There’s an old orthodoxy that suggests that a country needs a crisis to induce macroeconomic policy reform. Given the country’s over-reliance on extractive resources, the 2015 commodity price shock was that crisis for Mauritania.
Since then, the government took decisive reforms that helped turn the fiscal deficit of 2.7% of GDP in 2014-2015 to a surplus of 1% of GDP in 2016-2019, one of the best fiscal positions in Sub-Saharan Africa. However, despite restoring macroeconomic stability, economic growth was modest. GDP per capita only grew by 0.4% over the 2016-2019 period, highlighting the need to adopt a pro-growth fiscal policy.
Turning a crisis into an opportunity
The COVID-19 crisis has severely affected the Mauritanian economy and reversed years of poverty reduction. As a result, the economy contracted by 1.5% in 2020. This led to employment and income losses, pushing an estimated 48,000 people into extreme poverty. Like during the commodity crisis of 2015 , the COVID-19 shock presents the government with an opportunity for further policy reform and steers the economy in a new direction, which may put it in a stronger position to weather future shocks.
Our latest Public Expenditure Review shows that the government can take several measures to maintain fiscal sustainability in the future while improving service delivery in key social sectors. Here are the main recommendations of the report:
- I. Maintaining fiscal and debt sustainability by strengthening revenue mobilization: In addition to maintaining a prudent borrowing strategy that favors concessional financing to ensure debt sustainability, Mauritania would really benefit from increasing its efforts to collect more revenues, particularly to meet the heightened social needs in the wake of the COVID-19 shock. In fact, Mauritania has excellent potential to increase its tax revenues to about 17-17.3% of GDP, bringing an additional 2-3% of GDP compared to what it currently collects. To achieve this, essential reforms in tax policy are needed. These reforms should focus on rationalizing inefficient and counter-productive tax expenditures (3.4% of GDP in 2019) and boosting the performance of taxes on salaries, which suffer from a low rate of return at just 1.6% of GDP, compared to 2-3% across Sub-Saharan Africa (SSA).
- II. Reforming the existing public investment management system: Despite sustained high levels of public investment over the past decade ─ higher than the average in SSA ─ Mauritania lags behind the majority of comparator countries in terms of the quality and stock of infrastructure. The discrepancy between the quantity of public investment and the quality of infrastructure points to inefficiencies and weak Public Investment Management (PIM). As such, PIM reforms are critical to ensure these expenditures offer high rates of return both socially and economically. These include strengthening the capital budgeting systems, operationalizing evaluation tools for public investment, addressing existing shortcomings with the public investment management framework, improving the existing auditing mechanism, and strengthening the PPP framework.
- III. Undertaking reforms across the social sectors: The social sectors absorb a significant portion of government expenditure and require reform. For social protection, this includes increasing the benefit amounts allocated to the existing Tekavoul Social Transfer Program, which targets the extreme poor. It also means establishing a ‘Common Financial Vehicle’ for coordinating government and donor transfers relating to food security. For both the private and public pension systems, reforms are required around inflation indexation, extending retirement ages, increasing contribution rates, and reducing accrual rates to set them on a sustainable path moving forward. There’s also a need to rein in inefficient fuel and food subsidies, which could be better targeted towards those that need support most. In the education sector, while it will be important to maintain the upward trend observed in education spending since 2018, strengthening the efficiency of that spending would be critical. Some reforms to do so include improving the distribution of the budget by level of education and enhance initial teacher training. These reforms will help to reduce the high dropout and repetition rates and improve the quality of education.
The combined set of reforms highlighted above will generate savings estimated at 3.1% of GDP per year. These savings will not only maintain fiscal and debt sustainability but would also help support a more inclusive economy by freeing up space for much needed investments in social sectors and rendering Mauritania more resilient to future shocks.