On January, 28, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Mauritania.
In recent years, Mauritania’s economy has benefited from macroeconomic stability and high growth in the context of contained inflation, responsible macro policies, high iron ore prices, windfall donor assistance, and scaled-up public investment. Real GDP growth is estimated at 6.4 percent in 2014, from 5.7 percent in 2013 owing to a rebound in the fishing sector. The current account deficit has remained at 25 percent of GDP during 2013–14 owing to large capital imports associated with investments in the extractive sector and, lately, to worsening terms of trade. International reserves, which remained at 6½ months of prospective imports, excluding those related to the extractive industries in 2013, have absorbed the deterioration of the terms of trade, declining to 4.7 months in 2014. The overall balance, excluding grants, posted a deficit of 2.2 percent of non-extractive GDP in 2013, down from 3.0 percent in 2012, but deteriorated to 4.7 percent of non-extractive GDP in 2014 on lower revenues, mainly mining revenues from SNIM, the public mining company. Monetary indicators suggest a moderate increase in credit.
The Financial System Stability Assessment (FSSA) concluded that the banking sector is well capitalized and liquid, but remains fragile to shocks. High credit concentration (including credit to the public sector), foreign exchange risk exposures, and low profitability due to a constrained business model and higher competition exacerbate banking vulnerabilities. While the banking system appears well capitalized overall, some banks are not meeting the minimum capital requirement and are under-provisioned. Asset quality remains weak with nonperforming loans representing 20 percent of loans in the second quarter of 2014.
The near-term outlook remains favorable despite slower economic activity and lower iron ore prices. Real GDP growth is projected to decline to 5.5 percent in 2015 because of lower growth in mining activity and lower private investment and consumption. Terms of trade are projected to deteriorate by 4.5 percent as lower iron ore prices (by 24 percent) are partially compensated by the decline in oil prices (of 40 percent). Inflation is expected to accelerate somewhat but remain below 5 percent, favored by the decline in international food prices and lower non-extractive GDP growth. Continued appreciation in real terms could result in higher private sector demand. Medium-term prospects remain promising: Mauritania’s large resource endowment provides ample opportunities for development. Structural reforms are essential to generate more growth and jobs and to address the challenges of economic diversification, inequality, and unemployment.
Risks to the outlook are tilted to the downside and dominated by global developments. Spillovers from weakening external demand for commodities could further reduce iron ore prices and mining export revenues. Larger-than-envisaged declines in main export prices would further reduce exports and FDI and cast doubts on mining expansion plans, dimming growth prospects and worsening fiscal balances. External shocks could expose vulnerabilities in the banking system, exacerbating a negative shock to growth and financial stability.
Executive Board Assessment2
Executive Directors commended the Mauritanian authorities for policies that have secured macroeconomic stability and supported development in recent years. Directors noted, however, that the risks from further declines in iron ore prices and weak activity in key trading partners cloud the outlook for the near term. Accordingly, they encouraged the authorities to persevere with prudent policymaking and the implementation of institutional and structural reforms to boost the economy’s resilience and foster more inclusive growth.
Directors welcomed progress with fiscal consolidation and the improved revenue performance. They agreed that the 2015 budget mitigates shortfalls in mining revenue, but considered that additional measures may be needed if the budget comes under pressure. Directors also stressed the importance of strengthening public financial management to reduce the risk of debt distress. Looking ahead, they underscored the need to improve the fiscal framework over the medium term to enhance the management of resource wealth and support macrostability. They recommended implementing an appropriate fiscal rule that takes into consideration the development needs of the country and helps safeguard the budget from boom-bust cycles of natural resource revenue, while reinforcing fiscal governance.
Directors encouraged the authorities to take advantage of the favorable inflation environment to reinforce Mauritania’s monetary framework by strengthening liquidity management. They also noted that prompt recapitalization of the central bank is essential to safeguard its credibility and independence. Directors emphasized the importance of a gradual liberalization of the foreign exchange market, noting that greater exchange rate flexibility would help absorb external shocks and support the reconstitution of reserve buffers. They welcomed the authorities’ steps toward compliance with Article VIII obligations, and encouraged them to eliminate the remaining exchange restriction as soon as possible.
Directors underscored the need to further strengthen the stability of the financial system. They welcomed the authorities’ intention to implement the recommendations of the recent Financial System Stability Assessment. Priorities include strengthening regulatory enforcement and supervisory independence, expanding central bank supervision to cover public banks and the insurance sector, and enhancing the bank resolution framework.
Directors encouraged the authorities to accelerate reforms to promote private sector development and economic diversification, which would boost employment and reduce poverty. In particular, they recommended working closely with development partners to address infrastructure bottlenecks, invest in human capital and education, improve governance and institutions, and deepen financial inclusion.
International Monetary Fund (IMF)