Mauritania - Structural Adjustment Program Project

Document of The World Bank FOR OFFICIAL USE ONLY C ,#.// ^f)'> Report No. P-4550-MAU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS FOR A PROPOSED DEVELOPMENT CREDIT OF SDR 11.7 MILLION AND A PROPOSED SPECIAL AFRICAN FACILITY CREDIT OF SDR 21.4 MILLION TO THE ISLAMIC REPUBLIC OF MAURITANIA FOR A STRUCTURAL ADJUSTMENT PROGRAM May 11, 1987 This docment has a restricted distribution and may be used D/ recipients only in the performance of their official duties. Its Contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Ouguiya (UM) US$1.00 = UM 72 (April 1987) UM 1 million US$13,830 (1987) SYSTEM OF WEIGHTS AND MEASURES: METRIC Metric US Equivalent 1 meter (m) 3.28 feet (ft) 1 kilometer (km) - 0.62 miles (mi) 1 square kilometer (km2) - 0.39 square mile (sq mi) 1 hectare (ha) D 2.47 acres (a) 1 metric ton (t) = 2,205 pounds (lb) 1 kilogram (kg) = 2.2046 pounds (lb) FISCAL YEAR January 1 - December 31  FOR OFFICI use ONLY ISLAMIC REPUBLIC OF MAURITANIA STRUCTURAL ADJUSTMENT CREDITS Table of Contents -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- Page List of Acronyms and Abbreviations ................................ i Credit Summary ............ ..........****........*......... ii PART I - THE ECONOMY ..................................... 1 A. Economic and Financial Developments, 1978-1984...... 2 B. The Recovery Program and First Results ............. 3 PART II - THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM ... ...... 4 A. Macroeconomic Policies ........ . . . . . . . . . . . . . . . . . . . . . 5 B. Public Sector Management ........................... 8 C. Banking Sector Reform ... .... ........... ... . 10 D. Energy Sector ...... 66** .............. ... ............. 13 E. Agriculture and Food Policy ........................ 15 F. Fisheries Sector .................................. 17 G. Private Sector Promotion ........................... 18 PART III - ECONOMIC, FINANCIAL AND SOCIAL IMPACT OF THE ADJUSTMENT PROGRAM ........... ...... .... 20 A. Growth Prospects and Prerequisites ..... ............ i20 B. Need for Foreign Assistance ........................ 24 C. Social Impact ................ 26 PART IV - THE PROPOSED CREDITS ................. 28 A. Financing ........................ .......***** 28 B. Monitorable Actions ................... .*** 28 C. Next Phase for Adjustment Effort ................... 30 D. Management and Administration ...................... 31 E. Coordination with the IMF and Other Donors ......... 32 F. Procurement, Disbursements and Retroactive Financing 32 G. Benefits ........ 33 R. Risks .......... ............................... 33 Thi document ha a resticted distibuon and may be ud by ret, ',prlpofornuce of teir offlW d4uties. Its contnts may not orwi be discksed with%. k authoodlton.  Table of Contents (cont.) PART V - BANK GROUP OPERATIONS AND STRATEGY ..................... 35 PART VI - RECOMMENDATION ......................................... 38 Text Table Table 1 Composition of Public Investment by Sector ......... 7 Table 2 Macroeconomic Projections Summary .................. 21 Table 3 External Asiistance and Debt ....................... 25 ANNEES Annex I - Economic Indicator Data Sheet ................... 39 Annex It - Status of Bank Group Operations ................. 42 Annex III - Projections: Selected Tables ................... 43 Annex IV - Letter of Development Policy ..... ............... 47 Annex V - Natrix of Actions ...... ........ ......* 77 l  LIST OF ACROYMS AND ABBREVIUTIONS Acronym/Abbreviation Definition ACP-EEC Africa/Caribbean/Pacific - European Economic Community AFDB African Development Bank AFESD Arab Pund for Econ.mic and Social Development BALM Banque Arabe Libyenne pour le Commerce et le D4veloppement BAMIS Banque Al Baraka Nauritano-Islamique BCH Banque Centrale de Mauritanie BNA, Banque Internationale pour la Neuritanie BMCI Banque Mauritanienne pour le Commerce et l'Industrie BNDC Banque Mauritanienne du D6veloppement et du Commerce CCCE Caisse Centrale de Coop4ratioi Economique (France) CFF Compcnsatory financing facility CF Common fund CG Consultative group CSA Commissariat la 1Scurit6 Altmentaire EEC European Economic Community ED? European Development Fund EMN Etablissement Maritime de Nouakchott FAO (United Nations) Food and Agriculture Organization FF1 Food-for-Work FIRVA Fonds d'Insertion et de Rensertion dans la Vie Active -ndD Fonds National du DNveloppement FRG Federal Republic of Germany ICOR Incremental Capital Output Ratio LDP Letter of Development Policy MrE Ministry of Economy and Finance MIFERMA Ex-Societ6 Mini0re de Wer de Nauritanie (now-SNIM) OPT Office des Postes et T4l6communications PFP Policy Frame-work Paper RP Recovery program SAE Structural Adjustment Facility SFA Special Facility for Africal SJF Special Joint Financing SMB Societ6 Mauritanienne de Banque SMCP Societe Mauritanienne pour la Commercialisation du Poisson SMCPP Socit6 Mauritanienne pour la Commercialisation des Produits P6troliers SME Small and medium enterprise SNIM Soci6td Nationale Industrielle et Mini6re SOMIR Socilte Mauritanienne des Industrie de Raffinage SONADER Soci&tg Nationale pour le Dwveloppement Rural SONELEC Societe Nationale d'Eau et d'Electricite SONIMEX Societe Nationale d'Import export (Food) STPN Societe de Transport Public de Nouakchott UN Ouguiya UNDP United Nations Development Program  - ii - MAURITANIA STRUCTURAL ADJUSTMENT CREDITS Credit Summary Borrower: Islamic Republic of Mauritania Amounts: IDA Credit: SDR 11.7 million (US$15 million equivalent) Special Facility for Africa Credit: SDR 21.4 million (US$27.4 million equivalent) Special Joint Financing Facilities: Federal Republic of Germany: DM 5.0 million (US$2.8 million equivalent) Kingdom of Saudi Arabia: SR 18.0 million (US$4.8 million equivalent) Terms: Standard IDA Description of Credits: The proposed Credits would support the Government's comprehensive adjustment program for addressing the key macroeconomic and sectoral issues facing Mauritania over the mediumterm. This program is described in the Government's Letter of Development Policy which contains a matrix of specific, monitorable actions (Annex IV). The objective of the program is to help the Government achieve its mediumterm goal of an economic growth of about 2.5 percent rate per annum. To achieve this objective, the Government has developed and adopted: (i) a growth strategy based on the fisheries and rural sectors; (ii) a program to improve economic management; and (iii) a program to promote the private sector. Detailed action programs have been developed in the following areas: macroeconomic management, civil service and public administration, the banking sector, energy, agriculture and food pot-icy, fisheries, and private sector promotion. These action programs will be implemented over the next twelve months. The foreign exchange provided under the Credits would be used to finance essential imports. Risks: The main risks associated with the proposed operation are: (a) the uncertainty of weather conditions affecting the agriculture sector; (b) the volatility of world prices for iron ore and fish; (c) a slower and/or weaker than expected response from the private sector; (d) a strong negative public reaction to the recommended austerity measures; and (e) the possibility that the Government's implementation capacity may be overtaxed by the comprehensive nature of the reform. Estimated Disbursements: The proposed Credits would be disbursed in two tranches, the first, for US$25 million equivalent, upon effectiveness and the second, equivalent to US$25 million, upon satisfactory overall implementation of the program and provided the conditions in para. 82 have been fulfilled.  ITERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 11.7 MILLION AND A PROPOSED SPECIAL AFRICA FACILITY CREDIT OF SDR 21.4 MILLION TO THE ISLAMIC REPUBLIC OF MAURITANIA FOR A STRUCTURAL ADJUSTMENT PROGRAM 1. I submit the following report and recommendation on a proposed Development Credit of SDR 11.7 million (US$15 million equivalent), a proposed Special Africa Facility Credit of SDR 21.4 million (US$27.4 million equivalent) on standard IDA terms to the Islamic Republic of Mauritania to help support the Government's Structural Adjustment Program. The program will also be supported by two Special Joint Financing (SJF) Credits in total amount of $7.6 million (DM 5.0 million from the Federal Republic of Germany and SR 18.0 million from the Kingdom of Saudi Arabia). 2. Part I of this report reviews the characteristics, performance and constraints of the economy; Part It outlines the Government's Structur- al Adjustment Program; and Part III analyzes the expected economic, finan- cial and social impact of the program and subsequent prospects. Parts IV and V describe the proposed operation and Bank Group operations and strate- gy in Mauritania. PART I - THE ECONOMY 3. A report entitled Mauritania: Country Economic Memorandum (No.5537-MAU) was distributed to the Executive Directors on July 10, 1985. Updated country data appear in Annex I. 4. Mauritania faces today a multitude of economic problems which have resulted from repeated drought and the sluggish world demand for iron ore, its main export. These problems were exacerbated by the Government's own weak economic management and poorly conceived investment policy throughout much of the 1970s and the early 1980s. The investment effort was stepped up in the mid-1970s with the support of heavy inflows of foreign assistance. These resources were used principally to finance ambitious projects which were to prove non-viable except in the iron ore sector. External and internal factors combined were, thus, responsible for t l transition from the period of economic growth in the 19609, when GDP expanded at an average annual rate of 8 percent, to a period of stagnation and financial instability in the 1980s. As a result of these trends and a population growth rate of 2.7 percent per annum, per capita income of about US$410 in 1986 was no higher in real terms than a decade before.  - 2 - 5. Since December 1984, a new Government has undertaken, with marked success, a series of policy adJustments aimed at regaining stability and reducing financial disequilibrium. Additional, more comprehensive policy reforms are now planned to create the conditions for a more equitable economic and social development. However, the country faces deep-rooted constraints to sustainable growth, and efforts to raise living standards among the mass of the Mauritanian population--severely affected by recent droughts--continue to be constrained by the limited number of trained managers, progressive desertification, and the lack of export diversification prospects. A. Economic and Financial Developments, 1978-1984 6. In 1978 and 1980, the Government negotiated stabilization pro- grams with the IMF, 1/ which called for the rescheduling of debt service obligations, tight controls over government expenditures and an intensified tax effort. However, the improved performance of the economy could not be maintained in the face of a depressed world market for iron ore and the recurrence of severe droughts. Iron ore production fell by more than 20 percent in 1982/83; the livestock herd suffered major losses; and cereals production met less than 10 percent of total demand. 7. The public finance situation, too, deteriorated substantially. The Government's consolidated fiscal deficit rose to a peak of 11.2 percent of GDP in 1984. Expansion of the civil service and high external debt service payments contributed to the deficits. These were financed out of Central Bank advances to the Treasury and through the accumulation of external and domestic arrears. At the end of 1984, arrears on external debt service amounted to about US$100 million. 8. In the external sector, export growth was modest, but imports remained at a high level mainly because of capital imports associated with major public investments. In 1983-84, the current account deficit was about 30 percent of GDP, while the investment/GDP ratio averaged 35 per- cent. A legacy of this period is that in spite of a high degree of concessionality, Mauritania's annual external debt service obligations substantially exceed its payment capacity. Total scheduled payments on existing debt would imply a debt service averaging nearly US$200 million a year over the 1987-89 period, or about 40 percent of exports of goods and services. 9. While exogenous factors contributed significantly to the deterio- ration of Mauritania's economic and financial situation, their impact was aggravated by weak overall economic policies. These were manifested in (i) poor management of public enterprises, reflected in heavy financial losses, 1/ First, under the Compensatory Financing Facility (CFF) for SDR 10.5 million; later, under a first Stand-by arrangement for SDR 29.7 million, which had to be replaced almost immediately by a revised one for SDR 25.8 million.  -3- overstaffing and inefficiencies; (ii) inappropriate sector strategies which, in particular, neglected long-term external and domestic demand constraints and intersectoral linkages; and (iii) the lack of appropriate criteria for selecting public investments, which resulted in starting projects with low or even negative rates of return. 10. Because of its geopolitical situation, Mauritania has benefitted from an unusually high external assistance of about US$180 per capita p.a over the 1982-84 period. This assistance has financed large and inadequately appraised and poorly-managed public investments. Moreover, it has allowed the country to live above its means and postpone facing the inevitable structural reform of the economy. The deteriorating performance of the economy, however, started to alarm even Mauritania's most lenient donors and creditors. When confronted with its inability to service its debt and settle its arrears, the country had to face the inescapable need for comprehensive structural reforms. The experience of the previous stabilization programs and the aborted 1981-85 Development Plan clearly showed that, without such reforms, the country could not expect any lasting improvement in its growth prospects. In this context, a new Government team headed by President Taya started preparing and implementing a comprehensive Economic and Financial Recovery Program (RP) for the 1985-88 period which was fully endorsed by the donors at the first meeting of the Consultative Group (CG) for Mauritania in November 1985. B. The Recovery Program and First Results 11. The Recovery Program (RP) focused on implementing the following austerity and restructuring measures: a flexible exchange rate policy; a restrictive monetary and credit policy favoring the private sector; ;%ntin- ued austerity in public finances; decontrol of prices so that they reflect real costs; continued rehabilitation of the parapublic sector; an invest- ment program giving priority to the productive sectors (fisheries and agriculture) and rehabilitation projects (in mining, infrastructure and public services); development of training facilities tailored to the needs of the economy; and setting up of an incentive framework to promote private investment, job creation, and community participation in the satisfaction of basic needs. 12. The Government implemented a first two-year phase of stabiliza- tion measures under two IMF Stand-by arrangements approved on April 12, 1985 and April 26, 1986 respectively, both for SDR 12 million. Implementa- tion for the 1985-86 period has been impressive, notably: a 22 percent devaluation in real terms coupled with implementation of a flexible ex- change rate policy; an inflation rate kept below 9 percent p.a.; across-the-board increase in interest rates of 2 percent which kept them positive in real terms; sizeable adjustments in producer and consumer food prices and automstic adjustment of other regulated prices to reflect cost incr4ases; a freeze on the number of public servants; and a cut in public investments from 29 percent of GDP in 1984 to 22 percent in 1986 by limit- ing the program to justifiable, high-priority projects. The devaluation stimulated fish exports and helped to contain the financial losses in the iron ore sector resulting from the fall in world prices. The strict budgetary discipline enforced during the past two years increased revenues  -4- by 19 percent p.a., while outlays expanded by only 10 percent, bringing about an overall budgetary surplus in 1986. The restrictive monetary policy, following IMP guidelines, kept credit to the Government at its 1984 level; new loans were limited to the fishing and industry sectors. At the same time, the Government continued to implement rehabilitation measures in the parapublic sector, including tariff adjustments. 13. Financial support for the RP was agreed at a Special Donor Conference organized by the Bank in Paris in March 1985. Rescheduling of extental debt service was negotiated at two Paris Club meetings in 1985 (including arrears accumulated up to December 1984) and in 1986 and during bilateral negotiations. As a result, large external resource gaps of about US$300 million (including arrears) in 198' and US$120 million in 1986 were successfully financed, in particular thcough rescheduling and direct balance of payments support. All arrears were eliminated. The external current account deficit was reduced and savings performance improved. 14. With the objective of continuing and expanding these positive efforts, the Government has adopted an updated Structural Adjustment Program which is consistent with the Policy Framework Paper (PIP) discussed by the Board in September 1986; with this PFP, Mauritania obtained assistance of SDR 6.8 million under the IMF's Structural Adjustment Facility (SAF) in 1986. In addition, after having satisfied, with remarkable punctuality, the performance criteria of two stabilization programs with the IMP, the Government has successfully negotiated a third Stand-by arrangement for SDR 10 million on May 4, 1987 which should enable Mauritania to seek a new rescheduling of its external debt through the Paris Club in June 1987 and through bilateral agreements. The structural adjustment measures that it intends to implement in 1987-88 are described in a Letter of Development Policy (LDk) and a matrix of actions which are attached in Annexes IV and V and summarized in Part II. PART II - THE GOVERNMENT'S STRUCTURAL ADJUSTMT fROGRAM 15. The Government's medium-term objective is to contain the fiscal and external account imbalances and prepare the basis for a sustainable per capita income growth. Priority is given to actions to (i) maintain the main macroeconomic equilibria; (ii) Improve economic management (mainly public sector management and banking sector reform); and (1ii) improve domestic production prospects (mainly through energy policy, food policy, fisheries promotion, and private sector promotion). In parallel, social measures aim at cushioning the impact on negatively affected groups. Macroeconomic consequences are smmarized in Part III. Because of manage- ment constraints, the Government program concentrates on a carefully selected set of measures for immediate execution, which are described below. The SAL program focuses on "core actions" which can be defined in monitorable terms (listed in Part IV).  -5- A. Macroeconomic Policies 16. Since 1985, significant progress has been achieved in reducing and controlling the financial imbalances of the economy (para. 12). To continue this performance, the Government will introduce additional fiscal and balance of payment measures as follows. 17. Fiscal Revenues. Total tax and non-tax revenues are estimated to have reached a ratio to GDP (at factor cost) of about 26.4 percent in 1986, compared to 25.4 percent in 1984. This ratio reflects a substantial effort to improve the recovery of tax assessments and arrears. Increasing the tax rates, which are already quite high, could have a disincentive effect on the economy in view of the country's poor endowment. Therefore, the main objectives of the fiscal reform will be to improve the efficiency of the fiscal system by reducing tax rates while limiting exemptions to priority sectors, providing incentives to profitable economic ventures and improving burden sharing. 18. A first step was to reduce the number of tax exemptions in the 1987 Budget Law. The next step is to review the impact of the present fiscal system on growth prospects in three key sectors: mining, fisheries, and small entrepreneurs. Studies on this have already been initiated and will be completed by June 1987. With IMF assistance, several reforms of key aspects of the fiscal system will be reviewed before the end of 1987 and reflected in the preparation of the 1988 Budget Law. 19. Current Expenditures. The Government has adopted stringent measures tO (i) keep budgetary expansion below the GDP growth rate in current prices, and (ii) improve the budgetary effort in priority social sectors (para. 72). It is committed to continuing these measures in 1987 and 1988. The key measures are: - no increase in civil servants' wage bill in real terms. This requires a freeze on the number of civil servants, ;xcept those in education and health (which will be compensated by a decrease in benefits); and - no increase in all non-wage expenditures except for interest payments and operating costs for social ministries. All subsi- dies to public enterprises with commercial production were abolished in 1985. 20. The Government is aware of the difficulties and risks of exercis- ing budgetary austerity by limiting expenditures across-the-board. It has, therefore, embarked on a thorough restructuring of the budgetary process and sectoral allocations. This reform will take time to become fully operational, but same priority actions will be implemented in 1987-88, as follows. 21. Consolidated Budget. In the past, budgetary procedures covered only expenditures financed by domestic resources. In order to control all financing sources used by Government, the Ministry of Economy and Finance (MEF) will prepare, with the help of the tank Group and the IMP,  - 6 - consolidated budget8 encompassing both internally- and externally-financed expenditures, current and capital. Through Stand-by arrangements, the IMF will monitor the trends of the main budgetary components and financing gaps. The first consolidated budget was prepared for 1987. This first attempt needs to be strengthened, and in October 1987, an analysis of the new procedure, coupled with a public expenditure review, will be carried out with Bank Group assistance. The focus will be on the sectoral distribution of current and investment expenditures. In that context, attention will be given to: (i) the cost effectiveness of budget expenditures and recurrent costs allocated to the social sectors-in particular education, the fastest growing budget item; and (ii) greater local cost financing by promoting the use of food aid (para. 52). Based on this review, the Government will restructure the central budget, starting with the one for 1988. 22. Public Investment Program. The Association reviewed the public project portfolio through a PIR mission in May 1985 and discussed the 1985-88 Recovery Program which included an investment program concentrated on high-priority infrastructure rehabilitation and quick-yielding projects. As a result, the annual public investments were scaled down relative to GDP as shown in Table 1. 23. Lessons from the serious inefficiencies of past public invest- ments were candidly drawn in the Recovery Program. In the LDP, the Govern- ment is committed to limiting future investment to projects which are well prepared, with acceptable economic rates of return, adequate management capabilities, and operating and maintenance funds. Improving the contribu- tion of these investments to economic growth will necessitate better project preparation and appraisal and strengthening of public investment management, with tighter coordination between planning and technical departments, in particular prior to new foreign-financing negotiations. 24. The reorientation of public investment has been appropriate in several respects. First, emphasis has been given to rural development. Industry's share has declined mainly because the impetus for this sector has been shifted to private entrepreneurship. The Government is taking a firm stand against the creation of public enterprises during the recovery period (para. 30). Second, in 1985-86, the share of public investment financed by grants increased markedly -- from 19 percent in 1984 to 38 percent - and that of domestic financing rose from 4 percent to 6 percent. Moreover, since early 1985, coordination among publ'c agencies has been improving, and the discipline imposed by the list of projects attached to the RP was strictly respected by Government and donors in recent bilateral negotiations. Prior to SAL negotiations, the RP program's tranche for 1987 was jointly agreed upon with the Association in the context of consolidated budget procedures (para. 21). The Association will seek a similar agreement for the 1988 budget. The preparation of the next CG meeting in 1988 will also be used to intensify the implementation of the above-mentioned measures, jointly with the elabcration of a 1988-90 investment program.  -7- Table 1. Composition of Public Investment, by Sector (Percentage Distribution) (Actual) (Actual) (Programmed) (Estimated) 1975-80 1981-84 1985-88 1985-86 Rural infrastructure 8.0 21.1 20.0 21.5 Other rural 2.0 4.7 15.3 12.2 Fisheries 2.2 0.6 5.0 1.7 Mining 8.5 37.4 10.8 13.0 Industry 15.2 2.5 3.0 4.3 Public utilities 4.7 4.8 16.2 15.2 Transpor:stion 45.4 22.5 17.2 23.5 Social 14.0 6.4 12.5 8.6 Total 106.0 100.0 100.0 100.0 Memo Item - Average annual investment (US$ million) Current prices 171 235 162 175 1982 prices 225 226 118 131 (In Z of GDP) (29.6) (31.2) (22.4) (23.2) 25. The discipline imposed by the consolidated budget procedures, together with the granting of approval authority for new projects and borrowing to an Interministerial Committee (para. 84), will help the orderly execution of the investment program. The special attention now given by the Government to strengthening project management and programming is reflected in the pursuit of the following objectives: - implementing three-year rolling investment programs which will be discussed at CG or donor sector meetings and executed by annual tranches, using consolidated budget procedures; - assuring consistency between budgetary provisions and the ad- vancement phase of projects; - improving project supervision capabilities in key technical ministries. Planning units already exist for rural development, fisheries, education and health, but they will be strengthened; - streamlining bidding procedures and strengthening the autonomy of public enterprise managers in executing their programs, once approved (a Bank Group mission is preparing recommendations to be implemented before the end of 1987); - providing adequate budgetary provisions for recurrent and mainte- nance costs; and - mobilizing adequate local cost financing by using food aid counterparts (para. 52).  -8- The success of these measures will depend on the extent to which the donors support them as well as on other institutional reforms in areas such as aid coordination, food policy, and the fisheries sector. 26. External Deficits. Another objective of the macroeconomic policies is to keep external current account imbalances at a manageable level in order to stabilize the net requirements for foreign assistance (in kind or in cash, para. 69). The main instrument will remain the flex- e exchange rate policy (para. 12). There is a need, however, to manage this oolicy by taking into account the combined impact of exchange rate adjustments and fiscal policy on the ability to maintain competitiveness in the export sectors (fisheries and iron ore, paras. 63 and 65). 27. To control domestic demand for imports, the Government will phase out import quotas on a schedule to be decided once the ongoing study on protection is completed (para. 57). Import licensing will be progressively liberalized starting with intermediate and capital goods in 1987. To avoid short-term disruptive effects on the external current account, the liberal- ization measures will be combined with reduced duty exemptions (para. 58) and a revised credit policy (para. 36). The monitoring of these policies will put heavy pressure on public sector management. B. Pullic Sector Management 28. Civil Service and Public Administration. The small group of managers in charge of preparing and implementing the Recovery Program can count on only limited support from the poorly-trained public service. Therefore, relieving the administrative bottlenecks to structural adjust- ment is a priority. An Administrative Assessment carried out by the Bank Group in late 1985 highlighted the need to start improving personnel management and overhauling the decision-making process in the Mauritanian administration. An IDA credit to assist development management currently under preparation is designed to assist in implementing some of the most pressing reforms and preparing the next ones by providing technical assistance and financing special studies required. This project will complement existing programs from other donors (France, Germany, EDP, USAID and UNDP). 29. The Government assigns particular importance to reforming the management of public entities and personnel management policies and to strengthening the institutions responsible for economic management. An action program has been elaborated to strengthen the Ministry of Economy and Finance based on an internal review of this Ministry's operations initiated by the French technical assistance. The definition and implemen- tation of a broad-ranging program of administrative reforms will take time, but in the LDP, the Government has agreed to start with specific actions to address the immediate deficiencies in public service management. These measures include: (i) establishing an institutional capability for adminis- trative reform (done in February 1987); (ii) ;mplementing a detailed action plan for reorganizing and computerizing civil service management; and (iii) undertaking a thorough review and assessment of public employment and non-salary compensation. The last two actions will be prepared in 1987;  - 9 - preliminary corrective measures will be included in the 1988 Budget Law, in cooperation with the IMF. 30. Public Enterprise Management. The Government defined a strategy and a program to restructure the entire public sector in 1984. The two main goals are to restructure existing enterprises if they are viable and to refrain from creating new ones. For the existing enterprises, the Government has already implemented selective rehabilitation of the five largest enterprises, privatization (involving three enterprises) and liquidation (affecting five). The Government intends to pursue this program, in particular in -he banking sector, by privatizing three banks (para. 40). Implementation is being closely supervised under our Parapublic Sector Rehabilitation Credit (FY85) as well as under two sectoral operations. The Government has assigned priority to the five largest enterprises, which have already shown an improvement in their efficiency, but their financial viability remains shaky. SNIM (iron ore) is actively implementing a program to increase efficiency, supported by a US$20 million loan by the Bank, approved in December 1985. Long-term projections indicate that the export price of iron ore will, if anything, deteriorate in real terms. The survival of the company will, therefore, require stringent measures to cut labor and other operating costs. Already in March 1987, a cut by 25 percent of the total labor force was implemented, coupled with other austerity measures. At a meeting in Paris on April 1 and 2, 1987, the main co-lenders complimented Mauritania for this remarkable effort and pledged support to help finance measures geared to improve productivity. The Governnent agreed to adjust the export tax to preserve SNIM's financial viability (a 50 percent cut has already been granted for 1987, equivalent to 3 percent of government revenues). It promised to use the flexible exchange policy to help SNIM maintain its competiltveness. 31. Among the other priority enterprises, SONADER (the irrigation agency), has already streamlined its operations and taken measures to strengthen its management, iuprove its field interventions to meet farmers' needs and help implement the future irrigation master plan in the Senegal Valley (para. 47). OPT (Post and Telecommunications) is renegotiating the service of debts incurred for excessive telecommunications equipment; ENN (Nouakchott Wharf) is being reinforced to take over the management of the Nouakchott deep-sea harbor, just completed with Chinese assistance; and SONELEC (water and electricity) is constructing a new cost-saving power plant in Nouakchott (para. 46). 32. These five priority operations, now fairly advanced, will be complemented by a second set of restructuring operations in the framework of the sectoral strategies implemented in 1986 and 1987; the Bank Group is focusing its assistance on the banking, energy, fisheries and food-policy fields. The public sector management will be reviewed during 1987 when an intense program of studies, now in process, produces recommendations on wage policies, training, accounting procedures, and the policies governing relations between the State and public enterprises.  - 10 - C. Banking Sector Reform 33. Over the past years, the Mauritanian banking system has become increasingly fragile. Unable to mobilize adequate local resources to finance the growth of credit to the economy, and facing limited rediscount facilities because of the restrictive monetary policy initiated under the stabilization programs, the primary banks resorted to heavy and costly foreign financial facilities, and thus aggravated the country's foreign reserve situation. This was coupled with very high portfolio arrears due to a weak credit policy. The result has been a snowballing liquidity crisis that the Central Bank (BCM) could not control because of lack of proper organizational and control procedures. The Government has already introduced reforms in its credit and monetary policies, but it recognizes that these will not be sufficient to salvage the system. It has decided to restructure the entire banking system. 34. In July 1985, in response to these shortcomings, the Government commissioned a consulting firm to study the whole banking system and identify appropriate measures to stop its deterioration. This study, co-financed by the Association and the Arab Monetary Fund, was completed in mid-1986. It confirmed that the overall situation of five out of the seven Mauritanian banks (BIDA, SMB, BNDC, BMCI, and BALM) 2/ was very critical and that the banking system needed a thorough restructuring. As of end-1985, uncollectible and doubtful loans granted by these institutions amounted to about UM 10 billion (about US$130 million), or 51 percent of total credit to the economy and 36 percent of total banks' assets. Banks do not have the capacity to make adequate provisions for bad loans. Meanwhile, they would still owe foreign creditors about UM 2.2 billion (or US$30 million). The study, therefore, recommended a massive financial restructuring plan, coupled with measures to improve the organization, procedures and managerial capability of BCM (the central bank), and of the primary banks. 35. In March 1987, the Government and the Association agreed on 'a reform program for the banking system focusing on three main areas: (i) reforming credit policies and banking regulations; (ii) strengthening of the Central Bank; and (iii) restructuring of four of the seven financial institutions. These are discussed below. In developing this reform program, the Bank Group has worked in close collaboration with the IMF. The Association has focused on the restructuring of the commercial banking system; the IMF has concentrated on the management of the Central Bank. 2/ The State has a majority shareholding in three banks (BIMA, SMB and BMDC). It has a minority participation in BALM (owned jointly with Libya) and BMCI (in which 90 percent of equity is owned by private Mauritanians). One institution, the National Development Fund (FND), is too recent to have yet encountered financial difficulties. The seventh institution, BAMIS, an Islamic Bank, which started operations in 1986, was not included in the study.  - 11 - 36. Reform of Credit Policies and Banking Regulations. The Govern- ment has decided to develop financial policy reforms directed at containing inflation, maintaining aggregate demand for credit in line with available resources, improving credit allocation, and promoting savings. First, BCM will strengthen its monitoring of credit policy (rediscounted credit as well as advances to the Government) through the administration of ceilings initiated and periodically reviewed with IMF assistance. Second, follow- i.ng the reorganization of its main departments, BCM will strengthen credit screening to ensure that it remains targeted on solvent and productive activities. Third, BCM will, with foreign assistance, formulate uniform accounting procedures for use by all Mauritanian banks in order to facili- tate supervision and improve the assessment of their financial performance. Fourth, although the interest rate adjustments in 1985 kept rates positive, the Government and BCM will, in consultation with the IMF and the Association, improve in 1988 the structure and the review procedure to make long term deposits attractive. 37. Before October 1987, a new banking law will be enacted to ensure the independence of primary banks vis-a-vis BCM and of BCM vis-a-vis Government. With regard to banking regulations, the new law will adjust those currently enforced to improve the banks' management and compliance with sound financial practice. Consultations with the IMF and the Association will take place prior to implementing the new regulations and banks' prudential ratios. At the beginning, minimal ratios will reflect what new management should achieve to improve each bank's balance sheet and ensure financial viability. Then, objective ratios with a time frame will be agreed upon (see below). 38. Strengthening of the Central Bank - BCM. In May 1987, the BCM transferred all its shareholdings in commercial banks to the State in order to restore its independence from them and its ability to enforce financial policies and control banks' activities. The IMF will continue to provide technical assistance to help improve BCM's organization and procedures. BCM's main departments subject to reform are: the Control Commission in charge of banks' supervision, the "Centrale des Risques" in charge of collecting information on risks attached to credits over a certain limit, and an Information Department to be created to provide banks with information on their clients' financial position. Special attention will be given to providing the Bank Control Department, under adequate technical assistance and supervision, with efficient operating procedures and skilled personnel. 39. Restructuring of Individual Banks. The new banking regulations to be enacted before the end of 1987 will be applied to all primary banks, to be restructured or not. The restructuring program aims at consolidating and transforming banks into viable institutions. To that end, the Govern- ment has agreed that the banks' ownership and management should be left to the private sector, local and foreign, except for a development finance institution, for which the State would remain the majority shareholder. Returning banks to a long-term viable position and increasing private participation in their capital will require a significant improvement of their balance sheets before the banks' assets can be sold. To that end, the Government has agreed that it must accept responsibility for all the  - 12 - State's financial obligations as shareholder, as owner of indebted compa- nies, and as guarantor of non-performing credits. Its financial obliga- tions could mostly be covered by the cancellation of outstanding refinancing of banks by the Central Bank, which will be compensated by Treasury bonds. During the restructuring phase, the Government will sign a cession agreement with new owners and a "contract-program" with each bank; both documents will ensure that the banks are viable and managed professionally. The Central Bank will have a vital role in supervising the implementation of the measures agreed in each document; in October 1987, it will enact a by-law fixing the appropriate financial ratios to be respected by all banks. 40. Of the seven Mauritanian financial institutions, two (BMDC and FND) will be merged into a development bank. Two others (BIMA and SMB) will be sold after their balance sheets are improved; already a group of private Mauritanian investors as well as foreign banks have shown interest in taking themt over. There is good evidence that these interests are serious and that the parties concerned have the capacity to take over effectively. A fifth bank, BMCI, was bought by a group of Mauritanian merchants in November 1986; it has already started its own restructuring plan. The last two institutions are not considered to need restructuring. Improving balance sheets for the banks to return to a long-term viable position will require the following steps: (a) For all banks, the Government will offset bad debts from state-owned enterprises against liabilities of the banks to the Central Bank and possibly part of equity belonging to the State. (b) For the four banks to be restructured, the Government will take over debts to foreigners, due and unpaid. Outstanding foreign debts will be negotiated with the new shareholders. (c) For the two banks, BIMA and SMB, where the non-state shareholders are in a majority, the remaining debts from non-state enterprises will be sold at a discount to be negotiated as part of the cession agreement. In this agreement, new shareholders will have to inject enough fresh equity to enable the restructured banks to meet, in due course, the banking law regulation and financial ratios. (d) For the new Development Bank, the merging of FND/BMDC will be undertaken by the Government with possible private minority shareholders. The balance sheet will be restructured like for the other two banks. The contract-program (see below) will also ensure that management has full decision-making autonomy and full accountability in day-to-day operations. The financial institu- tions which opened credit lines to BNDC and FND will be consulted on the conditions of their merging and the future operations of the new Development Bank. 41. All the banks, existing or restructured, will sign a con- tract-program with the Government and the BCM which will include provisions to secure adequate management, streamline personnel, install sound  - 13 - procedures and a proper system of accounting, and meet the regulation and management ratios required by the banking law. These ratios will be fixed by BCM taking into account the state of the newly restructured balance sheets. The maximum time allocated to banks to meet these ratios should not exceed 18 months. Each bank will be tied to an implementation program with technical assistance, if required. This assists . should be provided by foreign financial institutions either as shareholders or through manage- ment contract. The BCM will prepare special regulations for the Islamic Bank. 42. Implementation of the reform program should not exceed one year. The first phase of preparing the cession agreements for BIMA and SMB and the merging agreement for END and BMDC and estimating the financial cost for the Government is now actively underway. Before the end of 1987, all banks should have their new owners in control. The second phase of negoti- ating the contract-programs will start in June 1987 and will be concluded before the end of the year, once the Central Bank has enacted its by-law. Three high-level experts selected with the Association's agreement will supervise the implementation of the whole reform program. One will be in charge of implementing the supervision procedures and regulations concerning the Control Department of the BCM (para. 38) and the primary banks. A second will prepare the cession agreements and contract-programs and help the new shareholders abide by the the banking law regulations. A third will assist the Government in the negotiations with private investors and foreign financial institutions. All cession agreements and contract-programs and their satisfactory conclusion and implementation will be closely supervised by the Association and the IMF. D. Energy Sector 43. Mauritania ie entirely dependent on oil imports to satisfy its energy needs, except for fuel wood. The latter is almost depleted, with dramatic environmental consequences in terms of the impact on desertification 3/. As for renewable energy (wind and solar), appropriate technologies have not been found at an affordable cost. Studies carried out under an IDA credit for oil exploration development have demonstrated that there are some prospects for discovering commercial oil in Mauritanian waters. But these are for the longer term. Meanwhile, even though the recent drop in world oil prices alleviates the cost of imported fuel in foreign exchange (equivalent to 10 percent of merchandise imports), the Government attaches priority to the optimal use of energy products. 44. A comprehensive sector strategy was prepared in June 1986 based on the Energy Assessment Report (No. 5224-MAU of April 1985) cofinanced with UNDP and the studies designed to complement this report. This 3/ Reforestation projects are extremely expensive, complex to organize and difficult to maintain. To cut costs, food-for-work programs are used, with priority being given to protecting urbanized and cultivated/irrigated zones from desertification.  - 14 - strategy involves energy product pricing, power tariff setting, a pollcy for oil product distribution, and an assessment of the role and financial viability of the public sector. 45. In November 1986, the Government adopted a policy statement on energy pricing and oil product marketing based on import parity and full cost pricing with a liberalized distribution system. Steps are already in progress to implement a comprehensive action program focusing on pricing, supply policy, investments, institutions, and restructuring of the main public enterprises. The first step, taken in April 1987, was to implement a new energy price structure in which all import and distribution opera- tions had been priced at their real cost. An existing levy to help the state-owned petroleum importing and marketing company, (SMCPP), cover its financial imbalances, was eliminated. Quarterly revisions of the import tax will ensure that windfall profits from oil import prices are channeled to the central budget. Partial duty draw back on fuel oil prices will help keep export-oriented activities competitive. In May 1987, the Government took the second step by opening the import and distribution system of products to all oil companies willing to do business in Mauritania. Following an ongoing study financed by the Bank, a third step will be to prepare, by early 1988, a comprehensive revision of electricity tariffs taking into account future sfi,ply costs and the promotion of domestic and export industries. A fourth step, to be carried out in 1988, will consist of defining an overall strategy to promote the use of household energy-saving technologies. The necessary studies are in progress. The Government has already agreed to eliminate all subsidies on gas. In January 1987, it removed those on large gas bottles, which benefitted the high-income groups; in July 1987, with the opening of a new gas-bottling plant, butane will be priced at its real cost. 46. To help implement these policy objectives, the public sector is being restructured as follows. The refinery (SOMIR) is now leased to an Algerian company which will supply products for domestic use at world price equivalents. SMCPP, which has until now enjoyed a de facto monopoly on imports, will share importing and retail distribution with private firms but retain the responsibility of ensuring that no break occurs in the country's supply. It will be audited before July 1987, and a financial and management restructuring plan will be adopted after consultation with the Bank. One state-owned oil transport company (STPN) is reviewing its activities to allow competition with private transport companies. The electricity/water company (SONELEC) faces a critical financial situation and needs emergency measures until 1990, when the new power plant in Nouakchott is expected to reduce production costs. To meet the immediate financial squeeze, several measures have already been implemented; they include (i) improving bill collection; (ii) cutting labor cost (personnel has already been reduced by 10 percent); (iii) a tariff rationalization (20 percent increase in August 1986 and 10 percent in July 1987); and (iv) an increase in the Government's equity to be partly financed with the windfall profits from oil imports. In May 1987, a new gas-bottling plant has started operations in Nouakchott. Consistent with the Government's overall policy towards the public sector (para. 30), the majority of the plant will belong to non-state partners, and management capability will be developed with Algerian technical assistance.  - 15 - E. Agriculture and Food Policy 47. Largely because of natural conditions, local food production in Mauritania is small, supplying from 10 to 30 percent of requirements, depending on weather conditions. Desertification has decimated nomadic livestock and limited rainfed agriculture to a small zone in the South. The resulting large cereal deficits have been met through commercial imports (approximately 40 percent of domestic demand) and increasing amounts of food aid (up to 50 percent). Mauritania also faces the danger of a meat deficit. This deficit, however, can be prevented or reduced through improved herd management and animal husbandry; the Government is implementing important reforms in these areas (para. 63). Although the scope for increasing agricultural production is severely limited by physical constraints, some expansion in production can be achieved through improved cultural techniques (such as planned flood-recession) and, over the longer term, through irrigated farming in the south. The Association is helping the Government to prepare a master plan for developing the Senegal River Basin and to coordinate investment activities in this region. A first phase will develop 10,000 irrigated hectares (roughly doubling the irrigated area) and 20,000 hectares of flood recession areas. When the plan is substantially completed in early 1988, a donor sector meeting will be convened to agree on the main follow-up steps required. 48. The expansion of irrigation can ease the food deficit over the long run. Although costly, it is, nevertheless, an alternative that Mauritania cannot ignore. It requires, however, a careful definition of pricing and marketing policies. An IDA-financed cereal sector study, completed in May 1987, includes an analysis of the cost structure of producer and consumer prices which will help the Government define, by October 1987, price and tax levels and a marketing system that meet the following objectives. On one hand, to increase production in irrigated areas in the early years, producer prices must be kept remunerative; as in Senegal this requires significant protection during the period when efficiency in irrigated farming is being improved. On the other hand, the low purchasing power of most consumers imposes a need to keep consumer prices affordable. Thus, while a tax on imports is appropriate to protect producers over a transition period, it should be kept modest in order not to inflate consumer prices unduly. In addition, food prices should take into account pricing policies in neighboring countries in order to avoid an undue diversion of local supplies to them. With regard to marketing, the Government has formulated a'strategy for increasing the participation of private traders in the distribution system for food products, including food aid. Although the Gevernment will scale down its intervention, in order to ensure food security, it wishes to retain a network of regional food distribution centers. Any Government intervention, however, will be designed and periodically reviewed in close cooperation with donors (in particular, USAID and the FRG assistance) to assure efficient distribution to all regions, while maximizing private sector participation in this activity. A better targeted pricing and marketing policy is a key element of a coherent food strategy. The Association, although not a food aid donor, is providing assistance to speed up the implementation of the elements of the strategy set out below.  - 16 - 49. Annual Food Programming. Each year. the Government will estimate the total cereal deficit, the affordable level of commercial imports and the need of food aid. At the same time, it will agree with donors on an appropriate allocation of this aid among sales, food-for-work programs, and free distribution. This annual process, which started in December 1986, calls for agreement between the Government and donors on expected deficits by main regions, limiting free distribution to the truly needy, increase in food-for-work (FFW) programs, need for counterpart funds from sales, and a storage policy to meet unexpected shortages adequately. 50. Food Aid Accountability. The Food Security Commission (CSA) will improve its budgeting and accounting capacity by adopting a new financial management system and procedures, improving staff training, and making more effective use of technical assistance. Based on a Bank-financed consul- tant's recommendations discussed in November 1986, CSA will implement a first set of budgeting and accounting reforms in 1987. Annual provisional budgets (in the context of consolidated budget procedures, para. 21) will be presented to the donor community for approval and financing, fixing the level of counterpart funds available to finance development activities once CSA's operating costs are covered. 51. Improved Institutional Framework. With a new food pricing structure and food aid policy, the roles of all public sector institutions (SONIMEX, CSA) involved in food distribution will be redefined before the end of 1987. SONIMEX, the only importer of rice, tea, and sugar, will keep its monopoly 4/, but annual audits starting in 1987 will ensure that proper procedures are applied. The CSA has been successful in handling large quantities of food aid. Donors give high marks to the Government for having avoided any famine in the country. However, CSA needs to streamline its organization to cope with its responsibilities in implementing food policy and to limit its intervention in food marketing to supervising food aid distribution, particularly emergency cases, and keeping a stabilization role with respect to local production by guaranteeing a floor price for local products and a ceiling price for final products at a limited number of centers. Cereal processing, transport and marketing of food aid will be relinquished to the private sector. 52. Using Food Aid for Promoting Rural Development. In November 1986, a Decree established a Common Fund (CF) to coordinate the use of counterpart funds generated from food aid sales. This Fund was created after lengthy contacts between the Government and most food aid donors. Though based on similar schemes in Mali and Senegal, the CF in Mauritania has a wider field of intervention; it will allocate additional counterpart revenues to projects aimed at promoting domestic production, improving food availability and nutritional status, and generating other rural or urban activities. Donors have accepted that the CP program will cover a portion 4/ This monopoly is explained by the fact that these three food commodities are imported under Government-to-Government agreements at low prices. SONIMEX is not involved in local distribution.  - 17 - of CSA's operating costs until the central tudget can take them over. The Fund will also contribute to the Government's consolidated investment budget and be coordinated with other action programs, particularly communi- ty-based programs, FFW activities, and investment projects financed direct- ly by donors. The CSA budget and a CF program of about US$4 million for 1987 were discussed for the first time by Government and donors at the CF Donor-Government Joint Committee in April 1987. Besides seeking to impose greater accountability on the CSA, the Government will give priority in 1987 to implementing an institutional framework and programming process for Food-for-Work (FFW) activities. F. Fisheries Sector 53. As the largest source of foreign exchange, only the fisheries sector can provide significant impetus to the economy in the short and medium term. The main policy issue arises from the enclave character of most operations in this sector. A strategy of maximizing the benefits accruing to the economy, which was adopted in 1979, did lead to larger gross export and budgetary revenues and a fast growing fleet owned by nationals which accounts for about half of the production in the fisheries sector, but it did not achieve greater integration of fishing activities into the rest of the economy. 54. A report on the long-term sectoral issues, prepared by an IDA consultant in July 1985, identified a set of basic studies required to define a comprehensive strategy and an action program. In November 1985, the Kuwait Fund took the lead in financing these basic studies and related feasibility studies; other financing came from IDA and the CCCE. The basic studies concentrated on seven areas of interest: overall situation of the sector, domestic market, resource management, surveillance, training, institutional aspects and economic framework, and integrated development. Analysis and recommendations were thoroughly discussed in August 1986 and March 1987. 55. Based on these studies, a clearly articulated, long-term strategy was identified and adopted by the Government in April 1987. This strategy establishes the level of fishing capacity and type of fleet appropriate to Mauritanian waters; it also includes the priority actions to be taken by the Government and investment projects to be promoted. Fishing capacity will be carefully monitored through an annual system of fishing permits to limit the authorized fleet to a capacity compatible with the fishing resources. Because of evidence that the level of overfishing has been reached for many species, the maximum fishing quotas will be lowered. This requires a well-defined fisheries resource management, including an annual system for granting fishing permits, adequate research capabilities to monitor the fisheries resource trends, and a strong surveillance system. Because of the risk of overfishing, the Government intends to give priori- ty to the fleet registered in Mauritania by reducing the number of licensed and chartered vessels and to the promotion of production systems which increase the net national value added. This new strategy could face strong opposition from Mauritanian investors, who do not accept that there is a risk of overfishing, and from powerful foreign companies used to more lenient conditions. Because of the limited number of permits allowed, the  - 18 - Government will, at a second stage of strategy implementation, define allocation procedures (such as auction) to capture the maximum rent while selecting the most efficient fishermen. For successful implementation, the strategy will require the full support of all donors, in particular those from countries which have fisheries ventures in Mauritania. These issues and an investment program will be presented at a Donor Sector Meeting scheduled for early 1988; five donors (Kuwait Fund, Arab Fund, CCCE, FAO and the Bank Group) agreed to finance the required preparatory studies at a meeting in Nouakchott in March 1987. 56. Already, the Government has taken preliminary steps to strengthen fisheries resource management capability. First, it limited new fishing permits in 1987 to new local vessels which, because of better performance can advantageously replace licensed, chartered or existing local vessels. Second, it started to staff a surveillance unit. In past years, the surveillance system has not been able to establish efficient control. The present system is being revamped to include new types of pAtrol vessels and aircraft with appropriate personnel training and maintenance. Considerable benefit should accrue from a newly-created one-command structure in Nouadhibou in charge of implementing the new surveillance system; it will establish a new reporting system involving fishing logs, declarations of landings and a computerized data base for use by all interested agencies, in particular those dealing with research. This will help to carry out a better assessment of the stock and the impact of fishing permits and licensing policies. Based on studies financed by CCCE, the Nouadhibou port facilities will be reorganized without building new major infrastructure; instead, relocation will be accompanied by improvements to unloading methods and changes in managing the Port Authority and the labor force. The public enterprise in charge of operating the port will be restructured. Developing a private Mauritanian fleet (by mixing small-size trawlers with artisanal and ice boats to supply on-shore facilities in Nouadhibou) requires: (i) a careful assessment of the impact in terms of net fiscal and foreign revenues; and (ii) an adjustment of the incentive system (energy products delivered at international competitive prices, non-penalizing taxation, adequate credit facilities). But even with adjusted taxation and foreign exchange rates, a share of existing on-shore processing and freezing capacity, often managed by joint ventures, will have to be restructured, privatized or closed; this process will be part of a second phase of the adjustment program. The Association will focus its assistance on the surveillance system, a new fiscal and incentive framework, a training program and a coherent investment program. G. Private Sector Promotion 57. The Recovery Program, drawing lessons from past failures in promoting viable public enterprises, put forward a new strategy to develop the private sector, which is expected to stimulate the economy in the longer term. However, under present economic conditions and in view of the limited pool of private entrepreneurship, it will be difficult to promote industrial production at a fast pace. In the years ahead, the role of private entrepreneurs can be viewed from several perspectives: the possi- bility of developing technologies better adapted to the country's market and resource endowment; the promotion of employment at a time when the  - 19 - public sector is streamlining its labor force; the mobilization of savings, in particular from Mauritanians abroad; the integration of agriculture with the rest of the economy, through the establishment of agrobusinesses and ancillary services; and, more generally, the provision of an economic base for urban and regional development. A faster development of private enterprises, however, requires a complete reform of the incentive system and the institutional arrangements, particularly for small-enterprise promotion. Financed by the second IDA Credit (1572-MAU) for industrial and artisanal development in Mauritania, technical assistance is being provided to the Ministry of Industry to review the current policies and institution- al set-up, estimate existing eff.ctive protection, and recommend changes and revisions in it. A first report is due in June 1987. Based on this report, the Government will decide on a set of policy reforms before December 1987. IDA-financed technical assistance will help implement the appropriate reform measures. 58. In the LDP, the Government has accepted to focus on the incentive system and policy measures that impact on the development of private investment in small and medium enterprises (SME). This will only be a key step towards addressing all the issues to define a comprehensive trade and pricing policy. The Association, in cooperation with the IMF, will continue its dialogue towards such a policy (para. 83), and has, for 1987 and 1988, already agreed on a set of policy reforms, the IMF focusing on fiscal and foreign exchange control issues. First, the Investment Code will be revised before the end of 1987 and further improved to stimulate private investment, and especially joint ventures. (In 1985, benefits were extended to all investments regardless of their size.) The improvement envisaged will aim at encouraging labor-intensive and export-oriented projects and the use of local resources by reducing tariff duty exemptions on imported raw materials. A draft Investment Code should be ready for discussion with the Association in October 1987. Second and as regards the tariff system, the objective is to gradually replace the relatively high level of protection by a uniform and moderate level of protection in order to reduce distortions in the allocation of resources and foster productivity. Third, the import licensing system will be progressivelv abolished and quantitative restrictions on imports removed. Fourth, prices will be gradually de-controlled 5/. A first reduction in the number of products with fixed prices was implemented in March 1986; a second one will be implemented in 1987 by shifting products from the administered price category to the fixed-margin one and from fixed-margin to free pricing. 5/ Price fixing policy is limited to a list of 8 key products that the Government considers essential for household consumption (compared to 13 in 1985); the objective is to limit this list to cereal and energy products. Ad valorem margins are imposed on goods produced locally with de facto monopoly; the objective is to dismantle these monopolies progressively and, by liberalizing imports, to eliminate the need for imposing fixed margins.  - 20 - 59. Institutional Set-up for SME Promotion. To accompany these changes in the incentive system, specific meaures need to address institu- tional and other impediments to private SME development which might exist such as labor laws and the absence of technical training. The technical assistance provided by the Association will help the Government identify and implement the various measures required during 1988. To that end, assistance to local entrepreneurs for project promotion and management is being reassessed to avoid duplication, ensure more efficiency within each institution involved and improve cooperation between them. In addition to streamlining the organizational set-up for SME promotion, the procedures used by intermediaries to appraise projects will be standardized and simplified. Other actions will take into account the need to develop credit facilities and other forms of direct assistance to prospective entrepreneurs, including assistance for training, and to improve management capacity. PART III - ECONOMIC, FINANCTAL ANqD SOCIAL IMPACT 60. The 1985-88 Recovery Program included macroeconomic projections, prepared with assistance from the Bank, which demonstrated the need for reducing external and internal imbalances. A revised set of projections is presented in Annex III and summarized in Table 2. A. Growth Prospects and Prerequisites 61. During the first half of the 1980s, GDP at factor cost was severely affected by droughts and low iron ore exports. During the struc- tural adjustment period (1986-89) and up to 1990, our projections assume a recovery from previously low agricultural production and the beginning of copper ore exploitation in 1989. This recovery underlies the GDP projec- tion of 3.5 percent-p.a. for 1987-90; compared to average levels in 1979-81, when weather conditions were fair, the GDP level expected in 1990 would imply an annual growth rate of about 2 percent p.a. in real terms in the 1980s 6/. 6/ Economic performance projected in Annex III incorporates the most recent data available. Macroeconomic indicators are generally in line with those presented to the Board in the Policy Framewnr1a Paper on September 4, 1986. Prospects for exports are slightly rel6iced (sluggish iron ore market and overfishing) triggering a !Awer GDP growth rate (lower by 0.5 percent p.a. in 1987-89) and a higher current account deficit (by US$ 7 million over the same period). The liberalization and privatization policy has also induced a rebound in private activities and thus, savings performance is improving at a slower pace; the ratio of domestic savings to GDP reaching 9.4 percent compared to 10.7 percent projected in the PEP.  - 21 - Table 2. Macroeconomic Projections Summary (Actual) (Estimates) (Projections) 1982-84 1985-86 1987-90 1991-95 Growth Rates (% p.a. in real terms) GDP (at factor cost) -0.2 2.7 3.5 2.4 Primary 0.0 2.7 a/ 2.5 2.7 Secondary 7.1 2.8 5.7 b/ 1.8 Tertiary -4.0 2.5 2.6 2.4 Exports of GNFS -0.5 8.4 4.2 bJ 1.6 Imports of GNFS -1.5 -2.8 2.6 1.9 k/ Percent of GDP (current, annual average) Private Consumption 82.2 76.0 72.9 70.7 Public Consumption 21.1 14.9 13.9 14.3 Domestic Savings -3.3 9.0 13.2 15.0 Gross Investment c/ 33.6 22.6 22.6 19.7 Resource Balance -36.9 -13.6 -9.4 -4.7 Budgetary Savings -1.9 3.7 3.2 4.1 Overall Fiscal Deficit 10.9 3.5 2.2 0.6 Current Account Balance d/ -30.2 -18.2 -12.4 -5.1 Memorandum Items ICOR 7.9 5.5 a/ 6.5 8.3 I/ GDP per capita growth rate -1.0 -0.1 0.6 -0.3 Private per cap. consumption el 20.8 19.8 18.2 16.2 Debt Service Ratio (%) 32.3 17.0 f/ 40.3 i/ 28.8 i/ Debt OutstandinR/G/P (%) 167.5 190.0 f/ 180.0 127.0 US$ Million (annual averages) Current account balance -197.0 -121.0 -118.5 -65.9 Net private & direct investment 25.5 5.8 24.2 20.0 Official grants 42.2 47.5 55.3 51.9 Projected loan disbursements g/ 148.1 96.1 101.0 h/ 97.3 Projected loan amortization -51.6 -42.0 -137.6 i/-122.2 Other financing required (net) j/ 32.8 (13.6) 75.6 18.9 a/ Mainly a recovery from severe droughts in 1983-84. b/ Including the copper mine opening in 1989. cl Includes change in stocks. d/ Excluding capital grants. e/ Thousands of constant 1982 UM. f/ After debt rescheduling in 1985 and 1986. j/ Including new commitments for project financing only. h/ Excluding SAL credits. i/ Excluding new debt rescheduling after 1986. I/ Before changes in foreign reserves, without rescheduling and before SAL. k/ Reflecting the impact of a flexible exchange rate policy. 1/ Reflecting the impact of the irrigation investment program. Source: IMF and Bank staff estimates; for further detail, see Annex III.  - 22 - 62. Taking the possibilities and constraints described below into consideration, the Mauritanian economy is projected to grow at a rate of about 2.5 percent p.a. after 1990, assuming reasonable weather conditions. This is below the annual increase in population and therefore the objective of a positive growth of consumption per capita in real terms (para. 15) will not be achievable. In addition, given the weak resource base, it may be difficult for Mauritania to sustain even this modest rate of economic growth. After 1990, a continuous relief on debt accumulated before the adjustment period, i.e., before 1985, will keep external accounts manageable (para. 69). 63. Long-term prospects look indeed precarious. The only well identified prospect for economic growth is in the fisheries sector. This would come from better control of unauthorized fishing in Mauritanian waters and greater integration of fishing activities into the domestic economy (para. 55). Over the long term, however, expansion will be limited because of the identified danger of overfishing, which, we expect, could limit sectorial growth to 2.5 p,ercent p.a. over the next 10 years. The feasibility of even this modest growth is to be confirmed through more in-depth studies on the optimal volume compatible with renewable stocks by species. 64. The difficulty of assessing future growth potential is particu- larly acute in the case of agriculture, especially with regard to livestock and crop production. For livestock, past techniques brought about a downward trend in output. A new policy is being implemented with assis- tance under a project cofinanced by the ADB, OPEC Fund and IDA; the main elements are to adjust the size and composition of the herd and to develop pastoral cooperative associations. Through improved pasture management, rigid cost recovery and elimination of cross subsidies, herdsmen should adjust their herds to the most favorable combination of animals, in partic- ular to resist the alternation of droughts and rains. The macroeconomic impact of this new policy in terms of income and jobs is difficult to assess at present. We project that livestock output will grow at 2 percent p.a. after 1990; livestock will remain the sector with the largest contri- bution to GDP. Prospects in dryland agriculture are also not well known, and the long-term effects of desertification are poorly understood. There is a need for more intercountry research to develop feasible rainfed cropping techniques in the context of Sahelian agriculture. Irrigated production depends on the number of hectares developed (or rehabilitated) each year, and successful private sector promotion (farmers and ancillary services). Around 1990, the use of water resources made available by the Manantali and Diama dams in the Senegal Valley will become a key develop- ment issue. Because large perimeters will be expensive to develop, improv- ing flood recession irrigation would be a first step towards mastering water use at acceptable costs for the economy. (See para. 47 on agricultural policy.) 65. The projections for other sectors are shaped by the pote-tial for exploiting Mauritania's natural resources, mainly iron ore. Production of this commodity is projected to vary around 9.5 million tons at least until 1995 (not significantly higher than the 9.3 million tons produced in 1985). As mentioned in para. 30, financial prospects for SNIM remain  - 23 - uncertain because of poor world market prospects. Gypsum and copper output will expand over the next three years but will rapidly level off after 1990. There is no new economically viable mining project in sight at current world price prospects. In addition to the prospect for the discovery of commercial oil, large reserves of phosphate rock along the Senegal river could be commercially exploited if the world markets improve in the 1990s for phosphate-based products. There is also some potential for developing private, small-scale enterprises in food processing, urban and rural services, trade and transport, encouraged by the reforms in the incentive system described above (para. 57). 66. Improve investment efficiency through better programming and selection of projects. Adjusting the share of resources allocated to public projects over the medium term will require a significant change in public sector management (para. 22). In the short and medium term, quick improvements in efficiency can be achieved by concentrating on maintenance and rehabilitation of existing infrastructure or productive capacity. Soon thereafter, however, the country will face the challenge of developing new Investment projects (particularly in irrigation, communication and social infrastructure). These projects, though needed, have longer gestation period or less direct effects on growth. Consequently, investment effi- ciency is expected to deteriorate from the relatively high level during the adjustment program period; this is reflected in a projected relatively high ICOR of around 8 after 1991 (Table 2). 67. Improve the mobilization of domestic savings. While Mauritania restructures its consumption to a level commensurate with its means, the capacity for rapid savings mobilization will remain limited. A prerequisite is the complete restructuring of the banking system (para. 33). This could improve savings performance and credit availability for the private sector somewhat during the adjustment period. Living standards could be improved through innovative approaches to mobilize beneficiaries' participation in projects affecting their environment, e.g., using food-for-work programs (para. 52). With a current budget in balance after 1985 and public enterprise rehabilitation, total public savings (including public enterprises) would cover a growing share of public projects (equivalent to 22 percent in 1995 compared to 10 percent in 1986). However, the estimated gross public savings after 1990 would be insufficient to cover external debt service (before debt relief). 68. Control current account deficits. Despite the significant devaluation of the ouguiya in real terms that has already taken place, projections indicate that after 1988 Mauritania's export revenues will slow down because of: (i) poor market prospects for iron ore; and (ii) the need to regulate the growth of the only other export -- fisheries - in order not to deplete resources. There are, however, possibilities for curbing imports of goods and services further, in particular if weather conditions remain normal, allowing increased food production and halting the migration of the cattle to southern grazelands. Despite the limited prospects for import substitutior, current account deficits should be stabilized over the next four years. After this period of austerity, which will reduce the ratio of total imports to GDP from 76 percent in 1985 to 61 percent in  - 24 - 1990, further reduction will become increasingly difficult, unless it is accompanied by a further deceleration in GDP growth. B. Need for Foreign Assistance 69. Mauritania has received extensive debt relief, which has kept the actual debt service ratio at about 24 percent. The prospects for export growth are such that no increase in the actual debt service ratio is feasible if GNP growth (already projected below population growth) is not to be reduced further. To avoid an increase in debt service payments, further rescheduling of Mauritania's debt is essential, unless equivalent amounts of additional grant financing become available. If the extended terms under consideration by the Paris Club are approved, their application to Mauritania would help to substantially reduce the prospective financing gap. The magnitude of this gap can be illustrated by the fact that, because of a growing debt burden, all foreign assistance disbursements combined (transfers, grants and loans to finance investment projects) would be absorbed by debt service obligations between 1987 and 1990 (including maturities already rescheduled under the 1985 and 1986 Paris Club agrecments and assuming no further rescheduling). Other possibilities such as improving lending terms are limited, Mauritania's debt being already at concessional terms. It should, moreover, be underlined that net total amount of annual foreign aesistance required beyond 1986 will be less than pre-1984 levels, i.e., before the adjustment period (Table 3), reflecting Mauritania's effort to reduce its dependence on external capital. 70. It shoild also be stressed that the aid effort required is subject to significant uncertainties, as noted above. Our projections do not reduce import demand from non-exporting sectors below the demographic growth to avoid a long-term detrimental effect on the population. This is why the monitoring of the social impact of stabilization and adjustment programs will be strengthened (para. 73). In the Mauritanian context, even if all the adjustment measures were rigorously implemented, they could not guarantee that the economy will not be struck by an unforeseen shortage of foreign exchange, Such a volatile situation, therefore, requires a close coordination between the Government and the donors. There has been real progress in streamlining and improving the selection of investment financ- ing since the 1985-88 RP was published (para. 24), but shortcomings in providing non-project financing were observed in 1986, in spite of the donors' promises at the CG meeting in November 1985. Therefore, the figures in Table 3 should be regularly discussed with donors at Consultative Group meetings (para. 88) to mobilize adequate exceptional financing, and require annual review and adjustment under IMF supervision. 71. Because of an already high level of assistance, we assume that the international community will maintain official transfers at present levels (with the possible exception of food aid if required by a new cycle of droughts). The investment program should also continue to be financed with a majority of grants or loans exclusively on concessional terms. Based on these assumptions, Mauritania's balance of payments will still require exceptional assistance. The Government obtained a Third IMF Stand-by arrangement of about US$10 million for 1987 on May 4, 1987. It should negotiate a third rescheduling of external debt service payments at terms  - 25 - Table 3. External Assistance and Debt (US$ million) (Average) (Est.) (Average) 1982-84 1985 1986 1987-88 1989-95 Total net assistance 189 139 119 113 79 mum m- Gross assistance 227 190 214 240 211 . public current transfers (W-9 ( W (41) (44) (50) - food aid 17 31 17 15 20 c/ - others 32 23 24 29 30 . project aid (178) (136) (173) (196) (161) - grants 30 41 68 54 52 - loans disbursement 148 98 95 103 99 - IV purchases (with SAY) - -3 10 14 -10 d/ - SAL disbursements - - - 25 - External Debt -68 -225 -185 -207 -161 7/o rescheduling)