Thursday 10, August 2017 by Matthew Amlôt

IMF Executive Board Concludes 2017 Article IV Consultation with the Islamic Republic of Mauritania

On July 28, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Islamic Republic of Mauritania.

Mauritania continues to face a challenging external environment with low and volatile metal prices. A steep decline in iron ore prices in 2014–15 took away half of exports, widened the fiscal deficit, put pressure on reserves, and exposed bank vulnerabilities. In response, the authorities adjusted the budget significantly in 2016 (by three percent of GDP), allowed the exchange rate to adjust, and mobilised foreign grants and loans. These efforts contributed to reducing external imbalances and maintaining macroeconomic stability: the external current account deficit narrowed to 15 percent and inflation was contained at 1.5 percent on average in 2016. However, growth remained low at an estimated 1.7 percent and external debt continued to rise (to 72 percent of GDP). The deceleration of economic activity also increased financial stability risks. In response, the authorities are strengthening bank supervision and are preparing a national strategy for accelerated and inclusive growth covering 2016–30, including structural reforms and large-scale, foreign-financed infrastructure investment program to support jobs, growth, and diversification.

Growth prospects have improved along with planned public investment and structural reforms and some—albeit short-lived— recovery in metal prices. However, large external imbalances remain; exogenous commodity price developments and foreign investment in the extractive sectors continue to shape the outlook; and upcoming debt repayments could put further pressure on reserves, which have dipped to 4.8 months of non-extractive sector imports as of March 2017. Possible development of a recently discovered off-shore gas field could be a game-changer starting in 2021.

Executive Directors commended the Mauritanian authorities for their strong economic policy response to the challenging external environment of low metal prices, but noted that macroeconomic and financial stability as well as the incipient recovery remain fragile. Against this background, they agreed that the main challenge now is to support growth, reduce poverty and unemployment, diversify the economy, and meet infrastructure needs while, at the same time, strengthening macroeconomic stability, the external position, and debt sustainability. To achieve these objectives in the context of limited resources and elevated debt, Directors called for sustained prudent policies and structural reforms.

Directors concurred that structural reforms and infrastructure improvements are critical to address external imbalances and promote economic diversification. At the same time, most Directors called for greater exchange rate flexibility as a priority to help boost competitiveness, improve the external position, absorb shocks, and allow monetary policy to better address tight bank liquidity and support economic growth. A few Directors questioned the exchange rate’s potential to boost competitiveness, given the country’s limited production base. Some Directors also noted the authorities’ concern that an accommodative monetary policy could jeopardize ongoing efforts to stabilize the still weak external position. More generally, Directors encouraged the authorities to introduce a competitive and transparent foreign exchange auction system, remove regulatory obstacles to the development of an interbank market, and strengthen reserve buffers.

Directors recommended that fiscal policy be focused on consolidating the adjustment achieved so far and on creating fiscal space by accelerating ongoing reforms. This would allow for higher social and infrastructure spending without jeopardizing macroeconomic stability and debt sustainability. Directors encouraged the authorities to continue to modernize tax and customs administration, introduce a corporate income tax, adopt the new organic budget law, and review and phase out tax exemptions. They called for recent measures to strengthen public investment and debt management to be operationalized promptly to help prioritize projects. Directors generally agreed on the need to avoid non-concessional borrowing and, instead, give preference to concessional loans and grants. Regarding Mauritania’s ongoing negotiations with bilateral non-Paris Club creditors, a few Directors reiterated the importance of preserving comparability of treatment across official bilateral creditors.

Directors stressed the importance of addressing heightened financial stability risks and boosting credit to the private sector. In this regard, they encouraged the authorities to build on recent progress and accelerate the implementation of the 2014 FSAP recommendations, especially strengthening banking supervision and adopting the new banking law and central bank statute.

Directors welcomed the authorities’ draft multi-year development strategy to achieve higher and more inclusive growth, and encouraged its swift finalization and implementation. They recommended expanding social policies, strengthening social safety nets, and continuing efforts to improve the business climate and governance to support private sector growth, job creation, and diversification. Directors emphasized that higher spending on education and health would improve social outcomes and productivity, and help reduce poverty.

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