Press Release No. 03/117

Press Release: IMF Approves a Three-Year, US$8.8 Million PRGF Arrangement for the Islamic Republic of Mauritania

July 18, 2003

The Executive Board of the International Monetary Fund (IMF) approved today a three-year, SDR 6.4 million (about US$8.8 million) Poverty Reduction and Growth Facility (PRGF) arrangement for the Islamic Republic of Mauritania. As a result of this approval, Mauritania can draw SDR 920,000 (about US$1.3 million) under the arrangement immediately.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board's discussion of Mauritania's economic program and poverty-reduction strategy, Ms. Anne Krueger, First Deputy Managing Director and Acting Chair, stated:

"In recent years, Mauritania has registered strong economic performance supported by sound policies and a firm commitment to reform. As a result, growth has been robust, inflation has remained low, and the external position has strengthened. In addition, substantial progress has been made in reducing poverty. Mauritania demonstrated sustained program ownership over the period of the last PRGF-supported arrangement, whose key objectives were achieved.

"Despite these achievements, much remains to be done to alleviate poverty further, and achieve Mauritania's Millennium Development Goals. In particular, implementation capacity and key public institutions continue to be weak, and there is a need to strengthen governance and transparency, and pursue the reform agenda with respect to the public finances and the financial sector. In this context, the Fund supports the request by the Mauritanian authorities for a successor PRGF-supported program which aims at addressing those challenges, and setting the stage for sustained growth and poverty reduction.

"Macroeconomic policies under the program will require maintaining a prudent fiscal stance, effective management of bank liquidity, flexibility in exchange rate management, and careful debt management. Fiscal policy will need to concentrate on accelerating pro-poor spending and broadening the tax base. Particular attention should be placed on better targeting of social spending, and a broad-based improvement in public expenditure management.

"The authorities' strategy for growth and poverty reduction is anchored firmly in the PRSP, which places emphasis on improving access to social services, employment and income-generating activities for the poor. As part of this strategy, structural measures during the first year of the PRGF arrangement will be targeted toward building capacity, reforming the civil service and the judicial system, enhancing transparency, and furthering good governance.

"Increasing the efficiency of financial intermediation will be crucial for promoting private investment and activity. To this end, efforts will continue to reduce the degree of concentration in the banking sector and separate banking and commercial operations. More generally, supervision of the banking system should be enhanced, and there is a need to bolster banks' capital and broaden the ownership base.

"It will be essential for the authorities to closely involve civil society and the poor in monitoring and evaluating actions taken by the government to reduce poverty. For the success of this strategy, the authorities are encouraged to develop a set of social indicators that could be updated and discussed on a regular and timely basis," Ms. Krueger stated.

ANNEX

Recent Economic Developments

Mauritania completed its previous PRGF arrangements in December 2002 (see News Brief No. 02/119). Growth has been relatively strong despite repeated external shocks, and inflation has remained subdued. The external current account has narrowed, Mauritania's reserve position has reached a comfortable level, and some progress was made in the reduction of poverty. These achievements are underpinned by appropriate macroeconomic policies and far-reaching structural reforms. However, the banking system has remained highly concentrated with inadequate financial intermediation, and the functioning of the foreign exchange market has continued to face some structural rigidities that contribute to a small spread between official and parallel market rates. Additionally, there has been modest improvement in building and strengthening administrative capacity.

Program Summary

The program seeks to increase growth and reduce poverty by focusing on banking and exchange rate reform, capacity building, and governance - which are the main weaknesses of the previous arrangement - while maintaining macroeconomic stability. For the medium term, the macroeconomic framework targets an inflation rate of less than 4 percent, a growth rate of about 5 percent to 6 percent until 2005. The level of official reserves is expected to be equivalent to at least 5 to 6 months of exports, under the program. And the increased growth envisioned under Mauritania's PRGF-supported program is expected to come from a rebound in the traditional sectors of the economy - agriculture and livestock - continued growth in services, and potentially from oil. Growth is expected to be further underpinned by a broad range of structural reforms envisioned under the PRGF-supported program.

For the period through 2004, fiscal policy is expected to focus on reforming direct taxation and strengthening tax administration and public expenditure management, while spending on pro-poor programs is increased. The central bank is expected to maintain a prudent monetary policy and follow a more flexible exchange rate policy. Structural policies are designed to deepen financial intermediation and improve the functioning of the banking system and Mauritania's foreign exchange market. This includes measures to reinforce banking supervision to help separate banking and commercial activities, and to ensure that all prudential regulations are respected. The authorities intend to draw on the resources of the recently inaugurated West Africa Technical Assistance Center (AFRITAC) to assist the government's efforts to strengthen capacity building. The PRGF-supported program also envisions improvements in governance, including through the establishment of a civil service ethics code, and measures to support private-sector led development, which would be particularly enhanced through improvements in Mauritania's judiciary envisioned under a program supported directly by the World Bank.