Madagascar showed strong economic growth and low inflation under the Poverty Reduction and Growth Facility (PRGF) Arrangement. Executive Directors commended these developments, and stressed the need to restore fiscal discipline, improve governance, strengthen the business climate to encourage private investment, and accelerate structural reforms. They welcomed the plan to privatize and rehabilitate the telecom, cotton, sugar, and utility companies, and agreed that Madagascar has successfully completed the fourth review under the PRGF program, and approved waiver, additional interim assistance, and an extension of the arrangement.

Abstract

Madagascar showed strong economic growth and low inflation under the Poverty Reduction and Growth Facility (PRGF) Arrangement. Executive Directors commended these developments, and stressed the need to restore fiscal discipline, improve governance, strengthen the business climate to encourage private investment, and accelerate structural reforms. They welcomed the plan to privatize and rehabilitate the telecom, cotton, sugar, and utility companies, and agreed that Madagascar has successfully completed the fourth review under the PRGF program, and approved waiver, additional interim assistance, and an extension of the arrangement.

1. The following supplementary information has become available since the issuance of the staff report. The thrust of the staffs assessment remains unchanged.

  • Cyclone Gafilo, one of the most violent cyclones in 50 years, hit the country in March, adding to the damage already exacted by cyclone Elita in January and February 2004. In light of the additional balance of payments need, the authorities have requested an augmentation of access under the current PRGF arrangement, which the staff supports.

  • The consumer price index declined by 0.8 percent from December 2002 to December 2003, compared with the projection in the staff report of a 0.3 percent increase.

  • Preliminary data indicate that tax revenue in 2003 was 10 percent of GDP, consistent with the projection in the staff report.

  • With the economy emerging from the 2002 political crisis, imports during January-August 2003 almost recovered to the level during the same period in 2001. For the rest of the year, imports rose sharply as the tax and tariff relief law took effect on September 1. As a result, the 2003 imports surpassed the 2001 level by 10 percent.

  • From end-December 2003 to end-February 2004, the Malagasy franc depreciated by 14 percent against both the euro and the dollar, reflecting rising imports and a weak export performance. The exchange rate stabilized somewhat in March, in part because of smoothing operations undertaken by the central bank.

  • The international tender for the purchase of the cotton company, HASYMA, was launched on January 29, 2004, representing a step toward compliance with the end-March 2004 structural performance criterion for the completion of the bidding process.

  • The indicative targets for end-September 2003 were met, except for that on the domestic financing of the budget.