Mauritania - Structural Adjustment Program Project

- of ~ocumeni The World Bank FOR OFFICIAL USE ONLY Report No. 9 68 2 PROGRAM PERFORMANCE AUDIT REPORT ISLAMIC REPUBLIC OF MAURITANIA STRUCTURAL ADJUSTMENT CREDIT (IDA CREDIT 1812-MAU AND AFRICAN FACILITY CREDIT A-028-MAU) JUNE 20, 1991 Operations Evaluation Department 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.  CURRENCY EQUIVALENTS (period average) Currency Unit = Ouguiya (UM) LIST OF ACRONYMS AND ABBREVIATIONS AfDB A f r i c a n Development Bank ASAL A g r i c u l t u r a l S e c t o r Adjustment Loan BALM Banque Arabe-Libyenne Pour l e Connnerce e t l e Developpement BAMIS Banque A 1 Baraka Mauritanienne-Islamique BCM Banque C e n t r a l e de M a u r i t a n i e BIM A Banque I n t e r n a t i o n a l e pour l a M a u r i t a n i e BMC I Banque Mauritanienne pour l e Connnerce e t 1 ' I n d u s t r i e BMDC Banque Mauritanienne du Developpernent e t du Connnerce BNM Banque N a t i o n a l e de M a u r i t a n i e CF Connnon Fund CSA Connnissariat B l a S e c u r i t e A l i m e n t a i r e EPCV Enqugte Permanente s u r l a C o n d i t i o n de Vie d e s Menages ESAF Extended S t r u c t u r a l Adjustment F a c i l i t y FIRVA Fonds d ' l n s e r t i o n e t de R e i n s e r t i o n dans l a Vie A c t i v e FND Fonds N a t i o n a l du Developpement MDR M i n i s t r y of R u r a l Development M EF M i n i s t r y of Economy and Finance OED O p e r a t i o n s E v a l u a t i o n Department OPT O f f i c e d e s P o s t e s e t T616connnunications PAP Programme d'Action P r i o r i t a i r e PCR Program Completion Report PESAL P u b l i c E n t e r p r i s e S e c t o r Adjustment Loan PIP P u b l i c Investment Program PPA Program Performance Audit PPAR Program Performance Audit Report PREF P l a n de Redressement Economique e t F i n a n c i e r (Economic and F i n a n c i a l Recovery Program) SAF S t r u c t u r a l Adjustment F a c i l i t y SAL S t r u c t u r a l Adjustment LoanlProgram SDA S o c i a l Dimensions of Adjustment SMB S o c i 6 t e Mauritanienne de Banque SMCP S o c i e t e Mauritanienne pour l a Connnercialisation du P o i s s o n SMCPP S o c i e t e Mauritanienne pour l a Connnercialisation d e s P r o d u i t s P d t r o l i e r s SNIM S o c i e t e N a t i o n a l e I n d u s t r i e l l e e t Miniere SOMIR S o c i e t 6 Mauritanienne d e s I n d u s t r i e s de R a f f i n a g e SONADER S o c i e t e N a t i o n a l e pour l e Developpement R u r a l SONELEC S o c i e t e N a t i o n a l e dlEau e t d ' E l e c t r i c i t e SONIMEX Societe Nationale dlImportation e t dVExportation UDB Union d e s Banques de Developpement (formed by t h e merger of B MDC and FND) UM Ouguiya SYSTEM OF WEIGHTS AND MEASURES: METRIC Metric US Equivalent 1 meter ( m ) - 3.28 f e e t ( f t ) 1 k i l o m e t e r (km) - 0.62 m i l e s ( m i ) 1 s q u a r e k i l o m e t e r (km2) = 0.39 s q u a r e m i l e ( s q m i ) 1 hectare (ha) - 2.47 a c r e s ( a ) 1 metric ton ( t ) - 2,205 pounds ( l b ) 1 kilogram ( k g ) - 2.2046 pounds ( l b ) FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Otfice of Director-General Operation8 Evaluation June 20, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Mauritania - Structural Adjustment Credit (IDA Credit 1812-MAU and African Pacilitv Credit A-028-MAU) Attached, for information, ie a copy of a report entitled "Program Performance Audit Report on Mauritania - Structural Adjustment Credit (IDA Credit 1812-MAU and African Facility Credit A-028-MAU)" prepared by the Operations Evaluation Department. Attachment - Thb documan1 hlu a mlrlcltd dlvlribullon ond mny bt uud by reciylcnb only In lllc pertorn~uncc ot lllclr omclnl dullm Its conknts nlay ml othe~wbcbe dluelcd wllhoul World Bunk nuthorla~tlon  STRUCTURAL ADJUS- CREDIT (IDA CREDIT 1812-MAU AND AFRICAN FACILITY CREDIT A-028-HAU) TABLE OF CORTeNTS PREFACE ............................................................. i BASIC DATA SHEET .................................................... iii EVALUATION SUb&URY .................................................. v A. General Oblectiver ....................................... 4 B. Sector Obiectives ........................................ (i) Public Finance Objectivas .......................... (ii) Improvement of Public Administration (iii) Rehabilitation of tha Banking Systan ............... ............... (iv) Objectives in the Enargy Sector .................... (v) Objectivas in the Fisheries Sector ................. (vi) Food and Agriculture Objective. .................... (vii) Objectives of Private Sector Promotion ............. C . Macroeconomic Obiectivas ................................. 8 (i) G r w t h Projections ................................. 8 (ii) Objectives of Internal Uacroeconomic Adjustment .... 8 (iii) Objectives of External Macroeconomic Adjustment .... 9 (iv) Mitigating the Costs of Adjustmnt ................. 9 VI . SAL RESULTS .................................................. 11 A. ........................................... (i) Impact on Public Finances .......................... (ii) Improved Public Sector Administration .............. (iii) Implementation of Banking Sector Reforms ........... (iv) Implementation of Energy Policy Reforms ............ (v) Changer in the Fisheries Sector .................... (vi) Implementation of Food and &ticulture Polify Reforma.......................................... (vii) Impact on the Private Sector ....................... 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 discloeed without World Bank authorization. TABLE OF CONTENTS (cont'd.) Pane No . VI . SAL RESULTS (cont'd.) B . flacroeconomic Results (i) Impact on Growth .................................... ................................... (ii) Impact on Other Internal Macroeconomic Indicators (iii) Impact on External Equilibria .. ...................... (iv) Social Dimensions of Adjustment .................... CONCLUSIONS A. B. SAL Achievements ......................................... .................................. C. Shortcomings of the SAL Sustainability ........................................... 1 2 . . Mauritania: Mauritania: ........... Macroeconomic Projections Suannary Key Economic and Financial Indicators. 1985-91 ................................................ PROGRAM COMPLETION REPORT I . BACKGROUND .... ... .......................................... A . The Onset of Crisis ...................................... B . The Government's Economic and Financial Recovery Program (1985-88) and Initial Stabilization Efforts .... I1 . THE STRUCTURAL ADJUSTMENT PROGRAM ............................ A . The Preparation of the SAL ............................... B . SAL Objectives and Design ................................ C . Credit Effectiveness and Disbursements ................... D . Supervision of SAL Implementation ........................ 111 . ACHIEVEMENTS OF STRUCTURAL ADJUSTMENT AND THE IMPACT OF THE SAL ...................................................... A . Economic Performance ..................................... B . Public Sector Management ................................. Public Investment and Consolidated Budget .............. Public Finances ........................................ Public Enterprises ..................................... Institutional Development .............................. Information Management ................................. C . Banking Sector ........................................... D . Rural Development and Food Policy ........................ E . Liberalization of the Regulatory Framework and Promotion of Private Investment ........................ F . Energy Policy ............................................ . Fisheries Policy ......................................... H . Social Dimensions ........................................ C TABLE OF CONTENTS (cont'd.) Pane 100 . IV . TEE DESIGN . SEQUENCING AND TIMING OF REFORMS: LEARNED FROM TEE SAL LESSONS ......................................... A . Mauritania's Economy After the SAL ....................... B . . Government Performance ................................... Donor Performance ........................................ C D E . . Bank Performance ......................................... Forward Links to Adjustment Operations (SECALs and SALs) .............................................. I . . Basic Data Sheet ............................................. Structural Adjustment Program .Measures and Action Program .. 11 I11 IV . . Mauritania: Key Economic and Financial Indicators. 1985-91 Letter of Development Policy .. .................................  PROGRAM PERFORMANCE AUDIT RE= STRUCTURAL ADJUSTMENT CREDIT (IDA CREDIT 1812-MU AND AFRICAN FACILITY CREDIT A-028-MU) This is the Program Performance Audit Report (PPAR) on a Structural Adjustment program for Mauritania, involving IDA Credit 1812-WU (USS15.0 million) and African Facility Credit A-028-WU (USS27.4 million). The prin- cipal objective of the credits was to support the second phase of the Government's Economic and Financial Recovery Program for the 1985-88 period. The credits were approved in June 1987 and the last disbursements made in December 1988; the credits closed in December 1988, six months behind schedule. Both credits were fully disbursed. The PPAR consists of the Program Performance Audit (PPA) prepared by the Operations Evaluation Department (OED) and the Program Completion Report (PCR) prepared by the Africa Regional Office of the Bank. The PPA is based on the attached PCR, the President's Report, sector and economic reports, credit documents, the project files, and discussions with Bank staff. In addition, an OED mission visited Mauritania in JuneIJuly 1990 and discussed the effectiveness of the Bank's assistance with Government officials and business leaders. Their kind contribution and valuable assis- tance in the preparation of this report is gratefully ackncrvledged. The PCR provides a satisfactory account and assesement of the program experience and discusses the performance of the Bank and the Govern- ment. The PPA elaborates on particular aspects such as the significance of the achievements of the SAL when viewed in a longer-term context. The draft PPAR was sent to the Borrcrver for caments, but none were received.  PROGRAM PERFORMANCE AUDIT REPORT ISLAMIC REPUBLIC OF MAURITANIA STRUCTURAL ADJUSTMENT CREDIT (IDA CREDIT 1812-MAU AND AFRICAN FACILITY CREDIT A-028-MAU) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ Million) As of Avr. 30, 1991 Credit Original la Disbursed fi Cancelled Revaid Outstandinq fi No. 1812 15.0 15.26 0.26 - 15.33 NO. A-028 27.4 28.41 - - 28.55 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Appraisal Estimate (US$ M) 25 .O 42.4 Actual (US$ M) 25.0 42.4 Actual as % of Appraisal ( % ) 100% 100% Date of Final Disbursement: December 9, 1988 PROGRAM DATES Original Actual Initiating Memorandum 02 / 86 Letter of Development Policy 09/86 Negotiations 10186 Board Approval 06/87 Signing 06/87 Effectiveness 08/87 Loan Closing 06/30/88 la To this total of USS42.4 million, USS7.6 million was added in cofinancing, for a total operation of US$50.0 million. /b The credits were fully disbursed. Disbursed and outstanding totals differ from the original amount of the credit in terms of US$ because of changes in the US$/SDR exchange rates.  swLu!am (staf*eelrr) PYS'I BteP Tot.l Preappraisal 42.8 0.7 - - - 43.5 Appraisal - 79.6 - - - - - - 79.6 Negotiations - 16.8 16.8 Supervision - 1.6 84.6 21.6 17.1 124.9 Other - 2.3 -- - - 9rl 3 0 Total 45.1 98.7 85.2 21.6 17.2 267.8 MISSION D A U no. of UO. of Staff Date of MonthlYear Weeks Para- W.ekr Renort Preparation 01/86 4 7 Pre-appraisal 03/86 3 7 Appraisal 06/86 2 15 Supervision I 11/87 3 8 Supervision 11 02188 3 3 Supervision 111 05/88 3 4 Canpletion - 4 1 OTHER PROGRAM Borrwer/Executing Agency: Republic of Mauritania Operation: Agricultural Sector Adjustment & Investment Amount: USS25.0 million Credit No. 2093-MU Board Date: February 13, 1990 Operation r Public Enterprise Sector Adjustment Amount : USS40.0 million Credit No. 2166-MU Board Dater June 26, 1990  PROGRAM PERFORMANCE AUDIT =PORT STRUCTURAL ADJUSTMENT CREDIT (IDA CREDIT 1812-NAU AND AFRICAN FACILITY CREDIT A-028-NAU) EVALUATION S U M W R Y Introduction SAL Oblectives 1. Mauritania's growth potential 2. The objectives were many and is constrained by some very severe c a n be grouped i n four areas. problems, including a narrow re- First, the macroeconomic objectives source base, low factor produc- of the SAL were fairly modest. It tivity, limited investment oppor- was made clear that this first SAL, tunities and structural instability. even in conjunction with other aid Throughout the 1970s and into the measures, was not going to solve all early 1980s these problems were of Mauritania's problems or put the masked by heavy reliance on foreign country on a path of self-sustained resources, which permitted a fairly growth. This is clearly demon- substantial expansion in final de- strated by t h e economic growth mand in spite of output stagnation. o b j e c t i v e s (paras. 4.12-4.13). As the debt service ratio rose and After a small increase during the threatened to exceed 40% and arrears SAL period itself, per capita GDP accumulated, the financial situation was projected to decline by about became untenable and the Government 0.3% p.a. afterwards. This was a launched an Economic and Financial reflection of the severity of the Recovery Program (PREF) for the development challenge in Mauritania 1985-88 period, backed by three IMF and t h e f a c t t h a t i n v e s t m e n t stand-by arrangements and a struc- spending would have to be con- tural adjustment facility. The strained. The investment ratio, second phase of the PREF (1987-88) which had already declined dramat- was also supported by a Bank SAL, ically before the SAL, was to be approved on June 2, 1987, for a kept at its 1986 level of 22-232 of total of $50 million, including $7.6 GDP. Major declines in the public million in cofinancing. Disburse- finance and balance of payments ment was to take place in two equal deficits had also taken place before tranches. The conditions on which the SAL: the objective now was to the SAL was granted consisted of a keep these deficits at a level low set of 95 reform measures, some to enough to reassure donors that their be undertaken prior to loan effec- past aid was being managed properly tiveness, others before release of and to convince them to finance t h e second tranche, others yet these reduced deficits, as much as before the closing date. However possible, on a grant basis. numerous, the 95 measures on the list were not ranked in any order of 3. Second, the more general and importance. w e r a l l objective of the SAL was the substitution of a market-oriented f o r a government-regulated economy. was an eight-month d e l a y i n meeting T h i s i n c l u d e d promotion of t h e c o n d i t i o n s f o r second t r a n c h e r e - p r i v a t e s e c t o r , r e d u c t i o n of t h e lease. F u r t h e r m o r e , some of t h e number of p u b l i c e n t e r p r i s e s , r e - proposed measures were never t a k e n s t r u c t u r i n g and a d o p t i o n of p r i v a t e d u r i n g t h e SAL p e r i o d i t s e l f , b u t s e c t o r management p r a c t i c e s i n were subsequently designated a s e x i s t i n g public enterprises, easing c o n d i t i o n s f o r a p p r o v a l of follow-up of c o n t r o l s on p r i c e s and f o r e i g n adjustment o p e r a t i o n s . I n t h e end, t r a d e and e l i m i n a t i o n of d i s t o r t i o n s t h e c r e d i t was c l o s e d w i t h a d e l a y c r e a t e d by s u b s i d i e s , exemptions and of about s i x months. the like. 7. The d e l a y s d i d n o t r e s u l t from 4. T h i r d , r e h a b i l i t a t i o n of t h e major government r e s e r v a t i o n s about banking s y s t e m was t h e p r i m o r d i a l adjustment p o l i c i e s : t h e f ounda- g o a l of t h e SAL and t h e major f o c u s t i o n s f o r t h e s e had been l a i d of a t t e n t i o n . The o b j e c t i v e was e a r l i e r i n t h e PREF, which had a l - threefold: lay the basis for a ready r e s u l t e d i n d r a s t i c c u t s i n workable and f l e x i b l e c r e d i t p o l i c y , domestic and e x t e r n a l d e f i c i t s . In s t r e n g t h e n t h e C e n t r a l Bank and f a c t , t h e r e a s o n s f o r d e l a y had much c l a r i f y its relations with the more t o do w i t h a l a c k of c a p a c i t y primary banks, and r e s t r u c t u r e f o u r t o a c t t h a n w i t h a l a c k of commit- o f t h e s e v e n p r i m a r y b a n k s em- ment. The v e r y l e n g t h of t h e l i s t phasizing p r i v a t i z a t i o n including o f m e a s u r e s made t h i s a l m o s t un- b o t h l o c a l and f o r e i g n i n v e s t o r s . avoidable. Thus, o f t e n t h e t i m e r e q u i r e d t o p r e p a r e and c o m p l e t e 5. F i n a l l y , t h e SAL c o n t a i n e d a some of t h e reforms had been under- v a r i e t y of o b j e c t i v e s i n t h e f i s h - e s t i m a t e d , o r t h e complexity had n o t e r i e s , energy and a g r i c u l t u r a l sec- been f o r e s e e n , o r t h e r e was simply t o r s (paras. 4.08-4.10). In the b u r e a u c r a t i c i n e r t i a . The long l i s t l a t t e r , f u l l c o s t p r i c i n g and l i b e r - of measures, w i t h o u t p r i o r i t y a l i z a t i o n were t h e g o a l s . The un- o r d e r i n g , meant t h a t t h e Bank found d e s i r a b l e e f f e c t s of food a i d on i t d i f f i c u l t t o r e f u s e r e l e a s e of o u t p u t and consumption were t o be t h e second t r a n c h e when t h e m a j o r i t y l e s s e n e d by s e t t i n g up a n a n n u a l of r e q u i r e d a c t i o n s had been t a k e n , food program, reducing t h e f r e e even though two of t h e most irnpor- d i s t r i b u t i o n of food, i n t r o d u c i n g a t a n t ones, banking s e c t o r reform and food-for-work program t o make pro- food p o l i c y a c t i o n , were behind d u c t i v e u s e of t h i s t y p e of a i d , and schedule. I n s p i t e of t h e above, c e n t r a l i z i n g t h e c o u n t e r p a r t revenue t h e b a s i c t h r u s t of t h e SAL r e - from s a l e s of food a i d i n a Common mained: 66 reform measures o u t of fund . t h e 95 planned were achieved p r i o r t o t h e c l o s i n g d a t e and t h e main Imvlementation Experience o b j e c t i v e s of t h e reform were n o t abandoned. 6. SAL implementation took some- what l o n g e r than a n t i c i p a t e d . SAL R e s u l t s Already t h e c r e d i t n e g o t i a t i o n p r o c e s s had been slowed p r i m a r i l y 8. Actual G DP growth r a t e s d u r i n g b e c a u s e t h e Government, n o t s u r - t h e SAL y e a r s were remarkably c l o s e p r i s i n g l y , had been h e s i t a n t t o t o t h e p r o j e c t i o n s on which t h e SAL agree t o t h e p r i o r conditions f o r was based. However, t h e r e a s o n s f o r a p p r o v a l of t h e SAL a s t h e s e were t h i s g r o w t h w e r e d i f f e r e n t from many and f a r - r e a c h i n g ( p a r a . 3 . 0 4 ) . e x p e c t a t i o n s . The SAL had, i n f a c t , During implementation i t s e l f t h e r e l i t t l e i m p a c t on t h e growth r a t e (para. 6.19). Only in the case of 10. In the banking sector the the expansion in cereal production intended new legislation and regula- was there a connection but even here tions were introduced as planned and favorable weather and earlier in- the proposed Bank mergers took vestments in irrigation were prob- place. However, there have also ably more important. As intended, been many problems and delays. the public sector and external Foreign banks have shown little deficits were maintained at accept- interest in participating in the able levels and there was a cor- privatization process, the total respondingly very large increase in cost of the reform far exceeded the the share of grant financing (para. funds available under the SAL and . 6.2 1) The major deviation from the difficulties in debt recovery program intentions was a substantial remain. Nevertheless, the results further drop in the investment ratio have been real. First, collapse of to an estimated 14% in 1989 which is the banking system was avoided. likely to have an adverse impact on Second, the country now possesses a growth over the longer run. During group of lending institutions and a the SAL period, however, this facil- body of banking regulations that itated strong consumption growth should make it possible, at least in which may well explain why the theory, to pursue sound credit poli- Mauritania SAL provoked so little cies and banking practices, although discontent. the final results of experience are still awaited. 9. The private sector has bene- fitted substantially from several 11. Fairly good progress was made aspects of the SAL program such as in introducing reforms in the the elimination of some public sec- fisheries and energy sectors (paras. tor monopolies and the legal incen- 6.08-6.11). In agriculture there tives created to promote private have been both impressive results sector growth, including land (cereals production, privatization) reform, liberalization and relaxa- and important failures (Common Food tion of price controls. Many other Aid Fund) or delays (reorganization measures were delayed, however, and of governmental agencies). Follow- the overall impact is hard to up adjustment measures in the agri- measure. Thus, e.g., while the cultural sector are being supported growth in the cereal subsector can by the Bank. be partly attributed to the SAL there has, at the same time, been Sustainability of the Results and limited private investment response Lessons Learned and, thus far, no export diversifi- cation. The efforts to restructure 12. Possibly the most important public enterprises also have had achievement of the SAL was that it mixed results. While there have prevented major crises from sur- been important delays in some areas facing. In particular, an external there has been marked improvement in payments crisis was avoided largely others, such as the management of because the SAL was a vehicle to several enterprises. Nevertheless, elicit generous donor support. the problems remain severe and a While the SAL helped ensure con- follow-up adjustment program for the tinuity of the Government's 1985-88 public enterprises sector is now PREF program, there were important being supported by the Bank. problems: some of the reforms were delayed, carried out only partially or not followed up with changes in specific policies, although it  - viii - should be added that the reform which will, among others, require process has subsequently been pur- investments. While the SAL helped sued further under SECALs and IHF avoid crises and while consumption programs. The SAL also was partial levels were maintained, the invest- in that it left some of the most ment level contracted much more than b a s i c s t r u c t u r a l p r o b l e m s of anticipated. Unless this trend can Mauritania untouched (para. 4.03). be reversed, the SAL would, in retrospect, turn out to have been 13. The sustainability of what has little more than a stabilization been achieved thus far has two effort. In fact, a different coun- dimensions. First, continuity of try assistance strategy may have a the reform process, as is, cannot be much more sustained impact. It is taken for granted because many of evident, o n the one hand, that the reforms required major and sud- Mauritania can use external support den changes in economic practices only in the form of highly conces- and behavior, which could easily be sional or grant financing. On the reversed. Thus, to ensure adherence other hand, if such support is to to the reforms and continuation, the have any lasting value it should be Bank is following up with more used not for stabilization but pri- adjustment lending. Second, and marily to finance the limited pro- much more fundamentally however, it duct ive investment opportunities h a s t o be recognized that t o available. generate any economic growth in Mauritania, which is the ultimate objective, is a formidable challenge  ISLAMIC REPUBLIC OF MAURITANIA STRUCTURAL ADJUSTMENT CREDIT (IDA CREDIT 1812-MAU AND AFRICAN FACILITY CREDIT A-028-MAU) I. ECONOMIC POSITION OF MAURITANIA PRIOR TO SAL 1.01 Mauritania is a vast country of more than 1 million km2, but with a very limited resource base and a small population of around 2 million. Most of its terrain is desert. Food production covers only a fraction of domestic consumption (between 102 and 502, depending on the year) and accounts for around 52 of GDP. Livestock is much more important, accounting for 202 of GDP, though it is no longer a driving force. Manufacturing is in its infancy. Only iron ore mining and fisheries have been major dynamic sectors, accounting for about 152 and 82 respectively of GDP, and they are the sole sources of export revenue. 1.02 Four structural features of the economy restrict its growth potential. (1) Geographic fragmentation is evident in the concentration of the population in three widely separated zones: the Senegal River area in the south; the northwest, sustained by fishing and iron ore mining; and the new urban agglomeration of Nouakchott on the central coast, a result not of the citySs own economic expansion but of the agro-pastoral crisis precipitated by the 1973 drought. Any attempt to bring these elements of the economy together into a whole would require sizeable investments in infrastructure and transportation. At the same time, each region maintains somewhat separate relations with the rest of the world (except for the recent interruption of relations between the south and Senegal). (2) With few exceptions, MauritaniaSs enterprises cannot compete on world markets: only fisheries products and, to a lesser degree, iron ore are competitive, even though in the latter case it has often been necessary to give tax breaks or provide investment assistance; farming and livestock are competitive only in the context of informal inter-African exchanges; and any natural comparative advantage can be exploited only through heavy capital-intensive investments (mining, irrigation). (3) The country*^ capacity to absorb capital is weak and finding projects whose likely economic rate of return exceeds 102 has always been difficult. (4) Economic instability is a common problem resulting from a variety of factors: erratic climatic conditions; heavy dependence on fluctuations in the world market for iron ore; vulnerability to increased oil prices, especially because of a total lack of fossil energy sources and the specter of exhaustion of fuelwood resources; and volatile relations with neighboring countries as well as with major donors. 1.03 Throughout the 19708, a temporary solution to these structural problems was found in a large and growing resource gap which reached up to the equivalent of 402 of GDP. Thus, between 1973 and 1982, final demand could increase by 802 in real terms, even though GDP grew by only 222. The deficit waa financed by aome 30 donors, a process which was facilitated by Mauritania*s geopolitical aituation, the lending capacity of Arab countries and the worldwide expansion of credit. External financing of this magnitude provided support for the country's balance of payments, the deficit in its public finances, the unrestricted growth of its public enterprises and a particularly lax credit policy. First and foremost, such financing made possible an average investment to GDP ratio far above that in comparable countries which led to an incremental capital-output ratio which at times reached 20. 1.04 These developments were clearly uneuetainable: the debt-service ratio rose rapidly and threatened to exceed 402 while arrears in both external and domestic payments accumulated. A number of other events combined to produce a crisis situation: the world debt problem, a slump in iron ore pricee, a decline in the lending capacity of the oil-producing countries, fear on the part of donors that their food aid might act ae a disincentive to agricultural production and their mounting criticism of management practices in the banking and public enterprieee eectors. The Government launched an Economic and Financial Recovery Program (PREF) for the 1985-88 period, the second phase of which (1987-88) was supported by the SAL. 11. THE STRUCTURAL ADJUSTMENT PROGRAM 2.01 On June 2, 1987, the Executive Directors of the Bank approved a structural adjustment operation (SAL) for Mauritania in the amount of SDR 33.1 million (USS42.4 million). The arrangement was financed by two credits: an IDA Development Credit (1812-MAU) for SDR 11.7 million (USS15 million) and an SFA Credit (A-028-MAU) for SDR 21.4 million (USS27.4 million). The combined credit wae increased by cofinancing of USS2.8 million from the Federal Republic of Germany and cofinancing of USS4.8 million from the Kingdom of Saudi Arabia. To the resulting total of USS50 million was added parallel financing of USS19.6 million from the African Development Bank. Disbursement was to take place in two tranches of USS25 million each; releaee of the second tranche was to be contingent on the completion of 12 priority actions (anticipated for the early months of 1988). 2.02 The credite provided general balance of payments aeeistance that could be used to finance any imports (except for a small negative list coneieting primarily of luxury consumer goods or goods intended for military or para-military use), although not more than USS10 million could be ueed to finance imports of oil and food products. No link wae established between the amount available under the SAL and the expenditures which would flow from the fulfillment of its conditions. In the event, the Mauritanian authorities decided to allocate the counterpart funds to the financing of banking sector reforms and the reorganization of public enterprises. 2.03 The conditions on which the SAL was granted coneieted of a set of 95 refonn measures, some to be undertaken prior to loan effectiveness, others before release of the eecond tranche, othere yet before the date specified for cloeure of the whole operation (see list in Annex VI of the PCR). Most of these meaeures were legal or adminietrative decieione whose economic and financial coneequences were not evaluated in the underlying agreement -- although there were macroeconomic projections aeeociated with the SAL, even if they were not always linked to epecific refonne. 2.04 The fact that the SAL program was formulated as a detailed list of 95 measures certainly paved the way for great precision and therefore ease in the negotiations and monitoring processes. On the other hand, the measures on the list were not ranked in any order of importance (although those on which release of the second tranche would depend were, of course, identified). This lack of a priority ordering is far from desirable: Government officials will be tempted to demonstrate rapid execution of the program by attending first to less costly measures; and the Bank found it difficult to refuse to release the second tranche when the majority of the measures listed had been carried out, even though two of the most important ones, banking sector reform and food policy action, were behind schedule. 111. SAL PREPARATION 3.01 The SAL was not the cornerstone of Mauritania's economic adjustment policy, but merely a means of providing support for reforms already begun, chiefly within the ambit of the 1985-88 Economic and Financial Recovery Program (PREF), which was backed by three IMF stand-by arrangements (SDR 12 million, August 12, 1985; SDR 12 million, April 26, 1986; and SDR 10 million, May 4, 1987) and by a Structural Adjustment Facility for SDR 23.7 million in 1986. 3.02 SAL preparation benefitted from substantial earlier economic and sector work: studies (carried out from 1983 onwards at the request of donors) on the country's escalating debt, payment arrears and banking crisis; donors' discussion papers on food aid, its potential dangers, and the need for a new agriculture and food policy; research on the need to monitor fishery activi- ties; and the reports of IMF missions (in which Bank staff participated) concerned with preparation and approval of the stand-by arrangements and the Structural Adjustment Facility. 3.03 Advantage was also taken of experience gained in handling the difficulties associated with earlier reform programs which had failed. The need for financial reorganization, e.g., had emerged as a primordial issue. Preappraisal missions began cataloging reforms that had not been started or had bogged down, and pinpointing the legal and administrative obstacles that had led to the standstill. The result, an excellent inventory of the decisions needed to complete or re-start reforms already decided on prior to the SAL, was used in drawing up the conditions on which approval of the SAL would be contingent. 3.04 SAL preparations by Bank staff began in 1985 (the Economic Memorandum of that year, participation in IMF missions to appraise stand-by arrangements). In 1986, there were several preappraisal and negotiation missions to Mauritania. The negotiation process was longer than anticipated and approval of the SAL, at first expected in late 1986, was delayed for about six months. The delay was due partly to the Government's lack of familiarity with many of the workings of a market-oriented economy, which it was about to introduce, and partly to the Government's hesitation to agree to the prior conditions for approval of the SAL eince these were many and far-reaching, as illurtratmd by the following list: introduction of a consolidated public invmstment budget and adoption of the firrt such budget (December 1986); initiation of the studies that were a necessary prelude to improvements in economic management and creation of a government department with responsibility for the business of institutional reform; strengthening of Central Bank monitoring of bad-debt recovery actions and the credit allocation process; an agreement on reorganization and privatization of two canmercial banks-- Banque Internationale pour la Mauritanie (BZHA) and SociBtB Mauritanienne de Banque (SMB); an agreement on the merger of Banque Mauritanienne du DBveloppement et du Commerce (BMDC) and Fonds National du DBveloppement (FND); and an agreement with the IMP on technical assistance to strengthen the Monitoring Department of the Central Banks adoption of a coherent energy sector policy; introduction of a new petroleum products price sttucture and liberalization of oil import procedures; establishment of a Common Fund to centralize food aid counterpart sales revenue; presentation of a program for the reorganization of the Commissariat B la SBcurit6 Alimentaire (CSA); formulation of the major objectives of a strategy for the fisheries sector; steps to reduce the number of fishing licenses issued in 1987; and appointment of a new high-level staff group to introduce a new fisheries surveillance system. Given the length of this list of prior conditions, it is not surprising that the SAL negotiation process was both lengthy and marked by interruptions. IV. SAL OBJECTIVES A. General Objectives 4.01 Since they were canmon to all the country's reform programs (particularly the PREP and the IMF stand-by arrangements), the general objectives of this structural adjustment program were in many instances spelled out less explicitly than its specific objectives. Nevertheless, they need to be examined if the logic behind the SAL is to be understood and its results evaluated. 4.02 There were four general objectives: (1) Substitution of a market- This included : promotion of the private sector; reduction of the number of public enterprises (elimination of public monopolies) and adoption of private-sector management practices; elimination or easing of controls on prices, exchange operations and foreign trade; elimination of distortions created by subsidies, exemptions, tariff barriers and other discriminatory measures. (2) Reduction of macroeconomic deficits to a level low enough to reassure donors that their past aid was being managed properly and to convince them to finance these reduced deficits. Wherever possible, financing should be on a grant basis, since this would avoid further indebtedness. This particular definition of an optimum deficit level needs to be understood if the results of the SAL are to be judged properly. (3) Financial adjustment, requiring -- prior to reorganization of the banking sector and reform of lending standards -- settlement of payment arrears, elimination of the problem of bad debts, and rescheduling and permanent reduction of debt-service obligations. (4) Increased ~roductivitvthroughout the economy by improving resource allocation, reducing non-productive expenditure, eliminating subsidized activities, and achieving higher investment efficiency. The strategy would be to cut back the investment ratio to a level more in keeping with the country's capacity to absorb capital, the hypothesis being that it would be possible to substitute growth through increased productivity for g r w t h through a high investment ratio. 4.03 This first SAL, even in conjunction with other aid measures, was not meant to solve all problems and to put Mauritania on a path of self- sustained grwth. This is borne out by the macro-projections, among others (para. 4.12). and the SAL should not be enraluated from that perspective. It is nevertheless instructive to examine the links between the SAL and the four structural features of the Mauritanian economy referred to earlier (para. 1.02). (1) As to Mauritania's geographic fragmentation, it was implicitly assumed that this could not be remedied to any extent in a period when there were to be major cutbacks in investment. The regional disparities that had been the focus of projects launched during the years of expansion were no longer emphasized. (2) While the SAL document did suggest that Mauritanian enterprises could be made competitive through depreciation of the exchange rate, cost reduction and promotion of the private sector, it is interesting to note that the accompanying macroeconomic projections only allwed for growth of the two existing export products. (3) Increased efficiency of capital was apparently assumed to derive more or less automatically from the growth of private sector enterprises. (4) The structural instability of the Mauritanian economy was the basis for the objective of increasing foreign exchange reserves (to c w e r three months instead of just one month of imports) and for a plea that food aid donors act quickly and in unison at times of crisis. Hwever, the discussion was vague on the causes of instability and other possible remedial measures. B. Sector Obfectives (i) Public Finance Oblectives 4.04 The objectives for public finances were straight-foward: (1) Reduction of the fiscal deficit (but not its elimination, since that would have precluded receipt of grant financing). (2) Maintenance of, but not an increase in, the tax ratio, which was regarded as having reached its maximum. (3) A halt in the growth of current expenditure, through freezing of the public sector wage bill. (4) Reduction of public investment activity (lwering total investment -- which had accounted for 33.6% of GDP in 1982-84 -- to 22% of GDP). (5) Introduction of a consolidated public investment budget and its accompanying inventory of all external financing arrangements. (6) Formulation of a Public Investment Program (PIP) with a reduced spending level consistent with the country's absorptive capacity, and reorientation especially twards agriculture. (7) A variety of changes in the structure of tax revenues, customs tariffs, and revenues and expenditures of public enterprises. (ii) q 4.05 Imprwed public administration was a general Bank objective for Mauritania well before the SAL. The specific goal of the SAL was to prepare a list of legal and administrative impediments to improved public administra- tion, to make an inventory of reforms planned but not yet carried out, and to set up the information resources and inetitutions that would allow for monitoring of reforms. The SAL was therefore less an instrument for the financing of a reform program than a vehicle for introducing the legal and administrative instruments and information processes needed for a future program. Accordingly, the proposed measures focussed on such things as the creation of an interministerial committee to monitor the PREP, measures to strengthen the Ministry of Economy and Finance and to facilitate relations with donors, improvements in the data base (debt, emplopment, living conditions) and laying the groundwork for taxation reforms. Three specific measures, affecting the public enterprises sector, were second tranche release conditions: electric power tariff reform, signature of a performance contract with the SociBt6 Nationale d9Eau et d9Electricit6 (SONELEC) and reorganization of the SociQtB Mauritanienne pour la Commercialisation des Produits PBtroliers . ( SMCPP ) (iii) Rehabilitation of the Bankinn System 4.06 By 1985-86, Mauritania's banking sector was regarded as being on the verge of collapse because of the size of its foreign debt (USS30 million), arrears receivable, and non-recoverable or doubtful loans (estimated at approximately USS130 million, or 51% of all credit to the economy and 36% of sector assets). In the circumstances, rehabilitation of the banking systemwas the primordial goal of the SAL, its most specific project and the major focus of attention. 4.07 Three sets of measures were envisaged: (1) Introduction, under IMP supervision, of regulations designed to lead to a workable, flexible credit policy (e.g., procedures for setting interest rates, ceilings on advances, prudential ratios). (2) Strengthening of the Central Bank through redefinition of its powers and responsibilities and those of the primary banks in granting loans, selecting borrowers and deciding on sanctions to be applied to debtors in default. (3) Restructuring of four of the seven primary banks -- BMDC, FND, BIMA and SMB (the Banque Mauritanienne pour le Commerce et l91ndustrie had already been privatized, in 1986, while the Banque A1 Baraka Mauritanienne- Islamique and Banque Arabe-Libyenne pour le Commerce et le DQveloppement were not considered to need restructuring) -- "the ownership and management of which were to be left to the local and foreign private sector, with the exception of one development finance institution whose majority shareholder was to be the Government" and which would be formed from the merger of BMDC and FND. This restructuring would depend on bad debts being either collected or taken over by the Treasury, and on settlement by the Government of the foreign debt of the banking sector. Despite the complexity and anticipated cost of these operations, it was announced in May 1987 that they should be carried out within a year at most and that new owners would be found for all the banks by the end of 1987 (presumably promising contacts had already been made with foreign banks). (iv) Objectives in the Enernv Sector 4.08 The SAL energy sector strategy had been laid out in the 1986 Bank/UNDP Energy Sector Report. The goal was to institute full cost pricing. This should have entailed estimating shadow prices for petroleum, gas and fuelwood. But while the problem of relative shadow prices was the reason given for surveying households on their choices between butane and fuelwood , the goal of full cost pricing was hardly referred to in the SAL except as justification for proposing elimination of subsidies and tax exemptions, improved revenue collection, dissolution of import and transport monopolies and indexation to world prices (Soci6t6 Mauritanienne des Industries de Raffinage ( S M R ) , the oil refinery, being required to keep its prices in line with those charged by its foreign counterparts). Tbo public enterprises in particular were earmarked for restructuring: SONELEC, which was to rationalize tariffs, cut back payroll costs, improve bill collection, enter into a performance contract and benefit from a capital increase; and SMCPP, which lost its monopoly and tax subsidies, besides being required to adjust its prices and rate schedules on a quarterly basis and to enter into a performance contract. (v) Objectives in the Fisheries Sector 4.09 The importance of the country's fishery resources and fishery sector industries (which accounted for roughly two thirds of exports in 1986), and the potential -- pointed out by numerous experts from 1985 onwards -- that existed for improving their administration, led to the sector's being included in the SAL. Three of the conditions for second tranche release concerned it: design of a sector training program, formulation of a sector investment program, and arrangements for the surveillance of fishery activities. In addition, a number of other recormendations reflected the reasoning behind SAL conditionality in general: increasing local-currency export prices by depreciation of the exchange rate; lowering internal costs through increased productivity; promotion of both domestic and foreign private sector investment; re-funding lending institutions (sector demand for credit being high); and reorganizing the Soci6t6 Mauritanienne pour la Commercialisation du Poisson (SMCP) -- the fishery product marketing corporation. Still other recormenda- tione were more specific and introduced concerns into the SAL conditions that did not appear in connection with other sectors: conservation of natural resources, public financing for infrastructure (port facilities in Nouadhibou), and operations surveillance. Certain interventions clearly had less to do with a return to a market-oriented economy than with something not generally part of structural adjustment operations, i.e. national appropriation of natural resources: control over foreign vessels, incentives for the creation of quasi- public companies, increases in inter-country royalty payments, and requirements that local facilities be used. The degree of determination to maximize local value added even during the course of preparatory work for the SAL aroused some fears that foreign investors might lose interest. (vi) Food and Agriculture Obfectives 4.10 SAL objectives in the food and agricultural policy area were full cost pricing and liberalization. The undesirable effects of food aid on output and consumption were to be lessened by setting up an annual food program (designed in conjunction with donors), reducing the free distribution of food, introducing a food-for-work program to make productive use of this type of aid, and centralizing the counterpart revenue from sales of food aid in a Common Fund. In the cereal subsector, where the goal was increased self-sufficiency, there was to be an increase in prices, deregulation of marketing and pro- cessing, elimination of input subsidiee, increased participation by private producers in farming new irrigated areas, and some liberalization of import activities (until then a public monopoly held by the Soci6te Nationale d91mportation et d'Exportation (SONIMEX)). The governmental agencies (Socidtd Nationale pour le Ddveloppement Rural (SONADER), SONIMEX, CSA) responsible for administering -- respectively -- the production, import and distribution of food products were to be evaluated with a view to their adaptation to the increasing role of the market. (vii) Obiectives of Private Sector Promotion 4.11 Private sector promotion centered around two somewhat different goals. The first of these was primarily npromotionn: move to the private sector activities from which the public sector had withdrawn, encourage existing enterprises and possibly create new enterprises that would generate employment and mobilize domestic or foreign savings. The means to this end were: to amend the country's labor legislation, offer vocational training, provide enterprises with promotional assistance and credit facilities, make price controls less stringent, and see to both internal and externalliberal- ization. The second goal was to create the right environment for competition to flourish and, to the extent possible, exports to grow. In this instance, promotion of the private sector meant reducing protection, eliminating exemptions from customs duties, doing away with subsidies, and cutting back on the advantages enjoyed by large-scale enterprises. Unlike the first goal, the second was threatening to a number of existing companies -- especially because of its proposals for tax reform, tariff reform and a new Investment Code. It must be added that the SAL's quantitative projections did not provide much detail on likely private sector growth points and, in particular, did not anticipate an important expansion in non-traditional exports. C. Macroeconomic Obiectives (i) Growth Proiections 4.12 Projected growth rates were modest: 3.5% for 1987-90 and 2.4% for 1991-95. In other words, after a small increase during the SAL period itself, per capita GDP was projected to decline by about 0.3% p .a. during 1991-95. Contrary to what is often accepted wisdom on structural adjustment, the immediate and short-term effects of the SAL would thus not be regressive, but, by the same token, its long-term structural effects could not preclude a decline in per capita income. Or, this first SAL was not going to solve the structural problems in the Mauritanian economy: private per-capita consumption in 1991-95 would be equivalent to only 77% of the 1981-84 level. 4.13 The pessimistic tone of these growth projections can be traced to the estimates of sector potential: a weak outlook for iron ore; slow expansion (estimated somewhat arbitrarily at 2%) in livestock activities; expansion in the services sector at a long-term overall rate of 2.4%. Only two sectors, fisheries and cereal production, were regarded as possible sources of significant growth, except that the former faced the specter of eventual over- fishing and the latter accounted for just a very small part of GDP. (ii) Obiectives of Internal Macroeconomic Adjustment 4.14 The internal macroeconomic adjustments expected from the SAL were fairly limited. For one thing, as noted already, the SAL did not aim at elimination of the resource gap but rather at achieving a deficit level acceptable to donors. For another, the maj or readjustment effort had been made prior to the SAL, when the resource gap had been brought darn from 36.9% of GDP in 1982-84 to 13.6% in 1985-86. The SAL goal was simply to bring it down further to 9.4% over the 1987-90 period (and 4.7% w e r the 1991-95 period). Thus, no major further interruption of the economic development process would be required, as this had already occurred within the context of the PREP. For instance, the decline in the investment ratio had been great enough (a drop from 33.6% to 22.6%) between 1982-84 and 1985-86 to mean that it could be kept fairly stable during the SAL implementation period; it would subsequently not fall below 19.7%. Total consumption as a share of GDP, which had declined from 103.3% in 1982-84 to 90.9% in 1985-86, would show only a slight further decline, to 86.83, in 1987-90. Per capita private consumption would increase very slightly during the SAL implementation period before subsequently declining. (iii) Oblectives of External Macroeconomic Adlustment 4.15 The external macroeconomic adjustment envisaged would be charac- terized by: (1) Reduction of the current account deficit, already brought d m from 30.2% to 18.2% of GDP between 1982-84 and 1985-86, at a slower rate: 12.4% in 1987-90 and 5.1% in 1991-95. (2) Maintenance of a net flow of foreign aid, estimated -- for the same time periods -- at USS189 million, USS129 million, USS113 million and US$79 million. This was a key goal of the SAL, recognized to be a main element in the reasoning behind it. (3) Maintenance of the debt service ratio at roughly 25% of exports of goods and services, which was expected to require further debt rescheduling: macro-projections suggested that the ratio might rise to 40% in 1987-90. (4) An increase in the gross flow of external financing, so as to ensure both that debt service cammitments could be met and the net flow of external financing could be kept up. This gross flow (which changed from USS227 million on average in 1982-84 to USS190 million in 1985 and USS214 million in 1986) would rise to USS240 mil- lion in 1987-88 and then subsequently fall to an average of USS191 million during the 1991-95 period. This was a long way from the assertione sometimes made concerning adjustment of the balance of payments through the exchange rate. (5) An increase in the concessional component of external financing, to avoid having to choose between elimination of the deficit and a new increase in borrowing. This quest for grant money to finance the external deficit stands in contrast to the internal micro-economic objective of eliminating all subsidies. (iv) Mitinatinn the Costs of Adfustment 4.16 The social coats of adjustment -- which the Mauritanian authorities originally feared might provoke hostile reactions to the SAL -- were discussed in the SAL documents but not much detail was provided, except that reference was made to the bleak outlook for per capita incomes and to the impact of staff retrenchments by public enterprises and banks. On the other hand, four sets of measures to mitigate possible social costs of the operation were emphasized: (1) Food aid distribution was to be better targeted to vulnerable groups, while the reduction of free food distributions would facilitate financing the food- for-work program; also, the increase in domestic producer prices should help reduce the gap between urban and rural areas. (2) Public resources, which were shrinking, were to be redirected toward social services, such as education and health, eo that these would not be cut back as a result of adjuetment. (3) Job retrenchments were to be offset by (in addition to the food-for-work program) providing retrenched employees with help in creating their own sources of incane -- in particular by means of loans from the Fonds d'Insertion et de RBinsertion dons la Vie Active (FIRVA). (4) The almost complete lack of data on incomes, consumption patterns and access to social services warranted setting up a permanent household survey and including Mauritania in the World BanklUNDP Social Dimensions of Adjustment Project. v. SAL ZHPLEMENTATION 5.01 SAL implementation took somewhat longer than anticipated primarily because of an eight-month delay in meeting conditions for second tranche release. Furthermore, some of the actions incorporated in the SAL were never taken during the SAL period itself, but were subsequently designated as conditions for approval of adjustment operations in the agriculture and public enterprise sectors (Agricultral Sector Adjustment Loan (ASAL) and Public Enterprise Sector Adjustment Loan (PESAL), approved by the Executive Directors in February and June 1990, respectively). In the end, the credit was closed with a delay of about six months. 5.02 The delays did not result from major Government reservations about adjustment policy or from social disturbances in reaction to the stringency of the measures taken. The foundations for this SAL had been laid earlier by the Mauritanian authorities in the PRJZF, which had already resulted in radical action to cut domestic and external deficits significantly. Initially, the SAL did indeed arouse some misgivings, the product of a certain political instability and fears at what social and political reactions might greet losses of jobs, higher prices on consumer goods, and the anticipated decline in per capita consumption. However, in the final analysis, there was no head-on resistance to the package of reforms introduced as part of the SAL and no move to undercut them technically. 5.03 Moreover, the reforms designated as conditions for approval of the SAL and release of its proceeds were implemented with the agreement and cooperation of all donors (IMF, other multilateral agencies such as the African Development Bank and the European Comunity, and bilateral agencies). The African Development Fund, e. g., tied release of the second tranche of its funds to the conditions -- in fact already met -- for release of the first tranche of the SAL. Since donors had been in agreement since the early eighties on the need for monetary, financial, managerial and administrative reform in Mauritania, there was no opposition in principle to austerity nor any temptation to soften it by being more lax in approving funding. At most, there were instances of loans being granted on terms easier than those of the SAL itself, differing positions on use of the counterpart funds generated by the sale of food aid, and a range of opinions on the estimated social costs of adjustment and on the steps that could be taken to mitigate them. 5 04 In fact, the reasons for delay had much more to do with a lack of capacity to act than with a lack of commitment, and they were many. (1) Initial underestimation of the time required by experts connnissioned to adviee on such mattere ae custome tariffe, fisheries surveillance, and arrears and other non-recoverable claims; or s l m e s s on their part. (2) The complexity, also initially underestimated, of the reforms themselves: food and agriculture policy, fisheries surveillance, banking sector reorganization. (3) Bureaucratic inertia and resistance from institutions and public enter- prises threatened with reorganization. (4) Initial miscalculation of likely financial support from abroad: over-estimation of the willingness of foreign banks to participate in the capital structure of privatized local banks, over- optimistic projections of project financing requirements, overestimation of the interest food aid donors would take in the Common Fund. (5) A tendency by the authorities to go slow on reforms with an adverse impact on public revenue, such as the reduction of revenue from tea and sugar with the elimination of the SONIMEX import monopoly, especially where this impact had been underestimated initially. (6) Fears about the social consequences of reform. 5.05 In some instances these delays entailed considerably higher direct costs such as, e.g., in the case of banking sector reform as a result of further interest payments to creditors. In general, the difficult and lengthy implementation process has required considerably more supervision and "negotiation" than originally anticipated on the part of the Bank, and has led to important compromises and concessions to, e .g., postpone reforms with adverse public finance effects or to allow second tranche release without satisfactory banking sector or agricultural policy reform. Nevertheless, in spite of the above, the basic thrust of the SAL was not changed: its initial objectives were not abandoned; 66 reform measures out of the 95 planned were, as discussed in the PCR, achieved prior to December 1988; even in the critical banking and agricultural areas, other reforms in these sectors were suffici- ently far-reaching to maintain the momentum of change. (Amuch more worrisome development was the excessive decline in investment spending, discussed in para. 6.20 below.) VI. SAL RESULTS A. Sector Results (i) Impact on Public Finances 6.01 The available statistical information on public finance develop- ments is a bit too fragmentary to come to precise judgments on outcomes. However, some general conclusions can be derived. As noted earlier, the major adjustments towards re-establishing equilibrium in public finances had already been made before the SAL. The primary goal of the SAL was to maintain a deficit level acceptable to donors and to restrain public investment, improve its quality and efficiency while keeping the total (public and private) investment ratio at around 22.6% of CDP during the SAL period. (Public investment in Mauritania traditionally has accounted for the bulk of total investment.) On the whole, the objective of maintaining public financial indicators at acceptable levels appears to have been attained, but the total investment ratio dropped to 17.8% in 1987, 14.7% in 1988 and an estimated 14% in 1989. In other words, investment appears to have declined considerably more than targeted in the SAL, which raises serious questions about the ability of the economy to generate growth in the future.  (ii) I m r w e d Public Sector Administration 6.02 The program to improve public sector administration was too complex for its results to be easily measurable. The legal decisions that were a necessary prelude to institutional reforms have generally been taken, although it would be imprudent to assert that actual administrative procedures and behavior patterns have changed to any marked degree (especially in the Interministerial Coordination Caamittee and the Uinistry of the Economy and Finance). Some statistical instruments have imprwed (the household survey and price indexes, in particular), although estimates of macroeconomic data still diverge significantly, with the paradoxical result that the effects of a program to improve the country's statistics are the subject of estimates that differ so widely in documents put out by the same sources. 6.03 The efforts made during the SAL period to reorganize and rehabili- tate the public enterprises have had varying results. On the one hand, there were same important problems: of the three conditions for second tranche release involving public enterprises, only one was met in 1988 (introduction of new electric power tariffs), while another (signature of a performance contract by SONELEC) was not met until 1989, and the third (signature of a performance contract by SMCPP) had to be made one of the prior conditions for PESAL. On the other hand, there was also same significant progress since 1985, either in the context of the SAL (see para. 6.08 for SONELEC and SUCPP, and para. 6.14 for SONIMEX and SONADER) or in the context of other programs (Loan 2643-HAU for the rehabilitation of the Soci6t6 Nationale Industrielle et Miniere (SNIM) and Credit 1567-MAU for other public enterprises). There has been marked improvement in the management of several enterprises and in their accounting procedures and results, an inventory of arrears receivable, settlement of accounts with banks, payment (by the Gwernment) of debts contracted abroad by the public enterprises, an inventory of the cross- indebtedness between the enterprises and the Gwernment, and redefinition of the respective responsibilities of the Government and the enterprises in performance contracts. Nevertheless, the werall results were mixed: in 1988, 60% of the public enterprises were still deficit operations, their total losses exceeding US$25 million, and half of those that were SAL beneficiaries showed poorer profit performance in 1988 than in 1987. This was the basis for the initiation of a structural adJustment program for the public enterprises sector proper (P-5293-HAU) in Hay 1990. (iii) Implementation of Bankinn Sector Reforms 6.04 The key goal of the SAL, reform of the banking system, was also the one whose implementation was most difficult, which encountered most delays, and whose results are the most ambiguous. First, although introducing the necessary elements of a prudent and flexible credit policy presented no particular difficulty, experience alone will tell hov effectively the new instruments will be used. Second, newly formulated responsibilities and powers of the Gwernment, the Central Bank and the primary banks were embodied in the necessary legal texts; again, however, it is still too early to judge whether the changes in the decision-making autonomy of the primary banks and in the capacity of the credit system to draw up and apply purely economic criteria for the granting of loans will p r w e satisfactory in practice. Third, the sector was restructured as planned -- by merging BMDC and FND to form the Union des Banquee de DBveloppement (UDB), and by merging B W and SIB to form the Banque Nationale de Hauritanie (BNM) (a move not initially planned but which the Gwernment, in 1988, when divestiture p r w e d difficult., requested be sub- etituted for privatization in the SAL conditione). 6.05 The privatization scheduled for 1987 ran into a lack of interest on the part of foreign banks, whoee deeire to participate had certainly been werestimated originally, and who became even more reticent becauee of the interruptions in sector reorganization, and oleo perhape becauee of the untoward effects of the inventory of arreare and bad debte. It became necessary to relax the conditions and go ahead with release of the eecond tranche even though initial goale had not been met. Subeequently, local investor interest was aroused but, eince the authoritiee prohibited any private shareholder from owning more than 5% of bank etock, privatization dragged on until the last quarter of 1990 (i.e., three years longer than the projected date and two years after closure of the SAL). 6.06 The proposed settlement of accounts wae oleo affected by difficul- ties and delays. The inventory of bank debts, arrears and non-recwerable claims was the subject of successive audite which resulted in an ever more pessimistic evaluation of the inevitable costs (increased by the interest payable during delays in the reform proceee). The total cost to the public purse was approximately UM 10 billion, considerably more than the sum available under the SAL. To raise the sums needed in addition to the proceeds of the SAL, the Government issued Treasury Bonds (UM 1.8 billion in 1988 and UM 5.3 billion in 1989) through the banks, a m w e that was little more than an accounting device that omitted to assign reeponsibility for the costs of sector rehabilitation to anybody. Recwery of bad debte was clearly not facilitated by a reluctance -- sociological in origin -- to execute decisions handed down by the courts. Failure to collect bad debte, which was the root cause of the banking crisis, is a persisting problem that affecte even new loans and could well jeopardize the initial goal of the whole banking reform process. 6.07 The delays, costs and compromieee that affected the reorganization of the banking sector should not obscure the real, though still inconclusive, results of the process. First, collapee of the banking system was avoided, which was far from certain without the SAL. Unfortunately, the attempt to integrate Mauritanian banks into the international banking eyetem was not euccessful. Second, Mauritania now possesses a group of lending institutions and a body of banking regulations that will make it possible, at leaet in theory, to pursue a prudent and flexible credit policy and to provide the various services and facilities demanded of a credit eyetem. Only experience will ehav whether these lending inetitutione can avoid poet management errors and, e.g., prevent bad debts from reappearing. (iv) Imvlementation of Enernv Policv Reforme 6.08 Despite delays in reorganizing SONELEC and SMCPP, most reforme planned for the energy sector were implemented, at leaet partially. Firet, SONELEC made very significant progreee in ite billing operatione, bad debt recovery and the transparency of ite relationehipe with the Gwernment. Quality of eervice and particularly continuity of eupply improved, but thie woe oleo the reeult of completion of a new power etation financed by donore. Second, the principle of full cost pricing was introduced for butane gas, despite initial opposition from the Mauritanian authorities who would have preferred to continue the low prices on the emall containers used by law-income households. In addition, the study requested by the World Bank and UNDP on the energy consumption strategy of this group of households was carried out. Third, SHCPP overcame the elimination of its monopoly (unfortunately only one competitor, British Petroleum, came onto the scene) as well as elimination of its indirect tax subsidy, although it must be added that this was facilitated by the decline in world oil prices, which also made it possible to eliminate the petroleum consumption taxes paid by SNIM and by the fisheries sector. (v) Changes in the Fisheries Sector 6.09 Good progress was made in introducing reforms in the fisheries sector. ' Itro of the second tranche release conditions affecting the sector, finalization of a training program and preparation of a financing plan, were met on schedule; studies on possible improvements in sector development strategy were completed; even before the SAG began, advantage was taken of the depreciation of the local currency to increase the profitability of businesses; and an agreement was signed with the European Cormnunity that increased royalties from the sector. 6.10 In same areas, however, there were important delays: sector taxation reform, reorganization of facilities in the port of Nouadhibou, audit of SMCP, and surveillance reform. The complexity of the latter was doubtless underestimated initially and delays in this area were the result of a number of factors: differences of opinion among experts, turf disputes among government departments, and late delivery of the necessary surveillance vessels. 6.11 Nevertheless, these delays and other difficulties cannot be blamed for a number of basic problems which are now affecting the sector: smaller catches, problems in putting crews together, fewer fishing trips and the financial problems of many sector enterprises. The reasons for these problems are diverse and range from possible overfishing and shrinkage of the usual pool of manpower because of the 1989 conflict with Senegal to the age of vessels and difficulties in obtaining new credit given the indebtedness of many enter- prises. (vi) Im~lementationof Food and Agriculture Policy Reforms 6.12 Some of the results of reform in the agricultural sector were truly impressive. Liberalization of cereal production led to a spectacular expansion in private sector activity, an influx of capital and an increase in rice output from 16,708 metric tons in 1984 to 50,915 tons in 1987-88. Such an expansion would have been unlikely without the increase in the land areas entrusted to the private sector, without the cutback in free distributions of food aid, and without the privatization of marketing and processing. Clearly, however, the completion of the Dama and Manantali dams and of the land reforms decided in 1983 also played a major role. The expansion was further facilitated by the oximtonce of two special market outlets -- informal export markets in Senegal, whore guaranteed prices were higher, and the Gwernment's grain purchasee through CSA. The first of these markets no longer exists because of the border conflict, while the role of the second was reduced by the liberalization measures. This uncertainty regarding market outlets may have been partly responsible for the observed stagnation in production between the 1987188 and 1989190 seasons. 6.13 Administration of food aid was changed appreciably by the new food policy and by the drop in the volume of food distributed free of charge from 74,649 metric tons in 1985 to 13,921 tons in 1989, although it has not been possible to measure the social consequences of such a change. Nevertheless, whether or not the large-scale food-for-work program was economically effective, it does appear to have had an impact as a mobilizing force. However, the C o w o n Fund for the proceeds of food aid sales, although formerly set up, remained virtually inactive because of differences of opinion among donors and a hesitant attitude on the part of Mauritania because of the implications for the autonomy of its budget management. 6.14 Reorganization of the governmental agencies concerned with food production was considerably affected by delays. The two second tranche release conditions that affected the food and agriculture sector, namely, reorganiza- tion of CSA and decrees governing grain marketing, were not met either prior to that release or even before closure of the SAL; in fact, they were not met until May and June 1989 (as prerequisites for the approval of ASAL). However, these delays did not prevent the SAL from serving as a vehicle for continuing pressure and negotiations in pursuit of privatization: abandonment of rice milling by CSA, reduction of CSA's role in marketing, abolishment of SONIMEX's monopoly on rice imports, reduced SONADER coverage of development costs, elimination of SONADER subsidies on inputs, transfer of the responsibility for farm credit to UDB, and the increased importance given to new institutions (e.g., the Ministry of Rural Development Planning Unit). 6.15 The ultimate outcome of this ongoing process of state disengagement remains unclear, given the appearance of difficulties not foreseen initially: land tenure conflicts, risk of marginalization of traditional producers, uncertainties over upkeep of improvements made as a condition for legal title, the poor recovery rate (47% for the 1989190 season) on loans granted by UDB, uncertainties over market outlets and over the future of the grain subsector deficit: a new formula for cost sharing between consumers, producers and Government has not yet been agreed upon. (vii) Impact on the Private Sector 6.16 The private sector benefitted substantially from several aspects of the SAL program: the elimination of public sector monopolies in importing (petroleum products, rice, pharmaceuticals) and grain marketing; the legal incentives created to promote a market-oriented economy (land reform, the new Investment Code, liberalization of importlexport procedures, relaxation of price controls); and the quite marked change in ideas and attitudes toward the role of the market. 6.17 Several of the measures to promote the private sector, however, were not only affected by bureaucratic delays but also aroused opposition when they were expected to lead to temporary, let alone permanent, reductions in employment, incomes and profits. Reform of the customs tariff fell several months behind schedule, primarily due to delays on the part of the expert advisors involved; the new Investment Code met with strong opposition to the proposed eliminations of tax and tariff exemptions; the foreign exchange market is still not free, and exchange rate flexibility has not done away with the parallel market; and, finally, numerous vestiges of the previous bureaucratic system still exist in practice. 6.18 The economic results of measures to promote the private sector are hard to measure. The successes achieved in the cereal subsector are of course undeniable, and there has probably been also growth in the private segment of the services sector, although available information is fragmentary and uncertain; domestic private investment has increased but remains limited and has failed to offset the cutback in g w e n m e n t capital spending; private foreign investment is almost non-existent; exports have not been diversified, despite the efforts to increase private sector competitiveness via a flexible exchange rate; and informal export activities to other African countries have slackened (although for reasons independent of the SAL). Some private sector enterprises may initially have been adversely affected by reorganization of the credit system (fisheries, small farms), by the elimination of protection, subsidies and exemptions from duties on imported inputs, and, in some instances, by the contraction in market outlets. However, the creation of an environment supportive of private enterprise development is obviously a slow process and the difficulties presently being experienced may be no more than temporary. B. Macroeconomic Results (i) Impact on Growth 6.19 Actual GDP growth rates, 2.82 in 1987, 2.62 in 1988 and 3.62 in 1989 (Attachment 2), were not far out of line with the projections (3.52) on which the SAL was based. Thus, as expected, the SAL had no generally regressive effects w e t the short term. Hawever, it ultimately had little impact on the rate of growth of the economy, as may be seen from examining sector growth rates, whichmainly reflected cyclical or other exogenous events. In the case of fisheries, expectations were that it would prove to be a driving force for growth, at least w e r the short term; in fact, the sector showed signs of stagnation, if not decline. On the other hand, the iron ore sector, which had been expected to stagnate, showed good performance, partly because of the first reorganization of SNIH, but also because of a cyclical improvement in external markets and as a result of earlier investments of otherwise doubtful cost effectiveness. The growth seen in the agriculture sector was undoubtedly due to the long process of liberalization, which was further supported by the SAL, but also to favorable weather conditions and earlier investments in irrigation facilities. There was also evidence of growth in the services sector, and in particular a relative increase in public services. (ii) Impact on Other Internal Macroeconomic Indicators 6.20 Three features of the internal macroeconomic adjustment in response to the SAL are worth mentioning. First of all, monetary or financial dieequilibria were kept under control. Inflation remained moderate, the exchange rate depreciated only slightly (not enough, however, to prevent the continuation of a parallel rate) and, most importantly, the feared collapse of the banking system was avoided. It must be added that the costs of financial restructuring far exceeded the level of resources made available through the SAL, thereby necessitating mobilization of both external and domestic public resources to salvage the credit system. Secondly, and even though macro-data should be viewed with some caution, there appears to have been a strong shift in aggregate demand towards consumption which grew at some 15% in real terms w e r a three-year period. This may very well explain why the Mauritania SAL I program prwoked little public discontent. Third, the investment ratio dropped significantly and far below the intentions of the program. While the objective had been to keep investment at around 22-231 of GDP, it declined to 17.8% of GDP in 1987, 14.7% in 1988 and an estirmated 14% in 1989 (Attachment 2). Some of the explanation may be found in the poor public investment project implementation rate (65% on average during 1985-88), which may well have resulted partly from the increased scrutiny by donors of the viability of projects in response to the SAL program, but it also reflects the slow reaction of private investors to the new policy environment. In retrospect, the decline in the investment ratio was the essential instrument for balancing not only the macroeconomy but also the public and external finances. Over the longer run, however, this reduced investment level is likely to have an adverse impact on economic growth, in contrast to the GDP growth during the SAL period which largely reflected the benefits from earlier heavy investments in, e.g., irrigation and mining. Finally, there were also substantial differences in project implementation rates among sectors, ranging from less than 5% to more than 100%; implementation rates for major sectors for the period 1985-87 (which admittedly refers more to the PREP than to the SAL period) were: mining and industry, 122%; agriculture, 65%; road infrastructure, 38%; fisheries, 25%; health, 9%; and education, 4%. In fact, this is equivalent to a reordering of priorities. Especially noteworthy are the low rate for the fisheries sector which does not bode well for the future, and the extremely low rates for health and education, clearly at variance with the planners' objectives. (iii) Impact on External Equilibria 6.21 Aggregate balance of payments trends between 1986 and 1989 were roughly in line with the SAL projections, but the underlying reasons were, at times, quite different from those anticipated originally. Furthermore, important structural causes of disequilibrium have remained. Thus, the current account deficit, which as a share of GDP dropped in half between 1983 and 1986 has since stabilized or, if anything, declined. However, the main reasons for this were totally different from expectations. Mauritania benefitted from an unexpected imprwement in the terms of trade (the index rose from 100 in 1980 and 81 in 1986 to 123.8 in 1987 and 139.9 in 1989) and an unexpected increase in the volume of iron ore exports. Conversely, a projected increase in fish exports turned into a decline. And, on the import .side, there was no further cutback. Following a gradual decline in imports between 1983 and 1986, there was, in fact, some resurgence during 1987-89. In particular, food imports did not decline, despite the increase in local output. On the capital account, there was an important decline in loan disbursements (in fact, a fairly large negative net flow in 1988 and 1989) but a corresponding very large increase in net official transfers, i.e. a doubling between 1986 and 1988, providing a clear indication that the SAL did succeed not only in maintaining the deficit at a love1 acceptable to donors but also in having this deficit increasingly financed on a grant basis. By 1988, the concessional element in newly committed funds was around 75% as against 30% in 1983. 6.22 Yet, the overall balance of payments situation remained precarious. Maintenance of the debt service ratio at around 25% was possible only because of successive debt reschedulings. Furthermore, the external vulnerability of the Mauritanian economy, which was once again illustrated in 1989 by the interruption of relations with Senegal (much of which involves informal flows and therefore is not easily measurable) may, if anything, have increased. Not only was there no diversification for exports, but the increased reliance on grant financing made the country even more vulnerable to geopolitical factors than before, as did the 1990 Persian Gulf crisis. (iv) Social Dimensions of Adiustment 6.23 As mentioned earlier, the SAL did not provoke major social discontent probably because, for the economy as a whole, there was, in fact, no severe retrenchment nor a decline in per capita consumption. Nevertheless, there were important social costs associated with the adjustment: salaries and recruitment in the public sector were frozen; public enterprises laid off personnel (1,400 jobs were lost at SNIM alone); prices of basic consumer goods rose sharply -- rice (a 70% increase between 1984 and 1988). pharmaceuticals and butane; SONELEC increased its tariffs and improved its bill collection; and free distributions of food were reduced substantially. It is unclear, however, how these costs were shared among different social groups: the proposed "ongoing household survey" was implemented, but with some delay, and to date there is no information available on trends. 6.24 The results of the various measures designed to mitigate the eventual social costs of adjustment were mixed. The food-for-work program was probably beneficial (para. 6.13). but FIRVA has been criticized for both the allocation of its funds and its very low loan recovery rate (25%); proposals to devote relatively more resources on education and health were not followed up in the investment budget (para. 6.20) and ran into budget constraints on the current expenditure side; spending on vocational training was increased, but the need for it also grew following the return of repatriates from Senegal; new job opportunities expected from the growth of small and medium enterprises did materialize in the cereals subsector but little is known about other branches of activity. Finally, in some areas, the impact of the SAL was extremely complex and difficult to measure. Thus, e.g., there certainly was a relative increase in producer incomes suggesting increased income equality, but this also gave rise to substantial capital mobility and land conflicts, which may have been a source of new inequalities. Likewise, measures introduced to encourage the emergence of competitive enterprises may well have resulted in the creation of oligopolies or monopolies, in the context of an economy characterized by a narrow market and highly structured social relationships.  VII. C0NCLUS10NS A. SAL Achievements 7 -01 Possibly the most important achievement of the SAL was that it prevented major crises from surfacing in the Mauritanian econany. Thus, the banking system did not collapse, as had been feared prior to the SAL. The SILL also contributed to the prevention of other disruptions such as an external payments crisis, the failure of public enterprises, or sector breakdcrwas, 8.8.. interruptions in electric power supplies. Above all, it helped to ensure the continuity of a program of reforms (the PRBF) that had been launched some years earlier and still continues. This continuity largely followed from the fact that the SAL was based on a precise identification of decisions which, after three years of reforms, had become both possible and necessary if the reform program were not to come to a halt. 7.02 The very presence of a SAL served as a guarantee of good policy- making to other donors and facilitated needed debt reschedulings, cofinancing arrangements as well as increases in the concessional component of foreign capital inflows. Generous external financing, and a reduced investment ratio, permitted maintenance, if not an increase, in private consumption. This, together with some notable successes associated with the SAL program, 8.8.. the production and marketing of cereals, helped prevent widespread discontent with the SAL, which, in turn, made it possible to implement retrenchment policies such as job layoffs, a wage freeze, reduced free distributions of food and higher prices. Acceptance of these policies was all the more remarkable since the proceeds of the SAL were modest coapared to the financial cost of the reforms planned. B. Shortcominns of the SAL 7 .03 The Mauritania SAL, as many others, appears to have suffered from the disparate and, at the same time, incoaplete nature of its assortment of objectives. First, though useful, the long list of projected reforms fragmented negotiators' attention and emphasized legal indicators of compliance with camnitments at the expense of economic indicators of performance. In particular, inclusion on the same list of radical banking sector reforms and numerous less important other reform measures may have facilitated implemen- tation of the latter but it was certainly an obstacle to understanding, implementing and monitoring the financial reorganization -- which should undoubtedly have been the focus of a special program. Second, the legis- lative/regulatory reforms needed to promote and govern free market-oriented growth were often presented as being sufficient conditions, whereas, as a minimum, it should have been made clear and researched whether the economic conditions required for success of this policy were also present. 7.04 The SAL program was also somewhat short on quantitative estimates of tha costs or impact of reform. Although a vary large number of reform propooals ware expected to have an impact on public finances, no astimates of this impact warm made initially) this played an important role in the obsarved dalayo in implamantation as tha authoritias oftan hasitated in the face of unaxpectad financial consequencas. In a ganeral sansa, no link was established between the amount available under the SAL and the expenditures which would result from implementing the reform measures. 7.05 Finally, it is worth recalling that, while the SAL did succeed in maintaining the momentum of the reform process and while few of the proposals it included met with complete failure, some of the reforms were not follwed up with changes in specific policies, many reforme were carried out only partially, and throughout the process there were costly delays in execution. C. Sustainability 7.06 Possibly the most important achievement of the SAL was that it prevented major crises from surfacing. In particular, an external payments crisis was avoided largely because the SAL was a vehicle to elicit generous donor support. While the SAL helped ensure continuity of the Gavetrrment's 1985-88 PREF program, there were important slippages and delays, although it should be added that the reform process has subsequently been pursued further under the SECALs and IMP programs. The SAL also was partial in that it left same of the most basic structural problems of Mauritania untouched (para. 4 . 0 3 ) . 7.07 The sustainability of what has been achieved thus far has two dimensions. First, continuity of the reform process as is cannot be taken for granted because many of the reforms required major and sudden changes in economic practices and behavior, which could easily be reversed. Thus, to ensure adherence to the reforms and continuation, the Bank is f o l l d n g up with more adjustment lending. Second, and much more fundamentally, havever, it has to be recognized that to generate any economic grcrwth in Mauritania, which is the ultimate objective, is a formidable challenge which will, among others, require investments. While the SAL helped avoid crises and while consumption levels were maintained, the investment level contracted much more than anticipated. Unless this trend can be reversed, the SAL would, in retrospect, turn out to have been little more than a stabilization effort. In fact, a different country assistance strategy may have a much more sustained impact. It is evident, on the one hand, that Mauritania can use external support only in the form of highly concessional or grant financing. On the other hand, if this support is to have any lasting value it should be used not for stabiliza- tion but primarily to finance the limited productive investment opportunities available. GDP ( a t factor coat) Primary Secondary Tertiary Exports of G NFS Imports of G NFS Percent of GDP (current, annual average) Private Conoumption Public Coneumption Domeatic Savinge Groee Inveetment & Resource Balance Budgetary Savinge Overall Fiecal Deficit Current Account Balance Memorandum Iterns ICOR GDP Per Capita Grwth Rate Private Per Capita Coneumption Debt Service Ratio (2) Debt Outetanding/GDP (2) US$ Million (annual average.) Current Account Balance -197.0 -121.0 Net Private & Direct Imeatment 25.5 5.8 Official Grant8 42.2 47.5 Projected Loan Diabureementa ' 148.1 96.1 Projected Loan Amortization -51 .6 -42.0 Other Financing Required (net) fi 32.8 (13.6) Hainly a recovery frcm severe drought. i n 1983-84. Including the copper mine opening i n 1989. Reflecting the impact of a flexible exchange rate policy. Include8 change i n atocka. Excluding c a p i t a l grants. Reflecting the impact of the irrigation investment program. Thoueande of conatant 1982 IRI. After debt reecheduling i n 1985 and 1986. Excluding new debt reecheduling a f t e r 1986. Including new coucnitmente for project financing only. Excluding SA X , credits. Before changea i n foreign reaervea, without reecheduling and before SAX,. Source: SAX, Prerident'e Report (No. P-4550-MU), dated Hay 11, 1987.  ATTACBMENT 2 Page 1 of 4 MURITANIA: KEY ECONOMIC AND FINANCIAL INDICATORS, 1985-91 ---.- - 1 1 m - 1 1 - 1 - 1 C I --I-.;. PI.C.. -.a. 100.0 lW.O 100.0 100.0 100.0 100.0 lb6 Idired l a m a 0.8 9.4 1 W.7 lo. 11.8 4ricul-n 8 a.0 8 8 8 m.4 -1 4 n.8 w.4 u.9 n o m.8 (d.*;& W a W w i n d 8.7 .. .. .. .. .. (.I .*i& M i n i 4 4 19.8 U.8 0 11.0 104 8arwiaa 8 8 41.0 1 41.1 a.9 l o . 8.1 9.1 1.0 -8.8 0.4  ATTA- 2 Page 2 of 4 L.C.1 - Pro1ir. mhbaw -------- ((I ..a) C w r r C r i c a (ICI M) iao -- lW.O --- 1 1M.8 - i 1TT.4 -- - 1- i - 1 .. --- lao - im -- -------- 1- .. iwr-n S 1m-m 10.7 ---- I - 9.1 -1-la P r i m a (ICI N) .. .. .. .. .. .. .. I) - md Wr hra in: -1-1- ~8r~i.r 1-1 1-1 0.1 1.7 14.1 100.0 W.8 9.0 m.7 100.0 .. . .. . 4.1 n.4 14.4 -7.4 Y.? 4.a -- .... - -- 1- Onrai' - C Ir - 1 9 nn - ma M i m a T a u - 1 wirl-ro m bdu8bw Tu1 IQI (d .*id I(wr(.hrlry) .. (d .Lid Miriry) YII 8wni.r 11m UI - 1 - m MI 11 cI.rrcrlm - a8U H 1 Cri.8- -aim u rw a-9 -0 *a-8 n Yw Y 1 - 4 m - M W i W b T u r d T.J.Mj-I Onr-ia. O On n ~ n-*I-I r8 I' r mbi-1 r m Xo8r8 P- . kiq . 1 - lam4 - 1 0 I YQ Unl I404 I rn U I am a - w UlM aiin - 1 -7U mom n w I. OTn m- . -17U - 1 - -ID) -mu m& r m 8 T d o m QI ma8 )I I -110 Onrml-l k i n a 4 U . -Y 1lm 1101 . n30  ATTACHMENT 2 Page 3 of 4 ----------------------------------------- WII.1 ----- P r o 1 im. P m j r r i u -------------- Ian ---- -- --- --- --- -- 1 ------------------------*.I- 1 - 1 - 1 1 W.. 1-100. --- --- 1 - - 1 --- --- - ' ------------- - 1 1 1 - 100.0 Y.0 1W.O 1Q.O lm.0 lQ.2 114.8 UI.6 lSl.8 lSl.8 11a.4 100.0 0 m.0 407.0 W.0 U1.0 8 9 44.1 4 #.a Im.6 . 1 . 7 OID.0 YO.0 4W.O .. .. .. 100.0 100.s 1m.a a . 10.0 ia.9 w aUor C l r v r M POL d -or kq r 1mUmdi.U M (d .*id C r i r w M) (d .*id mnur. M) Cribml M 7-1 mrd. I - -------------V8lrr(urc1)* Crisr (IY mi I 1 iu) 1 0 lm 08 Y U U 114 U I I U Y I a o I I m 46 Y U I I P ~ P ~ Y 10 U m Y lo? U 1 0 118 .. .. Y U U .. .. .. .. .. Y I a o m m Y 7 4 7 a a m I P 1 ~ i r n r o l s i 7 = r p r a a o ------------------------------------------ I.R.ro d1.T X or R) o r C r r r m r P r i e n ------------------------- C. OrrU h b m R) m r c . r W ~ r P r i o r ~wr --- im IWI ---- tan --- ---- -- 1 - ------- inrro 1-n ---- iworr ~wr-n ----- --- ---------- muhdir r u w OY.r W r M POL b OL .I . b o r q Inbmmdiobm M (d .*id ? r i m - M) (d .*id mnur. M) b i - 1 M l .T )cm*. r b m mm 0-Cr-W  ATTACHMENT 2 Page 4 of 4 ( W O m i l l i.w m r w r m r a r i a r ) ................................... hCul ---- PmlIm -------------- Prwjnairu --- -- 1 - - 1 19.4 ---- ---- 1 - ---- ---- 1 - la? --- - ---- ---- --- 1 1 - 1 1991 - 1 A. bmorbmdW*m zm w a a m u 7 ua ma 4 114 ~1 rw 1. W r s h m d i n ( m ) 1 811 ou an 4m .OI 00 478 471 2. ~ b n - k c u brvicr n m r n ~ n Y u I7 ~M D. I C) h c.vI - -n -u -n 4 1 -n u -u -n -aa 1. h c r r R u m i r u 17 9 8 4 2 2 2 I I I 6 2. t a c r r h r m m u U 71 Y 76 OO 61 Y (i-r-a mrmba) 81 r L? m n n m C. b r ~ l e m c ~ i r l I . A l r 210 100 01 1P a 1 ?S 74 1 n Ir I#? 1. Y b O i r r I O w r Y . l l 91 1 9 7 I I 8 I 4 4 4 2. m a W f i e i a l T r d u m 117 W Q Q 76 97 UO 01 118 ~LP u 8. Y I LT W L Q ( 1 U U U U 6 4 1 -10 10 Y a. Oih-bm 10 UO 114 U 1 UD U LP 1W UI b . h ~ m m (incl. r m1 17 14 a0 81 ~7 LO^ 1 n rro roo ra 111 1- mr-rn in 1 W ) ------------------------- k e i r L . 8 h . r ~ krnn: 1. Xnb'l. krnn ( I - ) 110 101 MY 2. 0ml1 (4rr b r d a ariea) 7 4 4 4 4 .,a . .I. k r n r inel. Q l d 1 110 81 U U 4 . ~ l * . . i n ~ Y u b e * b 4 2 2 1 1 Source: PESAL President's Report (No. P-5293-EMU) , dated May 30, 1990. . ..  PROGRAM COMPLETION REPORT ISLAMIC REPUBLIC OF MAURITANIA STRUCTURAL ADJUS'I?lENT CREDIT (IDA CREDIT 1812-MAU AlOD AFRICAN FACILITY CREDIT A-028-MAU) February 23, 1990 Country Operation. Division Sah01i.n Dopartmont Africa Rogion  ISUnIC REPUBLIC OF WhUBXTMXA smcnrrw. ADmm catDIt (IDA CPBIIT 1812-all Am I. BACKGROUND 1. I n response t o G o v e ~ a t ' r request and t o a s s i s t Government i n reaching i t s adjustment objectives, t h e B . n L Board approved a Structural Adjustment Operation (SAL) on June 2, 1987. The S AL was signed in June 1987, became e f f e c t i v e in August 1987 and was closed on December 31, 1988. 11 The combined c r e d i t s (IDA C r . 1812-MAU and SPA C r . A-028-MU) were f o r ~ F ~ 4 2 . 4 million, with cofinancing from the Federal Republic of Gemmy (USS2.8 m i l l i o n equivalent) and t h e Kingdm of Saudi Arabia (USS4.8 million equivalent). I n addition p a r a l l e l finurcing of USS19.6 million from the African Development B8n.k (AfDB) was nude a v a i l a b l e f o r the program. The S AL supported the second phase (1987-88) of the PREP, s p e c i f i c a l l y the Governmrnt*~ medium-term objectives of (i)reaching an a n n u l growth r a t e of about 3.5 percent; (ii) containing the f i s c a l and e x t e n u l account imbalmces; m d (iii) preparing the b a s i s f o r sustainable growth m d development. As mentioned in the President's Report (P-4550 W ) dated May 1 1 , 1987, emphasis was placed on policy reforms in s i x areas, aaawly: public administration, banking and public e n t e r p r i s e reforms, energy, food policy, f i s h e r i e s developamat, and p r i v a t e s e c t o r promotion. A t the saaw time, e f f o r t s were nude t o b e t t e r i d e n t i f y and monitor t h e s o c i a l impact of the country's adjustment program and t o design measures t o provide s a b g r u r d s f o r the most vulnerable groups in society. A. The Onset of C r i s i s 2. Led by increases in i r o n ore production, H.uritania'8 G DP sustained an average growth r a t e of 8 perceat during the 1960s and e a r l y 19?Os. I n the mid 1970s the economy experienced a sharp deceleration in g r w t h m d then a period of marked f i n a n c i a l i n s t a b i l i t y in the l a t e r p a r t of the decade. The p r i n c i p a l f a c t o r s -re: reduced world demand f o r i r o n ore, . on which the country had beconm dependent f o r 70-80 perceat of i t s export earnings, m d the e f f e c t s of severe and repeated droughts on output in t h e r u r a l sector. These f a c t o r s were compounded by prolonged m i l i t a r y c o n f l i c t i n the Western Sahara and a poorly conceived investment policy. Despite the slow-down in grouth in t h e mid 19708, t h e investment program was stepped up t o r a t e s approaching bO percent of GDP, financed by heavy inflows of foreign a s s i s t a n c e , p a r t i c u l a r l y from OPEC sources urd by coumercial borrowing. Resources w r e used p r i n c i p a l l y t o finance t h e n a t i o n a l i z a t i o n of the mining s e c t o r , ambitious p r o j e c t s in transport i n f r a s t r u c t u r e , and a feu i n d u s t r i a l venturer which w r e t o prove unviable. 3. There combined e f f e c t s and a generally m ak record of economic manag-t in the mid 1970s brought the country t o a f i n a n c i a l c r i s i s by 1977. Modest boosts in i r o n ore urd f i s h e r i e s production and the stimulus of a am investment e f f o r t temporarily e a ~ b l e dthe econamy t o enjoy a three- year period of growth averaging 4 perceat per .nnum in 1979-81. The improved perfomunce of the e c o n q could not be sustained, however, in the face of a fallback in mining production m d the recurrence of drought. Iron ore production f e l l temporarily by 15 perceat in 1982-83 t o a l e v e l of 65 percent of t h a t r e g i s t e r e d in the record year 1974. With r a i n f a l l only about 20 - 11 The closing date was extended from 6130188 t o 12131188. percent of normal l e v e l s in the 1983184 season, the livestock herd suffered major losses, and c e r e a l s production met l e s s than 10 percent of t o t a l demand. 4. f i e f a i l u r e of the mining sector t o underpin growth of the economy in the 1980s marked a major reversal of expectations, and l e d t o s u b s t a n t i a l . imbalances in the macroeconomy O n t h e assumption of gradual recovery i n the world s t e e l industry and a consequent s i g n i f i c a n t increase of Uauritania's ore production, mining was expected t o resume i t s r o l e a s the economy's motor of growth through a t l e a s t t h e f i r s t half of the decade. The desire t o ensure future mining capacity and a t the same t i m e t o diversify the economy resulted in Mauritania's understating one of the highest r a t e s of investment recorded among developing countries. Gross c a p i t a l formation averaged USS240 million annually in 1981-83, o r 35 percent of GDP, r e f l e c t i n g the simultaneous campletion of large projects in the .transport sector begun i n the l a t e 1970s and implementation of the Guelbs mining project. Additionally, a spurt of private sector investment in f i s h e r i e s was made in the e a r l y 1980s in response t o Government incentives t o promote the development of a Mauritanian f i s h i n g f l e e t . A t the same time, private investment in import-substituting and export-oriented a c t i v i t i e s was discouraged by an exchange r a t e which became increasingly overvalued, i n large measure a s a r e s u l t of the overheating of investment demand. 5. Mauritania's i n a b i l i t y t o maintain s a t i s f a c t o r y r a t e s of growth in the i r o n ore mining sector a s a r e s u l t of slack export demand sharply aggravated i t s dependence on foreign resources t o meet consumption a s w e l l a s investment requirements. Whereas the external current account d e f i c i t was held in check a t an average 22 percent of GDP in the 1979-81 period and the o v e r a l l balance of payments maintained in approximate balance, Mauritania's external position weakened a f t e r 1982. Despite a strong r i s e in earnings from f i s h exports, the current account d e f i c i t expanded t o 33 percent of GDP in 1983-84. Though i n p a r t the r e s u l t of exceptionally heavy foreign- financed mining investment, the expansion of the d e f i c i t was unmatched by a corresponding increase in c a p i t a l inflows, forcing a cumulative drawdown of Central Bank reserves by USS110 million in 1982-84 and a build-up of payments a r r e a r s on external medium and long-term debt t o an estimated USS95 million by the end of 1984. B. The Government's Economic and Financial Recovery Program j1985-88) and I n i t i a l S t a b i l i z a t i o n E f f o r t s 6. Faced with an untenable economic and f i n a n c i a l s i t u a t i o n , the Govemnwnt adopted, i n September 1985, a comprehensive Economic and Financial Recwery Program (PREP) f o r the 1985-88 period. The major objectives of the PREP were t h e following: (i)promotion of economic growth: (ii)improvement in the productivity of investment; (iii) reaching a budget equilibrium by 1986: ( i v ) reduction of the external d e f i c i t ; and (v) reduction of the external debt. 7. The f i r s t phase of the PREP focused on implementing a number of basic s t a b i l i z a t i o n and restructuring measures: (i)a f l e x i b l e exchange r a t e ; (ii)disciplined r e s t r i c t i v e monetary and c r e d i t p o l i c i e s ; (iii)a u s t e r i t y in public finances: ( i v ) decontrol of prices t o r e f l e c t r e a l c o s t s t o allow greater r o l e f o r market forces; (v) r e h a b i l i t a t i o n of the parapublic sector; ( v i ) an investment program giving p r i o r i t y t o the productive sectors ( f i s h e r i e s and agriculture) and r e h a b i l i t a t i o n projects (in mining, i n f r a s t r u c t u r e and public services): ( v i i ) s e t t i n g up of an incentive framework t o promote private investment: ( v i i i ) development of training f a c i l i t i e s t a i l o r e d t o the demands of the economy: ( i x ) job creation: and (x) cormunity participation i n meeting basic needs by preparing a 'Priority Action Program' of projects targeted t o the most vulnerable groups and also by implementing a 'Food f o r Work Programm. 8. I n i t i a l s t a b i l i z a t i o n measures were supported by two IHF Stand- by arrangements (SBA) approved on April 12, 1985 and April 26, 1986 respectively, both f o r S D R 12 million. Implementation of the PREP in the 1985-86 period was impressive, notably: the ouguiya was devalued by 22 percent i n r e a l terms, followed subsequently with the implementation of a f l e x i b l e exchange r a t e policy: the i n f l a t i o n r a t e was kept below 9 percent p.a.; there was an across-the-board increase in i n t e r e s t r a t e s of 2 percent which kept them positive i n r e a l terms, sizeable adjustments in producer and consumer food prices and automatic adjustment of other regulated prices were made t o r e f l e c t cost increases. Public investment was c u t from 29 percent of GDP i n 1984 t o 22 percent i n 1986 by limiting the program t o e c o n d c a l l y j u s t i f i a b l e , high-priority projects. 9. The devaluation stimulated f i s h exports and helped t o contain tpe f i n a n c i a l losses i n the iron ore sector resulting from the f a l l in werld market prices. S t r i c t budgetary discipline enforced during 1985186 increaeed revenues by 19 percent p.a., while outlays expanded by only 10 percent. Thie brought about an overall budgetary surplus in 1986. Restrictive monetary policy kept c r e d i t t o the Govenuwnt a t i t s 1984 level: new loans were limited t o the fishing and industry sectors. A t the same time, the Government continued t o implement rehabilitation meaeures in the parapublic sector, including u t i l i t y t a r i f f adjustments. 10. Financial support f o r the PREP was agreed a t a Consultative Group Meeting organized by the Bank i n Paris in March 1985. Rescheduling of external debt service (including arrears accumulated up t o December 1984) was negotiated a t Paris Club meetings in 1985 and 1986 and through b i l a t e r a l negotiations. A l l a r r e a r s were remcheduled. The external current account d e f i c i t was reduced and savings performance improved. As a r e s u l t , large external resource gaps of about USS300 million (including a r r e a r s ) in 1985 and USS120 million i n 1986 were successfully financed. 11. THE STRUCTURAL ADU J STMENT PROGRAM A, The Preparation of the SAL 11. Having s a t i s f i e d performance c r i t e r i a of the two i n i t i a l s t a b i l i z a t i o n programs with the IHF, the Govemwnt obtained a t h i r d SBA f o r SD R 10 million f o r the period June 1987-May 1988. Subsequently, Mauritania's adjustment program was l a i d out i n a f i r s t Policy Framework Paper (PFP) which waa reviewed by the Executive Directors of both the Bank and the Fund i n September 1986. 12. I n response t o Government's request and t o a s s i s t Government in reaching i t s macro policy objectives, an economic mission v i s i t e d Mauritania in early 1986 t o prepare a Structural A d j u r m n t Loan. 21 A preapprairal mirrion went t o Mauritania in March 1986 t o a r r e r r Government*r progrerr in implomanting the PUP, and t o i n i t i a t e the drafting of a Letter of Developant Policy. 13 The preapprairal mirrion nude r u b r t a n t i a l progrerr in defining the major elementr of a Structural Ad.jurmnt Program, including ertablirhing condition8 f o r both tranche relearer and in drafting the Letter of Development Policy. An apprairal mirrion went t o Mauritania in June 1986 and v i r t u a l l y finalized with Government the Letter of Development Policy which i d e n t i f i e d monitorable action8 t o rerve a r tranche releare c m d i t i m r , but the mirrion concluded t h a t the Govemm4nt*r i n r t i t u t i o n a l capacity f o r monitoring the PREP and the S AL war weak and needed t o be reinforced. Government took inmediate rtepr t o addrerr t h i r irrue. 14. A pro-negotiation miorion v i r i t e d Mauritania in March 1987 t o update the Letter of Development Policy and t o f i n a l i z e the elomanto of dircurrion on the SAL program and, in particular, the banking rector reform component. 15. The SAL war negotiated in May 1987 and apprwed by the Board on June 2, 1987. The cambined credit. ( I M C r . 1812-WU and SPA C r . A-028-W) were f o r USS42.4 million, with coffruncing from the Federal Republic af Germ8ny (USs2.8 million equivalent) and the Kingdopa of Saudi Arabia (USW.8 million equivalent). In addition, p a r a l l e l ffruncing of USS19.6 million from the African Developant Bank (AfDB) war made available f o r the program. 0. SU, Oblectiver and Dorim 16. The SAh rupported the recond phare (1987-88) of the P W , r p e c i f i c a l l y the Government'r medium-term objectiver of (i) reaching an annual growth r a t e of about 3.5 percent; (ii) containing the f i r c a l and external account imbalancer: and (iii)preparing the b a r i r f o r rurtainable growth and developant. Ar mentioned in the Prerident'r Report (P-4550 M U ) dated May 1 1, 1987, it empharized policy reformr in the arear o f t public adminirtration, banking and public enterprire reforma, energy, food policy, f i r h e r i e r developant and private rector proppotion, giving p r i o r i t y tor (a) i n i t i a t i n g reform of the incentiver r y r t m , including l i b e r a l i z a t i o n o f t h e regulatory fruwwork covering trade and invertmont in order t o f o r t e r private invertment, e f f i c i e n t production and exportr in agriculture, f i r h e r i e r and induotry: (b) r e h a b i l i t a t i n g the financial rector, rertoring l i q u i d i t y in the economy and imprwing f f r u n c i a l intermediation; (c) restructuring two key public enterprirer, reforming public invertment progrrnming, and rtrengthening the managmnt of public financer: and - 21 For a timetable of mirrionr attached a r Annex I. related t o SAL, roe the Bank Data Sheet  (d) rtrengthening the Kinistry of E c o n q and Finance to enable it to implement a11 actionr required under the program. At the 8 - t h e , effort8 were nude to better identify and monitor the rocial impact of the countryes adjurtment program and to derign mmarurer to provide rafeguardr for the moat vulnerable groupr in rociety. 17. The adjurtment program war relatively camprehenrive, with twenty- rix tranche releare conditionr (of which eleven were required for releare of the recond tranche) and 95 monitorable actionr related to the area8 mentioned above. There conditionr and actionr are dircurred fully in Part 111 of thir report and the character of there actionr can be clarrified ar follow: (i) far-reaching policy changer, e .g. liberalization of the pricing and marketing ryrtem of cerealr, private incentive8 reform, t u reform; (ii) inrtitutio~l reformr, e.. a new organization rtructure for the HEP and the CSA, preparation of a legal framework for rupervirion of the conrolidated budget; (iii) intermediate actionr, e.g. increare of water and electricity tariff 10 percent in July 1987s (iv) prerequirite actionr related to policy intent, e.g. Governmenter declaration8 on enerw policy and dircurrion/agreement on the Food for Work program: and (v) rtudier and reportr, e.g. study on fringe benefitr, promotion of artiranal firhetier, report on data collection are rtmmcrrized in Annex 11 to the prerent report. Performance r e v i m -re anticipated in October 1987 and in February 1988 for the recond tranche releare. C. Credit Bffectivenerr and Dirburrementr 18. Dirburrementr were forereen in two equal tranche, of USS25 aillion equivalent, the firrt available upon effectivenerr and the recond upon ratirfactory overall implementation of the program. Following rigning of the credit agreement in June 1987, the SAL bec- effective in Augurt 1987, when the Xauritanian Government ratified the agreenmnt. At the timb the credit became effective, the Bank had received rufficient valid w i t h d r m l applicationr to cover the entire amount of the firrt tranche and firrt dirburrementr were nude a feu week8 later. The recond tranche releare war delayed by eight months until October 1988 due to Government delayr in meeting tranche releare conditionr. In the care of both trancher, counterpart fundr were ured to rupport Covernment*~recurrent budget, and banking rertructuring. D. Su~ervirionof SAL Iomlementation 19. 1 66 out During the SAL period, which ended on December 31, 1988, 2 of 95 monitorable actionr had been fully accomplirhed. Twenty one are u n d e m y and eight had not been implemented.. Annex I1 prerentr a clarrification by heading8 and rubheadingr of each of the SAL monitorable action8 into one of the five categorier mentioned in para 17 above. Table I below runmarite8 the rtatur of there actionr a8 of December 31, 1989. - 31 The cloring date of SAL I war extended from 6130188 to 12/31/88.  MURITANUt TYPOLOGY AND STATUS OF WNITOEABLE ACTIONS W N I T O W L E ACTIONS .................................................... Typology of Action8 Number Completed In Progreaa Not Implemented I. Far reaching policy change 18 11 6 1 11. Institutional reform 14 10 2 2 111. Intermediate action 11 5 3 2 IV. Prerequisite action8 related to policy intent 29 23 20. A r e v i w of the hpletwntation of theae monitorable action8 ahom that t h e m action8 have been aucceaafully ippplemented in area8 auch 88 public aector m u u g w m n t , b a i n g aector reform, energy pricing, fiaheriea policy and food policy. Harrver, it ha8 been alwer in agpp8 area8 8uch 88 fiacal reform, public expenditurea management, public enterpriaea reform and credit policy. Finally, area8 where inrpl.~wntation lagged well beyond the SAI. period were the follwingt public adminiatration (audit of wage billa and enactment of n w competitive bidding procedures), artiauul promotion of firheria8 and private aector promotion (atrengthening of inatitutiona dealing with SHg promotion). 21. For the benefit8 of the adjustment program to be realired in fuil, it ia hportant that the objectivea underlying the monitorable action program be fully attained. Where delaya have occurred, completion of the adjuatmsnt program ia being continued under the auapicea of aubaequent programs. Fiacal reform, public expenditure reform and credit policy r e f o m are being monitored and aupported, jointly with the IMF, through the PFP proceaa. Incomplete public enterpriae reform are being addreaaed in the context of a Public Enterprise S E W which waa appraised in February 1990, and which carriea the reform conriderably further than war enviaaged under the SLlt. Completion of the restructuring of the major paraatatal in the fiaheriea aector ( W P ) ia a180 being addreared through the PE S E W . The Developpa,nt Management Project, currently under implomntation, ia putting in place the remaining monitorable action8 to atrengthen public adminiatration. Delay8 in private rector promotion activities were p r h r i l y of an administrative nature and are being addreared through the Induatrial and Artiaanal Development Project (Credit 1572-MU) which ia being redefined to facilitate thia . 22. Within the categories of actions s e t out in the para. 17 above, it i s obvious t h a t only implementation of (i) , (ii)and (iii)would have an impact on perfornunce, while ( i v ) and (v) would not a l t e r , by themselves, in any way the status-quo, unless they are t r a n r l a t e d l a t e r on i n t o concrete actions. Although the Government has f u l l y implemented the vast majority of actions foreseen under the program (see h e x I f ) , a review of r e l a t i v e progrers i n d i f f e r e n t policy areas ruggests t h a t the implementation of supply-ride reformr has been mixed. 23. Thir conclurion i s confirmed by a review of the report8 of the three supervirion mirsions. The report of the f i r r t supervision misrion of November 1987, while noting rome progress in implemonting the program, reported delayr i n a number of key areas. These slippages were of varying importance and f o r reasonr which wore ramstimes beyond the gwemmsnt's control. Reforms in the areas of banking reform, energy policy and public enterprises were delayed, while progress in public expenditure management and investment programing were good. Hore rerious delays, and a lack of commitment of the concerned authorities, were perceived by the rupervision mirrion i n the a g r i c u l t u r a l and f i r h e r i e r canpononts of the program. 24. There rlippages and delays were expected t o jeopardize the timely implementation of the program and more particularly the fulfillment -of tranche release conditionr i f corrective action8 wore not rapidly taken. Overall, a t the tima of the mirrion, of the 1 1 specific conditions required f o r the recond tranche release, only one had been s a t i s f a c t o r i l y completed (preparation of the 1988 Consolidated Budget), two were almost campleted (preparation of the 1988-90 PIP and the reorganization of the HEF) and eight r t i l l had t o be f u l f i l l e d (food policy, energy policy, contract-plans f o r two PEE, banking reform, f i r h e r i e s rtrategy, reform of private sector incentiver and tax reform). 25. This lack of progress was due p r k r i l y t o a very tense p o l i t i c a l and s o c i a l situation. The decision-nuking process in economic matterr war almost paralyzed rince the a u t h o r i t i e s wore confronted with: a pcnmr struggle among the military, an aborted coup d 9 6 t a t , r o c i a l unrert, a financial rcandal which rerulted in the incarceration of three key playerr of the Governwnt'r economic team (the Minister of Finance, the Governor of the Central Bank, and the Hinirter of Fisheries) a8 well as three epidemics (cholera, yellow fever and r i f fever) along with i n r e c t invasions ( l o c u r t ) . 26. The report of the recond supervision miasion of February 1988 noted progrerr in implementing mearurer related t o economic management, energy policy and f i r h e r i e s policy but reforms related t o food policy, banking sector r e s tructuring and public enterprires were w o l l behind rchedule While p a r t of the delays were due t o the d i f f i c u l t y of the measurer, the main . problem appeared t o be the exceptiorully weak economic team which war in place in l a t e 1987 and e a r l y 1988, compounded by a high turnover of renior r t a f f in key m i n i r t r i e r and by delays in the consultants' work. 27. The report of the t h i r d rupervision mirrion of May-June 1988 noted t h a t a new government economic team, which war more dynamic and more c d t t e d t o the adjustment e f f o r t , was i n place and r a t i r f a c t o r y overall1 though belated, progresr had been made in preparing reforms in food policy, implementing an agreed energy policy, preparing a f i s h e r i e s strategy, formulating reform of private incentives and improving mobilization of rerources. The program, however, s t i l l lagged in two arearr banking rector reform and public enterprires. I n these two areas many actions were delayed f o r reason8 beyond the Govetnwnt's control. Nonethelesr, the d r r i o n recommnded t o defer tranche release u n t i l October 1988, a t which point the Bank decided t o accept one modified condition (an interim action plan f o r the r e h a b i l i t a t i o n of four primary banks), one p a r t i a l l y met condition (the contract-plans f o r two PEs) and t o defer a t h i r d condition ( t h e preparation of new tax regulations f o r f i s h e r i e r , mining and small burinesr). ACHIEVEMENTS O M F STRUCTURAL ADJUSTMENT AND TEE I PACT OF TEE SAL 28. It i s too early t o link the Gwemment's adjustment e f f o r t s with r p e c i f i c macro-economic r e r u l t r such as a higher GDP growth r a t e o r expanded exports. The predominant influencer on the performance of the economy during the PREP and the SAL period8 were world market price8 f o r Uauritania principal exports ( f i s h and iron-ore) and import8 and a180 external factor8 such a r weather, but not necesrarily the e f f e c t s of adjustment. It i r however possible t o evaluate the impact thur f a r of adjurtment measurer on the key economic indicators (see Annex III), and t o come t o raprs t e n t a t i v e conclurions about the appropriatenesr of the reforms and t h e i r timing and sequencing. This section presents an overview of e c o n d c performance W r the adjustment program, as well as a non detailed review of the major cormponentr . A. Econa~aicPerformance 29. During the period of implementation of the economic and financial recovery program (PREP), the macroeconoaric performance of the economy was considerably b e t t e r than in the himediately preceding years. Real G DP growth rose from an average of 0.2 percent per year during 1982-84 t o an ertimated 3.4 percent per year during 1985-88. A s a r e r u l t of the adjurtment policies purrued, the overall f i s c a l d e f i c i t on a commitment baris declined from 4.5 percent of G DP in 1985 t o 0.1 percent in 1987. Helped by consecutive good harvests, s t a b l e prices f o r the country*^ key imports, and s t r i c t c r e d i t control, the annual r a t e of i n f l a t i o n , measured by the G D P deflator, f e l l from 13.6 t o 6.3 percent during 1985-88 period. U a u r i t a n i a * ~external position ha8 a180 shown rteady improvement, reducing food import8 in response t o improved incentive8 in the agricultural sector and favorable weather conditions. A s a share of GDP, the current account d e f i c i t (excluding o f f i c i a l t r a n s f e r s ) declined from 26.2 percent in 1984-85 t o an ertimated 17.8 percent in 1987-88 (See Annex 1 Indicators). 11 - Key Economic and Financial 30. During the SAL period, (June 1987-December 1988) the l4aurit.ni.n economy witnessed a s h i f t towards a more decentralized and market-oriented s t r u c t u r e and improved efficiency in public resource management. Strict budgetary discipline brought down the consolidated government d e f i c i t (including foreign-financed investmentr) from -1.8 percent of G DP in 1987 t o 2.3 percent of G DP in 1988: the number of c i v i l setvantr war frozen; and public invertnuntr were cut from 18.2 percent of G DP i n 1987 t o 13.9 percent in 1988. I n t e r e s t r a t e s were kept positive in r e a l terms, monetary policy was r e s t r i c t i v e and c r e d i t t o the Govetnmsnt war maintained a t i t s 1984 level throughout the period; nev loan8 wore limited t o the f i r h i n g and i n d u r t r i a l rectorr . 31. However, delay8 i n the preparation and implementation of important rupply-ride reform8 (such a8 the nev invertment code, new curtoma t a r i f f , f i r h e r i e r policy, food policy and bank rertructuring), cmpounded by a deprerred iron-ore world market (and the f a l l of the U S d o l l a r ) rlowsd growth i n 1987-88 t o an ertimated r a t e of only 2.5 percent. 32. Budget d e f i c i t r , which in the f i r r t year8 of the program widened in rerponre t o an increare in rubridier t o public enterpriser plur an urgent need f o r increased r e h a b i l i t a t i o n and maintenance expenditure, have been kept within the t a r g e t r ertablirhed under the program. Rertraint in c r e d i t policy ha8 been maintained, and r e a l i n t e r e r t r a t e r have b e c m poritive. Largely due t o introduction of the floating exchange r a t e ryrtem, the Central Bank grorr foreign exchange rererver increared from 1088 than 1.1 month8 of importr i n 1985-86 t o about 1.3 month8 of importr in 1987-88, and exterarrl paymentr a r r e a r r have been reduced. Ar a r e r u l t of imprwementr in the policy environtlsnt, an a n n u l average increare in r e a l C DP of 3.4 p e r c m t war achieved during 1985-88. 33. A8 a r e r u l t of the SAL, the econauy i r no longer a s regulated a s it war ktil l a t e 1987. Quantitative import r e r t r i c t i o n r and price control8 have been mortly removed 80 t h a t price8 mve more f r e e l y with rupply and demand. There i r today much more private a c t i v i t y in a l l economic rectorr e r p e c i a l l y in procerring and amrketing of agriculture c m d i t i e r and in firherier. Host important i 8 the direction of future change which the Government has rpelled out in variour policy rtatementr. The Mauritanian economy i r r o t t o become a more mmrket-oriented one with the Govarmwnt*r r o l e limited t o f a c i l i t a t i n g private i n i t i a t i v e r rather than one of controlling and directing the econoaic a c t i v i t y a r in the part. 34. The improved policy and i n r t i t u t i a r u l environment has led t o a surge i n private rector a c t i v i t y which underpinned the e c o n w * r rerumption of growth, and ha8 helped lay the foundation f o r rurtained medium-term growth and d i v e r r i f i c a t i o n of the econaay. I n 1985-88, the contribution of the f i r h e r i e r rector t o C DP increared f r a a 6.9 percent t o almost 9 percent as a r e r u l t of the r e c t o r 9 r increared p r o f i t a b i l i t y , which a t t r a c t e d new private operatorr. Cereal8 production expanded f r a ~ ~ l e than r r 20,000 metric ton8 in 1984-85 t o 166,000 metric ton8 in 1987-88, a8 a r e r u l t primarily of improved economic conditionr. B. Public Sector H.naltement 35. Under the SAL, a program war developed to: (i)improve coordination of economic policy-nuking and Recovery Program monitoring and implementation through creation of an interprinirterial coordinating colrmittee rupported by a technical working group and a r e c r e t a r i a t ; (ii)e r t a b l i r h an i n r t i t u t i o n a l mechanirm t o develop and coordinate a program of i n s t i t u t i o n a l reform; (iii) develop a computerized perroanel information ryrtem and computerize c i v i l rervice artminirtration; ( i v ) carry out an audit of the wage b i l l and a review of non-wage canpenration in the c i v i l r e ~ i c e ;and (v) rtrengthen pluming, econcnnic p o l i c y - d i n g and debt muragement c a p a b i l i t i e r in the M i n i r t q of Econauy and Finance, through a p a r t i a l reorganixation, recruitment of specialized s k i l l s , training, and improvements i n systems and procedures. These actions were supported by the Bank under the Development Management Project (Credit 1865), which was approved i n December 1987. Public Investment and Consolidated Budnet 36. A major focus of the S A L was Public Investment Program (PIP) reform. Previously, the lack of well-defined sectoral s t r a t e g i e s and objectives, compounded by a deficient i n i t i a l project i d e n t i f i c a t i o n , l e d t o injudicious investment choices which l a t e r on were poorly implemented because of inadequate preparation. F e a s i b i l i t y studies were rarely prepared t o show the s i z e and nature of demand f o r the projected output, a l t e r n a t i v e technical solutions, the order of magnitude of the investment and recurrent cost, and the i n s t i t u t i o n a l constraints t h a t the project could encounter. Many projects were not subjected t o a thorough appraisal t o make sure that the investments were economically j u s t i f i e d and financially viable, and t h a t they would contribute t o the country's development objectives. 37. As a r e s u l t , large public investments had contributed t o the government*^ mounting external debt and t o increased imports, but f a i l e d t o stimulate and diversify the productive base of the econamy. Hence, implementation of a progr.mming approach t o public investmrwts was an appropriate means of introducing more discipline i n t o G o v e ~ n t ~ s development budget and actual expenditure. A s the Government agreed with the Bank, monitoring of PIP reform by the Bank was i n t e g r a l t o the SAL program. 38. B y l a t e 1988, the Government had f u l f i l l e d the conditions of the second tranche releases namely, it had prepared a three-year P I P , carefully revienmd and agreed t o by the Bank and the IHP. It covered 1989-91 and t o t a l l e d approximately USS602 million, o r on average 11.7 percent of GDP annually. Emphasis was s h i f t e d tornrd agricultural development and the maintenance and rehabilitation of infrastructure and c a p i t a l assets, p a r t i c u l a r l y i n the health and education sectors. Infrastructure projects i n the transport and copmmunications sectors were limited t o completion of those already under implementation. This new 1989-91 P I P was endorsed by the international comnunity in a Donors * Meeting held i n Paris in July 1989. Also, preparation of a consolidated budget, comprising both i n t e r n a l and external financing expenditures, was s t a r t e d in 1987 and yearly thereafter with the assistance of the Bank and the IHP. 39. In the preparation of the 1989-91 P I P and of annual invertment budgets, the Government carefully followed a policy aimed a t limiting the s i z e of public investment, improving the efficiency of public investment, cutting out low p r i o r i t y projects and c u r t a i l i n g Government*s role in areas where private investment i s expected t o play an important role following policy reforms. 40. Host importantly, s t a r t i n g 1988, the P I P i s s e t in the context of a policy framework and the Government has indicated i t s intention t o adopt i n s t i t u t i o n a l and procedural reform measures t o strengthen investment planning including preparation of a three-year r o l l i n g Public Investment Program f o r the future. These reforms are being supported by the Second Technical Assistance Project ( C r . 1292-HAU), the Second Rural Sector Technical Assistance ( C r . 1 4 1 4 - W ) , the Public Enterprise Rehabilitation Project ( C r . 1567-MU), and the Development Management Project ( C r . 1865- MU). Public Finances 41. Under the SAL, reforms were t o be introduced with the aim of increasing revenues and reducing expenditures t o bring down the overall public d e f i c i t . These reforms were by and large successfully implemented. I n terms of measures t o increase public revenues, a new general import t a r i f f code was studied under the SAL and adopted under the 1989 Consolidated budget. Also the tax base was widened with the implementation of the new investment code and the taxation of imports and public contracts financed by donors. A f i r s t phase of tax reform on mining and small enterprises, which was a second tranche release condition, was a l s o impleamnted, with the assistance of the Bank and the IHP. Howetver the planned reform of f i s h e r i e s taxation did not take place due t o delays in the consultants* work but a l s o because t h e i r work was judged very unsatisfactory by the Government a s well as the Bank and the IMP. 42. Some progress was made i n public expenditure management, despite considerable delays in carrying out an agreed program t o improve external debt management. This progres 8 notably helped reduce government dams8t i c a r r e a r s and contain the public wage b i l l . kleasures taken includet (i)the s t a b i l i z a t i o n of t r a n s f e r s and subsidies: (ii)a review of u n c d t t e d funds under projects already completed o r cancelled; (iii)expenditure m i t o r i n g improvements; and ( i v ) the preparation of d r a f t l e g i s l a t i o n t o reform public procurement. Public E n t e n r i s e s 43. Under the SAL, as p a r t of i t s reform and a s a condition of second tranche release, the Government and the Bank were t o agree by December 1987 on the following: (1) a restructuring program f o r the petroleum product d i s t r i b u t i o n company (SHCPP)! ( i f ) a contrat-plan f o r SHCPP: and (iii) a contrat-plan f o r SOHELEC. 44. This condition was p a r t i a l l y met a t the time of the tranche release. Delays experienced i n meeting t h i s condition were mainly due t o delays i n the consultants* work. After a delay of a h s t a year, the management and f i n a n c i a l audit of SHCPP was completed and reviewed by the Bank. The restructuring plan f o r S M CPP was approved by the Bank and i t s implementation s t a r t e d but i t was agreed t h a t preparation of a contrat-plan would be delayed u n t i l completion of the restructuring phase. The Government i s now studying the p o s s i b i l i t y of privatizing t h i s enterprise. 45. The restructuring of the Soci6t6 Nationale d*Eau e t d 0 E l e c t r i c i t 6 (SONELEC) showed good progress. Key actions taken include; (i)adoption by the Government of an overall u t i l i t i e s policy: (ii)the financial recovery of SONELEC through t a r i f f increases f o r water and e l e c t r i c i t y and increasing i t s c a p i t a l by UM 1 b i l l i o n ; (iii)a survey t o update customers' accounts; and ( i v ) preparation of a contrat-plan which was signed i n Paris on February 8, 1989. 46. Prior t o the SAL and as part of i t 8 adjurtment e f f o r t , Mauritania undertook important reform initiative8 a h d a t improving the perfoznunce of the moat important public enterprirer such a8 SNRl (mining company). Under the SNRl Rehabilitation Project (Ln. 2643-HAU), SNRl war given complete a u t o n q through explicit exemption from public enterprire legirlation, i t 8 cortr were reduced and i t 8 mrmagenmnt rtrengthened. Also, under the Rural Sector TA Project ( C r . 1414-MU) a f i r r t phare rertructuring of SONADEX war undertaken in 1985 with a view t o streamlining operation8 and diverting functions that could more appropriately be handled by farmerr or the private sector. 47. To help Government with i t s adjurtment e f f o r t r , the Board approved in March 1985 a Public Enterprire Rehabilitation Project ( C r . 1567-HAU) whore m u i n objective war t o provide financial and technical arrirtance t o rehabilitate and rtrengthen the power and water u t i l i t y (SONELEC), the telecmmunicationr agency (OPT) and the port of Nouakchott (EMN), a8 well a8 t o help Government define and implement policy and i n r t i t u t i o m l reform8 of the rector. 48. The abwe project war a l r o aimed a t introducing rector wide reforma and a t rationalizing and redefining the relationrhip between the Government and public enterprirer. There reforma have progrerred only slowly or, in rame rerpectr, not a t a l l , becaure of inexperience, inrufficient gwe-t c d t m e t n t , weaknerrer with the i n r t i t u t i o m l and legal framework and delay, in completing rector rtudier. there reforma w i l l be expanded and deepoaod under the proposed Public Enterprise Sector Adjurtment Program ( P E S E U ) . 1nrtitutioll.l Development 49. Implementation of the public rector management component war uneven: (i) while the interminirterial coordinating c d t t e e war formally ertablirhed, it never met on a regular barir and did not develop into an effective coordinating mochanim: (ii) a Bureau for coordination of inrtitutioll.1 reform war ertablirhed in Mcember 1987, along with an interminirterial coordinating c d t t e e for inrtitutional reform, and both have since been operating effectively: (iii)computerization of perronnel adadnirtration got underway with arrirtance fromthe Tunirian C N I (National Data-procerring Center) under a twiaaing arrangement; system development i r progressing ratirfactorily, and Wuritanianr are being trained t o participate in ryrtem development and arruma ryrtem operation on a rurtainable barir; (iv) rather than carrying out the dircrete agreed actions concerning wage b i l l manrgenmnt and non-wage compenration, the Mauritanian authoritier embarked on a camprehenrive review of public perronnel policier involving employment, compenration, career development and training policies; these rtudier, however, only got undemy in November 1989 a f t e r considerable delay; (v) the Uiairtry of E c o n q and Finance war effectively reorganized along agreed liner in August 1988. Thir war a condition for the recond tranche releare. However, in mid 1989 the Hinirtry war r p l i t into i t r Planning and Finance components. While the benefit8 of the reorganization were not l o r t , t h i r further rertructuring of core econamic institutionr, ar w e l l a8 the continued very high turnover among upper-echelon Hinirtry r t a f f , ha8 delayed much of the training and other inrtitutioxml development activities . Information Hanaaement 50. Under the SLLL, measures were included to obtain econoaric and financial data necessary for macroeconomic forecasting and policy analysis. Sane of these measures were partially implemented by the end of the SAL period, m l y the preparation of foreign trade statistics, the forecasting of government current and investment expenditures, household surveys and debt management. The technical capacity of the Government, which was somewhat overestimated at the tiam of the SAt preparation, is expected to be reinforced through the ongoing Development Management Project. This is expected to have a positive impact on the qulity of e c o n d c , financial and social information and should lead to a more accurate and detailed assessmhnt of the impact of the structural adjustment process to date. C. Bankinn Sector 51. By early 1985, the banking sector in Mauritania was in disarray and effectively paralyzed. Five out of seven comercia1 banks were in a very critical situation because of a rapid deterioration of their portfolio resulting from arrears, particularly fromprivate sector operators and public enterprises, amounting to about USS130 million. This situation was compounded by the high cost of external funding and excessive operating costs. 52. Under the SAL, the Government and the Bank agreed on a banking reform program, which was developed in close collaboration with IWP staff. The program focused on three main areas: (i) reforming credit policies and bank regulations; (ii) strengthening of the Central Bank: and (iii) restructuring of four of the seven camarcial banks. Actions agreed in these three specific areas included: (i) restructuring of two cao~~oercial banks (SHB and B W ) ; (ii) msrging of two development financial institutions (BHDC . and FND) and preparation of a contract-program for the new institution; and (iii) agreeing with the ZHP on an action plan and technical assistance to strengthen the Control Department of the Central Bank. 53. In addition, and as a second tranche release condition, the Government agreed to conclude agreements satisfactory to the Bank on the following: (a) with private partners for the rehabilitation of four primary banks; and (b) with a11 restructured banks to ensure adequate conduct of their operations and timely compliance with a11 requiremsnts prescribed by the new Banking Law. 54. Results in the implementation of the banking sector component have been mixed, but overall progress has been satisfactory. Substantial progress has been achieved in the - legal and administrative reforms, including the enactment of a new banking law and the application of prudential banking ratios, the establishment of a nbw and uniform accounting plan, the reinforcement of the Central Bank's supervisory function over the coummrcial banks, and the preparation of performance contracts for each of the co~mwrcialbanks. These contracts, drafted in consultation with the Bank, set forth specific deadlines for each individual bank to comply fully with the new banking law. The collection of loans in arrears has improved s a w h a t with the establishment of a 'special court' but still requires rtrong government rupport t o achieve better r e r u l t r with the mort important debtorr . 55. With rerpect t o the rertructuring of the four a i l i n g gwernment banks, on. of the b a r , Banque Mauritanienne du Ddveloppement e t du Cmwrce (BMDC) i u r been merged, ar enviraged, with a government-financed inrtitution, Fondr National du Ddveloppement (FND), and arrangement8 t o prwide the rerulting Union der Banquer do D4veloppement (UBD) with imprwed management capabilitier under a twinning contract with a foreign bank were made with the Bank'# approval. The majority riure of a recond b8n.k. Banque Mautitanienne pour 10 Camerce e t 1'1ndurtrie (WCI) i r now privately-awned and i r under Mauritanian private rector management. 56. pour Effort8 t o privatize the two other bank#, Burque I n t e r ~ t i o r u l e l a Mauritanie (BflU) and Socidtd Mauritanienne do Burque (SHB) have failed due t o factor8 beyond government control. Negotiation8 with potentially intereatad foreign bank8 t o privatize both bank8 were i n i t i a t e d in 1987 with Bank-financed arrirtance, but the foreign banking commaraity ten&d to conrider the limited banking market of Mauritania unattractive and rirky. Faced with the great difficulty th8t the Government w8r experiencing in attracting foreign private partnerr, it propoaed t o the Baak, as an alternative rolution, t o merge BMh and SHB under the ram9 general manager with 8 v i m t o rationalizing the rtaffing and operationr of the morged bmk (a rolution which in fact war equivalent t o liquidating BIHh) and conrequently, condition (a) (para. 53) iud t o be modified in July 1988 .Ird the Government .ad the Bank agreed on a timetable for the k p l m t a t i o n of the a l t e r ~ t i v erolution. 57. So f a r , a11 nasarurer in the alternative rolution iuve been implemented. They include: the ertablirhwnt of a coordinating c a m i t t e e under BCn'r rerponribility which would monitor the baaking ryrtem reform and report monthly t o the Bank; the creation of the Banque Nationale do Mauritanie (BNM) a8 a rerult of the merging of BflU and SHB; the appointra6nt of an interim general manager t o head the merged bank; the rubmirrion t o foreign bank8 of a proporal of a managing partnerrhip in the merged bank; the irruance of inrtructionr t o UBD'r management t o tightly monitor, under the control of the above-mentioned coordinating cwmittee, it# trearury and operationr and t o atreamline i t 8 r t a f f ; and the twinning contract f o r UBD, apprwed by the Baak, with a Tunirian baak (BDET). Further mearurer t o continue with the rertructuring of the banking rector are being monitored jointly by the Bank and the Fund through the PFP procerr. D. Rural Developmant and Food Policy 58 . One of the moat important componentr of the SAL conrirted in revitalizing agriculture in order t o increare and diverrify agricultural production and t o raire productivity through encouragemant of private rector i n i t i a t i v e , a change in incentive policier and a progrerrive withdrawal of the State from direct involvement in marketing a c t i v i t i e r . In addition, under the SAL, good progrerr ha8 been made on the following: rtrengthening of a planning unit of the Ministry of Rural Development; the ertablirhwnt of an annual food aid program, the rtrengthening of the food-for-work progrm and the ertablirhwnt of a 'Co9rmon Rand' t o ure the counterpart fundr from food aid raler t o finance development projectr, particularly i n the rural rector. The record of achievement in t h i r area h.8 been ratirfactory, though rubject t o rignificant implementation delays mainly in the adoption of the pricing and mrketing reform8 and in the implementation of required mearurer f o r the C d r r a r i a t Ir l a S4curit4 A l h n t a i r e (CSA). 59. A8 for the cereal8 policy (pricing and marketing), the Government adopted in June 1988 a ratirfactory food policy declaration, backed by a round action program, which reprerented a rignificant #top toward8 imprwed policy making. The a h of the Gwernwnt'r declaration and the action program were: (i) t o encourage private rector participation in the production of local cerealr; and (ii)t o encourage production, procerring and marketing of local cerealr. I n order t o achieve thin, Governmaat coawnitted i t r e l f t o implementing, over a period of three year,, the following action#: ( a ) ending the monopoly of SOHIHEX (Soci4t4 Nationale d'ImportlExport) and CSA in the marketing of rice and food aid; (b) gradually increaring the raler price of donated foodrtuffr t o reach parity with price8 of damsrtically produced cerealr: and ( c ) redefining the role of the CSA. 60. Regarding the l a t t e r , the Bank and the Governmant rpecifically agreed on the following up-front actionrr (i) CSA a c t i v i t i e r would be gradually redirected from conmarcia1 a c t i v i t i e r t o the dirtribution of food aid: (ii) CSA would gradually r e r t r i c t it, purcharer of local cerealr t o thore produced by # m a l l farmerr located in irolated arear: (iii)the cram rubridier between SONIHEX and CSA would be #topped and a l l rubridier paid by Government t o CSA on account of marketing of locally produced cerealr would be reflected in the national budget: ( i v ) CSA would keep a recurity f l e e t of 47 truck8 and r o l l the remainder of i t 8 f l e e t in two tranche#: (v) a l l rice m i l l 8 would be privatized no l a t e r than December 31, 1988: ( v i ) the CSA car repair #hop f a c i l i t i e r would be privatized or alternative nun8g-t arrangement8 would be put in place no l a t e r than December 31, 1988: and ( v i i ) CSA.8 r t a f f would be reduced accordingly. Implementation of action (i) began during the 1988189 harvert while action8 (ii)and (iii)were completed by Pebnury 1989, prior t o negotiation of the third year PFP. Action, ( i v ) , (v) and ( v i ) were completed in March 1989 before negotiation of the Agriculture Sector Adjurtment IInvertment Project . (AGSECAL) rtrengthening of t h i r policy would be rupported by the AGSECAL. Continuation and E. Liberalization of the Renulatory Framework and Promotion of Private Invertment 61. Before the adoption of the PREP, the development of Mauritania'r # m a l l uld medium enterprirer had been adverrely affected by both unfavorable worldwide econamic condition8 and by inappropriate policier. The principal we.hr.rrer of there policier were: ( a ) the priority given t o import- rubrtitution indurtrier which 8180 inhibited the growth of non-traditional export#: (b) the proliferation of privilege8 under rpecial agreementr, leading t o tu and other exorbitant exemption8 for certain enterprirer, dirtorted the indurtrial incentive environment and rerulted i n poor rerource allocation and high unit cortr: and ( c ) excerrive regulatory conrtraintr on enterprirer. 62. Under the SAL, rignificant progrerr war made toward8 reforming there policier and i n improving public rerource mobilization. A new Invertment Code (recond tranche releare condition) and a new import t a r i f f code were adopted in l a t e 1988 and implemented together with the 1989 Consolidated Budget. The new t a r i f f code was designed with the aim of rationalizing the protection of Mauritanian industries, reducing the average effective protection r a t e s from around 132 percent t o around 66 percent and narrowing the range of t a r i f f t o between 20-70 percent through reducing t a r i f f s of many i n d u s t r i a l products. Also a new duty draw-back system was introduced. 63. The new Investment Code provided f o r l i b e r a l i z a t i o n and more limited tax incentives than the previous one and created a one-stop window t o process applications f o r new investments. The processing tiwr f o r apprwal was reduced from 180 days t o a maximum of 90 days. Also, good progress has also been made in reviewing special agreements made under the 1979 code and adapting them t o the new code. These two measures a r e producing inmediate revenues and gradually expanding the tax base. Progress has a l s o been made in tu reform, in price liberalization and in reducing controls and t h i s indicates the Government's resolve t o continue the reforms required t o diversify the econoq and t o promote a more dynamic mobilization of internal resources. F. E n e r r Policy 64. I n November 1986, the Government adopted a policy statement on energy pricing and o i l product marketing based on import parity and f u l l copt pricing with a liberalized distribution system. A new petroleum price structure was adopted t o r e f l e c t the r e a l cost of import and distribution operations. An existing levy t o help the state-ouaed petroleum importing and marketing company (SMCPP) c w e r i t s financial losses, was eliminated. A s agreed under the SAL, the Goverawnt opened up the sector t o a l l o i l ccuupanies willing t o import and d i s t r i b u t e products in the country. But the decree as adopted did not go f a r enough. The decree in practice limits the d i s t r i b u t i o n of petroleum t o two o i l ccuupanies, British Petroleum (BP) .ad St4CPP. This r e s t r i c t i o n w i l l be removed under the PXSXCAL. Also, e f f o r t s a r e being made t o s e l l SWPP t o private investors. G. Fisheries Policr 65. Under the SAL, and as a second tranche release condition, the Government agreed t o strengthen i t s f i s h e r i e s management resource capability by December 1987 mainly through: (i)agreeing with the Bank on an investment program f o r the sector; and (ii)submitting an action program satisfactor)r t o the Bank to: (a) enhance the surveillance and control of fishing a c t i v i t i e s r and (b) formulate a training program f o r the f i s h e r i e s sector. 66. Implementation of the f i s h e r i e s component has been mixed. On the basis of several studies financed by the Kuwait Fund and the Bank, the Government prepared and dircuaaed with the B a n k on November 1987, a aectoral investment programs the training progrlm f o r the f i s h e r i e s aector was formulated with Bank assistance by Febrrur)r 1988 and adopted by the Governmetnt only i n June 1988. This training program i s being financed under the Second and Third Bank-financed Education Projects ( C r . 1214 and C r . 1943). Regarding the strengthening of f i s h e r i e s surveillance, land-based a c t i v i t i e s proceeded smoothly, whilst further strengthening of the sea-based surweillance unit was dependent upon the acquisition of equipment financed by donors on a grant basis. Effective implementation of the sea-based aurweillance a t a r t e d only in July 1989 when the veaaela firunced by a grant from Gemany arrived in Mauritania. H. Social Dimsnaiona 67. Under the SAL, the need t o take apecific action8 t o mitigate the aocial costa of adjustment in the ahort t e r n m a recognized f r m the beginning. I n many reapecta, the effect8 of aeveral SM, faeaaurea were t o help in a l l e v i a t i n g poverty. There faeaaurea were: (1) making distribution of food a i d more targeted and equitable: (ii) reallocation of public expenditurea t o s o c i a l aectora; (iii) employment generation and p r w t i o n of micro-enterpriser; and ( i v ) preparation of a 'Priority Action Programm of projects targeted t o the moat vulnerable groupa. 68. Food a i d and food-for-work programs have been an important element in helping the moat vulnerable groupa in Mauritania t o cope with the aocial coat of adjuatment. Furthermore, deapite budgetary constraints, the Government ha8 protected, as agreed, baaic 80ci.l aervicea, namely education and health. 69. Several msaaurea were deaigned t o increaae emplopent and mitigate the hardships of unemployment, eapecially thoae brought about by tho implementation of apecific adjuatmentmaaurea auch 88 8dPrinirtrative ref- and the restructuring of public enterpriaea and cae~wrci.1 b a a . Furthermore, a Reinsertion Fund (FIRVA) m a created with the aim of helpin8 young technicians and former c i v i l aervanta t o a t a r t - 1 1 buaineaa operationa. Under the program, retrenched workers were provided w i t h employment counrelling, acceaa t o training, i f appropriate, and f i r u n c i a l aaaiatance f o r the eatabliahment of - 11 buaineaaea in p r i o r i t y aectora. Demand f o r the program ha8 nonetheleaa been r e l a t i v e l y lw. Thia may be p a r t l y due t o inadequate follow-up of the program operations capounded with a low loan recovery r a t i o . 70. A 'Priority Action Programm (PAP) identifying a number of ahort term projecta targeted t o the moat vulnerable social-economic groups m a prepared under the SDA i n i t i a t i v e . There projecta include r community developmsnt i n i t i a t i v e s , labor intenrive actiona a t the municipal level, health and n u t r i t i o n a l actions, urban houaing a l l e v i a t i o n and micro-enterprire initiativea. Thia P AP has been integrated i n the Govemment'a reinsertion program designed a f t e r the c i v i l diaturbancea in April-- 1989. 71. Perhapa the moat important i n i t i a t i v e f o r aaaeaaing the aocial impact of the S M , and achieving the integration of the s o c i a l dimsnaiona war the design and launching of the Mauritania SM Project, aupported by the B a . 8 SM Unit, with funding f r m USAID: t h i a project includes: (i) a a t a t i a t iC.1 component with a permanent Hour ehold Surwey (EPCV) gathering data on the l i v i n g standard8 of Mauritanian houaeholda: (ii) an analyaia component, serving aa the baaia f o r the design of the Covernment'a aocial policy; and (iii)a aocial policy component.  IV. THE DESIGN. SEQUENCING AND TIMING OF REFORMS: LESSONS L W D FROH THE SAL 72. What lessons should the B a d e learn from the SU? What are the ways and means for bringing about in Mauritania the necessary changes and structural reform to achieve the program's goals in the tims frame that has been set? A. Mauritania's Economr after the SAL 73. Despite adjustment progress made under the PREP and especially under the SAL, the klauritanian economy remains fragile and its long-term prospects are uncertain. Its resource base is very narrow, its market size is small, and its export prospects are not only limited but also highly sensitive to price fluctuations on the international market. Public finances are constrained by a relatively inelastic revenue base and limited scope for further reduction in expenditures. The burden of Mauritania's external debt is very heavy; debt service would have represented s a w 52.8 percent of Mauritania's export revenues in the absence of the 1989 rescheduling. Thur, while much was achieved under the SAL, the remaining adjustment irsues such as: completion of banking restructuring, development of financial intermsdiation, institutional development at the sectoral level, public expenditure management, credit policy, industrial policy, artisanal fisheries development, private sector promotion, trade liberalization, e c o n d c environment reform and public enterprises reform are very substantial and the econcmy is far from achieving sustainable adjustment and economic growth. 74. Given this evolution, -re the assumptions underlying the SAL valid, was the program design correct, and was the sequencing, and the time allowed for implementation of actions appropriate? The SAL was conceived as an incremental segment of an ongoing medium-term adjustment program (PREP) and . was broadly based on it. The Letter of Developrment Policy, the economic memoranda, sector studies and a11 three PFPs converge in the judgment that generally the country's problems Prare correctly identified. Nevertheless, one might wonder whether (a) the SAL itself war too ambitious with too many refornu to be implemented simultaneously across sectorsa and (b) if the sequencing, timing, and time allotted for implementation of actions was well adapted to the particularities of Mauritania, especially considering the difficulties in obtaining a political consensus in favor of reforms. It might have been preferable to have a leso ambitious and more focused operation, first getting the banking sector into a better position to support the nuin productive sectorr to exploit the improved economic environment supported by the SAL. Nonetheless, successful liberalization of the market environment achieved under the SAL has contributed to a better understanding of the need for further structural reform which should be supported under subsequent adjustment lending. 75. Given the improvements in economic performance under the SAL, it would appear that the economic analysis underlying the design of the reform progrrun supported by the SAL was broadly correct. The fundamental direction in which these reforms should lead the economy, that is the increasing role of the private sector in a liberalized market environment and a reduction in the role of Government with a refocusing of public expenditure, were appropriate for Mauritania. However, in its future adjustment operations,  the Bank must be aware of the extent and depth of the s t r u c t u r a l prob1.0l and of the f a c t t h a t not a l l reforms could be tackled sintultaneously given: the p o l i t i c a l constraints (because i n t e r n a l consensus-building takes time), the continuous m i n i s t e r i a l reshuffles (between November 1987 and December 1988, the task manager of the SAL met with four d i f f e r e n t Ministers of Economy and Finance and three Governors of the Central Bank), the high turnover of senior s t a f f (three Planning Directors between November 1987 and December 1988). the weak capacity of the public administration t o design and implement reform, the d i f f i c u l t i e s in getting donors' coordination and cooperation in implementing concrete act.ions and the influence of a l t e r n a t i v e sources of external financing on the p o l i t i c a l resolve t o adhere t o a particular conditionality. 76. Horeover, experience has proven t h a t in Mauritania an adequate and careful preparation of the SALISECAL operations i s needed in order t o get the most r e a l i s t i c assessment of the constraints in each sector ro that appropriate action can be taken and t h a t technical assistance projects are not the proper vehicle f o r carrying out policy and i n s t i t u t i o n a l reforms. 77. Future adjustment lending should focus on r e l a t i v e l y few areas where constraints e x i s t and therefore it i s very important t h a t adjustment operations should give support t o the reform process i t s e l f and not t r y t o cover i r e a s of secondary importance. Structural adjus-nt lending ( U s ) ehould be complemented by sector adjustmsnt lending ( S E W S ) and o r hybrid adjustmentlinvestment operations t o deepen reform s t a r t e d under the S1UI- i n key sectors of the economy, in p a r t i c u l a r agriculture, financial sector, public enterprises, f i s h e r i e s and industry. 78. I n terms of reform sequencing, it could be argued t h a t , whilst the trade l i b e r a l i z a t i o n measures introduced under the SAL were n e c e s s a q and appropriate, actions t o remove supply-side r i g i d i t i e s especially in the agriculture sector or the restructuring of the banking sector should ha- been tackled much e a r l i e r in the reform process. 79. Whilst the record of achievement in the implementation of actions under the SAL has been generally s a t i s f a c t o r y and most c r i t i c a l measures have been implemented, a number of actions were delayed, notably food policy, public enterprise reform, f i s h e r i e s and banking. For many actions, the necessary technical framework simply did not e x i s t or the implenmnting ministries were poorly staffed. I n other cases, adverse factors lay somewhat outside the control of the Government, such as the unavailability of consultants or the d i f f i c u l t y in a t t r a c t i n g foreign partners. 80. For the Gwemnwnt, the Bank and the co-financiers, the lessons learned suggest t h a t , in the i n t e r e s t of Mauritania's moving ahead on the c r u c i a l reforms, there w i l l have t o be further cooperation and coordination on the measures and the conditionality f o r future adjustment operations. The implementation of the ad.justment measures must be accompanied by consensus-building e f f o r t s by the Government with the various i n t e r e s t groups which have a amjor impact on decision-making so t h a t action caa proceed rapidly and smoothly i n the areas where policy reforms a r e s t i l l required. ? 81. For the Bank, it i s imperative t h a t it i n s i s t with G o v e ~ n and t donors on up-front actions and s t r i c t (and timely) implementation of the mearurer the Government ha8 agreed t o adopt and donorr t o rupport. To f o r e a t a l l rlippage of implementation, the Bank murt continue t o rchedule frequent and detailed rupervirion mirrionr and enrure an active and coordinate role of Rerident Hirrion r t a f f , with a particular view t o rupporting technical m i n i r t r i e r rerponrible f o r implementing rectoral mearurer . 82. To runmurize, a11 Bank rupervision mirrionr of the SAL concluded t h a t delayr i n the agriculture, f i r h e r i e r and b a i n g areas retarded the momentum of the adjustment procers. The analyris of the SAL implementation a l r o pointr out r h o r t c ~ g r in there three particular reform areaa. Moreover, i n the areaa of banking rector rertructuring, food policy and f i s h e r i e s , the dimenrionr of the problem turned out t o have been much larger than originally e a t h a t e d by the Bank and the Government. With the benefit of hindsight, the program war too optimirtic in two rerpectrr f i r r t , agreed actions were scheduled too early r e l a t i v e t o the Governwnt'r a b i l i t y t o reach consenrus, and aecond, inadequate tima war allowed f o r f u l l implementation. B. Government Performance 83. Much of the ruccerr of the f i r r t phare of the PBEF and of progrerr made under the SAL can be a t t r i b u t e d t o the f a c t t h a t they had the firrn c d t m e n t of the Prerident and the econanic team i n place a t t h a t t i a m . In addition, Government*r dircurrionr prior t o , during, and a f t e r the SAL program have always been open and productive. 84. The Government retain# a rtrong c d t m e n t t o overcaw conrtraintr on growth through a rurtained program of e c o n d c r e f o r m with the continued rupport of the donor cnnanmity. The Government'r medium-term program and r p e c i f i c objectiver were reaffirmed and extended in the Policy Framework Paper 1989-91 reviewed by the C d t t e e of the Whole on May 11, 1989, and considered by the RlF Board on April 17, 1989, which a180 approved a f i r r t Extended Structural Adjurtment F a c i l i t y ( E M ) f o r the equivalent of SDR 50.8 million. C. Donor Performance 85. During the SAL period, there war somatimer inadequate coordination among some donors in implementing specific action8 agreed under the SAL. A care in point war the implementation of the action-plan t o reorganize CSA o r the derign and implemmntation of the rurveillance system f o r the f i s h e r i e s rector. There two examples point t o the need f o r a continued dialogue among the Government, the Bank and donorr in order t o avoid l a t e r diragreement and implementation delayr. 86. A8 f o r the Bank and the RlF, it rhould be pointed out t h a t rince the beginning both i n r t i t u t i o n r have provided mutual support t o each other and have closely coordinated t h e i r e f f o r t 8 i n Mauritania and thereby strengthened not only t h e i r rerpective programr but 8180 each other's programr .  D. Bank Performance 87. The SAL was a comprehensive program t h a t attempted t o address every economic ill in a croar-sectoral context. I n retroapect, it t r i e d t o cover too many important and d i f f i c u l t issues, p a r t i c u l a r l y in the agricultural, f i r h e r i e s , energy, banking and public e n t e r p r i r e rectors, m d a l s o in investment and tax reforms. This broad coverage ( o r lack of c l e a r focus) brought a higher probability of delay8 i n meeting the program's objectives i n the areas mentioned above. 88. A s r t a t e d in paras. 17 and 18, three area8 in which the program foresaw d i f f i c u l t i e r in implementing actions, which were attached as conditions of the second tranche release, were banking restructuring, food policy and f i s h e r i e s . In addition t o being over.mbitious, the program under the SAL was largely over-optimistic in terms of time-bound actions, as s e t f o r t h in a policy matrix (roe Annex 1 1 attached). 89. One instance of delay, which was p a r t l y the Bank's rerponsibility, was the preparation of a contrat-plan f o r S ONELEC because i t s orrugemrnt received on a number of occasions contradictory signals from Bank s t a f f . Thir p a r t i c u l a r problem affected mostly SONELEC but it was corrected by the time of the second tranche releare. 90. The SAL was procesred expeditiourly within the World Bank. Burlt rupervision was thorough and conducted in a timely fashion. As shornr in the attached Baric Data Sheet (See Annex I ) , the f i r s t rupervirion misrion went t o Mauritania in November 1987, three months a f t e r c r e d i t effectivenesr ( t h i s delay war mainly due t o the Banker reorganization process). There was a second supervision mission three months l a t e r (February 1988) and a t h i r d supemision mission was conducted in May 1988, l e s s t h m three months a f t e r the second supervision mission. I n addition, a J o i n t Bank/RlF mirsion v i s i t e d Mauritania in November 1988, one month a f t e r the recond t r m c h e release. Bank s t a f f had an excellent working relationrhip with key people a t the HEP and BCH a8 we11 as in other technical ministries. Horewer, mutual t r u s t u ~ o n g Governwnt, Bank, and IMP s t a f f allowed f o r a team approach t o problem solving, which rignificantly contributed t o the ruccess of the program. E. Forward Links t o AdlusMent O ~ e r a t i o n s(SECALs and SALs) 91. The Agriculture Sector AdjustmentlInvestment Project, negotiated by the Bank and Government on March 1989, w i l l support the Govemmnt's medium- term r e c t o r adjurtment, m d rpecificallyr ( a ) deepen and extend the l i b e r a l i z a t i o n of cereals marketing and price policy i n i t i a t e d under the SAL; (b) support n.w sector refornu designed t o improve land tenure l e g i s l a t i o n and administration m d build i n s t i t u t i o n a l and f i n m c i a l capacity f o r a g r i c u l t u r a l c r e d i t : ( c ) support improved effectiveness of the public sector by restructuring SONADER, improving the public investment program in agriculture, and increasing the Hinirtry of Rural Development's (HDB) capacity f o r planning and policy analysis. Thir component would create an economic framework favorable t o a viable and equitable development of the i r r i g a t i o n rubsector, both by privately funded and managed perimeters and by publicly funded perimeters t o be managed by smallholders. The investment component would help the Government t o r t new approachor t o rmallholder irrigation in the Senegal River Valley, through an irrigation imprw-nt operation in the Corgol area. It is the complementarity betwen the adjustment credit, designed to rupport policy and inrtitutional reform to prawte development of private and public (rnullholder) irrigation, and the investment componant, derignad to tort new approachar to rnullholder irrigation, that jurtifier the hybrid nature of thir operation. 92. The Public Enterprire Sector Adjurtment Operation, to be appraired by the Bank in January 1990, will rupport tha Covetnmsnt*r medium-term consolidation program 1989-91 (PCR) which includes a comprehenrive reform of the public enterprise rector, rtapr to improve the perfornunca and reduce the role of the rector in H.urit.aia*r economy. ANNEX I1 Page 1 of 10  i i I,? .- 17 fj t ; : 1 ; . - 3 - ANNEX I1 - 1 10 1 I& ?i 3 i P j i- g & It! - 1 I I! iIr jl tj ii z Iil ;r 2* i = 1 ,,j : l i ! I l li iii 1,11 I1jiI 12 .fi :i - 4 . i- j8!1 L 1 1 11 .* I itj I! 1. I! !$ k ! Ij 2 'i ;; j j. j iB 1 i i S !!I 12 ,i !f 9 a a: - i 4 ef a- I!{ fit ANNEX I1 P a g e f 10  ANNEX 11 Page 5 of 10 II It, I I://  ANNEX I1 Pan. 6 o f 10 i  PI. P - b -4 ...U=@P FW J (W@@ P l l V d 'W Job WnCQU* -I-* F mJ .k - - - .I --I . *m@w I 1 - - J U 7 4 I ~ I ~ r' @ @~ * ! @!IW f~ rlb@O # I ~.rg wn -I= -I -!w!rr-!r ~@C.rd) yuob- F w ' m- 4 p(m do) la J ~ U -10 'J@@aF -I-* m* -4 WJb Job @@@IPtP - 1. *-I ' p n).uk )(IW F uovDO 'm@Iw - UlIJM - 11 -4 I- Job . ) . U I * . * Y1Im-a - -4 . U b*F - b 1.01). @WP "@I*.Jm'@Jd @ . @* - !1-a, P!.P-bfl1P=-Ib*~UlI- -1-dW.m - 1 J@W q . - ) m. r *- *- r *- m. -IIVW @@I* m@IcS- L I I t J m W - A I ~ I 'm*I / w P -I*..II-I~ - d -Y F @WJob ' w "8lllqlY - *-@(a)--I (UIIJW I 4 rP 1 ~J ..I @ - 1 . a- -l*@lr- 4. -I*..Ie @VQ F - - --------------------------------------------------------------------------------------------------------------------------------------- m.19 UlI PJY I1 -I*-! q- 4 @@W @ m !- - 11- Job . ) ! * " I r)( 4. l a l * Q I I U @ q l l @W'O W J W -~*@lr- - - l * @ Y ~ a (a I ~ -- m I m (-O . WJ@A I-I~!JD) ---------------------------------------- I--.PW.u*u UrOmlLm my13 ------- ----------- ~ 1 1 0 --1------~ ~ 1 m u m r r # ANNEX 11 Page 8 of 10 ANNEX I1 9 - 10 ANNEX I1 Page 10 of 10  ANNEX I11 Table 1. ' Mauritania: Xey tconomic and Financial I n d i c a t o r s , 1985-91+ -------------------------------.-----.------- ------------------------------------------ 1985 1986 1987 1988 (Annual percentage change, unless o t h e r v i s e indicated) GDP a t constant ricer 2.9 5.4 2.8 2.5 p r i v a t e consumpt!on per c a p i t a 1.2 -0.8 3.0 2.0 Exports of goods m d non f a c t o r serrrices 21.6 12. S -0.7 9.9 I m o r t s of goods and non f a c t o r s e r v i c e s -0.1 6.0 0.3 4.8 ~ e ts t e r v i c e ( m i l l i o n of US$) 114.4 186.6 199.9 268.8 Currant account ( m i l l i o n of USSI -102 4 -114 S -110.2 -6.7 i c u r r d l t account exciudfng o f f i c i a l t r a n f e r r ) ( m i l i o n s of us$) GDP d e f l a t o r Consumer p r i c e index 11 (As a percentage of GDP) Gross domestic investment Domertic Savings Natf onal '8avings - - - - - investments Public ~ Public savings P r i v a t e inve stment P r i v a t e savings Ratio of publrc t o p r i v a t e i n v e s m n t 21 Total revenue and g r a n t s of which: b u d g r t a q revenue Total expenditure and ne t lending of which: c u r r e n t expenditure Overall d e f i c i t o r s u r p l u s (+) of c o n ~ o l i d a t e ~ ~ b u d ~ e t Exports of goods 8nd non f a c t o r s e r v i c e s Imports of goods and non f a c t o r s e r v i c e s Current account excluding official trans err Debt s e r v i c e b Debt s e r v i c e r a t i o 21 Real e f f e c t i v e exchurge rate (1980 = 100) 31 11 Based i n p a r t on ? m d s t a f f e s t i n u t e s . 21 Expressed a s a m u l t i p l e of p r i v a t e investemat. I I n e r c e n t of export of goods 8ad noatactor services. r l ilom!nal e f f e c t i v e exchange r a t e ca1culat.d by ? m d s t a f f and adjusted by t h e o f f i c i a l p r i c e index I + 1985188 P u t period. 1 9 8 7 / 8 8 SAL period.  ANNEX 10 Page 1 of 30 LETTER OF DEVELOPMENT POLICY IN MAURITANIA 1. In 1984 the Islamic Republic of huritania faced growing budgetary and external deficits which led to a substantial build-up of arrears. Efforts to check that deterioration did not yield tangible results because they were not directed at its true causes, notably: weak e c o n d c management and inefficiencies in the selection and financing of public investments. These domestic causes were aggravated by a depressed internationaA environment and unfavorable natural conditions. 2. In December 1984, the Government decided to tackle this situation resolutely. It ham spared, and vill continue to spare, no effort to bring the budgetary and external accounts deficits under control. The Government has decided to i m p l w n t the necessary internal structural reforms in order -- to avoid a return to unmanageable deficit financing. To accaplish this, - an Economic and Financial Recovery Program the Prograru de Redressmnt was adopted for the period 1985-88. The content of this Program has been videly ~ublicizedin Mauritania. This ha6 helped to explain to the people the makitude of the effort demanded and the necessity for the sacrifices they are being asked to make. During the first two-year phase of the Recovery Program, important progress has been made in reducing the external current account deficit and mobilizing budgetary savings. 3. Unfortunately, huritania cannot meet the costs of implementing the Recovery Program without substantial external aid. Even If this aid does not exceed the pre-1985 level of net transfers, it would have to be mobilized in f o r u more in line vith the recovery policies currently being implemented. The international c-nity has reacted favorably to the Government's appeal in negotiations to mobilize the financing of external deficits. Donors have agreed to reschedule part of our external debt, either bilaterally, or through hto Paris Club meetings, held in April 1985 and Hay 1986. We have also been granted exceptional aid. 4. Nevertheless, external financing needs go beyond the usual methods of financing investment or technical assistance projects. They extend to venture capital, capital participationa, the financing of certain recurrent maintenance, training and environmental protection expenditures, and support for financial recovery or personnel conversion programs. The First Consultative Croup meeting in November 1985 provided the initial opportunity to make donors aware of the situation. The Government will continue to promote closer coordination with the donors in order to involve t h a in the implementation of Recovery Program policies. If. TEE 1985-88 RECOVERY PROGRAM A. Halor Objectiver 5. The Recwery Prowam uu adopted 1985. Itr objectiver include econaic growth, itp-nt the C o v r r ~ r r n tin September in the productivity of i a v e r t ~ n t ,budget equilibrlor, and rodaction of the t there objectiver ccrllr external d e f i c i t and external debt. A c h i o v ~ of f o r policy meuurer, r e c t o r a l action p W , and a public i n v e r m n t progrm. B. F i r r t Pture of Execution, 1983-86 - 6. A f i r r t a e r i e r of u u u r e r h u bean introduced. They pertain t o the folloving regtorr: - F trade: The currency d m a l m t i o n f o l l m by the adoption of a f l u t l b l e uc-e February 1985 uu in r a t e policy; a11 external debt a r r e a r r have bean c l u r e d and it lur been decided not t o contract n w 1 - and t o accord the State'r guarantee d y to 1 0- uhich are granted in f m r a b l e term# and uhich rerpond t o p r i o r l t y ruedr. - Bud e t o l i c : Reduction and regular r t r u c t a r a l l m p r w ~ of the f-bl acc-to of the S t a t e luve been t purrued by s t e p p a up t u collectiao, r e v ir w certain t u u t i o n rcaler, limiting the h e r of c i r i l service s t a f f , r t a b i l i r w a i l i t a r y erpenditarer, rubridier and t r r a r f e r r , and eliminating domartic arrears. - Wonetary policy: A limit hu been placed m c r e d i t t o the economy rr well u a freeti- of net c r e d i t t o the Govetnnmt: i n t e r e r t r a t e r -re raired by 2 percent in February 1985, while *diate u a n r r e s tnre taken t o r e d n r r the rittrrtion In the burLing r y s t a r o u t o a p e d up the recwery of froten debtr. - Price policy: The list of f i r e d o r capped pricer lur been limited t o e r r e n t i a l productr. Moreover, t o encourage local production, price. h&e bemu f i r e d so a r t o p r w i d e & incentive f o r faiaaers. Lartly, pricer and tariff. hmre been adjurted t o r e f l e c t the r e a l costa of public m t e r p r l r e r and p e m i t them t o Imprwe t h e i r financial rituatiolu. - Management of the public rector: The rehabilitation of the f i v e largert enterprlrer that began i n 1984 har been accelerated. Clorer coordination i n investment relectlon and fiu8ncing har been instituted; and the annual iavertment progrrar have bean integrated into a mtltlannual progrm. .. . course 7. Thus, after nearly tvo years of implementation, ve are wee on in correcting the mafor macroeconomic disequilibria. These results have strengthened the country's external credibility, thus permitting the mobilization of exceptiorul aid from the Kingdom of Saudi Arabia and-France and the successful negotiation of tvo Stand-by arraneem<nts with the IMP for SDR 12 million each in April 1985 urd Ei.y 1986,. *;ectively. In addition, we have been granted access to the IMP'S Structural Mjustmant Facility, and negotiatiom are currently under way for access to the World Bank's Special Africa Facility. 8. During this first phase of execution, the Government's actions have met vith understanding from the people of EI.urit.ni. in spite of the magnitude of the austerity measures. With a return to normal rainfall, the rural population and many recent emigrants from urban areas b e begun vorking again in the fields. Private entrepreneurs have reacted favorably to the more incentive-oriented approach adopted toward them. The G o v e ~ e n tis nevertheless aware that the necessary pursuit of the restructuring effortr will have important sociopolitical repercussiom and that it must renuin vigilant and take the necessary follow-up measures. Its priority concerns are in the area of employment for young people in urban areas, as well as for thore vho have lost their Jobs. In fact, to make the public sector more efficient. the C o v e m a t hu abolished the autoamtic entitlement to civil serPice appointment for graduates of the Higher Education Schools and some enterprises have reduced their staffs. Nevertheless, this search for efficiency, in a context of financial austerity, calls for a comprehensive administrative reform as well as more precisely defined program of restructuring existing personnel tied to a policy for integrating young, better-trained graduates. The reduction of public-sector staff continues to have an adverse effect on public opinion. while the creation of new jobs is dependent, in the short term, on private initiatives in both the rural and the urban areas. Accelerating these initiatives depends, in turn, on reforms in the banking system, in our system of incentives and controls and, in the longer term, in the education and training system. 9. Improving the nutritional and health status of the population remains a priority. The return of normal rainfall in 1985 unfortunately does not put an end to the damage caused by the routhward expansion of desertification, an expansion that has destroyed the traditional econoq based on lot+density livestock raising and rainfed crops. Improving the long-term prospects for the welfare of rural populations depends on advances in providing safe drinking vater and in irrigated farming, program vhich are somewhat behind schedule. For the Immediate future, the Government is redefining its food policy, starting vith the use of, and objectives for, food aid. Although the nutritional situation is still unsatisfactory both in the areas devastated by the drought and in the urban informal settlements, the Government has agreed to limit the distribution of free food aid in order to promote utilization of "Food-for-Work" programs and thereby help motivated rural and urban communities to execute works that can create jobs and income and improve living conditions. 10. The execution of the Recovery Program has also had the immediate impact of reducing the Public Investment Program (PIP). Although this was necessary in order to enhance the efficiency of the PIP, its depressive  ANNEX IV Page 4 of 30 , affect on the econamy is being severely felt. The C o v e m n t has, therefore, decided, during the second phase of execution of the Recovery Program, to actively promote adequate priority programa in order to stimulate domestic production while pursuing the structural r e f o m and keeping tight control over macroeconomic equilibria. C. Second P h e of Execution, 1987-88 11. The ultimate objective of the Recovery Program is to stimulate local production by revitalizing the production and services structures, both public and private. Prerequisites for this revitalization are to - system, to prepare improve economic management, to reform the brnlcing - coherent sectoral policies, to make public semices to the eco* more efficient, and to create a more favorable environment for the promotion of private enterprises. Until 1984, in its desire to speed up the tempo of development, the Cotrermnent created public entities to u k e up for the lack not only of private initiatives, but also of a atlmulating or motivating euvironment which vould offer incentives to private initiatives. These public entitles have performed at levels much lower than vere expected. 12. Looking at the result of part activities, the Covermnent proposes taking a more p r a m t i c approach to-th. role of the public sector in the next frv years. It vill, accordingly, - -~ continue its efforts to rehabilitate public entities by ensuring that they are viable and by calling upon local or foreign private capital whenever possible to increase their managerial efficiency. It does not propose to create new public enterprises, nor give its endorsement to any new private enterprise. 13. More rapid implementation of the Recovery Program has been hampered by the veakness of the public sector and the need to assign priorities among the many recovery measures which are required. Our efforts will therefore be concentrated on strengthening public sector management and p r o g r d n g structures, on reform of the banking sector, on improved control of the prices and marketing structure of essential products (food and energy), on formulation of strategies in the subsistence agriculture and fishing sectors, and on promotion of the private sector and introduction of accoatpanying social measures. 14. These efforts are taking the form of priority prograh for pursuing the goals and objectives of the Recovery Program. The purpose of this letter is to describe h w these programa are going to be undertaken while keeping the budget and the balance of payments under control. It explains, in particular, the measures taken, or to be taken, between now and 1988 in order to achieve the quantified goals set forth in the Recovery Program with respect to budget equilibrium, financing of public investment through domestic aavings, growth of credit, external daficits and external debt. u 15. The axecution of tha Recovery Program will continue to depend on natural or external factors which are particularly praponderant in the case of Uuritania; in particular, foreign exchange income is totally dapendent . on t v o sectors: iron ore and fishing. Iron mining currently suffers from a depressed world price for iron ore, and fishing is subject to the growing risk that current exploitation levels endanger the future of fisheries  Atmx IV Page 5 of 30 .' . Program resources. In there circumstancer, the recond phase of the Recovery can be executed only on the condition that the aariatance of major donors is maintained. In addition to intensified bilateral negotiations for this purpose, the Government ham begun to keep the donorr informed on the preparation of sectoral group8 on firhing (early 1988). irrigation (mld-1988) and potable vater (end-1988). It intend8 to preaent to the Second Conaultative Croup meetin& in 1988 ui uaeaamont of the actiaas taken in the context of the Recwery Program and a new development progrrr for the period 1989-91, in which the long-term conrtraintr and proapectr will be clearly set forth. 111. CONTROL OF DOMESTIC AND EXTERNAL FINANCIAL DISEQUILIBRIA A. Public Finance8 16. Public ~eveaue. The tax burden r~ountrto 28 percent of GDP at factor coat in 1986. Thir burden is already high; the Government does not wirh to increare it rince that rate already reflect8 a rubataatial effort. In future, the Government proporer to increaae uaea.llmtr and tax collection and to limit exwptionr to -11-jurtified carea. 17. Applying the recmendatioru of ongoing rtudiea on taxation of the mining and fisheries rectors and on indurtrial enterpriser, the Government vill adopt a reform of the Tax Code in 1987 in order to adapt it to the goals of the Recovery Program. Thir reform will focus on the promotion of activities capable of improving foreign exchange receipts, developing natural resourcer and creating jobs. For the fisherier and iron ore sectors, the reform rhould strengthen their ability to compete with external competitors. For S N M , financial equilibrium will be attained while respecting the c d t m e n t s made to itr creditorr. For fisheries, integration of the sector in the national economy will be a priority. Similarly, taxation, particularly on energy produc'ts, and the systim of incentives to encourage the creation of enterprises will be radically revised in the context of promotion of the private sector (see section X below). Implementation of the reform will begin with the 1988 Finance Lav. 18. Operational Exponditurea of the Administration. In order not to increare the tax burden, balancing the budget calls for corrective action on the expenditure side. The principles .dopted in the Recovery Program will be applied through a precire program of action. These actions relate to: - capping the civil service vage bill in real term, at least for 1987 and 1988; - improvement of personnel management through computerization of civil service departments before the end of 1988: - revision of the salariea and benefits stricture. A study will be carried out in 1987 to define a new structure which could be put into effect progrersively, beginning vith the 1988 Finance Lav; .. . - improvamant of tha d i r t r i b u t i o n batvaan r a l a r i a r and oparating axpmditurar. Thir vill ba brought about through an i n c r a a r e in oparating axpanditurar i n r a a l tarma v i t h p r i o r i t y givan t o t h a h a a l t h r a c t o r and improvad budgat progr-ing, notably by taking b a t t a r account of t h e racurrant axpanditurir of public invartmentr; and - capping of o t h a r c u r r a n t budgat axpandituras, p a r t i c u l a r l y n r b r i d i a s t o t h a public a s t a b l i s h r m t s v l t h irudaquata indapandant i n c o w s through 1988; subsidias t o i n d u s t r i a l and conmarcia1 a r t a b l ir h w n t r vara abolishad in 1986. 19. A l l thasa u a s u r a r v i l l prova Inadaquato in modarnizing tha *arinistratioa and improving its a f f i c i a n c y i n abranca of f u r t h a r , far-raaching i n t e r n a l r a s t r u c t u r i n g . Tha Covarament hu, tharafora, askad aach m i n i s t a r i a 1 dapartmant t o r a v i a v t h e appropriatanass of its organization and its human and phyrical rarourcas in l i g h t of its t a r b and r a s p o e u i b i l i t i a s i n t h a framavork of tha o v a r a l l . d n i n i r t r a t i v a r e f o m , v h i l a raspacting r t r i c t budgatary d i r c i p l i n a . Thasa e f f o r t s hava alraady bagun, but it i r r t i l l too a a r l y t o drav f i n concluaionr from them. 20. Tha Public Invartmant Program (PIP). Tha Covaranunt a r r i g n s absoluta p r i o r i t y t o improving t h a managamant of tha PIP. I n t h a f i r s t stag., tha PIP providad undar t h a Racovary Program vlis c a r a f u l l y praparad and l i m i t a d t o t h a mora p r o f i t a b l a p r o j a c t r ; tha r a s u l t has baan t o focus i t on r e h a b i l i t a t i o n and maintarrrmca of a x i s t i n g p l a n t s , p r o j a c t r t h a t raduca production c o r t r and imports, and p r o j a c t r v l t h h a d i a t a a f f a c t s on production. Thir har laad t o a n appraciabla raduction i n tha r a t i o of invastment t o G DP and t o an improvamant of tha programfa f i n a n c i a l r t r u c t u r a and thur i t s o v a r a l l productiviry. 21. Tho Covarnment continuar t o davota c l o r a a t t a n t i o n t o adharanca by t h a public a n t i t i e r t o t h a goals which hava bran r a t . To accomplish t h i s , i n p a r t i c u l a r , it has taken the following mamaras: - E r t a b l i s h w n t of an I n t a r - M i n i s t e r i a l Recovary Program Honitorina Cornmittma, praridad ovar by the Minirter of Economic A f f a i r s and Finance, and c o n r i r t i n g of tha Cotramor of the Cantral Bank and t h a Chiaf of S t a f f a t tha Praridency. Tho C a m i t t a r has t o approva a l l p r o j a c t r antarad i n t o and guarantaad by tha Cova-nt befora thay a r a rubmittad f o r extarnal o r domastic financing. The Committee i s eeconded by a Tachnical Support Group composed of s e n i o r o f f i c i a l s of the economic departments t h a t prapare i t s doesiers. In tha medium term. project preparation. a p p r a i s a l and monitoring procedures w i l l be improved through the budgetary reform dercribad balow. - Impleaentation of Consolidated Budget procedures vhich group togather i n a r i n g l a document tho Ganaral Budgat, the c a p i t a l u p a n d i t u r e a of the S t a t e r and the a n c i l l a r y budgatr of the public a n t i t f a r that lack indapandant income rourcas. An annual inttartment program f o r tha public r a c t o r is a l r o included. Tha  first experiment with thera procadurar took placa with the preparation of the 1987 budgat, for vhich all tha public rarvicar had to submit thair projects to ba axacutad with axtarnal financing. In addition in April 1987, for tho first time a liat of projacta for which local funding ir needed was rubmlttad for financing under tha C a r o n R m d for countarpart revenuer from tha aala of food aid. For the 1988 Budgat, an effort vill be made to enaura that racurrent expanditoraa are carafully artbatad and that thosa projacts are iacludad vhich will ba fbancad out of tho Conmon Fund for cotantarpart ravanuar from food aid or in the form of "Food for Work" program# (aaa raction VII) . 22. In conclusion, the Consolidated Budgat ir axpectad to ba an effective instrument for improving tha coordinatad management of tha Government's development activitias. This annual program will be tha subject of intenulnistarial dircusaiona to varify its profitability and its conaistency with the goals of tha Racwarp Program. Thasa diacussions will also ensure its consolidation and arbitrage batvaan aactorr in ordar to arrive at a PIP which raspactr the ovarall firuncial constraints, particularly increased financing out of savings and reduction of tha indebtedness rate. In addition, the coorolidatad Budgat vill facilitata continued cloaa collaboration with the donore, on bodgatary and projact management procedurea. Only profacts that ara evaluated and fotmd to be economically and financially remunerativa will be entered in the consolidated budget. . B. Mobilization of Domestic Savings 23. In this area, the goal is to mobiliza a critical volume of savings in order to reduce dependence on foreign capital to finance investments. Efforts are underway to mobiliza: (1) a budget surplua, with the target of covering 15 percent of public investment in 1988; (11) savings by public entitier with tha help of ongoing rehabilitation program; and (ill) private rector ravings, which will be encouragad by tha reform of the banking rector. 24. The budget aurplw, projacted at 2 percent of GDP in 1987 (1 parcent in 1986), will continue to increase as a result of the eff0rt.s already described concerning revenue genaration and control of expenditures. In viev of tha goal of reducing tha country's rath of indebtedness, tha Government's consolidatad financial accounts, including external grants, will progresrivaly be brought into equilibrium. To achieve that, it will be necessary to mobilize a sufficiently high percentage of public investment financing out of external grants and loans on soft terms. 25. Initially, the public entity eavinse will have to cover thair debt service obligationa in the framwork of the specific rehabilitation programs for the major public entarprisas (re. rection VII). Theea enterprises will hava to eliminata thair arraarr. Arraars with tha Government have already baen rattled in July 1986. Those with tha rart tha Administration and the public ractor, particularly the banking rector, will be aliminated by the and of 1988. 26. The mobilization of private saving8 depend8 on the ruccerr of the i e f o m of the banking system (re. rection V). T a b s into account the implementation of the b k f n g rector reforr, the G o v k m o n t will prepare a . plan of action for savingr oobilization; it will rubmit the broad liner of thir plan to the Second Conrultative Group meting plumed for 1988. Among the warurer already taken, the most important ir to keep real interest rater poritive the way they have been rince the initial adjurtment mearurer undertaken in 1985. In addition, measurer have been initiated in 1986 to oncourage the mobilization of raving8 of h u r i t m i r n r working abroad. Aaother reforr planned for 1988 will focur on promoting more efficient method. for dirtribution of credit to the ecoaamy. In thir context, priority will be given to agriculture md firhing actidtier, ar well ar to -11 entrepreneur8 and a r t i r w . C. External Equilibria 27. The 8-1 of reducing external current account deficit8 to at l e u t below 10 percent of CDP in 1988 callr for a coherent ret of mearures to promote optirur utiliqation of foreign exchange. The firrt measure has been to ret a realistic exchange rate. The policy of combining devaluations with the retting of a flexible exchange rate allowed an a d j w t u n t in real t e r m of 22 percent in 1985. Tbir flexible exchange rate policv till be purrued in order to prererve the export mterprirer' ability to compete. 28. A recond mearure will be to liberalize the prerent control of foreign traaractioas. Thir will be achieved in rtages rince the Government conriderr that the prerent economic rtructurer do not permit rapid deregulation. Beginning in 1986, the opening of convertible accounts in Ouguiyaa was authorized for exporterr. 29. The liberalization policy will begin with rimplifping, before the end of 1987, the system of licenrer and reviring the Investment Code in order to ertablish-a more suitable ryrtem of protection. The policy will enter into full effect beginning in 1988. 30. To be able to relax the exchange control rules, the Central Bank will have to maintain a high level of reserves in foreign exchange, at leart equivalent to three months of import8 of goods and aervicea. Special foreign aid is needed to reach this resource level. 31. Achievement of the goal of keeping external deficits under control will be facilitated by improving management of the economy. To this end, management of the ekteGal debt will be atrengthened at the Central Bank, where computerization is currently proceeding. It will be extended to the ~inistr;of Economic Affairs and kinance and completed before the end of 1987. Semi-annual reporta will be submitted to the Inter-Hinirterial.Monitoring Committee on the development of the principal aggregates and achievement of the goala set.  IIlS#EXIv Page 9 of 30 IV. IMPROVING PUBLIC SECTOR W A G - 32. The preparation of the Recovery Program and its first phase of execution have highlighted the urgent need to strengthen the management of Mauritania's public sector. A. Planning and Management of Public Finances 33. Through implementation of the co~olid8tedbudget, the budgatina process has been videned, as a first step, to encompass all flnmcial resources, including food aid. In the medium-term, the Ministry of E c o n d c Affairs and Finance (MEF) will establish an e c o n d c and financial forecasting and monitoring capacity in order to clarify the decision making process and the major macroeconomic equilibria pursued. 34. The emphasis vill be placed on greater coherence of economic planning and financial manaqement. This baa already been reflected in the merger of the Ministry of Planning and the Ministry of Finance. To make this merger fully operational, the MEF is currently working on a new scheme of organization based on three major lines of action: (I) more precise definition of taska and delegation of responsibilities combined vith stricter performance controls; (11) adjustment of structures and linkages, in particular to facilitate the introduction of the consolidated budget. vith the object of Improving coordination and making the major administrative units less unviildy and more efficient; and (111) strengthening of the Ministry's permanent training system. This scheme vill be implemented beginning in Hay 1987. Management of Administrative Stnrctures 35. Achievement of the goals of the Recovery Program calls not simply for modification of organizational charts, but for better matching between StNCtllreS. functions and human resources which, while taklng into account the budgetary constraint, permlts greater admlaistrative efficiency. To this end, studies vill be conducted batmen now and 1988 of the ministries chiefly concerned vith the Recovery Program, to take stock of their functioaa and the human resources available to them so that they iay, where appropriate, be reorganized in accordance vith new standards and management principles. A Departmental Organization Chart will be prepared by the and of 1988 to define the rules governing the creation, modification, merger and abolition of major administrative units. Implementation of the necessary program of action, which will extend over several years, began vith the creation of a Consultative Committee for the Institutional Reform to be assisted by an Office for Coordination, in February 1987. c. Personnel Management 36. Improving personnel management requires first of all the development of a manpower planning capacity which will include: (1) Tha computerization and harmonization of personnel administration with financial management. This opportunity vill be used to define clearly the  ANNEX I V Page 10 of 30 distribution of rosponoibilitios bottnon tho Ministry of Civil Son~ico, tho Ministry of Economic Affairs and Firurrco and tho rector minirtrior. Computerization vill be carplotod by tho and of 1988. (11) A reviov of tho civil somrlce and auxiliary staff rogulatioar uith tho object of rodemiring, harmonizing and rkplify* them. Thir revision v il rointroduco l more prociao nil08 g w o m g accorr to tho various catogoriar for promotion a d advancement. New general rogulatioos for the civil ramico will be published in 1989. (ill) Improvement of 'managomant to bring wages and salaries into liru vith rorpoaribilitior, and to encourage groator efficierrcy-a o a g tha porsoaaol. An audit of tho Payroll office vlll bo camiod out and verification procoduros vill be drafted lrrd inatallad in 1987. A study on fringe banofitr will allow the system of bonofitr to ba roadjustad in viev of budgetary coostraintr and tho nood to eucourago qualified porrorm.1. A first rat of meamror vill be included in tho 1988 F i ~ n c oLav. D. Improving Public Sor~icoEfficiencr 37. Pending rooiev by tho G o v o m n t of ontarpriros vith inadequate indopondont incoll.~, tho total m a ~ of t their mbridios has boon rtabilizod at its 1985 nominal love1 through 1987. Tho Govommont is re-ox.nining whether thoir managomopt autonomy ir jurtified and will improve tho procedures for preparation of thoir budgets and the application of a portoriori controlr. Their oporating and capital budgets will be 8aulyzod In tho context of tho coarolidatod badgotr. For the largest of m c h ontropriror, multiannual dovoloprmt plans vill bo prepared by 1988. They will dofino the spoci.1 ruler all- tho.eutorprirorr, if their ~ t t t r oro wamantr, to collect rosourcor (or rocovor coats) to finance part of their operating oxponditaror. Thoro ortablishmonts Include the University of Nouakchott, which vill bo dircurrod in tho section on education policy, tho CSA (soction on Food Policy) and SONMER (roction on Rural Dovolopment). Rortructuring progruma aro already under preparation for tho ORTM (radio and telovirion), AlP (prorr) and SWPI (newspaper). 38. Eaterprisos vith Financial Autonomy. Tho Government wishes to lioit its participation to thou. public establishments for which the private soctor cannot provide man&emont. To this end, the Government plans to reviev its entire portfolio. For 1987 and 1988, tho ongoing effort will bo continuod in rolation to tho four laaort ontorprisos (SNR4, OPT, EMN and SO#KEC) m d vill be extended to tho roh+bilitation of SMCPP, PAN, SOCOCfn and STPN, for which e c o n d c , financial and management audits will bo parformod. In 1986, tho transport monopoly war liberalized. P€IARMARIM (plmmucy) vill bi disrolvod before end-1987. 39. Tho Covernmont vill evaluate its public roctor rehabilitation policy and tho lorrons learned from its inrplomontation. It will decide on  ANNEX I V Page 11 of 30 possible privatizatioxm, mergers o r closures of existing enterprises. The r e s u l t s of these s t u d i e s w i l l be s e t f o r t h i n a special report uhich the Inter-I4inisterial C d t t e e - 1 complete in 1988. The report w i l l define the future of the o t h e r major e a t i n g enterprises (such a s ASMAR and Air Mautit.nie) f o r which r e h a b i l i t a t i o n program b e not y e t baen formulated. A s p e c i a l study vlll be devoted t o the CNSS. Tbr Govemamt vlll a l s o conalder the mixed-capital e n t e r p t i s e s ( S m ) , with which the Covarament wishes t o c l a r i f y i t s r e l a t i o n s while safeguarding t h e i r autonwy and limiting the guarantees furnished. It - 1 define the f u n c t i o ~ of the S t a t e Contracts C o d s s i o n s , vhich w i l l be s t r e d i n a d , and improve the decentralization of declaion-maldng powers within the public enterprises. Tbr preparation of these two l a t t e r reforma is in progress and nev procedures w i l l be defined before end-1987. V. BeFORn OF TEE BANKING SYSTEn 40. The Government ha8 studied the diagnosis of the Mauritanian b a n k presented in a consultants' report prepared in 1986. The b a g system continoes t o s u f f e r from serious f i n a n c i a l d i s e q u i l i b r i a . The s u b s t a n t i a l e f f o r t s deployed t o halt its f i n a n c i a l d e t e r i o r a t i o n and speed up t h e recovery of delinquent c r e d i t balances have borne f r u i t but cannot provide a permantent remedy f o r t h e s i t u a t i o n . A l l the banks except the National Development Fund (Fonds National de Developpement -- FND) and the newly created Al Baraka Bank (Banque Al Baraka Mauritanienne Islamlque -- B A K X S) a r e affected by t h i s f i n a n c i a l disequilibrium t o one degree o r another. The Government has therefore decided t o implement a refoxm of the banking sector accompanied by m d i a t e measures t o h a l t the d e t e r i o r a t i o n of the sector. 41. The p r i n c i p a l s of t h i s reform w i l l be applied t o a l l primary b a n k and the Central Bank. As f a r a s the primary b a n k a r e concerned, the Government intend8 t o designate one i n s t i t u t i o n , f o r which the S t a t e is the majority shareholder, t o concentrate i t s a c t i v i t i e s on development projects. Control of a11 the other f i n a n c i a l i n s t i t u t i o n s w i l l be assumed by private investors, l o c a l o r foreign. Foreign b a n k should play not only the r o l e of partners, but a l s o a s s i s t i n managing the i n s t i t u t i o n s . A new banking law w i l l regulate a l l future banking a c t i v i t y . The Central Bank, having returned t o its t r a d i t i o n a l r o l e of ensuring monetary independence, establishing c r e d i t policy and monitoring the primary banks, w i l l have a key responsibility i n guaranteeing t h a t d i r e c t i v e s a r e implemented and banking management r a t i o s respected. The GovernmenC w i l l devote i t s e l f t o the task of defining the main objectives of the economic incentive policy, and r e f r a i n from i n t e r f e r i n g i n daily management of the banks. A. Immediate Measures * 42. These comprise. the following : - Recovery of outstanding debts: The Government is giving its unqualified support t o t h i s operation and camnittees have been s e t up within each bank under the surpeillance of the Central Bank. I n April 1986, the Government took measures t o exclude debrors uho have not s e t t l e d t h e i r debts with the banking system  mmx IV Page 12 of 30 from access to facilities and advantages, such as the Investment Code, goverument contracts, and transfers abroad. Regulations issued at the end of June 1986 require the b.nlu to refer the files on frozen credits to a SpecisL Court after a period of more than one year. The latter haa uorked with the C o v e m u n t to find vays of cutting recovery costs by urging the b.nlu to give priority to pursuing the largest debtors.. In 1987, the high cost of legal proceedings, vhich hu hampered the rocwery effort, . will be reduced.. - Improved credit allocation: At the beginning of 1986 the Ceatral . Bank llmited bank overdraft authorizatioar to special cases. It ha8 revieved its procedures with respect to the collection of information necessary for a systematic assessment of customer r i s k and lending interest rates. - Uanagement and profitability of the bank: Since June 30, 1986, the b a s h have no longer included the proceeds of frozen credits in their operating accounts, and the Minlatry of Plnu~cehas decided that the H h l m m Flat Bate Tax (Impot l h l m m Forfaitaire) u l l l be levied only om products net of interest payments on frozen credit accounts. B. Strengthening of the Central Bank 43. To enaure proper supemision of the primary banka, the Central Bank is in the process of undertaking the folloving - .sr ue: r - - Revision of the Banking Lav. This must be adopted i n 1987. The revision involves adjustments in the functioning of the Banking Control Codssion, raising of the applicable penalties and re-oxamlnation of the governing nrles imposed on the banks, including minimum capital requirements and various other ratios. - Credit polic~. This vill be reviewed during 1987 and 1988. In the .ismediate future, it-vill be implemented in view of the potential impact of the restnrcturing of the primary banks. Specifically, a new bank interest rate and c o d s s i o n policy will be examined in the context of the new banking law in order to define the refinancing, credit capping and compulsory reserve systems. - Review-of organization and methods. This is aimed at improving recovery rates and accounting for foreign exchange transactions. The rearganization, fmplemented in 1987, includes the Risks ) , creation of an Clearing Rousa (Cantrale des R ~ ~ ~ U O Uthe information unit on busineos activities and the promotion of 8 uniform accounting system for the banks. - Strengthenintg Bank Control. This department will ba reorganizad and equipped vith adaquate human and material resources to help it fulfill its functions and to anaura that normal banking procedureo are follovad via-&via creditoro, dabtors and foreign  partners. Necessary technical a s s i s t a n c e w i l l be providod i n 1987 t o d e f i n e procedures and t r a i n the needed personnel. P r i n c i p l e s of Bank Restructurina 44. I n 1986, t h e Mauritanian a u t h o r i t i o s aasemblod tho information and established t h e c o n t a c t s required t o forrmlato a roatructuring plan f o r arch bank. This provided tho u uu f o r evaluating tho finurci.1 c o s t s of t h i s plan and dof i n i n g tho modalities t o cover those 'costs. To dof i n 0 these plans, i t wao nocossary t o a s c e r t a i n tho banka' not a s s o t s and l i a b i l i t i e s and the amount of tho i n t o n m l funds t o be rocoxumtituted; and t o prepare a complete inventory of govornmont comitmonts and c r e d i t balances vis-a-vis tho banking system. 45. To implement theso r e s t r u c t u r i n g plans, tho Government has accepted the f olloving comitmonts : - t o accopt tho trannfor, by April 1987, of a11 tho Central Bank's c a p i t a l s h a r e s in t h e banklng system, permitting i t t o reassume a p o s i t i o n of n o u t r a l i t y in tho application of tho banking rogulationr, and c r e d i t control; - t o assumo a11 tho r ~ s ~ o n s i b i l i t i e s accruing t o it i n t h e r e s t r u c t u r i n g process a s shareholder of the b a n b , a s p a r t y responsible f o r t h e debt toward tho banka, companies and agencies i n which i t i s a sharoholdor, and f i n a l l y a s guarantor of loans granted by tho banks, whoever tho beneficiary of such guarantees may be; - t o consider a11 s o l u t i o n s t h a t can provide tho c o m e r c i a 1 b a n b v i t h a s t a b l e f i n a n c i a l baoo. Tho Govornmont has decided t o withdraw its c a p i t a l from a l l tho banks, with tho exception of tho development bank, o r t o become a mfnority shagaholder of certain b a n b -- i f tho now p r i v a t e partners so desire. 46. To be a b l e t o c l e a r tho balance shoots of tho banks, the f i r u n c i a l contributions of tho p r i v a t e p a r t n e r s w i l l t a b a v a r i e t y of . forma ( t r a n s f e r s of f r e s h money, consolidation i n tho form of c a p i t a l of debts due by the bank, etc.) For its p a r t , tho Covemmont w i l l f u r n i s h tho f i n a n c i a l c o n t r i b u t i o n duo from i t by reason of its r e s p o n s i b i l i t i e s , e i t h e r out of counterpart contributions from external a i d t h a t i t i s a b l e t o mobilize or by a l l o c a t i n g a11 o r p a r t of tho refinancing already granted by the Central Bank t o compensate frozen debts. I f possible, t h i s should come d i r e c t l y out of Government resources. D. Restructuring Plans of the Primary Banks - 47. The broad o u t l i n e s of the r e s t r u c t u r i n g plans were approved i n March 1987, and t h e i r p r i n c i p a l components w i l l be implemented by tho end of 1987. The banking system w i l l than c o n s i s t of: - one bank with tho S t a t e a s majority shareholder, which w i l l  -. ANNEX IV Page 14 of 30 .. . promote Mauritanian enterprises, in particular small- and madiwsize enterprises, in addition to c-rci.1 activities. b ., I. The Bank will be cerated from the morging of FND and EMDC. This merger requirer an increare in fixed arretr in which the Government viaher to t a u i n in the majority. The current shareholders of FND and B1Q)C vill be comulted on this merger; - private bank.: two such brPlu v i U be cruted from the restructuring of B M a and SHE vith at l u a t 80 percent of equity - allocated to private invertorr, local or foreign. Tbe two - private bank. 8btn and B5EI are in the procerr of Implementing firuncial and m a n a g m a t mauurer in order to - conform with the nev banking ru1.e~. 3ixu119, a bank under - Islamlc lav BAMIS vill be subject to a special ruling to be prepared by the Central Bank before December 1987. In view of the limited development poaaibilitiea of the Mauritanian finoncia1 market and the limited availability of skilled managers, the Government vill l m v e the choice to the bank's private rhareholdersar to whether or not to exploit the economies of rcale that could rerult from the eventual merger of certain bank. 48. Until the restructuring plans have been completely implemented and the previously mentioned objectives have been attained, the Central Bank vill maintain refinancing facilities which should be in line with monetary policy and treat all banka equally. 49. In the course of preparing, approving and implementing the restructuring plans, the Governmmt vill ensure that the following targets are undertaken: first, balance sheetr will be cleanred in order to secure the bankof liquidity and guarantee that fixmucia1 ratior, a8 required by the banking lav, vill be reached after an adjurtma~tperiod; and adequate managemnt systems and qualified senior and rupport staff will be put in place. To that end: - - The Government vill sign a cesrion agre-nt vith banks to be restructured (BM)C/FND, BfMA, SMB) in vhich the folloving will be specified: financial conditionr of ownership transfer, and financial restntcturing with a timotable of implementation steps. The Government agrees to arrume the fixuncial commitments to foreigners which are due but unpaid. - The Government vill assume all doubtful and frozen credits granted to state-owned enterprises by the banking system. These credits, now deducted from the banks' assets, will be.compensated by an equivalent amount deducted from the debt to the Central + Bank and by a share d'f the fixed arretr belonging to the State. The Central Bank will sign a contract- lan vith each bank in which it vill approve the above o jectives, the measures needed to fulfill them and the implemantation schedule. This contract-plan vill indicate the function8 and designating rules of the Board and of the General Manager in order to ensure responsible and autonowus management.  ANNEX IV o f - 30 VI. STRENGTHENING SECTORAL POLICIES 50. In viev of the constraints previously mentioned, the Government is confronted vith difficult choices in the areas of sectoral development and financial and human resources needs. This letter 'focuses on policies in four productive sectors: energy, food policy, rural development and fisheries; and on the efforts to promote the private sector and strengthen social policies. Eovever, before coaing to these sectors, we would like to describe efforts u n d e m y to rehabilitate the SRM iron ore company and to lmprove the country's tramport and telecorunicatioru nehrorka. A. SNIM Rehabilitat ion 51. SNIM is facing a declining vorld market for iron ore which, ln 1986, permitted it to export only 8.9 million t o m at an F.O.B. price reduced by 10 percent in real terms over the previous year. This situation has brought about serious cash flov difficulties. At the same t h e , the start-up of the Guelbs mine has been haapered by technical difficulties. SNIM management confronted this situation vith measures to cut operating and overhead costs. Prospects are, hwever, worrisome in view of a selling price which is expected to continue to decline In real term. Without ds further action, SNIM vill be confronted vith a structural flnanclal deficit after amortization, debt serpicing and paymant of the 10 percent sales t u . 52. S N M has, therefore, implemented a very strict recovery program, including a reduction of its staff by 15 percent and a program to cut costs and lmprove factor productivity. The Coverument is fully aware of SNIM's key role in the Mauritanian economy prwidlng 40 percent of its export revenues for goods, and that SNM' s continued operations remain vital for the country's regional balance. The G o v e m u n t is therefore ready to adjust its fiscal system to allow SHIM to cope vith its financial situation. In 1987, for example, the Government agreed to a 50 percent reduction in royalty payments. In April 1987, these prospects and the measures undertaken by S N M mere presented at a meeting of SNM's co-lenders in an effort to secure further support which may be required during this difficult period. 0. The Transport and Telecommunications Netvorkn 53. Under the Recovery Program the main objective is to improve and maintain existing infrastructure by rehabilitating and strengthening the public entities responsible for managing them. The drafting of a long-term strategy and a coherent action and investment program will be started in the context of the 1989-91 Development Plan. - 54. The road transportation sector is the most vulnerable component, since the service provided is very inadequate. Its development is hampered by network maintenance costs which can no longer be carried by the central Budget and for which foreign aid is being sought. 55. The OPT (Post and Telecmnications) must, within its management responsibilities, absorb the operation of the satellite telecoarmunication facilities, which became operational in November 1985 and which have spectacularly improved international semrice, thereby helping the export .' . sectors. The OPT i s thus focusring on t h e :Inatallation of functional accounting and e f f i c i e n t maintenance semrices .Od of t a r i f f s which do not impair the a b i l i t y of these e n t e r p r i s e s t o compete. A t t h e current lave1 of t a r i f f s , w e n adjusted f o r d a u s t i c i n f l a t i o n , tha OPT clonot ba umarad of f i n a n c i a l v i a b i l i t y without the r e s t r u c t u r i n g of i t s d e b t , aud the Goverment i r c u r r e n t l y negotiating t h i r . 56 . - The SQQI (Nourrkchott wharf) dl1 a - its r t r u c t u r a in 1987 v i t h a v i m touards managing tha port r a c a n t l y b u i l t by t h e People's Rapublic of China. The mathod of managemant of t h e p o r t , t h a p r i n c i p l a r of rate-setting and the scheduling of any neceraary rupplemental investments vill be dafined i n a study baginning i n J u l y 1987. Aa p a r t of tha p r o w t i o a of the f i s h e r i e r s e c t o r (sea P a r t fX), the Nouadhibou Port Authority (PAN) vill be r e h a b i l i t a t e d and a f i s h i n g port vill be developad. VII. E n R C Y POLICY 57 Tho Government formulated a coharent long-term aactor s t r a t e g y in January 1987, including, i n p a r t i c u l a r : - a l i b e r a l p r i c i n g policy which f o s t e r s energy conmamation .nd s u b s t i t u t i o n awn8 energy productr; - i n t h e abort-term, giving p r i o r i t y t o the r e h a b i l i t a t i o n of the public e n t e r p r i s e s i n t h i s s e c t o r ; and - i n t h e madim-term, m u s u r e s t o r e s t o r e the country's ground cover and t o cambat d a s e r t i f i c a t i o o ; 58. Implementation of t h i s a t r a t e g y i s undercny, and the folloving moasures have baan taken or a r e in progress: O olic . The syrtem of s e t t i n g and a d j u r t i n g p r i c e s of i q u i d anargy products using w r l d p r i c e s f o r reference m e &a F off ici.1 in March 1987. This p r i n c i p l a w i l l a l s o be applied vhu! l o c a l needs a r e supplied by the Nouadhibou refinery. Under t h i r syrtem implemented in April 1987, the p r i c e s t r u c t u r e includes 811 r e a l marketing costa. The tu earmarked f o r t h e D8velopment Support Fund, ertablished a t the wholesale l e v e l , vill be applied t o a l l categories of consumers. A j o i n t c d s s i o n (State, b u r i n e r r groups) vill be reactivated t o adjuat the t a r i f f s t r u c t u r e . To t h i s end, the coa~nirsion's composition w i l l be reviewed and i t 8 operational modalities redefined before J u l y 1987. Before t h i s date, a Technical C d t t e e on p r i c e s vill a l s o be established.. Its r e s p o n s i b i l i t y vill be t o prepare q u a r t e r l y p r i c e adjustment d e c l a r a t i o n s f o r combustible l i q u i d s and gas. A t the same t h e , a study, pl8nned f o r 1987, vill - provide the b a s i r f o r a new syrtem of s e t t i n g e l e c t r i c i t y t a r i f f s , t o be introduced by t h e end of t h e pear. It w i l l r e c m a n d a mathod f o r r a t t i n g t a r i f f s f o r various consumer groups .Pd dl1 examine, i n p a r t i c u l a r , t a r i f f - r e t t i n g f o r export a c t i v i t i e s , the impact of i n t e g r a t i n g SNM i n t o t h e Nouadhibou netvork and the new Nouakchott powmr s t a t i o n . These t a r i f f s should ensure SONELEC's f i r u n c i a l v i a b i l i t y , 1.e. ensure t h e  ANNEX IV Page 17 of 30 necessary resources to cover its operating costs, its debt service on credits onlent by the State and a net self-financing rate which will provide at least 15 percent of investment costs for the electricity sector. - Definition of the role of the public sector. The public sector will continue to play a central role in the *lamentation of the sector strategy. 'Thir role includes supervisi& of the agreements betwem the Nouadhibou refinery and the W r t e r s and distributorr, monitoring of Imports, tranrportation and distribution, vhich will bo subjected to greater competition, and prumoting measures to conserve and develop renewable energp sourcer. The ministerial departmentr with responsibility for this sector will be reorganized and rtrengthened under the administrative refo m . The importation of petroleum products will be liberalized and a covenant regulating importation and marketing activity will be produced before 1987. Nevertheless, the SWPP's role of guaranteeing reliable natiorul supply in adequate quantities will be orintained. The rehabilitation program8 for SONELEC and S C P P will cmtinue with the ip.tallation of arulytic accounting systema, an efficient system of bill collection, and a trainin8 and recycling program for parsonnel combiued with revision of salary rcaler. These program8 will be finalized in late 1987 for S H P P and early 1988 for SONELEC. By then, SONELEC's financial viability vill be assured by a combination of measures including: (a) reduction of technical losses, made possible through the rehabilitation of p w a r atations and the strengthening of the transmission and distribution network; (b) improvement of billing and collections through a survey of customers and a computerized billing statement; and (c) a periodic adjustment of tariffs taking into account variations in operating costa. A tariff increase of 15 percent was decided in August 1986 at the same time 8s a price reduction for dierel fuel used by SONELEC; a further tariff increase of 10 percent is planned for July 1987. For SOUELEC to achieve financial equilibrium between a m and 1989, the Government will increase its equity in parallel with the implementation of a contract-plan that includes targets for increased productivity. 59. Energy consemation and promotion of alternative energy sources. With respect to energy ravings, incentives will be <eveloped to encourage the largest industrial consumers and transport companies to undertake m r g y audits. The promotion of alternative energy resources will have to be integrated into a special program empliasizing economical techniques and m r.n . substitution. Tha conuervation of ground cover and the promotion of reforestation will be stepped up, particularly in production zones (irrimted perimeters, oaais, etc.) and in inhabited areas. In this comtut, a strategy on the optimal utilization of household energy  ANNEX IV -f o 30 ' (popularizing improved wood burning stoves, expanding the use of butane, @romoting lamp o i l , etc.) w i l l be defined and Implemented. 60. h l t i a n n u r l investment program. Thir focuses on r e h a b i l i t a t i o n and optlmal use of t h e e x i r t i n g p l a n t r and on experimental programs in areas of water heating, pumping, e l e c t r i c i t y generation, optimal u t i l i z a t i o n of hourehold energy and r e f o r e r t a t i o n , which rerpond t o the 80810 sumarized above. There program u i l l be financed by grant. o r quai-grant., including coverage of recurrant oxpeaditurer, and w i l l be supported by "Food-f or-Workn p r o j e c t r (8.8.. t r e e p l u r t i a g f o r multipurpore) o r c o m u a i t y participations. The Govemmont wlrher t o encourage a more rigorour approach by donorr t o applied rerearch and necerrary e x p e r h e n t a t i o n t o prepare large-rcale programs b u e d on appropriate and economical techniquor. VIII RUBU DEVELOPMENT AND FOOD POLICY 61. The d e v e l o p n t of a g r i c u l t u r a l production, of l i v e r t o c k and of other r u r a l incoma-generating a c t i v i t i e r a r e among t h e Govermnent'r highert p r i o r i t i e s . Although t h e importance of developing i r r i g a t i o n is undeniable and Mauritania'r n a t u r a l c o d i t i o n r croate seriour c o a a t r a i n t r , e f f o r t s orill focur on r e h a b i l i t a t i n g and hpr- conditioer f o r production under rainfed, flood-recerrion, and t r a d i t i o z u l *building techniques which represent a l a r g e share of arrtiorul production and play an important r o l e i n r u r a l r e c t o r a c t i v i t i o r . Similarly, l i v e r t o c k a c t i v i t i e s w i l l be strengthened s o t h a t they w i l l continuo t o represent tho l a r g e s t share of GNP i n the a g r i c u l t u r a l r e c t o r d enrure Mauritania'r self-sufficiency in meat. 62. I n viev of t h e v i t a l importance of t h i s sector t o Mauritania's future development, t h e Governmont is f h l i z i n g an a c t i o n program f o r t h e next few years. This program, designed t o achieve the goals of the Recovery Program, e ll be presented t o the donors a t a Sector Meeting on r u r a l development scheduled f o r 1988. The program w i l l emphasize improved v a t e r management f o r i r r i g a t i o n and p o l i c i e s t o prorote and support a g r i c u l t u r a l production. The program w i l l include investments consisting chiefly of a master plan f o r i r r i g a t e d perimeters i n t h e Senegal River Valley, while taklng i n t o account t h e importance of rainfed and flood-recession c u l t i v a t i o n (valo, t r a d i t i o n a l d.r-building). Futthe-re, the program w i l l seek t o c o ~ o l i d a t e p r o j e c t r already i n progress t o correct s t r u c t u r a l d e f i c i e n c i e s t h a t threaten t h e i r s u s t a i n a b i l i t p . 63. The p r i o r i t y accorded t o v a t e r mtugement, i n order t o be f u l l y j u s t i f i e d , muat take i n t o account the following considerations: - within t h e fraamvork of the OMVS program, and i n l i g h t of the prohibitive c o s t s of i r r i g a t e d perimeters, water management schemes must rerve t o r e c r e a t e n a t u r a l flooding patterns and allow c u l t i v a t i o n techniques which a r e more e a s i l y mastered; and - the p r i o r i t y placed on water management arst be broadly defined, . making u r e of t h i s rerource wherever i t may be found (rtrum8, dam-building, underground rourcor)  Amm I V ' Pane 19 of 30 . . A. Agricultural Sector Strata= 64. The Government w i l l i n t e n r i f y i t 8 e f f o r t 8 t o Improve food recurity and p r w i d r employment and income f o r the n r r a l population. I n the short-term, the rtrategy a i u t o (1) rupport l o c a l a g r i c u l t u r a l production with renumerative producer pricer, ( 1 1 ) a r r u r e an adeqtute d o u r t i c food rupply a t rearorubl'r pricer, and ( 1 1 1 ) mobilize rerourcer t o finance development activities. 1. Cerealr pricina p o l i c ~ 65. Coverago of food noedr i n I(.urit.ni. depend. on a - 1 1, but increaring m u n t of r u t i d production a r well ar on a large voltma of food a i d and caar.rci.1 import8 of cereal8 and vheat flour. The r e l l i n g price of food import8 (food a i d and c a r r r c i . 1 import.) i r , therefore, the deteroining factor f o r market pricer of l o c a l production. For t h i r rearon, adequate incentiver and protection of l o c a l production may p r w e necerrary. In addition, the price r t a c t u r e must not give r i r e t o i l l i c i t trading which underminer the policy of promoting l o c a l production. Ewever, t h i r rhould not prove d i f f i c u l t given t h a t 13.uritmir1r neighborr a r e pursuing r i d l a r p o l i c i e r t o protect t h e i r producerr. 66. The pricing system vill be b u e d on a l i b e r a l i z a t i o n of marketing and procesring ch.nnelr. To rupport the goalr of i t r food policy, the Government w i l l introduce a r y r t n of reference pricer f o r l o c a l production which dl1 include: f i r r t , a f l o o r prico vhich incorporates an adoqtutely remunerative producer price and the average t r a m p o r t coat from production arear t o C SA purchuiag centerr; recond, a "ceiling price" f o r the purchare of f i n a l products which includer the f l o o r price, procerring and d i s t r i b u t i o n c o r t r and p r o f i t margin8 which p r w i d e adequate lncentiver a t a11 rtager of marketing; and t h i r d , a c e i l i n g price f o r s a l e s which w i l l be guaranteed by C SA and SO1OMEX. The adoption of such a system w i l l provide a b e t t e r price guarantee f o r producerr and vill allow conrumerr t o benefit from private sector i n t e r ~ e n t i o n -- especially through cooperative groups -- while retaining CSA1r role a8 guarantor of f l o o r and ceiling pricea. C o ~ e q u e n t l y ,reference pricer w i l l be adjurted annually t o aupport the goalr defined above, while the l e v e l of protection accorded t o l o c a l production, procesring, and marketing vill be reduced t o favor the moat efficient operatim. 67. To enrure that the objectives of the pricing policy are achieved, the annual food progr-ng exercise w i l l take i n t o account the need t o limit f r e e d i r t r i b u t i o n s of food aid t o the needy who a r e unable t o work, and t o promote "food-for-vork" prograw f o r those who can. 68. A study of the cereals rector, which was presented i n March 1987, w i l l be used to define the precise procadures.for detemining and adjusting cereals prices. After dircussions with the donors, t h i s new pricing structure , w i l l be finalized and adopted i n October 1987. I(.rketing policy 69. The r m rtudy will help In defining more e f f i c i e n t uurketiw .I $hanrrels which will promote private sector involvement through adequate remuneration of services. In viev of the unique characteristics of its food policy, the Government will retain its role of importer via SOWINEX, which can negotiate bilateral agreements on more advantageous t e r m than through traditional channels. A urugement audit of SOHIHEX will be undertaken before the end of 1987. 70. The Government har accepted the principle of private sector marketing of food aid and will determfne the precise procedures for it with the donor comunity. Eouever, CSA will maintain all or part of its national netvork of saler centers and will apply a policy of maintaining a minimum stock in its centers in order to continue playing its role of guaranteeing food security and stabilizing the cereals market. This will avoid sudden and excessive price fluctuationa which could rerult from speculation by local merchants. These measures will serve to test the capacity and efficiency of the private sector. In addition, CSA initiated itr own reorganization plan in 1986, which vill include a reorientation of its activities to reflect the nev goals defined under the food policy. In particular, CSA will enaure food security in all regiona of the country, and administer food aid in ways which promote development activities, in close cooperation with the Uinistry of Rural Development. To permit CSA to play its full role in regulating and stabilizing prices, a reimbursable crop searon credit will be allocated each year u part of CSA's budgeting process. The reorganization vill also include the inatallation of cost accounting, management and progrming systems, u -11 as plans for nationalizing personnel and for privatizing transport and processing activities. Private rector incentives policr 71. The purpose of this policy is two-fold: to interest entrepreneurs in developing agro-food operations -- which can range from a family farm marketing a modest surplus, to larger-scale agribusiness operations -- to promote associated upstream and downstream activities, most notably, and food processing, such as rice mllling. The operational details of this policy are currently being studied. The first principle applied, in effect since January 1986, vas to eliminate all subridier on inputs and to liberalize their trade. Other incentives, including agricultural credit and measures to promote SHES (see section X), will depend on both the banking sector reform and the adoption of an incentive policy for agricultural production. Finally, this policy will be examined in the more general context of the national spatial planning policy. The Government plans to improve coordination between the development of rural agricultural areas and the associated service infrastructures and urban framework necessary for balanced and sustained development. 4. Environmental protection policy 7 2- In response to the deterioration of the environment, the Government needs to intensify its priority work program, to slow down deforrrtation, to encourage replanting and to bring about a better balance . behnen livestock herding and crop farming. In particular, this policy will include components for the protection of w l l s and settlement areas. 8oliance on lmprwed dwlling sites as a means to combat desertification  Am Ex IV Page 21 of 30 .. . will be encouraged. The Government ir reeking grant financing for pilot project8 aimed at developing better method8 of enviroumental protection. Finally, reforestation/coruervation projects vill be developed in the framevork of Food-for-Work programr, in areas surrounding irrigation works, in cultivated are-, and in principal villager .nd rods. Institution streonthenins policz 73. The PUnimtry of Rural Development vill be strengthened under the administrative reform program which hu alredy been defined. Priority h u c h completing k organizational been accorded to ~ ~ ~ A D k , - w h iis rertructuring plan the main purpose of which is to rtre8mLln. its structure by transferring a11 activities other than the maugement of irrigation investments to other Government remices. It is nov well-managed and haa installed a functional budgeting process. Its budget is annexed to the Goverament's annual consolidated budget. Its supemision should be tightened, while maintaining management autonomy. An action program, which vill lead to greater decentralization of itr activitier, vill be coordinated vith the master plan for irrigatik development. B. Food Policy 74. In light of Ifauritani.'~ structural food deficit, the country will continue to depend on food imports, particularly in the form of aid, for many years to come. It must endeavor to reduce thia dependence as far as its natural resources permit, using food aid to promote the necerrrry structures and means to do so. To that end, a close coordination is being developed betveen the Government and the major food aid donors in order to implement a coherent food policy which includes the folloving components: 1. The Annual Food Prpnram 75. This program (Programme Allmantaire Annuel - P M ) is d r a m up each November and serves ar the basis for determining the importation and distribution needs as defined by the food security policy, taking into account the size of the country, the sharp fluctuations in local production, the weakness of the marketing netvork, and the need to maintain emergency stocks. The firrt P M wu established in December 1986. On the basis of the results of previous yearr, the P M ertablirher, for each region, the expected volume of local production and the need for distribution of free food aid, Food-for-Work (FFW) programs, special programs, and sales of food aid. In preparing the P M , the Government intends to limit free aid to the truly needy, reducing generalized free food distributions and replacing them vith Food-for-Work programs or special program (e.g., for children under five, pregnant women, the sick and the handicapped). It therefore proposes to reduce free food distribution progrersively over the next few years from the peak level in 1985 of 65,000 tons. The amount will not exceed 30,000 tons in 1987, thanks to the return of normal rainfall. It vill be only in emergency cases, verified jointly with the donorr, that axceptional aid will be granted in addition to the programned regional allocations. In addition, SONMEX, in preparing its import program, will take into account: (a) the moving volume of national cereals production; and (b) the volume of food aid sales earmarked to finance development projects through the C m o n Fund  ANmxTV Page 23 of 30 FISEIEBIES POLICY 80. I n 1979 Mauritania i n s t i t u t e d a f i s h e r i e s policy -- the louvelle Politique de Pfche (NPP) -- through which it h u been able t o develop 'a national f i s h i n g f l e e t and f i s h e r i e s infrastructure. This h u increased budgetary d export revenues, r e s u l t i n g i n a positive trade balance in 1985. Hovever, the Government recognizes t h a t the economy is not reaping a l l the p o t e n t i a l b e n e f i t s of t h i s sector. The Recovery Program included an i n i t i a l diagnosis of the s e c t o r ' s coartraints. Th. Coverrimant p l u u t o discuss t h i s diagnosis with t h e p r i n c i p a l donors a t a Fisheries Sector Meetinq in e a r l y 1988. It would lib t o i n c r e u e .w.reness oaoag the participants of the v i t a l Importance of effectively exploiting the resources of the sea and of t h e e f f o r t s t h a t have been undertaken t o control i l l e g a l fishing, i n t e g r a t e the sector more f u l l y i n t o the econary and promote associated a r t i s a a a l a c t i v i t i e s . It w i l l present its nev strategy, and the a c t i o n program required t o reach its objectives, a t the sector meeting. 81. This action program, based on studies carried out i n 1986, w i l l seek t o implement the nev s t r a t e - t h a t the Covemrant endorsed i n April 1987. The s t r a t e g y is incorporated in a Policy Statement on Sector Development vhich o u t l i n e s the long-tern objectives, the major development components and the p r i n c i p l e meam t o undertake them. This Statement emphasizes the r a t i o n a l e x p l o i t a t i o n of f i s h e r i e s resources i n the Mauritanian Exclusive Economic Zone in order t o optimize the e c o n d c rent and the net national value-added of t h e sector, v h i l e ensuring the protection and preservation of f i s h e r i e s stocka, m d the equilibrium of the maritime ecosyster. This s t r a t e g y takes u Its s t a r t i n g point the f a c t t h a t present f i s h i n g a c t i v i t i e s threatened t o exceed the q u a n t i t i e s a1loved to ensure stock p r e s e r ~ a t i o n . Consequently, t h i r capacity w i l l be carefully monitored t o avoid exceeding permissible q u a n t i t i e s , using a system of fishing permits adjusted on an . ~ u . l b a s i s . This system w i l l give p r i o r i t y t o integrated operations which increase the n e t national value-added, 1 .e. a r t i s a n a l f ishing/ice boats/fresh exports/on-shore processing and freezing. The Government w i l l establish an incentive system, m o st notably through f i s c a l measures, t o lmprwe the p r o f i t a b i l i t y and competitiveness of these integrated operatioor. 82. The action program c o n s i s t s of four p r i o r i t y components, each with its i n s t i t u t i o n a l , regulatory and promotional mbcomponents and a lirt of investment projects. These components a r e 8 s follovs: - Research and Resource Management. This includes strengthening of the a n a l y t i c and research c a ~ a c i t i e s of the Nation81 ~ceanogrh~hi and c Fisheries kesearch Center (CNROP) . The Center v i l l be responsible f o r defining and monitoring fishing zones by species and by type of fishing; taking i n t o account the % reproduction p o t e n t i a l of the various species. - Follow-up, Monitoring, and Surveillance. An annual program f o r granting fishing permits w i l l be established which limits f i s h i n g . a c t i v i t i e s t o within permissible catching volumes and enforces regulatioar applicable t o the different zones. A s y s t e r w i l l be adopted and provided with a l l the legal, l o g i s t i c a l , and maapawrr  ANNEX I V Page 24 of 30 .. . resources needed t o monitor the exploitation of national waters, coordinate the c i v i l and m i l i t a r y agencies rerpousible f o r processing of a l l available m r v e i l l a n c e and ensure c o ~ i s t e n t infomation. The Covema.nt w i l l rigorously apply a11 mearures deemed necesrary t o avoid w e r f i s b i n g of its rerources. - Training. A uthodology will be defined, based on e x i s t i n g o r n.vlp-created programm, t o t r a i n o r recycle s u f f i c i e n t manpower with t h e q u a l i f i c a t i o n s required, taking i n t o account t h e f i s h i n g d processing techrriquer t o be promoted. - I n s t i t u t i o u s and Economic Environment. All regulations and procedures vtrich have been applied t o a c t i v i t i e r in the r e c t o r ~ ~ w i l l be revised and updated. The Government lus established a techrrical group t o prepare the necessary i ~ t i t u t i o n a and l regulatory reforma and the new u a s u r e r a r i s i n g from the recownendationa of t h e s t u d i e s c a r r i e d out in 1986. It w i l l negotiate revised agreementr with its foreign partners i n accordance with the new s t r a t e g y and w i l l adopt the s e t of new u u u r e s before the Sector Meeting. P r i o r i t y w i l l be given t o revising the f i s c a l d t a r i f f r t r u c t u r e r of t h e public u t i l i t i e s rerving t h e f i s h i n g s e c t o r (energp products, water, e l e c t r i c i t y ) d t o the d e v e l o p n t of bank c r e d i t following the banking s e c t o r reform. The e n t i r e body of laws and r e g u l a t i o ~ is currently under review, especfally those governing labor, with a view t o l i b e r a l i z i n g recruitpunt, a s well a s those concerning the operation of f i s h i n g v e s s e l s and processing units. 83. The complexity of these measures t o be implemented require t h a t t h e W n i s t r y of Fisheries (HPEH) strengthen its capacities i n 1987, by asrersing the adequacy of its s t a f f f o r these tasks and i n s t i t u t i n g a b u i c l r e f rasher t r a i n i n g program. I n t h i s regard, a new u n i t responsible f o r coordinating surveillance -- t h e F i r h e r i e s Control Center- w i l l be in place by October 1987. 84. While one of the goals of the f i s h e r i e s r t r a t e g y is the f u l l u t i l i z a t i o n of e x i s t i n g procersing f a c i l i t i e s a t Nouadhibou, the Govemm.nt recognizes t h a t t h i n must be achieved under conditions of competitiveness d p r o f i t a b i l i t y . A l l on-shore f i s h e r i e s i n f r a s t r u c t u r e orill be r e h a b i l i t a t e d t o enable the n a t i o n a l f i r h i n g f l e e t t o operate competitively. A c t i v i t i e s w i l l include renovation of i n f r a s t u r c t u r e , the organization and management of t h e Port of Nouadhibou (PAN) and the creation of a r t i s a n a l fishing f a c i l i t i e s . The Government w i l l encourage the private sector t o develop a p r i v a t e shipyard a t Nouadhibou t o help i n the maintenance of the national f l e e t . In addition, a l l a n c i l l a r y services ( i n p a r t i c u l a r , rhip 'r chandlers) w i l l be encouraged. 83 Marketing a c t i v i t i e s orill a l s o lm encouraged, p a r t i c u l a r l y a d i v e r s i f i c a t i o n toward the l o c a l market or African markets Prices and marluting channels i n the national market w i l l be l i b e r a l i z e d i n order t o encourage f i s h e m e n and increase t h e i r production. Sales and d i v e r s i f i c a t i o n opportunities, whether i n t e r n of species or of marketr, vill be developed f o r both f r e s h and processed fish. This d i v e r s i f i c a t i o n w i l l complemmt frozen f i s h marketing a c t i v i t i e r carried out by the Public  AN#EXIV Page 25 of 30 - . Marketing Company (SHCP). This company, which registers very satisfactory c-ercial and financial results, will continue to vork with the private sector entrepreneurs. The Government would like SMCP to play a larger role in promotion and diversification. It will also seek financing for artisanal and industrial boats on advantageous t e r n to m b d d z e the impact of the debt service on the balance of payments. A similar effort will be made to analyze the viability of mixed-capital enterprises. The necessary measures will be taken to ensure their profitability aud financial viability; these will be accompanied by a rehabilitation of on-shore facilities in Nouadhibou. 86. In conclusion, the Government recognizes the decisive role that the development of the fisheries sector must play in creating employment and generating revenues and in maintaining an equilibrium in the trade balance and Govermnent budget over the medium-tern. X. PR-ION OF PRIVATE ENTERPRISE 87. In order to diversity the economic foundation,of the country, accelerate economic growth and create more jobs, the Government is giving priority to the promotion of mall- and mediuesited enterprises. This decision is dictated, on one hand, by the inconclusive experience of the State in the industrial sector where most investments have proven unprofitable, and, on the other, by the desire of the State to disengage itself from sectors in which the private sector is most efficient. The Government will concentrate its efforts on the creation of an appropriate environment based on incentives and on an institutional infrastructure. which will allov expansion of the sector. The emphasis will be put on . improving the management of basic facilities and providing reliable public services. This State action should not create distortions between different sectors of the economy as in the past, when private initiative was most often directed towards cornmarcia1 activities. Other sectors such as agriculture and its associated sectors, the modern artisanal sector in the cities, transportation and services should attract private investment. 88. Along these lines, the Government has put in place several incentives for private sector development such as the Investment Code, promotional institutions such as the CEPI and lines of credit for financing small and medium-scale enterprises. This action has lead to the creation of more than 30 new private enterprises. Hovever, the concentration of these entities in limited sectors, the absence of selectivity in the Code, operatiohal problems of the CEPI and the distortions created by often rigid regulations have all reduced the impact of these incentives. Therefore, the Government has decided to implement a new incentive system including reviq$ons of the Investment Code, the fiscal system, procedures and taxation for imports and the pricing system. To accomplish this, the Government has begun a study of which recommandations will be available in June 1987. This study should provide a coherent policy framework for promoting increased competitiveness and creating a healthy rivalry among enterprises. The elements of this policy framework will be the easing of import restrictions, the simplification of agremaent procedures under the Code and a reduction of effective protection. It will be complmaented by .- . t h e developmoat of h a t i t u t i o n r rerponrible f o r pronoting t h e creation of p r i v a t e e n t e r p r i r e r , a p r e r e q u i r i t e f o r which i r the reform of the banking r e c t o r nov i n progrerr. I n addition, in v i n r of t h e verCcness of the natural rerource bare, e n t e r p r i r e r with foreign p a r t n r r r w i l l be encouraged; however, a rtudy i r needed t o i d e n t i f y t h e typer of actlo. r q u i r e d t o facilitate much e n t e r p r i r e r . 89. I n view of t h e magnitude of t h e r t r u c t u r a l coxmtraiats which confront t h e development of t h e r e c t o r (!.ack of i a f r a a t r u c t u r e a d llmited l o c a l markets), i t will taka r m tlme f o r a11 t h e r e reforma t o be u r L i l a t e d and t o exert t h e i r f u l l impact. l b r e o v ~ r , t h e Government i r u u i o u r t o alleviate the effect. of a p o r r i b l e econoric r e c e r r i o n during t h i s intermediate period; hwever, i t 8 a ;. - of a c t i o n remain limited. It therefore proporer t o develop t h e confidence of p o t e n t i a l investors by c l a r i f y i n g t h e incentive ryrtem and rtepping up its dialogue v i t h ~ - reprerentativer of p r i v a t e e n t e r p r i s e r c ~ ~ ~ e r n tihn e gs u i t a b 4 l i t y of t h e mouurer already taken, a d j u r t i n g t h a i f experience r o ' v a r r a n t s . It has repeatedly affirmed i t r determination t o p e d t t h e development of a dpnrric and competitive p r i v a t e rector. The Govemmont, however, vishea t o n k e c l e a r t h a t while t h e p r i n c i p l e of deregulation of t r a d e i s accepted, a r a matter of day-to-day practice, i t r.uier nacerrary t o e l f r i a a t e tax fraud which r d u c e r the incontiver t o produce locally. XI. SOCIAL POLICIES 90. Before dircusring the a c t i o a r t h a t w i l l be taken t o soften the 8oci.l impact of t h e a 4 j u s m n t program, i t i r necerrary t o r e c a l l the present l i v i n g conditionr of t h e majority of the population. Until the , e a r l y 19708, our society's r u l e s had been rhaped by centuries of t r a d i t i o n and adaptation t o ecological conditionr. The d e t e r i o r a t i o n of there couditiona and t h e diaruptioar caused by e x t e r n a l influences have subjected our t r a d i t i o n a l rociety t o enormour prermurer which have changed our way of l i f e and our ethnic and family r o l i d a r i t i a r . The shock caused by these changer, the population r h i f t r toucrrd now l i v i n g area., and rapid u r b u d z a t i o n have not y e t been absorbed by and integrated i n t o our society. The Government, therefore, needr t o r e f l e c t on these problem8 and help t h e population t o wercome t h a . 91. A t the ramo t h , the Govemwnt i r conrciour of the constraint8 on i t 8 m e- of a c t i o n d, therefore, doer not wish t o c o n d t i t s e l f t o a r o c i a l policy t h a t w u l d generate budget criaer. It ha. decided on a prudent approach t o there p r o b l r w while recognizing t h a t i t must face up t o them i n order t o a l l e v i a t e the impact of the austerity measures on the poorest regmentr of the population. Itr primary objective is t o ensure t h a t the e s e e n t i a l needa-of the populatioa a t e b e t .nd t o develop new f o m of c o l l e c t i v e areociatfoaa v i t h i n the new aociolonical s t r u c t u r e s imposed . by d r o u e t d d e r e r t i f i c a t i o n . In 0rd.r t o c o l l r c t needed data on the roc181 impact of readjuatmnt mearurer, a perm8nent hourahold survey war r t a r t e d i n October 1986. The runrey w i l l provide import.rrt data on . )I.uritani.'8 d f f f e r e n t roci.1 group. vhich vill be used t o define correct measurea 92. The f i r r t . p r i o r i t y i r t o m r u r e t h a t food need. a r e r a t i r f i e d . Thir explain8 the importance arsigned t o the food policy diacursed e a r l i e r " 'and t o the u t i l i z a t i o n of a i d t o promote development a t t h e c m i t y level. The recond p r i o r i t y i r t o promote h e a l t h , m a r e a in which previour e f f o r t r have not produced r a t i s f a c t o r y r e r u l t r . The currout o y r t r r bu a 1 high budgetary coat vhich bu not produced m y appreciable l m p r w e n t i n th. h u l t h r t a t w of the population. The Cattemwnt proporer t o define a far-reaching r e f o r n of t h e h e a l t h rector. Rowaver, i t bu t8kon a a r g e n w m u u r e r in lin. v i t h t h e goals of t h e Recwery Program. The u j o r ~ u m r e l a t o Increase t h e budget appropriation f o r p u r c h u e r of h u l t h c u e productr and equipment r o as t o e m r e b e t t e r u t i l i z a t i o n of existing f a c i l i t i e r . The second m a r u r e bu been t o develop b u i c preventive n d i c i n e in c l o r e cooperation v l t h non-govemwntal org.nizationa (R;COr). The Govenment v i r h e r t o pursue the #GO approach vhich r t r e r r e r t h e Involvemaat of c m i t i e r in t h e corutruction and operation of w d i d f a c i l i t i e r . This e f f o r t v l l l be r w t a i n e d i n t h e fr-rk of t h e "Food- for-Work"projectr. The t h i r d . u r g e n c y meamre coucerru potable water suppl~ (see paras. 100-101 b e l w ) ; t h i r vill be a deci.ive f a c t o r in irprovFng h e a l t h coditloor i n r u r a l a r e a s and in urban rpaat.n.our housing areas. A f i r u l m u u r e v i l l be t o authorize t h e c r e a t i o n of p r i v a t e h e a l t h f a c i l i t i e r m d h e l p t h a gain a c c e r r t o c r e d i t . 93. A major caw. f o r concern on t h e p a r t of t h e Govemunt i r t h e graviag u n a p l o y w n t among young people. The s h o r t - t e r r outlook i r d i r q u i e t i n g because the r t a b i l i z a t i o a of the public-rector labor force meuu t h a t f o b c r e a t i o n vill depend d i r e c t l y on t h e promotion of p r i v a t e e n t e r p r i r e r . Although o a r development policy hu been formulated t o provide t h e country v i t h r t r u c t u r e r o f f e r i n g g r e a t e r i n c m t i v e r i n t h i r f i e l d , entrepreneurs vlll t8ko rol. tip. t o adapt m d r e a c t t o t h a . The Governaunt v i r h e r t o met up r p e c i a l fundr h 1987 t o encourage t h e c r e a t i o n of individual e n t e r p r i r e r ; it hu already ertabli.hed t h e ?und f o r Entry and Be-entry i n t o Economic L i f e (Fond d'Inaertion e t Reinsertion d u u l8 Vie Active -- FIRVA), which i r designed t o encourage young m d r e t i r e d public-sector managers t o s e t up e n t e r p r i s e s of t h e i r own. Thir Fund got off t o m e x c e l l e n t rtart in 1986. The Coverumant has u k e d t h a t the Food-for-Work program give a t t e n t i o n t o the p r o b l a of job c r e a t i o n i n t h e r u r a l arear. ' 94. --aae A f i n a l p r i o r i t y is hourin p a r t interventionr have not produce derired l f i e l d in which t h e Covermeat r r e r u l t r . I n t h e context of public r e c t o r r e h a b i l i t a t i o n , SOCOCM is c u r r m t l y undergoing a thorough audit. A study on housing policy is under vay which vill make reconmendations on SOCOCM'r r o l e u promoter m d define a more s u i t a b l e f r m v o r k f o r the promotion of p r i v a t e initiative. 95. Uore generally, thinking on f u t u r e s o c i a l policy w i l l be mriched by t h e recommendatioar t h a t emerge from t h e ongoing s p a t i a l development studies. There s t u d i e s rhould lead, i n t h e 1989-91 Economic and Social Developant P l m , t o a b e t t e r underrtanding of the l i n l u g e r betvaeo t h e location of invertments and other public a c t i o n r and regional development potential. I n an approach o f t h i r kind, b e t t e r a l l o c a t i o n of r o c i a l expenditure vill be m o t h e r f a c t o r i n strengthening t h e e f f e c t i v e n e r r of t h e action8 of the Government and of the.public r e c t o r i n general. Moreover, t h e arrumption of r e r p o r u i b i l i t y f o r r o c i a l policy by t h e ) autoaowur l o c a l a u t h o r i t i e r ~ c k n e s created in 1986 vlll be given f u r t h e r support. .' 96. The Government realizes, however, that social policy cannot ignore the question of population growth md the need to tailor the growth rate to the real e c ~ ~ ~ o Pg c m h possibilities. It therefore wishes to ir develop basic education, dispensed at the family level, to coovince the population of the benefits of adapting f M y sire to available family income. Care will have to be taken to respect people's religiour and cultural traditioar and to avoid clashing with their comictioar. The Government l a convinced that the package of mmasures described, aimed at developing education, basic health and c-nity development, will have a positive impact on the perception of the inportaace of this problem at the f d l y level. . A Training Polic;j! 97. The Government has set up a Natioeul Education Reform C o d a s i o n to review the entire education system which, in spite of its very high cost, has not produced the expected results. The reform is a difficult one to define because it has to take into account the groving number of young people for whom the State wishes to prwide a basic education within the strict limits inposed by public finances. The baaic data for the design of the reforms should becou available in 1987 aad its general outline should be ready in t h for presentation to the Second Consultative Croup. The Government has also undertaken a large adult literacy program and set up for thir effort a secretariat charged with combatting illiteracy. 98. With respect to inmadlate action, it is necessary to begin Implementing goals of the Recovery Program in this sector, namely: promote more rapid expansion .of primary education; to enhance the efficiency of the system; and to meet the real needs of the economy. The Government is currently analyzing the results of a study of unit coats by type of education cycle which was completed in February 1987. The study confirms the high cost of Mauritania's education system, in particular university education, and stresses the necessity of making difficult changes in the allocation of budgetary resources. The strategy for the next few years is to avoid increaring education's share of the national budget and to radically revise its structure in order to give priority to primary education. Initial measures will be introduced with the 1988 Finance Law. In addition, the Government emphasirer the preparation of training program in all the sectoral activities that it has undertaken (particularly, administrative reform, the banking system, fishing and agriculture). It will be necessary to experiment with educational models that are adapted to the people's needs and that take account of the necessity to inculcate into young people the ability to adapt to technological changes and to create a better understanding of the constraints under which their country has to operate. 99. Pending its decisions to'finalize the reform, the Government has taken the decision to concentrate on better utilization of the existing technical and higher education schools. With the restriction on recruitment in the public sector, the existing irutitutions will have to convert 8nd 8pecFolize in order to meet the need. arising out of the .dainistrative reform, rehabilitation of the public enterprises and other goals of the Recovery Program. A "think tank" wfll, therefore. review in  ANNEX IV Page 29 of 30 . . . draw 1987 the entire vocational and technical training structures in order to a reorganization plan for after 1988. Over the short term, the Government will need foreign assistance to finaace training abroad In the specialties in which domestic capacity is lacking. Potable Water Strategl! 100. In view of the vital role of potable water policy In Mauritania, the Government is currently preparing a multiurnual action program which it p l u u to present to a Donor Sector Xeetiq in 1988. The Eecwery Program's goals for potable water and sanitation will be actively pursued. These include, in particular, bringing water supply to 30 percent of the rural population, who will assume respo~ibilityfor maintenance. For urban centers, the Government will continue to rehabilitate SONELEC in order to Improve urban water distribution and drainage in Nouakchott and Nouadhibou and In the other population centers. 101. These objectives will be pursued through the following actions : - Tariff policx. The objective of this policy, together with the electricity tariffs, will be to secure SONELEC's finaacial autonomy (for details, see the above section on energy, para. 57 et seq.). The water tariff will give the poorest people access to the necessary minimum water supply while discouraging waste. - Long-term studies progran. Under this program, studies will be conducted on the long-term supply potential for each network and for distribution, extension aud drainage schemes compatible with carefully worked-out urban development plans and the existing capacity to manage them efficiently. - Appropriate forms of financing designed to reduce recurrent charges. These will be based on external aid in the form of grants or quasi-grants which should finance a part of recurrent expenditures on projects financed with food aid, with the participation of the rural commmities concerned, or through the use of semice contracts with private entities (secondary centers). XI1 . CONCLUSION 102. The Mauritanian Government, since December 12, 1984, has instituted a large number of reform measures and has succeeded in'halting and redressing the deterioration of Mauritania's budgetary and external accounts. It has had.the great satisfaction of having the cooperation of the entire donor community in this task. Of even more importance, it has . obtained the confidence and collaboration of the entire Mauritanian populatton, despite the sacrifices that these measures entail. 103. The economic development policy, the objectives of which have been outlined above, is complex to implement and calls for an enormous effort. But the Government remains f l a y resolved to carry through a11 the a c t i m necessary for the recovery of the economy. It hopes that it d l 1 be supported in this resolve by friendly countries and international .. . F&titutioru and that thay will continua t o conduct an opon and frank dlalogua on Wrpritlair '8 problar. Alt- 8r - tha - in amla Md c ~ l p l u i t y t o tho- facad t o addrarr t h a urt ba r a m i difficult corditlono irr W.urit.ai.. n1 Coofaram on Africa ha14 by tho Uaitod Matioru. It i -t tho80 p r o b l m ara vary other S h l i r a coaatriar, of tha particularly Siatlarly, tho uadarlylng objactivar of thir davalopnnt policy ara conslatoat with thooo adoptad by tha Spoci.1 . tharofora nacarury that foraign .id w a r tha n u t f iva 70.t.~ r h i l o - r h m amugh to a w uin t h e aet flow of tramtaro a d wiml a t thois c u h m t levalo, v i l l ba diverrlfiad ro u to rtr- tho u j o r ct a - of oar davalopuat policy. X t i r t h i r goal that will be parmod i n oar b i l ~ t o r a l namti.tioru* in tha r a c t o r - m -.twr rrd in tho r a c d mating of tha C o ~ u l t a t i v aGroup schadulad for 1988.