Strengthen the Framework for the Management of Oil Revenues. Despite Good Progress to Date, the Overall Legal Framework and Procedures Need to Be Strengthened
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Report No.36386-MR Report No.Mauritania 36386-MR ChallengesandOptions Resources: ManagingNatural Mauritania Managing Natural Resources: ChallengesPublic Disclosure AuthorizedPublic Disclosure Authorized and Options Country Economic Memorandum Update December 2006 PREM 4 Africa Region Public Disclosure AuthorizedPublic Disclosure Authorized Public Disclosure AuthorizedPublic Disclosure Authorized Document of the World Bank Public Disclosure AuthorizedPublic Disclosure Authorized ... 111 LDF Loi des Finances; Budget ofthe State LDR Loi de RBglement; Budget Execution Law LNG Liquefied Natural Gas MAED MinistBre des Affaires Economiques et du De'veloppement; Ministry ofEconomic Affairs and Development MC Mining Cadastre MDRI Multilateral Debt Relief Initiative MGDs Millennium Development Goals MDRE Ministtre du Ddveloppement Rurale et de 1'Environnement; Ministry ofRural Development and Environment MEP Ministry ofEnergy and Petroleum; Ministere de I'Energie et du Petrole MEN MinistBre de L 'Education National ; Ministry ofEducation MIFERMA Mauritanian Iron Mines ; Mines de Fer de Mauritanie MMI Ministdre de Mines et Industrie; Ministry ofMining and Industry MOF MinistBre de Finance; Ministry of Finance MPEM MinistBre de la P6che et de I'Economie Maritime; Ministry ofFisheries MOHSA MinistBre de la Sante' et 1 'Action Sociale; Ministry ofHealth and Social Action NORAD Norwegian Development Agency MTEF Medium-term Expenditure Framework ONS Office National de la Statistique; National Statistics Office OPEX Operating Expenditure PER Public Expenditure Review PI Permanent Income PIP Public Investment Program PPP Purchasing power Parity PRGF Poverty Reduction and Growth Facility PRISM2 Second Mining Sector Capacity Building Project PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Strategy Paper PSA Production Sharing Agreement PSIA Poverty and Social Impact Analysis FEER Real Effective Exchange Rate ROSC Report on Observance of Standard Codes SAVF Saving Fund SESA Strategic Environmental and Social Assessment SIGM Geographical Information System SIGE Environmental management Information System SMH Socie'te' Mauritanienne des Hydrocarbures ; National Oil Company SNDE Socie'te' Nationale d'Eau; National Water Company SNIM Socie'te' Nationale Industrielle et Minitre; National Industrial and Mining Company SOMELEC Socie'te' Mauritanienne d 'Electricitd ; National Electricity Company SONELEC Socie'te' Nationale d 'Eau et d 'Electricitd ; National Electricity and Water Company SSA Sub-Saharan Africa STABF Stabilization Fund TOFE Tableau d'ope'rations FinanciPres de I'Etat; Monthly government financial and economic accounts WE0 World Economic Outlook Vice President: Gobind Nankani Country Director: James Bond Sector Director: Sudhir Shetty Sector Manager: Robert R. Blake Task Team Leader: Nicola Pontara iv TABLE OF CONTENTS ACKNOWLEDGMENTS ......................................................................................................... VI1 EXECUTIVE SUMMARY ..................................................................................................... .VI11 1. THE POLITICAL ECONOMY OF NATURAL RESOURCE WEALTH: LESSONS FROM INTERNATIONAL EXPERIENCE ........................................................................... 1 1.1 INTRODUCTION... .................................................................................................................... 1 1.2 THEORETICALAP HES TO THE ANALYSIS 1.2.I Volatile and Declining Terms of Trade..................................................................................... .3 1.2.2 The Dutch Disease Effects of Over-rapid Domestic Revenue Absorption .. 1.2.3 Adverse Nature of Point Source Commodi I .2.4 Political Economy of Rent-Driven Development 1.3 DEPLOYMENTOF MINERAL RENTS: GLOBAL EXPERIENCE AND POLICY OPTIONS ........................... I .3.I Unsuccessful Mineral Economies: The Nigeria I .3.2 Successful Mineral Economies: Indonesia and ........................................................ 12 1.4 MAINCONCLUSIONS AND RECOMMENDATIONS ............................................. 2. THE MAURITANIAN CASE: INITIAL CONDITIONS AND NATURAL RESOURCE POTENTIAL ............................................................................................................................ 15 2.1 INTRODUCTION....... .............................................. ..... 15 2.2 MAURITANIA’SINITIAL CONDITIONS ...... .................................................................................. 16 2.2.1 Does Mauritania Already Suffer fro utch Disease Effects? ............... .................... 16 2.2.2 The Political Economy of the Mauritanian State: A Snapshot................. 2.3 MAURITANIANATURAL RESOURCE POTENTIAL ................. ................. 2.3.I The Oil Sector................ ............................................................................... 20 2.3.2 The Mining Sector .......... ............................................................................... 26 2.4 MAINCONCLUSIONS AND RECOMMENDATIONS .............................................................................. 29 3. MANAGING NATURAL RESOURCE WEALTH IN MAURITANIA: CHALLENGES AND GOVERNMENT RESPONSE....................................................................................... 30 3.1 INTRODUCTION................ ............................... .....30 3.2 KEYCHALLENGES IN THE MANAGEMENTOF NATURAL RESOURCE WEALTH ................................. 31 3.2.1 Coordinating Policy Response to Oil Booms, Fiscal Policy Options, and Sustainability 3.2.2 Establishing Appropriate Mechanisms for the Management of Oil Revenues.................. 3.3 OIL REVENUEMANAGEMENT: THE GOVERNMENT RESPONSE TO DATEAND REMAINING CHALLENGES................................................................................................................................... 36 3.3.I The Oil Sector Institutional Framework 3.3.2 TheEITI............... 3.3.3 Capaciq Building 3.4 MAINCONCLUSIONS AND RECOMMENDATIONS .............................................................................. 43 4. THE IMPACT OF NATURAL RESOURCE WEALTH ON THE MAURITANIAN ECONOMY............................................................................................................................... 45 4.1 INTRODUCTION....... ................ 4.2 RECENTECONO ...................................................................................... 46 4.2.I Deterioration in Macro-budgetary Discipline and Recovery 4.2.2 The Economic Outlook (2006-2010) and Debt Sustainability Analysis ................................... 47 4.3 OPTIONS FOR ABSORBINGTHE OIL RENT INTO THE MAURITANIANECONO 4.3.I Strategic Options for the Use of Hydrocarbon Financial Resources 4.3.2 Option A: Boosting Public Investment in Infrastructures ......................... 4.3.3 Option B: Transferring Oil Revenues to Households .............................................................. 53 4.3.4 Option C: Saving Part of the Windfall for the Future............................... V 4.5 MAIN CONCLUSIONS AND RECOMMENDATIONS ............................. ....... 57 5. IMPLEMENTING CROSS-SECTORAL REFORMS AND BUILDING A DYNAMIC MARKET SECTOR................................................................................................................. 58 5.1 INTRODUCTION......................... 5.2 THE CROSS-SECTORALREFORM 5.2.I Creating an Enabling Environment for the Private Sector ....................................... 59 5.2.2 Improving Public Sector G 5.2.3 Building Capacity in the Public Administration 5.3 DUALSECTOR RENTABSORPTION STRATEGY ................................................................................. 64 5.3.1 Track 1: Boosting Income and Employment in Rural Areas ................................ .64 5.3.2 Expanding Niche Tourism in Rura 5.3.3 Encouraging Manufacturing Growth 5.3.4 Boost the Emergence of a National ........................................................... 70 5.3.5 Track 2: Reforming the Rent-Drive 5.4 MAIN CONCLUSIONS AND RECOMMENDATIONS .............................................................................. 72 List of Tables Table 1: Summary of Policy Recommendations...................... .................................................................. 1 Table 2: Rent Share in GDP 1994 and GDP Growth 1985-97, Natural Resource Endowment ......... Table 3: Index of Institutional Quality 2005, and Human Development Index (2003), Selected Countr Table 4: Evolution of Political Accountability under Political States with Differing Autonomy and Rent ....8 Table 5: Windfalls 1974-81, Selected Countries (% non-mining GDP/annum) ........................................... 10 Table 6: Real Effective Exchange Rate Movements, Selected Countries 1970-84 ....................................... 11 Table 7: Changing Export Structure, Indonesia and Malaysia 1970-2000..................... Table 8: Aid Flow, Selected African Countries 1960-2003 (% of GNI) ....................................................... 17 Table 9: Proven Crude Oil Reserves and Average Daily Production in Selected Countries ......................... 23 Table 10: Oil Price Scenarios ............................................... ........................................ Table 11 : Projections on Government Take (US$ million, d real) 2006-2024 ........... Table 12: Shares in World Iron Ore Production, 1990-2000......................................................................... 27 Table 13: SNIM Production and Exports (2000-2005) ................................................................................