Republic of Madagascar
Selected Issues
Author: International Monetary Fund
Publication Date:
13 Jul 2007
eISBN:
9781451825435
Language:
English
Keywords:
ISCR; CR; Madagascar; trade; tariff; FDI inflow; scaling-up investment; MAP objective; Madagascar action plan goal; sequencing investment; Foreign direct investment; sanitation investment
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This Selected Issues paper on the Republic of Madagascar reports on the several key themes associated with longer-term development issues in Madagascar. As one of the poorest countries in sub-Saharan Africa, Madagascar suffers from low levels of social indicators across all fronts including education, health, water and sanitation, and infrastructure. To make progress toward the Millennium Development Goals, the country will need to scale up substantially both public and private investment while taking actions to increase absorptive and institutional capacity and implementing supportive policies in each of the priority sectors.

Abstract

This Selected Issues paper on the Republic of Madagascar reports on the several key themes associated with longer-term development issues in Madagascar. As one of the poorest countries in sub-Saharan Africa, Madagascar suffers from low levels of social indicators across all fronts including education, health, water and sanitation, and infrastructure. To make progress toward the Millennium Development Goals, the country will need to scale up substantially both public and private investment while taking actions to increase absorptive and institutional capacity and implementing supportive policies in each of the priority sectors.

I. Macroeconomic Implications of “Scaling-Up” Foreign Assistance and Foreign Direct Investment in Madagascar 1

A. Introduction

1. Madagascar has recently launched its second generation Poverty Reduction Strategy (PRS) entitled the MAP with a view to accelerating progress toward achieving the MDGs. As one of the poorest countries in sub-Sahara Africa (SSA), Madagascar suffers from low levels of social indicators across all fronts—education, health, water and sanitation, and infrastructure. To make progress toward the MDGs, the country will need to “scale up” substantially both public and private investment, while taking actions to increase absorptive and institutional capacity and implementing supportive policies in each of the priority sectors. Scaling-up investment will involve a concerted effort aimed at mobilizing domestic revenues, increasing donor assistance, and creating an enabling environment conducive to foreign direct investment (FDI). Augmenting the absorptive capacity of the economy will require addressing the main obstacles to private sector development while undertaking key public investments which increase productivity. Improving institutional capacity will necessitate strengthening both public financial management and service delivery at both the finance and the sectoral ministries. The authorities will also need to maintain a stable macroeconomic environment and implement a set of sectoral policies supportive of achieving the MDGs.

2. This paper discusses the macroeconomic implications of scaling-up donor assistance and FDI in Madagascar. Section II provides a brief overview of the international effort aimed at reducing poverty worldwide and of Madagascar’s own poverty reduction strategy. Section III highlights key social indicators in Madagascar, including in comparison with other low-income countries, and the targets that the authorities have set for 2012. Section IV discusses the resource requirements for making progress toward achieving individual MDGs drawing on recent sectoral studies. Because there are likely to be synergies between expenditures in one social sector and outcomes in another, the section also discusses the dynamic effects of scaling up and the associated savings. Section V focuses on the main macroeconomic implications and policy measures of higher public and private investment, with a view to providing the authorities with an analytical framework for assessing and managing such scaling up. The paper concludes with a proposed agenda for possible further analytical work.

B. Achieving the Millennium Development Goals through Country-Owned Poverty Reduction Strategies

3. In 2000, the international community established a set of ambitious goals for reducing poverty worldwide—the MDGs.2 Using 1990 as the base year, the objective was to reduce income poverty 3 by one-half while improving key social indicators in the areas of education, health, water and sanitation, and infrastructure by 2015 (Box I.1) It was recognized that countries would be at different starting points and face different challenges. Hence, progress was to be measured relative to each country’s starting point. To facilitate this, countries were encouraged to develop their own poverty reduction strategy (PRS) through a broad based participatory process involving civil society and development partners. The PRS would assess poverty in the country, set ambitious yet achievable goals customized to the country’s situation, and define priority policies and measures that were to bring this about. Country authorities were to measure progress annually through a set of objective indicators that would be assessed and presented in annual progress reports. The PRS would then be updated every three to five years in light of implementation experience and possible changes in priorities.

4. Madagascar prepared its first PRS in 2003 which guided social and economic policies and donor assistance through 2006.4 In November 2006, the authorities launched their second PRS, the MAP.5 In contrast to the first PRS, the MAP is more results-oriented and prioritized. Key monitoring indicators, most with baselines for 2005 and targets for 2012, have been selected to measure progress toward achieving the MAP’s goals and objectives (Box I.2). The 2007 Finance Law aligns the budget with the MAP commitments and presents medium term expenditure projections for 2007–11. The 2008 Finance Law and all subsequent finance laws are expected to do the same.

The Millennium Development Goals

At the Millennium Summit in September 2000, world leaders adopted the UN Millennium Declaration, committing their nations to a new global partnership to reduce extreme poverty and setting out a series of time-bound targets, with a deadline of 2015, that have become known as the MDGs. These are the world’s time-bound and quantified targets for addressing extreme poverty in its many dimensions-income poverty, hunger, disease, lack of adequate shelter, and exclusion-while promoting gender equality, education, and environmental sustainability. They are also basic human rights—the rights of each person on the planet to health, education, shelter, and security. The goals are to:

1. Eradicate extreme hunger and poverty: Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day and halve the proportion of people who suffer from hunger.

2. Achieve universal primary education: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to compete a full course of primary schooling.

3. Empower women: Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education by no later than 2015.

4. Reduce child mortality:Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.

5. Improve maternal health: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.

6. Combat HIV/AIDS, malaria and other diseases: Have halted by 2015 and begun to reverse the spread of HIV/AIDS, the incidence of malaria, and other major diseases.

7. Ensure environmental sustainability: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to save drinking water and basic sanitation. Have achieved by 2020 a significant improvement in the lives of at least 100 million slum dwellers.

8.Develop a global partnership for development: Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system; address the special needs of the Least Developed Countries; address the special needs of landlocked developing countries and small island developing countries; deal comprehensively with the debt problems of developing countries though national and international measures in order to make debt sustainable in the long term; and develop and implement strategies for decent and productive work for youth in cooperation with developing countries.

Source: United Nations Millennium Project (www.unmillenniumproject.org).

Madagascar Action Plan Goals and Objectives

article image
Source: “Madagascar Action Plan 2007-12: A Bold and Exciting Plan for Rapid Development,” www.madagascar.gov.mg/MAP, 2006.

C. The MDGs and Key Social Indicators

5. Madagascar is one of the poorest countries in SSA with a per capita income of US$309 (2005) and a rank of 146 out of 177 on the United Nations Human Development Index in 2006. Since the base line for measuring progress toward achieving the MDGs is 1990, this section provides a brief overview of the poverty and social indicators at that time and progress since. Relative to other SSA countries in 1990 (Table I.1) Madagascar had a higher poverty headcount (MDG 1), a lower primary school completion rate (MDG 2), and lower access to water and sanitation (MDG 7). In contrast, health indicators such as the under-5 mortality rate (MDG 4) and maternal mortality rate (MDG 5) were better than those in other SSA countries.

Table I.1.

MDG Attainment in Madagascar and Sub-Saharan Africa

article image
Source: www.developmentgoals.org

6. The 2002 political crisis resulted in substantial disruption and destruction of the country’s social and economic infrastructure. As a result, the poverty headcount rate actually rose from 68 percent in 1990 to 74 percent in 2004. While the country did make unprecedented progress toward achieving universal primary education and extending public infrastructure, particularly roads, there was only modest progress across most of the other social indicators. If the current trajectory is maintained, most MDGs in Madagascar will not be met by 2015 (Figure I.l). According to the World Bank, only the education MDGs are likely to be achieved, assuming that spending in this sector is increased as envisaged. Income poverty, however, would not be reduced by one-half (to 34 percent), and while progress is expected with regard to the health, water and sanitation, and infrastructure indicators, it will likely fall short of achieving the MDGs in each of these areas.

Figure I.1.
Figure I.1.

Madagascar: Progress Toward Millennium Development Goals, 1990-2015

(Percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2007, 239; 10.5089/9781451825435.002.A001

Source: World Bank, http://ddp-ext.worldbank.org; and United Nations, http://unstats.un.org.

D. Costing Estimates of the MAP

7. The Malagasy authorities have attempted to estimate the cost of achieving the MAP’s objectives in collaboration with World Bank and United Nations staffs.6 Although the authorities’ costing estimates are preliminary and are expected to be refined during the period ahead, they nonetheless provide an initial basis for considering the magnitude of the resource requirements involved.

8. The details regarding the costs of achieving each of the eight MAP commitments 7 over the period 2007–11 are summarized in Table I.2. The authorities estimate the total cost to be US$ll.6 billion, of which US$9.4 billion (82 percent) would be public expenditure and US$2.l billion (18 percent) would be the expected private sector contribution in the form of direct investment in areas related to the MAP’s objectives.8 The magnitude of these spending requirements is significant relative to existing levels. For example, the average annual level of public sector capital expenditure (US$1,887) assumed in the MAP is more than twice the total public investment in the 2007 Finance Law (US$750 million). Similarly, the average annual level of additional FDI assumed in the MAP (US$427 million) is six times the historic average (US$70 million).

Table I.2.

Madagascar: Preliminary Costing for Achieving the MDGs

(Millions of U.S. dollars)

article image
Source: Malagasy authorities.

9. Infrastructure improvements consists of one-half of the total estimated cost of the MAP, with governance (14 percent), rural development (10 percent), and health (10 percent) being the other main components. The authorities have included allocations for recurrent expenditure along with their estimates of capital investment requirements.9 The capital intensity of the public investment is assumed to vary across sectors, with health investment comprising principally intermediate equipment (30 percent) and investment in facilities (43 percent) versus labor (27 percent), while education spending goes mainly into wages (42 percent) and investment (48 percent) and water and sanitation investment is associated mainly with construction and rehabilitation costs (80 percent), with only minimal labor costs (3 percent).

10. These preliminary estimates, however, are likely to overstate the true cost of achieving the MAP objectives because they do not take capture the synergies that are likely to be had from investments in one sector and their positive spillover affects in another. For example, spending on infrastructure will boost development of the rest of the economy by increasing productivity and accessibility of public services, such as health and education. Spending on health will have positive spillover effects regarding improved productivity of workers. Similarly, spending on education will result in improved health outcomes and, in turn, improved productivity of workers. Clean water and improved sanitation would also have positive effects on health outcomes. World Bank staff have made preliminary estimates of the synergies between social sectors within the context of a computable general equilibrium model.10 While the exercise to date has been limited to six MDGs, the implications appear quite clear—actual costs should be less than those estimated via partial sectoral analyses. There are other limitations to the authorities’ initial estimates.11 They intend to continue refining their costing estimates with assistance from the World Bank and other development partners and will report on progress in their subsequent annual MAP implementation reports.

11. IMF staff had previously made estimates of the economic growth rates and aggregate investment levels that would be necessary to reduce income poverty by one half (MDG 1) using a growth accounting framework.12 If Madagascar is to reach this MDG by 2015, extreme poverty would need to be reduced by about 30 percentage points from its 1990 level of 59 percent (2004 level was 56 percent).13 Using an estimated elasticity of poverty with respect to growth of -0.45, cumulative real per capita income would need to grow by about 60 percent over the next decade and overall real GDP by 107 percent (7.6 percent a year). To sustain this level of growth, investment would need to increase by 16 percent a year in real terms so that the investment-to-GDP ratio rises to 35 percent by the end of the period. It is assumed that most of this investment would come from the domestic private sector and support broad-based growth. In addition, foreign capital inflows (both foreign assistance and foreign direct investment) would need to rise to the equivalent of at least 12.5 percent of GDP, which would mean an annual increase of foreign capital inflows of about SDR 275 million above the base case by the end of the period.

E. Macroeconomic Implications of Resource Inflows

12. A substantial increase in either donor assistance or foreign direct investment flows could have potentially destabilizing macroeconomic effects depending on the size and composition of the flows and the capacity of the economy to absorb these flows. Such effects could include an appreciation of the real exchange rate and result in so called “Dutch Disease,” which pose important challenges to competitiveness and macroeconomic management.14 As will be discussed further below, the resulting challenges differ depending on which of the two distinct types of resource flows occurs.

Dutch disease

13. The potential risk of “Dutch Disease” arises from the projected high levels of inflows of donor assistance and FDI as the domestic spending component of these foreign exchange inflows increases and places upward pressure on the domestic price level and, in turn, the real exchange rate if the absorptive capacity for a supply response is not in place (Box I.3). The ensuing change in relative prices (tradable/nontradable) could render the tradable sector less competitive and shift resources toward the higher returns to be had in the nontradable sector. If left unchecked, the export sector could be at risk, particularly those firms that are already operating at the margin (e.g., textiles, shrimp).

“Dutch Disease”

“Dutch Disease” describes a situation in which currency appreciation makes tradable goods less competitive and leads to an increase in imports. The result is a shift of resources away from the production of tradable goods and toward nontradables.

Increased foreign assistance and foreign direct investment boosts demand for both imports and domestically produced nontradable goods. Public sector is typically assumed to have a higher propensity to consume domestically produced goods and services than the private sector. Thus, the domestic component of demand will likely be higher if the foreign assistance finances higher public expenditure. A country can import goods directly from the world market, but only domestic producers can supply nontradables.

Unless there is considerable excess supply in the economy, the price of nontradables must become higher than the prices of tradables (that is, the real exchange rate must rise) in order to encourage resources, including labor, to switch from the production of exportables to the production of nontraded goods. As the real exchange rate appreciates, the tradable goods sector contracts compared with the nontradable sector.

Source: Excerpts from “Macroeconomic Challenges of Scaling Up Aid to Africa: A Checklist for Practitioners,” Sanjeev Gupta, Robert Powell, and Yongzheng Yang, International Monetary Fund, Washington, D.C., 2006.

Permanent versus temporary flows

14. A key question that needs to be answered in order to determine the appropriate policy response, if any, is whether these flows are considered to be temporary or permanent? If the scaled up donor assistance and/or private sector FDI are expected to be sustained over the medium term, a case could be made that a permanent structural change in the economy is under way. The exchange rate should therefore be allowed to move to its new equilibrium in line with market forces, with the monetary authorities intervening in order to smooth day-to-day volatility. The impact of an appreciation of the nominal exchange rate could be offset through measures aimed at increasing productivity, which would leave the real exchange rate unchanged and thereby safeguard competitiveness. Such productivity increases could arise from government expenditure in health, education, infrastructure (i.e., roads, power supply, etc.), and/or in manpower training. Considerable time will likely be required for productivity-enhancing reforms to take effect. This raises the question of whether the higher aid flows should be phased in gradually in order to avoid a strong appreciation of the exchange rate prior to these reforms taking effect. This would, however, involve a trade off between accelerating progress toward achieving the MDGs and protecting the export sector from such an appreciation.15

15. If the higher inflows are expected to be temporary or reversible, then a case could be made for policy intervention. In the event of a temporary increase in aid inflows, a judgment needs to be made whether the benefit of spending these resources outweighs the loss of competitiveness resulting from the accompanying real appreciation. If competitiveness concerns dominate, it would be preferable to save the aid inflow proceeds and utilize them gradually so as to minimize the impact on competitiveness (see ¶¶18 and 19). Typically, it would not be advisable to spend the additional resources while trying to resist the real appreciation through monetary policy measures. This is because higher spending places upward pressure on inflation as well as on the current account deficit. Rather, a more effective use of aid would be to link spending and real exchange rate appreciation closely together (the so called “spend-and-absorb approach”).16 If the central bank responds by selling sufficient foreign exchange from the aid inflows, the nominal exchange rate would appreciate, thereby dampening inflation and financing the widening of the current account deficit. The latter increases the resource envelope that is available to the economy, thereby absorbing the additional aid resources. If, in contrast, the central bank resists selling foreign exchange, the benefits of the increased aid would be negated as restoring macroeconomic stability would eventually require a tightening of monetary policy in order to bring down inflation and reduce the current account deficit, ultimately leading to a crowding out of private sector activity in order to make room for the fiscal expansion. In other words, without a widening of the current account deficit, aid inflows would not increase the resource envelope available to the economy and the higher fiscal spending would ultimately crowd out private sector activity (similar to a fiscal expansion without aid financing). Otherwise, an appreciation of the real exchange rate would be necessary to bring about a widening of the current account deficit.

16. In the case of a temporary increase in FDI, the concern would be to offset the appreciation of the real exchange rate in order to protect the export sector from being wiped out in the short run since it would be viable in the long run. The authorities could choose to intervene in the foreign exchange market (i.e., purchase foreign exchange and thereby reduce pressure on the nominal rate) and mop up any excess liquidity injected from these operations. There would, however, be a cost associated with this policy that may have to be incurred by the budget, which would come at the expense of other expenditure assuming that the same aggregate spending ceiling and macroeconomic objectives are maintained.17 Such a cost may be reasonable, however, given the implications for the export sector in the event of no intervention.

17. Regarding FDI, present indications are that there may indeed be a structural change taking place in the economy and that the inflows are more of a permanent nature. In addition to the two large mining projects that are presently at the construction phase, there are other mining projects that are at advanced stages of discussion as well as prospects for production of both onshore and offshore oil. There are also potential large investments to be made in the tourism sector and other sectors of the economy as well. As regards scaled up donor assistance, these flows have yet to manifest. The authorities are hopeful that with the recent launch of the MAP there will be a substantial scaling up of donor assistance, with their high case scenario assuming that donor assistance will increase by about 3 percentage points of GDP per annum. However, based on estimates recently provided by Madagascar’s main development partners, net external foreign assistance is expected to decline (not increase) by 2.5 percentage points of GDP over the period 2006–09. So, for now, concerns over scaled up donor assistance are purely theoretical. Nonetheless, the authorities should carefully think through the implications of potential scaling up so that they can be well prepared to manage these flows, should they arise.

Donor assistance (budget and project) versus FDI

18. As there are important differences between donor budget support, project support, and FDI regarding who controls these inflows, the policy response by the authorities will need to vary accordingly. If scaled up foreign assistance comes in the form of budget support, the foreign exchange from the donor assistance would be lodged in the central bank and the domestic currency counterpart would be placed in a government deposit held at the central bank. In the first instance, foreign reserves would increase, net domestic assets of the central bank decline, and reserve money would therefore remain constant. The government could then choose if and when to draw down these deposits, which would result in an injection of liquidity into the economy. If the authorities determine that the absorptive capacity for such expenditure is not in place, they could elect to delay the expenditure until the point in time when such capacity is in place, thereby eliminating the pressure for Dutch Disease.18 This policy imposes no direct cost on the government, except the intertemporal opportunity cost of any delayed spending.

19. If, however, the scaled up foreign assistance is in the form of project support, a portion of the proceeds would be set aside for import related expenses, with the remainder being for local costs. The foreign exchange related to project imports is most often lodged in an external commercial bank account and, hence, never directly enters the country. The foreign exchange used to finance the project’s local costs would, however, normally be lodged in a domestic commercial bank or central bank account. If the absorptive capacity for this domestic expenditure is not in place, the authorities could in principle choose to delay project implementation accordingly.19 If the project’s local currency deposits are held in the commercial banking system, they would nonetheless still have an expansionary impact on the money supply since the banks would be able lend against these deposits. The monetary authorities could, however, take offsetting operations to mop up the additional liquidity injection. If, however, the project accounts are held in the central bank, they would have no effect on liquidity or prices until the point in time that they are drawn down and spent.

20. In the case of FDI, the private sector is the recipient of the inflows. The domestic spending component of the FDI would be lodged in the commercial banks initially as a foreign exchange deposit and then as a local currency deposit after selling the foreign exchange and purchasing local currency in the interbank market. These deposits would normally be drawn down and spent within a short period of time as private sector agents would most likely transfer FDI for domestic spending requirements on an “as needed” basis. While the monetary authorities should allow broad money to grow in line with the higher demand for real money balances arising from the domestic spending component of the FDI, reserve money would grow by only a fraction (i.e., multiplier effect). The central bank would therefore need to sterilize a portion of domestic spending component by purchasing foreign exchange in the interbank foreign exchange market and offsetting the liquidity impact through open market operations. Alternatively, the authorities could consider running a fiscal surplus and thereby reduce the appreciation pressure on the exchange rate by accumulating local currency deposits at the central bank. However, it is unlikely that such a measure would be acceptable from a political economy point of view as it would require expenditure reductions that would likely come at the expense of making progress toward the MDGs.

F. Proposed Agenda for Future Analytical Work

21. A sound understanding on how a country intends to spend additional foreign assistance, as well as the appropriate policy response to the possible macroeconomic impact of these and private sector FDI inflows, is essential to assessing the implications of scaling up public and private sector resources in support of poverty reduction.20 The authorities have taken good initial steps in costing their MAP, but further steps are needed to ensure that they are well informed of the macroeconomic implications and policy options before them. Key areas of further analytical work include:

  • a. Improved sector-specific costing methodologies, including more refined assessments of the necessary levels of recurrent expenditure relative to the investment expenditure in each sector; use of sector-specific deflators in estimating annual recurrent and capital expenditure needs, and consideration of sequencing between essential public infrastructure and private investment;

  • b. Improved intersectoral costing, including the use of the MAMS model to capture the inter-sectoral dynamic effects and synergies of public investment;

  • c. Quantification of the impact of scaled up foreign assistance on the real exchange rate, exports, and inflation taking into account the likely import content of additional expenditures;

  • d. Consideration of sequencing investments with high import content in public spending up front, and back loading investments with high domestic content in order to allow greater time for a supply response (absorptive capacity);

  • e. Determination of whether the government has the institutional capacity to execute the scaled up expenditures effectively with regard to both planning and implementation;

  • f. Assessment of whether the envisaged spending and investment plans are consistent with reaching the growth object as well as of the trade-off between directing aid toward enhancing growth (i.e., spending on infrastructure) and focusing aid on relieving poverty (i.e., aid to rural sectors);

  • g. Consideration of policies that that may assist in effectively absorbing higher aid levels while taking into consideration emerging supply pressures in different sectors;

  • h. Assessment of adequate sequencing for orderly liberalization of capital account flows which may help to alleviate the appreciation pressure on the exchange rate arising from foreign assistance and/or FDI inflows. Such liberalization will need to be carefully sequence with measures aimed at strengthening the soundness of the financial sector; and

  • i. Consideration of what to do (i.e., exit strategy) in the event that scaled up aid by donors and/or higher levels of FDI by the private sector are not sustained. This could include determining the appropriate macroeconomic path to follow after the scaled up resource flows return to more normal levels and developing possible fiscal scenarios for an exit strategy based on estimates of the recurrent expenditure resulting from a scaling up of aid.

1

Prepared by Brian Ames.

2

United Nations Millennium Declaration (www.un.org/millennium/declaration/ares552e.htm).

3

Using the standard World Bank poverty line of one U.S. dollar per day in purchasing power terms.

4

For a more detailed discussion of the first PRS and assessments of its implementation, see Madagascar ‐ Poverty Reduction Strategy Paper, Country Report No. 03/323, October 2003; Madagascar ‐ Poverty Reduction Strategy Paper ‐ Joint Staff Assessment, Country Report No. 04/43, February 2004; Republic of Madagascar ‐ Poverty Reduction Strategy Paper Annual Progress Report, Country Report No. 04/402, December 2004; Republic of Madagascar ‐ Poverty Reduction Strategy Paper Annual Progress Report ‐ Joint Staff Assessment, Country Report No. 04/403, December 2004, Republic of Madagascar ‐ Poverty Reduction Strategy Paper Annual Progress Report ‐ Joint Staff Advisory Note, Country Report No. 06/304, August 2006; and Republic of Madagascar ‐ Poverty Reduction Strategy Paper Annual Progress Report, Country Report No. 06/303, August 2006.

5

The MAP website is www.madagascar.gov.mg/MAP

6

Estimates of the cost of achieving the MDGs in Madagascar can be found in “Le Cadre de Dépense a Moyen Terme du Secteur de la Santé 2006-2008,” Ministry of Health and Family Planning, Antananarivo, Madagascar, 2005 (for health-related MDGs), “Plan Education pour Tous: Situation en 2005: Actualisation des objectifs et stratégies,” Ministry of Education, Antananarivo, Madagascar, 2005 (for education-related MDGs), and “Direction de l’ eau de l’ Assainissement,” Ministry of Energy and Mining, Antananarivo, Madagascar, 2005 (for water- and sanitation-related MDGs).

7

The eight MAP commitments are: (1) responsible governance; (2) connected infrastructure; (3) educational transformation; (4) rural development and a green revolution; (5) health, family planning, and the fight against HIV/AIDS; (6) high growth economy; (7) cherish the environment; and (8) and national solidarity.

8

The authorities also expect the population to contribute to the MAP with its labor and creativity and have been conducting mobilization workshops throughout the 22 regions and 116 districts to this end.

9

The authorities assume 15 percent of total expenditure for each of the eight MAP commitments are for recurrent spending, with the remaining 85 percent constituting capital expenditure.

10

See “Maquette for MDG Simulation (MAMS),”World Bank, October 2006.

11

These include the use of a constant factor (15 percent) for recurrent expenditure requirements across all sectors, the lack of use of sector-specific deflators in estimating annual investment costs, the need to consider sequencing between essential public infrastructure and private investment, etc.

12

IMF Country Report No. 06/306, August 2006. For a detailed discussion on the determinants of FDI, the determinants of economic growth, and the impact of FDI on economic growth, see Noorbakhsh, F., Paloni, A., et. al. (2001). “Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence.” World Development 29(9): 1593-610; Wheeler, D. and Mody, A. (1992) “International Investment Location Decisions:the Case of U.S. Firms.” Journal of International Economics 33:57-76; Barro, Robert J., (2003). “Determinants of Economic Growth in a Panel of Countries.” Annals of Economics and Finance; Block, Steven, (1997). “Does Africa Grow Differently?” Journal of Development Economics; Ndulu et. al., (2006). “Challenges of African Growth.” World Bank (forthcoming); De Gregorio, J. and Lee, J-W., (1998). “How Does Foreign Direct Investment Affect Economic Growth?” Journal of International Economics, Vol. 45(1): 115-135, Elsevier; and http://rru.worldbank.org/PapersLinks/Impact-Foreign-Direct-Investment/.

13

These poverty statistics are based on the national definition of poverty which differs from the World Bank definition (percentage of people whose income is less than $1 per day). See “Republic of Madagascar - Poverty Reduction Strategy Paper Annual Progress Report,” Country Report No. 06/303, August 2006.

14

For a further discussion on the problems and policy options regarding Dutch Disease and scaling-up effects such as a currency appreciation, see Adam and Bevan, “Aid, Public Expenditure and Dutch Disease,” www.bepress.com/csae/paper184/.

15

It should also be noted that productivity-enhancing measures such as road construction can be expensive and may divert resources away from supporting other MDGs. Trade facilitation could also facilitate imports and thereby reduce the appreciation pressure on the exchange rate, although there is likely to be little scope here as the Malagasy trade regime is already fairly liberal.

16

For a more detailed discussion on of the spend-and-absorb approach, see “The Macroeconomics of Managing Increased Aid Inflow,” IMF Occasional Paper No. 253, 2007.

17

The cost would be the central bank losses arising from the difference between the rate of return earned on the newly acquired foreign assets and the interest that would have to be paid on the domestic instruments used for mopping up the excess liquidity.

18

The question arises, however, as to whether a donor would provide additional budget assistance in cases where the authorities are not in a position to spend it and/or the economy is not in a position to absorb it.

19

As in the case of budget assistance, the question arises as to whether a donor would disburse project assistance if the project was not able to be implemented in the period ahead.

20

Staff from the African Department at the IMF have prepared a comprehensive checklist for practitioners on the macroeconomic analysis of scaling-up aid to Africa. See “Macroeconomic Challenges of Scaling Up Aid to Africa: A Checklist for Practitioners,” Sanjeev Gupta, Robert Powell, and Yonzheng Yang, International Monetary Fund, Washington, D.C., 2006.

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Cover IMF Staff Country Reports
Republic of Madagascar: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 239
Publisher:
International Monetary Fund
ISBN:
9781451825435
ISSN:
1934-7685
Pages:
75
DOI:
https://doi.org/10.5089/9781451825435.002
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    Madagascar: Progress Toward Millennium Development Goals, 1990-2015

    (Percent, unless otherwise indicated)

Madagascar: Progress Toward Millennium Development Goals, 1990-2015

(Percent, unless otherwise indicated)