IMF tops up Mauritania loan to $101.6 million, but what are these changes?

IMF
Standard

Executive Summary: Bye bye price subsidies, hello price inflation without wage increases

IMF Executive Board Completes Fifth Review Under Mauritania’s Extended Credit Facility Arrangement and Approves US$16.9 Million Disbursement

Press Release No. 12/460
November 27, 2012

The Executive Board of the International Monetary Fund (IMF) completed today the fifth review of Mauritania’s economic performance under the program supported by an Extended Credit Facility arrangement (ECF) and approved an extension of the arrangement by three months until June 30, 2012.1 The Board’s decision, which was taken on a lapse of time basis,2 enables the immediate disbursement of an amount equivalent to SDR 11.04 million (US$16.9 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 66.24 million (US$101.6 million).

The Executive Board approved a three-year arrangement for Mauritania in March 2010 for an amount equivalent to SDR 77.28 million (about 120 percent of the country’s quota in the IMF, see Press Release No. 10/89).

Economic activity in Mauritania has been resilient, despite a severe drought and several external shocks. Inflation was contained, and fiscal and external buffers have reached unprecedented levels. Nonetheless, progress in reducing poverty and unemployment is uneven, and the economy is still too dependent on developments in extractive industries.

The sizeable buffers accumulated during the ECF-supported program provide a cushion against downside risks in 2013. As before, the economy remains exposed to a sharp fall in external demand, renewed bouts of volatility in the terms of trade, and a delay in the disbursement of fishing licenses. Yet a record level of foreign exchange reserves and a surplus in the overall fiscal balance this year create room for policy to respond if downside risks materialize. Over the medium term, reducing poverty by making growth more inclusive remains an overarching challenge.

Anchoring fiscal policy on developments in non-extractive industries will help preserve debt sustainability while protecting pro-poor spending. The draft 2013 budget preserves fiscal discipline through ambitious subsidy reform and wage bill containment, reducing reliance on volatile mining revenues[1]. At the same time, the spending on well-targeted social safety nets will increase [2]. The planned ramp-up in public investment spending [3] is appropriate in light of Mauritania’s pressing infrastructure needs, but should take into account absorptive capacity constraints and the new procurement code.

Monetary policy will become more active through the introduction in the immediate future of a new monetary policy instrument [4] that will help absorb excess liquidity and reduce risks of an unhealthy credit spiral. Sustaining greater exchange rate flexibility is essential for absorbing external shocks.

Continued satisfactory program implementation—based on phasing-out ill-targeted subsidies [5], strictly applying the new investment and procurement codes, and reinvigorating labor market and public enterprise reforms—will help diversifying the economy. This, in turn, is necessary for making growth more inclusive and reducing poverty. The sixth and final review of the ECF-supported program is scheduled for May 2013.

  1. The draft 2013 budget preserves fiscal discipline through ambitious subsidy reform and wage bill containment, reducing reliance on volatile mining revenues. So no pay rises, possible lay-offs or pay cuts, and more “ambitious” fuel price increases to erode subsidies.
  2. Spending on well-targeted social safety nets will increase. More graft for the regime insiders to pocket cash intended for small business loans and grants, social care, and the “Hope” shops
  3. Planned ramp-up in public investment spending .. should take into account absorptive capacity constraints and the new procurement code. Maybe they mean projects like solar / oil / gas / roads – but those are all funded from loans. Maybe IMF would like transparent and fair contract bidding? Wouldn’t we all.
  4. Monetary policy will become more active through the introduction in the immediate future of a new monetary policy instrument that will help absorb excess liquidity and reduce risks of an unhealthy credit spiral. Sustaining greater exchange rate flexibility is essential for absorbing external shocks. Any emergency paraconomists out there? What is this instrument? Maybe a fiscal blunt object to the back of the neck is heading Mauritania’s way. Will it take the same route carved out by the increasingly magical yet friendly bullets?   Seriously, this in context of the comments about “volatile mining revenue”, make me think the state is about to reassess the value of some major assets, which could herald a sell-off or compulsory purchase (using the windfall from tax on mining that began this year with Kinross and is about to happen with MCM), depending on the direction of the revaluing. On the other hand, it could mean an increase in the central bank interest rate, though I doubt a positive response from Mauritania’s private investment sector. That leaves an investment bond issue, and this is my punter’s pick. Aziz and his team have been courting any and every potential source of customers for any T-paper they might be planning to issue. 
  5. Continued satisfactory program implementation - based on phasing-out ill-targeted subsidies… etc see 1.

Mauritania’s most recent letter of intent is available as a PDF: [Fr] http://bit.ly/Rsb482 [En] http://bit.ly/VdfhIi