Madagascar is one of the poorest countries in sub-Saharan Africa, ranking 146 out of 177 on the United Nations Human Development Index. The country has one of the lowest tax revenue-to-GDP ratios in the world (10.1 percent in 2005). To address these challenges, the authorities are requesting a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) to support their economic program for 2006–08. Broad money growth declined sharply in 2005, but credit to the private sector was strong. The banking system is profitable and well capitalized.

Abstract

Madagascar is one of the poorest countries in sub-Saharan Africa, ranking 146 out of 177 on the United Nations Human Development Index. The country has one of the lowest tax revenue-to-GDP ratios in the world (10.1 percent in 2005). To address these challenges, the authorities are requesting a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) to support their economic program for 2006–08. Broad money growth declined sharply in 2005, but credit to the private sector was strong. The banking system is profitable and well capitalized.

July 21, 2006

Since the issuance of the staff report, the following information has become available. The thrust of the staff appraisal remains unchanged.

The two outstanding prior actions have been completed. The Ministry of Finance has issued a circular requiring all ministries to submit monthly plans for expenditure commitments in accordance with the quarterly budget appropriations. In addition, the authorities have submitted to parliament a supplementary budget which is in line with the 2006 fiscal program and increases the share of PRSP priority spending in total domestically financed spending compared to the initial 2006 budget. While the latter measure was implemented only on July 20, 2006, this was principally owing to administrative and procedural delays and, as the authorities explained, a technical error in the original submission that was subsequently addressed through the issuance of a correction to the draft supplementary budget. The staff has reviewed the revised supplementary budget and can confirm that it is in line with the understandings previously reached with the authorities.

Inflation in May rose to 12.8 percent (year-on-year), owing mainly to higher food prices and a further increase in petroleum product pump prices. This higher than projected outcome requires that monetary policy remains tight throughout the remainder of 2006 to achieve the program target for year end (11.3 percent).

Fiscal revenue appears to have remained on track to meet the authorities’ program target. Based on preliminary information through end-June, both domestic tax revenues and customs receipts exceeded the program target by a small margin.

As envisaged in the staff report, the World Bank cancelled Madagascar’s debt to the International Development Association under the Multilateral Debt Relief Initiative effective July 1, 2006. The cancellation amounts to US$ 1,780 million, in addition to US$ 444 million of relief previously granted under the enhanced Heavily Indebted Poor Countries Initiative.

The authorities concurred with the Fund’s reclassification of Madagascar’s foreign exchange rate regime from “independently floating” to “managed float with no predetermined path.” This classification reflects Madagascar’s de facto exchange rate policy in which the central bank intervenes in the foreign exchange market to smooth large exchange rate fluctuations and to meet its foreign reserve target.

Republic of Madagascar: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Activation of the Trade Integration Mechanism—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Republic of Madagascar
Author: International Monetary Fund