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Statement by Mr. Yambaye and Mr. Ismael on Republic of Madagascar, July 27, 2016

Author(s):
International Monetary Fund. African Dept.
Published Date:
August 2016
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On behalf of our Malagasy authorities, we would like to thank management and staff for their continued support to the Republic of Madagascar. The authorities are highly appreciative of staff’s constructive and candid dialogue and the Fund’s continued engagement in their country. Through comprehensive technical assistance, two RCFs and an SMP, this engagement has been decisive in supporting the country’s recovery from the severe shocks related to the political crisis and the cut-off of most external assistance from 2009 to 2013. Over the past two years, progress has been accelerating, building a good track record and developing the capacity to implement a strong medium term program.

With Fund staff’s close assistance, the authorities have put in place a medium term economic and financial program anchored on their National Development Plan (NDP). The program aims at strengthening macroeconomic stability, developing the economy’s potential, enhancing its resilience to shocks, and addressing the deep-seated poverty issues. In support of their program, our Malagasy authorities are requesting Fund’s assistance in the form of an arrangement under the Extended Credit Facility (ECF) in an amount of 180 per cent of quota, or SDR 220 million. The authorities are strongly committed to the set of measures agreed under the program. They are also in broad agreement with staff’s assessment, notably on the challenges facing the country.

Recent Developments and Progress under the SMP

Economic and financial conditions have been improving since early last year with Fund’s assistance, and satisfactory performance was achieved under the SMP. The authorities have been taking measures that have helped to strengthen macroeconomic stability, notably by boosting revenue mobilization, enhancing the quality of fiscal spending, strengthening central bank independence and operations, and improving the functioning of the foreign exchange market. Fuel subsidies were eliminated with the introduction of an automatic pricing mechanism. A substantial portion of arrears were paid, and an escrow account was created at the central bank to ensure the refund of VAT.

Economic growth, however, at 3.1 percent was slightly lower than projected as the economy was negatively affected by lower agricultural output due to adverse weather conditions, falling mining prices, and lower tourist arrivals due to challenges facing Air Madagascar. Inflation was kept under control. Both the fiscal and external current account deficits increased, but the level of international reserves at the central bank increased substantially.

The Medium-Term Program

While progress is being achieved, important challenges remain, and the reforms started need to be strengthened. It is in this context that the authorities are requesting Fund assistance under a 40-month ECF arrangement. The Memorandum of Economic and Financial Policies covers well all the policy measures and reforms to be implemented. We will highlight the most important aspects of the program.

Policies and Objectives under the ECF-supported Program

The ECF-supported program represents an intensification of reform efforts. The main objectives are the reversal of the deterioration in development indicators. These will be achieved by strengthening macroeconomic policies (notably raising domestic revenue and containing current expenditure), increasing capital expenditure, improving the financial performance of the state-owned enterprises, addressing the issues of governance and increasing social expenditure. The program also includes measures aimed at encouraging private sector development and catalyzing increased support from development partners.

Under the program, economic growth is projected to accelerate steadily from 4.1 percent in 2016 to 5 percent by 2019 driven by investment in and expansion of agriculture, tourism, manufacturing and mining. The inflation rate is projected to moderate and fall towards 5 - 6 percent. Fiscal revenue is projected to increase to over 12 percent of GDP over the medium term with an increase in capital investment. The external current account deficit will remain relatively large due to high imports of capital goods related to investments. However, the authorities expect increasing inflows of FDI which should help to finance the deficit. Building on recent progress, international reserves are projected to increase gradually throughout the program period to reach an amount equivalent to about 3 ½ months of imports by 2019.

Fiscal Sector

Increased revenue collection and enhancing the quality of public spending is central to the program. Revenue measures are aimed at expanding the tax base by integrating the large informal sector through more effective inspections and audits, stricter control of tax credits and exemptions, and increased cooperation between the tax and customs administrations. The program also includes measures to improve the quality of public spending. This will involve improving pubic financial management, cleaning the government’s payrolls, taking measures to reduce government transfers to public pension funds and state enterprises, as well as ensuring full cost recovery prices for fuel. The authorities have also started discussions with oil distributors to review the fuel price structure, including the distributors’ margins and taxes levied. Additional administrative and fiscal measures have also been introduced in the 2016 supplementary budget which has been approved by the National Assembly.

The authorities are taking additional measures to strengthen tax and customs administration, based on IMF TA. These include collection of tax arrears, and the introduction of a unique tax identification number (TIN) for corporations and individuals, as well as the withholding of 5 percent of invoice by suppliers that are without a TIN. An added effort is being made to strengthen the monitoring and control of tax expenditures, and reports on tax expenditure will be produced annually. There will be an audit of tax credits granted for investment together with other measures to strengthen control of exemption at customs. As a result, the tax ratio (excluding one-off measures) is projected to increase from 10.5 percent of GDP in 2016 to about 12 percent by 2019. Total expenditures on the other hand are expected to increase from 16.2 percent of GDP in 2016 to about 18 percent in 2019 as a result of an increase in public investment spending and spending on social services. Similarly, the fiscal deficit is projected to increase modestly from 3.2 percent of GDP in 2016 to about 4.4 percent in 2019. It is to be noted that a major share of the public investment is expected to be foreign financed (grants and concessional loans). The efforts to clear current domestic arrears are ongoing, and it is the authorities’ firm intention to avoid accumulating arrears in the future. Some technical difficulties developed as regards some external arrears, but the authorities are working diligently and in good faith to resolve them.

Monetary and Financial Policies

Under the program, the implementation of monetary policy will be strengthened. In this regard, decisive measures have been taken to enhance the independence of the Central Bank, including through a new Central Bank Act which has been approved by the National Assembly. The audit oversight and control environment is being reinforced with the central bank presenting its accounts in accordance with International Financial Reporting Standards (IFRS) starting in 2018. The Central Bank authorities will also implement monetary and exchange rate policies aimed at keeping inflation in single digits while building an adequate reserve buffer.

The government and the Central Bank will work to develop the financial system and improve access by implementing the action plan and recommendations identified by the Financial Sector Assessment Program (FSAP). In this context, measures are being taken to enhance prudential supervision of banks and non-banks, the mobilization of savings, and the bank recovery and resolution mechanisms.

State-Owned-Enterprises

An important part of the reform program is focused on the rehabilitation of the state owned enterprises and in particular JIRAMA, the water and electricity public enterprise. Besides the restructuring being undertaken with the support of the World Bank, the authorities have raised tariffs by a weighted average of 15 percent, in two steps. Under the rehabilitation program, there will be a focus on both cost reductions and revenue enhancement, with the objective of achieving full operational cost recovery and the elimination of all transfers from the central government.

Other measures underway include installing smart meters for the largest customers, intensifying on-site inspections and introducing better techniques to reduce total electricity losses. A wide number of administrative measures are also under consideration in the context of the restructuring program. This includes, in particular, the requirement that all of JIRAMA’s contracts be awarded competitively through open bidding, with any exceptions limited to clearly justified reasons, such as emergencies. In addition, all tender offers and final contracts will be published on their web site. There will also be an independent annual audit of the contracts within six months of the company’s fiscal year.

The restructuring of Air Madagascar will be steadfastly pursued. Measures already taken, such as the replacement of Management and the Board, and those underway are expected to restore the airline to operational profitability by end-2016. In this regard, flight schedules are being restructured with a focus on profitable routes. Staff and maintenance and distribution costs are being reduced. It is the intention of the authorities to renegotiate contracts and to replace existing airplanes with more fuel efficient ones. But most importantly, the EU approval to allow Air Madagascar to fly to Europe with its own crews and a Malagasy registration will greatly help the finances of the company.

Additional measures are under consideration to improve the overall transparency of state-owned-enterprises. As a start, the largest SOEs have been requested to publish and submit their 2015 financial statements to the Courts of Auditors.

Governance

Improving economic governance is another important objective of the program. In this regard, a national strategy to fight corruption at all levels has been put in place and new and stronger laws are being drafted, and are aimed at strengthening the anti-corruption legislation, enhancing the independence and resources of BIANCO (the public anti-corruption agency), and establishing anti-corruption units at all agencies. The government will also reform the legal system, including judicial reform to address the current excessive delays in trying court cases. The MEFP gives full details of the comprehensive measures being implemented.

Public Financial Management (PFM) is being strengthened, with the development of more standardized procedures, computerization of critical process, and modernization and centralization of public finance systems. Audit systems and expenditure management will be strengthened with the implementation of open and competitive procurement procedures and publication of tenders. Moreover, the government is developing a medium-term PFM strategy with the assistance of development partners and the IMF.

Structural Program

The program has an important structural agenda aimed at addressing weaknesses in many sectors and creating the conditions for sustainable, inclusive growth. Besides measures that are focused directly at improving and broadening access to health and education, the program also includes specific measures to encourage private investment, especially in agriculture and improving the business environment. As regards the latter, measures envisaged include simplification and reduction in the number of rules and regulations. The authorities also intend to complete the legislative process which will allow Madagascar to join OHADA, the Organization for the Harmonization of African Business Law, to support the transparency and predictability of the business environment. Moreover, the codes governing mining and petroleum will be revised and brought in line with international best practices, and the authorities are also developing a law on Special Economic Zones (SEZ) so as to attract investment in these zones.

However, to attract private investment, both domestic and international, and to develop the economy, the country needs to develop its infrastructure which is either inadequate or inexistent. Investments are needed in almost all critical developmental areas such as roads, railways, seaports, airports, communications and energy, and will require large financing. The authorities understand well that the investments have to be prioritized with careful consideration being given to debt sustainability and fiscal risks. In this regard, they intend to rely mostly on grants and borrowing on concessional terms. Moreover, they intend to present their investments plan at a Donors’ Meeting later in the year. They will also make use of private-public partnerships (PPPs) where appropriate, with due consideration of the fiscal implications. A new PPP law has been enacted, to that effect, and has benefitted from cooperation from an international legal expert as well as comments from development partners. To assure full transparency and minimize fiscal costs, all new contracts will be attributed through open and transparent tenders and the terms and conditions will be published within one month of the date of the signature. In cases of non-concessional borrowing, but for high-yield investment projects, the authorities will consult with IMF and World Bank staff.

Conclusion

Overall, our authorities view the program as well balanced and takes into consideration the fragile situation of Madagascar and the unique challenges the country faces. It is consistent with the objectives of the National Development Plan and the Sustainable Development Goals. The authorities are very appreciative of the close collaboration with staff and the efforts made to understand these unique challenges. Our Malagasy authorities, at the highest level, are committed to the program which they view as critical to supporting their efforts to address the country’s vulnerabilities and its balance of payments difficulties and at the same time, the program contains critical measures that will help the development of the economy’s potential and raise living standards. We would, therefore, greatly appreciate Directors’ support to the request of our Malagasy authorities.

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