On November 18, 2015, the Executive Board of the International Monetary Fund (IMF) approved a SDR 30.55 million (about US$42.1million) disbursement in financial assistance for Madagascar under the Rapid Credit Facility (RCF)1. This is intended to assist the authorities to meet urgent balance of payments needs. The authorities’ request follows a first RCF disbursement of an equivalent amount—SDR30.55 million (about US$42.1million)—approved by the Executive Board on June 18, 2014 (see
The Executive Board was also informed about the Managing Director’s approval of a six-month Staff-Monitored Program (SMP) covering the period up to the end of March 2016. The SMP is intended to guide policy implementation, further develop local capacity, and build a stronger track record. A demonstrated capability to sustain reforms is a prerequisite for a future request for an arrangement under the Extended Credit Facility (ECF). The SMP in combination with the RCF disbursement are also expected to catalyze external financial assistance in 2015 and 2016.
The economic environment remains challenging. The recovery that began in 2014 has failed to gain further momentum due to falling commodity prices, weather-related shocks, and deep-rooted structural weaknesses. Against this background, private investment has also remained weak. Growth is expected to reach 3.2 percent in 2015, with end-year inflation contained at 7.9 percent.
Despite the challenges facing Madagascar, macroeconomic policies have generally succeeded in maintaining economic stability and sustainability in 2015. Going forward, the authorities have begun implementing significant measures aiming to further strengthen macroeconomic stability, particularly to improve revenue generation, enhance the quality of fiscal spending, strengthen central bank operations, and improve the functioning of the foreign exchange market. The ultimate policy objective is to scale up spending on essential infrastructure and social development to secure strong, sustainable, pro-poor growth that reverses the deterioration in development indicators. The government has also adopted a new strategy to fight corruption and improve governance.
New measures to improve tax administration focus on increasing compliance, deterring fraud, eliminating some exemptions, and tackling the large informal sector. To enhance the quality of expenditures, the authorities will eliminate inefficient fuel subsidies and reduce the need for transfers to loss-making state-owned enterprises, including the energy company JIRAMA and Air Madagascar. The authorities will also take actions to avoid the build-up of new domestic arrears and settle the existing stock expeditiously. The ongoing recapitalization of the central bank, revision of its legal framework, and more active bank liquidity management will reinforce the capacity to safeguard price and financial sector stability.
Following the Executive Board discussion on Madagascar’s new RCF request, Mr. Furusawa, Deputy Managing Director and Acting Chair stated:
“Madagascar’s economic recovery has been slower than expected as a result of falling world prices for commodity exports, weather-related shocks, and deep-rooted structural problems. Against this background, financing and balance of payments needs have grown. Nonetheless, the authorities’ policies over the past six months have succeeded in broadly preserving macroeconomic stability and debt sustainability. The disbursement under the Fund’s Rapid Credit Facility should help catalyze donor support.
“The government aims to raise growth and reduce poverty on a sustained basis. This will require higher public investment in physical, human, and institutional capital. Efforts to create the necessary fiscal space focus on raising the currently low level of revenue collection, combined with better spending prioritization. Stronger economic governance, including a strategy against corruption, is needed to enhance the efficiency of the public sector and improve the business climate, thereby promoting private sector-led growth. The authorities are committed to avoiding a build-up of new domestic arrears and to clearing the existing stock expeditiously. The draft 2016 budget includes welcome policy initiatives in these directions. Sustained reform efforts will be necessary to support medium-term development and mobilize additional external financing.
“The Malagasy authorities have taken steps to enhance the functioning of the foreign exchange market, maintain a flexible exchange rate, and strengthen the central bank’s capacity and independence. Additional measures, including more active liquidity management, should aim to deepen the financial sector and strengthen price and financial sector stability.”
The RCF (http://www.imf.org/external/np/exr/facts/rcf.htm) provides immediate financial assistance with limited conditionality to low-income countries with an urgent balance of payments need. In this context, the economic policies of a member receiving RCF financing are expected to address the underlying balance of payments difficulties and support policy objectives including macroeconomic stability and poverty reduction. Financing under the RCF carries a zero interest rate, has a grace period of 5.5 years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities every two years.