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Republic of Madagascar: Staff-Monitored Program and Request for Disbursement Under the Rapid Credit Facility

Author(s):
International Monetary Fund. African Dept.
Published Date:
December 2015
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Background and Context

1. Madagascar’s economic recovery has failed to gain momentum, due to external shocks, persistent political instability, and weak governance. This disappointing outcome since the re-establishment of constitutional democracy in 2014 continues a pattern over the last fifty years. Projected real growth in 2015 is around 3 percent, roughly the same as 2014 and equivalent to population growth. As a result, per capita GDP has stagnated, amid already widespread poverty (Figure 1).1 The economic, social, and institutional costs of the political crisis in 2009-13 were profound—per capita incomes fell, social indicators worsened, and measures of governance, the rule of law, and public sector efficiency deteriorated sharply (Figure 2). Political consensus has proven elusive since 2014, with conflicts among the executive, legislative, and judicial branches2 hamstringing implementation of key reforms.3 Local elections were held in July 2015, opening the way for the formation of the Senate and other institutions.

Figure 1.Key Developments, 1960-2015

Sources: Malagasy authorities; the World Bank, World Development Indicators; and IMF staff estimates and projections.

Figure 2.Real Sector Developments, 2006-16

Sources: Malagasy authorities; EM-DAT/CRED.; Mo Ibrahim Index, 2015; and IMF staff estimates and projections.

2. Despite these difficulties, macroeconomic policies in 2015 have generally succeeded in maintaining stability and sustainability. Notwithstanding exogenous shocks and sluggish growth, inflation has remained in single digits and the import coverage of international reserves is projected to rise somewhat. Fiscal and current account deficits also remain compatible with medium-term sustainability. The authorities have also begun implementing significant measures aiming to strengthen stability and sustainability, particularly to improve revenue generation, the quality of fiscal spending, central bank operations, and the functioning of the foreign exchange market. In June 2015, the Malagasy authorities finalized implementation plans for the National Development Plan (NDP), which aims to significantly increase spending on infrastructure and social development to support strong, sustainable, pro-poor growth. Meeting these needs both requires an improvement in persistently low revenue collection and gives rise to a protracted balance of payments need.

3. In light of urgent balance of payments needs the Malagasy authorities are requesting a second disbursement under the Rapid Credit Facility (RCF), accompanied by a Staff-Monitored Program (SMP). Madagascar faces a balance of payments financing gap and a low level of international reserves. The requested RCF disbursement will help to fill this gap, as well as catalyze much needed donor support in 2015 and 2016; in the absence of this support, financing shortfalls for both the balance of payments and the budget would prove highly disruptive to external and internal stability. This request follows a previous RCF disbursement in June 2014. Outcomes fell short of the ambitious targets initially set in 2014, however, highlighting the deep rooted challenges in a fragile country like Madagascar. Nevertheless, the track record of economic policies over the past six months has been adequate to maintain stability and sustainability (see Economic Developments and Policy Performance below), which forms the basis for the request for a second RCF disbursement. At the same time, in light of the outcomes in 2014 and 2015, the Malagasy authorities have not yet sufficiently demonstrated the capacity to strengthen economic policies significantly and ensure adequate financing. This capacity is necessary to implement a medium-term economic program successfully, which in turn could be supported by an arrangement under the Extended Credit Facility (ECF). The SMP, which covers the period from September 2015 to end-March 2016, is intended to guide policy implementation, further develop policy implementation capacity, and build a stronger track record. The RCF and SMP are expected to have a catalytic effect on bilateral and multilateral financial assistance in 2015 and 2016.

Economic Developments and Policy Performance

A. Real economy and external sector

4. The modest economic recovery that began in 2014 has failed to gain momentum in 2015. Growth projections for 2015 have been revised down to 3.2 percent, compared to 3.3 percent in 2014. External shocks (falling commodity prices, cyclones, and droughts) have hit the mining and agriculture sectors. Power outages by the electricity company have also held back output, while problems at Air Madagascar—including a month-long strike in July that grounded nearly all flights—have hurt the tourism sector. Private investment has remained restrained by structural problems, the weak business climate and political uncertainty, rather than rebounding as hoped following the end of international isolation. Consumer price inflation has risen slightly from 6 percent year-on-year (yoy) in December 2014 to 7.5 percent in September 2015, driven particularly by higher prices for rice and for charcoal, the principal energy source for most households.

5. After declining significantly in 2014, the current account deficit is widening modestly in 2015. Last year, the current account deficit fell to 0.2 percent of GDP as a result of falling fuel prices and a shift in large mining projects from investment to exports. The deficit is expected to grow in 2015, driven by low tourism receipts, an increase in dividend outflows, and lower budget support grants. Meeting Madagascar’s large infrastructure investment needs will require more imported inputs, financed externally, and as a result, deficits should grow over the medium term (Figure 3).

Figure 3.External Sector Developments, 2006-16

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

6. Pressures in the foreign exchange market have increased. At end-August, the market exchange rate used for private sector transactions had depreciated 10.5 percent (yoy) in nominal effective terms. In early September, the central bank discontinued buyback operations in the foreign exchange market, which had artificially maintained the published official rate at a more appreciated level.4 To ease the resulting transition, the central bank enacted a temporary 100 percent surrender requirement for exporters in August and sold around US$18 million in foreign exchange in early-September; the market exchange rate has remained roughly stable. International reserves are projected to rise slightly this year, but at about 2½ months of import coverage, they remain below the optimal level (about 3½ months according to the last Article IV assessment).

7. Weather shocks exacted a toll on output and revenue in the first quarter. Cyclones and severe flooding damaged agricultural crops and infrastructure. The World Bank estimates the economic losses at about 1.2 percent GDP. The authorities have yet to identify sources of funding for the associated reconstruction work, which is estimated to cost about 2.8 percent of GDP (Text Table 1). Droughts in other regions have depressed agricultural output and heightened the need for social assistance. In general, the institutions assigned to deal with disaster relief are underfunded relative to the size of recurrent climatic shocks.

Text Table 1:Estimated Rehabilitation Costs from Climactic Shocks in 2015
Percent of GDP
Agriculture and fishing1.3
Transport0.8
Water and sanitation0.4
Education and health0.3
Other (incl. housing and energy)0.0
Total2.8
Source: World Bank.
Source: World Bank.

B. Fiscal policy

8. Confronted with difficulties in budget execution in 2014 and 2015, the authorities have taken measures to strengthen fiscal policy and preserve stability. While revenues rose in 2014 compared to 2013, they fell short of projections (reaching 9.9 percent of GDP versus a target of 11.0 percent in the supplementary budget). The combination of this revenue shortfall, delays in donor financing, arrears repayments, and unanticipated spending needs (notably from state-owned enterprises (SOEs) and the civil service pension funds) put pressure on budget execution. In response, the authorities cut other spending (especially delaying civil service recruitment and domestically financed investment), expanded the float (accounts payable), and increased statutory advances from the central bank (for 1.4 percent of GDP)—these responses transferred much of the financing pressures to 2015. Consequently, the overall deficit in 2014 was kept to 2.3 percent of GDP on a commitment basis, as anticipated in the supplementary budget.5 The 2015 budget also targeted ambitious increases in revenue accompanied by savings in subsidies and transfers to SOEs. Fiscal reforms to support these targets gained momentum (below); however, despite some improvement over 2014, the results did not fully materialize as projected. Consequently, the authorities curtailed other planned spending to preserve budget execution consistent with macroeconomic stability. Relative to the budget, spending appropriations have been reduced for goods and services, including in social sectors, and domestically-financed investment (Text Table 2).

Text Table 2.Revisions to Central Government Spending in 2015
BudgetRevised

Proj.
Difference
(MGA billion)(Percent)
Wages and salaries1,7751,647−7
Goods and services261167−36
Of which: Social sectors10876−30
Transfers and subsidies8441,00819
Of which: JIRAMA85179111
Air Madagascar028
Civil Service Pension Funds15025067
Interest charges343250−27
Domestically-financed investment422179−58
Foreign-financed investment8681,20439
Central bank recapitalization0340
Arrears clearance11822994
TOTAL4,6315,0259
Sources: Malagasy authorities and IMF projections
Sources: Malagasy authorities and IMF projections

9. Efforts are underway to address structural fiscal weaknesses, although existing constraints have led to uneven progress. Tighter financing constraints, both in 2014 and 2015, have also led to mixed progress on arrears. Following agreement on a repayment plan with most tax creditors in 2014, some additional arrears on VAT refunds to exporters, as well as on government payments to JIRAMA’s suppliers, continued to accumulate in late 2014 and 2015. The authorities are negotiating the settlement of outstanding arrears and bills by issuing treasury bills to creditors and are developing a framework to manage and prevent the recurrence of arrears (IMF technical assistance (TA) is underway on this issue). The authorities are also seeking to reduce reliance on central bank financing by reducing the stock of statutory advances at end-December 2015. Progress was also made on the implementation of the PFM priority action plan 2014-15, including on a census of public agencies and the preparation of outstanding Budget Report Acts covering 2008-11 for submission to parliament.

10. Despite measures, revenue collections in 2015 have only stabilized relative to the economy, contrary to initial projections. Despite rising by 22 percent year-on-year through September (gross basis), tax collections are projected to reach only 9.9 percent of GDP again in 2015, versus an initial projection of 11.5 percent in the budget. During the 2009-13 crisis, the combination of growing informality, weaker revenue administration, and increasing corruption dragged tax revenues down to very low levels. Revenue performance in 2015 has been weighed down by slower-than-projected growth in imports and the economy in general, especially the mining sector. The tax and customs administrations have begun to implement measures to deter fraud, recover tax arrears, improve controls and verifications, and reduce exemptions (MEFP ¶11).6 Results have been limited so far, however, as the implementation of planned reforms have encountered structural obstacles, including regulatory constraints on the tax and customs administration (Figure 4) and weaknesses in judicial processes.

Figure 4.Fiscal Developments, 2006-16

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

11. Efforts are ongoing to generate savings on less productive spending and improve expenditure management (MEFP ¶17). Transfers to JIRAMA have been cut from last year (0.6 percent of GDP in 2015 versus 1.7 percent), thanks largely to drops in fuel costs and electricity theft, even though they exceeded the initially budgeted amount. The authorities have issued a decree to improve the management of commercial SOEs, including clarifying the role of the state and changed the management and Board of Air Madagascar, where losses also exceeded expectations. Adjustments in consumer fuel prices combined with falling world prices have cut the cost of fuel subsidies from 0.4 percent of GDP in January-July 2014 to 0.1 percent for the same period this year. Finally, audits of public payroll data have started a cleansing of “ghost workers,” yielding savings.

C. Monetary and financial sector policies

12. Despite strong money growth in 2015, liquidity conditions have become tight for most banks (Table 7). Fiscal deficit financing through “statutory advances” from the central bank accelerated base money growth in late 2014. Banks used the liquidity to increase both their lending to the private sector and their holdings of T-bills in the first half of 2015. However, in the second half of 2015, liquidity has become constraining for most banks; while aggregate liquidity appears adequate, the system is highly segmented, with just three banks (out of eleven) holding nearly 80 percent of liquidity. The liquid banks appear to have binding internal risk management limits that constrain their participation in the T-bill market,7 leading to limited demand and higher interest rates (reaching 12 percent on one-year T-bills).8 In response, the central bank in October reduced both the reserve requirement from 15 percent to 13 percent and the reference interst rate from 9.5 percent to 8.7 percent (the first adjustment since 2004, see Figure 5).

Table 1.Madagascar: Selected Economic and Financial Indicators, 2013–16
2013201420152016
ActualsPrel. Est.Projections
(Percent change; unless otherwise indicated)
National account and prices
GDP at constant prices2.33.33.24.3
GDP deflator5.16.67.67.4
Consumer prices (end of period)6.36.07.97.2
External sector
Export of goods volume21.75.713.95.9
Import of goods volume11.14.6−0.86.5
Terms of trade (deterioration -)10.312.6−4.0−2.8
Money and credit
Reserve money−6.114.110.811.9
Broad money (M2)9.09.810.914.9
(Growth in percent of beginning of period money stock (M2))
Net foreign assets−15.86.111.56.6
Net domestic assets24.93.7−0.68.3
of which: Credit to the private sector8.19.77.58.0
(Percent of GDP)
Public finance
Total revenue (excluding grants)9.610.110.310.9
of which: Tax revenue 19.39.99.910.7
Grants1.32.32.12.1
Total expenditures14.914.716.916.2
Current expenditure11.810.812.111.0
Wages and salaries5.75.65.85.6
Interest payments0.70.60.90.9
Other4.84.14.14.0
Goods and Services0.60.90.60.8
Transfers and Subsidies4.13.23.53.1
Treasury operations (net)0.60.61.30.5
Capital expenditure3.13.94.85.2
Domestic financed0.61.20.61.5
Foreign financed2.52.84.23.7
Overall balance (commitment basis )−4.0−2.3−4.5−3.2
Float (variation of accounts payable, - = increase)0.2−0.60.00.0
Variation of domestic arrears ( - = increase)−2.20.70.80.6
Overall balance (cash basis)−2.0−2.4−5.3−3.8
Total Financing2.02.45.31.0
Foreign borrowing (net)1.01.24.00.4
Domestic financing1.01.21.30.7
Excess financing after prospective financing ( - = gap)0.00.00.0−2.1
Savings and investment
Investment15.915.616.617.2
Government2.53.94.85.2
Nongovernment13.411.611.812.0
Gross domestic savings7.511.313.314.0
Public−2.0−0.2−1.50.2
Private9.411.414.813.8
Gross national savings10.315.314.815.4
Public−0.91.60.42.0
Private11.113.714.513.5
External sector
Exports of goods, f.o.b.18.420.622.724.5
Imports of goods, c.i.f.31.731.231.334.8
Current account balance (exc. grants)−6.9−2.2−3.9−3.9
Current account balance (inc. grants)−5.6−0.2−1.8−1.8
Public debt34.035.240.640.1
External22.823.730.731.5
Domestic11.111.410.08.7
(Units as indicated)
Gross official reserves (millions of SDRs)502535590629
Months of imports of goods and services2.22.52.72.8
Real effective exchange rate
(period average, percent change)3.6−3.3
GDP per capita (U.S. dollars)462453400370
Nominal GDP at market prices (billions of ariary)23,39725,77528,61832,055
Sources: Malagasy authorities; and IMF staff estimates and projections.

See tables 3 and 4 for details.

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

See tables 3 and 4 for details.

Table 2.Madagascar: National Accounts, 2013-16
2013201420152016
ActualsPrel. Est.Projections
(Percent change)
Real supply side growth
Primary sector−6.13.30.72.5
Agriculture−12.84.50.63.3
Cattle and fishing1.42.80.81.9
Forestry−1.9−1.01.01.0
Secondary sector22.28.54.14.8
Food and drink3.13.44.13.7
Export processing zone5.92.17.18.0
Energy5.64.23.15.5
Extractive industry219.225.93.35.0
Other−2.02.14.54.4
Tertiary sector0.82.14.05.1
Transportation3.62.23.35.6
Services2.21.25.05.8
Trade−3.42.93.12.8
Public administration1.01.41.01.0
Public works/construction−2.23.18.39.9
Indirect taxes8.52.14.54.8
Real GDP at market prices2.33.33.24.3
Nominal demand side composition(Percent of GDP)
Resource balance−8.4−4.3−3.3−3.3
Imports of goods and nonfactor services38.737.137.740.7
Exports of goods and nonfactor services30.332.834.437.4
Current account balance (including grants) = (S-I)−5.6−0.2−1.8−1.8
Consumption92.588.786.786.0
Government11.110.211.210.1
Nongovernment81.578.575.575.9
Investment (I)15.915.616.617.2
Government2.53.94.85.2
Nongovernment13.411.611.812.0
Of which: foreign direct investment5.22.93.13.3
National savings (S)10.315.314.815.4
Government−0.91.60.42.0
Nongovernment11.113.714.513.5
Memoranda items:
Nominal GDP (at market prices)23,39725,77528,61832,055
Net factor income−3.2−2.8−3.6−4.0
Transfers6.06.95.15.5
Nominal GNP23,40025,77928,62032,056
Sources: Malagasy authorities; and IMF staff estimates and projections.
Sources: Malagasy authorities; and IMF staff estimates and projections.
Table 3.Madagascar: Fiscal Operations of the Central Government, 2013-16(Billions of Ariary)
201320142015201520161
DecDecDecMarJuneSeptDecMarDec
ActualsPrel. Est.BudgetPrel. Est.ProjectionsProjections
Total revenue and grants2,5503,2043,8987681,6662,6653,5527954,166
Total revenue2,2542,6113,3946491,4952,2342,9617343,497
Tax revenue 12,1822,5473,3326421,4472,1642,8447313,429
Taxes on income, profits, and capital gains455694706167367528672174801
Taxes on international trade and transactions1,1721,2521,7612716319911,4823441,689
Domestic taxes on goods and services556601866204449645690212849
Non-tax revenue71646284871118368
Grants29659350311917143059061669
Current grants12074500047078
Capital grants29638645911917143054361591
Total expenditure and lending minus repayments3,4833,7974,5518472,0253,2594,8348535,202
Current expenditure2,7522,7813,2616561,6292,4223,4506783,541
Wages and salaries1,3421,4451,7753637531,2361,6484521,806
Interest payments1591423434810718225062300
Foreign394561112639602496
Domestic12097282378114319039204
Other1,1171,0461,1061394445751,1751271,269
Goods and services1150222262147910016738262
Transfers and subsidies9688248441243654751,008891,007
of which: SOEs207325
Treasury operations (net) 11351483810832547637853166
Capital expenditure7311,0161,2901913968371,3831751,661
Domestic financed1383024223788417920481
Foreign financed5937148681883187531,2041551,180
Identified financing963
Unidentified financing218
Overall balance (commitment basis )−933−593−654−79−359−594−1,282−58−1,036
Overall balance (excluding recapitalization and interest
rescheduling, commitment basis)−254−942
Float (variation of accounts payable, - = increase)40−1560104250000
Variation of domestic arrears (- = increase)−516187118407717222960185
Overall balance (including grants, cash basis)−457−624−772−222−460−766−1,512−118−1,221
Overall balance (excluding recapitalization and interest
rescheduling, cash basis)−426−1,172
Total financing4576247722224607661,512118321
Foreign borrowing (residency principle)2343104002032214031,13723113
External borrowing, Gross2974435912202985071,31094371
Budget support loans011518215115118464800
Project loans2973284106914732366194371
Amortization on a due basis (-)−63−133−192−16−77−104−173−63−258
Domestic borrowing (residency principle)2233143721923936337595208
Monetary sector42822232713138335134090224
Non-monetary sector631745−15−3812355−16
Treasury correspondent accounts (net)−2681810−97−1070000
Privatization proceeds000000000
Excess financing (+)00000000−899
Prospective financing218
Excess financing after prospective financing (+)−682
Sources: Malagasy authorities; and IMF staff estimates and projections.

Projections for domestic taxes and other treasury operations net in 2016 include an amount of MGA 90bn (0.3 percent of GDP) corresponding to tax arrears of Air Madagascar used for its recapitalization.

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

Projections for domestic taxes and other treasury operations net in 2016 include an amount of MGA 90bn (0.3 percent of GDP) corresponding to tax arrears of Air Madagascar used for its recapitalization.

Table 4.Madagascar: Fiscal Operations of the Central Government, 2013–16(Percent of GDP)
20132014201520161
DecDecDecDec
ActualsPrel. Est.BudgetProjectionsProjections
Total revenue and grants10.912.413.512.413.0
Total revenue9.610.111.710.310.9
Tax revenue 19.39.911.59.910.7
Taxes on income, profits, and capital gains1.92.72.42.32.5
Taxes on international trade and transactions5.04.96.15.25.3
Domestic taxes on goods and services2.42.33.02.42.6
Non-tax revenue0.30.20.20.40.2
Grants1.32.31.72.12.1
Current grants0.00.80.20.20.2
Capital grants1.31.51.61.91.8
Total expenditure and lending minus repayments14.914.715.716.916.2
Current expenditure11.810.811.312.111.0
Wages and salaries5.75.66.15.85.6
Interest payments0.70.61.20.90.9
Foreign0.20.20.20.20.3
Domestic0.50.41.00.70.6
Other4.84.13.84.14.0
Goods and services0.60.90.90.60.8
Transfers and Subsidies4.13.22.93.53.1
of which: SOEs0.71.0
Treasury operations (net) 10.60.60.11.30.5
Capital expenditure3.13.94.54.85.2
Domestic financed0.61.21.50.61.5
Foreign financed2.52.83.04.23.7
Identified financing3.0
Unidentified financing0.7
Overall balance (commitment basis )−4.0−2.3−2.3−4.5−3.2
Overall balance (excluding recapitalization and interest rescheduling, commitment basis)−3.3
Float (variation of accounts payable, - = increase)0.2−0.60.00.00.0
Variation of domestic arrears (- = increase)−2.20.70.40.80.6
Overall balance (including grants, cash basis)−2.0−2.4−2.7−5.3−3.8
Overall balance (excluding recapitalization and interest rescheduling, cash basis)−4.1
Total financing2.02.42.75.31.0
Foreign borrowing (residency principle)1.01.21.44.00.4
External borrowing, gross1.31.72.04.61.2
Budget support loans0.00.40.62.30.0
Project loans1.31.31.42.31.2
Amortization on a due basis (-)−0.3−0.5−0.7−0.6−0.8
Domestic borrowing (residency principle)1.01.21.31.30.7
Monetary sector1.80.91.11.20.7
Non-monetary sector0.30.10.20.10.0
Treasury correspondent accounts (net)−1.10.70.00.00.0
Privatization proceeds0.00.00.00.00.0
Excess financing (+)0.00.00.00.0−2.8
Prospective financing0.7
Excess financing after prospective financing (+)−2.1
Sources: Malagasy authorities; and IMF staff estimates and projections.

Projections for domestic taxes and other treasury operations net in 2016 include an amount of MGA 90bn (0.3 percent of GDP) corresponding to tax arrears of Air Madagascar used for its recapitalization.

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

Projections for domestic taxes and other treasury operations net in 2016 include an amount of MGA 90bn (0.3 percent of GDP) corresponding to tax arrears of Air Madagascar used for its recapitalization.

Table 5.Madagascar: Balance of Payments, 2013–20
20132014201520162017201820192020
EstimatesPrelim. Est.Projections
(Millions of SDRs)
Current account−390.4−16.8−125.5−117.3−142.4−244.8−283.6−298.7
Goods and services−586.7−302.7−228.3−214.6−257.1−369.9−427.4−447.3
Trade balance of goods−539.7−360.0−209.7−278.0−318.3−425.3−472.9−490.1
Exports, f.o.b.1,283.41,444.81,571.21,605.51,730.41,797.71,928.32,080.3
Of which: Mining342.4500.0533.5524.2596.0600.3605.2608.6
Imports, f.o.b.−1,823.1−1,804.8−1,780.9−1,883.4−2,048.7−2,223.0−2,401.2−2,570.4
Of which: Petroleum products−371.8−360.5−267.8−296.9−341.0−384.7−418.5−445.0
Of which: Food−227.8−200.5−191.8−209.2−215.2−221.6−228.7−236.1
Of which: Intermediate goods and capital−571.4−585.2−624.1−657.6−704.1−752.9−806.3−852.6
Services (net)−46.957.3−18.663.461.255.445.542.8
Receipts831.0858.4804.4842.9885.3930.0977.81,029.5
Payments−877.9−801.1−822.9−779.5−824.1−874.6−932.3−986.7
Income (net)−221.0−197.0−250.3−263.4−266.4−269.7−277.0−296.8
Receipts11.89.610.611.913.615.216.016.9
Payments−232.8−206.5−260.9−275.3−280.0−284.9−293.0−313.7
Of which: interest on public debt−11.9−12.3−14.4−19.7−25.0−29.4−36.3−44.1
Current transfers (net)417.2482.8353.1360.7381.1394.8420.8445.4
Official transfers44.584.734.041.142.736.438.841.0
Of which: Budget aid 10.054.810.315.915.98.08.59.0
Of which: Other (net)44.529.923.725.326.828.430.232.0
Private transfers372.7398.2319.1319.6338.4358.4382.1404.3
Capital and financial account234.733.5104.4−53.594.8115.9142.5182.3
Capital account88.185.1131.1120.7147.7150.6145.4145.4
Of which: Project grant 188.185.1131.1120.7147.7150.6145.4145.4
Financial account153.7−36.8−7.1−174.3−52.9−34.7−2.836.9
Foreign direct and portfolio investment362.8205.7212.8215.5241.6271.7306.8343.8
Other investment−209.1−242.5−219.9−389.8−294.5−306.4−309.7−306.9
Government66.682.7274.523.175.927.430.829.8
Drawing88.5118.7316.475.9136.281.480.380.3
Project drawings 188.588.3159.775.9136.281.480.380.3
Budgetary support 10.030.4156.60.00.00.00.00.0
Amortization−21.9−36.0−41.8−52.7−60.2−54.0−49.5−50.5
Monetary authority and private sector−118.1−114.0−176.5−149.0−106.5−99.9−106.5−112.8
Banks34.8−24.921.00.00.00.00.00.0
Other (inc. unrepatriated export revenues)−192.5−186.3−338.9−263.9−263.9−233.9−233.9−223.9
Errors and omissions−7.1−14.8−19.70.00.00.00.00.0
Overall balance−155.716.6−21.1−170.8−47.6−128.9−141.1−116.4
Financing155.7−16.6−9.3−51.0−48.7−46.4−43.5−46.6
Central bank (net; increase = –)173.7−16.6−9.3−51.0−48.7−46.4−43.5−46.6
Use of IMF credit (net)−6.217.5−11.8−10.6−8.4−6.0−3.1−6.2
Other assets, net (increase = –)179.8−33.32.5−40.4−40.4−40.4−40.4−40.4
Debt relief and cancellation0.00.00.00.00.00.00.00.0
Residual financing gap−18.00.030.4221.896.3175.3184.5163.0
Financing gap 2003022296175185163
(Percent of GDP; unless otherwise indicated)
Memorandum items:
Grants1.32.02.02.12.42.22.01.9
Loans1.31.74.61.22.01.11.01.0
Direct investment5.22.93.13.33.53.73.94.1
Current account
Excluding net official transfers−6.9−2.2−3.9−3.9−4.4−5.5−5.6−5.5
Including net official transfers−5.6−0.2−1.8−1.8−2.1−3.3−3.6−3.6
Debt service (percent of exports of goods)39.434.932.030.026.623.821.018.6
Gross official reserves (millions of SDR)502535590629702783870958
Months of imports of goods and nonfactor
services2.22.52.72.82.93.03.13.2
Exchange rate (ariary/US$, period average)2,2072,415
Sources: Malagasy authorities; and IMF staff estimates and projections.

Only includes external financial support that has been signed by the authorities.

Consists of unidentified project, budget, and balance of payment support.

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

Only includes external financial support that has been signed by the authorities.

Consists of unidentified project, budget, and balance of payment support.

Table 6.Madagascar: Monetary accounts, 2013–161(Billions of Ariary; unless otherwise indicated)
2013201420152016
DecDecMarJuneSepDecMarDec
ActualsPrel. Est.Proj.Proj.
Net foreign assets1,8402,1592,3102,1692,3242,8162,8153,235
Net foreign assets (BCM)1,2191,3891,5231,4251,4931,9371,9242,305
Net foreign assets (deposit money banks)621770787744831878891930
Net domestic assets4,0544,3904,4524,7774,7904,5164,5975,096
Domestic credit3,9434,5824,7025,0795,2285,3625,4516,102
Net credit to government1,1191,2321,3791,6311,6121,5951,6901,828
BCM4306527319091,0281,0511,0681,056
DMBs431326380452300267340487
Gross credits (mainly BTAs)810695802825697662735881
Deposits−379−369−422−374−397−394−394−394
Other credits258254268270283277282285
Credit to the economy2,8243,3503,3223,4493,6163,7673,7614,274
Credit to public enterprises54798299100828282
Credit to private sector2,7453,2503,2333,3353,5083,6773,6714,184
Other credits25218158888
Other items (net)111−184−250−302−438−846−854−1,006
BCM90677472658443015613235
Other−795−965−976−887−868−1,001−986−1,041
Money and quasi-money (M3)5,8946,5496,7626,9467,1137,3327,4128,331
Foreign currency deposits6668098288389179699821,025
Short term obligations of commercial banks3643424141434143
Broad money (M2)5,1915,6985,8926,0676,1566,3216,3897,263
Currency in circulation1,6081,8261,7811,8371,9252,0081,9522,281
Demand deposits in local currency1,9452,0872,2202,1352,2122,3422,4102,725
Quasi-money including time deposits1,6381,7861,8912,0952,0181,9712,0262,257
(Percentage change relative to broad money at beginning of the year)
Net foreign assets−15.86.12.70.22.911.50.06.6
Net domestic assets22.06.51.16.87.02.21.39.2
Domestic credit18.912.32.18.711.313.71.411.7
Net credit to government10.82.22.67.06.76.41.53.7
Credit to the economy8.110.1−0.51.74.77.3−0.18.0
Credit to public enterprises0.00.50.00.40.40.00.00.0
Credit to private sector8.19.7−0.31.54.57.5−0.18.0
Other items (net; asset = +)3.2−5.7−1.1−2.1−4.5−11.6−0.1−2.5
(Percentage change year-on-year)
Broad money (M2)9.09.813.014.216.610.98.414.9
Currency in circulation6.013.616.212.916.310.09.613.6
Demand deposits in local currency3.97.314.111.816.012.28.616.3
Quasi-money in local currency19.39.09.018.117.510.47.114.5
Credit to the private sector (in nominal terms)16.218.418.116.018.313.213.613.8
Credit to the private sector (in real terms)10.012.45.26.6
Memorandum items:
Money multiplier (M3/reserve money)2.402.342.432.402.402.362.472.40
Velocity of money (GDP/end-of-period M3)3.973.943.923.923.923.903.983.85
Sources: Malagasy authorities; and IMF staff estimates and projections.

End of period.

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

End of period.

Table 7.Madagascar: Balance Sheet of the Central Bank, 2013-161(Billions of Ariary; unless otherwise indicated)
2013201420152016
DecDecMarJuneSepDecMarDec
ActualsPrel. Est.Proj.Proj.
Net foreign assets1,2191,3891,5231,4251,4931,9371,9242,305
Gross foreign assets1,7342,0132,1552,0702,1892,8202,7933,184
Gross foreign liabilities−515−624−632−644−696−882−869−879
Net domestic assets1,2341,4101,2661,4651,4661,1651,0731,166
Credit to government (net)4306527319091,0281,0511,0681,056
Claims on central government5419198629821,0891,1511,1681,156
Statutory advances33366311307371231248265
Securitized debt (T-bonds and bills)338338532532532735735711
Discounted bills of exchange8719181760606060
Other credits821952126126124124120
Government deposits−111−267−131−72−61−100−100−100
Claims on other sectors98997877
Claims on banks: Liquidity operations (+ = injection)−111−24−201−380−49−13468
Other items (net; asset +)90677472658443015613235
Reserve money2,4532,7992,7882,8902,9583,1022,9973,471
Currency outside banks1,6081,8261,7811,8371,9252,0081,9522,281
Bank reserves8449721,0061,0521,0321,0941,0441,190
Currency in banks153170119146122161130178
Deposits6918028879079109339141,011
(Cumulative annual flows)
Memorandum items:
Net foreign assets−62417013436103548−13368
Millions of SDRs−1741614−17−4036−850
Net domestic assets465176−1445556−245−921
Credit to government (net)27122280258377399175
Reserve money−159346−1192159303−105369
(Millions of SDRs)
Net foreign assets353369383352330405397455
Sources: Malagasy authorities; and IMF staff estimates and projections.

End of period.

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

End of period.

Figure 5.Monetary Developments, 2014-15

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

13. The authorities have initiated several actions to strengthen the central bank’s capacity in 2015. The actions aim to make monetary policy more active and enhance the bank’s capacity to safeguard macroeconomic stability:

  • Revisions to the Central Bank Act are being developed to (i) gradually reduce central bank statutory advances to the government; (ii) automatically transfer central bank losses and profits to the government; and (iii) establish an Audit Committee of the Board of Directors.

  • Deposit auctions and sales of treasury bills were reintroduced to improve liquidity management.

  • The central bank was recapitalized in June 2015 by the government settling overdue interest payments equal to 0.4 percent of GDP.

  • In connection with ending buyback operations, the central bank increased transparency in the foreign exchange market in September by starting to report daily minimum and maximum exchange rates for transactions, in addition to the average exchange rate.

  • New investment guidelines and a new directive on reserve management were approved.

  • A joint IMF/World Bank Financial Sector Assessment Program (FSAP) is underway.

D. Inclusive growth and investment

14. The strategy for inclusive growth and poverty reduction has been refined, although implementation requires more resource mobilization. The implementation plan for the National Development Plan (NDP) and the Presidential Plan of Urgent Action (PPUA) was finalized in June 2015, and it will be the foundation for a donor conference planned for 2016. Full NDP implementation will require substantial public investment financed partly externally and partly through domestic revenue mobilization. The steering committee on investment priorities, established in March 2015, is working to strengthen project implementation and a prioritized investment plan will be completed shortly.

Outlook and Policy Discussions

15. In light of the slow recovery and budget tensions, the authorities have recently intensified their reform agenda, as reflected in the SMP. While Madagascar will ultimately need broad-based reforms to support sustained growth over the medium-term, short-term measures should be focused and realistic in light of existing capacity constraints. The policies under the agreed SMP focus on: (i) creating fiscal space for priority spending; (ii) reinforcing macroeconomic stability by strengthening the central bank and monetary policies; and (iii) starting to unlock the potential for sustained inclusive growth.

16. Economic growth is projected to accelerate somewhat in 2016 to 4.3 percent. Growth would be driven by a rebound in agricultural production, a modest recovery in textile exports (including to the US following the restoration of AGOA trade privileges in 2015), and a slight increase in infrastructure investment, partly financed by donors and public private partnerships. As usual, the projected growth will be exposed to the risks from slippages in implementation of reforms, particularly in fiscal policy and SOEs, as well as from natural disasters, which may be heightened by the El Niño weather pattern.

A. Creating more fiscal space

17. The overall fiscal policy goal is to create the additional fiscal space needed for a successful implementation of the NDP. The top priority is to reverse the recent trend of falling revenues relative to GDP through further changes in tax policy and administration. At the same time, it is also important to make the best use of limited fiscal resources by reprioritizing spending, strengthening public financial management (PFM), and improving the selection of investment projects.

18. New revenue measures aim to stabilize tax revenues in 2015 and lead to a modest increase in 2016 (MEFP ¶11, ¶18). Drawing on TA recommendations, administrative measures to be launched in 2015 focus on further strengthening customs control procedures (including setting up remote audit teams to conduct ex-post verification of suspicious operations (benchmark, MEFP Table 2)), recovering tax arrears, and limiting the abuse of exemption rules. The draft revisions to the 2015 budget9 and the draft 2016 budget introduce several tax policy initiatives (prior action, MEFP Table 2), including: increased excise duties on beverages; a new tourist arrival fee of US$25 per visitor; and limiting sales by Economic Processing Zones companies to the domestic market and subjecting them to customs duties and taxes (benchmark, MEFP Table 2). Relying on these measures, the budget targets an increase in the collection of tax revenues of ½ percent of GDP in 2016.10 The customs and tax administrations are also drawing up medium-term plans for continued modernization. In addition, a review of the institutional framework for mining and petroleum activities and their taxation will be completed by end-2015, with a view to ensuring an appropriate revenue contribution in the long run (MEFP ¶15-16).

19. The government will also intensify efforts to improve the composition and quality of fiscal spending (MEFP ¶17, ¶19-22). The fuel price subsidy—whose benefits tend not to accrue to the most vulnerable—will be eliminated through the adoption of an automatic pricing formula to maintain full cost-recovery fuel prices from end-December 2015 (continuous benchmark, MEFP Table 2). Specific reform strategies are being developed for JIRAMA and Air Madagascar with World Bank assistance. Budget transfers to pension funds will be addressed through a clean-up of the pension rolls and parametric pension reforms. More cost savings are also expected from the continuing audit of civil service pay data. To bring the accumulation of arrears under better control, the authorities will establish a framework to define, identify, and monitor arrears on expenditure of the central government and key SOEs by end-December 2015. In addition, an escrow account will be created at the Central Bank to ring fence the resources required by VAT reimbursements starting January 1, 2016 (benchmark, MEFP Table 2). Implementation of a PFM reform agenda covering 2014-15 is also continuing.

20. The projected fiscal deficits in 2015 and 2016 are consistent with medium-term sustainability, although the limited availability of financing creates difficulties. The overall fiscal deficit (commitment basis) is projected at 3.3 percent of GDP in 2015, excluding the central bank recapitalization.11 The demand for domestic government securities, as well as the availability of external concessional financing, is limited, however. As a result, residual financing needs are expected to be met by an external bank loan on commercial terms to be signed shortly. The projected deficit (commitment basis) in 2016 is 3.2 percent of GDP. To finance the 2016 budget, the authorities need external financing that is not yet identified equivalent to 2 percent of GDP (roughly US$200 million).12 The authorities are in discussions with development partners on the availability of external budget financing.

B. Strengthening central bank capacity to support stability

21. Changes in the operations of the central bank aim to enhance its capacity to support macroeconomic stability (MEFP ¶30). Central bank financing of the fiscal deficit, petroleum subsidies, and associated large and volatile swings in excess bank reserves have created challenges to the macroeconomic stability in recent years. To strengthen central bank independence, governance, and accountability, the authorities are planning to submit a revised Central Bank Act for Cabinet approval by end-December 2015 (benchmark, MEFP Table 2) that tightens limits on financing to the government and reinforces governance and management. The government will also compensate the central bank for losses made during 2011-13 by issuing securities worth 0.8 percent of GDP, further restoring the financial position of the central bank.13 To improve transparency, the central bank will adhere to International Financial Reporting Standards (IFRS) starting in 2016.

22. The central bank is committed to maintaining a flexible exchange rate and improving the functioning of the interbank foreign exchange market (MEFP ¶29). The authorities will refrain from reintroducing buyback operations (continuous benchmark, MEFP Table 2) and plan to limit interventions to a gradual accumulation of foreign exchange reserves, in the absence of extraordinary volatility in the exchange rate. The exchange rate will adjust to economic fundamentals. The temporary 100 percent surrender requirement introduced in August will expire at end-December 2015, and the authorities are committed to minimizing any resort to administrative measures to restrict foreign exchange outflows and fully respecting their commitments under Article VIII.

23. The central bank is committed to a more active monetary policy (MEFP ¶27-28). The current growth of broad money and private sector credit is positive to the extent it reflects financial deepening, but vigilance is warranted to avoid any inflationary effects or risks of fiscal dominance. Going forward, the central bank will progressively focus on keeping inflation in single digits and building adequate reserves; in particular, with technical support from the IMF, it will work toward setting explicit bank liquidity targets and meeting them by actively using Treasury bill sales, deposit auctions, and credit auctions. The central bank’s reference (policy) interest rate will be adjusted more frequently to signal movements in the money market. Enhancing the efficiency of the interbank market is also important, since its segmentation is complicating the implementation of monetary policy and government financing.

24. Indicators of financial soundness do not suggest any serious immediate concerns, and the FSAP currently underway will provide a more in-depth assessment. The banking system has weathered economic storms despite deficiencies in prudential regulation and supervision, and in the bank intervention framework. The capital adequacy ratio is comfortable, notwithstanding a slow decline in the context of a brisk recovery in private sector credit. The banking sector enjoys high profitability, and deposits exceed loans for the system as a whole, allowing some banks to place excess liquidity with their parent banks abroad. Microfinance institutions (MFIs) are growing rapidly; while many are financially fragile, their aggregate balance sheet remains very small relative to that of the commercial banks.

C. Starting to unlock the potential for sustained inclusive growth

25. The key medium-term challenge remains to secure strong, sustainable, pro-poor growth, which will help reverse the deterioration in development indicators. Poverty-reducing growth will require enhancing the productivity of all segments of the population, including marginalized groups, particularly in rural areas. This ultimately requires a set of policies that advance: (i) investment in key infrastructure, especially power, transportation and resilience to natural disasters; (ii) stronger economic governance, including fighting corruption and encouraging entrepreneurship; and (iii) an enhanced human capital base through investment in education, health and social protection.

26. Near-term policies under the SMP focus on strengthening the foundation for investment and social protection policies (MEFP ¶23-26, ¶34). The authorities’ investment plans emphasize infrastructure and social spending, relying largely on external borrowing on concessional or near concessional terms (Table 8). To maximize the benefits and manage the risks from external borrowing, the authorities will: (i) bring the DMFAS database into full operation and publish details on the stock and flows of public and publicly-guaranteed debt by end-March 2016 (benchmark, MEFP Table 2);14 (ii) implement a careful process of investment prioritization to scale up investment in critical infrastructure, including by limited non-concessional borrowing (consistent with Madagascar ‘weak’ debt monitoring capacity and ‘moderate’ risk of external debt distress (DSA, Appendix 2), the SMP includes a non-concessional borrowing ceiling of US$200 million, commitment basis); and (iii) submit a law on public-private partnerships (PPPs) to the parliament by end-December 2015. To enhance the design and implementation of social protection programs, the Cabinet will approve the National Social Protection Policy by end-December 2015 (benchmark, MEFP Table 2). Improved regulation and supervision of MFIs is also a priority to protect consumers and sustain stability, an issue the FSAP will examine further. In addition, plans to improve the business climate and the performance of key SOEs like JIRAMA and Air Madagascar, including service delivery, are central to successful inclusive growth.

Table 8.Madagascar: Projected External Borrowing, 2015Q3-16Q3
Public and Publicly-Guaranteeed External DebtVolume of new debt in 2015/16
US$ millionPercent
By sources of debt financing540.8100
Concessional debt, of which340.863
Multilateral debt316.659
Bilateral debt24.24
Other0.00
Non-concessional debt, of which200.037
Semi-concessional120.022
Commercial terms80.015
By Creditor Type540.8100
Multilateral316.659
Bilateral - Paris Club84.216
Bilateral - Non-Paris Club60.011
Other80.015
Uses of debt financing540.8100
Infrastructure161.330
Social spending152.828
Budget financing166.731
Other60.011
Sources: Malagasy authorities; and IMF staff estimates and projections.
Sources: Malagasy authorities; and IMF staff estimates and projections.

27. The government has adopted a new strategy to fight corruption and improve governance (MEFP ¶17, ¶33). Enduring governance challenges deepened further during the 2009-13 crisis. Corruption, illegal logging, and other illicit activities increased. The National Anti-Corruption Strategy adopted in September 2015 involves a broad set of actions, including: strengthening the judiciary and sanctions system to punish corrupt behavior; increasing communication about corruption; coordinating international support against corruption; setting aside sufficient fiscal resources; and mobilizing the general population. The authorities will also initiate an evaluation of the effectiveness of the current sanction system, including the Conseil de Discipline de la Fonction Publique, by end-March 2016, and increase the budget for agencies dedicated to fight corruption by 50 percent in the 2016 budget.

Program Risks and Capacity Building

28. The economic program and projections are subject to significant uncertainty and risks (Box 1. Risk Assessment Matrix). Major risks stem from: (i) political uncertainty and disappointing progress in fighting corruption that could reduce reform implementation, economic confidence, donor support, and tourism earnings; (ii) the need for additional transfers to cover losses in JIRAMA and Air Madagascar; and (iii) failure to secure all of the projected external financing in 2015. If any of these events were to materialize, priority spending on investment and social development could be crowded out, and additional domestic arrears might accumulate.

29. Capacity building has been an integral part of the re-engagement with Madagascar since 2014. Many of the ongoing or planned reforms draw heavily on TA missions from the IMF, World Bank, African Development Bank, and others. The TA provided so far has focused on near-term, quick impact measures to improve revenue generation, public financial management, and central bank operations. While fiscal issues will continue to play a major role, the ongoing FSAP will set the stage for increased TA on financial sector issues over the next year.

Program Design and Capacity to Repay

30. The SMP covers a six-month period, September 2015 through March 2016, and will be monitored based on quantitative targets and structural benchmarks (MEFP, Tables 1 and 2). The targets include ceilings on the accumulation of new external payment arrears, external borrowing on non-concessional terms, the central bank’s net domestic assets, and net bank credit to the government, and floors on the central bank’s net foreign assets, social priority spending, and gross tax revenue.

31. The debt sustainability analysis (DSA) indicates that Madagascar has moved from ‘low’ to ‘moderate’ risk of debt distress (DSA, Appendix 2). Debt indicators have deteriorated since the last DSA (June 2014), mainly as a result of greater than anticipated exchange rate depreciation. Weak revenue generation remains the greatest source of risk to debt sustainability. Madagascar’s capacity to repay the Fund remains adequate (Table 10).

Table 9.Madagascar: Selected Financial Soundness Indicators, 2009-151(Ratios, percent)
20092010201120122013201420152015
DecDecDecDecDecDecMarJune
Capital Adequacy
Regulatory capital to risk-weighted assets14.614.415.315.214.713.313.413.5
Capital to assets7.17.47.27.27.97.77.37.7
Regulatory Tier 1 capital to risk-weighted assets14.814.916.215.915.013.614.014.1
Tier 1 to assets7.27.67.67.68.07.97.68.0
Non-performing loans net of provisions to capital20.219.218.013.517.717.317.215.4
Net open position in equities to capital6.66.36.86.06.57.67.58.3
Asset Quality
Non-performing loans to total gross loans11.313.114.614.213.812.011.811.5
Earnings and Profitability
Return on assets1.61.51.82.02.33.13.73.8
Return on equity21.919.922.925.429.138.135.336.3
Interest margin to gross income60.762.163.263.663.958.857.256.8
Non-interest expenses to gross income50.952.352.856.054.248.046.446.8
Trading income to total income97.597.997.497.797.597.798.098.0
Personnel expenses to non-interest expenses36.637.737.238.439.541.341.340.6
Liquidity
Liquid assets to total assets (liquid asset ratio)46.945.949.750.443.239.943.640.8
Liquid assets to short-term liabilities69.767.871.074.163.758.964.960.9
Customer deposits to total (non-interbank) loans183.5175.0188.2188.3158.2145.8154.2151.5
Sensitivity to Market Risk
Net open position in foreign exchange to capital15.415.114.511.917.18.98.27.8
Spread between reference lending and deposit rates10.611.211.611.912.512.011.423.1
Foreign currency-denominated loans to total loans4.94.77.35.96.35.34.85.3
Foreign currency-denominated liabilities to total liabilities17.819.318.317.516.317.616.916.5
Sources: Malagasy authorities.

Ratios only concern banking sector.

Sources: Malagasy authorities.

Ratios only concern banking sector.

Table 10.Madagascar: Indicators of Capacity to Repay the Fund, 2015-25
20152016201720182019202020212022202320242025
(Millions of SDRs)
Fund obligations based on existing credit
Principal0.010.68.35.93.16.16.16.16.13.10.0
Charges and interest0.00.00.00.00.00.00.00.00.00.00.0
Fund obligations based on existing and prospective credit
Principal0.010.68.35.93.16.112.212.212.29.26.1
Charges and interest0.00.00.00.00.20.20.20.10.10.10.0
Total obligations based on existing and prospective credit
Millions of SDRs0.010.68.35.93.26.312.412.312.39.26.2
Billions of Ariary0.052.142.631.717.936.373.975.978.060.241.4
Percent of exports of goods and services0.00.40.30.20.10.20.40.30.30.20.1
Percent of debt service0.09.37.35.32.54.79.98.37.34.72.8
Percent of GDP0.00.20.10.10.00.10.10.10.10.10.1
Percent of government revenue0.01.51.10.70.30.61.11.00.90.60.4
Percent of quota0.08.76.84.82.75.110.110.110.17.65.0
Outstanding IMF credit based on existing and prospective drawings
Millions of SDRs85.975.267.061.158.051.939.727.515.36.10.0
Billions of Ariary355.4368.4344.5327.0321.3299.8237.4169.196.739.80.0
Percent of exports of goods and services3.63.12.62.22.01.71.20.80.40.10.0
Percent of debt service84.065.959.055.244.938.931.718.59.03.10.0
Percent of GDP1.21.11.00.80.70.60.40.30.20.10.0
Percent of government revenue12.010.58.67.16.14.93.42.21.10.40.0
Percent of quota70.361.654.850.047.542.532.522.512.55.00.0
Net use of IMF credit (millions of SDRs)30.6−10.6−8.3−5.9−3.1−6.1−12.2−12.2−12.2−9.2−6.1
Disbursements30.60.00.00.00.00.00.00.00.00.00.0
Repayments and repurchases0.010.68.35.93.16.112.212.212.29.26.1
Memorandum items:(Billions of Ariary, unless otherwise indicated)
Exports of goods and services (millions of SDRs)2,3762,4482,6162,7282,9063,1103,3203,5543,8124,0974,410
Debt service423.2558.6584.3592.7715.9770.4749.5915.31,074.91,280.41,499.2
Nominal GDP (at market prices)28,61832,05535,60239,31343,34947,85052,75558,16364,12670,70077,948
Government revenue2,9613,4974,0294,6275,3056,1066,9437,7718,6969,72910,882
Quota (millions of SDRs)122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2
Source: IMF staff estimates and projections.
Source: IMF staff estimates and projections.

32. The last safeguards assessment was completed in January 2015. The CBM has taken or is planning to take steps to address the assessment’s priority recommendations, including on its legal framework, transparency, and audit quality.

Staff Appraisal

33. Madagascar’s economic recovery has proven slower than expected, due in large part to external shocks and deep-rooted structural problems. Falling world prices for commodity exports and weather-related shocks have contributed to slower growth. At the same time, political uncertainty, poor governance (including corruption), and weak institutions (including SOEs and the judiciary) have restrained private investment, slowed the implementation of reforms, and delayed their benefits. In this context, financing and balance of payments needs have grown.

34. In spite of this challenging economic environment, the government has broadly maintained macroeconomic stability while launching measures to strengthen it. Notwithstanding exogenous shocks and slower economic growth, the authorities have preserved single-digit inflation and the import coverage of international reserves. Fiscal and current account deficits also remain compatible with medium-term sustainability. The real exchange rate has depreciated modestly, reflecting nominal flexibility, and is broadly aligned with economic fundamentals. To maintain macroeconomic stability, the government has had to curtail spending plans owing to weak revenue collections, larger-than-budgeted transfers to state-owned enterprises, and binding limits on central bank financing. Progress on arrears clearance has also been mixed at best, because of the tight budget constraints.

35. Despite maintaining stability under difficult circumstances, the authorities recognize the need to improve results to achieve development over the medium-term. Economic growth is currently only keeping pace with the rising population, and public investment in physical, human, and institutional capital has not yet reached a level sufficient to support sustainable growth. Resilience to natural disasters remains a concern. The authorities have appropriately intensified their efforts, stressing an increase in domestic revenue collections as an immediate priority. Effectively sanctioning tax evasion is a key to improved results. At the same time, it is important to improve the quality of spending by reducing the need for transfers to loss-making SOEs as well as eliminating the inefficient fuel subsidy. In addition, the authorities need to avoid the build-up of new arrears and settle the existing stock expeditiously, as they undermine confidence in public finances and hold back private sector-led growth. These enhancements to the quality of fiscal policy will enable the authorities to increase priority spending, without unsustainable increases in the fiscal deficit or domestic financing. Strengthening governance, cutting corruption, and improving the business climate are also essential to success; staff welcomes the authorities’ commitment to building their capacity with the ultimate objective of implementing a successful medium-term program.

36. The impact of the authorities’ investment plans depends both on enhancing the investment process and on mobilizing additional financing. Ongoing efforts to carefully prioritize projects based on economic impact are central. To reconcile the substantial needs with debt sustainability, the authorities need to rely as much as possible on external concessional financing, for which the needs are considerable. If any non-concessional borrowing is required, it should be limited in size and longer in maturity. A sound legal foundation for public-private partnerships (PPPs) is also important to establish the right incentives for all parties and to limit public liabilities.

37. Staff welcome the authorities’ actions to enhance the functioning of the foreign exchange market, maintain a flexible exchange rate, and strengthen the central bank’s capacity. Discontinuing buy-back operations, bolstering transparency, and implementing exchange rate flexibility significantly enhance external sustainability. The gradual accumulation of foreign exchange reserves, combined with an RCF disbursement, boost an important policy buffer. Staff urged the authorities to minimize recourse to administrative measures restricting foreign exchange outflows and to ensure full compliance with Article VIII obligations. The ongoing recapitalization of the central bank, revision of its legal framework, and more active liquidity management will reinforce its capacity to safeguard price and financial sector stability. The recent easing of monetary policy was an understandable reaction to tight bank liquidity and does not appear to pose immediate risks to macroeconomic stability. For the medium-term, however, these challenges highlight the need both to enhance the quality of fiscal policy and to address structural weaknesses in the financial sector. While financial deepening is an important objective, it is vital that it remains compatible with price and financial sector stability.

38. Staff supports the authorities’ request for a disbursement under the RCF in the amount of SDR 30.55 million (25 percent of quota), based on the policy track record over the past six months. The authorities have maintained economic stability and sustainability under demanding conditions with an adequate policy mix. The RCF disbursement, in combination with the SMP, would supplement the authorities’ own policy efforts, help build reserves, and catalyze additional donor financing. In addition to helping guide policy, the SMP provides an opportunity to begin demonstrating a track record necessary to implement a successful medium-term economic program, which in turn would support a request for an arrangement under the Extended Credit Facility. The challenges for qualifying for an ECF arrangement would include exhibiting the capacity to sustain reforms in key areas, especially revenue collections, economic governance and management of SOEs. This capacity would in turn help mobilize the domestic and external resources to ensure adequate financing. Future Fund engagement will also be guided by recommendations from the ongoing FSAP.

Box 1.Madagascar: Risk Assessment Matrix 1/

Source of RisksRelative LikelihoodPotential ImpactPolicy Response
Domestic Risks
Political uncertainty and disappointing progress in fighting corruption.HighHigh: Reduced inflow of FDI and donor support. Reduced export earnings from tourism. Reduced implementation of reform and reduced fiscal space impeding delivery of public services.Maintain exchange rate flexibility and reallocate fiscal spending to support of the most vulnerable. Encourage authorities and development partners to protect spending in priority social areas.
Larger than anticipated transfers to SOEs (JIRAMA and Air Madagascar).HighHigh: Reduced fiscal space would impede the government’s ability to deliver public services.Protect key public services in budget. Encourage authorities and development partners to protect spending in priority social areas. Minimize accumulation of new arrears. Consider private management of specific units or operations.
External Risks
Structurally weak growth in the Euro Area.HighHigh: Uncertain/slow donor support reduces fiscal space, impeding the ability to deliver public services. Slower growth in tourism.Energize donor support through a concerted campaign emphasizing the merits and needs of the medium-term development plan; look within budget for ways to protect key public services. Maintain exchange rate flexibility. Diversify tourism markets.
Cyclones, floods, and droughts.MediumMedium: Loss and damage of physical and human capital and lower growth.Reallocate fiscal spending to finance recovery work and make appeal to donors for post-disaster financing. Build buffers and resilience.
Sharp China slowdown in 2015-16LowMedium: Depressed prices of commodities, mainly nickel, reduces export earnings and tax revenue.Maintain exchange rate flexibility and continue with revenue reforms to expand the local tax base.
1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of the IMF staff. The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
Table 11.Madagascar: Millennium Development Goals1
199019952000200520122015

target
Status 2
Goal 1: Eradicate extreme poverty and hungerLow progress
Employment to population ratio, 15+, total (%)8484858486
Employment to population ratio, ages 15-24, total (%)7171737275
GDP per person employed (constant 1990 PPP $)1,7141,4411,4941,4261,348Medium progress
Income share held by lowest 20%6565
Malnutrition prevalence, weight for age (% of children under 5)36303719Unlikely to meet
Poverty gap at $1.25 a day (PPP) (%)33412743
Poverty headcount ratio at $1.25 a day (PPP) (% of population)7276688135Unlikely to meet
Vulnerable employment, total (% of total employment)8486
Goal 2: Achieve universal primary educationLow progress
Literacy rate, youth female (% of females ages 15-24)68100Unlikely to meet
Literacy rate, youth male (% of males ages 15-24)73100Unlikely to meet
Persistence to last grade of primary, total (% of cohort)3427363641100Unlikely to meet
Primary completion rate, total (% of relevant age group)3531365870100Unlikely to meet
Adjusted net enrollment rate, primary (% of primary school age children)67566577100Unlikely to meet
Goal 3: Promote gender equality and empower womenHigh progress
Proportion of seats held by women in national parliaments (%)4871850Likely to meet
Ratio of female to male primary enrollment (%)96104969699100Likely to meet
Ratio of female to male secondary enrollment (%)949695100Likely to meet
Ratio of female to male tertiary enrollment (%)7783878992100Likely to meet
Share of women employed in the nonagricultural sector31383550Medium progress
(% of total nonagricultural employment)
Goal 4: Reduce child mortalityLow progress
Immunization, measles (% of children ages 12-23 months)4755577469100Unlikely to meet
Mortality rate, infant (per 1,000 live births)978569544131Unlikely to meet
Mortality rate, under-5 (per 1,000 live births)159137109815853Unlikely to meet
Goal 5: Improve maternal healthMedium progress
Adolescent fertility rate (births per 1,000 women ages 15-19)150153152140125Medium progress
Births attended by skilled health staff (% of total)57474651Medium progress
Contraceptive prevalence (% of women ages 15-49)17191927Medium progress
Maternal mortality ratio (modeled estimate, per 100,000 live births)640550400310240122Unlikely to meet
Pregnant women receiving prenatal care (%)78777180100Medium progress
Unmet need for contraception (% of married women ages 15-49)322624Medium progress
Goal 6: Combat HIV/AIDS, malaria, and other diseasesMedium progress
Children with fever receiving antimalarial drugs6134Low progress
(% of children under age 5 with fever)
Incidence of tuberculosis (per 100,000 people)391335293262234Medium progress
Prevalence of HIV, female (% ages 15-24)0
Prevalence of HIV, male (% ages 15-24)0
Prevalence of HIV, total (% of population ages 15-49)01111Medium progress
Tuberculosis case detection rate (%, all forms)1448354049Medium progress
Goal 7: Ensure environmental sustainabilityMedium progress
Forest area (% of land area)2423232222
Improved sanitation facilities (% of population with access)8911121454Unlikely to meet
Improved water source (% of population with access)293438424868Unlikely to meet
Goal 8: Develop a global partnership for development
Net ODA received per capita (current US$)3422205020
Debt service (PPG and IMF only,447753High progress
% of exports of goods, services and primary income)
Internet users (per 100 people)00012Medium progress
Mobile cellular subscriptions (per 100 people)000339High progress
Telephone lines (per 100 people)00011Medium progress
Source: World Bank, World Development Indicators (October 2013).

Figures may refer to the most recent period available, other than those specified in the header.

Status according to “Enquête Nationale sur le Suivi des Objectifs du Millénarie pour le Développement à Madagascar”, report published in 2014 by l'Institut National de la Statistique (INSTAT) in cooperation with les Partenaires Techniques et Financiers. The report, based on data for 2012-13, is available on www.instat.mg

Source: World Bank, World Development Indicators (October 2013).

Figures may refer to the most recent period available, other than those specified in the header.

Status according to “Enquête Nationale sur le Suivi des Objectifs du Millénarie pour le Développement à Madagascar”, report published in 2014 by l'Institut National de la Statistique (INSTAT) in cooperation with les Partenaires Techniques et Financiers. The report, based on data for 2012-13, is available on www.instat.mg

Appendix I. Letter of Intent

Antananarivo, Madagascar

November 4, 2015

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431 USA

Dear Madam Managing Director:

1. We have continued our program of recovery from the transition period. Our policy measures in 2015 have aimed to strengthen our macroeconomic stability and sustainability in support of durable poverty reduction and growth. Despite a difficult external environment and deep-rooted structural weaknesses, we have made progress this year.

2. These policies mark the launch of a medium-term economic reform program. Durable poverty reduction and growth will call for significantly increased investment, which in turn will require improved mobilization of domestic revenue and will lead to a protracted balance of payments need. To assist us in this effort, we are counting on the financial support of the international community, which is needed if our efforts are to succeed in materially improving living standards in the next few years. We are asking the International Monetary Fund to provide immediate support in the form of a disbursement under the Rapid Credit Facility (RCF) in an amount equivalent to 25 percent of quota, or SDR 30.55 million that would be disbursed to the Central Bank of Madagascar.

3. The attached Memorandum of Economic and Financial Policies (MEFP) describes the policies that we have implemented this year, as well as those we plan to implement both over the next six months and all next year. The policy plans for the next six months will also form the basis of a staff-monitored program, which is intended to help lay the groundwork for a multi-year program supported by the Extended Credit Facility (ECF). The government is convinced that the policies and measures included in this memorandum will help to address our balance of payment difficulties and advance our poverty reduction and growth objectives. We stand ready to take any further measures that may prove necessary to meet our objectives and will consult with IMF staff prior to the adoption of any changes to the policies set forth in this Memorandum. The government also undertakes to cooperate fully with the IMF to achieve its policy objectives and not to introduce measures or policies that would compound Madagascar’s balance of payment difficulties. The Central Bank of Madagascar is committed to provide timely monitoring information and undergo a safeguards assessment update, if required.

4. The Malagasy authorities agree to the publication of this Letter of Intent (LOI) and the attached MEFP and Technical Memorandum of Understanding (TMU), as well as the IMF staff report related to the request for a disbursement under the Rapid Credit Facility (RCF) and the Debt Sustainability Analysis, after approval by the Executive Board of the IMF.

Sincerely yours,

/s//s/
Mr. François Marie Maurice Gervais RakotoarimananaMr. Alain Hervé Rasolofondraibe
Minister of Finance and BudgetGovernor
MadagascarCentral Bank of Madagascar

Attachments: - Memorandum of Economic and Financial Policies

- Technical Memorandum of Understanding

Attachment I. Memorandum of Economic and Financial Policies

I. Overview

1. This memorandum of economic and financial policies lays out the reform program of the Government of the Republic of Madagascar for the remainder of 2015 and 2016 in connection with a request for a disbursement under the Rapid Credit Facility (RCF), as well as a staff-monitored program (SMP). Recurring cycles of political instability have hindered economic and social development in Madagascar over the last fifty years. As a result, real per capita GDP has been declining with widespread and growing poverty. During the latest 2009-13 crisis, average real GDP growth was reduced to ½ percent a year, significantly below population growth of 2.8 percent a year. This crisis period resulted in the stalling of efforts to improve the rule of law and public sector efficiency and governance deteriorated.

2. The government is now promoting an agenda of consensus, reconciliation, and the restoration of governance. The emphasis is on improving physical and human capital, strengthening governance and the rule of law, and thereby creating the foundation for inclusive growth benefiting all income levels and regions. The government’s strategic direction is stated in the National Development Plan (NDP), covering 2015-19, and the Presidential Plan of Urgent Action (PPUA), covering 2015-16. The NDP and the PPUA together identify five unifying and complementary strategic priorities: (i) governance, rule of law, security, decentralization, democracy, and national solidarity; (ii) preservation of macroeconomic stability and support for development; (iii) inclusive growth and territorial anchoring of development; (iv) adequate human capital for the development process; and (v) development of natural capital and strengthening resilience to disaster risk.

3. Our policy measures in 2015 have aimed to strengthen our macroeconomic stability and sustainability in support of durable poverty reduction and growth. Despite the constraints of political developments and external shocks, we have made some progress this year. But meaningful improvement in physical and human capital will call for significantly increased investment, which will require improved mobilization of domestic revenue and lead to a protracted balance of payments need.

4. These policies mark the launch of a medium-term economic reform program. We would like this program to be supported by a scaling up of external assistance and, eventually in the future by a three-year Extended Credit Facility (ECF) arrangement. With these objectives in view, we will continue to build our policy implementation capacity and address institutional weaknesses. In particular, we are prioritizing measures to improve revenue performance and control financial losses in state-owned enterprises and related arrears. Accordingly on the basis of the policies undertaken so far and the policy objectives laid out below, we are now requesting a disbursement under the RCF of SDR 30.55 million, combined with a staff-monitored program for the period end-September 2015 to end-March 2016. We also met with development partners in October to discuss financing needs and intend to convene a conference next year to request medium-term financing for implementing the NDP.

A. Economic Developments in 2014 and 2015

5. Notwithstanding exogenous shocks, the policies undertaken in 2014 and 2015 have supported macroeconomic stability, while laying the groundwork for future progress. Fiscal and current account deficits have remained compatible with medium-term sustainability, and inflation remains in single digits. However, the nascent economic recovery that started in 2014 has so far failed to gain momentum. Mining production is held back by low commodity prices. Agriculture was negatively affected by cyclones with heavy rains in the central highlands in early 2015, which displaced 39,000 people, and prolonged drought in the south, with food assistance given to 200,000 people. Damage from the cyclones and other weather-related events is estimated at 1 percent of GDP with reconstruction costs projected at close to 3 percent of GDP or US$270 million. Tourism has been hampered by difficulties at Air Madagascar, especially a crippling month-long strike in July that grounded nearly all domestic flights. In addition, weaknesses in the business climate continue to inhibit private investment. On the positive side, the decline in fuel prices is reducing the cost of petrol imports. Against this background, the projected economic growth has been revised downward to 3.2 percent in 2015.

6. The government has taken measures to improve revenue mobilization and strengthen expenditure management, although results have so far yielded less than expected. Institutional capacity constraints, including, in some cases, difficulties in ensuring compliance, are holding back the results of public sector reforms. The government has engaged in wide-ranging reform measures to improve tax and customs administration, however revenue collections remain weak with adverse fiscal implications. While we have been able to keep priority social spending in line with plans through reprioritization, larger-than-expected transfers to loss-making public enterprises (in particular the public utility company JIRAMA and Air Madagascar) and the underfunded pension funds continue to crowd out domestic capital spending. We identified and reached agreement on a repayment schedule for previously accumulated domestic budgetary arrears in 2014, but new arrears have accumulated on VAT refunds and payments to JIRAMA’s suppliers. We remain determined to resolve these institutional weaknesses in order to create a solid foundation for strong inclusive growth and durable poverty reduction.

7. We are moving forward with macroeconomic and structural reforms notwithstanding capacity constraints:

  • Policy strategy. The NDP and the PPUA, which provide the framework for policy formulation going forward, were approved by the Cabinet in late 2014. The implementation plan (Plan de mise en œuvre, PMO), which implements the NDP and the PPUA, was approved in June.

  • Revenue mobilization. The customs administration has drawn up a list of emergency measures to deter fraud, including a significant tightening of controls at the main port of Toamasina and an increase in the number of ex post verifications. The tax administration is focused on enhancing compliance through improved controls and verifications, the recovery of tax arrears, and increased information sharing and collaboration with customs services. Cooperation between the customs and tax administrations has improved, though it is taking some time to translate into stronger revenue numbers. The suspension of duties and taxes for petroleum imports for non-JIRAMA related oil imports was removed in March 2015.

  • Public expenditure management. Steps are underway to generate cost savings and improve expenditure management: specifically the public payroll is being cleaned from ghost workers and JIRAMA has taken steps to minimize its operational losses and the subsequent need for large budgetary transfers. Transfers to JIRAMA have fallen from 1.7 percent of GDP in 2014 to a projected 0.6 percent this year, aided by the fall in international fuel prices. The issuance of the implementation decree of law 2014-14 on public enterprises with commercial character has clarified the role of the state in the management of public enterprises.

  • Fuel subsidies. Fuel prices have been increased three times between July 2014 and July 2015. These adjustments and the fall in world fuel prices have cut the cost of fuel subsidies from 0.4 percent of GDP in January-July 2014 to 0.1 percent for the same period this year.

  • Debt management and project appraisal capacity. A steering committee on investment priorities, under the leadership of the Prime Minister, was established in March 2015. The committee will develop a priority investment plan with projects that are needed to attain the NDP objectives.

  • Central bank operations. As part of the process to improve governance and management at the central bank, overdue interest payments owed to the central bank of about 0.4 per-cent of GDP were settled by the government in June, the central bank’s audited financial statements for 2010-13 have been published, new investment guidelines were approved in December 2014, and a new directive on reserve management was approved in February 2015.

  • Foreign exchange operations. Since September the central bank has discontinued buyback operations at non-market rates in the interbank foreign exchange market, which had influenced the official published rate based on the weighted average of transactions. It has also started publishing daily minimum and maximum exchange rates, in addition to the reference rate.

  • Monetary policy. The central bank reintroduced weekly deposit auctions in April to improve bank liquidity management.

  • Business-climate. We have initiated measures to strengthen the foundation for sustained private sector development. In this regard, Madagascar has regained eligibility to preferential access to US markets through AGOA; established a formal platform for public-private dialogue with the private sector; and restructured and rejuvenated the Economic Development Board of Madagascar (EDBM). We have adopted the implementation decree for the Zone Franche.

II. Fiscal Policy and Debt Management

8. Fiscal policy will be geared towards supporting the implementation of the PPUA and the NDP. We will increase spending on critical infrastructure, education, and health care to rebuild Madagascar’s physical and human capital. We will also invest in rural development. Fiscal space for these priorities will be created through adjustments to tax policy, further efforts in tax and customs administration, and expenditure reprioritization. Starting in 2015 with the expansion of the Ivato airport and the transfer of a power plant to a private operator, we are exploring public-private partnerships (PPPs) as a means to finance large infrastructure projects. In addition, to make better use of scarce budgetary resources, we will focus more on prioritization and public financial management reforms.

9. We estimate that the tax ratio (on a gross/net basis) will increase from 10.1/9.9 percent of GDP in 2014 to around 11.0/10.4 percent of GDP in 2016. In 2015, revenue gains from the tax policy and revenue administration measures are expected to be partly offset by the more subdued pace of economic activity and imports, resulting in a net tax ratio that is broadly unchanged from 2014. The overall deficit on a cash basis is projected at 5.3 percent of GDP in 2015. However, the fiscal deficit for 2015 includes the recapitalization of the central bank and rescheduling of interest arrears for an amount equivalent of 1.2 percent of GDP. To assist in the implementation of our reform plans in the staff monitored program, we will set targets on net claims on government by the banking system (ceiling), gross tax revenue (floor), and priority social spending (floor).

10. Improving revenue mobilization remains a key objective. Our overall revenue mobilization strategy seeks to break out of this revenue underperformance with a focus on strengthening revenue administration to boost taxpayer compliance in line with the findings of recent technical assistance (TA) and the Tax Administration Diagnostics Assessment Tool (TADAT). We also plan to restructure the tax administration and develop communication strategies to improve the quality of services to tax payers.

11. To enhance revenue collections, we launched several specific tax and customs administration measures in September and October. Among other measures, these include:

  • Stricter monitoring and auditing of the declared value and nature of imports, especially for consolidated load cargo;

  • Improved customs control measures to limit the abuse of exemption rules, including those on imported rice, and special regimes such as those relating to Export Processing Zones (EPZs) and temporary imports;

  • Set up remote audit teams with the mission to undertake ex-post verifications focused on highly suspected fraud operations (benchmark, Table 2);

  • Efforts for the recovery of arrears on domestic taxes and customs duties and taxes;

  • Generation of a consistent and comprehensive list of all beneficiaries of tax exemptions to crosscheck it against our taxpayer database to identify firms that claim benefits fraudulently;

  • Strengthening the efforts of the joint committee to coordinate customs and tax collection efforts, including the organization of joint working groups to identify targets for control. (The creation of a tax policy coordination unit in 2016 is also being studied.)

12. Bringing informal activity into the formal sector is essential. Since 2014 we have initiated the following measures: repression of sales without invoices; increased controls on the ground; improved taxation of forestry, mining and fisheries sectors; harmonization of administrative values for transactions on property and second-hand vehicles; stricter controls on VAT refund credits; recovery of tax arrears; and transfer pricing adjustments. We have abolished, effective end-December 2015, all duty-free shops, except those located in our international airport departure terminals. Enhancing the efficiency of tax audits, including through greater risk-based management, is also a priority.

13. Customs administration reforms will continue and aim to balance revenue mobilization and trade facilitation. In the near term, we will step up efforts to increase the effectiveness of verifications and reduce fraud. Starting in March 2015, we have increased scanning of imported containers at the port of Toamasina and set up an ancillary team in Antananarivo for secondary follow-up verifications. Other measures in 2015 include mandatory packing lists for all containers, increased use of tablets during physical inspections to optimize use of our databases, further securitization of the port perimeters through greater electronic monitoring and use of surveillance cameras, and acceleration of procedures for auction of containers which remain unclaimed. In addition, we plan to double the amount of audits on the declared value of imports from 6 to 12 percent and continue to improve our in-house database on reference import values and risk-management analysis starting with the port of Toamasina.

14. Information sharing and collaboration between the customs and tax directorates will be further strengthened. The customs directorate has developed an information sharing platform to enable automatic sharing of data in ASYCUDA with the tax administration twice daily. We have started joint training sessions for the staff of both directorates and identified 20 large enterprises on which verifications will be conducted jointly in 2015, and continuing annually. The customs directorate will also act as the collection agent for the intermittent income tax to enable more expedient processing. In addition, an update of estimated tax exemptions and expenditures, with the intention of later extending it from domestic taxes to customs, is planned.

15. Ensuring an appropriate contribution from the natural resource sector to fiscal revenue is a priority. We are working to modernize the mining and petroleum codes to bring them in line with best practice, while ensuring their consistency with the statutes of the existing law on large mining investments (LGIM). The principal envisaged measures of the codes and their associated Décret d’Application include: an increase in royalty rates and more differentiation by type of mineral; a review of the royalty revenue-sharing formula; simplification of the corporate income tax regimes; a tightening of thin capitalization rules; and a reduction in the length of fiscal stability clauses.15 In order to accomplish this, we have set up a joint committee comprising officials from the Ministry for Strategic Resources, the chamber of mines, the association of mining operators, and the Ministry of Finance and Budget. We plan to finalize the draft laws, with input from the World Bank, and ensure that their provisions comply with international best practice before submitting them to the National Assembly. We plan to incorporate all the fiscal provisions of the mining and petroleum codes with the General Tax Code through amendments to be undertaken by the end of December 2015.

16. Moreover, the institutional framework for mining activities will be revamped. In this regard, we seek to update the status of 3,600 mining permits to redress irregularities that arose following the 2009 moratorium on the award and conversion of permits. We have processed 1,800 permits to date and anticipate that the update will be completed by the end of-March 2016. We adopted a decree setting up a national gold agency (ANOR) in April 2015 which will be responsible for collecting gold mining royalties and administering permits for gold mining activities. In parallel with the preparation of a decree lifting the ban on gold exports, we have set up gold counters to purchase existing stocks of mined gold from individuals. To further formalize and expand gold mining activities, the central bank and Ministry for Strategic Resources will jointly complete a feasibility study by the end of December-2015 for the setting up of a public-private refining company which will be tasked with certifying the gold exported from Madagascar.

17. We are committed to addressing the causes of spending inefficiencies and budgetary pressures. Fuel subsidies, transfers to state-owned enterprises including JIRAMA, and the underfunded civil service pension funds are weighing heavily on budget execution. We intend to use the additional fiscal space created to reorient current spending to priority social sectors. We foresee the following measures and savings in 2015 and 2016:

  • Cost savings from deferred recruitment because of insufficient absorptive capacity; prioritization of spending, including domestically-financed investment; and a reduction in the amount of fuel coupons (‘chèques carburants’), with a view to their elimination.

  • Elimination of the fuel price subsidy, which is falling with world market prices, by the end of-December 2015. An automatic pricing formula for maintaining full cost-recovery fuel prices (for diesel, gasoline, and kerosene) will be introduced on January 1, 2016 (continuous benchmark, starting at the end of-December 2015, Table 2). The temporary bus subsidy, introduced to mitigate the price impact from higher fuel prices, will cease at end-December 2016.

  • Oversight of state-owned enterprises will be strengthened, starting with financially challenged public enterprises, through ensuring compliance with the implementation decree of law 2014-14 on public enterprises with commercial character, for example by requiring the regular communication of financial results, independent control functions, and fully accountable Boards. Reform strategies have been developed for two of the larger and most strategically important public enterprises—Air Madagascar and JIRAMA—which are described below.

  • Underfunding of pension funds will be addressed through a two-pronged approach, focusing first on a clean-up of the pension rolls and second on parametric pension reforms, the latter supported by World Bank technical assistance in 2015 and 2016. We plan to put in place such parametric reforms by the end of 2016.

  • Extension of the audit of civil service personnel and pay data housed at the Ministry of Finance and Budget to sectoral ministries. The first audit, started in 2015, identified 2,256 irregular workers (e.g., so-called ghost workers and double-dippers) dispersed across various ministries, providing wage bill savings of MGA1.3 billion per month. We expect further cost-savings from this exercise. Installation of an electronic platform for workforce planning (“Gestion Prévisionnelle des Effectifs, des Emplois et Compétences”) is expected to be completed by December 2016, with support from the European Union. This, in turn, is envisaged to pave the way for a more comprehensive civil service census. We will also initiate an evaluation of the effectiveness of the current sanctions system, including the Conseil de Discipline de la Fonction Publique by the end of March 2016. These measures will enhance the productivity of the civil service while reducing the public sector wage bill as a proportion of GDP.

18. The 2016 budget will seek to consolidate policy efforts underway in 2015 and introduce measures in line with the priorities identified in the NDP. Beyond the objective to increase revenues, fiscal policy measures will aim to tackle income tax evasion and protect local rice production. Thus, we will introduce the following revenue measures in the draft revisions to the 2015 budget and the draft 2016 budget: elimination of the tax holiday on new companies; introduction of a uniform ten percent excise duty on all imported new vehicles; an increase in excise duties on alcoholic beverages and soft drinks; and ensure that local sales of EPZ companies are restricted to 5 percent of total sales and that they are subject to customs declaration and duties and taxes (benchmark, Table 2); the introduction of a tourist arrival fee of US$25 per visitor; and the elimination of the exemption from import duties and taxes for imported cooking oil. We also intend to reinforce the filing of income tax declarations, including for incomes below MGA250,000, and to consider the possible elimination of tax exemptions on imported rice. Consideration of the possible elimination of the rice tax exemption will be informed by a study on the damage caused by the recent climatic shocks on local rice production which will be completed by end-November 2015. On the spending side, our objective is to scale up expenditure in priority areas (agriculture, education, health and infrastructure) by at least 0.5 percent of GDP while preserving sustainability. To this end, we will continue to improve the efficiency of spending, introduce parametric pension reforms and improve the allocation of resources through the use of a medium-term expenditure framework. Our fiscal plans will yield an overall fiscal deficit (commitment basis) of around 3 percent of GDP. The draft revisions to the 2015 budget and the draft 2016 budget law incorporating these revenue measures will be submitted to the National Assembly by the end of October (prior action, Table 2).

19. A comprehensive public financial management reform strategy will be essential to improving the efficiency of public spending. The 2013 PEFA self-assessment highlighted the need to strengthen public expenditure management. A Priority Action Plan in public financial management for 2014-15 was developed accordingly, with TA from the IMF. We have made substantial progress on the implementation of the plan and are committed to completing the remaining actions. In particular, for 2015 the priorities are to improve expenditure prioritization, including through greater transparency and phasing-in multi-year budgeting; enhancing public procurement; and more effective payroll controls. We have requested additional TA to advance work in these areas. We are also developing a PFM reform strategy for 2016-20 with support from the African Development Bank, which will be approved by Cabinet.

20. The occurrence of arrears is holding back the economic recovery and requires action. Since 2009, both the central government and state-owned enterprises have accumulated a significant stock of payment arrears, including in VAT refunds, subsidies to petroleum distributors and direct payments by the Government to JIRAMA’s suppliers. In accordance with the Priority Action Plan for strengthening PFM and building on recent TA from the IMF, we will develop a strategy to stop, from January 2016, the emergence of arrears on new spending commitments by the central government for fiscal year 2016. As first steps, by December 31, 2015, we will (i) finalize the evaluation of the stock of arrears, based on a clear definition of the maximum delays of payment for the main categories of expenditures and (ii) implement the reporting procedures and the organization required to manage arrears. In addition, we will create an escrow account at the Central Bank to ring fence the resources required by VAT reimbursements starting January 1, 2016 (benchmark, Table 2). Given the high risk that arrears accumulated by the state-owned enterprises have to be paid by the central government, the Treasury will be instructing SOEs to report their arrears to suppliers and the tax administration, starting by end-December 2015 with JIRAMA, Air Madagascar, and Madarail. This exercise will be extended to all SOEs by the end of March 2016 and JIRAMA, Air Madagascar and Madarail will also be required to have a plan by this date for clearing their arrears.

21. The government is committed to the financial turnaround and rehabilitation of JIRAMA. A Comité Stratégique chaired by the Minister of Energy and Hydrocarbons, established in March 2015, will guide JIRAMA’s restructuring. We have hired a consultant to develop a management improvement plan, which includes the organizational restructuring of JIRAMA, to be presented to the Comité by November 2015. Existing legislation will be reviewed with the intention of including JIRAMA under the provisions of commercial law and increasing penalties for electricity theft. Our strategy to improve the company’s financial position is centered on reducing losses and identifying theft and fraud. A program of on-site audits of the 1,000 largest users to ensure permanent elimination of unmetered consumption (commercial losses) is expected to be completed by the end of December 2015. We are investigating the use of advanced metering for new customers to secure future revenues. JIRAMA is also undertaking measures to reduce costs, such as rehabilitating the heavy fuel oil generating units and auditing its supplier contracts.

22. There is also an urgent need to address Air Madagascar’s dire operational and financial situation, in the context of the government’s new “open sky” policy. We are committed to rebuilding our national flagship carrier to successfully compete in this new framework and to minimize the fiscal risks posed to the government. We will implement an “air access strategy” to help spur domestic and international competition by mid-2016, in support of our economic development. The company is actively seeking strategic alliances to support it going forward, and has already taken the first steps toward becoming an attractive investment partner. Management and the Board were replaced following a month-long strike over governance issues. The new team is working with the World Bank to contract external expertise to develop a new business plan for the company, including a review of the tariff structure, fleet composition, staffing level, and structure of the company. Management has also taken steps to address the company’s precarious financial situation by looking for additional revenue sources and investigating the reason for the company’s high operational expenses, such as by carrying out an audit of existing contracts. These measures aim to restore Air Madagascar’s operational profitability by end-2016.

23. Infrastructure investment needs in Madagascar are significant, and with limited resources, public investment projects need to be well prioritized. The World Bank Doing Business report flags poor energy infrastructure as a particular impediment to growth. Investment in roads, railways, seaports, and airports is also critically needed. Given the limited domestic and international resources available for such investment, careful prioritization of the most important projects is required. The steering committee on investment priorities, under the leadership of the Prime Minister and with the support of the Ministry of Economic Planning and Development and other line ministries, will develop a priority investment plan. This plan will specify a list of key projects that are needed in order to attain the objectives set out in the NDP and will include preliminary cost estimates for each project. The plan will be completed by the end of-October 2015.

24. The scale of the infrastructure challenges makes it critical to explore all options, including Public-Private Partnerships (PPPs). Aligned with the NDP, a list of potential PPPs has been identified. The government is committed to taking all necessary measures to minimize the budgetary risks of such arrangements. To this end, a policy and legal framework for PPPs is under preparation and planned to be enacted by the end of December 2015. We also plan to create a dedicated unit to control and manage our PPPs at the Presidency by end-2015.

25. Borrowing and guarantees to fund Madagascar’s investment needs will require careful management to ensure debt remains on a sustainable trajectory. To ensure debt sustainability, the cost and risks associated with new loans and state-guarantees needs to be minimized. In August 2014, the National Assembly ratified the Loi Régissant la Dette Publique et la Dette Garantie par le Governement Central (2014/12) which clearly states the roles and objectives of the government with respect to new borrowing. A debt management strategy will be ready by no later than the end of March 2016 following the development of the list of priority investment projects and the adoption of the medium-term budgetary framework. Furthermore, starting with the 2016 budget, we will publish details on the anticipated stock and flows of the central government’s public and publicly-guaranteed debt; and with the support of UNCTAD, our external debt database will be fully operational by the end of March 2016 (benchmark, Table 2).

26. Every effort will be made to meet our considerable external financing needs on concessional terms. Madagascar is assessed to have a moderate risk of external debt distress, and is particularly vulnerable because of the low revenue generation. Ensuring that debt is contracted on concessional terms will help to ensure debt sustainability. That said, if all possibilities for concessional external financing are exhausted, some limited medium-term and long-term non-concessional borrowing could be considered to support critical expenditure needs; in that event, we will consult in advance with IMF and World Bank staff. We will also avoid short-term external borrowing. To assist in the policy implementation in the staff monitored program, we have set on explicit indicative targets on non-concessional borrowing and short-term external borrowing.

III. Monetary and Exchange Rate Policy

27. Monetary and exchange rate policy will aim to contain demand pressures, keep inflation in single digits, and help build an adequate reserve buffer. In doing so, the CBM aims to give more significance to the reference interest rate and monetary policy operations going forward. To assist in the policy implementation in the staff monitored program, we have set explicit indicative targets for net foreign assets and net domestic assets as defined in the technical memorandum of understanding. Despite balance of payments pressures, we are also aiming for a buildup in gross foreign assets to reach SDR 597 million by end-2015.

28. The CBM will pursue a restrained monetary policy and take further steps to strengthen liquidity management. Monetary policy has been somewhat passive in recent years, allowing for large excess bank reserves with the government increasingly resorting to statutory advances from the central bank to finance the fiscal deficit. Going forward, we will engage in further TA with the aim of setting explicit liquidity targets and using Treasury bill sales and weekly deposit auctions to achieve these targets. The reference interest rate will be allowed to fluctuate more and reflect movements in the money market.

29. We will maintain a flexible exchange rate to ensure orderly conditions in the foreign exchange market and facilitate external adjustment over the medium term. Going forward, CBM will focus its interventions on achieving a gradual accumulation of gross foreign assets. We will refrain from reintroducing buyback operations at non-market rates in the interbank foreign exchange market (continuous benchmark, Table 2). With the aim of improving the functioning of the foreign exchange interbank market, we will reinforce the protocols of trading in the interbank market. We are also committed to minimize any resort to administrative measures to restrict foreign exchange outflows and to ensure conformity with Article VIII obligations.

30. Strengthening the independence of the CBM and improving its governance and controls is crucial. The financial autonomy of the central bank has been challenged in recent years. While within legal limits, CBM extended significant credit to the government through statutory advances in 2014. In addition, petroleum subsidies in 2012-13 and uncollected accrued interest on government bonds put further pressure on financial autonomy. Independent control and audit oversight can be strengthened and the quality of external auditors needs to be enhanced. We will take several measures to deal with these issues. To further establish the independence of the central bank, we will submit a revised Central Bank Act to the Cabinet for approval by the end of December 2015 (benchmark, Table 2). The revised law will: (i) include a phased elimination of statutory advances from the central bank as a source of domestic financing down to 5 percent of ordinary revenues starting in 2018, as well as a discontinuation of securitization of statutory advances, with the objective of eliminating statutory advances by 2024 (consistent with guidance from SADC); (ii) provide an effective mechanism for the automatic transfer of central bank losses and profits to the government; (iii) establish an Audit Committee of the Board of Directors (and adopt a charter that specifies its roles and responsibilities for the oversight of internal and external audit, financial reporting, and the system of internal controls); and (iv) establish an Executive Committee (composed of the Governor and two Deputy Governors) that will propose policies to the Board of Directors and will be in charge of the day-to-day operations of the central bank. We will settle outstanding central government obligations owed to the central bank through issuance of interest-bearing instruments of a total amount of MGA 214 billion with a 20 year maturity and a 2.25 percent interest rate by the end of December 2015. As a result of this transaction and previously settled debt obligations, the financial position of the central bank will improve. To improve reporting transparency, the CBM is in the process of migrating towards International Financial Reporting Standards (IFRS) starting with 2016 accounts, supported by TA.

IV. Financial Sector Reforms

31. We are committed to developing our financial sector. Our aim is to create the foundation for a strong and independent financial system that can sustain the strong inclusive growth we are aiming for. An action plan will be finalized following the completion of the Financial Sector Assessment Program (FSAP) of the IMF and the World Bank that Madagascar is currently undergoing. Pending the FSAP, we are currently focusing on: (i) improving the supervision of our foreign-owned banks through agreed memoranda of understandings with banking supervisors in countries where the headquarters of our foreign-owned banks are located (primarily France, Mauritius, and Morocco); (ii) studying the prerequisites for a possible deposit insurance scheme; (iii) finalizing a law regulating mobile banking in 2015; and (iv) completing the ongoing revision of the Financial Sector Law, including the establishment of the stock exchange, in 2016. We are also conducting a study to improve the legal/regulatory and institutional capacity needed for adequate supervision of the microfinance sector in cooperation with the World Bank.

V. Inclusive Growth

32. National reconciliation calls for inclusive growth benefitting all citizens and all regions of Madagascar. This objective underlies our National Development Plan and Presidential Plan of Urgent Action (PPUA). We aspire to mobilize the full potential of Madagascar’s young and vibrant population and various sectors of the economy. This will require reforms that (i) improve governance; (ii) improve the quality of education and health services to strengthen the human capital base; (iii) open up for a more decentralized administration; and (iv) create the framework for a sustainable exploitation of Madagascar’s abundant natural capital, while preserving our unique ecosystem for future generations.

33. We are committed to strengthen our institutions to improve governance and create a solid foundation for private sector growth. Corruption and weaknesses in the civil service, judiciary and security systems have resulted in inferior public service delivery and revenue collections well below expectations. Systemic reforms of government institutions are complex and take time. Key elements in controlling corruption are better regulatory system and enforcement, well-defined boundaries on government power, and effective sanctions to reprimand corrupt behavior. To send a strong signal about our commitment to combat corruption, we will look to amend the civil service law. An essential element at the heart of the fight against corruption is a strong independent and impartial judiciary and we are initiating a number of reforms to ensure that our judiciary performs this role, including regular meetings of the Conseil Superieur de la Magistrature that oversees performance of individual magistrates. Our efforts to improve governance will be guided by the national strategy against corruption that was launched in 2014. In recognition of the importance of improving governance, we have increased the budget allocation for the agencies dedicated to the fight against corruption by nearly 50 percent in 2016 with the objective of reaching 0.3 percent of the budget over time.

34. Broadening access to health care and education is a key policy objective. To improve quality and access to schooling, we aim to expand programs for households with children and emphasize minimum job standards and training of teachers. Recruitment of so-called community teachers (“Maitres FRAM”) will be based on qualifications and performance evaluation. In an effort to seek new solutions to make health services more accessible, we plan to introduce mutual insurance on a pilot basis. Developing social protection programs for the most vulnerable is also a priority. The national social protection policy under preparation will guide the design and implementation of social protection programs, including social safety nets for the poorest and most vulnerable households, and will be approved by the Cabinet by the end of December 2015 (benchmark, Table 2).

35. Agriculture is of great importance for growth and poverty reduction. It generates about 26 percent of GDP and the main income for about 63 percent of households. The overall challenge is to move from subsistence farming to production for domestic, regional, and international markets and reduce risks for the most vulnerable households. To support this transformation, we aim to: (i) increase investment in roads and irrigation infrastructure; (ii) increase investment in schools and training focused on agriculture; (iii) increase funding of research to develop seeds and agricultural techniques that are well adapted to Madagascar; and (iv) expand social protection programs targeting the most vulnerable subsistence farmers. To protect farmers’ rights to the land they own, local land offices with the right to issue land certificates will be established in all districts of the country by end-2018.

36. Decentralization reforms are important. Such reforms are essential to improve the quality and access to public services and to foster local development policies through more immediate responses to the needs of citizens. We are starting reforms in 2015 by identifying and defining appropriate local government structures; implementing measures to strengthen local governance; preparing the legal framework for the local civil service; and ensuring full coherence between the existing legal and institutional frameworks for decentralization with local development plans and the NDP objectives.

VI. Statistical Policy

37. We are committed to the production of more timely and accurate statistics to allow better assessment of developments in the country. With support from the IMF and other development partners, the National Statistics Institute (INSTAT) is preparing a provisional and revised series of national accounts based on the 1993 SNA for the period of 2007-14. We want to develop satellite national accounts on mines, forests, tourism and water, to be integrated in the national accounts in 2016. As an update to the 1993 population census, we intend to undertake a new census in coming years, subject to the availability of additional financing. The CBM will continue to improve the compilation of balance of payments and monetary statistics.

Table I.1.Madagascar: Indicative Targets 2015-16
End-Dec. 2015End-March 2016
Proj.Proj.
(Billions of Ariary; unless otherwise indicated)
External
Ceiling on accumulation of new external00
payment arrears (US$ millions) 1
Ceiling on new nonconcessional external debt with original200200
maturity of more than one year, contracted or guaranteed
by the central government or BCM (US$ millions) 1
Ceiling on new nonconcessional external debt with original00
maturity of up to and including one year, contracted or
guaranteed by the central government or BCM (US$ millions) 1
Central bank
Floor on net foreign assets (NFA) of BCM (millions of SDRs) 2416407
Ceiling on net domestic assets (NDA) of BCM 21,5581,485
Fiscal
Ceiling on net bank credit to the government 334090
Floor on social priority spending 320433
Floor on gross tax revenue 32,994746
Memorandum items
Budget support grants and loans (millions of SDRs) 4119119
New concessional loans, contracted or guaranteed by the167327
central government or BCM (US$ millions) 5
Program exchange rate (MGA/SDR)3,761.883,761.88
Recapitalization of the central bank for losses made214214
during 2011-13 4
Sources: Malagasy authorities; and IMF staff projections.

Cumulative ceilings that will be monitored on a continuous basis starting from end-August, 2015.

Stock of NFA and NDA respectively measured at the program exchange rate.

Cumulative figures from the beginning of each calendar year.

Cumulative figures starting from the beginning of 2015.

Cumulative figures starting from end-September, 2015.

Sources: Malagasy authorities; and IMF staff projections.

Cumulative ceilings that will be monitored on a continuous basis starting from end-August, 2015.

Stock of NFA and NDA respectively measured at the program exchange rate.

Cumulative figures from the beginning of each calendar year.

Cumulative figures starting from the beginning of 2015.

Cumulative figures starting from end-September, 2015.

Table I.2.Madagascar: Prior Actions and Structural Benchmarks for RCF and SMP
ActionTest Date
RCF
Strengthen fiscal policy implementation
Submission of draft revisions to the 2015 budget and draft 2016 budget to parliament with the revenue measures outlined in the MEFP (paragraph 18).Prior Action
SMP
Improve exchange rate policies
Refrain from reintroduction of buyback operations at non-market rates.Continuous benchmark
Mobilizing fiscal revenue
Set up remote audit teams with the mission to undertake ex-post verifications focused on highly suspected fraud operations.End-December 2015
Ensure that local sales of EPZ companies are restricted to 5 percent of total sales and that they are subject to customs declaration and duties and taxes.End-March 2016
Improving the composition and quality of fiscal spending
Implement an automatic pricing formula for maintaining full cost-recovery fuel prices (for diesel, gasoline, and kerosene).

Create an escrow account at the Central Bank to ring fence the resources required by VAT reimbursements.
Continuous benchmark from end-Dec. 2015

January 1, 2016
Improving fiscal transparency
Bring the DMFAS database into full operation and publish details on the stock and flows of public and publically-guaranteed debt starting with the 2016 budget law.End-March 2016
Strengthening the independence of the central bank
Submit Central Bank Act revised to incorporate the elements outlined in the MEFP (paragraph 30) to the Cabinet for approval.End-December 2015
Promoting inclusive growth
Cabinet approval of the National Social Protection Policy to guide the design and implementation of social protection programs, including social safety nets for the poorest and most vulnerable households.End-December 2015

Attachment II. Madagascar: Technical Memorandum of Understanding on Monitoring Indicative Targets for the Staff Monitored Program in 2015 and 2016

This technical memorandum of understanding (TMU) defines the indicative targets and adjustments that have been established to monitor the staff monitored program. It also describes the methods to be used to assess performance.

I. Indicative Targets

1. Targets will be set for end-December 2015 and end-March 2016 for the following variables:

  • Floor on net foreign assets (NFA) of the Central Bank of Madagascar (CBM), calculated as the stock at program exchange rates; and

  • Ceiling on net domestic assets (NDA) of CBM, calculated as the stock at program exchange rates; and

  • Ceiling on net bank credit (NBC) to the Government, calculated as the cumulative flow from the beginning of the calendar year; and

  • Floor on gross tax revenue of the central government, calculated cumulatively from the beginning of the calendar year; and

  • Floor on priority social spending by the central government, calculated cumulatively from the beginning of the calendar year.

2. A target applicable on a continuous basis has been established with respect to a:

  • Ceiling on the accumulation of new external payment arrears by the government or CBM calculated in cumulative terms from end-August 2015;

  • Ceiling on medium- and long-term non-concessional external debt contracted or guaranteed by the government or CBM, calculated in cumulative terms from end-August 2015;

  • Ceiling on short-term non-concessional external debt contracted or guaranteed by the government or CBM, calculated in cumulative terms from end-August 2015; and

  • Zero-Ceiling on CBM buyback operations at non-market rates in the interbank foreign exchange market.

3. The adjustor to the measurement of indicative targets is budget support (external grants and loans) to the government from bilateral and multilateral agencies, calculated as the cumulative flow from the beginning of the calendar year.

4. For accounting purposes, the following program exchange rates apply:

Program Exchange Rates
Malagasy Ariary (MGA)/SDR3,761.88
U.S. Dollar/SDR1.448699
Euro/SDR1.187713
Australian dollar/SDR1.774606
Canadian dollar/SDR1.666667
Japanese Yen/SDR173.119204
Swiss Franc1.433198
U.K. Pound Sterling/SDR0.932216

Foreign currency accounts denominated in currencies other than the SDR will first be valued in SDRs and then be converted to MGA. Amounts in other currencies than those reported in the table above and monetary gold will first be valued in SDRs at the exchange rates and gold prices that prevailed on December 31, 2014, and then be converted to MGA.

5. Government is defined for the purposes of this TMU to comprise the scope of operations of the treasury shown in the opérations globales du Trésor (or OGT). The government does not include the operations of state-owned enterprises and sub-national authorities.

II. Monetary Aggregates

A. Floor on Net Foreign Assets of the Central Bank of Madagascar

6. The NFA of CBM is defined as the difference between CBM’s gross foreign assets and total foreign liabilities, including debt owed to the IMF. All foreign assets and foreign liabilities are converted to SDRs at the program exchange rates, as described in paragraph 4. For reference, at end-December 2014, NFA was MGA 1,389 billion, calculated as follows:

Foreign Assets2,013.221
Of which:
Cash0.048
Demand deposits233.536
Term deposits and securities1,489.464
Other foreign assets290.173
Foreign Liabilities624.150
Of which:
Non-residents deposits2.439
Deposits of international organizations0.505
Use of Fund credit and loans252.190
Medium-and long-term foreign liabilities (including SDR allocation)369.016
Net Foreign Assets1,389.071

Adjustment

7. The floor on NFA will be adjusted downward (upward) by the cumulative deviation downward (upward) of actual from projected budget support (external grants and loans). This adjustment will be capped at the equivalent of SDR75 million, evaluated at program exchange rates as described in paragraph 4.

B. Ceiling on Net Domestic Assets of the Central Bank of Madagascar

8. The NDA of CBM are defined as the difference between reserve money and the NFA of the CBM valued in MGA using the program exchange rates as described in paragraph 4. It includes net credit to the government, credit to enterprises and individuals, claims on banks, liabilities to banks (including the proceeds of CBM deposit auctions—appels d’offres négatifs, and open market operations), and other items (net). For reference, at end-December 2014, NDA was MGA 1,410 billion, calculated as follows:

Net Foreign Assets1,389.071
Base Money2,798.794
Of which:
Currency in circulation1,825.522
Currency in banks169.994
Bankers’ reserves801.531
Other deposits included in monetary base
1.747
Net Domestic Assets1,409.723
Of which:
Net credit to the central government651.844
Credit to the economy8.280
Net credit to depository corporations−24.000
Other items (net)773.599

Adjustment

9. The ceiling on NDA will be adjusted upward (downward) by the cumulative deviation downward (upward) of actual from projected budget support (external grants and loans). This adjustment will be capped at the equivalent of SDR75 million, evaluated at program exchange rates as described in paragraph 4.

III. Fiscal Aggregates

A. Ceiling on the Net Bank Credit to the Government

10. The NBC to the government is measured by the change in net credit to government in the monetary survey; and consists of CBM and commercial bank claims on the central government, including auctioned treasury bills (BTAs) and other securities and liabilities, net of central government deposits with the CBM and commercial banks, including foreign currency deposits. For reference, at end-December 2014, NBC to the Government was MGA 977.7 billion, of which MGA 651.8 billion from the central bank and MGA 325.9 billion from commercial banks.

Adjustment

11. The ceiling on the NBC to the government will be adjusted upward (downward) by the cumulative deviation downward (upward) of actual from projected budget support external grants and loans). This adjustment will be capped at the equivalent of SDR75 million, evaluated at program exchange rates as described in paragraph 4.

12. The ceiling on the NBC to the government will be adjusted downward by any shortfall in financial compensation paid to the CBM for losses made during 2011-13 (see Table I.1).

B. Floor on Tax Revenue

13. Government tax revenue is measured on a gross basis that is, before the refund of VAT credits. It comprises all domestic taxes and taxes on foreign trade received by the central government treasury. Tax revenue excludes: (1) the receipts from the local sale of in-kind grants, (2) any gross inflows to the government on account of signature bonus receipts from the auction of hydrocarbon and mining exploration rights, and (3) tax arrears recorded in the context of regularization operations, such as those related to the recapitalization of Air Madagascar in 2016. Revenue will be measured on a cash basis as reported in the table of government financial operations prepared by the Directorate of Budget and the Directorate of Treasury in the Ministry of Finance and Budget. For reference, for the year ending December 2014, government tax revenue was MGA 2,582.8 billion.

C. Floor on Priority Social Spending

14. Priority social spending includes spending primarily related to interventions in nutrition, education, health, and the provision of social safety nets

15. Priority social spending is calculated as the sum of spending defined above related to (i) the Presidency; (ii) the Prime Minister’s Office; (iii) the Ministry of Finance and Budget; (iv) the Ministry of Health; (v) the Ministry of Population and Social Affairs; and (vi) the Ministry of National Education. (See table 2).

D. Domestic Expenditure Arrears

16. Expenditure arrears consist of payment obligations related to acquisition of goods and services by the central government liquidated and not paid after 90 days. Arrears on VAT refund consists of eligible claims not paid after 60 days of presentation by the taxpayer.

IV. External Debt

A. Ceiling on External Payment Arrears

17. These arrears consist of overdue debt-service obligations (i.e., payments of principal and interest) related to loans contracted or guaranteed by the government or CBM. Debt service obligations (including unpaid penalties and interest charges) are overdue if they have not been paid by the due date or within a grace period agreed with, or unilaterally granted by, each creditor before the due date. They exclude arrears resulting from nonpayment of debt service for which rescheduling negotiations are under way or that are in dispute. This monitoring target should be observed on a continuous basis.

B. Ceilings on Non-Concessional External Debt

18. For program monitoring purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows; the grant element of a debt is the difference between the nominal value of debt and its net present value (NPV), expressed as a percentage of the nominal value of the debt. The NPV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discount rate used for this purpose is 5 percent.

19. For program monitoring purposes, the definition of debt is set out in point 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), adopted December 5, 2014 (see Annex I). External debt is defined by the residency of the creditor.

20. For loans carrying a variable interest rate in the form of a benchmark interest rate plus a fixed spread, the PV of the loan would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the loan contract. The program reference rate for the six-month USD LIBOR is 3.85 percent and will remain fixed for the duration of the program. The spread of six-month Euro LIBOR over six-month USD LIBOR is -296 basis points. The spread of six-month JPY LIBOR over six-month USD LIBOR is -336 basis points. The spread of six-month GBP LIBOR over six-month USD LIBOR is -145 basis points. For interest rates on currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is 0 basis points.16 Where the variable rate is linked to a benchmark interest rate other than the six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added.

Medium- and Long-Term External Debt

21. A continuous ceiling applies to new nonconcessional external debt with nonresidents with original maturities of more than one year contracted or guaranteed by the government or CBM. The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received. It applies to private debt for which official guarantees have been extended and which, therefore, constitutes a contingent liability of the government or CBM.

22. Excluded from the ceiling are (i) the use of IMF resources; (ii) concessional debts; (iii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt and up to the amount of the actually restructured/refinanced/prepaid debt; and (iv) debts classified as international reserve liabilities of CBM. If the government has a special need for external nonconcessional financing, discussions with IMF staff should take place in advance to consider including the request in the program.

Short-Term External Debt

23. A continuous ceiling applies to new nonconcessional external debt with nonresidents with original maturities of up to and including one year contracted or guaranteed by the government or CBM. The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received. It applies to private debt for which official guarantees have been extended and which, therefore, constitutes a contingent liability of the government or CBM.

24. Excluded from the ceiling are (i) concessional debts; (ii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt and up to the amount of the actually restructured/refinanced/prepaid debt; (iii) debts classified as international reserve liabilities of CBM; and (iv) normal import financing. A financing arrangement for imports is considered to be “normal” when the credit is self-liquidating.

V. Zero-Ceiling on CBM Buyback Operations at Non-Market Rates in the Interbank foreign Exchange Market

25. With the aim of maintaining a flexible exchange rate and improving the functioning of the interbank foreign exchange market, the CBM ceased buyback operations at non-market rates in the interbank foreign exchange market on September 4, 2015. The zero-ceiling on CBM buyback operations at non-market rates is applicable since the point in time when the CBM declared that it had ceased to engage in such operations in the foreign exchange market (September 4, 2015). For transparency and monitoring reasons, CBM will increase the reporting of exchange rate data as described in Table 1.

VI. Data Reporting

26. The data listed in Table 1 will be provided for monitoring performance under the program based on data templates agreed with IMF staff. The best available data will be submitted, so that any subsequent data revisions will not lead to a breach of indicative targets. All revisions to data will be promptly reported to IMF staff. For variables that are relevant for assessing performance against program objectives, but not specifically defined in this memorandum, the authorities will consult with IMF staff as needed on the appropriate way of measuring and reporting.

Table 1.Madagascar: Data Reporting Requirements
ItemPeriodicity
Exchange rate data
Central Bank of Madagascar (CBM)
Total daily CBM gross purchases of foreign exchange – break down by currency purchasedDaily, next working day
The weighted average exchange rate of CBM gross purchases, the highest traded exchange rate, and the lowest traded exchange rate –break down by currency purchasedDaily, next working day
Total daily CBM gross sales of foreign exchange – break down by currency purchasedDaily, next working day
The weighted average exchange rate of CBM gross sales, the highest traded exchange rate, and the lowest traded exchange rate – break down by currency purchasedDaily, next working day
Total CBM net purchases/sales of foreign exchange - break down by currency purchasedDaily, next working day
Total interbank foreign exchange transactions (net of CBM transactions) -break down by currency purchasedDaily, next working day
Total interbank and retail foreign exchange transactions (net of CBM transactions) - break down by currency purchasedDaily, next working day
Monetary, interest rate, and financial data
Central Bank of Madagascar (CBM)
Foreign exchange cash flow, including foreign debt operationsMonthly
Stock of gross international reserves (GIR) and net foreign assets (NFA), both at program and market exchange ratesMonthly
Detailed data on the composition of gross international reserves (GIR), including currency compositionMonthly
Market results of Treasury bill auctions, including the bid level, bids accepted or rejected, and interest ratesMonthly
Stock of outstanding Treasury billsMonthly
Data on the secondary market for Treasury bills and other government securitiesMonthly
Bank-by-bank data on excess/shortfall of required reservesMonthly
Money market operations and ratesMonthly
Bank lending by economic sector and termMonthly
Balance sheet of BCMMonthly, within two weeks of the end of each month
Balance sheet (aggregate) of deposit money banksMonthly, within six weeks of the end of each month
Monetary surveyMonthly, within six weeks of the end of each month
Financial soundness indicators of deposit money banksQuarterly, within eight weeks of the end of the quarter
Fiscal data
Ministry of Finance and Budget (MFB)
Preliminary revenue collections (customs and internal revenue)Monthly, within three weeks of the end of each month
Treasury operations (OGT)Monthly, within eight weeks of the end of each month
Stock of domestic arrears, including arrears on expenditure and VAT refundsMonthly, within eight weeks of the end of each month
Priority social spending as defined by the indicative targetMonthly, within eight weeks of the end of each month
Subsidies to JIRAMA’s suppliersMonthly, within eight weeks of the end of each month
State-owned enterprise data
Data summarizing the financial position of JIRAMA and Air MadagascarQuarterly, by the end of the subsequent quarter
Debt data
Ministry of Finance and Budget (MFB)
Public and publically-guaranteed debt stock at end of month, including: (i) by creditor (official, commercial domestic, commercial external); (ii) by instrument (Treasury bills, other domestic loans, external official loans, external commercial loans, guarantees); and (iii) in case of new guarantees, the name of the guaranteed individual/institution.Monthly, within four weeks of the end of each month
External data
Central Bank of Madagascar (CBM)
Balance of paymentsQuarterly, by the end of the subsequent quarter
Real sector and price data
INSTAT
Consumer price index data (provided by INSTAT)Monthly, within four weeks of the end of each month
Details on tourismMonthly, within twelve weeks of the end of each month
Electricity and water production and consumptionMonthly, within twelve weeks of the end of each month
Other data
OCH
Petroleum shipments and consumptionMonthly, within four weeks of the end of each month
Table 2.Social Spending in 2015 and First Quarter of 2016 by Ministry(Billions of Ariary)
End- Dec 2015End-March 2016
01 Présidence (Presidency)41
031 Coordination de la lutte contre le SIDA
05 Primature (Prime Minister’s Office)363
095 Projet d’urgence de securité alimentaire et de reconstruction
104 Projet d’urgence pour la sécurité alimentaire et protection sociale (PURSAPS)
105 Filets sociaux de securité
21 Ministère des Finances et du Budget (Ministry of Finance and Budget)434
189 Appui d’urgence aux services essentiels d’éducation, de santé et de nutrition
193 Appui aux couches défavorisées
194 HIMO - développement
52 Ministère de l’Eau, de l’Assainissement et de l’Hygiène (Ministry of Water, Sanitation and Hygiene)162
056 Approvisionnement en eau potable et assainissement
065 Programme d’approvisionnement en eau potable et assainissement en milieu rural (PAEAR)
082 Alimentation en eau dans le sud
084 Evacuation des eaux usées et des ordures ville Antananarivo (SAMYA)
71 Ministère de la Santé (Ministry of Health)439
026 Appui aux districts sanitaires
030 Réhabilitation, construction, équipement des infrastructures
024 Appui au système hospitalier de référence
025 Appui aux programmes de lutte contre les maladies transmissibles
028 Equipes sanitaires mobiles
045 Appui aux programmes de lutte contre les maladies non transmissibles
046 Appui aux programmes de lutte contre les maladies epidémo-endémiques
022 Appui à la politique de survie de la mère et de l’enfant (ex-bien être de la famille)
Aide d’urgence pour la lutte contre la peste
76 Ministère de la Population, de la Protection Sociale et de la Promotion de la Femme (Ministry of Population, Social Protection and Promotion of Women)10
056 Appui aux services sociaux de base
050 Promotion de développement socio-économique des femmes
035 Promotion de l’intégration socio-économique des personnes handicapées
040 Appui aux ménages en difficulté
046 Amélioration de la condition de vie des personnes âgées
031 Droits et protection des enfants (ex-services urbains de base)
81 Ministère de l’Education Nationale (Ministry of National Education)6214
104 Appui à l’enseignement primaire en matière de nutrition
105 Redynamisation de l’enseignement primaire
107 Education pour tous (volet MINESEB)
112 Travaux et équipement pour les écoles primaires
136 Projet d’appui d’urgence a l’éducation pour tous (PAUEPT)
138 Programme d’appui aux services sociaux de base-éducation (PASSOBA)
113 Travaux et équipement des collèges
102 Appui à l’enseignement general
132 Travaux et équipement des lycées
TOTAL20433
Source: Malagasy authorities.
Source: Malagasy authorities.
Annex I. Guidelines on Performance Criteria With Respect to External Debt

Excerpt from paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No. 15688-(14/107), adopted December 5, 2014.

8. (a) For the purpose of these guidelines, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary one being as follows:

  • (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

  • (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and

  • (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. The debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.

(b) Under the definition of debt set out in point 8(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

Per capita income in US dollar terms has fallen an estimated 13 percent between end-2013 and end-2015, due to the depreciation of the currency.

For example, in May 2015, the National Assembly voted to impeach the President but the High Constitutional Court rejected the legal grounds for the impeachment in June. In July 2015, the National Assembly fell just short of the two-thirds majority needed to remove the Prime Minister and cabinet.

For example, it was not possible to enact high priority legislation to combat the illegal trade in rosewood.

These operations created a wedge between the official published exchange rate and the market exchange rate. In early September, the wedge was over 10 percent, but it disappeared following the end of the buyback operations.

The 2014 deficit on a cash basis was 2.4 percent of GDP (compared to 3.5 percent envisaged in the supplementary budget).

Tax suspensions on non-JIRAMA related oil imports were eliminated in early 2015. In addition, the authorities are strengthening the monitoring of tax exemptions with a view to limiting fraudulent appropriations and assessing their effect on the tax base.

In addition, the inter-bank market remains nascent. In a context of persistent uncertainty, high counter-party risk, and weak legal recourse, liquid banks are reluctant to lend to other banks or new corporate clients.

Bank holdings of T-bills fell from 3.2 percent of GDP at end-May 2015 to 2.5 percent at end-September 2015, reflecting both structural and seasonal factors.

The draft revisions to the 2015 budget were submitted to parliament together with the draft 2016 budget at the end of October and are expected to become effective toward the end of the year.

The total increase is 0.8 percent of GDP, including a one-off payment by Air Madagascar of tax arrears that is financed by an offsetting fiscal transfer.

The 2015 deficit (commitment basis) is projected to be 4.5 percent of GDP including the recognition of old government debt owed to the central bank. Considering ongoing arrears clearance, the corresponding deficit on a cash basis that needs to be financed rises to 5.3 percent of GDP.

The 2016 financing gap does not yet take into account any programmatic budget support loans (i.e., not for foreign financed investment projects). In 2015, Madagascar received about 1 percent of GDP in programmatic budget loans.

The central bank’s financial position will improve significantly in 2015 as a result of two recapitalization operations (together 1.2 percent of GDP). (For the government, the recapitalization is self-financed through issuance of new debt instruments.) The central bank’s capital needs will be reviewed following the adoption of IFRS starting in 2016.

This will support an improvement in the capacity of Madagascar to monitor its debt.

For large mining projects, the length of the fiscal stability remains as specified under the LGIM.

The program reference rate and spreads are based on the “average projected rate” for the six-month USD LIBOR over the following 10 years from the Fall 2015 World Economic Outlook (WEO).

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