FOLLOWING THE MONEY PART 2

C O N F I D E N T I A L NOUAKCHOTT 000130


E.O. 12958: DECL: 02/12/2019
TAGS: ECON EAID EFIN PGOV MR
SUBJECT: FOLLOWING THE MONEY PART 2

REF: A. 08 NOUAKCHOTT 476

B. 08 NOUAKCHOTT 664

C. 08 NOUAKCHOTT 599

D. NOUAKCHOTT 93

E. NOUAKCHOTT 105

Classified By: Charge d'Affaires Dennis Hankins for reasons for 1.4 (b)
and (d).


1. (C) Summary: This cable is a follow-on to post's first
following the money cable (REF A). Six months after the
coup, the economic situation in Mauritania has deteriorated
precipitously. There are increasing signs that the junta is
running out of money and hard currency is becoming
increasingly difficult to obtain. The junta's overspending
in the first months of the coup combined with the effects of
the global financial crisis have made this a particularly
difficult time in Mauritania. The business community is
becoming increasingly disenchanted with the junta's
management of the economic situation, especially as they have
not seen any economic benefit from their support for the
junta. At this point, most are lukewarm toward the junta and
just want a solution to the political crisis so that they can
return to business as usual. In addition, Mauritania's elite
have sent their wealth out of the country, a sign that they
have little confidence in the country's future. As donor
money and private investment have dried up, the junta may be
counting on fresh cash infusions from Iran, Qatar, or Libya.
Barring a political solution and the gradual return of donor
assistance and private investment, the economy could spiral
out of control and criminality and smuggling could start
playing an increasingly important role in the economy. End
Summary.

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HARD CURRENCY SHORTAGES AND THE EXCHANGE RATE
--------------


2. (C) The Central Bank has been experiencing foreign
currency shortages since early December which have grown more
serious in recent weeks. While nobody has exact figures, the
general consensus is that the Central Bank has only about
$100 to $150 million in reserves, down from the $330 million
targeted for 2008. Deputy General Manager of BNP-Paribas
Assen Ouastani told EconOff February 3 that banks had not
been able to get any hard currency for the past three weeks.
He added that in just one day in December, the Central Bank
had only been able to provide 14% of the foreign exchange
requested. Representatives of Societe Generale concurred,
telling post's financial management section that there was
"no hard currency out there." President of the BCI bank and
the Banking Association Isselmou Ould Tajidine was more
circumspect. He told EconOff that while there were
"tensions" regarding the exchange rate and hard currency, the
situation was not yet a crisis. He said that banks were
still getting hard currency but delays had increased and in
many cases banks were only getting about half of what they
requested. The BMCI and BCI banks report that the Central
Bank is only transferring hard currency abroad on a limited
case by case basis.


3. (C) World Bank ResRep Francois Rantrua concurred with the
assessments of BNP-Paribas and Societe Generale
representatives, telling Charge that there is "no hard
currency out there." IMF ResRep Marc Carre admitted that he
was not entirely sure how much hard currency was out there
and added that the IMF does not know exactly when the junta
will run out of money. Discussing currency reserves and the
exchange rate, he said "there is a problem" and noted that
foreign reserves are declining and the balance of payments is
under pressure. Former Minister of Economy and Finance
Abderrahmane Ould Hama Vezzaz also concurred, telling A/DCM
that Mauritania's terms of trade had deteriorated
significantly in the past few months and added that soon the
country would not be able to respect its obligations to
foreign banks.


4. (C) Normally when there is a currency shortage there is a
rush to buy foreign exchange. Carre noted that even if there
is money coming into the country from smuggling and other
illegal activities, people would still demand foreign
exchange. However, there have been no reported shortages of
dollars or euros on the parallel market and until recently
foreign exchange was actually about 5% cheaper there. Carre
called the situation "puzzling," reasoning that if there
really is as little hard currency as everyone says there is,
there should be a much greater difference between the
parallel exchange rate and the official exchange rate. As a
result, Carre said that initially he did not think that the
reports of currency shortages were as serious as everyone
said, but that he is now starting to question his earlier
assessment.


5. (C) Carre now believes that this seemingly contradictory
situation may be a sign that the government is cracking down
on capital flight and illegal holdings of foreign exchange.
Tajidine offered another explanation, pointing to euros
flooding in from Mali and Senegal. He explained that prices
for staples such as flour, rice, and sugar are much lower in
Mauritania than in neighboring countries. He said that
traders from these countries exchange their CFA for euros and
then come to Mauritania, using euros to purchase food
staples. Mauritanian traders then exchange the euros they
receive for ouguiya on the parallel market, thus replenishing
it regularly with hard currency. LES note that the
Mauritanian banks control the parallel exchange market behind
the scenes. The traders operating on the streets are all
connected to the banks.


6. (C) While the Central Bank has always intervened to
maintain the stability of the ouguiya, it holds regular
foreign exchange auctions to allow market forces to set the
exchange rate. Since the coup, there have been widespread
complaints throughout the banking sector that the exchange
rate is not being managed properly. The ouguiya (UM) has
already fallen from 227 UM per dollar just before the coup to
257 UM per dollar as of February 11. Tajidine reported that
the Banking Association met January 29 to discuss problems
related to foreign exchange with "Minister of Finance"
Sid'Ahmed Ould Raiss and Central Bank "Governor" Sidaty Ould
Benhmeida. The Chief of Staff of the BCI bank reported that
the shake-up at the Central Bank with the change in governors
has caused difficulties because of a lack of continuity in
personnel and policies (REF B). Several representatives from
the banking industry complained about Benhmeida's lack of
experience and apparent inability to deal with the current
situation. The Central Bank is reportedly reviewing its
current policies and strategies to improve the foreign
exchange situation and to create security for foreign
investors operating in Mauritania.


7. (C) As to how this situation could play out, Carre said
that the Central Bank maintains that the exchange market will
continue to function. However, he said that if foreign
reserves continue to decline, the Central Bank could resort
to buying foreign exchange but establishing lengthy delays
before it transfers it to local banks. According to Carre,
if things continue as they are now, at a certain point the
Central Bank will no longer be able to intervene. This could
cause the situation to spiral out of control. In that case
the Central Bank would be forced to either artificially hold
currency or else there would be a rapid devaluation in the
value of the ouguiya.

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CAUSES OF THE CURRENCY SHORTAGE
--------------


8. (SBU) Both the political situation in Mauritania and the
international financial crisis have contributed to the
foreign currency shortages. Mauritania is extremely
vulnerable to fluctuations on the international market
because it exports nearly everything that it produces and
imports nearly everything that it consumes. The country
relies on iron ore, petroleum, and seafood exports for most
of its foreign exchange. Both price and demand for all three
products have dropped significantly in the past six months.
SMCP, the national company in charge of all sales of frozen
seafood products, continues to have trouble making sales.
When it does manage to make a sale, it is for about half the
price that the same product was selling for a year ago (REF
C). Mauritanian fishing companies are increasingly
remunerating their earnings through the parallel market or
just keeping them abroad in European banks, meaning even less
hard currency in Mauritanian banks. In terms of iron ore,
both the price and demand for iron ore are down significantly
compared to 2008. National mining company SNIM has
reportedly been having a difficult time finding buyers for
its iron ore and several recent sales have been cancelled or
delayed. In the petroleum sector, Mauritania's sole producer
Petronas is currently producing just 17,000 barrels per day.
With prices hovering around $40 per barrel, there is very
little money going into government coffers from the petroleum
sector. The situation could deteriorate further, as it is
widely reported in Nouakchott that Petronas may just cap its
current production wells in Mauritania to avoid losing money.


9. (SBU) The freezing of donor money has also exacerbated the
hard currency shortage. A portion of the aid from many
multilateral and bilateral donors such as the World Bank, EU,
and France passes through the national budget and the central
government, thus replenishing the Central Bank's foreign
exchange reserves. While the amount of aid varies from year
to year, this halt in donor assistance will likely result in
the loss of hundreds of millions of dollars of hard currency
for Mauritania. The vast majority of the $2.1 billion
pledged at the December 2007 Consultative Group meeting
remains frozen. In addition, there has been almost no new
private investment since the coup. What investments had been
planned prior to the coup now appear to be on hold. Many
business leaders lament the fact that there have been no new
development projects since the coup to inject money into the
economy.

--------------
IS THE JUNTA RUNNING OUT OF MONEY?
--------------


10. (C) There have been various reports that the government
is having increasing difficulty meeting its obligations. IMF
ResRep Carre continues to be concerned about the junta's
abandonment of RACHAD, although the junta denies ever having
abandoned it. RACHAD is the system implemented under
Abdallahi's tenure to track all government expenditures and
prevent extra-budgetary spending. Carre said that in October
2008 he visited the budget director to request a printout of
the reports from RACHAD. He told the budget director that he
would wait in his office until he had the reports. During
his three hour wait, someone came into the budget director's
office asking "is RACHAD really open again?" He noted that
the junta's use of RACHAD by opening it up when a payment
needs to be made and then closing it again immediately
afterward is a classic way for a government to hide that it
is falling into arrears. Carre says that the regime has
since presented him with a whole range of excuses for its
closure, ranging from being careful about expenditures to
blaming it on the reorganization of ministries. He said that
while he has received assurances from the junta authorities
that RACHAD is being used properly and remaining open once
again, he has no faith in their assurances. He feared that
whenever a new government does take power it will find a
massive pile of unpaid bills. He reiterated once again that
the IMF would need to do a very serious audit of the figures
before ever restarting programs in Mauritania.


11. (SBU) There are several isolated reports that the junta
has been late in paying salaries to government employees and
some government employees have seen their salaries slightly
reduced. At this point the reports remain isolated and post
has not yet observed this as a widespread trend.


12. (C) The treasurer of the Tiris Zemour province Mohamed
Mahmoud Ould Sidi Mahmoud contacted LES to report that
"Minister of Finance" Sid'Ahmed Ould Raiss ordered provincial
treasurers to bring all cash deposits to the Central Treasury
in Nouakchott. In addition, he ordered all treasurers to
stop paying pensions to retirees in cash and instead to open
up bank accounts for them at local branches of the BMCI bank.
Comment: This appears to be an indication that the junta is
running low on funds and is looking to access as many funds
as possible. It may also indicate that the junta fears it
will not be able to fulfill all of its pension obligations in
the near future. It is therefore looking for a way to take
pressure off the government if there are late payments by
blaming them on technical problems related to the transfers
or blaming the bank. End Comment.


13. (C) The Ministry of Finance has reportedly ordered tax
authorities to increase their tax collection efforts to
provide additional government revenues. The junta recently
announced that it would be cracking down on unpaid vehicle
taxes and immediately impounding any cars without the proper
tax documentation. Police are also reportedly issuing more
tickets for traffic violations. The junta may also be
looking for additional funding from private investment.
Vezzaz reported that the junta had been on the verge of
awarding a contract to a company to operate the Port of
Nouakchott that would have brought in investments from
Persian Gulf countries to expand port operations. He said
that Morocco objected strenuously, fearing that it would take
away business from its own port operations. At Morocco's
request, Aziz apparently cancelled the pending deal. Vezzaz
did not know if Morocco promised the junta any financial
support in return to cancelling the deal or just its
continued political support.

--------------
2009 BUDGET
--------------


14. (C) The 2009 budget remains a mystery. The budget, which
is normally approved and published in December, has still not
been released. The junta has provided some general figures
which show that the 2009 budget will be approximately 14%
less than the 2008 budget, but the detailed budget has not
been published. With the extra-budgetary spending that the
junta has already been engaged in, the junta may have already
been in a deficit situation before the 2009 budget year began
in January. Even when the budget finally is published,
donors and international organizations have little confidence
that the numbers included in it will actually be meaningful
or adhered to.

--------------
CAPITAL FLIGHT
--------------


15. (C) Mauritania's wealthy elite have apparently already
taken steps to protect themselves from any pending economic
crisis. Representatives from the banking industry that
EconOff spoke with were unanimous in their assessment that
Mauritania's rich and powerful (including members of the
junta) have already gotten their money out of Mauritania.
The BCI bank reported that customer withdrawals were three
times higher in the fourth quarter of 2008 compared to the
first quarter of 2008. Comment: This is likely a sign of
lack confidence in the junta and the current government and a
belief that the political and economic situation could
further deteriorate. As a result, those who can have sent
their money to foreign banks where they believe it will be
safer. End Comment.

--------------
DIFFICULTIES OBTAINING CREDIT
--------------


16. (SBU) Foreign banks appear to be much more wary of the
stability of the ouguiya and Mauritanian banks than in the
past. In the past, Mauritanian importers would obtain
irrevocable letters of credit from their bank to purchase
goods abroad. Importers were given a generous amount of time
to pay the loan back and would do so at whatever the current
rate for the ouguiya was. Now international banks are
demonstrating an unwillingness to take exchange rate risks.
They are requiring importers to pay off the loan 120 days
after the arrival of the goods in Mauritania. They are also
requiring merchants to pay at the exchange rate at the time
the loan was authorized, not the exchange rate at the date of
payment.


17. (SBU) Microcredit institutions in Mauritania report that
they have stopped nearly all lending because they have no
money to lend. Microcredit institutions are suffering not
only from a lack of available credit, but also from a
significant management shake-up in the sector. The junta has
replaced nearly all of the general managers of the
microcredit institutions in the past month. The junta has
accused some former managers of corruption while simply
making "personnel changes" at other institutions. In doing
so, it has replaced most of the managers with members of
Aziz's Ouled Bousba tribe or others have close to the junta.
This shake-up has created uncertainty and caused many to
question their confidence in institutions that are a vital
resource for Mauritania's poor.

--------------
SAUDI COUNTERTERRORISM MONEY
--------------


18. (C) Vezzaz confirmed that Saudi Arabia had given
Mauritania $50 million for counterterrorism prior to the
coup. He stated that the Saudis did not want this assistance
to be made public. Prior to the coup, there was disagreement
within the government as to how the money should be spent.
The military asked President Abdallahi for the money
immediately but he refused because he wanted to channel the
money properly through Parliament and the national budget so
there could be no question about extra-budgetary spending.
Vezzaz said that the money was placed in a U.S. bank (he did
not know which one) in the name of "Banque Centrale
Mauritanienne." He said that he has heard that there is only
$3 million left in the account. Post understood that this
money was likely used to pay for rallies and support for the
junta, but Vezzaz said that he suspected that much of this
money has been laundered by the junta.

--------------
IRAN, LIBYA OR QATAR TO THE RESCUE?
--------------


19. (C) The junta may be counting on assistance from Iran,
Qatar, and/or Libya to make up for lost funding from Western
donors (REF D and E). Junta representatives have met
recently with officials from all three countries. Mauritania
recently "froze" diplomatic relations with Israel. Post has
seen no information that Iran, Qatar, or Libya has stepped in
to take the place of other donors in return for Mauritania
freezing relations with Israel so far. However, actually
cutting diplomatic relations with Israel would not only gain
popular support for the junta, but may also gain financial
support from one or more of these three countries. The junta
appears to be moving in this direction, recently closing its
Embassy in Tel Aviv and implying to the Israeli Ambassador
that he should leave Mauritania.

--------------
THE NEXT SIX MONTHS
--------------


20. (C) Nearly all members of the business community are
stressing the need for an end to the current political
crisis. Ouastani called the coup "a terrible economic
decision" and Tajidine stated that the country cannot
continue indefinitely down this path, adding that things
would become more difficult if the military remains. With
the exception of the few businessmen such as Mohamed Ould
Bouamattou, Bahaye Ould Ghadda and other members of Aziz's
Ouled Bousba tribe that remain strong supporters of the
junta, most are agnostic about the kind of solution so long
as there IS a solution. Many also realize that given the
opaque political situation, it is dangerous to be too
strongly allied with either side because no one wants to be
out of favor with the eventual winner. Of note is Tajidine's
striking change in position toward the coup over the past six
months. Just weeks after the coup, Tajidine sought out a
meeting with EconOff on behalf of the Banking Association.
He laid out the reasons why the coup was necessary for
Mauritania's well-being and implored the USG to support the
junta for the good of Mauritania. In the February meeting
however, Tajidine said that he was "apolitical" and implied
that he had exited the political realm almost entirely and
was only an economic actor now. He said that he favored
neither the junta nor the FNDD, but just wanted a solution to
the current political crisis for the good of the economy.


21. (C) At best, the business community sees some sort of
political solution and a gradual return of donor assistance
and private investment. At worst, they see the economic
situation spiraling out of control and the economy becoming
one based on criminality and smuggling. Ouastani said that
he had already started seeing signs of this, noting that
BNP-Paribas had already cancelled several transactions that
it did not believe were legitimate. He implied that criminal
activity is already occurring in Mauritanian banks and said
that they were not honest. As proof, he said that
BNP-Paribas, with just 25 employees in Mauritania, paid more
in salary taxes in 2008 than all of the Mauritanian banks
combined. He also said that Mauritanian banks routinely
purchase hard currency off the black market and said that one
bank had recently purchased $1.4 million off the black market
and sent it to the Gambia by plane.


22. (C) Comment: Barring a political solution or rebound in
the price and demand for Mauritanian exports in the next few
months, it is hard to envision anything but continued
economic decline. The junta has already picked the
low-hanging fruit. Additional resources needed to sustain
itself in power will become harder and harder to find. At
some point Bouamattou and other wealthy junta supporters may
realize that continued financial support for the junta is not
sustainable and they have nothing to gain by continuing. If
and when this occurs, they may be the ones with the power to
finally convince the junta to leave. End Comment.

HANKINS