to make the float more responsive to market conditions and to limit the spread between the official and parallel market rates, currently at about 5 percent. The liberalization process will continue in 2000. To ensure the convergence of the rates of exchange bureaux, the interbank market, and the parallel market, the authorities have unified the interbank market and the exchange bureaux market in April 2000. The official rate is established daily according to the procedures devised with Fund assistance in the context of a unified market fixing session, ending the practice of multiple exchange rates that existed until then. The spread between the official exchange rate and the parallel market rate will be maintained at below 6 percent.

21.  Beginning in September 2000, Mauritanian residents will be authorized to maintain foreign exchange deposits, remunerated at market rates. Furthermore, the percentage of export receipts, other than those from mineral products, that exporters will be able to keep available will be raised to 80 percent in June 2000 (with a maximum holding period of one year), and to 100 percent in December 2000 (with unlimited maximum duration). Similarly, the obligation to surrender to the BCM the foreign exchange repatriated by the SNIM will be reduced to 30 percent in June 2000 and to 20 percent in December 2000. The authorities will send the IMF a copy of the annual agreement between the government and the SNIM regarding the amount of foreign exchange that this enterprise is supposed to repatriate, in the month following conclusion of the agreement.

22.  The government intends to implement a set of coherent reforms covering resource mobilization, government expenditure management, governance, modernization and strengthening of the tax administration, particularly the General Tax Directorate (DGI). The first group of tax reform measures undertaken in the context of the medium-term program with technical assistance from the IMF and the World Bank is being implemented in the context of the 2000 budget law. This reform aims at broadening the tax base while reducing the tax burden on enterprises. Regarding direct taxation, the deduction for minimum presumptive tax payments from corporate profits tax has been raised from 25 percent to 50 percent; the standard reduction on property income tax has been reduced from 30 percent to 20 percent, and the system for accelerated investment depreciation is now in place. In 2001, the deduction rate for the minimum presumptive tax will be raised to 75 percent. Furthermore, a reduction from 40 percent to 35 percent in the corporate profits tax rate is envisaged. Following a study conducted this year, the number of wage tax brackets will be reduced from 11 to five, without, in principle, any major effect on the revenue from this tax.

23.  To improve tax administration, the DGI was recently reorganized and its operating resources were strengthened, in particular by creating a unified structure for large enterprises and reinforcing the tax audit units. Beginning this year, the system for monitoring defaulters will be improved in line with the recommendations of the technical assistance report of the IMF’s Fiscal Affairs Department. The government is also committed to setting up a taxpayer registration file and launching an operation to identify licensed importers who are not registered.

24.  As part of the unification of VAT rates to be enacted in the 2001 budget law, the government will complete the study on the unification of VAT rates by September 2000. In principle, this unification will have a neutral impact on budget revenue. As stated in the program, the system for taxing SNIM will be revised and the clauses of the agreement providing for a special lump-sum VAT payment system will be repealed. In the context of the 2001 budget law, SNIM will be subject to the common law VAT system beginning in 2001. The specific measures needed for the transition between the two tax systems have been devised with FAD technical assistance. Tax exemptions accorded to other public enterprises will be eliminated under the 2001 Budget Law. These measures will constitute prior actions for the second program review. The government has undertaken a tax reform aimed at broadening the tax base by (i) strengthening tax administration, and (ii) reforming corporate taxation. To deepen this reform, the government will undertake a study on the effective marginal rate of corporate taxation. Once this study is completed, in 2001, the government will re-examine existing exemptions, with a view to eliminating them, with World Bank assistance. In addition, the government will continue to foster a transparent environment favorable to private investment. In this context, the government intends to bring tax incentives for investment within the framework of common law system and cease granting special waivers with respect to the general system.

25.  In the context of the 2000 Budget Law, the government has established the harmonized system of tariff classification and has adopted the fourth and last phase of the tariff reform started in 1997. Effective January 1, 2000, the two highest rates were reduced from 22 to 20 percent and from 13 to 10 percent, respectively (excluding the statistical tax). As a result, Mauritania’s tariff structure is now comparable to that of other countries in the subregion. Also, the import surcharge levied by the communes will be abolished and replaced by equivalent funds under the 2001 Budget Law, based on the study being finalized with World Bank assistance. The statistical visa will be abolished in 2000 and a system for monitoring exports and related repatriations will be introduced.

26.  The BCM will extend effective banking supervision to the Banque de l'Habitat, to new banks such as Mauritanie-Leasing and the Banque pour le Commerce et l'Industrie, and to nonbank financial institutions. The new institutions will be included in the 2000 monetary statistics. The BCM will ensure strict observance of the prudential ratios (liquidity ratios, risk-weighted capital-assets ratio, and open net foreign exchange position, risk concentration ratios) and will communicate them monthly to the IMF. After each supervision operation and within 21 days of the end-date of the supervision, the BCM will provide the supervised bank with a copy of its report. In order to expand access to credit, the loan concentration ratio per individual borrower will be limited to 40 percent in June and 35 percent in December 2000, while that for loan concentration per group of related borrowers will be limited to 70 percent in June and 62.5 percent in December 2000. Fines for noncompliance will be calculated in consultation with the IMF Monetary and Exchange Affairs Department .

27.  In order to further strengthen the banking system, the BCM’s advance to BAMIS will be repaid in accordance with the original schedule. Moreover, the BCM will bear the loss caused by the sale of its shares in the Banque de l'Habitat by March 2000, over a period of three financial years, beginning in 2000, and SNIM will sell its interest in the Banque de l'Habitat by December 2001. The BCM will continue to monitor strictly the soundness of banks and other financial institutions. In particular, should the need arise, the BCM will require shareholders of banks and financial establishments to contribute the necessary additional capital. In order to improve the efficiency of banking operations, the BCM will establish an electronic network for information exchanges between itself and the commercial banks.

28.  The BCM has restructured its organization chart to make it compatible with its new mission. By end-June 2000, the BCM will engage the services of well-known experts to audit its financial statements and reclassify other items net with a view to establishing an opening balance sheet on January 1, 2001. The BCM will publish its annual report and financial accounts in order to make them accessible to the general public. The BCM’s financial statements will be sent regularly to the IMF. Beginning in April 2000, public enterprises no longer hold accounts in the BCM.

Post and telecommunications office (OPT)

29.  As part of the reform of the telecommunications sector and with the establishment in April 2000 of separate opening balance sheets for Mauritel and Mauripost, enterprises that resulted from the separation of the OPT telecommunications and postal services, it is expected that the government, assisted by the World Bank, will sell Mauritel to an international strategic operator by end-2000. Furthermore, in pursuing its effort to promote the development of cellular telephone services in a more competitive and efficient environment, the government has granted an operating license to a private operator in May 2000, and will grant one to Mauritel.

30.  Despite some delays in the reorganization of SONELEC, the government intends to pursue its reform trying to adhere as closely as possible to the original calendar. In the energy sector, according to the calendar established by the consultant in charge of the operation, the authorities should adopt, by June 2000, the legal and regulatory framework for the reorganization of SONELEC. The document evaluation phase should be completed in December 2000. Consequently, the end of the first phase, leading to the sale of 49 percent of the SONELEC’s electricity component to a strategic partner, scheduled for August 2000, has been deferred to March 2001. At the end of this phase, the entire responsibility for managing the company, including the appointment of its managing director, will be assumed by the strategic partner. The government will maintain a role in managing the company through a commissioner, who will ensure that the company’s decisions are consistent with the strategic interests of the entire sector.

Air Mauritanie

31.  The government reaffirms its commitment to privatizing Air Mauritanie and retaining only a minority share in its capital. It is therefore committed to limiting its participation, whether direct or indirect, to no more than 13 percent of the capital. In this context, the government launched in early 2000 an international tender with a view of selling 64.46 percent of the company’s capital to a strategic partner or to a consortium, with at least 34 percent of the capital going to a strategic sectoral operator. On May 23, 2000 the government opened the financial offers. On the basis of their evaluation, the government will proceed with designating the provisional successful bidder. It will then start negotiation with the winning consortium with a view of completing the sale transaction by June 30, 2000.

Reform of the other public enterprises

32.  As part of its goal to withdraw from productive activities, the government reaffirms its determination to complete successfully the privatization program agreed in 1999 and envisages awarding a concession for operation of the Nouakchott abattoir company (SAN) to a private operator. The invitation for bids will be issued by end-December 2000. The government will continue discussions with its partners in SAMIN to amend the terms of the establishing agreement as soon as possible. It will then consider a strategy for withdrawing from SAMIN in favor of the private sector in 2001. During 2000, the government is determined to increase private sector participation in the capital or management of PANPA, PAN, Baie du Repos, and Société des Bacs de Rosso.

33.  The Mauritanian authorities also reaffirm their willingness to further open up the capital of SNIM to private shareholders, if this would promote the company’s future growth. In order to encourage economic competitiveness and expansion outside the traditional mining and fishing sectors, the government is ready to consider the privatization of SNIM subsidiaries, particularly those in sectors unrelated to mining activity.

Liberalization of the petroleum products sector

34.  The supply contract will be renegotiated upon its expiration in July 2002, and imports of petroleum products will be completely liberalized on that date. The fate of the refinery linked to the supply contract will also be re-examined at that time. The government is already committed to leasing or privatizing it. The social impact of this measure will be evaluated and the cost of the required actions could be financed with donor support. It is understood that if no buyer is found for the refinery, its storage facilities will be managed according the system described below for the case of Nouakchott.

35.  The management of the storage facilities currently under construction in Nouakchott will be entrusted, subject to terms and conditions, to a professional operator chosen by bid solicitation. The terms and conditions will specifically include an exit clause in the event of noncompliance or practices deemed inefficient, as well as a means of calculating storage charges to achieve maximum efficiency in the area of hydrocarbon storage. This manage-ment method will be introduced in 2001. Financing for this operation (including drafting the terms and conditions) could be sought from IDA. At the same time, a security stock will be established, which will be financed in part by oil companies according to their market share, with the remainder to be financed by donors.

36.  A new regulatory framework will be put in place in the first quarter of 2001 at the latest. Starting December 2000, new distributors will be free to enter the market. To that end, the decree organizing the distribution of petroleum products will be adapted to this new environment by end-December 2000. However, distributors will be required to supply landlocked areas according to a partition scheme agreed among themselves and with the regulatory authorities. The servicing of landlocked areas will be reorganized by dividing them among distributors, who will also be responsible for the transportation of petroleum products by September 2000.

37.  The taxation of petroleum products will be modified in the context of the May 2000 supplementary budget and will be based on quantities (excise tax); as a result, the FSD will be eliminated. Prices below the reference prices will be unrestricted.

38.  The pump prices of petroleum products were adjusted by 24 percent compared with their January 1, 2000 level, in the last week of May, to reflect the new taxation system and changes in international prices in recent months. Until the findings of the study on the pricing of petroleum products become available, the reference prices will be updated every two months and whenever the change in international prices exceeds the most recent reference prices by +/- 5 percent. The terms of reference for this study will be reviewed to take into account the various aspects of the reform of the hydrocarbons sector. The study should be available by September 2000 at the latest.

Land transport prices

39.  Land transport prices will be deregulated by end-December 2000. A proposal for the organization of the transport sector in Mauritania is to be drafted no later than September 2000. The granting of budget subsidies for transport to the most isolated regions will be included in the 2001 Budget Law on an as-needed basis.

Civil service reform

40.  With the goal of reorganizing the civil service to improve the quality of decision-making and strengthen administrative efficiency, the government will introduce revised civil service regulations by December 2000 at the latest. It will continue evaluating performance on the basis of professional behavior and recruiting civil servants by competition. Based on the experience of reorganizing five economic ministries (Economic Affairs, Finance, Industry, Fisheries and Mining) and the findings of sectoral public expenditure reviews, the government will identify additional reforms and measures needed to adapt the civil service to the government’s new role. With assistance from the World Bank and the IMF, the government will then prepare a reform of the salary structure with a view to upgrading the status of civil servants.

Private sector development

41.   The government’s objective is to make the private sector the engine for faster, equitable economic growth so as to reduce significantly, in the medium term, the incidence of poverty among the population. To that end, it will do what is needed to continue improving the business climate while simultaneously exploring all the possibilities for involving the private sector in the various segments of the economy, particularly infrastructure, including in the social sectors.

42.  Having adopted an action plan in October 1999 based on the recommendations of the report prepared by the Foreign Investment Advisory Service (FIAS) of the World Bank group to eliminate the administrative and sectoral barriers to investment, the government will ensure that it is executed according to schedule. Similarly it will ensure implementation of the laws concerning the business environment, which Parliament adopted in June and December 1999. In particular, these relates to (i) the commercial code; (ii) the arbitration code; (iii) the code of commercial, civil, and administrative procedures; (iv) the trade register, and (v) the law on judicial organization and the status of legal officials. The government will adopt all the implementing legislation, train the magistrates, disseminate these new laws, and make sure that they are enforced. In addition, during 2000, the government will make the "Legal Information Center" operational.

43.  During 2000, the government will prepare a private sector development strategy with World Bank support. This will help identifying the sources of economic growth, the actions required for their optimal exploitation, and the respective roles of the public and private sectors. In this context, the government will continue the reform of public enterprises, including by withdrawing from their capital, and will pay special attention to the needs of small and medium-sized enterprises, as well as to the informal sector.

44.  The economy needs a competitive environment in order to expand its growth potential. As a law on competition already exists, the government is committed to ensuring that it is applied. In this spirit, a Regulatory Authority in the telecommunications sector has been established, whose scope can gradually become multisectoral. In order to ensure a competitive environment in the various sectors of the economy, the government intends to strengthen the capacity of the regulatory authority to provide effective economic regulation, apt at promoting sound competition and reconciling the interests of private operators with those of consumers.

Sectoral policies

45.  Improving private sector supply response will also require the strengthening of certain sectoral policies. To ensure rational and sustainable management of fisheries resources, oceanographic research and surveillance must be improved. In this context, a new strategy is being prepared to develop artisanal fishing, with implementation starting in 2000. Regarding rural sector development, the efficiency and diversification of agricultural production will be encouraged to improve resource allocation. The principal measures are the liberalization of the rice subsector, the adoption of the integrated development program for irrigated agriculture (PDIAIM), and improving access to credit for small producers. A comprehensive strategy for managing water resources, including a cost-recovery mechanism, is to be formulated in December 2000 and new laws governing water users associations will be published in 2001. The legal framework and the modalities for implementing the new mining code have been completed, while the mining cadastre should be fully operational by June 2000.

The social sectors

46.  In recent years, Mauritania has made progress in improving social indicators. The government is pursuing its efforts in this direction and, in 1999, decided to undertake an ambitious reform of its education system. On the health front, the government is determined to improve health services and increase cost effectiveness. In line with these objectives, reviews of health and education expenditure will be carried out in 2000, with the support of the World Bank. The government continues to implement its population policy action plan and, in 2000, will carry out a population census and a demographic and health survey. The monitoring of the implementation of the social measures will be carried out on the basis of a broad range of quantifiable and social indicators.

Poverty reduction

47.  With the participation of locally elected representatives, local governments, and civil society, including NGOs, and with the support of its partners, the government will continue to prepare a fully participatory poverty reduction strategy (PRS). This strategy was launched in December 1999 and will be completed during 2000. The first round of household surveys will be completed by October 2000 and will make it possible to update the poverty profile and establish the strategic objectives and indicators to be monitored. The government will prepare the first version of the PRSP in October with the evaluation of program costs, followed by an open discussion and assessment of the various strategies. The final version of the PRSP will be presented to the Boards of the World Bank and the IMF by end-2000.

Statistical issues

48.  The government will intensify its efforts to develop the statistical system. Improving the statistical base is an essential requirement for improving the monitoring of the economic environment, program management, and the formulation of economic policies, particularly regarding the national accounts and price indices. With this in mind, the government is in the process of adopting the IMF’s General Data Dissemination System as a reference framework for developing the national statistics system, with technical support from IMF staff, if necessary.

49.  To facilitate the assessment of the state’s role in the economy, the government intends to institute a system of consolidated accounts for the general government (State, local governments, and the social security fund (CNSS)) and the nonfinancial public sector (general government and nonfinancial public enterprises) starting in December 2001. To advance toward this objective, the government will make available to the IMF the annual accounts of the CNSS for the years 1996-98, by end- April 2000, and the budgets executed by the largest local governments, for the same years, in September 2000. The authorities commit to send, by December 2000, the data for 1999 for both the CNSS and the largest local governments. To institute a reliable system of public sector consolidated accounts, the government intends to request IMF technical assistance, if necessary.

Governance

50.  The government is resolutely committed to prevent and fight all forms of corruption and to improve governance. To that end, it undertakes to improve the production and publication of economic data, strengthen the monitoring and transparency of government financial operations and ensure that information is circulated. In the context of the Poverty Reduction Strategy Papers (PRSP), it plans to set up a sliding three-year current public expenditure program and a sliding three-year public investment priority program (PIPP), explicitly reflecting sectoral strategies and programs and inter- and intrasectoral priorities. Investments of US$5 million or more will be subject to comprehensive evaluations and project monitoring will be strengthened. Moreover, to improve the effectiveness of public expenditure, the government with the assistance of its development partners will conduct, during 2000, a review of sectoral budgetary expenditure, beginning with social expenditure.

51.  The principal objective of the government’s external debt policy is the normalization of relations with its creditors, an objective that will be achieved as part of the rescheduling envisaged under the enhanced HIPC Initiative. The authorities had asked Paris Club creditors for a rescheduling on Cologne terms and a meeting for that purpose took place on March 16, 2000. The government also undertook a process of reconciling the debt owed to the Paris Club and other bilateral creditors who are not Club members. Following the agreement with Paris Club creditor countries, the authorities have redoubled their efforts—with IMF staff assistance—to obtain relief from creditors who are not Paris Club creditors on terms at least as favorable as those granted by the latter. Assistance from all Mauritania’s creditors under the enhanced HIPC Initiative and the ongoing adjustment strategy are essential for ensuring external debt sustainability and balance of payments viability in the medium term. The authorities are committed to ensuring that any benefit resulting from the enhanced HIPC Initiative with respect to public enterprise debt is transferred to the government budget. This was achieved through written agreements between the government and the public enterprises concerned, signed on March 15, 2000. Debt reconciliation and the rescheduling agreement should lead to the normalization of Mauritania’s relations with its creditors.

52.  Regarding debt management, the authorities' strategy is aimed primarily at avoiding external payments arrears and securing grants, to the extent possible, or loans on highly concessional terms in the context of projects that are highly profitable from an economic and social standpoint. Efforts to strengthen debt management will continue in 2000, particularly with the introduction of new debt management software, external training, intensification of the activities of the interministerial committee on debt, fresh efforts to streamline management of the debt database, and reduced duplication of effort. Improvements in the functioning of exchange market should make it possible to avoid the emergence of new private sector arrears. The authorities undertake not to assume any exchange losses that banks and importers may incur.

53.  The following measures are proposed as prior actions for the completion of the first review: (i) first steps towards the introduction of new instruments of monetary policy, including an analysis of the existing system, an implementation calendar and a system for the daily monitoring of liquidity; (ii) repayment of the BCM’s advance by the BAMIS according to the original calendar; (iii) adoption by the Council of Ministers of the new tax regime for petroleum products, based on an excise tax and the disappearance of the FSD; (iv) a 24 percent rise in the price of the different petroleum products compared with their January 1, 2000 level in the last week of May; and (vi) unification of the interbank market and the exchange bureaus market, and reduction of the spread between the official rate and the parallel market rate to below 6 percent by end-April 2000. The program also contains certain key structural measures to be taken by end-June 2000 and end-December 2000. These measures are described in the attached Table 3.

54.  During 2000, the Mauritanian authorities will continue to inform the IMF regularly on its progress in implementing the program with respect to performance criteria and indicative targets. Drawings under the PRGF arrangement will be subject to compliance with the quantitative performance criteria and the structural performance criteria described in the attached tables.

55.  The tables present the end-June and end-December 2000 performance criteria and the quarterly indicative targets for end-March, end-June, end-September, and end-December 2000, as well as the structural benchmarks proposed for 2000. The June 2001 performance criteria will be established during the second review under the arrangement.

56.  The quantitative performance criteria bear on: (i) floors on central bank net foreign assets; (ii) ceilings on central bank net domestic assets; (iii) floors on the government’s overall balance; (iv) limits on the obtaining or guaranteeing of new nonconcessional loans by the government or the BCM; and (v) elimination of existing arrears on medium and long-term debt and the nonaccumulation of new external payments arrears throughout the duration of the program. Indicative targets for base money have also been fixed. The criteria and objectives will be adjusted as described in the attached table. We request that the third disbursement under the arrangement be made available on December 1, 2000 and that the fourth be made available on May 1, 2001. These disbursements (each for the equivalent of SDR 6.07 million), which will be subject to observance of the relevant performance criteria, shall also be subject to the completion of the second and third reviews under the arrangement, respectively. Disbursements will be subject to satisfactory reviews, except for the last drawing, which will be subject to observance of the end-May 2002 performance criteria.

57.  The government repeats its undertaking that during the period of the PRGF arrangement, Mauritania will not: (a) impose or intensify restrictions on payments and transfers for current international transactions; (b) introduce or modify multiple currency practices; (c) conclude bilateral payments agreements that are inconsistent with its obligations Article VIII of the IMF’s Articles; (d) impose or intensify import restrictions for balance of payments reasons; or (e) accumulate any new arrears on public or publicly guaranteed domestic and external debt

58.  The government of the Islamic Republic of Mauritania undertakes to fully implement the macroeconomic and structural measures described above in accordance with the timetable provided.