MAURITANIAN ECONOMY DETERIORATING AND LIKELY TO

C O N F I D E N T I A L NOUAKCHOTT 000260 E.O. 12958: DECL: 04/09/2019 TAGS: ECON EFIN EMIN PGOV MR SUBJECT: MAURITANIAN ECONOMY DETERIORATING AND LIKELY TO WORSEN Classified By: Charge d'Affaires Dennis Hankins for reasons 1.4 (b) and (d). ¶1. (C) Summary: The foreign exchange market in Mauritania has stopped functioning and the Central Bank has been rationing foreign currency since November 2008. The difference between the parallel and official exchange rates has grown from zero to 10%. While large companies with connections abroad continue to import goods, smaller companies and individuals are having difficulty obtaining credit and foreign exchange. Imports are currently down by about 25% compared to a year ago. Mauritania's current account deficit has increased to 15% of GDP and the 2008 budget deficit rose to 8% of GDP due to increased government spending. There was an acute treasury crisis in January and February when the Government of the Islamic Republic of Mauritania's (GIRM) current account went negative. The GIRM was forced to take a number of emergency measures, including limiting all government expenditures to only salaries and interest payments on its debt. Mauritania's economic and financial problems are likely to worsen in the coming months. SNIM will renegotiate its iron ore contracts in April and prices are likely to be down 40-60% compared to 2008. Given that approximately 45% of Mauritania's export earnings coming from iron ore exports, this steep decline in prices is likely to have a significant negative impact on the country's economic and financial situation. Most troubling is that because the junta is not providing data and the World Bank and IMF have stopped their programs, there is little information available to provide any early warning prior to a serious deterioration in economic conditions. End Summary. ¶2. (C) IMF Country Representative Marc Carre told EconOff April 8 that the foreign exchange market has stopped functioning in Mauritania. Rather than letting market forces set the exchange rate for the ouguiya as it did before, the Central Bank is rationing foreign exchange to deal with growing shortages. Carre stated that the Central Bank began rationing currency in November 2008 and has now segmented the foreign exchange market. For example, one day the Central Bank will allow only the petroleum sector to obtain foreign exchange and on another day only food importers will be able to obtain foreign exchange. ¶3. (C) Since January, the exchange rate on the parallel market has begun to move away from the official exchange rate. The government had made a concerted effort to close the gap between the official and parallel exchange rates in 2006 and 2007. By 2008, the two exchange rates were nearly identical. Since January, there is now a 10% difference between the two rates. Carre stated that given the foreign exchange shortage, he would expect to see a much wider gap between the parallel and official exchange rates. He speculated that there is enough illegal and black market activity occurring in Mauritania to keep the parallel market supplied with foreign exchange. Carre said that eventually Central Bank officials may be forced to change strategies and devalue the ouguiya. However, he thought that the Central Bank would do everything that it could to forestall any devaluation until after the planned June 6 elections so as not to diminish consumers' purchasing power before the elections. ¶4. (C) Carre stated that he was surprised that there was not yet a more visible effect from the foreign currency rationing. He noted that stores still appear fully stocked, food is widely available, and there has been no significant price increase for basic goods. Maersk representative David Ware told EconOff that maritime shipping companies were currently experiencing about a 25% drop in imports compared to last year. He said that the large importers are continuing to import, but many of the smaller importers have stopped or significantly decreased their imports. Ware blamed the decrease on small importers' inability to obtain credit. Given the foreign exchange shortage and decrease in imports, it is still difficult to explain why there do not appear to be more shortages on the market. The most likely explanation is that merchants are selling the stock that they already have on hand and the shortages will only become more apparent several months from now when their stocks have been depleted. ¶5. (C) Carre noted with alarm that Mauritania's current account deficit has reached 15% of GDP. He said that the GIRM started experiencing serious difficulties in January and February when it was unable to refinance its debt. Since the August 2008 coup, the junta had issued large amounts of treasury bills to finance its spending. In January and February many of the treasury bills fell due, but the GIRM was not able to find enough buyers and thus unable to refinance its debt. Carre said that there was an acute treasury crisis when the GIRM's current account went negative in January. When that happened, the GIRM issued a decree to a number of public companies and required them to transfer all of their funds to the Treasury so that the GIRM would have access to them. Carre's report confirms other reports that post received from provincial representatives in January and February who said that they had been ordered to bring all of their money to the Central Bank. Carre said that during January and February the GIRM paid only salaries and interest on its debt. It made no other expenditures during that period. He said that he has not yet received the data for March, but suspects that the same thing may have happened then too. Carre added that he has heard rumors that the junta recently obtained a $400 million line of credit from Libya, but noted that he has nothing concrete to substantiate the rumor. ¶6. (C) Carre stated that the GIRM's current financial problems are primarily a result of policy failures and could have been avoided in large part. Carre said that the national iron ore mining company SNIM cut production in the second half of 2008, which should have signaled to the GIRM that it was necessary to decrease spending. Instead, the GIRM increased spending. Carre said that government expenditures were very high in the second half of 2008 as the GIRM tried to fulfill all of the promises that it made. He added that imports remained strong during this period in spite of the global financial crisis, likely as a result of strong government spending. As a result of the increased spending, the 2008 budget deficit reached 8% of GDP, far above the 3% cap that had previously been agreed upon with the IMF. ¶7. (C) Carre is one of the few people outside of the GIRM to have received a copy of the line by line 2009 budget. He said that he believes that the GIRM has significantly overestimated revenue projections for 2009. In addition, current expenditures have been cut significantly compared to ¶2008. He questioned whether such drastic cuts were realistic or if perhaps they were too much. GIRM officials told him that they would be able to cut current expenditures with little harm to the population but reducing waste, but Carre said that he thought their explanation was unrealistic. He said that investment expenditures in the 2009 budget were very high. He noted that these would be easy to reduce if revenues ended up being less than expected. ¶8. (C) Carre assessed that Mauritania is already facing a difficult economic situation but that the coming months will be even more difficult. He said that the impact of the international financial crisis has not yet hit Mauritania, but is likely to soon. He explained that the national iron ore mining company SNIM will renegotiate its iron ore contracts in April. Prices are expected to be 40-60% lower compared to 2008. Reduced revenues from iron ore exports will have an enormous impact on the Mauritanian economy because they accounted for approximately 45% of export revenues in 2008. Because the IMF has stopped its program in Mauritania, it is not making official GDP projections. Carre said that he had done some rough calculations, but was unwilling to provide any specific figures. When EconOff asked if it was possible that GDP growth would be negative in 2009, he said yes, noting that the main drivers of the economy were all expected to be down sharply in 2009. ¶9. (C) The GIRM's mismanagement of government finances is slowly becoming more visible. Carre said that suppliers have told him that the GIRM is in arrears in its payments to them. The national power company SOMELEC has not yet paid its fuel bill for March. If SOMELEC is unable to purchase fuel, this could lead to widespread power shortages throughout the country. The GIRM has also fallen behind in its payments to SOMAGAZ, which distributes bottled propane for cooking. The problems at SOMAGAZ were exacerbated by the junta's decision to lower consumer prices for bottled gas without any means to make up for reduced revenues. There are continuing shortages of bottled gas on the market and there are now reports that SOMAGAZ was unable to obtain credit to purchase its next shipment of gas from abroad. ¶10. (C) There are reports that the fuel distribution company NAFTEC is on the verge of ceasing its activities in Mauritania. NAFTEC is 51% owned by the Government of Algeria (GoA),34% owned by the GIRM, and 15% owned by a private Mauritanian investor. The Government of Mauritania is reportedly nearly $8 million in arrears in its payments to NAFTEC. The GoA stopped transferring funds to NAFTEC after the coup, demanding that the GIRM pay its debt to the company before it considers making any new fuel transfers. NAFTEC was able to obtain credit from private banks for the past two months while it tried to find a solution, but local banks are now refusing to loan it any more money and are requesting that their debt be paid back immediately. ¶11. (SBU) The GIRM is late on monthly stipend payments to students at the University of Nouakchott. Students from the interior of Mauritania and poor students from Nouakchott receive a monthly stipend of approximately $42 to help defray their cost of living while they are students. Students protested the non-payment April 7 and began burning tires in front of the university. Police had to be called in to disperse the students with tear gas. ¶12. (C) World Bank Country Representative Francois Rantrua told EconOff that he had little information about the Mauritanian economy since the coup. World Bank programs have all been suspended and the staff is either on administrative leave or has been temporarily assigned to other countries. Rantrua said that he has been able to get little data, and he has little confidence in what data he does receive. He noted that importers have been telling him for months that they have not been able to obtain foreign exchange. He said that what they say is probably true, yet somehow people continue to import. He noted that if Mauritania really were on the verge of economic collapse, he would expect to see a much greater difference between the parallel and official exchange rates. Rantrua called Mauritania a high risk country because of its heavy dependence on a single export commodity (iron ore). He strongly suggested that the World Bank be allowed to do macroeconomic monitoring in Mauritania in order to avoid a sudden economic collapse with little or no warning. He added that he was in no way suggesting that the World Bank reengage with the GIRM, but did think that macroeconomic monitoring was necessary. He noted that any change in the Bank's policy would have to be carefully presented so that it was not misconstrued as a sign that the World Bank was reengaging with Mauritania. ¶13. (C) Comment: There has been speculation for months that Mauritania is on the verge of economic collapse, yet there had been few signs to suggest that it was actually occurring. However, we may now be starting to see the first signs. Carre's confirmation that the GIRM actually did run out of money in January and February provides the first concrete indication of the seriousness of the financial problems that the GIRM is facing. Furthermore, it is unclear how much longer the Central Bank will be able to continue to ration foreign exchange before it will be forced to devalue the ouguiya. The renegotiation of the iron ore contracts will strike another major blow to the economy. The junta is likely to do everything in its power to maintain economic stability through the scheduled June 6 elections. What will happen after the elections is almost impossible to say, but economic conditions are almost certain to further deteriorate. Unless the junta is able to secure financing from somewhere, it is unclear how much longer it will be able to maintain some semblance of macroeconomic stability. Given the current political situation, there is little early warning system in place that might be able to signal if Mauritania is on the verge of economic collapse. End comment. HANKINS