Outlook for 2011-12

The government is expected to remain in power over the forecast period, and the president, Mohamed Ould Abdel Aziz, will continue to strengthen his hold on power. Moreover, political stability will improve as the president and opposition political parties engage in dialogue. The ruling Union pour la République (UPR) is expected to win a majority of seats in the municipal and legislative elections scheduled to take place in 2011 and 2012 respectively, consolidating Mr Abdel Aziz's control over legislation. Improved donor relations will pave the way for renewed aid flows and substantial foreign direct investment. Mineral exploration and mining, private investment and greater emphasis on capital spending in the national budget will boost economic growth, which is forecast to pick up further, to an average of 6.2% a year in 2011-12. The current-account deficit will narrow slightly in 2011, to 8.2%, before returning to 9% of GDP in 2012 on the back of continued increases in public and private investment.

The political scene

In late November Mr Abdel Aziz called on all of the country's political groups to engage in dialogue. This announcement is potentially significant, as it represents a softening of the president's stance towards opposition parties allied together in the Coordination de l'opposition démocratique (COD) that have so far refused to accept the legitimacy of the president and have remained on the sidelines of the political process. At the same time, the COD has been weakened by the announcement that another of its member parties is to split from the coalition and support the government in its reform programme.

Economic policy

In early December the IMF published its first review of the extended credit facility (ECF) with Mauritania for 2010-12. The IMF gave a positive assessment of the authorities' performance, and noted that all but one of the quantitative performance criteria had been met. During the review the Fund noted that budgetary outturn in 2010 had been better than expected and adjusted its estimate for the budget deficit to 4% of GDP (previously 5%).

The domestic economy

The government hosted an international mining conference in the capital, Nouakchott, in mid-November, and it highlighted current investor interest in the country's vast uranium deposits.

Foreign trade and payments

The strong recovery in international demand for Mauritania's key exports-iron, gold and oil-in 2010 led to a higher trade surplus than expected.

Land area

1,030,700 sq km

Population

3.3m (UN 2009 estimate; 2.5m in December 2000 census result)

Main towns

(Population estimates 2009, World Gazetteer)

Nouakchott (capital): 798,725

Nouadhibou: 113,400

Kiffa: 80,612

Climate

About 80% desert (less than 200 mm rainfall per year); only the southern extremity supports rain-fed vegetation; temperatures average more than 25°C, with wide daily and seasonal fluctuations

Weather in Nouakchott (altitude 21 metres)

Hottest month, September (24-34°C); coldest month, December (13-28°C); irregular rains occur from July to October

Languages

Arabic (official), French, Pular, Soninké, Wolof

Measures

Metric system

Currency

Ouguiya (UM)

Time

GMT

Public holidays

Fixed: January 1st (New Year), May 1st (Labour Day), May 25th (African Unity Day), July 10th (Armed Forces Day), November 28th (Independence Day); all Islamic holidays are observed in accordance with the lunar calendar, which means that the following dates are approximate: Mawlid al-Nabi (the birthday of the Prophet, February 15th 2011); Eid al-Fitr (end of Ramadan, August 30th); Eid al-Adha (Feast of the Sacrifice, November 6th); Islamic New Year (November 26th)

Official name

République islamique de Mauritanie

Form of state

Arab and African Islamic republic

Legal system

Based on the 1991 constitution, strongly influenced by sharia (Islamic law)

National legislature

The bicameral parliament consists of the Senate, with 56 members, and the National Assembly, with 95 seats

National elections

July 2009 (presidential), November 2009 (legislative); next municipal elections in 2011, legislative in 2012 and presidential election in 2014

Head of state

Mohamed Ould Abdel Aziz

National government

On July 18th 2009 the leader of a military coup in August 2008, Mohamed Ould Abdel Aziz, won a presidential election in one round of voting, securing 53% of the vote; following his election, Mr Abdel Aziz appointed a new government

Main political parties

The main political parties are: Union pour la République (UPR); Parti républicain pour la démocratie et le renouveau (PRDR); Rassemblement des forces démocratiques (RFD); Union des forces du progrès (UFP); Alliance populaire progressiste (APP); Union pour la démocratie et le développement (UDP); Rassemblement pour la démocratie et l'unité (RDU); Parti mauritanien pour l'union et le changement (Hatem); Front populaire mauritanien (FPM); Pacte national pour la démocratie et le développement (PNDD); Union des forces démocratiques (UFD); Alliance pour la justice et la démocratie/Mouvement pour la rénovation (AJD/MR); Rassemblement national pour le renouveau et le développement (RNRD or Tawassoul); El Wiam

Prime minister: Moulaye Ould Mohamed Laghdaf

Key ministers

Civil service: Comba Ba

Culture, youth affairs & sports: Cissé Mint Cheikh Ould Boyde

Defence: Hamadi Ould Hamadi

Economic affairs & development: Sidi Ould Tah

Energy & oil: Wane Ibrahima Lamine

Finance: Amedi Camara

Fisheries & maritime economy: Ghdafna Ould Ehih

Foreign affairs & co-operation: Naha Mint Hamdi Ould Mouknass

Health: Cheikh El Moctar Ould Horma Ould Babana

Industry & mines: Mohamed Abdallahi Ould Oudaa

Infrastructure, urban planning & housing: Ismail Ould Bedde Ould Cheikh Sidiya

Interior & decentralisation: Mohamed Ould Boilil

Justice: Abidine Ould el Khair

Rural development: Brahim Ould M'bareck Ould Mohamed El Moctar

Secondary & tertiary education: Ahmed Ould Baya

Trade, tourism & crafts: Bomba Ould Daramane

Transport & equipment: Yahya Ould Hademine

Central Bank Governor

Sid'Ahmed Ould Raiss

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Overall, the Economist Intelligence Unit's central forecast is that political stability will improve during the forecast period. The government's campaign against a regional Islamist terrorist group, al-Qaida in the Islamic Maghreb (AQIM), is expected to reduce the number of attacks perpetrated by the group. In addition, the positive outlook for economic activity and foreign aid inflows will reduce the potential for popular unrest, as this will have a positive impact on local livelihoods and development spending. Furthermore, the opposition appears to be increasingly willing to negotiate with the regime rather than simply to insist that the election of the president, Mohamed Ould Abdel Aziz, in 2009 was illegitimate. Moreover, the ability of the main opposition alliance, Coordination de l'opposition démocratique (COD), to incite potentially destabilising popular anger over this issue is expected to diminish further. The president is set to remain popular, and his rule will increasingly be accepted by his opponents.

The primary threats to the positive outlook stem from AQIM and, to a lesser extent, the military. On the first point, the government will continue to pursue a carrot-and-stick approach to AQIM and militant Islam, on the one hand targeting AQIM militarily, including sending troops into neighbouring Mali, while on the other hand offering amnesties to militants who are willing to renounce jihad and working with moderate religious leaders. The Economist Intelligence Unit expects this strategy to succeed in limiting AQIM's capacity to carry out attacks and to recruit. However, although the number of attacks is expected to diminish, they will not altogether disappear given the difficulty of policing the vast desert areas where AQIM operates. Furthermore, there is considerable opposition among nationalist and mainstream Islamist groups to the involvement of Western intelligence and security services in the government's campaign against terrorists. Invaluable though such foreign support is, it could turn popular opinion against the campaign, particularly if civilians are harmed during such joint operations. The terrorists, aware of this, will continue to portray themselves as national defenders against "infidel" invaders, despite the fact that their own ranks comprise many foreign militants. The president, who is a former general, still commands the respect of the army. However, another coup attempt cannot be ruled out altogether given Mauritania's recent history of military interventions in politics.

Following Mr Abdel Aziz's victory in the presidential election, the ruling Union pour la République (UPR) has evolved from a hastily constructed vehicle of presidential power into a fully fledged political party. The president's campaign against terrorism and tough rhetoric on fighting corruption in public service has increased his popularity. Moreover, the return to constitutional rule has been associated with the return of global economic growth, a coincidence that Mr Abdel Aziz will take advantage of to strengthen his popularity. Meanwhile, the COD-which formed in response to Mr Abdel Aziz's presidential victory-is fragmenting. Given its refusal to accept the legitimacy of the president, the COD has been side-stepped by the regime in policymaking and weakened by defections to the presidential camp. The COD has since indicated that it is willing to negotiate with the president, but it will do so from a weakened bargaining position and may alienate its members in the process. In the municipal election scheduled in 2011 and the legislative election in 2012, the UPR is expected to build on its performance in the 2009 presidential election, gaining a majority of seats in local councils and the parliament.

Mauritania's international relations are expected to improve further. Two European countries, Spain and France, have been particularly eager to seek close relations with the new administration, as Mauritania is a key partner in their strategies to reduce illegal immigration and to combat terrorist activities. The US administration will continue to collaborate on anti-terrorism campaigns, as will NATO. Relations with China, now Mauritania's largest trading partner, are set to become closer, especially in the development of ancillary infrastructure for the oil industry. Economic and political ties with the Arab world will strengthen, particularly following recent generous aid pledges to Mauritania.

The government's closer collaboration with Algeria in the fight against AQIM may strain historically strong ties with Morocco, which resents Algeria's stance in relation to the disputed region of Western Sahara. Following the suspension of diplomatic ties with Mali earlier this year, in protest at the supposedly soft line taken by the Malian authorities towards AQIM, ties have been restored and co-operation in the fight against terrorism will continue to increase.

The government is expected to finalise a new poverty reduction and growth facility (PRSP)-a national development strategy that is often required for development programmes with the IMF and World Bank-before the middle of 2011, and a draft has already been shared with key development partners. In addition to improvements in the provision of basic public services, such as healthcare and education, the government will focus on efforts to maintain economic stability and improve the efficiency of the public administration, as well as improving energy and transportation infrastructure to reduce the cost of exploiting the country's natural resources. On September 26th the IMF concluded the first review under the extended credit facility (ECF), which is expected to result in the disbursement of SDR11m (US$17m), given an overall positive assessment. The programme with the Fund identifies a number of structural reforms, to improve the prudential oversight of the banking sector and to restructure public enterprises, although the government may struggle to reach quantitative performance criteria related to fiscal consolidation in advance of the 2012 legislative election. Mauritania's outspoken stance against terrorism will win it plaudits with traditional bilateral donors, particularly France and the US. Meanwhile, the race for minerals will draw in non-traditional donors, such as China and India, and Mauritania's alignment with the Arab bloc, emphasised in 2010 by the much-publicised severing of ties with Israel, will bring in funding from the Middle East. As a result, aid flows are expected to pick up over the medium term.

Details of the 2011 budget are confused. Despite the president's frequent promises to reduce public-sector waste and the government's programme with the IMF, which envisages fiscal consolidation to reduce the budget deficit, local media have reported that parliament passed a UM500bn (US$1.8bn) budget in early December. If true, this would represent a 69% increase on the latest estimates for 2010 expenditure and a 75% increase relative to the government's programme with the IMF. According to the IMF resident representative, the budget figures presented in the press are unlikely given agreements between the IMF and the government. As a result, we have scaled down our budget forecast for 2011 and expect a limited expansion of expenditure, of 5% per year over the forecast period, as spending broadly keeps pace with inflation. A mining conference held in mid-November led to a spate of new mining permits being purchased, which will boost revenue. Moreover, economic activity is forecast to improve further in 2011 and 2012, which will support the tax base. Efforts to restrict the recurrent budget are likely to be frustrated in advance of a municipal election in 2011 and a legislative election in 2012. Military spending will also increase as the president seeks to maintain the loyalty of the armed forces and as the country's fight against terrorism continues. The capital budget will be expanded slightly, although absorptive capacity constraints will limit its execution. In view of these trends, we expect the fiscal deficits to narrow further, from an estimated 4.2% of GDP in 2010 to 3.5% of GDP in 2011. The deficit will then shrink further, to 2.9% in 2012. The deficit will be funded by a mix of domestic borrowing and an increasing proportion of concessional foreign loans.

The ECF with the IMF has committed the government to greater prudence in monetary policy. In particular, the Fund will seek to promote improved co-ordination of monetary and fiscal policies. Although the IMF supported the cautious and gradual easing of monetary policy to underpin recovery, it has cautioned against further policy loosening to maintain low inflation expectations. However, supporting the banking sector and economic growth will be prioritised over containing inflation during the forecast period. As a result, the repurchase (repo) rate is expected to remain at around 9% in 2011, before increasing by 100 basis points towards the end of 2012. Although foreign reserves fell slightly in the first quarter of 2010 (from US$225m in December 2009 to US$211m in March 2010, the latest figures available), reserves are expected to increase modestly over the forecast period in line with financial inflows, although they will remain well below three months of import cover.

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The resumption of donor support in 2009 and 2010 is expected to remain largely on course, contingent on political stability, as will the inflow of foreign direct investment. Economic growth is therefore expected to pick up in 2011-12. Non-ferrous metals exploration and investment will be a major driver of growth. Oil exploration will also contribute to economic growth, but the lag between prospecting for viable oilfields and their coming on stream means that overall oil production is expected to continue to decline in 2011. Agricultural output will remain broadly steady owing to continued government neglect of the sector, with the exception of fisheries, where the total catch is expected to maintain the upward trend reported in recent years.

Global commodity prices are forecast to remain strong in 2011 and, to a lesser extent, 2012, following their sharp rebound in 2010. This has heightened investor interest, and exploration and output from the non-oil minerals sector will support the medium-term growth outlook. This will hold particularly for non-ferrous metals, such as copper and gold, which have witnessed rapid growth since production began in 2006. Investor interest in uranium mining will also remain strong as prices continue to be well above historical levels. The national iron producer, Société nationale industrielle et minière (SNIM), has received funding for its large investment programme and will oversee construction and expansion activities costing over US$1bn over the forecast period. A master plan for the electricity sector has been finalised and the national electricity company will be restructured and recapitalised with the support of donors. Greater political stability will also encourage growth in dynamic services such as banking and telecommunications, as firms that were previously deterred from expanding operations will now have more confidence in the regulatory environment and the government's willingness to honour contracts. Overall, we forecast real GDP growth of 6% in 2011, picking up further, to 6.3%, in 2012.

Historically, consumer prices have broadly tracked movements in prices for international commodities, particularly food and fuel, given that they account for such a large proportion of household spending and that reliance on imports of these commodities is high. In this respect the expected mild appreciation of the ouguiya will help to contain inflation. Overall, we expect annual average consumer price inflation to slow from an estimated 6% in 2010 to 5.5% in 2011, before slowing further, to 5%, in 2012. However, there are significant risks to this forecast, and inflation will be much higher if the ouguiya appreciates less than currently expected (or not at all) or if unfavourable weather conditions lead to higher international food prices, which made up 22.3% of the import bill in 2009, according to the IMF.

The ouguiya:dollar exchange rate has depreciated slightly over the course of 2010. However, the expected influx of foreign exchange, given commitments of grants and loans, the outlook for increased foreign direct investment and exports, leads us to expect a slight appreciation of the local currency against the US dollar to an average of UM273.75:US$1 in 2011-12.

Exports, dominated by oil and other minerals, are expected to remain strong in 2011-12, although the trade balance will remain roughly constant in 2011 and fall in 2012 as imports are boosted by increased oil and gas exploration as well as public investment. The country's dependence on imported services is expected to increase over the forecast period, again primarily as a result of increased activity in the hydrocarbons sector. Meanwhile, tourism receipts are expected to remain depressed given the media attention on recent terrorism attacks in Mauritania. As a result, the deficit on the services account is expected to widen in 2011-12. The income deficit is set to remain broadly stable, as repatriation of foreign firms' profits will not rise significantly until new oilfields come on stream. Renewed ties with the country's donors-coupled with an increase in remittances from expatriate Mauritanians as developed economies return to growth-will lead to an increase in the current transfers surplus to US$290m in 2011 and US$351m in 2012. Overall, the current-account deficit is forecast to narrow from an estimated 9% of GDP in 2010 to 8.2% of GDP in 2011, before returning to 9% of GDP in 2012 as imports outpace exports. There will be no difficulties financing the current account, as the capital account will post a large surplus owing to high foreign investment in the extractive industries.

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In late November-on the eve of the 50th anniversary of Mauritania's independence-the president, Mohamed Ould Abdel Aziz, called on all of the country's political groups to engage in dialogue. The announcement is potentially significant because since the hotly disputed presidential poll in 2009 relations between the government and the opposition have been mired in deep hostility. With the notable exception of the Rassemblement des forces démocratique (RFD), which entered talks with the government in September (October 2010, The political scene), the main opposition coalition, Coordination de l'opposition démocratique (COD), has continued to contest the legitimacy of Mr Abdel Aziz's victory. The COD has hitherto refused to engage in talks with the regime except on the basis of the political accord that was signed in the Senegalese capital, Dakar, prior to the poll (July 2009, The political scene). The opposition claims that the president has reneged upon his commitments under the Dakar deal, thus rendering his regime illegitimate.

The president's invitation to dialogue pointedly did not specify if it would be on the basis of the Dakar accord, but the COD nonetheless welcomed Mr Abdel Aziz's newfound willingness to engage with the opposition. Although these overtures suggest that a breakthrough to the political deadlock may be within reach, there is a strong chance that talks will founder on the irreconcilable differences in interpretation of what the government's obligations are under the deal signed in Senegal. The main tenets of the Dakar accord provided for a transitional power-sharing government before the 2009 presidential election and even representation on the electoral commission. However, these conditions have been rendered irrelevant by the holding of the poll.

Yet, the opposition has argued that the government's non-fulfilment of these commitments prior to the election means that it is entitled to share power. Although the president has shown himself willing to co-opt elements of the opposition to his parliamentary majority, he has not countenanced explicit power-sharing in the form of ministerial positions or policy input. Nonetheless, on balance, the Economist Intelligence Unit expects the COD to soften its stance in order to have some influence on the government through the proposed dialogue.

Leaders of a constituent party of the COD, Pacte national pour la démocratie et le développement (PNDD), announced in early December their intention to leave the opposition coalition and support the government in its reform programme. The move was reportedly led by Yahya Ould Waghef, the party's president and a former prime minister who in 2008 served under the presidency of Sidi Mohamed Ould Cheikh Abdallahi before he was deposed in a coup led by Mr Abdel Aziz (October 2008, The political scene). The party has a history of shifting loyalties. Although the PNDD was founded by Mr Abdallahi in early 2008 as a vehicle of support for his policy agenda in the National Assembly, he subsequently lost the support of most the party's parliamentarians, many of whom welcomed his forcible ousting by the current president. The latest volte-face by the PNDD lacks the backing of the whole party, which has since split. On December 12th dozens of party members, including two vice-presidents and one parliamentarian, announced their mass resignation in protest at what they view as a betrayal of the PNDD's principles. Specifically, the rebels insist that former coup leaders (including Mr Abdel Aziz) should be forbidden from becoming president for life.

The departure from the COD coalition of the PNDD and its subsequent split have weakened the opposition further, following the decision of the RFD in September to break with COD policy and start talks with the government without reference to the Dakar accord (October 2010, The political scene). Although the RFD has not formally left the COD and continues to describe itself as an opposition party, its actions have greatly weakened the opposition's unity. That even part of the PNDD has rallied to the government is a boon to the president, who may well chalk up more successes in his strategy of co-opting the opposition.

The Economist Intelligence Unit's democracy index ranks Mauritania 115th out of 167 countries, placing it in the list of states that are considered to be governed by authoritarian regimes. Despite a return to constitutional rule following the presidential election in July 2009, Mauritania's score fell slightly in the 2010 index, to 3.86, from 3.91 in 2008. However, owing to the global decline in democracy, Mauritania moved up three places in the ranking to 115th out of 167 countries. In regional terms Mauritania is ranked one place above Morocco, ranked 116th, and ten places above Algeria, ranked 125th; however, Mauritania is ranked considerably lower than Mali and Senegal, at 79th and 95th respectively.

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Poor democratic institutions

Mauritania's score has improved for electoral process since 2008, to 3 from 2.08, owing to improvements in the security of the vote during the 2009 presidential election, which took place peacefully. However, democratic processes are not well established given the country's recent history of coups, and electoral process remains the country's lowest-scoring indicator. The country's second-worst score is for political culture, which fell from 3.75 in 2008 to 3.13 in 2010 as a result of an increasing tolerance amongst the population for the president, Mohamed Ould Abdel Aziz, to bypass some institutional checks and balances in the face of the persistent political deadlock following the 2009 election. Mauritania's score for political participation has also fallen, from 4.44 to 3.89, as citizen engagement in politics has declined. Mauritania receives a slightly better score for functioning of government in view of the quality of the civil service relative to some other countries in the region, although serious shortcomings persist. In the category of civil liberties Mauritania receives a mediocre score of 5 out of 10 (with 10 being the best possible), reflecting the existence of a lively, popular and often challenging media in the country, but also the weakness of the judiciary in upholding individuals' liberties, as well as frequent repression of public demonstrations that challenge the regime. The president has recently extended an offer to opposition parties to enter into dialogue with his government, which bodes well for the ability of the opposition to influence policy and encourage political participation. Moreover, the regime will become increasingly tolerant of dissenting political expression as political stability improves. Overall, the democracy index score for Mauritania is expected to improve in 2011 and 2012 as the country organises municipal and legislative elections.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy and definitions of democracy are contested. Having free and fair competitive elections, and satisfying related aspects of political freedom, is the sine qua non of all definitions. However, our index is based on the view that measures of democracy that reflect the state of political freedom and civil liberties are not "thick" enough: they do not encompass sufficiently some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are, at best, marginalised by other measures.

Our index of democracy covers 167 countries and territories. The index, on a 0 to 10 scale, is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are inter-related and form a coherent conceptual whole. Each category has a rating on a 0 to 10 scale, and the overall index of democracy is the simple average of the five category indexes.

The category indexes are based on the sum of the indicator scores in the category, converted to a 0 to 10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the capability of the civil service to implement policies.

The index values are used to place countries within one of four types of regimes:

• full democracies-scores of 8 to 10;
• flawed democracies-score of 6 to 7.9;
• hybrid regimes-scores of 4 to 5.9;
• authoritarian regimes-scores below 4.

In early December the IMF published its first review of the extended credit facility (ECF) with Mauritania for 2010-12. The ECF, which is the Fund's financing mechanism for low-income countries, was approved in March 2010 and provides for SDR77.2m (US$118m) in funding (July 2010, Economic policy). In its Letter of Intent to the Fund, published together with the first ECF review, the government requested a disbursement of SDR11m, which is expected to be forthcoming. The IMF gave a positive assessment of the local authorities' performance to date under the instrument. All the quantitative performance criteria had been met except for that relating to poverty-reducing expenditure, owing to delays in executing investment spending.

The review also noted the government's strong progress in advancing structural reforms. These focus primarily on improving the soundness of the country's banks, with a view to increasing the level of financial intermediation in the country from currently low levels in order to stimulate private-sector activity and economic diversification. To this end the government aims to raise banks' minimum capital requirements by the end of 2011 and to ensure by the end of 2010 that all banks are independently audited. The government also intends to tighten requirements relating to solvency, liquidity, risk-concentration and non-performing loans.

The review welcomed the fact that fiscal outturn in 2010 has been better than originally projected. Non-oil receipts (including grants) for the year are now estimated to be 6.4% higher than previously expected by the Fund, at UM246bn (US$890m), owing to some unbudgeted windfall bonuses and royalties from the iron and gold mining sectors. The authorities have stated their intention to save the extra revenue to meet future financing needs.

Capital spending in 2010 is estimated at UM93bn, 3.7% down on original projections, owing to difficulties in executing investment projects. Notably, only foreign-financed capital spending, totalling UM39bn, came in below expectations; domestically funded capital projects are still estimated to total UM53bn. By contrast, current expenditure of UM189bn was up by 2.7% on previous estimates. This rise was entirely accounted for by spending on the public-sector wage bill exceeding initial expectations by 10.3%, to total UM84.5bn.

The basic non-oil deficit in 2010 has been revised down by 12.6%, from UM32.6bn to UM28.5bn. As a percentage of GDP, the Fund now estimates the basic non-oil deficit at 3%, compared with 3.8% previously. The overall balance-including net oil revenue of UM11.4bn and grants of UM22.4bn-is now estimated at UM38.5bn, down by 11.1% on the IMF's previously projected UM43.3bn. The overall deficit is now estimated at equivalent to 4% of GDP in 2010, down from 5% previously.

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In their Letter of Intent to the Fund, the authorities stressed their intention to pursue fiscal consolidation in 2011. No doubt in view of the ballooning public-sector wage bill in 2010, the government pledged to enforce greater discipline in its current spending. It hopes to achieve this through adopting a new payroll forecasting methodology and improving databases on staff numbers. Furthermore, it hopes to build on the impressive revenue performance estimated in 2010. The government hopes that this will be achieved in 2011 in part through continued rapid economic growth, as well as by implementing reforms to boost the efficiency of revenue collection through computerising the operations of the tax office and customs service, claiming arrears, unifying Treasury accounts and completing a tax-payer census by September. Revised budget proposals for 2011 submitted by the government to the IMF provide for a cut in overall spending by 3.2% from UM295.7bn in 2010 to UM286.2bn, with non-oil revenue and grants expected to rise by 0.5% from UM245.7bn to UM246.9bn. Overall, the authorities hope to limit the basic non-oil deficit to UM17.1bn, equivalent to a forecast 1.6% of GDP.

According to several media reports in mid-December, the government submitted for parliamentary approval a budget for 2011 in which spending totalled a staggering UM500bn (just over US$1bn), up by 69% on the latest spending estimates for 2010 and by 75% on the revised projections for 2011 agreed with the IMF.

However, details of this unprecedented and unexpected shift in the government's spending plans were not available at the time of writing. Moreover, the IMF's resident representative in the country, Tijani Najeh, has stated to the Economist Intelligence Unit that, as far as he is aware, the press reports about a huge increase in spending were incorrect and the government will stick to its consolidation plan. Consequently, in the absence of official confirmation of reports that spending is set to balloon in 2011, we expect the government to stick broadly to the programme agreed with the IMF. Further confusing the budgetary stance, in a mini-cabinet reshuffle on December 15th the president replaced the minister of finance, Ahmed Ould Moulaye, with Amedi Camara, a career civil servant. Mr Camara, who before the cabinet reshuffle was serving as the secretary-general in the Ministry of Industry and Mines, appears to have been chosen for his technocratic credentials.

In mid-November an international mining conference was held in the capital, Nouakchott. The highlight of the event was the announcement of the latest round of uranium reserve estimates for several sites. Forte Energy-an Australian-owned company that has been conducting surveys in Bir en Nar, Zednes region, in the north of the country-estimates uranium ore reserves in the area at 1.33m tonnes. Moreover, the uranium content of the ore is high: Forte estimates that over 2m lbs (900 tonnes) of the element could be extracted from it. The company began drilling on its prospect in late October.

Also in late October another company, UK-based Alecto Energy, was awarded two uranium-prospecting licences in Mreiti (covering an area of 888 sq km) and Wad Mourkba (704 sq km). Alecto also acquired licences to explore for copper and gold. Meanwhile, an Australian firm, Aura Mining, has reported highly encouraging results from its explorations in the Reguibat Craton area in northern Mauritania, which the firm believes contains a large deposit of recoverable uranium, 40m-60m lbs. Aura has a second uranium exploration site in the Fai Est prospecting block, which is at an early stage. There has also been local interest in uranium. An industry newsletter, Africa Mining Intelligence, reported in November that the locally owned Azizi group had joined forces with a French junior mining firm, OSEAD SAS, to establish a new company, OSEAD Mauritania, with a view to exploring for the element in eight prospecting blocks.

The Economist Intelligence Unit expects investor interest in the country's uranium resources to be strong, as the outlook for global demand for the commodity is very promising. We expect world uranium prices to rise from an estimated US$48.3/lb in 2010 to US$70/lb in 2011. China is expected to lead the pick-up in global demand. One likely investor in the development of Mauritania's uranium wealth is a French state-owned mining giant, Areva, which has shared geological data with Forte and has extensive uranium interests in neighbouring Niger. However, the threat from a regional terrorist network, al-Qaida in the Islamic Maghreb, will add considerably to the security and insurance costs of any uranium mining venture in the country.

This strong interest in Mauritania's uranium has not been at the expense of investment in the two mainstays of the country's mining sector, iron and gold. Following its purchase of the Canadian operator of the Tasiast gold mine, Red Back Mining, in September (October 2010, The domestic economy), Kinross Gold (also of Canada) announced plans in late November to invest US$1.5bn to increase production at the mine to 1m troy oz annually by the end of 2013, which would represent a fivefold increase in annual production. In an indication of the company's long-term commitment to the country, Kinross has earmarked US$10m of this investment to establish the Mauritania Mining School, which is expected to start training local specialist workers from 2013. We expect global demand and prices for gold to remain very strong in 2011 before falling back slightly in 2012. However, there is considerable risk to the forecast for gold prices given their upward volatility in recent years. A sharp fall in the price of gold would probably lead Kinross to reconsider its ambitious investment programme at Tasiast.

In late November the president, Mohamed Ould Abdel Aziz, laid the foundation stone of a large infrastructure project to expand output of the state-owned iron miner, Société nationale industrielle et minière (SNIM), at its Guelb el Aouj site (January 2010, Foreign trade and payments). The project, Guelb II, aims to increase annual output of ore to 18m-20m tonnes by 2012, from current levels of 12m-13m tonnes, and to build a new plant with capacity to enrich 4m tonnes of ore a year. The plan also involves construction of a new power plant, as well as port and railway infrastructure. The total cost of Guelb II has been put at around US$750m, which will be met in part by assistance from donors such as the African Development Bank and the European Investment Bank (January 2010, Foreign trade and payments). Sphere Minerals, SNIM's Australian partner at the Guelb site, was in the process of being bought out by a UK-Swiss mining giant, Xstrata, as this report was going to print. On December 16th Xstrata acquired over 75% of Sphere's shares that were currently in issue. Although an Xstrata spokesman, quoted in mid-November, claimed that it was too early to commit to actual investment figures, Mauritania's mines and industry minister, Mohamed Abdallahi Ould Oudaa has told Bloomberg, a global information provider, that Xstrata will invest US$6bn in the country.

We expect global demand growth for steel, and by extension iron ore, to be sluggish in 2011-12, largely because the construction sectors of OECD economies are set to remain lethargic. However, SNIM will be hoping that its extra output will find buyers in Asia, and in particular China, where demand is expected to remain strong. The company's client base has already shifted radically eastward and it is well positioned to capture even more of Asia's demand for iron ore now that it is publicly trading ore on the Chinese spot market (October 2010, The domestic economy).

The IMF's recently published review of performance under the extended credit facility (ECF) noted that consumer price inflation had accelerated to 6.9% year on year in August 2010, from 5% in December 2009. However, the pace of price rises might have been quicker still, given the increase in global prices for food-which accounts for 53% of the consumer price basket-and energy, as well as the depreciation of the local currency, the ouguiya, by 9% against the US dollar over the period. Moreover, the Banque centrale de Mauritanie (BCM, the central bank) reduced the repurchase (repo) rate from 12% to 9% in November 2009-the first change to the repo rate since October 2007-which the IMF estimates had a statistically significant effect on the stock of credit to the private sector. In other words, the loosening of monetary policy at the end of 2009 directly led to an increase in inflation. This also indicates that, despite the shallow banking sector, BCM policy holds influence over inflationary fundamentals. The BCM has said that it will target inflation of around 5% in 2011.

The strong recovery in international demand for Mauritania's key commodity exports-iron, gold and oil-in 2010 following the slump in 2009 has led to a higher trade surplus than expected, according to recently published figures from the IMF. The Fund now estimates that the trade balance turned from a deficit of US$83m in 2009 to a surplus of US$81m in 2010, compared with the previously projected surplus of just US$6m. Total export earnings are estimated to be up by over 40% on 2009. The stronger performance was led by exports of iron ore, which are now estimated at US$920m in 2010, up by an impressive 76% on the total of US$522m registered in 2009.

By contrast, the IMF now estimates a slightly larger services deficit in 2010, of US$612m, than previously (US$590m), as activity in the mining sector has utilised imported services. The income balance in 2010 is now estimated to be a small surplus of US$36m, which represents a slight fall from 2009 as a result of a fall in compensation from the EU for fishing permits. A rise in official transfers from donors following the return of democratic rule in late 2009 has increased the overall transfers surplus from an estimated US$131m in that year to US$176m in 2010. As a result of these trends the overall current-account deficit shrank to US$318m in 2010 from US$379 in 2009; the Fund had originally expected the deficit to widen to US$407m.

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The surplus on the capital and financial account is estimated to have risen rapidly in 2010 to US$1.4bn, from US$227m in 2009, a sixfold increase. However, this stellar performance was largely due to a one-off windfall of just over US$1bn under the multilateral debt-relief initiative (MDRI). Net direct investment outperformed the Fund's original expectations: the small deficit of US$3.1m in 2009 was originally expected to remain broadly steady but in the event turned to a surplus of US$57m in 2010. Official medium- and long-term loans almost doubled in 2010 to an estimated US$354m, reflecting the return of democratic rule in the country. Bilateral budgetary support included allocations of US$25m and US$17m respectively from the governments of Libya and France. Owing to the MDRI there was a surplus on the overall balance of payments of US$1.1bn.