Report No. 26200-MAU Mauritania Accelerating Diversified, Private Sector-Led Growth A Country Economic Memorandum November 7, 2003 PREM 4 Africa Region Document of the World Bank i TABLE OF CONTENTS ACRONYMS AND ABBREVIATIONS ................................................................................................. ... 111 ACKNOWLEDGMENTS .......................................................................................................................... v EXECUTIVESUMMARY ........................................................................................................................ vi IINTRODUCTION 1 I1 BACKGROUND .. .................................................................................................................................. ................................................................................................................................... 3 A THESTRUCTUREOFTHEMAURITANIAN ECONOMY ................................................................ 3 3 I11 ECONOMICDEVELOPMENTS SINCETHE 1980s .B. .. EXTERNAL ENVIRONMENT REGIONALINTEGRATION AND ...................................................... .................................................................... 5 A ECONOMICDEVELOPMENTS INDEPENDENCETO 1992: A SNAPSHOT FROM .......................... 5 B STABILIZATIONAND STRUCTURALREFORM, 1992-2002 ......................................................... 7 14 IV DEVELOPMENTOUTCOMES OF REFORMS OF 1992-2002 .C.. PRODUCTIVESECTORPOLICIES, 1992-2002 ........................................................................... .................................................. 18 A 18 B.. MAJOR MACROECONOMIC CONCLUSION .............................................................................................................................. DEVELOPMENTS .......................................................................... 21 V PROMOTINGDIVERSIFIED PRIVATE SECTOR-LED GROWTH . 22 A ENHANCING ENABLINGENVIRONMENT THE ........................................................................... ......................................... 22 B.. . PROMOTINGEXPORT-ORIENTED 30 C. SECTOR-SPECIFIC ISSUES ......................................................................................................... ACTIVITIES ......................................................................... 34 53 VI OUTLOOK .D. EMPHASIS INFRASTRUCTURES ON ........................................................................................... ......................................................................................................................................... 58 A MACROECONOMIC PROSPECTS ................................................................................................ 58 B FISCALPROSPECTS .................................................................................................................... 61 c.. CONCLUSION .............................................................................................................................. 67 .. 11 ANNEXES ANNEXA. TIMETABLEFORIMPLEMENTATION OF THE RECOMMENDATIONS ........................................... 69 ANNEXB. ANNUALRECURRENTEXPENDITURESAS A PROPORTIONOFPUBLIC INVESTMENT PROJECTS: INDICATIVE "R"C0EFFICIENTS .................................................. 75 ANNEXC. RECOMMENDED ACTIVITIES TO ENHANCE FISHERIESDEVELOPMENT ..................................... 76 ANNEXD. LIVESTOCK: ANTICIPATED RESULTSUNDER TWO SCENARIOS ................................................. 77 ANNEXE. COMPARATIVE OVERVIEW OF FISHERIESALLOCATION MECHANISMS USED INMAURITANIA ................................................................................. 78 STATISTICAL ANNEX ................................................................................................................................... 79 REFERENCES .............................................................................................................................................. 109 BOXES Box 1.1: Profile of Mauritania..................................................................................................................... 1 Box 3.1: A Summary o f Ten Years o f Sustained Structural Reforms ......................................................... 9 Box 3.2: Making CompetitionWork ......................................................................................................... 13 Box 6.1: Mauritania's Medium-Term Sources o f Growth......................................................................... Box 5.1: ImprovingMarket Performance.................................................................................................. 24 59 FIGURES Figure 2.1: Figure 3.1: Incidence o f Poverty at National Level and by Zone o f Residence (1990-2000).................18 Structure o f GDP by Sector inConstant 1985 Prices (%. 1992-2002).................................. 3 Figure 3.2: Evolution o f Depth and Severity o f Poverty (1990-2000) .................................................... 18 TABLES Table 3.1: Inward Foreign Direct Investment as a Percentage o f GDP (1998-1999) ............................ 14 Table 3.2: Public Expenditure on Social Sectors (1990-2002) .............................................................. 16 Table 3.3: Selected Social Indicators for Mauritania and Selected Countries....................................... 16 Table 4.1: 20 Macroeconomic Framework (2003-07) ................................................................................ Consolidated Government Operations (1991-2002) ............................................................. Table 6.1: 60 Table 6.2: ConsolidatedGovemment Financial Operations (2003-06) ................................................ 65 ... 111 ACRONYMS AND ABBREVIATIONS ANEPA National Potable DrinkingWater and Sanitation Agency APAUS Agency for the Promotion of Universal Access to Basic Water Services BCI Banque Mauritanienne pour le Commerce et 1'Industrie B C M Central Bank o f Mauritania B M C I Banque Mauritanienne pour le Commerce International BNT BureauNational de Transport CAMEC NationalDrugProcurement and DistributionCompany CDHLCPI Commissariat for Human Rights and the FightAgainst Poverty and for Integration C E M Country Economic Memorandum C F A A Country Financial Accountability Assessment C M A P Mauritanian Center for Policy Analysis C M T A Compagnie Mauritanienne des Transport Aeriens CNCESP National Committee for the Consultation between State andPrivate Sector CNRE NationalWater Resource Center CNROP National Ocean Fishing Research Center CNSS Caisse National de SCcurit6 Sociale CNTT Center for Blood Transfusions CSA Country social assessment CWIQ Core Welfare Indicators Questionnaires DHA Water and Sanitation Directorate D H S Demographic and Health Survey DTT Directionde Transports Terrestres ECOWAS Economic Community o f West African States EEZ Exclusive Economic Zone EFA Education for All-see EFA-FTI EFA-FTI Education for All Fast Track Initiative EIG Economic interest group EPCV Nationalhousehold surveys (Enquetes Permanentes sur les Conditions de Vie des MCnage) ESAF Enhanced Structural Adjustment Facility EU European Union FA0 Food and Agricultural Organization FDI Foreign direct investment FGTP FCdCration GCnCral des Transporteurs de Personnes FIAS Foreign InvestmentAdvisory Service FTM FCdCration des Transporteurs de Mauritanie FNT FCdCrationNational des Transports GASP Group for the Analysis and Monitoring o f Poverty GDP Gross domestic product GIRM Government o f the Islamic Republic o f Mauritania GTU Groupement des Transporteurs Urbains HIPC Heavily Indebted Poor Countries H P M Health and Poverty inMauritania I C Interministerial Committee IDA Intemational Development Association IMF InternationalMonetary Fund INROP Institute National des Recherches Oceanographiques et des Peches IS Integrated survey M&E Monitoring and evaluation iv MAED Ministryo fEconomic Affairs MDRE Ministbre du DCveloppement rural et de l'environnement METR Marginal effective tax rate MTEF Medium-termexpenditure framework ODA Official Development Assistance OHADA Organisationpour l'harmonisation en Afrique du Droit des Affaires OMVS Organisation de la Mise en Valeur du Fleuve Senegal ONS National Statistical Office OPIC Overseas Private Investment Corporation? P A C A D Support Program for Cooperatives inDifficulty PCIME Prise en charge intCgrCe des maladies de l'enfant PDIAIM Integrated Program for the Development o f IrrigatedAgriculture PDU NationalProgram for Urban Development PE Public enterprise PGRNP Program for Natural Resource Management inRain-fed Areas PIP Public investment program PNDSE National Program for the Development o f the Education Sector PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper PSI Pre-shipment inspection PSIA Poverty and social impact analysis REER Real Effective Exchange Rate RIO Reference Interconnection Offer ROSC Report on the Observance o f Standards and Codes SAF Structural adjustment facility SECAL Sector adjustment loan SGS SociCte GCnerale de Surveillance SMCP SociCtC Mauritanienne de Commercialisation de Poissons SME Small and medium enterprises SNAREC Strategy for the Strengthening o fNational Capacity S N I M SociCtCNationale Industrielle et Minibre SOE State-owned enterprise SOMELEC SociCtt mauritanienne d'ClectricitC SONELEC SociCtCNationale d'eau et d'ClectricitC TA Technical assistance TC Technical committee TOFE Monthly government financial and economic accounts UEMOA Union Economique et MonBtaire Ouest Africaine UMA Arab Maghreb Union U N C A C E M National Union o f Savings and Loan Organizations U N D P UnitedNations Development Program VAT Value-added tax WTO World Trade Organization Vice President: Callisto E.Madavo Country Director: A. DavidCraig Sector Manager: Emmanuel Akpa Task Team Leader: Miguel Saponara V ACKNOWLEDGMENTS This report was prepared by a core team o f Bank staff Miguel Saponara (Task Team Leader, with main responsibility for the report (AFTP4); Nicola Pontara (AFTP4); Ismael Ouedreago (AFTR2); Francois L e Gall (AFTR2); Paulo de Sa (COCPD); Hawa Cisse Wague (AFTP4); and Simplice Zouhon-Bi (AFTP4). Logistical support was provided by Judite Fernandes (AFTP4). The World Bank team worked closely with a core Mauritanian team: Mohamed Ould Abed (MAED); Zein Ould Zeidane (Mauritanian Center for Policy Analysis (CMAP /MAED); Mohamed Cherif (Ministry o f Finance); Mohamed Lemine Ould Raghani, Central Bank o f Mauritania (BCM); Mohamed El Heyba Ould Lemrabot, Commissariat for Human Rights and the Fight Against Poverty and for Integration(CDHLCPI); Thiam Dombar (MF); and ElHassan OuldZein (CMAPMAED). The report has benefited from the overall guidance of EmmanuelAkpa, Sector Manager (AFTP4) and by comments made by the peer reviewers, Hasan Tuluy, Director (MNACS) and Philippe Le Houerou, Sector Manager (AFTP1). The team is also grateful to Alan Gelb, Chief Economist (AFR) and to H.E. Abdallah Ould Cheikh-Sidia, Minister for Economic Affairs and Development (MAED) for their support. Incarrying out this task, the team drew upon economic reports and operations prepared bythe Bank inthe last ten years, the documentationprepared by the Mauritanian Government for the Consultative Group (presented inParis in December 2001) and on the analytical work o f the IMFteam working inMauritania. The report was discussed with the Mauritanian authorities on October 21, 2003. As the government emphasized, the medium and long-term strategy issues for accelerating a diversified, private sector-led economic growth and reducing poverty are critical for Mauritania. These issues are the focus o f the present report. vi EXECUTIVESUMMARY 1. The last Country Economic Memorandum (CEM) on Mauritania was issued in 1985. Its content supported an active dialogue which underpinned the reforms implemented by the Mauritanian authorities during the latter half o f the 1980s. It was followed in 1994 by a Macroeconomic Update reviewing the country's economic and adjustment performance during 1985-93. The Update provided inputs into policy decision-making as the country overcame socio-economic difficulties during 1989-92 and neededto relaunch efforts to reform and stabilize the economy and restore economic growth. Accordingly, the report supported a strategy focused on strengthening external competitiveness; deepening structural reforms to encourage private sector-led development and reliance on market forces; liberalizing the regulatory framework; and reforming the banking sector and seeking extemal debt relief. The positive impact o fthe reforms o f this period enabled Mauritania to approach the PRSP with confidence and set relatively ambitious goals. This C E M analyzes the reform experience o f 1992-2002, examines the mid- course record of the PRSP, and proposes ways to firm up the agenda for the future. I. STABILIZATIONANDSTRUCTURALREFORMOF1992-2002 2. The macroeconomic and structural reforms implemented since 1992, have stimulated sustained economic growth, stabilized public finances, reduced the state's role in the economy and increased private sector activity. These positive developments, furthermore, have resultedin a decline inthe incidence o fpoverty and improvements insocial indicators. Macroeconomic Stability 3. Macroeconomic policies aimed at healthier public finances and reduced use o f banking system resources. This would be the key pillar o f prudent aggregate demand management, leading to more stable prices, release o f resources to stimulate credit to the private sector, and strengthenthe external sector inthe interest o freducing vulnerability. This was largely achieved by 1996, with prudent budgetary policies permitting the improvement o f the fiscal accounts. This, in tum, allowed the total re-payment o f the banking system debt and the constitution of precautionary reserves. The improvement in aggregate demand was reflected in the extemal sector accounts, which saw the current account and overall balance gaps narrow significantly over time. As part o f these achievements, the inflation rate fell; the ouguiya stabilized; and the savings gap narrowed as the national savings capacity was strengthened. Reorganizing the Role of the State 4. Regulatory Reforms. Mauritania carried out significant regulatory and other supply-side reforms in the early to mid-1990s: opening its domestic market to trade and investment, abolishing import monopolies, enacting new investment and mining codes, liberalizing prices and marketing o f agricultural products, reducing the size and role of the state in the economy, and establishing a multisectoral regulatory agency. Measures were introduced to bring Mauritania into compliance with intemational procedures on arbitration and business law. The vii direction o f these reforms, and the quality o f their concept and design, were largely consistent with intemational best practices, for which the government deserves credit. Due to privatization, liberalization, and market opening in the 1990s, state ownership and overt antimarket economic interventions subsided. Although, the framework for market activity i s incomplete. More needs to be done to create a sound environment conducive to private sector-led growth. 5. Public Enterprises. Effective restructuring efforts began in the early 1990s, by way o f reforming the legal and institutional framework and restructuring the finances o f key enterprises. At the same time, the government divested itself o f and obsolete a large number o f state monopolies and eliminated its cross-debts. About two-thirds o fpublic enterprises were liquidated or privatized. Divestiture o f key government assets is continuing, although the pace has often been subject to slippages and delays. For instance, the privatization o f SOMELEC, the electricity company, was due to take place in early 2002, but had to be postponed due to the disruption o f energy and financial markets in2002. Structural Change for an Enabling Environment 6. Trade and Exchange Reforms. All quantitative and qualitative trade barriers have been eliminated. Trade tariffs have also been aligned with those o f UEMOA countries. Tax reforms have harmonized the corporate and personal tax regime with the Arab Maghreb Union. The system o f exchange rate regime has been widely liberalized and a unified foreign exchange market has beengradually put inplace. 7. Banking System. The government introduced a number o f measures to restructure the banking sector as part of its reform agenda from 1985 to 1990. However, these regulatory reforms were not effectively implemented. The entire banking system had to be financially restructured for the second time in 1992 and 1993, at a large budgetary cost (approximately 7 percent o f GDP). Once state-owned commercial banks were restructured, the government divested its shareholding invirtually all commercial banks, and a special agency responsible for loan recovery was established. A new banking law was enacted, banking supervision was tightened, and prudential regulations that reflect intemational best practices were introduced. The Central Bank moved toward market-based instruments o f liquidity management with the introduction o f treasury-bill auctions and creation of an interbank market. Further restructuring o f the bankingsector has movedmore slowly. The oligopolistic nature o fthe banking system and highconcentrationratiospose animpedimentto the development o fnew economic activities. Facilitating Private Sector Growth 8. Policy and institutional reforms in various sectors sought to create room for private initiative to develop. These particularly important in the fisheries, rural, telecom, banking, oil andminingsectors. 9. Industrial Fisheries. Significant and systemic reform of the fishing sector did not begin until 1994, when Mauritania introduced a comprehensive sectoral development policy. The objective o f this policy was to use market-related mechanisms, such as license fees and access rights, instead o f the previous export tax regime. The government also reduced its role in the viii sector by decreasing its participation in the Socikti! Mauritanienne de Commercialization de Poissons (SMCP), the state-owned export company to 35 percent, abolishing its legal monopoly on all fish marketing. The government also sold its shares in all the fisheries sector joint-venture companies. In 1995, fish marketing outside SMCP was liberalized and deep-sea fishing was opened to foreign operators. Surveillance and monitoring of fisheries activities was strengthened. Mauritania negotiated its first five-year fishing agreement with the European Union (EU) in 1995 and renegotiated a new one in2001. 10. Rural Sector. During the last decade, government policies in the agriculture subsector have focused on promoting efficiency and some diversification in agricultural production. A land-tenure program was introduced in some regions o f the country, a countrywide cooperative credit scheme was established, and the provision o f rural services was decentralized. Pricing and marketing in the rice subsector were liberalized, marketing subsidies on domestic rice were removed, and the state-owned rice mills were privatized. To increase rural value-added, income, and employment in the Senegal River Valley, irrigation schemes are being rehabilitated, and producers are being provided with basic rural infrastructure and support. The livestock sector, which in2002 accounted for about 70 percent o f primary sector GDP and some 15 percent o f the country's GDP, i s poorly integrated into the national economy.No significant reforms have been implemented. 11. Mining. The climate for private sector investment in mining in Mauritania improved substantially with the approval of a new mining code in 1999 and Law 2002/02, which established a new fiscal regime for mining. One o f the major innovations o f the code was the introduction o f a transparent and efficient system o f mining-titlemanagement. Boosted by the changes in the legal and regulatory framework and the geological discoveries in neighboring countries, the mining sector in Mauritania has experienced significant development in recent years. HumanResource Development and Poverty Reduction 12. From a low priority in the 1 9 8 0 ~human resource development and poverty reduction ~ became key parts o f the government's economic development strategy from 1994 onwards. Educational sector reforms were introduced to improve access to primary education, reduce illiteracy, and strengthen the quality o f primary and secondary education. Health sector policies focused on improving access to primary and preventive health care. Despite the fiscal consolidation that took place inthe 1990s, public expenditures on social sectors as a percentage o f GDP were maintained and increased. Measures, such as cost-sharing and the decentralization o f education and health services to bringthem closer to local needs, were used to expand access. A full "Poverty Assessment" Report (a companion to this CEM) examines poverty reduction issues ingreater detail. 11. STRATEGY FOR ADDITIONAL POVERTY REDUCTION 13. In2001 the government elaborated a poverty reduction strategy, set forth inthe Poverty Reduction Strategy Paper (PRSP). The strategy seeks to accelerate economic growth, with the private sector as the main engine, and to use public resources to improve people's welfare, ix paying particular attention to the poor. The PRSP focused on four pillars: accelerate private sector-led growth; anchor growth in the economic environment o f the poor; develop human resources and ensure universal access to basic services; and strengtheninstitutional capacity and governance. Overall, the implementation o f the PRSP to date has been successful in that key measures have been implementedinthe macroeconomic, structural, and social areas. 14. The assessment o f the first and second PRSP-PR confirms that the country continues to face significant challenges. It also points to key constraints to growth and poverty reduction. These include lack o f diversification inthe economy and the country's continued vulnerability to fluctuations in external demand for its exports and the vagaries o f the weather; ongoing absorption capacity constraints; and the still insufficient volume o f government investment inthe rural areas where most o f the poor live. A number o f key lessons were learned during the first two years of PRSP implementation. 15. First, there is now a realization that, while the PRSP bears overall pertinence, certain targets need to be reviewed in order to set more realistic goals interms o f poverty reduction and key social indicators. Second, it i s still necessary to eliminate the remaining barriers to the development o f private business and stimulate financial intermediation to unleash the private sector as the main engine o f growth. Next, it remains important to focus on the efforts to stimulate growth in the areas where the poor are concentrated. Those include agriculture, livestock, and artisanal fisheries, as well as urban areas. That work could be aided by a better understanding o f the dynamics o f urban informal sector activities. A fourth lesson indicated the importance o f improving the management o f public expenditure and moving slowly but steadily towards decentralization and budget deconcentration to improve the availability o f necessary resources at the service delivery front line. In parallel, also, it was learned that adopting a regional approach to the PRSP by establishing poverty reduction programs in each wiluyu o f the country i s important. Fifth, it i s important to enhance absorption capacity and the speed at which expenditure i s executed in key social sectors. Finally, civil society must be involved more effectively in the implementation o f PRSP programs to expedite their execution and strengthen ownership at the national level. 111. RESULTS OF THE REFORMS Real Economy 16. The emphasis on macroeconomic stability and structural reform reversed economic imbalances and had a beneficial impact on growth. Economic growth increased from an average o f 3.6 percent during 1991-94 to an average of 4.5 percent between 1999-2002. Consumer price inflation averaged 4 percent between 1999-2002, down from 7.3 percent during 1991-94. External Sector 17. The current account o f Mauritania's balance o f payments, structurally in deficit in the past, has improved significantly in recent years. At the same time, gross official reserves increased to comfortable levels. The current account deficit (excluding official transfers) narrowed from an average o f 18.4 percent between 1991-94, to an average o f 6.9 percent between 1999-2002. Gross domestic savings have also improved significantly, rising from 17 X percent o f GDP in 1995-1998 to an average o f 26 percent during 1999-2002. Mauritania reached the completion point under the enhanced HIPC Initiative in early June 2002. As a result, the net present value of Mauritania's total external debt was reduced by some 50 percent, providing a good basis for long-term debt sustainability. PublicFinance 18. Tax revenue has remained broadly constant at about 15 percent of GDP over the last decade, a relatively highproportion for the sub-region. The introduction o f the VAT in 1995 and improvements in tax administration partially offset the decline in revenue from intemational trade taxes (which fell from 28.6 percent o f total tax revenue in 1996 to 16.2 percent in 2002), following the introduction o f tariff reforms in 1997-98. Nontax revenue, by contrast, increased markedly, from 11percent to 23 percent o f GDP, driven mainlyby EUfish royalties. 19. Public expenditure has increased from an average of 25 percent of GDP during 1992-98 to 31 percent in 2002. This increase was mainly driven by higher capital expenditure over the period, while current expenditure increased at a much slower pace. Overall, the GIRM has been reorienting expenditure towards social sectors and poverty reduction. Duringthe last decade the government successfully managed a slowdown in the rate o f increase o f wage and salary expenditure: spending on wages and salaries declined by 2 percent o f GDP between 1997 and 2001. The govemment also considerably reducedmilitary expenditure and increased allocation to social sectors. Public investment as a share of GDP increased from an average o f 18.6 percent between 1995-98 to an average o f 24 percent between 1999-2002. This increase was mainly driven by a rise inpublic investmentinthe social sectors. Impact on well-being 20. There has been noticeable improvement in the income and living standards o f the population. According to the 2000 household survey, the incidence o f income poverty has been constantly declining, from 56 percent in 1990 to 50 percent in 1996 and to 46.3 percent in2000. However, this decline i s not evenly spread over the country. Significant challenges remain for the future. Iv. ANUPDATED PROGRAMFORSTRONGERAND DIVERSIFIED PRIVATE SECTOR-LEDGROWTH Continuingcross-sectoralreforms 21. Private Sector-Led Growth i s critical to poverty reduction, income generation, and employment opportunities. Given its proximity to European markets, a dynamic private sector, relatively low labor cost, and a decade o f comprehensive and sustained structural reforms, Mauritania has significant potential for private sector-driven export-oriented growth. However, the achievement o f higher private sector-led economic growth will require the maintenance o f a stable macro-economic framework and the development o f an adequate enabling environment. The latter include creating a credible regulatory and judiciary system, developing a sound x i financial system, developing a basic infrastructure to facilitate competition and factor mobility, internal market integration, and closer economic integration with the rest o f the world. 22. Regulatory Reform. Of almost all the major challenges facing Mauritania, continuing the regulatory reforms i s among the most important. These reforms are necessary if privatization, deregulation, and state-owned enterprise (SOE) reforms are to support accelerated and diversified longer-term growth and expand market size, if considerable increases in both local and foreign private investment are to be achieved. Therefore, Mauritania's emphasis now should turnto the more difficult aspects ofregulatory reform. The government needs to implementthe thirdphase o fthese reforms. That phase is part o fthe larger structural program aimed at creating an enabling environment for private enterprise, buildingpublic and private institutions based on values o f simplification, transparency, neutrality, andgenuine competition that fosters innovative private sector development and yields benefits for the poor. Properly designed and implemented, the reforms can help diversify production and open new markets, while increasing private investment (domestic and foreign), business start-ups, job creation, and incentives for efficiency among formal and informal enterprises. 23. Reform of the labor market. Labor qualifications in Mauritania fall short o f those required by a modem economy, as they tend to focus on trade in the informal sector. A major task therefore will be to upgrade professional training for new entrants to the labor force and for those already gainfully employed. For several years, a new labor code has beenunder preparation by the government that would abolish the state monopoly on employment offices, permit workers to be employed under time-limited contracts, and ease the process o f granting labor permits to foreign workers. This code should be enacted promptly to clarify the situation in the labor market, even though it appears that practices in the labor market are more flexible than would appear from reading the present labor code. The reform o f the labor market will be essential ifMauritaniawants to reduce unemployment and improve its potential to createjobs. 24. Financial Sector Development. The development o f a sound and competitive financial sector i s an essential condition for both private sector development and export-oriented productive activities. Under an accelerated growth scenario, more complex and larger financial services will be required. However, at present the banking sector is not open to all kinds o f economic activities, since transaction costs are high, medium- and long-term financing and its supporting secondary markets are practically inexistent. For the mediumand long-term, the main challenge will be to mobilize a large pool o f resources and allocate it to productive activities. In this respect, it is recommended that the GIRM speed up the preparation o f the Financial Sector study and implementthe regulatory reform recommendations relatedto the banking and financial sector. 25 Market Integration. To expand and integrate the internal market, several constraints- identified in this report-will need to be addressed. Mauritania needs to act in key sectors, including the telecommunications and financial sectors, which play a key role in linking buyers and sellers, integrating economic centers, and encouraging entrepreneurship. Regional co- opevation should be a much more important part o f Mauritania's development strategy as a way to increase market size and attractiveness to foreign investment and also because regional economic linkages have become essential to international economic organization. xii Diversifying the Sectoral Sources of Growth 26. Agriculture Sector. Inspite o f recent downturns and unabated out-migration fueling rapid urban population growth, the agriculture sector has great potential for growth. It remains central in employment and income generation and overall poverty reduction inMauritania. The erratic climatic conditions in rainfed agriculture (low and unpredictable rainfall, recent flooding and frost) are well documented. Better managed, however, the land and water resources in the Senegal River valley can compensate somewhat for these difficult conditions. 27. Rainfed Agriculture. Government policies should aim at stabilizing production through the development and promotion o f soil and water conservation infrastructure and practices, demand-driven agricultural services delivery programs, and rural roads to improve access to markets and basic services. The implementation o f such measures and programs would lead to modest growth in rainfed production commensurate with population growth, though with important annual variations. Clearly, Mauritania needs to look to the Senegal River Valley inthe south for rapid and important income growth and employment generation inthe rural sector. 28. Irrigated Agriculture. Mauritania should continue to claim back the potential o f its irrigated land, its major and still untapped renewable resource. It has become evident that this potential would be realized by promoting not just rice but also diversified agricultural production. Programs and measures to improve the production o f rice, as well as fruits, vegetables, and other fodder crop, should continue to be implementedina timely manner. 29. Irrigated Rice. In a relatively short span, Mauritania has successfully extricated itself from a heavily public-assisted and poor-quality rice production and marketing system to a more liberalized and quality-oriented system that competes effectively with imported rice. To minimize disruptions in the rice sub-sector, the GIRM should continue implementing accompanying measures to allow domestic rice to hold its own in the face o f competition from imported rice. These measures include the promotion o f better quality seeds, extension services, expanded agricultural credit, planned land rehabilitation, and an acceleration o f the implementation o f the land tenure law, particularly for cooperative farmers. 30. Agricultural Diverszjication. Aggregated, the domestic, regional, and international markets bound the potential demand for Mauritania's food and fiber supply. Mauritania's domestic market i s admittedly small, but it i s expanding due to rapid population growth, overall income growth, and significant elasticity o f demand for the potential products o f irrigated agriculture (particularly fruits and vegetables, animal feed, and wood products). Decades-long sedentarization and urbanization have brought along sweeping changes in consumer food tastes and preferences that increasingly include fruits and vegetables. In this respect, it i s strongly recommendedthat the GIRM implement the agribusiness strategy paper (December 2001). Livestock Sector. To enhance this sector's contribution to growth, trade, and poverty reduction, Mauritania will need to implement, in a timely and sequential manner, the main recommendations made in the Livestock Sector Study (2003). A summary o f these ... X l l l recommendations, as well as the impact o f their implementation, i s presented in para. 114 and Annex D. 32. Industrial Fisheries. To diversify and add more value to its fish products, to land and process the catches in the country, and to build markets for new products, Mauritania will have to invest in developing onshore domestic processing facilities (see Annex C). The country must introduce the procedures and institutions to support new products, such as (i)adequate inspection, communication, and documentation facilities; (ii) trained operators; (iii)processing and cleaning personnel; (iv) effective monitoring activities by regulatory authorities; and (v) adequate scientific data and properly equipped laboratories to support regular monitoring programs. 33. The fishing rights allocation system in Mauritania could be greatly improved if it were clarified in several respects, including preparation o f development plans and determination and publication o f licensing procedures and maximum takes o f major resources. As a result o f discrepancies between the objective o f obtaining government revenues in hard currency and the objective o f resource conservation, there i s no clear definition for delimiting fishing activities or establishing the distribution o f national artisanal fishing, national industrial fishing, and foreign fishing (see Annex E). Clarifying these matters would avoid the problems o f over-fishing in relation to certain stocks. In this regard, issuance o f fishing licenses should be perceived as a government commitment to manage the resource in a rational manner and to ensure the sustainability o f resources based on available scientific and technical information. Similarly, the fisheries surveillance system must be further strengthened with both human and material resources for providing complete coverage o f fishing zones and detecting any irregularities. Its role i s important because this i s the only institution that can function as a factual reporter o f the activities o f all fishingboats inthe Exclusive Economic Zone (EEZ) o f Mauritania. 34. Artisanal Fisheries. The potential for further growth o f the artisanal fisheries subsector i s constrained by the fact that many fishing villages are isolated from markets and lack the services needed to handle perishable products. However, artisanal fisheries' contribution to growth, employment, and poverty reduction (besides its advantage in terms o f efficiency and reduced management costs) can be significantly increased ifthe adequate infrastructure and services were provided. A much more broad approach to the potential and outstanding problems of this subsector would help diversify economic opportunities for the poor, increase added value to artisanal fishproducts, and improve artisanal fishery income inthe mediumand long-term. 35, Manufacturing Sector. Mauritania's population i s rapidly urbanizing, and this trend will likely continue inthe near future. This bringsto the development strategy the need to realign the economy inline with the changing geographical distribution o f the population. That will require creating employment and providing cash incomes to meet new demands from the growing urban population. Outside o f mining, fisheries, and telecommunications, light industrial activity i s severely constrained by the size o f the domestic market, lack o f infrastructure, high labor costs, and lack o f skilled labor. But achieving a high GDP growth in Mauritania will also require encouraging industrial development. Although the development o f a light industrial sector i s at present quite constrained, there i s room for expansion, mainly by providing input and processing the outputs o fthe rural and fisheries sectors, which could also be a source of employment for the xiv urbanpopulation. Also, the creationo furban consumer markets could be expected to give rise to production o f goods other than those that are already produced inMauritania. To promote SMEs, which could make a large portion o f the employment market and be the foundation o f a dynamic private sector, Mauritania will need to implement a set o f recommendations aimed at promoting the expansion o f labor-intensive small and medium enterprises and facilitating the incorporation o f the informal sector into the formal economy (see Box 5.1). 36. Mining. Mining today i s one o f the most important sectors o f the country's economy, with a significant iron-ore mining industry that contributes up to 12 percent o f the country's GDP and accounts for over half o f the country's export earnings. Although miningproduction i s still dominated by iron-ore produced by Socie`te` Nationale Industrielle et Miniire (SNIM), Mauritania has a vast and diversifying geological potential for other substances like copper, gold, diamonds, and phosphates. Most o f the major mining companies are now investing in Mauritania. Investments inexploration have increased inspite o f a general drop inthe region. On the other hand,with additional private sector investmentand efficiency gains at the railway, iron- ore production could potentially be expanded from 12 to 20 million tons per year. 37. Oil. Since the first discovery o f oil by Woodside on their Chinguetti offshore prospect in 2001, there has beenconsiderable interest inhydrocarbon exploration inMauritania inparticular in the Coastal Basin. The discovery of oil has also highlighted the petroleum potential of the virtually unexplored onshore Mauritanian basins, renewing interest in the Taoudeni Basin. It i s anticipated that Mauritanian hydrocarbon sector will become a major player in the country's economy. Work to develop the field i s expected to begin in 2004, and the production o f oil in Mauritania could start by 2006. 38. The production o f oil raises significant strategic, tactical and institutional development issues and challenges for the country: macro-relatedpolicy issues, inparticular, those related to avoiding or at least minimizing the Dutch disease undesirable effects; revenue management and governance issues; legal, regulatory and contractual issues; regional trade, transportation and integration issues; and dealing with potential adverse environmental impact. While the oil and gas industries provide significant opportunities for the Mauritanian economy, it also brings substantial risks. These will needto be managed and mitigated by the government, investors, and communities. The depleting nature o f oil and gas resources make it particularly important that the government's economic policies ensure that the benefits o ftheir exploitation contribute to the socio-economic development and physical capital needed for sustainable and diversified development over the long-term. 39. Unfortunately, in certain cases, neither investment nor oil revenues have been able to guarantee economic growth or poverty reduction. Thus, the presence o f major oil and gas industries has been associated with a variety o f negative social and environmental outcomes (the so-called "Paradox of Plenty '7 where the mismanagement o f the resource has failed to generate the sustainable benefits expected. Avoiding these and other common pitfalls will be one o f the most urgent challenges. The Mauritanian Government would do well to put in place legal, regulatory and fiscal regimes to accelerate the growth o f the Mauritania's hydrocarbon industry, as well as to buildthe capacity for a successful management of the oil resources. To do so, they would need to pay attention to the issues stated inparas. 140-147 o f the main report. xv 40. Tourism. Another area where Mauritania's private sector could compete internationallyi s tourism, but this i s another industry where quality control i s key. The regulatory framework for tourism i s entirely insufficient to ensure the quality o f hotels, transport, guides, and tourist agencies. To improve the prospects o f the tourism sector, the recommendations o f the inter- ministerial commission should be rapidly implemented-in particular, those related to the role o f the OfJice National du Tourisme and the role o fthe private sector indeveloping the industry. Emphasisin DevelopingBasicInfrastructure 41. The development o f basic infrastructure (telecommunications, water and sewerage, electricity, roads, airports, and new information and communication technologies) i s essential to developing trade, reducing production costs, enhancing the competitiveness o f the national economy, promoting market integration, and anchoring economic growth in the economic environment o f the poor. This should be primarily done through private investment and service delivery, as well as improving the efficiency o f management and maintenance systems. If Mauritania really wishes to attract private sector participation and financing in the above- mentioned areas, it will need to tackle the outstanding institutional and regulatory issues presented in SectionD- Emphasis inInfrastructure and Box 5.1 Medium- andLong-TermOutlook 42. For the medium and long-term, two scenarios are envisaged to illustrate the path to support higher growth, employment creation, and income generation. Both scenarios assume sound macroeconomic conditions and sound management o f the exptected oil revenues to avoid the potential effects o f "Dutch Disease'' , as well as the absence o f increased external shocks. However, the high-case scenario i s underpinned by both the implementation o f a major third wave o f reforms, regulatory, structural, and institutional and developments inthe oil sector 43. A baseline scenario considers a pattern o f overall GDP growth similar to the one observed during 1992-2002. Under this scenario, Mauritania's growth continues to depend heavily on the traditional sectors, the implementation o f the remaining structural and regulatory reforms moves slowly, and the fundamental problems for economic diversification, export- oriented activities, and private sector investment remain. The outcome o f this scenario i s that growth will continue to be based on the expansion o f the tertiary sector (commerce and telecommunications), productivity gains in the irrigated subsector, economic integration o f some livestock activities, and the mining sector. Under this scenario, real GDP would grow at about 5.6 percent during 2003-07. However, under this scenario, the lack o f economic diversification will limit Mauritania's scope to reduce its vulnerability to external shocks, as well as its dependency to external savings. Moreover, the growth o f the labor force resulting from rapid urbanization, along with constraints for private investment, would result inrising unemployment and slow down the poverty reduction effort. 44. An enhanced medium- and long-term growth scenario i s based on the assumption that Mauritania must and should grow faster. This scenario assumes positive developments inthe oil sector-that is, oil exploitation comes on stream in 2006 and makes a significant contribution to GDP growth. In addition, it i s assumed that the effective implementation o f policy reforms, xvi notably those related to the regulatory framework and the promotion o f export-oriented activities, i s made in a sustained and timely manner. Doing so, would also entail a significant transformation of the economic structure. The outcome o f this scenario indicates that real GDP growth would reach an average medium-term growth rate o f about 6.7 percent during 2003-07. on the long-term, it is assumed that in addition to oil, the GIRM will finance the non-oil economy out o f its oil revenues, so that growth rates inthe agriculture and livestock sectors also pick up significantly as envisaged inthe sectoral strategies developedby the GIRM. Intersectoral linkages with agriculture, livestock, and fisheries, together with increased value-added in the production channel, also would enhance secondary sector growth and expand the export base, while the expansion o f the service and infrastructure sectors would continue unabated. Under these assumptions, the real GDP growthrate could reach about 9 percent inthe long-term. 45. Clearly, it would also be possible to consider a low-case scenario, with a lower GDP growth due to persistent droughts and insect plagues, external shocks, climatic changes, lower demand in prices for iron-ore and fish, and delays in implementing reforms. Such a scenario i s not presented inthis report. 46. Fiscal Prospects. The expected expansion of private investment and production, combined with a growing demand for social services and an increasing need to finance the economic cost o f social and economic infrastructure, will put further pressure on the government's budget. More revenue will need to be raised to finance the increased larger expenditures stemming from the government's strategy of enhanced growth and poverty reduction. However, given the present narrow tax base, inthe short and medium-termit could be difficult to raise fiscal revenue to meet these demands unless revenue collection i s strengthened, discretionary measures are implemented (para. 174), and the tax base i s expanded. As for public expenditure, to reap the benefits o f integration into the regional and world economy and achieve its goal of private sector-led growth and poverty reduction, the government must be able to sustain enhancements o f its human capital and secure a steady private investment effort, while ensuring that economic growth raises the overall standard o f living. This will require increasing public expenditures in the social sectors, in developing, operating, and maintaining basic infrastructure, and in developing support services for the productive sectors--in particular, rural and fisheries. This will also require additional shifts in the composition of public expenditure- first, to facilitate the role o f the private sector inproviding services and launching new economic activities, and second, to allow public expenditure to play a more significant role in the growth and poverty reduction effort. Giventhat the Mauritanian public sector i s relatively small, there i s room for reorienting and enhancing both resource allocation and the efficiency o f public expenditure. A set of recommendations aimed at improving - over the medium-term- the public expenditure efficiency and effectiveness is presented in para. 177. It i s also recommended that the GIRMpays particular attentionto the sound management ofoil revenues. xvii VI. ISSUES ANALYSIS FORFURTHER 47. Some issues have beenidentified inthis report as deservingfurther analysis and research work. Work on these and other related issues will be important, both in accelerating diversified, private sector-led growth, employment creation and inreducing poverty. These include: Prospects for the oil sector and its contribution to economic growth. This area includes management o f oil revenues as well as the development and financing o f the non-oil sectors. Approaches for the modernization o f the State. This includes institutional development, civil service reform, role o fthe legislative branch, rule o f law and governance issues. Paths for further fiscal adjustment at the central and local levels taking into account the linkages between growth, public resource management, and poverty reduction. Ways to further develop a sound and competitive financial system. This includes micro- credit. Linkages between an export-oriented strategy, growth, employment, and education. Labor market analysis/informal sector and its contribution to economic activities and resource mobilization. I. INTRODUCTION 1. The last Country Economic Box 1.1: Profile of Mauritania Memorandum (CEM) on Mauritania was Culture and Population.Mauritania has an intricate culture with traditional ties with the Maghreb countries to the north and with Sub-Saharan Africa to the south issued in 1985, and east. The sociocultural landscape o f Mauritania has undergone rapid covering the period transformation. At independence (1960), Mauritania was a traditionally nomadic from 1980 to 1984.' In society, with only 5 percent o f the population living in urban centers. In 1998, this 1985, the Government proportion had risento over 50 percent-that is, 1.6 million urban dwellers out o f a o f the Islamic Republic total population o f 2.7 million, a demographic change fuelled by rapid migration o f Mauritania (GIRM) from rural areas, particularly since the mid-1980s. Nouakchott, the capital city, recognized the need for currently hosts one-third o f the country's total population. The Environment.More than 90 percent of the land surface is desert, and water ambitious economic scarcity i s a widespread problem. Desertification and environmental degradation and financial reforms are threatening scarce arable land (only 0.5 percent o f the total surface). Irrigation and launched a and other infrastructure investments in the Senegal River Valley are needed but also pose challenges, as they affect economic, environmental, and social issues in stabilization and neighboring countries. Improved fishing resource management, including better adjustment program conservation and surveillance, is necessary to ensure sustainable supplies o f fish. In with assistance from urban areas, the most pressing issues include improving sanitation and waste management and expanding access to water. the World Bank and the History of BankRelations.To date, the World Bank Group has approved 64 loans Intemational Monetary and credits for Mauritania for a total o f US$857.5 million (all dollar amounts are Fund(IMF). In 1994, a US.dollars). The current project portfolio consists of 13 investment operations for a total commitment of $294 million with an undisbursed balance o f $179 million. Macroeconomic The Bank's lending operations reflect a cross-sectoral emphasis on accelerating Update was completed diversifiedand private sector-led growth and reducing poverty. reviewing the country's PoliticalOutlook.From 1978 through 1992, a military government led Mauritania. In 1992, opposition parties were legalized and a new constitution was ratified in a economic and national referendum, followed shortly thereafter by legislative and presidential adjustment elections. Mauritania was the first member o f the Arab League to hold direct performance during Mauritania has held two presidential elections. Legislative and municipalelections presidential elections. Since opposition political parties were legalized in 1992, 1985-93.2 The update are conducted regularly and have become accepted practice in the country. The provided an account o f most recent were held in October 2001. Intemational observers welcomed the Mauritania as the smooth organization, the manner, and the results o f the two rounds o f these elections, as well as the fact that they allowed for proper participation o f all electors country reached a in an atmosphere of normality and democratic openness. On June 8, 2003, an turning point following attempted military coup was successfully and rapidly put down by the government. the troubled period o f The next presidential elections are due by the end o f 2003. 1989-92. The Update emphasized that Mauritania needs to re-launch the reform effort, to stabilize the economy and restore economic growth. 2. In 1992, the Government of Mauritania embarked on a series of macroeconomic and structural reforms that have stimulated sustained economic growth, stabilized public ISee Islamic Republic o f Mauritania: Country Economic Memorandum, Report No. 5537-MAU, July 10, 1985. See Mauritania Macroeconomic Update: Structural Adjustment and Development Issues, Report No. 11898-MAU,April 1994. 2 finances, and reduced the state's role in the economy and increased private sector activity. These positive developments, furthermore, have resulted in a decline in the incidence o f poverty and improvements insocial indicators. 3. Inorder to consolidate and furtherbuilduponthese achievements, the government has designed a poverty reduction strategy (PRS) that aims to sharply reduce poverty and improve social indicators over the 2001-2004 period. Successful implementation o f this strategy, as presented in the GIRM's Poverty Reduction Strategy Paper (PRSP), was one of the conditions set forth inthe Heavily IndebtedPoor Countries (HIPC) Decision Point document that allowed Mauritania to reach the HIPC Completion Point inJune 2002.3 4. This CEM reviews the economic, structural, and institutional reforms introduced by the GIRM since 1992, and assesses the economic and social impact o fthese measures, as a prelude to exploring the long-term structural and regulatory constraints that Mauritania needs to deal with, in order to achieve an accelerated, diversified private sector-led growth and poverty reduction. See Mauritania: Decision Point Document under the Enhanced HIPC Initiative - Report No IDA/W000- 8, January 18, 2000 3 11. BACKGROUND A. THESTRUCTUREOFTHEMAURITANIAN ECONOMY 5. Resource Base. Mauritania i s one of the largest countries in Africa, measuring some 1.1million square kilometers. Over 90 percent o f the country's territory i s desert, and less than 0.5 percent o f the land i s considered suitable for crop Figure 2.1: Structure of GDP by Sector in cultivation. Mauritania i s also subject Constant 1985 Prices (YO,1992-2002) to extensive drought and plagues (for 100.0 instance, infestations o f desert locusts). Increasing land degradation and 60 0 desertification threaten to further 40 0 reduce the already limited stock o f arable land. While the country has rich 20 0 and extensive coastal fishing grounds, 0 0 over-fishing has begun to threaten this 1992 (1993- 2001 2002 2000) natural resource in recent years. Mining and fishery activities dominate ElPrimary sector Secondary sector 0Tertiary secto the industrial sector and together account for nearly the totality o f export earnings. The rural sector i s the main source o f income for the population and employs an estimated 40 percent o f the labor force. Livestock contributes to a significant, but unrecorded share o f exports. 6. Structure of Production. As Figure 2.1 shows, the tertiary sector dominates the productive structure, accounting for more than 50 percent o f GDP over the last decade. The share o f the service sector has grown over time, from an average o f 43 percent o f GDP in 1990-92 and 46.2 percent between 1993-2000 to 52.1 percent in 2002. This increase was fuelled by expansion in trade, transport, and communication services, as a result o f the extension o f the network o f roads and artisanal ports, and the privatization o f the telecommunications sector. B. EXTERNAL ENVIRONMENT REGIONALINTEGRATION AND 7. Trade Concentration and Vulnerability. The Mauritanian economy remains vulnerable to both price fluctuations and changes in demand for its products on world markets (table 23.1). Almost all o f Mauritania's exports (close to 99 percent) consist o f two commodities: fish and iron-ore, representing 45 percent and 55 percent o f total exports in 2001/02, respectively. About 80 percent o f exports go to industrial countries. Little or no export diversification has occurred, despite the government's commitment to this objective since the late 1 9 8 0 ~ ~ Mauritania's unfavorable climate, a low level o f industrialization, and its narrow productionbase means that it depends heavily on imports Iron-ore and fisheries have always accounted for 99 percent o f total export eamings. 4 to meet most demands. Petroleum products represent about 30 percent o f total imports, followed by food (25 percent); machinery, transport, and equipment (25 percent); and basic manufactures (15 percent). The volatility o f petroleum prices translate into frequent changes inprice fluctuations o f the country's external terms o f trade. 8. Significant progress has been made in recent years to liberalize Mauritania's foreign trade regime, which in the 1980s was characterized by high protection rates, multiple tariffs rates and bands, widespread exemption, and significant non-tariff barriers. The most important measures taken to liberalize trade figure include (i) elimination o f the licensing systems; (ii)the abolition o f all export and import monopolies; (iii)the reduction in the number o f tariffs and quasi-tariffs from 33 to 3; and (iv) the reduction o f the combined maximum tariff from 180 percent to 20 percent by 2000. As a result, Mauritania's average tariff rate was reduced from 19 to 9.2 percent in 2001, causing an improvement in the country's trade restrictiveness index (from 3 to 2, on a scale o f 1 tolO, 10beingthe most restrictive). 9. Climatic Shocks. Mauritania i s highly vulnerable to adverse climatic conditions. Cereals and livestock production remain heavily dependent on rainfall. Periodically, Mauritania's main agricultural regions experience droughts, flooding, and cold rains and severe frost. For instance, in 2000-01, drought and flooding resulted in a sharp drop in cereal production (from 223,200 metric tons in 1999-2000 to 207,000 in 2000-Ol), as well as massive loss o f livestock. These developments led to lower than expected GDP growth in 1992, 1994 and 1996-2002 and contributed to inflation. 10. International Aid. Net Official Development Assistance (ODA) increased from $202 million (equivalent to 30.2 percent o f imports o f goods and services) in 1992 to $212 million (46 percent of imports o f goods and services) in 2000. For the foreseeable future, Mauritania will remain dependent on inflows of concessional extemal assistance for the implementation o f its PRSP. The GIRM, donors, and principal creditors will need to improve their coordination efforts to ensure that implementation o f the PRSP i s effective and that appropriate levels o f financing are available for investment in basic infrastructure, such as transport, urban and rural development, water supply, and modemizationo f the economy. 11. Regional Integration. Mauritania left the CFA franc zone in 1973, and since then has maintained its own currency, the ouguiya. Mauritania also withdrew from the Economic Community o f West Afiican States (ECOWAS) in December 2000. Mauritania i s one o f the founding members of the Organisation de la Mise en Valeur du Fleuve Senegal (OMVS) and has benefited from collaboration with others in the group around the shared use o f the resources of the Senegal River basin. Mauritania could benefit from stronger trade relations with other members of the Arab Maghreb Union (UMA, made up o f Mauritania, Morocco, Algeria, Tunisia, and Libya) and with Europe, although it has little influence inthis group. Since UMA itselfhas made little headway on integration since its creation in 1989, the benefits to Mauritania from belonging to UMA have been small. This effective regional cooperation i s currently limited to joint ventures 5 with enterprises from neighboring c~untries.~Mauritania would benefit from better integration into the regional andworld economy. 111. SOCIO-ECONOMIC DEVELOPMENTS SINCE THE 1980s A. ECONOMICDEVELOPMENTS FROMINDEPENDENCETO 1992: A SNAPSHOT 12. From Independence to the Mid-1980s. Mauritania saw its economy shift from rapidand sustained growth inthe 1960s to a severe worsening o fthe economic, financial, and social situation in the mid-1970s. Inappropriate economic policy, extemal shocks, including a sharp deterioration in the terms o f trade contributed to stagnation. The adverse extemal factors included depressed world markets for iron-ore, the country's major source o f growth to the mid-1970s and its chief source of foreign exchange earnings. The intemational prices and declining domestic production reduced the share o f iron-ore in GDP from more than 20 percent in the 1970s to an average o f 11percent in the early 1980s. Other exports, such as copper and gypsum, disappeared owing to improved excessively high production costs. Although the output o f fisheries and fish processing with the adoption o f a new fisheries policy in 1978, these activities still accounted for less than 10 percent o f GDP. The occurrence o f repeated droughts also adversely affected the rural economy. Livestock and agriculture, which accounted for 35- 40 percent o f GDP inthe 1960s, never recovered to the output levels achieved before the 1968-73 drought. 13. Internal factors included (i) economic management; (ii) overseas weak heavy borrowing to nationalize the mining sector and finance ambitious industrial and transport projects, many of which proved unprofitable6; and (iii)the diversion o f human and financial resources to a costly war in the Western Sahara (see be lo^).^ Most industrial activities were conducted by parastatals characterized by poor financial and technical management, while private sector activity was hindered by high production costs, the small size o f the domestic market, and unreliable service delivery. The only sector displayingunintempted growth for the decade prior to 1984 was the central government. The country was also highly indebted. Overseas borrowing, chiefly in the form o f investment project financing, averaged nearly $200 million a year for over 10 years, resulting in outstandingmedium- and long-term public debt of $1.8 billion at the end of 5Under the umbrella o f the OMVS, for instance, the Manantali high-tension network i s already distributing to O M V S countries power generated on the Senegal River. The 15 percent o f the electricity generated by this scheme goes to benefit Mauritania and represents some 60 percent o f present national production. Furthermore, Tunisian and Moroccan firms are involved in Mauritania's telecommunication sector. The Moroccan electricity company is seeking to buy the electricity company in Mauritania. A telecommunications project called Cable de Garde a Fibre Optiqueshas been set up to improve connectivity between the telecommunications companies o f Mauritania, Mali, and Senegal. 6 For example, a sugar refinery ($25 million) and a petroleum refinery ($87 million), financed by commercial creditors, closed in 1978, a mere year after completion. 'Defense and security expenditures accounted for 33 percent o f total public expenditure in 1986. 6 1984, equivalent to 245 percent of GDP and five times the average o f developing countries at similar income levels. 14. In the 1980s, the performance of social indicators was disappointing. Life expectancy, at 45 years, had not changed substantially since independencein 1960. The adult literacy rate, at 25 percent, was half or less than half that o f the lowest income countries in Sub-Saharan Africa. It was for this reason that the 1985 C E M concluded that "human resource development is a dimension remarkably lacking in Mauritania's development strategy for the 1980s." 15. Restructuring of the Economy, 1985-1989. Faced with economic crisis and stagnation in 1985, the government adopted a comprehensive stabilization and adjustment strategy, supported by the Fund, Bank, and other donors, to address the large internal and external balances that had emerged in the early 1 9 8 0 The program had ~ ~ several key objectives: (i)render the economy more market-oriented; (ii)achieve macroeconomic stability; (iii) improve the financial outlook through settling payment arrears, rescheduling debt, and reforming the banking sector; and (iv) increase productivity through better resource allocation, elimination o f subsidized activity, and reduction innonproductive expenditure. 16. The reforms succeeded in opening up the economy, improving the country's macroeconomic performance, and laying the foundation for subsequent sectoral reforms. During this period, the most severe economic imbalances were eased, and the Mauritanian economy underwent a shift toward a more market-oriented system, with less government intervention and an increase inprivate sector activity. Real GDP growthrose from about 2 percent in 1984-85 to 4.8 percent in 1989. The current account deficit, excluding official transfers, fell sharply from 31 percent o f GDP to 14.5 percent during the same period. 17. A Troubled Period, 1989-1992. This favorable course was interrupted in 1989. The Mauritania-Senegal conflict (1989) and the Persian Gulf Crisis (1991) nearly paralyzed economic policy making, disrupted economic activity, and interrupted the reform effort. International assistance dropped sharply, and unfavorable weather conditions complicated the situation further. Output in the agricultural, mining, and fisheries sectors slowed, and domestic financial imbalances worsened. Real GDP growth averaged 0.8 percent from 1990-92, down 3.4 percent from 1985-89, while the growth in average annual per capita GDP droppedto minus 2 percent for 1990-92, compared to an annual rate o f 0.9 percent in the preceding five years. The current account deficit 8 Mauritania's adjustment efforts begun with three standby arrangements and two arrangements under the Fund's Structural Adjustment Facility (SAF) between 1985 and 1987. IDA support begun with a structural adjustment credit in 1987. In 1989, Mauritania entered a new three-year program supported by the Fund through an Enhanced Structural Adjustment Facility (ESAF) and by IDA sectoral credit operations. However, this program was interrupted in 1991 when intemal and external imbalances reemerged. Since then, Mauritania's reform efforts have been supported by successive ESAF arrangements from 1992-99; a Poverty Reduction and Growth Facility (PRGF) beginning in 1999; IDA-supported Public Enterprise and Agriculture Sector Adjustment Loans (SECALs) (1990) and a Private Sector Development SECAL (1995); and IDA-financed sector investment operations 7 (excluding official transfers) widened to 16.6 percent o f GDP in 1992, and the overall consolidated fiscal deficit (excluding grants and restructuring operations on a cash basis), increased from 1.6 percent o f GDP in 1990 to 3.1 percent in 1992. These deficits were financed by credit from the Central Bank, causing an accumulation in arrears on external debt. Those problems, combined with increased credit to the agricultural and fisheries sectors, ledto an expansion o f the money supply and greater inflationary pressures. B. STABILIZATION AND STRUCTURAL REFORM, 1992-2002 18. The economic disruption in 1989-92, combined with social and political upheaval led the government to relaunch reform efforts. Recognizing that economic recovery would require a more comprehensive and sustained effort than had been undertaken in the past, a government strategy was developed focusing on consolidating macroeconomic stability and also creating the basis for stronger private sector-led growth through structural reforms. These reforms reduced the reach o f State in the economy while improving its performance o f inherently public sector functions. It also broadened the scope for private initiative, assisted by greater reliance on market forces within a liberalized legal and regulatory environment. B.l. Consolidating Macroeconomic Stability 19. Macroeconomic policies aimed at healthier public finances and reduced use of banking system resources. This would be the key pillar o f prudent aggregate demand management, leading to more stable prices, release o f resources to stimulate credit to the private sector, and strengthen the external sector inthe interest o f reducing vulnerability. This was largely achieved by 1996, with prudent budgetary policies permitting the improvement o f the fiscal accounts. This, in turn, allowed the total re-payment o f the banking system debt and the constitution o f precautionary reserves. The improvement in aggregate demand was reflected in the external sector accounts, which saw the current account and overall balance gaps narrow significantly over time. As part o f these achievements, the inflation rate fell; the ouguiya stabilized; and the savings gap narrowed as the national savings capacity strengthened. B.2. Structural Reforms 20. To achieve the structural change envisaged, the GIRM reorientedthe public sector to make it more focused and efficient. Next, they tackled a number o f areas: (i) cross- cutting development issues (trade and exchange policies; (ii) banking and financial system; (iii) regulatory environment); (iv) direct support to private sector development; (v) productive sector interventions; and (vi) humandevelopment. 21. Reorienting the Public Sector. Having stabilized the expansion o f the public administration by the early 90s, their attention next turned to improving its performance. A particular concern was to improve the management of public expenditure resources. Initial efforts focused on improving budget formulation. Key measures adopted since then includethe implementation of a three-year rollingpublic expenditure program, both 8 current and capital. The gains inplanning in the multi-year but rolling perspective were reinforced with the adoption o f a new budgetary nomenclature. This, intum, enabled the authorities by the mid-1990s to focus on measures to enhance the efficiency o f public expenditure, transparency and accountability, all enhanced by dissemination o f public expendituredata on a timelybasis. 22. A number o f capacity-building measures were used to buttress these efforts of improving public resource mobilization, allocation, and its use.' Medium-term expenditure frameworks were developed for the priority sectors o f health and education inmid-2001, and for transport infrastructure, and the rural and urban sectors in2002." Additional measures that are under way include, inter alia, the computerization o f the expenditure system (circuit de la dkpense), and the strengtheningof the capacity of the audit office (Cour des Comptes) to improve the transparency and efficiency o f public expenditure. 23. Notwithstanding these reforms, further efforts are needed to improve the efficiency and accountability o f public resource management. These include (i) strengthening budget and project programming and monitoring; (ii)improving the transparency o f public financial management; and (iii) strengthening accountingpractices and making them consistent with intemational standards. The need for these improvements has acquired added importance in the context o f the government's PRS and HIPC debt relief. Continued inefficiencies in public spending could undermine the effectiveness o f increased social expenditures while alienating donors and reducing the provision o f extemal assistance necessary to the successful implementation o f the PRS. 24. Restructuring of Public Enterprises was an even more important part of the public sector reform agenda. By the late 1 9 8 0 ~the ~ public enterprise sector was undertaking more than halfo f public investment; received almost one-fifth of domestic banking sector credit; and was employing one-fourth of the modem sector work force. But the enterprises made high losses even as they relied on and usedmonopoly privileges. They built up a rising debt burden and accumulated arrears on payments. Restructuring efforts began in the early 1 9 9 0 ~with reforms o f the legal and institutional framework and ~ restructuring o f the finances o f key enterprises, including the national mining company (SNIM), and the water and electricity company (SONELEC). At the same time, the government divested itself o f a large number them (insurance and importation and distribution o f key commodities). By the late 1990s, about two-thirds o f public enterprises were liquidated or privatized. To improve managerial rigor in those remaining, a major effort o f cross-debts elimination took place. 25. Divestiture o f key government assets i s continuing, although there have been slippages and delays. The national airline, Air Mauritania, was privatized in 2000. Following the introduction o f legal, regulatory, and institutional reforms favorable to the competitive private provision o f telecommunications services, a 51 percent stake in the The IDA-financed Public Sector Management Credit (1995-99) was a key source o f support for these reforms, incoordinationwith assistance from other donors, including the EU, France, and the UNDP. lo An overall medium-term expenditure framework is due to beprepared for the economy by mid-2003. 9 telecommunications PE (Mauritel) was sold in2001. To improve the quality and delivery of public utilities, the activities o f the water and electricity company have been separated. But the privatization ofthe electricity branch o f SONELEC,which was due to take place inearly 2002, hadto bepostponed due to disruption ofthe energy and financial markets in2002. II Box 3.1: A Summary of Ten Years of Sustained Structural Reforms 1993-1997 Fisheries. The fishing marketingboardand sectoralpublic enterpriseswere privatized. A license system for industrial fishing was implemented. The Oceanographic Research Center and the SurveillanceUnit were strengthened. Fishing activities opened up to foreign operators. Regulation of ship chandlery activities was adopted, as was a fishing resourcesmanagementprogram. A systemo f territorial rights for artisanal fisheries was implemented. Mining. The SociLtL Nationale Industrielle et Minidre (SNIM) was successfullyrestructured. Transport. Air andlandtransport activitieswere liberalizedand port servicesprivatized. Education and Health. Technical training centers were strengthened and medium-term literacy programs were implemented, as was an action planfor basic education inrural areas.Reforms of the educational systemwere adopted. A primary health programwas implemented.The service delivery system was strengthened and decentralized to the regions. Community-basedhealthpolicieswere implemented. Banking. The Development Bank was abolished. All commercial banks were privatized. A new banking law was enacted. A market for treasury bills was created. Regulation of savings and loan associations was adopted, as was s framework for microfinance.The foundationfor stronger bankingsector supervision was established. Public Enterprises. All public enterprises, except for SNIM, were liquidatedor privatized; subsidies, tax exemptions and cross-debts were eliminated. Insurance. The GIRM-ownedinsurancecompany was privatizedand sector activities liberalized. Private Sector. Measuresto promote private sector development in banking, foreign exchange, tariffs, pricing, anc marketingwere put inplace.The GIRM withdrew from all commercialandindustrialactivities; state monopolieswere abolished; the Chamber of Commercewas reinvigorated; andregulationpertainingto the creation of economic interesi groups (EIGs) was adopted. The New York, Vienna, andHague Conventionswere ratified. 1998-2002 Governance. New regulationsfor legalprofessions were adopted. The judicial systemwas modernized. The Nationa Audit Office was strengthened. A new procurement code was adopted. The tax directorate was reorganized and thc customs administrationwas strengthened.An expenditure clearinglaw was adopted. The governmentbeganpublishing quarterlyreportstracking poverty-relatedexpenditures. Rural. Achievements inthe rural sector included full liberalization of pricing and marketing;privatizing o f rice mills land-tenurereform implementedand monitored inthe Trarza region and inthe entire middle and upper Senegal Rivei Valley; strengthening of a cooperative credit system; privatizing of veterinary services; and adoption of a livestock developmentcode. Energy. The electricity company (SOMELEC) was in the process o f beingprivatized. Transport. Air-Mauritania was privatized. Mining. The mining sector opened to private investment. A new mining codewas adopted. Telecommunications. Telecommunications and postal services laws were adopted. Postal and telecom activitie! separated. Competitionwas introducedintelecom services andthe state operator was privatized. Fiscal. Tariff, VAT, and direct taxation reform was implemented; a new investment code was adopted; MTEFs fo healthand education infrastructureandurban sectors were prepared; a newbudget nomenclaturewas implemented;anc computerizationofthe entire expenditure chain was initiated. Public Administration. Recommendations o f the audit of the civil service were implemented: Ministries o f Rura Development, Economic Affairs and Development, Education, Finance, Fisheries and Commerce were reorganized EducationandHealth Serviceswere decentralized; andmunicipal decentralizationis ongoing. A Secretaryof State fo New Technologies and a Commissariat aux droits de I'homme, a la lutte contre la pauvretC et a la reinsertion, thi Office of the Ombudsmanof the Republic, and a multisectoralregulatoryagency were created. 26. Trade, tax, and tariffreforms were implementedto enhance revenue performance, whilst improving the overall competitiveness o f the economy. Measures were taken to 10 diversify and simplify the tax system," improve tax and custom administration, broaden the tax base (by eliminating tax and customs duty exemptions). While aimed primarily to enhancing revenue and eliminating trade distortions, the reforms also sought to make the tax system more transparent and equitable. Additional reforms included eliminating quantitative import restrictions and price controls, liberalizing foreign trade albeit with a systemo fimport surveillance, and eliminating exit fees on outgoing goods and factors. l2 27. The reforms have been introduced in several phases. In 1995, the V A T was introduced, accompanied by institutional measures to improve VAT management.I3 In 1995-97, to reduce distortions and improve compliance, export taxes for fish were eliminated and a shift made to a system aimed at sustainable management o f fishery resources, including access rights for deep-water fishing, auction licenses for pelagic fishing and territorial rights for artisanal fishing. Direct taxation reform was implemented inJanuary 2000. 28. These reforms succeeded in enlarging the tax base (mainly by eliminating exemptions), simplified procedures, and improved tax administration. An added dimension i s the harmonization o f the corporate and personal tax regime with that o f the Arab Maghreb Union, and alignment o f tariffs with the U E M O A countries. This sets the stage for better integrating Mauritania into the regional and international economy. 29. Early inthe period, changes inexchange ratepolicies were introducedto improve the functioning o fthe exchange market, essentially freeing up access to foreign exchange. The requirement o f prior approval by the Central Bank (BCM) for most current account transactions was eliminated; an interbank foreign-exchange market was created; and more than 40 foreign-exchange bureaus were licensed to trade in foreign currency. Despite these reforms, the foreign-exchange market still functioned weakly. Between 1993 and 1998, several devaluations were necessary to correct the divergences between official and parallel market exchange rates. 30. Reform efforts picked up in late 1998, when the foreign exchange surrender requirement for fish export proceeds was eliminated; the surrender requirement for export proceeds o f the national iron-ore company (SNIM) was reduced; and the central bank agreed to buy or sell any quantity o f foreign exchange needed to clear the market at the official exchange rate. In early 2000, an "extended exchange market" was introduced, unifying different components o f the official exchange market. By the end of 2000, exchange controls were virtually eliminated, as exporters o f non-mineral products were "Maintaining and consolidating macroeconomic stability through, inter alia, the diversification and simplification o f the tax base was a key policy focus o f the Bank's 1997 Country Assistance Strategy. l2Many significant trade and tariff reforms had already been introduced inthe late 198Os,including the use o f ad valorem duties; lowering the average rate o f effective protection; reducing import duty exemptions; and eliminating quantitative import restrictions, import quotas, and import license requirements. l3 Since 2002 the indirect tax system has been further simplified through the unification o f VAT rates (14%) and the elimination o f VAT exemptions, except for those items that are essential for the poor. Tax administration was strengthened by the creation o f the large taxpayers unit and by introducing a VAT refund mechanism. 11 allowed to retain their full export proceeds, and residents were allowed to open foreign currency accounts. 31. Despite the reforms, muck stickiness remains in the exchange market which requires some action. With no significant new products emerging in the economy over the decade, the substantial depreciation o f the currency did not appear to have much stimulated exports. Imports have grown relatively faster and created an excess demand for foreign exchange that has not been met systematically by the Central Bank and commercial banks. This has driven a wedge between the official and the parallel rates. Giventhe comfortable level of reserves, the Central Bank has the capacity to narrow this gap by meeting the market demand for foreign exchange while maintaining a comfortable reserve target. Indeed, following an aggressive policy by the BCM, this gap was reduced from more than 10percent bymid-2002, to 4.5 percent by the end o f 2002. 32. The banking andflnancial system was restructuredto spur the mobilization and recycling o f investable resources. There were two important drawbacks to deal with. First, the system operated as an exclusive club representing a few rich families who are very much involved in trade, services, fishing, and other economic activities. Second, large government deposits have been cushioning the banks at virtually no cost (a 3 percent remuneration on government deposits commenced in 2002). Few incentives to attract private deposits have been put in place. Lending has been based on personal relationships and traditionally has been highly concentrated within privileged groups, thus limiting lending to small- and medium-size borrowers in an environment o f almost nonexistent auxiliary financial instruments. 33. Although the government introduced a number of measures to restructure the banking sector as part o f its reform agenda from 1985-90, these regulatory reforms were not effectively implemented. The entire banking system had to be restructured for the second time, in 1992-93, at a large budgetary cost (approximately 7 percent o f GDP). Reforms initially focused on preventing the banking system's collapse and recovering bad debts. Subsequently, the assets o f commercial banks were restructured. The government divested its shareholding in virtually all commercial banks, and set up a special agency for loan recovery from delinquent borrowers. Banking supervision was tightened, and supervisory procedures and prudential regulations that reflect international best practices were introduced. The Central Bank moved toward market-based instruments o f liquidity management with the introduction o f treasury-bill auctions and the creation o f an interbankmarket. 34. Other policy changes were targeted at reducing the cost o f business to banks and clients. These include (i) elimination o f the surrender requirement for exports the receipts; (ii)the permission for residents to open foreign exchange accounts at the commercial banks; (iii) removal o f restrictions on foreign exchange purchases for travel; (iv) enforcement o f international norms for foreign exchange balances o f commercial banks at the Central Bank; (v) reduction o f discretionary action by the B C M on foreign exchange markets; (vi) eliminating requirements to remit foreign exchange; and (v) encouragement of S N I M to participate inforeign exchange markets. 12 35. Furtherrestructuring o f the banking sector has movedmore slowly, however, and both the oligopolistic nature o f the banking system and high concentrationratios pose an impedimentto the development o fnew economic activities. Despite the establishment o f five new commercial banks with private capital since 1992, the banking systemremains highly oligopolistic.'4 The government has agreed that it is important to reduce the concentration ratios in commercial banks, both to reduce risk exposure and make credit more widely available to the private sector. This task has proved more difficult to implement than expected, owing to the limitednumber o f creditworthy borrowers and the commercial banks' preference to mainly finance trade operations. 36. Specific measures that favor private sector development, were taken. The GIRM recognized early that the private sector must be the engine o f growth and employment. Policies to encourage private sector development have focused on improving the regulatory framework and restructuring the financial sector in order to encourage private investment. An important area was that o f creating an environment that banished he risk o f expropriation o f the investor without due cause and without compensation. Measures were introduced to bring Mauritania into compliance with international procedures on arbitration and business law. Further, clear relations were established with external agencies like OPIC, MIGA, and the German arbitration agency, for added investor security. 37. Other measures sought to increase the attractiveness o f investing in Mauritania. A new investment code was introduced in 2002, which gives foreign investors full exemption from import duties, allowing them to make foreign transfers freely and choose foreign or national arbitration for dispute resolution. A one-stop window for business licenses was established, and most state monopolies and restrictions on private sector investment in previously reserved sectors were eliminated. Because the biggest obstacle to investment was fiscal, direct taxes were reduced. Use o f foreign labor i s still regulated by a decree, which provides for work permits to be granted to employers, but inthe new investment code there i s more flexibility. For instance, foreign investors can bring in up to four persons without permits. 38. The investment code of 2002 simplified the tax system, eliminated targeted tax incentives and distortions, and improved the tax system's transparency. To improve the competitiveness o f the Mauritanian business environment, the government reduced the corporate tax rate from 35 percent in2001 to 25 percent in 2002, bringing it closer to the lower end o f regionally prevailing rates. The mining sector was opened to private investment. A new mining code was issued in 1999 introducing tax incentives and simplifying the procedures for awarding miningtitles. l4 Today, Mauritania's banking sector consists o f the Banque Centrale de Mauritanie and seven primary banks, namely the Banque Nationale de Mauritanie, the Banque Mauritanienne pour le Commerce et 1'Industrie (BCI), the Banque al-Baraka Mauritanienne Islamique, Chinguetti Bank, the Generale de Banque en Mauritanie, Banque a1 Amana, and Banque Mauritanienne pour le Commerce International (BMCI). Of these, only BCI is a recent creation (1999). The next most recent, Banque A1 Amana, was created in 1996. Thus, liberalization has not led to a great increase in the number o f banks, although a further new bank, BACIM Bank, was launched inMarch 2002. 13 39. Table 3.1 shows the inward foreign investment performance o f Mauritania" compared to neighboring countries and to Eastem Europe, where investment activities have grown rapidly. Mauritania lags behind its neighbors-Senegal, Mali, and Morocco-in the level and flow o f inwardinvestmentinthe most recent years for which data i s available. Box 3.2: Making CompetitionWork The case of telecommunications.Inmid-1998, Mauritania faced several constraints as it embarked on a competitive program o f private provision o f infrastructure services - relatively highcountry risk, a small domestic market, and virtual absence o f institutional capacity for regulating competitive utility sectors. By the end o f 2001, highly successful reforms in telecommunications overcame these constraints well beyond expectations and also laid the foundations for similar reforms in other utility sectors, such as power and water. The monopoly o f the state-owned telecommunications operator ended in mid-2000 when the first mobile telecommunications license was granted through a competitive tender, generating proceeds o f $28 million. InFebruary 2001, a competitive tender for privatizing the state-owned operator yielded a post-privatization enterprise value o f $48 million or $4,065 per access line, well above the previous record in Sub-Saharan Africa and the world average o f $2,500. Competing in all segments of telecommunications services, both operators have now multiplied access lines from 20,000 at the beginning o f 2000 to over 130,000 by the end o f 2001. Furthermore, competition has accelerated investment inthe sector, which inthe years 2000 and 2001 alone was equivalent to more than 10 percent o f GDP. A windfall from competition has been the creation o f 2000 telecommunications-related jobs in the informal sector, as over 300 micro-enterprises have sprung up in the main cities to repair telephone equipment and sell prepaid calling cards and mobile handsets. Similar reforms in the power sector have benefited from a significantly improved country risk as well as a well-tested institutional framework for privatizationand for regulation. The case of mining. A preliminary analysis o f mining sector reform policy shows a considerable increase in investment in mining exploration. Foreign direct investment (FDI) in 2001 amounted to $15 million compared to $10 million for 1999. The area covered by the exploration increased from 477,132 square kilometers in 1999 to 532,136 square kilometers in 2000, but decreased to 389,338 square kilometers in2001, due to the introduction o f area fees, but this translated into an increase ininvestment per square kilometer. The number o f operators has gone from six in 1999 to 13 in 2001. Just three operators held about 96 percent o f the area and more than 80 percent o f investment in 1999. In 2001, these percentages decreased to less than 70 percent o f the area and 60 percent o f investment. One can also observe the presence o f an increased number o f foreign investors: the only national operator (SNIM) has seen its share o f investments in mining exploration decline from 10 percent to 7 percent between 1999 and 2001, while its share o f exploration area covered has gone from 53 percent to 15 percent inthe same period. l5Private investment seems to be significantly underestimated. Mauritania does not have a monitoring system to track foreign and local private investment. This has become a major issue, in particular since 1999 when significant foreign and local private investment began to occur in the telecommunications, agriculture, fisheries, mining, and tourism sectors. 14 Table 3.1: Inward Foreign Direct Investmentas a Percentageof GDP (1998-1999) II II 1998 Stock 1 Flow II 1999 Stock 1 Flow I1 I EastemEurope I 12.23 1 3.03I 13.32 1 3.03 I C. PRODUCTIVE SECTOR POLICIES, 1992-2002 C.1. RuralDevelopment 40. I n arable agriculture, policies over the decade focused on promoting efficiency and diversification in agricultural production, particularly in underprivileged areas. A land-tenure program was introduced in some regions o f the country, a countrywide cooperative credit scheme was established, and the provision o f rural services was decentralized. A number o f important steps were also taken to liberalize the rice subsector, including elimination o f reference prices for rice, removing marketing subsidies on domestic rice, and the privatization o f rice mills. In the Senegal River Valley, where there i s scope to raise incomes rapidly, a start was made on rehabilitating irrigation schemes, and the provision o f basic rural infrastructure and support to producers has begun. Despite these measures, the agricultural sector's contribution to the country's GDP (3.7 percent in 2002) remains low. Further development continues to be hinderedby poor infrastructure, while limited access to credit and the lack o f secure land tenure remain obstacles ininvestment. 41. Policies infisheries in the 1990s represented a sharp reversal o f those pursued in the late 1970s and 1 9 8 0 when Mauritania rapidly expanded the state's role inthe sector ~ ~ while paying little attention to resource management. Rapid buildup o f the Mauritanian fishing fleet in the 1980s led to an overexploitation o f fisheries resources, resulting in a 25 percent fall in the estimated catch by 1990 from its peak in 1986. Equally important, catches o f higher-value species exhibited the greatest decline. The share o f fish exports in total foreign exchange eamings declined from 65 percent to 49 percent between 1998 and 2000. In addition to the negative impact on the balance o f payments, the decline in performance had negative implications for the budget (as export taxes accounted for about 20 percent o f total budgetary receipts) and the banking sector (owing to the substantial amount o f credit that hadbeen extended to the sector). 15 42. Despite the sharp decline in catches, significant and systemic reform o f the fisheries did not begin until 1994,16 when Mauritania introduced a comprehensive development policy for the sector. The objective o f this policy was to use market-related mechanisms such as license fees and access rights, instead o f the previous export tax, to ensure efficient exploitation while preserving the natural resource base. SMCP, the main export company, hadheld a monopoly on all fish marketing. This was abolished with the liberalization of fish marketing in 1995. The government also reduced its role in the sector by reducing its participation in SMCP to 35 percent, including selling some o f its participation injoint ventures. 43. A resource management programwas adopted in 1994. The following year, deep- sea fishing was opened to foreign operators. In mid-1998, the government adopted additional reforms intended to increase private sector involvement in order to raise investment, value-added, and exports. In particular, foreign exchange surrender requirements of fish export proceeds were eliminated, as part of reforms introduced inthe foreign exchange market system. Other measures introduced aimed at improving stock management. The latter included more diligent surveillance o f operations and better monitoring o f developments inthe sector as a whole. 44.- Mauritania negotiated its first five-year fishing agreement with the EU in 1995 and renegotiated a new one in 2001. Under a new five-year agreement, financial compensation has risen from 267 million to 430 million for 2001-2006. Part o f these proceeds are to be devoted to further development o f the domestic fishing sector and enhanced monitoring o f fishing activities and resources, while some o f the increased royalties will be used to expand social spending beyond what was projected in the government's PRS.17 C.2. ProgressinHumanDevelopmentandPovertyReduction 45. Human Development and Social Sectors. In contrast to the 1980s, when human resource development was low on the list o f government priorities, poverty reduction and social development have been a key part o f the government's economic development strategy since 1994. That year, the government began redirecting public expenditures toward social sectors and basic infrastructure. Despite the fiscal consolidation that took place in the 1990s, public expenditures on social sectors as a percentage o f GDP were maintained and increased insubsequentyears. 46. As shown in Table 3.2, public expenditure on social sectors increased from an average o f 5.8 percent o f GDP over 1990-92 to 10.5 percent o f GDP in 2002. Over the same period, the allocations to health more than doubled, while public expenditure on l6 measureswere adoptedprior to Two this time: a limited fisheries surveillance and control project was implemented (as a condition o f structural adjustment credits from the Bank); and a more favorable licensing agreement was negotiated with the European Union in 1991, leading to an increase in annual financial compensation from $14 million to $19 million. l7 A portion o fthe royalties is also kept ina special govemment account at the central bank. 16 education increased by one percentage point o f GDP. In addition, some 2.2 percent o f GDP is now spent onpoverty-relatedprojects and programs. Table 3.2: PublicExpenditure on Social Sectors (percent of GDP, 1990-2002) I I 1990-92 I 1993-98 1 1999 I 2000 I 2001 I2002 I Social expenditure 5.8 7.3 7.6 7.3 8.0 10.5 Education 4.4 5.1 5.3 4.4 4.4 5.4 Health 1.3 1.7 1.7 1.3 1.9 2.8 Poverty reduction* 0.1 0.5 0.7 1.3 1.6 2.2 Source: World Bank, Mauritania: HIPC Debt Initiative Report, 2000, IMF, Mauritania: Statistical Annex, 2001. 47. Measures were also introduced to improve the quality and effectiveness o f social expenditures, including cost-sharing and cost-recovery policies and the decentralization o f education and health services to bring them closer to local needs. Educational sector reforms were introduced to improve access to primary education, reduce illiteracy, and strengthen the quality o f primary and secondary education. Sectoral health policies focused on improving access to primary and preventive health care. The progress made in reducing the incidence o f poverty i s among the core issues discussed later inthis chapter. Progress made in improving education and health indicators i s discussed in detail in a companion volume to this report devoted to poverty and human development. Suffice it here to say that the combination o f economic growth and increased social expenditures had a positive impact on social welfare, although significant challenges remain for the future. As shown in Table 3.3 below, the performance o f Mauritania's social indicators has markedly improved in recent years, both in absolute term and vis-a-vis Sub-Saharan averages. Table 3.3: Selected SocialIndicatorsfor Mauritania and SelectedCountries (latest availableestimates) Life Infant Child Fertility Primary Retention expectancy mortality, mortality index (no. Incidence gross ratein at birth (per 1,000 (per 1,000 of children of poverty enrollment primary (years) live births) live births) per (Po,,%) Rate(YO) school (% (under 1) (under 5) woman) of cohort) (1999) (1999) (2000) (1999) (1999/2000) Mauritania 54 87 (74)* 135 (116)* 4.7 46.7 84.0 56.9 (2000) S. S. Africa 49 107 173 5.4 45.3 79.0 nla 17 48. Employment. The last report prepared by the Mauritanian authorities ((L'emploi en Mauritanie - Un etat des lieux ", 1997 about the labor market showed un active population o f 678,000 persons, o fwhich 12percent were working inthe formal sector, 24 percent in the informal sector and 64 percent in the rural sector. Those working in the modem economy were heavily concentrated intrade, services and public sector. There i s little data in unemployment. Two distinctive features that seems to characterize the Mauritanian labor market are (i) the continue search of opportunities in the informal economy; and (ii) there i s a skills mismatch between the skills o f those entering the labor market and those required in the available opportunities. However, one statement that could be made about the labor force and employment creation i s that the statistical data available will support at the best no more than rough judgments o f the basic characteristics, structure and the quantitative dimensions o f the problem. In this respect, any estimate should be consider only as illustrative. Given the lack o f reliable data it is difficult to establish the rate at which changes in the structure o f employment are being imposed by the development process. But, while it i s not possible at the present time, to quantify the structural links between the urban and rural sectors, the existence of such links increases the sensitivity o f labor market responses to the increased employment creation problem. 49. Some empirical conclusions that may be reach about the employment situation in Mauritaniaare the following (i) i s no doubt, however, about a well established trend there in the rural migration towards the main cities, in particular, Nouakchott and in the associate shift from rural to non-rural activities; (ii)unemployment will continue to have its deepest roots inthe rural sector but ilwill be more visible inthe urban centers; (iii) the new labor force entrants and younger workers would be disproportionately affected by the lack o fjob opportunities; and (iv) effective policies to deal with the structural shifts in labor force and employment must take into account the inter-action betweenthe rural and non-rural sectors. 50. Poverty Reduction. Between 1990 and 2000, the percentage o f Mauritanians living below the poverty line fell by 10 percentage points, which is quite a significant achievement. The decline was quite rapid inthe half o f that period (from 56.6 percent to 46.7 percent), but then it slowed over the succeeding half (the incidence fell from 50 percent to 46.7 percent). The decline in poverty was more significant in urban than in rural areas. Urban poverty declined from 40.3 percent in 1990 to 25.4 percent in 2000, while the incidence o f rural poverty declined more modestly, from 71.6 percent in 1990 to 61.2 percent in2000 (See Figure 3.1). 51. The decline in the incidence of poverty was also accompanied by declines in the depth and severity o f poverty. At the national level, the depth o f poverty declined from 28.2 percent in 1990 to 17 percent in 2000. Similarly, the severity of poverty declined from 18.1 percent in 1990 to 8.2 percent in 2000 (Figure 3.2). Once more, the rate o f decline was slower during 1996-2000 than over 1990-96. These results indicate two changes. First, since 1990, the gap between the average expenditures o f the poor and the poverty line has narrowed--that is, the poor are less poor today than they were in 1990. Second, the inequalities between the poor have diminished. Between 1996 and 2000, the depth o f poverty declined from 28 to 24.1 percent in rural areas and from 8.1 to 6.3 18 percent in urban areas. Similarly, the severity o f poverty declined from 15.2 to 12.1 in rural areas and from 2.9 to 2.1 percent inurbanareas. Figure 3.1: Incidence of Poverty at National Figure 3.2: Evolution of Depth and Severity of Level and by Zone of Residence (1990-2000) Poverty (1990-2000) 1 71.6 30 7 28.2 40.3 18.1 National Rural Urban Depth Severity m1990 U1996 02000 01990 U1996 02000 52. A more detailed analysis o f poverty and human development in Mauritania is provided in a "Poverty Assessment" Report (PAR) devoted to these topics. This PAR includes, among others things, a discussion of the determinants o f poverty (at both the macroeconomic and microeconomic levels), a review of progress on poverty reduction over time, especially indicators and policies in health and education, and an analysis o f the progress made so far inimplementing the PRSP. IV. DEVELOPMENT OUTCOMES OF REFORMS OF 1992-2002 A. MAJORMACROECONOMIC DEVELOPMENTS 53. Growth and Inflation. The renewed emphasis on macroeconomic stability and structural reform beginning in 1992 reversed economic imbalances and had a beneficial impact on growth. Real GDP growth increased from an average o f 3.6 percent during 1991-94 to an average o f 4.5 percent between 1999-2002. At the same time, the consumer price inflation averaged 4 percent between 1999-2002, down from 7.3 percent over 1991-1994. On both the economic growth and inflation fronts, Mauritania's performance surpassed the average for Sub-Saharan Africa. 54. Key factors underlying this progress since 1992 include the realignment o f relative prices, as a result o f a 45 percent devaluation at the onset o f the program; containment o f domestic demand through strong fiscal consolidation and tight monetary policy; implementation o f key structural reforms (see below); substantial reduction in debt service resulting from repeated concessional Paris Club rescheduling; increased 19 availability o f foreign financing on concessional terms; and improving terms o f trade from 1994 on. 55. Investment and Savings. Increases in capital formation accompanied the growth. Investment as a share of GDP increased from an average o f 18.6 percent between 1995- 98 to an average o f 24 percent between 1999-2002. This increases came from a rise in public investment, ongoing expansion inminingcapacity, and a large influx o f FDIinthe recently liberalized telecommunication industry. Much o f this investment had its counterpart in rising domestic savings. Gross domestic savings rose from 17 percent o f GDP during 1995-98 to an average o f26 percent between 1999-2002. Public and private savings moved in contrasting ways during the period, with government savings as a proportion o f national savings has falling over time while private savings (including that byPES)rose. 56. The reforms strengthened Mauritania's external sector by reinforcing the competitiveness of the economy. The current account deficit (excluding official transfers) narrowed from an average o f 18.4 percent between 1991-94 to an average o f 6.9 percent between 1999-2002. Including grants, the extemal current account balance recorded a large surplus in 2002, largely due to the receipt o f two EU fishing license payments (for 2001 and 2002).18 Since 1995, gross official reserves have also steadily improved. Gross reserves averaged seven months of imports between 1999-2002, as compared to a mere 1.1 months o f imports during 1991-94. Given the vulnerability o f the economy, Mauritania shouldmaintain a comfortable level o f gross extemal reserves o f no less than six months of imports to help absorb exogenous shocks without undermining priority spending andpoverty reduction. 57. Improved debt management was used to ease up the resource constraint, which permitted the attainment o f the investment objectives while remaining on the path towards stabilization. In 1993, Mauritania's extemal debt was $2.2 billion, equivalent to 217 percent o f GDP and 497 percent o f total export receipts, almost all o f it public or publicly guaranteed. Although the external debt problem was eased through a 1993 Paris Club rescheduling, debt service remained burdensome at 28 percent o f exports (after debt relief). Mauritania reached the decision point under the enhanced HIPC Initiative inearly 2000 and the completion point in early June 2002. As a result o f HIPC assistance, the net present value o f Mauritania's total extemal debt was reduced by some 50 percent, providing a good basis for long-term debt sustainability. Following Mauritania's HIPC completion point, debt service payments was cut substantially -- from about $88 million in 1998 (actually paid before HIPC assistance) to $35 million in 2003, and averaging approximately $39 million per year over 2002-11, with HIPC and additional sources o f debt relief included. As a result, debt service as a percentage o f government revenue will be reduced from 35 percent in 1998 to an annual average o f 11 percent. Resources made available by debt reliefprovided under the HIPC Initiative are beingallocated to fund key antipoverty programs, which are outlined inMauritania's PRSP. l 8A five-year fishing agreement (2001-05) was concluded with the EUinJuly 2001, raising annual fishing royalties to be collected by about 3 percent o f GDP (to 8 percent o f GDP). 20 58. Successive adjustment programs have begunto put Mauritania's public finances on a sounder footing. Tax revenue has remained broadly constant between 14 and 16 percent o f GDP. International trade taxes fell from 28.6 percent o f total tax revenue in 1996 to 16.8 percent in2001 following the introduction o f tariff reforms in 1997-98. But the introduction o f the VAT in 1995 and improvements in tax administration partially offset that decline inrevenue. Non-tax revenue, by contrast, increased markedly, from 11 percent to 23 percent of GDP, drivenmainlyby EUfish royalties. 59. The public finance stance involved increasing overall expenditures, but with capital spending rising correspondingly more that current outlays. Total public expenditure has increased from an average o f 25 percent o f GDP between 1992-1998 to 31 percent in 2002. The bias in favor o f capital items raised their expenditures from an average of 7 percent during 1992-98 to 12 percent o f GDP in2002. Some o f this was in relation to key policy directions: a cash advance o f UM 9.4 billion to Mauritel, the telecommunications company, to improve its balance sheet and allow the company to buy a cellular license before it was privatized in2001, and the launchingo f an important road program. The accompanying slowdown in current outlays applied to wages and salaries (decline o f 2 percent o f GDP between 1997 and 2001) and military expenditures, while allocations to social sectors increased. 60. The government's overall consolidated fiscal balance, which was indeficit during 1991-94, turned positive during 1995-98. The development o f this fiscal surplus primarily reflects a surge in fishing royalties after a new fishing agreement with the EU, and the government's decision to sterilize a sizeable share o f that transfer. Despite the positive trends, the overall deficit reached 4.4 percent and 5.5 percent in 2000 and 2001, before turning positive in 2002, mainly due to a drop in revenues, the cash advance to Mauritel noted and the delay in the EU fish license fee payment (2001). The budget deficits were financed entirelythrough external concessional loans and grants. Table 4.1: ConsolidatedGovernment Operations (1991-2002) (inpercent ofGDP) 991-94 1995-98 99-02 1999 2000 2001 2002 Source: IMF 2002) 61. Banking System and Intermediation. The liberalization o f the system led to an increase inbank, reflecting some increase incompetition. Credit to the private sector also increased markedly, with an annual rate averaging almost 20 percent during 1999-2001, as compared to 11percent in 1997-98. Nominal interest rates have been declining since early 2000, as the Central Bank gradually reduced the repurchase rate (previously called the purchase rate) from 18 percent to 11percent by the end o f 2001. The reduction inthe 21 interest rates was aimed at reducing the high (real) cost o f borrowing in general and at encouraging bank lending to the private sector--in particular, to nontraditional borrowers who usually have had limited access to credit because o f their relatively weak ties to the banking system. Notwithstanding this progress, Mauritania still does not have a sound financial system. Intermediation remains underdeveloped and most domestic financial transactions are cash based. The ratio o f broad money to GDP decreased from an average o f 25 percent in 1985-90 to an average o f about 16 percent during 1995-2002. Credit tends to be overwhelmingly short-term (93 percent) and is driven mainly by the general trade sector (40 percent) and the fisheries sector (20 percent). Given the relatively low rate o f capitalization of the banks and the preponderance o f demand deposits inthe total, it is not surprisingthat there is little long-term lending. A rise in demand deposits rather than time deposits i s drivingthe increase inbank deposits. 62. Exchange Rate Regime and Competitiveness, The reforms o f the exchange regime have resulted ina largely unifiedforeign exchange market. The Central Bank now determines the daily exchange rate on the basis o f supply and demand trends in this market, as well as other factors, includingcompetitiveness, inflation, and reserve targets. Judged on the basis o f the trends inthe real effective exchange rate (REER), it appears that the competitiveness o f Mauritania improvedover the last fifteen years. Inreal terms, the ouguiya has depreciated by an average of 5 percent a year since 1985. The REERhas gradually stabilized in recent years, however, following a depreciation of the ouguiya over 1997-99, including a steep devaluation o f 11.6 percent in 1998 triggered by exchange rate misalignment. 63. Mauritania's competitiveness against major competitors inthe iron-ore sector has improved during the last decade. That includes comparisons to China and, to a lesser extent, Australia and South Africa. Yet, despite this positive trend and the collapse o f the Russian market share after the fall o f the Soviet Union in 1992, Mauritania's share o f world iron-ore production has remained small and broadly constant. Evaluating the competitiveness o f fish exports i s hampered by data limitations. Overall, it appears that Mauritania's competitiveness has been maintained in the last decade or so, although vigilance i s requiredto preventany policy reversal, especially given the country's narrow export base and the authorities' intention to develop nontraditional exports in agriculture and livestock sectors. B. CONCLUSION 64. Over the last ten years, Mauritania has implemented an impressive array o f macroeconomic and sectoral structural reforms. Macroeconomic performance has been strong. Resultingincreases inper capita income have meant improving social indicators, and in significant reduction in poverty. This period also covers the first two years o f implementing the Poverty Reduction Strategy. The results are encouraging. Nevertheless, diversification o f the economy has barely begun. The economy i s not yet attracting significant amounts o f foreign direct investment. The banking system has remained highly concentrated and adequate financial intermediation has not been developed, and institutional capacity i s still weak. Above all, the economy remains 22 vulnerable to exogenous factors. However, Mauritania's medium-term outlook appears promising and the authorities are committed to implement an extensive structural reform agenda aimed at enhancing the enabling environment for private sector investment, diversifying the economy in order to achieve stronger and diversified private sector-led growth, employment creation and poverty reduction. V. PROMOTINGDIVERSIFIEDPRIVATE SECTOR-LED GROWTH 65. I s Mauritania ready for a diversified and higher private sector-led economic growth and faster poverty reduction? Mauritania has made significant progress since 1992 on stabilization and structural adjustment policies, aimed at restoring and maintaining growth, and reducing poverty. The growth in recent years i s a payoff to successful macroeconomic policies and reasonable progress on the liberalization o f key sectors, such as telecommunications, mining, tourism, fisheries, and agriculture. Mauritania has gone further than many developing countries with the deregulation and privatization parts o f its regulatory reform agenda. However, a good part o f the socioeconomic improvement during 1992-2002, has also been due to increases inpublic investment. Further, strong progress such as foreseen in the targets o f the PRSP, would require that the country make fuller use o f its human and physical assets to diversify its economy inorder to reach higher economic growth rates. The private sector would play a much greater role in that scenario, and become the main source o f economic development, modernization, income growth, and employment. That would require a policy and institutional reform agenda built around the elements considered below inthe remainder o f this chapter. A. ENHANCING ENABLINGENVIRONMENT THE A.l. Regulatory Reform 66. In almost all of the major challenges facing Mauritania, regulatory reforms are among the most important. These reforms are necessary if privatization, deregulation, and state-owned enterprise reforms are to support accelerate and diversified longer-term growth and expand market size and if the country hopes to achieve considerable growth in both local and foreign private investment.Mauritania now should tum to the more difficult aspects o f regulatory reform. It needs to see the implementation o f the third phase o f these reforms as part o f the larger structural program aimed at creating an enabling environment for private enterprises. By buildingpublic and private institutions based on values o f simplification, transparency, neutrality and genuine competition, Mauritania can foster innovative private sector development that yields benefits for the poor. 67. As recommended in the regulatory reform study, reforms should focus on three goals (i)boosting overall economic growth by enlarging and deepeningdomestic markets 23 in order to expand opportunities for small and informal enterprises; (i) domestic attract and foreign private investment; (ii)increase market competition and incentives for efficiency in infrastructure and formal sectors; (iii) reduce infrastructure constraints and input costs; and (iv) increasingthe gains o f growth for the poor. Regulatoryreformhas an important role to play as part o f a coherent poverty reduction strategy, and hence i s accorded high priority by the government and the private sector, in cooperation with donors and helping the government become more effective in achieving its policy goals through better design, implementation and application o fregulatory instruments. 68. Mauritania has to improve the use o f regulatory reforms and coordination to enlarge and deepen its internal, regional, and international markets in order to stimulate investment and competition by (i) enhancing absorption capacity and the speed at which expenditure i s executed in key social sectors; (ii)developing strategies for regulatory coordination, harmonization, and elimination o f regulatory barriers to regional cooperation in West Africa, OMVS, and the Maghreb on improvements to regulatory regimes; and (iii) reaping the benefits o f initiatives inUEMOA by using its initiatives as benchmarks. 69. To this end, Mauritania should establish a policy o f regulatory convergence with the West African region and pursue detailed coordination o f sectoral regulations across UMEOA and ECOWAS; joining the Organisation pour 1'harmonisation en Afrique du Droit des Affaires and the Association pour I'UniJication du Droit en Afrique, which has developed regional legal instruments o f corporate governance, or at least adopting their legislation; coordinating among the regulatory authorities o f the region, a move that would be valuable because o f appeal to investors o f larger regional markets and the efficiencies o f coordinating networks across borders; and improving regulatory quality- control regimes in export sectors to add value and to open new markets. Efforts are needed to progressively raise production quality inthe domestic economy, broadening the base for exports and expand markets. 70. Box 5.1 below presents a set o f regulatory actions that need to be undertaken to improve both the business environment and market performance. Annex A presents a suggestedtimetable for its implementation. 24 Box 5.1: ImprovingMarketPerformance Acceleratingthe transitionfromthe informalto the formalsector - Implementing a transition period for informal enterprises that wish to enter the formal sector ("enterprises in transition") and making easily accessible one-stop shopping for business - formalities for enterprises intransition. Incentives for such enterprises could include: Phasing -in levels o f taxation over time, with access to special tax credits for investments in training and physical capital and a possible tax rate o f zero; and payments under the Caisse - National de Sdcuritd Sociale (CNSS), with phased-in benefits; Setting-aside programs inpublic procurement for enterprises intransition; - -- Regularizingurban land ownership; Establishingprocedures for contract and dispute resolution inthe commercial courts; Exempting new enterprises from minimumwage for a period o f time (perhaps five years); and - Enacting a new labor code. Encouragingentry and competitioninroadand air transportation services - Eliminating the BureauNational de Transport (BNT) to reduce collusion and cartelization in the -- industry. Eliminating the ban on private carriers; - Permitting trucking rates to be set freely; Eliminating the tour de r61e rule; encouraging more charter flights to expand capacity and keep fares down. Telecommunications - Awarding a second fixed-line license. Continued monitoring o f the fixed line incumbent to - ensure that obligations are met; Preventing vertical price squeezing by imposing a wholesale cost imputation requirement on Mauritel to ensure that the same interconnection charge imposed on the new mobile entrant, - Mattel, i s imputed to Maritel's mobile service subsidiary, Mauritel Mobiles; Requiring Mauritel to enter into service level agreements with Mattel and other operators that - may emerge; Increasingtransparency by publishinginterconnectionagreements concluded with the dominant operator and requiring a dominant operator to publisha reference interconnection offer (NO) to - help accelerate agreement on interconnection terms and conditions; Conducting a thorough review o f the principles relating to the provision o f universal access, taking into consideration the need for enhanced transparency and accountability. Bankingsector - Establishing a clear government policy to encourage entry by foreign banks to promote - innovation and modern banking techniques; Monitoring connections between concentration in banking and constraints on competition in non-bank sectors, and increasing transparency o f information about bank control and holdings to - make it possible to monitor company relationships and investment patterns; and Encouraging adoption o f new technology. 25 Public Sector (improving capacities to design and apply market-oriented regulation that is transparent, efficient, and neutral) Targeting foreign investment incentives, particularly toward sectors where there i s inadequate competition, such as banking and trucking. Trade, aid, and other cooperation agreements with other countries should focus on encouraging competition and market entry inthese key sectors; Accelerating and broadening comprehensive reforms to improve the regulatory environment for businesses through political oversight, and better planning and coordination o f multiple initiatives; Building good regulatory incentives and capacities inside the public administration by developing a government-wide policy on regulatory quality. Adopting explicit quality standards for regulations based on market principles; Improving the market orientation o f new regulations by implementing, step by step, a program o fregulatory impact analysis within the ministries; and Rationalizing the Mauritanian legal system by reviewing the stock o f legal instruments and creating a central regulatory registry with positive security. Simplify andspeed up formalities for businesses - Developing a simplification "hit list" o f priority measures and, every six months, prepare a consolidated simplification law integrating business simplification measures from across all - ministries; broadening use o f the "silence i s consent" tool; Promoting attention to competition principles by clarifying the role o f government intervention and focusing on market abuses; - - Lowering transaction costs and facilitating the establishment o f new businesses; Minimizing the potential for intervention inprices by reducing the number o f staple products for - which prices are monitoredto a symbolic few (perhaps three or four); Removing ambiguous standards for intervention in prices, notably "manifestly unusual market condition" and just "exceptional circumstances," while leaving in place the better reasons for intervention: monopoly, government action, and public emergency; - Devoting time and attention to dealing with restrictive and anti-competitive practices to ensure that competition develops among Mauritania's formal businesses. Inthe distribution sector 71. Regulatory reforms will also benefit the poor, mainly by boosting entrepreneurship and job creation. Regulatory reforms can aid the informal sector in contributing to job creation and investment, not only through indirect effects, but also through such strategies as accelerating the transition o f the best-performing informal enterprises into the formal sector and improving linkages in export sectors to small producers. Since new jobs are most likely to occur in services in urban areas, the urban poor are more likely to benefit from the recommended reforms. This makes regulatory reform o f direct relevance to Mauritania's poverty reduction needs, since increasing urbanization demands more urbanjob creation, particularly inNouakchott, where poverty rates have actually increased. In contrast, increased quality in export sectors should expand opportunities for small producers inrural areas. 72. Other poverty reduction benefits can be far-reaching and indirect. For example, general growth increases tax receipts that can be used to finance the social safety net. Competition in key sectors such as transport, electricity, telecommunications, and health can lower prices and improve access to these services besides increasing economic 26 activities in many other sector~.'~More generally, measures to increase the size o f the relevant market will increase the overall intensity o f competition and contribute to increasingthe purchasing power o f households (see Table 5.1). A.2. Promoting Market Integration 73. Internal Markets. The internal market in Mauritania i s fragmented by several factors. Low population density, coupled with infrastructure weaknesses and high transport costs, limits interactions among sectors and population centers. With much economic activity concentrated inthe two main cities, Nouakchott and Nouadhibou, plus a large informal sector, businesses face many expansion constraints. The low manufacturing base limits diversification and export possibilities and increases import dependence. Because the services sector i s heavily dominated by trading activity, the broader range o f services needed for development may not be present in sufficient strength.Finally, these market weaknesses meanthat foreign investmentis almost always directed at export markets, not Mauritania's internal market. 74. To expand and integrate the internal market, several constraints will need to be addressed, including accelerating the formalization o f the best-performing informal enterprises to extend their reach. Action in key sectors will need to be implemented, including the telecommunication and financial sectors, which play a leading role linking buyers and sellers, integrating economic centers, and encouraging entrepreneurship. Another way to consolidate the internal market i s to improve transport infrastructure and services, enabling producers to reach larger numbers of consumers. The section below on trucking contains several recommendations to reduce costs. Infrastructure deficiencies in the roads also add to costs. More public investment in roads would yield efficiencies in economies o f scale for domestic producers. One proposal suggested that certain sections o f the road network, ports, and airports,2obe managed privately. Such management could encourage new investment and improve efficiency o f construction and maintenance. 75. Regional Markets. Regional cooperation should be a much more important part o f Mauritania's development strategy to increase market size and attractiveness to foreign investment.Regional economic linkages have become essential to international economic organization. As they progress toward free trade and economic integration, regional economic groupings encourage industrial restructuring and new investment within the grouping and from outside. 76. Mauritania should develop aspects o f regional cooperation through several existing channels. With respect to the Maghreb, the focus should be on leading initiatives The universal access program launched by the GIRM will allow groups now deprived o f such services to consume more o f them in the future. Mauritania should monitor these programs carefully to ensure that they promote both efficiency and access for target groups. The liberalization in basic services will have more direct impacts o n the poor as consumers. 2oTelecommunications, electricity, air transport, and ports sectors already have private sector investments and management. 27 that can help to accelerate integration.21This could include initiatives to reduce tariff and non-tariff barriers, encourage movement o f capital and labor, introduce mutual recognition o f qualifications, and all the standard features o f economic integration. Inthe absence o f consensus within the Maghreb on improvements to the regulatory regime, Mauritania should proceed in advance o f consensus by cooperating on such initiatives with like-minded countries. If agreement seems unlikely, Mauritania could nevertheless experiment with one-sided concessions in particular areas to build up momentum for change. Experience in Europe has shown that non-EU members can deepen economic integration with the EU through harmonization o f intemal market conditions, mostly regulations. Mauritania should carefully consider membership in UEMOA, if not ECOWAS. It should also consider participating inthe full range o f initiatives under way in the region, all of which have potential for increasing Mauritania's trade and investment, and for providing a broader basis for economic growth inthe future. 77. International Markets. Because o f the needto increase exports, to createjobs, and to achieve diversification and technology upgrading, boosting inward foreign investment in export-oriented economic activities should be a policy priority for Mauritania. Nevertheless, there are still reservations about the conditions for foreign investment. These include doubts about whether the legal system i s sufficiently impartial in a dispute between a national and a foreign partner. Hence, intemational arbitration i s now the preferred option (see below). Such problems seem to be rarer inthe mining sector, where companies tend to be larger and where there i s a longer history o f foreign participation. There i s a more general reservation about the emphasis on partnerships with local firms. The new investment code does not contain a specific requirement for local partnerships, but the perception is that Mauritania emphasizes local partners as the usual form o f foreign investment. A.3. PromotingPrivateInvestment 78. Private sector investment i s critical to growth, poverty reduction, income generation, and employment opportunities. Given its proximity to European markets, a dynamic private sector, relatively low labor costs, and a decade o f comprehensive and sustained structural reforms, Mauritania has significant potential for private sector-driven export-oriented growth. However, the sustainability o f higher private sector-led economic growth will depend on several factors. These include (i) maintenance o f a stable macro- economic framework; (ii) improvements in public resource management, including the expected oil revenues; (iii) expansion o f the economic and export bases beyond mining and fisheries; (iv) diversification o f agricultural crop production and development o f non- farm activities; (v) integration o f the livestock sector into the modem economy; and (vi) increase inthe fisheries sector value-added. *'The importance of more attention to developing regional economic cooperation is emphasized by recent developments among other Maghreb states that undermine regional economic integration. Morocco has had an EU association agreement since 1996 that i s laying the groundwork for a free trade zone, especially in industrial and agricultural products. Tunisia has done the same, and Algeria has also signed an agreement. The practical consequences are that Moroccan tomatoes will be less competitive in Algeria than Spanish ones, and Mauritanian fish products in the Tunisian market will not have any competitive advantage compared to those of Spain. 28 79. Mauritania's FDI i s still rather low - even though it benefited from recent investments in the telecom, mining, and oil (exploration) sectors. While many factors may account for the low level o f FDI, it i s instructive to compare a number o f investment climate indicators that may influence the interest that foreign investors have in Mauritania. As shown in Table 3.1, it would appear that for a number o f indicators Mauritania ranks closer to Mali and Senegal than to countries like Tunisia, a level that certainly i s within reach for Mauritania in the short-term. This calls for simplification o f bureaucratic requirements for investors and the implementation o f a clear regulatory framework. 80. However, stimulating the development o f the private sector as the engine o f growth will require many factors, as shown in three recent studies. These are (i) developing adequate infrastructures; (ii) removing remaining barriers to competition and factor mobility; (iii)improving the legal and regulatory environment; (iv) further streamlining tax regulations; (v) exploiting new market opportunities; (vi) improving savings mobilization and developing financial intermediation to facilitate access to services and credit; (vii) lowering production and transaction costs; (viii) increasing private sector participation inthe delivery o f public services; and (ix) increasing intemal and external competitiveness and developing support services to exports by well- performing public and private support institutions.22 81. The cost of credit. Bank credit i s very expensive, except for the very best creditors; it is heavily concentrated on parties affiliated with the banks and i s made up largely o f short-term Intermediation margins appear very high, reflecting the oligopolistic structure o f the banking sector, which encourages neither competition nor efficiency in banking services. Access to bank credit is skewed towards operators associated directly or indirectly with the groups that own the banks, as reflected in the concentration ratios that often exceed the regulatory ones. Inaddition, loan terms are still inadequate--more than three-fourths o f private sector credit i s made up o f short-term credit, mainly trade financing. Particular attention must be given to lowering the cost o f and improving access to credit. With the present high interest rates and limited access to credit, few investment projects are financially viable. 22 The overall benefits o f private investment are well documented. Given the appropriate host-country policies, private investment can make a significant contribution to economic growth and poverty reduction by triggering technology innovation, assisting with human capital formation, enhancing enterprise development, helping to create a more competitive environment, leading to more socially responsible corporate practices and promoting economic diversification and international trade integration. There are, o f course, some costs that private investment may bring: repatriation o f profits -albeit often offset by the incoming FDI; some social disruption, as a consequence o f accelerated marketing-; stronger competition in the national market; and the perception that a country may be somehow dependent o n international enterprises or is losing political sovereignty. 23The Central Bank has entered into contracts with commercial banks to bring their concentration ratios in line with bank regulations, after which stronger Central Bank supervision and enforcement will need to be implemented to ensure continued respect o f the banking legislation in this respect. Competition in lending may benefit from the entry o f foreign financial institutions. It i s important to improve bank financing and make credit more readily available to productive economic activities. 29 82. The cost of telecommunications has fallen considerably since the privatization o f the telecoms sector and the granting o f a mobile license. Telecommunications costs might be reduced even more by granting another new license. 83. The transport sector i s a major handicap for exports and deserves particular attention. Projects are under way to build new roads betweenthe capital and Nouadhibou and along the Senegal River, while a new airport and cold-storage facility are plannedfor Nouakchott. Such projects will greatly enhance the export prospects o f the fishing and agricultural sectors exports. 84. The Investment Code. The revised investment code (Law 03/2002 dated Jan. 20, 2002) proposes the creation o f "points francs" for the export sector, so that those firms that export 100 percent o f their production would obtain duty-free access to imports o f capital goods and intermediate goods, but no special consideration with respect to income taxes. However, managing the "points francs" system, without damaging the revenue generation role o f the import tax, requires a carefully thought out and well-managed system to match the import content o f the exports to avoid having excessive imports being resold on the local market. Alternatively, tariff on all capital goods and intermediate goods could be abolished, so that cost reduction would benefit all producers, not only exporters. 85. Corporate taxation. The burden of corporate tax has already fallen considerably inrecent years, andthe tax framework is now quite satisfactory. As the 2002 budgetlaw allowed the deductibility of the IMF and established the drawback system, the fiscal burden on exporters has been reduced substantially. A review o f the marginal effective tax rates24under the normal tax regime suggests that the tax burden in Mauritania i s not very different from that o f some o f its neighbors. It is, however, much higher than that o f other transition economies that have been able to attract substantial amounts o f FDI.With the provisions o f the new investment code, the tax rates are roughly aligned to most o f the countries inthe sample, except for Poland.25 86. Judiciary and legal system. Mauritania has started reforming its judiciary and legal system, and in 2001 also modernized its commercial code. Efforts now should be devoted to ensuring that the judicial system can implement and enforce this new legal framework and that competition legislation i s enforced.26 24 The marginal effective tax rates capture the extent to which the tax system (all taxes that impact o n profitability, the income tax system, not only the rates structure, as well as indirect taxes) causes the before and after tax return to investments to differ 25With the introduction o f the 2002 tax provisions, the METR under the normal tax regime dropped from 43.7 percent to 33.1 percent for the industrial sector and from 33.1 percent to 19 percent for the services sector, bringingit in line with Morocco and Tunisia. For the industry sector, the normal tax regime would still leave the tax burden higher than i s implied under a well-functioning investment code. Consequently, a furfher reduction - particularly o f tariffs o n capital and intermediate goods-should be implemented to lower the overall fiscal burden on enterprises, freeing the investment code from providing fiscal advantages 26 Given the tendency for increasing concentration o f economic power in the hands o f a few economic groups, the latter will present a major challenge. Mauritania has signed the New York, Vienna, and Hague 30 87. Lowering production and transaction cost. The capacity o f Mauritanian enterprises to export will depend crucially on their capacity to produce quality commodities at low cost. Thus, lowering production costs i s very important. Labor costs are apparently low and would appear to enhance Mauritania's competitiveness, i.e. minimum wages and the overall salary structure appear very competitive with regional levels: minimumwages, for instance, are $30 per month, compared with $50 per month inSenegal. 88. Reform of the labor market. Labor qualifications inMauritania fall short o f those required by a modern economy, as they tend to focus on trade in the informal sector. A major task therefore will be to upgrade professionaltraining for new entrants to the labor force and for those already gainfully employed. For several years, a new labor code has been under preparation by the government that would abolish the state monopoly on employment offices, permit workers to be employed under time-limited contracts, and ease the process o f granting labor permits to foreign workers. This code should be enacted promptly to clarify the situation in the labor market, even though it appears that practices in the labor markets are more flexible than would appear from reading the present labor code. The reform o f the labor markets will be essential ifMauritania wants to reduce unemployment and improve its potential to createjobs. To this end, it would be advisable to first reduce the cost o f private employment creation by eliminating various direct and indirect surcharges. Second, the hiring and firing process should be more flexible and should not require government's approval. Third, given the ongoing wide- scale privatization and public sector reform, laborhocational training schemes should be emphasized. 89. Financial deepening and development. When compared with other low-income countries, Mauritania's financial depth i s low and actually falling. Money as a share o f GDP stood at 15.5 percent in2002, as against 25 percent in 1990.*' For an average low- income country, this ratio rose from 33 percent in 1990 to 35 percent in 1996.28As for the degree o f financial development, Mauritania ranks in the medium level o f financial development according to the Comprehensive Index.29 B. PROMOTINGEXPORT-ORIENTED ACTIVITIES 90. With respect to private sector export-oriented activities, both the survey and the Mauritania Integrated Framework3' study underscore several factors. First, political conventions that regulate arbitration procedures and business rights to facilitate the resolution o f business disagreements, but these procedures still need to be tested. 27 This apparent demonetization o f the economy is not further researched inthis CEM but deserves to be looked into carefully. 28 World Development Indicators, 2001. 29 The comprehensive index combines six different criteria: development o f the monetary sector and monetary policy; banking sector, size, structure, and efficiency; quality o f banking supervision and regulations; development o f the non-bank financial sector; openness o f the financial sector; and institutional environment. 30 Mauritania: Integrated Framework Study - Diagnostic Trade Integration Study - A Poverty Focused Trade Strategy. World Bank, December 2001. 31 stability in Mauritania provides foreign investors with a positive investment climate, but sectoral policies should be adjusted to improve the export performance in individual sectors. Next, Mauritania has made a significant effort in the past few years to increase competitiveness; the survey and study also highlighted the constraints on the development o f exports andproposed a set o f measures to increase the competitiveness o f the economy and its integration in world trade.3' Third, export expansion and diversification would require enhancing the competitiveness o f the Mauritanian economy,3233including improving customs administration and improving the institutional support for exports. Ina liberal economy, the private sector largely undertakes exporting activities, and the public sector i s responsible for, among other things, establishing an adequate incentive system, ensuring that trade agreements favorable to Mauritania are entered into and that these are effectively implemented. The public sector should also monitor the performance o f the sector, promote the country's image de marque, and coordinate the operations o f the various government units whose work influences export competitiveness. 91, Significant opportunities for export-oriented private investment exist in the mining, tourism, fisheries, agriculture, and oil sectors, based on Mauritania's unique natural resource opportunities. Investments in the information technology, services, and industrial sectors should be particularly sought after, as they are likely to provide significant employment opportunities and would be the first beneficiaries o f an improved investment climate.34 3' The principal recommendations in this study focus on: policies to enhance competitiveness (taxation, credit, commercial, and competition-related legislation, cost o f the factors o f production); measures to facilitate trade (above all, customs procedures); institutional support for the development o f trade (such as strengthening the main administrative agencies involved, agencies devoted to trade promotion, training, and information, standards and product quality; and support for policies geared to developing the export sectors (fishing, livestock, agriculture, and tourism). Some o f the study's recommendations have already been taken into account in the framework o f reforms and programs currently under way. Others were incorporated inan action plan finalized inMarch 2002 and included inthe PRSP priority program for 2002- 04. 32 International competitiveness should be understood as a multidimensional concept that comprises the ability to export, efficient use o f resources and factors o f production, and increasing productivity that ensures rising living standards o f the population. It depends o n macroeconomic environment; the ability to absorb and adapt new technology to reduce production costs and improve quality; and the adoption of dynamic and innovative marketing strategies. 33 Mauritania's exchange rate i s competitive as measured by developments in the REER over time and in comparison with that o f its trading partners and competitors. However, these favorable developments inthe exchange rate have not significantly affected Mauritania's traditional exports (iron-ore and fisheries), as these operate under very particular conditions. It remains important, however, to monitor REER trends closely if exchange rate policy is to support export diversification. 34 Aside from mineral and fishing resources, Mauritania presently has very few exportable products and services. This i s largely due to an unfavorable factor endowment and a very small domestic market that does not permit economies o f scale. Mauritania's chances o f better integrating in the world economy would be improved if it were to improve the business environment, provide supporting institutions, and reduce production costs. Such a program would boost earnings for present exporters, but it would also assist the emergence o f others. 32 B.l. Customs Reformin Support of Trade Facilitation 92. The trade reforms undertaken in recent years by Mauritanian authorities have substantially reduced the costs o f international trade. To the extent that imports have become cheaper, the overall incentive structure i s shifting away from import substitution and towards producing for export. Yet import procedures are still lengthy and control- minded, while the valuation procedures are inadeq~ate.~~ A challenge for customs will be to combine its traditional role o f raising budgetary revenues with a less traditional but increasingly important role o f facilitating trade. This would be an important contribution to enhancing the competitiveness o f the Mauritanian economy. It i s therefore urgent that the customs reforms undertaken so far be deepened as recommended by the report not least because Mauritaniahas to fulfill its obligations to the World Trade organization. 93. To make better use o f the pre-shipment inspection services (PSI), several steps should be taken in the very short run. First, enforce the PSI requirement, putting an end to PSI inspections after arrival o f the goods in Mauritania. Second, create an internal control mechanism, at cabinet level through the Ministry o f Finance. This mechanism would oversee PSI services and ensure that PSI value i s incorporated in the customs declaration and that a reconciliation is made between the PSI value and that used by customs. Third, it i s important to create an effective appeals procedure, with private sector participation, to reconcile differences between importer and PSI valuation. These actions should be implemented even before the present PSI contract i s renewed. The renewal should benefit from the findings o f an external audit to be undertaken o f PSI services in Mauritania in terms o f resource mobilization and strengthening customs administration. B.2. MobilizingFinancialResources: Banking,Microfinance,andInsurance 94. Cultural factors play a significant role in the relatively low use o f banks for conventional banking functions. Businesses and individuals rely a great deal on cash and the informal financial system known as tontines. Bankers in Mauritania have been described as very cautious, after some bad experiences in the past. The question i s whether financial intermediaries in Mauritania contribute enough to the growth o f new 35 Correct customs valuation o f imports is a crucial element inthe determination o f duties and taxes due on imports. The valuation practices inMauritania are handicapped by the absence o f reliable data o n the value o f previous or similar imports, the widespread use o f de facto reference prices, and the practice o f under invoicing and o f relying o n negotiations between custom officials and importers. Cognizant o f these problems, Mauritanian authorities in 1994 entered into a contract with SociCtC GCnCrale de Surveillance (SGS), a pre-shipment inspection (PSI) agency. Under the contract with that firm, all imports into Mauritania above a certain value should be inspected before shipment from the exporting country. SGS was to certify the value, quantity, and tariff code o f the inspected imports. For these services, SGS receives .98 percent o f the value o f inspected goods, a fee paid from the Mauritanian budget. Values inspected by SGS increase on average by a factor o f three over the invoice value. However, about 65 percent o f imports subjected to the PSI requirement arrive in Mauritania without a PSI certificate and are inspected after arrival. This latter process takes time and is extremely inadequate. Such a practice i s contrary to the intention o f the PSI Convention. Furthermore, the PSI information is not often and fully used in the determination o f customs value, nor i s any discrepancy between the PSI data and those used by customs in the calculation o f the customs value subjected to any audit or verification. 33 enterprises. The banks have created a Centrale des risques and a Centrale des incidents de paiements. When these agencies are fully documented and operational, they should allow commercial banks to better evaluate the solvency o f local firms and thus to increase lending. 95. As mentioned before, a major concern with regard to banks is the cost of credit. The gap between borrowing and lending rates appears very high; it i s even higher in practice because o f the method o f interest calculation (every three months). While estimates vary o f the exact interest rates charged and paid out, the gap may be as much as 20 per cent. Even correcting for inflation this i s a very high differential and seems disproportionate to the rates o f return likely in an economy growing only moderately. This suggests that the level o f competition betweenbanks is low, even though the number o fbanks inthe market appears at first sight to be adequate. 96. The banking system offers services at very limited levels. This is probably largely a reflection o f the stage o f economic development in Mauritania. Encouraging foreign banks with a more active strategy and better technology to enter the Mauritanian market might stimulatetechnology-based ~ompetition.~~ 97. Microfinance. The basic framework for microfinance in Mauritania i s given by Law 98-008, which provides a legal definition and basis of operation for microfinance entities. Like the banks, microfinance entities are regulated by the Central Bank, which authorizes and controls their operations. Growth in this field has been rapid. The main focus o f lending has been towards commerce (58 percent o f the total). Small trades (30 percent), consumption (8 percent), and social needs (4 percent) account for the remainder. 98. This rapid growth in microfinance in Mauritania is encouraging, and the regulatory framework appears to be appropriate. However, there i s a significant demand gap between the microfinance and the small and mediumenterprise (SME) sectors that i s not being addressed by any form o f finance: the typical SME (whether formal or informal) has no commercial source o f finance and commercial banks are described as having no interest in microfinance. The very small sums lent in the microfinance sector cannot address the credit requirements o f the SME sector or of those businesses anxious to expand beyond the informal sector. On balance, it seems more desirable to encourage wider availability o f commercial credit for SMEs from banks rather than from the microfinance ~ector.~' 36 Although the reform o f the banking sector has had some positive effects--removal o f direct credit and interest rate control--it did not change the structure o f the banking and financial sector, nor was it associated with improved competition and efficiency. 37 In the rural and artisanal fisheries sectors, small farmers and artisanal fishermen cannot modernize production without access to credit at a reasonable cost. Small farmers may obtain credit from he National Union o f Savings and Loan Associations (UNCACEM), but it i s too expensive (the rate o f interest i s 15 percent) while artisanal fishermen are financed by a cooperative or by the owners o f on-shore facilities. A new approach directed at poor farmers i s needed, based o n cooperative credit and credit founded on collective guarantees. The small-scale agriculture sector will be disadvantaged as long as the banking sector , continues to offer loans only at high interest and with very restrictive conditions. 34 99. Responsive, flexible, and small-scale forms o f credit are vital for encouraging the development o f SME and its eventual incorporation into the formal economy. Microfinance i s a crucial component o f credit systems for this purpose, since it can enable small businesses, entrepreneurs, farmers, and artisan fishers to start or develop activities. 100. Insurance Sector. Law 93-40 o f 1993 lifted the monopoly inthe insurance sector. That year, there was one state-owned insurance company; by 2001 there were five privately owned. Because the insurance market in Mauritania i s so underdeveloped, existing legal insurance requirements need to be enforced, to considerably increase the market and entry and to promote lower insurance premiums.A wider variety o f insurance products on offer would also stimulate demand. In addition, if the insurance companies themselves made more marketing efforts, especially by encouraging sales through intermediaries and by opening branch offices around the country, demand could also be stimulated. A further aspect i s the regulatory issue: whether extending insurance requirements into other aspects o f business, including, for instance, public liability insurance, would also contribute to the stimulation o f the insurance industry and to the predictability o f the business environment ingeneral. C. SECTOR-SPECIFIC ISSUES 101. The development o f a diversified economy and the provision o f basic infrastructure are essential to developing trade, reducing production costs, and enhancing the competitiveness o fthe national economy. 102. The type of growth sought must take account o f the characteristics of Mauritania and its continuing formidable challenges in economic development. Mauritania i s a country large in area but small in population. Average incomes are low, and even lower outside the main urban centers. Urbanization pressures are mounting. Most o f the labor force i s engaged in the agriculture, fisheries, and mining sectors, and opportunities for expansion in other sectors have not been realized. Manufacturing in particular has seen little activity, and prospects are not good for its expansion. Exports are limited and the diversification o f the economy remains extremely low. C.l. Agriculture 103. In spite of recent downtums and unabated outmigration fueling rapid urban population growth, Mauritania's agriculture and rural sector remain central in employment, income generation and overall poverty reduction inMauritania. The erratic climatic conditions inrainfed agriculture (low and unpredictable rainfall, recent flooding and frost) are well documented. Better managed, however, the abundant land and water resources in the Senegal river valley could somewhat compensate for these difficult conditions. In 2001/02, for example, the production o f coarse grain (sorghum, millet, maize) plummeted about 50 percent below that o f the previous season (reaching almost 20-year lows); but the production o f irrigated rice increased by 15 percent. Overall, the decline in total crop production over last year reached some 18 percent, according to 35 recent estimates from the Ministkre du De`veloppement rural et de 1'environnement (MDRE). These results were achieved even though irrigated rice production was just recovering from back-to-back years o f flooding in2000 and2001. 104. Rainfed Agriculture. Government policies should aim at stabilizing the production o f rainfed agriculture through the development and promotion o f soil and water conservation infrastructure and practices; demand-driven agricultural service delivery programs; and rural roads to improve access to markets and basic services. The implementation o f such measures and programs would lead to modest growth in rainfed production commensurate with population growth, though with important annual variations. Clearly, Mauritania looks to the Senegal river valley inthe south for rapid and important income growth and employment generation inthe rural sector. 105. Irrigated Agriculture. For an overall total o f 130,000 hectares o f irrigable land, some 40,OO hectares o f irrigation schemes have beenbuilt,but only about 15,000 hectares are now under production and the rest has been abandoned. The irrigation schemes have not fulfilled their potential o f bringing food security, generating the hoped-for rice surplus for export to neighboring countries, and lifting the whole valley out o f poverty. Several reasons account for this. The irrigation schemes, meant only for rice cultivation, were illconceived i s poorly maintained and managed. Rice producers were not provided with adequate technical and managerial assistance. Government subsidies encouraged rent seeking rather than competitive behavior. The government's failure to build roads opening access to markets contributed to the marginalization o f potentially rich agricultural areas. With support from the World Bank and others donors, Mauritania i s attempting to claim back the potential o f its irrigated land, its major and still untapped renewable resource. It has become evident that this potential could be realized by promoting not just rice but also diversified agricultural production, including the country's other important source of rural wealth, livestock production. Through the World Bank-supported Integrated Program for the Development of Irrigated Agriculture (PDIAIM), the Government of Mauritania plans to rehabilitate and create about 20,000 hectares by the start o f the next decade. Programs andmeasures are beingimplementedto improve production o f rice, fruits and vegetables, and fodder crops. 106. Irrigated Rice. In a relatively short span, Mauritania has successfully extricated itself from a heavily public-assisted and poor-quality o f rice production and marketing system to a more liberalized and quality-oriented system that competes effectively with imported rice. To minimize disruptions in the rice subsector and build support for the liberalization policies, protection for domestic rice was maintained at a still high level, through an aggregate tariff o f 45 percent levied on imported rice. At the same time, with the Bank's assistance, the GIRM i s implementing accompanying measures that are allowing domestic rice to hold its own in the face of competing imported rice. These measures include the promotion o f better quality seeds, extension services, expanded agricultural credit, and planned landrehabilitation. The rehabilitation program has lagged because o f difficulties in the implementation o f the land tenure law, particularly for cooperative farmers. 36 107. Agricultural Diverszjkation. Aggregated, the domestic, regional, and intemational marketsboundthe potential demand for Mauritania's food and fiber supply. Mauritania's domestic market i s admittedly small, but it i s expanding, driven by rapid population growth, overall income growth, significant elasticity of demand for the potential products o f irrigated agriculture (particularly fruits and vegetables, animal feed, and wood products), and the anticipated control o f inflation. Decades-long sedentarization and urbanization have brought sweeping changes in consumer food tastes and preferences that increasingly include fruits and vegetables. Domestic consumption o f vegetables is estimated to be about 60 kilograms per capita per annum inNouakchott and 20 kilograms in rural areas. It is estimated that domestic consumption of fuel wood is eight times higher than the sustainable wood production potential. The GIRM's agribusiness strategy paper (December 2001) projects that in 2015, Mauritania could produce some 67,000 tons o f h i t s and vegetables to satisfy most o f the expected three- to four-fold increase in local consumption, from its current supply-base of only 3,950 tons. As for exports o f h i t s and vegetables, the document projects that Mauritania could export some 40,900 tons o f fruits and vegetables against the 300 tons it currently exports (see tables 24.1 & 24.2). Indeed, the continually expanding European fruit and vegetable market represents a boundless demand for Mauritanianproducts, ifMauritanian producers can compete. 108. Introductions o f fruits and vegetables already show encouraging results. For the first time, Mauritanian consumers are being provided with a regular, though still limited, supply o f homegrown melons and mangoes and green beans, while the local supply of tomatoes, carrots, and cabbage has steadily increased. Pilot shipments o f green beans and melons to European markets received favorable feedback from importers. Several constraints to the development o f fruits and vegetables remain, however. The costly and poorly managed seaport at Nouakchott has emerged as one o f the most limiting constraints. Its official hours o f operation are 9 A.M. to 4 P.M., but in practice those working hours are actually much more curtailed-- meaning that boats have to add one or two extra days to a voyage whenthey are at call at this port. This problemis coupledwith the highoperation costs and other inefficiencies o f Nouakchott seaport, which compares very unfavorably with such ports as Abidjan and Dakar. Mauritania has a very advantageous location, only four or five days out o f southern Europe, closer than any other Sub-Saharan, Israeli, or Latin American competitors. But the unattractive aspects o f Nouakchott's port nearly negate that potential comparative advantage. Poor access to markets i s second on the list o f complaints from producers and exporters of fruits and vegetables. Other major complaints include land tenure (whose transparent and timely implementation is yet to reach full throttle), availability o fbasic cold-chain infrastructure, and limited capacity of producers and exporters, particularly when it comes to total quality management systems to comply with the stringent food safety and quality standards of Europeanmarkets. 109. Synergies between irrigated agriculture and livestock production are clear, particularly as they relate to the insertion o f livestock into the formal economy. Periurban milk production and production of poultry and eventually redmeat for export must rely on a feed supply that i s primarily home grown ifit i s to generate the value-added needed to boost the economy. This provides the third area o f diversification in irrigated agriculture. A fourth area is ago-forestry. That industry inneighboring Dagana, Senegal, 37 shows the potential o f wood production for numerous uses, including house construction, telephone poles, sheds, and fuel wood. 110. Agricultural Credit. Mauritania's rural credit institution has expanded its scope within and outside its traditional rice market. Whereas inthe past it restrictedits lending to rice growers (primarily to purchase inputs and irrigation equipment), it has now engagedin additional lendingto rice traders and transformers as well as to entrepreneurs engaged in diversified agricultural production. By rescheduling the debts o f farmers hit hard by recent years of flooding, the credit agency was instrumental in boosting rice production in 2002 at a time when calamitous rain conditions all but ruined coarse grain production. With its blend o f short-, medium-, and long-term credit lending to a more diversified client base, the credit agency would be better prepared to play a major role in the growth andpoverty reduction o f the agricultural and rural sector. It would still have to tread carefully with the size of the rescheduled debt, looking, for example, at ways to promote a state-backed crop insurance scheme. Also, additional resources should be made available to accommodate the rehabilitation and creation o f irrigation schemes and the expected boom infruit andvegetable production and marketing. 111. Land Tenure. Secure tenure, whether of individual or collective lands, is an important factor in encouraging producers to invest in and maintain irrigation schemes, infrastructure, and equipment to improve productivity. Initiated in the late 1980s in Ordinance 83427, Mauritania's land tenure was further refinedinthe 1990sand again in 2000, with Decree No. 2000-89 o f July 17, 2000. In principle, current land legislation ensures land tenure security and therefore incorporates incentives for sustainable investment. It speeds up the process for land registration (concession definitive) and promotes a land market by allowing landtransactions. However, the enforcement o f these laws i s still hampered by the incompleteness o f application decrees and ancillary prerequisites (such as recognition o f citizenship and cooperatives). Difficulties in land registration were to blame for delays in implementation o f land rehabilitation programs funded under the Integrated Program for the Development of Irrigated Agriculture (PDIAIM). A good concerted effort was made in this direction, but much more remains to be done, particularly inthe Upper River Valley. C.2. Livestock 112. Considering this sector's importance in Mauritania's economic growth and poverty reduction, assistance to the livestock sector has remained relatively paltry since the 1970s. Public investment in livestock, which i s steadily declining, has also been well below that devoted to the agricultural sector. Public services have remained confined to the areas o f animal health and the creation o f herders' organizations, without providing effective support services, appropriate financial services, and research focused on the priorities o f livestock and on the concrete problems o f herders and risk reduction. Such research should includethe urban-owned pastoral system and transhuman sheep herding. 113. The most recent sector analyses shows that given the markeddifferences between production systems and within these systems, the emergence and future development o f potential for improving livestock and production systems and the growth o f commodity 38 chains depends to a great extent on the removal o f a series o f obstacles. Those obstacles are closely linked to many problems (i) poor balance o f feed rations, difficult access to fodder inputs, and the low level o f use and development o f possible opportunities and alternatives with regard to natural fodder or silage, agricultural byproducts, and complementarities between agriculture and livestock; (ii)poor organization o f herd movements, poor management o f livestock systems, low productivity o f animals and the inadequate conditions in which they are exploited; (iii) difficulties o f sustainable access and exploitation o f pastoral resources and water, and the low level o f collective management o f these resources; (iv) difficulties in access to preventive and curative treatments (an issue tied to qualified human resources and to qualitative and quantitative issues related to veterinary inputs); (v) weak organization o f marketing channels, the number and quality o frelevant infrastructures, the sanitary and commercial quality o fthe products, the quality o f information on products and markets, and the mechanisms by which such information i s disseminated; (vi) difficulty in deriving value from livestock products throughout the year; and (vii) the lack o f research institutions that focus on the priorities o f livestock and on the concrete problems o f herders and commodity chain operators, support services that dispense effective advice, and the virtual absence o f appropriate financial services. 114. Annex D shows the estimated contribution, under two scenarios, of the livestock sector to economic growth, trade, andpoverty reductionby 2015.38 A 2015 situation "without improvement," assuming spontaneous evolution o f the current situation with no external intervention; and An "improved 2015 situation" to ensure the sustainability o f livestock systems that are capable o f exploiting a difficult environment, particularly by (i) improving the collective management o f pastoral and hydraulic resources; (ii) range o f public the and private services available to herders and other actors o f the commodity chains; and (iii) the quality and efficiency o f those services, in order to better respond to the needs and demands o f beneficiaries. This second scenario will require the implementation o f a set o f actions aimed at enhancing growth and trade and reducing poverty. 115. To enhance the sector contribution to growth, and poverty reduction Mauritaniawill need to: 38 For a detailed discussion o f these scenarios see "Mauritania - Livestock Contribution to Poverty Reduction and Economic Growth", FAO-IFAD, August 2002. 39 Analyses at commodity chains level indicate quite clearly that frozen red meat for intemational export and intensive poultry do not have much potential due to their low levels o f economic retum. However, the analysis also reveals good prospects for commodity chains that are already dynamic, particularly red meat (for sale domestically and in the form o f live animals exported to countries in the subregion), dairy products, hides and skins, and traditional poultry. Indeed, these various commodity chains demonstrate acceptable economic and financial returns and good prospects for evolving in step with projected national and subregional demand through the year 2015. 40 Iti s estimated that the informal sector exports about 30 per cent o f livestock production. Regulation and quality control are needed to improve the export potential and the health o f the herd, including bringing 39 Exploit the potential o fpromising markets, enabling vulnerable herders to gain lasting access to them by boosting the efficiency o f up-and-coming sectors that are already dynamic, while ensuring that the added value generated accrues to vulnerable groups and poor households, and by supporting, along with the private sector, the emergence o fnew markets. Establish efficient and targeted services to producers and other actors o f the commodity chains, based on the country's priorities and the needs o f the actors concemed, and dispensed by public and private service providers who are cognizant o ftheir respective roles and responsibilities. Establish efficient collective management o f pastoral resources and water, taking into account micro- and macro-level herd movements, and involving all permanent and temporary users o fpastoral areas. Implement appropriate preventive measures to reduce the harmful effects o f future droughts. Develop infrastructures and services to provide incentives and support the development o f a performing productive sector. Facilitate the most vulnerable groups to enter promising production streams and participate, as much as possible, inthe sector's development. Support the self-promotion o f salaried workers in livestock, and particularly that o f herdsmen and water haulers. C.3. Fisheries Sector 116. Industrial Fishevies. The Fisheries Development Policy Letter adopted in 1994 changed the government's state-owned orientation and made possible the opening o f the sector to both foreign investmentand foreign fleet operations. But, if it i s to diversify and add more value to its fish products, to land and process the catches inthe country, and to buildmarkets for new products, Mauritaniamust (i) introduce procedures and institutions to support new products, such as adequate inspection, communication, and documentation facilities; (ii) trained operators and processing and cleaning personnel; (iii)effective monitoring activities by regulatory authorities; and (iv) adequate scientific data andproperly-equipped laboratories to support regular monitoringprograms. 117. A number o f positive changes have been achieved. The National Ocean Fishing Research Center (CNROP) and the surveillance unit have been strengthened. Infrastructure has been developed for both the industrial and the artisanal fisheries. Mauritanian nationals have been trained in order to replace foreign laborers working in national legislation in line with international requirements, and getting the herd declared free o f foot-and- mouth disease. Promotion o f live animal exports would be encouraged by improved access to credit and improved infrastructure along the routes and stations for issuinghealth certificates. 40 the national fleet. As a result o f the rationalization o f the national fleet, the number o f vessels dropped from 556 in 1996 to 334 in2000.41Meanwhile,the number o fjobs inthe industrial fleet increased from 2500 to 3500. Mauritania's 460 miles o f coastline i s one o f the world's richest fishing waters. It is estimated that about 1.5 million metric tons are caught every year by the national and foreign fleets. However, Mauritania's fishing industry is fragile and at high risk from a weak management system and poor quality Although the fishing industry believes that quality control i s a state function rather than a private function, it i s clear that quality assurance requires extensive cooperationbetweenthe public andprivate sectors. 118. The private sector has invested substantially to improve the quality o f the fishing industry in Mauritania. For example, the amount o f refrigeration equipment to store fish multiplied in Noaukchott in the 1 9 9 0 ~Standards, on the other hand, are the ~ ~ responsibility o f the Institute National des Recherches Oce`anographiques et des Peches (INROP) inthe MinistBre desptches et de 1'e`conomie maritime. A laboratory was set up in 1999 to inspect fish for export and ensure conformity with international standards. the Direction de la promotion des produits de la ptche i s responsible for raising awareness among exporters o f the importance o f quality. INROP is the inspecting agency responsible for providing certificates showing that exporters are complying with EU directives on phytosanitary standards. But actual compliance has been uneven. An INROP survey in 1999 found that out of 24 fish processors, only seven were in compliance with European phytosanitary standards, and ten had grave problems that merited immediate action or shutdown. As a result, a great deal o f fish was processed not inMauritania but elsewhere, on board ships, or it was landed not inMauritania but in Senegal or inEurope. These processing options are not possible or desirable for artisanal fishing products. In 2000, 51 Mauritanian processors were recognized as in compliance with EUstandards. 119. TheFisheries Management System. First and foremost, it should be noted that the Mauritanian situation i s not as gloomy as it may appear in light o f the prevailing situations in other countries o f the region. Cooperation with these countries and with northern countries appears to be a means to build up the strengths and offset the inadequacies o fthe existingsituation.44 120. The statistical system is relatively fragmented due to the large number o f institutions producing information (including the Fisheries Surveillance Delegation, CNROP, customs, Central Bank, Ministry o f Economy, SMCP, and ONS). To date, each institution has generated data without considering any informational requirements other than its own. This makes it almost impossible to draw useful comparisons among the 41Not all vessels are operational. By the end of 2001 there were only 144 vessels inoperation. 42Mauritania has seen this first hand, since its fish exports and those o f Senegal were threatened in 1995 and 1996 by an EUban based o n quality standards. 43According to the Federation Nationale de P2che by the end o f 2001 there were 89 industrial plants in Mauritania, which on average were operating at 30 percent of installed capacity. 44 Mauritania has implemented, in coordination with other regional countries, a two months period o f "repos biologique". Also, it has recently signed a protocole d'accord with Egypt. By this accord Egypt would provide TA inthe areas of training, research, and the promotion of inland fisheries. 41 statistics issued by different organizations. Thus, the overall logic i s flawed. Inaddition, data from foreign fleets and from the national artisanal fleet i s incomplete and o f variable quality. There i s little monitoring o f artisanal fishing activities in terms o f landings, marketing, and exports. Coordination i s thus needed in order to develop standardized statistical nomenclature; adequately cover the field o f investigation; and eliminate any deficiencies in the system o f statistical monitoring, information gathering, and data processing. One way to ensure the reliability and the timely availability o f data would be to include inall licenses the obligation to submit data. 121. The fishingrights allocation systeminMauritania would be greatly improved ifit were clarified in several respects: preparation o f development plans and determination and publication o f maximum takes o f major resources and licensing procedures. As a result o f discrepancies between the objective o f obtaining government revenues in hard currency and the objective o f resource conservation, there i s no clear definition for delimiting fishing activities or establishing the distribution o f national artisanal fishing, national industrial fishing, and foreign fishing. In 1995, the government abandoned a two-faceted allocation system which involved a tax on exports for nationals and a license payment for foreigners in favor o f a systembased solely on the issuance o f licenses. That has made the mechanics o f resource allocation clearer but has done little to make the underlyingpolicy more understandable. 122. Preparation and implementation o f a fisheries development plan that goes beyond a simple recitation o f general objectives and clearly establishes the policy for issuing licenses and, in particular, the key elements o f the national artisanal, national industrial, and foreign distribution would avoid the problems o f over-fishing in relation to certain stocks such as octopus. Inthis regard, issuance o f fishing licenses should be perceived as a government commitment to manage the resource in a rational manner and to ensure the sustainability o f resources based on available scientific and technical information. In other words, licenses should only be issued within limits whereby catch capacity i s consistent with the resource's potential. Similarly, the fisheries surveillance system must be further strengthened with both human and material resources for providing complete coverage o f fishing zones and detecting any irregularities. Its role i s important because this is the only institution that can function as a factual reporter of the activities of all fishingboats inthe Exclusive Economic Zone (EEZ) o fMauritania. 123. In sum, greater coordination of the overall fisheries management system is needed. This would provide a consistent working framework for the research, assessment, allocation, and surveillance systems. The allocation process should be directly based on an assessment o f the existing level o f effort and the resource's potential. 124. Review of Fishing Rights Allocation Mechanisms. Overall delimitation o f the fisheries consists o f defining the `maximum and optimal number o f boats to ensure a sustainable catch. Interfleet and intrafleet delimitations are based on key elements o f distribution among the three fishing fleets involved (national industrial fishing, national artisanal fishing, and foreign fishing) and within each fleet. Annex E provides an overview o f fisheries allocation mechanisms. It attempts to present, in an admittedly simplistic fashion, the causes and consequences o f applying regulations, export taxes, 42 licenses and access fees as management tools to adjust catch capacity to a fishery resource's p o t e n t i a ~ . ~ ~ 125, Regarding the possibilities o f exportation o f processed fisheries products, Mauritania will need to develop two important elements: Quality control. To address health considerations and appreciation invalue within the context o f fisheries products, the issue o f quality control has to be examined at three levels: product preparation and processing; presentation and packaging; and identification and labeling. Contrary to the traditional approach to inspection, which focused on finished product quality controls, the new, so-called preventive approach has made producers responsible for the quality o f their products. The self-monitoring obligation involves the producer in the entire chain and makes the producer accountable to the consumer. The competent agency validates and verifies implementation o f the self-monitoring program, which the enterprise pursues to ensure the quality o f the finishedproduct. Health control. Health control aims to protect public health and the safety o f consumers. This task falls under government authority.46 Healthiness i s also a prerequisite for tapping a resource, insofar as the health of the environment i s a precondition that must be established before any operation i s launched.47 126. The country's heavy dependence on fishing underscores the need for prudent management o f these resources. The challenge would be to use EU fishing agreement royalties to modernize the fleet and improve the fishing sector's integration within the economy. Vigilance i s required to avoid over-fishing, including more studies on fish stock availability, possibly longer seasonal closures, and better control and surveillance of foreign fishing boats operating in Mauritanian waters. Critics o f the agreement with 45 A change from taxation on exports to fee collection (in the form o f licenses) essentially amounts to a change from a policy o f exit levies to one o f entry levies. In the first case, the product itself i s taxed (and the amount o f tax i s determined o n the basis o f volume at landing, sale price, and tax rate); in the latter case, it i s the production unit that must handle payment o f access fees, based on certain characteristics (depending on the length o f the boat inthe case o f artisanal fishing and the TJBs inthe case o f national and foreign industrial fishing). 46 Five basic health-control principles are applied for fishery products and facilities: each country that exports fishery products must have a single competent agency empowered to monitor compliance with standards o f health and hygiene: health certification, a self-monitoring program, compliance o f finished products; handling and processing facilities (boats, plants) must meet minimum design requirements for materials and equipment to guarantee hygienic treatment. The competent agency must possess adequate legal, human, material, and operational resources; economic operators: producers have the obligation to set inplace an internal health-control systemthat is both effective andtransparent,; the finished products must meet the required standards (for instance, sensory, chemical, microbiological,); and the competent agency o f an exporting country such as Mauritania i s subject to oversight at any time by the competent agencies o f importing countries or groups o f countries, such as the EU. 47 Shellfish resources (clam beds) inMauritania are currently untapped for lack o f evidence concerning the health o f the environment: a rigorous and continuous monitoring program covering the entire year is needed, along with a data bank o f the results o f chemical and microbiological analyses, inorder to establish an annual or seasonal fisheries development plan. Since Mauritania does not yet meet these conditions, the country was unable to obtain authorization for shellfish exports to the EU at the time o f the oversight mission o f European experts inJune 1996. 43 the EU claim that resources are being sold too cheaply and that Morocco and Senegal have negotiated better deals. The authorities should begin planning soon for the next round o f negotiations with the EU (in 2005). In conclusion, if the Mauritanian fishery industries do both make a greater and sustainable contribution to economic and export growthand is also to survive inthe the GIRM will needto: Strengthen the research capacity o f CNROP, as well as its ability to perform its oversight role, including matching fishing fleet capacity and allowable catch. Adopt more responsible practices and approaches, particularly in the area o f fisheries management. Apply in a consistent manner the license system and, if possible, introduce the "transferablehradable fishingquota" system. Adhere to the Food and Agricultural Organization (FAO) Code of Conduct for Responsible Fishing4'. Diversifyits export markets. Develop and maintain adequate fishing infrastructure facilities. Promote product development as the responsibility o fmemberso fthe profession. Promote partnership to ensure technological transfer and market access. In this regard, SMCP should encourage direct contact between producers and purchasers as a way to promote the marketing o f Mauritanianproducts. Pay attention to ocean discharges and processing facility rejections inorder to reduce postcatch losses. 127. Annex C summarizes a set o f additional activities needed to increase the potential impact of the fisheries sector on the economy. C.4. ArtisanalFisheries 128. Artisanal fishing i s an area in which Mauritania hopes to develop economic opportunities and increased exports and create employment for the poor. During 1993- 2001, total employment in the artisanal sector i s estimated to have increased from about 3,000 in 1993 to 33,000 in 2001. The number o f artisanal fishermen grew from about 3,000 in 1992 to 8,780 in 2001, while the number o f pirogues grew between 1993-2001 48The FA0 reported in 2000 that, globally, an estimated 25 percent o f fish stocks are under-exploited or moderately exploited, 50 percent o f stocks are fully exploited, 15 percent are overexploited, and 10 percent have been fully depleted. 49It provides assistance to governments contemplating fisheries sector reforms, including fisheries management and know-how. 44 from 1,261 to 2,200; and catches increased from 17.5 million metric tons to about 30 million metric tons. However, as only limited production i s valorized, the subsector's contribution to GDP has declined from 0.9 percent to 0.7 percent. Artisanal fisheries' real GDP growth averaged 4 percent over 1993-2000, compared to a decline of 2 percent in industrialfisheries. 129. The potential for further growth of the artisanal fisheries subsector i s constrained by the fact that many fishing villages are isolated from markets and lack the services needed to handle perishable products. However, artisanal fisheries' contribution to growth, employment, and poverty reduction" (and its advantages in terms o f efficiency and reduced management costs) could be significantly increased if adequate infrastructure and services were provided.51 130. To enhance the artisanal fisheries' potential, Mauritanian authorities will needto: Invest in improving infrastructure (roads, landing sites, cold storage capacity, and fisheries markets). This would both encourage traders to serve fishing villages more efficiently and fishermen to respond to the increased demandby increasing quantities they supply. Improve fishing gear and methods by encouraging the adoption o f fuel-passive and stationary fishing gear, which i s more cost effective than traditional active gear. Improve marketing functions and practices by resolving outstanding problems in assembly, sorting, preservation, storage, transport, andinformation. Establish resource management practices directing artisanal fisheries towards under- exploited areas, to prevent over-fishing. Enforce quality and health controls to meet the standard requirements o f the EU and Japan. Develop small fisheries credit schemes to facilitate the modernization o f fishing boats and the acquisition o fnew equipment. Develop human capital by designingand implementingtraining intransformation and marketing techniques--in particular, for women and fishermen in the context o f the ongoing artisanal fishing development projects. Assuming that one out o f four fishermen heads a household, development inthe artisanal fisheries would benefit to about 56,000 to 110,000 persons and contribute to poverty and extreme poverty reduction inrural and urban areas. Artisanal fishing is mostly a family activity. Household size in Mauritania i s about 6.5 (average) to 7.3 (poor). "Comparedto industrialfishing interms ofgrowth andpovertyreduction, artisanalfisheries activities need only one-fifth the capital o f industrial fishing. While the profitability o f the investment could be 10 times higher, it creates more jobs and four times added value with less skilled labor and light infrastructure. 45 Conduct research o f under-exploited resources, as well as the potential o f aquaculture. This may be, in some cases, a viable alternative to artisanal coastal fishing activities, in particular if artisanal fishermen should be displaced in order to reduce the entire fishing effort. 131. The broad approach outlined above would help diversify economic opportunities for the poor, increase value-added to artisanal fish products and improve artisanal fishers' income in the medium and long-term. It i s also clear that a targeted approach to expanding artisanal fisheries production as well as rural consumptionof fishingproducts, could contribute to a significant increase in the per capita intake o f protein products by thepoor. C.5. ManufacturingSector 132. The rapid urbanization o f the population and the likelihood that this trend will continue inthe near future bring to development strategy the needto realign the economy inline with the changing geographical distribution of the population. This will require creating employment and providing cash incomes to meet new demands from an increasingurban population. 133. Between 1992-2002, the industrial sector grew by 3 percent per year and its share of GDP decreased from 32.4 percent in 1992-93 to about 26 percent in 2001-02. Mauritania's industrial sector has a major impact on its export record (mining and fisheries) but not in foreign investment employment and value-added creation. One explanation for this i s that the mining and fisheries industries are highly capital intensive (as will be the oil industry). So, despite important macro and micro reforms, Mauritania's manufacturing sector remains a relatively small and capital-intensive one with distinctive enclave characteristics. 134. Outside o f mining, fisheries, and telecommunication, light industrial activity i s severely constrained by the size o f the domestic market, lack o f infrastructure, high labor costs and lack o f skilled labor. But achieving a high GDP growth in Mauritania will also require encouraging industrial development. Although the development o f a light industrial sector i s at present quite constrained, there i s room for expansion. This could be achieved mainly by providing input and processing the outputs o f the rural and fisheries sectors, which could also be a source o f employment for the urban population. 135. Inaddition, the creation of urban consumer markets can be expected to give rise to production o f goods other than food, beverages, and construction materials, which are already produced in Mauritania. Mauritania needs to promote SMEs, which could make up a large portion of the employment market and become the foundation of dynamic S M E S . ~Success in developing labor-intensive manufacturing activities and growth ~ depends onthe ability o fthe financial sector to mobilize and allocate savings efficiently. 52 The investment code encourages the establishment o f points francs for export-oriented economic activities through fiscal exemptions and some flexibility inthe hiring o f foreign staff (a maximumo f four), 46 136. Implementing a reliable legal and regulatory framework, so entrepreneurs are confident that their rights are clearly defined and contracts fully enforceable, i s also necessary. All legal and informal barriers to enterprise creation and competition should be abolished. It i s also desirable to focus public investment on providing basic infrastructure that i s complementary to private investment activities. 137. Particular attention should be paid to (i) rural areas and export-oriented activities; (ii)promoting joint ventures to facilitate the adaptation and absorption of new technologies; (iii)enhancing labor skills by investing in training facilities; and (iv) facilitating access to local financing.53 C.6. MiningSector 138. The investment climate for private sector investment in mining in Mauritania improved substantially with the approval o f a new miningcode in 1999 and Law 2002/02 establishing a new fiscal regime for mining. One o f the major innovations o f the code was the introduction o f a transparent and efficient system o f mining-title management. Boostedby the changes inthe legal and regulatory framework and geological discoveries in neighboring countries, the mining sector in Mauritania has experienced significant developmentinrecent years. 139. Miningtoday is one ofthe most importantsectors ofthe country's economy, with a significant iron-ore mining industry that contributes up to 12 percent o f the country's GDP and accounts for over half o f the country's export earnings. Although mining production is still dominated by iron-ore produced by SNIM, Mauritania has a vast and diversifying geological potential to produce other resources, such as copper, gold, diamonds, and phosphates. The number o f mining companies active in exploration in Mauritania has increased from eight in 1999 to 14 in 2001. Most of the major mining companies (such as Rio Tinto, D e Beers, and BHP Billiton) are now investing in Mauritania. Investments in exploration increased from $10 million in 1999 to $13.5 million in 2001, in spite o f an overall economic decline in the region. Two mining projects have now moved to the feasibility phase: the copper-gold property of Akjoujt and the gold deposits o f Tasiast. On the other hand, with additional private sector investment and efficiency gains at the railway, iron-ore production could potentially be expanded from 12 to 20 million tons per year. C.7. Oil Sector 140. Since the first discovery o f oil by Woodside on their Chinguetti offshore prospect in2001,there has been considerable interest inhydrocarbon exploration inMauritania in particular in the Coastal Basin. The discovery o f oil has also highlightedthe petroleum potential of the virtually unexploredonshore Mauritanianbasins, renewing interest inthe 53The current situation in Mauritania is that local commercial banks prefer to finance trade or safer loans, or to hold high-yield government treasury bonds. This approach unfortunately dims the prospects for sustainable development o f an SME sector, a major player in job creation as well as in reducing both poverty and income inequality. 47 Taoudeni Basin. It i s anticipated that Mauritanian hydrocarbon sector will become a major player inthe country's economy. 141. A number o f international oil companies, including Woodside, Dana, Brimax, IPG and Hardman Resources have signed contracts and have been carrying out exploration work in Mauritania. In Sept. 2002 the same oil company -Woodside- announced another find o f similar size and better quality than the first. Exploration is continuing in order to evaluate the size and scope o f the reserves. Latest Reserves Estimates -- (reported end February 2003) following analysis o f data obtained from the appraisal o f the Chinguetti field has increased its estimates for the amount o f recoverable oil at Mauritania's wells and it now estimates that the field contains 142m barrels o f potentially recoverable oil, up from a previous estimate o f lOOm barrels54. Work to develop the field is expected to begin in 2004, and the production o f oil in Mauritania could start by 2006. 142. The production o f oil raises significant strategic, tactical and institutional development issues and challenges for the country: macro-related policies issues, in particular, those related to avoiding or at least minimizing the Dutch disease undesirable effects; revenue management and governance issues; legal, regulatory and contractual issues; regional trade, transportation and integration issues; and dealing with potential adverse environmental impact. The Mauritanian Government objective i s to ensure that the oil and gas sector will play a major and important role in the economy. They would do well to put in place legal and fiscal regimes to accelerate the growth o f the Mauritania's hydrocarbon industry, as well as build the capacity for a successful management o f the oil resources. To do so, they would need to pay attention to the following issues: Getting ready institutionallyfor the oil era: 143. The production o f oil and, to a lesser extent, gas raises profound developmental and institutional issues for the countries where these activities take place. Inthis respect, it is important to establish contracts for extraction which benefit the host governments and support future exploration and production. It is also crucial to ensure that the money received from taxation o f these upstream rents i s used for the maximum benefit o f the country. This requires transparency in transferring the money to the government and in spendingit. Production o f oil and gas can have adverse environmental and social impacts whenbadly managed. C.7.1. Macro-Related Policies 144. While the oil and gas industries provide significant opportunities for the Mauritanian economy it also brings substantial risks. These will need to be managedand mitigated by governments, investors, and communities. The depleting nature o f oil and gas resources make it particularly important that the government prepares a 54 Preliminary estimations should be taken with caution. Since 1993, most oil companies have acknowledged that they have overestimated reserves by 30-80 percent (Rose, 2001). 48 mediudlong-term strategic "vision" for the sector's development and its inter-action with the rest o f the economy. This should be done as soon as possible to guide the actions o f the Government, civil society and oil operators. Economic policies should ensure that the benefits o f their exploitation contribute to the socio-economic development and physical capital needed for sustainable development over the long-term. Unfortunately, in certain cases, neither investment nor oil revenues have been able to guarantee economic growth or poverty reduction. Thus, the presence o fmajor oil and gas industries has been associated with a variety o f negative economic, social and environmental outcomes. The so-called "Paradox @Plenty where the mismanagement " o f the resource has failed to generate the sustainable benefits expected. Avoiding this pitfallwill be one o fthe most urgent challenges. C.7.2. Revenue Management and Governance 145. Oil and gas industries generate significant revenues for the national economy. Sound macroeconomic management and govemance are required to ensure that these revenues are successfully invested into social capital and in developing a broader-based overall economic development that lead to sustained growth and poverty reduction. To manage the problem the keypolicieshsues below are critical. 146. A clear legal, regulatory and contractual framework is a cornerstone for private sector' involvement in the oil and gas sector. The framework should emphasize the government's objective inmaximizing the positive impact that the oil and gas sector can have on overall economic development, as well as on poverty reduction. This should be translated into petroleum laws, regulations, contracts and institutions that promote foreign and domestic direct investment and competition. This implies the following: Designing and implementing arrangements for sector oversight and management capacity to monitor claims submittedby the oil operator(s) and make sure that these are legitimate55.Intemational experience shows that collecting revenue from oil and other non-renewable resources could be a high-intensive effort, which very often i s played ina quite unevenfield. Assessing the potential petroleum revenues flows will help the country frame its macroeconomic and fiscal policies56. Focusing on how to avoid, or at least minimize, undesirable effects on the domestic structure o f production and consumption due to the large inflows o f foreign exchange (Dutch Disease). Avoiding the deterioration o f competitiveness o f the non-oil sectors. 55 According to the oil companies during 1999-2002 they have invested US$235 million and their investment plans for 2003-07 amount to $1,080 millions. 56As to the financial flows -- from experiences elsewhere in similar environments, a commercial discovery should have a minimal capacity o f 150 million barrels, providing for a peak-production plateau o f 150,000 barrels per day to be obtained 3 - 4 years after the production started. The value of the gross annual production would be 360 Million US$. Assuming that the Government would get 10% as royalties and taxes, the annual government revenues would be 36 million US$/year. 49 Insulating expenditure from revenue shocks arising from the volatility and unpredictability o f oil prices. Deciding on what portion o f these revenue should be saved for future generations. Developing mechanisms to avoid "transfer pricing" in the expenditure side o f oil operations. Preparing and implementing an action plan for establishing high standards o f transparency with respect to all oil (and budget) flows and awarding o f government contracts and concessions. Developing institutional capacity inlegal, economic, technical and management areas, so that nationals will have capability to assess and implement sector policies. Establishing transparency and accountability with respect to revenues earned and their disposition. Consulting with principal stakeholders indeveloping plans for the use o fresource revenues. C.7.3. MostCommonPitfallsin OilRevenueManagement Based on the experiences o f other mineralrich countries, the most commonpitfalls are: . Revenue Windfalls are often mismanaged. There i s tendency to over-spend during oil booms caused by rising oil prices often leaving the country even worse off than it was before the boom. The concentration o f the rents in the fiscal authority tends to weaken the incentives for budgetary restraint, leading to over-expansion o f government and the misallocation of resources. The lack o f sufficient absorptive capacity. Countries with pressing infrastructure needs are tempted to undertake huge investment in domestic physical assets without taking into account the recurrent costs. This leads -overtime - to unsustainable levels o f spending. The volatility o f oil revenues often creates an unstable, stop-go, budgetary pattern and economic performance. These cyclical patterns affect the entire economy. Avoiding thepitfalls: "Smoothing" expenditure, provides a means o f sharing the proceeds o f the revenue between current and future generation^^^. Long-term benefits to expenditure smoothing via a stabilization5' or a savings fund5' . 57The gains to adopting smoothing rules are that it imposes budgetary discipline. The rules can be defined based on the development objectives o f the country. They can espouse the form o f constant expenditure in perpetuity inreal per capita terms; constant nominal expenditure inperpetuity; discounting future spending, 50 There are four main advantages for adopting smoothing rules: The economy i s insulated from the deleterious effects o f the mineral resource boom andbust cycle by mitigating the "decline" o f the non-mineral traded goods, which are crucial to the development o f the non-oil economy. The permanent production and price shocks or new resource discoveries may necessitate adjustments to the permanent level o f expenditure. However, these adjustments will tend to be more moderate if the "smoothing" strategy i s maintained, thus providing a more predictable and favorable investment climate for the private sector. It helps match the level o f public investment with the economy's absorptive capacity, support non-oil growth and create a larger revenue base inthe future. It promotes both good governance o f the oil funds and within the government, rent seeking and corruption are far less likely to happen if the "expenditure smoothing" rules are invoked. Establishing/Managing afund will require: Setting clearly defined rules, purposes and objectives for the Fundare important for improving transparency and establishing the legitimacy o f fund operations. Regular and frequent notification to the legislature and the general public on principles governing the fund, its inflows and outflows, the allocation o f assets helps the transparency process. A detailed annual report - preferably audits by internationally established experts - can also serve to provide important information such as asset allocation, summary statistics on the performance o f the portfolio and retrospective o f activities o f the fund duringthe year. Fitting the fund consistently within the overall fiscal and medium-term budgetary framework o f the country. No fund targeting or independent spending authority should be allowed. Integration within the budget programming and approval process and the fiscal framework will help avoid the emergence o f two budgets and loss o f budgetary control. It will also provide a measure o f transparency and governance for the budget and fund expenditures. Transfers to and from the fund should require parliamentary approval. or a fixed dollar amount o f expenditure based o n the "permanent" income). Alternatively, smoothing rules couldbe based o n an appropriate non-oil fiscal policy stance 58A Stabilization find is designed to stabilize the impact o f volatile revenues available to the budget, but it usually does not affect fiscal spending directly. In the process it can also support fiscal discipline and provide greater transparency in the revenue spending. However, stabilization funds rarely succeed in stabilizing fiscal spending and are typically not an effective vehicle for dealing with resource depletion. 59 Savings funds for future generations focus o n the inter-temporal consumption. They face similar conceptual issues as stabilization funds. In the absence o f liquidity constraints, savings funds would not necessarily leadto higher savings as the government can finance spending in other ways or use the funds as "collateral". An effective savings fund is, therefore, the one where the fiscal authority feel bound by the "rules." It can however act as an institutional mechanism to reinforce fiscal prudence and enhance transparency. 51 Avoiding using the Fund as collateral to increase borrowing or government expenditure. Managing at arm's length by independent and competing two or three top-rated international fund managers. Each fund manager should have the objective o f maximizing the yield o f the invested funds. The performance o f the managers must be frequentlymonitored. Reflecting in the fund's asset management strategy, the government's consolidated portfolio. This should be consistent with government's overall sound debt management. C.7.4. Legal, Regulatory, Contractual and Institutional Aspects 147. A clear legal, regulatory and contractual framework is a cornerstone for private sector involvement in the oil and gas sectors. The framework should emphasize the government's objective inmaximizing the positive impact that the oil and gas sectors can have on overall economic development, as well as on poverty reduction. This should be translated into petroleum laws, regulations, contracts and institutions that promote foreign and domestic direct investment and competition. This implies the following: Designing o f pricing and taxation policies to stimulate research and exploration, to facilitate the deregulation o fprices and the elimination o f cross-subsidies. The development o f appropriate tariffs o f the services of, and access conditions for, monopoly elements o f the oil and gas supply chain, inparticular pipelines. Tax regime to provide investment incentives while safeguarding reasonable government revenue shares. Designing o f direct subsidy schemes, and o f social safety net support for lower income domestic consumers faced with rising energy bills as the result o f sector reforms. The development o f transparent regulatory systems for the oversight o f natural monopolies. In the effort to open up domestic markets to external competition, involving the promotion o f competition horizontally and the unbundling o f vertically integrated monopolies, careful consideration i s given to investment by privatization operations. The development o f a national capacity to design and implement reforms in the government institutions i s a critical component o f the sector development program. 52 C.7.5. RegionalTrade, Transport, andIntegration 148. Oil and gas trade6', especially pipeline trade, has the potential to bringsubstantial economic benefits to producers and both economic and environmental benefits to consumers indeveloping and developed economies alike. Major oil and gas resources are currently unexploited in developing or emerging economies, due to lack o f access to viable commercial markets. Removal o f obstacles to the construction o f transport infrastructure and international trade, represents an important opportunity to beneficially rationalize and expand oil and gas development and consumption in many client countries. To this end, the government should: Strengthen institutional and regulatory frameworks for development, transport and trade o f oil and gas. Harmonize pricing and taxation policies and other economic regulations. Facilitate the construction or rehabilitationo f transitional oil and gas pipelines. Manage the environmental and social impacts. C.7.6. BuildingGovernment's Capacityto Regulateand MonitorEnvironmental Impacts Environmental concerns are important for the development o f a sustainable oil and gas sector. Production, transport and use o f hydrocarbons can cause serious environmental damage unless these activities are properly managed. The adverse environmental consequences include: (i)production operations; (ii)use o f hydrocarbons; (iii) reduction o f gas faring and oil; and (iv) spills safety and air pollution. C.8. TourismSector 149. Another area where Mauritania's private sector could compete internationally i s tourism, but this i s another industry where quality control i s key. The regulatory framework for tourism is entirely insufficient to ensure the quality o f hotels, transport, guides, and tourist agencies. The two regulatory texts in this sector date from 1969 and 1973. The tourism office has few resources. The classification o f hotels i s inconsistent and not in agreement with international standards. Training i s not assured. Hotel taxes are earmarked to develop this sector, but are not collected, according to a recent study. As infishing, quality control and training (of guides, cooks, and drivers) are mostly done by foreign investors, such as ACCOR, in cooperation with SOMASERT (a subsidiary o f ~ 6o It is estimated that Mauritania has gas reserves amounting to 30 billion o f m3. The development o f commercial markets for such gas will be especially beneficial because o f obtaining both environmental and economic benefits and Mauritania should also consider developing gas transmission and distribution. Responding to environmental concerns and to economic and efficiency incentives, developing countries have become increasingly significant consumers o f natural gas. Inthe past five years, gas consumption has increased by 6 percent annually inthe developing world-a large share o f it for power generation. 53 SNIM) and with French assistance. In April 2001, an interministerial commission recommended that the OfJice National du Touvisme should better define its authority, its scope, and its means of acting, including clearly defining the separate roles o f regulation andthe role o fthe private sector (marketing, competition). D. EMPHASIS ONINFRASTRUCTURES 150. Maintaining and developing its basic infrastructure i s very important for Mauritania in fostering private sector-led economic development by facilitating growth and trade in agriculture, livestock, fisheries and mining, in raising social indicators, and inreducing poverty by lowering the cost of basic services. This last aspect is especially important given the pace o f urbanization and decentralization. Mauritanian cities are becoming key centers o f economic activity and providers o f markets for rural and industrial production.61 151. Telecommunications and New Technologies. International calling prices are substantially higher, in part reflecting high international accounting rates with other countries. A three-minute call to a neighboring country was about $2.20; these costs rise to $2.55 for a call to New York, $3.19 for London and $4.78 for Tokyo. These prices appear to be at the lower end when compared to other countries in the region. Yet, they are significantly above prices in fully liberalized markets, which often are substantially less than a dollar for a three-minute call. Despite Mauritania's small market size, international experience suggests that there i s scope for further price cuts by reductions in bilateral accounting rates and the introduction o f competition for international services. Substantial gains have already been achieved from partial liberalization in telecommunications. The next step would seem to be the introduction and strengthening o f competition in the various fixed-line (already planned for 2004) and mobile market segments and to upgrading regulatory capacity. 152. Although there are five Internet service providers in the country, use of the Internet is still very limited. In May 2000, there were an estimated 849 Internet subscribers (household and business) in the country, although this number i s likely to have increased substantially since then. Monthly charges o f $1,172 for high bandwidth capacity (64 kilobits per second) are likely to restrict commercial Internet use to only the largest enterprises in the economy. For purposes o f comparison, monthly charges for a line o f similar bandwidth are only $440 in India. The high cost o f Internet access in Mauritania i s largely due to high charges for leased line services, which are still exclusively provided by Mauritel. Competition in this market segment could make a positive contribution to greater use o f the Internet by export-oriented businesses in 61 Mauritania's urban infrastructure i s not well developed and an increased urban population has become dependent on an old and deteriorated stock of basic infrastructure (including roads, drainage, electricity, solid waste collection and disposal, provision and upgrading of basic services inslum areas. The GIRM has launched a ten-year program aimed at slum upgrading in Nouakchott and Nouadhibou, land allotment, allocation, and development to prevent future creation of squatter settlements; provision o f infrastructure to support labor-intensive activities; extension of basic infrastructure and community facilities in 12 towns; and provision o f water and electricity inthe slums ofNouakchott. 54 Mauritania. In 1999, the GIRM established an independent sector regulator, with six technical and economic professionals. 153. Electricity. The new electricity company i s the Societe mauritanienne d'klectricite (SOMELEC), which emerged from the separation o f the water and electricity branches o f SONELEC, the mother company. SOMELEC obtains its energy from thermal sources. Many enterprises, however, rely on their own generators, which substantially increases their energy costs. In2003, Mauritania started obtaining energy from the 200 megawatt Manantali hydroplant. To increase the competitiveness o f the economy, SOMELEC should give top priority to lowering the costs to the electricity user, as well as to proceed with its plannedprivatization.62 154. Water. Underwater reserves are important, but under-exploited. The number o f connections to the water system i s rather low, which leads to high water costs and charges. Water charges in Mauritania appear to be the highest in the region (20 percent higher than Senegal and CBte d'Ivoire and 60 percent higher than Ghana), and efforts should be undertaken to lower these costs to the water user. The water network needs to be expanded to provide greater access to safe water, which will imply substantial new investment. Such a program would greatly enhance the competitiveness o f the economy, as well as helpthe poor, for whom water charges are a significant expenditure. D.1. Transport 155. The size o fthe territory, difficult physical conditions, hightransport costs, and the low density o f transport networks hamper the development and profitability o f investments. Besides the above constraints, if Mauritania wishes to attract private sector participation and financing, inparticular inthe transport sector it will need to tackle some outstanding institutional and regulatory issues, as described below: 156. Roads. The road system is not extensive. N o passable road connects the major economic centers o fNouakchott andNouadhibou. Only 11 percent o f all roads are paved, compared with 16 percent in the average low-income country. In addition, maintaining the road system is expensive due to periodic sandstorms. As a consequence, large segments o f the country are difficult to access, leaving its economic potential under- exploited. For instance, roads inthe South that would open up the promising agricultural area along the Senegal River are not passable in the rainy season and are difficult to negotiate during any other season. Major infrastructure projects are under preparation. These include a road connecting Nouakchott andNouadhibou, as well as a road alongside the Senegal River. Investments in transport infra~tructure~~are necessary to reduce It should be noted that privatization might not always be the best and easiest solution. Private schemes need to be well designed and policy issues resolved before proceeding with privatization. While resolving technical problems could be relatively easy, political ones are more difficult and decision makers should not oversold on the benefits o f privatization. The key question could be: who should pay for a public enterprise's financial losses, the consumer or the taxpayer? 63The EU i s the main donor for the transport sector. It will finance, during 2002-07, a sectoral development program in the amount o f 88 million. However, under a situation o f public resource constraint, cost recovery i s critical for the sustainability o f infrastructure programs. 55 transport costs o f goods and persons, facilitate external trade, and improve farm production and marketing, as well as the mobility of labor across national territory.64 157. Transport costs are also high because of the monopoly granted to the FkdCration National des Transports (FNT).653 This monopoly has been abolished inprinciple. The 66 effect on lowering road transport costs should be closely monitored. Private management o f selected road segments i s an option to consider, as it could bring in additional investment capital. Overall, the investment requirements to bring the road network up to standard inMauritania will be substantial. 158. BNT controls competitionby controlling the operation o f freight terminal^.^' The freedom to transport i s conditional on having a bon de sortie or a boa de chargement from the BNT, which serves as the driver's passport at checkpoints. This requirement applies not just to transport for hire, but even to transporting something for one's own use. A shipper's freedom to choose a hauler i s compromised by the tour de r61e which i s requiredby the 1998 ministrydecision about terminal^.^' 159. Ending the trucking monopoly in Mauritania will impose costs on parts o f the trucking industry.The purpose o f a cartel, and the likely effect o f the FNT-BNT cartel, i s to protect inefficient firms. Without this protection, unreliable operators and poorly maintained equipment will exit the industry. If there are particular services for which some subsidy i s needed to ensure adequate service, it would be more efficient for the government to paythat subsidydirectly for the service, through competitive procurement, rather than to embedit inthe fares of a protectedmonopoly. 64 The GIRM's sectoral policy for the transport sector focuses on maintenance o f existing assets (10,297 kilometers, o f which 2,160 kilometers are paved roads, 776 kilometers are improved dirt roads, and 7,361 are trails), extension of the road network,64 and maintenance o f rail transport. 65 The Fdderation National des Transports (FNT), formed in 1990, is still the principal industry association. The FNT's role amounts almost to managing the industry as a single firm: assembling loads, developing tariffs, billing, and collecting. Operators pay an annual fee and monthly charges. After the liberalization decree o f 1998, three other associations appeared, motivated in part by a desire to avoid paying the fees that FNT was charging operators, but they have stopped participating, under pressure from FNT. 66 FTM (Fdddration des Transporteurs de Mauritanie); GTU (Groupement des Transporteurs Urbains); and FGTP (Fdde`ration Gdne`ral des Transporteurs de Personnes). 67 A license is requiredto engage inpublic and private transport services. This requirement, set by a law of 1968 and implemented by a decree o f the same year and another law, i s administered by an office in the transport ministry, DTT (Direction de Transports Terrestres). The most important control i s performed by the BNT, which i s responsible for the management o f freight and passenger terminals. This institution was created in 1998. It sets the rules and fees for matching drivers and loads (appairage). For passenger transport the same tour de r61e requirement i s applied, so a passenger i s supposed to take the first vehicle in line. But FNT i s less effective at preventing entry for passenger services, and thus the regulations do not have the same constraining effect. 69 Carriers have to take a place inline for a destination (and can only get in one line), and cannot leave the line until they get an order specifying the pickup point, destination, and cargo from the terminal. The shipper must use the services of the operator who i s first in line. These limitations principally affect large- scale deliveries, inter-city freight, and transport o f construction material, for which the shipper clients are mostly small businesses and individuals. Petroleumdistribution too i s done through FNT-controlled trucks. 56 160. Air transport. In the late 1990s, the government o f Mauritania took significant steps towards developing a commercially oriented air-service market. In 1998, the government opened its domestic market to competition. Further, in 1999, the government sold a majority stake in the national flag carrier, Air Mauritanie, to a foreign operator. A domestic competitor, Compagnie Mauritanienne des Transport Aeriens (CMTA), recently started operations. It i s estimated to command a 5 percent market share. Mauritania i s a signatory to the Yamoussoukro declaration, which foresees the creation o f a regional open skies agreement inAfrica. 161. The principal constraints are in international service, which is govemed by bilateral agreements that limit flexibility and heavily regulate tariffs and capacities. These agreements typically do not authorize nations' carriers to transport between destinations other than the signatories. The set o f bilateral air-service agreements Mauritania has signed governing international air services mostly do not grant free landing rights and heavily regulate capacity and tariffs. With the disappearance o f Air Afrique, only Air France provides scheduled direct service to Europe. Airfares to Mauritania from Europe tend to be higher than those to CBte d'Ivoire and Senegal, although they are in line with those to Burkina Faso and Mali. Part o f the explanation may be the small size of the market. The end o f Air Afrique services to Nouakchott will further reduce competition in an already concentrated market. The government may aim to introduce greater openness in intemational air transport services on all routes along the lines of the liberalization accomplished in the regional context. Such liberalization will require revising the restrictive international agreements, which means persuading the other parties to agree to changes. Aside from more liberal air-service agreements, greater flexibility with respect to charter flight operations could be a partial solution to reduce the high airfares. The latter could be especially important for the development of the country's tourism industry. 162. As for air freight transport, the national regulatory structure is open to competition, but other constraints limit services. The limits on scheduled passenger service imply limits on air cargo service, too. Enterprises interested in developing specialty high-value fish and agricultural products for European markets have been frustrated that there i s little capacity for quick delivery." 163. Maritime transport. Two foreign-owned consortia, Delmas and Maersk, currently dominate the market for international liner shipping services. These two entities account for approximately 85 percent of the total market.Unfortunately, it has been impossible, at this stage, to assemble detailed information on international freight rates. Yet anecdotal evidence points to large costs o f international maritime transport to and from Mauritania. Figures 5.2 and 5.3 show the rate quoted on the web page of Maersk for selected container shipments from Baltimore to Nouakchott and, for purposes o f comparison, 70 Some charter cargo flights are available now from Nouadhlbou to Portugal. But the current scheduled commercial flights from Nouakchott to France can only carry 15 tons per week (5 tons per flight). For regular export service, consultants have estimated that there would need to be two chartered cargo flights per week, o f 35 tons each. The constraints are not a direct result o f regulatory problems directed at air cargo; rather, they are indirect consequences of the still-tight controls on international passenger traffic and the still-undeveloped state o f production inMauritania. 57 Hong Kong. Despite its shorter shippingdistance, freight rates to Nouakchott are between two and three times higher than comparable freight rates to Hong Kong, a situation that also prevails inmore strategically situated ports such as Dakar and Banjul. 164. Economies o f scale and scope are likely to be an important explanatory factor behind these price differences. Yet the concentrated market structure may also be an important reason for the higher freight rates. Indeed, concerns about the lack o f competition and potentially abusive practices by carriers have featured prominently in analyses o f West African shipping markets. It i s arguably difficult for a small country like Mauritania to foster competition ininternational markets. At the same time, regional cooperation on competition matters and the development o f hub-and-spoke systems could make a contribution towards more competitive maritime shipping markets. To some extent, such cooperation already exists. The Maritime Organization for West and Central Africa, o f which Mauritania i s a member, seeks to coordinate policies o f member countries inthe maritime sector, including the development o fregional cabotage.71 165. Nouakchott port i s a multiproduct port for imports and exports, while the port in Nouadhibou specializes in minerals and fish-product exports. Prima facie port tariffs are competitive, but merchants complain that port services are poor and not client friendly, thus increasing their costs. As indicated below in the sector on fisheries, substantial investment will be requiredto ensure adequate services for the proper development o f the fisheries sector. Port management should also be reviewed. For the moment they are managed under contrat plan although operation under a concession agreement might be more efficient. Under such an arrangement, the concessionaire would be responsible for the operation o f the port as well as for part o f the new investment.The benefits o f this option deserve to be closely studied. 166. Liberalization inthis sector appears therefore to have led to limited improvements inthe availability or costs of shippingbetween Mauritania and other parts of the world. However, until there i s a better balance between export and import volumes, and until infrastructure links within Mauritania are improved (allowing for greater market access and perhaps also for more competition between the different ports in Mauritania and other countries) large improvements are unlikely. Changes in the management structure, for instance by outsourcing it as has been suggested, may not at this stage bring returns sufficient to justify the effort requiredfor such a change "Despite the lack o f formal constraints, services could be improved. To some extent, Mauritania shares these problems with other small countries in West Africa, where traffic i s not sufficient to achieve economies o f scale and thus transaction costs are relatively high. Although Nouakchott receives regular service, no container ships leave Nouakchott directly for Europe. Agricultural exports for European markets mustbe transshipped through Dakar or Abidjan, taking 12 days to reach a Europeanport. 58 VI. OUTLOOK A. MACROECONOMIC PROSPECTS A.1. Buildingthe Foundationfor Long-termGrowth 167. Mauritania's stabilization and structural adjustment policies have been quite successful in leading to a quick resumption o f economic growth. However, Mauritania's challenges remain significant. The country now has a good opportunity to accelerate the growth rate and diversifyits economy, inorder to attract FDI.It can also capitalize on the growth o f world trade and the EU's intention to seek closer cooperation with Maghreb countries. In order to do so, the GIRM will have to maintain a stable macroeconomic framework; tackle in an effective way the remaining medium- and long-term structural problems o f the Mauritanian economy; implement trade policies that encourage growth through outward orientation; develop basic infrastructure; and implement financial policies that are conductive to long-term private savings andhigher private consumption. 168. For the medium and long-term, two scenarios illustrate the path toward high growth, employment creation, and income generation. Sound macroeconomic conditions and no major extemal shocks are assumed under both scenarios, but implementation o f a major second wave o f reforms (regulatory, structural, and institutional) and developments inthe oil andinfrastructure sectors will underpinthe high-case scenario. It is important to emphasize that the proposed second wave o f reforms will need to be implemented if sustainable and higher growth and faster poverty reduction i s to be achieved. A.2. MacroeconomicScenarios,2003-2007 169. Baseline Scenario. The baseline growth scenario considers a pattem o f overall GDP growth similar to the one observed during 1992-2002. Under this scenario, Mauritania's growth continues to depend heavily on the traditional sectors, the implementation o f the remaining structural and regulatory reforms moves slowly, and the fundamental problems for economic diversification, export-oriented activities, and private sector investment remain. The outcome o f this scenario i s that growth will continue to be based on the miningsector, expansion o fthe tertiary sector (commerce and telecommunications), productivity gains in the irrigated subsector, and economic integration o f some livestock activities. Under this scenario, real GDP would grow at about 4.5 percent during 2003-07. Moreover, the lack o f economic diversification would limit Mauritania's scope to reduce its vulnerability to extemal shocks as well as its dependency on external savings. Moreover, the growth o f the labor force resulting from rapid urbanization, along with the constraints for private investment, would result in rising unemployment and slow down the poverty reduction effort. 170. Enhanced Medium-term Growth Scenario. An enhanced medium-term growth scenario i s based on the assumption that Mauritania must and should grow faster while entailing a significant transformation o f the economic structure. The main assumptions 59 are presented in Box 6.1. The outcome of this scenario indicates that real GDP growth would reach an average medium-term growth rate of about 6.7 percent during2003-07. Box 6.1: Mauritania's Medium-Term Sources of Growth Large investments in urban development and roads will help spur the services industry as well as the construction and public works sector. The agriculture sector is expected to recover in2003 from its dismal performance of the last three years. Over the medium-term, agricultural production's contribution to growth, while still relatively small, will improve mainly due to progress inthe development o f irrigated agriculture, which has already shown some promise in the rice sector this year, more crop diversification, reduced drought vulnerability and extended agricultural credit. Mining production will increase as a result of ongoing non-iron-ore mining exploration, as well as of past and current S N I M investments in its capacity expansion, which will peak in 2003. Assuming a favorable external demand climate, iron-ore production's contribution to growth will be close to 1percent in 2004 and 2005, reflecting respectively a 12 and 13 million- ton production by 2004 and 2005. The GIRM could also encourage more exploratiodexploitation for other minerals and increase value-added inthe sector. The services sector, representing about one-third of GDP in the medium-term, will continue to be a main contributor to growth. The transports sector will continue to expand, helped by new road constructions. The telecommunications sector will stay dynamic as the phone infrastructure for the country i s developed and as the fixed telephone system opens up to competition. The tourism sector will build on progress already made. These sectors, as well as trade will be helped by private sector investments through the implementation o f legal. Judicial and regulatory policy measures, the promotion o f export-oriented activities, the elimination of existing basic infrastructure bottlenecks, and the development o f financial intermediation. Off-shore oil production i s expected to start at end 2005 and to contribute significantly to GDP.Based on very preliminary informationand using a conservative estimate of 50,000 barrels a day o f production during the last six months o f 2006, and highintermediate costs of 80 percent, oil could contribute 2-3 percentage points to growth in 2006 alone. Production could double in the long-term Table 6.1: Macroeconomic Framework, 2003-07 (In percent of GDP, unless otherwise indicated) 2001 4/ 2002 2003 2004 2005 2006 2007 Economic growth and prices Est.41 Projected Real GDP (percentage change) 4.0 3.3 5.4 6.1 6.0 9.0 7.6 Nonoil real GDP ("A change) 4.0 3.3 5.4 6.1 6.0 5.7 5.6 Nominal GDP (% change) 9.5 7.1 10.2 9.8 9.6 12.0 10.7 GDP implicit deflator (% change) 5.3 3.6 4.6 3.5 3.4 2.8 2.9 Consumer price index (annual % change, period average) 4.7 3.9 6.4 3.7 3.5 3.5 3.5 Real GDP per capita (percentage change) 1.1 0.4 2.4 3.1 3.0 5.9 Gross domestic expenditures 120.9 128.4 136.8 135.8 141.1 110.0 106.1 Consumption1/ 86.4 95.4 93.6 ,93.2 91.2 78.8 70.8 Government 15.3 18.5 18.7 18.6 17.9 17.8 17.9 Non-government 71.1 76.9 75.0 74.5 73.3 61.0 52.8 Investment and Savings Grossfixed investment 34.5 33.0 43.1 42.6 49.8 31.2 35.3 Oil 7.9 11.1 18.5 19.2 25.4 8.7 12.6 Nonoil gross fixed investment 26.6 21.9 24.6 23.4 24.5 22.5 22.7 Government 8.1 10.8 12.0 12.0 12.1 12.1 12.2 Non-government 18.5 11.2 12.7 11.3 12.3 10.4 10.5 Public enterprise excl. SNIM 2.6 1.4 1.2 1.2 1.1 1.o 1.o Public enterprise incl. SNIM 7.6 5.5 6.3 4.9 4.2 3.4 3.1 Private 1/ 10.9 5.6 6.3 6.4 8.1 7.0 7.4 Gross national savings 23.9 27.9 21.6 20.5 22.2 22.5 23.5 Govemment 2.5 16.0 7.8 7.0 7.4 8.8 10.7 Non-government 21.4 11.9 13.8 13.5 14.9 13.7 12.8 Current account (including officialtransfers and oil) -10.6 -5.2 -21.5 -22.1 -27.6 -8.6 -11.9 Net exports o f goods and non-factor services -20.9 -28.4 -36.8 -35.8 -41.1 -10.0 -6.1 Exports o f goods and non-factor services 38.6 38.5 35.6 35.7 35.4 46.5 52.1 Imports o f goods and non-factor services 21 59.5 66.9 72.4 71.4 76.5 56.5 58.2 Gross domestic product 3/ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Net factor income 3/ -2.3 13.6 5.5 5.1 4.9 -7.2 -14.1 Grossnational income 97.7 113.6 105.5 105.1 Net transfers 12.6 9.7 9.8 8.6 8.6 8.5 8.4 Gross disposableincome 110.2 123.2 115.3 113.7 Memorandumitems: Nominal GDP (inbillions o f ouguiyas) 251.3 269.1 296.4 325.6 356.9 399.7 442.7 Nonoil gross investment(as % o f non oil GDP) 26.6 21.9 24.6 23.4 24.5 23.6 24.3 Government revenue, excluding grants 20.6 37.6 29.4 28.4 27.9 29.4 31.3 Ofwhich tax revenue 14.4 14.4 14.1 14.4 14.8 16.0 17.5 Govemment expendimres 26.1 31.4 31.6 31.1 30.8 30.4 30.6 Overall government balance -5.5 6.2 -2.1 -2.7 -2.9 -0.9 0.8 Sources: Mauritanian authorities; and IMFestimates and projections. 61 171. Over the long-term, it i s assumed that in addition to oil, the GIRM will financed out o f its oil revenues the non-oil economy so that the growth rate in the agriculture and livestock sectors also pick up significantly, as envisaged in the sectoral strategies developed by the Intersectoral linkages with agriculture, livestock, and fisheries, together with increased value-added through the production channels, also enhance secondary sector growth, while the expansion o f the service and infrastructure sectors continues unabated. Under these assumptions, the real GDP growth rate could reach about 9 percent inthe long-term. 172. Clearly, it i s also possible to consider a low case scenario with a lower GDP growth due to persistent droughts and insect plagues, external shocks and climatic changes, delays in implementingreforms, and lower demand and prices for iron-ore and fish. Such a scenario is not presented inthis report. B. FISCAL PROSPECTS 173. The expected expansion of private investment and production, combined with a growing demand for social services and an increasing needto finance the economic cost o f social and economic infrastructure, will put further pressure on the government budget. More revenue will need to be raised to finance the increased larger expenditures stemming from the government's strategy o f enhanced growth and poverty reduction. However, given the present narrow tax base, it would be difficult to raise fiscal revenue to meet these demands unless new and informal economic activities are formally developed and contribute to the budget. B.l. Resource Mobilization 174. Resources can be raised from domestic financing (taxes, commissions, and fees; banking, financing, and government bonds) and from external financing (loans, grants, and sovereign bond issues). Expenditure efficiency i s also a key tool to free additional resources. Mauritania's tax revenue to GDP ratio o f around 14 percent i s comparable to other countries inthe region. However, it should be noted that this ratio may not be fully comparable between countries--Mauritania's tax system has undergone a significant number of reforms since 1992 and the fiscal effort has switched from international trade (33 percent in 1992-98 versus 16 percent in2002) to consumption (33 percent in 1992-98 versus 51 percent in 2002) with taxes on income and profits maintaining a 30 percent contribution. Also note that in 2002, non-tax revenue (fishing and mining royalties) contributed 61 percent o f total budget revenue, up from 32 percent during 1992-98. This makes total budget revenue, and the GIRM's ability to finance increasing expenditure, highlydependent on non-tax revenue, and this also implies that volatility inworld market prices for iron-ore, oil, and fisheries products (or even delays inthe EUfishing agreement payments) affects fiscal policy. Preliminary total revenue projections show that it should increase over the next few years both on account o f tax revenue, projected to increase by 72((Mauritanie Strategie de developpement du secteur rural)), ((Strategic agro-alimentaire de la Mauritanie)) and ((Etude sectorielle de l'elevage -Propositions pour une strategie nationale)). 62 about one percentage point o f GDP between 2002 and 2007; and o f non-tax revenue, which should increase significantly beginning in 2006 when oil i s projected to come on stream.73 175. Inthe case ofMauritania, six aspectsneedparticular attentioninorder to increase its revenue-generating capacity and reduce the budget's dependency on the EU fishing agreement and the potential oil-related revenues: TheJivst aspect i s related to revenue enhancement. Mauritania needs to broaden its tax base and improve tax administration and collection. It also needs to avoid, even occasionally, frequent changes in the fiscal framework. Such frequent changes are always a concem for taxpayers and investors and, in the medium-term, lead to increased tax evasion and corruption as well as higher collection costs. A short-term effort would raise its tax revenue while dealing properly with many o f the challenges facing the economy, including developing and improving human and basic infrastructure capital.74 The second aspect i s related to the existing special import regimes. About half o f total imports into Mauritania pay no duties or taxes. Government imports financed under grants or loans and some financed with their own resources are exempted, as are the imports o f SNIM, the state owned mining company. In addition, there are the usual diplomatic exemptions, exemptions given to imports that benefit from the investment code and to NGO imports. Finally, exceptional and partial exemptions that are o f unclear origin also exist. Most government imports are supposed to be subjected to a system o f fiscalisation des marches. This overall system o f special regimes implies substantial revenue losses to the treasury. During 2000-02 these losses averaged 6 percent o f GDP. Such losses mean other revenue sources must be tapped to compensate. As a result, duty and tax rates on the tax bases that are captured are higher than they would otherwise be, providing disincentives to investment and formal economic activity in general. To the extent that this situation leads to lower fiscal revenue, it deprives the budget of resources required for the financing o f pro- poor expenditures. Several options exist to rectify this situation: - Governmentshouldinstituteamethodtopayimportdutiesonallitsownimports, and provide additional budget resources to finance the payment o f these duties. This i s the intention of the fiscalisation des marches publics, which should be extended to imports financed by foreign loans and grants, and closely monitored. 73 Beginning in 2006, oil i s expected to become an important source o f growth and revenue. The government recently announced the discovery o f 200 million barrels o f oil (and 30 billion cubic feet o f gas) that will be commercially exploited starting in 2006. Information i s not yet available on the level of production, the resources that will be generated, or the details o f the production-sharing agreement signed with the oil companies. Nonetheless, even a modest daily production, of, say, 50,000 barrels, would have a significant impact on growth, government revenue, and on the economy in general. Estimates suggest that this sector could inthe early years generate as muchfinancial resources as the EUfishingroyalties. 74Taxation is inevitable in a modern economy to finance public spending, which is aimed at meeting the country's fundamental economic and social objectives. However, it i s important to take into account the taxpayers' perception o f a fair tax system, the practical enforceability o f tax rules, and the costs arising from compliance. 63 On the surface, this would appear to yield no additional revenue, as additional revenue i s matched by extra budgetary outlays to finance these import charges. Yet this procedure would level the playing field betweenlocal suppliers of these goods and services on the one hand, and imports on the other hand. It would permitbettercontrol o fthese exemptions. - The exemptions granted to SNIM should be eliminated, and its fiscal regime (it presently pays a 9.5 percent turnover tax) adjusted accordingly, so that it i s subjected to the general tax provisions. - Thelegislationregulatinganumberofexemptionswasenactedinthe1960s-it i s outdated and should be reviseddrastically. - All exceptionalexemptions shouldbe stopped immediately. - Customs shouldsetupamonitoring systemto follow the finaluseofgoodsthat enter duty free. The third one i s related to the effort needed to integrate the informal sector and the growing number o fmicro-enterprises into the formal economy. This could be difficult and complicated. But even if inthe medium-termit does not provide much additional tax revenue, the effort should be made. Integration presents the potential to broaden the tax base. Further reforms in the tax system will need to take into account considerations related to income distribution, expenditure needs, and the quality o f spending. Thefourth one i s the potential for expanding the tax base and raising more revenue through the application o f presumptive taxation methods. This approach involves simple and cost-effective techniques to capture domestic transactions and sources o f income that quite often escape taxation under the conventional tax system. The fifth one i s the issue o f fiscal deconcentration, which should grant local governments more taxation and spendingresponsibility. Thesixth one i s to prepare an action planto integrate oil sector-related fiscal activities inthe central government budget, enhancing both transparency and accountability as well as administrative capacity for the monitoring and control o f oil revenues. B.2. PublicExpenditureManagement 176. Regardingpublic expenditure management, the structure o f spending shows that current expenditure has been maintained at about 18 percent o f GDP, while capital spending increased from about 7 percent o f GDP to about 12 percent in 2002. Government spending has also undergone some adjustments in recent years due to 64 privatizations, reduced interest payment^,^' and HPC resources. Public spending has been vulnerable to external shocks. Low prices for iron-ore and fisheries led to revenue shortfalls, and public spendingwas cut so that the financial deficit outtum was closed to the original target. Although revenue shocks were absorbed by adjustments in spending, core social programs were increased. Nevertheless, public spending continues to lag in several areas, including the social sector and the development and maintenance o f basic infrastructure. This i s despite the fact that needs are growing, as indicated inthe sectoral studies and MTEFs. 177. While lower interest payments and a refocusing o f spendingpriorities may help to increase public spending efficiency, the narrow tax base and the significant reliance in nontax revenue could hamper the GIRM's effort to achieve better results in some critical areas. But, if the GIRM wants to reap the benefits o f integration into the regional and world economy and achieve its goal o f private sector-led growth, it must be able to sustain its effort to enhance its human capital and secure a steady private investment effort. Also, there i s a need to ensure that economic growth raises the living standards o f the population. This will require increasing public expenditure, as indicated in the MTEFs.Morewill needto be spent inthe social sectors, to develop, operate andmaintain basic infrastructure and develop support services for the rural and fisheries sectors.76This will also require additional shifts inthe composition o fpublic expenditureto facilitate the role o f the private sector in the provision o f services and in launching new economic activities. Given that the Mauritanian public sector i s relatively small, there i s room for reorienting and enhancing both resource allocation and efficiency o f public expenditure to reach these objectives and to allow public expenditure to play a more significant role inthe growth and poverty reduction effort. To this end, the GIRM should: maintain an adequate level o f fiscal stability,77 further disengage from productive activities, for instance in the energy sector; improve absorptive capacity; and implement measures to improve public expenditure efficiency. Table 6.2 shows the projected evolution of public expenditure with and without the expenditure levels recommended by the health, education, infrastructure, urban and rural sectoral MTEFs. However, it should be noted that the full inclusion o f these MTEFs would bring the average overall budget deficit from 2.1 percent o f GDP to 5.1 percent o f GDP in 2004-06. It i s recommended that the authorities carefully analyze the sustainability, financing and impact of such higher deficits. 75 While Mauritania's external debt was declared sustainable at the completion point, vigilance i s required to ensure its sustainability over the medium and long-term. The net present value o f Mauritania's total external debt has been reduced by some 50 percent, and the N P V o f external debt to fiscal revenue i s projected to remain under 250 percent over the medium and long-term. However, even after additional bilateral assistance, the N P V o f debt to exports will not be reduced to below 150 percent-the sustainable threshold-before 2006. In view o f Mauritania's vulnerability to exogenous shocks, the authorities will need to establish a prudent debt strategy and a well-prioritized investment plan, and refrain from non- concessional external borrowing. 76TheMTEFs for rural water, rural electricity, and fisheries should be ready by July 2003. "Onceoilcomesonstream, thebiggestchallengeforMauritaniawillbehowtouseitsoilwealthwithout squandering the proceeds. The pertinent deficit measure will be the primary non-oil deficit, which makes explicit that revenue excludes oil income on the grounds that it i s more like financing and provides an useful indicator for measuring the direction and sustainability o f fiscal policy. 65 Table 6.2: ConsolidatedGovernment FinancialOperations, 2003-06 2003 2004 2005 2006 Total revenue 87,176 93,102 99,077 117,672 Tax revenue 42,555 46,831 52,276 60,832 Nontaxrevenue 41,675 43,244 43,732 53,727 Total expenditure(exc. MTEFs) 93,421 101,212 109,838 121,146 Currentexpenditure 57,184 61,940 66,368 72,746 Total capital expendituresandnet lending 36,237 39,272 43,469 48,400 Deficit 6,245 8,110 10,761 3,474 %of GDP 2.09% 2.48% 3.00% 0.86% Total expenditure(inc. MTEFs) 93,421 110,807 120,627 133,356 Currentexpenditure 57,184 64,584 69,461 76,391 Total capital expendituresandnet lending 36,237 46,223 51,166 56,965 Deficit ...... 6,245 17,705 21,550 15,684 %of GDP ...... 2.09% 5.40% 6.00% 3.90% 177. Regarding improvements in the efficiency and effectiveness o f public spending it i s recommended that the Government implement -over the medium-term- the following measures: Strengthening monitoring and control of the budgetprocess: The budget presented to the Parliament for discussion should be an unified budget, which must include all sources o f financing. It must indicate the orientation o f public expenditure within a medium-term macroeconomic scenario (MTEF), which must have clear benchmarks for priority spending. It should also include an indicative spending ceiling for local governments. Multi-annual financial planning should be implemented, starting with the budgetary procedures for the 2004 budget law. Such planning should cover three years and include an explicit and credible target for current primary expenditure. Aggregate spending ceilings must be set, based on prudent macroeconomic assumptions, over the medium-termcovered by the expenditure program. This should used as a tool to prevent overspending and undesirable midyear cuts in budget allocations. The budget law must be structured by programs and activities. This should help to determine more precisely, via outcome indicators, the links between outcomes and human and financial resources. A quantification o f short- and medium-term effects should be introduced before the budgetis approved. Efficiency savings should be transferred between programs. Internal and external auditing should be strengthened. Public expenditure should be registered on a `commitment' basis. Budget management tools must be upgraded to provide timely, accurate and relevant information. Systems and procedures must be designed to account for the use o f potential oil revenues. 66 Improve matching of resources: Allow local governments greater fund-raising autonomy while enforcing spending discipline and increasing local accountability. Strengthen user choice, both across public providers and betweenpublic and private providers. This would require the development o f cost-accounting, in particular for local governments. Increase incentives and strengthen control mechanisms in public administration: Modernize the state apparatus and downsize civil service in order to pay salary levels that are an incentive for improved performance. Define public sector objectives in a more outcome-oriented manner and enhance the status and professionalism o f civil servants. Strengthen accountability to minimize waste o f resources and opportunities for corruption. Rely more extensively on performance-oriented career management schemes for public employees and reconsider the extent o f their non-pecuniarybenefits. Rely more on fixed-term contracts and consultants to handle issues that could prove temporary. Encourage competition and market signals: Pursue pilot schemes to introduce efficiency incentives in the provision o f social services. Pursue efforts to encourage outsourcing and competitive tendering, subject to a careful assessment o fbenefits and transaction costs. Strengthening audits and control mechanisms: In order to strengthen audit and control mechanisms, each ministry should have an internal financial controller, responsible for controlling the budget execution and producing consolidate accounts. The budgetary execution should also be subject to external audits at regular intervals. Implement the CFAA (Country Financial Accountability Assessment) and ROSC recommendations to enhance transparency, financial control, and accountability o f the expenditureprocess. Betterfinancial coordination within thepublic sector: The Ministry o f Finance should require other spending agencies o f the general government to provide financial data on budget outturns during the year, on a regular andtimelybasis. 178. Public Investment. Although significant progress has been made inpreparing the public investment program (PIP), there are still limited capabilities at the central and sectoral levels. These limitations particularly appear in the areas o f project preparation, appraisal and monitoring as well as in the planning and programming process. Such weaknesses are compounded by lengthy procurement procedures, multistage approval, release o f funds processed by development partners (due to heavy and lengthy disbursement procedures that would require a higher degree o f coordination between donors), and limited private sector capacity. All these factors tend to slow down the timely execution o f investment projects. The most urgent need in the area o f public 67 investment is to improve the allocative efficiency o f public investment, the absorptive capacity for projects for which financing i s available, and the monitoring o f project execution. 179. Two other aspects that also require particular attention in the area o f public investment programming are the need to periodically actualize the cost o f the projects, giventhe delays observed intheir execution as well as the prevailing absorptive capacity; and the need to properly register in the budget the recurrent expenditures needed to operate and maintain public investment projects.'' These two estimates will ensure a correct connection between capital and recurrent expenditures and assist decision makers inpracticing soundmacroeconomicmanagement. 180. The rapid urbanizationprocess and the launching o f programs such as Education for All, urban development, and basic infrastructure and roads construction, as well as the implementation o f targeted poverty reduction actions, should inthe near future shape the design o f public investment. As in the past, the PIP will continue to be dominated by Mauritania's needs in infrastructure, rural development, and human de~elopment.~' Overall, these three sectors will account for 64 percent o f the PIP. Total public investments would be higher than inthe past by about 59 percent. However, in order for such public investment to have a net positive impact, the higher spending needs to be financed by increased local resources and concessional financing rather than by a widening o f the government's deficit. This would require higher savings if projected higher growth is to be achieved without puttingexcessive pressure on resources. G. CONCLUSION 181. While sound macroeconomic management is a cornerstone to build the bases o f stronger medium and long-term economic growth other buildingblocks are also critical to achieve a diversified private sector-led growth and poverty reduction. Key policy actions leading to the high growth scenario are: enhancing the enabling environment, promoting private investment inthe productive sectors inorder to diversify the sources o f growth, developing basic infrastructure. Also it will be critical to integrate the national and regional markets and the development of a solid financial system, with an efficient intermediation, to mobilize financial resources. The advent o f an oil era raises significant strategic, tactical and institutional development issues and challenges for the country. The Mauritanian Government objective should be to ensure that the oil sector will play a major and important role in the economy. They would do well to put inplace legal and fiscal regimes to accelerate the growth o f the Mauritania's hydrocarbon industry as well as to buildthe capacity for a successful management of the oil resources. ''The indicative "r" coefficients for the estimation o f recurrent cost by type o f investment are presented in Annex F. 79Theimpact o f public investment o n Mauritania's growth (as in many other countries) is not clear-cut since investment decisions are not necessarily based on cost-benefit analysis or rates o f return and the impact could be to crowd out more productive private investment. Empirical analysis in several transition countries does suggest that investment in human capital and basic infrastructure have a clear positive impact on economic growth. 68 ANNEXES 69 ANNEX A. TIMETABLE FORIMPLEMENTATIONOF THE RECOMMENDATIONS markets in order to stimulate investment and comuetition Develop strategies for Without consensus within Institutional co-ordination regulatory coordination, harmonizationand the Maghreb on among the regulatory elimination of regulatory improvements to authorities of the region barriers to regional regulatory regimes, would be valuable because of cooperation in West Africa. Mauritania should appeal to investors of larger proceed by co-operating regional markets and the on such initiatives with efficiencies of coordinating like-minded countries. networks across borders. This will probably be with Mauritania should carefully Morocco, and similar consider membership of initiatives should be taken UEMOA, if not ECOWAS. with neighboring If Mauritania does not want countries such as Senegal to change its membership of and Mali. regional organizations, it can still reap the benefits of initiatives in UEMOA by using its initiative as benchmarks. To this end, Mauritania should establisha policy of regulatory convergence with the West African region, and pursue detailed co-ordination of sectoral regulations across the UMEOA and ECOWAS regions; Mauritania should also consider joining OHADA and the Association pour l%iarmonisation du Droit des Affaires en Afrique, which has developed regional legal instruments of corporate governance, or at least adopting its legislation. 70 Improveregulatoryquality Reviewing the regulatory Improving regulatory Developing controlregimesin export sectorssuch as fish, tourism, framework for each supervision through a small independent animals, andleather to add export-oriented sector to and unified national quality testing value and openmarkets. This ensure that appropriate inspectorate for export laboratories: couldbe done by: quality standards are in sectors, relying on acommon place throughout the management and laboratory supply chain, and that infrastructure; standards and inspection Creating training regimes and certification and workshops for procedures are as simple stakeholders on quality as possible; issues; and a Increasing incentives in Initiating social concertation, the Investment Code or in similar in scale to the procurement policy for consultation initiative used producers willing to for the PRSP, to raise invest in quality awareness of "quality" infrastructure or in standards throughout foreign partnerships in production, processing, and quality assurance. transport. Accelerate the transitionfrom A one-stop shop for business the informal to the formal sector by creatinga new legal formalities for Enterprises in status for informal enterprises Transition; ("Enterprises inTransition") Phased levels o f taxation that wish to enter the formal over time, and access to sector. Implementatransition special tax credits for periodfor suchenterprises, investments in training and which couldincludethe following incentives: physical capital, with a possibletax rate ofzero; Phased-in payments under the C a k e Nationale de Se`curite` Sociale (CNSS), with phased-inbenefits; Set-aside programs in public procurement for Enterprises inTransition; Priority in recognition and formalization of urban land ownership; Efficient justice through special priority procedures for contract and dispute resolution in the commercial courts; Exemption from minimum wages for a period of time (perhaps five years), with a possibility of extension; and Other exemptions from the rigid Labor Code 71 Long-termactions :4-5 years) Sncourage entry and [nthetrucking sector: :nthe trucking. sector: [nthe air uassenger :ompetition intransportation Eliminate BNT to reduce Create a public institution service sector: ;emices by: collusion and cartelization independent o f the industry Seek to inthe industry. to oversee the operation of renegotiate the Eliminate the ban on terminals; intemational private carriage; Apply technical standards agreements that Permit trucking rates to be and operating rules to ensure divide markets set freely; public safety and and limit entry. Eliminate the tour de r6le preservation o f rule infrastructure. [nthe mounduassenger [nthe grounduassengertransuort transuort sector: sector: Eliminate the tour de r61e Apply safety standards more rule and permit operators consistently in competitive o f large buses to set up markets to avoid competition their own terminals to inlaxity. encourage the re- introduction of larger, safer vehicles. Inthe air uassenger service sector: Until a more liberal agreement about air service i s reached, encourage more charter flights to expand capacity and keep fares down. Accelerate innovation and Preparations should begin Quality o f service standards investment in and targets should be set, and communications by now for the award o f a addressing regulatory barriers second fixed line license. performance information to competition in Continued monitoring i s should be published. telecommunications: needed o f the fixed line To increase transparency, the incumbent to ensure that regulator should publish obligations are met; Interconnection Agreements To prevent vertical price concluded with the dominant squeezing, the regulator operator and require a should impose a dominant operator to publish `wholesale cost a Reference Interconnection imputation requirement' Offer (RIO) to help on Mauritel to ensure that accelerate agreement on the same interconnection interconnection terms and charge imposed on the conditions; new mobile entrant, A thorough review o f the Mattel, be imputed to principles relating to the Maritel's mobile service provision o f universal access subsidiary (Mauritel in Mauritania should be Mobiles); conducted, taking intc Mauritel should be consideration the need fo1 required to enter into enhanced transparency and Service Level Agreements accountability. 72 Long-termactions (4-5 years) with Matte1 and other operators that emerge. Encourage entry, innovation, Inthe banking sector: Inthe banking sector: and risk-taking inthe financial sector through Establish a clear Monitor connections regulatory and other govemment policy to between concentration in strategies that expand encourage entry by banking and constraints on participants, services and foreign banks to promote competition in non-bank choices: innovation and modem sectors, and increase bankingtechniques; transparency o f information Inthe insurance sector: about bank control and Enforce existing legal holdings to make it possible insurance requirements to to monitor company expand the market, bring relationships and investment in new entry, and reduce pattems; and prices. Continue to encourage take- Target foreign investment up o f new technology incentives particularly (electronic payments, toward sectors where ATMS, credit cards) b y there i s inadequate banks by constructing competition, such as supportive regulatory banking and trucking. frameworks. The Secretariat Trade, aid and other d'etat au de'veloppement des cooperation agreements technologies nouvelles has with other countries begun to address e-business should focus on issues such as the necessary encouraging competition legal framework and the and market entry in these requiredpayments systems. key sectors. The Comite' de surveillance du marche' could make specific proposals in this regard. Improve public sector capaciti 'to design and apply market-oriel 'd regulation that is transparent, effic nt, and neutral. Accelerate and broaden Through political comprehensive reforms to improve the regulatory oversight, and better environment for businesses planning and coordination o f multiple initiatives, by the Comite' interministe'riel, supported by stronger surveillance and promotion by the Ministry o f Economic Affairs and Development, including development of a technical unit trained in good regulatory techniques. Build good regulation Adopting explicit quality Requiring that ministries incentives and capacities inside the public standards for regulations prepare justification administration by developing based on market statements for all proposed a government-wide policy on principles; projets de lois, de'crets, and regulatory quality. The Requiring that argtes; 73 Mauritanian projets de Requiring that ministries wide controlsonregulatory submit proposed projets de quality by: lois, de`crets, and arrite`s shall be designed to lois, dkcrets, and arritks for comply with those review to the trained unit standards. within the Ministry o f Economic Affairs and Development;and Implementing training programs for civil servants on the quality standards and to gradually improve awareness of good regulation techniques. Improvethe market Implementing, step by orientationof new regulationsby: step, a program o f regulatoryimpact analysis within the ministries. The first step should be an agreement by: ministers to require an expanded justification statement for all new projets de lois, dkcrets, and arrgte`s. A pilot RIA program in the Ministry of Economic Affairs and Development could be a useful demonstration program that will help refine a government-wide effort. Enhancethe transparencyof Establishing standard and Rationalizing the laws andregulationsby: efficient procedures Mauritanian legal system by through a permanent reviewing the stock of legal Business Advisory Group instruments, and creating a for government-wide central regulatory registry consultation with affected with positivesecurity. groups on major draft projets de lois, de`crets, andarites. Simplify and speed up Developing a Broadening use o f the formalities for businessesby: simplification "hit list" of "silence i s consent" tool. priority measures and prepare, each six months, a consolidated simplification law integrating business simplification measures from across all ministries. As the market develops, promote attention to competition principles by clarifiing the role of government rtervention and focusing on market abuses. I Maintain the momentum I Remove ambiguous I 74 o f reform, minimize the standards for intervention in potential for intervention prices, notably "manifestly in prices by reducing the unusual market condition" number staple products and just "exceptional for which prices are circumstances," while monitored to a symbolic leaving in place the better few (three or four). reasons for intervention: monopoly, government action, and public emergency. The secretariat o f the Comite` de surveillance du marchk should devote its time and attention to dealing with restrictive and anti- competitive practices to ensure that competition develops among Mauritania's formal businesses. In the distribution sector, for example, the authorities should launch a program to formalize the largest non- formal enterprises in the importing sectors by enforcing tax and other laws against these enterprises. If constraints are imposed b y private agreements or abuses o f dominance, apply the competition law to correct them. 75 ANNEX B. ANNUAL RECURRENT EXPENDITURESAS A PROPORTIONOF PUBLIC INVESTMENTPROJECTS: INDICATIVE "r"COEFFICIENTS 1 :: Primary Education Secondary Etfucuiion 14 Tcriiary Educatfon 15 Access re Quality: Rehabilitationor Rqlacemcnt o f ExistingFacilities 0.030-0.331 1 16 Primory Education 17 SecondaryEducation I r 37 Wastewater Treatment 76 ANNEX C. RECOMMENDEDACTIVITIES TO ENHANCEFISHERIESDEVELOPMENT Activity output Impact Researchandresource Betterknowledgeo f Basisforbetter utilization S W Y b avaj~leresources b ofresources Forelgnexchange eanungs Morutonngsurveillance Controlo fforegnfleet fromhcense fees andcontrol b operatuns b Basisfor lrcensmgthe Implementatunofa Preservatlonofresources foreign fleet vessels Re- comprehensmresource b sllocatloncanbemade b management system under chanpg codtuns - Analysis of market and Recomendatlonson Increasedshare offishm b promotingschemesto nutntun consumptmpattem mrease fishconsumptlon b Increase uproductmty, Buddlrlgoflartdmg Betterl"g andhandlmg reductlonmhandlmgloss processandhandhng fzllitles for artlsanal b facll1tles b fleet TmmdfEhermen,tmed Increase employment Manpowerdevelopment b. mFISextractionand processmgpersonnel processmg Identficatmand Foregnexchange s m g s Settmgup ofmanufacturing h d U S t dUbi'XOly coorhatmnoflocal b localmanrfactunng plants,Strength% o f s e m e manlfacture,multl- sectorally capabhtles Port complex Buildingo fquaysandport infrastructure.Improved Increaseddockings in podfacilities for industrial Mauritaniaratherthan vessels, foreignand foreignports ~ Rehabilitationo ftrairing infrastructureand Decisiononpossible Improveutilizationof facilities b alternateuses b. rehabilitatedfacilities 77 ANNEX D. LIVESTOCK:ANTICIPATED RESULTS UNDERTWO SCENARIOS Source :Sector Study on livestock, 2001 0 79 STATISTICAL ANNEX 1 9 9 -h c o o C ? " ? "3" 2 : 2 c C r C cr C 4 0 9 c 4 2 3 U 4 U p! N W 4 3 a r CI 0 m r-: 7- s : 2 3 3 3 3 M 00 3 3 m 'E V m g g g g 3 W -0 9 Lu I .5 I x N m N m v? d 00 00 c? d 0 *, v, m i& Y 3 e, a % 3 fd 0 m 3 m- W hl 0 0 In d W :* W ". vl 0 W Q\ 00 r- 3 2 -? 3 W W 2 0 W 2 m W 3 2 v: z .-M A 3 U 0 0 e4 3I 0 0 c1 c U e 48 a em U 2 3B*. r( a, 3 fm" m m3" m 80 3 u u m- N" m m d o c o o b 1 n o w p m a d m d c o c o m s l i m- r' Y 0 -wa,5 3 .- -0 C m - g! S Y 0S 'C z0 3 a, a J O d - O r - O - - 0 0 b O b O r 0 0 - 0 - 0 c o o m o m o o - 0 - 0 m 0 e J 0 ~ 0 0 0 0 - 0 m o o o o o o o - - 0 z 0 - 0 - 0 - 0 0 0 0 - 0 z 0 b 0 ~ 0 ~ 0 0 r 0zm 0 0 c\1 0 : Q , - b O N 0 0 - O r 0 0 3 z C 0 m 0 a: 3 u 3 3 3 N 3 3 3 N n n2 x, n2 b n L 0 2 c, u rl $ eE 2 9 n U e 0 c, e In h .-rJ 0 m 2 u Y E d B n -$ 2 c, u Q) m h2 3. e. rl c1 a2 43 0 x 9 v ? z m o o o , 5 Y i 3 w a ' " a \ m a U 108 Table 24.1: Domestic Market Projections for Selected Fruits and Vegetables II I I Current situation (2001) Projections by 2015 I 1 Local Mauritania Growth in Mauritania I Local Import (T) production (T) 11 Share III localdemand I Share 1I production (T) I Fruits 950 451 32% 311% 83% 4,800 Freshvegetables 26,700 3,50( 12% 133% 58% 62,050 Total 27,650 3,95( 13% 141% 85% 66,850 Source: RIM: StratCgieAgro-alimentaire de la Mauritanie(dCcembre 2001) revised. Note : The fruits considered here are mango, melon, watermelon,papaya, and table grapes. Table 24.2: Export Market Projections for Selected Fruits and Vegetables within Mauritania's Competitive Advantage Current situation (2001) Pro:ections by 2015 Mauritania Growth in Rural Postharvest Items Exports to exports to Mauritania Mauritania Employ- Employ- EU(T) Exports(T) Share EU share exports (T) ment ment Fruits 599,749 100 0% 33% 2% 14,364 2,660 2,190 Vegetables 209,443 200 0% 35% 9% 26,615 11,310 7,335 Total 809,192 300 0% 34% 4% 40,979 13,970 9,525 109 REFERENCES Groupe d'Analyse et Suivi de la Pauvretd - Contribution au Rapport Economique sur la Mauritanie: Accdldrer la Croissance et Amdliorer I 'Equitd, Nouakchott, 2003. FIAS (1999), Mauritanie: Analyse des barridres administratives et des blocages sectoriels a 1'investissement, March, Washington, D.C. FIAS (2000), Mauritanie: Systdme d'imposition des enterprises et rdgimes d 'incitations: analyse et recommendations, November 2000, Washington, D.C. 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MinistBre des Affaires Economiques et du Ddveloppement (MAED)/ ONS/ Commissariat aux Droits de I'Homme, a la Lutte contre la Pauvretd et a I'Insertion (CDHLCPI) (2002), ProJil de la Pauvretd en Mauritanie 2000, Nouakchott. Ministdre du Plan (MDP), ProJle de Pauvretd en Mauritanie 1990,Nouakchott, 1992. MOHIBanque Mondiale (2002), Sante et Pauvretd en Mauritanie: Analyse et Cadre Stratdgique de Lutte Contre La Pauvretd (Nouakchott). World Bank (200l), SystBme Educatif Mauritanien: Eldments d 'Analysepour Instruire des Le Politiques Nouvelles, Sdrie Ddveloppement Humain de la Rigion Afrique (Washington, DC). World Bank (2001a), Education Sector Development Program, Report No. 22529-MAU (Washington, DC).