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

Author(s):
International Monetary Fund. African Dept.
Published Date:
December 2015
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Introduction

1. This joint DSA has been prepared by IMF and World Bank staff. It is based on the framework for LICs approved by the respective Executive Boards. The framework takes into account indicative thresholds for debt burden indicators determined by the quality of the country’s policies and institutions.2 The assessment comprises a baseline scenario and a set of alternative scenarios.

2. This DSA includes public debt and guarantees of the general government. The DSA does not include the debt of local government or state owned enterprises (other than through direct guarantees). The measure of debt is on a gross rather than net basis. And the residency criterion is used to determine the split between external and domestic debt.

Recent Developments and Current Debt Situation

3. Over 2008-14, domestic debt was the main driver of total PPG debt in Madagascar (Figure 1). A significant reduction in loans from development partners during the 2008-13 crisis period resulted in a greater reliance on domestic sources to finance budget deficits. In 2008, domestic debt was 7.3 percent of GDP, but increased to 11.4 percent by end-2014. This debt includes domestic budgetary arrears, which increased sharply in 2013. In contrast, external PPG debt was maintained at around 24 percent of GDP over 2008-14. The authorities also refrained from borrowing externally on non-concessional terms, which helped to maintain debt sustainability. Overall, total public debt rose from around US $2.5 billion (33 percent of GDP) in 2007 to US$3.5 billion (35 percent of GDP) in 2014. This modest increase in debt remains substantially below the pre-HIPC peak of 95 percent of GDP. The debt service to revenue ratio, however, has increased due to a greater reliance on domestic financing and declining fiscal revenues.

Figure 1:Debt Level and Service Ratios

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

4. A significant nominal exchange rate depreciation in 2015 increased the burden of external debt. In 2015, a projected depreciation of 8 percent in the period average nominal effective exchange rate (22 percent depreciation against the dollar) is expected to increase external debt by 6 percentage points of GDP. And exchange rate base effects will lead to a further deterioration in the debt-to-GDP ratio in 2016. Nominal debt increased by a relatively modest 3 percentage points of GDP, and this was largely offset by real GDP growth. The larger than expected exchange rate depreciation, therefore, is the primary driver of the deterioration in debt dynamics in 2015, relative to the forecast in the 2014 DSA.

5. The majority of external debt is owed to multilateral creditors on highly concessional terms. Table 1 summarizes PPG debt by creditor type. Around one-third of total debt is held by domestic creditors mainly in the form of bonds and loans to the private sector. Debt to the central bank and arrears were also relatively high at around 2.5 percent of GDP respectively in 2014. The vast majority of external debt is held by multilateral creditors, in particular the World Bank and African Development Bank. This debt is highly concessional.

Table 1:Break-down of Total PPG Debt (end-2014)
CreditorAmount (US$m)Percent of GDPPercent of total
Domestic debt, of which:1,21711.434.1
Treasury bills4254.011.9
Debt to the Central Bank2762.67.7
Arrears2822.67.9
Other inc. loans2342.26.5
External debt, of which:2,35723.765.9
Multilateral1,85418.751.9
Paris Club1071.13.0
Non-Paris Club3803.810.6
Commercial170.20.5
Total PPG debt3,57435.1100.0
Sources: Malagasy authorities; and IMF staff estimates and projections.
Sources: Malagasy authorities; and IMF staff estimates and projections.

6. Private external debt is mainly issued by local subsidiaries of multinational companies. According to the authorities, external debt owed by domestically owned companies and households is negligible. There are, however, a number of multinational companies—for instance in the mining, banking, telecommunication sector—which wholly own local subsidies with external debt. The authorities do not have comprehensive data on these obligations. But by far the largest of these debtors is the Nickel/Cobalt mine and processing facility, which has external debt of around US$2bn (21 percent of GDP). This obligation has caused total external debt to increase from 24 percent of GDP in 2007 to 44 percent at end-2014. It is projected that this commercial loan will be fully repaid by around 2030.

Underlying Assumptions

7. The key variables driving debt dynamics are forecast to improve over coming years (Box 1). The DSA projections are consistent with the authority’s plan to scale-up much needed infrastructure and social spending. Much of this investment will be financed through concessional external borrowing and grants, although some non-concessional borrowing is envisaged throughout the forecast horizon. This will increase during the forecast horizon, and as such, the average grant element of new borrowing is projected to decline from 40 percent today to around 30 percent in 2035. The current assumptions are somewhat more conservative than the 2014 DSA.

8. The main risks to these assumptions relate to revenue generation and donor grant support, although these are symmetrical in nature. Continued weak revenue performance and a low donor grant support (perhaps as a result of the failure to reform on revenue) pose significant risks to debt sustainability. However, there is also significant upside potential to generate revenues, especially from such a low base. This has the potential to boost the ability to service higher debt levels and stimulate greater donor support. In this sense, risks are both to the upside and downside.

Box 1.Baseline Macroeconomic Assumptions

Real GDP growth. Growth is expected to be lower in the near term than projected in the 2014 DSA, largely as a result of natural disasters and continued political uncertainty, which held back reforms and private investment. Growth is expected to steadily increase over the next 5 years, stabilizing at 5 percent for the medium term. This is driven by improved confidence, further re-engagement of development partners, and increased mining exports.

Current account. The decline in global oil and rice prices led to an improvement in the current account, which was only partially offset by lower than expected mining revenues. In coming years, a bounce back in imports is projected, as domestic consumption and investment recover. Over the medium term, the noninterest current account deficit is expected to stabilize at 3.0-3.5 percent of GDP, similar to the 2014 DSA.

Grants. Donor grant support has been significantly lower in 2014 and 2015 than anticipated in the 2014 DSA. This has led to a downward revision to medium term projections of grant support to around 2.5 percent of GDP per annum. Over the long-run, grants are assumed to decline to 0.6 percent of GDP by 2035.

Revenues. This is an area of vulnerability for debt sustainability. Tax revenues have fallen from (a relatively modest) 12.1 percent of GDP in 2008, to 9.9 in 2014. This is lower than anticipated in the 2014 DSA, and so the path of revenue going forward is projected to rise at a more modest pace.

Expenditure. Expenditure will be somewhat constrained by the lower than expected revenue projection, and so is somewhat below the 2014 DSA. However, the primary deficit is expected to be higher in the near term in order to accommodate a modest scaling up of capital investment and social spending.

Table 2:Madagascar; Baseline Macroeconomic Assumptions
20152016201720182019
Real GDP growth (percent)2015 DSA3.24.34.44.54.7
2014 DSA4.04.54.54.54.5
Non-interest current account deficit (percent GDP)2015 DSA1.51.51.83.13.3
2014 DSA5.45.25.04.33.9
Primary deficit (percent of GDP)2015 DSA3.51.93.62.92.7
2014 DSA1.40.71.41.31.3
Total revenues (percent of GDP)2015 DSA12.413.513.814.214.4
2014 DSA15.016.015.715.916.3
Grants (percent of GDP)2015 DSA2.13.02.62.72.4
2014 DSA3.73.73.73.73.7
Non-Interest Expenditure (percent of GDP)2015 DSA15.915.417.417.117.1
2014 DSA16.416.717.117.217.5
Source: IMF staff projections.
Source: IMF staff projections.

External DSA

Baseline scenario

9. The level of PPG external debt in 2014 is a little over US$2.5 billion, and is projected to grow gradually throughout the forecast horizon. PPG external debt is forecast to increase from 24 percent of GDP in 2014 to peak at 34 percent of GDP in 2020 (Table 3). This is driven by a step-up in foreign financed investment, consistent with the authority’s National Development Plan. As domestic debt markets deepen (see below), PPG external debt will decline as a proportion of GDP to around 30 percent of GDP. A persistent trade deficit and outflows from the mining sector3 are balanced with increasing grant inflows (over the next decade) and relatively strong growth. FDI inflows are assumed to be lower than that experienced over the last few years, during which major mining projects were being constructed.

Table 3.Madagascar: External Debt Sustainability Framework, Baseline Scenario, 2012-351(In percent of GDP; unless otherwise indicated)
ActualHistorical 6/

Average
Standard 6/

Deviation
Projections
2012201320142015201620172018201920202015-2020

Average
202520352021-2035

Average
External debt (nominal) 1/44.943.944.338.014.551.352.049.647.745.944.848.637.535.336.2
of which: public and publicly guaranteed (PPG)24.222.823.724.216.331.232.632.733.033.333.832.832.928.431.3
Change in external debt2.6−1.00.52.116.27.00.7−2.5−1.9−1.7−1.20.1−1.60.6−0.6
Identified net debt-creating flows−1.2−2.5−3.0−2.8−3.8−3.6−2.5−2.4−2.7−2.7−3.2
Non-interest current account deficit6.55.3−0.18.97.01.51.51.83.03.23.22.43.52.63.1
Deficit in balance of goods and services9.58.44.313.86.33.33.33.75.05.55.44.45.85.15.5
Exports29.230.332.834.337.437.837.137.137.538.143.339.7
Imports38.738.737.137.640.741.542.242.642.943.948.545.2
Net current transfers (negative = inflow)−6.0−6.0−6.9−6.42.6−5.1−5.5−5.5−5.4−5.4−5.4−5.4−5.4−5.4−5.4
of which: official−1.2−1.3−2.0−2.11.7−2.0−2.1−2.4−2.2−2.0−1.9−2.1−1.4−0.8−1.2
Other current account flows (negative = net inflow)3.02.92.51.51.03.33.73.63.43.13.23.43.12.83.0
Net FDI (negative = inflow)−7.8−5.2−2.9−5.32.3−3.1−3.3−3.5−3.7−3.9−4.1−3.6−4.1−4.1−4.1
Endogenous debt dynamics 2/0.2−2.60.0−3.24.1−1.2−2.0−1.9−1.8−1.7−1.7−1.7−2.1−1.6−1.9
Contribution from nominal interest rate0.30.30.30.30.10.40.30.30.30.40.40.30.40.60.5
Contribution from real GDP growth−1.3−1.0−1.4−1.31.5−1.6−2.3−2.1−2.1−2.1−2.2−2.1−1.8−1 6−1 7
Contribution from price and exchange rate changes1.2−1.91.2
Residual (3-4) 3/3.81.43.4−4.214.19.84.51.10.50.61.53.01.13.92.2
of which: exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/33.837.738.236.034.432.931.926.527 1
In percent of exports103.2109.8102.295.392.688.785.069.562.4
PV of PPG external debt13.217.518.719.119.720.320.921.920.2
In percent of exports40.351.150.150.653.154.655.857.546.6
In percent of government revenues130169172169168166164157127
Debt service-to-exports ratio (in percent)2.01.72.92.73.02.92.72.72.73.33.9
PPG debt service-to-exports ratio (in percent)2.01.72.92.73.02.92.72.72.73.33.9
PPG debt service-to-revenue ratio (in percent)6.25.59.59.010.19.88.68.27.99.010.2
Total gross financing need (Millions of U.S. dollars)−77.471.0−221.2−64.7−63.8−58.135.834.94.9108.629.1
Non-interest current account deficit that stabilizes debt ratio3.86.4−0.6−5.50.84.24.95.04.45.11 9
Key macroeconomic assumptions
Real GDP growth (in percent)3.02.33.32.93.53.24.34.44.54.75.04.35.05.05.0
GDP deflator in US dollar terms (change in percent)−2.74.5−2.66.79.9−11.9−8.82.12.22.41.7−2.11.81 91 9
Effective interest rate (percent) 5/0.70.60.80.80.30.70.60.60.70.91.00.71.21.91.6
Growth of exports of G&S (US dollar terms, in percent)9.411.08.910.616.3−4.83.67.75.07.18.04.47.78 68 0
Growth of imports of G&S (US dollar terms, in percent)2.16.9−3.68.421.5−7.82.88.78.58.27.74.77.68.57.8
Grant element of new public sector borrowing (in percent)42.837.440.437.336.736.538.534.028 231 5
Government revenues (excluding grants, in percent of GDP)9.69.610.110.71.010.310.911.311.812.212.811.614.014.714.5
Aid flows (in Millions of US dollars) 7/120134246404441401438426417382279
of which: Grants120134246200239253264248249245206
of which: Concessional loans0.00.00.0204.0202.1148.5173.5178.2167.6136.672.8
Grant-equivalent financing (in percent of GDP) 8/3.54.13.83.73.43.13.62.31 32 0
Grant-equivalent financing (in percent of external financing) 8/64.261.967.265.262.863.164.159 442.652.6
Memorandum items:
Nominal GDP (Millions of US dollars)992010602106749700922398241049411249120111678132896
Nominal dollar GDP growth0.36.90.7−9.1−4.96.56.87.26.82.26.97.06 9
PV of PPG external debt (in Millions of US dollars)1311.61480.31685.51845.32038.02251.12462.93616 86538 7
(PVt-PVt-1)/GDPt-1 (in percent)1.62.11.72.02.01.91.91.41.11.4
Gross workers’ remittances (Millions of US dollars)
PV of PPG external debt (in percent of GDP + remittances)13.217.518.719.119.720.320.921 920 2
PV of PPG external debt (in percent of exports + remittances)40.351.150.150.653.154.655.857.546.6
Debt service of PPG external debt (in percent of exports + remittances)2.92.73.02.92.72.72.73 33 9
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

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

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

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

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

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

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

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

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

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

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

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

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

10. Under the baseline projection, all PPG external debt indicators remain below the policy-dependent debt burden thresholds (Figure 2). The present value (PV) of the 2014 level of external debt, 13 percent of GDP, is projected to increase to 20 percent by 2035. This projection is broadly consistent with the medium term forecast from the last DSA conducted in 2014.

Figure 2.Madagascar: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2015-35 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

11. Private external debt is projected to decline slowly, as the mining project loans are repaid. Given the exceptional nature of this project, the DSA does not forecast substantial new external borrowing from the private sector. Furthermore, this debt is not assessed to pose a significant threat to external sustainability, as the ultimate liability of these loans is to the multinational shareholders, rather than resident entities (such as domestic banks or the government).

Alternative scenarios

12. The two standard DSA stress test scenarios are applied to the baseline external PPG debt projection. First, the standard bounds test applies pre-defined shocks to the key macroeconomic variables that drive external debt (summarized in Footnote 1 of Figure 2). Second, a historical scenario where macroeconomic variables are assumed to equal their average over 2004-13 is imposed on the baseline projection. These shocks are detailed in Table 4.

Table 4.Madagascar: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015-35(In percent)
Projections
201520162017201820192020202120222023202420252026202720282029203020312032203320342035
PV of debt-to GDP ratio
Baseline171818181920202021212120202020202019191919
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/171922252730323436373839404041424344454647
A2. New public sector loans on less favorable terms in 2015-2035 2171819202223242525262626262627272727282828
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-2017171820202121222223232322222222212121212120
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/172025252626262726262525242323222222212020
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017171718181919202020202020201919191919191818
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/171921212122222323222222212121202020201919
B5. Combination of B1-B4 using one-half standard deviation shocks171618181919192020202020191919191918181818
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/172626272829293030303030292929292928282827
PV of debt-to-exports ratio
Baseline504848505152535455555453525150494847464443
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/50515967748186929699101101102103104105106107107107108
A2. New public sector loans on less favorable terms in 2015-2035 2504951555860636668696968686767676766666564
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-2017504747495151525454545352515049484746454342
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/505884868887888988868380777572706865636058
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017504747495151525454545352515049484746454342
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/505155565858596060595857555352515048474544
B5. Combination of B1-B4 using one-half standard deviation shocks504652545556575859595856555453525150484745
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/504747495151525454545352515049484746454342
PV of debt-to-revenue ratio
Baseline166165160157156154152153152151148144140136134131128124121117117
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/166175196210224237246258266271274275276277279282283283284284319
A2. New public sector loans on less favorable terms in 2015-2035 2166168171173177178180185187188188185183182181180178176174171188
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-2017166169174172171168166167167165162157153149146143140136132128139
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/166182223216212205201199194188181174167160155150144138133127137
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017166151156153153150148149149147144140136133131128125121118114124
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/166173182178176171169169167163159153148144140137132128124119129
B5. Combination of B1-B4 using one-half standard deviation shocks166144156153152149147148148145143138134131128125122119115111121
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/166239234230229225223224224221217211205200196192187182177171186
Debt service-to-exports ratio
Baseline333333333333334444444
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/333333344555566666666
A2. New public sector loans on less favorable terms in 2015-2035 2333333344444555555555
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-2017333333333333334444444
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/334444456655666655555
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017333333333333334444444
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/333333334444444444444
B5. Combination of B1-B4 using one-half standard deviation shocks333333333434444444444
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/333333333333334444444
Debt service-to-revenue ratio
Baseline910108887889899991010101099
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/99988881012131314151516161616171719
A2. New public sector loans on less favorable terms in 2015-2035 2910988891010111112121313131313141416
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20179111199989910910101011111111111112
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/910101010991012121212121212121211111112
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20179910888788989999101099911
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/910109988910101010101010101010101011
B5. Combination of B1-B4 using one-half standard deviation shocks9998877889899999999910
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/91514121211111213131213141414141414141416
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/313131313131313131313131313131313131313131
Sources: Country authorities; and staff estimates and projections.

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

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

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

Includes official and private transfers and FDI.

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

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

Sources: Country authorities; and staff estimates and projections.

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

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

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

Includes official and private transfers and FDI.

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

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

13. For the standard bounds tests, two scenarios cause a breach of the thresholds for PPG external. A one-time 30 percent depreciation shock would cause the PV of debt-to-GDP to peak at 32 percent, slightly above the 30 percent threshold implied by Madagascar’s CPIA rating. The breach for the PV of debt-to-revenue is larger, peaking at just below 249 percent compared to a threshold of 200 percent. For this metric, the standard shock to exports4 also causes a breach of the threshold.

14. The historical scenario5 projects a rapid increase in all debt metrics and causes a breach for three of the five external debt thresholds. These scenarios cause a substantial breach in the thresholds, especially for the PV of debt-to-GDP and the PV of debt-to-revenue. But there is reason to place less weight on this scenario—the very large current account deficit in 2008 and 2009 (over 20% of GDP in both years) was mainly driven by substantial imports associated with large mining investments, which were partly financed through non-debt creating FDI. These did not lead to a build-up of PPG external debt, and this period is not representative of the normal economic environment in Madagascar.

Public DSA

Baseline scenario

15. Domestic PPG debt as a proportion of GDP is projected decline over the next decade, with authorities substituting away from local financing into concessional borrowing, as donor relations normalize. Domestic PPG debt is then expected to grow as a proportion of GDP thereafter, as domestic markets deepen.

16. The present value of total PPG debt is projected to remain around 25-30 percent of GDP throughout the forecast - below the threshold (Figure 3 and Table 5). Madagascar’s relatively weak revenue to GDP ratio leaves the authorities somewhat vulnerable on the debt service to revenue measure. This risk is likely to increase through time as higher interest payments (associated with less concessional financing) increases at a faster rate to revenue mobilization.

Figure 3.Madagascar: Indicators of Public Debt Under Alternative Scenarios, 2015-35

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025.

2/ Revenues are defined inclusive of grants.

Table 5.Madagascar: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012-35(In percent of GDP, unless otherwise indicated)
ActualProjections
201220132014Average5/Standard 5/

Deviation
2015201620172018201920202015-20

Average
202520352021-35

Average
Public sector debt 1/33.734.035.238.916.840.640.138.838.037.637.838.837.332.636.1
of which: foreign-currency denominated24.222.823.729.716.330.731.531.231.231.632.031.431.326.429.5
Change in public sector debt1.10.31.25.5−0.5−1.4−0.8−0.30.1−0.3−1.1
Identified debt-creating flows−1.1−0.92.78.40.41.71.11.01.1−1.7−2.7
Primary deficit1.83.21.61.11.33.51.93.62.92.72.52.80.0−1.5−0.5
Revenue and grants10.810.912.414.23.512.413.513.814.214.414.813.915.415.315.7
of which: grants1.21.32.33.52.92.12.62.52.42.22.12.31.50.61.2
Primary (noninterest) expenditure12.614.114.015.32.615.915.417.417.117.117.316.715.413.815.2
Automatic debt dynamics−1.6−1.91.04.1−2.1−2.3−2.0−1.8−1.4−1.6−1.2
Contribution from interest rate/growth differential−1.0−0.7−1.4−1.4−2.0−2.1−1.9−1.8−1.9−1.9−1.4
of which: contribution from average real interest rate0.00.0−0.3−0.3−0.3−0.4−0.30.0−0.1−0.10.2
of which: contribution from real GDP growth−1.0−0.7−1.1−1.1−1.7−1.7−1.7−1.7−1.8−1.8−1.6
Contribution from real exchange rate depreciation−0.6−1.22.45.40.0−0.2−0.1−0.10.5
Other identified debt-creating flows−1.4−2.20.10.80.60.30.20.20.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0
Reduction of domestic arrears−1.4−2.20.10.80.60.30.20.20.00.00.0
Residual, including asset changes2.21.2−1.50.01.7−2.9−1.0−3.1−1.9−1.4−0.9−1.81.41.61.7
Other Sustainability Indicators
PV of public sector debt24.627.126.625.625.225.125.426.724.8
of which: foreign-currency denominated13.217.218.018.118.519.119.720.718.6
of which: external13.217.218.018.118.519.119.720.718.6
Gross financing need 2/7.910.19.412.513.811.59.210.08.58.17.49.15.04.55.2
PV of public sector debt-to-revenue and grants ratio (in percent)198.1218.5197.1185.6177.6173.9171.5173.1162.2
PV of public sector debt-to-revenue ratio (in percent)243.0262.1244.1226.5214.3205.2199.2191.2169.1
of which: external 3/130.4165.8164.7159.8156.8155.7154.0148.0127.0
Debt service-to-revenue and grants ratio (in percent) 4/21.422.322.341.167.622.920.818.216.016.415.218.215.819.317.4
Debt service-to-revenue ratio (in percent) 4/24.125.327.366.3130.327.425.722.219.319.317.621.917.520.118.8
Primary deficit that stabilizes the debt-to-GDP ratio0.72.90.41.41.4−2.02.45.03.73.02.32.40.2−0.4−0.2
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)3.02.33.32.93.53.24.34.44.54.75.04.35.05.05.0
Average nominal interest rate on forex debt (in percent)1.21.21.51.10.31.41.00.80.91.31.31.11.42.31.8
Average real interest rate on domestic debt (in percent)1.50.7−2.71.03.4−1.0−0.2−0.20.94.74.81.54.84.84.8
Real exchange rate depreciation (in percent, + indicates depreciation−2.6−5.010.70.25.723.8
Inflation rate (GDP deflator, in percent)5.55.16.69.13.77.67.46.45.75.35.16.35.05.05.0
Growth of real primary spending (deflated by GDP deflator, in percent)−0.914.32.61.64.617.01.218.02.24.96.18.25.5−5.33.5
Grant element of new external borrowing (in percent)45.437.741.637.736.736.839.334.328.432.0
Sources: Country authorities; and staff estimates and projections.

General government gross debt

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

Revenues excluding grants.

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

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

Sources: Country authorities; and staff estimates and projections.

General government gross debt

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

Revenues excluding grants.

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

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

Alternative scenarios

17. All three of the alternative scenarios used to stress-test the baseline breach the risk threshold (Figure 3). The scenario whereby the primary deficit as a proportion of GDP remains unchanged throughout the forecast generates the highest debt to GDP ratio trajectory. However, staff and authorities agree that reducing the current gap between revenue and spending is a priority.

Conclusion

18. The authorities agree with the analysis presented in this DSA. The DSA was discussed with authorities during the September mission, and there was broad agreement on the risks to debt sustainability. The authorities have begun using the LIC DSA template to help develop their medium-term debt strategy and assess risks. Reforms to enhance debt resilience should focus on i) increasing tax revenues to increase the capacity of the state to service debt; ii) ensure that debt continues to be financed on the most concessional terms possible; iii) ensure that investments are carefully prioritized to enhance growth and human capital accumulation; and iv) improve debt monitoring capacity, especially in terms of controlling debt guarantees and potential contingent liabilities.

Table 6.Madagascar: Sensitivity Analysis for Key Indicators of Public Debt 2015-35
Projections
201520162017201820192020202120222023202420252026202720282029203020312032203320342035
PV of Debt-to-GDP Ratio
Baseline272726252525252626262727272727272727262625
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages272624222221222426283032333538404245474950
A2. Primary balance is unchanged from 2015272827272728303336384143454750525557596162
A3. Permanently lower GDP growth 1/272726262627282930313233353637394041424343
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-2017272829303032323435363738394041424243434342
B2. Primary balance is at historical average minus one standard deviations in 2016-2017272725252525252526262626262727272727262525
B3. Combination of B1-B2 using one half standard deviation shocks272726262627282930313132333334353536353534
B4. One-time 30 percent real depreciation in 2016273432313031303030313131313131323231313029
B5. 10 percent of GDP increase in other debt-creating flows in 2016273433323132313232323232323232323231313029
PV of Debt-to-Revenue Ratio 2/
Baseline219197186178174172167170172173173173172171171171169165159152162
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages219195172157148143147160170181190200210222234246256266277284324
A2. Primary balance is unchanged from 2015219206193187188190200219235250264277289303316328337346354359406
A3. Permanently lower GDP growth 1/219199189183183183182190197203209214220226234241246249252253282
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-2017219208209206208211211221228234239244247251255259260259257252275
B2. Primary balance is at historical average minus one standard deviations in 2016-2017219200182174171169164168169170171171170169169169167163158151161
B3. Combination of B1-B2 using one half standard deviation shocks219201183179180182181188194199202206208211214217217215212207225
B4. One-time 30 percent real depreciation in 2016219250233219211206198200200201201200199199198198196191186179192
B5. 10 percent of GDP increase in other debt-creating flows in 2016219250237223218214207210211210209207205203202200197191185176187
Debt Service-to-Revenue Ratio 2/
Baseline232118161615141515161617171819191919191819
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages232118141312111317181920212325272829303135
A2. Primary balance is unchanged from 2015232119181717161822232426272931333435363641
A3. Permanently lower GDP growth 1/232118161716161717191921222324262727282731
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2016-2017232220182019181920212123242526272828282730
B2. Primary balance is at historical average minus one standard deviations in 2016-2017232118161515141515161617171818191919191819
B3. Combination of B1-B2 using one half standard deviation shocks232119161417161718181820212222232424242325
B4. One-time 30 percent real depreciation in 2016232322202019181920212122232425262626262528
B5. 10 percent of GDP increase in other debt-creating flows in 2016232122321920161719191920212222222222222122
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Prepared by IMF and World Bank staff, in consultation with the country authorities, during the September 2015 staff mission to negotiate an RCF. This DSA follows the IMF and World Bank Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries, November 5, 2013 (available at http://www.imf.org/external/pp/longres.aspx?id=4827).

According to the World Bank Country and Policy Institutional Assessment (CPIA) Index, Madagascar is rated as a ‘low’ performer, unchanged from the last DSA. The indicative thresholds for external debt applicable for that category of countries are: (i) 30 percent for the PV of debt-to-GDP ratio; (ii) 100 percent for PV of debt-to-exports ratio; (iii) 200 percent for the PV of debt to fiscal revenues ratio; (iv) 15 percent for the debt service to exports ratio; and (v) 18 percent for the debt service to revenue ratio. The indicative threshold for the PV of total PPG debt is 38 percent of GDP.

The large residual in Table 3 is partly related to mining activity. Mining exports are recorded in full in the balance of payment statistics. However, only a fraction of these receipts actually returns to Madagascar, with the remainder being repatriated to the parent companies.

Export value growth at historical average minus one standard deviation

Key macroeconomic variables (non-interest current account, growth, GDP deflator, growth of exports, current official transfers and net FDI) remain fixed at the average of the 2004-13 period.

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