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Republic of Madagascar

Author(s):
International Monetary Fund
Published Date:
July 2007
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I. Background and Key Challenges

1. Madagascar is one of the poorest countries in sub-Saharan Africa (SSA). It ranks 146 out of 177 on the U.N. Human Development index and has performed poorly relative to other SSA countries on most macroeconomic indicators (Figure 2). Poverty remains high and progress toward achieving the MDGs has been uneven (Figure 1 and Table 10).

Madagascar and Sub-Saharan African Countries: Macroeconomic Indicators, 1997—2006
1997-20032004-2006
MadagascarSub-Saharan Africa 1MadagascarSub-Saharan Africa 1
(Annual percent change)
Real GDP2.93.74.96.4
Real per capita GDP-0.11.21.93.9
CPI (period average)7.421.614.415.9
(Percent of GDP, unless otherwise indicated)
Broad money20.325.419.827.0
Private sector credit29.214.610.214.4
Tax revenue9.817.310.620.7
Fiscal balance, excluding grants-8.3-5.7-11.5-2.6
Current account balance, excluding grants-6.4-7.3-11.7-4.4
Gross official reserves (months of imports of
goods and services)2.83.92.94.1
Total investment15.518.523.919.9
Source: National authorities and IMF staff estimates.

Weighted average, excluding South Africa and Nigeria.

For sub-Saharan Africa, data start in 2001.

Source: National authorities and IMF staff estimates.

Weighted average, excluding South Africa and Nigeria.

For sub-Saharan Africa, data start in 2001.

Table 1.Madagascar: Selected Economic and Financial Indicators, 2005–09
20052006200720082009
Prog.1Proj.2Est.Prog.2Proj.Proj.2Rev. Proj.Proj.
(Percentage change, unlessotherwise indicated)
National income and prices
Nominal GDP growth23.816.816.516.715.816.513.314.213.5
Real GDP growth4.64.74.74.95.66.55.67.37.5
GDP deflator18.411.511.211.39.79.57.36.45.6
Consumer price index (period average)18.411.210.710.89.69.87.17.15.5
Consumer price index (end of period)11.411.310.810.98.07.96.06.05.0
External sector
Export of goods volume16.5-1.63.87.81.33.04.83.26.8
Import of goods volume-13.0-9.7-6.1-6.12.533.96.416.4-0.2
Terms of trade (deterioration = -)-36.4-7.1-4.4-5.5-1.83.01.9-0.60.8
Money and credit 3
Reserve money411.712.212.213.013.621.811.919.317.1
Broad money3.115.617.025.615.526.713.324.119.4
Net foreign assets1.922.824.229.95.37.14.97.93.6
Net domestic assets1.2-7.2-7.2-4.310.119.68.416.215.9
Credit to government-5.3-16.8-16.8-16.30.54.4-0.2-0.1-0.1
Credit to the private sector 422.424.521.219.523.029.419.737.032.2
Velocity of money (M3; average)4.64.74.64.34.64.04.63.63.5
(Percent of GDP)
Public finance
Total revenue (excluding grants)10.911.711.411.211.411.112.111.612.1
Of which: tax revenue10.111.010.710.711.210.911.711.411.9
Grants 55.749.547.548.05.15.04.03.53.4
Total expenditure21.221.921.521.420.721.720.719.419.6
Current expenditure11.010.310.511.110.411.810.410.210.4
Capital expenditure10.311.511.010.310.39.910.39.29.2
Domestic balance-2.2-0.9-1.2-2.0-1.4-2.7-1.4-1.3-1.3
Overall balance (cash basis, incl. grants)-4.338.736.837.5-4.4-5.8-4.5-4.3-4.1
Overall balance (cash basis, excl. grants)-10.1-10.8-10.7-10.5-9.5-10.7-8.6-7.8-7.5
Domestic financing0.5-3.1-3.1-2.50.31.50.10.30.3
Excluding central bank recapitalization0.6
Savings and investment
Investment22.521.821.824.822.129.222.233.931.7
Government10.311.511.010.310.39.910.39.29.2
Nongovernment12.310.310.814.511.719.311.924.722.5
Gross domestic savings8.48.18.713.69.39.99.711.811.7
Gross national savings11.711.411.816.012.211.712.313.012.5
External sector and public debt
Exports of goods, f.o.b.17.015.416.917.715.914.515.512.812.4
Imports of goods, c.i.f.33.930.431.732.530.633.729.833.630.2
Current account balance (excl. grants)-12.1-11.6-11.2-10.0-10.7-18.2-10.6-21.3-19.6
Current account balance (incl. grants)-10.9-10.5-10.0-8.8-9.9-17.5-10.0-20.9-19.2
Public debt80.334.234.238.634.736.435.834.835.4
External69.925.625.628.827.226.829.426.227.5
Domestic10.48.58.69.87.49.66.48.67.8
Net present value (NPV) of external debt
NPV of debt-to-exports ratio134.358.852.138.759.446.266.454.160.9
NPV of debt-to-fiscal revenue ratio215.083.583.464.293.871.2105.278.183.3
(Units as indicated)
Gross official reserves (millions of SDRs)337.4348.7360.9381.6391.8460.3419.7554.7623.8
Months of imports of goods and services2.92.92.93.03.02.73.02.72.9
Months of imports, excl. large mining projects3.33.63.7
Financing gap0.09.27.90.015.715.723.315.77.9
Ariary per SDR (period average)2,9583,1353,1673,146
GDP per capita (U.S. dollars)282294296299319374338439473
Nominal GDP (billions of ariary)10,09511,79511,76011,78113,62213,72915,43215,67717,788
Sources: Malagasy authorities and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF. The 2006 fiscal numbers correspond to a revised program (see Table 3a.).

Growth in percent of beginning of period money stock (M3).

Year-on-year growth.

Includes MDRI capital transfers in 2006.

Sources: Malagasy authorities and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF. The 2006 fiscal numbers correspond to a revised program (see Table 3a.).

Growth in percent of beginning of period money stock (M3).

Year-on-year growth.

Includes MDRI capital transfers in 2006.

Table 2.Madagascar: National Accounts and Savings-Investment Balance, 2005–2009
2004 GDP
Share20052006200720082009
Est.Proj.
Real supply side growth(Annual percent change at constant prices)
Primary sector0.322.52.12.63.23.2
Agriculture0.154.52.62.33.53.5
Cattle and fishing0.140.81.93.23.23.2
Forestry0.031.01.01.01.51.5
Secondary sector0.123.03.76.46.67.1
Food and drink0.040.34.79.39.29.2
Export processing zone0.020.00.00.00.00.0
Energy0.012.54.45.65.65.6
Extractive industry0.004.49.110.511.531.6
Other0.048.210.35.96.36.1
Tertiary sector 10.456.06.88.910.110.3
Transportation0.155.37.39.310.910.8
Services0.136.76.08.49.69.6
Trade0.104.54.47.38.98.9
Public administration0.053.02.12.54.15.6
Public works/construction0.0318.822.522.818.118.0
Indirect taxes0.116.36.26.76.76.7
Real GDP at market prices1.004.64.96.57.37.5
Nominal demand side composition(Percent of GDP)
Resource balance-14.1-11.2-19.3-22.1-20.0
Imports of goods and nonfactor services41.040.944.043.941.2
Exports of goods and nonfactor services26.929.724.721.821.2
Current account balance (including grants) = (S-I)-10.9-8.8-17.5-20.9-19.2
Consumption91.686.490.188.288.3
Government8.48.89.98.79.1
Nongovernment83.277.680.279.479.1
Investment22.524.829.233.931.7
Government10.310.39.99.29.2
Non-government12.314.519.324.722.5
Of which: foreign direct investment1.74.011.515.313.1
National savings11.716.011.713.012.5
Government 25.96.34.14.95.1
Nongovernment5.79.87.68.17.3
Memoranda items:(Billions of ariary unless otherwise specified)
Nominal GDP (at market prices)10,09511,78113,72915,67717,788
Net factor income-157-171-154-171-247
Transfers 38055,964938812883
Nominal GNP10,74417,57414,51316,31718,423
Sources: Malagasy authorities and IMF staff estimates.

Includes non-inputed banking services.

Excluding MDRI capital transfers in 2006.

Including MDRI capital transfers in 2006.

Sources: Malagasy authorities and IMF staff estimates.

Includes non-inputed banking services.

Excluding MDRI capital transfers in 2006.

Including MDRI capital transfers in 2006.

Table 3a.Madagascar: Government Financial Operations, 2005–2009(Billions of ariary, unless otherwise indicated)
20052006200720082009
Prog.1Rev. prog.2Est.Prog.2Proj.Proj.2Rev. proj.Proj.
Total revenue and grants1,682.27,214.36,920.96,978.52,251.42,205.12,487.72,370.22,762.4
Total revenue and grants (excl. MDRI
capital transfers)2,044.92,020.22,116.1
Total revenue1,102.71,376.61,340.11,323.11,552.11,521.11,865.11,815.22,148.6
Tax revenue1,020.01,295.81,259.31,260.81,523.81,492.81,803.41,782.92,111.9
Domestic taxes529.0636.2636.2631.9765.8773.7898.4989.81,222.6
Taxes on foreign trade491.0659.6623.1628.9758.0719.1905.0793.0889.3
Nontax revenue82.880.880.862.228.328.361.732.336.7
Grants579.55,837.75,580.85,655.4699.3684.1622.5555.0613.9
Current grants141.0182.0193.8173.2150.5132.0133.198.8107.5
Capital grants438.55,655.75,387.05,482.2548.8552.1489.5456.2506.4
Project grants438.5486.3486.3619.8548.8552.1489.5456.2506.4
Capital transfers MDRI5,169.44,900.74,862.4
Total expenditure (commitment basis)2,145.52,580.52,531.02,521.32,822.42,973.33,189.63,047.73,489.1
Current expenditure1,107.21,221.31,240.61,312.51,415.61,617.01,597.81,596.31,847.4
Personnel456.4599.8596.9589.9721.1721.1827.1836.1965.8
Interest obligations266.6235.4253.4284.8221.1251.2218.8230.4220.7
Foreign interest obligations 397.950.647.855.521.533.547.936.442.2
Domestic interest obligations168.7184.8205.6229.3199.6217.6171.0193.9178.5
Other300.0373.6377.8381.1459.7475.7536.4462.4584.4
Treasury operations (net) 484.212.512.556.713.7169.015.467.476.4
Of which: central bank recap.0.0110.0
Capital expenditure1,038.31,359.21,290.41,208.81,406.81,356.31,591.81,451.41,641.7
Domestically financed304.8304.2286.3286.2349.0306.5525.3466.2567.3
Foreign-financed733.51,055.01,004.1922.61,057.81,049.81,066.4985.31,074.4
Net cost of structural reforms-8.5-6.2-6.2-9.90.00.00.00.00.0
Domestic balance (commitment basis) 5-219.8-104.5-145.2-230.0-191.0-368.9-210.1-210.8-223.9
Float 644.9-40.7-40.7-25.4-3.30.00.00.00.0
Variation of domestic arrears-10.9-20.0-20.0-4.7-23.4-23.40.00.00.0
Overall balance (cash basis)
Excluding grants-1,017.2-1,270.8-1,257.8-1,238.2-1,297.0-1,475.7-1,324.4-1,232.5-1,340.6
Including grants-437.74,566.94,323.04,417.2-597.8-791.6-701.9-677.5-726.7
Including grants, excl. MDRI capital
transfers and central bank recap.-602.5-577.7-445.2-597.8-667.5
Financing437.7-4,566.9-4,323.0-4,417.2597.8791.6701.9677.5726.7
Foreign (net)387.8-4,210.3-3,966.3-4,133.2560.3585.3680.6631.5683.0
Drawings454.5710.8683.8467.2634.4605.3732.5651.6704.1
Amortization 3-177.0-4,921.0-4,650.1-4,600.4-74.1-20.0-52.4-20.5-21.5
External debt relief110.30.00.00.00.00.00.50.40.4
Domestic (net)49.4-362.1-361.8-289.037.5202.321.346.043.7
Banking system-111.6-365.2-366.0-355.412.1120.5-5.0-5.0-5.0
Of which:MDRI account-325.5-325.5-325.536.236.236.236.236.2
Nonbanking system120.03.14.273.525.481.826.351.048.7
Treasury correspondent accounts (net)41.00.00.0-7.10.00.00.00.00.0
Privatization receipts0.65.55.05.00.04.00.00.00.0
Memorandum items:
MDRI flow debt-service savings73.472.565.5111.6101.1123.4104.8115.4
Net domestic financing 784.0-55.7-55.747.610.8182.921.346.043.7
Excluding central bank recap.10.858.8
Priority spending 81,060.51,292.21,292.21,294.21,500.81,500.8
Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

After MDRI debt relief from 2006 onward.

Includes annexed budgets of quasi-public entities (i.e. port authorities, post office, government printing office, civil service, retirement funds, and correspondent accounts of local authorities).

Total revenue minus expenditure, excluding foreign interest payments and foreign-financed capital expenditure.

6/ Difference between committed and paid expenditure.

Banking system, nonbanking system, Treasury correspondent accounts (net), privatization receipts, float, and variation in arrears, excluding capital transfer flowing from MDRI assistance from IMF via central bank in 2006.

Spending of Education, Health, Agriculture, Public works, Justice and Environment ministries.

Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

After MDRI debt relief from 2006 onward.

Includes annexed budgets of quasi-public entities (i.e. port authorities, post office, government printing office, civil service, retirement funds, and correspondent accounts of local authorities).

Total revenue minus expenditure, excluding foreign interest payments and foreign-financed capital expenditure.

6/ Difference between committed and paid expenditure.

Banking system, nonbanking system, Treasury correspondent accounts (net), privatization receipts, float, and variation in arrears, excluding capital transfer flowing from MDRI assistance from IMF via central bank in 2006.

Spending of Education, Health, Agriculture, Public works, Justice and Environment ministries.

Table 3b.Madagascar: Government Financial Operations, 2005–2009(Percent of GDP, unless otherwise indicated)
20052006200720082009
Prog.1Rev. prog.2Est.Prog.2Proj.Proj.2Rev. proj.Proj.
Total revenue and grants16.761.258.859.216.516.116.115.115.5
Total revenue and grants (excl. MDRI
capital transfers)17.317.218.0
Total revenue10.911.711.411.211.411.112.111.612.1
Tax revenue10.111.010.710.711.210.911.711.411.9
Domestic taxes5.25.45.45.45.65.65.86.36.9
Taxes on foreign trade4.95.65.35.35.65.25.95.15.0
Nontax revenue0.80.70.70.50.20.20.40.20.2
Grants5.749.547.548.05.15.04.03.53.5
Current grants1.41.51.61.51.11.00.90.60.6
Capital grants4.348.045.846.54.04.03.22.92.8
Project grants4.34.14.15.34.04.03.22.92.8
Capital transfers MDRI43.841.741.3
Total expenditures (commitment basis)21.221.921.521.420.721.720.719.419.6
Current expenditure11.010.310.511.110.411.810.410.210.4
Personnel4.55.15.15.05.35.35.45.35.4
Interest obligations2.62.02.22.41.61.81.41.51.2
Domestic Interest1.71.61.71.91.51.61.11.21.0
Foreign Interest 31.00.40.40.50.20.20.30.20.2
Other3.03.23.23.23.43.53.52.93.3
Treasury operations 40.80.10.10.50.11.20.10.40.4
Of which: central bank recap.0.00.80.0
Capital expenditure10.311.511.010.310.39.910.39.39.2
Domestically financed expenditure3.02.62.42.42.62.23.43.03.2
Foreign-financed expenditure7.38.98.57.87.87.66.96.36.0
Net cost of structural reforms-0.1-0.1-0.1-0.10.00.00.00.00.0
Domestic balance (commitment basis) 5-2.2-0.9-1.2-2.0-1.4-2.7-1.4-1.3-1.3
Float 60.4-0.3-0.3-0.20.00.00.00.00.0
Variation of domestic arrears-0.1-0.2-0.20.0-0.2-0.20.00.00.0
Overall balance (cash basis)
Excluding grants-10.1-10.8-10.7-10.5-9.5-10.7-8.6-7.9-7.5
Including grants-4.338.736.837.5-4.4-5.8-4.5-4.3-4.1
Including grants, excl. MDRI capital
transfers and central bank recap.-5.1-4.9-3.8-4.4-4.9
Financing4.3-38.7-36.8-37.54.45.84.54.34.1
Foreign (net)3.8-35.7-33.7-35.14.14.34.44.03.8
Drawings4.56.05.84.04.74.44.74.24.0
Amortization 3-1.8-41.7-39.5-39.0-0.5-0.1-0.3-0.1-0.1
External debt relief1.10.00.00.00.00.00.00.00.0
Domestic (net)0.5-3.1-3.1-2.50.31.50.10.30.2
Banking sector-1.1-3.1-3.1-3.00.10.90.00.00.0
Nonbanking sector1.20.00.00.60.20.60.20.30.3
Treasury correspondent accounts (net)0.40.00.0-0.10.00.00.00.00.0
Privatization receipts0.00.00.00.00.00.00.00.00.0
Memorandum items:
Nominal GDP (billions of ariary)10,09511,79511,76011,78113,62213,72915,43215,67717,788
MDRI flow debt-service savings0.60.60.60.80.70.80.70.6
Net domestic financing 70.8-0.5-0.50.40.11.30.10.30.2
Excluding central bank recap.0.10.4
Priority spending 810.511.011.011.010.9
Net external aid 98.610.310.29.49.19.08.17.37.1
Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

See Table 3a., footnote 1.

See Table 3a., footnote 2.

See Table 3a., footnote 3.

See Table 3a., footnote 4.

SeeTable 3a., footnote 5.

See Table 3a., footnote 6.

See Table 3a., footnote 7.

See Table 3a., footnote 8.

9/ Foreign grants and loans, less debt service (excluding MDRI capital transfers in 2006).

Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

See Table 3a., footnote 1.

See Table 3a., footnote 2.

See Table 3a., footnote 3.

See Table 3a., footnote 4.

SeeTable 3a., footnote 5.

See Table 3a., footnote 6.

See Table 3a., footnote 7.

See Table 3a., footnote 8.

9/ Foreign grants and loans, less debt service (excluding MDRI capital transfers in 2006).

Table 4.Quarterly Government Financial Operations, 2007(Billions of ariary, cumulated since the beginning of the year, unless otherwise indicated)
MarchJuneSeptemberDecember
Prog.1Proj.Prog.1Proj.Prog.1Proj.Prog.1Proj.
Total revenue and grants501.6409.71,135.61,080.01,659.11,558.42,251.42,205.1
Total revenue340.8292.5767.2749.81,154.91,105.31,552.11,521.1
Tax revenue339.7291.3761.3743.91,136.91,087.31,523.81,492.8
Domestic taxes162.1138.0392.3397.7574.0574.8765.8773.7
Taxes on foreign trade177.5153.4369.0346.2563.0512.5758.0719.1
Nontax revenue1.11.15.95.917.917.928.328.3
Grants160.8117.2368.4330.2504.2453.1699.3684.1
Current grants7.256.188.581.692.7107.3150.5132.0
Capital grants153.761.1279.9248.6411.6345.8548.8552.1
Total expenditure721.2585.91,378.41,494.72,065.02,139.82,822.42,973.3
Current expenditure363.8320.4705.7848.21,044.91,217.01,415.61,616.9
Personnel180.3180.3360.6360.6540.8540.8721.1721.1
Interest expenditure54.559.0115.2127.0163.0186.3221.1251.1
Foreign interest obligations 21.96.111.417.312.823.221.533.5
Domestic interest obligations52.652.9103.8109.7150.2163.1199.6217.6
Of which:central bank recapitalization0.00.00.04.90.09.60.014.1
Other120.266.1217.2223.6328.2337.8459.7475.7
Treasury operations (net) 38.915.012.7137.012.8152.013.7169.0
Of which:central bank recapitalization0.00.00.0110.00.0110.00.0110.0
Capital expenditure357.4265.5672.7646.51,020.1922.81,406.81,356.3
Domestically financed61.260.0133.2137.9226.7199.2349.0306.5
Foreign financed296.2205.5539.5508.6793.4723.61,057.81,049.8
Net cost of structural reforms0.00.00.00.00.00.00.00.0
Overall balance (commitment basis)
Excluding grants-380.5-293.5-611.2-744.9-910.1-1,034.5-1,270.3-1,452.2
Including grants-219.7-176.3-242.8-414.7-405.8-581.5-571.1-768.2
Including grants, excluding central bank
recapitalization-219.7-176.3-242.8-299.8-405.8-461.9-571.1-644.1
Domestic balance (commitment basis) 4-82.4-81.9-60.3-219.0-103.9-287.7-191.0-368.9
Float 5-10.0-14.217.21.59.238.1-3.30.0
Variation of domestic arrears-23.40.0-23.4-23.4-23.4-23.4-23.4-23.4
Overall balance (cash basis)
Excluding grants-413.9-307.7-617.4-766.8-924.3-1,019.8-1,297.0-1,475.6
Including grants-253.1-190.5-249.0-436.6-420.0-566.7-597.8-791.6
Including grants, excluding central bank
recapitalization-253.1-190.5-249.0-321.7-420.0-447.2-597.8-667.5
Financing253.1190.5249.0436.6420.0566.7597.8791.6
Foreign (net)132.7138.9259.5281.5459.6469.8560.3585.3
Drawings142.5144.4294.8290.8507.2485.3634.4605.3
Budget0.00.035.230.8125.4107.5125.4107.5
Projects142.5144.4259.6260.0381.8377.8509.0497.8
Amortization 2-9.8-5.5-35.2-9.3-47.6-15.5-74.1-20.0
Domestic (net)120.351.5-10.6154.1-39.695.537.5202.3
Banking system52.0-32.2-4.687.3-41.367.912.1120.5
Central bank2.0-82.85.4107.38.792.912.1150.5
Of which:MDRI account9.09.018.118.127.127.136.236.2
Commercial banks & OPCA50.050.7-10.0-20.0-50.0-25.00.0-30.0
Nonbanking system68.383.7-5.966.81.727.625.481.8
Treasury correspondent accounts (net)0.00.00.00.00.00.00.00.0
Privatization receipts0.00.00.01.00.01.40.04.0
Memorandum items:
MDRI flow debt-service savings27.925.255.850.583.775.7111.6100.9
Net domestic financing 686.937.4-16.8133.2-53.8111.610.8182.9
Excluding central bank recapitalization86.937.4-16.818.3-53.8-7.910.858.8
Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

See Table 3a, footnote 2.

See Table 3a, footnote 3.

See Table 3a, footnote 4.

See Table 3a, footnote 5.

See Table 3a, footnote 6.

6/ See Table 3a, footnote 7.

Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates and projections.

See Table 3a, footnote 2.

See Table 3a, footnote 3.

See Table 3a, footnote 4.

See Table 3a, footnote 5.

See Table 3a, footnote 6.

6/ See Table 3a, footnote 7.

Table 5.Madagascar: Balance of Payments, 2005–2011(Millions of SDRs)
2005200620072008200920102011
Prog. 1Proj. 2Est.Prog. 2Proj.Proj. 2Rev.Proj.Proj.
Current account-371-393-372-329-403-828-439-1187-1204-610-683
Goods and services-481-516-485-420-521-912-551-1255-1250185314
Trade balance-402-394-371-372-413-667-433-896-832423563
Exports58058062966264568868472577619212231
Of which: big mining projects2310961352
Imports-982-974-1000-1034-1058-1355-1116-1621-1608-1498-1668
Of which: big mining projects-87-322-514-403-219-270
Net services-80-121-114-48-109-245-118-359-418-238-250
Income (net)-53-42-49-54-43-53-51-62-87-931-1138
Receipts1616162017221821212121
Payments-69-58-65-74-60-75-69-83-108-952-1159
Of which: government interest 3-33-16-15-18-7-12-14-13-15-16-16
Current transfers164164162145161138163130134137140
Government4444454632342723232628
Budget aid5354575544443836374144
Other (net) 4-10-10-12-8-12-10-11-13-14-15-16
Private12012011899129104136107110111112
Capital and financial account31151550248841888344412661265660730
Capital account 5109180917091750164185140164177194211
Of which: MDRI grant for debt due after 2006165415561553
Financial account183-1294-1207-118825469830411011088466519
Direct investment58606115087543110866821207236
Other125-1354-1268-1338167154194235267259283
Government120-1349-1258-1286167202194227238249258
Drawing180227216182189208209235246258271
Project drawings126181163129152171165191198206214
Budgetary support5445525237374444475257
Amortization 5-60-1576-1474-1468-22-7-15-7-7-9-13
Of which: IDA and AfDF loans-1534-1433-1431
Private sector, net (including banks)-3-5-10-440-4408291025
Other (incl. errors and omissions)2000-750000000
Overall balance-601211311591555479615147
Financing60-131-138-159-31-71-28-94-69-73-71
Central bank (net; increase = -)25-149-153-174-31-71-28-94-69-73-71
Use of IMF credit (net)3-137-129-12908000-1-2
Other assets, net (increase = -)22-11-24-44-31-79-28-94-69-71-69
Debt relief and cancellation341815140000000
Residual financing gap09801616231682224
Possible IMF financing8016161616800
Memorandum items:
Grants (percent of GDP)4.55.35.36.54.84.63.83.33.23.13.0
Loans (percent of GDP)3.5-35.9-33.9-34.34.14.34.44.03.83.53.3
Direct investment (percent of GDP)1.71.61.64.02.111.52.515.313.13.03.0
Current account (percent of GDP)
Excluding net official transfers-12.1-11.6-11.2-10.0-10.7-18.2-10.6-21.3-19.6-9.0-9.1
Including net official transfers-10.9-10.5-10.0-8.8-9.9-17.5-10.0-20.9-19.2-8.7-8.7
Debt service (percent of exports of goods) 68.02.72.62.63.72.83.62.82.91.31.3
Gross official reserves337349361382392460420555624695764
Months of imports of goods and nonfactor services2.92.92.93.03.02.73.02.72.93.53.5
Months of imports, excl. large mining projects3.33.63.73.93.9
Exchange rate (ariary/SDR, period average)295931353167314633502904
Sources: Central Bank of Madagascar, Ministry of Finance, IMF Finance Dept., and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

After MDRI debt relief from 2006 onward.

Other official grants less payments due to scholarships and contributions to international organizations

Includes impact of HIPC completion point in 2004 and MDRI in 2006.

After HIPC and MDRI debt reliefs .

Sources: Central Bank of Madagascar, Ministry of Finance, IMF Finance Dept., and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

After MDRI debt relief from 2006 onward.

Other official grants less payments due to scholarships and contributions to international organizations

Includes impact of HIPC completion point in 2004 and MDRI in 2006.

After HIPC and MDRI debt reliefs .

Table 6.Madagascar: Monetary Survey, 2005–2009(Billions of ariary, unless otherwise specified)
20052006200720082009
Dec.MarchJuneSept.Dec.
Prog.1Proj.2Est.Prog.2Proj.Prog.2Proj.Prog.2Proj.Prog.2Proj.Proj.2Rev. Proj.Proj.
Net foreign assets933.41,429.61,460.31,584.01,408.61,635.71,480.91,702.41,563.61,756.91,595.81,777.21,740.82,051.22,204.4
Net foreign assets (BCM)526.51,000.71,011.01,050.6933.41,101.21,005.71,143.41,088.41,159.51,120.61,149.01,243.41,349.41,563.6
Net foreign assets (domestic money banks)406.9428.9449.2533.4475.2534.5475.2558.9475.2597.4475.2628.3497.4701.8640.8
Net domestic assets1,243.91,086.71,086.81,151.11,218.81,270.21,195.81,312.41,186.91,435.21,345.01,687.21,591.22,249.12,931.7
Domestic credit1,409.21,288.61,286.11,293.81,502.91,350.41,458.01,426.01,404.41,516.21,576.11,717.51,864.02,329.73,005.1
Net credit to government (budget)294.1-71.1-71.9-60.8-19.9-93.0-76.526.5-113.27.1-59.859.7-64.854.749.7
Other claims on public sector104.7104.7107.0138.5107.0138.5107.0138.5107.0138.5107.0138.5107.0138.5138.5
Credit to the economy1,010.41,255.01,250.91,216.11,415.71,333.71,427.51,356.51,410.51,455.71,528.91,565.81,821.82,136.62,816.9
Credit to public enterprises13.313.342.824.842.824.742.824.742.824.742.824.742.824.724.7
Credit to private sector997.11,241.71,208.11,191.31,372.91,309.01,384.71,331.81,367.71,431.01,486.11,541.11,779.02,111.92,792.2
Other items (net; asset = +)-165.3-201.8-199.2-142.8-284.1-80.2-262.2-113.7-217.5-81.0-231.2-30.2-272.8-80.7-73.3
M32,177.02,516.32,547.12,735.02,627.42,906.02,676.73,014.72,750.53,192.12,940.73,464.53,331.44,299.95,135.7
Foreign currency deposits334.3339.5403.2443.5446.6445.4426.5467.6443.2493.8465.5518.1527.3643.1768.1
M21,842.72,176.92,143.92,291.62,180.82,460.62,250.32,547.12,307.32,698.32,475.32,946.42,804.13,656.84,367.6
Currency in circulation599.1692.5692.1711.8666.0701.5678.7755.7697.5805.0787.3874.6878.51,042.11,207.3
Deposits in local currency1,214.51,455.31,421.91,548.61,484.81,727.41,541.61,759.91,579.81,861.71,658.02,040.21,895.62,583.13,128.7
Short-term obligations of commercial banks29.129.130.031.130.031.630.031.630.031.630.031.630.031.631.6
Memorandum items:(12-month percentage change unless otherwise indicated)
M33.115.617.025.615.828.111.926.215.529.015.526.713.324.119.4
M24.618.116.324.415.830.614.029.216.830.715.528.613.324.119.4
Domestic credit5.5-8.6-8.7-8.230.817.624.622.124.837.922.632.718.335.629.0
Credit to the economy21.124.521.220.432.224.828.723.421.124.123.028.819.736.531.8
Net credit to government (NCG)-27.5-124.2-124.4-120.7-31.5220.530.4-145.2-37.5-103.8-16.8-198.18.4-8.4-9.1
Nominal change in NCG since beginning of year-111.6-365.2-366.0-354.952.0-32.2-4.687.3-41.367.912.1120.5-5.0-5.0-5.0
Reserve money11.712.212.213.012.720.79.618.617.718.813.621.811.919.317.1
Money multiplier (M3/reserves)2.32.42.42.62.72.72.62.72.52.72.52.72.52.82.8
Velocity of money (GDP/end-of-period M3)4.64.74.64.34.64.04.63.63.5
Exchange rate (ariary per SDR; end of period) 33,0873,1353,1673,0273,3502,9533,3502,9333,3502,8673,3502,8023,5072,7612,843
Sources: Central Bank of Madagascar (BCM) and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism . December 2006 program targets are unchanged.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

Future exchange rate for monetary programming purposes.

Sources: Central Bank of Madagascar (BCM) and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism . December 2006 program targets are unchanged.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

Future exchange rate for monetary programming purposes.

Table 7.Madagascar: Balance Sheet of the Central Bank, 2005–2009(Billions of ariary)
20052006200720082009
Dec.MarchJuneSept.Dec.
Prog.1Proj.2Est.Prog.1Est.Prog.1Proj.Prog.1Proj.Prog.1Proj.Proj.1Rev. Proj.Proj.
Net foreign assets526.51,000.71,011.01,050.6933.41,101.21,005.71,143.41,088.41,159.51,120.61,149.01,243.41,349.41,563.6
Gross foreign assets1,041.31,093.11,143.01,155.11,073.01,226.11,171.71,267.51,254.31,303.31,312.91,289.81,472.11,531.51,773.5
Gross foreign liabilities514.835.6132.0104.6139.6124.9165.9124.1165.9143.8192.2140.8228.8182.1209.9
Net domestic assets411.351.340.99.256.6-40.934.3-17.61.68.674.1141.893.8191.0240.2
Credit to government (net)325.3-14.6-30.4-82.044.3-193.619.9-70.1-17.5-74.253.868.5119.3110.5174.5
Of which:IMF MDRI debt relief30.0-325.5-325.5-325.5-316.5-325.5-307.5-307.5-298.4-298.4-289.4-289.4-253.2-253.2-217.0
Claims on public enterprises4.54.54.54.64.54.54.54.54.54.54.54.54.54.54.5
Liquidity operations (+ = injection)1.11.1-10.4-49.5-10.4-33.2-10.4-99.9-10.4-89.6-10.4-50.9-10.4-18.4-19.5
Other items (net; asset +)80.560.477.2136.118.3152.720.352.525.082.826.3119.8-19.594.580.7
Reserve money937.81,051.91,051.91,059.8990.01,060.31,040.01,125.81,090.01,168.11,194.71,290.81,337.21,540.41,803.8
Currency outside banks599.1692.5692.1711.8666.0701.5678.7755.7697.5805.0787.3874.6878.51,042.11,207.3
Bank reserves338.4359.4359.5345.3323.6358.3360.8369.7392.0362.7407.0415.7458.1497.9596.0
Currency in banks40.244.749.851.141.745.446.849.041.652.256.456.860.767.177.1
Deposits298.2314.7309.7294.2281.9312.9314.1320.7350.4310.4350.6359.0397.4430.8518.9
Memorandum items:
Cumulative annual flow
Net foreign assets6.4474.2484.5524.1-77.750.6-5.392.977.4108.9109.698.4122.7200.4214.2
Excluding MDRI77.587.9127.4
In SDRs-9.019.919.947.7-40.625.8-19.042.95.757.315.363.020.178.761.2
Net domestic assets91.7-359.7-370.5-402.115.8-50.1-6.6-26.8-39.3-0.633.3132.619.749.249.2
Excluding MDRI36.926.2-5.4
Credit to government (net)460.5-365.2-366.0-407.22.0-82.85.4107.38.792.912.1150.512.142.064.0
Reserve money98.1114.4114.1122.0-61.90.5-11.966.138.1108.3142.8231.0285.3249.6263.4
Sources: Central Bank of Madagascar (BCM) and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism. December 2006 program targets are unchanged.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

Total amount of MDRI debt relief from the IMF, excluding already received HIPC support (MGA 396.7 billion or SDR128.7 million). Of this amount, MGA 36 billion was repaid to the BCM to cover prior onlending to the government of an IMF disbursement, leaving a balance of MGA 361.7 billion.

Excludes treasury bills used for monetary policy purposes.

Sources: Central Bank of Madagascar (BCM) and IMF staff estimates and projections.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism. December 2006 program targets are unchanged.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

Total amount of MDRI debt relief from the IMF, excluding already received HIPC support (MGA 396.7 billion or SDR128.7 million). Of this amount, MGA 36 billion was repaid to the BCM to cover prior onlending to the government of an IMF disbursement, leaving a balance of MGA 361.7 billion.

Excludes treasury bills used for monetary policy purposes.

Table 8.Madagascar: Selected Economic and Financial Indicators, 2005–2011
2005200620072008200920102011
Est.Proj.
(Percentage change, unless otherwise indicated)
National income and prices
Nominal GDP growth23.816.716.514.213.515.214.5
Real GDP growth4.64.96.57.37.59.89.0
GDP deflator18.411.39.56.45.64.95.0
Consumer price index (period average)18.410.89.87.15.55.05.0
Consumer price index (end of period)11.410.97.96.05.05.05.0
External sector
Export of goods volume16.57.83.03.26.8147.617.1
Import of goods volume-13.0-6.133.916.4-0.2-6.511.8
Terms of trade (deterioration = -)-36.4-5.53.0-0.60.80.4-0.5
Money and credit 1
Reserve money 211.713.021.819.317.116.916.2
Broad money3.125.626.724.119.416.916.2
Net foreign assets1.929.97.17.93.64.53.2
Net domestic assets1.2-4.319.616.215.912.513.0
Credit to government-5.3-16.34.4-0.1-0.1-0.1-0.1
Credit to the private sector 222.419.529.437.032.221.522.3
Velocity of money (M3; average)4.64.34.03.63.53.43.4
(Percent of GDP)
Public finance
Total revenue (excluding grants)10.911.211.111.612.112.613.0
Of which: tax revenue10.110.710.911.411.912.412.8
Grants 15.748.05.03.53.43.33.2
Total expenditure21.221.421.719.419.619.719.8
Current expenditure11.011.111.810.210.410.911.2
Capital expenditure10.310.39.99.29.28.88.6
Domestic balance-2.2-2.0-2.7-1.3-1.3-1.2-1.2
Overall balance (cash basis, incl. grants)-4.337.5-5.8-4.3-4.1-3.8-3.6
Overall balance (cash basis, excl. grants)-10.1-10.5-10.7-7.8-7.5-7.2-6.8
Domestic financing0.5-2.51.50.30.30.30.3
Savings and investment
Investment22.524.829.233.931.723.824.5
Government10.310.39.99.29.28.88.6
Nongovernment12.314.519.324.722.514.915.9
Gross domestic savings8.413.69.911.811.726.428.5
Gross national savings11.716.011.713.012.515.115.8
External sector and public debt
Exports of goods, f.o.b.17.017.714.512.812.427.328.4
Imports of goods, c.i.f.33.932.533.733.630.225.125.0
Current account balance (excl. grants)-12.1-10.0-18.2-21.3-19.6-9.0-9.1
Current account balance (incl. grants)-10.9-8.8-17.5-20.9-19.2-8.7-8.7
Public debt80.338.636.434.835.435.034.7
External69.928.826.826.227.528.028.2
Domestic10.49.89.68.67.87.16.4
Net present value (NPV) of external debt
NPV of debt-to-exports ratio134.338.746.254.160.937.738.5
NPV of debt-to-fiscal revenue ratio215.064.271.278.183.385.587.8
(Units as indicated)
Gross official reserves (SDR millions)337.4381.6460.3554.7623.8695.3764.4
Months of imports of goods and services2.93.02.72.72.93.53.5
Months of imports, excl. large mining projects3.33.63.73.93.9
Residual financing gap (SDR millions)0.00.015.715.77.921.924.3
Ariary per SDR (period average)2,9583,1462,904
Real effective exchange rate (period average,
percent change)6.10.816.110.00.00.00.0
GDP per capita (U.S. dollars)282299374439473519568
Nominal GDP (billions of ariary)10,09511,78113,72915,67717,78820,48823,458
Sources: Malagasy authorities and IMF staff estimates and projections.

Growth in percent of beginning of period money stock (M3).

Year-on-year growth.

3/ Includes MDRI capital transfers in 2006.

Sources: Malagasy authorities and IMF staff estimates and projections.

Growth in percent of beginning of period money stock (M3).

Year-on-year growth.

3/ Includes MDRI capital transfers in 2006.

Table 9.Madagascar: Bank Soundness Indicators, 2002–2006(end-of-period)
20022003200420052006
Prelim.
Capital adequacy(Ratio; percent)
Regulatory capital to risk-weighted assets
Lowest ratio11.410.77.28.89.6
Average15.314.412.012.012.7
Asset quality
Nonperforming loans to total gross loans19.616.711.59.58.7
Risk concentration (highest)54.541.362.9
Earnings and profitability
Return on assets0.82.43.03.73.2
Return on equity13.437.949.161.243.2
Interest margin to gross income59.364.868.4
Noninterest expenses to gross income52.246.944.842.445.8
Personnel expenses to noninterest expenses38.338.935.436.435.2
Liquidity
Liquid assets to total assets52.150.547.443.444.0
Liquid assets to short-term liabilities77.873.267.661.364.7
(Billions of ariary; unless otherwise specified)
Memorandum items:
Total assets1,393.01,537.22,006.62,208.82729.5
Total profits before tax15.949.980.2111.4112.9
Foreign exchange exposure (highest ratio)19.658.3127.216.89.4
Sources: Banking and Financial Supervision Commission, Central Bank of Madagascar (BCM).
Sources: Banking and Financial Supervision Commission, Central Bank of Madagascar (BCM).
Table 10.Madagascar: Millennium Development Goals
199419972000200320052015

Target
Goal 1. Eradicate extreme poverty and hunger.
1. Population below US$1 a day (percent)46.049.0
2. Poverty gap ratio at US$1 a day (percent)18.018.0
3. Share of income or consumption held by poorest 20 percent (percent)5.0
4. Prevalence of child malnutrition (percent of children under 5)45.040.033.042.020.5
5. Population below minimum level of dietary energy consumption (percent)40.038.017.5
Goal 2. Achieve universal primary education.
6. Net primary enrollment ratio (percent of relevant age group)65.077.089.0
7. Percentage of cohort reaching grade 551.057.0
8. Youth literacy rate (percent age 15-24)70.0
Goal 3. Promote gender equality and empower women.
9. Ratio of girls to boys in primary and secondary education (percent)96.7100.0
10. Ratio of young literate females to males (percent ages 15-24)93.9
11. Share of women employed in the nonagricultural sector (percent)
12. Proportion of seats held by women in the national parliament (percent)4.08.04.06.9
Goal 4. Reduce child mortality.
13. Under-5 mortality rate (per 1,000)137.0123.056.0
14. Infant mortality rate (per 1,000 live births)84.076.0
15. Immunization against measles (percent of children 12-23 months)63.046.056.059.059.0
Goal 5. Improve maternal health.
16. Maternal mortality ratio (modeled estimate, per 100,000 live births)550.0123.0
17. Proportion of births attended by skilled health personnel47.346.251.3
Goal 6. Combat HIV/AIDS, malaria, and other diseases.
19. Contraceptive prevalence rate (percent of women ages 15-49)19.019.017.027.0
20. Number of children orphaned by HIV/AIDS8,20013,000
21. Prevalence of death associated with malaria
22. Share of population in malaria risk areas with effective prevention and
treatment
23. Incidence of tuberculosis (per 100,000 people)217.9
24. Tuberculosis cases detected under DOTS (percent)64.876.273.7
Goal 7. Ensure environmental sustainability.
25. Forest area (percent of total land area)22.022.0
26. Nationally protected areas (percent total land area)4.34.3
27. GDP per unit of energy use (PPP, $ per kg oil equivalent)
28. CO2 emissions (metric tons per capita)0.10.10.10.1
29. Proportion of population using solid fuels
30. Access to improved water source (percent of population)46.072.0
31. Access to improved sanitation (percent of population)32.0
32. Access to secure tenure (percent of population)
Goal 8. Develop a Global Partnership for Development.1
45. Unemployment rate of population ages 15-24 (total)
Female
Male
46. Proportion of population with access to affordable essential drugs
47. Fixed line and mobile telephones (per 1,000 people)2.53.27.319.5
48. Personal computers (per 1,000 people)1.42.24.55.0
Sources: World Bank.

Indicators 33-44 are excluded because they cannot be measured on a country-specific basis. They are related to official development assistance, market access, and the HIPC initiative.

Sources: World Bank.

Indicators 33-44 are excluded because they cannot be measured on a country-specific basis. They are related to official development assistance, market access, and the HIPC initiative.

2. The mission took place following the re-election of President Ravalomanana, the appointment of a new government, and the launch of the MAP.1 The President retained key Ministers from the previous government, including the Minister of Finance and Budget. The MAP provides the authorities’ overall strategic framework for accelerating growth and reducing poverty in line with the MDGs and is complemented by more specific sector strategies and actions plans.2

3. Madagascar is prone to exogenous shocks which disrupt economic activity. Volatility in key commodity prices (notably for oil and vanilla) (Figure 2.1), the termination of the textile quota in early 2005, and the expected termination of the third party provision under the U.S. Africa Growth and Opportunity Act have created uncertainty regarding trade flows. The country is also vulnerable to weather-related shocks, such as the severe tropical storms and flooding that hit Madagascar in late December 2006 and in early 2007 and the drought that affected the southern part of the country.

Figure 1.Madagascar: Progress Toward Millennium Development Goals, 1990–2015

(Percent, unless otherwise indicated)

Source: World Bank, http://ddp-ext.worldbank.org; and United Nations, http://unstats.un.org.

Figure 2.Madagascar: Major Economic Challenges

4. Although increasingly open and diversified, Madagascar’s economy has been losing market share since 2002. The trend improvement in export market share since the mid-1990s was reversed by the 2002 political crisis, the drop in vanilla prices from the high levels of 2003, and the loss of textile markets to more efficient producers (Figure 2.2). In spite of pervasive weaknesses in the business environment (also noted in World Bank and World Economic Forum surveys), Madagascar’s openness has nonetheless improved: the share of trade in GDP is growing and exports are more diversified—although with products where prices have lagged behind world prices.

Madagascar: Exports of Goods and Services, 1985–2006

(Percent of GDP)

Sources: Malagasy authorities and IMF staff estimates.

Global Competitiveness Index 2006

(Out of 125 countries, best=1, worst=125)

Madagascar ranks particularly low in higher education and training, macroeconomic stability, and infrastructure.

Overall ranking of Madagascar Subcategories:109
Innovation77
Institution92
Technological readiness99
Business sophistication99
Health and primary education100
Market efficiency103
Higher education and training113
Macroeconomic stability115
Infrastructure116
Source: World Economic Forum.
Doing Business Indicators 2006

(Out of 175 countries, best=1, worst=175)

Madagascar ranks relatively well on protecting investors but low on registering property and getting credit.

Overall ranking of Madagascar Subcategories:149
Protecting investors46
Paying taxes86
Enforcing contracts106
Starting a business110
Trading across borders131
Employing workers136
Closing a business151
Dealing with licenses152
Getting credit159
Registering property162
Source: World Bank.

5. Domestic revenue mobilization is amongst the lowest in SSA and is insufficient to finance critical development expenditure in support of the MDGs. Madagascar has one of the lowest tax revenue-to-GDP ratios in Africa (Figure 2.4); the tax system has been fraught with exonerations, exemptions, and special regimes, and the tax and customs administrations are plagued with severe institutional capacity constraints. This not only impedes the government’s ability to finance its own development agenda, but also discourages foreign assistance flows as donors expect recipient countries to improve domestic revenue mobilization.

6. Other capacity constraints impede implementation of macroeconomic policy. Weaknesses in public financial management (PFM) hinder the government’s ability to design and execute the budget and manage its cash flow. Implementation of monetary and exchange policy is hampered by the central bank’s weak financial position and limited monetary policy instruments. Constraints in data collection and management affect the quality of the data on which macroeconomic policy is based.

7. The financial system is shallow, and has not been effective at promoting broadbased growth. Monetization of the Malagasy economy is low, credit to the private sector is limited, and the economy remains largely cash-oriented (Figure 2.5)—all of which constrain private sector-driven growth.

Monetary Statistics of Selected Countries, 2005
Percent of GDPPercent of Broad Money
Broad MoneyCredit to the

Private Sector
Currency in Circulation
Madagascar21.69.927.5
Mozambique28.413.916.9
Mauritius85.858.2
South Africa71.274.14.9
Bangladesh39.028.7
Vietnam82.466.019.0
Jamaica37.616.912.2
Source: IMF country staff reports.

8. Large increases in FDI in the mining sector may signal an important shift in the structure of the economy. Construction by foreign investors of a US$650 million (12 percent of GDP) ilmenite mine began in mid-2006. Construction of another foreignowned US$2.5 billion (45 percent of GDP) nickel and cobalt mine and processing facility commenced in 2007 and will be completed over the next three years. Production and export of these commodities should begin in 2009/10. These projects contain a large share of local expenditure (about 20 percent), which is placing upward pressure on the exchange rate. Other large mining and petroleum projects are at various stages of discussion and could accentuate this pressure and pose further challenges to macroeconomic management.

9. Implementation of past Fund policy advice has been mixed. The authorities have made good progress in managing liquidity and reducing inflation. They have started ambitious reforms to improve PFM, but ad hoc tax exemptions until mid-2006 and weaknesses in tax and customs administration have continued to dampen revenue performance. The country’s statistical capacity remains weak. And limited progress has been made in improving the reliability of power supply, which is a major impediment to private sector development according to most business climate surveys.

II. Recent Economic Developments

10. In 2006, economic growth increased while inflation continued to decline. Growth picked up in 2006, largely because of the startup of construction of a large mining project, sizeable investments in public infrastructure, and strong performance in telecommunication, transportation, and financial services (Table 2.) Meanwhile, primary sector growth declined owing to a normal rice harvest after the previous year’s bumper crop. Inflation continued on its downward path in 2006 aided by tight monetary policy, low rice prices, a decline in world oil prices during the second half of the year, and the recent appreciation of the nominal exchange rate. Agriculture growth (particularly rice and vanilla) in 2007 has been negatively affected by the recent floods, and inflation rose in the early months of the year owing to an increase in rice prices.

Madagascar: Contribution to Real Growth at Factor Cost, 2004–2006

(Percent)

Sources: Malagasy authorities and IMF staff estimates.

Madagascar: Consumer Price Index, December 2004 – March 2007

(Annual percent change)

Source: Malagasy authorities.

Madagascar: Revenue and Expenditure, 2000–2006

(Percent of GDP) 1

Citation: 2007, 236; 10.5089/9781451884227.002.A001

Source: Malagasy authorities and IMF staff estimates.

1 For nontax revenue and grants and the overall balance in 2006, excludes MDRI capital transfers.

11. The authorities achieved their tax revenue target in 2006, but missed their domestic financing target on account of spending overages. Government revenues and grants rose owing mainly to tax policy measures and an increase in grants in support of the country’s poverty reduction strategy. The authorities phased out their capital goods import tax exoneration scheme in September 2005 and increased excise taxes on petroleum products. Despite these measures, tax revenues as a share of GDP remained lower than in 2004. The domestic financing target was missed in 2006 due to higher than programmed obligatory spending, principally the result of underbudgeting of civil service pensions, VAT reimbursements, and correspondingly higher domestic interest payments (Tables 3a and 3b). MDRI debt relief freed up resources for priority spending.

Madagascar: Fiscal Indicators, 2004–06

(Percent of GDP) 1

200420052006
(a)(b)(b) - (a)
Total revenue and grants 220.316.718.01.3
Tax revenue10.910.110.70.6
Nontax revenue1.20.80.5-0.3
Grants 28.25.76.71.0
Total expenditure (commitment basis)25.121.221.40.2
Current expenditure12.611.011.10.2
Capital expenditure12.510.310.30.0
Overall balance (commitment basis, including grants) 2-4.9-4.7-3.51.1
Overall balance (cash basis, including grants) 2-5.7-4.3-3.80.5
Foreign financing 26.43.83.1-0.7
Domestic financing 2-0.70.50.70.2
Memorandum items:
Net external aid 2313.08.69.40.8
Of which: MDRI flow debt-service savings0.60.6
Priority PRSP spending12.010.511.00.5
Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates.

Aggregates may differ from the sum of components due to rounding.

Excluding MDRI capital transfers.

Foreign grants and loans, less debt service.

Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates.

Aggregates may differ from the sum of components due to rounding.

Excluding MDRI capital transfers.

Foreign grants and loans, less debt service.

12. In 2006, the overall balance of payment deficit shifted to a surplus owing to large foreign direct investment inflows, strong export performance, and a reduction in debt service (Table 5.). The large jump in FDI inflows was due to the large ilimite mining project and an increase in reinvested profits of foreign commercial banks. With the exception of vanilla and textiles, exports were strong owing to a pick up in international prices, as were non-factor services, particularly tourism and business services (owing to the increase in FDI). Debt service declined by 45 percent due to the implementation of the MDRI. The improved overall balance of payments allowed gross official reserves to rise to the equivalent of three months of imports, and the real and nominal exchange rates to appreciate since mid- 2006.3

Madagascar: Balance of Payments, 2000–2006

(Percent of GDP, unless otherwise indicated)

Source: Malagasy authorities.

Madagascar: Real and Nominal Effective Exchange Rate and Relative Prices, December 2002–March 2007

(Index, June 2004=100)

Sources: INS.

13. The demand for real money balances increased during 2006 and was accommodated through higher NFA accumulation (Table 6.). The increase in money demand arose principally from the domestic spending requirements related to rising FDI. The Central Bank of Madagascar (BCM) accommodated the higher money demand by purchasing foreign exchange in the interbank foreign exchange market (MID). To meet its December 2006 NFA and NDA targets, the BCM mopped up MGA 50 billion (about 5 percent of reserve money). During the first quarter of 2007, reserve money grew at an annual rate of 21 percent as the central bank purchased foreign exchange, but without mopping up the liquidity injected.

Madagascar: Real Money Growth, December 2003 – March 2007

(Annual percent change)

Source: Malagasy authorities.

Madagascar: Reserve Money Growth and the Contribution of Net Foreign Assets to Reserve Money Growth, December ‘05 - March’07

(Percent)

Source: Malagasy authorities and IMF staff estimates.

14. Banking sector soundness improved. In 2006, nonperforming loans declined as a share of total loans, capital adequacy increased, and foreign exchange exposure declined (Table 9.). A license was issued to a new commercial bank which should increase competition in the banking sector. At end-October 2006, the IMF’s MCM estimated that the central bank had a negative net worth of about 5 percent of its balance sheet (0.6 percent of GDP) according to international financial reporting standards. The central bank was recapitalized in May 2007 (¶31).

15. Performance under the PRGF arrangement has been mixed (Table 1113). All program conditionality was observed with the exception of one quantitative performance criterion (PC) at end-December 2006 and two structural PCs. The quantitative PC on domestic financing of the budget was missed owing to the spending overruns previously mentioned (¶11). The authorities have subsequently revised their 2007 budget to fully account for all obligatory spending and will continue to strengthen their control over spending commitments within their PFM action plan. It appears that the continuous structural PC on no departures from the established procedures for valuation and clearance of goods at customs has not been respected, and the authorities have requested the independent anticorruption office to conduct an audit on compliance with the customs procedures. In turn, they have requested that Executive Board consideration of the second review under the PRGF arrangement be postponed until after the audit has been completed, which is currently expected to be in September.

Table 11.Madagascar: Quantitative Performance Criteria and Indicative Targets for the PRGF Arrangement, 2006 1(Billions of ariary, cumulative from the beginning of the year, unless otherwise indicated)
July 31September 30December 31
Performance CriteriaIndicative TargetsPerformance Criteria
Program 2AdjustedActualStatusProgram 2 AdjustedActualStatusProgram 2RevisedActualStatus
ProgramProgramProgram 3Adjusted
1. Quantitative performance criteria
External
(a) Ceiling on accumulation of new external arrears (millions of SDRs)40.00.0Met0.00.0Met0.00.00.0Met
(b) Ceiling on contracting or guaranteeing of new external debt on
nonconcessional terms40.00.0Met0.00.0Met0.00.00.0Met
Central Bank
(c) Floor on net foreign assets (NFA) of the BCM 56-24.1-18.231.9Met62.761.6148.1Met77.577.5198.0Met
(d) Ceiling on net domestic assets (NDA) of the BCM 516.88.7-47.5Met-35.6-36.7-102.4Met36.936.9-79.1Met
Fiscal
(e) Ceiling on domestic financing of the central government 5133.9133.9-8.2Met62.166.4-62.6Met-55.7-55.7-1.3Not Met
(f) Floor on tax revenue695.1722.0Met907.8906.5Not Met1,295.81,259.31,260.8Met
(g) Ceiling on accumulation of new domestic arrears 40.00.0Met0.00.0Met0.00.00.0Met
II. Memorandum items:
Floor on net foreign assets (NFA) of the BCM NFA (SDR millions)56-7.7-7.710.120.020.047.019.919.962.5Met
Net external budget (program) support (SDR millions)-1.1-7.730.446.446.559.044.2
Budget support grants and loans (SDR millions)16.615.248.669.473.684.079.2
External cash debt service (SDR millions)17.722.918.222.927.125.035.0
Exchange rate (MGA/SDR)3,134.73,172.13,134.73,153.33,134.73,167.33,027.3
Sources: Malagasy authorities and IMF staff estimates and projections.

See Technical Memorandum of Understanding (TMU) in IMF Country Report No. 07/7 for full description of variables and adjustments.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

To be observed on a continuous basis.

Excluding capital transfer flowing from MDRI assistance from IMF via central bank.

For December 2006, the revised floor on NFA is set in SDR terms.

Sources: Malagasy authorities and IMF staff estimates and projections.

See Technical Memorandum of Understanding (TMU) in IMF Country Report No. 07/7 for full description of variables and adjustments.

IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism.

IMF Country Report No. 07/7, Republic of Madgascar: First Review under the Three-Year Arrangement under the PRGF.

To be observed on a continuous basis.

Excluding capital transfer flowing from MDRI assistance from IMF via central bank.

For December 2006, the revised floor on NFA is set in SDR terms.

Table 12.Madagascar: Structural Performance Criteria and Benchmarks for the PRGF Arrangement, 2006
TimingStatus
Performance Criteria
• No waivers of the requirement to present pre- andContinuousNot met
• post-customs inspection reports for the import and
• clearance of goods (Rapport d’inspection
recevabilite[RIR] and Rapport d’inspection
enlevement[RIE], or on the use of the pre- and post
• inspection company SGS valuation of goods.
• No granting of ad hoc tax or tariff exemptionsContinuousMet
• outside those specified in the Customs Code and
• international treaties or conventions.
• Finalization of an audit of the VAT arrears owed bySeptember 30, 2006Met
• the government on capital expenditure.
• No transactions carried out between the governmentContinuousMet
• and the central bank that are contrary to the
• provisions of the Central Bank Charter.
• Issuance of monthly commitment ceilings for the lastSeptember 30, 2006Not met
• quarter of 2006 by the Ministry of Finance to allImplemented
• ministries on the basis of the latest cash flow planwith delay on
• prepared by the Treasury.October 24,
2006
Benchmarks
• Extension of the new ASYCUDA++ software to theSeptember 30, 2006Not met
• five largest customs bureaus.Implemented
with delay in
December
2006
• Inclusion of a recapitalization plan for the BCM inOctober 31, 2006Met
• the 2007 Budget Law.
• Development of a comprehensive time-bound actionDecember 31, 2006Met
• plan translating the 2003 and 2006 IMF FAD tax
• administration recommendations in operational
terms.
• Install the expenditure tracking information systemDecember 31, 2006Met
• SIGFP in 13 ministries.
• Completion of the verification of at least 80 percentDecember 31, 2006Not met
• of outstanding VAT credits at end-June 2006.Implemented
with delay on
March 20,
2007
Table 13.Structural Performance Criteria and Benchmarks for the PRGF Arrangement, 2007
TimingStatus
Performance criteria
• No granting of ad hoc tax or tariff exemptions outside those specified in theContinuousMet
• Customs Code and international treaties or conventions.
• No waivers of the requirement to present pre- and post-customs inspectionContinuousNot met
• reports for the import and clearance of goods (Rapport d’inspection
recevabilite[RIR] and Rapport d’inspection enlevement[RIE] or on the use
• of the pre- and post-inspection company SGS valuation of goods for custom
• offices that are not linked with the information system Tradenet.
• No waiver of the requirement to generate a cargo tracking slip (BSC) inContinuousMet
• advance of all imports.
• Implementation a recapitalization plan for the BCM which would include at aMarch 31, 2007Not Met
• minimum the issuance of a government bond to recapitalize the BCM and aImplemented
• written agreement between the Treasury and the BCM to pay market-with delay on May 30, 2007
• related rates of interest on the Treasury’s debt to the BCM.
• Production of a report on commitments, payment orders, and payments byApril 30, 2007Met
• major spending lines during the first quarter of 2007, in at least 13 ministries
• where the budget information system, SIGFP, is operational.
• Issuance of quarterly commitment ceilings by the Ministry of Finance andJune 30, 2007
• Budget to all ministries taking into account the most recent outlook for
• external and internal resources.
Structural benchmarks
• Provide the BCM with new instruments (securities) through theJanuary 31, 2007Met
• securitization of government debt to help it better manage liquidity.
• Complete a study on the opportunity of a single nonzero customs tariff, itsJune 30, 2007
• budgetary and economic impact, and other possible options within the
• framework of regional integration.
• Inclusion in the 2008 Finance Law of articles streamlining the Tax andOctober 31, 2007
• Customs Codes, while meeting the 2008 fiscal revenue objective of the
• program.
• Adopt a streamlined budget classification in the 2008 Finance Law toOctober 31, 2007Delayed to
• establish a clear link between each ministry and its programs to ensureOctober 31,
• accountability and clearly identify poverty reducing expenditure in the2008
• budget.
• Establish a computerized communication network between the TaxDecember 31,Delayed to
• Directorate, the Customs Directorate, and the Treasury to closely monitor2007June 30, 2008
• tax collection and broaden the tax base.
• Implement a comprehensive time-bound action plan to modernize taxDecember 31,
• administration in line with the Fund’s Fiscal Affairs Department2007
• recommendations of June 2006.
• Issue an international tender for the transfer of JIRAMA’s management to aDecember 31,Delayed to
• private operator under a lease (affermage).2007December 31, 2008

III. POLICY ISSUES

16. The Article IV consultation discussions centered on four main themes: (i) managing the changing medium-term outlook; (ii) preserving macroeconomic stability; (iii) improving PFM and transparency; and (iv) fostering private sector development.

A. Managing the Changing Medium-Term Outlook

17. The authorities have revised their base case medium-term projections to take into account projected FDI inflows. The construction of the two large mining projects includes substantial infrastructure development which is expected to be completed by 2010. Imports should increase substantially over the medium term owing to the high import content of the mining FDI and appreciation of the exchange rate. The current account deficit will rise to about 20 percent of GDP and will be mostly financed by the FDI inflows, thereby allowing the overall balance of payments to remain in surplus (Table 8.). Gross official reserves are expected to increase to the equivalent of 3.9 months of imports (excluding mining-related imports) by 2010. Thereafter, the trade balance should shift to a large surplus as mining exports commence. The current account, however, will remain in deficit because of large dividend payments to the mining projects’ equity holders. The authorities and staff have revised upward the economic growth projections to 8 percent on average over 2007–11 (more than twice the average over the past decade), while inflation is expected to continue on its downward path to 5 percent as envisaged.

FDI

(Percent of GDP)

Source: National authorities and IMF staff projections.

18. The increase in private sector FDI poses important challenges to competitiveness. The mission discussed the potential danger of “Dutch disease” arising from the large external inflows and the impact that an appreciation of the real exchange rate could have on the competitiveness of traditional exports. The authorities acknowledged that such a risk exists, but were confident that competitiveness could be maintained through the productivity-enhancing public investments (i.e., education, health, and infrastructure) and structural reforms (i.e., rehabilitation of the public utility company, streamlining of business regulations, etc.) that were underway. They reiterated that the government’s strategy is to encourage FDI and believed that on balance the economy would benefit from these inflows.

19. Despite these challenges, the authorities saw no need to change the current exchange rate regime (managed float with no predetermined path). The authorities expected both the pace and degree of appreciation experienced since the middle of 2006 to subside as the demand for imports picked up in the aftermath of the presidential, legislative, and municipal elections. They believed that the economy was undergoing a permanent structural change, that the exchange rate should be allowed to move to its new equilibrium, and that intervention should be limited to achieving the foreign reserve target and smoothing day-to-day volatility. To help reduce pressure on the exchange rate, the authorities have recently implemented measures to liberalize foreign exchange controls such as lengthening the time period allowed to repatriate export proceeds and increasing the ceiling on the open foreign exchange position of commercial banks.

20. The staff concurred that the exchange rate regime has been appropriate, but suggested that some “leaning against the wind” could be helpful in avoiding possible overshooting. Staff analysis suggests that the exchange rate has moved, albeit with a lag, broadly in line with macroeconomic fundamentals, and that the real effective rate has broadly reflected movements in the terms of trade and allowed export volume to grow strongly in recent years. Moreover, although the real exchange rate appreciated since the middle of 2006, a large share of the competitiveness gains achieved by the 2004 depreciation of the currency has been preserved (Figure, ¶12). However, in view of the thinness of the foreign exchange market and the magnitude of FDI inflows, overshooting was a risk. In this light, intervention could help avoid the exchange rate moving too far ahead of productivity gains, resulting in a major loss of competitiveness; it would also provide an opportunity to build foreign exchange reserves. The authorities agreed on the need to closely monitor real exchange rate and export developments, and on the merits of foreign exchange interventions if signs of overshooting emerged.

Madagascar: Real Effective Exchange Rate, Terms of Trade, and Export Volume of Goods, 1995–2006

(Index, 1995=100)

Source: National authorities; IMF World Economic Outlook; and IMF staff estimates.

Madagascar: Ariary per SDR, Actual Versus PPP Estimated Exchange Rate, January 1995 – March 2007

(Period average, inverted scale)

Source: Malagasy authorities and IMF staff estimates.

21. The staff also noted the substantial scope for improving the efficiency of the foreign exchange market in line with MCM recommendations. The staff urged caution, however, regarding liberalizing capital account transactions, as such liberalization needed to be carefully sequenced with efforts to strengthen the framework for banking supervision and prudential regulations. Staff also reminded the authorities of the need not to compromise prudential regulations in this process.

22. While the authorities agreed that running a fiscal surplus could help reduce appreciation pressure on the exchange rate, they did not believe that this was feasible from a political economy point of view given the need to increase poverty-reducing spending. They believed that the fiscal program, which allows only very limited recourse to domestic financing, was already tight. Any further expenditure cuts would therefore come at the expense of making progress towards the MDGs. The staff concurred but noted that a further exchange rate appreciation could also be detrimental to poverty reduction. Staff therefore recommended the identification of contingency spending reduction plans in nonpriority spending to cope with recurrent problems of revenue shortfalls and expenditure overruns.

23. The authorities have prepared an alternative high case scenario within the context of the MAP. The MAP foresees somewhat higher growth rates, tax revenues, government investment, and gross official reserves relative to the base case scenario, while the inflation objective would be broadly the same. Net external aid (including grants) is assumed to be substantially higher, resulting in a lower current account balance (including grants). The authorities’ preliminarily estimate the cost for achieving the MAP’s objectives at Euro 1.5 billion per year over the period 2007–12.4 Based on estimates provided by Madagascar’s main development partners, however, net external foreign assistance is expected to decline by 2.5 percentage points of GDP over the period 2006–09, while the MAP’s high case scenario assumes that donor assistance would increase by about 3 percentage points of GDP per annum. The authorities agreed, however, that they should continue to base their policies and budgets on the more conservative baseline scenario until the assumed higher levels of financing materialize. The staff noted that the fiscal stance could be relaxed if additional concessional external financing was forthcoming, subject to progress in increasing absorptive capacity and reducing inflation.

Madagascar: Key Targets under PRGF and MAP Scenarios
AverageAverage, 2007-2011
2004-06PRGFMAP
(Percentage change)
Real GDP growth4.98.08.3
CPI (period average)14.46.56.4
(Percent of GDP)
Investment23.928.626.0
Government11.09.111.6
Nongovernment12.919.514.4
Tax revenue10.611.912.9
Overall fiscal balance (incl. grants)-7.0-4.3-4.2
Current account balance (incl. grants)-9.6-15.0-7.0
Net external aid 110.47.310.6
Foreign direct investment2.39.23.4
Gross official reserves (months of imports)2.93.14.4
Sources: Madagascar Action Plan (MAP); Malagasy authorities; and IMF staff estimates and projections.

Foreign grants and loans, less debt service (excl. MDRI capital transfers in 2006).

Sources: Madagascar Action Plan (MAP); Malagasy authorities; and IMF staff estimates and projections.

Foreign grants and loans, less debt service (excl. MDRI capital transfers in 2006).

24. The sustainability of Madagascar’s debt outlook has improved thanks to the MDRI and improved prospects for growth and exports. A joint Bank/Fund debt sustainability analysis (DSA) was carried out based on the low-income debt sustainability framework (Appendix I). It reveals that the key debt indicators in 2005, which were already below the thresholds of a medium performer such as Madagascar, fell sharply in 2006 as relief was granted under the MDRI, and will fall further owing to the impact of the mining sector FDI on GDP and exports. Even under the most extreme stress cases, the ratio would remain far below the 150 percent threshold from 2010 onward. The debt service-to-exports ratio would also remain significantly below the 20 percent threshold.

Madagascar: Stock of Public Debt, 2000–2006

(Percent of GDP)

Sources: Malagasy authorities and IMF staff estimates.

Madagascar: External Debt Sustainability Indicators, 2005–06
2005 12006Debt sustainability


thresiholds 2
(Percent)
NPV of debt-to-exports ratio134.338.7150.0
NPV of debt-to-GDP ratio35.811.540.0
NPV of debt-to-fiscal revenue ratio215.064.2250.0
Debt service-to-exports ratio8.43.520.0
Debt service-to-fiscal revenue ratio16.38.030.0
Memorandum item:
MDRI debt relief (in percent of GDP)42.0
Sources: IMF staff projections.

IMF Country Report No. 06/306.

For a medium performer according to the World Bank Country and Policy Institutional Assessment (CPIA).

Sources: IMF staff projections.

IMF Country Report No. 06/306.

For a medium performer according to the World Bank Country and Policy Institutional Assessment (CPIA).

B. Preserving Macroeconomic Stability

25. The authorities confirmed their monetary policy objective for 2007 was to achieve single-digit inflation. The staff noted that the rise in the demand for real money balances (¶13) would allow the money supply to increase correspondingly without jeopardizing the inflation objective. The authorities agreed that reserve money would not need to grow at the same pace as broad money given that financial intermediation is expected to increase and excess bank reserves to decline. With a view to accommodating money demand while also increasing foreign reserves, the central bank plans to augment its holdings of NFA.

Madagascar: Inflation, Broad and Reserve Money, January 2003—March 2007

(12-month moving average growth rate)

Source: Malagasy authorities and IMF staff projections.

26. To help achieve their monetary policy objectives, the authorities will use open market operations and closely monitor core inflation. With assistance from MCM, the authorities have converted the consolidated government debt owed to the central bank (1.6 percent of GDP) into marketable securities bearing market rates of interest. The BCM can now use these securities to conduct open market operations, thereby providing an additional monetary policy instrument beyond the short-term deposit auctions (appel d’offres). In assessing the appropriateness of the monetary stance vis-à-vis the inflation objective and given the volatility in food and energy prices, the staff suggested that the authorities also use a measure of “core” inflation (Box 1.). Such an indicator removes the effect of highly volatile rice and oil prices that are susceptible to supply-related shocks. The authorities agreed that core inflation is a useful indicator for assessing the conduct of monetary policy.

Box 1.Madagascar: Core Inflation 1

Core inflation generally refers to a measure of inflation that excludes volatile and supply-driven elements such as food and energy prices. It is often used as an indicator in determining the effectiveness of monetary policy because it captures demand-related pressures. In the case of Madagascar, the staff calculated core inflation as the weighted average of the price changes for the consumer price index excluding rice and energy products.

Core inflation can assist policy makers in assessing the underlying trend in inflation and determining the appropriate monetary policy to pursue. For example, overall inflation was lower than core inflation during the second half of 2006 owing to lower rice and energy prices. If the monetary authorities focused solely on general inflation, they could have concluded that monetary policy should be loosened when in fact it should have remained tight in order to achieve their price stability objective.

Madagascar: Core Inflation, December 2004 – March 2007

(Year-over-year percent change)

Source: Malagasy authorities and IMF staff estimates.

1 See Chapter 4 of forthcoming Selected Issues Paper (www.imf.org).

27. A prudent fiscal stance is essential for preserving macroeconomic stability. The authorities concurred that total spending should be kept in line with domestic revenues and concessional external financing, keeping domestic financing of the budget deficit to a minimum so not to crowd out private sector credit. They intended to absorb the shock of cyclones and flooding since the beginning of the year with humanitarian aid and expenditure switching within the envelope approved in the 2007 budget. However, they believed that the 2007 fiscal program should be revised to take into account the impact of the expected appreciation on government revenue and expenditure (0.3 percent of GDP), the underestimation of obligatory spending (0.2 percent of GDP), and additional transfers to the electricity company (0.3 percent of GDP) (¶34). Moreover, as the cost of recapitalizing the central bank (0.9 percent of GDP) was not known at the time of budget preparation, it should now be included. With a view to minimizing the government’s recourse to domestic financing, the authorities will undertake reductions in nonpriority spending equivalent to 0.5 percent of GDP. As the recapitalization expenditure would not have an impact on aggregate demand, it could be financed domestically without undermining the inflation objective. The staff agreed that the revised fiscal stance was broadly consistent with the authorities’ macroeconomic objectives for 2007.

Madagascar: Fiscal Indicators, 2007

(Percent of GDP) 1

Prog.Proj.
(a)(b)(b) - (a)
Total revenue and grants16.516.1-0.5
Tax revenue11.210.9-0.3
Nontax revenue0.20.20.0
Grants5.15.0-0.2
Total expenditure (commitment basis)20.721.70.9
Of which: central bank recapitalization0.00.90.9
Overall balance (commitment basis, including grants)-4.2-5.6-1.4
Overall balance (cash basis, including grants)-4.4-5.8-1.4
Without: central bank recapitalization-4.4-4.9-0.5
Foreign financing4.14.30.1
Domestic financing0.31.51.2
Without: central bank recapitalization0.30.60.3
Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates.

Aggregates may differ from the sum of components due to rounding.

Sources: Ministry of Economy, Finance, and Budget; and IMF staff estimates.

Aggregates may differ from the sum of components due to rounding.

C. Improving PFM and Transparency

28. Problems in tax policy and tax and customs administration continue to undermine the country’s revenue mobilization effort in support of the MDGs. The authorities indicated that the MAP’s objective is to raise the tax-to-GDP ratio from 10.7 percent in 2006 to 15 percent by 2011. In the area of tax policy, they plan to implement a simplified corporate and personal income tax system within the context of the 2008 Finance Law. Following FAD recommendations, the authorities will incorporate the export processing zone (EPZ) companies into the common law regime and simplify the corporate and personal income tax structure (Box 2.). They indicated, however, that some recommended measures (i.e., taxation of fringe benefits at market value, elimination of low yielding taxes which finance local authorities) would need to be implemented gradually. The staff underlined that urgent efforts to tighten the administration of large-and medium-size tax payers were required to meet the revenue targets in 2007–08. Remedial actions were also needed to address serious shortfalls in customs valuation and clearance procedures, which appear to have permitted about 20 percent of imports to depart from established procedures. The authorities were confident that the installation of Tradenet—a state-of-the-art electronic information system that traces imports in real time—would dramatically curtail opportunities for fraud at customs. The staff concurred with the priority being placed on tax policy and administration, but warned that the MAP revenue objective appears ambitious and will require considerable progress in tax and customs administration. In light of the mining and oil exploration potential of the country, the staff urged the authorities to review whether the fiscal regimes for mining and oil projects were in line with international standards.

Box 2.Madagascar: Tax Policy Reform Priorities1

At around 10.7 percent, the ratio of tax revenue to GDP in Madagascar is some 3 percentage points lower than the average in comparable low income countries. Most of this underperformance stems from the low yield of the personal and corporate income tax, and the limited reliance on trade taxes.

Poor revenue performance arises both from policy measures that erode the tax base and poor tax and customs administration. The tax system is being poorly administered, most notably in relation to customs procedures and VAT refunds. This leads to pressures for special treatment to avoid these burdens which further complicates the tax system.

Tax policy reform priorities for promoting growth and strengthening revenue performance include: integrating the EPZ companies into a common and more attractive corporate tax structure, while respecting the benefits already granted to the existing EPZ companies; raising the threshold of the VAT which will enable scarce administrative resources to be better focused on core tasks such as refunding excess credits; imposing the VAT on agricultural inputs; reviewing the rate structure and exemptions under the personal income tax; removing protection hidden in the structure of domestic excises by raising rates on domestic products; eliminating a wide range of low-yielding taxes; and reviewing the fiscal regime of mining and oil projects. The resulting streamlined tax code will foster resource allocation by the private sector in line with Madagascar’s comparative advantages.

Madagascar and Low Income Countries: Composition of Tax Revenue.(Percent of GDP)
YearTaxTaxes on Income, ProfitsPopertyDomestic Taxesn G. andS.International
Revenueand Capital GainsTaxesOf which:Trade
Of which:Sales TaxTaxes
TotalIndivi-Corpo-Totalor VATExcisesOther
dualrate
Madagascar2005-0610.42.40.81.60.16.75.11.50.11.2
Low income countrries 12000-0113.73.91.92.00.25.93.52.00.43.7
Difference-3.3-1.5-1.1-0.4-0.10.81.6-0.5-0.3-2.5
Source: Ministry of Finance and Budget; and Fund staff.

26 countries.

See Chapter 3 of forthcoming Selected Issues Paper (www.imf.org).

Source: Ministry of Finance and Budget; and Fund staff.

26 countries.

See Chapter 3 of forthcoming Selected Issues Paper (www.imf.org).

29. Better public expenditure management is essential for improved budget execution and control. Building on the 2005 and 2006 Public Expenditure and Financial Accountability assessments, the authorities have been implementing a priority action plan to improve budget and cash management with donor support, including the IMF. Good progress has been made in budget preparation and execution with the implementation of the budget information system (SIGFP) and the early preparation of the 2008 budget. The staff indicated, however, that major weaknesses remained owing to the lack of comprehensive and timely reports on budget execution and poor application of the Procurement Code. The authorities agreed that they should place highest priority in 2007 on implementing SIGFP in the main spending ministries. They would also strengthen procurement practices with the assistance of the World Bank. The staff noted that the pay-as-you-go civil service pension system appears to be severely unbalanced and, if unaddressed, could crowd out priority budgetary spending in the medium term.5 The authorities agreed and proposed that civil service pension reform be a key focus of the next program review.

30. The authorities confirmed their commitment to adhere to the principles of the EITI. They are creating an EITI committee to be comprised of representatives from the government, the natural resource companies, and civil society (including the media) and are launching a public information campaign. They are also considering the possible creation of an offshore future generation fund for the management of natural resource receipts, with technical support from Norway. With large-scale mining activities coming on line and with the possibility of significant offshore oil discoveries in the future, the staff considered these initiatives to be very timely and helpful in addressing the ensuing macroeconomic challenges, but insisted on the need for full accountability and transparency of such a fund in the fiscal accounts.

31. A financially sound central bank is vital for the conduct of monetary and exchange rate policy. The staff welcomed the authorities’ decision to recapitalize the central bank and to remunerate central bank claims on the treasury at market rates of interest. In addition, it stressed the need to reduce the central bank’s operating costs, including the costs of banknotes, and to remove from the central bank law the possibility to distribute unrealized foreign exchange valuation gains. The authorities indicated that this would be done as part of an overhaul scheduled for 2008 of the central bank law to make it compatible with the SADC treaty. The BCM expects to propose a cost reduction plan next Fall.

32. Data are adequate for surveillance purposes, but need to be improved (Informational Annex). The authorities recognized the deficiencies and agreed with staff that they should redouble their efforts to improve the provision of macroeconomic economic data, particularly real sector data. Madagascar is benefiting from technical assistance from STA and the French authorities in the areas of national accounts statistics, and a revised set of accounts should be produced next year. The authorities have agreed to publish the statistical appendix on the government web sites.

D. Fostering Private Sector Development

33. The authorities are undertaking further trade liberalization, both on a multilateral and regional basis. Madagascar unilaterally reduced some of its tariffs resulting in a drop of its simple average MFN tariff from 16.2 percent at the end of 2005 to 12.9 percent in 2007. The authorities have also taken important steps towards regional integration into the Southern African Development Community (SADC), and believe that the economic gains from regional integration would be substantial. The findings of a recent staff study indicate that the direct impact of SADC membership on economic growth in Madagascar is likely to be quite limited (Box 3.). The staff urged the authorities to complement regional trade liberalization with a multilateral liberalization whose gains were likely to be larger. The authorities noted that trade liberalization should continue on an MFN basis in parallel to regional integration.

Box 3.The Economic and Fiscal Impact of Joining the SADC Free Trade Area1

Madagascar plans to phase out its tariff on imports from SADC over the period 2007-12. This will liberalize 5.6 percent of Madagascar 2006 imports, of which 88 percent will be imports from South Africa. Because the trade affected by the SADC FTA is small, the gains to real GDP are estimated to be limited to 0.4 percent. Nevertheless, staff simulations suggest that the SADC FTA would affect significantly the trade structure as well as the structure of production:

  • Madagascar’s trade with SADC, mainly South Africa, would increase by about 5 percent while its trade with the rest of the world would decline.

  • The product composition of Madagascar’s trade would change. The textiles and clothing industries would be the major beneficiaries and could increase by almost 1 percent.

  • Customs revenue could decline by about 8 percent, but total revenue from taxes on international trade (which accounted for about half of Madagascar’s tax revenue in 2006) would be reduced by less than 3 percent in the first year. The impact will be more limited in 2007 since the tariff cut initially scheduled to take place in January 2007 has been delayed.

  • A simulation of SADC FTA membership complemented by a small multilateral liberalization produces much larger gains.

1 See Chapter 2 of forthcoming Selected Issues Paper (www.imf.org).

34. Restructuring and rehabilitating the public utility company (JIRAMA) is essential for increasing private sector investment, sustaining economic growth, and strengthening public finances. Private sector representatives complained about the frequent power surges and outages which disrupted economic activity and increased production costs. According to the International Finance Corporation (IFC) and the World Bank, at current electricity tariffs JIRAMA would need to increase average electricity tariffs by 45 percent in order to cover its operating costs. The authorities indicated that they were prepared to phase in electricity tariff increases (15 percent in October 2007, April 2008, and October 2008, respectively) and would henceforth adopt an automatic pricing index formula. To address the interim shortfalls in operating revenues and to finance urgent rehabilitation investment, they will allocate annual budgetary transfers equivalent to 0.5 percent of GDP to JIRAMA in 2007–08, and identify priority rehabilitation investments in close consultation with the IFC and the World Bank. Once JIRAMA becomes profitable, the authorities intend to transfer its management to a private operator through a lease-type agreement, for which an international tender is tentatively scheduled for end-2008.

35. Financial intermediation needs to be broadened and access to credit expanded in order to sustain broad-based economic growth and development. The staff noted that the part of the FDI inflows that remains in the country will significantly expand bank deposits and present an opportunity to improve financial intermediation and expand access to credit. Building on the recommendations of the Financial System Stability Assessment,6 the authorities have developed a draft medium-term financial sector strategy (Box 4.), which they wish to further elaborate in collaboration with Bank/Fund staff, including through a supporting technical assistance program. They intend to improve financial intermediation by encouraging competition and licensing more banks, creating a credit bureau, and improving the payments system. They pointed to the strong expansion of microfinance institutions (MFIs), which would improve access to credit and support more broad-based growth, and noted that the MFI regulatory framework and surveillance were being improved. The staff supported the authorities’ initiatives and emphasized the importance of close oversight during this expansionary period.

Box 4.Key Elements of Financial Sector Strategy

The authorities have prepared a draft medium-term national financial sector strategy and are in the process of developing a supporting technical assistance program. The main objectives are to:

1. Support the operational independence of the central bank

  • Improve monetary operations and introduce open market operations (2007).

  • Ensure more effective BCM intervention in the MID and enforcement of MID guideline (ongoing).

  • Revise the central bank statute to conform with SADC requirements and best practices (2007/08).

2. Build up banking sector supervision

  • Implement decrees under new banking law (2007).

  • Increase resources allocated to the banking supervision office (ongoing).

3. Strengthen the nonbank sector

  • Improve supervision of microfinance sector and implement decrees covering MFIs (2007/08, with assistance of World Bank and Millennium Challenge Corporation [MCC]).

  • Improve supervision of insurance companies and pension funds (2008).

  • Audit public pension funds (2008).

4. Improve the efficiency of the financial sector

  • Encourage banking sector competition and license more banks (ongoing).

  • Create a credit bureau for banks and microfinance institutions (2008).

  • Reduce payment delays in banking system (diagnostic study in process under MCC, 2007/08).

IV. STAFF APPRAISAL

36. Madagascar has suffered from decades of macroeconomic instability arising from political crises, poor macroeconomic polices, and exogenous shocks. Poverty remains high, inflation persists at double-digit levels, and growth has been insufficient for making adequate progress toward achieving the MDGs.

37. The authorities’ new poverty reduction strategy (MAP) presents a vision for addressing the key structural and other problems that have hindered economic development. Key to the realization of the MAP’s objectives will be advancements in domestic revenue mobilization, public financial management, scaling up of donor assistance, foreign direct investment, and electricity sector reform.

38. Macroeconomic policies should be based on a more conservative base case scenario until scaling up of aid materializes. Accommodation should be made for additional priority expenditure in support of growth and poverty if financed on a concessional basis and if capacity to absorb these funds is in place.

39. Large FDI in the mining sector signals a important shift in the structure of the economy. The domestic spending component of these FDI flows places appreciation pressures on the exchange rate as it moves to its new equilibrium. This appreciation poses significant challenges for the competitiveness of the non-mining tradable sector and macroeconomic management.

40. The authorities’ exchange rate policy of a managed float with no predetermined path remains appropriate. This policy has allowed the exchange rate to move in line with macroeconomic fundamentals and has maintained the competitiveness of exports. But, exports and real exchange rate developments need to be closely monitored and there would be scope for foreign exchange intervention to help avoid an overshooting of the exchange rate and to utilize capital inflows to help boost foreign exchange reserves. The authorities should be cautious regarding liberalizing capital account transactions, however, as such liberalization needs to be carefully sequenced with efforts to strengthen the framework for banking supervision and prudential regulations.

41. The authorities need to continue to pursue a monetary policy that is consistent with their foreign reserves and single-digit inflation targets. They should therefore be prepared to mop up any excess liquidity, including through their new monetary instrument (i.e., tradable government securities), while ensuring that the money supply increases in line with the higher demand for money balances arising from the FDI flows.

42. A prudent fiscal policy needs to be maintained. While running a fiscal surplus would in principle help alleviate appreciation pressures on the exchange rate, reducing expenditure at this time would undermine efforts to increase spending in support of the MDGs. The authorities should continue to keep domestic financing of the budget at low levels so as not to crowd out credit to the private sector and place pressure on domestic interest rates, while redoubling their efforts to increase revenues. Strengthening the operations of large-and medium-size tax payers units and customs administration is indispensable to meet the revenue targets. They should also include contingency spending reductions plans in future budget submissions to address possible revenue shortfalls and avoid repeated expenditure overruns.

43. The exchange rate appreciation reinforces the need to implement structural reforms critical to private sector development. The restructuring and rehabilitation of JIRAMA, the deepening of financial intermediation, and the liberalization of trade on an MFN basis should be implemented without delay.

44. Addressing institutional capacity constraints will alleviate risks to policy implementation. Exogenous shocks, uncertainty over donor assistance, and institutional capacity constraints could impede policy implementation. The country’s debt situation is sustainable, especially in the aftermath of the MDRI. Action plans in the areas of tax and customs administration, public financial management, monetary and exchange rate management, and statistics, for which the authorities receive substantial technical assistance, need steadfast implementation. The central bank recapitalization should be followed by steps to reduce its operating costs.

45. It is proposed that the next Article IV consultation with Madagascar take place within 24 months subject to the provisions of the decision on consultation cycles in program countries.

APPENDIX I: MADAGASCAR—JOINT BANK-FUND DEBT SUSTAINABILITY ANALYSIS

Madagascar’s risk of debt distress is low. The upgrading of Madagascar’s risk of debt distress rating compared to the previous debt sustainability analysis (DSA) is on account of the improved growth and export prospects linked to the big mining projects under construction. Madagascar’s external debt burden indicators under the baseline scenario remain below the relevant policy-dependent indicative thresholds. The stress tests do not result in indicators breaching the thresholds although they reveal that external debt sustainability is sensitive to export shocks, which are likely given the concentration of Madagascar exports. The inclusion in the analysis of the small domestic debt does not change the assessment of country’s risk of debt distress.

A. Introduction

1. This DSA has been prepared jointly by IMF and World Bank staff. It is based on the framework for low-income countries approved by the respective Executive Boards. The framework takes into account indicative thresholds for debt burden indicators determined by the quality of the country’s policies and institutions.1 It comprises of a baseline scenario (which assumes, among others, full delivery of Heavily Indebted Poor Countries (HIPC) Initiative debt relief by external creditors) 2 and a set of alternative scenarios.

B. Recent Developments and Current Debt Situation

2. Madagascar reached its completion point under the Enhanced HIPC Initiative in October 2004. The resulting debt relief, including additional bilateral debt relief from most Paris Club creditors, reduced the end-2003 NPV of debt-to-exports ratio to an estimated 137 percent.34 At that time, the ratio was projected to increase to 154 percent in 2004 and decline thereafter.

Madagascar : External Debt Outstanding 2006
CreditorAmountsIn percentShare
(millions of $US)of GDP(in percent)
Total external debt1,584.428.8100
Bilateral Creditors724.513.146
Paris Club111.62.07
Other countries612.911.139
Private creditors14.30.31
Multilateral845.615.353
Source: Madagascar authorities and Fund Staff estimates

3. Madagascar’s external public debt declined significantly from US$3.5 billion at end 2005 (including arrears) to US$1.6 billion at end 2006 on the account of the debt relief under the Multilateral Debt Relief Initiative (MDRI). The IMF’s debt relief under the MDRI became effective in January 2006 and amounts to US$197 million.5 MDRI debt relief from IDA was implemented starting in July 2006 through the 100 percent reduction of the debt disbursed as of end-2003 that was still outstanding at the implementation date. Total MDRI debt service relief from IDA is estimated at SDR1.2 billion (equivalent to about US$1,780.1 million).6 As for the ADF, the delivery of debt relief under the MDRI though a write-off of the outstanding obligations as of end-December 2004 became effective in September 2006 (with retroactive application to January 2006). Estimated MDRI debt relief from the ADF amounts to US$393 million. This has been partly offset by new borrowings as well as exchange rate developments7, and the actual outstanding stock of debt has declined by 55 percent in 2006.

4. The MDRI debt relief has triggered a drastic change in the creditor composition. The share of multilateral creditors has decreased from more than 75 percent at end-2005 to 53 percent at end-2006. Conversely, bilateral and commercial creditors represented 47 percent of total outstanding obligations (with Paris Club creditors accounting for 7 percent), compared to about 23 percent by end-2005. The bilateral Paris Club debt that remains is mainly to Russia. The current creditor composition is broadly similar to the one prevailing at end-2003, i.e., prior to the debt write-offs granted by most Paris Club and the MDRI debt relief.

C. Baseline Medium- and Long-Term Scenario

5. The baseline scenario is substantially different to the one described in the previous DSA due to the impact of two large mining projects. Construction of a US$650 million (12 percent of GDP) ilmenite mine began in mid-2006 and a US$2.5 billion (45 percent of GDP) nickel and cobalt mine and processing facility commenced in 2007 and will be completed over the next three years. Such a large inflow of capital is leading to an appreciation of the currency and the project will result in higher growth and starting in 2009/10 in higher exports (Box 1.) than in the previous DSA.

6. The baseline scenario is built on a number of key macroeconomic assumptions, the implementation of sound macroeconomic and structural policies and external financing that is through grants and highly concessional loans. Key macroeconomic assumptions are indicated in Box 1.. With respect to external financing, new borrowing is projected to remain largely at highly concessional terms. External assistance as a share of GDP, which had climbed very rapidly to close to 14 percent in 2004 due to large inflows of external aid and borrowing to finance recovery after the 2002 political crisis, will remain relatively high in the short term (increasing from 8 percent of GDP in 2005 to 11 percent of GDP in 2006, in part due to external financing of the presidential election, and 9 percent in 2007 based on recent information from donors) and gradually decrease to about 6 percent of GDP by the end of the projection period. The borrowing is largely for financing infrastructure projects aimed at lowering costs and enhancing competitiveness, and to help Madagascar attain the objectives of the Madagascar Action Plan (MAP) and the Millennium Development Goals (MDGs).

7. Under the baseline scenario, Madagascar’s external debt indicators remain well below the thresholds throughout the projection period (Figure 1a. and Table 1a). The debt indicators dropped sharply in 2006 as a result of the MDRI (Table 1a). The NPV of debt-to- GDP ratio which was at about 36 percent in 20058 (a level already below the threshold for medium performers) dropped to below 12 percent in 2006 (Figure 1a. and Table 1a); it increases subsequently to peak at 16 percent in 2017 and drops after to about 13 percent in the outer years. The NPV of debt-to-revenue ratios (Tables 2a) exhibit a similar profile. The increase in these ratios in the initial years (from the low post-MDRI levels) reflects relatively high new borrowing albeit at concessional terms to finance needed investment expenditures. The NPV of debt-to-exports is driven by the impact of the big mining projects. Before they start their exports, these projects are expected to lead to an appreciation of the exchange rate that will negatively impact competitiveness of exports. This in conjunction with the weak performance of agricultural prices of key exports, such as vanilla, leads to a deterioration of debt indicators based on exports up to 2009. The mining projects are expected to start exporting in end-2009 or in 2010. The value of these exports is so large that the NPV of debt-to-export ratio is projected to drop from 61 percent in 2009 to 38 percent in 2010 and grow through the projected period (but remaining well below the threshold) due to new borrowing. The debt service-to-exports ratio exhibits a similar pattern. Moreover, given the highly concessional nature of the existing debt and new borrowing, the debt service ratios are well below the indicative thresholds throughout the projection period but show a rising trend due to the accumulation of new debt.

8. Madagascar’s total public debt ratios, including domestic debt, also stay well below the external debt sustainability thresholds under the base case scenario (Figure 2a. and Table 2a.). The domestic debt is projected to remain under 10 percent of GDP through the projection period, as total expenditure is assumed to be broadly kept in check with available financing from tax revenue and external assistance, and the fiscal deficit is projected to remain predominantly financed by external assistance on concessional terms.

D. Sensitivity Analysis

External public debt indicators

9. The sensitivity analysis suggests that the external debt indicators are low but could deteriorate with inappropriate policies, and/or if confronted by adverse shocks. They would however remain below the threshold.9

  • The debt indicators in the historical scenario (Scenario A1 in Figure 1a. and Table 1b based on the average of the years 1999–2006) follow a lower trajectory than under the baseline. It should be noted, however, that the years leading up to 2006 include years of political turmoil, large terms of trade shocks, cyclones, and natural disasters. During that period, although real growth averaged only about 3.5 percent, the current account deficit was also low as the Export Processing Zone sector (put in place in 1989) was growing at very high rates. This factor explains the relatively benign trajectory of the debt indicators under the historic scenario. If the years of the political crisis (GDP decline of 12.7 percent in 2002) and the recovery from this (growth of 9.8 percent in 2003) are excluded, the average growth is significantly higher at 5 percent, which remains below the baseline scenario but close to it if the impact of the big mining projects is excluded.

  • The financing scenario(Scenario A2) reveals that Madagascar’s external debt indicators are sensitive to the terms of new borrowing. Under this scenario, the NPV of debt-to-GDP remains below the threshold but would more than double in the next decade (from 11 percent in 2007 to 23 percent in 2017), and remains at about that level through 2021 before decreasing slightly. The NPV of debt-to-exports ratio would increase steadily from 46 percent in 2007 to 101 percent in 2027. This increase is substantial although the ratio would remain below the threshold. The projected path of these two ratios, together with the rising trend of the debt service ratio from 2 to 6 percent during the projection period, points to risks from new borrowing at less favorable terms than assumed in the baseline scenario.10

  • The bound tests do not reveal major underlying vulnerabilities. The most extreme stress tests shows the impact of the combined FDI and growth shock on the NPV of debt-to- GDP ratio (Scenario B5), and exports shock (Scenario B2) on the NPV of debt-to exports ratio do not result in indicators significantly breaching thresholds. These scenarios show that debt sustainability is most vulnerable to changes in the inflows of FDI and to the impact of these projects on growth and exports. The NPV of debt-to-GDP increases significantly (to 26 percent in 2027) but remains comfortably below the threshold level. On the other hand, the export based indicator-the NPV of debt to exports, crosses the threshold in 2009 only but falls back below the threshold as soon as the exports of the two big mining projects materialize. The shock to exports is somewhat extreme (the standard deviation is about 33 percent) as it is influenced by the rapid increase in exports in the historical period from textiles exports, and the large decline in exports that took place during the political crises and the subsequent rapid recovery. The implications of export concentration for vulnerability are nevertheless to be noted, as they illustrate the impact of shocks to certain export commodities (such as textiles), which have become large as a share of total exports in Madagascar (about 40 percent in 2005 and 2006), as well as the exports of only two mining projects that are expected to account for over 50 percent of exports of goods and services over 2011–17. However, the vulnerabilities associated with the big mining projects appear limited: even if the exports of the big mining projects are only 1/3 of their baseline level (due either to a lower volume and/or to lower export prices) the NPV of debt-to-exports would remain below the threshold (scenario B7) peaking at 71 percent in 2022 (61 percent in the baseline).

Total public debt indicators

10. Total public debt indicators are most sensitive to economic growth shocks. A temporary or permanent deviation from the baseline real GDP growth path would bring the total public debt beyond the external debt sustainability thresholds beginning in 2015, if spending plans were kept unchanged, which is unlikely in view of past experience (, Scenarios A3 and B1).

E. Debt Distress Classification and Conclusions

11. Madagascar’s risk of debt distress is low following the debt relief under the HIPC Initiative and the MDRI and due to the impact on exports and GDP of big mining projects. In the baseline scenario Madagascar’s debt indicators are below the thresholds. The debt situation does not appear to be significantly vulnerable to shocks. Debt sustainability appears somewhat vulnerable if large export shocks materialize. This is a risk in the medium term given the high concentration in exports in textiles in the short run and two mining products whose prices are volatile.

12. In conclusion, the debt situation seems under control and not subject to major risks. Sensitivity analysis nonetheless points to the need not only for implementing the policies underpinning the baseline scenario, but also for careful monitoring of borrowing policies and, more importantly, export performance. The latter is critical given the concentration of exports in textiles and clothing in the short run and in two mining projects starting in 2010. Borrowing at non-concessional terms as well new borrowing beyond the levels assumed under the baseline could also raise Madagascar’s risk of debt distress.

Box 1.Baseline Macroeconomic Assumptions

Real GDP growth is projected at 7 percent over 2007-2027. This growth rate is higher than the historical average (5 percent over 1999–2006 if the impact of the political turmoil of 2002 is excluded) due to the impact of two large mining projects that started at the end of 2006. Without these projects, the real growth rates would have been a little under 6 percent on average i.e. higher but close to the historical rate.

Inflation as measured by the GDP deflator in dollar terms is projected to average about 3.7 percent, with higher rates of 20 percent in 2007 and decelerating to 2 percent subsequently. However, reflecting the impact of the large inflows of FDI on the exchange rate, which in turn will depend crucially of the monetary policy undertaken, the increase in the GDP deflator in local currency is expected to decelerate from 9.5 percent in 2007 to 5 percent beginning in 2010.

Export volumes grow at 11 percent on average and support GDP growth. The growth rates are relatively modest in the initial years reflecting the impact of the exchange rate appreciation on some vulnerable export industries such as textiles and shrimp but will jump as soon as the exports of the big mining projects start.

Import volumes average about 7 percent for the period. Import volumes are expected to grow significantly due to the high import content (estimated at about 80 percent) of the mining projects during their construction phase and will then slow down to about 6.5 percent i.e., at about the pace of real GDP growth.

The current account deficit is projected to increase significantly during the initial years of the projections due to the large increase in imports related to the big mining projects. However as exports of these projects start, the current account deficit would gradually shrink from about 20 percent of GDP in 2008 to 9 percent by 2010 and 5 percent by the end of the projection period.

Tax revenues are projected to increase from 10.7 percent of GDP in 2006 to about 15.5 percent of GDP in 2027, owing to the termination of ad hoc tax and import duty exemptions, tax policy reforms aimed at simplifying the corporate and personal income tax regimes, and steadfast improvements in tax and custom administration.

Total expenditures are broadly kept in check with available financing from tax revenue and external assistance, resulting in a roughly constant share of GDP over the projection period.

External assistance progressively unwinds from the exceptionally high level of about 11 percent of GDP reached during the period 2004 to 2006 (financing of recovery after the 2002 political crisis and of the 2006 presidential elections) to over 7 percent of GDP over 2007–11 (which is slightly higher than the 6 percent of GDP observed during the late 1990s because of donor financing of the MAP) and to 5 percent of GDP in outer years. The share of grants gradually increases from half in the initial years to more than half in the later years.

Table 1a.Madagascar: External Debt Sustainability Framework, Baseline Scenario, 2007-2027 1(Percent of GDP, unless otherwise indicated
ActualHistoricalStandardProjecltions
Average 6Deviation 62007-122013-27
200420052006200720082009201020112012Average20172027Average
External debt (nominal)179.969.728.826.826.227.528.028.229.029.623.2
o/w public and publicly guaranteed (PPG)79.969.728.826.826.227.528.028.229.029.623.2
Change in external debt-3.3-10.2-41.0-2.0-0.61.30.40.30.7-0.2-0.7
Identified net debt-creating flows25.0-6.4-4.80.61.11.50.60.81.3-0.4-2.4
Non-interest current account deficit7.910.18.55.52.917.320.719.08.48.58.56.74.36.0
Deficit in balance of goods and services14.914.111.219.322.120.0-2.6-4.0-3.0-0.41.6
Exports32.626.929.724.721.821.236.137.035.429.220.8
Imports47.541.040.944.043.941.233.533.032.428.822.5
Net current transfers (negative = inflow)-7.6-4.8-3.9-4.01.7-2.9-2.3-2.1-1.9-1.8-1.6-1.4-1.1-1.3
Other current account flows (negative = net inflow)0.60.81.20.90.91.213.014.313.18.53.8
Net FDI (negative = inflow)-5.2-6.5-7.7-5.21.6-15.4-18.2-15.9-5.7-5.7-5.7-5.5-5.3-5.3
Endogenous debt dynamics 3222.4-10.0-5.6-1.2-1.4-1.5-2.2-2.0-1.5-1.6-1.4
Contribution from nominal interest rate1.20.80.30.30.20.20.20.20.30.30.2
Contribution from real GDP growth-5.5-3.2-3.1-1.4-1.6-1.8-2.4-2.3-1.8-1.9-1.6
Contribution from price and exchange rate changes26.6-7.7-2.8
Residual (3-4)3-28.3-3.8-36.2-2.6-1.7-0.2-0.1-0.5-0.60.11.6
o/w exceptional financing-1.5-1.0-0.40.00.00.00.00.00.00.00.0
NPV of external debt411.511.411.812.913.614.314.916.212.7
In percent of exports38.746.354.161.037.738.542.355.560.8
NPV of PPG external debt11.511.411.812.913.614.214.916.212.7
In percent of exports38.746.254.160.937.738.542.255.560.7
Debt service-to-exports ratio (percent)107.08.33.51.61.71.70.90.91.22.22.7
PPG debt service-to-exports ratio (percent)107.08.33.51.61.71.70.90.91.22.22.7
Total gross financing need (billions of U.S. dollars)1639.4294.5102.9158.3245.5320.8326.4374.8421.2387.4-218.9
Non-interest current account deficit that stabilizes debt ratio11.220.349.519.221.217.78.08.27.77.05.1
Key macroeconomic assumptions
Real GDP growth (percent)5.34.64.93.56.76.57.37.59.89.07.27.97.17.27.1
GDP deflator in US dollar terms (percent change)-24.210.64.22.512.620.512.42.82.72.92.47.32.32.42.3
Effective interest rate (percent) 51.21.20.41.10.31.11.01.00.90.81.31.01.20.91.1
Growth of exports of G&S (U.S. dollar terms, percent)12.8-4.720.814.032.96.76.37.492.215.04.922.15.66.55.8
Growth of imports of G&S (U.S. dollar terms, percent)18.1-0.19.112.428.338.020.23.6-8.310.77.712.06.85.77.0
Grant element of new public sector borrowing (percent)43.844.244.244.244.244.244.144.244.244.2
Memorandum item:
Nominal GDP (millions of U.S. dollars)4357.75041.95509.87067.48518.79412.910615.111912.813074.520676.651853.2
Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 1b.Madagascar: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007-27(Percent)
Projections
20072008200920102011201220172027
NPV of debt-to-GDP ratio
Baseline1112131414151613
A. Alternative Scenarios
A1. Key variables at their historical averages in 2007-26 11112121211111013
A2. New public sector loans on less favorable terms in 2007-26 21113151618192321
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2007-081113161718182016
B2. Export value growth at historical average minus one standard deviation in 2007-0831115212121212114
B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-081115181920212318
B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08 41120272726272415
B5. Combination of B1-B4 using one-half standard deviation shocks1116222324252619
B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 51116181919202217
NPV of debt-to-exports ratio
Baseline4654613838425561
A. Alternative Scenarios
A1. Key variables at their historical averages in 2007-26 14654553231313461
A2. New public sector loans on less favorable terms in 2007-26 246597045485478101
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2007-084654613838425561
B2. Export value growth at historical average minus one standard deviation in 2007-083468917110199105124117
B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-084654613838425561
B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08 446911287471758473
B5. Combination of B1-B4 using one-half standard deviation shocks4663885353587376
B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 54654613838425561
Debt service ratio
Baseline22211123
A. Alternative Scenarios
A1. Key variables at their historical averages in 2007-26 122311235
A2. New public sector loans on less favorable terms in 2007-26 222221236
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2007-0822211234
B2. Export value growth at historical average minus one standard deviation in 2007-08 323433378
B3. US dollar GDP deflator at historical average minus one standard deviation in 2007-0822211234
B4. Net non-debt creating flows at historical average minus one standard deviation in 2007-08 422322255
B5. Combination of B1-B4 using one-half standard deviation shocks22321245
B6. One-time 30 percent nominal depreciation relative to the baseline in 2007 522211234
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 64242424242424242
Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1a.Madagascar: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2007-2027

(Percent)

Source: Staff projections and simulations.

Table 2a.Madagascar: Public Sector Debt Sustainability Framework, Baseline Scenario, 2004-2027(Percent of GDP, unless otherwise indicated)
ActualHistorical

Average 5
Standard

Deviation 5
EstimateProjections
2007-122013-27
200420052006200720082009201020112012Average20172027Average
Public sector debt 192.480.338.636.434.835.435.034.735.336.633.7
o/w foreign-currency denominated79.969.928.826.826.227.528.028.229.029.623.2
Change in public sector debt-6.8-12.1-41.7-2.3-1.50.5-0.3-0.40.60.2-0.7
Identified debt-creating flows10.9-4.6-53.7-2.10.8-0.5-0.4-0.50.60.2-0.6
Primary deficit2.02.01.11.71.33.82.82.82.82.72.93.02.61.52.3
Revenue and grants20.316.718.016.115.115.515.916.216.417.218.0
of which:grants8.25.76.75.03.53.43.33.23.22.92.5
Primary (noninterest) expenditure22.218.719.119.817.918.318.718.919.319.819.6
Automatic debt dynamics11.3-4.9-12.8-5.7-2.0-3.3-3.1-3.1-2.3-2.5-2.2
Contribution from interest rate/growth differential-5.8-5.0-3.6-1.8-2.0-2.1-2.9-2.3-1.7-1.8-1.8
of which:contribution from average real interest rate-0.8-0.90.10.50.40.30.20.60.60.60.5
of which:contribution from real GDP growth-5.0-4.1-3.7-2.3-2.5-2.4-3.1-2.9-2.3-2.4-2.3
Contribution from real exchange rate depreciation17.10.1-9.2-3.90.0-1.2-0.2-0.7-0.6
Other identified debt-creating flows-2.4-1.7-42.0-0.2-0.1-0.1-0.1-0.10.00.00.0
Privatization receipts (negative)-0.40.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HI PC and other)-2.0-1.7-41.9-0.1-0.1-0.1-0.1-0.10.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes-17.7-7.512.0-0.2-2.31.10.10.10.00.00.0
NPV of public sector debt21.421.020.420.720.720.721.323.123.1
o/w foreign-currency denominated11.511.411.812.913.614.214.916.212.7
o/w external11.511.411.812.913.614.214.916.212.7
NPV of contingent liabilities (not included in public sector debt)0.00.00.00.00.00.00.00.00.00.00.0
Gross financing need220.516.513.414.212.811.710.79.99.69.612.3
NPV of public sector debt-to-revenue ratio (in percent)3118.9130.7134.9133.7129.8127.4129.3134.4128.4
o/w external64.271.278.183.385.587.890.994.170.2
Debt service-to-revenue ratio (in percent)3425.926.418.912.310.68.87.36.46.17.08.0
Primary deficit that stabilizes the debt-to-GDP ratio8.714.142.86.14.42.33.13.02.32.52.2
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)5.34.64.93.55.96.57.37.59.89.07.27.97.17.27.1
Average nominal interest rate on forex debt (in percent)2.01.50.81.70.81.01.01.00.90.81.41.01.20.91.1
Average real interest rate on domestic currency debt (in percent)-2.3-1.59.50.75.68.57.87.36.55.54.76.74.64.54.5
Real exchange rate depreciation (in percent, + indicates depreciation)21.70.1-14.01.411.4-14.6
Inflation rate (GDP deflator, in percent)14.318.411.310.24.79.56.45.64.95.04.96.14.84.94.9
Growth of real primary spending (deflated by GDP deflator, in percent)34.7-12.17.09.221.210.7-3.09.812.110.29.68.27.56.67.2
Grant element of new external borrowing (in percent)0.043.244.28.718.444.244.244.244.244.244.244.244.245.2
Sources: Malagasy authorities; and Fund staff estimates and projections.

Central government. Gross public debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Malagasy authorities; and Fund staff estimates and projections.

Central government. Gross public debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 2b.Madagascar: Sensitivity Analysis for Key Indicators of Public Debt 2007-2027
Projections
20072008200920102011201220172027
NPV of Debt-to-GDP Ratio
Baseline2120212121212323
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages2120202020202127
A2. Primary balance is unchanged from 20072121222324252936
A3. Permanently lower GDP growth 12121222223253354
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2008-20092123283032354454
B2. Primary balance is at historical average minus one standard deviations in 2008-20092120212121212323
B3. Combination of B1-B2 using one half standard deviation shocks2121222221212220
B4. One-time 30 percent real depreciation in 20082125242322232323
B5. 10 percent of GDP increase in other debt-creating flows in 20082129292827272725
NPV of Debt-to-Revenue Ratio 2
Baseline131135134130127129134128
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages131131127123120119115130
A2. Primary balance is unchanged from 2007131140144144146150168201
A3. Permanently lower GDP growth 1131137139138140147188288
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2008-2009131152175182190202248292
B2. Primary balance is at historical average minus one standard deviations in 2008-2009131136135131128130135129
B3. Combination of B1-B2 using one half standard deviation shocks131138139132126126122111
B4. One-time 30 percent real depreciation in 2008131167155145138137134126
B5. 10 percent of GDP increase in other debt-creating flows in 2008131195185173165163156138
Debt Service-to-Revenue Ratio 2
Baseline1211976678
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages12119766610
A2. Primary balance is unchanged from 200712119877912
A3. Permanently lower GDP growth 1121198771016
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2008-2009121111109101316
B2. Primary balance is at historical average minus one standard deviations in 2008-20091211976678
B3. Combination of B1-B2 using one half standard deviation shocks1211976667
B4. One-time 30 percent real depreciation in 20081211987789
B5. 10 percent of GDP increase in other debt-creating flows in 2008121113109889
Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Figure 2a.Madagascar: Indicators of Public Debt Under Alternative Scenarios, 2007-2027 1

Source: Staff projections and simulations.

1 Most extreme stress test is that which yields the highest ratio in 2017.

2 Revenue including grants.

The Madagascar Action Plan (IMF Country Report 07/59, February 5, 2007).

See also the forthcoming Joint Staff Advisory Note on the Madagascar Action Plan (www.imf.org).

At end-March 2007, the nominal effective exchange rate had appreciated by 8 percent compared to end-May 2006, and the real effective exchange rate by 20 percent.

See Chapter 1 of the forthcoming Selected Issues Paper (www.imf.org).

Two thirds of the civil servants will reach retirement age (55) within the next seven years.

Country Report No. 06/305, Republic of Madagascar: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, and Anti- Money Laundering.

According to the World Bank Country and Policy Institutional Assessment (CPIA) Index, Madagascar is rated as a medium performer. This rating is the same using either the latest index or the three-year average. The indicative sustainability thresholds for external debt applicable for that category of countries are: (i) 150 percent for NPV of debt-to-exports ratio; (ii) 40 percent for the NPV of debt-to-GDP ratio; (iii) 250 percent for the NPV of debt to fiscal revenues ratio; (iv) 20 percent for the debt service to exports ratio; and (v) 30 percent for the debt service to revenue ratio.

As of end-2006, Madagascar has estimated US$595 million in arrears towards non-Paris Club and private creditors that are not delivering HIPC debt relief (Algeria, Libya, and Iraq are the largest accounting for 92 percent of the total). Madagascar continues to make efforts to contact these creditors, regularize the payments, and obtain full debt relief under the HIPC Initiative.

Total debt relief to Madagascar under the Initiative amounts to US$836 million in NPV terms.

Most Paris Club creditors have written-off their outstanding claims after full delivery of HIPC debt relief, reducing claims on Madagascar by further US$466 million in NPV terms. In 2006, Sweden and Israel canceled 100 percent of the Malagasy debt. In addition an agreement was finalized with Japan and an agreement is under discussion with the Federation of Russia. Regarding non-Paris Club creditors, cancellation agreements should be finalized soon with Abu Dhabi and the People’s Republic of China.

See www.imf.org for details on the implementation of the MDRI by the IMF. The amount of relief includes undisbursed HIPC assistance from the Fund, previously expected to be delivered over time, and MDRI assistance. Excluding the HIPC share, the MDRI debt relief amounts to US$186 million.

For details on the implementation of the MDRI by IDA, see IDA/SecM2005 and IDA/SecM2006-0131.

This refers to the increase on the US$ value of the debt due to the depreciation of the US$ vis-à-vis other currencies in which Madagascar’s debt is denominated.

See IMF Country Report No. 06/306, Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism.

The stress tests performed under the sensitivity scenario assumed permanent modifications of key baseline assumptions (“alternative scenarios”) as well as temporary deviations (“bound tests”). The “alternative scenarios” include a “historical scenario”, under which the main variables that determine the debt dynamics are assumed to remain at their historical average, and a “financing scenario” that depicts the impact of lower concessionality in new borrowing. The “bound tests” are designed to examine the impact on debt and debt service indicators of shocks, based on the country’s historical volatility, to key variables.

This scenario is similar to a sharp decline in grant financing, compared to the baseline, compensated by loans.

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