Document of The World Bank FOR OFFICIAL USE...

The World Bank Mauritania First Competition and Skills DPF (P167348)

Document of The World Bank

FOR OFFICIAL USE ONLY Report No: PGD32

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A PROPOSED

DEVELOPMENT POLICY GRANT

IN THE AMOUNT OF SDR 36.1 MILLION

(EQUIVALENT TO US$50.0 MILLION)

TO

THE ISLAMIC REPUBLIC OF MAURITANIA

FOR THE

FIRST COMPETITION AND SKILLS DEVELOPMENT POLICY FINANCING

June 25, 2019

Macroeconomics, Trade And Investment Global Practice Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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. Islamic Republic of Mauritania

GOVERNMENT FISCAL YEAR January 1 – December 31

CURRENCY EQUIVALENTS

Exchange Rate Effective as of April 30, 2019 Currency Unit: Mauritanian Ouguiya (MRU)

US$1.00 = MRU 36.47 US$1.00 = SDR 0.72163

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank IPF Investment Project Financing ADR Alternative Dispute Resolution MEF Ministry of Economy and Finance ARE Regulatory Authority MENA Middle East and North Africa

BCM Central Bank of Mauritania MNEVTT Ministry of National Education and Vocational and Technical Training BoP Balance of Payments MRU Mauritanian Oughyia

CDD Register of Deposit Development (Caisse des Dépôts et de Développement)

MTEF Medium-term Expenditure Framework

COGES School Management Committees NPL Non-performing Loan CPF Country Partnership Framework ONS Office Nationale de la Statistique DB Doing Business PA Prior Action

DGERSE

Directorate of Studies, Reforms, and Monitoring and Evaluation (Direction Générale des Etudes, des Réformes, du Suivi et d'Evaluation)

PER Public Expenditure Review

DPF Development Policy Financing PFM Public Financial Management DSA Debt Sustainability Analysis PIM Public Investment Management DTIS Diagnostic Trade Integration Study PIP Public Investment Program ECF Extended Credit Facility PPG Public and Publicly Guaranteed EIA Environmental Impact Assessment PPP Public-Private Partnerships

EMIS Education Management Information System (Ecoles Normales des Instituteurs)

PV Present Value

ENIs Teacher Training Schools SCAPP National Strategy for Accelerated Growth and Shared Prosperity (Stratégie de Croissance Accélérée et de Prospérité Partagée)

ESSP Education Sector Support Project SDI Service Delivery Indicators EU European Union SDR Special Drawing Rights

FAID

Development Assistance and Intervention Fund (Fond d ’Assistance et d ’Intervention pour le Développement)

SME Small and Medium Enterprise

FDI Foreign Direct Investment SNIM National Mining Company (Société Nationale des Industries Minière) FPA Fisheries Partnership Agreement SOE State Owned Enterprise

FY Fiscal Year SOMELEC Electricity utility (Société Mauritanienne d’Électricité) GCI Global Competitiveness Index SSA Sub-Saharan Africa GDP Gross Domestic Product TA Technical Assistance GoM Government of Mauritania TBs Treasury Bills GRS Grievance Redress Service ToT Terms of Trade

GTA Grande-Tortue/Ahmeyim TVET Technical and Vocational Education Training

IBRD International Bank for Reconstruction and Development UAF Universal Access Fund

ICT Information, Communication and Technology US$ United States Dollars

IDA International Development Association WARCIP West Africa Regional Communications Infrastructure Project

IFC International Finance Corporation WBG World Bank Group IMF International Monetary Fund

.

.

Regional Vice President: Hafez M. H. Ghanem Country Director: Louise J. Cord

Country Manager: Laurent Msellati

Practice Director: Marcello Estevao Practice Manager: Lars Christian Moller

Task Team Leaders: Wael Mansour, El Hadramy Oubeid, Cristina Navarrete Moreno, Arthur Foch


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. ISLAMIC REPUBLIC OF MAURITANIA

MAURITANIA FIRST COMPETITION AND SKILLS DEVELOPMENT POLICY FINANCING

TABLE OF CONTENTS

SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................2

1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................4

2. MACROECONOMIC POLICY FRAMEWORK ....................................................................................6

2.1. RECENT ECONOMIC DEVELOPMENTS ............................................................................................ 6

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 12

2.3. IMF RELATIONS ............................................................................................................................ 16

3. GOVERNMENT PROGRAM ........................................................................................................ 16

4. PROPOSED OPERATION ............................................................................................................ 17

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 17

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 19

4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 30

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 31

5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 31

5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 31

5.2. ENVIRONMENTAL ASPECTS ......................................................................................................... 35

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 35

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 37

6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 38

ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 41

ANNEX 2: IMF RELATIONS ANNEX ..................................................................................................... 45

ANNEX 3: LETTER OF DEVELOPMENT POLICY ..................................................................................... 48

ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 60

ANNEX 5: DPF PRIOR ACTIONS AND ANALYTICAL UNDERPINNINGS ................................................. 62

The operation was prepared by an IDA team consisting of Wael Mansour (Senior Economist, GMTA2, co-Task Team Leader), El Hadramy Oubeid (Public Sector Specialist, GGOAW, co-TTL), Cristina Navarette Moreno (Private Sector Specialist, GFCAW, co-TTL), Arthur Foch (Senior ICT Policy Specialist, GTD11, co-TTL), Waly Wane (Senior Education Specialist, GED07), Mohamed Tolba (Education Specialist, GED07), Maimouna Mbow Fam (Lead Financial Sector Specialist, GGOAW), Mamata Tiendrebeogo (Senior Procurement Specialist, GGOPF), Brahim Hamed (Senior Procurement Specialist, GGOPF), Samer Naji Matta (Economist, GMTA2), Micky Ananth (Operation Analyst, GMTA2), Theresa Bampoe (Program Assistant, GMTA2), Sophie Wernert (Senior Council, LEGAM); under the guidance of Louise Cord (Country Director, AFCF1), Laurent Msellati (Country Manager, AFMMR), Lars Christian Moller (Practice Manager, GMTA2), Sophie Naudeau (Program Leader, AFCF1) and Christine Richaud (Lead Economist, GMTA02). Peer Reviewers: Samba Ba (Senior Economist, GMTA1) and Tobias Haque (Senior Economist, GMTSA).


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SUMMARY OF PROPOSED FINANCING AND PROGRAM

BASIC INFORMATION

Project ID Programmatic If programmatic, position in series

P167348 Yes 1st in a series of 3

Proposed Development Objective(s)

Improving the regulatory environment and skills for boosting competition and inclusiveness of the Mauritanian private sector.

Organizations

Borrower: MINISTRY OF ECONOMY AND FINANCE

Implementing Agency: MINISTRY OF ECONOMY AND FINANCE

PROJECT FINANCING DATA (US$, Millions) SUMMARY

Total Financing 50.00 DETAILS International Development Association (IDA) 50.00

IDA Grant 50.00

INSTITUTIONAL DATA

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Overall Risk Rating

Substantial

Results


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Indicator Name Baseline Target

R1: Number of cases solved through alternative dispute resolution mechanisms [0] [2018]

[5] [2021]

R2: Number of insolvency cases settled by the courts (as measured by the World Bank Doing Business Indicators) [0] [2018] [>] [5] [2021]

R3: Number of information requests processed at the business and collateral registry [0] [2018] [1000] [2021]

R4: Number of internet providers authorizations granted [0] [2018] [>4] [2021]

R5: Average monthly retail price of one-megabit internet subscription [35] [2017] [25] [2021]

R6: Percentage of rural households with access to the internet [18%] [2017] [28%] [2021]

RI7: Public primary school teachers’ absence rate 29% [2017] 10% [2021]

RI8: Share of in-service teachers who score above the bar on a competence test and are therefore apt to teach

4% [SDI 2017] 35% [2021]

RI9: Number of TVET graduates 2,343 [2017] 4,000 [2021]

RI10: Number of youths benefiting from short-term labor market-oriented training 8,390 [2017] >15,000 [2021]

RI11: Percentage of female youth benefitting from short-term labor market-oriented training 25% [2017] 35% [2021]

. .


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IDA PROGRAM DOCUMENT FOR A PROPOSED GRANT TO THE ISLAMIC REPUBLIC OF MAURITANIA

1. INTRODUCTION AND COUNTRY CONTEXT

1. This program document proposes a first Development Policy Financing (DPF) operation in a programmatic series of three operations. The series is designed to support the Government of Mauritania (GoM) in improving the regulatory environment and worker skills for boosting competition and inclusiveness of the private sector. The proposed operation will be in the amount of SDR 36.1 million (US$50.0 million equivalent). It is aligned with the National Strategy for Accelerated Growth and Shared Prosperity (Stratégie de Croissance Accélérée et de Prospérité Partagée, SCAPP) 2016-2030, and supported by ongoing technical assistance (TA) projects implemented under the World Bank’s FY18-FY23 Country Partnership Framework (CPF). The operation has been prepared following extensive consultation with private sector representatives and in coordination with other partners, including the International Monterey Fund (IMF) and the African Development Bank (AfDB). It builds on the findings of the Systematic Country Diagnostic (SCD 2016), lessons from the previous DPF series (2016-2017) as well as results from past and ongoing analytical work. 2. Economic growth has been largely reliant on a volatile extractives sector that has gone through a boom and bust cycle over the past decade. Extractives industries have been the engine of economic development for over a decade, representing an average of 25 percent of gross domestic product (GDP), 82 percent of exports and 23 percent of fiscal revenues in 2006-2015. The commodity boom in 2009-2014 supported a state-driven development model with significant public investment in infrastructure and a large role for public enterprises. However, the boom did little to encourage economic diversification and private sector-led growth. Growth averaged 4.2 percent during that period, at par with Sub-Saharan Africa (SSA) and was primarily led by domestic demand for non-tradeable services supported by extractives revenues. The sharp decline in global commodity prices since 2014 has brought growth to a grind and exposed Mauritania’s vulnerabilities: a non-diversified economy facing significant challenges of job creation in the private sector. Moreover, the ambitious Public Investment Program (PIP) along with increased foreign borrowing compounded these pressures leading the country to a situation of high risk of external debt distress. Rigidities in exchange rate policies and a lack of monetary policy tools limited the ability of the central bank to address structural imbalances and respond to the terms of trade (ToT) shock, thereby eroding competitiveness. 3. Slowing economic growth puts at risk the recent gains in poverty reduction. Rising per-capita GDP enabled Mauritania to reach lower-middle-income status in 2010, and the poverty rate declined from 44.5 percent in 2008 to 33 percent in 2014. Poverty reduction occurred principally in rural areas and was driven by rural-urban migration, changes in prices of agriculture products, as well as increased social and public capital spending. Income inequality declined substantially as the Gini coefficient fell from 35.3 percent in 2008 to 31.9 percent in 2014. While the income gap between rural and urban areas narrowed, the income distribution within each area remained largely unchanged. The slowdown in economic activity coupled with high fertility rates (4.5 children per woman) and droughts jeopardize these poverty gains. 4. The bust prompted a severe fiscal adjustment that helped restore macroeconomic balance, but the challenge remains to accelerate structural reforms to boost growth and promote the private sector. In 2016-2017, the Government realized the need to address the underlying macro-economic imbalances


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and it embarked on a fiscal consolidation plan that was successful in stabilizing the economy. It also initiated reforms to introduce exchange rate flexibility, improve the effectiveness of the monetary policy, and strengthen the supervisory framework for the financial sector. It has done so with support of an IMF Extended Credit Facility (ECF) program approved in December 2017. This combined with some reforms in the business environment, irrigation, fisheries and livestock, have led to a moderate recovery with growth reaching 3.6 percent in 2017. The challenge ahead is to raise Mauritania’s potential growth rate by boosting competition and skills and enabling a much larger space for the private sector, while maintaining macroeconomic stability. 5. As macroeconomic stability is regained, the Government has turned its focus to structural reforms in support of a private-sector led growth. Mauritania is attempting to recalibrate its development model through a diversification program focusing on improving the enabling environment for the private sector to operate, create jobs and drive growth. To achieve this, the country will need to overcome interlinked structural constraints. Challenges include a limited private sector that is dominated by small and medium enterprises (SMEs) and informality with a business environment that does not enable competition and lacks access to credit. A stark example of weak competition is observed in growth-enabling sectors like telecom and broadband. The situation is aggravated by the dominant presence of the public sector in commercial activities and the small pool of available skills to draw upon from the labor force given the overall low levels of human capital. To tackle these challenges, the proposed program supported by the DPF is designed in three pillars (see paragraph 33 for details): Pillar 1 supports reforms in SMEs’ business environment. This pillar focuses on strengthening access

of economic agents to an efficient and transparent commercial justice system and to reliable information on companies and collateralized assets.

Pillar 2 supports reforms of broadband digital infrastructure. This pillar focuses on removing barriers to investment and competition in the internet broadband market and facilitating equitable access to ICT services.

Pillar 3 supports reforms in basic education and vocational training. This pillar tackles reforms to improve teachers’ training and competence, recruitment systems, and effective deployment.

6. The macroeconomic policy framework provides an adequate basis for the proposed operation. This assessment is affirmed by: i) a favorable medium term growth prospects underpinned by continued strength in fishing and agricultural production and substantial public and private foreign investments in energy, extractives and ports infrastructure; ii) the expected continuation of hitherto successful implementation of a prudent fiscal policy that will further bring down the debt burden; and iii) the continued satisfactory implementation of reforms in foreign exchange markets, active monetary and liquidity-management policies. The macroeconomic policy framework is supported by an IMF ECF program. Downside risks, however, remain substantial. They include pressures on external financing linked with the variation in commodity prices, and political-electoral risks potential leading to fiscal slippages and/or stalled implementation of monetary reforms. 7. The political context has been dominated by the presidential elections. President Mohamed Ould Abdel Aziz has abided to the constitution and has not sought a third mandate. The first round of the presidential elections were held on June 22, 2019, with a high turnout of 62.6 percent. According to the


Page 6

Independent National Electoral Commission (Commission Electorale Nationale Indépendante, CENI), Mr. Mohamed Ould Ghazouani, the candidate of the presidential majority, has won 52 percent of the vote. This result still needs to be confirmed by the constitutional council of Mauritania. These elections will be the first transition of power between two democratically elected presidents in Mauritania since independence in 1960. Policy continuity is the order of the day. The President-elect indicated during the campaign that he will continue the economic reforms initiated by the current Government. In his presidential program, he also committed to an inclusion agenda together with a proactive policy to support human capital development.

2. MACROECONOMIC POLICY FRAMEWORK

2.1. RECENT ECONOMIC DEVELOPMENTS

8. Growth has continued to gradually recover in 2018, but the extractives sector remains a drag. Growth increased from 3.0 in 2017 to 3.6 percent in 2018 (0.8 percent per capita). This moderate pick-up was driven by a 5.7 percent increase in the non-extractive sector, namely telecommunications, transport, and the primary sector. The latter has benefitted from past reforms in the fishing sector, favorable weather, and from a publicly financed expansion of irrigated agriculture (Table 1). The transport sector also benefited from the Government’s program aimed at improving Mauritania’s road network. This included the construction of the Bongou-Basseknou road and the launch of the Néma-Achemim corridor. Meanwhile, the extractive sector declined for a second consecutive year by 14.2 percent in 2018. The decline is explained by continued operational problems at the public mining utility, SNIM1, rising production costs and lower iron demand from China. Gold production was adversely impacted by a delay in machinery upgrading. The contraction in extractives also reflected the end of crude oil production.

1 National Mining Company (Société National Minière de la Mauritanie).


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Table 1: GDP Decomposition

Source: National Statistics Office and World Bank Staff Calculations as of April 15, 2019. 9. Inflation remains moderate as the increase in international oil prices was not transmitted to consumers. Overall, inflation increased from 2.3 percent in 2017 to 3 percent in 2018. This rise was fueled by an 8.9 percent rise in the prices of bread and cereals due to higher international prices. In contrast, transport prices remained stable following the government decision not to transmit the rise in international oil prices to the domestic market and thus keeping gasoline prices at the pump fixed. Meanwhile, core inflation2 rose slightly from 1.9 percent in 2017 to 2.2 percent in 2018, reflecting a gradual narrowing of the negative output gap. 10. External pressures have increased in 2018 due to unfavorable ToT and continued production problems in extractives. The external current account deficit widened from 14.3 percent of GDP in 2018 to an estimated 18.0 percent of GDP in 2018. This reflects a surge in imports due to higher oil and wheat prices coupled with increased construction imports3, as well as a decline in mining exports caused by lower iron prices and lower production of iron, gold, and copper4. The deficit was financed through increased foreign direct investment (FDI) linked to the oil and gas off-shore explorations that started in January 2018 and other financial flows from TASIAST, the private gold company. As a result, foreign reserves remained stable at about 3.7 months of imports in 2018. Meanwhile, the Real Effective Exchange Rate remains overvalued between 4-12 percent, according to the IMF’s external balance assessment methodology. 11. The fiscal position strengthened further in 2018 owing to spending restraint. Fiscal consolidation

2 Core inflation excludes food and fuel prices. 3 The increase in construction imports relates to the development of the first deep water port in Nouadhibou and the construction of a new conference center and two hotels to host the African Union summit in June 2018. 4 Iron production dropped by 6.9 percent in the first nine months of 2018 due to the continued operational problems at SNIM. Likewise, gold and copper production declined by 11.9 and 19.9 percent in the first half of 2018, respectively.

2015 2016 2017 2018e 2019p 2020p 2021p 2022p

GDP 1.4 2.0 3.0 3.6 6.7 5.8 6.0 9.7Cons. 0.8 1.6 3.9 4.3 3.8 3.8 4.0 3.9

Private cons 1.1 2.8 3.1 3.5 3.0 3.1 3.2 3.1Public cons -0.3 -1.2 0.8 0.8 0.8 0.7 0.8 0.8

Investment 0.1 -3.9 0.8 1.3 2.4 3.6 2.5 1.7Private inv -1.3 -0.2 1.3 2.2 2.1 3.1 1.9 0.5Public inv 1.4 -3.7 -0.5 -0.9 0.3 0.5 0.6 1.2

Net exports 0.5 4.3 -1.7 -2.0 0.5 -1.6 -0.5 4.1Exp 1.9 0.6 -0.7 -1.1 1.9 0.5 0.9 3.4Imp -1.4 3.7 -1.0 -0.9 -1.4 -2.1 -1.4 0.7

GDP 1.4 2.0 3.0 3.6 6.7 5.8 6.0 9.7Agriculture 1.6 0.9 1.4 1.7 1.7 1.8 1.9 2.0Industry -0.3 -0.3 -0.2 -0.5 2.6 1.7 1.4 5.0

Non-extractive industries 0.3 -0.4 0.9 1.0 0.8 1.0 0.8 1.1Extractive industries -0.6 0.0 -1.1 -1.5 1.8 0.7 0.6 3.9

Services 1.2 -1.9 1.4 2.0 2.0 2.0 2.2 2.3Net taxes -1.1 3.4 0.4 0.4 0.4 0.4 0.4 0.4

(Demand side)

(Supply side)


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helped turn the overall fiscal deficit from 0.2 percent of GDP in 2017 to an estimated surplus of 1.5 percent of GDP in 2018. Moreover, the Government has managed to maintain a primary surplus (including grants) for a third consecutive year. Public spending declined from 27.9 percent of GDP in 2017 to an estimated 26.6 percent in 2018. This was explained by a 1.8 percent of GDP decline in capital spending. Reduced foreign-funded investments resulted from reduced foreign grants and a slower execution of domestically-funded projects is partly explained by reduced use of single-source procurement. Recurrent spending increased by 0.4 percent of GDP as policies to consolidate public sector recruitment were more than fully offset by (i) increased subsidies for fuel and to support the drought-affected livestock sector and (ii) higher interest payments.5 12. Despite revenue loss from fixed domestic fuel prices and a reduction in grants, fiscal revenues increased thanks to the increase in tax collection and one-off license revenue. Total revenues increased from 27.6 percent of GDP in 2017 to 28 percent of GDP in 2018. Continued efforts to strengthen revenue mobilization have boosted consumption taxes which rose by 1.6 percent of GDP in 2018. This was accompanied by the one-time royalty fee for a new gas and oil exploration license (1.3 percent of GDP) in January 2018.6 However, these resources were mainly offset by the 1.2 percent of GDP drop in gasoline excise revenues as the price differential between the higher international oil prices and the fixed domestic retail prices turned negative.7 This was accompanied by the end of crude oil production, a 0.5 percent of GDP decline in mining revenues, and a 0.4 percent of GDP drop in foreign grants.

5 Fuel subsidies were provided in the last quarter of 2018 to local distributors to cover the price differential between higher international oil prices and fixed fuel prices at the pump. 6 The royalty is from ExxonMobil for rights to explore a maritime block in Mauritania’s deep-water zone. 7 These receipts are part of a special accounts called FAID (Fond d ’Assistance et d ’Intervention pour le Développement). The reference price is fixed. Any downward departure from that price provides revenue for the government. Any upward movement of international prices reduces those revenues and could even turn into losses or subsidies. Those excises are not registered under consumption taxes as they are earmarked and placed in this special fund, which is then spent on infrastructure and development projects.


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Table 2: Key Macroeconomic Indicators (2015 – 2022)

*The Kuwait debt worth US$1 billion is part a loan that was contracted in the 1970s from the Kuwait Investment Authority and was not cancelled as part of the HIPIC initiative. The loan is dormant as no interest or principal has ever been paid. The Mauritanian authorities are in discussions with Kuwait to cancel this debt, but no agreement has been reached yet. Commodity price projections for 2019-2021 are from the IMF January 2019 World Economic Outlook. Source: Ministry of Economy and Finance (MEF), National Statistics Office, Central Bank of Mauritania (BCM), IMF, United Nations (UN) Population, World Bank Staff Calculation as of April 15, 2019.

Fiscal (% of GDP) 2015 2016 2017 E2018 P2019 P2020 P2021 P2022Total Revenues 29.3 27.7 27.6 28.0 27.2 27.5 27.4 28.7

Revenues excluding Extratcives and Grant 25.8 24.2 24.3 24.9 24.3 24.4 24.5 25.2Tax Revenues (excl. extractives) 16.7 16.5 17.4 18.4 18.5 18.5 18.6 19.1

Income and corportate tax 6.1 5.6 5.6 5.7 5.7 5.7 5.8 6.1Tax on goods and services 7.9 8.2 8.3 9.4 9.4 9.4 9.5 9.5Tax on trade 2.5 2.8 3.0 3.4 3.4 3.4 3.4 3.5Other taxes 0.3 0.0 0.5 0.0 0.0 0.0 0.0 0.0

Non-tax revenues 9.1 7.7 7.0 6.5 5.8 5.9 5.9 6.1Revenues from fishing 2.8 3.5 3.7 3.7 3.1 3.2 3.2 3.3Dividends from SOEs 0.9 0.6 0.6 0.6 0.6 0.6 0.6 0.7Special Accounts 3.0 2.6 1.8 0.6 0.7 0.7 0.7 0.7Others 2.4 1.0 0.9 1.5 1.4 1.4 1.4 1.4

Extractive Revenues 1.7 1.6 2.3 2.5 2.2 2.4 2.4 3.0Mining Revenues 0.8 0.9 1.3 0.8 1.3 1.4 1.4 1.5Petroleum and Gas Revenues 0.8 0.7 1.0 1.7 0.9 1.0 1.0 1.5

Grants 1.8 1.9 1.0 0.6 0.7 0.8 0.6 0.5

Total Expenditure 32.7 28.2 27.9 26.6 27.1 27.2 27.3 28.4Recurrent Expenditures 18.5 16.6 17.2 17.6 16.6 16.5 16.5 16.8

Wage Bill 7.6 7.4 7.3 7.3 7.5 7.7 7.8 8.0Goods and Services 4.0 3.5 3.5 3.4 3.4 3.4 3.5 3.6Transfers and Subsidies 4.3 3.3 3.1 3.1 2.9 2.8 2.7 2.7Interest Payments 1.1 1.0 1.4 1.6 1.6 1.3 1.2 1.1

external 0.8 0.8 1.2 1.4 1.1 1.0 1.0 0.9domestic 0.3 0.2 0.3 0.2 0.4 0.3 0.2 0.2

Others 1.5 1.3 1.8 2.2 1.3 1.3 1.3 1.4 incl. special accounts 0.2 0.6 0.9 1.3 0.5 0.6 0.6 0.7Capital Expenditure 14.0 11.6 10.6 8.8 10.5 10.7 10.8 11.6

through external resources 5.0 2.7 2.1 1.5 2.4 2.3 2.2 2.1through domestic resources 9.0 9.0 8.5 7.3 8.1 8.4 8.6 9.5

Restructuring & net lending 0.2 0.0 0.1 0.1 0.0 0.0 0.0 0.0

Primary balance (excl. extractives and grant -5.8 -2.9 -2.1 -0.1 -1.2 -1.5 -1.6 -2.1Primary balance (excl. extractives) -4.0 -1.1 -1.1 0.6 -0.5 -0.7 -1.1 -1.6Primary balance (excluding grants) -4.1 -1.3 0.2 2.4 1.0 0.9 0.8 0.9Primary balance -2.3 0.5 1.2 3.1 1.7 1.7 1.3 1.4Fiscal balance (excluding extractives and gr -6.9 -4.0 -3.5 -1.7 -2.7 -2.8 -2.8 -3.2Fiscal balance (excluding extractives) -5.1 -2.1 -2.6 -1.0 -2.0 -2.0 -2.3 -2.7Fiscal balance (excluding grants) -5.2 -2.4 -1.2 0.8 -0.6 -0.4 -0.4 -0.2Fiscal balance -3.4 -0.5 -0.2 1.5 0.1 0.4 0.1 0.3

https://www.imf.org/external/pubs/ft/weo/2019/01/weodata/index.aspx


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Table 3: Key Fiscal Indicators (2015 – 2022)

Source: MEF, World Bank Staff Calculation as of April 15, 2019. Mauritania does not have fiscal data on accrual basis.

13. Despite continued fiscal improvement, public debt levels increased due to the agreement of arrears payment to the central bank. After dropping to 75.7 percent of GDP in 2017, public debt (excl. the Kuwait debt) rose to 81.9 percent of GDP in 2018 despite the continued fiscal surpluses.8 The increase

8 Public sector debt includes central government, the central bank’s debt to Saudi, debt guaranteed by the government to state owned enterprises (SOE).

Fiscal (% of GDP) 2015 2016 2017 E2018 P2019 P2020 P2021 P2022Total Revenues 29.3 27.7 27.6 28.0 27.2 27.5 27.4 28.7

Revenues excluding Extratcives and Grant 25.8 24.2 24.3 24.9 24.3 24.4 24.5 25.2Tax Revenues (excl. extractives) 16.7 16.5 17.4 18.4 18.5 18.5 18.6 19.1

Income and corportate tax 6.1 5.6 5.6 5.7 5.7 5.7 5.8 6.1Tax on goods and services 7.9 8.2 8.3 9.4 9.4 9.4 9.5 9.5Tax on trade 2.5 2.8 3.0 3.4 3.4 3.4 3.4 3.5Other taxes 0.3 0.0 0.5 0.0 0.0 0.0 0.0 0.0

Non-tax revenues 9.1 7.7 7.0 6.5 5.8 5.9 5.9 6.1Revenues from fishing 2.8 3.5 3.7 3.7 3.1 3.2 3.2 3.3Dividends from SOEs 0.9 0.6 0.6 0.6 0.6 0.6 0.6 0.7Special Accounts 3.0 2.6 1.8 0.6 0.7 0.7 0.7 0.7Others 2.4 1.0 0.9 1.5 1.4 1.4 1.4 1.4

Extractive Revenues 1.7 1.6 2.3 2.5 2.2 2.4 2.4 3.0Mining Revenues 0.8 0.9 1.3 0.8 1.3 1.4 1.4 1.5Petroleum and Gas Revenues 0.8 0.7 1.0 1.7 0.9 1.0 1.0 1.5

Grants 1.8 1.9 1.0 0.6 0.7 0.8 0.6 0.5

Total Expenditure 32.7 28.2 27.9 26.6 27.1 27.2 27.3 28.4Recurrent Expenditures 18.5 16.6 17.2 17.6 16.6 16.5 16.5 16.8

Wage Bill 7.6 7.4 7.3 7.3 7.5 7.7 7.8 8.0Goods and Services 4.0 3.5 3.5 3.4 3.4 3.4 3.5 3.6Transfers and Subsidies 4.3 3.3 3.1 3.1 2.9 2.8 2.7 2.7Interest Payments 1.1 1.0 1.4 1.6 1.6 1.3 1.2 1.1

external 0.8 0.8 1.2 1.4 1.1 1.0 1.0 0.9domestic 0.3 0.2 0.3 0.2 0.4 0.3 0.2 0.2

Others 1.5 1.3 1.8 2.2 1.3 1.3 1.3 1.4 incl. special accounts 0.2 0.6 0.9 1.3 0.5 0.6 0.6 0.7Capital Expenditure 14.0 11.6 10.6 8.8 10.5 10.7 10.8 11.6

through external resources 5.0 2.7 2.1 1.5 2.4 2.3 2.2 2.1through domestic resources 9.0 9.0 8.5 7.3 8.1 8.4 8.6 9.5

Restructuring & net lending 0.2 0.0 0.1 0.1 0.0 0.0 0.0 0.0

Primary balance (excl. extractives and grant -5.8 -2.9 -2.1 -0.1 -1.2 -1.5 -1.6 -2.1Primary balance (excl. extractives) -4.0 -1.1 -1.1 0.6 -0.5 -0.7 -1.1 -1.6Primary balance (excluding grants) -4.1 -1.3 0.2 2.4 1.0 0.9 0.8 0.9Primary balance -2.3 0.5 1.2 3.1 1.7 1.7 1.3 1.4Fiscal balance (excluding extractives and gr -6.9 -4.0 -3.5 -1.7 -2.7 -2.8 -2.8 -3.2Fiscal balance (excluding extractives) -5.1 -2.1 -2.6 -1.0 -2.0 -2.0 -2.3 -2.7Fiscal balance (excluding grants) -5.2 -2.4 -1.2 0.8 -0.6 -0.4 -0.4 -0.2Fiscal balance -3.4 -0.5 -0.2 1.5 0.1 0.4 0.1 0.3


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was driven by an 8.2 percent of GDP domestic debt issued to the central bank to repay arrears9. Since most of the debt is on concessional terms, debt-service obligations remain manageable, at about 5.7 percent of revenues in 2018. However, as 87 percent of debt is denominated in foreign currencies, the vulnerability of the public debt stock to exchange rate risks is still very high. 14. The BCM is addressing structural weaknesses of the monetary policy under the IMF program. The absence of monetary policy tools has reduced the effectiveness of the central bank to manage domestic liquidity, respond to terms-of-trade shocks, and act as a lender of last resort. To remedy this, the BCM introduced in 2017 a new lending and deposit facilities and operationalized it in March 2018 by defining the eligible collateral required by banks to participate. The BCM also reduced in November 2018, for the first time in a decade, its policy interest rate from 9 to 6.5 percent. The lower rate reflects better the market dynamics especially that of Treasury Bills (TBs). Such decision renders the policy rate more effective in influencing commercial interest rates and encourages commercial banks to conduct refinancing operations with the central bank. These policy reforms are expected to re-launch the inter-bank market in Mauritania and boost liquidity. Moreover, the BCM issued a new directive in March 2018 on the composition of capital and solvency requirements based on Basel II and III requirements with the aim of strengthening banks’ resilience. This directive also raised the minimum capital to MRU1 billion, which should encourage bank mergers. An emergency refinancing mechanism was also established to provide liquidity to banks experiencing temporary pressures. 15. The banking sector still suffers from several vulnerabilities, despite strong private sector growth. The recovery in aggregate demand, new donors credit lines, and the opening of two new banks led to an increase in private sector credit by 18.8 percent in August 2018 (latest available data), up from 5.6 percent in August 2017. Such rebound was also depicted by growth in money supply (M2), which reached about 8.6 percent in August 2018. Nonetheless, vulnerabilities in the banking sector persist. Despite improvements in supervision and ongoing efforts to write-off old debt, non-performing loans (NPLs) increased from 22.4 percent in 2017 to 22.9 percent by June-2018, well above the SSA average of 10.1 percent (in 2017). This was also accompanied by 4.2 and 5.1 percentage point drops in the provisioning rate and the liquid-to-total assets ratio, respectively. These indicators reflect structural vulnerabilities in the sector linked to weaknesses in the supervisory framework, a narrow deposits base, and low rates of banking and credit concentration.

16. To tackle these constraints, the authorities have strengthened the regulatory framework of the banking sector and adapt it to international standards. With IMF support, Mauritania has adopted a new banking law in July 2018. The law boosts the central bank independence and strengthens the crisis management mechanism by establishing a new framework for bank resolution and depositor protection. The law also expands BCM’s scope of supervision to include insurance companies and the “Caisse des Dépôts et de Développement” (CDD).10 To reduce transactions costs and promote financial inclusion, the BCM is also developing automated payment tools and mobile banking instruments. The BCM also issued a new directive in November 2018 aimed at combatting money laundering and terrorism financing. As a consequence, 700 illegal money transfer service providers were closed by March 2019. 9 The arrears were accrued by previous governments and was not formally recognized till 2018. The Government issued debt instead with a repayment period of 40 years and a 10 years grace period. 10 The CDD is a public financial institution that primarily work on microfinance loans. Its importance resides in the fact that it holds large deposits from State-Owned-Enterprises and as such makes it effectively one of the largest banks in the country. The CDD is currently not regulated by the central bank and does not follow its prudential regulations.


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2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

17. The medium-term outlook is favorable as growth is projected to average 7.0 percent over the period 2019-2022. The pick-up in growth is likely to be driven by three factors. First,

past reforms that have opened the sector for more competition;

the Grande-Tortue/Ahmeyim (GTA) gas project is expected to significantly raise growth. The development of phase 1 of this project would increase FDI-related construction in 2020-2021 due to some local contracting of onshore project-related investments (such as a breakwater). More importantly, this will be followed by the onset of gas production and exports in 2022. Third, iron production would surge in 2019 (20 percent) as 2 million tons of iron would be additionally produced per year due to the completion of the Guelb-II Project. 18. On the expenditure side, private demand and extractive exports are expected to be the main drivers of growth. Private consumption growth is projected to accelerate as revenues from the primary and services sectors increase. These sectors constitute the main source of income for most Mauritanian households. In addition, private investment is expected to pick-up thanks to port, telecom and extractive-FDI linked to the development of phase 1 of the gas project (Box 1). FDI is expected to average 14.7 percent of GDP in 2019-21 compared to 11.3 percent in 2016-18. This will be supported by higher liquidity and improved competitiveness in the agriculture sector. Extractive exports would also support growth thanks to increased iron exports in 2019 and the onset of gas exports in 2022. These exports would be partly offset by higher infrastructure-related imports linked to the gas project in 2020-2021. Finally, public investment would contribute positively to growth as it recovers after three years of constant decline and the Government uses some of the gas revenues to implement its plan of ameliorating infrastructure.

Box 1: The Grande-Tortue/Ahmeyim (GTA) Project and Prospective Opportunities The GTA is an ultra-deep offshore gas field straddling the maritime borders between Mauritania and Senegal. It is estimated to hold 15 trillion cubic feet (tcf) of gas to be produced in 25 years. A Final Investment Decision (FID) for phase 1 (out of 3) was finalized on December 21, 2018, three years after the resource was discovered. Phase 1, with frontloaded capital spending and lowest gas capacity, would kick-start production in 2022, with an annual capacity of 2.3 million tons (mtpa); while other phases are programmed to follow in 2023 and 2024. Over 2019-2022, this project will benefit the Mauritanian economy through increased FDI and the onset of gas production. While significant progress has been made, technical and financial uncertainties still surround the project. The direct effects, especially those linked to fiscal gains and growth, are not expected to materialize before 2022 when gas extraction and production begins. Before that, this project will indirectly contribute to growth through higher construction-related investments that are necessary from a logistical perspective. There is some reassurance for the medium to long term because of expected fiscal and export inflows starting in 2022. Preliminary estimates indicate that gross aggregate revenues from the full development of the GTA could amount to US$80 billion over a period of 30 years, of which US$14.4 billion of net revenues will go to Mauritania (equivalent to 260 percent of 2018 GDP). These potential dividends, however, are highly sensitive to fluctuations in the price of oil and LNG and could vary between US$4.2 and US$25.5 billion under the price scenarios of US$30/bbl and US$90/bbl respectively. Moreover, these results are sensitive to the completion of the full project.

Source: World Bank. (2019). Macroeconomic Management of Gas Revenues in Mauritania. Washington D.C. forthcoming.


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19. External deficits will narrow owing to increased extractive exports and improved ToT. The current account deficit is projected to significantly decline to 7.7 percent of GDP in 2022 as gas exports come online during that year. Increased mining production, higher iron-export prices, and lower oil-import prices would also contribute to the reduction in the current account deficit. All these developments will more than outweigh the rise in investment-imports linked to extractives and public private partnership (PPP) projects such as the container terminal and the expansion of petroleum storage facilities in Nouakchott11. External financing needs would decrease and would be met by extractive-related FDI as well as long-term disbursements reflecting the foreign-financed public investment pipeline. As a result, international reserves would reach about 5.4 months of imports by 2022 (Table 2).

Table 4: Balance-of-Payments (BoP) Financing Requirements and Sources (2015 – 2022)

(*) includes SNIM disbursement, commercial banks and exceptional financing. Source: BCM, IMF Second ECF Review, World Bank Staff. 20. The Government is expected to maintain its prudent fiscal policy and benefit from gas-related revenues. The primary balance (excl. grants) is expected to remain in surplus and average 0.9 percent of GDP in 2019-2022 (Table 3). The outlook is supported by continued reforms on tax policy and administration, and prudence in terms of transfers to public entities. On the revenues side, the 2017 decision to reform tax expenditures and transfer pricing, coupled with the introduction of a new corporate income tax law planned end-2019 and taxes collected from gas operators, are expected to boost tax revenues by 0.7 percent of GDP12. In parallel, the 0.7 percent of GDP projected rise in mining revenues, due to improved iron production and higher prices, would be accompanied by a 0.5 percent of GDP increase in hydrocarbon revenues stemming from gas resources in 2022. These revenue increases will be partially offset by lower fishery revenues due to the termination of the Fisheries Partnership Agreement

11 The Government has initiated the launch of a US$390 million PPP project in the second half of 2018. The project includes a container terminal and the expansion of the petroleum storage facility in Nouakchott. It is financed by Singaporean investors. 12 Reforms on tax expenditures and transfer pricing have been introduced as part of the World Bank Fiscal Consolidation and Private Sector Support DPF in 2017. They are expected to bring about 0.2 percent of GDP in additional revenues by 2020. The corporate income tax reforms are being introduced as part of the IMF program.

in Million US$ 2015 2016 2017 E2018 P2019 P2020 P2021 P2022Financing Requirements 809 822 704 1,272 1,218 1,542 1,506 790

Current Account Deficit 956 707 709 966 890 1,207 1,062 529Long Term Debt Amortization 163 180 215 239 260 266 376 193Amortization of Saudi Arabia BoP-suppor 3 3 7 67 68 68 68 68Other Short Term Capital Outflows 0 0 0 0 0 0 0 0Errors and Omissions -313 -68 -228 0 0 0 0 0

Financing Sources 809 822 704 1,272 1,218 1,542 1,506 790FDI and portfolio investments (net) 502 271 588 869 659 1,034 959 0Capital Grants 31 8 11 15 70 0 0 0Short term debt disbursements 0 0 0 0 0 0 0 0Long term debt disbursements (excl. IMF) 570 322 242 253 297 385 371 322Other sources (*) -344 261 -52 215 246 215 311 -820Deposit from Saudi Arabia at the Central B 300 0 0 0 0 0 0 0Change in reserves (- means accumulation -201 -3 -25 -70 -92 -189 -118 1,317SNIM medium- and long-term loans -66 -61 -63 -63 -10 48 -16 -29Drawdwn of oil account 16 24 -22 6 0 0 0 0IMF credit (net) 0 0 23 47 47 48 0 0


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(FPA) with the European Union (EU), which used to generate about 1.1 percent of GDP as budgetary inflows between 2013 and 201813. Higher revenues coupled with prudent recurrent spending will create the needed fiscal space to increase capital expenditures by 2.8 percent of GDP over the outlook period. This will enable the Government to execute projects that have been postponed in recent years. Moreover, the efficiency of public investments is also anticipated to improve as the authorities reap the benefits of past public investment management reforms.14 21. Public debt is sustainable, but the risk of external and overall debt distress is high. The latest World Bank-IMF Debt Sustainable Analysis (DSA) carried out in May 2019 reveals that Mauritania remains at high risk of debt distress, with multiple breaches of threshold under the baseline (Figure 1). Capitalization of central bank advances to the Government have increased domestic debt (see paragraph 12). Most public debt is held in foreign currency (87 percent in 2018), which is defined as external debt. The short-term external debt dynamics deteriorate due to increased borrowing for the GTA project but improve in the medium term on account of better macroeconomic prospects. As a result, the present value (PV) of public and publicly guaranteed (PPG) external debt is now projected to remain above the 40 percent threshold until 2025 but will continue downward thereafter. With a breach of the debt service-to-revenue ratio until 2023, reflecting the onset of repayments in 2021 on the Saudi deposit at the BCM, there is a need to maintain a prudent borrowing strategy that favors concessional financing. This will be reinforced by the zero non-concessional borrowing limit which the Government has committed to under the IMF program.15 Moreover, the Government has no access to international capital markets and meets its financing needs primarily through grants and concessional loans from bilateral and multilateral development partners.16

22. The reform momentum for strengthening the monetary and exchange rate policies is expected to continue over the outlook period. As part of the IMF ECF program, the authorities plan to deepen the foreign exchange market and adapt it to international standards. To do so, BCM will introduce a multiple-pricing system to foreign currencies auctions to make it more market driven. This measure would make the exchange rate more flexible and help support external sustainability as it would limit BCM’s intervention in the foreign exchange market. In addition, BCM aims to establish a regulatory framework and a technical platform to create an interbank foreign exchange market in 2019. 13 The FPA allowed the EU fleet to fish in Mauritanian waters for shrimp, demersal fish, tuna and small pelagic fish, up to a total of 287,050 tons a year. It is a 5 years program that ended in October 2018. 14 These reforms include an improved prioritization and monitoring exercise, upgrade in public investment management (PIM) IT systems, and the advancement of procurement reforms. They have been introduced too as part of the World Bank Fiscal Consolidation and Private Sector Support DPF in 2016 and 2017. 15 As the GTA project is expected to yield large revenues in the future (IMF second ECF Review, 2018), the IMF Board agreed to an exception to the debt limit policy, which addresses the non-concessionality of the GTA-related debt. The debt itself, however, is accounted in full in the PPG debt. 16 62.7 percent of external public debt stock, excluding the Kuwaiti debt, is owed to multilateral development donors.


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Figure 1: Indicators of Publicly Guaranteed External Debt (left chart) and Public debt (right chart) under Alternative Scenarios, 2019–2039 (Percent of GDP, %)

Source: World Bank-IMF DSA, May 2019. 23. The macroeconomic outlook is subject to domestic downside risks related to the presidential elections and delays in implementing reforms. The presidential elections held in June 2019 were calm and not associated with significant social unrest. Yet, they could undermine fiscal discipline and put upward pressure on public debt if the new government does not adopt a similar prudent policy. In addition, delays or failures of reform implementation could adversely affect growth prospects in the non-extractive sector. 24. Fiscal risks could also arise from contingent liabilities associated with Mauritania’s state-owned iron-ore company SNIM, which has suffered financial losses in recent years. These problems started in 2015 with the large drop in iron prices and were exacerbated by operational problems due to the delay in the finalization of the Guelb-II Project, and higher production costs driven by the increase in oil prices in 2017-2018. As a result, SNIM’s dividends to the treasury dwindled from more than 2 percent of GDP in 2010-2014 to 0 starting 2015. If SNIM’s financial problems continue, the Government could be faced with pressures to provide debt guarantees or even extend direct transfers to cover losses. This would have repercussions on public debt. 25. External risks could also weigh down on the outlook. Higher-than-expected oil prices would lead to increased fuel subsidies if domestic prices are not increased commensurately. Staff estimates that every US$1 increase in international oil prices above US$69 per barrel could cost the Government an estimated US$1.1 million annually in the form of fuel subsidies if prices are not transmitted to consumers. At the same time, lower mining-export prices worsen the trade and fiscal balances. Given the large financing needs, a lower-than-expected FDI is another downside risk that could erode the reserves buffer, potentially forcing the central bank to react on the exchange rate or return to bilateral external borrowing to close the financing gap.17 Regional security risks in the Sahel is another concern and military expenditures could rise faster than expected. 26. The macroeconomic framework for the proposed operation is adequate. The medium-term outlook for Mauritania is positive with economic growth projected to average 7.0 percent in 2019-2022. 17 The BCM resorted to such borrowing in 2015 with a US$300 million non-concessional loan from Saudi Arabia.

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This is underpinned by strong activity in the primary sector, increasing mining production, and the development of the new offshore GTA gas project. Inflation will remain contained below 4 percent over this period. The Government will maintain fiscal prudence going forward following a successful consolidation effort in recent years. This, coupled with the zero non-concessional borrowing limit under the three-year IMF ECF program, would help maintain public debt on a sustainable path. The IMF program also includes reforms that would help make monetary policy more effective and the exchange rate more flexible. The external current account deficit is financed with substantial extractive FDI inflows supporting a gradual buildup of international reserves.

2.3. IMF RELATIONS

27. Mauritania is currently under a three-year program (2017-2020) with the IMF for an ECF that started in December 2017. The SDR 115.9 million (around US$164 million equivalent) program provides financing to support reforms in the foreign-exchange market and external adjustments, strengthen banking supervision and regulatory framework, and maintain fiscal consolidation. The IMF Board successfully concluded the third review on May 20, 2019. All performance criteria and seven of the nine structural benchmarks for December 2018–April 2019 were met; the remaining two were completed with a one-month delay. The IMF Board decision led to the disbursement of SDR 16.56 million (around US$23.5 million equivalent), thus bringing total disbursements under the arrangement to SDR 66.24 million (about US$91.3 million). The World Bank team is coordinating closely with IMF counterparts and regularly exchanging views on the adequacy of the macroeconomic policy framework and the status of the structural reform agenda. The teams are also coordinating on reforms for public investment management, social safety nets, and the macroeconomic management of the new gas resources.

3. GOVERNMENT PROGRAM 28. The Mauritania Growth and Shared Prosperity Strategy (SCAPP18 2016-2030), adopted by the Council of Ministers on October 19, 2017, forms the basis of economic and social policies. It was developed through consultations and dialogue between the administration, elected officials, academia, civil society ― including for the first time, members of the diaspora ― private sector, and development partners. The SCAPP’s stated objective is to achieve strong, inclusive and sustainable economic growth to meet the essential needs of all citizens and improve their livelihood within a framework of good governance and in alignment with the 2030 Sustainable Development Goals. This vision is built around three pillars: (a) promoting strong, inclusive and sustainable growth; (b) developing human capital and access to basic social services; and (c) strengthening governance in all its dimensions. The SCAPP will be implemented through three five-year action plans, the first covering the period 2016-2020, with bi-annual sectoral evaluations and annual reviews. A dedicated directorate at the MEF has been established to track and report on the progress of the SCAPP and adjust the strategy if needed. A key SCAPP reforms area, which this DPF series is anchored too, is boosting private sector-led growth through improving the business environment, fostering competition and building skills. This includes: 29. Private-Sector Development. Diversifying the economy to rely less on the extractive industries, 18 National Strategy for Accelerated Growth and Shared Prosperity (Stratégie de Croissance Accélérée et de Prospérité Partagée).


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enhancing private sector participation in the economy, and improving investment climate will require a robust and vibrant private sector. To enhance the business environment, the authorities are taking steps to improve the business regulatory environment and providing the building blocks for a more modern and transparent economy that leverages private investment for growth and job-creation. During the last few years, the Government has implemented important reforms to promote public-private dialogue, develop a formal PPP framework, expand credit to the private sector, re-examine the dominant position of public enterprises, facilitate business creation and trade across borders, strengthen its legal and regulatory framework for property rights, encourage economic liberalization especially in sectors like ICT, and strengthen tax policy and administration. 30. Human capital and skills. Mauritania is ranked 150th out of 157 countries on the Human Capital Index with a score of 0.35. Despite significant gains in access in recent years, education trends remain particularly worrisome: the average Mauritania child can only expect to achieve 6.3 years of schooling (versus 8.1 in SSA and 11 in MENA)19 and to score 342 points on harmonized test scores (versus 374 in SSA and 408 in MENA). The Government is now focusing on deepening the reform agenda to further improve access gains while also enhancing the overall quality of human capital. Delivering quality education is key to boosting labor productivity and the growth potential in Mauritania. As such, the SCAPP dedicates two operational pillars focusing on promoting quality alongside good governance of education over the entire learning cycle (basic, secondary, and tertiary), and on improving the quality and financing for vocational training to better match skills with the labor market demand. In addition to growth, these reforms are expected to improve living conditions, reduce inequality and provide economic opportunities for the most vulnerable groups.

4. PROPOSED OPERATION 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

31. The years of the extractives boom (2009-2015) and bust (2015-2017) have revealed the limitations of Mauritania’s development model. This includes: i) the dependency on extractives revenues and FDI to finance public investments and domestic consumption and ii) the substantial role of the public sector in economic activity. To tackle these issues, Mauritania is attempting to recalibrate its development model through a diversification program focusing on improving the enabling environment for the private sector to operate, create jobs and drive growth in the medium and long run. To achieve this, the country will need to overcome interlinked structural constraints. The private sector is dominated by SMEs and informality; the business environment does not enable competition and lacks access to credit. These constraints are also undermined by the dominant presence of the public sector in commercial activities and the small pool of available skills to draw upon from the labor force given the overall low levels of human capital in the country. The proposed operation has been designed to help tackle these challenges. 32. The DPF series is fully aligned with the SCAPP’s objective of boosting private sector-led growth through improving the business environment, fostering competition and building skills. The operation is designed to support reforms in the areas of private sector development (Pillar 1 of the SCAPP) and building human capital and skills (Pillar 2). Moreover, strengthening governance and institutions (Pillar 3) is a cross— 19 MENA refers to the Middle East and North Africa.


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cutting theme in the DPF and is therefore considered in the design of all suggested reforms. As such, the proposed operation can be viewed as part and parcel of the overall national development plan and responds to the government policy priorities. 33. More specifically, the DPF supports a program of three pillars to improve the regulatory environment and skills for boosting competition and inclusiveness of the Mauritanian private sector:

Pillar 1 supports reforms in SMEs’ business environment. This pillar focuses on strengthening access of

economic agents to an efficient and transparent commercial justice system and to reliable information on companies and collateralized assets. These reforms will strengthen the Government’s objectives to modernize the economy, level the playing field among economic agents, reduce time and costs to enforce contracts for SMEs, improve commercial dispute resolution between economic actors, strengthen insolvency regimes, and improve access to credit. Ultimately, this will increase the attractiveness of the country for both national and international investors.

Pillar 2 supports reforms of the broadband digital infrastructure. This pillar focuses on removing

barriers to investment and competition in the internet broadband market and facilitating equitable access to information, communication and technology (ICT) services. It does so through regulatory reforms that i) open the internet retail and wholesale market up for competition and new entrants; ii) promote access to dominant operators’ essential infrastructure and reduces the costs for deploying digital infrastructure; iii) and boosts sustainable financing and more projects in underserved areas, especially rural ones. Boosting competition enables the provision of low-cost, high quality access to the population for these services. Such reforms are key to unleash the growth potentials stemming from ICT. It constitutes an opportunity to boost the overall productivity of the economy, enhance new business opportunities for private sector development, and utilize technology in service delivery.

Pillar 3 supports reforms in basic education and vocational training. This pillar focuses on improving

the quality and relevance of skills provided by both general education and training systems. On one hand, the pillar tackles reforms to improve teachers’ training and competence, recruitment systems, and effective deployment. On the other hand, it supports measures to overhaul the Technical and Vocational Education Training (TVET) governance systems especially for financing, training and curriculum. It also crowds-in the private sector in the education sector decision making to boost the relevance of the training offered and align it with labor market demands. These reforms are essential to improve the quality and relevance of skills provided by the national education system and as a result boost the competitiveness of the private sector and long-term productivity.

34. The design of the DPF series reflects the government’s administrative capacity constraints and complex policy challenges. The proposed prior actions are selective to avoid overwhelming the government’s limited administrative resources. The prior actions are thoroughly grounded in recent analytical work (Annex 5), and the operation employs a three-year programmatic structure to ensure that the supported reforms are fully implemented. Each pillar of the program is anchored in strong existing sectoral dialogue with the authorities through multiple complementary World Bank projects. 35. The operation builds on important lessons learned from the implementation of the previous DPF series “Fiscal Consolidation and Private Sector Reforms” in 2016 (P160592) and 2017 (P163057). The


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previous DPF series revealed gaps in terms of government capacity to implement reforms, coordination between public sector stakeholders, and ensuring early buy-in for reforms from the private sector. To remedy this, the current series incorporates these lessons learned. First, World Bank projects support policy implementation. Second, to avoid coordination gaps, the operation builds on a comprehensive framework for inter-departmental coordination. A central DPF implementation committee has been created to this effect20. The committee is chaired by the MEF but draws on focal points in all relevant line ministries to ensure appropriate monitoring. It also includes focal points in the central bank to ensure a close monitoring of the macro framework. Third, the operation widens the scope of the consultation by engaging multiple private sectors stakeholders early in the reforms process to facilitate implementation. This includes organized professional federations, representatives from small and medium enterprises, and large companies like telecom operators. As such the operation offers a public-private dialogue platform over the economic issues covered by the three pillars as early as the design phase.

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Pillar 1 –SMEs Business Environment Reforms

36. Enabling a competitive ecosystem for SMEs is key for Mauritania’s growth and job creation agenda. Although the country ranking improved by 28 positions in the last four years (2015-2019) in the Doing Business (DB) Report, the business environment remains challenging and below its potential considering the country’s income level (Figure 2). Mauritania currently ranks 148 out of 190 economies, according to the 2019 DB report. SMEs are at the heart of economic activity. They constitute the largest share of the private sector with an estimate representation over 80 percent of formal enterprises and are a key source of job creation. However, their business environment suffers from important bottlenecks that prevent competition, productivity, and growth. These include strong state presence in the economy, unfair competitive conditions, limited access to finance, a local workforce with limited skills, the prevalence of corruption, limited business services and inefficient bureaucracy are major constraints for private sector development in Mauritania. Private sector, especially SMEs, face these important challenges which limit their ability to enter grow or enter new markets.

20 The committee is presided by the Directorate of Studies, Reforms, and Monitoring and Evaluation (Direction Générale des Etudes, des Réformes, du Suivi et d'Evaluation, DGERSE).


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Figure 2: Mauritania Position in Doing Business Relative to its Income

Source: Doing Business and World Bank Staff Calculation. 37. Commercial justice services prevent businesses in Mauritania to develop as they are costly, inefficient, unreliable, and not accessible to all. Large parts of the commercial justice system are found to be insufficiently effective, creating as such important legal and judicial uncertainties for businesses especially SMEs. These include low-quality decisions, lengthy processing times notably during appeals, lack of homogeneity in the follow-up of procedures, lack of traceability, weak transparency and security of judicial procedures. According to the latest World Bank Enterprise Survey in 2014, more than 40 percent of Mauritanian companies surveyed consider that the judicial system is a major constraint to the development of their activity. This is double the percentage found for sub-Saharan Africa. Moreover, the Global Competitiveness Index (GCI) 2017-2018 shows critical deficiencies to private sector development regarding the judicial system such as lack of efficiency of the legal framework in settling disputes (ranked 130/137 in GCI), lack of efficiency of the legal framework in challenging regulations (ranked 134/137) and to some extent lack of judicial independence (ranked 116/137). In addition, recent analytical work (Annex 5) and consultations with SMEs have confirmed that access to an effective and reliable judicial system and access to finance are among the key constraints to private sector development in Mauritania. SMEs are particularly affected by these deficiencies as they often do not have the financial capacity or strength to weather lengthy or unreliable procedures. Furthermore, commercial justice services are currently not complemented by Alternative Dispute Resolution (ADR) mechanisms, whose practice is currently inexistent. 38. Another major constraint for private sector development is a fragmented and ineffective business and collateral registry. The commercial and collateral registry is a tool that allows collection and dissemination of information on businesses’ ownership, operations, finances, and collateralized assets. Currently, the registry partially fulfills its duty to register companies, but it is hardly used to register secured transactions. In 2017 and 2018 respectively, only four and seven transactions were registered to start their businesses, and only three filed financial statements. Moreover, this registry is not centralized and remains manual. As such, it does not constitute a source of reliable and transparent information on companies and collateralized assets, thus significantly hampering confidence of businesses and access to finance. While the Mauritanian business registries play their role correctly regarding the creation of


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companies, all subsequent transactions (search for information, filing of financial statements, registration of securities, changes of statutes, etc.) are only very rarely and hardly done. This is due to a lack of computerization and absence of controls and sanctions. Indeed, the availability of a reliable commercial registry is the backbone for the creation of a collaterals market that can be used by businesses and commercial banks to expand credit to firms as well as an essential tool to fight tax evasion, money laundering and overall enhance market transparency. 39. Supported by the DPF series, the Government has embarked on a medium-term reform program to tackle these constraints. Previous DPF series (2016 and 2017) have targeted critical business environment constraints such as access to public procurement contracts and State role intervention in the economy through the enacting of relevant laws and regulations. An effective and modern commercial justice system will be the focus of this DPF by supporting streamlined commercial procedures, strengthened skills and independence of magistrates, and digitization of the commercial justice chain. Planned reforms will enhance the quality, transparency and governance of the judicial system and will favor the practice of insolvency proceedings, which is currently quasi inexistent. The development of ADR mechanisms will also offer a cheaper and faster alternative to Courts, thus alleviating their caseload. Efficient and reliable creditor/debtor regimes and insolvency systems are critical for the reallocation of productive resources in the corporate sector, for investor confidence, for forward-looking corporate restructuring, and for access to finance. Furthermore, a reliable, fast and transparent commercial justice and business registry is a prerequisite for private sector investment and growth. All these reforms, as well as all future Investment Climate reforms, will be anchored, prepared, and evaluated by a technical Inter-Ministerial Public-Private Investment Climate Committee. This committee will have active representation from businesses and replaces the current informal committee that does not involve the private sector in decision making. This will institutionalize public-private policy dialogue. 40. Direct beneficiaries of this pillar will be Mauritanian SMEs, even though larger operators, local and international, will also benefit from it. The main implementing actors of the reforms proposed under this pillar will be the Ministry of Justice and the commercial courts. The program will also involve the General Directorate of Private Sector Promotion (DGPSP) of the MEF, the General Directorate of Information and Communication Technologies (DGTIC), as well as the Directorate of Industrial Development at the Ministry of Commerce, Industry and Tourism. Additional implementing actors will include the International Mediation and Arbitration Center of Mauritania (CIMAM), the bar association, as well as other private sector organizations, such as business associations. 41. The World Bank Group (WBG) will be accompanying these reforms through ongoing TA and lending projects. Planned reforms will be further supported by International Finance Corporation (IFC) Investment Climate and Entrepreneurship Advisory program (#601022) and Nouadhibou Eco-Seafood Cluster project (P151058). The IFC TA program will play a major role in mobilizing the private sector and supporting authorities in the consultation process to deepen the public-private dialogue in reform preparation. This IFC project will offer additional TA and capacity building required for the formulation and implementation of all planned reforms under Pillar 1. The World Bank Nouadhibou Eco-Sea Food Cluster (NESC) project will be supporting the modernization of the business and collateral registry by financing core investments related to the upgrade of the commercial justice facilities and computerization of the business and collateral registry. NESC will also provide the required skills training and TA required for the successful functioning of the Inter-Ministerial Public-Private Investment Climate Committee.


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Finally, these projects also complement IMF-TA on revenue administration and access to finance notably linked with insolvency law and the banking sector, as well as several initiatives on justice supported by the EU and the French Development Agency. 42. In line with government priorities, the first year of the DPF program (DPF1) will focus on commercial justice reforms and support inclusive SME growth. DPF1 will target alternative dispute resolution mechanisms, public-private dialogue in the preparation of investment climate reforms, and greater market transparency of use of the business and collateral registries. Specifically, DPF1 will: (i) review the Arbitration Law to bring it into line with international standards in aspects such as the appointment and status of arbitrators and judicial remedies enabling parties to reach faster and simpler settlements of disputes and complementing the commercial justice system; (ii) set up a formal institutional framework to strengthen the mechanism dialogue, coordination, preparation, implementation, and evaluation of investment climate reforms including reforms of the insolvency law and modernization of the business and collateral registry; and (iii) making it a condition for companies requesting financial commitment from a commercial bank to show a receipt proving that it has filed its financial statements at the business registry. This reform will be a first step to increase the use of the business registry, enhance market transparency, and progressively gather information to boost formality in the credit market, reduce financial risks to the banks, and create opportunities for access to finance through the development of a collaterals markets. It is expected that this measure will provide the needed incentives for firms to start using the business registry, targeting 10 percent of SMEs in country. Prior Action # 1: The Recipient’s Council of Ministers has submitted to Parliament a draft revised Arbitration Law.

Prior Action #2: The Recipient has issued Ministerial Decree No. 2019-032 and Ministerial Order No. 0000138 establishing and regulating the High Council for Improving Business Environment (vested with executive power) and its technical body, the Business Reforms Monitoring Committee. Prior Action #3: The Recipient’s Central Bank has issued a circular No. 01/GR/2019 to increase transparency and reliability of information making it a condition for a company to request a commitment from a commercial bank to show a receipt proving that it filed its financial statements at the business registry. Subsequent operations 43. DPF2 and DPF3 are expected to deepen and operationalize the reforms. Following on institutional and operational reforms through DPF1, the second and third DPFs are expected to focus on putting in place new legislations and on operationalizing these decisions. Indicative triggers regarding quality, transparency and governance of the judicial system will support the passing of legislation for a new law with the creation of Commercial Appeal Courts, will reduce delays at all levels of the commercial chain. It will also support a revision of the Statute of the Judiciary to reinforce the independence, immutability, and discipline of judges, thus improving the quality of judicial decisions. Indicative triggers on transparent creditor/debtor regimes and insolvency include revising the existing insolvency law, and ensuring the coherence in regulations between insolvency, secured transactions, real property and credit information. The aim is to improve creditor and debtor regimes and include clear rules of ownership and


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priority governing the hierarchy of competing claims or rights in the same assets. Finally, indicative triggers will also focus on operationalizing the business and collateral registries. This will be done through a set of triggers linked to the restructuring the organization of Local and Central business and collateral registries while guaranteeing the availability of online registration of companies and secured transactions and access to information. Results 44. At the end of the DPF series, it is expected that the systems for ADR mechanisms, insolvency and business registry will all be institutionalized and operational. As such, it is expected that both the number of cases solved through ADR mechanisms and the number of insolvency cases settled by courts will rise from 0 currently to exceed 5. Similarly, the number of information requests processed at the business and collateral registry is expected to exceed 1,000 requests. Relevant data to monitor these indicators will be provided by the CIMAM, Doing Business reports, and the Ministries of Justice, Commerce, and Economy and Finance.

Pillar 2: Reforms of the Broadband Digital Infrastructure 45. The proposed program aims at supporting the development of inclusive and competitive broadband infrastructure services and accelerate digital economy development. The expansion of digital technologies offers a unique chance to accelerate economic development by opening new channels for rapid, innovative and Job-creating economic growth (World Bank 2016; DE4A, 2018). Mauritania has a lot to gain in the adoption of digital. As part of the "moonshot" approach for the digital economy in Africa (DE4A), the WBG is aiming at supporting African governments to double access of the population to Broadband services by 2021. According to the International Telecommunications Union, around 70 percent of the Mauritanian population did not have access to mobile internet in 2016. Supporting the development of an inclusive and competitive broadband infrastructure would contribute to bridge existing digital divides by connecting the unconnected in both urban and rural areas. Today, and despite recent progress, Mauritania does not have a competitive broadband market and its current digital infrastructure is insufficient to allow for the development of a job-creating digital economy. 46. The development of the broadband sector is mainly hampered by insufficient regulation that promote competition especially in terms of mutualization of infrastructure. Despite some competition between three telecom operators, the broadband market is highly concentrated with the incumbent operator, Mauritel. This dominance is mainly due to inefficient sector regulation that does not promote infrastructure sharing between the incumbent and the alternative operators.21 Mauritel owns most of the strategic infrastructure and access by competitors is not sufficiently regulated. Regulation doesn’t apply to all telecom infrastructure markets affected by dominancy, and obligations imposed on dominant players are not only limited but are also insufficiently enforced. Competitors are persistently facing technical and price-related issues that prevent their access. This affects competition negatively and as a result many geographical areas remain solely served by Mauritel. Another challenge is the absence of regulation on access of telecom operators to the fiber optic networks owned by public utilities. This includes the mining company (SNIM) and the electricity utility (Société Mauritanienne d’Électricité, SOMELEC). While there is excess capacity available on those strategic digital assets, open access to these 21 As in many countries, the regulatory authority is protecting the incumbent operator.


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networks constitute a challenge. The utilities are not regulated and offer only limited access to their infrastructure at very high prices. Regulating those networks would contribute to create an open access wholesale market for fiber optic infrastructure. This would significantly boost competition by offering alternative options to non-dominant players who are struggling to access Mauritel’s fiber network. 47. With a view to facilitate private investment in infrastructure, especially in semi-urban and rural areas, the operation intends to address another regulation challenge pertaining to the cost of public domain occupation and the “dig once” policy. In absence of a specific regulation, rules for authorizing telecom operators to use the public domain are not transparent and costs charged by central and local governments on telecom operators are excessive. In addition, and while Mauritania has a lot of ongoing/upcoming public infrastructure projects, there are no obligations imposed on constructors to (i) consult with telecom operators before starting civil work;, and (ii) and to deploy underground ducts for future telecom cables. Most of the cost of linear infrastructure projects is composed of civil works (i.e. digging). Mutualizing this cost is proved to significantly reduce the total cost of deploying new infrastructure. 48. The broadband sector is also constrained by lack of financing especially for projects in rural and underserved areas. Mauritania has devised a Universal Access Fund (UAF) in 2001 to expand access to digital, electricity and water services in remote areas. The fund is a public financing instrument utilizing the revenues from a 3 percent tax levied on telecom operators. The tax yields around US$6 million annually. However, the UAF is severely mismanaged and under-used. While the fund is supposed to finance the deployment of broadband infrastructures and services in underserved - and hence unprofitable areas - it was never used as intended. Most of the resources have been used for the electricity and water sectors, with limited and untargeted interventions in ICT that do not respond to the needs in rural areas. Moreover, the government agency in charge of carrying out these projects has been constrained by its governance weaknesses, including lack of strategy and capacity, and was consequently recently dissolved. For years, absence of a universal strategy and action plan prevented the universal access public policy to be efficiently implemented. 49. The proposed DPF program supports the development of broadband infrastructure services by increasing competition, strengthening regulation, and activating the universal service fund program. Increased competition in the broadband market is expected to lead to a reduction in the price of services, increased quality, improved use, and higher investments in communication infrastructure and service provision. In line with government priorities, the proposed DPF series will support critical policy actions under three policy areas: (i) Opening the market to competition and investment across all segments of the broadband infrastructure - access, backbone, and international connectivity - by removing specific legal and regulatory obstacles to entry; (ii) Promoting private investment in digital infrastructure through regulation on infrastructure sharing, and regulatory measures aim at reducing the cost of infrastructure deployment by telecom operators; and (iii) Facilitating equitable access to ICT services by implementing effectively the universal access policy. 50. For each policy area, the proposed DPF will support a three-years reforms program focusing on: − Boosting the regulatory framework to allow for new private entrants into the broadband sector:

the program will support a more flexible regulatory regime which facilitates market entry of new


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broadband service providers. It does so through modernizing the current licensing regime to open the digital sector for competition and allowing for new private entrants into the broadband market (DPF1 – Prior Action (PA)#4), adopting standard guidelines to facilitate technical, administrative and operational requirements for firms wishing to enter the sector (DPF2 – Trigger #4, and creating a wholesale market for leasing excess fiber capacity and passive infrastructure owned by public utilities to expand opportunities for new entrants to use the digital infrastructure and compete with existing operators (DPF3- Trigger #4).

− Revise the regulatory framework to promote private investment in digital infrastructure: the program will support legal dispositions on infrastructure sharing between telecom operators allowing as such for those firms to expand their networks while maintaining profits (DPF1 – PA#5); the reinforcement of sector regulation and obligations to be imposed on dominant players in the broadband market to limit monopolistic behaviors (DPF2 – Trigger #5); and the revision of the public domain occupation fees along with obligations to utilize public infrastructure projects in deployment of digital infrastructure to reduce the costs for investments (DPF3 – Trigger #5).

− Facilitating equitable access to ICT services and bridging the urban-rural digital gap: the program

will support the adoption of a national digital strategy, including an investment plan22, to frame and operationalize the universal access policy in favor of rural and underserved areas (DPF1 – PA#6); the creation of an umbrella public-private governance body for the ICT sector - the “Haut Conseil National du Numérique” - mandated to advise government on strategic sector issues and monitor the implementation of the national digital strategy (DPF2 – Trigger #6); adopt a new governance and operational framework of the UAF to leverage more private sector participation in broadband infrastructure and services development in underserved areas. (DPF3 – Trigger #6).

Prior Action #4: Pursuant to its Telecom Law, the Recipient’s National Regulatory Council has adopted a regulatory decree (decision No. 026/19/ANE/CNR/DTP), subjecting internet service providers to a general authorization regime. Prior Action #5: Pursuant to its 2013 Telecom Law, the Recipient’s National Regulatory Council has adopted a regulatory decree (decision No. 225/18/ARE/CNR

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