Abstract
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
1. This statement summarizes economic developments since the issuance of the Article IV consultation staff report. These developments do not alter the thrust of the staff appraisal.
2. Overall inflation declined to 11.6 percent (year-on-year) in May after having peaked at 14.5 percent in March owing to the impact on food prices of the cyclones and floods that occurred earlier in the year. Non-food inflation continued on its downward trend, falling to 8.1 percent.
3. The nominal exchange rate (in SDRs) appreciated by a further 6 percent in April, and the central bank intervened in the interbank foreign exchange market in order to avoid a possible overshooting of the exchange rate. Reserve money rose by 19.2 percent (year-onyear) in April and broad money by 22.3 percent on account of the central bank interventions. Gross official foreign exchange reserves rose to about 3.3 months of imports at end-April. Since early May, the exchange rate has remained broadly stable.
4. Despite the continued appreciation, the trade balance was stronger than projected in the first quarter owing to better-than-expected export performance by textile export processing zone companies. Domestic tax revenue performance at end-April was on track, but custom receipts in local currency terms were lower than expected due to the appreciation of the ariary and low non-mining project related imports. Net domestic financing of the budget at end-March 2007 was some MGA 20 billion (0.1 percent of GDP) lower than projected in the staff report as execution of domestically financed capital expenditure was slow.
5. The average yield on treasury bills fell to 8.2 percent in early June from 18.2 percent at the end of March, on account of excess liquidity, slow execution of the budget, and net repayment of treasury bills with statutory central bank advances. Treasury bill real rates are expected to return to positive levels in the coming months as budget implementation accelerates and the central bank mops up the excess liquidity with its new open market operation instrument.
6. Progress in structural reforms has been mixed. As expected, the authorities approved increases in electricity prices and in government transfers to finance rehabilitation related investment in the national public utility company (JIRAMA). However, they submitted to Parliament a draft law that expands tax incentives for Export Processing Zone (EPZ) companies and makes the reintegration of EPZ companies into a simplified common corporate income tax regime more difficult to accomplish. Staff are seeking further clarification.
7. The authorities have communicated their consent to the Fund’s publication of the Staff Report for the 2007 Article IV Consultation.