Journal Issue
Share
Article

Republic of Madagascar: Request for an Arrangement Under the Extended Credit Facility; First Review Under the Staff Monitored Program

Author(s):
International Monetary Fund. African Dept.
Published Date:
August 2016
Share
  • ShareShare
Show Summary Details

Context, Recent Developments, and Program Performance

A. Context

1. Madagascar is a fragile country striving to recover from an extended political crisis and international isolation during 2009-13. However, the combination of political uncertainty, weak governance, and underinvestment in physical and human capital (Text Figure 1) has contributed both to persistent poverty (with some social indicators deteriorating) (Figure 1), and to holding back economic revival. The country has been unable to capitalize on its significant potential in agriculture, mining, tourism, and manufacturing. The authorities’ National Development Plan (NDP), adopted in 2014, aims to boost spending significantly on infrastructure and social development needs to support strong, pro-poor growth, giving rise to a protracted balance of payments need.

Text Figure 1.Madagascar: Domestic Capital Expenditure

(percent of GDP)

Source: Malagasy Authorities; and IMF staff estimtes and projections.

Figure 1.Madagascar: Poverty and Social Indicators

Sources: World Bank’s World Development Indicators; Face of Poverty in Madagascar, World Bank Report No. 78131-MG, March, 2014; Malagasy authorities; and IMF staff estimates and projections.

2. Weaknesses in revenue mobilization, the prioritization of spending, and economic governance have hampered the implementation of the medium-term economic program embodied in the NDP. Fiscal revenues remain significantly below the average of fragile countries in Sub-Saharan Africa (Text Figure 2), and low-priority spending, including transfers to key state-owned enterprises (SOEs) and pension funds, continues to crowd out high-priority spending. Governance indicators have similarly deteriorated (Text Figure 3). The public electricity utility JIRAMA illustrates these impediments, as its operational and financial difficulties, linked to goverance weaknesses, hold back economic growth and disrupt budget execution.

Text Figure 2.Sub-Saharan Africa: Tax and Customs Collections

(percent of GDP)

Source: World Economic Outlook.

Text Figure 3.Sub-Saharan Africa: Governance Indicators

Source: World Bank, Governance Indicators.

3. In light of these challenges, the Malagasy authorities have been seeking increased external support, including an arrangement under the Extended Credit Facility (ECF). Since re-engagement with the international community in 2014, the Malagasy authorities have expressed interest in an ECF arrangement to help provide a strong macroeconomic framework, meet protracted balance of payments needs, and catalyze additional donor support—both financial and technical. However, slow progress and uncertainty on several fronts—notably revenue, low-priority spending, and governance—highlighted weaknesses in the authorities’ implementation capacity. To support efforts to reinforce stability and ease balance of payments needs, Madagascar received two RCF disbursements—the first in June 2014 and the second in November 2015. The authorities also agreed on a six-month Staff Monitored Program (SMP) covering September 2015 to end-March 2016 to support stability and help build a track record of implementation. Since re-engagement, the IMF and others have provided intensive technical assistance in macro-critical areas such as public financial management, public enterprise reform, revenue generation, the quality of public spending, and financial sector development (including under the Financial Sector Assessment Program (FSAP), see below).

B. Recent Developments

4. Growth was constrained by unfavorable domestic and international events in 2015 (Figures 2-4 and Tables 1-7). The recovery in tourism suffered from disruptions from an extended strike at Air Madagascar; agriculture was held back by unfavorable weather conditions in early 2015; and earnings from mining exports declined as a result of falling world market prices. GDP growth in 2015 is now estimated at 3.1 percent, which is slightly slower than 2014 and barely higher than population growth of 2.8 percent. Inflation fell back to 6.3 percent at end-May 2016 from 7.6 percent at end-December 2015, led by lower food and fuel prices.

Figure 2.Madagascar: Real Sector Developments, 2006-16

Sources: Malagasy authorities; and IMF staff estimates and projections

Figure 3.Madagascar: Fiscal Developments, 2006-16

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

Figure 4.Madagascar: External Sector Developments, 2006-16

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

Table 1.Madagascar: Selected Economic and Financial Indicators, 2013–21
201320142015201620172018201920202021
ActualsPrel. Est.Projections
(Percent change; unless otherwise indicated)
National account and prices
GDP at constant prices2.33.33.14.14.54.85.05.05.0
GDP deflator5.16.67.66.76.96.46.15.55.4
Consumer prices (end of period)6.36.07.67.17.16.35.95.45.4
Money and credit
Reserve money−6.114.19.616.012.711.911.911.011.0
Broad money (M3)5.311.114.617.912.712.512.311.711.6
(Growth in percent of beginning of period money stock (M3))
Net foreign assets−13.55.46.97.53.32.62.52.72.9
Net domestic assets18.75.77.710.49.49.99.89.08.6
of which: Credit to the private sector6.98.68.24.66.67.87.76.46.2
(Percent of GDP)
Public finance
Total revenue (excluding grants)9.610.110.411.011.211.712.212.713.2
of which: Tax revenue 19.39.910.110.811.011.512.012.512.9
Grants1.32.31.52.02.71.51.31.21.1
Total expenditures14.914.715.116.218.317.618.018.218.3
Current expenditure11.810.811.711.010.310.09.910.110.2
Wages and salaries5.75.65.55.75.65.35.15.05.0
Interest payments0.70.60.80.90.91.01.01.11.2
Other4.84.13.93.83.63.63.63.73.9
Goods and Services0.60.90.50.70.81.11.21.31.3
Transfers and Subsidies4.13.23.43.22.72.52.42.52.6
Treasury operations (net)0.60.61.40.50.20.20.20.20.2
Capital expenditure3.13.93.55.38.07.68.18.28.1
Domestic financed0.61.21.01.51.92.43.03.33.4
Foreign financed2.52.82.53.76.15.25.14.94.7
Overall balance (commitment basis)−4.0−2.3−3.3−3.2−4.4−4.4−4.4−4.3−4.0
Float (variation of accounts payable, + = increase)−0.20.60.10.00.00.00.00.00.0
Variation of domestic arrears ( + = increase)2.2−0.7−0.5−1.2−0.7−0.5−0.3−0.20.0
Overall balance (cash basis)−2.0−2.4−3.7−4.5−5.1−5.0−4.7−4.5−4.0
Primary balance excl. foreign-financed investment2−1.3−0.60.10.20.30.40.7
Total financing2.02.43.74.54.74.02.31.50.8
Foreign borrowing (net)1.01.22.22.93.63.21.60.80.1
Domestic financing1.01.22.01.61.10.80.70.70.7
Excess financing after prospective financing (+)0.00.00.00.0−0.4−0.5−0.8−1.0−0.6
Savings and investment
Investment15.915.613.115.318.218.218.618.919.0
Gross national savings10.015.311.113.014.514.014.414.814.9
External sector
Exports of goods, f.o.b.18.120.621.021.520.820.720.921.020.9
Imports of goods, c.i.f.30.730.228.730.231.231.531.631.731.6
Current account balance (exc. grants)−6.5−1.5−3.4−4.3−6.4−5.6−5.5−5.3−5.2
Current account balance (inc. grants)−5.9−0.3−1.9−2.3−3.7−4.2−4.2−4.1−4.0
Public debt33.935.841.041.742.843.644.545.245.7
External22.824.428.430.432.634.535.836.937.4
Domestic11.111.412.611.310.29.18.68.38.3
(Units as indicated)
Gross official reserves (millions of SDRs)5025356007017828599451,0391,141
Months of imports of goods and services2.22.52.93.33.43.53.63.73.8
Real effective exchange rate (period average, percent change)3.6−3.4−0.5
Terms of trade (percent change, deterioration -)30.00.86.66.6−4.6−2.1−1.9−0.5−1.8
GDP per capita (U.S. dollars)462453402391405419437456476
Nominal GDP at market prices (billions of ariary)23,39725,77528,58531,77335,50739,60944,10348,82454,011
Sources: Malagasy authorities; and IMF staff estimates and projections.

See tables 3 and 4 for details.

Commitment basis.

See table 5 for details.

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

See tables 3 and 4 for details.

Commitment basis.

See table 5 for details.

Table 2.Madagascar: National Accounts, 2013-21
201320142015201620172018201920202021
ActualsPrel. Est.Projections
(Percent change)
Real supply side growth
Primary sector−6.13.3−0.72.22.83.23.63.73.7
Agriculture−12.84.5−2.42.83.54.35.05.15.1
Cattle and fishing1.42.80.81.92.52.52.52.62.6
Forestry−1.9−1.01.01.01.01.01.01.01.0
Secondary sector22.28.57.34.95.04.95.05.05.1
Food and drink3.13.43.83.83.83.83.83.73.8
Export processing zone5.92.1−0.39.410.07.57.57.57.5
Energy5.64.24.15.55.55.45.25.25.2
Extractive industry219.225.919.55.05.05.25.25.25.2
Other−2.02.11.24.54.85.05.15.35.4
Tertiary sector0.82.13.34.85.35.75.85.65.7
Transportation3.62.22.04.96.46.36.36.16.0
Services2.21.25.35.15.15.15.15.15.1
Trade−3.42.91.03.13.03.03.03.03.0
Public administration1.01.41.01.01.11.11.11.11.1
Public works/construction−2.23.19.410.010.013.614.212.012.0
Indirect taxes8.42.15.74.84.84.84.85.05.0
Real GDP at market prices2.33.33.14.14.54.85.05.05.0
Nominal demand side composition(Percent of GDP)
Resource balance−8.7−4.4−3.5−3.9−5.5−5.9−5.9−5.8−5.9
Imports of goods and nonfactor services38.737.135.536.837.737.937.938.037.8
Exports of goods and nonfactor services30.032.832.132.932.232.032.032.131.8
Current account balance (including grants) = (S-I)−5.9−0.3−1.9−2.3−3.7−4.2−4.2−4.1−4.0
Consumption92.888.890.488.587.387.887.387.087.0
Government11.110.210.810.09.39.08.98.99.1
Nongovernment81.778.679.678.578.078.778.478.077.9
Investment (I)15.915.613.115.318.218.218.618.919.0
Government2.53.93.55.38.07.68.18.28.1
Nongovernment13.411.69.610.010.210.610.510.710.9
Of which: foreign direct investment5.22.94.54.95.15.25.15.15.1
National savings (S)10.015.311.113.014.514.014.414.814.9
Government−0.91.60.22.13.63.13.73.94.1
Nongovernment10.913.611.011.010.910.910.710.910.9
Memoranda items:
Nominal GDP (at market prices)23,39725,77528,58531,77335,50739,60944,10348,82454,011
Net factor income−3.2−2.8−3.9−4.0−4.0−4.0−4.1−4.1−4.0
Transfers6.06.95.45.65.85.85.85.85.9
Nominal GNP23,40025,77928,58631,77535,50939,61144,10548,82654,013
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, 2013-21(Billions of Ariary)
2013201420152016120172018201920202021
DecDecDecMarJuneSepDecMarJuneDecDecDecDecDec
ActualsPrel. Est.Prel. Est.ProjectionsProjectionsProjections
Total revenue and grants2,5503,2043,3818441,8592,8894,1359071,9854,9185,2065,9826,7987,720
Total revenue2,2542,6112,9597561,6242,4373,4998201,8373,9744,6235,3886,1947,108
Tax revenue 12,1822,5472,8787461,5922,3883,4318091,8013,8984,5385,2936,0886,992
Taxes on income, profits, and capital gains4556947071853915588061914399371,1081,3701,6231,882
Taxes on international trade and transactions1,1721,2521,4583367241,1471,6693848261,8982,1582,3842,6132,903
Domestic taxes on goods and services5566017132264776839562345361,0631,2711,5391,8522,207
Non-tax revenue71648193249681136778595105116
Grants2965934228923545263687148944583594604612
Current grants120740000000430000
Capital grants2963863828923445163687148901583594604612
Total expenditure and lending minus repayments3,4833,7974,3288592,1483,5485,1621,0312,4676,4946,9627,9258,9029,889
Current expenditure2,7522,7813,3316811,5812,4173,4816691,6333,6473,9654,3604,9095,517
Wages and salaries1,3421,4451,5663869231,3261,8094211,0061,9722,0992,2572,4592,705
Interest payments1591422305213318329062145334390449541627
Foreign394557124149762060125176242316389
Domestic1209717340921342144284209214207226238
Other1,1171,0461,1221514558191,2171574721,2641,4141,5841,8302,093
Goods and services150222157289113921040130301429511627715
Transfers and subsidies9688249661233646801,0071163429649851,0731,2031,377
of which: SOEs29330025020015010050
Treasury operations (net)113514841293718916630107661697992
Capital expenditure7311,0169971785671,1311,6803628352,8472,9983,5653,9934,371
Domestic financed13830227524146330492332006759511,3231,6111,836
Foreign financed5937147221544218011,1893296342,1732,0472,2422,3822,535
Identified financing1,1892,1731,8701,5611,3871,138
Unidentified financing001776819951,397
Overall balance (commitment basis)2−933−593−947−15−289−659−1,026−124−483−1,576−1,756−1,943−2,104−2,169
Float (variation of accounts payable, + = increase)−4015642−41812180−9911000000
Variation of domestic arrears ( + = increase)516−187−149−116−310−349−389−98−120−235−214−113−940
Overall balance (including grants, cash basis)2−457−624−1,053−172−518−790−1,415−322−713−1,811−1,970−2,055−2,198−2,169
Primary balance excl. foreign-financed investment 3−37710330−126−1841801483098154215382
Total financing4576241,0511715187901,4153227131,6591,5761,011722422
Foreign borrowing (residency principle)234310618421364319151934531,2611,25871038948
External borrowing, Gross297443733662435861,1422425711,5111,5391,060783526
Budget support loans01153940572375890852392529300
Project loans297328340661873495532424861,2711,288967783526
Amortization on a due basis (-)−63−133−115−23−108−155−227−49−118−250−281−350−394−478
Domestic borrowing (residency principle)223314565182432408500129261399318301333374
Monetary sector42822247015622324437534138249198221293324
Non-monetary sector6317982621016512595123150120804050
Treasury correspondent accounts (net)−268181−132−57−50−5000000000
Excess financing (+)00−3000000−152−394−1,045−1,476−1,747
Prospective financing001776819951,397
Excess financing after prospective financing (+)0−152−217−363−481−349
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.

Data for overall balance in 2015 includes an amount of MGA 340bn (1.2 percent of GDP) corresponding to recapitalization and interest rescheduling operations with the central bank.

Commitment basis.

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.

Data for overall balance in 2015 includes an amount of MGA 340bn (1.2 percent of GDP) corresponding to recapitalization and interest rescheduling operations with the central bank.

Commitment basis.

Table 4.Madagascar: Fiscal Operations of the Central Government, 2013-21(Percent of GDP)
2013201420152016120172018201920202021
ActualsPrel. Est.Projections
Total revenue and grants10.912.411.813.013.913.113.613.914.3
Total revenue9.610.110.411.011.211.712.212.713.2
Tax revenue 19.39.910.110.811.011.512.012.512.9
Taxes on income, profits, and capital gains1.92.72.52.52.62.83.13.33.5
Taxes on international trade and transactions5.04.95.15.35.35.45.45.45.4
Domestic taxes on goods and services2.42.32.53.03.03.23.53.84.1
Non-tax revenue0.30.20.30.20.20.20.20.20.2
Grants1.32.31.52.02.71.51.31.21.1
Current grants0.00.80.10.00.10.00.00.00.0
Capital grants1.31.51.32.02.51.51.31.21.1
Total expenditure and lending minus repayments14.914.715.116.218.317.618.018.218.3
Current expenditure11.810.811.711.010.310.09.910.110.2
Wages and salaries5.75.65.55.75.65.35.15.05.0
Interest payments0.70.60.80.90.91.01.01.11.2
Foreign0.20.20.20.20.40.40.50.60.7
Domestic0.50.40.60.70.60.50.50.50.4
Other4.84.13.93.83.63.63.63.73.9
Goods and services0.60.90.50.70.81.11.21.31.3
Transfers and Subsidies4.13.23.43.22.72.52.42.52.6
of which: SOEs1.00.90.70.50.30.20.1
Treasury operations (net)10.60.61.40.50.20.20.20.20.2
Capital expenditure3.13.93.55.38.07.68.18.28.1
Domestic financed0.61.21.01.51.92.43.03.33.4
Foreign financed2.52.82.53.76.15.25.14.94.7
Identified financing3.76.14.73.52.82.1
Unidentified financing0.00.00.41.52.02.6
Overall balance (commitment basis)2−4.0−2.3−3.3−3.2−4.4−4.4−4.4−4.3−4.0
Float (variation of accounts payable, + = increase)−0.20.60.10.00.00.00.00.00.0
Variation of domestic arrears ( + = increase)2.2−0.7−0.5−1.2−0.7−0.5−0.3−0.20.0
Overall balance (including grants, cash basis)2−2.0−2.4−3.7−4.5−5.1−5.0−4.7−4.5−4.0
Primary balance excl. foreign-financed investment 3−1.3−0.60.10.20.30.40.7
Total financing2.02.43.74.54.74.02.31.50.8
Foreign borrowing (residency principle)1.01.22.22.93.63.21.60.80.1
External borrowing, gross1.31.72.63.64.33.92.41.61.0
Budget support loans0.00.41.41.90.70.60.20.00.0
Project loans1.31.31.21.73.63.32.21.61.0
Amortization on a due basis (-)−0.3−0.5−0.4−0.7−0.7−0.7−0.8−0.8−0.9
Domestic borrowing (residency principle)1.01.22.01.61.10.80.70.70.7
Monetary sector1.80.91.61.20.70.50.50.60.6
Non-monetary sector0.30.10.30.40.40.30.20.10.1
Treasury correspondent accounts (net)−1.10.7−0.50.00.00.00.00.00.0
Excess financing (+)0.00.00.00.0−0.4−1.0−2.4−3.0−3.2
Prospective financing0.00.00.41.52.02.6
Excess financing after prospective financing (+)0.0−0.4−0.5−0.8−1.0−0.6
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.

Data for overall balance in 2015 includes an amount of MGA 340bn (1.2 percent of GDP) corresponding to recapitalization and interest rescheduling operations with the central bank.

Commitment basis.

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.

Data for overall balance in 2015 includes an amount of MGA 340bn (1.2 percent of GDP) corresponding to recapitalization and interest rescheduling operations with the central bank.

Commitment basis.

Table 5.Madagascar: Balance of Payments, 2013-21
201320142015201620172018201920202021
ActualsPrel. Est.Projections
(Millions of SDRs)
Current account−408.7−22.1−132.9−158.8−273.3−325.2−346.5−365.9−385.8
Goods and services−604.9−308.0−241.5−269.6−404.1−461.9−489.7−521.4−569.1
Trade balance of goods−558.0−360.0−235.1−287.3−419.7−479.8−499.2−530.9−571.1
Exports, f.o.b.1,265.11,444.81,463.11,493.31,527.71,612.51,741.71,873.71,998.6
Of which: Mining344.9500.0487.6391.5449.5473.1480.5489.5493.6
Imports, f.o.b.−1,823.1−1,804.8−1,698.2−1,780.6−1,947.5−2,092.3−2,241.0−2,404.5−2,569.7
Of which: Petroleum products−371.8−360.5−256.9−189.2−228.3−248.6−271.2−294.5−317.8
Of which: Food−227.8−200.5−170.4−171.2−179.9−184.8−191.0−197.6−205.1
Of which: Intermediate goods and capital−571.4−585.2−618.1−702.1−762.2−829.7−894.9−964.7−1,026.4
Services (net)−46.952.0−6.517.715.717.99.69.52.1
Receipts831.0858.4770.6796.1838.5884.7931.7989.61,049.7
Payments−877.9−806.4−777.0−778.4−822.8−866.8−922.1−980.1−1,047.6
Income (net)−221.0−197.0−268.8−278.2−296.4−315.3−340.1−363.1−383.7
Receipts11.89.611.815.416.517.719.120.821.9
Payments−232.8−206.5−280.6−293.6−312.9−332.9−359.2−383.9−405.6
Of which: interest on public debt−11.9−12.3−13.8−16.6−26.0−34.7−45.8−57.6−68.9
Current transfers (net)417.2482.8377.4388.9427.2452.0483.3518.6567.0
Official transfers44.584.753.746.558.052.255.859.664.0
Of which: Budget aid10.054.89.00.08.80.00.00.00.0
Of which: Other (net)44.529.944.746.549.152.255.859.664.0
Private transfers372.7398.2323.7342.5369.3399.8427.5459.0503.0
Capital and financial account234.736.9181.5259.5322.9325.5234.5190.8177.7
Capital account88.1104.193.1139.2186.6114.8112.4110.3108.4
Of which: Project grant10.00.093.1139.2186.6114.8112.4110.3108.4
Financial account153.7−55.886.1120.3136.3210.7122.180.569.3
Foreign direct and portfolio investment362.8205.7297.6343.5373.7407.9426.3455.5489.3
Other investment−209.1−261.5−211.5−223.3−237.5−197.2−304.3−375.0−420.0
Government66.682.7150.6198.1261.0247.9134.371.08.5
Drawing88.5118.7178.7247.7312.7303.3200.5142.993.3
Project drawings 188.588.382.8121.0263.1253.7182.9142.993.3
Budgetary support 10.030.496.0126.749.649.617.70.00.0
Amortization−21.9−36.0−28.1−49.6−51.7−55.4−66.2−71.9−84.8
Monetary authority and private sector−118.1−114.0−123.6−118.5−118.1−112.4−111.1−109.6−117.8
Banks34.8−24.914.0−4.30.00.00.00.00.0
Other (inc. unrepatriated export revenues)−192.5−205.3−252.4−298.5−380.4−332.7−327.5−336.3−310.7
Errors and omissions−7.1−11.42.20.00.00.00.00.00.0
Overall balance−174.014.748.6100.749.60.3−112.0−175.1−208.1
Financing173.7−14.7−48.6−100.7−80.9−77.9−85.6−94.4−101.6
Central bank (net; increase = −)173.7−14.7−48.6−100.7−80.9−77.9−85.6−94.4−101.6
Use of IMF credit (net)−6.217.518.820.854.656.959.8−6.1−12.2
Other assets, net (increase = –)179.8−33.3−67.4−80.0−26.4−21.0−25.8−100.5−113.8
Debt relief and cancellation0.00.00.00.00.00.00.00.00.0
Financing gap 200003178198269310
(Percent of GDP; unless otherwise indicated)
Memorandum items:
Grants0.00.81.52.02.71.51.31.21.1
Loans1.31.72.63.64.33.92.41.61.0
Direct investment5.22.94.55.05.15.25.15.15.1
Current account
Excluding net official transfers−6.5−1.5−3.4−4.3−6.4−5.6−5.5−5.3−5.2
Including net official transfers−5.9−0.3−1.9−2.3−3.7−4.2−4.2−4.1−4.0
Debt service (percent of exports of goods)40.034.033.432.029.727.124.722.421.0
Export of goods volume (percent change)21.37.21.33.64.26.89.27.17.5
Import of goods volume (percent change)11.14.6−4.113.46.36.56.26.35.7
Gross official reserves (millions of SDR)5025356007017828599451,0391,141
Months of imports of goods and nonfactor2.22.52.93.33.43.53.63.73.8
Terms of Trade (based on RES trade deflators)0.0−2.56.6
Terms of Trade (based on buttom-up BOP projections)6.6−4.6−2.1−1.9−0.5−1.8
Exchange rate (ariary/US$, period average)2,2072,4152,934
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, 2013-21(Billions of Ariary; unless otherwise indicated)
201320142015201620172018201920202021
DecDecDecMarchDecDec
ActualsSMPActualsSMPActualsProj.Projections
Net foreign assets1,8402,1592,8162,6102,8152,7543,1723,4623,7213,9994,3354,749
Net foreign assets (BCM)1,2191,3891,9371,7631,9241,8812,2502,4932,7092,9493,2513,634
Net foreign assets (deposit money banks)6217708788478918739229691,0121,0501,0841,116
Net domestic assets4,0544,3904,5164,8924,5974,9995,6726,5057,4918,5929,72410,939
Domestic credit3,9434,5825,3625,5585,4515,6786,4047,2488,2359,32610,43611,640
Net credit to government1,1191,2321,5951,6961,6901,8432,1182,3752,5822,8113,1133,446
BCM4306521,0511,0491,0681,0231,137948755712669626
DMBs4313262673983405806851,1231,5141,7772,1132,480
Gross credits (mainly BTAs)8106956627737359411,0601,4981,8562,2552,6963,185
Deposits−379−369−394−375−394−360−375−375−342−477−583−705
Other credits258254277248282240296305313322331340
Credit to the economy2,8243,3503,7673,8633,7613,8344,2864,8735,6536,5157,3238,195
Credit to public enterprises547982608266148148148148148148
Credit to private sector2,7453,2503,6773,7853,6713,7584,1284,7155,4956,3577,1658,031
Other credits2521815810101010101015
Other items (net)111−184−846−666−854−677−732−743−744−734−711−686
BCM906774156359132351368410455505561614
Other−795−965−1,001−1,025−986−1,028−1,100−1,153−1,199−1,239−1,272−1,300
Money and quasi-money (M3)5,8946,5497,3327,5027,4127,7528,8449,96611,21212,59114,05915,689
Foreign currency deposits6668099698699829069329791,0221,0621,0961,128
Short term obligations of commercial banks364343344144443434343434
Broad money (M2)5,1915,6986,3216,6006,3896,8027,8688,95310,15611,49612,93014,527
Currency in circulation1,6081,8262,0082,1151,9522,0792,4622,7433,0883,4763,8744,318
Demand deposits in local currency1,9452,0872,3422,2852,4102,3952,7103,0113,3053,6093,9134,225
Quasi-money including time deposits1,6381,7861,9712,2002,0262,3302,6963,1993,7624,4105,1435,985
(Percentage change relative to broad money at beginning of the year)
Net foreign assets−15.86.111.57.90.02.28.53.72.92.72.93.2
Net domestic assets22.06.52.28.81.31.611.810.611.010.89.99.4
Domestic credit18.912.313.717.11.41.812.810.711.010.79.79.3
Net credit to government10.82.26.48.11.52.26.43.32.32.32.62.6
Credit to the economy8.110.17.39.0−0.1−0.46.47.58.78.57.06.7
Credit to public enterprises0.00.50.0−0.30.00.11.30.00.00.00.00.0
Credit to private sector8.19.77.59.4−0.1−0.45.27.58.78.57.06.7
Other items (net; asset = +)3.2−5.7−11.6−8.5−0.1−0.2−1.0−0.10.00.10.20.2
(Percentage change year-on-year)
Broad money (M2)9.09.810.915.88.415.419.213.813.413.212.512.4
Currency in circulation6.013.610.015.99.616.716.411.412.612.611.411.4
Demand deposits in local currency3.97.312.29.58.67.918.611.19.89.28.48.0
Quasi-money in local currency19.39.010.423.27.123.222.618.717.617.216.616.4
Credit to the private sector (in nominal terms)16.218.413.216.513.616.39.114.216.615.712.712.1
Credit to the private sector (in real terms)10.012.45.28.92.07.110.39.77.36.7
Memorandum items:
Money multiplier (M3/reserve money)2.402.342.362.452.472.652.492.482.502.512.522.53
Velocity of money (GDP/end-of-period M3)3.973.943.903.813.983.683.593.563.533.503.473.44
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, 2013-171(Billions of Ariary; unless otherwise indicated)
20132014201520162017
DecDecDecMarsJuneSepDecMarchJuneDec
ActualsSMPActualsSMPActualsProjections
SDRSDRSDRSDR
fixedrevaluedfixedrevalued
Net foreign assets1,2191,3891,9371,8471,7631,9241,9651,8811,9682,0362,2502,2832,3492,493
Gross foreign assets1,7342,0132,8202,6662,6662,7932,7672,7672,8883,0863,3123,3363,5673,883
Gross foreign liabilities 2−515−624−882−818−903−869−802−886−920−1,051−1,062−1,053−1,217−1,390
Net domestic assets1,2341,4101,1651,2191,3041,0739621,0471,2431,4211,3091,4041,4841,519
Credit to government (net)4306521,0511,0491,0491,0681,0231,0231,0281,1121,1371,1481,064948
Claims on central government5419191,1511,2631,2631,1681,1561,1561,1481,2331,2791,2681,1841,090
Statutory advances33366231376376248296296296296296296223150
Securitized debt (T-bonds and bills)338338735734734735734734851840829819808786
Discounted bills of exchange871960272760000057575757
Other credits8219512412612612412612629797979797
Government deposits−111−267−100−213−213−100−133−133−121−121−142−120−120−142
Claims on other sectors98866788874773
Claims on banks: Liquidity operations (+ = injecti−111−24−49−110−110−134−335−335−102−35−200−13613158
Other items (net; asset +)906774156274359132267351309337368385400410
Reserve money2,4532,7993,1023,0673,0672,9972,9272,9273,2113,4573,5593,6873,8344,012
Currency outside banks1,6081,8262,0082,1152,1151,9522,0792,0792,2092,2412,4622,3902,4872,743
Bank reserves8449721,0949519511,0448488481,0011,2161,0971,2961,3461,268
Currency in banks153170161188188130146146134167188167199223
Deposits6918029337627629147027028671,0499081,1291,1471,045
(Cumulative annual flows)
Memorandum items:
Net foreign assets170548458374−13−1,7632022062734873399243
Millions of SDRs16364627−842232738791926
Net domestic assets176−245−190−106−91−1,304−342−61117595175210
Credit to government (net)22239939739717−1,049−26−22638712−72−189
Reserve money346303268268−105−3,067−139144390492128275453
(Millions of SDRs)
Net foreign assets353369405416397397439420424435476477485502
Sources: Malagasy authorities; and IMF staff estimates and projections.

End of period.

New accounting principles increased the value of liabilities by SDR 19.04 million in December 2015 as a result of a revaluation of the SDR allocation.

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

End of period.

New accounting principles increased the value of liabilities by SDR 19.04 million in December 2015 as a result of a revaluation of the SDR allocation.

5. Budget execution was challenging in the second half of 2015. Compared to the initial 2015 Budget, priority spending was squeezed by underperforming revenue collections, tight financing constraints, and transfer needs at SOEs and pensions surpassing budgeted amounts.1 An expected external commercial loan for budget financing (about 0.8 percent of GDP) was delayed and domestic financing conditions tightened more than expected in the second half of the year. In response, the authorities reduced current and capital spending (including by delaying staff recruitment and investment), took measures to shore up revenue collection, and relied on higher than expected central bank financing. With these measures—contained in the SMP—execution of the revised budget managed to minimize negative effects on public finances and macroeconomic stability, with a significantly lower deficit than initially projected. To address tight bank liquidity, the central bank reduced the regulatory reserve requirement and the reference interest rate in October 2015 (followed by a further rate cut in May 2016), easing domestic financing constraints (Figure 5). The improved budget execution continued in the first quarter of 2016, with gradually improving revenue performance. In addition, the government reached agreements with creditors to clear a higher than expected amount of domestic arrears, partly through cash payments and partly through the issuance of special Treasury bonds. The 2016 Supplementary Budget with additional fiscal measures was submitted to Parliament in June 2016 (prior action) and passed in late June.

Figure 5.Madagascar: Monetary Developments, 2014-16

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

Text Table 1.Fiscal Operations of the Central Government, 2015 and March 2016(Percent of GDP)
20152016
DecemberMarch
BudgetSMPPrel. Est.SMPPrel. Est.
Total revenue and grants13.612.411.82.52.7
Tax revenue11.69.910.12.32.3
Total expenditure and lending minus repayments15.916.915.12.72.7
Current expenditure11.412.111.72.12.1
Wages and salaries6.25.85.51.41.2
Interest payments1.20.90.80.20.2
Other3.94.13.90.40.5
Transfers and subsidies2.93.53.40.30.4
Treasury operations (net)0.11.31.40.20.3
Capital expenditure4.54.83.50.50.6
Domestic financed1.50.61.00.10.1
Foreign financed3.04.22.50.50.5
Overall balance (commitment basis)−2.3−4.5−3.3−0.20.0
Float (variation of accounts payable, + = increase)0.00.00.10.0−0.1
Variation of domestic arrears ( + = increase)−0.4−0.8−0.5−0.2−0.4
Overall balance (including grants, cash basis)−2.7−5.3−3.7−0.4−0.5
Total financing2.75.33.70.40.5
External borrowing1.44.02.20.10.1
Domestic borrowing1.31.31.50.30.4
Sources: Malagasy authorities; and IMF staff estimates and projections.
Sources: Malagasy authorities; and IMF staff estimates and projections.

6. Balance of payments pressures lessened in the last third of 2015. In connection with the SMP, the central bank discontinued buyback operations in the foreign exchange market in September, which had maintained the published official rate at a more appreciated level than the market rate. The official exchange rate depreciated about 7 percent against the US Dollar to converge with the market rate. The Ariary has subsequently remained relatively stable, aided by falling world oil prices and a boost in confidence. At the same time, the central bank purchased foreign exchange of over US$150 million (net) in the market through end-May 2016. While rising, international reserves (projected at about 3.3 months of import coverage at end-2016) remain below the optimal level (see Annex I).

C. Performance Under the Staff-Monitored Program

7. Macroeconomic performance under the SMP was broadly satisfactory. All quantitative targets were met through end-March (Table 11), except the ceilings on net credit to government and new external payment arrears.2 In particular, tax revenue benefitted from additional measures under the SMP and priority social spending targets were met. The missed targets on net credit resulted from the shortfall in external financing, larger than projected clearance of domestic arrears (in early 2016), and difficulties in forecasting and adjusting spending on a quarterly basis. The net reduction in domestic arrears represented important progress in a problem affecting both public finances and the private sector. The floor on net foreign assets was exceeded by over US$10 million at end-December 2015 and almost US$50 million at end-March 2016.

Table 8.Madagascar: External Financing Requirements and Sources, 2015-19(Millions of U.S. Dollars)
201520162017201820192016-19
Prel. Est.Projections
Total financing requirements8591,0681,3651,3651,4165,213
Current account deficit1862223864594911,558
Net repayment of private sector debt173166167159157649
Repayment of government debt3970737894314
Gross reserves accumulation (+ = increase)90141114110121487
IMF repayments1715128439
Other (inc. unrepatriated export revenues)3544546145505492,166
Available financing8591,0671,3211,2551,1364,780
Foreign direct and portfolio investment4364825275766042,189
Budgetary support134177707025342
Project support2463646355204181,938
Project grants130195263162159780
Project drawings1161693713582591,158
IMF: RCF and ECF arrangement4344898989310
External financing gap0044110280434
Memorandum items:
Gross official reserves8399811,1031,2141,339
Sources: Malagasy authorities; and IMF staff estimates and projections.
Sources: Malagasy authorities; and IMF staff estimates and projections.
Table 9.Madagascar: Projected External Borrowing, 2016Q1-17Q2
Public and publicly-guaranteed external debtVolume of new debt in 2016Q1-2017Q2PV of new debt (program purposes)
USD millionPercentUSD millionPercent
By sources of debt financing24191001314100
Concessional debt, of which229995120792
Multilateral debt11064657944
Bilateral debt11934962848
Other0000
Non-concessional debt, of which12051078
Semi-concessional492363
Commercial terms713715
By Creditor Type24191001314100
Multilateral11554861547
Bilateral - Paris Club5292219615
Bilateral - Non-Paris Club6642743233
Other713715
Uses of debt financing24191001314100
Infrastructure205485110184
Social Spending1466685
Budget Financing218914411
Other10.010.1
Source: Malagasy authorities, and IMF staff estimates and projections.
Source: Malagasy authorities, and IMF staff estimates and projections.
Table 10.Madagascar: Financial Soundness Indicators, 2009-161(Ratios, percent)
20092010201120122013201420152016
DecDecDecDecDecDecDecMar
Capital Adequacy
Regulatory capital to risk-weighted assets14.6414.3715.3115.1714.7513.2512.3912.25
Capital to assets7.137.367.177.247.897.687.296.82
Regulatory Tier 1 capital to risk-weighted assets14.7814.8716.1815.8614.9713.6812.9712.82
Tier 1 to assets7.207.617.587.578.007.937.637.14
Non-performing loans net of provisions to capital20.2519.2017.9813.4817.7417.2919.0120.18
Net open position in equities to capital6.656.346.845.966.477.568.638.74
Asset Quality
Non-performing loans to total gross loans11.2913.1114.6114.2113.7812.0210.5611.03
Earnings and Profitability
Return on assets1.601.501.801.952.343.103.652.69
Return on equity21.8819.9022.9025.3629.1538.1246.0625.10
Interest margin to gross income60.7162.1263.2063.6463.8858.8057.8465.39
Non-interest expenses to gross income50.9052.3252.8155.9754.2348.0348.1852.62
Trading income to total income97.4697.9397.4297.6897.4997.7097.8098.58
Personnel expenses to non-interest expenses36.5837.6537.1738.4139.5241.3139.7940.63
Liquidity
Liquid assets to total assets (liquid asset ratio)46.8945.8749.6650.4343.2439.9337.8040.14
Liquid assets to short-term liabilities69.7367.8371.0174.0863.7358.9255.3059.94
Customer deposits to total (non-interbank) loans183.51175.02188.22188.34158.18145.81142.33150.41
Sensitivity to Market Risk
Net open position in foreign exchange to capital15.3915.1314.5011.9017.128.929.3210.60
Spread between reference lending and deposit rates10.5711.1611.5811.8512.5411.9711.6311.42
Foreign currency-denominated loans to total loans4.874.727.315.876.265.275.676.05
Foreign currency-denominated liabilities to total liabilities17.8419.3418.3117.5316.3317.6116.6716.52

Ratios only concern banking sector.

Sources: Malagasy authorities.

Ratios only concern banking sector.

Sources: Malagasy authorities.
Table 11.Madagascar: Indicative Targets, End-December 2015 and End-March 2016
End-Dec. 2015End-March 2015
ProjectedAdjustedActualStatusProjectedAdjustedActualStatus
(Billions of Ariary; unless otherwise indicated)
External
Ceiling on accumulation of new external payment arrears (US$ millions) 1011Not met015Not met
Ceiling on new nonconcessional external debt with original maturity of more than one year, contracted or guaranteed by the central government or BCM (US$ millions) 12000Met20023Met
Ceiling on new nonconcessional external debt with original maturity of up to and including one year, contracted or guaranteed by the central government or BCM (US$ millions) 100Met00Met
Central bank
Floor on net foreign assets (NFA) of BCM (millions of SDRs) 2416403417Met407394443Met
Ceiling on net domestic assets (NDA) of BCM 21,5581,6071,498Met1,4851,5351,261Met
Fiscal
Ceiling on net bank credit to the government 3340389463Not met90148Not met
Floor on social priority spending 3204311Met3385Met
Floor on gross tax revenue 32,9943,011Met746750Met
Memorandum items
Budget support grants and loans (millions of SDRs) 4119106119106
New concessional loans, contracted or guaranteed by the central government or BCM (US$ millions) 5167232327294
Program exchange rate (MGA/SDR)3,761.883,761.88
Recapitalization of the central bank for losses made during 2011-13 4214214214214
Sources: Madagascar 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 and excluding the SDR revaluation.

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: Madagascar 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 and excluding the SDR revaluation.

Cumulative figures from the beginning of each calendar year.

Cumulative figures starting from the beginning of 2015.

Cumulative figures starting from end-September, 2015.

8. All structural benchmarks under the SMP were also implemented, although some with minor delays (Table 12). Progress was achieved on several macro-critical structural fronts before and during the SMP:

  • The central bank strengthened the functioning of the foreign exchange market by discontinuing buyback operations that had artificially set the official exchange rate at an appreciated level relative to the market rate.

  • Administrative and legislative measures strengthened audits and controls for revenue collections, reversing a deterioration.

  • The reliability of VAT refunds—a major source of arrears in the past—benefitted from the creation of an escrow account.

  • The automatic fuel pricing mechanism—operational since February—has avoided any fuel subsidies, which previously led to substantial and unpredictable budget costs.3

  • The submission of the revised Central Bank Act to Cabinet for approval advanced a key institutional objective for macroeconomic stability.

  • The Cabinet approved a National Social Protection Policy.

  • A new database system enhanced debt management capacity and transparency.

  • The robust accumulation of foreign exchange reserves boosted external buffers.

Table 12.Madagascar: Structural Benchmarks for SMP
ActionTest DateStatus
Improve exchange rate policies
Refrain from reintroduction of buyback operations at non-market rates.Continuous benchmarkMet
Mobilizing fiscal revenue
Set up remote audit teams with the mission to undertake ex-post verifications focused on highly suspected fraud operations.End-December 2015Met at end-December
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 2016Met at 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).Continuous benchmark from end-Dec. 2015Implemented with delay March 1, 2016
Create an escrow account at the Central Bank to ring fence the resources required by VAT reimbursements.January 1, 2016Implemented with delay Jan. 29, 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 2016Met at 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 2015Implemented with delay Jan. 12, 2016
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 2015Met before end-Dec. deadline

Policies Under the ECF Arrangement

A. Program Objectives and Macroeconomic Framework

9. The program aims at both reinforcing macroeconomic stability and promoting sustainable and inclusive growth over the medium-term (Box 1).

Box 1.Medium-term Objectives Under the ECF-Supported Program (2016-2019)

Macroeconomic objectives for stronger stability and sustainability:

  • Accelerate economic growth to 5 percent a year.

  • Maintain inflation in single digits with a downward trend toward 5-6 percent.

  • Improve international reserves coverage gradually to at least 3½ months of imports.

  • Raise fiscal revenue gradually to 12 percent of GDP.

  • Boost public capital expenditure substantially to 8 percent of GDP.

  • Achieve a modest surplus in the fiscal anchor (primary balance excluding foreign-financed investment).

Structural reform objectives for sustainable and inclusive growth:

  • Promote inclusive growth, inter alia by shifting public spending significantly in favor of infrastructure investment, education, and health and improving the business climate.

  • Create fiscal space, inter alia by mobilizing domestic revenue and sharply reducing the need for transfers to SOEs and pension funds.

  • Enhance economic governance and fight corruption, inter alia by limiting the use of restricted tenders in procurement, devoting more resources to anti-corruption agencies and reinforcing the legal framework.

  • Strengthen stability and financial sector development, inter alia through enhanced central bank independence, reinforced financial sector supervision, and better liquidity management.

Medium-term macroeconomic framework

10. Scaled-up investment—in human as well as physical capital—and structural reforms are intended to accelerate growth and gradually improve social indicators. In health and education, the government is combining increased resources with reforms by integrating sectoral spending plans into a medium-term budget framework. The public investment plan aims to boost spending to 8 percent of GDP, with priority given to the transportation and energy sectors, which have been bottlenecks. At the same time, reform efforts aim to increase efficiency of investment, notably through a Public Investment Management Assessment and restructuring key SOEs, particularly JIRAMA. The agriculture, construction, tourism, manufacturing and mining sectors are expected to benefit from both increased investment and productivity gains prompted by reforms. Improved land rights management and rural infrastructure development will spur growth in agriculture, which employs about 80 percent of the population. A new legal framework under preparation will support investment in mining and petroleum. Inflation is expected to remain stable in 2016-17 and to fall gradually starting in 2018, as a result of a restrained monetary policy and limited international price pressures (Figure 6).

Figure 6.Madagascar: Medium-Term Macroeconomic Prospects, 2008-21

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

11. Fiscal policy will support the NDP’s goals of boosting investment and social spending, while safeguarding both stability and sustainability. The projected fiscal position remains consistent with maintaining a moderate risk of debt distress (DSA, Supplement 2), while accommodating a scaling up of investment. The overall deficit (commitment basis) rises slightly to 4½ percent of GDP in 2017-19, while the program fiscal anchor—the primary balance excluding foreign financed investment—improves gradually to a modest surplus. The improvement in the fiscal anchor ensures that the authorities can cover essential spending needs, while allowing for flexibility concerning volatile foreign-financed investment. Taken together, these factors make room for rising public investment, which is expected to more than double to over 8 percent of GDP by 2019, with a reliance on external financing on concessional terms.

12. With higher foreign-financed investment, the current account deficit is projected to increase modestly from 2 percent of GDP in 2015 to 4 percent of GDP in 2019. Unfavorable price developments for key exports (nickel, vanilla) would further weigh on Madagascar’s current account balance. The deficits are expected to be primarily financed by concessional public sector borrowing and FDI inflows, which would benefit from improvements in the business climate. As a result of sustained private sector investment (including FDI), production and export capacity should grow over the medium-term, and external sustainability remains comfortable. Financial inflows, together with IMF support, will help build reserve coverage without creating stress in the monetary sector; coverage is projected to reach 3.6 months of imports by 2019 (from 2.9 months at end-2015), within the estimated band for optimal reserve holdings (Annex I).

2016 macroeconomic framework

13. While the authorities’ macroeconomic framework for 2016 remains broadly appropriate, additional fiscal measures are needed to offset an expected revenue shortfall and avoid unplanned spending needs (MEFP ¶24). Lower world fuel prices are still projected to reduce revenue from petroleum products by 0.3 percent of GDP in 2016. Even though over-performance on other taxes offset this loss through end-March, the authorities will need efforts to continue to offset the loss. They decided to raise excise taxes on spirits in the supplementary budget; enhance cooperation between customs and tax administrations; and continue improved customs controls (already yielding an additional 0.2 percent of GDP by end April). In addition, consolidation of current spending will reduce expenses by 0.2 percent of GDP, mainly through cuts in goods and services.4 The cost of exceptional events like the summit of the Francophonie in November need to be carefully controlled to remain within budgeted amounts. Further cuts in discretionary spending would require reductions in high priority spending. The overall deficit (cash basis, including significant arrears clearance) is projected at 4.5 percent of GDP in 2016, which will be financed two-thirds by external borrowing and one-third by domestic borrowing. Considering that full fiscal financing is essential to internal and external stability, that the fiscal deficit is appropriate, and that other financing is not available, the central bank plans to on-lend up to SDR 24.7 million of the first ECF disbursement (MEFP ¶29). While the significant reserves accumulation this year boosts buffers, it has contributed to money growth and created tensions in domestic financing.

B. Promoting Inclusive Growth

14. Rapid and sustained poverty reduction requires robust growth with broadly distributed benefits. Investment in public infrastructure and broader access to education and health care can help boost productivity across the population, thereby raising living standards:

  • Due to past underinvestment, Madagascar now needs substantial investment in roads, railways, seaports, airports, and energy. To implement the NDP, the government has recently developed a priority investment program (PIP), which will be presented to development partners later in 2016 (MEFP ¶19).

  • The authorities will integrate health and education sectoral spending plans into a medium-term budget framework by end-June 2017 (structural benchmark, MEFP ¶12). Medium-term plans for mutual health insurance programs and a national solidarity health fund will create the foundation for universal health coverage. In education, priorities include the construction of new schoolrooms, recruitment of teachers (including contributing to community-paid teachers), more textbooks, increased teacher training, and school food programs in underserved districts (MEFP ¶14).

  • To implement the national social protection policy adopted in 2015, the government plans to (i) establish an inter-ministerial framework by 2017, and (ii) introduce conditional transfers to vulnerable households (MEFP ¶13).

  • The government is aiming for a steady growth in spending on social sectors. Domestic social spending5 (excluding salaries) has been volatile (0.5-1.1 percent of GDP over 2013-16), and the authorities and staff are examining the feasibility of increasing non-wage social spending from 0.8 percent of GDP to 1.3 percent over 2016-19. External support for social investment spending has increased steadily since 2014, reaching 0.8 percent of GDP in 2016 (commitments). To fully achieve the authorities’ social objectives, significant external resources will remain necessary over the medium term. Social sector ministries will also benefit from capacity building (with support from development partners) and less back-loaded budget execution, facilitating program implementation and reducing the risks of budget cuts late in the year.

15. Boosting public investment as planned will require substantial external financing, which needs to be carefully managed to ensure debt sustainability (MEFP ¶21-22). The framework assumes public investment of about 8 percent of GDP a year starting in 2017. While this level is more than double that of 2015, full PIP implementation would require even higher investment. However, considering debt sustainability and limited implementation capacity, projects must be prioritized based on a thorough cost-benefit analysis. The authorities are emphasizing investment capacity, drawing on a Public Investment Management Assessment underway with IMF and World Bank support. The authorities intend to rely as much as possible on concessional borrowing and have established program ceilings on non- and semi-concessional borrowing in 2016 and 2017.

16. Public-private partnerships (PPPs) are expected to play an important role in addressing the infrastructure gaps, although fiscal risks merit careful monitoring (MEFP ¶20). While PPPs can be helpful for mobilizing resources and managerial expertise, the authorities also recognize the importance of managing associated fiscal risks.6 To this end, a new PPP law was enacted in February 2016, and the application decrees will be published in September 2016. In this framework, new contracts are to be attributed through open and transparent tenders, except under specific limited conditions, and the terms and conditions will be published within one month of the date of signature (continuous structural benchmark). While the Presidency will coordinate PPPs, the Ministry of Finance and Budget will maintain the right to reject projects in the event of disproportionate fiscal implications.

17. A favorable business climate is essential for private sector-led growth (MEFP ¶17-18). The government is pursuing efforts to identify and reduce burdensome regulations with support from the World Bank, including: (i) accepting on-line registration of businesses; (ii) establishing a centralized database for land registries; (iii) creating a legal framework for credit reference bureaus; and (iv) reducing transaction costs for construction permits and electricity connections.7 The institutional and legal frameworks for mining, petroleum, and special economic zones for exports are also being revised. The first two aim to reflect international best practices, including higher royalty rates that are more differentiated by type of mineral, simplification of the corporate income tax regimes, and reduced length of fiscal stability clauses.8 The special economic zones will benefit from specific tax and customs provisions, labor and immigration regulations, land tenure, and corporate law.

C. Creating Fiscal Space

18. Fiscal policy will focus on creating room for higher priority spending on infrastructure and social areas over the medium term. Key actions include boosting revenue performance and shifting spending away from less productive areas, particularly transfers to SOEs and pension funds. Other priorities include clearing existing arrears, avoiding new ones, and ensuring a cost-efficient civil service.

19. Tax revenues are targeted to increase by ½ percent of GDP a year over the medium term, reaching 12 percent of GDP by 2019 (MEFP ¶30). While the potential for increased revenue is clear, concrete measures are needed to realize it, especially as customs collections will come under increasing pressure from international trade treaties, such as the Economic Partnership Agreement with the European Union and the tripartite free trade agreement between the Southern African Development Community, Common Market for Eastern and Southern Africa, and the East African Community.9 Drawing on technical assistance (TA) from the IMF, World Bank and others, the tax administration will focus on (i) monitoring and recovering tax arrears (structural benchmark); (ii) auditing tax credits granted for investment (structural benchmark); (iii) auditing taxpayers who report inconsistent data to the tax and customs authorities; and (iv) fully enforcing the withholding tax on suppliers without tax identification numbers. Customs will step up post-clearance audits and continue stricter control of consolidated cargoes and claimed exemptions, which has shown large potential.10 Over the medium term, additional means for deterring fraud are needed, such as more randomized controls, stronger sanctions (for both evaders and complicit tax officials), and improved transparency on tax crime prosecutions.

20. Strict control of less productive expenditures will increase the room for priority spending (MEFP ¶32, ¶36). While spending is projected to remain around 18 percent of GDP over the medium term, its composition will improve through (i) strict wage bill controls; (ii) reduced non-priority transfers; and (iii) increased social priority spending (monitored through an indicative program target). The authorities intend to reduce the wage bill gradually to around 5 percent of GDP in the next three years through ongoing payroll audits and strict limits on creating new positions. Staff welcomed these efforts while noting the importance of a cost-efficient civil service that meets the social needs of a growing population, which might warrant some rise in the wage bill over the medium-term. The authorities are also targeting reductions in non-priority transfers to the pension funds and JIRAMA (by about 0.15 percent of GDP each annually), while priority transfers and spending on goods and services are projected to increase (Text Table 2). Continued automatic adjustment of fuel prices will avoid any budget costs (continuous structural benchmark). Investment will be scaled up to support the large infrastructure needs, financed largely by external borrowing (although with a growing contribution from domestic resources).

Text Table 2:Fiscal Spending Estimates 2016-19(In percent of GDP)
20152016201720182019
Spending15.116.218.317.618.0
Current (non-interest) spending10.810.09.39.08.9
Salaries5.55.75.65.35.1
Goods and services0.50.70.81.11.2
Priority transfers1.61.31.31.51.6
Transfers to SOEs and pensions1.81.91.41.00.8
Other current spending1.40.50.20.20.2
Investment Spending3.55.38.07.68.1
Domestically financed1.01.51.92.43.0
Externally financed2.53.76.15.25.1
Memorandum Item
Social Priority Spending10.70.80.91.11.3
Sources: Malagasy authorities; and IMF staff estimates and projections.

Social Priority Spending is the sum of budget allocations to the Ministries of Health, Education, Population, and Water, excluding salaries and externally financed investment.

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

Social Priority Spending is the sum of budget allocations to the Ministries of Health, Education, Population, and Water, excluding salaries and externally financed investment.

21. Reducing the need for transfers to key SOEs will require forceful action to improve their management and control (MEFP ¶33-35, ¶39). Contingent liabilities of SOEs could also pose significant fiscal risks in the event of severe financial difficulties at a large SOE. The authorities have begun to reform the two SOEs with the largest transfers, Air Madagascar and JIRAMA, with support from development partners:

  • After a strike prompted financial difficulties in 2015, Air Madagascar underwent a deep operational and financial restructuring. A new board and management oversaw a reduction in routes and costs. The plan is to restore operational profitability and secure a strategic investment partner by end-2016; the recent removal of restrictions on flying to Europe for safety reasons will help.

  • Reform of the operations and management of JIRAMA poses larger challenges. Its needs for transfers to maintain operations were growing in 2016, exceeding budgeted amounts and jeopardizing the full financing of the budget. Drawing in part on TA from the World Bank, the authorities decided on forceful measures to contain its needs for transfers by raising revenue and cutting costs, including: (i) raising electricity tariffs (previously at 2009 levels in nominal terms) by 15 percent in 2016 (prior action); (ii) auditing energy supply contracts; (iii) drafting new legislation criminalizing theft of electricity and water; and (iv) converting from diesel-based generation to less expensive heavy fuel oil. With World Bank support, JIRAMA is developing a new business plan and enhancing governance, including an investment plan for low-cost production and hiring senior staff via a competitive recruitment process. Pending completion of the investment plan, the Board of JIRAMA has decided to strictly limit any non-competitive procurement for energy supply to clearly justified exceptions, which will be communicated to Fund and World bank staff (structural benchmark).

D. Enhancing Economic Governance

22. Weak governance in Madagascar is holding back economic stability, growth, and development. Madagascar suffers from systemic corruption, even compared to other fragile states (Text Figure 3), which hamstrings the conduct of regulatory and budgetary policies, ultimately hurting inclusive growth. To enhance governance, the authorities are addressing existing weaknesses in public financial management (PFM), supported by TA from the Fund and others, and intensifying efforts against corruption.

23. Improvements in the PFM system, particularly procurement, are essential for good governance (MEFP ¶37-39). Following an interim action plan for 2014-2015, a new PFM reform strategy for 2016-2019 is being developed with support from the AfDB, IMF and others, and Cabinet approval is expected in December 2016. The strategy will focus on arrears clearance, revenue management, public investment management, and the framework for public-private partnerships (PPPs). A centralized information system to be introduced at the Ministry of Finance will enhance transparency and reduce discretion by harmonizing data for all departments (including tax and customs), procurement, and social security. An immediate priority for both PFM and governance is strengthening procurement practices. The authorities are reinforcing the role of the independent review authority (Autorité de Régulation des Marchés Publics) with measures that limit the use of restricted tenders, expand its coverage to include SOEs’ procurement (including JIRAMA), and increase transparency, notably through timely publication of all tender offers and the terms and conditions of contracts (including PPPs, continuous structural benchmark), as well as an annual independent audit of the review process (structural benchmark). Transparency of SOEs’ finances will also be strengthened, with ten large SOEs publishing and submitting their 2015 financial statements to the Court of Auditors by end-December 2016 (structural benchmark).

24. The authorities are intensifying the implementation of the anti-corruption strategy (MEFP ¶41-42). The strategy, adopted in 2015, includes: (i) strengthening of anti-corruption legislation; (ii) increasing the independence and resources of the public anti-corruption agency (BIANCO); (iii) developing an information system to track all legal anti-corruption cases; (iv) establishing a commission to improve the integrity of the judicial system; and (v) making the Council of Budget and Financial Discipline (CDBF) fully operational (structural benchmark). Two new laws on declaration of assets and the formation of judicial anti-corruption centers were submitted to the Parliament in June (prior action) and a third new law on asset recovery is planned to be submitted to the Parliament in October (structural benchmark). To advance judicial reform, the authorities are also aiming to: reduce the currently excessive delays in trying of court cases; make all decisions available online; establish new guidelines for the random assignment of court cases; and improve the functioning of the Supreme Judicial Council (Conseil Supérieur de la Magistrature).

25. To build confidence in Madagascar’s financial system, the authorities are determined to stem money laundering and the financing of terrorism (MEFP ¶43). An action plan will be developed following a national risk assessment that is expected to be completed in cooperation with the World Bank by end-2016. Madagascar is also in the process of joining the Egmont group and the Eastern and Southern Africa Anti-Money Laundering Group.

E. Strengthening Macroeconomic Stability and Financial Sector Development

26. The authorities have taken decisive actions to enhance the independence and operations of the central bank:

  • In addition to securitization of government liabilities to the central bank, a new modern Central Bank Act, developed with IMF TA, was submitted to the Parliament in June 2016 and has been passed (MEFP ¶44-45). The new Act strengthens central bank independence by (i) gradually reducing central bank advances to the government; (ii) automatically transferring central bank losses and profits to the government; (iii) establishing an Audit Committee; and (iv) establishing an Executive Committee that will propose policies to the Board of Directors.

  • The central bank has also reinforced its audit oversight and control environment. The central bank accounts will begin to be presented in accordance with International Financial Reporting Standards (IFRS) starting with the 2018 financial statements (MEFP ¶46).

  • The central bank is improving the operational framework for monetary policy implementation, which is hampered by weak liquidity management and an inactive interbank market. In addition, these factors have periodically contributed to the government experiencing domestic financing difficulties; while the level of domestic savings is the fundamental constraint on domestic financing, credit from the few banks with excess liquidity is often constrained by risk limits on their exposure to the government and other banks in Madagascar. Key actions to deal with these challenges include: (i) publishing quarterly calendars of Treasury bill auctions on a rolling basis starting in September 2016; (ii) improving the operations of the interbank foreign exchange market, including through more efficient central bank interventions, increasing transparency, and updating the legal framework regulating the market by end-June 2017; and (iii) establishing a legal framework for repo transactions by mid-2018. The central bank is also planning to create an interest rate corridor for the interbank market, set explicit liquidity targets, and allow the reference rate to fluctuate more (MEFP ¶47).

27. The FSAP identified challenges in developing the financial system while preserving financial stability. Thanks to a conservative approach, the financial sector has survived the economic and political turmoil of the last decade relatively well, albeit with little progress in financial deepening or inclusion (Figure 7). Certain vulnerabilities could become acute especially if financial sector development were to accelerate.

Figure 7.Madagascar: Financial Sector Overview

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

  • Broad money (M3) has remained roughly constant relative to GDP for over ten years.

  • The banking sector (assets of 25 percent of GDP) is highly profitable and dominated by four banks with majority foreign ownership (Table 10). The levels of deposit taking and lending remain far below those of comparable countries. Nevertheless, stress testing quantified how a volatile macro-economy and weak institutional environment could give rise to significant credit risk.

  • The microfinance sector (assets of 1½ percent of GDP) seems not to pose a large risk to stability, although governance and profitability are weak.

  • Government is the dominant owner of nonbank financial institutions (NBFIs) (assets of 6½ percent of GDP), controlling the two main insurance companies, the postal service, the Savings Fund (Caisse d’Epargne de Madagascar, CEM), and to a large extent the National Insurance and Social Security Fund (CNAPS), which is the only pension fund with significant assets. These institutions are operationally weak, and their assets are probably over-valued.

28. The FSAP found that prudential regulation and supervision is hampered by regulatory gaps and is severely under-resourced (MEFP ¶48 and ¶50) (Box 2). On-site inspections have been very limited, especially of the larger banks. The assessment of compliance with the Basel Core Principles found widespread challenges, including a lack of mechanisms for early and effective intervention and many NBFIs not subject to prudential supervision.

Box 2.Summary FSAP Action Plan

Key recommendationsActions
Perform more frequent and penetrating supervision of banks and nonbanks to reduce the risks to stability. Regulators need to be better resourced and more independent and certain regulatory gaps need to be filled (for example, with regard to related-party lending).Financial supervision to receive more resources and stronger powers, with a risk-based approach (including more on-site inspections). New regulatory framework with prudential requirements at international norms, planned by end-2017. Approval of new law on supervision expected by end-2018.
Step up anti-money laundering and combating the financing of terrorism efforts, especially more vigorous follow-up to suspicious transaction reports, to support confidence in the financial system and complement other efforts to reduce corruption.Building on a national risk assessment following World Bank TA, an action plan to be developed by end-2016.
Establish a legal and operational framework to intervene in and eventually resolve problem institutions to help contain moral hazard, limit the government’s contingent liabilities, and protect savers.Approval of new law on resolution of banks and micro-financial institutions expected by end-2018.
Each government-owned NBFI needs to undergo a detailed operational and financial audit. These NBFIs should be covered by independent prudential oversight, and according to international best practices, many should eventually be privatized.Independent financial audits of the CEM and the postal financial services planned by end-2017. Responsibility for insurance supervision to be fully transferred to the banking supervision authority (CSBF) by end-2019.
Promote modern payment methods—particularly forms of electronic money—to help reduce transaction costs and facilitate financial inclusion.A law on electronic money to be submitted to the Cabinet by end-2016 and a law regulating the national payment system planned to be approved by end-2017.
Improve credit risk management and thus expand the supply of financing to viable projects, the two credit reporting systems need to be merged, and mechanisms for registering property to be used as security need to be modernized and made more cost effective.A law regulating the credit reporting system is expected to be approved by end-2018.

29. Financial inclusion is very low, in part due to institutional weaknesses (MEFP ¶49). Intermediation is discouraged by poor information on credit risks, deficiencies in accounting and audit practices in nonfinancial enterprises, and impediments to the registration and use of assets as securities. Rapid progress in payment infrastructure and credit reporting seems feasible (Box 2).

Capacity Building and Program Risks

30. Capacity building and technical assistance (TA) will continue to go hand-in-hand with policy discussions and program design. Future TA will focus on: (i) customs and tax revenue administration; (ii) PFM (medium-term budget framework, public investment management, arrears management); (iii) central bank monetary policy operations; (iv) financial sector supervision and bank resolution; and (v) strengthening statistics. The World Bank, EU, and AfDB are also providing significant TA (Informational Annex for a summary of World Bank-IMF collaboration in TA).

31. Given Madagascar’s vulnerabilities and fragility, the economic program and projections are subject to significant uncertainty and risks (Box 3. Risk Assessment Matrix). If any of the major risks were to materialize, economic recovery would slow, priority spending on investment and social development could be crowded out, and additional domestic arrears might accumulate.

Program Modalities and Financing Assurances

32. The new 40-month program includes quantitative indicators to ensure strengthening macroeconomic stability and structural measures to address major policy weaknesses. Program monitoring will be based on semi-annual reviews, with performance criteria (PCs) for the end of the second and fourth quarters, as well as indicative targets for the end of the first and third quarters (the program runs for three years and four months to allow time for completion of the final review). The program foresees quantitative PCs relative to: (i) the primary balance excluding foreign financed investment; (ii) non-concessional external borrowing (ceilings); (iii) net foreign assets (floor) of the central bank; (iv) net domestic assets (ceiling) of the central bank; and (v) external payment arrears (zero ceiling). Indicative targets relate to social spending and tax revenue collection (MEFP Table 1). Additionally, reform progress will be evaluated based on structural benchmarks in the areas of: (i) promoting inclusive growth; (ii) mobilizing fiscal revenue; (iii) improving the composition and quality of fiscal spending; (iv) enhancing economic governance; and (v) improving the quality of statistics (MEFP Table 2). Staff will monitor the implementation of Madagascar’s poverty reduction strategy, and the NDP (covering 2014-19) will be issued as an Economic Development Document, together with a World Bank assessment letter, at the time of the first review.

33. Financing needs are expected to be covered by a combination of donor and Fund support (Table 8):

  • US$2.7 billion of donor support is expected to be disbursed over 2016-19. The authorities have actively engaged with key donors, emphasizing their reform agenda, embodied in the NDP and PIP, and a donor conference is planned for later this year.

  • Financing assurances are in place for the first year of the program (up to end-June 2017) (Table 9). External budget support will be needed in the second half of 2017.

  • Access is proposed at a level equivalent to 180 percent of quota (SDR 220 million) for the new ECF arrangement (Table 13).11 The case for access at the norm is based on the large and protracted BOP needs and the strength of policy adjustments.

Table 13.Madagascar: Proposed Schedule of Disbursements and Timing of ECF Arrangement Reviews
Availability DateDisbursementConditions for Disbursement
(In percent of quota)(In SDRs)
July 27, 201625.731,428,000Board approval of the arrangement
January 27, 201725.731,428,000Board completion of first review based on observance of performance criteria for end-December 2016
July 27, 201725.731,428,000Board completion of second review based on observance of performance criteria for end-June 2017
January 27, 201825.731,428,000Board completion of third review based on observance of performance criteria for end-December 2017
July 27, 201825.731,428,000Board completion of fourth review based on observance of performance criteria for end-June 2018
January 27, 201925.731,428,000Board completion of fifth review based on observance of performance criteria for end-December 2018
July 20, 201925.731,432,000Board completion of sixth review based on observance of performance criteria for end-June 2019
Total180.0220,000,000
Source: IMF.
Source: IMF.

34. Madagascar’s capacity to repay the Fund remains strong (Table 14). The debt sustainability analysis (DSA) indicates that Madagascar is at moderate risk of debt distress (Supplement 2). Debt sustainability indicators have improved recently (compared with October 2015 DSA) thanks to debt forgiveness (e.g. full from Algeria, partial from China) and a stronger than expected exchange rate. Indicators are projected to deteriorate very modestly over the program period as a result of a scaling up of foreign financed investment. The main risks to debt sustainability relate to weak revenue generation, possible exchange rate shocks, and contingent liabilities associated with state-owned enterprises.

Table 14.Madagascar: Indicators of Capacity to Repay the Fund, 2016-30
201620172018201920202021202220232024202520262027202820292030
(Millions of SDRs)
Fund obligations based on existing credit
Principal5.38.35.93.16.112.212.212.29.26.10.00.00.00.00.0
Charges and interest0.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Fund obligations based on existing and prospective credit
Principal5.38.35.93.16.112.221.734.243.750.144.034.622.09.40.0
Charges and interest0.030.030.030.490.580.580.570.530.470.370.260.160.090.050.03
Total obligations based on existing and prospective credit
Millions of SDRs5.38.35.93.66.712.822.234.844.250.544.334.722.19.50.0
Billions of Ariary24.440.030.118.836.672.2129.1208.0272.6320.6289.6234.1153.467.80.2
Percent of exports of goods and services0.20.30.20.10.20.40.71.01.21.31.00.80.50.20.0
Percent of debt service4.76.84.52.33.96.510.013.916.215.812.18.24.61.80.0
Percent of GDP0.10.10.10.00.10.10.20.30.40.40.30.20.10.10.0
Percent of government revenue0.71.00.70.30.61.01.62.32.62.72.21.60.90.40.0
Percent of quota4.46.84.82.95.510.518.228.436.241.336.228.418.17.80.0
Outstanding IMF credit based on existing and prospective drawings
Millions of SDRs106.7161.3218.2278.0271.9259.7238.0203.8160.1110.066.031.49.40.00.0
Billions of Ariary487.4779.01,107.71,469.51,489.31,464.71,382.91,220.1987.2698.6431.8211.865.40.00.0
Percent of exports of goods and services4.76.88.710.49.58.57.35.84.32.71.50.70.20.00.0
Percent of debt service94.3133.3165.0184.0159.2132.5106.981.458.534.418.07.42.00.00.0
Percent of GDP1.52.22.83.33.12.72.31.91.40.90.50.20.10.00.0
Percent of government revenue13.919.624.027.324.020.617.113.39.55.93.21.40.40.00.0
Percent of quota87.3132.0178.6227.5222.5212.5194.8166.8131.090.054.025.77.70.00.0
Net use of IMF credit (millions of SDRs)26.154.657.059.8−6.1−12.2−21.7−34.2−43.7−50.1−44.0−34.6−22.0−9.40.0
Disbursements31.462.862.862.80.00.00.00.00.00.00.00.00.00.00.0
Repayments and repurchases5.38.35.93.16.112.221.734.243.750.144.034.622.09.40.0
Memorandum items:(Billions of Ariary, unless otherwise indicated)
Exports of goods and services (millions of SDRs)2,2892,3662,4972,6732,8633,0483,2473,5143,7494,0044,2794,5774,9005,2255,574
Debt service516.6584.2671.4798.6935.41,105.01,293.91,498.91,687.62,033.82,395.12,864.43,322.33,811.94,349.1
Nominal GDP (at market prices)31,77335,50739,60944,10348,82454,01159,54765,65172,38079,79987,97896,996106,938117,900129,984
Government revenue3,4993,9744,6235,3886,1947,1088,0759,16610,39411,77913,33814,99716,53418,22820,097
Quota (millions of SDRs)122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2122.2
Source: IMF staff estimates and projections.
Source: IMF staff estimates and projections.

35. Progress has been made in strengthening the safeguards framework at the BCM since the 2015 assessment. Governance arrangements and central bank autonomy are expected to be strengthened through the new Central Bank Act. The central bank has also reinforced its audit oversight and control environment, and is committed to undertake the necessary steps to implement International Financial Reporting Standards (IFRS) (MEFP ¶46). However, the timeliness of audit completion and publication of audited financial statements needs further improvement. An update safeguards assessment will be conducted before the first review.

Staff Appraisal

36. The Malagasy authorities’ economic program contains forceful measures needed for a successful recovery. While political and institutional constraints limit the scale and pace of some measures, action is necessary to reverse harmful trends, as the authorities recognize. Low revenue collection, substantial low-priority spending, and weak economic governance all jeopardize the success of a medium-term development program. Staff notes the significance of the macroeconomic and structural progress achieved during the SMP and welcomes the authorities’ continuing commitment to address the key impediments to achieving inclusive growth and poverty reduction. Staff stresses that the planned reforms will only be effective if they are implemented in a rigorous and sustained manner.

37. More rapid growth and sustained poverty reduction requires more fiscal space for investment in infrastructure and broader access to education and health care. The government’s target of gradually increasing tax revenue by ½ percent of GDP a year is essential to achieving the authorities’ development objectives and will require additional policy measures. Containing and then reducing lower priority spending is likewise necessary and will require ongoing vigilance. Stricter controls on procurement will support this effort, as well as governance. The plans to transform Air Madagascar and JIRAMA into efficient, commercially viable businesses with no need for government subsidies and transfers will enable a shift to higher priority spending, reduce fiscal risks, and boost growth prospects; meeting this objective will require sustained, determined action. To avoid slippages, the government must stand ready to take additional steps promptly if needed.

38. In light of large infrastructure needs, staff believe that substantial external borrowing is appropriate, but the financing and investment strategy must preserve debt sustainability. The authorities are right to focus on building investment and debt management capacity, which is as important to the success of scaling up as increased resources. Risks to debt sustainability would increase in the event of large borrowing for low-return projects and underperforming tax revenues. The authorities also need to rely as much as possible on external grants and concessional financing. While PPPs can mobilize expertise and resources, vigilance is necessary to manage the significant fiscal risks they can pose, particularly due to both explicit and implicit guarantees.

39. Reforms to strengthen governance and fight corruption are central to the program’s success. The PFM system is critical both to support the increase in priority public spending and improve governance. Measures to strengthen procurement practices will reduce costs and increase efficiency of public spending. Increased transparency in budget preparation and execution will be critical to build public support for further reforms in general and higher tax collection in particular. Tax compliance is more likely to improve when taxpayers see clear benefits in the form of better public infrastructure and services. Corruption threatens to weaken the results from the authorities’ reforms in practically every sector, and continuing to intensify the fight against corruption is a key element for the program’s success.

40. Madagascar faces the challenge of developing the financial system while preserving financial stability. While the financial sector has successfully managed the economic and political turmoil of the last decade, financial deepening and inclusion is lagging behind comparable countries. Creating a solid foundation for further financial deepening will require more frequent and penetrating supervision of banks and nonbanks, stepping up efforts against money laundering and the financing of terrorism, establishing a legal and operational framework for institutions in difficulty, promoting modern payment methods, and modernizing mechanisms for registering collateral. In addition, each government-owned non-bank financial institution should develop a viable strategy following audits.

41. The central bank should remain vigilant on inflation and continue to improve the operational framework for monetary policy implementation. The government has already taken important steps by strengthening central bank independence and the foundation for a more independent decision-making. Establishing a well-functioning money market, with frequent interbank transactions, is essential both for the long-term goal of adopting an inflation targeting framework and the near-term goal of facilitating government financing through the domestic market.

42. Based on the protracted balance of payments need and policy commitments, staff supports the authorities’ request for an arrangement under the ECF covering 40 months, with access equivalent to 180 percent of quota.

Box 3.Madagascar: Risk Assessment Matrix 1

Source of RisksRelative LikelihoodPotential ImpactPolicy response
Domestic Risks
Larger than anticipated transfers to SOEs (JIRAMA and Air Madagascar).HighHigh: Government transfers to SOEs lead to a reduction of other priority expenditure. Potential economic disruption if SOE’s operations are affected.Look within the budget for ways to protect key public services. Encourage development partners to take a larger direct responsibility for spending in social priority areas. Strengthen governance structures, including government oversight of key SOEs. Consider private management of specific units or operations.
Political uncertainty and tensions.HighHigh: Reduced inflows from FDI, donor support, and tourism. Less fiscal space impedes the ability to deliver public services.Maintain exchange rate flexibility and reallocate fiscal spending from investment to support of the most vulnerable. Encourage authorities and development partners to protect spending in social priority areas.
Failure to begin tackling corruptionHighHigh: Reduced inflow of FDI and donor support.Step-up anti-corruption and anti-money laundering/combating financing of terrorism (AML/CFT) efforts. See policy response to reduced inflows above.
Cyclones, floods, and droughts.MediumMedium: Loss of real and human capital and lower growth.Reallocate fiscal spending to finance recovery work and make appeal to donors for post-disaster financing.
External Risks
Structurally weak growth in key advanced and emerging economiesHigh (Euro area and Japan)/Medium (emerging markets)High: Loss of financing reduces fiscal space, impeding the ability to deliver public services. Slower growth in tourism. Weaker commodity prices and balance of payments.Maintain exchange rate flexibility as a shock absorber. Energize donor support through a campaign emphasizing the merits and needs of the medium-term development plan; protect key public services within budget. Diversify sources of tourism. Promote “open skies” policy to improve travel connections.
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.

Annex I. Madagascar: Estimate of Optimal Reserves

1. International reserves are currently below optimal levels. While a flexible exchange rate reduces the need for reserves, Madagascar’s reliance on mining exports and the challenging international environment increases the probability of shocks and hence the need for additional buffers. Assuming a cost of holding reserves of 6 percent, the current level (2.9 months import cover at end-2015) is below the lower bound of the target range (3.3 months import cover assuming an IMF program and 4.4 months without a program). With an ECF arrangement, reserves are projected to reach the lower bound by end-2019.1

Optimal Reserves

(target range and current levels, in months of imports)

Sources: IMF staff calculation

Appendix I. Letter of Intent

Antananarivo, Madagascar

July 12, 2016

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 and 2016 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 over the past year.

2. These policies represent both the continuation and intensification 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 increased external official resources, leading 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 support our program in the form of an arrangement under the Extended Credit Facility (ECF) in an amount equivalent to 180 percent of quota, or SDR 220 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 for the rest of this year and over the program period (2016-2019). 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. We are committed to provide timely monitoring information and the Central Bank will undergo a safeguards assessment update, as 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 an arrangement under the Extended Credit Facility (ECF) 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, 2016-19

I. Overview

1. This memorandum lays out the medium-term reform program of the government of Madagascar under the Extended Credit Facility (ECF). The ultimate policy objective of this program is to scale up spending on essential infrastructure and social development to reverse the deterioration in development indicators. This program aims to place the country on a sustained path toward raising living standards and improving social conditions, consistent with the objectives of the National Development Plan (NDP) and the Sustainable Development Goals (SDGs). This memorandum focuses on the targets and objectives both in the first year of the ECF and over the program period, setting forth the policy measures and structural reforms needed to preserve macroeconomic stability, strengthen the external position, and enhance overall competitiveness.

2. Over the past two decades, economic growth in Madagascar (2.8 percent) barely kept pace with population growth rate, leading to stagnant living standards and missing most Millennium Development Goals (MDGs). This low growth trajectory was exacerbated by the political transition period, lasting from 2009-2013. The country emerged from this political crisis with weakened social conditions: the poverty rate reached 71.5 percent of the population in 2012 (as defined as the FAO as minimal caloric intake); access to education barely improved, with the success rate in examinations, in particular at the baccalaureate level, having fallen (36 percent in 2014 compared to 41 percent in 2013); public health access improved slightly (with an increase in the rate of outpatient care provided at basic health centers: 29.2 percent and 32.9 percent in 2013 and 2014, respectively).

3. Progress toward political stability following the transition has been steady, enabling the government to rebuild institutions and step up reforms. The period 2014-15 has been somewhat overshadowed by political instability that prevented the implementation of deep-rooted reforms. Recent political developments, including the municipal and Senatorial elections, have strengthened institutional stability. Governance issues, especially corruption, weigh on the effectiveness of reform measures, but are starting to be addressed as well. The three anti-corruption agencies (Comité pour la Sauvegarde de l’Intégrité, BIANCO and SAMIFIN) have been bolstered, both financially and in terms of their strategy to strengthen the fight against corruption. Strong reforms will now be undertaken in order to send the right signal to investors, to catalyze the much needed donor support and above all to help improve the social and economic conditions of the population.

4. Under the Staff Monitored Program (SMP) in place from September 2015 to March 2016, the country has built a strong track record, with satisfactory progress in most areas. The program was able to reverse some negative trends witnessed in late 2014-early 2015, particularly in revenue and arrears accumulation. Performance during the six months of the SMP demonstrated a capability to sustain reforms. We began implementing significant measures aiming to further strengthen macroeconomic stability, to improve revenue generation, enhance the quality of fiscal spending and strengthen central bank operations. All quantitative targets were met through end-March, except the ceiling on net credit to government and new external payments arrears. In particular, tax revenue has steadily improved, while priority social spending was protected. The missed targets on net credit resulted from a large shortfall in external financing, larger-than-planned arrears payments, and inadequate time to adjust spending. External payments arrears resulted from technical difficulties in making debt service payments. In addition, all the measures envisaged in the structural benchmarks (SBs) were implemented, although some with minor delays compared to plans; in particular, these measures have discontinued fuel subsidies and ensured adequate resources for the reimbursement of VAT credits.

II. Macroeconomic Program and Targets

A. Medium-Term Objectives

5. The government is committed to placing Madagascar on the path of sustainable and inclusive growth, improved physical and human capital, and strong governance, as laid out in the National Development Plan and the 2016-2021 Government’s Priority Investment Program. The objective is to address the existing complex and significant challenges in several areas: economic, political, geographical, socio-cultural, and environmental. While the challenges are enormous and our strategy is ambitious, we are determined to advance on this path. The government’s vision of the future, outlined in the NDP, has the following five unifying and complementary 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. This vision is elaborated in the 2016-2021 Government’s Priority Investment Program.

6. In the medium-term, economic growth is projected to accelerate, driven by scaled-up investment and expansion of agriculture, tourism, manufacturing and mining. Rising public investment will spur construction activity beginning in 2016, and in the medium-term the investment-to-GDP ratio would approach 19 percent. Public investment in infrastructure, particularly the energy and transportation sectors, will be financed through domestic resource mobilization, donors and public private partnerships (PPPs). Promoting private investment is also central to our strategy. We aim to improve the business climate to attract investment. In tourism, the government’s goal is to attract 450,000 tourists annually within three years. Improved land rights management, rural infrastructure maintenance and rehabilitation, and productivity gains will spur growth in agriculture, which employs about 80 percent of the population. The introduction of new mining and petroleum codes will spur investment in our mining, natural gas, and oil industries. Economic growth is projected to steadily accelerate from 4.1 percent in 2016 to 5 percent by 2019. Against the backdrop of subdued international price pressures and the restrained monetary policy, inflation is projected to gradually decline from 7.6 percent in 2015 to around 6 percent by 2019.

7. The government’s fiscal policy supports the implementation of the NDP while reinforcing both stability and sustainability. 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 additional revenue mobilization, expenditure reprioritization, and domestic financing, as well as additional external resources. We expect to increase public investment to attain the objectives set out in the NDP, in a manner consistent with macroeconomic stability. The investments will be based on the Government’s Priority Investment Program (2016-2021). Borrowing and guarantees to fund Madagascar’s investment needs will be prudently managed to ensure that the risk of debt distress remains moderate and we will favor grants and concessional financing as much as possible.

8. We plan to increase the tax ratio (on a gross/net basis) from 11.0/10.5 percent of GDP in 2016 to around 12.5/12.0 percent of GDP by 2019. The increase reflects gains from tax policy and revenue administration measures. To meet our revenue measures, we plan on improving human resource management in the tax and customs administrations to reduce corruption (for example via performance-based contracts), bettering post-audit performance, and introducing effective sanctions against fraud and corruption. To control less productive expenditures, we will take measures to improve the performance of SOEs, reform the pension system, and strengthen budget execution. The overall deficit on a commitment basis is projected at 3.2 percent of GDP in 2016. During the implementation of the NDP, we will increase public investment spending from 5.3 percent in 2016 to over 8 percent of GDP by 2019, while priority social spending will rise from 0.8 percent of GDP to 1.3 percent. Over the 2017-19 period, 3.6 percent of GDP of financing still needs to be identified, of which 1.9 percent of GDP for externally financed investment projects. To promote priority spending while keeping debt on a sustainable path, the primary balance, excluding foreign financed investment (commitment basis), will serve as an anchor for fiscal policy and will target a sustainable level over the medium-term, currently estimated to be a modest surplus.

9. Monetary and exchange rate policy will aim to maintain internal and external stability – including keeping inflation in single digits – while building an adequate reserve buffer. We remain committed to maintaining a flexible exchange rate to ensure orderly conditions in the foreign exchange market and to facilitate external adjustment over the medium-term. We will refrain from reintroducing the buyback operations at non-market rates in the interbank foreign exchange market. The Central Bank of Madagascar (CBM) will pursue a restrained monetary policy supportive of moderate inflation and take further steps to strengthen liquidity management. The government and CBM will work to develop our financial sector and improve access, by implementing the action plan and recommendations identified by the Financial Sector Assessment Program (FSAP).

10. Current account deficits are projected to rise to about 4 percent of GDP in 2018, due mostly to investment-related imports and deteriorating terms of trade. The deficits will be primarily financed by sustained FDI inflows and public sector borrowing. Improvements in the business climate will attract private investment, which in turn will expand production and export capacities over the medium-term. The CBM will gradually accumulate international reserves, targeting 3.6 months of import coverage by 2019.

III. The Structural Reform Agenda

11. Our agenda for structural reforms will be focused on: (i) enhancing conditions for a sustained and inclusive growth; (ii) creating more fiscal space for development priorities; (iii) improving economic governance and combating corruption; and (iv) strengthening the capacity to support stability and financial sector development.

A. Promoting Inclusive Growth

12. Poverty reduction and sustainable development call for inclusive and robust growth, benefitting all citizens and regions. We will set aside financial resources and implement structural reforms focused on improving health and education, advancing agricultural production, decentralizing the public administration, increasing the amount and quality of investment, and improving the business climate. Sectoral expenditure frameworks will align objectives with expenditures, and the health and education sectoral spending plans will then be integrated into a medium-term budget framework by end-June 2017 (structural benchmark), as well as perhaps other sectors. Setting aside contingencies and preparing for periodic cyclones and drought is also a priority.

13. The new social protection policy, approved in 2015, aims to increase income and access to social services for the poorest, provide social protections to the most vulnerable, and develop social contribution systems. We are working to establish a legal and institutional framework to coordinate social projects and programs and improve the quality of services provided. An inter-ministerial framework supporting the national social protection policy will be in place by 2017 and we expect to reserve significant human, financial, and capital resources for social objectives over the medium-term. Introducing conditional monetary transfers to vulnerable households is a priority.

14. Broadening access to education and health care is essential for inclusive growth. Establishing one year of preschool, constructing and equipping new schoolrooms, recruiting new educators, and textbooks for primary school students will increase the quality of education. We will also provide more resources for teacher training, including coaching programs for primary school educators, launch school food programs in underserved districts, and recruit so-called community teachers (Maîtres FRAM) based on qualifications and performance evaluation. To fully achieve our priority health objectives would require additional financial resources, which would entail substantial donor support. We will also put in place a performance-based payments system to improve the quality of services. Mutual health insurance programs and a national solidarity health fund will create the foundation for universal health coverage, addressing nutrition, vaccination, and infant and maternal health.

15. Agriculture will play a central role in poverty reduction. Agriculture generates about 26 percent of GDP and is the main source of income for a majority of households. Agricultural reforms aim to improve productivity, support the move from just subsistence farming toward production for domestic, regional, and international markets, and reduce risks for the most vulnerable households. In this context, we aim to: (i) increase investment in roads and irrigation infrastructure; (ii) expand investment in agricultural training centers; (iii) increase funding of agricultural research; (iv) expand social protection programs targeting vulnerable subsistence farmers; and (v) protect farmers’ land rights. These measures should increase the amount of land used for agriculture, expand the number of trained agriculture workers, increase the number of households covered by social protection significantly, and boost the number of local land offices that issue land certificates.

16. Drawing on the Regional Development Plans, decentralization aims to improve the quality of and access to public services and foster policies better suited to meet the immediate needs of citizens. We are working to identify and define appropriate government structures and measures to strengthen local governance. Such measures include reforms to the legal framework for local civil service, while ensuring full coherence between the existing legal and institutional frameworks for decentralization with local development plans and the NDP objectives.

17. A successful private sector and a favorable business climate are essential for inclusive growth. Indicators such as the World Bank Doing Business Report (164 out of 189 countries) and the World Economic Forum Competitiveness Index (130 out of 140 countries) demonstrate the need for improvements in Madagascar’s competitiveness. With support from the World Bank, we aim to reduce burdensome regulations by: (i) reducing the time and documents necessary to create a business, (ii) facilitating the acquisition of construction permits, (iii) expediting property transfers, (iv) easing lending requirements for small-and medium-sized enterprises, (v) reducing barriers to international trade, and (vi) reducing the administrative burden required to pay taxes. We also envisage on-line registration of businesses, a centralized database for land registries, a legal framework establishing credit reference bureaus, and reduced transaction costs for construction permits and electricity hook-ups. Moreover, we will submit revisions to modernize the company act to parliament, inter alia to facilitate the creation of new businesses. At the same time, we will also finalize the legislative process of joining OHADA by end-2017 (Organisation pour l’Harmonisation en Afrique du Droit des Affaires). Moreover, we will implement the action plan to significantly improve our performance in the ease of doing business survey.

18. To promote investment, the institutional and legal frameworks for mining, petroleum, and Special Economic Zones (SEZ) will be revamped. The mining and petroleum codes will be brought in line with international best practices and made consistent with the existing law on large mining investments (LGIM). The principal measures 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; and a reduction in the length of fiscal stability clauses. We are developing a law on SEZs, with a view to promoting investment. Specific locations will benefit from special tax and customs provisions, labor and immigration regulations, land tenure, and corporate law.

19. Investment in public infrastructure will require prioritization and good management. Investments are needed in roads, railways, seaports, airports and energy (a particular impediment to growth according to the World Bank Doing Business report). Given the constraints of debt sustainability and absorptive capacity, careful prioritization is required. The Government’s Priority Investment Program will be presented to international donors in 2016. Management of our public investment clearly needs improvement as we scale up, and we are elaborating a strategy and action plan to strengthen existing practices, drawing on technical support from the IMF and World Bank.

20. We expect significant financing from public-private partnerships (PPPs) that will be managed based on a new legal framework. While PPPs can help mobilize additional funds, attract technical expertise, and improve efficiency, they pose significant fiscal risks. Incorporating existing PPPs into a fiscal risk statement and the new legal framework should reduce the budgetary risks. The new PPP law was enacted in February 2016 and the application decrees, elaborated in cooperation with an international legal expert and with comments from our development partners, are planned to be published in September 2016 and will specify the circumstances for exception to open tenders. A dedicated unit at the presidency is responsible for coordination, while the ministry of finance and budget maintains the right to disapprove/stop all projects at any stage in the process (before signature) if the fiscal implications are assessed to be disproportionate. PPP contracts can be suspended in the event of a breach of obligations by decision of the Comité de Suivi for PPPs. The PPP unit in the Ministry of Finance and Budget will remain appropriately staffed and financed and fully involved throughout the process (approche participative). To assure full transparency and minimize fiscal costs, all new contracts will be attributed through open and transparent tenders—except under the conditions provided for by the law and decrees—and the terms and conditions will be published within one month of the date of signature (continuous structural benchmark).

21. The new debt management strategy will reinforce debt sustainability. Based on the Loi Régissant la Dette Publique et la Dette Garantie par le Gouvernement Central, which states the roles and objectives of the government with respect to new borrowing, a debt management strategy has been developed and published in December 2015. The strategy aims to minimize costs and risks by maximizing the share of concessional external loans and progressively increasing the maturity of domestic debt instruments. To support transparency and inspire confidence, the 2016 budget started to include 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 has become fully operational (which was a structural benchmark under the SMP).

22. External financing will have to be primarily on grants and concessional terms to reconcile investment needs with debt sustainability. Madagascar is assessed to have a moderate risk of external debt distress. We will follow a prudent debt management strategy that aims to maintain a present value of debt consistent with this risk rating. Debt contracted on concessional terms will help maintain the current risk rating and debt sustainability. That said, if concessional external financing is exhausted, some limited long-term non- and semi-concessional borrowing could be considered to support critical expenditure needs, e.g. for high-yield investment projects. In these circumstances, we will consult in advance with IMF and World Bank staff. To assist in the policy implementation of the ECF program, we will avoid all non-concessional short-term external borrowing (with original maturity of less than one year) and will set yearly explicit ceilings for long-term non-concessional borrowing. Given the prospect of a donor conference during the second semester of 2016, we have set explicit performance criteria (Table 1) on a non-concessional borrowing ceiling at a level of $300 million for 2016 of which $100 million with grant element of less than 20 percent. For 2017, the ceiling for non-concessional debt is $383 million (cumulative).

B. Creating More Fiscal Space

23. To support the NDP, the government is determined to increase fiscal space over the medium term while maintaining debt sustainability. Sustainable and inclusive growth will require increased priority spending, especially on infrastructure, education, healthcare, and targeted social and natural disaster assistance. These priorities aim to lift living standards and protect the most vulnerable segments of our society. At the same time, we are committed to fiscal sustainability. In the current year we will contain the budget deficit (commitment basis) to 3.2 percent, and we are aiming at a modest surplus in the primary balance, excluding foreign financed investment, by the end of the program. Continued revenue mobilization, strict expenditure control and rationalization across all layers of the general government are at the center of the short to medium term budget planning to increase fiscal space. We will strengthen public financial management and revenue administration, enhance execution of budget plans, and reduce transfers to SOEs and pensions. In particular, we will continue the application of the automatic pricing formula for maintaining full cost recovery prices for fuel (continuous structural benchmark). Separately, we are studying the possibility of revising the fuel price structure, including the level of oil distributors’ margins and taxes. We are also discussing with the distributors the settlement of amounts due, including the distributors’ unpaid contributions to the Road Maintenance Fund (FER).

24. The government will be facing additional fiscal pressures in 2016 due to a revenue shortfall from lower petroleum prices as well as potentially higher spending needs. To balance these effects, the 2016 supplementary budget was submitted in June 2016 to parliament (prior action), which subsequently passed it. This includes a package of measures to boost revenue, rationalize expenditures, and close the financing gap, accompanied by complementary administrative actions:

  • The fiscal revenue target will be reached by means of the following measures: (i) DTI (duties and taxes on imports) paid by the ministries on foreign investment will increase, gaining an additional MGA 22.7 billion; (ii) a reinforcement of the collection of excise taxes on spirits (MGA 9 billion); and (iii) administrative actions to strengthen joint inspection by tax and custom administration of exempted products (MGA 11 billion). Custom administration efforts have led to larger than projected revenues on non-oil products (MGA 57.8 billion until end of April).

  • Spending on non-priority items in current and capital outlays is reduced by MGA 99 billion. If adequate financing cannot be identified by end-September, controls over spending will be imposed.

  • Immediate measures (see below) will eliminate the need for transfers to SOEs beyond budgeted amounts in 2016, particularly MGA 300 billion for JIRAMA.

Arrears Clearance and Fiscal Financing

25. The government remains committed to clearing current arrears over the medium-term and avoiding any significant new arrears accumulation. The stock of arrears will be repaid in the coming years in the form of cash payments, securitization and tax offsets: agreements are already in place for clearing MGA 388 billion and understanding are expected on the remaining MGA 632 billion later this year, covering primarily arrears to power producers and petroleum importers. To this effect, we aim at negotiating the already identified payment amounts under a coherent approach, focusing on a long maturity profile of domestic debt instruments, and limiting the use of cash repayments in the short term to affordable amounts. We will intensify our efforts to identify all existing arrears for the central government. To avoid new arrears, we will establish clear definitions and begin monitoring closely. Subsequently, we will also review the arrears of other public entities, with a view to prevent future occurrence.

26. VAT refund repayments are operated through a designated escrow account at the Central Bank, effective since March 2016, and funded by monthly transfers (currently 33 percent of large taxpayer revenues), which is adjustable according to needs for reimbursement. Its effectiveness will be enhanced by (i) establishing close monitoring of the needs and funds available; and (ii) strengthening the risk-based approach in VAT refund processing. Furthermore, we are intensifying efforts to shorten the lag between filing for and reimbursement of VAT refunds.

27. The Government will continue to encourage SOEs to move toward borrowing on the strength of their own balance sheet. This approach not only ensures the efficient running of these SOEs but also removes the need for Government to backstop SOE payment default in purely commercial agreements. It prevents the situation under which SOE debt increases the State’s contingent liability and potentially, when they crystallize, add to public debt stock.

28. To help avoid arrears going forward, we will continue to improve government financing and cash management. We intend to limit domestic banking system credit to the government (to around one percent of GDP this year and below that level thereafter) to continue creating space for private sector credit growth and to limit domestic debt. In addition, we are focusing on reducing rollover risks by balancing financing from domestic and external sources and lengthening the maturity profile of domestic public debt instruments.

29. To offset the reduction in statutory advances, the central bank will on-lend up to MGA 113 billion following the ECF disbursement. The terms of the loan will resemble the ECF disbursement and all foreign exchange risks will be carried by the government, as formalized in a memorandum of understanding.

Tax Policy and Administration

30. The government views improvements in tax compliance of utmost importance to increase the very low ratio of fiscal revenue to GDP in Madagascar. Incorporating the conclusions of the 2015 IMF TA report on tax and customs administration, we will develop a priority action plan that aims at improving the culture of taxation by aggressively pursuing tax evaders, strengthening capacity of tax and customs officials, and improving enforcement efforts on non-filers and misconduct by officials.

  • Collection of outstanding tax arrears will be improved by (i) strengthening the identification of the current amount of collectible tax arrears; (ii) collecting at least MGA 30 billion of tax arrears this year and publishing a report on outstanding arrears by end-February (structural benchmark); and (iii) implementing the rules and criteria to write-off non-collectible arrears.

  • The Government will further enhance data matching between the tax authority and customs. We have introduced the use of a unique tax identification number (TIN) for corporations and individuals, the use of which will be extended to other departments at the Ministry of Finance and the social security agency (CNAPS) by end-2017. Taxpayers who show significant discrepancies between the different sources or are classified as high risk in any given year will be subject to audit with losses recovered in the following years.

  • A framework to identify and investigate employees registered by the social security agency but unknown to the tax authorities will be developed by December 2016. We will authorize the joint payment and declaration of taxes (IRSA) and contributions to the CNAPS (by end 2017).

  • To broaden the tax base, we enforced that all wholesalers and industries withhold 5 percent from the amount invoiced by suppliers that are unknown to the tax administration (without a TIN). Monitoring will be enhanced by setting up an electronic declaration return process of the list of suppliers not registered by industries and wholesalers, by end 2016.

  • We will strengthen monitoring and control of tax expenditures with the assistance of the World Bank, by enhancing data sharing among various stakeholders (customs and revenue authorities, Ministry of Finance). Reports on tax expenditures will be produced annually starting this year.

  • The large amount of tax credits granted for investment to major companies will be audited to identify large taxpayers who have benefitted but not complied with legal requirements by the end of 2016. For companies claiming unjustified tax credit, the normal situation will be re-established by assessing and collecting the amounts due retroactively. Tax credits granted and irregular tax credits that will have been cancelled will be summarized in a report by June 2017 (structural benchmark).

  • To improve the performance of tax audit outcomes, customs and revenue authorities have started to apply risk-based audits to enhance the detection and deterrent effect of audits. The MFB will regularly prepare semi-annual reports starting end of July 2017, on progress made in the use of risk based audits, highlighting its effectiveness in widening the tax net.

  • Customs will establish a framework to strengthen the control of exemptions (good falsely declared to be tax exempted) and relief procedures (goods falsely declared to be used for tax exempted purposes). All exempted declarations that are classified as red category (e.g. for rice and fertilizers) will be scanned and at least 50 percent (randomly selected), physically inspected. For goods that are accurately declared but have a conditional exemption or conditional temporary admission, a post clearance audit program will verify the final use of the goods. Violations will result in penalties.

  • Customs will continue to strictly control consolidated cargo: (i) a declared detailed list of goods in the container (liste de colisage) is compulsory, (ii) each type of goods is declared separately with their individual value, and (iii) serious or repeated offences or non-compliance with these requirements result in penalties and suspension of the use of bonded warehouses.

  • To enhance transparency, we will start to regularly publish aggregate information on tax crime prosecutions (i.e., cases, convictions, custodial sentences, reparation orders and court fines) by end-2017.

31. We will work towards establishing a tax policy research and analysis unit under the MFB by end-2017, to efficiently reconcile data from tax and customs administration and improve our analytical capacity for tax policymaking in the medium term. In addition, by December 2016 we will complete a comprehensive review of tax exemptions to large taxpayers and the free trade zones, to identify those measures harming the revenue base most and thus could contribute to a future broadening of the revenue base.

Pensions

32. Reforms to the pension system will reduce public transfer needs and ensure its long-term sustainability. Several measures have already been introduced, including a census of retirees that will reduce 2016 transfer amounts by MGA 10 billion. To aid predictability of transfer amounts, the contribution rates of the two pension schemes (CRCM and CPR) will be unified in January 2017, and the two schemes will be combined effective the beginning of 2019. Contribution rates will increase and the retirement age will rise to 65 in two steps. All these measures will reduce public transfers to the pension fund by MGA 50 billion per year to arrive to MGA 150 billion by 2019. In addition, we will implement recent recommendations of the World Bank TA report, including changing the basis for calculating pensions at the time of retirement from the last year’s base salary, for example to the last five years.

State-Owned Enterprises

33. We are implementing a restructuring plan to address Air Madagascar’s difficult operational and financial situation. In the context of the government’s new international “open sky” policy and the objective of hosting 450,000 tourists annually within three years, we remain committed to rehabilitating Air Madagascar to be a commercially competitive and viable airline. Management and the Board were replaced following a month-long strike in 2015 over governance issues. To restore Air Madagascar’s operational profitability by end-2016, the company is undertaking several measures: (i) restructuring its flight schedule to focus on more lucrative routes; (ii) increasing its network partnerships; (iii) reducing maintenance and distribution costs; and (iv) initiating a staff reduction program of 30 percent (about 400 positions) of its workforce. Other major savings will be achieved via renegotiation of contracts and the replacement of the Airbus 340 fleet by Airbus 330. The Civil Aviation Authority of Madagascar and Air Madagascar were removed from EU’s Annex B list on June 16, which will allow Air Madagascar to fly to Europe with its own crews and a Malagasy registration. This will significantly improve the performance of the route both operationally, with back-up equipment, and financially, with savings in the order of US$5M, making the route profitable. The restructuring plans include refinancing with a government guarantee of a loan of about $25 million to reduce high-cost debt. The government has taken the decision to divest a minority ownership share in a strategic partnership. With the help of financial advisers, the company is seeking options for strategic private sector participation by October 2016.

34. The government wants to restructure the electricity and water company (JIRAMA) into an efficient, financially healthy enterprise. Transfers from the government to JIRAMA in 2015 were very costly, and potential losses in 2016 threaten the execution of the budget. Our aim is to make JIRAMA an operationally viable company capable of self-financing its operations, including maintenance, by 2020. The strategy to improve the company’s financial position is centered on boosting revenues and reducing costs. With the agreement of the Minister of Energy and Hydrocarbons, the Office de Régulation de l’Electricité (ORE) authorized an increase in tariffs – previously at 2009 levels in nominal terms – in June 2016 by 10 percent and a further five percent in July (prior action). For the future, we plan cost reductions and revenue enhancement, including gradual tariff increases if necessary, to achieve full operational cost recovery. We will install smart-meters on the 6,000 largest customers, representing 60 percent of total sales, and continue our program of on-site inspections of 20,000 customers each year. Our goal is to reduce total electricity losses (technical and non-technical) from around 35 percent in 2015 to 15 percent in 2020. We are preparing legislation to address the widespread losses by criminalizing the theft of electricity and water. To contain costs, we have conducted an audit of contracts, which revealed numerous weaknesses. We will review, renegotiate, or terminate contracts as needed and possible, based on the interests of the company and consistent with legal requirements. We are actively switching diesel-based generation facilities to be able to run on less expensive heavy fuel oil and are studying the installation of fuel consumption meters in all plants, as these are potentially important sources of savings.

35. We will also undertake measures to address JIRAMA’s governance problems. With the support of the World Bank’s PAGOSE program, we are developing a new business plan, which we will publish in 2016. We will also hire director level staff and above via a competitive recruitment process. Corporate decisions will be founded on data derived from new Management Information Systems, funded by the PAGOSE project, to be installed at JIRAMA in 2017 and producing operational and financial reports in 2018. Future investment and contracts will be guided by the Least Cost Power Development Plan (LCPDP), estimated to be completed in 2017. Via implementation of this plan, we aim to gradually move away from imported, fuel-based generation to renewable sources of energy, such as hydropower, wind and solar. This plan will contain the company’s strategy and action plans to identify investments on the basis of clear criteria, rules, and procedures, and the selection of private partners on a competitive basis. Other elements of the plan include tariff studies and plans to establish social safety nets. The PAGOSE project is also funding investment in new substations, transmission lines, and distribution systems in selected districts. In addition to the prior review of JIRAMA’s procurement by the ARMP established by Ordinance (Arrêté) 7275/2016, JIRAMA’s executive board announced on June 30, 2016 the requirement that all of the company’s procurement contracts for the purchase of electricity and the purchase and rental of generators be awarded competitively through open bidding in conformity with the existing procurement law, until the adoption of the LCPDP expected in 2017. We will provide prior notification to World Bank and IMF staff of any exceptions (such as emergencies) allowing for single source procurement contracts for JIRAMA’s purchases of electricity and purchases and rental of generators (continuous structural benchmark). In support of transparency, all tender offers and final contracts will be published on ARMP’s website, according to normal procedures. There will be an independent annual audit of the contracts within six months of the end of company’s fiscal year.

Personnel

36. The government is working toward productive, efficient work force that will meet society’s needs at a reasonable cost, creating space for other priority spending. Audits of civil service personnel and pay data are being extended to sectoral ministries and are expected to yield further cost-savings over the next 18 months. An electronic platform for workforce planning (Gestion Prévisionnelle des Effectifs, des Emplois et Compétences) is expected to be completed by June 2017, with support from the European Union, paving the way to begin a comprehensive civil service census by end-2017. An evaluation of the effectiveness of the current sanctions system, including the Conseil de Discipline de la Fonction Publique, is underway, with a report expected by 2019. In addition, the Ministry of the Civil Service will terminate the employment of any civil servant convicted of a crime in accordance with Article 1 of the law 61-026. These measures will enhance the productivity of the civil service while reducing the public sector wage bill as a proportion of GDP.

C. Enhancing Economic Governance

Public Financial Management (PFM)

37. The government is committed to strengthen controls of public spending. We will reduce administrative discretion by developing more comprehensive administrative manuals, standardized procedures, and computerized data systems that automate critical processes, including, for example, the modernization and centralization of all MFB systems into the SIIGFP (Système Informatisé et Intégré de Gestion des Finances Publiques). We will furthermore reinforce external audits, including by timely submission of audit reports to the Parliament, and submit audit reports on actual spending for 2012-14 to the Parliament by end-November 2016 and the report for 2015 by end-June 2017. Expenditure management will be strengthened, particularly by open and competitive procurement procedures:

  • The Prime Minister issued a “note d’instruction” to all public institutions and ministries reiterating that all procurement contracts (valued above MGA 140 million for public works, MGA 80 million for goods, and MGA 25 million for services) will be awarded competitively through open bidding, thereby limiting the use of restricted tenders to those in full compliance with legal provisions. Public institutions and ministries will be responsible for transmitting the instructions to the Etablissements Publics Nationaux (EPN) and public enterprises under their authority.

  • To improve transparency and permit monitoring, the Autorité de Régulation des Marchés Publics (ARMP) will certify and publish all tender offers and final contracts on its website within 7 days of finalization. An independent annual audit of the ARMPs activities will be conducted, due within 180 days of the end of the calendar year (structural benchmark).

  • The ARMP will ensure that the ordinance (arrêté) 7275/2016 subjecting State-Owned Enterprises to the public procurement code will be enforced.

  • Requests for proposals for public procurement will be published on the ARMP website at least 30 calendar days before their due date, in addition to three publications, in accordance with the law.

38. The government will develop a medium-term PFM strategy and action plan with the assistance of the AfDB and inputs from other development partners, including the IMF. The action plan, developed in consultation with major stakeholders and intended for Cabinet approval by December 2016, will include:

  • Full integration of cash flow needs from arrears clearance into Treasury plans and finalization of the accounting and monitoring of domestic arrears for the central government. In addition, we will review the arrears of other public entities, such as SOEs and sub national government levels, with a view to prevent future occurrence.

  • Inclusion of an annex to the 2017 budget law detailing non-tax revenue in order to improve its transparency, coverage and risk management. The annex will be extended to include revenue collected from natural resources (mining, water, etc.) as of the 2018 budget law.

  • Improvements in public investment management, taking into account the IMF TA mission planned for August 2016. This will include the establishment of a domestically-financed public investment project database, a list of donor financed projects as annexes to the budget law as of 2017, and a multi-year implementation schedule for existing projects.

  • Introduction of the national framework for public-private partnerships (PPPs) to promote infrastructure investment within well-structured fiscal arrangements.

  • The MFB intends to submit quarterly implementation reports on the action plan to the Steering Committee starting in the quarter after Cabinet approval.

39. The MFB intends to implement several measures to improve transparency of SOE activities and strengthen monitoring of public sector contingent liabilities: (i) publication and submission of the 2015 financial statements of ten large SOEs to the Court of Auditors: Air Madagascar, FANALAMANGA, CEM, ARO, ADEMA, SOAVOANIO, SPAT, SMMC, SONAPAR, and SEIMAD by end-December 2016 (structural benchmark); (ii) the accounts of two large SOEs, JIRAMA and KRAOMA, will require additional time to complete, and we intend to submit their 2015 and 2016 accounts to the Court of Auditors before the end of 2017; (iii) the 2017 budget law will commence publication of an annex that includes summary information on all SOEs, their names, activity, identity of all shareholders, equity of the government, and budgeted transfers and subsidies; and (iv) the Department of Financial Operations at the MFB will be strengthened to improve monitoring and reporting of SOEs, and to determine fiscal risks, with annual public reports starting in 2017.

Corruption

40. The government launched a national strategy to fight corruption in 2015. Key actions include: (i) drafting and approving new, stronger anti-corruption legislation; (ii) restructuring BIANCO (public anti-corruption agency) with the aim of increasing its independence and resources; (ii) establishing anti-corruption units at all ministries; (iii) developing an information system that tracks all legal anti-corruption cases from the start of proceedings until the final stage; (iv) establishing a commission to identify measures to improve the integrity of the judicial system; (v) launching of a system for the coordination, monitoring, and evaluation of anti-corruption measures; and (vi) making the Council of Budget and Financial Discipline (CDBF) fully operational by a decree submitted by end-September 2016, which regulates the organization, office allocation, and appointment of senior staff (the CDBF’s disciplinary decisions will be published online) (structural benchmark). We will update the range of fines that can be imposed in the budget law 2017 (as foreseen by the article 2 of the law 2004-06 on the CDBF).

41. Three new draft laws under development aim to strengthen the anti-corruption legislation. The draft laws on declaration of assets and the formation of anti-corruption centers were approved by the Council of Ministers in June 2016. The first draft law: (i) harmonizes the provisions on the declaration of assets; (ii) expands the definition of corruption offences; (iii) strengthens the protection of investigators, experts, judges, witnesses, and whistleblowers; and (iv) facilitates BIANCO’s use of the asset declarations and support for the public prosecution during trials. The second draft law: (i) ensures the operational independence of each anti-corruption center and (ii) establishes an independent committee at each center that is responsible for staff recruitment and management, supervision, monitoring, and evaluation of the center activities. A third draft law on asset recovery is being drafted and: (i) establishes a procedure for recovering assets acquired through corruption and activities related to money laundering, financing of terrorism, and organized international crime; (ii) harmonizes procedures of seizure, freezing, and confiscation of assets; (iii) facilitates the seizure of assets during an ongoing investigation; (iv) regulates the management of recovered assets; and (v) establishes a procedure for monitoring and control of property that has been seized, frozen, and confiscated to ensure transparent management. The government submitted the first two laws to Parliament in June (prior action) and intends to submit the third law to Parliament at its session opening in October, in line with the relevant FATF recommendations on asset recovery (structural benchmark). In addition, the law to establish special courts for precious wood trafficking has been promulgated, and the implementing decrees are expected to be approved by end-September.

42. Judicial reform is essential both in the fight against corruption and in our efforts to improve the business climate. Justice must be served within a reasonable time frame consistently between court decisions. We are, therefore, developing measures to reduce the currently excessive delays in trying of court cases. We also aim to make all court cases available online to the general public. We will establish new guidelines for the assignment of court cases to reduce the risk that one party in a pending trial could have undue influence on the selection of the judge. The Supreme Judicial Council (Conseil Supérieur de la Magistrature) is critical for the functioning of our judicial system. In our efforts to safeguard the integrity of the judicial system, the governance of the Council has been revised and a majority of the representatives of the judiciary are now elected by the judges.

43. The government is committed to take all necessary actions to stem money laundering and the financing of terrorism (ML/FT). The move toward a risk-based approach in the supervision of banks will be an important tool in developing a complete picture of existing risks in our financial system. In our efforts to identify the main ML/FT risks, we will complete a national risk assessment by end-2016, in cooperation with the World Bank. Once the risks have been identified, we will undertake the necessary measures to effectively address these risks. A World Bank mission on ML/FT risks in 2016 will assist our efforts and review existing legislation, regulations, and supervisory practices.

D. Strengthening Stability and Financial Sector Development

44. Monetary policy has been complicated by monetary financing of the government and interventions in the foreign exchange market in recent years. Petroleum subsidies in 2012-13 and uncollected accrued interest on government bonds put pressure on CBM’s financial autonomy and restricted monetary policy operations. While within legal limits, CBM extended significant credit to the government through statutory advances in 2014 and 2015. In addition, concerned about potential depreciation of the official exchange rate, the CBM significantly influenced the official foreign exchange rate through buyback operations in 2015. These actions interfered with monetary policy objectives.

45. We have launched measures to improve the foundation for a more independent decision-making on monetary policy. The central bank has securitized its claims on the central government by an amount equal of 1.4 percent of GDP in 2015. The buyback operations in the foreign exchange market were discontinued in September 2015. A revised Central Bank Act which strengthens its independence was approved by the Council of Ministers and submitted in June 2016 to the Parliament, which subsequently passed it. The revised Act: (i) includes a phased reduction of the ceiling on statutory advances from the central bank down to 10 percent of ordinary revenues in 2016 and 7 percent of ordinary revenues in 2017 with a ceiling of MGA 301 billion in 2016; (ii) provides an effective mechanism for the automatic transfer of central bank losses and profits to the government; (iii) establishes an Audit Committee of the Board of Directors; and (iv) establishes 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.

46. The central bank is reinforcing its audit oversight and control environment. An Audit Committee of the Board of Directors was established in November, 2015. The CBM Board has formalized its external audit policy and updated its internal audit charter to provide for a functional reporting line to the Board. Reports on all forms of credit to government and their compliance with statutory restrictions are now prepared for the CBM Board every six months. The central bank is in the process of implementing a time-bound capacity building plan that includes adoption of risk-based audit methodologies, development of technical competencies, professional internal audit certificates, and establishes a quality assurance program. A bank-wide procurement policy is also under preparation. Starting with the 2018 financial statements, the central bank accounts will be presented in accordance with International Financial Reporting Standards (IFRS, as a proforma). A safeguards assessment will be conducted by the first review.

47. The central bank will take actions to improve the operational framework for monetary policy implementation, especially liquidity management. The interbank money market and the market for secondary Treasury Bill trading are inactive. While there is significant excess liquidity in the money market, the seasonal fluctuations are strong and the excess liquidity is unevenly distributed among the banks. To ease the exchange of liquidity among the banks, the CBM’s deposit auctions Appel d’Offres Négatifs (AONs) will be added to the list of acceptable collateral, and short-term, fine-tuning operations at the initiative of the CBM will be finalized by September 2016. Moreover, the creation of a repo market is important and a legal framework for repo transactions is expected to be in place by mid-2018. The central bank is also planning to establish an interest rate corridor for the interbank market and the central bank will strengthen its capacity to forecast monetary variables with the aim of managing bank liquidity more efficiently. CBM will engage in further technical assistance (TA) with the aim of setting explicit liquidity targets and intervening in the money market to achieve these targets. The reference interest rate will be allowed to fluctuate more and reflect in particular movements in the money market. Treasury Bill auctions are critical for bank liquidity and the Treasury will publish quarterly auction calendars on a rolling basis starting in September 2016. The legal framework regulating the interbank foreign exchange market is also in the process of being updated by June 2017.

48. More resources will be allocated to strengthen financial supervision. While the FSAP noted that the banking system has been resilient to past shocks, underlying vulnerabilities could become acute with continued financial sector growth. Our financial supervision, therefore, needs to become more proactive and penetrating. We have started the work to revise the legal framework for financial supervision. The aim is to strengthen: (i) the powers and responsibilities of the supervisory authorities; (ii) the operations of the supervisory authorities by increasing the number of staff, initiating more on-site inspections, implementing more risk-based supervision, and increasing the co-operation with supervisors in other countries; and (iii) the prudential requirements and regulations by adjusting prudential ratios to international norms and developing new regulations to deal with governance (including related-party lending), risk management, and liquidity. We plan to: (i) continue close monitoring of all financially challenged micro-financial institutions (MFIs) and proceed to resolution by June-2017; (ii) complete the regulatory framework for banking supervision and make operational risk-based supervision by end-2017; and (iii) approve a new banking law strengthening banking supervision and a new law regulating MFIs by end-2018. Resolving problem institutions is also a priority and we plan to establish the legal framework for bank resolution, as part of a review of the banking law by end-2018, drawing on a report on a possible deposit guarantee scheme. In the meantime, we will pursue efforts to strengthen capacity to intervene in institutions in difficulty.

49. Developing modern payment methods is important to reduce transaction costs and advance financial inclusion. Three banks are currently authorized to issue electronic money in partnership with mobile telephone operators. Demand for these services is steadily increasing and about 4 percent of the population currently has an active mobile phone account. CBM will play an active role by developing the regulatory environment, participating in the drafting of a coordinated national strategy, and supervising the implementation of the interoperability project between operators to allow transactions across networks. The new law on electronic money, which will establish the rules for accessing and practicing the business of issuing electronic money and the prudential supervision of electronic money institutions, will be submitted to the Cabinet for approval by National Assembly by end-2016. A law regulating the entire national payment system, including the securities settlement systems and retail payments, is planned to be approved by end-2017. Access to reliable credit information is also important for financial development and we plan to approve a new law regulating the credit reporting system by end-2018.

50. The supervision of non-bank financial institutions (NBFIs) needs to be strengthened. We are currently reviewing the existing framework for the control and supervision of the NBFIs with the aim of establishing a new, more effective institutional structure. Most NBFIs (insurance, pensions, etc.) are controlled by the State and we aim to make their governing bodies more independent. The roles of the National Savings Fund (CEM) and the postal financial service need to be reviewed. Both institutions are financially challenged and competition is growing from new financial services (microfinance, mobile banking, etc.). To initiate the review, we intend to conduct an independent audit of CEM and the postal financial service (PAOMA), with results expected by end-2017. We are going to begin preparing the transfer of insurance supervision to the CSFB, by end-2017, including the legal framework by end-2018, with the full transfer of responsibilities planned for end-2019.

E. Improving the Quality of Statistics

51. The government considers that strengthening the statistical system is an essential part of achieving its development goals. The government will improve coordination among various institutions and ensure that adequate resources are allocated for the production and dissemination of statistical data, including staffing, equipment, and training. We are currently developing a modern statistics law to govern the operations of statistical organizations, establish professional guidelines for data handlers, and lay out the obligations of individual and institutional data providers, along with sanctions for non-provision of data. The government is also elaborating the second Stratégie Nationale pour le Développement de la Statistique (SNDS) covering the period 2016-20. We aim to adopt the strategy in June 2017 and submit the law to the National Assembly in the second half of 2017. To improve coordination among institutions, the government will create the core of the successor to the Comité de coordination des informations statistique et économique to reconcile official statistics and improve sharing of information across institutions. The full committee will be operational by the end of 2017. We are also establishing memoranda of understanding first between the different statistical units at INSTAT and the Ministry of Finance and Budget and the Central Bank by end-2016, and subsequently with the other line Ministries and stakeholders by July 2017. With the assistance of our partners, we will continue to strengthen capacity and modernize INSTAT through the provision of additional training, equipment, and financial resources.

52. The government will improve the compilation and dissemination of statistics. INSTAT is taking steps, with the help of TA from the Fund and donors, to improve the CPI and National Accounts statistics including: (i) publishing a revised series of national accounts based on the 1993 SNA for 2007 and 2014 by December 2016 and disseminating the data for the intervening years by end-June 2017 (structural benchmark); (ii) publishing quarterly national accounts in June 2017; (iii) continuing the process of integrating natural capital into the national accounts (adjusted net saving and total wealth) by producing satellite accounts on water (2016), mines (2017), and forests (2018); (iv) reweighting the CPI components based on a recent household survey, and introducing the new goods and services into the basket in 2017; and (v) resuming the production of an Industrial Production Index in 2017. The CBM will migrate its balance of payments statistics to BPM6 by March 2017 and begin producing and disseminating international investment position data. The BCM will also disseminate monetary and financial statistics in the Standardized Report Forms over the next year. Finally, to strengthen the medium-term expenditure framework and enhance efficiency of public investments, the government will migrate the OGT to the GFSM2014 methodology beginning in 2018. We have begun the preparation of a population census in 2017, the first in 24 years and intend to complete the physical counting in 2017, with the continuing support of our partners.

IV. Program Monitoring

53. The program will be evaluated based on quantitative performance criteria and structural benchmarks (Tables 1 and 2) and semi-annual reviews. Definitions of key concepts and indicators, as well as reporting requirements, are set out in the accompanying Technical Memorandum of Understanding (TMU). The first, second, and third reviews are scheduled to be completed on or after January 27, 2017, July 27, 2017, and January 27, 2018 respectively, based on test dates for periodic performance criteria of end-December 2016, end-June-2017, and end-December 2017, respectively.

Table 1.Madagascar: Quantitative Performance Criteria and Indicative Targets for the ECF Arrangement, 2016-17
20162017
End-Sep.End-Dec.End-MarchEnd-June
Indicative TargetsPerformance CriteriaIndicative TargetsPerformance Criteria
(Billions of Ariary; unless otherwise indicated)
Fiscal
Floor on primary balance excl. foreign-financed investment (commitment basis) 1−126−184180148
External
Ceiling on accumulation of new external payment arrears (US$ millions) 20000
Ceiling on new nonconcessional external debt with original maturity of more than one year, contracted or guaranteed by the central government or BCM (US$ millions) 3
Grant element of less than 35 percent300300383383
Grant element of less than 20 percent100100100100
Ceiling on new nonconcessional external debt with original maturity of up to and including one year, contracted or guaranteed by the central government or BCM (US$ millions) 20000
Central bank
Floor on net foreign assets (NFA) of BCM (millions of SDRs) 4435477477485
Ceiling on net domestic assets (NDA) of BCM 41,5241,4411,5661,678
End-Sep.End-Dec.End-MarchEnd-June
Indicative TargetsIndicative TargetsIndicative TargetsIndicative Targets
Indicative targets
Floor on social priority spending 116223560130
Floor on gross tax revenue 12,4913,5878461,875
Memorandum items
Official external program support (millions of SDRs) 352127127153
Official external program grants (millions of SDRs) 10009
New concessional loans, contracted or guaranteed by the central government or BCM (US$ millions)36871,0551,4221,790
Program exchange rate (MGA/SDR)4,443.864,443.864,443.864,443.86
Sources: Madagascar authorities; and IMF staff projections.

Cumulative figures from the beginning of each calendar year.

Cumulative ceilings that will be monitored on a continuous basis starting from end-May, 2016.

Cumulative ceilings that will be monitored on a continuous basis starting from January 1, 2016.

The total stock of NFA and NDA measured at the program exchange rate.

Sources: Madagascar authorities; and IMF staff projections.

Cumulative figures from the beginning of each calendar year.

Cumulative ceilings that will be monitored on a continuous basis starting from end-May, 2016.

Cumulative ceilings that will be monitored on a continuous basis starting from January 1, 2016.

The total stock of NFA and NDA measured at the program exchange rate.

Table 2.Madagascar: Prior Actions and Structural Benchmarks through End-June 2017
ActionTentative Dates
Prior actions
Submission to Parliament of a supplementary budget with measures outlined in the MEFP. (¶24)Prior action
Increase in the weighted-average electricity tariffs by 15 percent compared to April 2016. (¶34)Prior action
Submission to Parliament of draft laws (i) establishing special anti-corruption centers that ensures the operational independence of each center and establishes an independent committee at each center that is responsible for staff recruitment and management, supervision, monitoring, and evaluation of the center activities; and (ii) strengthening asset declarations and their use, as well as expanding the definition of corruption offenses. (¶41)Prior action
Promoting inclusive growth
Integrate health and education sectoral spending plans into a medium-term budget framework. (¶12)End-June 2017
Mobilizing fiscal revenue
Enforce the collection of outstanding tax arrears by collecting at least MGA 30 billion of tax arrears in 2016 and publish a report on outstanding arrears. (¶30)End-February 2017
Publish a report that summarizes the tax credits granted and irregular tax credits that will have been cancelled by major companies. (¶30)End-June 2017
Improving the composition and quality of fiscal spending
Continued implementation of the automatic pricing formula for maintaining full cost-recovery fuel prices (for diesel, gasoline, and kerosene. (¶23)

Conduct an independent annual audit of the Autorité de Régulation des Marchés Public’s (ARMP’s) activities. (¶37)
Continuous benchmark End-June 2017
Enhancing economic governance
The terms and conditions of all PPP contracts will be published within one month of the date of signature on ARMP’s web site. (¶20)Continuous Benchmark
Prior notification of World Bank and IMF staff of any exceptions (such as emergencies) allowing for single source procurement contracts for JIRAMA’s purchases of electricity and purchases and rentals of generators. (¶35)Continuous Benchmark
Make the Council of Budget and Financial Discipline (CDBF) operational by issuing a decree, appointing its staff, and publishing its disciplinary decisions. (¶40)End-September 2016
Submission to Parliament of the law regulating the collection, administration, and management of assets that have been seized because of investigations related to corruption, embezzlement, money laundering, financing of terrorism, or organized international criminal activities, in line with the relevant FATF recommendations. (¶41)End-October 2016
Publication and submission of the 2015 financial statements of ten large SOEs to the Court of Auditors: Air Madagascar, FANALAMANGA, CEM, ARO, ADEMA, SOAVOANIO, SPAT, SMMC, SONAPAR, and SEIMAD. (¶39)End-December 2016
Improving quality of statistics
Publish revised series of national accounts based on the 1993 System of National Accounts for the period 2007-14. (¶52)End-June 2017

Attachment II. Technical Memorandum of Understanding, July 2016

1. This technical memorandum of understanding (TMU) contains definitions and adjuster mechanisms that clarify the measurement of quantitative performance criteria and indicative targets in Tables 1 and 2, which are attached to the Memorandum of Economic and Financial Policies for 2016-17. Unless otherwise specified, all quantitative performance criteria and indicative targets will be evaluated in terms of cumulative flows from the beginning of each calendar year.

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 CBMMonthly, 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

I. General Definitions

2. For purposes of this TMU, external and domestic shall be defined on a residency basis.

3. 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.

4. The program exchange rates for the purposes of this TMU1 are as follows:

Program Exchange Rates
Malagasy Ariary (MGA)/SDR4,443.86
U.S. Dollar/SDR1.389049
Euro/SDR1.270538
Australian dollar/SDR1.903723
Canadian dollar/SDR1.926401
Japanese Yen/SDR167.377024
Swiss Franc1.375855
U.K. Pound Sterling/SDR0.937470

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, 2015, and then be converted to MGA.

5. Performance criteria included in the program, as defined below, refer to the net foreign assets and net domestic assets of the central bank, external payments arrears, non-concessional external debt owed or guaranteed by the central government and/or the central bank, and the primary balance excluding foreign financed investment (commitment basis). Performance criteria will be set for end-December 2016 and end-June 2017 while indicative targets will be set for end-September 2016 and end-March 2017.

II. Provision of Data to the Fund

6. Data with respect to all variables subject to performance criteria and indicative targets will be provided to Fund staff monthly with a lag of no more than four weeks for data on net foreign assets (NFA) and net domestic assets (NDA) of the Central Bank of Madagascar (CBM) and six weeks for other data (Table 1). The authorities will promptly transmit any data revisions to the Fund. For variables assessing performance against program objectives but which are not specifically defined in this memorandum, the authorities will consult with Fund staff as needed on the appropriate way of measuring and reporting.

III. Quantitative Performance Criteria

A. Fiscal Aggregates

1. Floor on primary balance excluding foreign financed investment (commitment basis)

7. The primary balance excluding foreign financed investment (commitment basis) is measured as total domestic revenue less spending excluding interest payments and foreign financed investment. Total domestic revenues include tax and non-tax revenues plus current (budgetary) grants. For the purposes of calculating the primary balance, tax revenues are measured on a net basis, i.e., net of the refund of VAT credits. Spending includes expenditures on wages and salaries, goods and services, transfers, and subsidies, treasury operations (net) excluding the refund of VAT credits, and domestically financed capital expenditure. The primary balance excluding foreign financed investment (commitment basis) will be calculated cumulatively from the beginning of the calendar year.2 For reference, for the year ending December 2015, the domestic primary current balance (commitment basis) was MGA -377 billion, calculated as follows:

Primary balance excluding foreign financed investment (commitment basis)−377
Total revenue and current grants2,999
Total revenue2,959
Net tax revenue2,878
Non-tax revenue81
Current grants40
Less:
Current expenditures3,101
Wages and salaries1,566
Goods and services157
Transfers and subsidies966
Treasury operations (net)412
Domestic financed capital expenditures275

B. External Debt

1. Ceiling on accumulation of new external payment arrears

8. 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 considered overdue if they have not been paid 90 days after the due date or after the end of 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 the creditor has accepted in writing to negotiate alternative payment schedules, as well as debt service payments in conformity with contractual obligations that fail to materialize on time for reasons beyond the control of the Malagasy authorities. This monitoring target should be observed on a continuous basis from end-May 2016.

2. Ceilings on new non-concessional external debt

9. 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. Debt is considered as semi-concessional if it includes a grant element of at least 20 percent, calculated as described above.

10. Where an external loan agreement contains multiple disbursements and where the interest rate for individual disbursement are linked to the evolution of a reference rate since the date of signature, the interest rate at the time of signature will apply for the calculation of the grant element for all disbursements under the agreement.

11. For program monitoring purposes, the definition of debt is set out in point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangement adopted by the Decision No. 6230-(79/140) of the Executive Board of the IMF, as subsequently amended, including by Executive Board Decision No. 15688-(14-107), adopted December 5, 2014 (see Annex 1). External debt is defined by the residency of the creditor.

12. 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 3.37 percent and will remain fixed for the duration of the program. The spread of six-month Euro LIBOR over six-month USD LIBOR is -249 basis points. The spread of six-month JPY LIBOR over six-month USD LIBOR is -286 basis points. The spread of six-month GBP LIBOR over six-month USD LIBOR is -108 basis points. For interest rates on currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is -209 basis points.3 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

13. Two continuous ceilings apply to new non-concessional external debt with nonresidents with original maturities of more than one year contracted or guaranteed by the government or CBM. The ceilings apply to debt and commitments contracted or guaranteed for which value has not yet been received. They apply to private debt for which official guarantees have been extended and which, therefore, constitutes a contingent liability of the government or CBM. The first ceiling concerns new non-concessional external debt with nonresidents with original maturities of more than one year contracted by the government or CBM with a grant element of less than 35 percent and the second ceiling concerns new non-concessional external debt with nonresidents with original maturities of more than one year contracted by the government or the CBM with a grant element of less than 20 percent. These monitoring targets should be observed on a continuous basis from January 1, 2016.

14. 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 non-concessional financing, discussions with IMF staff should take place in advance to consider including the request in the program.

Short-Term External Debt

15. A continuous ceiling applies to new non-concessional 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. This monitoring target should be observed on a continuous basis from end-May 2016.

16. 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.

C. Monetary Aggregates

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

17. The target floor for NFA of the CBM is evaluated using the end-period stock, calculated at program exchange rates. 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 2015, NFA was MGA 1,763 billion, calculated as follows:

Foreign Assets2,665.623
Cash0.040
Demand deposits366.972
Term deposits and securities2,032.812
Other foreign assets (including SDR holdings)265.798
Foreign Liabilities902.863
Of which:
Non-residents deposits0.761
Deposits of international organizations0.278
Use of Fund credit and loans381.495
Medium-and long-term foreign liabilities (including SDR allocation)520.329
Net Foreign Assets1,762.760

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

18. The target ceiling on NDA of the CBM is evaluated using the end-period stock, calculated at program exchange rates. 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 paragraphs 4 and 17. It includes net credit to the government, credit to the economy, 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 2015, NDA was MGA 1,304 billion, calculated as follows:

Net Foreign Assets1,762.760
Base Money3,066.683
Of which:
Currency in circulation2,115.441
Currency in banks188.180
Bankers’ reserves762.484
Other deposits included in monetary base0.578
Net Domestic Assets1,303.923
Of which:
Net credit to the central government1,049.296
Credit to the economy5.865
Net credit to banks−110.000
Other items (net)358.762

IV. Indicative Targets

A. Floor on priority social spending

19. Priority social spending includes domestic spending primarily related to interventions in nutrition, education, health, and the provision of social safety nets. The floor on priority social spending by the central government will be calculated cumulatively from the beginning of the calendar year. The floor is set as the sum of the budget allocations in the Loi de Finance to the Ministries of Health, Education, Population and Water, excluding salaries and externally financed investment.

B. Floor on gross tax revenue

20. 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. The floor on gross tax revenue will be calculated cumulatively from the beginning of the calendar year. For reference, for the year ending December 2015, gross government tax revenue was MGA 3,012 billion, comprised of net tax revenue of MGA 2,878 billion and VAT refunds of MGA 134 billion.

V. Memorandum Items

21. Official external program support is defined as grants and loans, including in-kind aid when the products are sold by the government and the receipts are earmarked for a budgeted spending item, and other exceptional financing provided by foreign official entities and the private sector and incorporated into the budget. Official external support does not include grants and loans earmarked to investment projects. Official external program support is calculated as a cumulative flow from January 1, 2016.

22. Official external program grants are defined as grants, including in-kind aid when the products are sold by the government and the receipts are earmarked for a budgeted spending item, and other exceptional financing provided by foreign official entities and incorporated into the budget. Official external program grant support does not include grants earmarked to investment projects. Official external program grants calculated as a cumulative flow from the beginning of the calendar year.

23. New concessional external debt contracted or guaranteed with original maturity of more than one year by the central government or the CBM measures such debt with a grant element of at least 35 percent.

VI. Use of Adjusters

24. The performance criteria on net foreign assets of the CBM and net domestic assets of the CBM will be adjusted in line with deviations from amounts projected in the program for official external program support. These deviations will be calculated cumulatively from January 1, 2016. The following is an explanation of these adjustments:

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

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

25. The performance criteria on the primary balance excluding foreign financed investment (commitment basis) will be adjusted in line with deviations from amounts projected in the program for official external program grants. These deviations will be calculated cumulatively from the end of each calendar year. The following is an explanation of these adjustments:

  • The floor on the primary balance excluding foreign financed investment (commitment basis) will be adjusted downward by the cumulative deviation downward of actual from projected official external program grant. This adjustment will be capped at the equivalent of SDR15 million, evaluated at program exchange rates as described in paragraph 4.

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 ones 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 lessor retains the title to the property. For the purpose of these guidelines, 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 this paragraph, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are 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.

The authorities also recognized central bank claims on the government (1.2 percent of GDP) reported under Treasury operations (net). While this recognition increased the domestic financing of the budget, it had no monetary effects because the claims were already reported as other assets of the central bank.

External payment arrears resulted from technical difficulties in making debt service payments to Iraq and Libya, and the Malagasy authorities are in discussions with these creditors. A missed payment to Russia in early 2016 also constituted arrears and was paid in July.

The adjustment was delayed a few days in May, while the authorities renegotiated the margins with private sector distributors.

At the same time, spending on domestic investment increases slightly because of higher tax payments on foreign financed investment.

Social spending is defined here and for the program’s indicative target (floor) as the sum of the budget allocations to the Ministries of Health, Education, Population and Water, excluding salaries and externally financed investment.

IMF’s Fiscal Transparency Code recommends that countries include fiscal risk statements in their annual budget documentation.

According to the World Bank’s Doing Business Indicators, Madagascar ranks second to the last in the world for access to electricity.

The new mining and petroleum codes will not apply to existing investments and permits, which will have the option to enter the new legal framework. Existing large investments will continue to be covered by their respective legal frameworks.

Customs revenues stand at 5.3 percent of GDP, far above the LIDC average of 3.5 percent (EU 2014 “Tax Revenue Mobilisation in Developing Countries: Issues and Challenges”).

The physical inspection of all claimed imports of tax exempted rice reduced their value by nearly 50 percent in the first half of 2016, while the import of other food products increased by a similar amount.

SDR 220 million corresponds to 90 percent of Madagascar’s new, increased quota that is expected to become effective shortly.

The reserve target range is calculated with the IMF Reserve Adequacy Template for credit constrained economies. Given the importance of mining exports, Madagascar is classified as resource rich.

Data refer to the mid-point reference exchange rates published on the CBM’s webpage for December 30, 2015. Data were downloaded June 1, 2016.

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

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).

Other Resources Citing This Publication