Republic of Madagascar: Second and Third Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver and Modification of Performance Criteria Informational Annex
Author: International Monetary Fund
Publication Date:
15 Feb 2008
eISBN:
9781451825459
Language:
English
Keywords:
ISCR; CR; customs revenue; staff appraisal; tax revenue collection; authority; government capacity; government program; bank liquidity; government finance; central government; Poverty reduction strategy; Financial sector; Operational risk; Monetary statistics; Global; MAP commitment
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There has been progress in strengthening public financial management; however, improving budget execution and strengthening public finances is required. The tax and custom administration reforms will help bolster private sector-led growth and meet the ambitious revenue target to finance priority expenditure. Monetary and exchange rate policy is required to reduce inflation while preventing an overshooting of the exchange rate. Further progress is needed to foster financial sector development. A more ambitious rehabilitation plan for the electricity sector needs to be designed and implemented with urgency.

Abstract

There has been progress in strengthening public financial management; however, improving budget execution and strengthening public finances is required. The tax and custom administration reforms will help bolster private sector-led growth and meet the ambitious revenue target to finance priority expenditure. Monetary and exchange rate policy is required to reduce inflation while preventing an overshooting of the exchange rate. Further progress is needed to foster financial sector development. A more ambitious rehabilitation plan for the electricity sector needs to be designed and implemented with urgency.

I. Madagascar: Relations with the Fund

(As of November 30th, 2007)

I. Membership Status: Joined: September 25, 1963; Accepted the obligations of Article VIII, Sections 2, 3 and 4: September 18, 1996.

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Payments to Fund (after HIPC and MDRI assistance)

(SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative:

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VIII. Implementation of MDRI Assistance:

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IX. Safeguards Assessments:

A safeguards assessment of the Central Bank of Madagascar (BCM) was completed on March 17, 2006; a previous assessment was completed in November 2001. The 2006 assessment identified continued weaknesses in BCM internal controls, financial reporting, and legal framework, and made recommendations to address the observed vulnerabilities. The recommendations included: (i) an annual external audit report on the BCM’s transactions with the government and their compliance with the central bank law; (ii) quarterly reviews by the BCM’s internal audit function of monetary program data reported to the Fund; (iii) adoption of International Financial Reporting Standards (IFRS) for BCM accounting; and (iv) measures to strengthen the quality of the BCM’s external audit, e.g., appointment of an international audit firm with experience in IFRS and international auditing standards.

X. Exchange System and Exchange Rate Arrangements:

After April 1982, when the peg to the French franc was discontinued, the exchange rate was managed with reference to a basket of 10 currencies. By the end of 1991, the authorities stopped the practice of adjusting the exchange rate to offset inflation differentials with key trading partners. Since July, 2004, the Malagasy franc has been determined through a continuous interbank foreign exchange market system, and on January 1, 2005, the Ariary (MGA) replaced the Malagasy franc as the country’s official unit of account, at the rate of MGA 1=FMG 5. The exchange rate in terms of the SDR at end-November 2007 was MGA 2,817 = SDR 1. The exchange rate regime is classified as a managed float with no predetermined path.

Madagascar accepted the obligations of Article VIII, Sections 2, 3, and 4 on September 18, 1996 and maintains no restrictions on the making of payments and transfers for current international transactions. Staff is currently working with the authorities as they put in place a new foreign exchange law and implementing regulations, to ensure that the new regime remains consistent with Madagascar’s obligations under the Articles of Agreement. Staff is also currently working with the authorities to determine if Madagascar has imposed any exchange restrictions solely for the preservation of national or international security, and to ensure that any such restrictions are notified promptly to the Fund in accordance with the procedures set out in Decision No. 144-(52/51) (August 14, 1952).

XI. Last Article IV Consultation:

The 2007 Article IV consultation staff report was discussed by the Executive Board on June 25, 2007 (Country Report No. 07/236, July 10, 2007).

XII. Technical Assistance:

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XIII. Resident Representative:

Madagascar has had a Fund Resident Representative since September 1989. Mr. Pierre vanden Boogaerde took up the post in February 2006.

II. Madagascar: Relations with the World Bank

(As of December 25, 2007)

Madagascar’s Development Strategy

1. The government has put in place the Madagascar Action Plan (MAP), a bold development plan for 2007–12 that is the second-generation Poverty Reduction Strategy. The MAP envisages accelerated and better-coordinated reforms and outlines the “strategies and actions that will ignite rapid growth, lead to the reduction of poverty, and ensure that the country develops in response to the challenges of globalization and in accordance with the national vision —Madagascar Naturally— and the Millennium Development Goals.”

2. The MAP was prepared in a participatory way and makes eight commitments: (1) responsible governance; (2) connected infrastructure; (3) educational transformation; (4) rural development and a green revolution; (5) better health, family planning, and the fight against HIV/AIDS; (6) a high-growth economy: (7) a cherished environment; and (8) national solidarity. For each commitment, the government identified challenges, goals and strategies, priority activities, and monitoring indicators. The MAP identifies six “breakthrough initiatives”—areas requiring immediate attention: (1) public finance reform; (2) significant increase in investment to promote high growth; (3) sowing the seeds of a green revolution; (4) transforming public security; (5) implementing bold new measures for health and family planning; and (6) transforming the judiciary.

3. Programs for implementing MAP commitments are being elaborated in greater detail in sector strategies. Some of these strategies are already in place, among them the National Environmental Action Plan and strategies in rural development, health, primary education, rural water, transport, and HIV/AIDS. The government is finalizing a risk management and social protection strategy and is working on a financial sector strategy. Implementation of the MAP is guided by the budget and the Politique Générale de l’ État, which represents annual agreements between the president and cabinet ministers.

Bank Group Country Assistance Strategy (CAS) and Lending Operations

4. The World Bank’s Country Assistance Strategy has been designed in parallel with the elaboration of the MAP in terms of timing, duration, and substance (it was discussed by the Bank’s Board on April 3, 2007). The CAS covers almost the same time period as the MAP (2007–12) and supports attainment of the MAP goals. In doing so, the CAS supports the areas of the government program that have the highest priority; those where the Bank Group has a comparative advantage. The CAS will continue the Bank Group’s focus on removing bottlenecks to sustainable and shared growth, anchored in good governance, with corresponding improvements in welfare indicators and thus MAP goals. The specific sets of results supported by the CAS are organized around two main pillars. The first concentrates on activities that will help remove constraints to investment and growth in rural and urban areas. The second brings together activities geared toward improving the scope and quality of service delivery.

5. The CAS sets out a program of Bank support that encompasses budget support (PRSCs); sector-wide operations (SWAPs); investment projects; public-private partnerships; and analytical and advisory activities (AAA). Poverty Reduction Support Credits (PRSC) will continue to serve as a forum for policy dialogue with the government and as a platform for donor harmonization. The next series of the PRSCs was approved by the Board in July 2007 and further emphasizes removing policy bottlenecks to achieving the MAP and CAS objectives. Given the breadth of the potential agenda, the Poverty Reduction Support Credits seek to avoid dispersion and focus on a few critical issues (such as governance and public resource management). They will provide US$40–60 million a year to complement IDA MDRI debt relief of over US$30 million a year during the CAS period. In response to the lessons learned from previous Poverty Reduction Support Credits, the transition to budget support is occurring more gradually and budget support will only be scaled up gradually to encompass other sectors in tandem with improvements in the public finance system.

6. With respect to pillar one of the CAS, removing constraints to investment and growth, the Bank will continue to provide integrated assistance through the Growth Poles Project (FY06), the Watershed and Irrigation Adaptable Program Loan (FY07), two on-going transport operations and one future project under preparation, followed by planned growth operations in FY09 and FY10. The Poverty Reduction Support Credits will complement, as needed, implementation of pro growth policies, help sort out priorities, address coordination issues, and provide budget support. Analytical work will supplement these efforts with a comprehensive infrastructure review to identify the main bottlenecks, draft a strategic vision, and evaluate the impact of investments.

7. The Country Economic Memorandum on growth which is under preparation will enrich the current growth diagnostics and help fine-tune future World Bank Group interventions, specifically the future growth operations. The Bank Group will step up its assistance to better integrate the economy into global and regional markets and to profit from market opportunities at home. This will include continued technical assistance to build government capacity and to help producers adopt improved quality standards within the Trade Integrated Framework Program. The Watershed and Irrigation project ($30 million)–financed currently by IDA with an additional financing of $6 million from GEF scheduled for May 2008 - is financing investments in irrigation infrastructure and supporting marketing and other services to increase agricultural productivity and diversification. The Bank Group will continue its programs aimed at lowering air transport and telecommunication costs and improving accessibility through an open sky policy and upgrades to the telecommunications sector, such as development of a national backbone connected to the regional communications network via the East Africa Submarine System (EASSy). This is being supported by a regional IDA project in which Madagascar is participating, that was approved by the Board in early March 2007.

8. The Bank will increase its support to the financial sector, making sure that all segments of demand, from microfinance to large enterprises, are adequately covered. IDA will provide technical assistance to improve supervision and regulation, payment and credit information systems, and the institutional capacity of the sector. IDA and the IFC will continue to cooperate on facilitating access to credit and other financial services, including such emerging areas as guarantees and leasing. Building on the FSAP recommendations and successful implementation of the IDA microfinance pilot project, the Bank Group will also continue to help the government to draw up a strategy, framework, and programs for scaling up and expanding coverage of financial sector interventions by using a sector-wide approach with other donors. A supplemental IDA credit for the microfinance project was approved (on April 10, 2007) to provide bridge financing until multi-donor sector wide support is in place and other sources of financing become available. In September 2007, Madagascar was selected to receive a $15 million grant for a Financial Sector Project from the Africa Catalytic Growth Fund: this project is on a fast-track for delivery and is scheduled for approval in early 2008. The project will build on the FSAP recommendation and will provide support to the Government to implement key elements of the financial sector strategy currently being finalized.

9. The Bank Group will continue its efforts to improve the energy sector. The main instruments are the Energy and Water Adaptable Program Loan 1&2 (FY07/09) and an IFC–IDA Partial Risk Guarantee for public-private partnership investments in hydropower (FY08). IDA will continue to assist the government in improving its business climate and bring in more foreign direct investment. This will include (i) continued assistance to the Economic Development Board through the Growth Poles project and other agencies to improve regulation; (ii) increase transparency in issuing licenses and concessions (especially in mining, fishing, tourism, and forestry); and (iii) improve the quality of governance in extractive industries; Madagascar’s membership in the Extractive Industries Transparency Initiative (EITI) will be supported through the current Mining Project and through additional financing for this project that was approved on May 22, 2007. A follow-on IDA project (FY10) in the environment sector is also planned.

10. The World Bank Group will complement growth-generating activities under the first CAS pillar with activities aimed at facilitating access to services. Helping to improve all aspects of public finances is a high priority for the CAS. Working jointly with other partners, such as the IMF and France, IDA will continue to help the authorities work to mobilize increased internal resources. Work on taxation and customs will seek to streamline the rules, create a level playing field for all taxpayers by reducing tax exemptions, and facilitate compliance with tax laws. IDA, working jointly with other donors, will continue to help the government better align allocation of resources with MAP priorities, improve budget execution, implement new procurement legislation, and measure the impact of public resource use. Periodic Public Expenditure and Financial Accountability (PEFA) assessments will monitor progress. IDA instruments will include Poverty Reduction Support Credits, the current and future Governance and Institutional Development Program projects, and complementary analytical and advisory work, such as the programmatic Public Expenditure Review, the Country Financial Accountability Assessment, a social accountability program, and continued close portfolio management.

11. IDA, jointly with other donors, will continue to assist the government in its efforts to achieve universal enrollment in primary education, increase completion rates, and improve the quality of education at all levels to better prepare the workforce for a more advanced economy. The primary avenue for assistance is the Education for All Fast-Track Initiative with Africa Catalytic Fund resources. IDA assistance will also include a future investment operation in post primary education and review of the labor market. In health, it will help the government make further progress on reducing child and maternal mortality by offering access to reproductive services, reducing child malnutrition, improving the availability of clean water and sanitation services, and keeping HIV/AIDS and sexually transmitted disease rates under control. This will be achieved through current operations in health and HIV/AIDS and the FY07 follow-on health project which is working gradually towards using a sectorwide approach. IDA will continue to work with the government on institutionalizing the nutrition program and extending nutrition support sites nationwide initially through the nutrition project and then through general budget support.

12. IDA will help the authorities decentralize the provision of basic services. The assistance will focus on support to the fine-tuning and implementation of the decentralization strategy, including assigning revenues and expenditure responsibility across different levels of government. IDA, the European Union, and other donors will provide financial support for the Local Development Fund (FY08) which is a new mechanism for financing local infrastructure that builds on the experience of the Community Development Project. Technical assistance will be provided through the Governance and Institutional Development Project, Community Development Project, and sector dialogue. Poverty Reduction Support Credits will provide budget support to key sectors and help identify priorities and monitor the implementation agenda.

13. As of December, 2007 the Bank’s portfolio consists of 17 IDA projects, one regional telecommunications project and one GEF project; total commitments are US$1,086 million, including the PRSC IV of $40 million that was disbursed in September 2007. Of the total portfolio amount, US$300 million is not yet disbursed. Projects scheduled for approval in FY08 include the Financial Sector Project ($15 million in grants), the Local Development Fund ($26 million), the second Governance and Institutional Development Project ($20 million), additional financing to the Growth Poles project ($30 million) and the Watershed GEF Project ($6 million).

IMF-World Bank Collaboration in Specific Areas

Areas where the Bank takes the lead

14. The World Bank takes the lead in advising in sectors where the Bank has active lending operations (especially in the social sectors, infrastructure, agriculture, and environment) and through a number of analytical studies. Together with the government and other donors, the Bank supports aid coordination, which includes mobilizing donor support for the MAP and the Education for All initiative.

Areas where the IMF takes the lead

15. The Fund takes the lead in policy advice and reforms related to (i) macroeconomic policies and targets; (ii) tax policy and administration; (iii) budgetary accounting; (iv) treasury procedures; (v) public sector wage policy; and (vi) monetary management and exchange rate policy. The Bank team actively participates in discussions between the Fund and the government in all these areas, especially with respect to tax policy and the setting of macroeconomic targets.

Areas of joint responsibility

16. IMF and World Bank staff work closely together on (i) support to the MAP; (ii) analysis and reforms in public financial management; (iii) other governance reforms, including customs; and (iv) financial sector assessment. Joint policy advice is given on budgetary procedures, including expenditure execution, and the functioning of internal and external budget controls. The Bank and the Fund are working particularly closely on helping the authorities to mobilize more internal resources. Work on taxation and customs will seek to streamline the rules, create a level playing field for all taxpayers by reducing tax exemptions, and facilitate compliance with tax laws. In addition, IDA and the IMF will continue to help the government better align the allocation of resources with MAP priorities, improve budget execution, implement new procurement legislation, and measure the impact of public resource use. Periodic PEFA assessments will monitor progress.

17. The Bank and the Fund are supporting implementation of the recommendations of the 2005 FSAP. The dialogue focuses on supporting the financial sector strategy framework and helping scale up and expand support to the financial sector by preparing a sector-wide approach with other donors.

III. Madagascar: Statistical Issues

1. Macroeconomic data are adequate for surveillance purposes, but need to be improved. The database remains weak, particularly in the areas of real sector, government finances, the balance of payments, and social statistics. The authorities are aware of these deficiencies and are working, with technical assistance from the international community, including the Fund, to alleviate them. Since May 2004, the country has participated in the General Data Dissemination System (GDDS). However, the metadata and plans for data improvement that are posted on the Data Dissemination Bulletin Board (DSBB) need to be updated.

Real sector

2. Production of complete national accounts (based on benchmark data) is infrequent and depends on irregularly collected source data. The last complete sets of benchmark data are for 2001. The reliability of national accounts estimates remains weak due to gaps in the source data and methodological shortcomings. In particular, the estimates of agricultural activities are poor because there is no suitable information about the size and the evolution of this sector. Moreover, service activities are not properly covered and little information is available on the magnitude of the informal sector. The recent national accounts missions helped the authorities complete a comprehensive exercise for 2001 GDP following the 1993 SNA. The National Institute of Statistics (INSTAT) is completing the details of the 2001 national accounts exercise and using it to transit to a new base year, 2005. Preparation of provisional estimates for the period 2002–2005 is underway.

3. INSTAT currently produces two industrial production indices, one for the export processing zone (IPI-ZF) and the other for enterprises outside the export processing zone (IPI-RC). These two indices have different survey frameworks and base years (2000 for the IPI-ZF and 2001 for IPI-RC). Both are quarterly but are released irregularly, sometimes with a lag of up to one year.

4. The current consumer price index (CPI) covers the four principal cities, has a base year of 2000, and expenditure weights based on the 1999 household survey. The CPI is generally reported to Fund staff on a timely basis. INSTAT plans to update the base year to 2005 and to derive new weights from the 2005 household expenditure survey in the near future. Data on producer prices and nationwide employment are not available. Various considerations underlie current work on revising the wholesale price index (WPI). The key issue is the relative importance of commercial activities. However, the usefulness of the WPI is constrained by the limited coverage of manufacturing products and insufficient timeliness.

Government finance

5. The 2004 multisector mission found significant gaps in the coverage of government financial statistics (GFS) and recommended that it be broadened to include public agencies that are part of the central government. Also, the mission made recommendations on the classification and recording of transactions, as well as the calculation of domestic arrears.

6. Data on central government financial operations are disseminated only annually, and data on public debt are not disseminated at all. The mission recommended monthly dissemination of central government data, and quarterly dissemination of the public debt data, but monthly reporting of both types of data to STA for publication in IFS. The latest data reported to STA and published in the 2007 GFS Yearbook relate to the consolidated central government for 2006. However, on the basis of available institutional information, it appears that they do not cover all extra budgetary units within the central government and classification problems remain, which require extensive use of adjustment entries to current expenditure, grants, and consumption of fixed capital. Detailed breakdowns of data on budgetary and nonbudgetary transactions are unavailable and it is not possible to determine outlays by functions of government. The country does not report sub-annual data for publication in International Finance Statistics (IFS).

Balance of payments

7. The Central Bank of Madagascar (BCM) implemented in 1997 the fifth edition of the Balance of Payments Manual (BPM5). However, the current compilation system is flawed, external trade data are derived from customs data that suffer from inadequate coverage and deficient recording procedures. Moreover, reported smuggling, particularly in the mining sector, further reduces the reliability of the trade data. Because the customs processing system has experienced numerous technical disruptions since 1998, trade data require many manual corrections. The implementation of the ASYCUDA (Automated System for Customs Data, Version 2.7) was largely completed by mid-2002, with the system installed in most customs offices. The five largest customs offices have been upgraded to the most recent version of ASYCUDA at end-2006.

8. The 2004 multisector technical assistance mission reviewed progress in the transition to BPM5 and found that the authorities had implemented foreign direct investment enterprise surveys and are using an upgraded international transactions reporting system (ITRS). The mission noted that the compilation system is still hampered by such recurring issues as excessive processing lags due to partial automation of customs reports and inadequate coverage of, for example, transactions for the private sector, NGOs, and foreign embassies. Also, debt relief obtained from multilateral financial institutions is still misclassified as a current transfer rather than as a capital transfer.

9. The EPZs that process goods and reexport them to a third economy are not properly identified within other business services (merchandising and other trade related services).

10. Although ASYCUDA and port authorities can provide separate data for freight, insurance and other categories, the current 12 percent c.i.f./f.o.b. correction for balance of payments statistics is entirely attributed to freight. Data for the services and income accounts rely excessively on the ITRS reports, and their accuracy is not routinely assessed against other readily available data.

11. As noted by previous STA missions, INSTAT and the BCM continue to use different techniques to adjust customs data and publish two distinct series of trade statistics, bringing into question the reliability of the balance of payments statistics.

12. The compilation of external debt statistics is generally satisfactory, and the United Nations Conference on Trade and Development (UNCTAD) is installing the latest version of the Debt Management and Financial Analysis System (DMFAS). This system is not yet fully operational; some data entry is still pending, and certain DMFAS modules have yet to be installed.

Monetary and financial statistics

13. The 2004 multisector mission found that prior TA advice had not been implemented, most notably: (i) improvement of the staff and computer resources in the unit in charge of compiling monetary statistics; (ii) electronic transmission of monthly call report forms by the commercial banks to the BCM; and (iii) expansion of the broad money survey to include the microfinance institutions that issue liabilities that meet the national definition of broad money. The mission recommended further improvements to the source data and the compilation of monetary statistics in closer observance of the Fund’s Monetary and Financial Statistics Manual methodology. The BCM reports monetary and financial data to STA on a timely basis for publication in IFS.

Madagascar: Table of Common Indicators Required for Surveillance

As of December 20, 2007

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).

1

Because assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point, these two amounts can not be added.

2

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest earned on the amount committed at the decision point but not disbursed in the interim period.

3

The Multilateral Debt Relief Initiative (MDRI) provides 100 percent debt relief to eligible member countries. The debt relief covers all debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief. The MDRI is financed by bilateral contributions, the Fund’s own resources, and resources already disbursed to the member under the HIPC Initiative (see Section VII above).

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Cover IMF Staff Country Reports
Republic of Madagascar: Second and Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver and Modification of Performance Criteria—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
Volume/Issue:
Volume 2008: Issue 066
Publisher:
International Monetary Fund
ISBN:
9781451825459
ISSN:
1934-7685
Pages:
86
DOI:
https://doi.org/10.5089/9781451825459.002